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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, 2007
 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: 0-17972
 DIGI INTERNATIONAL INC.
  Delaware
    
    41-1532464(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)
 11001 Bren Road East
Minnetonka, Minnesota 55343  (Address of principal executive offices) (Zip Code)
 (952) 912-3444  (Registrants telephone number, including area code)
 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
 þ
  o þ o
 o þ




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INDEX
   ITEM IN FORM 10-K
    
    PAGE/REFERENCEPART I.ITEM 1.
    
    Business
    
    4ITEM 1A.
    
    Risk Factors
    
    13ITEM 1B.
    
    Unresolved Staff Comments
    
    18ITEM 2.
    
    Properties
    
    19ITEM 3.
    
    Legal Proceedings
    
    19ITEM 4.
    
    Submission of Matters to a Vote of Security Holders
    
    20PART II.ITEM 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    21ITEM 6.
    
    Selected Financial Data
    
    23ITEM 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    24ITEM 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    39ITEM 8.
    
    Financial Statements and Supplementary Data
    
    40ITEM 9.
    
    Changes in and Disagreements with Accountants On Accounting and Financial Disclosure
    
    71ITEM 9A.
    
    Controls and Procedures
    
    71ITEM 9B.
    
    Other Information
    
    71
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ITEM IN FORM 10-K
    
    PAGE/REFERENCEPART III.ITEM 10.
    
    Directors, Executive Officers and Corporate GovernanceDirectors of the Registrant
    
    Election of Directors, Proxy StatementExecutive Officers of the Registrant
    
    72Compliance with Section 16(a) of the Exchange Act
    
    Section 16(a) Beneficial Ownership Reporting Compliance, Proxy StatementCode of Ethics
    
    73ITEM 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
    
    73ITEM 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 and Financial Statement Schedules
    
    76Subsidiaries of the CompanyConsent of Independent Registered Public Accounting FirmPowers of AttorneyCertification of Chief Executive OfficerCertification of Chief Financial OfficerSection 1350 Certification
  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
    Embedded Networking Products
 Modules 
  5




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ITEM 1. BUSINESS (CONTINUED)
 PRODUCTS (CONTINUED)
  Chips 
  Software and Development Tools 
 Single-Board Computers 
 Network Interface Cards 
 Non-Embedded Products
 Cellular Routers 
 Gateways 
 6




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ITEM 1. BUSINESS (CONTINUED)
 PRODUCTS (CONTINUED)
 Wireless Communications Adapters 
 Console Servers 
 Serial Servers 
 USB Connected Products 
 Remote Display Products 
 Cameras and Sensors 
 Serial Cards 
 7




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ITEM 1. BUSINESS (CONTINUED)
 PRODUCTS (CONTINUED)
 Network Management Software
 DROP-IN NETWORKING INITIATIVE
   APPLICATION MARKETS
  Industrial Automation
 Retail/Point-of-Sale (POS)
 Building Automation/Security
 Medical/Healthcare
 8




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ITEM 1. BUSINESS (CONTINUED)
 APPLICATION MARKETS (CONTINUED)
 Utilities
 Data Center Management
 Office Networking
 Traffic Management
 ACQUISITIONS
  
    
    In February 2002, we acquired NetSilicon®, Inc. (NetSilicon), a developer and marketer
of network attached processors and device connectivity software. NetSilicons advanced
microprocessors and software allow customers to build intelligent, network-enabled
solutions for manufacturers, mostly original equipment manufacturers (OEMs). The NetSilicon
acquisition added chips, NICs, and software and development tools to our embedded product
offering. The NetSilicon chips also formed the foundation for many of our embedded modules
and next generation of non-embedded box products.
    
    In April 2005, we acquired FS Forth-Systeme GmbH/Sistemas Embebidos S.A. (FS Forth),
leading providers of embedded modules based on our processors and NET+OS software, as well
as other microprocessors with supporting embedded software. The acquisition enhanced our
embedded module portfolio and also added expertise in a wide range of popular operating
systems including Linux and Microsoft Windows CE. Effective October 1, 2006, FS Forth
merged into Digi International GmbH.
    
    In May 2005, we acquired Rabbit Semiconductor® Inc. (formerly Z-World, Inc.). The
acquisition expanded our embedded portfolio to include the Rabbit line of microprocessors
and microprocessor-based core modules and Z-World single-board computers (now all sold
under the Rabbit brand). With bundled hardware and software, these products facilitate
quick time-to-market for device manufacturers who need to add network connectivity to
endpoint devices such as sensors, meters, vending machines, card readers, and scales.
 9




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ITEM 1. BUSINESS (CONTINUED)
 ACQUISITIONS (CONTINUED)
 
    
    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.
   DISTRIBUTION AND PARTNERSHIPS
      10




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ITEM 1. BUSINESS (CONTINUED)
 COMPETITIVE CONDITIONS
   OPERATIONS
   SEASONALITY
  RESEARCH AND DEVELOPMENT
  BACKLOG
  11




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ITEM 1. BUSINESS (CONTINUED)
 EMPLOYEES
  GEOGRAPHIC AREAS
  DIGI INTERNATIONAL WEBSITE
 www.digi.com www.sec.gov
  12




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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 make 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.
   13




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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.
  The cyclicality of the semiconductor industry may result in substantial period-to-period
fluctuations in operating results.
  14




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ITEM 1A. RISK FACTORS (CONTINUED)
 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.
  Our ability to compete could be jeopardized if we are unable to protect our intellectual property
rights.
  15




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ITEM 1A. RISK FACTORS (CONTINUED)
  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.
  The loss of key personnel could prevent us from executing our business strategy.
  16




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ITEM 1A. RISK FACTORS (CONTINUED)
 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.
  17




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ITEM 1A. RISK FACTORS (CONTINUED)
 Risks Related to Our Common Stock
 The price of our common stock has been volatile and could continue to fluctuate in the future.
  Certain provisions of the Delaware General Corporation Law and our charter documents have an
anti-takeover effect.
  We have not paid cash dividends on our common stock and do not expect to do so.
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS
  18




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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
    
    
    OwnedWaltham, MA
    
    Research & development,
sales and sales support
    
    
    13,424
    
    
    September 2010Austin, TX
    
    Sales, sales support,
marketing,
and administration
    
    
    6,563
    
    
    February 2009Davis, CA
    
    Sales, sales support,
manufacturing and
warehousing
    
    
    24,000
    
    
    December 2012Davis, CA
    
    Marketing, research &
development, and
administration
    
    
    11,200
    
    
    September 2008Lindon, UT
    
    Sales, marketing, research &
development,
and administration
    
    
    10,686
    
    
    December 2007Hong Kong, China
    
    Sales, marketing, and
administration
    
    
    4,061
    
    
    July 2010Beijing, China
    
    Sales, marketing, and
administration
    
    
    2,372
    
    
    December 2007Shanghai, China
    
    Sales, marketing, and
administration
    
    
    1,251
    
    
    June 2008Dortmund, Germany
    
    Sales, sales support,
marketing, and
administration
    
    
    65,348
    
    
    OwnedBreisach, Germany
    
    Sales, marketing, research &
development, manufacturing,
warehousing and
administration
    
