##### 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, 2011
 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
    
    (I.R.S. Employerincorporation or organization)
    
    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 and six months ended March 31, 2011 and 2010
    
    
    3Condensed Consolidated Balance Sheets as of
March 31, 2011 and September 30, 2010
    
    
    4Condensed Consolidated Statements of Cash Flows for
the six months ended March 31, 2011 and 2010
    
    
    5Notes to Condensed Consolidated Financial
Statements
    
    
    6ITEM 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    16Forward-looking Statements
    
    
    16ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    22ITEM 4. Controls and Procedures
    
    
    23PART II. OTHER INFORMATIONITEM 1. Legal Proceedings
    
    
    24ITEM 1A. Risk Factors
    
    
    24ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    24ITEM 3. Defaults Upon Senior Securities
    
    
    24ITEM 4. Reserved
    
    
    24ITEM 5. Other Information
    
    
    24ITEM 6. Exhibits
    
    
    25Exhibit 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 March 31,
    
    
    Six months ended March 31,2011
    
    
    2010
    
    
    2011
    
    
    2010(in thousands, except per common share data)Net sales
    
    $
    49,716
    
    
    $
    45,076
    
    
    $
    98,050
    
    
    $
    88,044Cost of sales (exclusive of amortization of purchased
and core technology shown separately below)
    
    
    23,212
    
    
    
    21,254
    
    
    
    46,032
    
    
    
    41,417Amortization of purchased and core technology
    
    
    853
    
    
    
    1,074
    
    
    
    1,701
    
    
    
    2,166Gross profit
    
    
    25,651
    
    
    
    22,748
    
    
    
    50,317
    
    
    
    44,461Operating expenses:Sales and marketing
    
    
    9,532
    
    
    
    9,603
    
    
    
    19,330
    
    
    
    18,843Research and development
    
    
    7,849
    
    
    
    7,078
    
    
    
    15,657
    
    
    
    13,564General and administrative
    
    
    4,628
    
    
    
    4,224
    
    
    
    9,073
    
    
    
    8,382Restructuring
    
    
    (20
    )
    
    
    (352
    )
    
    
    (70
    )
    
    
    (352
    )Total operating expenses
    
    
    21,989
    
    
    
    20,553
    
    
    
    43,990
    
    
    
    40,437Operating income
    
    
    3,662
    
    
    
    2,195
    
    
    
    6,327
    
    
    
    4,024Other (expense) income, net:Interest income
    
    
    69
    
    
    
    90
    
    
    
    126
    
    
    
    183Interest expense
    
    
    (27
    )
    
    
    (32
    )
    
    
    (53
    )
    
    
    (84
    )Other (expense) income
    
    
    (223
    )
    
    
    301
    
    
    
    (235
    )
    
    
    263Total other (expense) income, net
    
    
    (181
    )
    
    
    359
    
    
    
    (162
    )
    
    
    362Income before income taxes
    
    
    3,481
    
    
    
    2,554
    
    
    
    6,165
    
    
    
    4,386Income tax provision
    
    
    1,242
    
    
    
    868
    
    
    
    1,610
    
    
    
    1,501Net income
    
    $
    2,239
    
    
    $
    1,686
    
    
    $
    4,555
    
    
    $
    2,885Net income per common share:Basic
    
    $
    0.09
    
    
    $
    0.07
    
    
    $
    0.18
    
    
    $
    0.12Diluted
    
    $
    0.09
    
    
    $
    0.07
    
    
    $
    0.18
    
    
    $
    0.12Weighted average common shares:Basic
    
    
    25,230
    
    
    
    24,816
    
    
    
    25,169
    
    
    
    24,758Diluted
    
    
    25,692
    
    
    
    25,213
    
    
    
    25,562
    
    
    
    25,072
   3




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DIGI INTERNATIONAL INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (UNAUDITED)
 March 31,
    
    
    September 30,2011
    
    
    2010(in thousands, except share data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    57,282
    
    
    $
    50,943Marketable securities
    
    
    34,135
    
    
    
    36,634Accounts receivable, net
    
    
    26,116
    
    
    
