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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-K
 
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended: September 30, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to .
 Commission file number: 1-34033
 DIGI INTERNATIONAL INC.
  Delaware
    
    41-1532464(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification Number)
 11001 Bren Road East
Minnetonka, Minnesota 55343  (Address of principal executive offices) (Zip Code)
 (952) 912-3444  (Registrants telephone number, including area code)
 Securities registered pursuant to Section 12(b) of the Act:
 Title of each class
    
    Name of each exchange on which registeredCommon Stock, par value $.01 per share
    
    The NASDAQ Global Select Market
 Securities registered pursuant to Section 12(g) of the Act:
 o þ
 o þ
 þ o
 o o
 þ
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller Reporting Company o(Do not check if a smaller reporting company)
 o þ




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##### 



INDEX
   ITEM IN FORM 10-K

    
    PAGE/REFERENCEPART I .ITEM 1.
    
    Business
    
    4Executive Officers of the Registrant
    
    14ITEM 1A.
    
    Risk Factors
    
    16ITEM 1B.
    
    Unresolved Staff Comments
    
    23ITEM 2.
    
    Properties
    
    24ITEM 3.
    
    Legal Proceedings
    
    25ITEM 4.
    
    Submission of Matters to a Vote of Security Holders
    
    26PART II.ITEM 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    27ITEM 6.
    
    Selected Financial Data
    
    29ITEM 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    30ITEM 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    45ITEM 8.
    
    Financial Statements and Supplementary Data
    
    46ITEM 9.
    
    Changes in and Disagreements with Accountants On Accounting and Financial Disclosure
    
    81ITEM 9A.
    
    Controls and Procedures
    
    81ITEM 9B.
    
    Other Information
    
    81EX-21EX-23EX-24EX-31.AEX-31.BEX-32
  2




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ITEM IN FORM 10-K

    
    PAGE/REFERENCEPART III.ITEM 10.
    
    Directors, Executive Officers and Corporate GovernanceDirectors of the Registrant
    
    Election of Directors, Proxy StatementCompliance with Section 16(a) of the Exchange Act
    
    Section 16(a) Beneficial Ownership Reporting Compliance, Proxy StatementCode of Ethics
    
    82Audit Committee
    
    Proxy StatementITEM 11.
    
    Executive Compensation
    
    Proposal No. 1 Election of
Directors - Compensation Committee Interlocks and Insider Participation; Executive Compensation; Compensation of Directors, Proxy StatementITEM 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    Security Ownership of Principal
Stockholders and Management; Equity Compensation Plan Information, Proxy StatementITEM 13.
    
    Certain Relationships and Related Transactions and Director Independence
    
    Election of Directors - Director Independence; Related Person Transaction Approval Policy, Proxy StatementITEM 14.
    
    Principal Accounting Fees and Services
    
    Audit and Non-Audit Fees, Proxy StatementPART IV.ITEM 15.
    
    Exhibits, Financial Statement Schedules
    
    83
 3




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PART I
 FORWARD-LOOKING STATEMENTS
    
 ITEM 1. BUSINESS
  COMPANY OVERVIEW
   4




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ITEM 1. BUSINESS (CONTINUED)
 COMPANY OVERVIEW (CONTINUED)
      5




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ITEM 1. BUSINESS (CONTINUED)
 PRODUCTS
   Embedded Networking Products
 Modules 
  Chips 
  Software and Development Tools 
 6




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ITEM 1. BUSINESS (CONTINUED)
 PRODUCTS (CONTINUED)
 Single Board Computers 
 Network Interface Cards 
 Services 
 Satellite 
 Non-Embedded Networking Products
 Cellular Routers 
 Gateways 
 Wireless Communication Adapters 
 7




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ITEM 1. BUSINESS (CONTINUED)
 PRODUCTS (CONTINUED)
  Serial Servers 
 Console Servers 
 USB Connected Products 
 Remote Display Products 
 Cameras and Sensors 
 Serial Cards 
 8




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##### Table of Contents



ITEM 1. BUSINESS (CONTINUED)
 PRODUCTS (CONTINUED)
 Network Management Applications-
 APPLICATION MARKETS
  Smart Energy
 Fleet Management 
 Remote Device Management 
 Building Automation/Security 
 Medical/Healthcare 
 Traffic Management 
 9




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##### Table of Contents



ITEM 1. BUSINESS (CONTINUED)
 APPLICATION MARKETS (CONTINUED)
 Industrial Automation 
 Retail/Point-of-Sale (POS) 
 Data Center Management 
 Digital Signage 
 Government 
 ACQUISITIONS
  
    
    In April 2005, we acquired FS Forth-Systeme GmbH/Sistemas Embebidos S.A. (FS Forth),
leading providers of embedded modules based on our processors and NET+OS software, as well
as other microprocessors with supporting embedded software. The acquisition enhanced our
embedded module portfolio and also added expertise in a wide range of popular operating
systems including Linux and Microsoft Windows CE. Effective October 1, 2006, FS Forth
merged into Digi International GmbH.
 
    
    In May 2005, we acquired Rabbit Semiconductor® Inc. (formerly Z-World, Inc.). The
acquisition expanded our embedded portfolio to include the Rabbit line of microprocessors
and microprocessor-based core modules and Z-World single-board computers (now all sold
under the Rabbit brand). With bundled hardware and software, these products facilitate
quick time-to-market for device manufacturers who need to add network connectivity to
endpoint devices such as sensors, meters, vending machines, card readers, and scales.
Effective October 1, 2007, Rabbit Semiconductor® Inc. merged into Digi International Inc.
 
    
    In July 2006, we acquired MaxStream®, Inc. (MaxStream), a leader in the wireless device
networking market. MaxStream supplies device manufacturers and integrators with reliable
wireless modules and box products that are easy to use and allow customers to wirelessly
monitor and control electronic devices. Typical applications include automated utility
meter reading, oil and gas monitoring, remote control and monitoring of commercial heating
and air conditioning systems, vehicle information access for fleet management, industrial
controls, wireless sensors, and electronic signals. MaxStream was also a pioneer in the
field of ZigBee®/802.15.4 wireless communications. The MaxStream acquisition
 10




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ITEM 1. BUSINESS (CONTINUED)
 ACQUISITIONS (CONTINUED)
  
    
    In April 2008, we acquired Sarian Systems, Ltd. (Sarian), a leader in the European
wireless router market. Sarian designs, develops and manufactures advanced
wireless/cellular IP-based routing equipment for mission critical applications. Sarian
developed its own comprehensive IP-based operating system and software and can offer
customers technical excellence, flexibility and rapid customization. Sarian has a strong
customer base in ATM connectivity, retail and payment systems connectivity, remote
monitoring telemetry, lottery terminal connectivity and wireless backup of wired broadband
connections. Effective October 1, 2009, Sarian merged into Digi International (UK) Ltd.
 
    
    In July 2008, we acquired Spectrum Design Solutions, Inc. (Spectrum), a leading design
services organization. Spectrum is a wholly owned subsidiary of Digi International Inc.
Spectrum focuses on solving a customers wireless development challenges. Spectrums
engineers have extensive experience in wireless technologies such as GSM, CDMA, GPS, Wi-Fi
and proprietary RF as well as ASIC design, FPGA integration, embedded software and complete
turn-key product development which allows them to address virtually any wireless
development need.
 
    
    In June 2009, we acquired substantially all the assets of MobiApps Holdings Private
Limited (MobiApps), a developer of machine-to-machine (M2M) communications technology
focusing on satellite, cellular and hybrid satellite/cellular solutions. MobiApps has
locations in India, Singapore and in the U.S. Pursuant to the terms of the asset purchase
agreements, Digi International acquired the U.S. assets located in Herndon, Virginia. In
addition, we established Digi Wireless Singapore Pte. Ltd. and Digi m2m Solutions India
Private Limited, which acquired the assets of MobiApps affiliate companies, located in
Singapore and India, respectively. MobiApps provides a new generation of products based on
its own custom designed and patented mixed signal application specific integrated circuit
(ASIC), which dramatically reduces the complexity and improves performance of satellite M2M
system solutions. Satellite M2M applications include fleet management, marine vessel
tracking, container tracking, agricultural monitoring, energy management, and remote field
service applications. Satellite is especially suited to applications that cross country and
continental boundaries, providing connectivity in very remote locations, and providing
mission critical wireless backup solutions when cellular coverage is insufficient. MobiApps
also has cellular and hybrid cellular/satellite products packaged with various asset
tracking management services, including vehicle tracking, taxi dispatch and employee
tracking, focused on markets in India and Southeast Asia.
  DISTRIBUTION AND PARTNERSHIPS
  11




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ITEM 1. BUSINESS (CONTINUED)
 DISTRIBUTION AND PARTNERSHIPS (CONTINUED)
       OPERATIONS
   12




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ITEM 1. BUSINESS (CONTINUED)
 SEASONALITY
  RESEARCH AND DEVELOPMENT
  BACKLOG
  EMPLOYEES
  13




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ITEM 1. BUSINESS (CONTINUED)
 
 EXECUTIVE OFFICERS OF THE REGISTRANT
  Name
    
    Age
    
    PositionJoseph T. Dunsmore
    
    51
    
    Chairman, President and Chief Executive OfficerSubramanian Krishnan
    
    55
    
    Senior Vice President, Chief Financial Officer and TreasurerLawrence A. Kraft
    
    43
    
    Senior Vice President of Sales and MarketingJoel K. Young
    
    45
    
    Senior Vice President of Research and Development  and Chief Technical Officer
     14




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ITEM 1. BUSINESS (CONTINUED)
 GEOGRAPHIC AREAS
   DIGI INTERNATIONAL WEBSITE
 www.digi.com www.sec.gov
  15




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ITEM 1A. RISK FACTORS
  Risks Relating to Our Business
 Our dependence on new product development and the rapid technological change that characterizes our
industry makes us susceptible to loss of market share resulting from competitors product
introductions and similar risks.
   We intend to continue to devote significant resources to our research and development, which, if
not successful, could cause a decline in our revenues and harm our business.
    16




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ITEM 1A. RISK FACTORS (CONTINUED)
  Certain of our products are sold into mature markets, which could limit our ability to continue to
generate revenue from these products.
  Our failure to effectively manage product transitions could have a material adverse effect on our
revenues and profitability.
  Our failure to compete successfully in our highly competitive market could result in reduced prices
and loss of market share.
  Our inability to obtain the appropriate telecommunications or satellite carrier certifications or
approvals from other governmental regulatory bodies could impede our ability to grow revenues in
our wireless products.
  17




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ITEM 1A. RISK FACTORS (CONTINUED)
 We are dependent on wireless communication networks owned and controlled by others.
  The cyclicality of the semiconductor industry may result in substantial period-to-period
fluctuations in operating results.
  Loss of one or more of our large customers could have an adverse effect on our revenues.
  The long and variable sales cycle for certain of our products makes it more difficult for us to
predict our operating results and manage our business.
  We depend on manufacturing relationships and on limited-source suppliers, and any disruptions in
these relationships may cause damage to our customer relationships.
  18




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ITEM 1A. RISK FACTORS (CONTINUED)
  Our use of suppliers in Southeast Asia involves risks that could negatively impact us.
  Our ability to compete could be jeopardized if we are unable to protect our intellectual property
rights.
   From time to time, we are subject to claims and litigation regarding intellectual property rights
or other claims, which could seriously harm us and require us to incur significant costs.
  19