    
    8,748
    
    
    December 2008Logrono, Spain
    
    Sales, research &
development, and
administration
    
    
    3,228
    
    
    January 2017Tokyo, Japan
    
    Sales
    
    
    1,371
    
    
    November 2007
  
 ITEM 3. LEGAL PROCEEDINGS
  19




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ITEM 3. LEGAL PROCEEDINGS (CONTINUED)
  In re Initial Public Offering Securities Litigation en banc
    
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  20




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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
 2007
    
    First
    
    Second
    
    Third
    
    FourthHigh
    
    $
    14.50
    
    
    $
    13.93
    
    
    $
    15.67
    
    
    $
    16.71Low
    
    $
    12.99
    
    
    $
    11.39
    
    
    $
    12.02
    
    
    $
    13.12
 2006
    
    First
    
    Second
    
    Third
    
    FourthHigh
    
    $
    13.41
    
    
    $
    11.81
    
    
    $
    13.94
    
    
    $
    14.35Low
    
    $
    9.63
    
    
    $
    10.18
    
    
    $
    10.91
    
    
    $
    10.11
 Dividend Policy
   Issuer Repurchases of Equity Securities
  21




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ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES (CONTINUED)
 Performance Evaluation
  
 FY02
    
    FY03
    
    FY04
    
    FY05
    
    FY06
    
    FY07Digi International Inc.
    
    
    100.00
    
    
    
    338.91
    
    
    
    585.25
    
    
    
    549.41
    
    
    
    691.24
    
    
    
    729.13CRSP Index
    
    
    100.00
    
    
    
    152.35
    
    
    
    161.85
    
    
    
    184.73
    
    
    
    194.81
    
    
    
    230.57Peer Index
    
    
    100.00
    
    
    
    167.28
    
    
    
    167.83
    
    
    
    204.89
    
    
    
    228.57
    
    
    
    267.98
 22




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ITEM 6. SELECTED FINANCIAL DATA
  For the fiscal years ended September 30
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003Net sales
    
    $
    173,263
    
    
    $
    144,663
    
    
    $
    125,198
    
    
    $
    111,226
    
    
    $
    102,926Gross profit
    
    $
    91,346
    
    
    $
    77,505
    
    
    $
    71,491
    
    
    $
    63,469
    
    
    $
    55,766Sales and marketing
    
    
    33,499
    
    
    
    28,591
    
    
    
    26,339
    
    
    
    25,556
    
    
    
    24,734Research and development
    
    
    24,176
    
    
    
    20,861
    
    
    
    16,531
    
    
    
    17,159
    
    
    
    15,968General and administrative
    
    
    13,343
    
    
    
    12,830
    
    
    
    11,364
    
    
    
    8,973
    
    
    
    9,944Restructuring
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (600
    )Acquired in-process research and development
    
    
    
    
    
    
    2,000
    
    
    
    300
    
    
    
    
    
    
    
    Gain from forgiveness of grant payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (553
    )Operating income (1)
    
    
    20,328
    
    
    
    13,223
    
    
    
    16,957
    
    
    
    11,781
    
    
    
    6,273Total other income, net
    
    
    3,396
    
    
    
    2,044
    
    
    
    1,026
    
    
    
    369
    
    
    
    296Income before income taxes and cumulative effect
of accounting change
    
    
    23,724
    
    
    
    15,267
    
    
    
    17,983
    
    
    
    12,150
    
    
    
    6,569Income tax provision (benefit) (2)
    
    
    3,951
    
    
    
    4,154
    
    
    
    318
    
    
    
    3,487
    
    
    
    (23
    )Income before cumulative effect of accounting change
    
    
    19,773
    
    
    
    11,113
    
    
    
    17,665
    
    
    
    8,663
    
    
    
    6,592Cumulative effect of accounting change (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (43,866
    )Net income (loss)
    
    $
    19,773
    
    
    $
    11,113
    
    
    $
    17,665
    
    
    $
    8,663
    
    
    $
    (37,274
    )Net income (loss) per common share, basic:Income before cumulative effect of accounting change
    
    $
    0.78
    
    
    $
    0.48
    
    
    $
    0.79
    
    
    $
    0.41
    
    
    $
    0.31Cumulative effect of accounting change (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2.08
    )Net income (loss) per common share
    
    $
    0.78
    
    
    $
    0.48
    
    
    $
    0.79
    
    
    $
    0.41
    
    
    $
    (1.77
    )Net income (loss) per common share, diluted
Income before cumulative effect of accounting change
    
    $
    0.76
    
    
    $
    0.46
    
    
    $
    0.76
    
    
    $
    0.39
    
    
    $
    0.31Cumulative effect of accounting change (3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2.07
    )Net income (loss) per common share
    
    $
    0.76
    
    
    $
    0.46
    
    
    $
    0.76
    
    
    $
    0.39
    
    
    $
    (1.76
    )Balance sheet data as of September 30:Working capital (total current assets less
total current liabilities)
    
    $
    115,703
    
    
    $
    83,341
    
    
    $
    69,995
    
    
    $
    82,090
    
    
    $
    57,793Total assets
    
    $
    251,826
    
    
    $
    225,321
    
    
    $
    177,631
    
    
    $
    150,465
    
    
    $
    132,540Long-term debt and capital lease obligations
    
    $
    358
    
    
    $
    725
    
    
    $
    1,181
    
    
    $
    
    
    
    $
    Stockholders equity
    
    $
    222,905
    
    
    $
    193,830
    
    
    $
    153,537
    
    
    $
    127,079
    
    
    $
    105,863Book value per common share (stockholders equity
divided by outstanding shares)
    
    $
    8.73
    
    
    $
    7.74
    
    
    $
    6.78
    
    
    $
    5.83
    
    
    $
    5.23Number of employees as of September 30
    
    
    564
    
    
    
    549
    
    
    
    481
    
    
    
    341
    
    
    
    358
 
 (1)
    
    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 $3.0 million
($2.0 million after tax) or $.08 per diluted share during fiscal year 2007, and $2.3 million
($1.5 million after tax) or $.06 per diluted
share during fiscal year 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.(2)
    
    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 a settlement of tax audits with the French
government in 2006 and the Internal
Revenue Service in 2005. In 2003, we reversed a valuation allowance, resulting in an income
tax benefit of $1.4 million, based on
anticipated future taxable income generated by our German operations.(3)
    
    We adopted the provisions of FAS 142 as of October 1, 2002 at which time we determined that
there was a total goodwill impairment or
$43.9 million. The charge was attributable primarily to an impairment of the carrying value of
goodwill related to the acquisition of
Net Silicon of $38.4 million and goodwill related to the Central Data Corporation and INXTECH
acquisitions of $3.5 million and
$2.0 million, respectively. 23




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ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 OVERVIEW
     24




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ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
 CONSOLIDATED RESULTS OF OPERATIONS
  % Increase (decrease)2007
    
    
    2006Year ended September 30,
    
    
    Compared
    
    
    Compared($ in thousands)
    