    24,090Inventories
    
    
    25,758
    
    
    
    26,550Deferred tax assets
    
    
    3,362
    
    
    
    3,344Other
    
    
    2,918
    
    
    
    2,141Total current assets
    
    
    149,571
    
    
    
    143,702Marketable securities, long-term
    
    
    4,507
    
    
    
    Property, equipment and improvements, net
    
    
    16,058
    
    
    
    16,396Identifiable intangible assets, net
    
    
    16,869
    
    
    
    19,851Goodwill
    
    
    86,527
    
    
    
    86,210Deferred tax assets
    
    
    3,295
    
    
    
    320Other
    
    
    506
    
    
    
    486Total assets
    
    $
    277,333
    
    
    $
    266,965LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    6,862
    
    
    $
    7,449Accrued compensation
    
    
    6,537
    
    
    
    5,850Deferred payment on acquisition
    
    
    2,966
    
    
    
    2,914Other
    
    
    5,793
    
    
    
    5,384Total current liabilities
    
    
    22,158
    
    
    
    21,597Income taxes payable
    
    
    2,337
    
    
    
    2,838Deferred tax liabilities
    
    
    1,083
    
    
    
    1,457Other noncurrent liabilities
    
    
    410
    
    
    
    517Total liabilities
    
    
    25,988
    
    
    
    26,409Commitments and contingencies (see Note 11)Stockholders 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;
28,827,170 and 28,666,311 shares issued
    
    
    288
    
    
    
    287Additional paid-in capital
    
    
    190,478
    
    
    
    185,427Retained earnings
    
    
    96,204
    
    
    
    91,649Accumulated other comprehensive loss
    
    
    (8,845
    )
    
    
    (9,589
    )Treasury stock, at cost, 3,526,467 and 3,584,215 shares
    
    
    (26,780
    )
    
    
    (27,218
    )Total stockholders equity
    
    
    251,345
    
    
    
    240,556Total liabilities and stockholders equity
    
    $
    277,333
    
    
    $
    266,965
   4




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DIGI INTERNATIONAL INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 Six months ended March 31,2011
    
    
    2010(in thousands)Operating activities:Net income
    
    $
    4,555
    
    
    $
    2,885Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Depreciation of property, equipment and improvements
    
    
    1,453
    
    
    
    1,334Amortization of identifiable intangible assets
    
    
    3,393
    
    
    
    3,869Stock-based compensation
    
    
    1,713
    
    
    
    1,824Excess tax benefits from stock-based compensation
    
    
    (226
    )
    
    
    (39
    )Deferred income tax benefit
    
    
    (1,296
    )
    
    
    (848
    )Inventory obsolescence
    
    
    836
    
    
    
    309Restructuring
    
    
    (70
    )
    
    
    (352
    )Other
    
    
    6
    
    
    
    (312
    )Changes in operating assets and liabilities
    
    
    (2,844
    )
    
    
    285Net cash provided by operating activities
    
    
    7,520
    
    
    
    8,955Investing activities:Purchase of marketable securities
    
    
    (28,999
    )
    
    
    (28,510
    )Proceeds from maturities of marketable securities
    
    
    26,950
    
    
    
    4,334Acquisition of business, net of cash acquired
    
    
    
    
    
    
    (3,000
    )Purchase of property, equipment, improvements and certain other intangible assets, net of proceeds from sale
    
    
    (1,421
    )
    
    
    (1,469
    )Net cash used in investing activities
    
    
    (3,470
    )
    
    
    (28,645
    )Financing activities:Payments on capital lease obligations
    
    
    
    
    
    
    (7
    )Excess tax benefits from stock-based compensation
    
    
    226
    
    
    
    39Proceeds from stock option plan transactions
    
    
    1,119
    
    
    
    1,032Proceeds from employee stock purchase plan transactions
    
    
    486
    
    
    
    445Net cash provided by financing activities
    
    
    1,831
    
    
    
    1,509Effect of exchange rate changes on cash and cash equivalents
    
    
    458
    
    
    
    (820
    )Net increase (decrease) in cash and cash equivalents
    
    
    6,339
    
    
    
