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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, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to .
 Commission file number: 1-34033
 DIGI INTERNATIONAL INC.
  Delaware
    
    41-1532464(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification Number)
 11001 Bren Road East  Minnetonka, Minnesota 55343
 (952) 912-3444
 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
  Large accelerated filer oAccelerated filer þNon-accelerated filer o(Do not check if a smaller reporting company)Smaller reporting company o o þ




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INDEX
   ITEM IN FORM 10-K
    
    PAGE/REFERENCEPART I.ITEM 1.
    
    Business
    
    4ITEM 1A.
    
    Risk Factors
    
    14ITEM 1B.
    
    Unresolved Staff Comments
    
    21ITEM 2.
    
    Properties
    
    22ITEM 3.
    
    Legal Proceedings
    
    23ITEM 4.
    
    Submission of Matters to a Vote of Security Holders
    
    24PART II.ITEM 5.
    
    Market for
Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    25ITEM 6.
    
    Selected Financial Data
    
    27ITEM 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    28ITEM 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
    
    80ITEM 9A.
    
    Controls and Procedures
    
    80ITEM 9B.
    
    Other Information
    
    80
 2




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##### Table of Contents



ITEM IN FORM 10-K
    
    PAGE/REFERENCEPART III.ITEM 10.
    
    Directors, Executive Officers and Corporate GovernanceDirectors of the Registrant
    
    Election of Directors, Proxy StatementExecutive Officers of the Registrant
    
    81Compliance 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
    
    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, Proxy StatementEquity Compensation Plan Information
    
    82ITEM 13.
    
    Certain Relationships and Related Transactions, 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
    
    85EX-10.(o)EX-22EX-23EX-24EX-31.(a)EX-31.(b)EX-32
  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)
    PRODUCTS
   5




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




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ITEM 1. BUSINESS (CONTINUED)
 PRODUCTS (CONTINUED)
 Non-Embedded Products
 Cellular Routers 
 Gateways 
 Wireless Communication Adapters 
 Console Servers 
 Serial Servers 
 USB Connected Products 
 7




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ITEM 1. BUSINESS (CONTINUED)
 PRODUCTS (CONTINUED)
 Remote Display Products 
 Cameras and Sensors 
 Serial Cards 
 Network Management Software 
 APPLICATION MARKETS
  Industrial Automation 
 Retail/Point-of-Sale (POS) 
 Building Automation/Security 
 8




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ITEM 1. BUSINESS (CONTINUED)
 APPLICATION MARKETS (CONTINUED)
 Medical/Healthcare 
 Utilities 
 Data Center Management 
 Office Networking 
 Traffic Management 
 Remote Device Management 
 Hazardous Environments 
 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.
 9




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##### Table of Contents



ITEM 1. BUSINESS (CONTINUED)
 ACQUISITIONS (CONTINUED)
 
    
    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 significantly
expanded our wireless offering both with embedded modules and non-embedded wireless
communications adapters. The products also play a key role in our Drop-in Networking
initiative. Effective October 1, 2007, MaxStream merged into Digi International Inc.
    
    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.
    
    In July 2008, we acquired Spectrum Design Solutions, Inc. (Spectrum), a leading design
services organization. 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.
   10




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ITEM 1. BUSINESS (CONTINUED)
 DISTRIBUTION AND PARTNERSHIPS
        OPERATIONS
   11




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ITEM 1. BUSINESS (CONTINUED)
 OPERATIONS (CONTINUED)
 SEASONALITY
  RESEARCH AND DEVELOPMENT
  BACKLOG
  EMPLOYEES
  GEOGRAPHIC AREAS
   12




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ITEM 1. BUSINESS (CONTINUED)
 GEOGRAPHIC AREAS (CONTINUED)
   DIGI INTERNATIONAL WEBSITE
 www.digi.com www.sec.gov
  13




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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.
    14




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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 carrier certifications or approvals from
other governmental regulatory bodies could impede our ability to grow revenues in our wireless
products.
  15




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ITEM 1A. RISK FACTORS (CONTINUED)
 The cyclicality of the semiconductor industry may result in substantial period-to-period
fluctuations in operating results.
  Loss of one or more of our key 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.
  Our use of suppliers in Southeast Asia involves risks that could negatively impact us.
  16




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ITEM 1A. RISK FACTORS (CONTINUED)
 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.
  We face risks associated with our international operations and expansion that could impair our
ability to grow our revenues abroad.
  17




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ITEM 1A. RISK FACTORS (CONTINUED)
 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.
  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.
  18




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ITEM 1A. RISK FACTORS (CONTINUED)
  Negative conditions in the global credit markets may impair the liquidity of a portion of our
investment portfolio.
  Our consolidated operating results and financial condition may be adversely impacted by worldwide
economic conditions and credit tightening.
  We may have additional tax liabilities.
  19




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ITEM 1A. RISK FACTORS (CONTINUED)
 Risks Related to Our Common Stock
 If our stock price declines, we may need to recognize an impairment of our goodwill.
  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.
  20




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ITEM 1A. RISK FACTORS (CONTINUED)
  We have not paid cash dividends on our common stock and do not expect to do so.
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS
  21




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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 2009Davis, CA
    
    Sales, sales support, manufacturing and warehousing
    
    
    24,000
    
    
    December 2012Davis, CA
    
    Marketing, research & development, and administration
    
    
    11,200
    
    
    September 2011Lindon, UT
    
    Sales, marketing, research & development,
and administration
    
    
    11,986
    
    
    December 2010Hong Kong, China
    
    Sales, marketing, and administration
    
    
    4,061
    
    
    July 2010Beijing, China
    
    Sales, marketing, and administration
    
    
    2,372
    
    
    November 2009Shanghai, 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 2009Ilkley, UK
    
    Sales, sales support, marketing and administration
    
    
    5,475
    
    
    September 2015Ilkley, UK
    
    Warehousing
    
    
    1,058
    
    
    August 2009Logrono, Spain
    
    Sales, research & development, and administration
    
    
    3,228
    
    
    January 2017Tokyo, Japan
    
    Sales
    
    
    1,371
    
    
    November 2009
  22




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ITEM 3. LEGAL PROCEEDINGS
   In re Initial Public Offering Securities Litigation en banc
   23




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ITEM 3. LEGAL PROCEEDINGS (CONTINUED)
   
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  24




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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
 2008
    
    First
    
    Second
    
    Third
    
    FourthHigh
    
    $
    17.30
    
    
    $
    14.46
    
    
    $
    12.82
    
    
    $
    12.87Low
    
    $
    13.34
    
    
    $
    10.20
    
    
    $
    7.64
    
    
    $
    7.67
 2007
    
    First
    
    Second
    
    Third
    
    FourthHigh
    
    $
    14.50
    
    
    $
    13.93
    
    
    $
    15.67
    
    
    $
    16.71Low
    
    $
    12.99
    
    
    $
    11.39
    
    
    $
    12.02
    
    
    $
    13.12
 Dividend Policy
   Issuer Repurchases of Equity Securities
  Total
    
    
    Average
    
    
    Total Number of
    
    
    Maximum NumberNumber
    
    
    Price
    
    
    Shares Purchased
    
    
    of Shares that Mayof Shares
    
    
    Paid
    
    
    as Part of a Publicly
    
    
    Yet Be PurchasedFiscal Period
    
    Purchased
    
    
    per Share
    
    
    Announced Program
    
    
    Under the ProgramJuly 1, 2008 - July 31, 2008
    
    
    168,800
    
    
    $
    10.22
    
    
    
    168,800
    
    
    
    1,331,200August 1, 2008 - August 31, 2008
    
    
    140,000
    
    
    $
    10.52
    
    
    
    140,000
    
    
    
    1,191,200September 1, 2008 - September
30, 2008
    
    
    162,400
    
    
    $
    11.74
    
    
    
    162,400
    
    
    
    1,028,800Total
    
    
    471,200
    
    
    $
    10.83
    
    
    
    471,200
    
    
    
    1,028,800
 25




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ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES (CONTINUED)
 Performance Evaluation
  
 FY03
    
    FY04
    
    FY05
    
    FY06
    
    FY07
    
    FY08Digi International Inc.
    