    2007
    
    
    2006
    
    
    2005
    
    
    to 2006
    
    
    to 2005Net sales
    
    $
    173,263
    
    
    
    100.0
    %
    
    $
    144,663
    
    
    
    100.0
    %
    
    $
    125,198
    
    
    
    100.0
    %
    
    
    19.8
    %
    
    
    15.5
    %Cost of sales (exclusive of amortization of purchased
and core technology shown separately below) (1)
    
    
    77,376
    
    
    
    44.7
    
    
    
    62,322
    
    
    
    43.1
    
    
    
    49,516
    
    
    
    39.6
    
    
    
    24.2
    
    
    
    25.9Amortization of purchased and core technology
    
    
    4,541
    
    
    
    2.6
    
    
    
    4,836
    
    
    
    3.3
    
    
    
    4,191
    
    
    
    3.3
    
    
    
    (6.1
    )
    
    
    15.4Gross profit
    
    
    91,346
    
    
    
    52.7
    
    
    
    77,505
    
    
    
    53.6
    
    
    
    71,491
    
    
    
    57.1
    
    
    
    17.9
    
    
    
    8.4Operating expenses:Sales and marketing (1)
    
    
    33,499
    
    
    
    19.3
    
    
    
    28,591
    
    
    
    19.8
    
    
    
    26,339
    
    
    
    21.1
    
    
    
    17.2
    
    
    
    8.6Research and development (1)
    
    
    24,176
    
    
    
    14.0
    
    
    
    20,861
    
    
    
    14.4
    
    
    
    16,531
    
    
    
    13.2
    
    
    
    15.9
    
    
    
    26.2General and administrative (1)
    
    
    13,343
    
    
    
    7.7
    
    
    
    12,830
    
    
    
    8.9
    
    
    
    11,364
    
    
    
    9.1
    
    
    
    4.0
    
    
    
    12.9In-process research and development
    
    
    
    
    
    
    
    
    
    
    2,000
    
    
    
    1.4
    
    
    
    300
    
    
    
    0.2
    
    
    
    N/M
    
    
    
    N/MTotal operating expenses
    
    
    71,018
    
    
    
    41.0
    
    
    
    64,282
    
    
    
    44.5
    
    
    
    54,534
    
    
    
    43.6
    
    
    
    10.5
    
    
    
    17.9Operating income
    
    
    20,328
    
    
    
    11.7
    
    
    
    13,223
    
    
    
    9.1
    
    
    
    16,957
    
    
    
    13.5
    
    
    
    53.7
    
    
    
    (22.0
    )Total other income, net
    
    
    3,396
    
    
    
    2.0
    
    
    
    2,044
    
    
    
    1.4
    
    
    
    1,026
    
    
    
    0.9
    
    
    
    66.1
    
    
    
    99.2Income before income taxes
    
    
    23,724
    
    
    
    13.7
    
    
    
    15,267
    
    
    
    10.5
    
    
    
    17,983
    
    
    
    14.4
    
    
    
    55.4
    
    
    
    (15.1
    )Income tax provision
    
    
    3,951
    
    
    
    2.3
    
    
    
    4,154
    
    
    
    2.8
    
    
    
    318
    
    
    
    0.3
    
    
    
    (4.9
    )
    
    
    N/MNet income
    
    $
    19,773
    
    
    
    11.4
    %
    
    $
    11,113
    
    
    
    7.7
    %
    
    $
    17,665
    
    
    
    14.1
    %
    
    
    77.9
    %
    
    
    (37.1)
    %
 
  (1)
    
    As a result of adopting FAS No. 123R as of October 1, 2005 on a modified prospective basis,
stock-based compensation expense (pre-tax)
is included in the consolidated results of operations for the years ended September 30, 2007
and 2006 as follows (in thousands): Year ended September 30,2007
    
    
    2006Cost of sales
    
    $
    137
    
    
    $
    89Sales and marketing
    
    
    993
    
    
    
    694Research and development
    
    
    703
    
    
    
    530General and administrative
    
    
    1,192
    
    
    
    976Total
    
    $
    3,025
    
    
    $
    2,289
 NET SALES
   25




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##### Table of Contents



ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
 NET SALES (CONTINUED)
  Net Sales by Products
  Net Sales
    
    
    % of Net Sales($ in millions)
    
    2007
    
    
    2006
    
    
    2005
    
    
    2007
    
    
    2006
    
    
    2005Non-embedded
    
    $
    98.9
    
    
    $
    86.7
    
    
    $
    87.5
    
    
    
    57.1
    %
    
    
    59.9
    %
    
    
    69.9
    %Embedded
    
    
    74.4
    
    
    
    58.0
    
    
    
    37.7
    
    
    
    42.9
    %
    
    
    40.1
    %
    
    
    30.1
    %Total
    
    $
    173.3
    
    
    $
    144.7
    
    
    $
    125.2
    
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Non-Embedded
   Embedded
   Net Sales by Distribution Channels
  Net Sales
    
    
    % of Net Sales($ in millions)
    
    2007
    
    
    2006
    
    
    2005
    
    
    2007
    
    
    2006
    
    
    2005Direct / OEM Channel
    
    $
    88.6
    
    
    $
    70.3
    
    
    $
    62.7
    
    
    
    51.1
    %
    
    
    48.6
    %
    
    
    50.1
    %Distribution Channel
    
    
    84.7
    
    
    
    74.4
    
    
    
    62.5
    
    
    
    48.9
    %
    
    
    51.4
    %
    
    
    49.9
    %Total Company
    
    $
    173.3
    
    
    $
    144.7
    
    
    $
    125.2
    
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 26




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##### Table of Contents



ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
 NET SALES (CONTINUED)
   Net Sales by Geographic Area
  Net Sales
    
    
    % of Net Sales($ in millions)
    
    2007
    
    
    2006
    
    
    2005
    
    
    2007
    
    
    2006
    
    
    2005International
    
    $
    61.3
    
    
    $
    55.9
    
    
    $
    53.2
    
    
    
    35.3
    %
    
    
    38.6
    %
    
    
    42.5
    %United States
    
    
    112.0
    
    
    
    88.8
    
    
    
    72.0
    
    
    
    64.7
    %
    
    
    61.4
    %
    
    
    57.5
    %Total Company
    
    $
    173.3
    
    
    $
    144.7
    
    
    $
    125.2
    
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
  GROSS PROFIT
 2007 Compared to 2006
  2006 Compared to 2005
  OPERATING EXPENSES
 2007 Compared to 2006
  27




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ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
 OPERATING EXPENSES (CONTINUED)
      2006 Compared to 2005
   28




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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
 MaxStream, Inc.
   XStream Gen. 2
    
    $
    900X. Eleven
    
    
    500Mesh Firmware
    
    
    400Xbee Zigbee Firmware
    
    
    100Xplore
    
    
    100Total in-process research and development
    
    $
    2,000
  29




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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)
 Rabbit Semiconductor Inc.
    OTHER INCOME, NET
   INCOME TAXES
  30




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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
  31




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ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
 LIQUIDITY AND CAPITAL RESOURCES
  Consolidated Statement of Cash Flow Highlights (in thousands)
 Year ended September 30,2007
    