    (19,001
    )Cash and cash equivalents, beginning of period
    
    
    50,943
    
    
    
    48,434Cash and cash equivalents, end of period
    
    $
    57,282
    
    
    $
    29,433
   5




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DIGI INTERNATIONAL INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
  Basis of Presentation
   Recently Issued Accounting Pronouncements
    Three months ended March 31,
    
    
    Six months ended March 31,2011
    
    
    2010
    
    
    2011
    
    
    2010Net income
    
    $
    2,239
    
    
    $
    1,686
    
    
    $
    4,555
    
    
    $
    2,885Other comprehensive income (loss):Change in foreign currency translation adjustment
    
    
    2,777
    
    
    
    (2,136
    )
    
    
    769
    
    
    
    (2,846
    )Change in unrealized (loss) gain on investments
    
    
    (34
    )
    
    
    (52
    )
    
    
    (41
    )
    
    
    7Less income tax benefit (provision)
    
    
    13
    
    
    
    20
    
    
    
    16
    
    
    
    (3
    )Reclassification of gain included in net income
    
    
    
    
    
    
    (36
    )
    
    
    
    
    
    
    (36
    )Less income tax benefit
    
    
    
    
    
    
    14
    
    
    
    
    
    
    
    14Comprehensive income (loss)
    
    $
    4,995
    
    
    $
    (504
    )
    
    $
    5,299
    
    
    $
    21
  6




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
    Three months ended March 31,
    
    
    Six months ended March 31,2011
    
    
    2010
    
    
    2011
    
    
    2010Numerator:Net income
    
    $
    2,239
    
    
    $
    1,686
    
    
    $
    4,555
    
    
    $
    2,885Denominator:Denominator for basic net income per common
share  weighted average shares outstanding
    
    
    25,230
    
    
    
    24,816
    
    
    
    25,169
    
    
    
    24,758Effect of dilutive securities:Employee stock options and employee
stock purchase plan
    
    
    462
    
    
    
    397
    
    
    
    393
    
    
    
    314Denominator for diluted net income per common
share  adjusted weighted average shares
    
    
    25,692
    
    
    
    25,213
    
    
    
    25,562
    
    
    
    25,072Net income per common share, basic
    
    $
    0.09
    
    
    $
    0.07
    
    
    $
    0.18
    
    
    $
    0.12Net income per common share, diluted
    
    $
    0.09
    
    
    $
    0.07
    
    
    $
    0.18
    
    
    $
    0.12
    March 31, 2011
    
    
    September 30, 2010Accounts receivable, net:Accounts receivable
    
    $
    26,409
    
    
    $
    24,639Less allowance for doubtful accounts
    
    
    (293
    )
    
    
    (549
    )$
    26,116
    
    
    $
    24,090Inventories:Raw materials
    
    $
    19,880
    
    
    $
    21,678Work in process
    
    
    454
    
    
    
    418Finished goods
    
    
    5,424
    
    
    
    4,454$
    25,758
    
    
    $
    26,550
   7




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
  Spectrum Design Solutions, Inc.
        8




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
   Amortized
    
    
    Unrealized
    
    
    UnrealizedCost (1)
    
    
    Gains
    
    
    Losses (2)
    
    
    Fair Value (1)Current marketable securities:Corporate bonds
    
    $
    13,588
    
    
    $
    2
    
    
    $
    (19
    )
    
    $
    13,571Government municipal bonds
    
    
    12,830
    
    
    
    1
    
    
    
    (6
    )
    
    
    12,825Certificates of deposit
    
    
    3,751
    
    
    
    
    
    
    
    (7
    )
    
    
    3,744Commercial paper
    
    
    3,997
    
    
    
    
    
    
    
    (2
    )
    
    
    3,995Current marketable securities
    
    
    34,166
    
    
    
    3
    
    
    
    (34
    )
    
    
    34,135Non-current marketable securities:Corporate bonds
    
    
    2,136
    
    
    
    
    
    
    
    
    
    
    
    2,136Government municipal bonds
    
    
    1,874
    
    
    
    
    
    
    
    (1
    )
    
