10-Q

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, 2015

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.

(Exact name of registrant as specified in its charter)

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)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

On April 30, 2015, there were 24,926,816 shares of the registrant’s $.01 par value Common Stock outstanding.

INDEX

	Page
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2015 and 2014	3
Condensed Consolidated Statements of Comprehensive (Loss) Income for the three and six months ended March 31, 2015 and 2014	4
Condensed Consolidated Balance Sheets as of March 31, 2015 and September 30, 2014	5
Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2015 and 2014	6
Notes to Condensed Consolidated Financial Statements	7
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk	26
ITEM 4. Controls and Procedures	27
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings	28
ITEM 1A. Risk Factors	28
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	28
ITEM 3. Defaults Upon Senior Securities	28
ITEM 4. Mine Safety Disclosures	28
ITEM 5. Other Information	28
ITEM 6. Exhibits	29
EX-31.A
EX-31.B
EX-32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

2

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,
	2015		2014			2015			2014
	(in thousands, except per common share data)
Revenue:
Hardware product	$	48,108	$	40,560		$	93,041		$	82,549
Service	5,043		5,322			8,833			10,655
Total revenue	53,151		45,882			101,874			93,204
Cost of sales:
Cost of hardware product	25,498		20,012			48,610			40,275
Cost of service	3,575		4,090			7,264			8,241
Total cost of sales	29,073		24,102			55,874			48,516
Gross profit	24,078		21,780			46,000			44,688
Operating expenses:
Sales and marketing	10,299		10,399			21,091			20,618
Research and development	7,779		7,411			15,341			14,668
General and administrative	4,540		4,619			9,728			9,342
Restructuring charges, net	518		—			518			81
Total operating expenses	23,136		22,429			46,678			44,709
Operating income (loss)	942		(649		)	(678		)	(21		)
Other income, net:
Interest income, net	54		49			92			92
Other income, net	1,324		21			1,712			114
Total other income, net	1,378		70			1,804			206
Income (loss) before income taxes	2,320		(579		)	1,126			185
Income tax provision (benefit)	874		(1,317		)	19			(1,241		)
Net income	$	1,446	$	738		$	1,107		$	1,426
Net income per common share:
Basic	$	0.06	$	0.03		$	0.05		$	0.06
Diluted	$	0.06	$	0.03		$	0.04		$	0.05
Weighted average common shares:
Basic	24,492		25,644			24,319			25,680
Diluted	25,273		26,144			24,816			26,189

The accompanying notes are an integral part of the condensed consolidated financial statements.

3

DIGI INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(UNAUDITED)

	Three months ended March 31,						Six months ended March 31,
	2015			2014			2015			2014
	(in thousands)
Net income	$	1,446		$	738		$	1,107		$	1,426
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustment	(3,356		)	(181		)	(5,729		)	162
Change in net unrealized gain (loss) on investments	23			26			(6		)	64
Less income tax (provision) benefit	(9		)	(10		)	2			(25		)
Reclassification of realized loss on investments included in net income (1)	1			—			1			—
Other comprehensive (loss) income, net of tax	(3,341		)	(165		)	(5,732		)	201
Comprehensive (loss) income	$	(1,895	)	$	573		$	(4,625	)	$	1,627

(1) Recorded in Other income, net on our Condensed Consolidated Statement of Operations.

The accompanying notes are an integral part of the condensed consolidated financial statements.

4

DIGI INTERNATIONAL INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	March 31, 2015			September 30, 2014
	(in thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents	$	45,657		$	47,490
Marketable securities	39,220			32,898
Accounts receivable, net	28,615			28,576
Inventories	33,881			31,247
Deferred tax assets	3,388			3,221
Other	4,877			4,249
Total current assets	155,638			147,681
Marketable securities, long-term	7,550			11,541
Property, equipment and improvements, net	14,617			13,231
Identifiable intangible assets, net	5,348			6,785
Goodwill	101,742			103,398
Deferred tax assets	4,947			7,383
Other	320			440
Total assets	$	290,162		$	290,459
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	11,375		$	10,451
Accrued compensation	7,677			8,133
Other	3,421			3,170
Total current liabilities	22,473			21,754
Income taxes payable	1,893			2,724
Deferred tax liabilities	182			272
Other noncurrent liabilities	481			411
Total liabilities	25,029			25,161
Contingencies (see Note 9)
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; 31,462,480 and 30,703,895 shares issued	315			307
Additional paid-in capital	224,873			218,689
Retained earnings	118,923			117,816
Accumulated other comprehensive loss	(24,009		)	(18,277		)
Treasury stock, at cost, 6,538,789 and 6,313,937 shares	(54,969		)	(53,237		)
Total stockholders’ equity	265,133			265,298
Total liabilities and stockholders’ equity	$	290,162		$	290,459

The accompanying notes are an integral part of the condensed consolidated financial statements.

5

DIGI INTERNATIONAL INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Six months ended March 31,
	2015			2014
	(in thousands)
Operating activities:
Net income	$	1,107		$	1,426
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property, equipment and improvements	1,445			1,828
Amortization of identifiable intangible assets	1,537			1,891
Stock-based compensation	2,222			2,070
Excess tax benefits from stock-based compensation	—			(44		)
Deferred income tax provision (benefit)	2,212			(1,065		)
Gain on insurance settlement related to property and equipment	(989		)	—
Bad debt/product return provision	518			(151		)
Inventory obsolescence	476			409
Restructuring charges, net	518			81
Other	(27		)	46
Changes in operating assets and liabilities	(7,459		)	(9,681		)
Net cash provided by (used in) operating activities	1,560			(3,190		)
Investing activities:
Purchase of marketable securities	(22,099		)	(5,157		)
Proceeds from maturities of marketable securities	19,763			13,778
Proceeds from insurance settlement related to property and equipment	1,014			—
Proceeds from sale of property and equipment	45			—
Purchase of property, equipment, improvements and certain other intangible assets	(3,035		)	(1,921		)
Net cash (used in) provided by investing activities	(4,312		)	6,700
Financing activities:
Excess tax benefits from stock-based compensation	—			44
Proceeds from stock option plan transactions	6,006			3,209
Proceeds from employee stock purchase plan transactions	505			561
Purchases of common stock	(2,339		)	(5,416		)
Net cash provided by (used in) financing activities	4,172			(1,602		)
Effect of exchange rate changes on cash and cash equivalents	(3,253		)	329
Net (decrease) increase in cash and cash equivalents	(1,833		)	2,237
Cash and cash equivalents, beginning of period	47,490			41,320
Cash and cash equivalents, end of period	$	45,657		$	43,557

The accompanying notes are an integral part of the condensed consolidated financial statements.

6

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

The interim unaudited condensed consolidated financial statements included in this Form 10-Q have been prepared by Digi International Inc. (the “Company,” “Digi,” “we,” “our,” or “us”) pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures, normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto, including (but not limited to) the summary of significant accounting policies, presented in our Annual Report on Form 10-K for the year ended September 30, 2014 as filed with the SEC (“2014 Financial Statements”).

The condensed consolidated financial statements presented herein reflect, in the opinion of management, all adjustments which consist only of normal, recurring adjustments necessary for a fair statement of the condensed consolidated balance sheets and condensed consolidated statements of operations, comprehensive income and cash flows for the periods presented. The condensed consolidated results of operations for any interim period are not necessarily indicative of results for the full year. The year-end condensed consolidated balance sheet data were derived from our 2014 Financial Statements, but do not include all disclosures required by U.S. GAAP.

Recently Issued Accounting Pronouncements

Not Yet Adopted

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers.” This guidance provides a five-step analysis in determining when and how revenue is recognized so that an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects what it expects in exchange for the goods and services. It also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. This guidance is effective for fiscal years (and interim reporting periods within those years) beginning after December 15, 2016. We expect to adopt this guidance beginning with our fiscal quarter ending December 31, 2017. We are evaluating the impact that the adoption will have on our consolidated financial statements.

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2. EARNINGS PER SHARE

Basic net income per common share is calculated based on the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed by dividing net income by the weighted average number of common shares and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares result from dilutive common stock options and restricted stock units.

The following table is a reconciliation of the numerators and denominators in the net income per common share calculations (in thousands, except per common share data):

	Three months ended March 31,				Six months ended March 31,
	2015		2014		2015		2014
Numerator:
Net income	$	1,446	$	738	$	1,107	$	1,426
Denominator:
Denominator for basic net income per common share — weighted average shares outstanding	24,492		25,644		24,319		25,680
Effect of dilutive securities:
Stock options and restricted stock units	781		500		497		509
Denominator for diluted net income per common share — adjusted weighted average shares	25,273		26,144		24,816		26,189
Net income per common share, basic	$	0.06	$	0.03	$	0.05	$	0.06
Net income per common share, diluted	$	0.06	$	0.03	$	0.04	$	0.05

For the three months ended March 31, 2015 and 2014, there were 2,366,812 and 3,347,082 potentially dilutive shares, respectively, and for the six months ended March 31, 2015 and 2014, there were 3,496,463 and 2,627,905 potentially dilutive shares, respectively, related to stock options to purchase common shares that were not included in the above computation of diluted earnings per common share. This is because the options’ exercise prices were greater than the average market price of our common shares.

3. SELECTED BALANCE SHEET DATA

(in thousands)

	March 31, 2015		September 30, 2014
Accounts receivable, net:
Accounts receivable	$	28,937	$	28,943
Less allowance for doubtful accounts	322		367
Accounts receivable, net	$	28,615	$	28,576
Inventories:
Raw materials	$	27,773	$	26,402
Work in process	789		315
Finished goods	5,319		4,530
Inventories	$	33,881	$	31,247

Inventories are stated at the lower of cost or market value, with cost determined using the first-in, first-out method.

4. MARKETABLE SECURITIES

Our marketable securities consist of certificates of deposit, corporate bonds and commercial paper. We analyze our available-for-sale marketable securities for impairment on an ongoing basis. When we perform this analysis, we consider factors such as the length of time and extent to which the securities have been in an unrealized loss position and the trend of any unrealized losses. We also consider whether an unrealized loss is a temporary loss or an other-than-temporary loss based on factors such as: (a) whether we have the intent to sell the security, (b) whether it is more likely than not that we will be required to sell the security before its anticipated recovery, or (c) permanent impairment due to bankruptcy or insolvency.

8

4. MARKETABLE SECURITIES (CONTINUED)

In order to estimate the fair value for each security in our investment portfolio, we obtain quoted market prices and trading activity for each security where available. We obtain relevant information from our investment advisor and, if warranted, also may review the financial solvency of certain security issuers. As of March 31, 2015, 40 of our 68 securities that we held were trading below our amortized cost basis. We determined each decline in value to be temporary based upon the above described factors. We expect to realize the fair value of these securities, plus accrued interest, either at the time of maturity or when the security is sold. All of our current holdings are classified as available-for-sale marketable securities and are recorded at fair value on our consolidated balance sheet with the unrealized gains and losses recorded in accumulated other comprehensive loss. All of our current marketable securities will mature in less than one year and our non-current marketable securities will mature in less than three years. During the three months ended March 31, 2015 and 2014, we received proceeds from our available-for-sale marketable securities of $10.4 million and $6.7 million, respectively. During the six months ended March 31, 2015 and 2014, we received proceeds from our available-for-sale marketable securities of $19.8 million and $13.8 million, respectively.

At March 31, 2015 our marketable securities were (in thousands):

	Amortized Cost (1)		Unrealized Gains		Unrealized Losses			Fair Value (1)
Current marketable securities:
Corporate bonds	$	30,255	$	—	$	(41	)	$	30,214
Commercial paper	2,000		—		—			2,000
Certificates of deposit	7,002		7		(3		)	7,006
Current marketable securities	39,257		7		(44		)	39,220
Non-current marketable securities:
Corporate bonds	3,048		—		(10		)	3,038
Certificates of deposit	4,502		12		(2		)	4,512
Non-current marketable securities	7,550		12		(12		)	7,550
Total marketable securities	$	46,807	$	19	$	(56	)	$	46,770

(1) Included in amortized cost and fair value is purchased and accrued interest of $155.

At September 30, 2014 our marketable securities were (in thousands):

	Amortized Cost (1)		Unrealized Gains		Unrealized Losses			Fair Value (1)
Current marketable securities:
Corporate bonds	$	24,668	$	1	$	(22	)	$	24,647
Commercial paper	3,998		—		(1		)	3,997
Certificates of deposit	4,252		2		—			4,254
Current marketable securities	32,918		3		(23		)	32,898
Non-current marketable securities:
Corporate bonds	2,051		—		(4		)	2,047
Certificates of deposit	9,502		14		(22		)	9,494
Non-current marketable securities	11,553		14		(26		)	11,541
Total marketable securities	$	44,471	$	17	$	(49	)	$	44,439

(1) Included in amortized cost and fair value is purchased and accrued interest of $213.

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4. MARKETABLE SECURITIES (CONTINUED)

The following tables show the fair values and gross unrealized losses of our available-for-sale marketable securities that have been in a continuous unrealized loss position deemed to be temporary, aggregated by investment category (in thousands):

	March 31, 2015
	Less than 12 Months					More than 12 Months
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Corporate bonds	$	33,101	$	(51	)	$	—	$	—
Certificates of deposit	3,995		(5		)	—		—
Total	$	37,096	$	(56	)	$	—	$	—

	September 30, 2014
	Less than 12 Months					More than 12 Months
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Corporate bonds	$	23,475	$	(26	)	$	—	$	—
Commercial paper	3,998		(1		)	—		—
Certificates of deposit	2,980		(20		)	748		(2		)
Total	$	30,453	$	(47	)	$	748	$	(2	)

5. FAIR VALUE MEASUREMENTS

Fair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. This standard also establishes a hierarchy for inputs used in measuring fair value. This standard maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our assumptions about the factors market participants would use in valuing the asset or liability based upon the best information available in the circumstances.

The categorization of financial assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The hierarchy is broken down into three levels. 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 is applied to financial assets such as our marketable securities, which are classified and accounted for as available-for-sale. These items are stated at fair value at each reporting period using the above guidance.

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5. FAIR VALUE MEASUREMENTS (CONTINUED)

The following tables provide information by level for financial assets that are measured at fair value on a recurring basis (in thousands):

	Total carrying  value at		Fair Value Measurements Using  Inputs Considered as
	March 31, 2015		Level 1		Level 2		Level 3
Cash equivalents:
Money market	$	13,879	$	13,879	$	—	$	—
Available-for-sale marketable securities:
Corporate bonds	33,252		—		33,252		—
Commercial paper	2,000		—		2,000		—
Certificates of deposit	11,518		—		11,518		—
Total cash equivalents and marketable securities measured at fair value	$	60,649	$	13,879	$	46,770	$	—

	Total carrying  value at		Fair Value Measurements Using  Inputs Considered as
	September 30, 2014		Level 1		Level 2		Level 3
Cash equivalents:
Money market	$	19,630	$	19,630	$	—	$	—
Available-for-sale marketable securities:
Corporate bonds	26,694		—		26,694		—
Commercial paper	3,997		—		3,997		—
Certificates of deposit	13,748		—		13,748		—
Total cash equivalents and marketable securities measured at fair value	$	64,069	$	19,630	$	44,439	$	—

Our money market funds, which have been determined to be cash equivalents, are measured at fair value using quoted market prices in active markets for identical assets and are therefore classified as Level 1 assets. We value our Level 2 assets using inputs that are based on market indices of similar assets within an active market. There were no transfers into or out of our Level 2 financial assets during the six months ended March 31, 2015.

We did not carry, purchase or sell any Level 3 financial assets during the six months ended March 31, 2015.

The use of different assumptions, applying different judgment to matters that inherently are subjective and changes in future market conditions could result in different estimates of fair value of our securities, currently and in the future. If market conditions deteriorate, we may incur impairment charges for securities in our investment portfolio.

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6. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS, NET

Amortizable identifiable intangible assets were (in thousands):

	March 31, 2015							September 30, 2014
	Gross carrying amount		Accum. amort.			Net		Gross carrying amount		Accum. amort.			Net
Purchased and core technology	$	45,298	$	(44,949	)	$	349	$	45,952	$	(45,162	)	$	790
License agreements	—		—			—		2,440		(2,440		)	—
Patents and trademarks	11,830		(10,302		)	1,528		11,667		(9,799		)	1,868
Customer relationships	18,371		(15,468		)	2,903		18,894		(15,445		)	3,449
Non-compete agreements	1,100		(532		)	568		1,100		(422		)	678
Order backlog	—		—			—		360		(360		)	—
Total	$	76,599	$	(71,251	)	$	5,348	$	80,413	$	(73,628	)	$	6,785

Amortization expense was $0.8 million and $0.9 million for the three month periods ended March 31, 2015 and 2014, respectively. Amortization expense was $1.5 million and $1.9 million for the six month periods ended March 31, 2015 and 2014, respectively. Amortization expense is recorded on our consolidated statements of operations within cost of sales and in general and administrative expense.

Estimated amortization expense related to identifiable intangible assets for the remainder of fiscal 2015 and the five succeeding fiscal years is (in thousands):

2015 six months	$	1,378
2016	1,927
2017	901
2018	482
2019	438
2020	168

The changes in the carrying amount of goodwill are (in thousands):

	Six months ended March 31,
	2015			2014
Beginning balance, October 1	$	103,398		$	103,569
Foreign currency translation adjustment	(1,656		)	476
Ending balance, March 31	$	101,742		$	104,045

Goodwill is tested for impairment on an annual basis as of June 30, or more frequently if events or circumstances occur which could indicate impairment. The calculation of goodwill impairment requires us to make assumptions about the fair value of our one reporting unit, which historically has been approximated by using our market capitalization plus a control premium. Control premium assumptions require judgment and actual results may differ from assumed or estimated amounts.