    
    2006
    
    
    2005Operating activities
    
    $
    26,379
    
    
    $
    20,436
    
    
    $
    18,056Investing activities
    
    
    (28,715
    )
    
    
    (23,203
    )
    
    
    (30,067
    )Financing activities
    
    
    4,811
    
    
    
    5,558
    
    
    
    4,895Effect of exchange rate changes on cash
and cash equivalents
    
    
    226
    
    
    
    (107
    )
    
    
    578Net increase in cash and cash equivalents
    
    $
    2,701
    
    
    $
    2,684
    
    
    $
    (6,538
    )
    32




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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
    
    $
    6,453
    
    
    $
    2,076
    
    
    $
    2,602
    
    
    $
    1,240
    
    
    $
    535Capital leases
    
    
    850
    
    
    
    456
    
    
    
    394
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    7,303
    
    
    $
    2,532
    
    
    $
    2,996
    
    
    $
    1,240
    
    
    $
    535
  FOREIGN CURRENCY
   33




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ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
 RECENT ACCOUNTING DEVELOPMENTS
     CRITICAL ACCOUNTING POLICIES AND ESTIMATES
  34




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ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
 CRITICAL ACCOUNTING POLICIES AND ESTIMATES (CONTINUED)
       35




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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)
        36




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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)
       37




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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)
     38




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##### Table of Contents



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
        39




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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.
    40




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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (CONTINUED)
  
 41




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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,
    
    2007
    
    
    2006
    
    
    2005Net sales
    
    $
    173,263
    
    
    $
    144,663
    
    
    $
    125,198Cost of sales (exclusive of amortization of purchased
and core technology shown separately below)
    
    
    77,376
    
    
    
    62,322
    
    
    
    49,516Amortization of purchased and core technology
    
    
    4,541
    
    
    
    4,836
    
    
    
    4,191Gross profit
    
    
    91,346
    
    
    
    77,505
    
    
    
    71,491Operating expenses:Sales and marketing
    
    
    33,499
    
    
    
    28,591
    
    
    
    26,339Research and development
    
    
    24,176
    
    
    
    20,861
    
    
    
    16,531General and administrative
    
    
    13,343
    
    
    
    12,830
    
    
    
    11,364Acquired in-process research & development
    
    
    
    
    
    
    2,000
    
    
    
    300Total operating expenses
    
    
    71,018
    
    
    
    64,282
    
    
    
    54,534Operating income
    
    
    20,328
    
    
    
    13,223
    
    
    
    16,957Other income (expense):Interest income
    
    
    3,482
    
    
    
    2,426
    
    
    
    1,581Interest expense
    
    
    (86
    )
    
    
    (213
    )
    
    
    (104
    )Other expense
    
    
    
    
    
    
    (169
    )
    
    
    (451
    )Total other income, net
    
    
    3,396
    
    
    
    2,044
    
    
    
    1,026Income before income taxes
    
    
    23,724
    
    
    
    15,267
    
    
    
    17,983Income tax provision
    
    
    3,951
    
    
    
    4,154
    
    
    
    318Net income
    
    $
    19,773
    
    
    $
    11,113
    
    
    $
    17,665Net income per common share:Basic
    
    $
    0.78
    
    
    $
    0.48
    
    
    $
    0.79Diluted
    
    $
    0.76
    
    
    $
    0.46
    
    
    $
    0.76Weighted average common shares, basic
    
    
    25,259
    
    
    
    23,338
    
    
    
    22,450Weighted average common shares, diluted
    
    
    26,121
    
    
    
    24,080
    
    
    
    23,371
  42




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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,
    
    2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    18,375
    
    
    $
    15,674Marketable securities
    
    
    67,111
    
    
    
    43,207Accounts receivable, net
    
    
    21,022
    
    
    
    20,305Inventories
    
    
    26,130
    
    
    
    21,911Net deferred tax assets
    
    
    2,096
    
    
    
    2,667Other
    
    
    2,865
    
    
    
    2,861Total current assets
    
    
    137,599
    
    
    
    106,625Marketable securities, long-term
    
    
    2,081
    
    
    
    Property, equipment and improvements, net
    
    
    19,987
    
    
    
    19,488Identifiable intangible assets, net
    
    
    24,214
    
    
    
    31,341Goodwill
    
    
    66,817
    
    
    
    65,841Net deferred tax assets
    
    
    705
    
    
    
    1,366Other
    
    
    423
    
    
    
    660Total assets
    
    $
    251,826
    
    
    $
    225,321LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Capital lease obligations, current portion
    
    $
    379
    
    
    $
    381Accounts payable
    
    
    6,554
    
    
    
    6,748Income taxes payable
    
    
    3,156
    
    
    
    4,712Accrued expenses:Compensation
    
    
    7,080
    
    
    
    5,851Other
    
    
    4,537
    
    
    
    5,318Deferred revenue
    
    
    190
    
    
    
    274Total current liabilities
    
    
    21,896
    
    
    
    23,284Capital lease obligations, net of current portion
    
    
    358
    
    
    
    725Net deferred tax liabilities
    
    
    6,667
    
    
    
    7,482Total liabilities
    
    
    28,921
    
    
    
    31,491Commitments 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;
28,153,763 and 27,748,640 shares issued
    
    
    281
    
    
    
    277Additional paid-in capital
    
    
    172,156
    
    
    
    164,782Retained earnings
    
    
    66,782
    
    
    
    47,009Accumulated other comprehensive income
    
    
    2,121
    
    
    
    940Treasury stock, at cost, 2,606,419 and 2,711,496 shares
    
    
    (18,435
    )
    
    
    (19,178
    )Total stockholders equity
    
    
    222,905
    
    
    
    193,830Total liabilities and stockholders equity
    
    $
    251,826
    
    
    $
    225,321
  43




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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,
    
    2007
    
    
    2006
    
    
    2005Operating activities:Net income
    
    $
    19,773
    
    
    $
    11,113
    
    
    $
    17,665Adjustments to reconcile net income to net cash provided by operating activities:Depreciation of property, equipment and improvements
    
    
    2,453
    
    
    
    2,711
    
    
    
    2,295Amortization of identifiable intangible assets and other assets
    
    
    7,712
    
    
    
    7,855
    
    
    
    6,575Bad debt and product return recoveries
    
    
    (93
    )
    
    
    (368
    )
    
    
    (820
    )Gain on sale of intellectual property
    
    
    
    
    
    
    (247
    )
    
    
    Provision for inventory obsolescence
    
    
    369
    
    
    
    542
    
    
    
    76Excess tax benefits from stock-based compensation
    
    
    (621
    )
    
    
    (726
    )
    
    
    Tax benefit related to the exercise of stock options
    
    
    
    
    
    
    
    
    
    
    2,113Stock-based compensation
    
    
    3,025
    
    
    
    2,289
    
    
    
    53Deferred income taxes
    
    
    (115
    )
    
    
    1,700
    
    
    
    1,052Acquired in-process research & development
    
    
    
    
    
    
    2,000
    
    
    