    
    100.00
    
    
    
    172.68
    
    
    
    162.11
    
    
    
    203.96
    
    
    
    215.14
    
    
    
    154.10CRSP Index
    
    
    100.00
    
    
    
    106.23
    
    
    
    121.26
    
    
    
    127.87
    
    
    
    151.34
    
    
    
    119.35Peer Index
    
    
    100.00
    
    
    
    100.33
    
    
    
    122.48
    
    
    
    136.64
    
    
    
    160.20
    
    
    
    111.13
 26




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ITEM 6. SELECTED FINANCIAL DATA
 For the fiscal years ended September 30
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004Net sales (1)
    
    $
    185,056
    
    
    $
    173,263
    
    
    $
    144,663
    
    
    $
    125,198
    
    
    $
    111,226Gross profit
    
    $
    97,869
    
    
    $
    91,346
    
    
    $
    77,505
    
    
    $
    71,491
    
    
    $
    63,469Sales and marketing
    
    
    36,879
    
    
    
    33,499
    
    
    
    28,591
    
    
    
    26,339
    
    
    
    25,556Research and development
    
    
    27,040
    
    
    
    24,176
    
    
    
    20,861
    
    
    
    16,531
    
    
    
    17,159General and administrative
    
    
    16,035
    
    
    
    13,343
    
    
    
    12,830
    
    
    
    11,364
    
    
    
    8,973Acquired in-process research and development
    
    
    1,900
    
    
    
    
    
    
    
    2,000
    
    
    
    300
    
    
    
    Operating income (2)
    
    
    16,015
    
    
    
    20,328
    
    
    
    13,223
    
    
    
    16,957
    
    
    
    11,781Total other income, net (3)
    
    
    2,900
    
    
    
    3,396
    
    
    
    2,044
    
    
    
    1,026
    
    
    
    369Income before income taxes
    
    
    18,915
    
    
    
    23,724
    
    
    
    15,267
    
    
    
    17,983
    
    
    
    12,150Income tax provision (4)
    
    
    6,564
    
    
    
    3,951
    
    
    
    4,154
    
    
    
    318
    
    
    
    3,487Net income
    
    $
    12,351
    
    
    $
    19,773
    
    
    $
    11,113
    
    
    $
    17,665
    
    
    $
    8,663Net income per common share, basic:Basic
    
    $
    0.48
    
    
    $
    0.78
    
    
    $
    0.48
    
    
    $
    0.79
    
    
    $
    0.41Diluted
    
    $
    0.47
    
    
    $
    0.76
    
    
    $
    0.46
    
    
    $
    0.76
    
    
    $
    0.39Balance sheet data as of September 30:Working capital (total current assets less
total current liabilities)
    
    $
    112,236
    
    
    $
    115,703
    
    
    $
    83,341
    
    
    $
    69,995
    
    
    $
    82,090Total assets
    
    $
    271,416
    
    
    $
    251,826
    
    
    $
    225,321
    
    
    $
    177,631
    
    
    $
    150,465Long-term debt and capital lease obligations
    
    $
    345
    
    
    $
    358
    
    
    $
    725
    
    
    $
    1,181
    
    
    $
    Stockholders equity
    
    $
    231,934
    
    
    $
    222,905
    
    
    $
    193,830
    
    
    $
    153,537
    
    
    $
    127,079Book value per common share (stockholders equity
divided by outstanding shares)
    
    $
    9.14
    
    
    $
    8.73
    
    
    $
    7.74
    
    
    $
    6.78
    
    
    $
    5.83Number of employees as of September 30
    
    
    663
    
    
    
    564
    
    
    
    549
    
    
    
    481
    
    
    
    341
 
 (1)
    
    Acquisitions provided the following net sales during the year of acquisition: 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 SFAS No. 123 (revised 2004), Share-Based Payment (SFAS
No. 123R), using the
modified prospective method of application. Total compensation cost for stock-based payment
arrangements totaled $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 9 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 the fourth quarter of fiscal 2008 on an investment in a bond issued by Lehman
Brothers (see Note 12 to our
Consolidated Financial Statements).(4)
    
    In fiscal 2008, we recorded a net discrete tax benefit of $0.5 million resulting from a
reversal of previously established tax
reserves associated with the closing of a prior tax year. In fiscal 2007, we reversed income
tax reserves of $3.6 million associated
with the closing of a German tax audit and the statutory closing of a prior U.S. federal and
state tax year. We also recorded other
discrete tax benefits of $0.7 million in fiscal 2007 (see Note 8 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 2006 and the Internal Revenue Service in 2005. 27




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ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 OVERVIEW
     28




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ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
 CONSOLIDATED RESULTS OF OPERATIONS
  ($ in thousands)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    % Increase (decrease)2008
    
    
    2007Year ended September 30,
    
    
    compared
    
    
    compared2008
    
    
    2007
    
    
    2006
    
    
    to 2007
    
    
    to 2006Net sales
    
    $
    185,056
    
    
    
    100.0
    %
    
    $
    173,263
    
    
    
    100.0
    %
    
    $
    144,663
    
    
    
    100.0
    %
    
    
    6.8
    %
    
    
    19.8
    %Cost of sales (exclusive of amortization of purchased
and core technology shown separately below)
    
    
    83,096
    
    
    
    44.9
    
    
    
    77,376
    
    
    
    44.7
    
    
    
    62,322
    
    
    
    43.1
    
    
    
    7.4
    
    
    
    24.2Amortization of purchased and core technology
    
    
    4,091
    
    
    
    2.2
    
    
    
    4,541
    
    
    
    2.6
    
    
    
    4,836
    
    
    
    3.3
    
    
    
    (9.9
    )
    
    
    (6.1
    )Gross profit
    
    
    97,869
    
    
    
    52.9
    
    
    
    91,346
    
    
    
    52.7
    
    
    
    77,505
    
    
    
    53.6
    
    
    
    7.1
    
    
    
    17.9Operating expenses:Sales and marketing
    
    
    36,879
    
    
    
    20.0
    
    
    
    33,499
    
    
    
    19.3
    
    
    
    28,591
    
    
    
    19.8
    
    
    
    10.1
    
    
    
    17.2Research and development
    
    
    27,040
    
    
    
    14.6
    
    
    
    24,176
    
    
    
    14.0
    
    
    
    20,861
    
    
    
    14.4
    
    
    
    11.8
    
    
    
    15.9General and administrative
    
    
    16,035
    
    
    
    8.6
    
    
    
    13,343
    
    
    
    7.7
    
    
    
    12,830
    
    
    
    8.9
    
    
    
    20.2
    
    
    
    4.0In-process research and development
    
    
    1,900
    
    
    
    1.0
    
    
    
    
    
    
    
    
    
    
    
    2,000
    
    
    
    1.4
    
    
    
    N/M
    
    
    
    N/MTotal operating expenses
    
    
    81,854
    
    
    
    44.2
    
    
    
    71,018
    
    
    
    41.0
    
    
    
    64,282
    
    
    
    44.5
    
    
    
    15.3
    
    
    