    
    1,873Certificates of deposit
    
    
    500
    
    
    
    
    
    
    
    (2
    )
    
    
    498Non-current marketable securities
    
    
    4,510
    
    
    
    
    
    
    
    (3
    )
    
    
    4,507Total marketable securities
    
    $
    38,676
    
    
    $
    3
    
    
    $
    (37
    )
    
    $
    38,642
 (1)
    
    Included in amortized cost and fair value is purchased and accrued interest of $409.(2)
    
    The aggregate related fair value of securities with unrealized losses as of March 31, 2011 was
$28,922.
  Amortized
    
    
    Unrealized
    
    
    UnrealizedCost (1)
    
    
    Gains
    
    
    Losses (2)
    
    
    Fair Value (1)Current marketable securities:Corporate bonds
    
    $
    26,163
    
    
    $
    7
    
    
    $
    (9
    )
    
    $
    26,161Government municipal bonds
    
    $
    5,463
    
    
    $
    5
    
    
    $
    (2
    )
    
    
    5,466Certificates of deposit
    
    
    5,001
    
    
    
    6
    
    
    
    
    
    
    
    5,007Current 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.
    9




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (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 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 March 31, 2011 using:Total carrying
    
    
    Quoted price in
    
    
    Significant other
    
    
    Significantvalue at
    
    
    active markets
    
    
    observable inputs
    
    
    unobservable inputsMarch 31, 2011
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Cash equivalents:Money market
    
    $
    35,477
    
    
    $
    35,477
    
    
    $
    
    
    
    $
    Available-for-sale marketable securities:Corporate bonds
    
    
    15,707
    
    
    
    
    
    
    
    15,707
    
    
    
    Government municipal bonds
    
    
    14,698
    
    
    
    
    
    
    
    14,698
    
    
    
    Certificates of deposit
    
    
    4,242
    
    
    
    
    
    
    
    4,242
    
    
    
    Commercial paper
    
    
    3,995
    
    
    
    
    
    
    
    3,995
    
    
    
    Total cash equivalents and marketable
securities measured at fair value
    
    $
    74,119
    
    
    $
    35,477
    
    
    $
    38,642
    
    
    $
    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
    
    
    
    Government municipal bonds
    
    
    5,466
    
    
    
    
    
    
    
    5,466
    
    
    
    Certificates of deposit
    
    
    5,007
    
    
    
    
    
    
    
    5,007
    
    
    
    Total cash equivalents and marketable
securities measured at fair value
    
    $
    66,050
    
    
    $
    29,416
    
    
    $
    36,634
    
    
    $
    
  10




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
       March 31, 2011
    
    
    September 30, 2010Gross
    
    
    
    
    
    
    
    
    
    
    Grosscarrying
    
    
    Accum.
    
    
    
    
    
    
    carrying
    
    
    Accum.amount
    
    
    amort.
    
    
    Net
    
    
    amount
    
    
    amort.
    
    
    NetPurchased and core technology
    
    $
    46,599
    
    
    $
    (40,705
    )
    
    $
    5,894
    
    
    $
    46,484
    
    
    $
    (38,917
    )
    
    $
    7,567License agreements
    
    
    2,840
    
    
    
    (2,573
    )
    
    
    267
    
    
    
    2,840
    
    
    
    (2,537
    )
    
    
    303Patents and trademarks
    
    
    10,104
    
    
    
    (7,073
    )
    
    
    3,031
    
    
    
    9,753
    
    
    
    (6,522
    )
    
    
    3,231Customer maintenance contracts
    
    
    700
    
    
    
    (639
    )
    
    
    61
    
    
    
    700
    
    
    
    (604
    )
    
    
    96Customer relationships
    
    
    17,585
    
    
    
    (10,064
    )
    
    
    7,521
    
    
    
    17,481
    
    
    
    (9,096
    )
    
    
    8,385Non-compete agreements
    
    
    1,042
    
    
    
    (947
    )
    
    
    95
    
    
    
    1,039
    
    
    
    (770
    )
    
    
    269Total
    
    $
    78,870
    
    
    $
    (62,001
    )
    
