##### 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, 2008
 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
  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, 2008 and 2007
    
    
    3Condensed Consolidated Balance Sheets 
as of
December 31, 2008 and September 30, 2008
    
    
    4Condensed Consolidated Statements of Cash Flows
 for
the three months ended December 31, 2008 and 2007
    
    
    5Notes to Condensed Consolidated Financial
Statements
    
    
    6ITEM 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    17Forward-looking Statements
    
    
    17ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    25ITEM 4. Controls and Procedures
    
    
    26PART II. OTHER INFORMATIONITEM 1. Legal Proceedings
    
    
    27ITEM 1A. Risk Factors
    
    
    27ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    27ITEM 3. Defaults Upon Senior Securities
    
    
    27ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    27ITEM 5. Other Information
    
    
    27ITEM 6. Exhibits
    
    
    28Exhibit No. 31(a)Exhibit No. 31(b)Exhibit 32
   2




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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 31,2008
    
    
    2007(in thousands, except per common share data)Net sales
    
    $
    41,361
    
    
    $
    44,574Cost of sales (exclusive of amortization of purchased and core
technology shown separately below)
    
    
    19,069
    
    
    
    19,543Amortization of purchased and core technology
    
    
    1,044
    
    
    
    1,136Gross profit
    
    
    21,248
    
    
    
    23,895Operating expenses:Sales and marketing
    
    
    9,625
    
    
    
    8,686Research and development
    
    
    6,974
    
    
    
    6,589General and administrative
    
    
    3,883
    
    
    
    4,041Total operating expenses
    
    
    20,482
    
    
    
    19,316Operating income
    
    
    766
    
    
    
    4,579Other income (expense):Interest income
    
    
    580
    
    
    
    1,054Interest expense
    
    
    (85
    )
    
    
    (14
    )Other (expense) income
    
    
    (236
    )
    
    
    19Total other income, net
    
    
    259
    
    
    
    1,059Income before income taxes
    
    
    1,025
    
    
    
    5,638Income tax provision
    
    
    9
    
    
    
    1,968Net income
    
    $
    1,016
    
    
    $
    3,670Net income per common share:Basic
    
    $
    0.04
    
    
    $
    0.14Diluted
    
    $
    0.04
    
    
    $
    0.14Weighted average common shares, basic
    
    
    25,381
    
    
    
    25,619Weighted average common shares, diluted
    
    
    25,679
    
    
    
    26,593
   3




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DIGI INTERNATIONAL INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (UNAUDITED)
 December 31,
    
    
    September 30,2008
    
    
    2008(in thousands, except share data)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    22,632
    
    
    $
    14,176Marketable securities
    
    
    46,493
    
    
    
    59,337Accounts receivable, net
    
    
    19,824
    
    
    
    24,310Inventories
    
    
    35,157
    
    
    
    30,240Income taxes receivable
    
    
    1,395
    
    
    
    Other
    
    
    5,439
    
    
    
    5,106Total current assets
    
    
    130,940
    
    
    
    133,169Marketable securities, long-term
    
    
    1,119
    
    
    
    179Property, equipment and improvements, net
    
    
    16,334
    
    
    
    16,255Identifiable intangible assets, net
    
    
    30,079
    
    
    
    34,032Goodwill
    
    
    83,598
    
    
    
    86,578Other
    
    
    1,162
    
    
    
    1,203Total assets
    
    $
    263,232
    
    
    $
    271,416LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Capital lease obligations, current portion
    
    $
    267
    
    
    $
    267Accounts payable
    
    
    11,302
    
    
    
    10,343Income taxes payable
    
    
    
    
    
    
    182Accrued expenses:Compensation
    
    
    4,045
    
    
    
    5,981Warranty
    
    
    1,230
    
    
    
    1,214Other
    
    
    2,729
    
    
    
    2,946Total current liabilities
    
    
    19,573
    
    
    
    20,933Capital lease obligations, net of current portion
    
    
    9
    
    
    
    78Income taxes payable
    
    
    4,625
    
    
    
    4,358Deferred tax liabilities
    
    
    6,130
    
    
    
    7,582Deferred payment on acquisition
    
    
    5,625
    
    
    
    5,575Other noncurrent liabilities
    
    
    942
    
    
    
    956Total liabilities
    
    
    36,904
    
    
    
    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;
28,343,865 and 28,335,876 shares issued
    
    
    283
    
    
    