Our test for potential goodwill impairment is a two-step approach. We estimate the fair value for our one reporting unit by comparing its fair value (market capitalization plus control premium) to our carrying value. If the carrying value of the reporting unit exceeds its estimated fair value, the second step of the goodwill impairment analysis requires us to measure the amount of the impairment loss. An impairment loss is calculated by comparing the implied fair value of the goodwill to its carrying amount. To calculate the implied fair value of goodwill, the fair value of the reporting unit’s assets and liabilities, excluding goodwill, is estimated. The excess of the fair value of the reporting unit over the amount assigned to its assets and liabilities, excluding goodwill, is the implied fair value of the reporting unit’s goodwill.

At June 30, 2014, our market capitalization was $235.8 million compared to our carrying value of $273.0 million. Our market capitalization plus our estimated control premium of 35% (discussed in the paragraphs below) resulted in a fair value in excess

12

6. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS, NET (CONTINUED)

of our carrying value by a margin of 17%. We concluded that no impairment was indicated and we were not required to complete the second step of the goodwill impairment analysis. No goodwill impairment charges were recorded.

In June 2014, we performed a control premium study to determine the appropriate control premium to include in the calculation of fair value. We used a third party valuation firm to assist us in performing this control premium analysis. In order to estimate the range of control premiums appropriate for us, the following three methodologies were used: (1) analysis of individual transactions within our industry; (2) analysis of industry-wide data, and (3) analysis of global transaction data. Individual transactions in the Communication Equipment or Technology Hardware, Storage and Peripherals industries were used to find transactions of target companies that operated in similar markets and shared similar operating characteristics with us.  Transaction screening criteria included selection of transactions with the following characteristics:

•At least 50 percent of a target company’s equity sought by an acquirer,

•Target company considered operating (not in bankruptcy),

•Target company had publicly traded stock outstanding at the transaction date, and

•Transactions announced between June 30, 2009 and the valuation date.

In analyzing industry-wide data, transactions in the following three industries were identified that encompassed the products offered by us: Office Equipment and Computer Hardware, Communications, and Computer, Supplies and Services.  Finally, control premiums were considered for both domestic and international transactions. The control premium analysis resulted in a range of control premium of 30 percent to 40 percent. We reviewed the data and concluded that a 35 percent control premium best represented the amount an investor would likely pay, over and above market capitalization, in order to obtain a controlling interest given the economic conditions at that time.

If our stock price or control premium declines, the first step of our goodwill impairment analysis may fail. We have identified factors that could result in additional interim goodwill impairment testing. For example, we would perform the second step of the impairment testing if our stock price fell below certain thresholds for a significant period of time, or if our control premium significantly decreased. Events or circumstances may occur that could negatively impact our stock price, including changes in our anticipated revenues and profits and our ability to execute on our strategies. In addition, our control premium could decline due to changes in economic conditions in the technology industry, in the financial markets or more generally. An impairment could have a material effect on our consolidated balance sheet and results of operations. We have had no goodwill impairment losses since the adoption of Accounting Standards Codification (ASC) 350, Intangibles-Goodwill and Others, in fiscal 2003.

7. INCOME TAXES

Income tax provision was minimal for the six month period ended March 31, 2015. Tax benefits specific to the six months ended March 31, 2015 primarily include $0.5 million resulting from the reinstatement of the research and development tax credit for calendar year 2014 and the reversal of tax reserves due to the expiration of statutes of limitation from U.S. and foreign tax jurisdictions. For the six month period ended March 31, 2015, our effective tax rates before items specific to the period were more than the U.S. statutory rate due primarily to mix of income between jurisdictions having lower statutory tax rates than the U.S.

Income tax benefit was $1.2 million for the six month period ended March 31, 2014. Tax benefits specific to the period of $1.3 million related to the re-measurement and reversal of certain income tax reserves as a result of the conclusion in March 2014 of a federal income tax audit for fiscal 2012 and a reversal of reserves due to the expiration of statutes of limitation from U.S. and foreign tax jurisdictions. For the six month period ended March 31, 2014, our effective tax rates before items specific to the period were more than the statutory rate primarily due to reserves for unrecognized tax benefits and state income taxes in excess of domestic tax benefits.

Our effective tax rate will vary based on a variety of factors, including overall profitability, the geographical mix of income before taxes and related statutory tax rate in each jurisdiction, and tax benefits specific to the period, such as settlements of audits. We expect that we may record other benefits or expenses in the future that are specific to a particular quarter, based on expiration of statutes of limitation, the completion of tax audits, or legislation that is enacted for both U.S. and foreign jurisdictions.

13

7. INCOME TAXES (CONTINUED)

A reconciliation of the beginning and ending amount of unrecognized tax benefits is (in thousands):

Unrecognized tax benefits as of September 30, 2014	$	2,301
Increases related to:
Prior year income tax positions	50
Decreases related to:
Prior year income tax positions	(255		)
Settlements	(74		)
Expiration of statute of limitations	(139		)
Unrecognized tax benefits as of March 31, 2015	$	1,883

The total amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate is $1.9 million. We expect the total amounts of unrecognized tax benefits will decrease by approximately $0.6 million over the next 12 months.

Of the $1.9 million of unrecognized tax benefits, $1.5 million is included in non-current income taxes payable and $0.4 million is included with non-current deferred tax assets on the condensed consolidated balance sheet at March 31, 2015.

We recognize interest and penalties related to income tax matters in income tax expense. During both the six month periods ended March 31, 2015 and 2014, there were insignificant amounts of interest and penalties related to income tax matters in income tax expense. Accrued interest and penalties related to unrecognized tax benefits was $0.4 million at both March 31, 2015 and September 30, 2014. Our non-current income taxes payable on our condensed consolidated balance sheet includes accrued interest and penalties in addition to the unrecognized tax benefits of $1.5 million at March 31, 2015.

At March 31, 2015, we had approximately $26.0 million of accumulated undistributed foreign earnings, for which we have not accrued additional U.S. tax. Our policy is to reinvest earnings of our foreign subsidiaries indefinitely to fund current operations and provide for future international expansion opportunities, and only to repatriate earnings to the extent that U.S. taxes have already been recorded. Although we have no current need to do so, if we change our assertion that we do not intend to repatriate additional undistributed foreign earnings for cash requirements in the United States, we would have to accrue applicable taxes. The amount of any taxes and the application of any tax credits would be determined based on the income tax laws at the time of such repatriation. Under current tax laws, we estimate the unrecognized deferred tax liability to be in the range of $0.5 million to $1.5 million.

We operate in multiple tax jurisdictions, including the U.S. and other jurisdictions outside of the U.S. Accordingly, we must determine the appropriate allocation of income to each of these jurisdictions. This determination requires us to make several estimates and assumptions. Tax audits associated with the allocation of this income, and other complex issues, may require an extended period of time to resolve and may result in adjustments to our income tax balances in those years that are material to our consolidated balance sheet and results of operations. We are no longer subject to income tax examination for tax years prior to fiscal 2013, except for certain refund claims applicable to fiscal 2009, in the case of U.S. federal tax authorities and prior to fiscal 2009 for non-U.S. income tax authorities. For state taxing authorities, most notably in California and Texas, we are no longer subject to income tax examination for tax years generally before fiscal 2010, and for Minnesota for tax years prior to fiscal 2013.

8. PRODUCT WARRANTY OBLIGATION

In general, we warrant our products to be free from defects in material and workmanship under normal use and service. The warranty periods generally range from one to five years. We typically have the option to either repair or replace products we deem defective with regard to material or workmanship. Estimated warranty costs are accrued in the period that the related revenue is recognized based upon an estimated average per unit repair or replacement cost applied to the estimated number of units under warranty. These estimates are based upon historical warranty incidents and are evaluated on an ongoing basis to ensure the adequacy of the warranty accrual.

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8. PRODUCT WARRANTY OBLIGATION (CONTINUED)

The following table summarizes the activity associated with the product warranty accrual (in thousands) and is included on our Condensed Consolidated Balance Sheets within current liabilities:

	Balance at		Warranties		Settlements			Balance at
Period	January 1		issued		made			March 31
Three months ended March 31, 2015	$	950	$	206	$	(233	)	$	923
Three months ended March 31, 2014	$	1,013	$	176	$	(217	)	$	972
	Balance at		Warranties		Settlements			Balance at
Period	October 1		issued		made			March 31
Six months ended March 31, 2015	$	862	$	497	$	(436	)	$	923
Six months ended March 31, 2014	$	1,063	$	322	$	(413	)	$	972

We are not responsible for, and do not warrant that, custom software versions, created by original equipment manufacturer (OEM) customers based upon our software source code, will function in a particular way, will conform to any specifications or are fit for any particular purpose. Further, we do not indemnify these customers from any third-party liability as it relates to or arises from any customization or modifications made by the OEM customer.

9. CONTINGENCIES

In the normal course of business, we are subject to various claims and litigation. There can be no assurance that any claims by third parties, if proven to have merit, will not materially adversely affect our business, liquidity or financial condition.

10. STOCK-BASED COMPENSATION

Stock-based awards were granted under the 2014 Omnibus Incentive Plan (the “2014 Plan”) during the six months ended March 31, 2015. During the six months ended March 31, 2014, stock-based awards were granted under the 2013 Omnibus Incentive Plan (which expired during the second quarter of fiscal 2014) and the 2014 Plan. Upon stockholder approval of the 2014 Plan, we ceased granting awards under any prior plan. The authority to grant options under the 2014 Plan and set other terms and conditions rests with the Compensation Committee of the Board of Directors.

The 2014 Plan authorizes the issuance of up to 2,250,000 common shares in connection with awards of stock options, stock appreciation rights, restricted stock, restricted stock units, performance-based full value awards or other stock-based awards. Eligible participants include our employees, our affiliates, non-employee directors of our Company and any consultant or advisor who is a natural person and provides services to us or our affiliates. Options that have been granted under the 2014 Plan typically vest over a four year service period and will expire if unexercised after eight years from the date of grant. Restricted stock awards (RSU's) that have been granted to Directors typically vest in one year. RSU's that have been granted to executives and employees typically vest in November over a four-year period. Awards may be granted under the 2014 Plan until January 27, 2024. Options under the 2014 Plan can be granted as either incentive stock options (ISOs) or non-statutory stock options (NSOs). The exercise price of options and the grant date price of restricted stock shall be determined by our Compensation Committee but shall not be less than the fair market value of our common stock based on the closing price on the date of grant. Upon exercise, we issue new shares of stock. Our equity plans and corresponding forms of award agreements generally have provisions allowing employees to elect to satisfy tax withholding obligations through the delivery of shares or having us retain a portion of shares issuable under the award. As of March 31, 2015, there were approximately 1,492,183 shares available for future grants under the 2014 Plan.

Cash received from the exercise of stock options was $6.0 million during the six months ended March 31, 2015 and $3.2 million during the six months ended March 31, 2014. There were no excess tax benefits from stock-based compensation for the six months ended March 31, 2015. The excess tax benefits from stock-based compensation were minimal during the six months ended March 31, 2014.

We sponsor an Employee Stock Purchase Plan (the Purchase Plan), covering all domestic employees with at least 90 days of continuous service and who are customarily employed at least 20 hours per week. The Purchase Plan allows eligible participants the right to purchase common stock on a quarterly basis at the lower of 85% of the market price at the beginning or end of each three-month offering period. Employee contributions to the Purchase Plan were $0.5 million during the six months

15

10. STOCK-BASED COMPENSATION (CONTINUED)

ended March 31, 2015 and $0.6 million during the six months ended March 31, 2014, respectively. Pursuant to the Purchase Plan, 72,306 and 65,832 common shares were issued to employees during the six months ended March 31, 2015 and 2014, respectively. Shares are issued under the Purchase Plan from treasury stock. As of March 31, 2015, 669,072 common shares were available for future issuances under the Purchase Plan.

Stock-based compensation expense is included in the consolidated results of operations as follows (in thousands):

	Three months ended March 31,						Six months ended March 31,
	2015			2014			2015			2014
Cost of sales	$	83		$	82		$	189		$	150
Sales and marketing	306			282			649			568
Research and development	196			177			388			383
General and administrative	453			506			996			969
Stock-based compensation before income taxes	1,038			1,047			2,222			2,070
Income tax benefit	(361		)	(355		)	(775		)	(703		)
Stock-based compensation after income taxes	$	677		$	692		$	1,447		$	1,367

Stock-based compensation cost capitalized as part of inventory was immaterial as of March 31, 2015 and September 30, 2014.

The following table summarizes our stock option activity (in thousands, except per common share amounts):

	Options Outstanding		Weighted Average Exercised Price	Weighted Average Contractual Term (in years)	Aggregate Intrinsic Value (1)
Balance at September 30, 2014	6,029		$10.61
Granted	704		7.82
Exercised	(677	)	8.87
Forfeited / Canceled	(1,168	)	11.58
Balance at March 31, 2015	4,888		$10.22	5.3	$	3,263
Exercisable at March 31, 2015	3,482		$10.70	4.5	$	1,603

(1) The aggregate intrinsic value represents the total pre-tax intrinsic value, based on our closing stock price of $9.98 as of March 31, 2015, which would have been received by the option holders had all option holders exercised their options as of that date. The intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its exercise price.

The total intrinsic value of all options exercised during the six months ended March 31, 2015 was $0.8 million and during the six months ended March 31, 2014 was $0.5 million.

The table below shows the weighted average fair value, which was determined based upon the fair value of each option on the grant date utilizing the Black-Scholes option-pricing model and the related assumptions:

	Six months ended March 31,
	2015		2014
Fair value of options granted (in thousands)	$	2,046	$	3,995
Weighted average per option grant date fair value	$	2.91	$	4.44
Assumptions used for option grants:
Risk free interest rate	1.77% - 1.85%		1.76% - 1.91%
Expected term	6.00 years		6.00 years
Expected volatility	35% - 36%		40%
Weighted average volatility	35%		40%
Expected dividend yield	0		0

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10. STOCK-BASED COMPENSATION (CONTINUED)

The fair value of each option award granted during the periods presented was estimated using the Black-Scholes option valuation model that uses the assumptions noted in the table above. Expected volatilities are based on the historical volatility of our stock. We use historical data to estimate option exercise and employee termination information within the valuation model; separate groups of grantees that have similar historical exercise behaviors are considered separately for valuation purposes. The expected term of options granted is derived from the vesting period and historical information and represents the period of time that options granted are expected to be outstanding. The risk-free rate used is the zero-coupon U.S. Treasury bond rate in effect at the time of the grant whose maturity equals the expected term of the option.

We use historical data to estimate pre-vesting forfeiture rates. The pre-vesting forfeiture rate used during the six months ended March 31, 2015 was 6.0%. As of March 31, 2015 the total unrecognized compensation cost related to non-vested stock-based compensation arrangements, net of expected forfeitures, was $4.4 million and the related weighted average period over which it is expected to be recognized is approximately 3.0 years.

A summary of our non-vested restricted stock units as of March 31, 2015 and changes during the six months then ended is presented below (in thousands, except per common share amounts):

	Number of Awards		Weighted Average Grant Date Fair Value
Nonvested at September 30, 2014	171		$	9.35
Granted	432		$	7.96
Vested	(81	)	$	9.60
Canceled	(29	)	$	7.91
Nonvested at December 31, 2014	493		$	8.17

As of March 31, 2015, the total unrecognized compensation cost related to non-vested restricted stock units was $3.4 million and the related weighted average period over which it is expected to be recognized is approximately 1.7 years.

11. COMMON STOCK REPURCHASE

On October 28, 2014, our Board of Directors authorized a new program to repurchase up to $15.0 million of our common stock primarily to return capital to shareholders and to support our employee stock purchase program. This new authorization began on November 1, 2014 and expires on October 31, 2015. Shares repurchased under the program may be made through the open market and privately negotiated transactions from time to time and in amounts that management deems appropriate. The amount and timing of share repurchases will depend upon market conditions and other corporate considerations. We did not repurchase shares under this program during the first six months of fiscal 2015.

Our prior share repurchase authorization program expired on October 31, 2014. During the month of October 2014, we repurchased 287,787 shares under this program for $2.3 million.

In addition to the shares repurchased under the prior Board authorized repurchase program, during the six months ended March 31, 2015, our employees forfeited 9,371 shares in order to satisfy $0.1 million of withholding tax obligations related to stock-based compensation, pursuant to terms of awards under our board and shareholder-approved compensation plans.

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12. RESTRUCTURING

Below is a summary of the restructuring charges and other activity within the restructuring accrual (in thousands):

	2015 Restructuring			2014 Restructuring			2013 Restructuring
	Employee Termination Costs			Employee Termination Costs			Employee Termination Costs			Total
Balance at September 30, 2013	$	—		$	—		$	350		$	350
Restructuring charge	—			152			—			152
Payments	—			(152		)	(279		)	(431		)
Reversals	—			—			(71		)	(71		)
Balance at September 30, 2014	—			—			—			—
Restructuring charge	518			—			—			518
Payments	(342		)	—			—			(342		)
Balance at March 31, 2015	$	176		$	—		$	—		$	176

Fiscal 2015 Restructuring

On February 20, 2015, we announced a restructuring plan related to our Etherios operations in order to refocus the business on CRM and service cloud implementations. We recorded a restructuring charge of $0.3 million related to severance during the second quarter of fiscal 2015. We scaled the business to current and expected revenue levels resulting in an elimination of approximately 21 positions. The payments associated with these charges are expected to be completed by the end of fiscal 2015.