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ITEM 1A. RISK FACTORS (CONTINUED)
 We face risks associated with our international operations and expansion that could impair our
ability to grow our revenues abroad.
  The loss of key personnel could prevent us from executing our business strategy.
  Unanticipated changes in our tax rates could affect our future results.
  Any acquisitions we have made or will make could disrupt our business and seriously harm our
financial condition.
   
    
    problems combining the purchased operations, technologies, or products;
    
    unanticipated costs;
    
    diversion of managements attention from our core business;
    
    difficulties integrating businesses in different countries and cultures;
    
    adverse effects on existing business relationships with suppliers and customers;
    
    risks associated with entering markets in which we have no or limited prior experience; and
    
    potential loss of key employees, particularly those of the purchased organization.
  20




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ITEM 1A. RISK FACTORS (CONTINUED)
  Our failure to effectively comply with the requirements of applicable environmental legislation and
regulation could have a material adverse effect on our revenues and profitability.
  Negative conditions in the global credit markets may impair a portion of our investment portfolio.
  Our consolidated operating results and financial condition may be adversely impacted by worldwide
economic conditions and credit tightening.
  21




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ITEM 1A. RISK FACTORS (CONTINUED)
 Our consolidated operating results may be adversely impacted if economic conditions impact the
financial viability of our customers, distributors, or suppliers.
  We may have additional tax liabilities.
  Risks Related to Our Common Stock
 If our stock price declines, we may need to recognize an impairment of our goodwill.
  22




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ITEM 1A. RISK FACTORS (CONTINUED)
 The price of our common stock has been volatile and could continue to fluctuate in the future.
  Certain provisions of the Delaware General Corporation Law and our charter documents have an
anti-takeover effect.
  We have not paid cash dividends on our common stock and do not expect to do so.
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS
  23




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ITEM 2. PROPERTIES
  Ownership orApproximate
    
    LeaseLocation of
    
    
    
    Square
    
    ExpirationProperty
    
    Use of Facility
    
    Footage
    
    DateMinnetonka, MN
(Corporate headquarters)
    
    Research & development, sales, sales support,
marketing and administration
    
    
    130,000
    
    
    OwnedEden Prairie, MN
    
    Manufacturing and warehousing
    
    
    58,000
    
    
    OwnedMinneapolis, MN
    
    Engineering services
    
    
    16,837
    
    
    November 2016Waltham, MA
    
    Research & development, sales and sales support
    
    
    13,424
    
    
    September 2010Austin, TX
    
    Sales, sales support, marketing
and administration
    
    
    6,563
    
    
    March 2014Davis, CA
    
    Sales, sales support, research & development
    
    
    24,000
    
    
    December 2012Lindon, UT
    
    Sales, marketing, research & development
and administration
    
    
    11,986
    
    
    December 2010Herndon, VA
    
    Sales, marketing and tech support
    
    
    2,416
    
    
    October 2011Hong Kong, China
    
    Sales, marketing and administration
    
    
    4,061
    
    
    July 2010Beijing, China
    
    Sales, marketing and administration
    
    
    2,372
    
    
    November 2010Shanghai, China
    
    Sales, marketing and administration
    
    
    1,251
    
    
    June 2010Dortmund, Germany
    
    Sales, sales support, marketing and
administration
    
    
    21,485
    
    
    March 2013Breisach, Germany
    
    Sales, marketing, research & development,
manufacturing,
warehousing and administration
    
    
    8,748
    
    
    December 2010Neuilly sur Seine, France
    
    Sales and marketing
    
    
    2,895
    
    
    January 2015Ilkley, UK
    
    Sales, sales support, marketing and administration
    
    
    5,475
    
    
    September 2015Logrono, Spain
    
    Sales, research & development and administration
    
    
    3,228
    
    
    January 2017Tokyo, Japan
    
    Sales
    
    
    1,371
    
    
    November 2011Bangalore, India
    
    Sales, research & development and administration
    
    
    9,189
    
    
    July 2014Singapore
    
    Sales, marketing and administration
    
    
    518
    
    
    June 2011
  24




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ITEM 3. LEGAL PROCEEDINGS
   In
re Initial Public Offering Securities Litigation en banc
   25




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ITEM 3. LEGAL PROCEEDINGS (CONTINUED)
   
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  26




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PART II
 
 ITEM 5.

MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES Stock Listing
   Stock Prices
 2009
    
    First
    
    Second
    
    Third
    
    FourthHigh
    
    $
    11.10
    
    
    $
    8.98
    
    
    $
    10.72
    
    
    $
    10.87Low
    
    $
    6.88
    
    
    $
    6.26
    
    
    $
    6.40
    
    
    $
    8.11
 2008
    
    First
    
    Second
    
    Third
    
    FourthHigh
    
    $
    17.30
    
    
    $
    14.46
    
    
    $
    12.82
    
    
    $
    12.87Low
    
    $
    13.34
    
    
    $
    10.20
    
    
    $
    7.64
    
    
    $
    7.67
 Dividend Policy
   Issuer Repurchases of Equity Securities
  27




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ITEM 5.

MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES (CONTINUED) Performance Evaluation
  COMPARISON
OF 5-YEAR CUMULATIVE TOTAL 
RETURN
 
 FY04
    
    
    FY05
    
    
    FY06
    
    
    FY07
    
    
    FY08
    
    
    FY09Digi International Inc.
    
    
    
    100.00
    
    
    
    
    93.88
    
    
    
    
    118.11
    
    
    
    
    124.58
    
    
    
    
    89.24
    
    
    
    
    74.54CRSP Index
    
    
    
    100.00
    
    
    
    
    114.14
    
    
    
    
    120.35
    
    
    
    
    142.45
    
    
    
    
    112.31
    
    
    
    
    90.13Peer Index
    
    
    
    100.00
    
    
    
    
    122.08
    
    
    
    
    136.19
    
    
    
    
    159.67
    
    
    
    
    110.74
    
    
    
    
    110.48
 28




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ITEM 6. SELECTED FINANCIAL DATA
  For the fiscal years ended September 30
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005Net sales (1)
    
    $
    165,928
    
    
    $
    185,056
    
    
    $
    173,263
    
    
    $
    144,663
    
    
    $
    125,198Gross profit
    
    $
    81,265
    
    
    $
    97,869
    
    
    $
    91,346
    
    
    $
    77,505
    
    
    $
    71,491Sales and marketing
    
    
    35,304
    
    
    
    36,879
    
    
    
    33,499
    
    
    
    28,591
    
    
    
    26,339Research and development
    
    
    26,381
    
    
    
    27,040
    
    
    
    24,176
    
    
    
    20,861
    
    
    
    16,531General and administrative
    
    
    14,557
    
    
    
    16,035
    
    
    
    13,343
    
    
    
    12,830
    
    
    
    11,364Restructuring
    
    
    1,953
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Acquired in-process research and development
    
    
    
    
    
    
    1,900
    
    
    
    
    
    
    
    2,000
    
    
    
    300Operating income (2)
    
    
    3,070
    
    
    
    16,015
    
    
    
    20,328
    
    
    
    13,223
    
    
    
    16,957Total other income, net (3)
    
    
    1,212
    
    
    
    2,900
    
    
    
    3,396
    
    
    
    2,044
    
    
    
    1,026Income before income taxes
    
    
    4,282
    
    
    
    18,915
    
    
    
    23,724
    
    
    
    15,267
    
    
    
    17,983Income tax provision (4)
    
    
    199
    
    
    
    6,564
    
    
    
    3,951
    
    
    
    4,154
    
    
    
    318Net income
    
    $
    4,083
    
    
    $
    12,351
    
    
    $
    19,773
    
    
    $
    11,113
    
    
    $
    17,665Net income per common share, basic:Basic
    
    $
    0.16
    
    
    $
    0.48
    
    
    $
    0.78
    
    
    $
    0.48
    
    
    $
    0.79Diluted
    
    $
    0.16
    
    
    $
    0.47
    
    
    $
    0.76
    
    
    $
    0.46
    
    
    $
    0.76Balance sheet data as of September 30:Working capital (total current assets less
total current liabilities)
    
    $
    106,121
    
    
    $
    112,236
    
    
    $
    115,703
    
    
    $
    83,341
    
    
    $
    69,995Total assets
    
    $
    258,948
    
    
    $
    271,416
    
    
    $
    251,826
    
    
    $
    225,321
    
    
    $
    177,631Long-term debt and capital lease obligations
    
    $
    9
    
    
    $
    345
    
    
    $
    358
    
    
    $
    725
    
    
    $
    1,181Stockholders equity
    
    $
    229,586
    
    
    $
    231,934
    
    
    $
    222,905
    
    
    $
    193,830
    
    
    $
    153,537Book value per common share (stockholders equity
divided by outstanding shares)
    
    $
    9.29
    
    
    $
    9.14
    
    
    $
    8.73
    
    
    $
    7.74
    
    
    $
    6.78Number of employees as of September 30
    
    
    634
    
    
    
    663
    
    
    
    564
    
    
    
    549
    
    
    
    481
 
 (1)
    
    Acquisitions provided the following net sales during the year of acquisition: MobiApps in
fiscal 2009 of $0.4 million, Sarian and
Spectrum in fiscal 2008 of $6.5 million, MaxStream in fiscal 2006 of $3.2 million, Rabbit and FS
Forth of $13.3 million in fiscal 2005.(2)
    
    Effective October 1, 2005, we adopted authoritative guidance issued by FASB related to
share-based payments and began using
the modified prospective method of application. Total compensation cost for stock-based payment
arrangements totaled $3.5 million
($2.4 million after tax) during fiscal 2009, $3.7 million ($2.5 million after tax) during fiscal
2008, $3.0 million ($2.0 million after tax)
during fiscal 2007, and $2.3 million ($1.5 million after tax) during fiscal 2006. Prior to the
adoption of this statement, no compensation
cost for stock-based payment arrangements was recognized in earnings. Refer to Note 12 to our
Consolidated Financial Statements
for further discussion.(3)
    
    Included in total other income, net is an other-than-temporary impairment charge of $1.0
million ($0.7 million after tax) recorded
during fiscal 2008 on an investment in a bond issued by Lehman Brothers (see Note 6 to our
Consolidated Financial Statements).(4)
    
    In fiscal 2009, 2008 and 2007, we recorded net discrete tax benefits of $1.2 million, $0.5
million and $4.3 million, respectively (see
Note 11 to our Consolidated Financial Statements). In fiscal 2006 and 2005, we reversed income tax
reserves of $1.6 million and
$5.7 million, respectively, primarily due to settlement of tax audits with the French government in
fiscal 2006 and the Internal
Revenue Service in fiscal 2005. 29




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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 OVERVIEW
      30




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ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
 OVERVIEW (CONTINUED)
    31




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ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
 CONSOLIDATED RESULTS OF OPERATIONS
  % Increase (decrease)2009
    
    
    2008Year ended September 30,
    
    
    compared
    
    
    compared($ in thousands)
    
    2009
    
    
    2008
    
    
    2007
    
    
    to 2008
    
    
    to 2007Net sales
    
    $
    165,928
    
    
    
    100.0
    %
    
    $
    185,056
    
    
    
    100.0
    %
    
    $
    173,263
    
    
    
    100.0
    %
    
    
    (10.3)
    %
    
    
    6.8
    %Cost of sales (exclusive of
amortization of purchased
and core technology shown
separately below)
    