    $
    16,869
    
    
    $
    78,297
    
    
    $
    (58,446
    )
    
    $
    19,851
   2011 (six months)
    
    $
    2,7672012
    
    
    4,5812013
    
    
    3,2142014
    
    
    2,8952015
    
    
    1,9382016
    
    
    688
  Six months ended March 31,2011
    
    
    2010Beginning balance, October 1
    
    $
    86,210
    
    
    $
    86,558Foreign currency translation adjustment
    
    
    317
    
    
    
    (971
    )Ending balance, March 31
    
    $
    86,527
    
    
    $
    85,587
  11




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
     Uncertain tax positions as of September 30, 2010
    
    $
    2,265Increases related to:Prior year income tax positions
    
    
    34Decreases related to:Expiration of the statute of limitations
    
    
    (466
    )Uncertain tax positions as of March 31, 2011
    
    $
    1,833
      12




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
   Three months ended March 31,Balance at
    
    
    Warranties
    
    
    Settlements
    
    
    Balance atFiscal year
    
    January 1
    
    
    issued
    
    
    made
    
    
    March 312011
    
    $
    840
    
    
    $
    236
    
    
    $
    (230
    )
    
    $
    8462010
    
    $
    952
    
    
    $
    229
    
    
    $
    (216
    )
    
    $
    965
 Six months ended March 31,Balance at
    
    
    Warranties
    
    
    Settlements
    
    
    Balance atFiscal year
    
    October 1
    
    
    issued
    
    
    made
    
    
    March 312011
    
    $
    877
    
    
    $
    354
    
    
    $
    (385
    )
    
    $
    8462010
    
    $
    970
    
    
    $
    425
    
    
    $
    (430
    )
    
    $
    965
   Contingent obligations
 Initial Public Offering Securities Litigation
   13




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
    Patent Infringement Lawsuits
       14




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##### Table of Contents



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
   EmployeeTerminationCosts
    
    
    Other
    
    
    TotalBalance September 30, 2010
    
    $
    13
    
    
    $
    60
    
    
    $
    73Payments
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )Reversals
    
    
    
    
    
    
    (50
    )
    
    
    (50
    )Balance December 31, 2010
    
    $
    10
    
    
    $
    10
    
    
    $
    20Payments
    
    
    
    
    
    
    
    
    
    
    Reversals
    
    
    (10
    )
    
    
    (10
    )
    
    
    (20
    )Balance March 31, 2011
    
    $
    
    
    
    $
    
    
    
    $
    
   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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##### Table of Contents



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




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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
 CONSOLIDATED RESULTS OF OPERATIONS
  Three months ended March 31,
    
    
    % increase
    
    
    Six months ended March 31,
    
    
    % increase2011
    
    
    2010
    
    
    (decrease)
    
    
    2011
    
    
    2010
    
    
    (decrease)Net sales
    
    $
    49,716
    
    
    
    100.0
    %
    
    $
    45,076
    
    
    
    100.0
    %
    
    
    10.3
    %
    
    $
    98,050
    
    
    
    100.0
    %
    
    $
    88,044
    
    
    
    100.0
    %
    
    
    11.4
    %Cost of sales (exclusive of amortization of purchased and core technology
shown separately below)
    
    
    23,212
    
    
    
    46.7
    
    
    
    21,254
    
    
    
    47.1
    
    
    
    9.2
    
    
    
    46,032
    
    
    
    46.9
    
    
    
    41,417
    
    
    
    47.0
    
    
    
    11.1Amortization of purchased and
core technology
    
    
    853
    
    
    
    1.7
    
    
    
    1,074
    
    
    
    2.4
    
    
    
    (20.6
    )
    
    
    1,701
    
    
    
    1.7
    
    
    
    2,166
    
    
    
    2.5
    
    
    
    (21.5
    )Gross profit
    
    
    25,651
    
    
    
    51.6
    
    
    
    22,748
    
    
    
    50.5
    
    
    
    12.8
    
    
    
    50,317
    
    
    
    51.4
    
    
    
    44,461
    
    
    
    50.5
    
    
    