On January 22, 2015, we announced the closure of our India location. The March closure resulted in the elimination of approximately 38 employees from engineering, sales and administration. We recorded a restructuring charge of $0.2 million related to severance during the second quarter of fiscal 2015. The majority of this severance was paid during the second quarter of fiscal 2015.

Fiscal 2014 Restructuring

On October 31, 2013, we announced our intention to restructure certain of our operations in India. The restructuring was primarily associated with cost reduction initiatives resulting in the elimination of approximately 40 engineering and sales positions in our work force. We recorded a restructuring charge of $0.2 million related to severance during the first quarter of fiscal 2014. The majority of this severance was paid during the first quarter of fiscal 2014.

Fiscal 2013 Restructuring

On September 27, 2013, we announced our intention to restructure certain of our operations in the U.S. The restructuring was primarily associated with cost reduction initiatives and resulted in the elimination of 15 positions in our work force. We recorded a restructuring charge of $0.4 million for severance during the fourth quarter of fiscal 2013. The payments associated with these charges and all the actions associated with the restructuring were completed during the first quarter of fiscal 2014.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our management’s discussion and analysis should be read in conjunction with our Annual Report on Form 10-K and 10-K/A for the fiscal year ended September 30, 2014, as well as our subsequent reports on Forms 10-Q and 8-K.

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This Form 10-Q contains certain statements that are “forward-looking statements” as that term is defined under the Private Securities Litigation Reform Act of 1995, and within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.

Forward-Looking Statements

The words “assume,” “believe,” “anticipate,” “intend,” “estimate,” “target,” “may,” “will,” “expect,” “plan,” “project,” “should,” or “continue” or the negative thereof or other variations thereon or similar terminology, which are predictions of or indicate future events and trends and which do not relate to historical matters, identify forward-looking statements. Among other items, these statements relate to expectations of the business environment in which we operate, projections of future performance, perceived marketplace opportunities and statements regarding our mission and vision. Such statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, including risks related to the highly competitive market in which our company operates, rapid changes in technologies that may displace products sold by us, declining prices of networking products, our reliance on distributors and other third parties to sell our products, delays in product development efforts, uncertainty in user acceptance of our products, the ability to integrate our products and services with those of other parties in a commercially accepted manner, potential liabilities that can arise if any of our products have design or manufacturing defects, our ability to defend or settle satisfactorily any litigation, uncertainty in global economic conditions and economic conditions within particular regions of the world which could negatively affect product demand and the financial solvency of customers and suppliers, the impact of natural disasters and other events beyond our control that could negatively impact our supply chain and customers, potential unintended consequences associated with restructuring or other similar business initiatives that may impact our operations and our ability to retain important employees, the ability to achieve the anticipated benefits and synergies associated with acquisitions, and changes in our level of revenue or profitability which can fluctuate for many reasons beyond our control. These and other risks, uncertainties and assumptions identified from time to time in our filings with the United States Securities and Exchange Commission, including without limitation, our annual report on Form 10-K for the year ended September 30, 2014, and subsequent quarterly reports on Form 10-Q and other filings, could cause the company’s future results to differ materially from those expressed in any forward-looking statements made by us or on our behalf. Many of such factors are beyond our ability to control or predict. These forward-looking statements speak only as of the date for which they are made. We disclaim any intent or obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, the disclosure of contingent assets and liabilities and the values of purchased assets and assumed liabilities in acquisitions. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

A description of our critical accounting policies and estimates was provided in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the year ended September 30, 2014. There have been no material changes to our critical accounting policies as disclosed in that report.

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

OVERVIEW

We are a leading provider of machine to machine (M2M) networking products and solutions that enable the connection, monitoring and control of local or remote physical assets by electronic means. These networking products and solutions can connect communication hardware to a physical asset and convey information about the asset’s status and performance, which can be sent to a computer system and used to monitor, improve or automate one or more processes. Increasingly, these products and solutions are being deployed via wireless networks as wireless communications become more and more prevalent. Our products are deployed by a wide range of businesses and institutions. We compete for customers on the basis of existing and planned product features, service and software application capabilities, company reputation, brand recognition, technical support, relationships with partners, quality and reliability, product development capabilities, price and availability.

Total revenue was $53.2 million for the second quarter of fiscal 2015 compared to $45.9 million for the second quarter of fiscal 2014, an increase of $7.3 million or 15.8%. Total revenue in the second quarter of fiscal 2015 was unfavorably impacted by foreign currency translation of $1.1 million when compared to the same period in the prior fiscal year as a result of the weakening of the Euro and British Pound. Further, we estimate that approximately $1.5 million of revenue recorded in the second quarter of fiscal 2015 was a result of orders that were delayed from the first fiscal quarter of 2015, which could not be fulfilled due to the impact of the fire at our subcontract manufacturing location.

Operating income was $0.9 million, or 1.8% of revenue, in the second quarter of fiscal 2015 compared to an operating loss of $0.6 million, or 1.4% of revenue, in the year ago comparable quarter. Operating income for the second quarter of fiscal 2015 included restructuring expenses of $0.5 million, as we eliminated our workforce and closed our facility in India and restructured our Etherios operations in order to refocus the business on CRM and service cloud implementations. We scaled the Etherios business to current and expected revenue levels resulting in a workforce reduction.

We received $1.0 million of insurance proceeds in the second quarter of fiscal 2015 related to the replacement of our capital equipment destroyed in the fire at our subcontract manufacturer's location. These insurance proceeds were recorded as Other income, net.

Net income was $1.4 million in the second quarter of fiscal 2015, or $0.06 per diluted share, compared to net income of $0.7 million, or $0.03 per diluted share, in the second quarter of fiscal 2014. Net income in the second quarter of fiscal 2015 included insurance proceeds of $0.7 million, net of tax, or $0.03 per diluted share. This was offset by a reduction of $0.3 million, net of tax, or $0.01 per diluted share relating to the restructuring mentioned above. Net income in the second quarter of fiscal 2014 included tax benefits specific to the period of $1.1 million, or $0.04 per diluted share, resulting from the re-measurement and reversal of tax reserves in conjunction with the settlement of a federal income tax audit.

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

CONSOLIDATED RESULTS OF OPERATIONS

The following table sets forth selected information derived from our interim condensed consolidated statements of operations (dollars in thousands):

	Three months ended March 31,									% incr.		Six months ended March 31,										% incr.
	2015				2014					(decr.)		2015					2014					(decr.)
Revenue:
Hardware product	$	48,108	90.5	%	$	40,560		88.4	%	18.6		$	93,041		91.3	%	$	82,549		88.6	%	12.7	%
Service	5,043		9.5		5,322			11.6		(5.2	)	8,833			8.7		10,655			11.4		(17.1	)
Total revenue	53,151		100.0		45,882			100.0		15.8		101,874			100.0		93,204			100.0		9.3
Cost of sales:
Cost of hardware product	25,498		48.0		20,012			43.6		27.4		48,610			47.7		40,275			43.2		20.7
Cost of service	3,575		6.7		4,090			8.9		(12.6	)	7,264			7.1		8,241			8.9		(11.9	)
Total cost of sales	29,073		54.7		24,102			52.5		20.6		55,874			54.8		48,516			52.1		15.2
Gross profit	24,078		45.3		21,780			47.5		10.6		46,000			45.2		44,688			47.9		2.9
Operating expenses	23,136		43.5		22,429			48.9		3.2		46,678			45.9		44,709			47.9		4.4
Operating income (loss)	942		1.8		(649		)	(1.4	)	245.1		(678		)	(0.7	)	(21		)	—		NM
Other income, net	1,378		2.6		70			0.1		NM		1,804			1.8		206			0.2		775.7
Income (loss) before income taxes	2,320		4.4		(579		)	(1.3	)	500.7		1,126			1.1		185			0.2		508.6
Income tax provision (benefit)	874		1.6		(1,317		)	(2.9	)	166.4		19			—		(1,241		)	(1.3	)	NM
Net income	$	1,446	2.7	%	$	738		1.6	%	95.9	%	$	1,107		1.1	%	$	1,426		1.5	%	(22.4	)%

* NM means not meaningful

REVENUE

Overview

Total revenue was $53.2 million for the second quarter of fiscal 2015 compared to $45.9 million for the second quarter of fiscal 2014, an increase of $7.3 million, or 15.8%. Total revenue was $101.9 million for the six months ended March 31, 2015, compared to $93.2 million for the six months ended March 31, 2014, an increase of 8.7 million, or 9.3%. No significant changes were made to our pricing strategy that would impact revenue during the six month periods ended March 31, 2015 or 2014.

Hardware Products

	Three months ended March 31,								% incr.		Six months ended March 31,								% incr.
($ in thousands)	2015				2014				(decr.)		2015				2014				(decr.)
Growth hardware products	$	30,376	63.1	%	$	20,815	51.3	%	45.9	%	$	56,226	60.4	%	$	42,618	51.6	%	31.9	%
Mature hardware products	17,732		36.9		19,745		48.7		(10.2	)	36,815		39.6		39,931		48.4		(7.8	)
Total product revenue	$	48,108	100.0	%	$	40,560	100.0	%	18.6	%	$	93,041	100.0	%	$	82,549	100.0	%	12.7	%

Growth hardware product offerings include all wireless products as well as the ARM-based embedded module product line with both wired and wireless connectivity. Revenue from growth hardware products increased by $9.6 million and $13.6 million for the three and six month periods ended March 31, 2015, respectively, compared to the same periods a year ago, primarily related to increased revenue from large sales to certain customers of our cellular routers and gateway products and RF modules.

Mature hardware product offerings include generally all wired products, such as our serial servers, Rabbit-branded modules, chips and USB hardware offerings. Revenue of our mature hardware products decreased by $2.0 million and $3.1 million for the three and six month periods ended March 31, 2015, respectively, compared to the same periods a year ago. Most products in this category decreased, partially offset by an increase in revenue from serial servers. We expect that revenue from our mature products will continue to decrease in the future, however we may experience occasional increases in certain mature product lines due to specific customer purchases.

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

Services

Our service offerings include our wireless product design and development services, customer relationship management (CRM) consulting services, application development services, our platform-as-a-service (PAAS) recurring revenue generated from our Digi Device Cloud, and post-contract customer support and fees associated with technical support and training. Revenue from our service offerings was $5.0 million in the second quarter of fiscal 2015 compared to $5.3 million in the second quarter of fiscal 2014, a decrease of $0.3 million or 5.2%. The decrease in the second quarter of fiscal 2015 compared to a year ago was in wireless design service revenue, partially offset by an increase in our CRM consulting service revenue. Revenue from our service offerings was $8.8 million in the first half of fiscal 2015 compared to $10.6 million in the first half of fiscal 2014, a decrease of $1.8 million, or 17.1%, due to closing and fulfilling fewer customer projects. We expect that it is likely that revenue from our service businesses will fluctuate from quarter to quarter.

Revenue by Geographic Location

The following summarizes our revenue by geographic location of our customers:

	Three months ended March 31,				$ incr.		% incr.		Six months ended March 31,				$ incr.		% incr.
($ in thousands)	2015		2014		(decr.)		(decr.)		2015		2014		(decr.)		(decr.)
North America, primarily United States	$	32,388	$	27,352	$	5,036	18.4	%	$	63,101	$	56,789	$	6,312	11.1	%
Europe, Middle East & Africa	12,383		11,943		440		3.7		23,614		23,540		74		0.3
Asia	5,714		4,996		718		14.4		11,117		10,069		1,048		10.4
Latin America	2,666		1,591		1,075		67.6		4,042		2,806		1,236		44.0
Total revenue	$	53,151	$	45,882	$	7,269	15.8	%	$	101,874	$	93,204	$	8,670	9.3	%

Revenue in North America increased by $5.0 million for the three months ended March 31, 2015 compared to the same period a year ago due to an increase in product revenue of $5.3 million, partially offset by a decline of $0.3 million in service revenue. North America revenue increased as certain customers made large purchases of cellular routers and gateway products, partially offset by a decrease in service revenue as a result of fulfilling fewer customer projects. Revenue in North America increased by $6.3 million for the six months ended March 31, 2015 compared to the same period a year ago due to an increase in product revenue of $8.1, partially offset by a decline of $1.8 million in service revenue. The North America increase mostly related to large purchases of cellular routers and gateway products and RF products, partially offset by a decrease in service revenue as a result of closing and fulfilling fewer customer projects.

Revenue in Europe, Middle East & Africa (“EMEA”) increased by $0.4 million and $0.1 million for the three and six month periods ended March 31, 2015, respectively, compared to the same period a year ago. This increase was primarily due to increased revenue from cellular, serial servers and embedded modules compared to the same period in the prior fiscal year, partially offset by the fluctuation of foreign currency rates, which had an unfavorable impact on total revenue of $1.1 million for the three month period ended March 31, 2015 and $1.5 million for the six month period ended March 31, 2015 compared to the same periods a year ago, due to the weakening of the Euro and British Pound compared to the U.S. dollar.

Revenue in Asia increased by $0.7 million and $1.0 million for the three and six month periods ended March 31, 2015 compared to the same periods a year ago, primarily related to an increase in revenue from modules and serial servers.

Revenue in Latin America increased by $1.1 million and $1.2 million for the three and six month periods ended March 31, 2015 as compared to the same periods a year ago, primarily due to an increase in revenue from cellular products.

GROSS MARGIN

Gross margins were 45.3% and 45.2% for the three and six month periods ended March 31, 2015, respectively, compared to gross margins of 47.5% and 47.9% for the three and six month periods ended March 31, 2014, respectively.

Hardware product gross margin was 47.0% and 47.8% for the three and six month periods ended March 31, 2015, respectively, compared to 50.7% and 51.2% for the three and six month periods ended March 31, 2014, respectively. The decrease primarily was due to a shift in product mix, as revenue from mature hardware products is replaced with revenue from growth hardware products which generally have lower gross margins. We expect that there will continue to be pressure on pricing and consequently gross margins as we are selling more product to higher volume customers. We also incurred incremental

22

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

expenses, such as higher product costs associated with manufacturing at other subcontractor facilities, travel expenses and freight costs associated with the impact of the Thailand fire that also negatively impacted gross margin.

Service gross margin was 29.1% and 17.8% for the three and six month periods ended March 31, 2015, respectively, compared to 23.1% and 22.7% for the three and six month periods ended March 31, 2014, respectively. Service gross margin increased by 6.0 percentage points for the three months ended March 31, 2015 compared to the same period a year ago, resulting from improved utilization of consulting labor in connection with our restructuring. For the six month period ended March 31, 2015 compared to the same period a year ago, service gross margin decreased 4.9 percentage points. The decrease primarily was related to an underutilization of consulting labor that had been retained for the expected demand for these services in the first quarter of 2015 that has partially been offset in the second quarter of fiscal 2015 due to the aforementioned restructuring and improved revenue. We expect our service gross margin to vary from quarter to quarter for the foreseeable future as these margins are dependent on the utilization rates of our personnel.

OPERATING EXPENSES

The following summarizes our total operating expenses in dollars and as a percentage of total revenue:

	Three months ended March 31,								$ incr.			Six months ended March 31,								$ incr.
($ in thousands)	2015				2014				(decr.)			2015				2014				(decr.)
Sales and marketing	$	10,299	19.4	%	$	10,399	22.7	%	$	(100	)	$	21,091	20.7	%	$	20,618	22.1	%	$	473
Research and development	7,779		14.6	%	7,411		16.1	%	368			15,341		15.1	%	14,668		15.7	%	673
General and administrative	4,540		8.5	%	4,619		10.1	%	(79		)	9,728		9.6	%	9,342		10.0	%	386
Restructuring	518		1.0	%	—		—	%	518			518		0.5	%	81		0.1	%	437
Total operating expenses	$	23,136	43.5	%	$	22,429	48.9	%	$	707		$	46,678	45.9	%	$	44,709	47.9	%	$	1,969

Sales and marketing expenses decreased $0.1 million for the three month period ended March 31, 2015 compared to the same period a year ago. Sales and marketing expenses increased $0.5 million for the six month period ended March 31, 2015 compared to the same period a year ago, primarily due to an increase in compensation-related expenses partially offset by decreases in travel and entertainment expenses.

Research and development expenses increased $0.4 million and $0.7 million for the three and six month periods ended March 31, 2015, respectively, compared to the same periods a year ago. This primarily was due to an increase in compensation-related expenses partially offset by decreases in expenses for product certification.

General and administrative expenses decreased $0.1 million for the three month period ended March 31, 2015 compared to the same period a year ago. For the six month period ended March 31, 2015 compared to the same period a year ago, general and administrative expenses increased by $0.4 million. The increase was primarily due to an increase in compensation-related expense and final transition expenses of $0.3 million for our former CEO, partially offset by reduced amortization expense as certain intangibles were fully amortized.

Restructuring expense of $0.5 million for both the three and six month periods ended March 31, 2015 related to restructuring charges for our India and Etherios operations. In the six month period ended March 31, 2014 there was a $0.1 million restructuring expense pertaining to the 2014 restructuring that was announced on October 31, 2013, partially offset by a reversal related to the 2013 restructuring announced September 27, 2013 (see Note 12 to our Condensed Consolidated Financial Statements).

OTHER INCOME, NET

Other income, net increased $1.3 million and $1.6 million for the three and six month periods ended March 31, 2015, respectively, compared to the same periods a year ago primarily due to $1.0 million of proceeds for the settlement of an insurance claim related to the replacement of our capital equipment destroyed in the fire at our subcontract manufacturer’s location and foreign currency gains as the U.S. Dollar strengthened against the Euro and Yen.