    283Additional paid-in capital
    
    
    178,557
    
    
    
    177,614Retained earnings
    
    
    79,641
    
    
    
    78,625Accumulated other comprehensive loss
    
    
    (9,807
    )
    
    
    (1,897
    )Treasury stock, at cost, 2,915,429 and 2,960,457 shares
    
    
    (22,346
    )
    
    
    (22,691
    )Total stockholders equity
    
    
    226,328
    
    
    
    231,934Total liabilities and stockholders equity
    
    $
    263,232
    
    
    $
    271,416
   4




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DIGI INTERNATIONAL INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 Three months ended December 31,2008
    
    
    2007(in thousands)Operating activities:Net income
    
    $
    1,016
    
    
    $
    3,670Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation of property, equipment and improvements
    
    
    590
    
    
    
    601Amortization of identifiable intangible assets and other assets
    
    
    1,854
    
    
    
    1,896Excess tax benefits from stock-based compensation
    
    
    (2
    )
    
    
    (129
    )Stock-based compensation
    
    
    968
    
    
    
    872Deferred income tax benefit
    
    
    (836
    )
    
    
    (1,235
    )Other
    
    
    112
    
    
    
    162Changes in operating assets and liabilities
    
    
    (5,688
    )
    
    
    (1,820
    )Net cash
(used in) provided by operating activities
    
    
    (1,986
    )
    
    
    4,017Investing activities:Purchase of marketable securities
    
    
    (4,173
    )
    
    
    (23,836
    )Proceeds from sales and maturities of marketable securities
    
    
    16,064
    
    
    
    19,919Contingent purchase price payments related to business acquisition
    
    
    
    
    
    
    (1,315
    )Purchase of property, equipment, improvements and certain
other intangible assets
    
    
    (843
    )
    
    
    (1,177
    )Net cash provided by (used in) investing activities
    
    
    11,048
    
    
    
    (6,409
    )Financing activities:Payments on capital lease obligations
    
    
    (69
    )
    
    
    (102
    )Excess tax benefits from stock-based compensation
    
    
    2
    
    
    
    129Proceeds from stock option plan transactions
    
    
    55
    
    
    
    1,224Proceeds from employee stock purchase plan transactions
    
    
    309
    
    
    
    348Net cash provided by financing activities
    
    
    297
    
    
    
    1,599Effect of exchange rate changes on cash and cash equivalents
    
    
    (903
    )
    
    
    196Net increase (decrease) in cash and cash equivalents
    
    
    8,456
    
    
    
    (597
    )Cash and cash equivalents, beginning of period
    
    
    14,176
    
    
    
    18,375Cash and cash equivalents, end of period
    
    $
    22,632
    
    
    $
    17,778
   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
 SFAS No. 142,
   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)
   2.
    
    NET INCOME PER COMMON SHARE
   7




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 2.
    
    NET INCOME PER COMMON SHARE (CONTINUED)
  Three months ended December 31,2008
    
    
    2007Numerator:Net income
    
    $
    1,016
    
    
    $
    3,670Denominator:Denominator for basic net income per common
share  weighted average shares outstanding
    
    
    25,381
    
    
    
    25,619Effect of dilutive securities:Employee stock options and employee stock purchase plan
    
    
    298
    
    
    
    974Denominator for diluted net income per common
share  adjusted weighted average shares
    
    
    25,679
    
    
    
    26,593Net income per common share, basic
    
    $
    0.04
    
    
    $
    0.14Net income per common share, diluted
    
    $
    0.04
    
    
    $
    0.14
    Three months ended December 31,2008
    
    
    2007Net income
    
    $
    1,016
    
    
    $
    3,670Other comprehensive (loss) income:Change in foreign currency translation (loss) gain
    
    
    (7,901
    )
    
    
    695Change in unrealized loss on investments, net of income tax benefit of $5
    
    
    (8
    )
    
    
    Comprehensive (loss) income
    
    $
    (6,893
    )
    
    $
    4,365
 4.
    
    ACQUISITIONS
 Sarian Systems, Ltd.
  IP-based
  8




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 4.
    
    ACQUISITIONS (CONTINUED)
  Three months endedDecember 31, 2007Net sales
    
    $
    48,587Net income
    
    $
    2,567Net income per common share, basic
    
    $
    0.10Net income per common share, diluted
    
    $
    0.10
  Spectrum Design Solutions, Inc.
 5.
    