    10.5Operating income
    
    
    16,015
    
    
    
    8.7
    
    
    
    20,328
    
    
    
    11.7
    
    
    
    13,223
    
    
    
    9.1
    
    
    
    (21.2
    )
    
    
    53.7Total other income, net
    
    
    2,900
    
    
    
    1.5
    
    
    
    3,396
    
    
    
    2.0
    
    
    
    2,044
    
    
    
    1.4
    
    
    
    (14.6
    )
    
    
    66.1Income before income taxes
    
    
    18,915
    
    
    
    10.2
    
    
    
    23,724
    
    
    
    13.7
    
    
    
    15,267
    
    
    
    10.5
    
    
    
    (20.3
    )
    
    
    55.4Income tax provision
    
    
    6,564
    
    
    
    3.5
    
    
    
    3,951
    
    
    
    2.3
    
    
    
    4,154
    
    
    
    2.8
    
    
    
    66.1
    
    
    
    (4.9
    )Net income
    
    $
    12,351
    
    
    
    6.7
    %
    
    $
    19,773
    
    
    
    11.4
    %
    
    $
    11,113
    
    
    
    7.7
    %
    
    
    (37.5
    )%
    
    
    77.9
    %
 
 N/M means not meaningful NET SALES
    29




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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
  ($ in millions)
    
    Net Sales
    
    
    % of Net Sales2008
    
    
    2007
    
    
    2006
    
    
    2008
    
    
    2007
    
    
    2006Non-embedded
    
    $
    98.5
    
    
    $
    98.9
    
    
    $
    86.7
    
    
    
    53.2
    %
    
    
    57.1
    %
    
    
    59.9
    %Embedded
    
    
    86.6
    
    
    
    74.4
    
    
    
    58.0
    
    
    
    46.8
    %
    
    
    42.9
    %
    
    
    40.1
    %Total
    
    $
    185.1
    
    
    $
    173.3
    
    
    $
    144.7
    
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Non-Embedded
   Embedded
   Net Sales by Distribution Channels
  ($ in millions)
    
    Net Sales
    
    
    % of Net Sales2008
    
    
    2007
    
    
    2006
    
    
    2008
    
    
    2007
    
    
    2006Direct / OEM channel
    
    $
    87.5
    
    
    $
    88.6
    
    
    $
    70.3
    
    
    
    47.3
    %
    
    
    51.1
    %
    
    
    48.6
    %Distribution channel
    
    
    97.6
    
    
    
    84.7
    
    
    
    74.4
    
    
    
    52.7
    %
    
    
    48.9
    %
    
    
    51.4
    %Total company
    
    $
    185.1
    
    
    $
    173.3
    
    
    $
    144.7
    
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
   30




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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
  ($ in millions)
    
    Net Sales
    
    
    % of Net Sales2008
    
    
    2007
    
    
    2006
    
    
    2008
    
    
    2007
    
    
    2006North America
    
    $
    107.3
    
    
    $
    112.0
    
    
    $
    88.8
    
    
    
    58.0
    %
    
    
    64.7
    %
    
    
    61.4
    %International
    
    
    77.8
    
    
    
    61.3
    
    
    
    55.9
    
    
    
    42.0
    %
    
    
    35.3
    %
    
    
    38.6
    %Total Company
    
    $
    185.1
    
    
    $
    173.3
    
    
    $
    144.7
    
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
   GROSS PROFIT
 2008 Compared to 2007
  2007 Compared to 2006
  OPERATING EXPENSES
 2008 Compared to 2007
  31




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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)
     2007 Compared to 2006
    32




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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)
  ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
 Sarian Systems, Ltd.
   IPV6
    
    $
    1,300Gate Array
    
    
    400VPN technologies
    
    
    200Total in-process research and development
    
    $
    1,900
   MaxStream, Inc.
   33




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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 (CONTINUED)
 XStream Gen. 2
    
    $
    900X. Eleven
    
    
    500Mesh Firmware
    
    
    400Xbee Zigbee Firmware
    
    
    100Xplore
    
    
    100Total in-process research and development
    
    $
    2,000
  OTHER INCOME, NET
 2008 Compared to 2007
  2007 Compared to 2006
  INCOME TAXES
   34




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##### Table of Contents



ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
 INCOME TAXES (CONTINUED)
      INFLATION
  LIQUIDITY AND CAPITAL RESOURCES
  35




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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 30,2008
    
    
    2007
    
    
    2006Operating activities
    
    $
    24,070
    
    
    $
    26,379
    
    
    $
    20,436Investing activities
    
    
    (22,370
    )
    
    
    (28,715
    )
    
    
    (23,203
    )Financing activities
    
    
    (2,564
    )
    
    
    4,811
    
    
    
    5,558Effect of exchange rate changes on cash
and cash equivalents
    
    
    (3,335
    )
    
    
    226
    
    
    
    (107
    )Net (decrease) increase in cash and
cash equivalents
    
    $
    (4,199
    )
    
    $
    2,701
    
    
    $
    2,684
    36




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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
    
    $
    10,792
    
    
    $
    3,064
    
    
    $
    4,376
    
    
    $
    2,239
    
    
    $
    1,113Capital leases
    
    
    392
    
    
    
    324
    
    
    
    68
    
    
    
    
    
    
    
    Deferred payment on acquisition
    
    
    5,575
    
    
    
    
    
    
    
    5,575
    
    
    
    
    
    
    
    Unrecognized tax benefits
    
    
    3,652
    
    
    
    465
    
    
    
    1,796
    
    
    
    1,141
    
    
    
    250Total contractual cash
obligations
    
    $
    20,411
    
    
    $
    3,853
    
    
    $
    11,815
    
    
    $
    3,380
    
    
    $
    1,363
  FOREIGN CURRENCY
    37




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##### Table of Contents



ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
 RECENT ACCOUNTING DEVELOPMENTS
     38




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##### Table of Contents



ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
 RECENT ACCOUNTING DEVELOPMENTS (CONTINUED)
  CRITICAL ACCOUNTING POLICIES AND ESTIMATES
     39




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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)
       40




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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)
        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 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,
    
    2008
    
    
    2007
    
    
    2006Net sales
    
    $
    185,056
    
    
    $
    173,263
    
    
    $
    144,663Cost of sales (exclusive of amortization of purchased
and core technology shown separately below)
    
    
    83,096
    
    
    
    77,376
    
    
    
    62,322Amortization of purchased and core technology
    
    
    4,091
    
    
    
    4,541
    
    
    
    4,836Gross profit
    
    
    97,869
    
    
    
    91,346
    
    
    
    77,505Operating expenses:Sales and marketing
    
    
    36,879
    
    
    
    33,499
    
    
    
    28,591Research and development
    
    
    27,040
    
    
    
    24,176
    
    
    
    20,861General and administrative
    
    
    16,035
    
    
    
    13,343
    
    
    
    12,830Acquired in-process research & development
    
    
    1,900
    
    
    
    
    
    
    
    2,000Total operating expenses
    
    
    81,854
    
    
    
    71,018
    
    
    
    64,282Operating income
    
    
    16,015
    
    
    
    20,328
    
    
    
    13,223Other income (expense):Interest income
    
    
    3,579
    
    
    
    3,482
    
    
    
    2,426Interest expense
    
    
    (174
    )
    
    
    (86
    )
    
    
    (213
    )Impairment of marketable security
    
    
    (1,015
    )
    
    
    
    
    
    
    Other income (expense)
    
    
    510
    
    
    
    
    
    
    
    (169
    )Total other income, net
    
    
    2,900
    
    
    
    3,396
    
    
    