    300(Gain) loss on sale of property and equipment
    
    
    (427
    )
    
    
    82
    
    
    
    1Changes in operating assets and liabilities (net of acquisitions):Accounts receivable
    
    
    (142
    )
    
    
    (818
    )
    
    
    (2,730
    )Inventories
    
    
    (4,448
    )
    
    
    (2,883
    )
    
    
    (602
    )Other assets
    
    
    125
    
    
    
    (195
    )
    
    
    (736
    )Income taxes payable
    
    
    (270
    )
    
    
    (631
    )
    
    
    (7,039
    )Accounts payable
    
    
    (508
    )
    
    
    (1,174
    )
    
    
    863Accrued expenses
    
    
    (454
    )
    
    
    (814
    )
    
    
    (1,010
    )Total adjustments
    
    
    6,606
    
    
    
    9,323
    
    
    
    391Net cash provided by operating activities
    
    
    26,379
    
    
    
    20,436
    
    
    
    18,056Investing activities:Purchase of held-to-maturity marketable securities
    
    
    (92,742
    )
    
    
    (48,881
    )
    
    
    (48,943
    )Proceeds from maturities of held-to-maturity marketable securities
    
    
    66,757
    
    
    
    42,858
    
    
    
    73,898Proceeds from sale of intellectual property
    
    
    
    
    
    
    247
    
    
    
    Proceeds from sale of property and equipment
    
    
    950
    
    
    
    
    
    
    
    Purchase of property, equipment, improvements and certain
other intangible assets
    
    
    (2,899
    )
    
    
    (1,331
    )
    
    
    (1,329
    )Contingent purchase price payments related to business acquisitions
    
    
    (781
    )
    
    
    
    
    
    
    Acquisition of MaxStream, Inc., net of cash acquired
    
    
    
    
    
    
    (16,096
    )
    
    
    Acquisition of Rabbit Semiconductor, Inc., net of cash acquired
    
    
    
    
    
    
    
    
    
    
    (48,934
    )Acquisition of FS Forth-Systeme GmbH and Sistemas Embebidos S.A.,
net of cash acquired
    
    
    
    
    
    
    
    
    
    
    (4,759
    )Net cash used in investing activities
    
    
    (28,715
    )
    
    
    (23,203
    )
    
    
    (30,067
    )Financing activities:Payments on short-term borrowing and line of credit
    
    
    
    
    
    
    
    
    
    
    (1,274
    )Payments on capital lease obligations
    
    
    (369
    )
    
    
    (490
    )
    
    
    (152
    )Borrowing on note payable
    
    
    
    
    
    
    5,000
    
    
    
    21,000Payment on note payable
    
    
    
    
    
    
    (5,000
    )
    
    
    (21,000
    )Proceeds from stock option plan transactions
    
    
    3,389
    
    
    
    4,558
    
    
    
    5,600Proceeds from employee stock purchase plan transactions
    
    
    1,170
    
    
    
    764
    
    
    
    721Excess tax benefits from stock-based compensation
    
    
    621
    
    
    
    726
    
    
    
    Net cash provided by financing activities
    
    
    4,811
    
    
    
    5,558
    
    
    
    4,895Effect of exchange rates changes on cash and cash equivalents
    
    
    226
    
    
    
    (107
    )
    
    
    578Net increase (decrease) in cash and cash equivalents
    
    
    2,701
    
    
    
    2,684
    
    
    
    (6,538
    )Cash and cash equivalents, beginning of period
    
    
    15,674
    
    
    
    12,990
    
    
    
    19,528Cash and cash equivalents, end of period
    
    $
    18,375
    
    
    $
    15,674
    
    
    $
    12,990Supplemental Cash Flows Information:Interest paid
    
    $
    86
    
    
    $
    213
    
    
    $
    104Income taxes paid
    
    $
    6,468
    
    
    $
    3,384
    
    
    $
    4,314Income taxes refunded
    
    $
    (2,396
    )
    
    $
    (513
    )
    
    $
    (2
    )Other non-cash financing and investing items:Assumption of line of credit related to acquisition
    
    $
    
    
    
    $
    
    
    
    $
    1,275Assumption of capital leases related to acquisition
    
    $
    
    
    
    $
    
    
    
    $
    1,747Accrual for FS Forth-Systeme GmbH contingent purchase price payment
    
    $
    950
    
    
    $
    800
    
    
    $
    Issuance of common stock for MaxStream acquisition
    
    $
    
    
    
    $
    20,704
    
    
    $
    
  44




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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)
 DIGI INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
  AccumulatedAdditional
    
    
    
    
    
    Other
    
    TotalCommon Stock
    
    Treasury Stock
    
    Paid-In
    
    Retained
    
    Comprehensive
    
    StockholdersShares
    
    Par Value
    
    Shares
    
    Value
    
    Capital
    
    Earnings
    
    Income
    
    EquityBalances, September 30, 2004
    
    
    24,678
    
    
    $
    247
    
    
    
    2,866
    
    
    $
    (20,270
    )
    
    $
    128,538
    
    
    $
    18,231
    
    
    $
    333
    
    
    
    $127,079Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,665
    
    
    
    
    
    
    
    17,665Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    306
    
    
    
    306Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,971Employee stock purchase issuances
    
    
    
    
    
    
    
    
    
    
    (71
    )
    
    
    504
    
    
    
    217
    
    
    
    
    
    
    
    
    
    
    
    721Issuance of stock upon exercise of
stock options
    
    
    779
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    5,592
    
    
    
    
    
    
    
    
    
    
    
    5,600Tax benefit realized upon exercise
of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,113
    
    
    
    
    
    
    
    
    
    
    
    2,113Stock options issued to
non-employees
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53
    
    
    
    
    
    
    
    
    
    
    
    53Balances, 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
    
    
    
    $222,905
  45




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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 AND MARKETABLE SECURITIES
  ALLOWANCE FOR DOUBTFUL ACCOUNTS
  FAIR VALUE OF FINANCIAL INSTRUMENTS
  INVENTORIES
  46




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 PROPERTY, EQUIPMENT AND IMPROVEMENTS
   IDENTIFIABLE INTANGIBLE ASSETS
   GOODWILL
  STOCK REPURCHASES
  47




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 REVENUE RECOGNITION
    RESEARCH AND DEVELOPMENT
  48




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 INCOME TAXES
  NET INCOME PER COMMON SHARE
   Years ended September 30,
    
    2007
    
    
    2006
    
    
    2005Numerator:Net income
    
    $
    19,773
    
    
    $
    11,113
    
    
    $
    17,665Denominator:Denominator for basic net income per common
share - weighted average shares outstanding
    
    
    25,259
    
    
    
    23,328
    
    
    
    22,450Effect of dilutive securities:Employee stock options and employee stock purchase plan
    
    
    862
    
    
    
    742
    
    
    
    921Denominator for diluted net income per common
share - adjusted weighted average shares
    
    
    26,121
    
    
    
    24,080
    
    
    