23

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

INCOME TAXES

Income tax provision was minimal for the six month period ended March 31, 2015. Tax benefits specific to the six months ended March 31, 2015 primarily include $0.5 million resulting from the reinstatement of the research and development tax credit for calendar year 2014 and the reversal of tax reserves due to the expiration of statutes of limitation from U.S. and foreign tax jurisdictions. For the six month period ended March 31, 2015, our effective tax rates before items specific to the period were more than the U.S. statutory rate due primarily to mix of income between jurisdictions having lower statutory tax rates than the U.S.

Income tax benefit was $1.2 million for the six month period ended March 31, 2014. Tax benefits specific to the period of $1.3 million related to the re-measurement and reversal of certain income tax reserves as a result of the conclusion in March 2014 of a federal income tax audit for fiscal 2012 and a reversal of reserves due to the expiration of statutes of limitation from U.S. and foreign tax jurisdictions. For the six month period ended March 31, 2014, our effective tax rates before items specific to the period were more than the statutory rate primarily due to reserves for unrecognized tax benefits and state income taxes in excess of domestic tax benefits.

Our effective tax rate will vary based on a variety of factors, including overall profitability, the geographical mix of income before taxes and related statutory tax rate in each jurisdiction, and tax benefits specific to the period, such as settlements of audits. We expect that we may record other benefits or expenses in the future that are specific to a particular quarter, based on expiration of statutes of limitation, the completion of tax audits, or legislation that is enacted for both U.S. and foreign jurisdictions.

LIQUIDITY AND CAPITAL RESOURCES

We have financed our operations and capital expenditures principally with funds generated from operations. At March 31, 2015, we had cash, cash equivalents and short-term marketable securities of $84.9 million compared to $80.4 million at September 30, 2014. Our working capital (total current assets less total current liabilities) was $133.2 million at March 31, 2015 and $125.9 million at September 30, 2014. We presently anticipate total fiscal 2015 capital expenditures will be approximately $4.4 million.

Net cash provided by operating activities was $1.6 million for the six months ended March 31, 2015 and net cash used by operating activities was $3.2 million for the six months ended March 31, 2014, a net increase of $4.8 million. This was primarily due to an increase in non-cash adjustments related to deferred income tax benefit of $3.3 million, operating assets and liabilities of $2.2 million and bad debt, restructuring and stock-based compensation increases of $1.3 million, partially offset by a decreases related to the gain on insurance settlement of $1.0 million, depreciation and amortization of $0.7 million and net income of $0.3 million. The increase in cash provided by operating assets and liabilities of $2.2 million was primarily related to accrued liabilities, inventory and accounts payable, partially offset by net cash used by accounts receivable due mostly to timing of the revenue recorded within the second quarter of fiscal 2015. While inventory grew in both the six month periods ended March 31, 2015 and 2014, it grew by a larger amount in the six month period ended March 31, 2014 as we made certain strategic inventory purchases.

Net cash used in investing activities was $4.3 million during the six months ended March 31, 2015 compared to net cash provided by investing activities of $6.7 million during the six months ended March 31, 2014, a net decrease of $11.0 million. During the first six months of fiscal 2015, we had net purchases of $2.3 million for marketable securities and $3.0 million for capital expenditures, partially offset by proceeds from an insurance settlement of $1.0 million. During the first six months of fiscal 2014, we received net proceeds of $8.6 million from maturities of marketable securities, partially offset by $1.9 million of capital expenditures.

Net cash provided by financing activities was $4.2 million for the six months ended March 31, 2015 compared to net cash used in financing activities of $1.6 million for the six months ended March 31, 2014, a net increase of $5.8 million. During the first six months of fiscal 2015, we had $3.1 million less purchases of common stock and received $2.7 million more proceeds from stock option plan and employee stock purchase plan transactions compared to the same period a year ago.

We generally expect positive cash flows from operations and believe that our current cash, cash equivalents and short-term marketable securities balances, cash generated from operations and our ability to secure debt and/or equity financing will be sufficient to fund our business operations and capital expenditures for the next twelve months and beyond. On October 28, 2014, our Board of Directors authorized a new program to repurchase up to $15.0 million of our common stock primarily to

24

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

return capital to shareholders and to support our employee stock purchase program. This authorization expires on October 31, 2015. We did not repurchase shares under this program during the first half of fiscal 2015. During the month of October 2014, we repurchased 287,787 shares under our prior board-approved stock repurchase program for $2.3 million.

At March 31, 2015, our cash, cash equivalents and marketable securities, including long-term marketable securities, were $92.4 million. This balance includes approximately $29.6 million of cash and cash equivalents held by our controlled foreign subsidiaries of which $26.0 million represents accumulated undistributed foreign earnings. Although we have no current need to do so, if we change our assertion that we do not intend to repatriate additional undistributed foreign earnings for cash requirements in the United States, we would have to accrue applicable taxes. The amount of any taxes and the application of any tax credits would be determined based on the income tax laws at the time of such repatriation. Under current tax laws, we estimate the unrecognized deferred tax liability to be in the range of $0.5 million to $1.5 million.

Recently Issued Accounting Pronouncements

Not Yet Adopted

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers.” This guidance provides a five-step analysis in determining when and how revenue is recognized so that an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects what it expects in exchange for the goods and services. It also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. This guidance is effective for fiscal years (and interim reporting periods within those years) beginning after December 15, 2016. We expect to adopt this guidance beginning with our fiscal quarter ending December 31, 2017. We are evaluating the impact that the adoption will have on our consolidated financial statements.

25

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK

Our exposure to interest rate risk relates primarily to our investment portfolio. Our marketable securities are classified as available-for-sale and are carried at fair value. Our investments consist of certificates of deposit, money market funds, commercial paper and corporate bonds. Our investment policy specifies the types of eligible investments and minimum credit quality of our investments, as well as diversification and concentration limits which mitigate our risk. We do not use derivative financial instruments to hedge against interest rate risk because the majority of our investments mature in less than one year.

FOREIGN CURRENCY RISK

We are exposed to foreign currency transaction risk associated with certain sales transactions being denominated in Euros, British Pounds or Japanese Yen and in certain cases, transactions in U.S. Dollars in our foreign entities. We are also exposed to foreign currency translation risk as the financial position and operating results of our foreign subsidiaries are translated into U.S. Dollars for consolidation. We have not implemented a formal hedging strategy to reduce foreign currency risk as we continue to mitigate this risk with natural hedging strategies such as mitigating our net asset position in non-functional currencies.

For the six months ended March 31, 2015 and 2014, we had approximately $38.8 million and $36.4 million, respectively, of revenue from foreign customers including export sales. Of these sales, $11.1 million and $12.0 million, respectively, were denominated in foreign currency, predominantly Euros and British Pounds. In future periods, we expect a significant portion of sales will continue to be made in both Euros and British Pounds.

Total revenue was unfavorably impacted by foreign currency translation of $1.1 million and $1.6 million for the three and six month periods ended March 31, 2015, respectively, as compared to the same period in the prior fiscal year.

The table below compares the average monthly exchange rates of the Euro, British Pound and Japanese Yen to the U.S. Dollar:

	Six months ended March 31,		% increase
	2015	2014	(decrease)
Euro	1.1910	1.3655	(12.8	)%
British Pound	1.5514	1.6367	(5.2	)%
Japanese Yen	0.0086	0.0098	(12.2	)%

A 10% change from the first six months of fiscal year 2015 average exchange rate for the Euro, British Pound and Japanese Yen to the U.S. Dollar would have resulted in a 1.1% increase or decrease in revenue and a 1.9% increase or decrease in stockholders’ equity due to foreign currency translation. The above analysis does not take into consideration any pricing adjustments we might consider in response to changes in such exchange rates.

CREDIT RISK

We have some exposure to credit risk related to our accounts receivable portfolio. Exposure to credit risk is controlled through regular monitoring of customer financial status, credit limits and collaboration with sales management and customer contacts to facilitate payment.

Investments are made in accordance with our investment policy and consist of certificates of deposit, money market funds, commercial paper and corporate bonds. The fair value of our investments contains an element of credit exposure, which could change based on changes in market conditions. If market conditions deteriorate or if the issuers of these securities experience credit rating downgrades, we may incur impairment charges for securities in our investment portfolio. All of our securities are held domestically.

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ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of the principal executive officer and principal financial officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on this evaluation, the principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective because of the material weakness in our internal control over financial reporting described below.

REMEDIATION OF MATERIAL WEAKNESS IN INTERNAL CONTROL OVER FINANCIAL REPORTING

We are in the process of improving our internal controls to remediate the material weakness that existed as of September 30, 2014, as described in Management’s Report On Internal Control Over Financial Reporting in Item 9A of our Annual Report on Form 10-K/A for the year ended September 30, 2014. The actions we are taking are subject to ongoing senior management review, as well as audit committee oversight. These remediation actions include designing reconciliation and review controls over income tax accounts that will operate at a level of precision to ensure that the applicable controls will prevent or detect errors on a timely basis. We also outsourced our tax department resulting in an increase in tax resources and expertise.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

Other than changes intended to remediate the material weakness noted above, there were no other changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

27

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 1A. RISK FACTORS

There have been no material changes in our risk factors from those previously disclosed in Item 1A of Part I of our Annual Report on Form 10-K for the year ended September 30, 2014.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On October 28, 2014, our Board of Directors authorized a new program to repurchase up to $15.0 million of our common stock primarily to return capital to shareholders and to support our employee stock purchase program. This new authorization began on November 1, 2014 and expires on October 31, 2015. Shares repurchased under the new program may be made through the open market and privately negotiated transactions from time to time and in amounts that management deems appropriate. The amount and timing of share repurchases will depend upon market conditions and other corporate considerations. We did not repurchase shares under this program during the first six months of fiscal 2015.

The following table presents the information with respect to purchases made by or on behalf of Digi International Inc. or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of our common stock during the second quarter of fiscal 2015:

Period	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased as Part of a Publicly Announced Program	Maximum Dollar Value of Shares that May Yet Be Purchased Under the Program
January 1, 2015 - January 31, 2015 (1)	9,371	$8.6646	-	$15,000,000.00
February 1, 2015 - February 28, 2015	-	-	-	$15,000,000.00
March 1, 2015 - March 31, 2015	-	-	-	$15,000,000.00
Total	9,371	$8.6646	0	$15,000,000.00

(1) 9,371 shares were forfeited by employees in connection with the satisfaction of tax withholding obligations related to the vesting of restricted stock units.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

None

ITEM 5. OTHER INFORMATION

None

28

ITEM 6. EXHIBITS

Exhibit No.		Description
3	(a)	Restated Certificate of Incorporation of the Company, as amended (1)
3	(b)	Amended and Restated By-Laws effective December 17, 2014 (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	(a)	Transition Agreement between the Company and Steven E. Snyder dated March 25, 2015 (5)*
10	(b)	Offer Letter between the Company and Michael C. Goergen dated March 6, 2015 (6)*
31	(a)	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31	(b)	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32		Section 1350 Certification
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Calculation Linkbase Document
101.DEF		XBRL Taxonomy Definition Linkbase Document
101.LAB		XBRL Taxonomy Label Linkbase Document
101.PRE		XBRL Taxonomy Presentation Linkbase Document

*Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-Q.

______________

(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 3.2 to the Company’s Current Report on Form 8-K filed December 5, 2014 (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)

(5) Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed March 26, 2015 (File No. 1-34033)

(6) Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed March 26, 2015 (File No. 1-34033)

29

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

		DIGI INTERNATIONAL INC.
Date:	May 4, 2015	By:	/s/ Michael C. Goergen
			Michael C. Goergen
			Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer and Authorized Officer)

30

EXHIBIT INDEX

Exhibit Number		Document Description	Form of Filing
3	(a)	Restated Certificate of Incorporation of the Company, as Amended	Incorporated by Reference
3	(b)	Amended and Restated By-Laws effective December 17, 2014	Incorporated by Reference
4	(a)	Share Rights Agreement, dated as of April 22, 2008, between the Company and Wells Fargo Bank, N.A., as Rights Agent	Incorporated by Reference
4	(b)	Form of Amended and Restated Certificate of Powers, Designations, Preferences and Rights of Series A Junior Participating Preferred Shares	Incorporated by Reference
10	(a)	Transition Agreement between the Company and Steven E. Snyder dated March 25, 2015	Incorporated by Reference
10	(b)	Offer Letter between the Company and Michael C. Goergen dated March 6, 2015	Incorporated by Reference
31	(a)	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer	Filed Electronically
31	(b)	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer	Filed Electronically
32		Section 1350 Certification	Filed Electronically
101.INS		XBRL Instance Document	Filed Electronically
101.SCH		XBRL Taxonomy Extension Schema Document	Filed Electronically
101.CAL		XBRL Taxonomy Calculation Linkbase Document	Filed Electronically
101.DEF		XBRL Taxonomy Definition Linkbase Document	Filed Electronically
101.LAB		XBRL Taxonomy Label Linkbase Document	Filed Electronically
101.PRE		XBRL Taxonomy Presentation Linkbase Document	Filed Electronically

31

EX-31.A

Exhibit No. 31(a)

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Ronald E. Konezny, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Digi International Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s Board of Directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

May 4, 2015	/s/ Ronald E. Konezny
	Ronald E. Konezny
	President and Chief Executive Officer

EX-31.B

Exhibit No. 31(b)

CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Michael C. Goergen, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Digi International Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;

4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s Board of Directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

May 4, 2015	/s/ Michael C. Goergen
	Michael C. Goergen
	Senior Vice President, Chief Financial Officer and Treasurer

EX-32

Exhibit No. 32

CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Digi International Inc. (the Registrant) on Form 10-Q for the fiscal quarter ended March 31, 2015 as filed with the Securities and Exchange Commission on the date hereof, each of the undersigned certifies, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Quarterly Report on Form 10-Q complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

May 4, 2015
	/s/ Ronald E. Konezny
	Ronald E. Konezny
	President and Chief Executive Officer
	/s/ Michael C. Goergen
	Michael C. Goergen
	Senior Vice President, Chief Financial Officer and Treasurer

XML

Stock-Based Compensation (Details) (USD $)	6 Months Ended
	Mar. 31, 2015	Mar. 31, 2014	Jan. 27, 2014
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Proceeds from stock option plan transactions	$ 6,006,000	$ 3,209,000
Total intrinsic value of all options exercised	800,000	500,000
Forfeiture rate	6.00%
Stock Options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Total unrecognized compensation cost nonvested awards	4,400,000
Weighted average period, unrecognized compensation cost, nonvested awards	3 years
Restricted Stock Units
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Total unrecognized compensation cost nonvested restricted stock units	3,400,000
Weighted average period, unrecognized compensation cost, nonvested awards	1 year 8 months 12 days
The 2014 Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of shares authorized			2,250,000
Number of shares available for future grants	1,492,183
The 2014 Plan | Stock Options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vesting period	4 years
Expiration period	8 years
The Purchase Plan | The Purchase Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of continuous days of service	90 days
Number of hours per week employed	20 hours
Percent of market value	85.00%
Offering period	3 months
Employee contributions	$ 500,000	$ 600,000
Common shares issued to employees	72,306	65,832
Shares available for future issuance	669,072
Director | The 2014 Plan | Restricted Stock Units
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vesting period	1 year
Executives and Employees | The 2014 Plan | Restricted Stock Units
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vesting period	4 years

XML

Goodwill and Other Identifiable Intangible Assets, Net (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2015	Sep. 30, 2014
Finite-Lived Intangible Assets [Line Items]
Gross carrying amount	$ 76,599	$ 80,413
Accumulated amortization	(71,251)	(73,628)
Net	5,348	6,785
Purchased and Core Technology
Finite-Lived Intangible Assets [Line Items]
Gross carrying amount	45,298	45,952
Accumulated amortization	(44,949)	(45,162)
Net	349	790
License Agreements
Finite-Lived Intangible Assets [Line Items]
Gross carrying amount	0	2,440
Accumulated amortization	0	(2,440)
Net	0	0
Patents and Trademarks
Finite-Lived Intangible Assets [Line Items]
Gross carrying amount	11,830	11,667
Accumulated amortization	(10,302)	(9,799)
Net	1,528	1,868
Customer Relationships
Finite-Lived Intangible Assets [Line Items]
Gross carrying amount	18,371	18,894
Accumulated amortization	(15,468)	(15,445)
Net	2,903	3,449
Non-compete Agreements
Finite-Lived Intangible Assets [Line Items]
Gross carrying amount	1,100	1,100
Accumulated amortization	(532)	(422)
Net	568	678
Order Backlog
Finite-Lived Intangible Assets [Line Items]
Gross carrying amount	0	360
Accumulated amortization	0	(360)
Net	$ 0	$ 0

XML

Income Taxes (Tables)

6 Months Ended

Mar. 31, 2015

Income Tax Disclosure [Abstract]

Schedule of Unrecognized Tax Benefits

A reconciliation of the beginning and ending amount of unrecognized tax benefits is (in thousands):

Unrecognized tax benefits as of September 30, 2014	$	2,301
Increases related to:
Prior year income tax positions	50
Decreases related to:
Prior year income tax positions	(255		)
Settlements	(74		)
Expiration of statute of limitations	(139		)
Unrecognized tax benefits as of March 31, 2015	$	1,883

XML

Stock-Based Compensation (Fair Value Assumptions) (Details) (Stock Options, USD $) In Thousands, except Per Share data, unless otherwise specified	6 Months Ended
	Mar. 31, 2015	Mar. 31, 2014
Stock Options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Fair value of options granted	$ 2,046	$ 3,995
Weighted average per option grant date fair value	$ 2.91	$ 4.44
Assumptions Used For Options Grants [Abstract]
Risk free interest rate, minimum	1.77%	1.76%
Risk free interest rate, maximum	1.85%	1.91%
Expected term	6 years	6 years
Expected volatility rate, minimum	35.00%	40.00%
Expected volatility rate, maximum	36.00%
Weighted average volatility	35.00%	40.00%
Expected dividend yield	0.00%	0.00%

XML

Income Taxes (Details) (USD $)	3 Months Ended		6 Months Ended
	Mar. 31, 2015	Mar. 31, 2014	Mar. 31, 2015	Mar. 31, 2014	Sep. 30, 2014
Income Tax Disclosure [Abstract]
Income tax provision (benefit)	$ 874,000	$ (1,317,000)	$ 19,000	$ (1,241,000)
Income tax expense (benefit) specific to the period			(500,000)
Net tax benefit mostly related to research and development tax credits				(1,300,000)
Unrecognized tax benefits that would impact effective tax rate	1,900,000		1,900,000
Expected change in unrecognized tax benefits, minimum	600,000		600,000
Income tax penalties and interest accrued	400,000		400,000		423,000
Accumulated undistributed foreign earnings	26,000,000		26,000,000
Income Tax Contingency [Line Items]
Unrecognized tax benefits	1,883,000		1,883,000		2,301,000
Minimum [Member]
Income Tax Contingency [Line Items]
Estimate of unrecognized deferred tax liability	500,000		500,000
Maximum
Income Tax Contingency [Line Items]
Estimate of unrecognized deferred tax liability	1,500,000		1,500,000
Non-current income taxes payable
Income Tax Contingency [Line Items]
Unrecognized tax benefits	1,500,000		1,500,000
Non-current deferred tax assets
Income Tax Contingency [Line Items]
Unrecognized tax benefits	$ 400,000		$ 400,000

XML

Selected Balance Sheet Data

6 Months Ended

Mar. 31, 2015

Selected Balance Sheet Data [Abstract]

SELECTED BALANCE SHEET DATA

SELECTED BALANCE SHEET DATA

(in thousands)

	March 31, 2015		September 30, 2014
Accounts receivable, net:
Accounts receivable	$	28,937	$	28,943
Less allowance for doubtful accounts	322		367
Accounts receivable, net	$	28,615	$	28,576
Inventories:
Raw materials	$	27,773	$	26,402
Work in process	789		315
Finished goods	5,319		4,530
Inventories	$	33,881	$	31,247

Inventories are stated at the lower of cost or market value, with cost determined using the first-in, first-out method.