    2,044Income before income taxes
    
    
    18,915
    
    
    
    23,724
    
    
    
    15,267Income tax provision
    
    
    6,564
    
    
    
    3,951
    
    
    
    4,154Net income
    
    $
    12,351
    
    
    $
    19,773
    
    
    $
    11,113Net income per common share:Basic
    
    $
    0.48
    
    
    $
    0.78
    
    
    $
    0.48Diluted
    
    $
    0.47
    
    
    $
    0.76
    
    
    $
    0.46Weighted average common shares, basic
    
    
    25,659
    
    
    
    25,259
    
    
    
    23,338Weighted average common shares, diluted
    
    
    26,242
    
    
    
    26,121
    
    
    
    24,080
  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,
    
    2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    14,176
    
    
    $
    18,375Marketable securities
    
    
    59,337
    
    
    
    67,111Accounts receivable, net
    
    
    24,310
    
    
    
    21,022Inventories
    
    
    30,240
    
    
    
    26,130Deferred tax assets
    
    
    2,100
    
    
    
    2,096Other
    
    
    3,006
    
    
    
    2,865Total current assets
    
    
    133,169
    
    
    
    137,599Marketable securities
    
    
    179
    
    
    
    2,081Property, equipment and improvements, net
    
    
    16,255
    
    
    
    19,987Identifiable intangible assets, net
    
    
    34,032
    
    
    
    24,214Goodwill
    
    
    86,578
    
    
    
    66,817Deferred tax assets
    
    
    553
    
    
    
    705Other
    
    
    650
    
    
    
    423Total assets
    
    $
    271,416
    
    
    $
    251,826LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Capital lease obligations, current portion
    
    $
    267
    
    
    $
    379Accounts payable
    
    
    10,343
    
    
    
    6,554Income taxes payable
    
    
    182
    
    
    
    3,156Accrued expenses:Compensation
    
    
    5,981
    
    
    
    7,080Warranty
    
    
    1,214
    
    
    
    1,155Other
    
    
    2,593
    
    
    
    3,382Deferred revenue
    
    
    353
    
    
    
    190Total current liabilities
    
    
    20,933
    
    
    
    21,896Capital lease obligations, net of current portion
    
    
    78
    
    
    
    358Deferred tax liabilities
    
    
    7,582
    
    
    
    6,667Income taxes payable
    
    
    4,358
    
    
    
    Deferred payment on acquisition
    
    
    5,575
    
    
    
    Deferred gain on building sale  leaseback
    
    
    956
    
    
    
    Total liabilities
    
    
    39,482
    
    
    
    28,921Commitments 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;
28,335,876 and 28,153,763 shares issued
    
    
    283
    
    
    
    281Additional paid-in capital
    
    
    177,614
    
    
    
    172,156Retained earnings
    
    
    78,625
    
    
    
    66,782Accumulated other comprehensive (loss) income
    
    
    (1,897
    )
    
    
    2,121Treasury stock, at cost, 2,960,457 and 2,606,419 shares
    
    
    (22,691
    )
    
    
    (18,435
    )Total stockholders equity
    
    
    231,934
    
    
    
    222,905Total liabilities and stockholders equity
    
    $
    271,416
    
    
    $
    251,826
  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,
    
    2008
    
    
    2007
    
    
    2006Operating activities:Net income
    
    $
    12,351
    
    
    $
    19,773
    
    
    $
    11,113Adjustments to reconcile net income to net cash provided by operating
activities:Depreciation of property, equipment and improvements
    
    
    2,488
    
    
    
    2,453
    
    
    
    2,711Amortization of identifiable intangible assets and other assets
    
    
    6,830
    
    
    
    7,712
    
    
    
    7,855Bad debt provision and (product return recoveries)
    
    
    308
    
    
    
    (93
    )
    
    
    (368
    )Gain on sale of intellectual property
    
    
    
    
    
    
    
    
    
    
    (247
    )Provision for inventory obsolescence
    
    
    536
    
    
    
    369
    
    
    
    542Excess tax benefits from stock-based compensation
    
    
    (184
    )
    
    
    (621
    )
    
    
    (726
    )Impairment on marketable security
    
    
    1,015
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    3,697
    
    
    
    3,025
    
    
    
    2,289Deferred income taxes
    
    
    (1,624
    )
    
    
    (115
    )
    
    
    1,700Acquired in-process research & development
    
    
    1,900
    
    
    
    
    
    
    
    2,000(Gain) loss on sale of property and equipment
    
    
    (3
    )
    
    
    (427
    )
    
    
    82Amortization of deferred gain on building sale
    
    
    (142
    )
    
    
    
    
    
    
    Changes in operating assets and liabilities (net of acquisitions):Accounts receivable
    
    
    (1,838
    )
    
    
    (142
    )
    
    
    (818
    )Inventories
    
    
    (3,093
    )
    
    
    (4,448
    )
    
    
    (2,883
    )Other assets
    
    
    96
    
    
    
    125
    
    
    
    (195
    )Income taxes payable
    
    
    7
    
    
    
    (270
    )
    
    
    (631
    )Accounts payable
    
    
    3,322
    
    
    
    (508
    )
    
    
    (1,174
    )Accrued expenses
    
    
    (1,596
    )
    
    
    (454
    )
    
    
    (814
    )Net cash provided by operating activities
    
    $
    24,070
    
    
    $
    26,379
    
    
    $
    20,436Investing activities:Purchase of held-to-maturity marketable securities
    
    
    (69,196
    )
    
    
    (92,742
    )
    
    
    (48,881
    )Proceeds from maturities of held-to-maturity marketable securities
    
    
    77,857
    
    
    
    66,757
    
    
    
    42,858Proceeds from sale of intellectual property
    
    
    
    
    
    
    
    
    
    
    247Proceeds from sale of property and equipment
    
    
    6,954
    
    
    
    950
    
    
    
    Purchase of property, equipment, improvements and certain
other intangible assets
    
    
    (4,425
    )
    
    
    (2,899
    )
    
    
    (1,331
    )Increase in restricted cash  non-current
    
    
    (392
    )
    
    
    
    
    
    
    Contingent purchase price payments related to FS Forth-Systeme GmbH
    
    
    (1,315
    )
    
    
    (781
    )
    
    
    Acquisition of businesses, net of cash acquired
    
    
    (31,853
    )
    
    
    
    
    
    
    (16,096
    )Net cash used in investing activities
    
    
    (22,370
    )
    
    
    (28,715
    )
    
    
    (23,203
    )Financing activities:Payments on capital lease obligations
    
    
    (361
    )
    
    
    (369
    )
    
    
    (490
    )Borrowing on note payable
    
    
    25,000
    
    
    
    
    
    
    
    5,000Payment on note payable
    
    
    (25,000
    )
    
    
    
    
    
    
    (5,000
    )Purchase of treasury stock
    
    
    (5,104
    )
    
    
    
    
    
    
    Proceeds from stock option plan transactions
    
    
    1,699
    
    
    
    3,389
    
    
    
    4,558Proceeds from employee stock purchase plan transactions
    
    
    1,018
    
    
    
    1,170
    
    
    
    764Excess tax benefits from stock-based compensation
    
    
    184
    
    
    
    621
    
    
    
    726Net cash (used) provided by financing activities
    
    
    (2,564
    )
    
    
    4,811
    
    
    
    5,558Effect of exchange rates changes on cash and cash equivalents
    
    
    (3,335
    )
    
    
    226
    
    
    
    (107
    )Net (decrease) increase in cash and cash equivalents
    
    
    (4,199
    )
    
    
    2,701
    
    
    