    
    80,470
    
    
    
    48.5
    
    
    
    83,096
    
    
    
    44.9
    
    
    
    77,376
    
    
    
    44.7
    
    
    
    (3.2
    )
    
    
    7.4Amortization of purchased and core
technology
    
    
    4,193
    
    
    
    2.5
    
    
    
    4,091
    
    
    
    2.2
    
    
    
    4,541
    
    
    
    2.6
    
    
    
    2.5
    
    
    
    (9.9
    )Gross profit
    
    
    81,265
    
    
    
    49.0
    
    
    
    97,869
    
    
    
    52.9
    
    
    
    91,346
    
    
    
    52.7
    
    
    
    (17.0
    )
    
    
    7.1Operating expenses:Sales and marketing
    
    
    35,304
    
    
    
    21.3
    
    
    
    36,879
    
    
    
    20.0
    
    
    
    33,499
    
    
    
    19.3
    
    
    
    (4.3
    )
    
    
    10.1Research and development
    
    
    26,381
    
    
    
    15.9
    
    
    
    27,040
    
    
    
    14.6
    
    
    
    24,176
    
    
    
    14.0
    
    
    
    (2.4
    )
    
    
    11.8General and administrative
    
    
    14,557
    
    
    
    8.7
    
    
    
    16,035
    
    
    
    8.6
    
    
    
    13,343
    
    
    
    7.7
    
    
    
    (9.2
    )
    
    
    20.2Restructuring
    
    
    1,953
    
    
    
    1.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    N/M
    
    
    
    N/MIn-process research and development
    
    
    
    
    
    
    
    
    
    
    1,900
    
    
    
    1.0
    
    
    
    
    
    
    
    
    
    
    
    (100.0
    )
    
    
    N/MTotal operating expenses
    
    
    78,195
    
    
    
    47.1
    
    
    
    81,854
    
    
    
    44.2
    
    
    
    71,018
    
    
    
    41.0
    
    
    
    (4.5
    )
    
    
    15.3Operating income
    
    
    3,070
    
    
    
    1.9
    
    
    
    16,015
    
    
    
    8.7
    
    
    
    20,328
    
    
    
    11.7
    
    
    
    (80.8
    )
    
    
    (21.2
    )Total other income, net
    
    
    1,212
    
    
    
    0.7
    
    
    
    2,900
    
    
    
    1.5
    
    
    
    3,396
    
    
    
    2.0
    
    
    
    (58.2
    )
    
    
    (14.6
    )Income before income taxes
    
    
    4,282
    
    
    
    2.6
    
    
    
    18,915
    
    
    
    10.2
    
    
    
    23,724
    
    
    
    13.7
    
    
    
    (77.4
    )
    
    
    (20.3
    )Income tax provision
    
    
    199
    
    
    
    0.1
    
    
    
    6,564
    
    
    
    3.5
    
    
    
    3,951
    
    
    
    2.3
    
    
    
    (97.0
    )
    
    
    66.1Net income
    
    $
    4,083
    
    
    
    2.5
    %
    
    $
    12,351
    
    
    
    6.7
    %
    
    $
    19,773
    
    
    
    11.4
    %
    
    
    (66.9
    )%
    
    
    (37.5
    )%
 
 N/M means not meaningful NET SALES
     32




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##### Table of Contents



ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
 NET SALES (CONTINUED)
   Net Sales by Products
  Net Sales
    
    
    % of Net Sales($ in millions)
    
    2009
    
    
    2008
    
    
    2007
    
    
    2009
    
    
    2008
    
    
    2007Non-embedded
    
    $
    91.2
    
    
    $
    98.5
    
    
    $
    98.9
    
    
    
    55.0
    %
    
    
    53.2
    %
    
    
    57.1
    %Embedded
    
    
    74.7
    
    
    
    86.6
    
    
    
    74.4
    
    
    
    45.0
    %
    
    
    46.8
    %
    
    
    42.9
    %Total
    
    $
    165.9
    
    
    $
    185.1
    
    
    $
    173.3
    
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Non-Embedded
   Embedded
   Net Sales by Distribution Channels
  Net Sales
    
    
    % of Net Sales($ in millions)
    
    2009
    
    
    2008
    
    
    2007
    
    
    2009
    
    
    2008
    
    
    2007Direct / OEM channel
    
    $
    78.5
    
    
    $
    87.5
    
    
    $
    88.6
    
    
    
    47.3
    %
    
    
    47.3
    %
    
    
    51.1
    %Distribution channel
    
    
    87.4
    
    
    
    97.6
    
    
    
    84.7
    
    
    
    52.7
    %
    
    
    52.7
    %
    
    
    48.9
    %Total company
    
    $
    165.9
    
    
    $
    185.1
    
    
    $
    173.3
    
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 33




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##### Table of Contents



ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
 NET SALES (CONTINUED)
  Net Sales by Geographic Area
  Net Sales
    
    
    % of Net Sales($ in millions)
    
    2009
    
    
    2008
    
    
    2007
    
    
    2009
    
    
    2008
    
    
    2007North America
    
    $
    90.7
    
    
    $
    107.3
    
    
    $
    112.0
    
    
    
    54.7
    %
    
    
    58.0
    %
    
    
    64.7
    %Europe, Middle East & Africa
    
    
    56.0
    
    
    
    53.0
    
    
    
    41.4
    
    
    
    33.7
    %
    
    
    28.6
    %
    
    
    23.9
    %Asian countries
    
    
    15.6
    
    
    
    19.7
    
    
    
    15.6
    
    
    
    9.4
    %
    
    
    10.6
    %
    
    
    9.0
    %Latin America
    
    
    3.6
    
    
    
    5.1
    
    
    
    4.3
    
    
    
    2.2
    %
    
    
    2.8
    %
    
    
    2.4
    %Total net sales
    
    $
    165.9
    
    
    $
    185.1
    
    
    $
    173.3
    
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
     GROSS PROFIT
 2009 Compared to 2008
  34




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ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
 GROSS PROFIT (CONTINUED)
 2008 Compared to 2007
  OPERATING EXPENSES
 2009 Compared to 2008
     2008 Compared to 2007
  35




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##### Table of Contents



ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
 OPERATING EXPENSES (CONTINUED)
     RESTRUCTURING
   36




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##### Table of Contents



ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
 ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
 Sarian Systems, Ltd.
   IPV6
    
    $
    1,300Gate Array
    
    
    400VPN technologies
    
    
    200Total in-process research and development
    
    $
    1,900
   OTHER INCOME, NET
 2009 Compared to 2008
  2008 Compared to 2007
  37




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##### Table of Contents



ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
 INCOME TAXES
       INFLATION
  LIQUIDITY AND CAPITAL RESOURCES
  38




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##### Table of Contents



ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
 LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
 Consolidated Statement of Cash Flow Highlights (in thousands)
 Year ended September 30,2009
    
    
    2008
    
    
    2007Operating activities
    
    $
    15,686
    
    
    $
    24,070
    
    
    $
    26,379Investing activities
    
    
    25,286
    
    
    
    (22,370
    )
    
    
    (28,715
    )Financing activities
    
    
    (5,427
    )
    
    
    (2,564
    )
    
    
    4,811Effect of exchange rate changes on cash
and cash equivalents
    
    
    (1,287
    )
    
    
    (3,335
    )
    
    
    226Net increase (decrease) in cash and cash equivalents
    
    $
    34,258
    
    
    $
    (4,199
    )
    
    $
    2,701
   39




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##### Table of Contents



ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
 LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
    Payments due by fiscal periodLess than(in thousands)
    
    Total
    
    1 year
    
    1-3 years
    
    3-5 years
    
    ThereafterOperating leases
    
    $
    8,701
    
    
    $
    2,747
    
    
    $
    3,597
    
    
    $
    1,707
    
    
    $
    650Capital leases
    
    
    10
    
    
    
    9
    
    
    
    1
    
    
    
    
    
    
    
    Deferred payments on acquisition
    
    
    6,000
    
    
    
    3,000
    
    
    
    3,000
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    14,711
    
    
    $
    5,756
    
    
    $
    6,598
    
    
    $
    1,707
    
    
    $
    650
  FOREIGN CURRENCY
   40




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##### Table of Contents



ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
 FOREIGN CURRENCY (CONTINUED)
  RECENT ACCOUNTING DEVELOPMENTS
    CRITICAL ACCOUNTING POLICIES AND ESTIMATES
  41




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##### Table of Contents



ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
 CRITICAL ACCOUNTING POLICIES AND ESTIMATES (CONTINUED)
         42




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##### Table of Contents



ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
 CRITICAL ACCOUNTING POLICIES AND ESTIMATES (CONTINUED)
         43




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##### Table of Contents



ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
 CRITICAL ACCOUNTING POLICIES AND ESTIMATES (CONTINUED)
      44




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##### Table of Contents



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
         45




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##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM
 TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF DIGI INTERNATIONAL INC.
    46




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##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (CONTINUED)
  
 47




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##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)
 DIGI INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
 For the fiscal years ended September 30,
    
    2009
    
    
    2008
    
    
    2007Net sales
    
    $
    165,928
    
    
    $
    185,056
    
    
    $
    173,263Cost of sales (exclusive of amortization of purchased
and core technology shown separately below)
    
    
    80,470
    
    
    
    83,096
    
    
    
    77,376Amortization of purchased and core technology
    
    
    4,193
    
    
    
    4,091
    
    
    
    4,541Gross profit
    
    
    81,265
    
    
    
    97,869
    
    
    
    91,346Operating expenses:Sales and marketing
    
    
    35,304
    
    
    
    36,879
    
    
    
    33,499Research and development
    
    
    26,381
    
    
    
    27,040
    
    
    
    24,176General and administrative
    
    
    14,557
    
    
    
    16,035
    
    
    
    13,343Retructuring costs
    
    
    1,953
    
    
    
    
    
    
    
    Acquired in-process research & development
    
    
    
    
    
    
    1,900
    
    
    
    Total operating expenses
    
    
    78,195
    
    
    
    81,854
    
    
    
    71,018Operating income
    
    
    3,070
    
    
    
    16,015
    
    
    
    20,328Other income (expense):Interest income
    
    
    1,406
    
    
    
    3,579
    
    
    
    3,482Interest expense
    
    
    (257
    )
    
    
    (174
    )
    
    
    (86
    )Impairment of marketable security
    
    
    
    
    
    
    (1,015
    )
    
    
    Other income, net
    
    
    63
    
    
    
    510
    
    
    
    Total other income, net
    
    
    1,212
    
    
    
    2,900
    
    
    
    3,396Income before income taxes
    
    
    4,282
    
    
    
    18,915
    
    
    
    23,724Income tax provision
    
    
    199
    
    
    
    6,564
    
    
    
    3,951Net income
    
    $
    4,083
    
    
    $
    12,351
    
    
    $
    19,773Net income per common share:Basic
    
    $
    0.16
    
    
    $
    0.48
    
    
    $
    0.78Diluted
    
    $
    0.16
    
    
    $
    0.47
    
    
    $
    0.76Weighted average common shares, basic
    
    
    24,901
    
    
    
    25,659
    
    
    
    25,259Weighted average common shares, diluted
    
    
    25,183
    
    
    
    26,242
    
    
    
    26,121
  48




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##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)
 DIGI INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
 As of September 30,
    
    2009
    
    
    2008ASSETSCurrent assets:Cash and cash equivalents
    
    $
    48,434
    
    
    $
    14,176Marketable securities
    
    
    22,311
    
    
    