    23,371Basic net income per common share
    
    $
    0.78
    
    
    $
    0.48
    
    
    $
    0.79Diluted net income per common share
    
    $
    0.76
    
    
    $
    0.46
    
    
    $
    0.76
   49




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 STOCK-BASED COMPENSATION
   Year endedSeptember 30,2005Net income as reported
    
    $
    17,665Add: Total stock-based compensation
expense included in reported net income,
net of related tax effects
    
    
    35Deduct: Total stock-based compensation
expense determined under fair value
based method for all awards, net of
related tax effects
    
    
    (1,363
    )Pro forma net income
    
    $
    16,337Net income per common share:Basic  as reported
    
    $
    0.79Basic  pro forma
    
    $
    0.73Diluted  as reported
    
    $
    0.76Diluted  pro forma
    
    $
    0.70
 FOREIGN CURRENCY TRANSLATION
  50




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 USE OF ESTIMATES AND RISKS AND UNCERTAINTIES
  COMPREHENSIVE INCOME
  RECENT ACCOUNTING DEVELOPMENTS
     51




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 RECENT ACCOUNTING DEVELOPMENTS (CONTINUED)
  2. ACQUISITIONS
 MaxStream, Inc.
     52




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 2. ACQUISITIONS (CONTINUED)
  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
   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.
 53




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 2. ACQUISITIONS (CONTINUED)
 
    
    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.
  Rabbit Semiconductor Inc.
     Cash, including direct acquisition costs
    
    $
    49,287Fair value of net tangible assets acquired
    
    $
    8,766Identifiable intangible assets:Purchased and core technology
    
    
    8,700Customer relationships
    
    
    4,400Patents and trademarks
    
    
    2,600In-process research and development
    
    
    300Goodwill
    
    
    30,644Deferred tax liabilities related to identifiable
intangibles
    
    
    (6,123
    )$
    49,287
 54




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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 over the next six
fiscal years, or the estimated life cycle of the Rabbit 4000 microprocessor, 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 Rabbits products,
with an increase over time attributable to production synergies.
    
    The estimated selling, general and administrative expenses were based on consideration
of historical operating expenses as a percentage of sales and Rabbits projected 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 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 23%. 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.
  FS Forth-Systeme GmbH/Sistemas Embebidos S.A.
  55




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 2. ACQUISITIONS (CONTINUED)
    Cash, including direct acquisition costs
    
    $
    6,504Fair value of net tangible assets acquired
    
    $
    1,154Identifiable intangible assets:Purchased and core technology
    
    
    720Customer relationships
    
    
    1,290Goodwill
    
    
    4,124Deferred tax liabilities related to identifiable
intangibles
    
    
    (784
    )$
    6,504
    Year ended September 30,(in thousands, except per common share amounts)
    
    2006
    
    2005Net sales
    
    $
    155,749
    
    
    $
    156,574Net income
    
    $
    10,738
    
    
    $
    15,252Net income per common share, basic
    
    $
    0.46
    
    
    $
    0.63Net income per common share, diluted
    
    $
    0.45
    
    
    $
    0.60
 56




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 2. ACQUISITIONS (CONTINUED)
  3. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS
 Identifiable Intangible Assets
  As of September 30, 2007
    
    As of September 30, 2006Gross
    
    
    
    
    
    
    
    
    
    Grosscarrying
    
    Accumulated
    
    
    
    
    
    carrying
    
    Accumulatedamount
    
    amortization
    
    Net
    
    amount
    
    amortization
    
    NetPurchased and core technology
    
    $
    38,702
    
    
    $
    (26,689
    )
    
    $
    12,013
    
    
    $
    48,022
    
    
    $
    (31,492
    )
    
    $
    16,530License agreements
    
    
    2,440
    
    
    
    (2,290
    )
    
    
    150
    
    
    
    2,440
    
    
    
    (1,890
    )
    
    
    550Patents and trademarks
    
    
    7,925
    
    
    
    (3,818
    )
    
    
    4,107
    
    
    
    7,608
    
    
    
    (2,837
    )
    
    
    4,771Customer maintenance contracts
    
    
    700
    
    
    
    (394
    )
    
    
    306
    
    
    
    700
    
    
    
    (324
    )
    
    
    376Customer relationships
    
    
    11,613
    
    
    
    (3,975
    )
    
    
    7,638
    
    
    
    11,470
    
    
    
    (2,356
    )
    
    
    9,114Total
    
    $
    61,380
    
    
    $
    (37,166
    )
    
    $
    24,214
    
    
    $
    70,240
    
    
    $
    (38,899
    )
    
    $
    31,341
  Fiscal year
    
    Total2007
    
    $
    7,5792006
    
    $
    7,4842005
    
    $
    6,037
  Fiscal year
    
    Total2008
    
    $
    5,6682009
    
    $
    4,2022010
    
    $
    3,6372011
    
    $
    3,0762012
    
    $
    2,512
 57




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 3. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS (CONTINUED)
 Goodwill
  2007
    
    
    2006Beginning balance, October 1
    
    $
    65,841
    
    
    $
    38,675Acquisition of MaxStream
    
    
    (374
    )
    
    
    26,433Acquisition of FS Forth
    
    
    950
    
    
    
    800Currency translation adjustments
    
    
    400
    
    
    
    (67
    )Ending balance, September 30
    
    $
    66,817
    
    
    $
    65,841
 4. SEGMENT INFORMATION AND MAJOR CUSTOMERS
  Year Ended September 302007
    
    
    2006
    
    
    2005Non-embedded
    
    $
    98,879
    
    
    $
    86,638
    
    
    $
    87,453Embedded
    
    
    74,384
    
    
    
    58,025
    
    
    
    37,745Total net sales
    
    $
    173,263
    
    
    $
    144,663
    
    
    $
    125,198
  Year Ended September 30,2007
    
    
    2006
    
    
    2005United States
    
    $
    112,021
    
    
    $
    88,770
    
    
    $
    72,004Europe
    
    
    42,568
    
    
    
    35,104
    
    
    
    29,380Asia Pacific
    
    
    14,714
    
    
    
    16,557
    
    
    
    22,167Other international
    
    
    3,960
    
    
    
    4,232
    
    
    
    1,647Total net sales
    
    $
    173,263
    
    
    $
    144,663
    
    
    $
    125,198
 58




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 4. SEGMENT INFORMATION AND MAJOR CUSTOMERS (CONTINUED)
  As of September 30,2007
    
    
    2006
    
    
    2005United States
    
    $
    13,989
    
    
    $
    13,870
    
    
    $
    15,424International, primarily Europe
    
    
    5,998
    
    
    
    5,618
    
    
    
    5,384Total net long-lived assets
    
    $
    19,987
    
    
    $
    19,488
    
    
    $
    20,808
   Year Ended September 30,2007
    
    2006
    
    2005Accounts
    
    
    
    
    
    Accounts
    
    
    
    
    
    AccountsNet Sales %
    
    Receivable %
    
    Net Sales %
    
    Receivable %
    
    Net Sales %
    
    Receivable %Customer A
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    
    11.2
    %
    
    

    
    *
    
    
    10.3
    %Customer B
    
    
    *
    
    
    
    *
    
    
    
    *
    
    
    