    13.2Operating expenses
    
    
    21,989
    
    
    
    44.2
    
    
    
    20,553
    
    
    
    45.6
    
    
    
    7.0
    
    
    
    43,990
    
    
    
    44.9
    
    
    
    40,437
    
    
    
    45.9
    
    
    
    8.8Operating income
    
    
    3,662
    
    
    
    7.4
    
    
    
    2,195
    
    
    
    4.9
    
    
    
    66.8
    
    
    
    6,327
    
    
    
    6.5
    
    
    
    4,024
    
    
    
    4.6
    
    
    
    57.2Other (expense) income, net
    
    
    (181
    )
    
    
    (0.4
    )
    
    
    359
    
    
    
    0.8
    
    
    
    (150.4
    )
    
    
    (162
    )
    
    
    (0.2
    )
    
    
    362
    
    
    
    0.4
    
    
    
    (144.8
    )Income before income taxes
    
    
    3,481
    
    
    
    7.0
    
    
    
    2,554
    
    
    
    5.7
    
    
    
    36.3
    
    
    
    6,165
    
    
    
    6.3
    
    
    
    4,386
    
    
    
    5.0
    
    
    
    40.6Income tax provision
    
    
    1,242
    
    
    
    2.5
    
    
    
    868
    
    
    
    2.0
    
    
    
    43.1
    
    
    
    1,610
    
    
    
    1.7
    
    
    
    1,501
    
    
    
    1.7
    
    
    
    7.3Net income
    
    $
    2,239
    
    
    
    4.5
    %
    
    $
    1,686
    
    
    
    3.7
    %
    
    
    32.8
    %
    
    $
    4,555
    
    
    
    4.6
    %
    
    $
    2,885
    
    
    
    3.3
    %
    
    
    57.9
    %
   Three months ended March 31,
    
    
    % increase
    
    
    Six months ended March 31,
    
    
    % increase($ in thousands)
    
    2011
    
    
    2010
    
    
    (decrease)
    
    
    2011
    
    
    2010
    
    
    (decrease)Non-embedded
    
    $
    27,346
    
    
    
    55.0
    %
    
    $
    24,910
    
    
    
    55.3
    %
    
    
    9.8
    %
    
    $
    54,570
    
    
    
    55.7
    %
    
    $
    49,807
    
    
    
    56.6
    %
    
    
    9.6
    %Embedded
    
    
    22,370
    
    
    
    45.0
    
    
    
    20,166
    
    
    
    44.7
    
    
    
    10.9
    
    
    
    43,480
    
    
    
    44.3
    
    
    
    38,237
    
    
    
    43.4
    
    
    
    13.7Total net sales
    
    $
    49,716
    
    
    
    100.0
    %
    
    $
    45,076
    
    
    
    100.0
    %
    
    
    10.3
    %
    
    $
    98,050
    
    
    
    100.0
    %
    
    $
    88,044
    
    
    
    100.0
    %
    
    
    11.4
    %
 Non-embedded
   18




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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 March 31,
    
    
    $ increase
    
    
    % increase
    
    
    Six months ended March 31,
    
    
    $ increase
    
    
    % increase($ in thousands)
    
    2011
    
    
    2010
    
    
    (decrease)
    
    
    (decrease)
    
    
    2011
    
    
    2010
    
    
    (decrease)
    
    
    (decrease)North America
    
    $
    29,729
    
    
    $
    26,515
    
    
    $
    3,214
    
    
    
    12.1
    %
    
    $
    57,480
    
    
    $
    52,040
    
    
    $
    5,440
    
    
    
    10.5
    %EMEA
    
    
    12,029
    
    
    
    12,347
    
    
    
    (318
    )
    
    
    (2.6
    )
    
    
    24,702
    
    
    
    23,368
    
    
    
    1,334
    
    
    
    5.7Asia countries
    
    
    6,741
    
    
    
    5,238
    
    
    
    1,503
    
    
    
    28.7
    
    
    
    12,883
    
    
    
    10,573
    
    
    
    2,310
    
    
    
    21.8Latin America
    
    
    1,217
    
    
    