    59,337Accounts receivable, net
    
    
    19,032
    
    
    
    24,310Inventories
    
    
    26,619
    
    
    
    30,240Deferred tax assets
    
    
    2,415
    
    
    
    2,100Other
    
    
    3,844
    
    
    
    3,006Total current assets
    
    
    122,655
    
    
    
    133,169Marketable securities
    
    
    5,063
    
    
    
    179Property, equipment and improvements, net
    
    
    16,678
    
    
    
    16,255Identifiable intangible assets, net
    
    
    26,877
    
    
    
    34,032Goodwill
    
    
    86,558
    
    
    
    86,578Deferred tax assets
    
    
    440
    
    
    
    553Other
    
    
    677
    
    
    
    650Total assets
    
    $
    258,948
    
    
    $
    271,416LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    5,567
    
    
    $
    10,343Accrued expenses:Compensation
    
    
    3,275
    
    
    
    5,981Warranty
    
    
    970
    
    
    
    1,214Other
    
    
    3,035
    
    
    
    3,395Deferred payment on acquisition
    
    
    2,966
    
    
    
    Restructuring
    
    
    721
    
    
    
    Total current liabilities
    
    
    16,534
    
    
    
    20,933Deferred tax liabilities
    
    
    4,331
    
    
    
    7,582Income taxes payable
    
    
    4,893
    
    
    
    4,358Deferred payments on acquisition
    
    
    2,812
    
    
    
    5,575Other noncurrent liabilities
    
    
    792
    
    
    
    1,034Total liabilities
    
    
    29,362
    
    
    
    39,482Commitments and contingenciesStockholders equity:Preferred stock, $.01 par value; 2,000,000 shares authorized; none
issued and outstanding
    
    
    
    
    
    
    Common stock, $.01 par value; 60,000,000 shares authorized;
28,409,198 and 28,335,876 shares issued
    
    
    284
    
    
    
    283Additional paid-in capital
    
    
    181,282
    
    
    
    177,614Retained earnings
    
    
    82,708
    
    
    
    78,625Accumulated other comprehensive loss
    
    
    (6,527
    )
    
    
    (1,897
    )Treasury
stock, at cost, 3,708,302 and 2,960,457 shares
    
    
    (28,161
    )
    
    
    (22,691
    )Total stockholders equity
    
    
    229,586
    
    
    
    231,934Total liabilities and stockholders equity
    
    $
    258,948
    
    
    $
    271,416
  49




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##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)
 DIGI INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 For the fiscal years ended September 30,
    
    2009
    
    
    2008
    
    
    2007Operating activities:Net income
    
    $
    4,083
    
    
    $
    12,351
    
    
    $
    19,773Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation of property, equipment and improvements
    
    
    2,581
    
    
    
    2,488
    
    
    
    2,453Amortization of identifiable intangible assets and other assets
    
    
    7,476
    
    
    
    6,830
    
    
    
    7,712Bad debt/product return (benefit) provision, net
    
    
    (265
    )
    
    
    308
    
    
    
    (93
    )Provision for inventory obsolescence
    
    
    881
    
    
    
    536
    
    
    
    369Excess tax benefits from stock-based compensation
    
    
    (80
    )
    
    
    (184
    )
    
    
    (621
    )Impairment on marketable security
    
    
    
    
    
    
    1,015
    
    
    
    Stock-based compensation
    
    
    3,518
    
    
    
    3,697
    
    
    
    3,025Deferred income taxes
    
    
    (2,714
    )
    
    
    (1,624
    )
    
    
    (115
    )Acquired in-process research & development
    
    
    
    
    
    
    1,900
    
    
    
    Other
    
    
    (230
    )
    
    
    (145
    )
    
    
    (427
    )Changes in operating assets and liabilities (net of acquisitions):Accounts receivable
    
    
    5,384
    
    
    
    (1,838
    )
    
    
    (142
    )Inventories
    
    
    2,695
    
    
    
    (3,093
    )
    
    
    (4,448
    )Other assets
    
    
    193
    
    
    
    96
    
    
    
    125Income taxes (receivable) payable
    
    
    (1,090
    )
    
    
    7
    
    
    
    (270
    )Accounts payable
    
    
    (4,561
    )
    
    
    3,322
    
    
    
    (508
    )Accrued expenses
    
    
    (2,185
    )
    
    
    (1,596
    )
    
    
    (454
    )Net cash provided by operating activities
    
    $
    15,686
    
    
    $
    24,070
    
    
    $
    26,379Investing activities:Purchase of marketable securities
    
    
    (30,489
    )
    
    
    (69,196
    )
    
    
    (92,742
    )Proceeds from maturities of marketable securities
    
    
    62,624
    
    
    
    77,857
    
    
    
    66,757Proceeds from sale of property and equipment
    
    
    10
    
    
    
    6,954
    
    
    
    950Purchase of property, equipment, improvements and certain
other intangible assets
    
    
    (3,873
    )
    
    
    (4,425
    )
    
    
    (2,899
    )Increase in restricted cash  non-current
    
    
    
    
    
    
    (392
    )
    
    
    Contingent purchase price payments related to acquisition
    
    
    
    
    
    
    (1,315
    )
    
    
    (781
    )Acquisition of businesses, net of cash acquired
    
    
    (2,986
    )
    
    
    (31,853
    )
    
    
    Net cash provided by (used in) investing activities
    
    
    25,286
    
    
    
    (22,370
    )
    
    
    (28,715
    )Financing activities:Payments on capital lease obligations
    
    
    (336
    )
    
    
    (361
    )
    
    
    (369
    )Borrowing on note payable
    
    
    
    
    
    
    25,000
    
    
    
    Payment on note payable
    
    
    
    
    
    
    (25,000
    )
    
    
    Purchase of treasury stock
    
    
    (6,576
    )
    
    
    (5,104
    )
    
    
    Proceeds from stock option plan transactions
    
    
    423
    
    
    
    1,699
    
    
    
    3,389Proceeds from employee stock purchase plan transactions
    
    
    982
    
    
    
    1,018
    
    
    
    1,170Excess tax benefits from stock-based compensation
    
    
    80
    
    
    
    184
    
    
    
    621Net cash (used in) provided by financing activities
    
    
    (5,427
    )
    
    
    (2,564
    )
    
    
    4,811Effect of exchange rates changes on cash and cash equivalents
    
    
    (1,287
    )
    
    
    (3,335
    )
    
    
    226Net increase (decrease) in cash and cash equivalents
    
    
    34,258
    
    
    
    (4,199
    )
    
    
    2,701Cash and cash equivalents, beginning of period
    
    
    14,176
    
    
    
    18,375
    
    
    
    15,674Cash and cash equivalents, end of period
    
    $
    48,434
    
    
    $
    14,176
    
    
    $
    18,375Supplemental Cash Flows Information:Interest paid
    
    $
    54
    
    
    $
    136
    
    
    $
    86Income taxes paid, net
    
    $
    3,944
    
    
    $
    8,143
    
    
    $
    4,072Other non-cash financing and investing items:Deferred payment liability related to acquisition
    
    $
    
    
    
    $
    5,537
    
    
    $
    Equipment acquired under capital lease
    
    $
    
    
    
    $
    9
    
    
    $
    Accrual for FS Forth-Systeme GmbH contingent purchase price payment
    
    $
    
    
    
    $
    
    
    
    $
    950
  50




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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)
 DIGI INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
  AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    TotalCommon Stock
    
    
    Treasury Stock
    
    
    Paid-In
    
    
    Retained
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Par Value
    
    
    Shares
    
    
    Value
    
    
    Capital
    
    
    Earnings
    
    
    Income
    
    
    EquityBalances, September 30, 2006
    
    
    27,749
    
    
    $
    277
    
    
    
    2,712
    
    
    $
    (19,178
    )
    
    $
    164,782
    
    
    $
    47,009
    
    
    $
    940
    
    
    $
    193,830Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,773
    
    
    
    
    
    
    
    19,773Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,181
    
    
    
    1,181Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,954Employee stock purchase issuances
    
    
    
    
    
    
    
    
    
    
    (106
    )
    
    
    743
    
    
    
    427
    
    
    
    
    
    
    
    
    
    
    
    1,170Issuance of stock upon exercise of
stock options
    
    
    405
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    3,385
    
    
    
    
    
    
    
    
    
    
    
    3,389Tax benefit realized upon exercise
of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    537
    
    
    
    
    
    
    
    
    
    
    
    537Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,025
    
    
    
    
    
    
    
    
    
    
    
    3,025Balances, September 30, 2007
    
    
    28,154
    
    
    
    281
    
    
    
    2,606
    
    
    
    (18,435
    )
    
    
    172,156
    
    
    
    66,782
    
    
    
    2,121
    
    
    $
    222,905Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,351
    
    
    
    
    
    
    
    12,351Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,018
    )
    
    
    (4,018
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,333Cumulative effect from adoption
of FIN 48
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (508
    )
    
    
    
    
    
    
    (508
    )Employee stock purchase issuances
    
    
    
    
    
    
    
    
    
    
    (117
    )
    
    
    848
    
    
    
    170
    
    
    
    
    
    
    
    
    
    
    
    1,018Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    471
    
    
    
    (5,104
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,104
    )Issuance of stock upon exercise of
stock options
    
    
    182
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    1,697
    
    
    
    
    
    
    
    
    
    
    
    1,699Tax benefit realized upon exercise
of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (106
    )
    
    
    
    
    
    
    
    
    
    
    (106
    )Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,697
    
    
    
    
    
    
    
    
    
    
    
    3,697Balances, September 30, 2008
    
    
    28,336
    
    
    
    283
    
    
    
    2,960
    
    
    
    (22,691
    )
    
    
    177,614
    
    
    
    78,625
    
    
    
    (1,897
    )
    
    $
    231,934Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,083
    
    
    
    
    
    
    
    4,083Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,622
    )
    
    
    (4,622
    )Net unrealized gains (losses) on investments
(net of related tax effect of $2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    (4
    )Reclassification of gain included in net
income
(net of related tax effect of $3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    (4
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (547
    )Employee stock purchase issuances
    
    
    
    
    
    
    
    
    
    
    (145
    )
    
    
    1,106
    
    
    
    (124
    )
    
    
    
    
    
    
    
    
    
    
    982Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    893
    
    
    
    (6,576
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,576
    )Issuance of stock upon exercise of
stock options
    
    
    73
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    422
    
    
    
    
    
    
    
    
    
    
    
    423Tax benefit realized upon exercise
of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (148
    )
    
    
    
    
    
    
    
    
    
    
    (148
    )Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,518
    
    
    
    
    
    
    
    
    
    
    
    3,518Balances, September 30, 2009
    
    
    28,409
    
    
    
    284
    
    
    
    3,708
    
    
    
    (28,161
    )
    
    
    181,282
    
    
    
    82,708
    
    
    
    (6,527
    )
    
    $
    229,586
  51




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 BUSINESS DESCRIPTION
   PRINCIPLES OF CONSOLIDATION
  CASH EQUIVALENTS
  MARKETABLE SECURITIES
   ACCOUNTS RECEIVABLE
  52




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 ACCOUNTS RECEIVABLE (CONTINUED)
  INVENTORIES
  PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET
   IDENTIFIABLE INTANGIBLE ASSETS
   53




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 GOODWILL
     REVENUE RECOGNITION
   54