    
    *
    
    
    12.9
    %

    
    

    
    *
 
 *
    
    Represents less than 10% of net sales or trade accounts receivable, as applicable 59




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 5. SELECTED BALANCE SHEET DATA
 As of September 30, (in thousands)
    
    2007
    
    
    2006Accounts receivable, net:Accounts receivable
    
    $
    21,501
    
    
    $
    20,800Less allowance for doubtful accounts
    
    
    479
    
    
    
    495$
    21,022
    
    
    $
    20,305Inventories:Raw materials
    
    $
    20,097
    
    
    $
    16,491Work in process
    
    
    816
    
    
    
    606Finished goods
    
    
    5,217
    
    
    
    4,814$
    26,130
    
    
    $
    21,911Property, equipment and improvements, net:Land
    
    $
    2,447
    
    
    $
    2,381Buildings
    
    
    21,796
    
    
    
    20,653Improvements
    
    
    3,078
    
    
    
    2,612Equipment
    
    
    12,254
    
    
    
    12,483Purchased software
    
    
    9,662
    
    
    
    8,929Furniture and fixtures
    
    
    1,662
    
    
    
    1,75650,899
    
    
    
    48,814Less accumulated depreciation and amortization
    
    
    30,912
    
    
    
    29,326$
    19,987
    
    
    $
    19,488Other accrued expenses:Product warranty accrual
    
    $
    1,155
    
    
    $
    1,104Accrued professional fees
    
    
    522
    
    
    
    879Contingent purchase price accrual
    
    
    950
    
    
    
    800Other accrued expenses
    
    
    1,910
    
    
    
    2,535$
    4,537
    
    
    $
    5,318
  6. FINANCIAL GUARANTEES
  Fiscal
    
    Balance at
    
    Warranties
    
    Settlements
    
    Balance atyear
    
    October 1,
    
    issued
    
    made
    
    September 30,2007
    
    $
    1,104
    
    
    $
    877
    
    
    $
    (826
    )
    
    $
    1,1552006
    
    $
    1,187
    
    
    $
    454
    (1)
    
    $
    (537
    )
    
    $
    1,1042005
    
    $
    855
    
    
    $
    900
    (1)
    
    $
    (568
    )
    
    $
    1,187
 
 (1)
    
    Includes $17 for fiscal 2006 and $97 for fiscal 2005 of warranty liabilities assumed as a
result of acquisitions described in Note 2. 60




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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 Year2008
    
    $
    4562009
    
    
    3302010
    
    
    64Total minimum payments required
    
    
    850Less interest on capital lease obligations
    
    
    (113
    )Net minimum principal payments
    
    
    737Less capital lease obligations, current portion
    
    
    (379
    )Capital leases obligations, net of current portion
    
    $
    358
 61




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 8. INCOME TAXES
  For the years ended September 30,2007
    
    
    2006
    
    
    2005United States
    
    $
    18,375
    
    
    $
    12,287
    
    
    $
    15,311International
    
    
    5,349
    
    
    
    2,980
    
    
    
    2,672$
    23,724
    
    
    $
    15,267
    
    
    $
    17,983
  For the years ended September 30,2007
    
    
    2006
    
    
    2005Current:Federal
    
    $
    2,333
    
    
    $
    2,248
    
    
    $
    (2,325
    )State
    
    
    1,119
    
    
    
    991
    
    
    
    968Foreign
    
    
    614
    
    
    
    (785
    )
    
    
    623Deferred:U.S.
    
    
    (688
    )
    
    
    951
    
    
    
    589Foreign
    
    
    573
    
    
    
    749
    
    
    
    463$
    3,951
    
    
    $
    4,154
    
    
    $
    318
  2007
    
    
    2006Current deferred tax asset
    
    $
    2,096
    
    
    $
    2,667Non-current deferred tax asset
    
    
    705
    
    
    
    1,366Non-current deferred tax liability
    
    
    (6,667
    )
    
    
    (7,482
    )Net deferred tax liability
    
    $
    (3,866
    )
    
    $
    (3,449
    )
 2007
    
    
    2006Uncollectible accounts and other reserves
    
    $
    1,097
    
    
    $
    978Depreciation and amortization
    
    
    1,107
    
    
    
    1,073Inventories
    
    
    397
    
    
    
    845Compensation costs
    
    
    1,406
    
    
    
    844Net operating loss carryforwards
    
    
    
    
    
    
    1,682Tax credit carryforwards
    
    
    1,315
    
    
    
    3,140Identifiable intangible assets
    
    
    (9,188
    )
    
    
    (12,011
    )Net deferred tax liability
    
    $
    (3,866
    )
    
    $
    (3,449
    )
   62




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 8. INCOME TAXES (CONTINUED)
  2007
    
    2006
    
    2005Statutory income tax rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %Increase (decrease) resulting from:State taxes, net of federal benefits
    
    
    3.5
    
    
    
    4.2
    
    
    
    3.5Utilization of tax credits
    
    
    (4.1
    )
    
    
    (2.7
    )
    
    
    (3.4
    )Extraterritorial income tax benefit and
manufacturing deduction
    
    
    (1.3
    )
    
    
    (3.3
    )
    
    
    (3.0
    )German statutory tax rate change
    
    
    0.9
    
    
    
    
    
    
    
    Acquired in-process research and development
    
    
    
    
    
    
    4.6
    
    
    
    0.6Reversal of tax reserves primarily due to
settlement of tax audits
    
    
    (18.2
    )
    
    
    (10.4
    )
    
    
    (31.6
    )Non-deductible stock-based compensation
    
    
    0.5
    
    
    
    0.8
    
    
    
    Other, net
    
    
    0.4
    
    
    
    (1.0
    )
    
    
    0.716.7
    %
    
    
    27.2
    %
    
    
    1.8
    %
     63




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 9. STOCK-BASED COMPENSATION
       64




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 9. STOCK-BASED COMPENSATION (CONTINUED)
    Year ended September 30,2007
    
    
    2006
    
    
    2005Cost of sales
    
    $
    137
    
    
    $
    89
    
    
    $
    Sales and marketing
    
    
    993
    
    
    
    694
    
    
    
    Research and development
    
    
    703
    
    
    
    530
    
    
    
    General and administrative
    
    
    1,192
    
    
    
    976
    
    
    
    53Stock-based compensation before income taxes
    
    
    3,025
    
    
    
    2,289
    
    
    
    53Income tax benefit
    
    
    (1,000
    )
    
    
    (758
    )
    
    
    (18
    )Stock-based compensation after income taxes
    
    $
    2,025
    
    
    $
    1,531
    
    
    $
    35
   65




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 9. STOCK-BASED COMPENSATION (CONTINUED)
  WeightedOptions
    
    
    
    
    
    
    Weighted
    
    
    Average
    
    
    AggregateAvailable
    
    
    Options
    
    
    Average
    
    
    Contractual Term
    
    
    Intrinsicfor Grant
    
    
    Outstanding
    
    
    Exercise Price
    
    
    (in years)
    
    
    Value (1)Balances, September 30, 2004
    
    
    1,488
    
    
    