    976
    
    
    
    241
    
    
    
    24.7
    
    
    
    2,985
    
    
    
    2,063
    
    
    
    922
    
    
    
    44.7Total net sales
    
    $
    49,716
    
    
    $
    45,076
    
    
    $
    4,640
    
    
    
    10.3
    %
    
    $
    98,050
    
    
    $
    88,044
    
    
    $
    10,006
    
    
    
    11.4
    %
      Three months ended March 31,
    
    
    $ increase
    
    
    Six months ended March 31,
    
    
    $ increase($ in thousands)
    
    2011
    
    
    2010
    
    
    (decrease)
    
    
    2011
    
    
    2010
    
    
    (decrease)Sales and marketing
    
    $
    9,532
    
    
    
    19.1
    %
    
    $
    9,603
    
    
    
    21.3
    %
    
    $
    (71
    )
    
    $
    19,330
    
    
    
    19.7
    %
    
    $
    18,843
    
    
    
    21.4
    %
    
    $
    487Research and development
    
    
    7,849
    
    
    
    15.8
    
    
    
    7,078
    
    
    
    15.7
    
    
    
    771
    
    
    
    15,657
    
    
    
    16.0
    
    
    
    13,564
    
    
    
    15.4
    
    
    
    2,093General and administrative
    
    
    4,628
    
    
    
    9.3
    
    
    
    4,224
    
    
    
    9.4
    
    
    
    404
    
    
    
    9,073
    
    
    
    9.3
    
    
    
    8,382
    
    
    
    9.5
    
    
    
    691Restructuring
    
    
    (20
    )
    
    
    0.0
    
    
    
    (352
    )
    
    
    (0.8
    )
    
    
    332
    
    
    
    (70
    )
    
    
    (0.1
    )
    
    
    (352
    )
    
    
    (0.4
    )
    
    
    282Total operating expenses
    
    $
    21,989
    
    
    
    44.2
    %
    
    $
    20,553
    
    
    
    45.6
    %
    
    $
    1,436
    
    
    $
    43,990
    
    
    
    44.9
    %
    
    $
    40,437
    
    
    
    45.9
    %
    
    $
    3,553
  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 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
            21




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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,
    
    
    % increase2011
    
    
    2010
    
    
    (decrease)Euro
    
    
    1.3631
    
    
    
    1.4326
    
    
    
    (4.9
    )%British Pound
    
    
    1.5912
    
    
    
    1.5985
    
    
    
    (0.5
    )%Japanese Yen
    
    
    0.0121
    
    
    
    0.0111
    
    
    
    9.4
    %Indian Rupee
    
    
    0.0221
    
    
    
    0.0216
    
    
    
    2.3
    %
   22




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##### Table of Contents



ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (CONTINUED)
    
 ITEM 4.
    
    CONTROLS AND PROCEDURES
      23




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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1.
    
    LEGAL PROCEEDINGS
  
 ITEM 1A.
    
    RISK FACTORS
  The impact of natural disasters, such as the earthquake and tsunami that took place in March 2011
in Japan, could negatively impact our supply chain and customers resulting in an adverse impact to
our revenues and profitability.
  
 ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4.
    
    RESERVED
 
 ITEM 5.
    
    OTHER INFORMATION
   24




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##### Table of Contents



ITEM 6.
    
    EXHIBITS
 Exhibit No.
    
    Description3
    (a)
    
    Restated Certificate of Incorporation of the Company, as amended (1)3
    (b)
    
    Amended and Restated By-Laws of the Company (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 Chief Financial Officer32
    
    
    Section 1350 Certification
 
 (1)
    
    Incorporated by reference to Exhibit 3(a) to the Companys Form 10-K for the year ended
September 30, 1993 (File No. 0-17972)(2)
    
    Incorporated by reference to Exhibit 3(b) to the Companys 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)  25




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##### Table of Contents



DIGI INTERNATIONAL INC.Date:  May 6, 2011
    By:
    /s/ Steven E. SnyderSteven E. SnyderSenior Vice President, Chief Financial Officer
and Treasurer (Principal Accounting Officer)  26




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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 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
  27