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 REVENUE RECOGNITION (CONTINUED)
   RESEARCH AND DEVELOPMENT
  INCOME TAXES
  NET INCOME PER COMMON SHARE
  55




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 NET INCOME PER COMMON SHARE (CONTINUED)
  Years ended September 30,
    
    2009
    
    
    2008
    
    
    2007Numerator:Net income
    
    $
    4,083
    
    
    $
    12,351
    
    
    $
    19,773Denominator:Denominator for basic net income per common
share  weighted average shares outstanding
    
    
    24,901
    
    
    
    25,659
    
    
    
    25,259Effect of dilutive securities:Employee stock options and employee stock purchase plan
    
    
    282
    
    
    
    583
    
    
    
    862Denominator for diluted net income per common
share  adjusted weighted average shares
    
    
    25,183
    
    
    
    26,242
    
    
    
    26,121Basic net income per common share
    
    $
    0.16
    
    
    $
    0.48
    
    
    $
    0.78Diluted net income per common share
    
    $
    0.16
    
    
    $
    0.47
    
    
    $
    0.76
   STOCK-BASED COMPENSATION
  FOREIGN CURRENCY TRANSLATION
  56




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 FOREIGN CURRENCY TRANSLATION (CONTINUED)
  USE OF ESTIMATES AND RISKS AND UNCERTAINTIES
  SUBSEQUENT EVENTS
  COMPREHENSIVE INCOME (LOSS)
  RECENT ACCOUNTING DEVELOPMENTS
   57




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 RECENT ACCOUNTING DEVELOPMENTS (CONTINUED)
  2. ACQUISITIONS
 MobiApps Holdings Private Limited
    Cash, including direct acquisition costs
    
    $
    3,037Fair value of net tangible assets acquired
    
    $
    136Identifiable intangible assets:Existing purchased and core technology
    
    
    800License agreement
    
    
    400Goodwill
    
    
    1,701$
    3,037
 58




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 2. ACQUISITIONS (CONTINUED)
    Sarian Systems, Ltd.
    Cash, including direct acquisition costs
    
    $
    30,920Fair value of net tangible assets acquired
    
    $
    4,055Identifiable intangible assets:Existing purchased and core technology
    
    
    7,800Existing customer relationships
    
    
    4,800Trade names
    
    
    340Non-compete agreements
    
    
    300In-process research and development
    
    
    1,900Goodwill
    
    
    15,432Deferred tax liabilities related to identifiable intangibles
    
    
    (3,707
    )$
    30,920
  59




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 2. ACQUISITIONS (CONTINUED)
   IPV6
    
    $
    1,300Gate Array
    
    
    400VPN technologies
    
    
    200Total in-process research and development
    
    $
    1,900
   
    
    The estimated revenues were based upon our estimate of revenue growth for each of the
products over the next ten fiscal years, using the assumption that all revenue recorded
after the ten year period will be generated from future technologies.
    
    The estimated operating expenses were based on consideration of historical selling,
general and administrative expenses as a percentage of sales and Sarians projected
operating expenses.
    
    Maintenance research and development, defined as the research and development necessary
to sustain the existing technology and its revenue stream, was also included as an
operating expense. The estimated remaining cost to complete each in-process research and
development technology was also included in operating expenses.
    
    When applying the excess earnings method, the cash flows expected to be generated by an
asset are discounted to their present value equivalent using a rate of return that reflects
the relative risk of the investment, as well as the time value of money. This return,
known as the weighted average cost of capital (WACC), is an overall rate based upon the
individual rates of return for invested capital (equity and interest-bearing debt). The
discount rate used in the excess earnings method was 35%. Premiums were added to the WACC
to account for the inherent risks in the development of the products, the risks of the
products being completed on schedule, and the risk of the eventual sales of the product
meeting the expectations of the Company. We used a 35% rate of return for the in-process
research and development projects.
 60




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 2. ACQUISITIONS (CONTINUED)
   Year ended
    
    Year endedSeptember 30, 2008
    
    September 30, 2007Net sales
    
    $
    192,734
    
    
    $
    183,905Net income
    
    $
    11,537
    
    
    $
    17,205Net income per common share, basic
    
    $
    0.45
    
    
    $
    0.68Net income per common share, diluted
    
    $
    0.44
    
    
    $
    0.66
  Spectrum Design Solutions, Inc.
   61




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 2. ACQUISITIONS (CONTINUED)
  Cash, including direct acquisition costs
    
    $
    4,067Deferred payments  Spectrum shareholders (present value of $6.0 million)
    
    
    5,537Total purchase price
    
    $
    9,604Fair value of net tangible assets acquired
    
    $
    283Identifiable intangible assets:Existing purchased and core technology
    
    
    800Existing customer relationships
    
    
    2,100Trade names
    
    
    80Non-compete agreements
    
    
    800Goodwill
    
    
    5,541$
    9,604
    FS Forth-Systeme GmbH/Sistemas Embebidos S.A.
  62




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 3. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS
 Identifiable Intangible Assets
  As of September 30, 2009
    
    As of September 30, 2008Gross
    
    
    
    
    
    
    
    
    
    Grosscarrying
    
    Accumulated
    
    
    
    
    
    carrying
    
    Accumulatedamount
    
    amortization
    
    Net
    
    amount
    
    amortization
    
    NetPurchased and core technology
    
    $
    46,583
    
    
    $
    (34,893
    )
    
    $
    11,690
    
    
    $
    46,660
    
    
    $
    (30,745
    )
    
    $
    15,915License agreements
    
    
    2,840
    
    
    
    (2,464
    )
    
    
    376
    
    
    
    2,440
    
    
    
    (2,440
    )
    
    
    Patents and trademarks
    
    
    9,292
    
    
    
    (5,536
    )
    
    
    3,756
    
    
    
    8,906
    
    
    
    (4,682
    )
    
    
    4,224Customer maintenance contracts
    
    
    700
    
    
    
    (534
    )
    
    
    166
    
    
    
    700
    
    
    
    (464
    )
    
    
    236Customer relationships
    
    
    17,607
    
    
    
    (7,334
    )
    
    
    10,273
    
    
    
    18,137
    
    
    
    (5,472
    )
    
    
    12,665Non-compete agreements
    
    
    1,041
    
    
    
    (425
    )
    
    
    616
    
    
    
    1,075
    
    
    
    (83
    )
    
    
    992Total
    
    $
    78,063
    
    
    $
    (51,186
    )
    
    $
    26,877
    
    
    $
    77,918
    
    
    $
    (43,886
    )
    
    $
    34,032
  Fiscal year
    
    Total2009
    
    $
    7,4762008
    
    $
    6,8302007
    
    $
    7,579
  Fiscal year
    
    Total2010
    
    $
    7,6482011
    
    $
    6,4632012
    
    $
    4,6102013
    
    $
    3,0682014
    
    $
    2,447
 Goodwill
  2009
    
    
    2008Beginning balance, October 1
    
    $
    86,578
    
    
    $
    66,817Acquisition of MobiApps
    
    
    1,701
    
    
    
    Acquisition of Sarian
    
    
    
    
    
    
    15,432Acquisition of Spectrum
    
    
    
    
    
    
    5,541Currency translation adjustments
    
    
    (1,721
    )
    
    
    (1,212
    )Ending balance, September 30
    
    $
    86,558
    
    
    $
    86,578
 63




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 4. SEGMENT INFORMATION AND MAJOR CUSTOMERS
  Year ended September 302009
    
    
    2008
    
    
    2007Non-embedded
    
    $
    91,262
    
    
    $
    98,442
    
    
    $
    98,879Embedded
    
    
    74,666
    
    
    
    86,614
    
    
    
    74,384Total net sales
    
    $
    165,928
    
    
    $
    185,056
    
    
    $
    173,263
  Year ended September 30,2009
    
    
    2008
    
    
    2007North America
    
    $
    90,708
    
    
    $
    107,336
    
    
    $
    112,021Europe, Middle East & Africa
    
    
    56,018
    
    
    
    52,956
    
    
    
    41,384Asia countries
    
    
    15,578
    
    
    
    19,672
    
    
    
    15,597Latin America
    
    
    3,624
    
    
    
    5,092
    
    
    
    4,261Total net sales
    
    $
    165,928
    
    
    $
    185,056
    
    
    $
    173,263
  As of September 30,2009
    
    
    2008
    
    
    2007United States
    
    $
    15,324
    
    
    $
    14,920
    
    
    $
    13,989International, primarily Europe
    
    
    1,354
    
    
    
    1,335
    
    
    
    5,998Total net property, equipment and improvements
    
    $
    16,678
    
    
    $
    16,255
    
    
    $
    19,987
   64




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 5. SELECTED BALANCE SHEET DATA
 As of September 30, (in thousands)
    
    2009
    
    
    2008Accounts receivable, net:Accounts receivable
    
    $
    19,656
    
    
    $
    25,007Less allowance for doubtful accounts
    
    
    624
    
    
    
    697$
    19,032
    
    
    $
    24,310Inventories:Raw materials
    
    $
    21,359
    
    
    $
    20,979Work in process
    
    
    452
    
    
    
    981Finished goods
    
    
    4,808
    
    
    
    8,280$
    26,619
    
    
    $
    30,240Property, equipment and improvements, net:Land
    
    $
    1,800
    
    
    $
    1,800Buildings
    
    
    10,522
    
    
    
    10,522Improvements
    
    
    3,542
    
    
    
    3,227Equipment
    
    
    11,194
    
    
    
    13,940Purchased software
    
    
    10,788
    
    
    
    10,680Furniture and fixtures
    
    
    3,002
    
    
    
    1,44540,848
    
    
    
    41,614Less accumulated depreciation and amortization
    
    
    24,170
    
    
    
    25,359$
    16,678
    
    
    $
    16,255Other accrued expenses:Capital lease obligation, current portion
    
    $
    8
    
    
    $
    267Deferred revenue
    
    
    50
    
    
    
    353Accrued professional fees
    
    
    696
    
    
    
    507Deferred gain on building sale  short-term
    
    
    276
    
    
    
    273Income taxes payable
    
    
    
    
    
    
    182Deferred income tax liability  current
    
    
    48
    
    
    
    Other accrued expenses
    
    
    1,957
    
    
    
    1,813$
    3,035
    
    
    $
    3,395
  6. MARKETABLE SECURITIES
   65




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 6. MARKETABLE SECURITIES (CONTINUED)
    Amortized
    
    
    Unrealized
    
    
    UnrealizedCost (1)
    
    
    Gains
    
    
    Losses (3)
    
    
    Fair Value (1)Current marketable securities:Corporate bonds (2)
    
    $
    4,236
    
    
    $
    18
    
    
    $
    
    
    
    $
    4,254Certificates of deposit
    
    
    10,022
    
    
    
    4
    
    
    
    (1
    )
    
    
    10,025Government municipal bonds
    
    
    8,023
    
    
    
    11
    
    
    
    (2
    )
    
    
    8,032Current marketable securities
    
    
    22,281
    
    
    
    33
    
    
    
    (3
    )
    
    
    22,311Non-current marketable securities:Corporate bonds
    
    
    5,107
    
    
    
    
    
    
    
    (44
    )
    
    
    5,063Total marketable securities
    
    $
    27,388
    
    
    $
    33
    
    
    $
    (47
    )
    
    $
    27,374
 
 (1)
    
    Included in amortized cost and fair value is purchased and accrued interest of $263,883.(2)
    
    The remaining portion of the Lehman Brothers Bond is included in amortized cost at a fair value of $134,100.(3)
    
    The aggregate related fair value of securities with unrealized losses as of September 30, 2009 was $9,009,428. 66




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 6. MARKETABLE SECURITIES (CONTINUED)
  Amortized
    
    
    Unrealized
    
    
    UnrealizedCost (1)
    
    
    Gains
    
    
    Losses
    
    
    Fair Value (1)Current marketable securities:Corporate bonds
    
    $
    55,628
    
    
    $
    12
    
    
    $
    (2,771
    )
    
    $
    52,869Government municipal bonds
    
    
    3,709
    
    
    
    
    
    
    
    (10
    )
    
    
    3,699Current marketable securities
    
    
    59,337
    
    
    
    12
    
    
    
    (2,781
    )
    
    
    56,568Non-current marketable securities:Corporate bonds (2)
    
    
    179
    
    
    
    
    
    
    
    
    
    
    
    179Total marketable securities
    
    $
    59,516
    
    
    $
    12
    
    
    $
    (2,781
    )
    
    $
    56,747
 
 (1)
    
    Included in amortized cost and fair value is purchased and accrued interest of $967,258.(2)
    
    The Lehman Brothers Bond is included in amortized cost at a fair value of $179,100, net of the impairment charge
of $1,014,900 recorded in the fourth quarter of fiscal 2008. 7. FAIR VALUE MEASUREMENTS
    
    
    Level 1  Inputs are quoted prices in active markets for identical assets or liabilities.
    