XML

Stock-Based Compensation (Non-Vested Options) (Details) (Restricted Stock Units, USD $) In Thousands, except Per Share data, unless otherwise specified	6 Months Ended
	Mar. 31, 2015
Restricted Stock Units
Nonvested Number of Restricted Stock Units [Roll Forward]
Number of Restricted Stock Units, Beginning Balance	171
Number of Restricted Stock Units, Granted	432
Number of Restricted Stock Units, Vested	(81)
Number of Restricted Stock Units, Canceled	(29)
Number of Restricted Stock Units, Ending Balance	493
Nonvested Restricted Stock Units, Weighted Average Grant Date Fair Value per Common Share [Roll Forward]
Restricted Stock Units, Weighted Average Grant Date Fair Value per Common Share, Beginning Balance	$ 9.35
Restricted Stock Units, Weighted Average Grant Date Fair Value per Common Share, Granted	$ 7.96
Restricted Stock Units, Weighted Average Grant Date Fair Value per Common Share, Vested	$ 9.60
Restricted Stock Units, Weighted Average Grant Date Fair Value per Common Share, Canceled	$ 7.91
Restricted Stock Units, Weighted Average Grant Date Fair Value per Common Share, Ending Balance	$ 8.17

XML

Earnings Per Share (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Mar. 31, 2015	Mar. 31, 2014	Mar. 31, 2015	Mar. 31, 2014
Earnings Per Share [Abstract]
Net income	$ 1,446	$ 738	$ 1,107	$ 1,426
Denominator for basic net income per common share — weighted average shares outstanding	24,492,000	25,644,000	24,319,000	25,680,000
Effect of dilutive securities:
Stock options and restricted stock units	781,000	500,000	497,000	509,000
Denominator for diluted net income per common share — adjusted weighted average shares	25,273,000	26,144,000	24,816,000	26,189,000
Net income per common share, basic (USD per share)	$ 0.06	$ 0.03	$ 0.05	$ 0.06
Net income per common share, diluted (USD per share)	$ 0.06	$ 0.03	$ 0.04	$ 0.05
Potentially dilutive securities excluded from computation of earnings per share	2,366,812	3,347,082	3,496,463	2,627,905

XML

Restructuring (Tables)

6 Months Ended

Mar. 31, 2015

Restructuring and Related Activities [Abstract]

Schedule of Restructuring Reserve

Below is a summary of the restructuring charges and other activity within the restructuring accrual (in thousands):

	2015 Restructuring			2014 Restructuring			2013 Restructuring
	Employee Termination Costs			Employee Termination Costs			Employee Termination Costs			Total
Balance at September 30, 2013	$	—		$	—		$	350		$	350
Restructuring charge	—			152			—			152
Payments	—			(152		)	(279		)	(431		)
Reversals	—			—			(71		)	(71		)
Balance at September 30, 2014	—			—			—			—
Restructuring charge	518			—			—			518
Payments	(342		)	—			—			(342		)
Balance at March 31, 2015	$	176		$	—		$	—		$	176

XML

Common Stock Repurchase (Details) (USD $) In Millions, except Share data, unless otherwise specified	1 Months Ended	6 Months Ended
	Oct. 31, 2014	Mar. 31, 2015	Oct. 28, 2014
Common Stock Repurchase [Abstract]
Stock repurchase program, authorized amount			$ 15.0
Shares repurchased	287,787
Shares repurchased, value	2.3
Shares Forfeited for Withholding Tax Obligations for Share Based Compensation		9,371
Amount of Shares Forfeited Related to Tax Withholding for Share-based Compensation		$ 0.1

XML

Selected Balance Sheet Data (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2015	Sep. 30, 2014
Accounts receivable, net:
Accounts receivable	$ 28,937	$ 28,943
Less allowance for doubtful accounts	322	367
Accounts receivable, net	28,615	28,576
Inventories:
Raw materials	27,773	26,402
Work in process	789	315
Finished goods	5,319	4,530
Inventories	$ 33,881	$ 31,247

XML

Marketable Securities (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended			6 Months Ended
	Mar. 31, 2015 Security		Mar. 31, 2014	Mar. 31, 2015 Security		Mar. 31, 2014	Sep. 30, 2014
Schedule of Available-for-sale Securities [Line Items]
Number of securities below amortized cost basis	40			40
Number of securities	68			68
Proceeds from maturities of marketable securities	$ 10,400		$ 6,700	$ 19,763		$ 13,778
Available-for-sale securities, amortized cost basis	46,807	[1]		46,807	[1]		44,471	[2]
Available-for-sale securities, unrealized gains	19			19			17
Available-for-sale securities, unrealized losses	(56)			(56)			(49)
Available-for-sale marketable securities, fair value	46,770	[1]		46,770	[1]		44,439	[2]
Purchased and accrued interest	155			155			213
Fair value of available-for-sale securities in continuous unrealized loss position for less than twelve months	37,096			37,096			30,453
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than 12 Months, Accumulated Loss	(56)			(56)			(47)
Fair value of available-for-sale securities in continuous unrealized loss position for twelve months or longer	0			0			748
Available-for-sale Securities, Continuous Unrealized Loss Position, 12 Months or Longer, Accumulated Loss	0			0			(2)
Current Assets
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale securities, next twelve months, maximum year mature				1 year
Available-for-sale securities, amortized cost basis	39,257	[1]		39,257	[1]		32,918	[2]
Available-for-sale securities, unrealized gains	7			7			3
Available-for-sale securities, unrealized losses	(44)			(44)			(23)
Available-for-sale marketable securities, fair value	39,220	[1]		39,220	[1]		32,898	[2]
Non-current Assets
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale securities, year two through five, maximum year mature				3 years
Available-for-sale securities, amortized cost basis	7,550	[1]		7,550	[1]		11,553	[2]
Available-for-sale securities, unrealized gains	12			12			14
Available-for-sale securities, unrealized losses	(12)			(12)			(26)
Available-for-sale marketable securities, fair value	7,550	[1]		7,550	[1]		11,541	[2]
Corporate Bonds
Schedule of Available-for-sale Securities [Line Items]
Fair value of available-for-sale securities in continuous unrealized loss position for less than twelve months	33,101			33,101			23,475
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than 12 Months, Accumulated Loss	(51)			(51)			(26)
Fair value of available-for-sale securities in continuous unrealized loss position for twelve months or longer	0			0			0
Available-for-sale Securities, Continuous Unrealized Loss Position, 12 Months or Longer, Accumulated Loss	0			0			0
Corporate Bonds | Current Assets
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale securities, amortized cost basis	30,255	[1]		30,255	[1]		24,668	[2]
Available-for-sale securities, unrealized gains	0			0			1
Available-for-sale securities, unrealized losses	(41)			(41)			(22)
Available-for-sale marketable securities, fair value	30,214	[1]		30,214	[1]		24,647	[2]
Corporate Bonds | Non-current Assets
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale securities, amortized cost basis	3,048	[1]		3,048	[1]		2,051	[2]
Available-for-sale securities, unrealized gains	0			0			0
Available-for-sale securities, unrealized losses	(10)			(10)			(4)
Available-for-sale marketable securities, fair value	3,038	[1]		3,038	[1]		2,047	[2]
Commercial Paper
Schedule of Available-for-sale Securities [Line Items]
Fair value of available-for-sale securities in continuous unrealized loss position for less than twelve months							3,998
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than 12 Months, Accumulated Loss							(1)
Fair value of available-for-sale securities in continuous unrealized loss position for twelve months or longer							0
Available-for-sale Securities, Continuous Unrealized Loss Position, 12 Months or Longer, Accumulated Loss							0
Commercial Paper | Current Assets
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale securities, amortized cost basis	2,000	[1]		2,000	[1]		3,998	[2]
Available-for-sale securities, unrealized gains	0			0			0
Available-for-sale securities, unrealized losses	0			0			(1)
Available-for-sale marketable securities, fair value	2,000	[1]		2,000	[1]		3,997	[2]
Certificates of Deposit
Schedule of Available-for-sale Securities [Line Items]
Fair value of available-for-sale securities in continuous unrealized loss position for less than twelve months	3,995			3,995			2,980
Available-for-sale Securities, Continuous Unrealized Loss Position, Less than 12 Months, Accumulated Loss	(5)			(5)			(20)
Fair value of available-for-sale securities in continuous unrealized loss position for twelve months or longer	0			0			748
Available-for-sale Securities, Continuous Unrealized Loss Position, 12 Months or Longer, Accumulated Loss	0			0			(2)
Certificates of Deposit | Current Assets
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale securities, amortized cost basis	7,002	[1]		7,002	[1]		4,252	[2]
Available-for-sale securities, unrealized gains	7			7			2
Available-for-sale securities, unrealized losses	(3)			(3)			0
Available-for-sale marketable securities, fair value	7,006	[1]		7,006	[1]		4,254	[2]
Certificates of Deposit | Non-current Assets
Schedule of Available-for-sale Securities [Line Items]
Available-for-sale securities, amortized cost basis	4,502	[1]		4,502	[1]		9,502	[2]
Available-for-sale securities, unrealized gains	12			12			14
Available-for-sale securities, unrealized losses	(2)			(2)			(22)
Available-for-sale marketable securities, fair value	$ 4,512	[1]		$ 4,512	[1]		$ 9,494	[2]

[1] Included in amortized cost and fair value is purchased and accrued interest of $155

[2] Included in amortized cost and fair value is purchased and accrued interest of $213.

XML

Earnings Per Share

6 Months Ended

Mar. 31, 2015

Earnings Per Share [Abstract]

EARNINGS PER SHARE

EARNINGS PER SHARE

Basic net income per common share is calculated based on the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed by dividing net income by the weighted average number of common shares and potentially dilutive common shares outstanding during the period. Potentially dilutive common shares result from dilutive common stock options and restricted stock units.

The following table is a reconciliation of the numerators and denominators in the net income per common share calculations (in thousands, except per common share data):

	Three months ended March 31,				Six months ended March 31,
	2015		2014		2015		2014
Numerator:
Net income	$	1,446	$	738	$	1,107	$	1,426
Denominator:
Denominator for basic net income per common share — weighted average shares outstanding	24,492		25,644		24,319		25,680
Effect of dilutive securities:
Stock options and restricted stock units	781		500		497		509
Denominator for diluted net income per common share — adjusted weighted average shares	25,273		26,144		24,816		26,189
Net income per common share, basic	$	0.06	$	0.03	$	0.05	$	0.06
Net income per common share, diluted	$	0.06	$	0.03	$	0.04	$	0.05

For the three months ended March 31, 2015 and 2014, there were 2,366,812 and 3,347,082 potentially dilutive shares, respectively, and for the six months ended March 31, 2015 and 2014, there were 3,496,463 and 2,627,905 potentially dilutive shares, respectively, related to stock options to purchase common shares that were not included in the above computation of diluted earnings per common share. This is because the options’ exercise prices were greater than the average market price of our common shares.

XML

Fair Value Measurements (Details) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2015		Sep. 30, 2014
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale marketable securities	$ 46,770	[1]	$ 44,439	[2]
Fair Value, Inputs, Level 1 | Fair Value, Measurements, Recurring
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total cash equivalents and marketable securities measured at fair value	13,879		19,630
Fair Value, Inputs, Level 2 | Fair Value, Measurements, Recurring
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total cash equivalents and marketable securities measured at fair value	46,770		44,439
Fair Value, Inputs, Level 3 | Fair Value, Measurements, Recurring
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total cash equivalents and marketable securities measured at fair value	0		0
Money Market Funds | Fair Value, Inputs, Level 1 | Fair Value, Measurements, Recurring
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash equivalents	13,879		19,630
Money Market Funds | Fair Value, Inputs, Level 2 | Fair Value, Measurements, Recurring
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash equivalents	0		0
Money Market Funds | Fair Value, Inputs, Level 3 | Fair Value, Measurements, Recurring
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash equivalents	0		0
Corporate Bonds | Fair Value, Inputs, Level 1 | Fair Value, Measurements, Recurring
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale marketable securities	0		0
Corporate Bonds | Fair Value, Inputs, Level 2 | Fair Value, Measurements, Recurring
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale marketable securities	33,252		26,694
Corporate Bonds | Fair Value, Inputs, Level 3 | Fair Value, Measurements, Recurring
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale marketable securities	0		0
Commercial Paper | Fair Value, Inputs, Level 1 | Fair Value, Measurements, Recurring
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale marketable securities	0		0
Commercial Paper | Fair Value, Inputs, Level 2 | Fair Value, Measurements, Recurring
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale marketable securities	2,000		3,997
Commercial Paper | Fair Value, Inputs, Level 3 | Fair Value, Measurements, Recurring
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale marketable securities	0		0
Certificates of Deposit | Fair Value, Inputs, Level 1 | Fair Value, Measurements, Recurring
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale marketable securities	0		0
Certificates of Deposit | Fair Value, Inputs, Level 2 | Fair Value, Measurements, Recurring
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale marketable securities	11,518		13,748
Certificates of Deposit | Fair Value, Inputs, Level 3 | Fair Value, Measurements, Recurring
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale marketable securities	0		0
Estimate of Fair Value Measurement [Member] | Fair Value, Measurements, Recurring
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total cash equivalents and marketable securities measured at fair value	60,649		64,069
Estimate of Fair Value Measurement [Member] | Money Market Funds | Fair Value, Measurements, Recurring
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Cash equivalents	13,879		19,630
Estimate of Fair Value Measurement [Member] | Corporate Bonds | Fair Value, Measurements, Recurring
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale marketable securities	33,252		26,694
Estimate of Fair Value Measurement [Member] | Commercial Paper | Fair Value, Measurements, Recurring
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale marketable securities	2,000		3,997
Estimate of Fair Value Measurement [Member] | Certificates of Deposit | Fair Value, Measurements, Recurring
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Available-for-sale marketable securities	$ 11,518		$ 13,748

[1] Included in amortized cost and fair value is purchased and accrued interest of $155

[2] Included in amortized cost and fair value is purchased and accrued interest of $213.