    2,684Cash and cash equivalents, beginning of period
    
    
    18,375
    
    
    
    15,674
    
    
    
    12,990Cash and cash equivalents, end of period
    
    $
    14,176
    
    
    $
    18,375
    
    
    $
    15,674Supplemental Cash Flows Information:Interest paid
    
    $
    136
    
    
    $
    86
    
    
    $
    213Income taxes paid, net
    
    $
    8,143
    
    
    $
    4,072
    
    
    $
    2,871Other 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
    
    
    $
    800Issuance of common stock for MaxStream acquisition
    
    $
    
    
    
    $
    
    
    
    $
    20,704
  50




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##### Table of Contents



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, 2005
    
    
    25,457
    
    
    $
    255
    
    
    
    2,795
    
    
    $
    (19,766
    )
    
    $
    136,513
    
    
    $
    35,896
    
    
    $
    639
    
    
    $
    153,537Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,113
    
    
    
    
    
    
    
    11,113Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    301
    
    
    
    301Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,414Employee stock purchase
issuances
    
    
    
    
    
    
    
    
    
    
    (83
    )
    
    
    588
    
    
    
    176
    
    
    
    
    
    
    
    
    
    
    
    764Issuance of stock upon
exercise of
stock options
    
    
    615
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    4,552
    
    
    
    
    
    
    
    
    
    
    
    4,558Tax benefit realized upon
exercise
of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    564
    
    
    
    
    
    
    
    
    
    
    
    564Stock-based compensation
expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,289
    
    
    
    
    
    
    
    
    
    
    
    2,289Issuance of stock  MaxStream
acquisition
    
    
    1,677
    
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    20,688
    
    
    
    
    
    
    
    
    
    
    
    20,704Balances, 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
    )
    
    $
    231,934
  51




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##### Table of Contents



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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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 INVENTORIES
  PROPERTY, EQUIPMENT AND IMPROVEMENTS
   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,
    
    2008
    
    
    2007
    
    
    2006Numerator:Net income
    
    $
    12,351
    
    
    $
    19,773
    
    
    $
    11,113Denominator:Denominator for basic net income per common
share  weighted average shares outstanding
    
    
    25,659
    
    
    
    25,259
    
    
    
    23,328Effect of dilutive securities:Employee stock options and employee stock purchase plan
    
    
    583
    
    
    
    862
    
    
    
    742Denominator for diluted net income per common
share  adjusted weighted average shares
    
    $
    26,242
    
    
    $
    26,121
    
    
    $
    24,080Basic net income per common share
    
    $
    0.48
    
    
    $
    0.78
    
    
    $
    0.48Diluted net income per common share
    
    $
    0.47
    
    
    $
    0.76
    
    
    $
    0.46
   STOCK-BASED COMPENSATION
  56




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 FOREIGN CURRENCY TRANSLATION
  USE OF ESTIMATES AND RISKS AND UNCERTAINTIES
  COMPREHENSIVE INCOME
  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)
    58




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 2. ACQUISITIONS
 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
    IPV6
    
    $
    1,300Gate Array
    
    
    400VPN technologies
    
    
    200Total in-process research and development
    
    $
    1,900
 59




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 2. ACQUISITIONS (CONTINUED)
   
    
    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.
   Year ended September 30,2008
    
    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
  60




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 2. ACQUISITIONS (CONTINUED)
 Spectrum Design Solutions, Inc.
     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
    61




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 2. ACQUISITIONS (CONTINUED)
 MaxStream, Inc.
      Cash, including cash in escrow and direct acquisition costs
    
    $
    19,826Common stock, including stock in escrow
    
    
    20,704$
    40,530Fair value of net tangible assets acquired
    
    $
    5,090Identifiable intangible assets:Existing purchased and core technology
    
    
    6,900Existing customer relationships
    
    
    3,600Trade names and trademarks
    
    
    300Patent pending / unpatented technology
    
    
    1,300In-process research and development
    
    
    2,000Goodwill
    
    
    26,059Deferred tax liabilities related to identifiable intangibles
    
    
    (4,719
    )$
    40,530
 62




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 2. ACQUISITIONS (CONTINUED)
   XStream Gen. 2
    
    $
    900X. Eleven
    
    
    500Mesh Firmware
    
    
    400Xbee Zigbee Firmware
    
    
    100Xplore
    
    
    100Total in-process research and development
    
    $
    2,000
  
    
    The estimated revenues were based upon our estimate of revenue growth for each of the
products over the next five fiscal years, using the assumption that all revenue recorded
after that date will be generated from future technologies.
    
    The estimated gross margin was based upon historical gross margin for MaxStreams
products, with an increase over time attributable to production synergies.
    
    The estimated operating expenses were based on consideration of historical selling,
general and administrative expenses as a percentage of sales and MaxStream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 income valuation approach, 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 income valuation approach was 25%. 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 our expectations. We used a 40% rate of return for the in-process
research and development projects.
 63




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 2. ACQUISITIONS (CONTINUED)
    Year endedSeptember 30, 2006Net sales
    
    $
    155,749Net income
    
    $
    10,738Net income per common share, basic
    
    $
    0.46Net income per common share, diluted
    
    $
    0.45
  FS Forth-Systeme GmbH/Sistemas Embebidos S.A.
  64




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 3. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS
 Identifiable Intangible Assets
  As of September 30, 2008
    
    As of September 30, 2007Gross
    
    
    
    
    
    
    
    
    
    Grosscarrying
    
    Accumulated
    
    
    
    
    
    carrying
    
    Accumulatedamount
    
    amortization
    
    Net
    
    amount
    
    amortization
    
    NetPurchased and core technology
    
    $
    46,660
    
    
    $
    (30,745
    )
    
    $
    15,915
    
    
    $
    38,702
    
    
    $
    (26,689
    )
    
    $
    12,013License agreements
    
    
    2,440
    
    
    
    (2,440
    )
    
    
    
    
    
    
    2,440
    
    
    
    (2,290
    )
    
    
    150Patents and trademarks
    
    
    8,906
    
    
    
    (4,682
    )
    
    
    4,224
    
    
    
    7,925
    
    
    
    (3,818
    )
    
    
    4,107Customer maintenance contracts
    
    
    700
    
    
    
    (464
    )
    
    
    236
    
    
    
    700
    
    
    
    (394
    )
    
    
    306Customer relationships
    
    
    18,137
    
    
    
    (5,472
    )
    
    
    12,665
    
    
    
    11,613
    
    
    
    (3,975
    )
    
    
    7,638Non-compete agreements
    
    
    1,075
    
    
    
    (83
    )
    
    
    992
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    77,918
    
    
    $
    (43,886
    )
    
    $
    34,032
    
    
    $
    61,380
    
    
    $
    (37,166
    )
    
    $
    24,214
  Fiscal year
    
    Total2008
    
    $
    6,8302007
    
    $
    7,5792006
    
    $
    7,484
  Fiscal year
    
    Total2009
    
    $
    7,7002010
    
    $
    7,2532011
    
    $
    5,3622012
    
    $
    3,9522013
    
    $
    2,962
 Goodwill
  2008
    
    
    2007Beginning balance, October 1
    
    $
    66,817
    
    
    $
    65,841Acquisition of Sarian
    
    
    15,432
    
    
    
    Acquisition of Spectrum
    
    
    5,541
    
    
    
    Acquisition of MaxStream
    
    
    
    
    
    
    (374
    )Acquisition of FS Forth
    
    
    
    
    
    
    950Currency translation adjustments
    
    
    (1,212
    )
    