    Level 2  Inputs include quoted prices for similar assets or liabilities in active
markets, quoted prices for identical or similar assets or liabilities in markets that
are not active, and inputs (other than quoted prices) that are observable for the asset
or liability, either directly or indirectly.
    
    Level 3  Inputs are unobservable for the asset or liability. See the section below
titled Level 3 Valuation Techniquesfor further discussion of how we determine fair
value for investments classified as Level 3.
 Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
  67




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 7. FAIR VALUE MEASUREMENTS (CONTINUED)
   Fair Value Measurements at September 30, 2009 Using:Total carrying
    
    
    Quoted price in
    
    
    Significant other
    
    
    Significantvalue at
    
    
    active markets
    
    
    observable inputs
    
    
    unobservable inputsSeptember 30, 2009
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Cash equivalents:Money market
    
    $
    33,588
    
    
    $
    33,588
    
    
    $
    
    
    
    $
    Available-for-sale marketable securities:Corporate bonds
    
    
    9,317
    
    
    
    9,183
    
    
    
    
    
    
    
    134Certificates of deposit
    
    
    10,025
    
    
    
    10,025
    
    
    
    
    
    
    
    Government municipal bonds
    
    
    8,032
    
    
    
    8,032
    
    
    
    
    
    
    
    Total cash equivalents and marketable
securities measured at fair value
    
    $
    60,962
    
    
    $
    60,828
    
    
    $
    
    
    
    $
    134
  Level 3 Valuation Techniques
   Balance at September 30, 2008
    
    $
    179Realized gain recorded in other income (expense)
    
    
    7Sale of security
    
    
    (52
    )Balance at September 30, 2009
    
    $
    134
  68




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 8. FINANCIAL GUARANTEES
  Fiscal
    
    Balance at
    
    Warranties
    
    Settlements
    
    Balance atyear
    
    October 1,
    
    issued
    
    made
    
    September 30,2009
    
    $
    1,214
    
    
    $
    612
    
    
    $
    (856
    )
    
    $
    9702008
    
    $
    1,155
    
    
    $
    979
    
    
    $
    (920
    )
    
    $
    1,2142007
    
    $
    1,104
    
    
    $
    877
    
    
    $
    (826
    )
    
    $
    1,155
  9. SHORT-TERM BORROWINGS
  10. RESTRUCTURING
   69




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 10. RESTRUCTURING (CONTINUED)
  EmployeeTerminationCosts
    
    
    Other
    
    
    TotalBalance October 1, 2008
    
    $
    
    
    
    $
    
    
    
    $
    Restructuring charge
    
    
    1,766
    
    
    
    187
    
    
    
    1,953Cash payments
    
    
    (1,146
    )
    
    
    (86
    )
    
    
    (1,232
    )Balance September 30, 2009
    
    $
    620
    
    
    $
    101
    
    
    $
    721
  11. INCOME TAXES
  For the years ended September 30,2009
    
    
    2008
    
    
    2007United States
    
    $
    1,582
    
    
    $
    16,648
    
    
    $
    18,375International
    
    
    2,700
    
    
    
    2,267
    
    
    
    5,349$
    4,282
    
    
    $
    18,915
    
    
    $
    23,724
  For the years ended September 30,2009
    
    
    2008
    
    
    2007Current:Federal
    
    $
    1,160
    
    
    $
    6,654
    
    
    $
    2,333State
    
    
    292
    
    
    
    622
    
    
    
    1,119Foreign
    
    
    1,461
    
    
    
    912
    
    
    
    614Deferred:U.S.
    
    
    (1,829
    )
    
    
    (1,983
    )
    
    
    (688
    )Foreign
    
    
    (885
    )
    
    
    359
    
    
    
    573$
    199
    
    
    $
    6,564
    
    
    $
    3,951
 70




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 11. INCOME TAXES (CONTINUED)
  2009
    
    
    2008Current deferred tax assets
    
    $
    2,415
    
    
    $
    2,100Non-current deferred tax asset
    
    
    440
    
    
    
    553Current deferred tax liability
    
    
    (48
    )
    
    
    Non-current deferred tax liability
    
    
    (4,331
    )
    
    
    (7,582
    )Net deferred tax liability
    
    $
    (1,524
    )
    
    $
    (4,929
    )
 2009
    
    
    2008Uncollectible accounts and other reserves
    
    $
    2,030
    
    
    $
    1,705Depreciation and amortization
    
    
    567
    
    
    
    966Inventories
    
    
    165
    
    
    
    126Compensation costs
    
    
    2,999
    
    
    
    2,142Tax credit carryforwards
    
    
    329
    
    
    
    363Identifiable intangible assets
    
    
    (7,614
    )
    
    
    (10,231
    )Net deferred tax liability
    
    $
    (1,524
    )
    
    $
    (4,929
    )
    2009
    
    2008
    
    2007Statutory income tax rate
    
    
    34.0
    %
    
    
    35.0
    %
    
    
    35.0
    %Increase (decrease) resulting from:State taxes, net of federal benefits
    
    
    1.8
    
    
    
    0.2
    
    
    
    3.5Utilization of tax credits
    
    
    (15.6
    )
    
    
    (2.0
    )
    
    
    (4.1
    )Manufacturing deduction
    
    
    (2.9
    )
    
    
    (2.6
    )
    
    
    (1.3
    )Foreign taxes
    
    
    (9.0
    )
    
    
    (0.1
    )
    
    
    0.9Research and development credit related to 2008
    
    
    (13.3
    )
    
    
    
    
    
    
    Acquired in-process research and development
    
    
    
    
    
    
    2.8
    
    
    
    Adjustment of tax contingency reserves
    
    
    4.2
    
    
    
    1.4
    
    
    
    (18.2
    )Non-deductible stock-based compensation
    
    
    3.3
    
    
    
    0.7
    
    
    
    0.5Other, net
    
    
    2.1
    
    
    
    (0.7
    )
    
    
    0.44.6
    %
    
    
    34.7
    %
    
    
    16.7
    %
 71




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 11. INCOME TAXES (CONTINUED)
  Unrecognized tax benefits as of October 1, 2008
    
    $
    3,652Increases related to:Prior year income tax positions
    
    
    200Current year income tax positions
    
    
    838Decreases related to:Settlements
    
    
    (94
    )Expiration of the statute of limitations
    
    
    (450
    )Unrecognized tax benefits as of September 30, 2009
    
    $
    4,146
        72




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 11. INCOME TAXES (CONTINUED)
   12. STOCK-BASED COMPENSATION
      73




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 12. STOCK-BASED COMPENSATION (CONTINUED)
    Year ended September 30,2009
    
    
    2008
    
    
    2007Cost of sales
    
    $
    152
    
    
    $
    181
    
    
    $
    137Sales and marketing
    
    
    1,269
    
    
    
    1,251
    
    
    
    993Research and development
    
    
    833
    
    
    
    858
    
    
    
    703General and administrative
    
    
    1,264
    
    
    
    1,407
    
    
    
    1,192Stock-based compensation before income taxes
    
    
    3,518
    
    
    
    3,697
    
    
    
    3,025Income tax benefit
    
    
    (1,141
    )
    
    
    (1,223
    )
    
    
    (1,000
    )Stock-based compensation after income taxes
    
    $
    2,377
    
    
    $
    2,474
    
    
    $
    2,025
  74




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 12. STOCK-BASED COMPENSATION (CONTINUED)
  WeightedOptions
    
    
    
    
    
    
    Weighted
    
    
    Average
    
    
    AggregateAvailable
    
    
    Options
    
    
    Average
    
    
    Contractual Term
    
    
    Intrinsicfor Grant
    
    
    Outstanding
    
    
    Exercise Price
    
    
    (in years)
    
    
    Value
    (1)Balances, September 30, 2008
    
    
    1,942
    
    
    
    4,808
    
    
    $
    11.41Granted
    
    
    (815
    )
    
    
    815
    
    
    $
    8.59Exercised
    
    
    
    
    
    
    (73
    )
    
    
    5.77Cancelled
    
    
    178
    
    
    
    (836
    )
    
    
    10.91Balances, September 30, 2009
    
    
    1,305
    
    
    
    4,714
    
    
    $
    11.10
    
    
    
    5.6
    
    
    $
    2,375Exercisable at September 30, 2009
    
    
    
    
    
    
    3,429
    
    
    $
    11.28
    
    
    
    4.4
    
    
    $
    2,271
 
 (1)
    
    The aggregate intrinsic value represents the total pre-tax intrinsic value, based on our
closing stock price of $8.52 as of September 30, 2009, which would have been received by the option
holders had all option holders exercised their options as of that date.  2009
    
    2008
    
    2007Fair value of options granted (in thousands)
    
    $2,667
    
    $3,727
    
    $3,641Weighted average per option grant date fair value
    
    $3.27
    
    $5.17
    
    $5.58Assumptions used for option grants:Risk free interest rate
    
    1.57% - 2.41%
    
    2.53% - 3.41%
    
    4.44% - 4.80%Expected term
    
    4.5 - 5 years
    
    4 - 5 years
    
    3 - 5 yearsExpected volatility
    
    41% - 45%
    
    36% - 45%
    
    38% - 52%Weighted average volatility
    
    42%
    
    40%
    
    46%Expected dividend yield
    
    0
    
    0
    
    0
  75




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 12. STOCK-BASED COMPENSATION (CONTINUED)
  Weighted AverageGrant DateNumber of

    
    Fair Value perOptions

    
    Common ShareNonvested at September 30, 2008
    
    
    1,157
    
    
    $
    4.89Granted
    
    
    815
    
    
    
    3.27Vested
    
    
    (635
    )
    
    
    5.09Forfeited
    
    
    (52
    )
    
    
    4.13Nonvested at September 30, 2009
    
    
    1,285
    
    
    $
    3.80
   Options Outstanding
    
    Options ExercisableWeightedAverageRemaining
    
    Weighted
    
    Number of
    
    WeightedRange of
    
    Options
    
    Contractual Life
    
    Average
    
    Shares
    
    AverageExercise Prices
    
    Outstanding
    
    ( In Years)
    