XML

Stock-Based Compensation (Stock-Based Compensation Expense) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Mar. 31, 2015	Mar. 31, 2014	Mar. 31, 2015	Mar. 31, 2014
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock-based compensation before income taxes	$ 1,038	$ 1,047	$ 2,222	$ 2,070
Income tax benefit	(361)	(355)	(775)	(703)
Stock-based compensation after income taxes	677	692	1,447	1,367
Cost of Sales
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock-based compensation before income taxes	83	82	189	150
Sales and Marketing
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock-based compensation before income taxes	306	282	649	568
Research and Development
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock-based compensation before income taxes	196	177	388	383
General and Administrative
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Stock-based compensation before income taxes	$ 453	$ 506	$ 996	$ 969

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Condensed Consolidated Statements of Operations (Unaudited) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Mar. 31, 2015	Mar. 31, 2014	Mar. 31, 2015	Mar. 31, 2014
Revenue:
Hardware product revenue	$ 48,108	$ 40,560	$ 93,041	$ 82,549
Service revenue	5,043	5,322	8,833	10,655
Total revenue	53,151	45,882	101,874	93,204
Cost of sales:
Cost of hardware product	25,498	20,012	48,610	40,275
Cost of service	3,575	4,090	7,264	8,241
Total cost of sales	29,073	24,102	55,874	48,516
Gross profit	24,078	21,780	46,000	44,688
Operating expenses:
Sales and marketing	10,299	10,399	21,091	20,618
Research and development	7,779	7,411	15,341	14,668
General and administrative	4,540	4,619	9,728	9,342
Restructuring charges, net	518	0	518	81
Total operating expenses	23,136	22,429	46,678	44,709
Operating income (loss)	942	(649)	(678)	(21)
Other income, net:
Interest income, net	54	49	92	92
Other income, net	1,324	21	1,712	114
Total other income, net	1,378	70	1,804	206
Income (loss) before income taxes	2,320	(579)	1,126	185
Income tax provision (benefit)	874	(1,317)	19	(1,241)
Net income	$ 1,446	$ 738	$ 1,107	$ 1,426
Net income per common share:
Basic (USD per share)	$ 0.06	$ 0.03	$ 0.05	$ 0.06
Net income per common share, diluted (USD per share)	$ 0.06	$ 0.03	$ 0.04	$ 0.05
Weighted average common shares:
Basic (shares)	24,492	25,644	24,319	25,680
Diluted (shares)	25,273	26,144	24,816	26,189

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Restructuring Restructuring (Details) (USD $) In Thousands, unless otherwise specified	6 Months Ended	12 Months Ended	0 Months Ended		12 Months Ended	0 Months Ended	3 Months Ended	0 Months Ended
	Mar. 31, 2015	Sep. 30, 2014	Oct. 31, 2013 employees	Sep. 27, 2013 employees	Sep. 30, 2013	Feb. 20, 2015 employees	Mar. 31, 2015	Jan. 22, 2015 employees
Restructuring Cost and Reserve [Line Items]
Restructuring charge	$ 518	$ 152
Payments for Restructuring	(342)	(431)
Restructuring Reserve, Accrual Adjustment		(71)
Restructuring Reserve	176	0			350		176
Fiscal 2014 Restructuring
Restructuring Cost and Reserve [Line Items]
Number of employees eliminated			40
Fiscal 2013 Restructuring
Restructuring Cost and Reserve [Line Items]
Number of employees eliminated				15
Employee Termination Costs | Fiscal 2015 Restructuring
Restructuring Cost and Reserve [Line Items]
Restructuring charge	518	0
Payments for Restructuring	(342)	0
Restructuring Reserve, Accrual Adjustment		0
Restructuring Reserve	176	0			0		176
Employee Termination Costs | Fiscal 2014 Restructuring
Restructuring Cost and Reserve [Line Items]
Restructuring charge	0	152
Payments for Restructuring	0	(152)
Restructuring Reserve, Accrual Adjustment		0
Restructuring Reserve	0	0			0		0
Employee Termination Costs | Fiscal 2013 Restructuring
Restructuring Cost and Reserve [Line Items]
Restructuring charge	0	0			350
Payments for Restructuring	0	(279)
Restructuring Reserve, Accrual Adjustment		(71)
Restructuring Reserve	0	0			350		0
UNITED STATES | Fiscal 2015 Restructuring
Restructuring Cost and Reserve [Line Items]
Number of employees eliminated						21
UNITED STATES | Employee Termination Costs | Fiscal 2015 Restructuring
Restructuring Cost and Reserve [Line Items]
Restructuring charge							300
INDIA | Fiscal 2015 Restructuring
Restructuring Cost and Reserve [Line Items]
Number of employees eliminated								38
INDIA | Employee Termination Costs | Fiscal 2015 Restructuring
Restructuring Cost and Reserve [Line Items]
Restructuring charge								200

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Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Mar. 31, 2015	Mar. 31, 2014
Operating activities:
Net income	$ 1,107	$ 1,426
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property, equipment and improvements	1,445	1,828
Amortization of identifiable intangible assets	1,537	1,891
Stock-based compensation	2,222	2,070
Excess tax benefits from stock-based compensation	0	(44)
Deferred income tax provision (benefit)	2,212	(1,065)
Gain on insurance settlement related to property and equipment	(989)	0
Bad debt/product return provision	518	(151)
Inventory obsolescence	476	409
Restructuring charges, net	518	81
Other	(27)	46
Changes in operating assets and liabilities	(7,459)	(9,681)
Net cash provided by (used in) operating activities	1,560	(3,190)
Investing activities:
Purchase of marketable securities	(22,099)	(5,157)
Proceeds from maturities of marketable securities	19,763	13,778
Proceeds from insurance settlement related to property and equipment	1,014	0
Proceeds from sale of property and equipment	45	0
Purchase of property, equipment, improvements and certain other intangible assets	(3,035)	(1,921)
Net cash (used in) provided by investing activities	(4,312)	6,700
Financing activities:
Excess tax benefits from stock-based compensation	0	44
Proceeds from stock option plan transactions	6,006	3,209
Proceeds from employee stock purchase plan transactions	505	561
Purchases of common stock	(2,339)	(5,416)
Net cash provided by (used in) financing activities	4,172	(1,602)
Effect of exchange rate changes on cash and cash equivalents	(3,253)	329
Net (decrease) increase in cash and cash equivalents	(1,833)	2,237
Cash and cash equivalents, beginning of period	47,490	41,320
Cash and cash equivalents, end of period	$ 45,657	$ 43,557

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Goodwill and Other Identifiable Intangible Assets, Net Goodwill (Details) (USD $)	0 Months Ended	6 Months Ended
	Jun. 30, 2014	Mar. 31, 2015	Mar. 31, 2014	Sep. 30, 2014	Jun. 30, 2014 industry
Goodwill [Roll Forward]
Beginning balance		$ 103,398,000	$ 103,569,000
Foreign currency translation adjustment		(1,656,000)	476,000
Ending balance		101,742,000	104,045,000
Goodwill [Line Items]
Market capitalization	235,800,000				235,800,000
Carrying value	$ 273,000,000	$ 265,133,000		$ 265,298,000	$ 273,000,000
Control premium percent	35.00%
Percent fair value in excess of carrying value of goodwill	17.00%				17.00%
Target companies equity benchmark	50.00%				50.00%
Number of industries encompasses similar products	3				3
Minimum [Member]
Goodwill [Line Items]
Control premium percent	30.00%
Maximum
Goodwill [Line Items]
Control premium percent	40.00%

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Marketable Securities (Tables)

6 Months Ended

Mar. 31, 2015

Marketable Securities [Abstract]

Schedule of Marketable Securities

At March 31, 2015 our marketable securities were (in thousands):

	Amortized Cost (1)		Unrealized Gains		Unrealized Losses			Fair Value (1)
Current marketable securities:
Corporate bonds	$	30,255	$	—	$	(41	)	$	30,214
Commercial paper	2,000		—		—			2,000
Certificates of deposit	7,002		7		(3		)	7,006
Current marketable securities	39,257		7		(44		)	39,220
Non-current marketable securities:
Corporate bonds	3,048		—		(10		)	3,038
Certificates of deposit	4,502		12		(2		)	4,512
Non-current marketable securities	7,550		12		(12		)	7,550
Total marketable securities	$	46,807	$	19	$	(56	)	$	46,770

(1) Included in amortized cost and fair value is purchased and accrued interest of $155.

At September 30, 2014 our marketable securities were (in thousands):

	Amortized Cost (1)		Unrealized Gains		Unrealized Losses			Fair Value (1)
Current marketable securities:
Corporate bonds	$	24,668	$	1	$	(22	)	$	24,647
Commercial paper	3,998		—		(1		)	3,997
Certificates of deposit	4,252		2		—			4,254
Current marketable securities	32,918		3		(23		)	32,898
Non-current marketable securities:
Corporate bonds	2,051		—		(4		)	2,047
Certificates of deposit	9,502		14		(22		)	9,494
Non-current marketable securities	11,553		14		(26		)	11,541
Total marketable securities	$	44,471	$	17	$	(49	)	$	44,439

(1) Included in amortized cost and fair value is purchased and accrued interest of $213.

Schedule of Unrealized Losses on Available-For-Sale Securities

The following tables show the fair values and gross unrealized losses of our available-for-sale marketable securities that have been in a continuous unrealized loss position deemed to be temporary, aggregated by investment category (in thousands):

	March 31, 2015
	Less than 12 Months					More than 12 Months
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Corporate bonds	$	33,101	$	(51	)	$	—	$	—
Certificates of deposit	3,995		(5		)	—		—
Total	$	37,096	$	(56	)	$	—	$	—

	September 30, 2014
	Less than 12 Months					More than 12 Months
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Corporate bonds	$	23,475	$	(26	)	$	—	$	—
Commercial paper	3,998		(1		)	—		—
Certificates of deposit	2,980		(20		)	748		(2		)
Total	$	30,453	$	(47	)	$	748	$	(2	)

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Income Taxes (Unrecognized Tax Benefits) (Details) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Mar. 31, 2015
Reconciliation of Unrecognized Tax Benefits, Excluding Amounts Pertaining to Examined Tax Returns [Roll Forward]
Unrecognized tax benefits, beginning balance	$ 2,301
Increases related to Prior year income tax positions	50
Decreases related to Prior year income tax positions	(255)
Decreases related to Settlements	(74)
Decreases related to Expiration of statute of limitations	(139)
Unrecognized tax benefits, ending balance	$ 1,883

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Goodwill and Other Identifiable Intangible Assets, Net (Tables)

6 Months Ended

Mar. 31, 2015

Goodwill and Intangible Assets Disclosure [Abstract]

Schedule of Amortizable Identifiable Intangible Assets

Amortizable identifiable intangible assets were (in thousands):

	March 31, 2015							September 30, 2014
	Gross carrying amount		Accum. amort.			Net		Gross carrying amount		Accum. amort.			Net
Purchased and core technology	$	45,298	$	(44,949	)	$	349	$	45,952	$	(45,162	)	$	790
License agreements	—		—			—		2,440		(2,440		)	—
Patents and trademarks	11,830		(10,302		)	1,528		11,667		(9,799		)	1,868
Customer relationships	18,371		(15,468		)	2,903		18,894		(15,445		)	3,449
Non-compete agreements	1,100		(532		)	568		1,100		(422		)	678
Order backlog	—		—			—		360		(360		)	—
Total	$	76,599	$	(71,251	)	$	5,348	$	80,413	$	(73,628	)	$	6,785

Schedule of Estimated Amortization Expense Related to Identifiable Intangible Assets

Estimated amortization expense related to identifiable intangible assets for the remainder of fiscal 2015 and the five succeeding fiscal years is (in thousands):

2015 six months	$	1,378
2016	1,927
2017	901
2018	482
2019	438
2020	168

Schedule of Changes in Carrying Amount of Goodwill

The changes in the carrying amount of goodwill are (in thousands):

	Six months ended March 31,
	2015			2014
Beginning balance, October 1	$	103,398		$	103,569
Foreign currency translation adjustment	(1,656		)	476
Ending balance, March 31	$	101,742		$	104,045

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Basis of Presentation of Unaudited Interim Condensed Consolidated Financial Statements and Significant Accounting Policies

6 Months Ended

Mar. 31, 2015

Accounting Policies [Abstract]

BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANTACCOUNTING POLICIES

BASIS OF PRESENTATION OF UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The interim unaudited condensed consolidated financial statements included in this Form 10-Q have been prepared by Digi International Inc. (the “Company,” “Digi,” “we,” “our,” or “us”) pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures, normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto, including (but not limited to) the summary of significant accounting policies, presented in our Annual Report on Form 10-K for the year ended September 30, 2014 as filed with the SEC (“2014 Financial Statements”).

The condensed consolidated financial statements presented herein reflect, in the opinion of management, all adjustments which consist only of normal, recurring adjustments necessary for a fair statement of the condensed consolidated balance sheets and condensed consolidated statements of operations, comprehensive income and cash flows for the periods presented. The condensed consolidated results of operations for any interim period are not necessarily indicative of results for the full year. The year-end condensed consolidated balance sheet data were derived from our 2014 Financial Statements, but do not include all disclosures required by U.S. GAAP.

Recently Issued Accounting Pronouncements

Not Yet Adopted

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers.” This guidance provides a five-step analysis in determining when and how revenue is recognized so that an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects what it expects in exchange for the goods and services. It also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. This guidance is effective for fiscal years (and interim reporting periods within those years) beginning after December 15, 2016. We expect to adopt this guidance beginning with our fiscal quarter ending December 31, 2017. We are evaluating the impact that the adoption will have on our consolidated financial statements.

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Condensed Consolidated Statements of Comprehensive (Loss) Income (Unaudited) (USD $) In Thousands, unless otherwise specified	3 Months Ended			6 Months Ended
	Mar. 31, 2015		Mar. 31, 2014	Mar. 31, 2015		Mar. 31, 2014
Net income	$ 1,446		$ 738	$ 1,107		$ 1,426
Foreign currency translation adjustment	(3,356)		(181)	(5,729)		162
Change in net unrealized gain (loss) on investments	23		26	(6)		64
Less income tax (provision) benefit	(9)		(10)	2		(25)
Reclassification of realized loss on investments included in net income	(1)	[1]	0	(1)	[1]	0
Other comprehensive (loss) income, net of tax	(3,341)		(165)	(5,732)		201
Comprehensive (loss) income	$ (1,895)		$ 573	$ (4,625)		$ 1,627

[1] Recorded in Other income, net on our Condensed Consolidated Statement of Operations.

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Common Stock Repurchase

6 Months Ended

Mar. 31, 2015

Common Stock Repurchase [Abstract]

COMMON STOCK REPURCHASE

COMMON STOCK REPURCHASE

On October 28, 2014, our Board of Directors authorized a new program to repurchase up to $15.0 million of our common stock primarily to return capital to shareholders and to support our employee stock purchase program. This new authorization began on November 1, 2014 and expires on October 31, 2015. Shares repurchased under the program may be made through the open market and privately negotiated transactions from time to time and in amounts that management deems appropriate. The amount and timing of share repurchases will depend upon market conditions and other corporate considerations. We did not repurchase shares under this program during the first six months of fiscal 2015.

Our prior share repurchase authorization program expired on October 31, 2014. During the month of October 2014, we repurchased 287,787 shares under this program for $2.3 million.

In addition to the shares repurchased under the prior Board authorized repurchase program, during the six months ended March 31, 2015, our employees forfeited 9,371 shares in order to satisfy $0.1 million of withholding tax obligations related to stock-based compensation, pursuant to terms of awards under our board and shareholder-approved compensation plans.

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Document and Entity Information	6 Months Ended
	Mar. 31, 2015	Apr. 30, 2015
Document and Entity Information [Abstract]
Entity Registrant Name	DIGI INTERNATIONAL INC.
Entity Central Index Key	0000854775
Current Fiscal Year End Date	--09-30
Entity Filer Category	Accelerated Filer
Document Type	10-Q
Document Period End Date	Mar. 31, 2015
Document Fiscal Year Focus	2015
Document Fiscal Period Focus	Q2
Amendment Flag	false
Entity Common Stock, Shares Outstanding		24,926,816

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Restructuring

6 Months Ended

Mar. 31, 2015

Restructuring and Related Activities [Abstract]

RESTRUCTURING

RESTRUCTURING

Below is a summary of the restructuring charges and other activity within the restructuring accrual (in thousands):

	2015 Restructuring			2014 Restructuring			2013 Restructuring
	Employee Termination Costs			Employee Termination Costs			Employee Termination Costs			Total
Balance at September 30, 2013	$	—		$	—		$	350		$	350
Restructuring charge	—			152			—			152
Payments	—			(152		)	(279		)	(431		)
Reversals	—			—			(71		)	(71		)
Balance at September 30, 2014	—			—			—			—
Restructuring charge	518			—			—			518
Payments	(342		)	—			—			(342		)
Balance at March 31, 2015	$	176		$	—		$	—		$	176

Fiscal 2015 Restructuring

On February 20, 2015, we announced a restructuring plan related to our Etherios operations in order to refocus the business on CRM and service cloud implementations. We recorded a restructuring charge of $0.3 million related to severance during the second quarter of fiscal 2015. We scaled the business to current and expected revenue levels resulting in an elimination of approximately 21 positions. The payments associated with these charges are expected to be completed by the end of fiscal 2015.

On January 22, 2015, we announced the closure of our India location. The March closure resulted in the elimination of approximately 38 employees from engineering, sales and administration. We recorded a restructuring charge of $0.2 million related to severance during the second quarter of fiscal 2015. The majority of this severance was paid during the second quarter of fiscal 2015.

Fiscal 2014 Restructuring

On October 31, 2013, we announced our intention to restructure certain of our operations in India. The restructuring was primarily associated with cost reduction initiatives resulting in the elimination of approximately 40 engineering and sales positions in our work force. We recorded a restructuring charge of $0.2 million related to severance during the first quarter of fiscal 2014. The majority of this severance was paid during the first quarter of fiscal 2014.

Fiscal 2013 Restructuring

On September 27, 2013, we announced our intention to restructure certain of our operations in the U.S. The restructuring was primarily associated with cost reduction initiatives and resulted in the elimination of 15 positions in our work force. We recorded a restructuring charge of $0.4 million for severance during the fourth quarter of fiscal 2013. The payments associated with these charges and all the actions associated with the restructuring were completed during the first quarter of fiscal 2014.