    
    400Ending balance, September 30
    
    $
    86,578
    
    
    $
    66,817
 65




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 4. SEGMENT INFORMATION AND MAJOR CUSTOMERS
  Year ended September 302008
    
    
    2007
    
    
    2006Non-embedded
    
    $
    98,442
    
    
    $
    98,879
    
    
    $
    86,638Embedded
    
    
    86,614
    
    
    
    74,384
    
    
    
    58,025Total net sales
    
    $
    185,056
    
    
    $
    173,263
    
    
    $
    144,663
  Year ended September 30,2008
    
    
    2007
    
    
    2006North America
    
    $
    107,336
    
    
    $
    112,021
    
    
    $
    88,770Europe, Middle East & Africa
    
    
    52,956
    
    
    
    41,384
    
    
    
    35,104Asia Pacific
    
    
    19,672
    
    
    
    15,597
    
    
    
    16,557Latin America
    
    
    5,092
    
    
    
    4,261
    
    
    
    4,232Total net sales
    
    $
    185,056
    
    
    $
    173,263
    
    
    $
    144,663
  As of September 30,2008
    
    
    2007
    
    
    2006United States
    
    $
    14,920
    
    
    $
    13,989
    
    
    $
    13,870International, primarily Europe
    
    
    1,335
    
    
    
    5,998
    
    
    
    5,618Total net property,
equipment and improvements
    
    $
    16,255
    
    
    $
    19,987
    
    
    $
    19,488
  66




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 5. SELECTED BALANCE SHEET DATA
 As of September 30, (in thousands)
    
    2008
    
    
    2007Accounts receivable, net:Accounts receivable
    
    $
    25,007
    
    
    $
    21,501Less allowance for doubtful accounts
    
    
    697
    
    
    
    479$
    24,310
    
    
    $
    21,022Inventories:Raw materials
    
    $
    20,979
    
    
    $
    20,097Work in process
    
    
    981
    
    
    
    816Finished goods
    
    
    8,280
    
    
    
    5,217$
    30,240
    
    
    $
    26,130Property, equipment and improvements, net:Land
    
    $
    1,800
    
    
    $
    2,447Buildings
    
    
    10,522
    
    
    
    21,796Improvements
    
    
    3,227
    
    
    
    3,078Equipment
    
    
    13,940
    
    
    
    12,254Purchased software
    
    
    10,680
    
    
    
    9,662Furniture and fixtures
    
    
    1,445
    
    
    
    1,66241,614
    
    
    
    50,899Less accumulated depreciation and amortization
    
    
    25,359
    
    
    
    30,912$
    16,255
    
    
    $
    19,987Other accrued expenses:Accrued professional fees
    
    $
    507
    
    
    $
    522Deferred gain on building sale  short-term
    
    
    273
    
    
    
    Contingent purchase price accrual
    
    
    
    
    
    
    950Other accrued expenses
    
    
    1,813
    
    
    
    1,910$
    2,593
    
    
    $
    3,382
  6. FINANCIAL GUARANTEES
  Balance at
    
    Warranties
    
    Settlements
    
    Balance atFiscal year
    
    October 1,
    
    issued
    
    made
    
    September 30,2008
    
    $
    1,155
    
    
    $
    979
    
    
    $
    (920
    )
    
    $
    1,2142007
    
    $
    1,104
    
    
    $
    877
    
    
    $
    (826
    )
    
    $
    1,1552006
    
    $
    1,187
    
    
    $
    454
    
    
    $
    (537
    )
    
    $
    1,104
 67




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 6. FINANCIAL GUARANTEES (CONTINUED)
  7. CAPITAL LEASE OBLIGATIONS AND SHORT-TERM BORROWINGS
    Fiscal Year2009
    
    $
    3242010
    
    
    672011
    
    
    1Total minimum payments required
    
    
    392Less interest on capital lease obligations
    
    
    (47
    )Net minimum principal payments
    
    
    345Less capital lease obligations, current portion
    
    
    (267
    )Capital leases obligations, net of current portion
    
    $
    78
 8. INCOME TAXES
  For the years ended September 30,2008
    
    
    2007
    
    
    2006United States
    
    $
    16,648
    
    
    $
    18,375
    
    
    $
    12,287International
    
    
    2,267
    
    
    
    5,349
    
    
    
    2,980$
    18,915
    
    
    $
    23,724
    
    
    $
    15,267
 68




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 8. INCOME TAXES (CONTINUED)
  For the years ended September 30,2008
    
    
    2007
    
    
    2006Current:Federal
    
    $
    6,654
    
    
    $
    2,333
    
    
    $
    2,248State
    
    
    622
    
    
    
    1,119
    
    
    
    991Foreign
    
    
    912
    
    
    
    614
    
    
    
    (785
    )Deferred:U.S.
    
    
    (1,983
    )
    
    
    (688
    )
    
    
    951Foreign
    
    
    359
    
    
    
    573
    
    
    
    749$
    6,564
    
    
    $
    3,951
    
    
    $
    4,154
  2008
    
    
    2007Current deferred tax asset
    
    $
    2,100
    
    
    $
    2,096Non-current deferred tax asset
    
    
    553
    
    
    
    705Non-current deferred tax liability
    
    
    (7,582
    )
    
    
    (6,667
    )Net deferred tax liability
    
    $
    (4,929
    )
    
    $
    (3,866
    )
 2008
    
    
    2007Uncollectible accounts and other reserves
    
    $
    1,705
    
    
    $
    1,097Depreciation and amortization
    
    
    966
    
    
    
    1,107Inventories
    
    
    126
    
    
    
    397Compensation costs
    
    
    2,142
    
    
    
    1,406Tax credit carryforwards
    
    
    363
    
    
    
    1,315Identifiable intangible assets
    
    
    (10,231
    )
    
    
    (9,188
    )Net deferred tax liability
    
    $
    (4,929
    )
    
    $
    (3,866
    )
   69




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 8. INCOME TAXES (CONTINUED)
  2008
    
    
    2007
    
    
    2006Statutory income tax rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %Increase (decrease) resulting from:State taxes, net of federal benefits
    
    
    0.2
    
    
    
    3.5
    
    
    
    4.2Utilization of tax credits
    
    
    (2.0
    )
    
    
    (4.1
    )
    
    
    (2.7
    )Manufacturing deduction
    
    
    (2.6
    )
    
    
    (1.3
    )
    
    
    (3.3
    )Foreign taxes
    
    
    (0.1
    )
    
    
    0.9
    
    
    
    Acquired in-process research and development
    
    
    2.8
    
    
    
    
    
    
    
    4.6Adjustment of tax contingency reserves
    
    
    1.4
    
    
    
    (18.2
    )
    
    
    (10.4
    )Non-deductible stock-based compensation
    
    
    0.7
    
    
    
    0.5
    
    
    
    0.8Other, net
    
    
    (0.7
    )
    
    
    0.4
    
    
    
    (1.0
    )34.7
    %
    
    
    16.7
    %
    
    
    27.2
    %
   Unrecognized tax benefits as of October 1, 2007
    
    $
    3,464Increases related to:Prior year income tax positions
    
    
    27Current year income tax positions
    
    
    471Decreases related to:Prior year income tax positions
    
    
    (32
    )Settlements
    
    
    Expiration of the statute of limitations
    
    
    (278
    )Unrecognized tax benefits as of September 30, 2008
    
    $
    3,652
     70




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 8. INCOME TAXES (CONTINUED)
       9. STOCK-BASED COMPENSATION
  71




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 9. STOCK-BASED COMPENSATION (CONTINUED)
       72




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 9. STOCK-BASED COMPENSATION (CONTINUED)
  Year ended September 30,2008
    