    Exercise Price
    
    Vested
    
    Exercise Price$2.19  - $6.00
    
    
    433
    
    
    
    2.4
    
    
    $
    4.65
    
    
    
    433
    
    
    $
    4.65$6.01  - $8.00
    
    
    525
    
    
    
    3.3
    
    
    $
    7.25
    
    
    
    412
    
    
    $
    7.09$8.01  - $9.00
    
    
    650
    
    
    
    9.0
    
    
    $
    8.47
    
    
    
    42
    
    
    $
    8.39$9.01  - $11.00
    
    
    824
    
    
    
    5.6
    
    
    $
    10.25
    
    
    
    694
    
    
    $
    10.22$11.01  - $13.00
    
    
    801
    
    
    
    4.7
    
    
    $
    12.35
    
    
    
    763
    
    
    $
    12.34$13.01 - $14.00
    
    
    543
    
    
    
    6.5
    
    
    $
    13.39
    
    
    
    414
    
    
    $
    13.39$14.01 - $16.00
    
    
    840
    
    
    
    6.8
    
    
    $
    15.09
    
    
    
    573
    
    
    $
    15.04$16.01 - $27.69
    
    
    98
    
    
    
    0.7
    
    
    $
    27.61
    
    
    
    98
    
    
    $
    27.61$2.19 - $27.69
    
    
    4,714
    
    
    
    5.6
    
    
    $
    11.10
    
    
    
    3,429
    
    
    $
    11.28
  76




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 13. COMMON STOCK REPURCHASE
  14. SALE AND LEASEBACK OF BUILDING
    15. SHARE RIGHTS PLAN
  77




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 16. COMMITMENTS
  AmountFiscal Year
    
    (in thousands)2010
    
    $
    2,7472011
    
    
    1,8782012
    
    
    1,7192013
    
    
    1,0942014
    
    
    613Thereafter
    
    
    650Total minimum payments required
    
    $
    8,701
  2009
    
    
    2008
    
    
    2007Rentals
    
    $
    3,602
    
    
    $
    3,041
    
    
    $
    2,555Less: sublease rentals
    
    
    
    
    
    
    (301
    )
    
    
    (230
    )$
    3,602
    
    
    $
    2,740
    
    
    $
    2,325
 17. EMPLOYEE BENEFIT PLANS
   18. CONTINGENCIES
  78




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 18. CONTINGENCIES (CONTINUED)
  In
re Initial Public Offering Securities Litigation en banc
    79




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 18. CONTINGENCIES (CONTINUED)
  19. QUARTERLY FINANCIAL DATA (UNAUDITED)
  Quarter endedDec. 31
    
    Mar. 31
    
    June 30
    
    Sept. 302009Net sales
    
    $
    41,361
    
    
    $
    40,085
    
    
    $
    44,470
    
    
    $
    40,012Gross profit
    
    
    21,248
    
    
    
    19,169
    
    
    
    21,437
    
    
    
    19,411Net income (1)(2)
    
    
    1,016
    
    
    
    715
    
    
    
    1,393
    
    
    
    959Net income per common share  basic
    
    
    0.04
    
    
    
    0.03
    
    
    
    0.06
    
    
    
    0.04Net income per common share  diluted
    
    
    0.04
    
    
    
    0.03
    
    
    
    0.06
    
    
    
    0.042008Net sales
    
    $
    44,574
    
    
    $
    43,070
    
    
    $
    46,995
    
    
    $
    50,417Gross profit
    
    
    23,895
    
    
    
    23,177
    
    
    
    24,857
    
    
    
    25,940Net income (1)(3)
    
    
    3,670
    
    
    
    3,097
    
    
    
    1,985
    
    
    
    3,599Net income per common share  basic
    
    
    0.14
    
    
    
    0.12
    
    
    
    0.08
    
    
    
    0.14Net income per common share  diluted
    
    
    0.14
    
    
    
    0.12
    
    
    
    0.08
    
    
    
    0.14
 
 (1)
    
    During 2009 and 2008, we recorded discrete income tax benefits of $1.2 million and $0.5 million, respectively. Discrete
income tax benefits for fiscal 2009 were recorded of $0.4 million in the first quarter, $0.5 million in the third quarter and
$0.3 million in the fourth quarter related to the reversal of previously established income tax reserves, the resolution of
of certain state tax matters and the closing of a prior tax year. Discrete income tax benefits for fiscal 2008 were
recorded of $0.2 million in the third quarter and $0.3 million in the fourth quarter related to the reversal of income
tax reserves associated with the closing of a prior U.S. federal and state tax year.(2)
    
    During the third quarter of fiscal 2009, we recorded a $2.0 million pre-tax charge ($1.3 million after tax) related to a
business restructuring.(3)
    
    During the third quarter of fiscal 2008, we incurred a $1.9 million pre-tax charge with no related income tax benefit for
in-process research and development associated with the acquisition of Sarian. 20. SUBSEQUENT EVENT
  80




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##### Table of Contents



ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
  
 ITEM 9A. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Managements Report on Internal Control over Financial Reporting
  Internal Control  Integrated Framework
  Changes in Internal Control Over Financial Reporting
  
 ITEM 9B. OTHER INFORMATION
  81




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##### Table of Contents



PART III
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
  
 Code of Ethics
 www.digi.com www.digi.com
 82




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##### Table of Contents



PART IV
 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
  1.
    
    Consolidated Statements of Operations for the fiscal years ended
September 30, 2009, 2008 and 2007Consolidated Balance Sheets as of September 30, 2009 and 2008Consolidated Statements of Cash Flows for the fiscal years
ended
September 30, 2009, 2008 and 2007Consolidated Statements of Stockholders Equity and
Comprehensive
Income for the fiscal years ended September 30, 2009, 2008 and 2007Notes to Consolidated Financial Statements2.
    
    Schedule of Valuation and Qualifying Accounts3.
    
    Report of Independent Registered Public Accounting Firm
  ExhibitNumber
    
    Description2(a)
    
    Agreement and Plan of Merger among the Company, Dove Sub Inc. and NetSilicon,
Inc. dated as of October 30, 2001 (excluding schedules and exhibits which the Registrant
agrees to furnish supplementally to the Securities and Exchange Commission upon request)
(1)2(b)
    
    Purchase and assignment contract dated March 20, 2005 between Embedded Solutions
AG, Klaus Flesch, Angelika Flesch and Digi International GmbH (excluding schedules and
exhibits which the Registrant agrees to furnish supplementally to the Securities and
Exchange Commission upon request) (2)2(c)
    
    Agreement and Plan of Merger among Digi International Inc., Karat Sub Inc. and
Z-World, Inc. dated as of May 26, 2005 (excluding schedules and exhibits, which the
Registrant agrees to furnish supplementally to the Securities and Exchange Commission
upon request) (3)2(d)
    
    Agreement and Plan of Merger among Digi International Inc., Ocean Acquisition Sub
Inc. and MaxStream, Inc. dated as of July 27, 2006 (excluding schedules and exhibits
which the Registrant agrees to furnish supplementally to the Securities and Exchange
Commission upon request) (4)2(e)
    
    Share Purchase Agreement dated April 28, 2008 among Digi International
Limited, a subsidiary of Digi International Inc., and all of the shareholders of
Sarian Systems Limited (excluding schedules and exhibits which the Registrant
agrees to furnish supplementally to the Securities and Exchange Commission upon
request) (5)
 
 83




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##### Table of Contents



ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (CONTINUED)
 ExhibitNumber
    
    Description3(a)
    
    Restated Certificate of Incorporation of the Company, as amended (6)3(b)
    
    Amended and Restated By-Laws of the Company, as amended (7)4(a)
    
    Share Rights Agreement, dated as of April 22, 2008, between the Company and Wells
Fargo Bank, N.A., as Rights Agent (8)4(b)
    
    Form of Amended and Restated Certificate of Powers, Designations, Preferences and
Rights of Series A Junior Participating Preferred Shares (9)10(a)
    
    Digi International Inc. Stock Option Plan as Amended and Restated as of November
27, 2006* (10)10(b)
    
    Form of indemnification agreement with directors and officers of the Company*
(11)10(c)
    
    Agreement between the Company and Subramanian Krishnan dated March 26, 1999*
(12)10(c)(i)
    
    Amendment to Agreement between the Company and Subramanian Krishnan dated February
5, 2001* (13)10(d)
    
    Employment Agreement between the Company and Joseph T. Dunsmore dated September
27, 2006* (14)10(e)
    
    Digi International Inc. Employee Stock Purchase Plan, as Amended and Restated,
of the Company as of November 27, 2006, as approved by stockholders on January 22,
2007*(15)10(f)
    
    Digi International Inc. 2000 Omnibus Stock Plan as Amended and Restated
as of November 27, 2006, as approved by stockholders on January 22, 2007* (16)10(g)
    
    Digi International Inc. Non-Officer Stock Option Plan, as Amended and
Restated as of November 27, 2006 (17)10(h)
    
    NetSilicon, Inc. Amended and Restated 1998 Director Stock Option Plan
(18)10(i)
    
    NetSilicon, Inc. Amended and Restated 1998 Incentive and Non-Qualified
Stock Option Plan (19)10(j)
    
    NetSilicon, Inc. 2001 Stock Option and Incentive Plan (20)10(k)
    
    Form of Notice of Grant of Stock Options and Option Agreement and Terms
and Conditions of Nonstatutory Stock Option Agreement (Digi International Inc.
Stock Option Plan)* (21)10(l)
    
    Agreement between the Company and Lawrence A. Kraft, dated February 4,
2003* (22)10(l)(i)
    
    Amendment to Agreement between the Company and Lawrence A. Kraft dated July
30, 2007* (23)
 
 84




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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (CONTINUED)
 ExhibitNumber
    
    Description10(m)
    
    Agreement between the Company and Joel K. Young dated July 30, 2007* (24)10(n)
    
    Form of Notice of Grant of Stock Options and Option Agreement and Terms
and Conditions of Nonstatutory Stock Option Agreement (Digi International Inc.
2000 Omnibus Stock Plan)* (25)10(o)
    
    English Language Summary of Sale and Leaseback Agreement dated February
18, 2008 between Digi International GmbH and Deutsche Structured Finance GmbH &
Co. Alphard KG. (26)14
    
    Code of Ethics (27)21
    
    Subsidiaries of the Company23
    
    Consent of Independent Registered Public Accounting Firm24
    
    Powers of Attorney31(a)
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer31(b)
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer32
    
    Section 1350 Certification
   (1)
    
    Incorporated by reference to Annex A to the Companys Registration Statement on Form S-4
(File no. 333-74118).(2)
    
    Incorporated by reference to Exhibit 2(a) to the Companys Form 10-Q for the quarter ended
March 31, 2005 (File no. 0-17972).(3)
    
    Incorporated by reference to Exhibit 2 to the Companys Form 8-K dated May 26, 2005 (File no.
0-17972).(4)
    
    Incorporated by reference to Exhibit 2 to the Companys Form 8-K dated July 27, 2006 (File
no. 0-17972).(5)
    
    Incorporated by reference to Exhibit 2(a) to the Companys Form 10-Q for the quarter ended
March 31, 2008 (File No. 1-34033).(6)
    
    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).(7)
    
    Incorporated by reference to Exhibit 3(b) to the Companys Form 10-Q for the quarter ended
June 30, 2008 (File no. 1-34033).(8)
    
    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).
 