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Condensed Consolidated Balance Sheets (Unaudited) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2015	Sep. 30, 2014
Current assets:
Cash and cash equivalents	$ 45,657	$ 47,490
Marketable securities	39,220	32,898
Accounts receivable, net	28,615	28,576
Inventories	33,881	31,247
Deferred tax assets	3,388	3,221
Other	4,877	4,249
Total current assets	155,638	147,681
Marketable securities, long-term	7,550	11,541
Property, equipment and improvements, net	14,617	13,231
Identifiable intangible assets, net	5,348	6,785
Goodwill	101,742	103,398
Deferred tax assets	4,947	7,383
Other	320	440
Total assets	290,162	290,459
Current liabilities:
Accounts payable	11,375	10,451
Accrued compensation	7,677	8,133
Other	3,421	3,170
Total current liabilities	22,473	21,754
Income taxes payable	1,893	2,724
Deferred tax liabilities	182	272
Other noncurrent liabilities	481	411
Total liabilities	25,029	25,161
Contingencies (see Note 9)
Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares authorized; none issued and outstanding	0	0
Common stock, $.01 par value; 60,000,000 shares authorized; 31,462,480 and 30,703,895 shares issued	315	307
Additional paid-in capital	224,873	218,689
Retained earnings	118,923	117,816
Accumulated other comprehensive loss	(24,009)	(18,277)
Treasury stock, at cost, 6,538,789 and 6,313,937 shares	(54,969)	(53,237)
Total stockholders' equity	265,133	265,298
Total liabilities and stockholders' equity	$ 290,162	$ 290,459

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Goodwill and Other Identifiable Intangible Assets, Net

6 Months Ended

Mar. 31, 2015

Goodwill and Intangible Assets Disclosure [Abstract]

GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS, NET

GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS, NET

Amortizable identifiable intangible assets were (in thousands):

	March 31, 2015							September 30, 2014
	Gross carrying amount		Accum. amort.			Net		Gross carrying amount		Accum. amort.			Net
Purchased and core technology	$	45,298	$	(44,949	)	$	349	$	45,952	$	(45,162	)	$	790
License agreements	—		—			—		2,440		(2,440		)	—
Patents and trademarks	11,830		(10,302		)	1,528		11,667		(9,799		)	1,868
Customer relationships	18,371		(15,468		)	2,903		18,894		(15,445		)	3,449
Non-compete agreements	1,100		(532		)	568		1,100		(422		)	678
Order backlog	—		—			—		360		(360		)	—
Total	$	76,599	$	(71,251	)	$	5,348	$	80,413	$	(73,628	)	$	6,785

Amortization expense was $0.8 million and $0.9 million for the three month periods ended March 31, 2015 and 2014, respectively. Amortization expense was $1.5 million and $1.9 million for the six month periods ended March 31, 2015 and 2014, respectively. Amortization expense is recorded on our consolidated statements of operations within cost of sales and in general and administrative expense.

Estimated amortization expense related to identifiable intangible assets for the remainder of fiscal 2015 and the five succeeding fiscal years is (in thousands):

2015 six months	$	1,378
2016	1,927
2017	901
2018	482
2019	438
2020	168

The changes in the carrying amount of goodwill are (in thousands):

	Six months ended March 31,
	2015			2014
Beginning balance, October 1	$	103,398		$	103,569
Foreign currency translation adjustment	(1,656		)	476
Ending balance, March 31	$	101,742		$	104,045

Goodwill is tested for impairment on an annual basis as of June 30, or more frequently if events or circumstances occur which could indicate impairment. The calculation of goodwill impairment requires us to make assumptions about the fair value of our one reporting unit, which historically has been approximated by using our market capitalization plus a control premium. Control premium assumptions require judgment and actual results may differ from assumed or estimated amounts.

Our test for potential goodwill impairment is a two-step approach. We estimate the fair value for our one reporting unit by comparing its fair value (market capitalization plus control premium) to our carrying value. If the carrying value of the reporting unit exceeds its estimated fair value, the second step of the goodwill impairment analysis requires us to measure the amount of the impairment loss. An impairment loss is calculated by comparing the implied fair value of the goodwill to its carrying amount. To calculate the implied fair value of goodwill, the fair value of the reporting unit’s assets and liabilities, excluding goodwill, is estimated. The excess of the fair value of the reporting unit over the amount assigned to its assets and liabilities, excluding goodwill, is the implied fair value of the reporting unit’s goodwill.

At June 30, 2014, our market capitalization was $235.8 million compared to our carrying value of $273.0 million. Our market capitalization plus our estimated control premium of 35% (discussed in the paragraphs below) resulted in a fair value in excess

6. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS, NET (CONTINUED)

of our carrying value by a margin of 17%. We concluded that no impairment was indicated and we were not required to complete the second step of the goodwill impairment analysis. No goodwill impairment charges were recorded.

In June 2014, we performed a control premium study to determine the appropriate control premium to include in the calculation of fair value. We used a third party valuation firm to assist us in performing this control premium analysis. In order to estimate the range of control premiums appropriate for us, the following three methodologies were used: (1) analysis of individual transactions within our industry; (2) analysis of industry-wide data, and (3) analysis of global transaction data. Individual transactions in the Communication Equipment or Technology Hardware, Storage and Peripherals industries were used to find transactions of target companies that operated in similar markets and shared similar operating characteristics with us.  Transaction screening criteria included selection of transactions with the following characteristics:

•At least 50 percent of a target company’s equity sought by an acquirer,

•Target company considered operating (not in bankruptcy),

•Target company had publicly traded stock outstanding at the transaction date, and

•Transactions announced between June 30, 2009 and the valuation date.

In analyzing industry-wide data, transactions in the following three industries were identified that encompassed the products offered by us: Office Equipment and Computer Hardware, Communications, and Computer, Supplies and Services.  Finally, control premiums were considered for both domestic and international transactions. The control premium analysis resulted in a range of control premium of 30 percent to 40 percent. We reviewed the data and concluded that a 35 percent control premium best represented the amount an investor would likely pay, over and above market capitalization, in order to obtain a controlling interest given the economic conditions at that time.

If our stock price or control premium declines, the first step of our goodwill impairment analysis may fail. We have identified factors that could result in additional interim goodwill impairment testing. For example, we would perform the second step of the impairment testing if our stock price fell below certain thresholds for a significant period of time, or if our control premium significantly decreased. Events or circumstances may occur that could negatively impact our stock price, including changes in our anticipated revenues and profits and our ability to execute on our strategies. In addition, our control premium could decline due to changes in economic conditions in the technology industry, in the financial markets or more generally. An impairment could have a material effect on our consolidated balance sheet and results of operations. We have had no goodwill impairment losses since the adoption of Accounting Standards Codification (ASC) 350, Intangibles-Goodwill and Others, in fiscal 2003.

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Fair Value Measurements

6 Months Ended

Mar. 31, 2015

Fair Value Disclosures [Abstract]

FAIR VALUE MEASUREMENTS

FAIR VALUE MEASUREMENTS

Fair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. This standard also establishes a hierarchy for inputs used in measuring fair value. This standard maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our assumptions about the factors market participants would use in valuing the asset or liability based upon the best information available in the circumstances.

The categorization of financial assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The hierarchy is broken down into three levels. 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 is applied to financial assets such as our marketable securities, which are classified and accounted for as available-for-sale. These items are stated at fair value at each reporting period using the above guidance.

5. FAIR VALUE MEASUREMENTS (CONTINUED)

The following tables provide information by level for financial assets that are measured at fair value on a recurring basis (in thousands):

	Total carrying  value at		Fair Value Measurements Using  Inputs Considered as
	March 31, 2015		Level 1		Level 2		Level 3
Cash equivalents:
Money market	$	13,879	$	13,879	$	—	$	—
Available-for-sale marketable securities:
Corporate bonds	33,252		—		33,252		—
Commercial paper	2,000		—		2,000		—
Certificates of deposit	11,518		—		11,518		—
Total cash equivalents and marketable securities measured at fair value	$	60,649	$	13,879	$	46,770	$	—

	Total carrying  value at		Fair Value Measurements Using  Inputs Considered as
	September 30, 2014		Level 1		Level 2		Level 3
Cash equivalents:
Money market	$	19,630	$	19,630	$	—	$	—
Available-for-sale marketable securities:
Corporate bonds	26,694		—		26,694		—
Commercial paper	3,997		—		3,997		—
Certificates of deposit	13,748		—		13,748		—
Total cash equivalents and marketable securities measured at fair value	$	64,069	$	19,630	$	44,439	$	—

Our money market funds, which have been determined to be cash equivalents, are measured at fair value using quoted market prices in active markets for identical assets and are therefore classified as Level 1 assets. We value our Level 2 assets using inputs that are based on market indices of similar assets within an active market. There were no transfers into or out of our Level 2 financial assets during the six months ended March 31, 2015.

We did not carry, purchase or sell any Level 3 financial assets during the six months ended March 31, 2015.

The use of different assumptions, applying different judgment to matters that inherently are subjective and changes in future market conditions could result in different estimates of fair value of our securities, currently and in the future. If market conditions deteriorate, we may incur impairment charges for securities in our investment portfolio.

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Fair Value Measurements (Tables)

6 Months Ended

Mar. 31, 2015

Fair Value Disclosures [Abstract]

Fair Value of Assets Measured on Recurring Basis

The following tables provide information by level for financial assets that are measured at fair value on a recurring basis (in thousands):

	Total carrying  value at		Fair Value Measurements Using  Inputs Considered as
	March 31, 2015		Level 1		Level 2		Level 3
Cash equivalents:
Money market	$	13,879	$	13,879	$	—	$	—
Available-for-sale marketable securities:
Corporate bonds	33,252		—		33,252		—
Commercial paper	2,000		—		2,000		—
Certificates of deposit	11,518		—		11,518		—
Total cash equivalents and marketable securities measured at fair value	$	60,649	$	13,879	$	46,770	$	—

	Total carrying  value at		Fair Value Measurements Using  Inputs Considered as
	September 30, 2014		Level 1		Level 2		Level 3
Cash equivalents:
Money market	$	19,630	$	19,630	$	—	$	—
Available-for-sale marketable securities:
Corporate bonds	26,694		—		26,694		—
Commercial paper	3,997		—		3,997		—
Certificates of deposit	13,748		—		13,748		—
Total cash equivalents and marketable securities measured at fair value	$	64,069	$	19,630	$	44,439	$	—

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Basis of Presentation of Unaudited Interim Condensed Consolidated Financial Statements and Significant Accounting Policies (Policies)

6 Months Ended

Mar. 31, 2015

Accounting Policies [Abstract]

Recently Issued Accounting Pronouncements

Recently Issued Accounting Pronouncements

Not Yet Adopted

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers.” This guidance provides a five-step analysis in determining when and how revenue is recognized so that an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects what it expects in exchange for the goods and services. It also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. This guidance is effective for fiscal years (and interim reporting periods within those years) beginning after December 15, 2016. We expect to adopt this guidance beginning with our fiscal quarter ending December 31, 2017. We are evaluating the impact that the adoption will have on our consolidated financial statements.

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Contingencies

6 Months Ended

Mar. 31, 2015

Commitments and Contingencies Disclosure [Abstract]

CONTINGENCIES

CONTINGENCIES

In the normal course of business, we are subject to various claims and litigation. There can be no assurance that any claims by third parties, if proven to have merit, will not materially adversely affect our business, liquidity or financial condition.

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Income Taxes

6 Months Ended

Mar. 31, 2015

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

Income tax provision was minimal for the six month period ended March 31, 2015. Tax benefits specific to the six months ended March 31, 2015 primarily include $0.5 million resulting from the reinstatement of the research and development tax credit for calendar year 2014 and the reversal of tax reserves due to the expiration of statutes of limitation from U.S. and foreign tax jurisdictions. For the six month period ended March 31, 2015, our effective tax rates before items specific to the period were more than the U.S. statutory rate due primarily to mix of income between jurisdictions having lower statutory tax rates than the U.S.

Income tax benefit was $1.2 million for the six month period ended March 31, 2014. Tax benefits specific to the period of $1.3 million related to the re-measurement and reversal of certain income tax reserves as a result of the conclusion in March 2014 of a federal income tax audit for fiscal 2012 and a reversal of reserves due to the expiration of statutes of limitation from U.S. and foreign tax jurisdictions. For the six month period ended March 31, 2014, our effective tax rates before items specific to the period were more than the statutory rate primarily due to reserves for unrecognized tax benefits and state income taxes in excess of domestic tax benefits.

Our effective tax rate will vary based on a variety of factors, including overall profitability, the geographical mix of income before taxes and related statutory tax rate in each jurisdiction, and tax benefits specific to the period, such as settlements of audits. We expect that we may record other benefits or expenses in the future that are specific to a particular quarter, based on expiration of statutes of limitation, the completion of tax audits, or legislation that is enacted for both U.S. and foreign jurisdictions.

7. INCOME TAXES (CONTINUED)

A reconciliation of the beginning and ending amount of unrecognized tax benefits is (in thousands):

Unrecognized tax benefits as of September 30, 2014	$	2,301
Increases related to:
Prior year income tax positions	50
Decreases related to:
Prior year income tax positions	(255		)
Settlements	(74		)
Expiration of statute of limitations	(139		)
Unrecognized tax benefits as of March 31, 2015	$	1,883

The total amount of unrecognized tax benefits that, if recognized, would affect our effective tax rate is $1.9 million. We expect the total amounts of unrecognized tax benefits will decrease by approximately $0.6 million over the next 12 months.

Of the $1.9 million of unrecognized tax benefits, $1.5 million is included in non-current income taxes payable and $0.4 million is included with non-current deferred tax assets on the condensed consolidated balance sheet at March 31, 2015.

We recognize interest and penalties related to income tax matters in income tax expense. During both the six month periods ended March 31, 2015 and 2014, there were insignificant amounts of interest and penalties related to income tax matters in income tax expense. Accrued interest and penalties related to unrecognized tax benefits was $0.4 million at both March 31, 2015 and September 30, 2014. Our non-current income taxes payable on our condensed consolidated balance sheet includes accrued interest and penalties in addition to the unrecognized tax benefits of $1.5 million at March 31, 2015.

At March 31, 2015, we had approximately $26.0 million of accumulated undistributed foreign earnings, for which we have not accrued additional U.S. tax. Our policy is to reinvest earnings of our foreign subsidiaries indefinitely to fund current operations and provide for future international expansion opportunities, and only to repatriate earnings to the extent that U.S. taxes have already been recorded. Although we have no current need to do so, if we change our assertion that we do not intend to repatriate additional undistributed foreign earnings for cash requirements in the United States, we would have to accrue applicable taxes. The amount of any taxes and the application of any tax credits would be determined based on the income tax laws at the time of such repatriation. Under current tax laws, we estimate the unrecognized deferred tax liability to be in the range of $0.5 million to $1.5 million.

We operate in multiple tax jurisdictions, including the U.S. and other jurisdictions outside of the U.S. Accordingly, we must determine the appropriate allocation of income to each of these jurisdictions. This determination requires us to make several estimates and assumptions. Tax audits associated with the allocation of this income, and other complex issues, may require an extended period of time to resolve and may result in adjustments to our income tax balances in those years that are material to our consolidated balance sheet and results of operations. We are no longer subject to income tax examination for tax years prior to fiscal 2013, except for certain refund claims applicable to fiscal 2009, in the case of U.S. federal tax authorities and prior to fiscal 2009 for non-U.S. income tax authorities. For state taxing authorities, most notably in California and Texas, we are no longer subject to income tax examination for tax years generally before fiscal 2010, and for Minnesota for tax years prior to fiscal 2013.

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Product Warranty Obligation

6 Months Ended

Mar. 31, 2015

Product Warranties Disclosures [Abstract]

PRODUCT WARRANTY OBLIGATION

PRODUCT WARRANTY OBLIGATION

In general, we warrant our products to be free from defects in material and workmanship under normal use and service. The warranty periods generally range from one to five years. We typically have the option to either repair or replace products we deem defective with regard to material or workmanship. Estimated warranty costs are accrued in the period that the related revenue is recognized based upon an estimated average per unit repair or replacement cost applied to the estimated number of units under warranty. These estimates are based upon historical warranty incidents and are evaluated on an ongoing basis to ensure the adequacy of the warranty accrual.

8. PRODUCT WARRANTY OBLIGATION (CONTINUED)

The following table summarizes the activity associated with the product warranty accrual (in thousands) and is included on our Condensed Consolidated Balance Sheets within current liabilities:

	Balance at		Warranties		Settlements			Balance at
Period	January 1		issued		made			March 31
Three months ended March 31, 2015	$	950	$	206	$	(233	)	$	923
Three months ended March 31, 2014	$	1,013	$	176	$	(217	)	$	972
	Balance at		Warranties		Settlements			Balance at
Period	October 1		issued		made			March 31
Six months ended March 31, 2015	$	862	$	497	$	(436	)	$	923
Six months ended March 31, 2014	$	1,063	$	322	$	(413	)	$	972

We are not responsible for, and do not warrant that, custom software versions, created by original equipment manufacturer (OEM) customers based upon our software source code, will function in a particular way, will conform to any specifications or are fit for any particular purpose. Further, we do not indemnify these customers from any third-party liability as it relates to or arises from any customization or modifications made by the OEM customer.

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Stock-Based Compensation

6 Months Ended

Mar. 31, 2015

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

STOCK-BASED COMPENSATION

STOCK-BASED COMPENSATION

Stock-based awards were granted under the 2014 Omnibus Incentive Plan (the “2014 Plan”) during the six months ended March 31, 2015. During the six months ended March 31, 2014, stock-based awards were granted under the 2013 Omnibus Incentive Plan (which expired during the second quarter of fiscal 2014) and the 2014 Plan. Upon stockholder approval of the 2014 Plan, we ceased granting awards under any prior plan. The authority to grant options under the 2014 Plan and set other terms and conditions rests with the Compensation Committee of the Board of Directors.