    SELECTED BALANCE SHEET DATA
 (in thousands)
    
    December 31, 2008
    
    
    September 30, 2008Accounts receivable, net:Accounts receivable
    
    $
    20,561
    
    
    $
    25,007Less allowance for doubtful accounts
    
    
    737
    
    
    
    697$
    19,824
    
    
    $
    24,310Inventories:Raw materials
    
    $
    26,539
    
    
    $
    20,979Work in process
    
    
    1,213
    
    
    
    981Finished goods
    
    
    7,405
    
    
    
    8,280$
    35,157
    
    
    $
    30,240Other accrued expenses:Accrued professional fees
    
    $
    500
    
    
    $
    507Deferred gain on building sale  short-term
    
    
    266
    
    
    
    273Unearned revenue
    
    
    394
    
    
    
    353Other accrued expenses
    
    
    1,569
    
    
    
    1,813$
    2,729
    
    
    $
    2,946
   9




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 6.
    
    MARKETABLE SECURITIES
   held-to-maturity
  Amortized
    
    
    Unrealized
    
    
    UnrealizedCost (1)
    
    
    Gains
    
    
    Losses
    
    
    Fair Value (1)Corporate bonds
    
    $
    39,539
    
    
    $
    5
    
    
    $
    (646
    )
    
    $
    38,898Government municipal bonds
    
    
    3,729
    
    
    
    20
    
    
    
    
    
    
    
    3,749$
    43,268
    
    
    $
    25
    
    
    $
    (646
    )
    
    $
    42,647
 (1)
    
    Included in amortized cost and fair value is purchased and accrued interest of $752.  10




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
   Amortized
    
    
    Unrealized
    
    
    UnrealizedCost (1)
    
    
    Gains
    
    
    Losses
    
    
    Fair Value (1)Corporate bonds (2)
    
    $
    4,357
    
    
    $
    
    
    
    $
    (13
    )
    
    $
    4,344
 (1)
    
    Included in amortized cost and fair value is purchased and accrued interest of $89.(2)
    
    The Lehman Brothers security is included in amortized cost at a fair value of $179, net of the impairment charge
of $1,014 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.(2)
    
    The Lehman Brothers security is included in amortized cost at a fair value of $179, net of the
impairment charge
of $1,014 recorded in the fourth quarter of fiscal 2008.      11




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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. 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 December 31, 2008 Using:Total carrying
    
    
    Quoted price in
    
    
    Significant other
    
    
    Significantvalue at
    
    
    active markets
    
    
    observable inputs
    
    
    unobservable inputsDecember 31, 2008
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Cash equivalents:Money market
    
    $
    9,914
    
    
    $
    9,914
    
    
    $
    
    
    
    $
    Available-for-sale marketable securities:Corporate bonds
    
    
    4,357
    
    
    
    4,178
    
    
    
    
    
    
    
    179Total cash equivalents and marketable
securities measured at fair value
    
    $
    14,271
    
    
    $
    14,092
    
    
    $
    
    
    
    $
    179
  Level 3 Valuation Techniques
   12




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
     December 31, 2008
    
    
    September 30, 2008Gross
    
    
    
    
    
    
    
    
    
    
    Grosscarrying
    
    
    Accum.
    
    
    
    
    
    
    carrying
    
    
    Accum.amount
    
    
    amort.
    
    
    Net
    
    
    amount
    
    
    amort.
    
    
    NetPurchased and core technology
    
    $
    45,188
    
    
    $
    (31,581
    )
    
    $
    13,607
    
    
    $
    46,660
    
    
    $
    (30,745
    )
    
    $
    15,915License agreements
    
    
    2,440
    
    
    
    (2,440
    )
    
    
    
    
    
    
    2,440
    
    
    
    (2,440
    )
    
    
    Patents and trademarks
    
    
    8,966
    
    
    
    (4,919
    )
    
    
    4,047
    
    
    
    8,906
    
    
    
    (4,682
    )
    
    
    4,224Customer maintenance contracts
    
    
    700
    
    
    
    (481
    )
    
    
    219
    
    
    
    700
    
    
    
    (464
    )
    
    
    236Customer relationships
    
    
    17,209
    
    
    
    (5,862
    )
    
    
    11,347
    
    
    
    18,137
    
    
    
    (5,472
    )
    
    
    12,665Non-compete agreements
    
    
    1,019
    
    
    
    (160
    )
    
    
    859
    
    
    