    
    2007
    
    
    2006Cost of sales
    
    $
    181
    
    
    $
    137
    
    
    $
    89Sales and marketing
    
    
    1,251
    
    
    
    993
    
    
    
    694Research and development
    
    
    858
    
    
    
    703
    
    
    
    530General and administrative
    
    
    1,407
    
    
    
    1,192
    
    
    
    976Stock-based compensation before income taxes
    
    
    3,697
    
    
    
    3,025
    
    
    
    2,289Income tax benefit
    
    
    (1,223
    )
    
    
    (1,000
    )
    
    
    (758
    )Stock-based compensation after income taxes
    
    $
    2,474
    
    
    $
    2,025
    
    
    $
    1,531
   WeightedOptions
    
    
    
    
    
    
    Weighted
    
    
    Average
    
    
    AggregateAvailable
    
    
    Options
    
    
    Average
    
    
    Contractual Term
    
    
    Intrinsicfor Grant
    
    
    Outstanding
    
    
    Exercise Price
    
    
    (in years)
    
    
    Value (1)Balances, September 30, 2005
    
    
    950
    
    
    
    4,511Granted
    
    
    (478
    )
    
    
    478Exercised
    
    
    
    
    
    
    (615
    )Cancelled
    
    
    125
    
    
    
    (134
    )Balances, September 30, 2006
    
    
    597
    
    
    
    4,240Additional shares approved for grant
    
    
    2,500Granted
    
    
    (653
    )
    
    
    653Exercised
    
    
    
    
    
    
    (405
    )Cancelled
    
    
    62
    
    
    
    (62
    )Balances, September 30, 2007
    
    
    2,506
    
    
    
    4,426Granted
    
    
    (720
    )
    
    
    720
    
    
    $
    13.88Exercised
    
    
    
    
    
    
    (182
    )
    
    
    9.33Cancelled
    
    
    156
    
    
    
    (156
    )
    
    
    17.07Balances, September 30, 2008
    
    
    1,942
    
    
    
    4,808
    
    
    $
    11.41
    
    
    
    5.1
    
    
    $
    4,311Exercisable at September 30, 2006
    
    
    
    
    
    
    3,300
    
    
    $
    10.08Exercisable at September 30, 2007
    
    
    
    
    
    
    3,337
    
    
    $
    10.54Exercisable at September 30, 2008
    
    
    
    
    
    
    3,651
    
    
    $
    10.74
    
    
    
    3.9
    
    
    $
    4,239
 
 (1)
    
    The aggregate intrinsic value represents the total pre-tax intrinsic value, based on our
closing stock price of $10.20 as of September 30, 2008, which would have been received by the
option holders had all option holders exercised their options as of that date. 73




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 9. STOCK-BASED COMPENSATION (CONTINUED)
  2008
    
    2007
    
    2006Fair value of options granted (in thousands)
    
    $
    3,727
    
    
    $
    3,641
    
    
    $
    2,770Weighted average per option grant date fair value
    
    $
    5.17
    
    
    $
    5.58
    
    
    $
    5.79Assumptions used for option grants:Risk free interest rate
    
    
    2.53% - 3.41
    %
    
    
    4.44% - 4.80
    %
    
    
    4.28% - 5.02
    %Expected term
    
    4 - 5 years
    
    3 - 5 years
    
    3 - 5 yearsExpected volatility
    
    
    36% - 45
    %
    
    
    38% - 52
    %
    
    
    50% - 60
    %Weighted average volatility
    
    
    40
    %
    
    
    46
    %
    
    
    55
    %Expected dividend yield
    
    
    0
    
    
    
    0
    
    
    
    0
   Weighted AverageGrant DateNumber of
    
    
    Fair Value perOptions
    
    
    Common ShareNonvested at September 30, 2007
    
    
    1,089
    
    
    $
    5.19Granted
    
    
    720
    
    
    
    5.17Vested
    
    
    (594
    )
    
    
    5.75Forfeited
    
    
    (58
    )
    
    
    5.20Nonvested at September 30, 2008
    
    
    1,157
    
    
    $
    4.89
   74




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 10. COMMON STOCK REPURCHASE
  11. SALE AND LEASEBACK OF BUILDING
   12. MARKETABLE SECURITIES
    75




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 12. MARKETABLE SECURITIES (CONTINUED)
  Amortized
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Gains
    
    
    Losses
    
    
    Market ValueCorporate bonds (1)
    
    $
    55,807
    
    
    $
    12
    
    
    $
    (2,771
    )
    
    $
    53,048Government municipal bonds
    
    
    3,709
    
    
    
    
    
    
    
    (10
    )
    
    
    3,699Total marketable securities
    
    $
    59,516
    
    
    $
    12
    
    
    $
    (2,781
    )
    
    $
    56,747
 
 (1)
    
    The Lehman Brothers security is included in amortized cost at an expected realizable value of $179,100, net of the impairment of
$1,014,900.  Amortized
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Gains
    
    
    Losses
    
    
    Market ValueCorporate bonds
    
    $
    69,192
    
    
    $
    33
    
    
    $
    (141
    )
    
    $
    69,084
   13. SHARE RIGHTS PLAN
  14. COMMITMENTS
  76




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 14. COMMITMENTS (CONTINUED)
  AmountFiscal Year
    
    (in thousands)2009
    
    $
    3,0642010
    
    
    2,5892011
    
    
    1,7872012
    
    
    1,4242013
    
    
    815Thereafter
    
    
    1,113Total minimum payments required
    
    $
    10,792
  2008
    
    
    2007
    
    
    2006Rentals
    
    $
    3,041
    
    
    $
    2,555
    
    
    $
    2,352Less: sublease rentals
    
    
    (301
    )
    
    
    (230
    )
    
    
    (127
    )$
    2,740
    
    
    $
    2,325
    
    
    $
    2,225
 15. EMPLOYEE BENEFIT PLANS
   16. CONTINGENCIES
   77




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 16. CONTINGENCIES (CONTINUED)
  In re Initial Public Offering Securities Litigation en banc
     78




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 17. QUARTERLY FINANCIAL DATA (UNAUDITED)
 Quarter ended(in thousands, except per common share data)
    
    Dec. 31
    
    Mar. 31
    
    June 30
    
    Sept. 302008Net sales
    
    $
    44,574
    
    
    $
    43,070
    
    
    $
    46,995
    
    
    $
    50,417Gross profit
    
    
    23,895
    
    
    
    23,177
    
    
    
    24,857
    
    
    
    25,940Net income (1)(2)
    
    
    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
    
    
    
    0.142007Net sales
    
    $
    41,811
    
    
    $
    42,855
    
    
    $
    43,527
    
    
    $
    45,070Gross profit
    
    
    22,013
    
    
    
    22,511
    
    
    
    23,003
    
    
    
    23,819Net income (1)
    
    
    3,802
    
    
    
    3,597
    
    
    
    6,798
    
    
    
    5,576Net income per common share  basic
    
    
    0.15
    
    
    
    0.14
    
    
    
    0.27
    
    
    
    0.22Net income per common share  diluted
    
    
    0.15
    
    
    
    0.14
    
    
    
    0.26
    
    
    
    0.21
 
 (1)
    
    During 2008 and 2007, we recorded discrete income tax benefits of $0.5 million and $4.3
million, respectively. 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. Discrete income tax benefits for fiscal 2007 were recorded of $0.5 million in the first
quarter, $2.9 million in the
third quarter and $0.9 million in the fourth quarter related to the reversal of income tax
reserves of $3.6 million
associated with the closing of a German tax audit and the statutory closing of a prior U.S.
federal and state tax year and
$0.7 million primarily due to adjustments to actual for items reported on the tax return filed
for fiscal 2006.(2)
    
    During the third quarter of fiscal 2008, we incurred a $1.9 million charge with no related
income tax benefit for in-process
research and development associated with the acquisition of Sarian. 79




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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
  80




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##### Table of Contents



PART III
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
 Executive Officers of the Registrant
  Name
    
    Age
    
    PositionJoseph T. Dunsmore
    
    
    50
    
    
    Chairman, President and Chief Executive OfficerSubramanian Krishnan
    
    
    54
    
    
    Senior Vice President, Chief Financial Officer
and TreasurerLawrence A. Kraft
    
    
    42
    
    
    Senior Vice President of Sales and MarketingJoel K. Young
    
    
    44
    
    
    Senior Vice President of Research and Development
and Chief Technical Officer
     81




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##### Table of Contents



ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
(CONTINUED)
 
 Code of Ethics
 www.digi.com www.digi.com
 
 ITEM 12.
    