The 2014 Plan authorizes the issuance of up to 2,250,000 common shares in connection with awards of stock options, stock appreciation rights, restricted stock, restricted stock units, performance-based full value awards or other stock-based awards. Eligible participants include our employees, our affiliates, non-employee directors of our Company and any consultant or advisor who is a natural person and provides services to us or our affiliates. Options that have been granted under the 2014 Plan typically vest over a four year service period and will expire if unexercised after eight years from the date of grant. Restricted stock awards (RSU's) that have been granted to Directors typically vest in one year. RSU's that have been granted to executives and employees typically vest in November over a four-year period. Awards may be granted under the 2014 Plan until January 27, 2024. Options under the 2014 Plan can be granted as either incentive stock options (ISOs) or non-statutory stock options (NSOs). The exercise price of options and the grant date price of restricted stock shall be determined by our Compensation Committee but shall not be less than the fair market value of our common stock based on the closing price on the date of grant. Upon exercise, we issue new shares of stock. Our equity plans and corresponding forms of award agreements generally have provisions allowing employees to elect to satisfy tax withholding obligations through the delivery of shares or having us retain a portion of shares issuable under the award. As of March 31, 2015, there were approximately 1,492,183 shares available for future grants under the 2014 Plan.

Cash received from the exercise of stock options was $6.0 million during the six months ended March 31, 2015 and $3.2 million during the six months ended March 31, 2014. There were no excess tax benefits from stock-based compensation for the six months ended March 31, 2015. The excess tax benefits from stock-based compensation were minimal during the six months ended March 31, 2014.

We sponsor an Employee Stock Purchase Plan (the Purchase Plan), covering all domestic employees with at least 90 days of continuous service and who are customarily employed at least 20 hours per week. The Purchase Plan allows eligible participants the right to purchase common stock on a quarterly basis at the lower of 85% of the market price at the beginning or end of each three-month offering period. Employee contributions to the Purchase Plan were $0.5 million during the six months

10. STOCK-BASED COMPENSATION (CONTINUED)

ended March 31, 2015 and $0.6 million during the six months ended March 31, 2014, respectively. Pursuant to the Purchase Plan, 72,306 and 65,832 common shares were issued to employees during the six months ended March 31, 2015 and 2014, respectively. Shares are issued under the Purchase Plan from treasury stock. As of March 31, 2015, 669,072 common shares were available for future issuances under the Purchase Plan.

Stock-based compensation expense is included in the consolidated results of operations as follows (in thousands):

	Three months ended March 31,						Six months ended March 31,
	2015			2014			2015			2014
Cost of sales	$	83		$	82		$	189		$	150
Sales and marketing	306			282			649			568
Research and development	196			177			388			383
General and administrative	453			506			996			969
Stock-based compensation before income taxes	1,038			1,047			2,222			2,070
Income tax benefit	(361		)	(355		)	(775		)	(703		)
Stock-based compensation after income taxes	$	677		$	692		$	1,447		$	1,367

Stock-based compensation cost capitalized as part of inventory was immaterial as of March 31, 2015 and September 30, 2014.

The following table summarizes our stock option activity (in thousands, except per common share amounts):

	Options Outstanding		Weighted Average Exercised Price	Weighted Average Contractual Term (in years)	Aggregate Intrinsic Value (1)
Balance at September 30, 2014	6,029		$10.61
Granted	704		7.82
Exercised	(677	)	8.87
Forfeited / Canceled	(1,168	)	11.58
Balance at March 31, 2015	4,888		$10.22	5.3	$	3,263
Exercisable at March 31, 2015	3,482		$10.70	4.5	$	1,603

(1) The aggregate intrinsic value represents the total pre-tax intrinsic value, based on our closing stock price of $9.98 as of March 31, 2015, which would have been received by the option holders had all option holders exercised their options as of that date. The intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its exercise price.

The total intrinsic value of all options exercised during the six months ended March 31, 2015 was $0.8 million and during the six months ended March 31, 2014 was $0.5 million.

The table below shows the weighted average fair value, which was determined based upon the fair value of each option on the grant date utilizing the Black-Scholes option-pricing model and the related assumptions:

	Six months ended March 31,
	2015		2014
Fair value of options granted (in thousands)	$	2,046	$	3,995
Weighted average per option grant date fair value	$	2.91	$	4.44
Assumptions used for option grants:
Risk free interest rate	1.77% - 1.85%		1.76% - 1.91%
Expected term	6.00 years		6.00 years
Expected volatility	35% - 36%		40%
Weighted average volatility	35%		40%
Expected dividend yield	0		0

10. STOCK-BASED COMPENSATION (CONTINUED)

The fair value of each option award granted during the periods presented was estimated using the Black-Scholes option valuation model that uses the assumptions noted in the table above. Expected volatilities are based on the historical volatility of our stock. We use historical data to estimate option exercise and employee termination information within the valuation model; separate groups of grantees that have similar historical exercise behaviors are considered separately for valuation purposes. The expected term of options granted is derived from the vesting period and historical information and represents the period of time that options granted are expected to be outstanding. The risk-free rate used is the zero-coupon U.S. Treasury bond rate in effect at the time of the grant whose maturity equals the expected term of the option.

We use historical data to estimate pre-vesting forfeiture rates. The pre-vesting forfeiture rate used during the six months ended March 31, 2015 was 6.0%. As of March 31, 2015 the total unrecognized compensation cost related to non-vested stock-based compensation arrangements, net of expected forfeitures, was $4.4 million and the related weighted average period over which it is expected to be recognized is approximately 3.0 years.

A summary of our non-vested restricted stock units as of March 31, 2015 and changes during the six months then ended is presented below (in thousands, except per common share amounts):

	Number of Awards		Weighted Average Grant Date Fair Value
Nonvested at September 30, 2014	171		$	9.35
Granted	432		$	7.96
Vested	(81	)	$	9.60
Canceled	(29	)	$	7.91
Nonvested at December 31, 2014	493		$	8.17

As of March 31, 2015, the total unrecognized compensation cost related to non-vested restricted stock units was $3.4 million and the related weighted average period over which it is expected to be recognized is approximately 1.7 years.

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Goodwill and Other Identifiable Intangible Assets, Net Amortization Expense (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Mar. 31, 2015	Mar. 31, 2014	Mar. 31, 2015	Mar. 31, 2014
Goodwill and Intangible Assets Disclosure [Abstract]
Amortization expense	$ 800	$ 900	$ 1,537	$ 1,891
2015 six months	1,378		1,378
2016	1,927		1,927
2017	901		901
2018	482		482
2019	438		438
2020	$ 168		$ 168

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Selected Balance Sheet Data (Tables)

6 Months Ended

Mar. 31, 2015

Selected Balance Sheet Data [Abstract]

Schedule of Selected Balance Sheet Data

(in thousands)

	March 31, 2015		September 30, 2014
Accounts receivable, net:
Accounts receivable	$	28,937	$	28,943
Less allowance for doubtful accounts	322		367
Accounts receivable, net	$	28,615	$	28,576
Inventories:
Raw materials	$	27,773	$	26,402
Work in process	789		315
Finished goods	5,319		4,530
Inventories	$	33,881	$	31,247

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Product Warranty Obligation (Tables)

6 Months Ended

Mar. 31, 2015

Product Warranties Disclosures [Abstract]

Schedule of Product Warranty Accrual

The following table summarizes the activity associated with the product warranty accrual (in thousands) and is included on our Condensed Consolidated Balance Sheets within current liabilities:

	Balance at		Warranties		Settlements			Balance at
Period	January 1		issued		made			March 31
Three months ended March 31, 2015	$	950	$	206	$	(233	)	$	923
Three months ended March 31, 2014	$	1,013	$	176	$	(217	)	$	972
	Balance at		Warranties		Settlements			Balance at
Period	October 1		issued		made			March 31
Six months ended March 31, 2015	$	862	$	497	$	(436	)	$	923
Six months ended March 31, 2014	$	1,063	$	322	$	(413	)	$	972

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Stock-Based Compensation (Options and Common Shares Reserved for Grant) (Details) (Stock Options, USD $) In Thousands, except Per Share data, unless otherwise specified	6 Months Ended
	Mar. 31, 2015
Stock Options
Options Outstanding [Roll Forward]
Options Outstanding, Beginning Balance	6,029
Options Outstanding, Granted	704
Options Outstanding, Exercised	(677)
Options Outstanding, Forfeited / Canceled	(1,168)
Options Outstanding, Ending Balance	4,888
Options Outstanding, Exercisable	3,482
Weighted Average Exercise Price [Roll Forward]
Weighted Average Exercise Price, Beginning Balance	$ 10.61
Weighted Average Exercise Price, Granted	$ 7.82
Weighted Average Exercise Price, Exercised	$ 8.87
Weighted Average Exercise Price, Forfeited / Canceled	$ 11.58
Weighted Average Exercise Price, Ending Balance	$ 10.22
Weighted Average Exercise Price, Exercisable	$ 10.70
Weighted Average Remaining Contractual Term [Abstract]
Weighted Average Remaining Contractual Term, Outstanding	5 years 3 months 18 days
Weighted Average Remaining Contractual Term, Exercisable	4 years 6 months
Aggregate Intrinsic Value [Abstract]
Aggregate Intrinsic Value, Outstanding	$ 3,263	[1]
Aggregate Intrinsic Value, Exercisable	$ 1,603	[1]
Closing Stock Price	$ 9.98

[1] The aggregate intrinsic value represents the total pre-tax intrinsic value, based on our closing stock price of $9.98 as of March 31, 2015, which would have been received by the option holders had all option holders exercised their options as of that date. The intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its exercise price.

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Condensed Consolidated Balance Sheets (Unaudited) (Parenthetical) (USD $)	Mar. 31, 2015	Sep. 30, 2014
Statement of Financial Position [Abstract]
Preferred stock, par value (USD per share)	$ 0.01	$ 0.01
Preferred stock, shares authorized	2,000,000	2,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value (USD per share)	$ 0.01	$ 0.01
Common stock, shares authorized	60,000,000	60,000,000
Common stock, shares issued	31,462,480	30,703,895
Treasury stock, shares	6,538,789	6,313,937

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Marketable Securities

6 Months Ended

Mar. 31, 2015

Marketable Securities [Abstract]

MARKETABLE SECURITIES

MARKETABLE SECURITIES

Our marketable securities consist of certificates of deposit, corporate bonds and commercial paper. We analyze our available-for-sale marketable securities for impairment on an ongoing basis. When we perform this analysis, we consider factors such as the length of time and extent to which the securities have been in an unrealized loss position and the trend of any unrealized losses. We also consider whether an unrealized loss is a temporary loss or an other-than-temporary loss based on factors such as: (a) whether we have the intent to sell the security, (b) whether it is more likely than not that we will be required to sell the security before its anticipated recovery, or (c) permanent impairment due to bankruptcy or insolvency.

4. MARKETABLE SECURITIES (CONTINUED)

In order to estimate the fair value for each security in our investment portfolio, we obtain quoted market prices and trading activity for each security where available. We obtain relevant information from our investment advisor and, if warranted, also may review the financial solvency of certain security issuers. As of March 31, 2015, 40 of our 68 securities that we held were trading below our amortized cost basis. We determined each decline in value to be temporary based upon the above described factors. We expect to realize the fair value of these securities, plus accrued interest, either at the time of maturity or when the security is sold. All of our current holdings are classified as available-for-sale marketable securities and are recorded at fair value on our consolidated balance sheet with the unrealized gains and losses recorded in accumulated other comprehensive loss. All of our current marketable securities will mature in less than one year and our non-current marketable securities will mature in less than three years. During the three months ended March 31, 2015 and 2014, we received proceeds from our available-for-sale marketable securities of $10.4 million and $6.7 million, respectively. During the six months ended March 31, 2015 and 2014, we received proceeds from our available-for-sale marketable securities of $19.8 million and $13.8 million, respectively.

At March 31, 2015 our marketable securities were (in thousands):

	Amortized Cost (1)		Unrealized Gains		Unrealized Losses			Fair Value (1)
Current marketable securities:
Corporate bonds	$	30,255	$	—	$	(41	)	$	30,214
Commercial paper	2,000		—		—			2,000
Certificates of deposit	7,002		7		(3		)	7,006
Current marketable securities	39,257		7		(44		)	39,220
Non-current marketable securities:
Corporate bonds	3,048		—		(10		)	3,038
Certificates of deposit	4,502		12		(2		)	4,512
Non-current marketable securities	7,550		12		(12		)	7,550
Total marketable securities	$	46,807	$	19	$	(56	)	$	46,770

(1) Included in amortized cost and fair value is purchased and accrued interest of $155.

At September 30, 2014 our marketable securities were (in thousands):

	Amortized Cost (1)		Unrealized Gains		Unrealized Losses			Fair Value (1)
Current marketable securities:
Corporate bonds	$	24,668	$	1	$	(22	)	$	24,647
Commercial paper	3,998		—		(1		)	3,997
Certificates of deposit	4,252		2		—			4,254
Current marketable securities	32,918		3		(23		)	32,898
Non-current marketable securities:
Corporate bonds	2,051		—		(4		)	2,047
Certificates of deposit	9,502		14		(22		)	9,494
Non-current marketable securities	11,553		14		(26		)	11,541
Total marketable securities	$	44,471	$	17	$	(49	)	$	44,439

(1) Included in amortized cost and fair value is purchased and accrued interest of $213.

4. MARKETABLE SECURITIES (CONTINUED)

The following tables show the fair values and gross unrealized losses of our available-for-sale marketable securities that have been in a continuous unrealized loss position deemed to be temporary, aggregated by investment category (in thousands):

	March 31, 2015
	Less than 12 Months					More than 12 Months
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Corporate bonds	$	33,101	$	(51	)	$	—	$	—
Certificates of deposit	3,995		(5		)	—		—
Total	$	37,096	$	(56	)	$	—	$	—

	September 30, 2014
	Less than 12 Months					More than 12 Months
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Corporate bonds	$	23,475	$	(26	)	$	—	$	—
Commercial paper	3,998		(1		)	—		—
Certificates of deposit	2,980		(20		)	748		(2		)
Total	$	30,453	$	(47	)	$	748	$	(2	)

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Stock-Based Compensation (Tables)

6 Months Ended

Mar. 31, 2015

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Schedule of Stock-Based Compensation Expense

Stock-based compensation expense is included in the consolidated results of operations as follows (in thousands):

	Three months ended March 31,						Six months ended March 31,
	2015			2014			2015			2014
Cost of sales	$	83		$	82		$	189		$	150
Sales and marketing	306			282			649			568
Research and development	196			177			388			383
General and administrative	453			506			996			969
Stock-based compensation before income taxes	1,038			1,047			2,222			2,070
Income tax benefit	(361		)	(355		)	(775		)	(703		)
Stock-based compensation after income taxes	$	677		$	692		$	1,447		$	1,367

Schedule of Stock Option Activity

The following table summarizes our stock option activity (in thousands, except per common share amounts):

	Options Outstanding		Weighted Average Exercised Price	Weighted Average Contractual Term (in years)	Aggregate Intrinsic Value (1)
Balance at September 30, 2014	6,029		$10.61
Granted	704		7.82
Exercised	(677	)	8.87
Forfeited / Canceled	(1,168	)	11.58
Balance at March 31, 2015	4,888		$10.22	5.3	$	3,263
Exercisable at March 31, 2015	3,482		$10.70	4.5	$	1,603

(1) The aggregate intrinsic value represents the total pre-tax intrinsic value, based on our closing stock price of $9.98 as of March 31, 2015, which would have been received by the option holders had all option holders exercised their options as of that date. The intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its exercise price.

Schedule of Valuation Assumptions

The table below shows the weighted average fair value, which was determined based upon the fair value of each option on the grant date utilizing the Black-Scholes option-pricing model and the related assumptions:

	Six months ended March 31,
	2015		2014
Fair value of options granted (in thousands)	$	2,046	$	3,995
Weighted average per option grant date fair value	$	2.91	$	4.44
Assumptions used for option grants:
Risk free interest rate	1.77% - 1.85%		1.76% - 1.91%
Expected term	6.00 years		6.00 years
Expected volatility	35% - 36%		40%
Weighted average volatility	35%		40%
Expected dividend yield	0		0

Schedule of Nonvested Restricted Stock Units

A summary of our non-vested restricted stock units as of March 31, 2015 and changes during the six months then ended is presented below (in thousands, except per common share amounts):

	Number of Awards		Weighted Average Grant Date Fair Value
Nonvested at September 30, 2014	171		$	9.35
Granted	432		$	7.96
Vested	(81	)	$	9.60
Canceled	(29	)	$	7.91
Nonvested at December 31, 2014	493		$	8.17

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Product Warranty Obligation (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Mar. 31, 2015	Mar. 31, 2014	Mar. 31, 2015	Mar. 31, 2014
Product Warranties Disclosures [Abstract]
Warranty period, minimum			1 year
Warranty period, maximum			5 years
Standard Product Warranty Accrual [Roll Forward]
Beginning balance	$ 950	$ 1,013	$ 862	$ 1,063
Warranties issued	206	176	497	322
Settlements made	(233)	(217)	(436)	(413)
Ending balance	$ 923	$ 972	$ 923	$ 972

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Earnings Per Share (Tables)

6 Months Ended

Mar. 31, 2015

Earnings Per Share [Abstract]

Schedule of Calculation of Numerator and Denominator in Earnings Per Share

The following table is a reconciliation of the numerators and denominators in the net income per common share calculations (in thousands, except per common share data):

	Three months ended March 31,				Six months ended March 31,
	2015		2014		2015		2014
Numerator:
Net income	$	1,446	$	738	$	1,107	$	1,426
Denominator:
Denominator for basic net income per common share — weighted average shares outstanding	24,492		25,644		24,319		25,680
Effect of dilutive securities:
Stock options and restricted stock units	781		500		497		509
Denominator for diluted net income per common share — adjusted weighted average shares	25,273		26,144		24,816		26,189
Net income per common share, basic	$	0.06	$	0.03	$	0.05	$	0.06
Net income per common share, diluted	$	0.06	$	0.03	$	0.04	$	0.05