    1,075
    
    
    
    (83
    )
    
    
    992Total
    
    $
    75,522
    
    
    $
    (45,443
    )
    
    $
    30,079
    
    
    $
    77,918
    
    
    $
    (43,886
    )
    
    $
    34,032
   2009 (nine months)
    
    $
    5,7762010
    
    
    7,2532011
    
    
    5,3622012
    
    
    3,9522013
    
    
    2,9622014
    
    
    2,648
  Beginning balance, October 1, 2008
    
    $
    86,578Foreign currency translation adjustment
    
    
    (2,980
    )Ending balance, December 31, 2008
    
    $
    83,598
  13




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
     Three months ended December 31,2008
    
    
    2007Effective tax rate before impact of discrete tax benefit
    
    
    37.0
    %
    
    
    34.9
    %Impact of discrete tax benefit
    
    
    -36.1
    %
    
    
    0.0
    %Effective tax rate
    
    
    0.9
    %
    
    
    34.9
    %
  Uncertain tax positions as of October 1, 2008
    
    $
    3,652Increases related to:Prior year income tax positions
    
    
    199Uncertain tax positions as of December 31, 2008
    
    $
    3,851
      14




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
   Three months ended December 31,Balance at
    
    
    Warranties
    
    
    Settlements
    
    
    Balance atOctober 1
    
    
    expensed
    
    
    made
    
    
    December 312008
    
    $
    1,214
    
    
    $
    221
    
    
    $
    (205
    )
    
    $
    1,2302007
    
    $
    1,155
    
    
    $
    165
    
    
    $
    (186
    )
    
    $
    1,134
   Legal Proceedings
   In
re Initial Public Offering Securities Litigation en banc
  15




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
       16




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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
    17




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
  Marketable Securities
  OVERVIEW
      18




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
 OVERVIEW (CONTINUED)
   CONSOLIDATED RESULTS OF OPERATIONS
  Three months ended December 31,
    
    
    % increase2008
    
    
    2007
    
    
    (decrease)Net sales
    
    $
    41,361
    
    
    
    100.0
    %
    
    $
    44,574
    
    
    
    100.0
    %
    
    
    (7.2
    )%Cost of sales (exclusive of amortization of purchased
and core technology shown separately below)
    
    
    19,069
    
    
    
    46.1
    
    
    
    19,543
    
    
    
    43.8
    
    
    
    (2.4
    )Amortization of purchased and core technology
    
    
    1,044
    
    
    
    2.5
    
    
    
    1,136
    
    
    
    2.6
    
    
    
    (8.1
    )Gross profit
    
    
    21,248
    
    
    
    51.4
    
    
    
    23,895
    
    
    
    53.6
    
    
    
    (11.1
    )Operating expenses:Sales and marketing
    
    
    9,625
    
    
    
    23.3
    
    
    
    8,686
    
    
    
    19.5
    
    
    
    10.8Research and development
    
    
    6,974
    
    
    
    16.8
    
    
    
    6,589
    
    
    
    14.8
    
    
    
    5.8General and administrative
    
    
    3,883
    
    
    
    9.4
    
    
    
    4,041
    
    
    
    9.0
    
    
    
    (3.9
    )Total operating expenses
    
    
    20,482
    
    
    
    49.5
    
    
    
    19,316
    
    
    
    43.3
    
    
    
    6.0Operating income
    
    
    766
    
    
    
    1.9
    
    
    
    4,579
    
    
    
    10.3
    
    
    
    (83.3
    )Other income, net
    
    
    259
    
    
    
    0.6
    
    
    
    1,059
    
    
    
    2.3
    
    
    
    (75.5
    )Income before income taxes
    
    
    1,025
    
    
    
    2.5
    
    
    
    5,638
    
    
    
    12.6
    
    
    
    (81.8
    )Income tax provision
    
    
    9
    
    
    
    0.0
    
    
    
    1,968
    
    
    
    4.4
    
    
    
    (99.5
    )Net income
    
    $
    1,016
    
    
    
    2.5
    %
    
    $
    3,670
    
    
    
    8.2
    %
    
    
    (72.3
    )%
   Three months ended December 31,
    
    
    % increase($ in thousands)
    
    2008
    
    
    2007
    
    
    (decrease)Non-embedded
    
    $
    23,340
    
    
    
    56.4
    %
    
    $
    23,857
    
    
    