 85




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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (CONTINUED)
 (9)
    
    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).(10)
    
    Incorporated by reference to Exhibit 10(a) to the Companys Form 10-K for the year ended
September 30, 2006 (File no. 0-17972).(11)
    
    Incorporated by reference to Exhibit 10(b) to the Companys Registration Statement on Form
S-1 (File no. 33-30725).(12)
    
    Incorporated by reference to Exhibit 10(k) to the Companys Form 10-Q for the quarter ended
March 31, 1999 (File no. 0-17972).(13)
    
    Incorporated by reference to Exhibit 10(e)(i) to the Companys Form 10-Q for the quarter
ended December 31, 2000 (File no. 0-17972).(14)
    
    Incorporated by reference to Exhibit 10(d) to the Companys Form 10-K for the year ended
September 30, 2006 (File no. 0-17972).(15)
    
    Incorporated by reference to Exhibit 10(b) to the Companys Form 10-Q for the quarter ended
December 31, 2006 (File no. 0-17972).(16)
    
    Incorporated by reference to Exhibit 10(a) to the Companys Form 10-Q for the quarter ended
December 31, 2006 (File no. 0-17972).(17)
    
    Incorporated by reference to Exhibit 10(g) to the Companys Form 10-K for the year ended
September 30, 2006 (File no. 0-17972).(18)
    
    Incorporated by reference to Exhibit 4.3 to the Companys Registration Statement on Form S-8
dated February 13, 2002 (File no. 333-82672).(19)
    
    Incorporated by reference to Exhibit 4.3 to the Companys Registration Statement on Form S-8
dated February 13, 2002 (File no. 333-82670).(20)
    
    Incorporated by reference to Exhibit 4.3 to the Companys Registration Statement on Form S-8
dated February 13, 2002 (File no. 333-82668).(21)
    
    Incorporated by reference to Exhibit 10(a) to the Companys Form 8-K dated September 13, 2004
(File no. 0-17972).(22)
    
    Incorporated by reference to Exhibit 10(m) to the Companys Form 10-K for the year ended
September 30, 2006 (File no. 0-17972).(23)
    
    Incorporated by reference to Exhibit 10(a) to the Companys Form 10-Q for the quarter ended
June 30, 2007 (File no. 0-17972).(24)
    
    Incorporated by reference to Exhibit 10(b) to the Companys Form 10-Q for the quarter ended
June 30, 2007 (File no. 0-17972).(25)
    
    Incorporated by reference to Exhibit 10(o) to the Companys Form 10-K for the year ended
September 30, 2008 (File no. 1-34033).
 
 86




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##### Table of Contents



ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (CONTINUED)
 (26)
    
    Incorporated by reference to Exhibit 10(a) to the Companys Form 10-Q for the quarter ended
March 31, 2008 (File no. 1-34033).(27)
    
    Incorporated by reference to Exhibit 14 to the Companys Form 10-K for the year ended
September 30, 2003 (File no. 0-17972).
 87




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##### Table of Contents



SIGNATURES
  DIGI INTERNATIONAL INC.December 3, 2009
    By:
    /s/  Joseph T. DunsmoreJoseph T. DunsmorePresident, Chief Executive Officer, Chairman, and Director  December 3, 2009
    /s/  Joseph T. DunsmoreJoseph T. DunsmorePresident, Chief Executive Officer, Chairman, and Director
(Principal Executive Officer)December 3, 2009
    /s/ Subramanian KrishnanSubramanian KrishnanSenior Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer) GUY C. JACKSON
KENNETH E. MILLARD
AHMED NAWAZ  WILLIAM N. PRIESMEYER
BRADLEY J. WILLIAMS
  *
    
    Joseph T. Dunsmore, by signing his name hereto, does hereby sign this document on behalf of each
of the above named directors of the Registrant pursuant to Powers of Attorney duly executed by such
persons.
 December 3, 2009
    /s/ Joseph T. DunsmoreJoseph T. DunsmoreAttorney-in-fact 88




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##### Table of Contents



SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS
 DIGI INTERNATIONAL INC.
(in thousands)
 IncreaseBalance at
    
    (Decrease) to
    
    
    
    
    
    Balance atbeginning
    
    costs and
    
    
    
    
    
    end ofDescription
    
    of period
    
    expenses
    
    Deductions
    
    periodValuation account  doubtful accountsSeptember 30, 2009
    
    $
    697
    
    
    $
    (1
    )
    
    $
    72
    (1)
    
    $
    624September 30, 2008
    
    $
    479
    
    
    $
    308
    
    
    $
    90
    (1)
    
    $
    697September 30, 2007
    
    $
    495
    
    
    $
    73
    
    
    $
    89
    (1)
    
    $
    479Reserve for future returns and pricing adjustmentsSeptember 30, 2009
    
    $
    1,369
    
    
    $
    (264
    )
    
    $
    47
    (2)
    
    $
    1,058September 30, 2008
    
    $
    1,442
    
    
    $
    9
    
    
    $
    82
    (2)
    
    $
    1,369September 30, 2007
    
    $
    1,807
    
    
    $
    (166
    )
    
    $
    199
    (2)
    
    $
    1,442Valuation account  inventory reservesSeptember 30, 2009
    
    $
    1,742
    
    
    $
    881
    
    
    $
    778
    (3)
    
    $
    1,845September 30, 2008
    
    $
    2,049
    
    
    $
    535
    
    
    $
    842
    (3)
    
    $
    1,742September 30, 2007
    
    $
    2,580
    
    
    $
    369
    
    
    $
    900
    (3)
    
    $
    2,049
 
 (1)
    
    Uncollectible accounts charged against allowance, net of recoveries(2)
    
    Adjustments and recoveries(3)
    
    Scrapped inventory charged against allowance 89




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##### Table of Contents



EXHIBIT INDEX
 Exhibit
    
    Description
    
    Page2(a)
    
    Agreement and Plan of Merger
among the Company, Dove Sub
Inc. and NetSilicon, Inc.
dated as of October 30, 2001
(excluding schedules and
exhibits which the Registrant
agrees to furnish
supplementally to the
Securities and Exchange
Commission upon request)
    
    Incorporated by Reference2(b)
    
    Purchase and assignment
contract dated March 20, 2005
between Embedded Solutions
AG, Klaus Flesch, Angelika
Flesch and Digi International
GmbH (excluding schedules and
exhibits which the Registrant
agrees to furnish
supplementally to the
Securities and Exchange
Commission upon request)
    
    Incorporated by Reference2(c)
    
    Agreement and Plan of Merger
among Digi International
Inc., Karat Sub Inc. and
Z-World, Inc. dated as of May
26, 2005 (excluding schedules
and exhibits, which the
Registrant agrees to furnish
supplementally to the
Securities and Exchange
Commission upon request)
    
    Incorporated by Reference2(d)
    
    Agreement and Plan of Merger
among Digi International
Inc., Ocean Acquisition Sub
Inc. and MaxStream, Inc.
dated as of July 27, 2006
(excluding schedules and
exhibits which the Registrant
agrees to furnish
supplementally to the
Securities and Exchange
Commission upon request)
    
    Incorporated by Reference2(e)
    
    Share Purchase Agreement
dated April 28, 2008 among
Digi International Limited, a
subsidiary of Digi
International Inc., and all
of the shareholders of Sarian
Systems Limited (excluding
schedules and exhibits which
the Registrant agrees to
furnish supplementally to the
Securities and Exchange
Commission upon request)
    
    Incorporated by Reference3(a)
    
    Restated Certificate of
Incorporation of the Company,
as amended
    
    Incorporated by Reference3(b)
    
    Amended and Restated By-Laws
of the Company, as amended
    
    Incorporated by Reference4(a)
    
    Share Rights Agreement, dated
as of April 22, 2008, between
the Company and Wells Fargo
Bank, N.A., as Rights Agent
    
    Incorporated by Reference4(b)
    
    Form of Amended and Restated
Certificate of Powers,
Designations, Preferences and
Rights of Series A Junior
Participating Preferred
Shares
    
    Incorporated by Reference10(a)
    
    Digi International Inc. Stock
Option Plan as Amended and
Restated as of November 27,
2006
    
    Incorporated by Reference10(b)
    
    Form of indemnification
agreement with directors and
officers of the Company
    
    Incorporated by Reference10(c)
    
    Agreement between the Company
and Subramanian Krishnan
dated March 26, 1999
    
    Incorporated by Reference10(c)(i)
    
    Amendment to Agreement
between the Company and
Subramanian Krishnan dated
February 5, 2001
    
    Incorporated by Reference10(d)
    
    Employment Agreement between
the Company and Joseph T.
Dunsmore dated September 27,
2006
    
    Incorporated by Reference10(e)
    
    Digi International Inc.
Employee Stock Purchase Plan,
as Amended and Restated, of
the Company as of November
27, 2006, as approved by
stockholders on January 22,
2007
    
    Incorporated by Reference10(f)
    
    Digi International Inc. 2000
Omnibus Stock Plan as Amended
and Restated as of November
27, 2006, as approved by
stockholders on January 22,
2007
    
    Incorporated by Reference10(g)
    
    Digi International Inc.
Non-Officer Stock Option
Plan, as Amended and Restated
as of November 27, 2006
    
    Incorporated by Reference10(h)
    
    NetSilicon, Inc. Amended and
Restated 1998 Director Stock
Option Plan
    
    Incorporated by Reference
 90




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##### Table of Contents



EXHIBIT INDEX (CONTINUED)
 Exhibit
    
    Description
    
    Page10(i)
    
    NetSilicon, Inc. Amended and Restated 1998 Incentive
and Non-Qualified Stock Option Plan
    
    Incorporated by Reference10(j)
    
    NetSilicon, Inc. 2001 Stock Option and Incentive Plan
    
    Incorporated by Reference10(k)
    
    Form of Notice of Grant of Stock Options and Option
Agreement and Terms and Conditions of Nonstatutory
Stock Option Agreement (Digi International Inc. Stock
Option Plan)
    
    Incorporated by Reference10(l)
    
    Agreement between the Company and Lawrence A. Kraft,
dated February 4, 2003
    
    Incorporated by Reference10(l)(i)
    
    Amendment to Agreement between the Company and Lawrence
A. Kraft dated July 30, 2007
    
    Incorporated by Reference10(m)
    
    Agreement between the Company and Joel K. Young dated
July 30, 2007
    
    Incorporated by Reference10(n)
    
    Form of Notice of Grant of Stock Options and Option
Agreement and Terms and Conditions of Nonstatutory
Stock Option Agreement (Digi International Inc. 2000
Omnibus Stock Plan)
    
    Incorporated by Reference10(o)
    
    English Language Summary of Sale and Leaseback
Agreement dated February 18, 2008 between Digi
International GmbH and Deutsche Structured Finance GmbH
& Co. Alphard KG.
    
    Incorporated by Reference14
    
    Code of Ethics
    
    Incorporated by Reference21
    
    Subsidiaries of the Company
    
    Filed Electronically23
    
    Consent of Independent Registered Public Accounting Firm
    
    Filed Electronically24
    
    Powers of Attorney
    
    Filed Electronically31(a)
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief
Executive Officer
    
    Filed Electronically31(b)
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief
Financial Officer
    
    Filed Electronically32
    
    Section 1350 Certification
    
    Filed Electronically
 91