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
 
 Equity Compensation Plan Information
  (c)Number ofSecurities(a)
    
    
    
    
    
    Remaining AvailableNumber of
    
    
    
    
    
    for Future IssuanceSecurities to
    
    (b)
    
    Under Equitybe Issued Upon
    
    Weighted-Average
    
    Compensation PlansExercise of
    
    Exercise Price of
    
    (ExcludingOutstanding
    
    Outstanding
    
    SecuritiesOptions, Warrants and
    
    Options, Warrants and
    
    Reflected inPlan Category
    
    Rights
    
    Rights
    
    Column (a))Equity Compensation
Plans Approved by
Security Holders
    
    
    2,826,706
    
    
    $
    11.96
    
    
    
    2,260,445
    (1)Equity Compensation
Plans Not Approved
by Security Holders
(2)
    
    
    1,117,588
    
    
    $
    9.33
    
    
    
    -0-Total (3)
    
    
    3,944,294
    
    
    $
    11.22
    
    
    
    2,260,445
 
 (1)
    
    Includes securities available for future issuance under stockholder
approved compensation plans other than upon the exercise of options,
warrants or rights, as follows: 1,813,600 shares under the Companys 2000
Omnibus Stock Plan and 446,845 shares under the Companys Employee Stock
Purchase Plan.(2)
    
    Relates to the Digi International Inc. Non-Officer Stock Option Plan only.(3)
    
    The table does not include information for equity compensation plans
assumed by the Company pursuant to the acquisition of NetSilicon, Inc. in
February 2002. Pursuant to the Agreement and Plan of Merger, the Company
assumed options to purchase 4,134,658 shares of common stock of
NetSilicon granted under three different plans, which became exercisable
for an aggregate of 2,687,528 shares of common stock of the Company.
All of the options assumed by the Company remain subject to the assumed
plans until the options are exercised or expire. As of September 30,
2008, 864,188 options remained outstanding at a weighted average exercise
price of $12.25. The Company cannot grant additional awards under these
assumed plans. 82




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##### Table of Contents



ITEM 12.
    
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS (CONTINUED)
 Equity Compensation Plan Not Approved by Stockholders  Digi International Inc. Non-Officer Stock
Option Plan
  Plan Administration
  Shares Subject to the Non-Officer Plan
  Eligibility
  Incentive and Non-Statutory Stock Options
  Transferability and Termination of Options
  83




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##### Table of Contents



ITEM 12.
    
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS (CONTINUED)
 Adjustments, Modifications, Termination
  84




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PART IV
 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
  1.
    
    Consolidated Statements of Operations for the fiscal years ended
September 30, 2008, 2007 and 2006Consolidated Balance Sheets as of September 30, 2008 and 2007Consolidated Statements of Cash Flows for the fiscal years ended
September 30, 2008, 2007 and 2006Consolidated Statements of Stockholders Equity and Comprehensive
Income for the fiscal years ended September 30, 2008, 2007 and 2006Notes 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)
 
 85




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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)
    
    Fiscal 2007 Executive Officer Compensation* (22)10(m)
    
    Agreement between the Company and Lawrence A. Kraft, dated February 4,
2003* (23)10(m)(i)
    
    Amendment to Agreement between the Company and Lawrence A. Kraft dated July
30, 2007* (24)
 
 86




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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (CONTINUED)
 ExhibitNumber
    
    Description10(n)
    
    Agreement between the Company and Joel K. Young dated July 30, 2007* (25)10(o)
    
    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)*10(p)
    
    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
 
 *
    
    Management contract or compensatory plan or arrangement required to be filed as an exhibit to this
Form 10-K. (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).(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).
 
 87




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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (CONTINUED)
 (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 Item 1.01 of the Companys Form 8-K dated September 29, 2006
(File no. 0-17972)(23)
    
    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).(24)
    
    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)(25)
    
    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)(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).
 88




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##### Table of Contents



SIGNATURES
  DIGI INTERNATIONAL INC.December 5, 2008
    By:
    /s/  Joseph T. DunsmoreJoseph T. DunsmorePresident, Chief Executive Officer, Chairman, and Director  December 5, 2008
    /s/  Joseph T. DunsmoreJoseph T. DunsmorePresident, Chief Executive Officer, Chairman, and Director
(Principal Executive Officer)December 5, 2008
    /s/ Subramanian KrishnanSubramanian KrishnanSenior Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer) GUY C. JACKSONKENNETH E. MILLARDAHMED NAWAZ
    
    A majority of the Board of Directors*WILLIAM N. PRIESMEYERBRADLEY 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 5, 2008
    /s/ Joseph T. DunsmoreJoseph T. DunsmoreAttorney-in-fact 89




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##### Table of Contents



SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS
 DIGI INTERNATIONAL INC.
(in thousands)
 ChargedBalance at
    
    (Credited) to
    
    
    
    
    
    Balance atbeginning
    
    costs and
    
    
    
    
    
    end ofDescription
    
    of period
    
    expenses
    
    Deductions
    
    periodValuation account  doubtful accountsSeptember 30, 2008
    
    $
    479
    
    
    $
    308
    
    
    $
    90
    (1)
    
    $
    697September 30, 2007
    
    $
    495
    
    
    $
    73
    
    
    $
    89
    (1)
    
    $
    479September 30, 2006
    
    $
    872
    
    
    $
    (204
    )
    
    $
    173
    (1)
    
    $
    495Reserve for future returns and pricing adjustmentsSeptember 30, 2008
    
    $
    1,442
    
    
    $
    9
    
    
    $
    82
    (2)
    
    $
    1,369September 30, 2007
    
    $
    1,807
    
    
    $
    (166
    )
    
    $
    199
    (2)
    
    $
    1,442September 30, 2006
    
    $
    1,692
    
    
    $
    (164
    )
    
    $
    (279)
    (2)
    
    $
    1,807
 
 (1)
    
    Uncollectible accounts charged against allowance, net of recoveries(2)
    
    Adjustments and recoveries 90




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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
 91




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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)
    
    Fiscal 2007 Executive Officer Compensation
    
    Incorporated by Reference10(m)
    
    Agreement between the Company and Lawrence A. Kraft,
dated February 4, 2003
    
    Incorporated by Reference10(m)(i)
    
    Amendment to Agreement between the Company and Lawrence
A. Kraft dated July 30, 2007
    
    Incorporated by Reference10(n)
    
    Agreement between the Company and Joel K. Young dated
July 30, 2007
    
    Incorporated by Reference10(o)
    
    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)
    
    Filed Electronically10(p)
    
    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 Reference15
    
    Code of Ethics
    
    Incorporated by Reference22
    
    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
 92