    53.5
    %
    
    
    (2.2
    )%Embedded
    
    
    18,021
    
    
    
    43.6
    
    
    
    20,717
    
    
    
    46.5
    
    
    
    (13.0
    )Total net sales
    
    $
    41,361
    
    
    
    100.0
    %
    
    $
    44,574
    
    
    
    100.0
    %
    
    
    (7.2
    )%
  19




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
  Non-embedded
  Embedded
   Three months ended December 31,
    
    
    $ increase
    
    
    % increase($ in thousands)
    
    2008
    
    
    2007
    
    
    (decrease)
    
    
    (decrease)North America
    
    $
    23,145
    (1)
    
    $
    28,124
    
    
    $
    (4,979
    )
    
    
    (17.7
    )%EMEA
    
    
    13,328
    (2)
    
    
    11,144
    
    
    
    2,184
    
    
    
    19.6Asia Pacific
    
    
    3,834
    
    
    
    4,529
    
    
    
    (695
    )
    
    
    (15.3
    )Latin America (including Mexico)
    
    
    1,054
    
    
    
    777
    
    
    
    277
    
    
    
    35.6Total net sales
    
    $
    41,361
    
    
    $
    44,574
    
    
    $
    (3,213
    )
    
    
    (7.2
    )%
 (1)
    
    Includes Spectrum net sales of $1,048(2)
    
    Includes Sarian net sales of $3,111     20




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
   Three months ended December 31,
    
    
    $ increase($ in thousands)
    
    2008
    
    
    2007
    
    
    (decrease)Operating expenses:Sales and marketing
    
    $
    9,625
    
    
    
    23.3
    %
    
    $
    8,686
    
    
    
    19.5
    %
    
    $
    939Research and development
    
    
    6,974
    
    
    
    16.8
    
    
    
    6,589
    
    
    
    14.8
    
    
    
    385General and administrative
    
    
    3,883
    
    
    
    9.4
    
    
    
    4,041
    
    
    
    9.0
    
    
    
    (158
    )Total operating expenses
    
    $
    20,482
    
    
    
    49.5
    %
    
    $
    19,316
    
    
    
    43.3
    %
    
    $
    1,166
         21




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
   Highlights of Consolidated Statement of Cash Flow (in thousands):
 Three months ended December 31,2008
    
    
    2007
    
    
    ChangeOperating activities
    
    $
    (1,986
    )
    
    $
    4,017
    
    
    $
    (6,003
    )Investing activities
    
    
    11,048
    
    
    
    (6,409
    )
    
    
    17,457Financing activities
    
    
    297
    
    
    
    1,599
    
    
    
    (1,302
    )Effect of exchange rate changes on cash
and cash equivalents
    
    
    (903
    )
    
    
    196
    
    
    
    (1,099
    )Net increase (decrease) in cash and cash equivalents
    
    $
    8,456
    
    
    $
    (597
    )
    
    $
    9,053
 Reconciliation of Net Income to Cash Inflows (Outflows) from Operating Activities (in thousands):
 Three months ended December 31,2008
    
    
    2007
    
    
    ChangeNet income
    
    $
    1,016
    
    
    $
    3,670
    
    
    $
    (2,654
    )Deferred income taxes
    
    
    (836
    )
    
    
    (1,235
    )
    
    
    399Depreciation and amortization
    
    
    2,444
    
    
    
    2,497
    
    
    
    (53
    )Stock-based compensation
    
    
    968
    
    
    
    872
    
    
    
    96Other reconciling items
    
    
    110
    
    
    
    33
    
    
    
    77Net income adjusted for non-cash expenses
    
    
    3,702
    
    
    
    5,837
    
    
    
    (2,135
    )Net changes in operating assets and liabilities
    
    
    (5,688
    )
    
    
    (1,820
    )
    
    
    (3,868
    )Cash flows
(used in) provided by operating activities
    
    $
    (1,986
    )
    
    $
    4,017
    
    
    $
    (6,003
    )
    22




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
      SFAS No. 142,
    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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
           25




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ITEM 4. CONTROLS AND PROCEDURES
     26




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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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
   27




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##### Table of Contents



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)  28




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##### Table of Contents



DIGI INTERNATIONAL INC.Date:  February 9, 2009
    By:
    /s/ Subramanian KrishnanSubramanian KrishnanSenior Vice President, Chief Financial Officer
and Treasurer (Principal Financial and
Accounting Officer)  29




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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
  30