    4,785
    
    
    $
    9.15Granted
    
    
    (635
    )
    
    
    635
    
    
    
    13.41Exercised
    
    
    
    
    
    
    (778
    )
    
    
    7.20Cancelled
    
    
    97
    
    
    
    (131
    )
    
    
    12.91Balances, September 30, 2005
    
    
    950
    
    
    
    4,511
    
    
    $
    9.98Granted
    
    
    (478
    )
    
    
    478
    
    
    
    12.34Exercised
    
    
    
    
    
    
    (615
    )
    
    
    7.41Cancelled
    
    
    125
    
    
    
    (134
    )
    
    
    12.49Balances, September 30, 2006
    
    
    597
    
    
    
    4,240
    
    
    $
    10.54Additional shares approved for grant
    
    
    2,500Granted
    
    
    (653
    )
    
    
    653
    
    
    
    13.26Exercised
    
    
    
    
    
    
    (405
    )
    
    
    8.36Cancelled
    
    
    62
    
    
    
    (62
    )
    
    
    11.68Balances, September 30, 2007
    
    
    2,506
    
    
    
    4,426
    
    
    $
    11.12
    
    
    
    5.24
    
    
    $
    15,971Exercisable at September 30, 2005
    
    
    
    
    
    
    3,544
    
    
    $
    9.54Exercisable at September 30, 2006
    
    
    
    
    
    
    3,300
    
    
    $
    10.08Exercisable at September 30, 2007
    
    
    
    
    
    
    3,337
    
    
    $
    10.54
    
    
    
    4.12
    
    
    $
    14,483
 
 (1)
    
    The aggregate intrinsic value represents the total pre-tax intrinsic value, based on our
closing stock price of $14.24 as of September 28, 2007, which would have been received by the
option holders had all option holders exercised their options as of that date.  2007
    
    2006
    
    2005Fair value of options granted
    
    
    $3,641
    
    
    
    $2,770
    
    
    
    $4,030Weighted average per option fair value
    
    
    $5.58
    
    
    
    $5.79
    
    
    
    $6.35Assumptions used for option grants:Risk free interest rate
    
    
    4.44% - 4.80%
    
    
    
    4.28% - 5.02%
    
    
    
    3.03% - 4.09%Expected option holding period
    
    3 - 5 years
    
    3 - 5 years
    
    3.5 - 5 yearsExpected volatility
    
    
    38% - 52%
    
    
    
    50% - 60%
    
    
    
    60%Weighted average volatility
    
    
    46%
    
    
    
    55%
    
    
    
    60%Expected dividend yield
    
    
    0
    
    
    
    0
    
    
    
    0
  66




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 9. STOCK-BASED COMPENSATION (CONTINUED)
   Weighted AverageGrant DateNumber of
    
    Fair Value perOptions
    
    Common ShareNonvested at September 30, 2006
    
    
    940
    
    
    $
    5.33Granted
    
    
    653
    
    
    
    5.58Vested
    
    
    (463
    )
    
    
    6.02Forfeited
    
    
    (41
    )
    
    
    5.38Nonvested at September 30, 2007
    
    
    1,089
    
    
    $
    5.19
   Options Outstanding
    
    Options ExercisableWeightedAverageRemaining
    
    Weighted
    
    Number of
    
    WeightedRange of
    
    Options
    
    Contractual Life
    
    Average
    
    Shares
    
    AverageExercise Prices
    
    Outstanding
    
    ( In Years)
    
    Exercise Price
    
    Vested
    
    Exercise Price$2.19  - $5.00
    
    
    172
    
    
    
    5.1
    
    
    $
    2.82
    
    
    
    172
    
    
    $
    2.82$5.01  - $6.00
    
    
    336
    
    
    
    4.0
    
    
    $
    5.43
    
    
    
    336
    
    
    $
    5.43$6.01  - $8.00
    
    
    496
    
    
    
    3.5
    
    
    $
    7.12
    
    
    
    496
    
    
    $
    7.12$8.01  - $10.00
    
    
    362
    
    
    
    5.0
    
    
    $
    9.61
    
    
    
    361
    
    
    $
    9.61$10.01  - $11.00
    
    
    1,101
    
    
    
    4.0
    
    
    $
    10.72
    
    
    
    966
    
    
    $
    10.73$11.01  - $12.00
    
    
    278
    
    
    
    2.6
    
    
    $
    11.91
    
    
    
    263
    
    
    $
    11.94$12.01 - $13.00
    
    
    521
    
    
    
    8.4
    
    
    $
    12.68
    
    
    
    175
    
    
    $
    12.72$13.01 - $14.00
    
    
    599
    
    
    
    8.2
    
    
    $
    13.40
    
    
    
    107
    
    
    $
    13.33$14.01 - $15.00
    
    
    302
    
    
    
    6.7
    
    
    $
    14.72
    
    
    
    212
    
    
    $
    14.72$15.01 - $18.00
    
    
    92
    
    
    
    7.3
    
    
    $
    15.67
    
    
    
    82
    
    
    $
    15.72$18.01 - $27.69
    
    
    167
    
    
    
    1.7
    
    
    $
    25.61
    
    
    
    167
    
    
    $
    25.61$2.19 - $27.69
    
    
    4,426
    
    
    
    5.2
    
    
    $
    11.12
    
    
    
    3,337
    
    
    $
    10.54
  67




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 10. SHARE RIGHTS PLAN
  11. COMMITMENTS
  AmountFiscal Year
    
    (in thousands)2008
    
    $
    2,0762009
    
    
    1,4292010
    
    
    1,1732011
    
    
    6202012
    
    
    620Thereafter
    
    
    535Total minimum payments required
    
    $
    6,453
  2007
    
    
    2006
    
    
    2005Rentals
    
    $
    2,555
    
    
    $
    2,352
    
    
    $
    1,921Less: sublease rentals
    
    
    (230
    )
    
    
    (127
    )
    
    
    (183
    )$
    2,325
    
    
    $
    2,225
    
    
    $
    1,738
 12. EMPLOYEE BENEFIT PLANS
   13. CONTINGENCIES
  68




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 13. CONTINGENCIES (CONTINUED)
   In re Initial Public Offering Securities Litigation en banc
   69




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 13. CONTINGENCIES (CONTINUED)
  14. QUARTERLY FINANCIAL DATA (UNAUDITED)
  Quarter endedDec. 31
    
    Mar. 31
    
    June 30
    
    Sept. 302007Net 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
    
    
    
    0.212006Net sales
    
    $
    33,376
    
    
    $
    34,380
    
    
    $
    35,860
    
    
    $
    41,047Gross profit
    
    
    18,198
    
    
    
    18,318
    
    
    
    19,467
    
    
    
    21,522Net income (1)(2)
    
    
    2,183
    
    
    
    2,567
    
    
    
    3,348
    
    
    
    3,015Net income per common share  basic
    
    
    0.10
    
    
    
    0.11
    
    
    
    0.14
    
    
    
    0.12Net income per common share  diluted
    
    
    0.09
    
    
    
    0.11
    
    
    
    0.14
    
    
    
    0.12
 
 (1)
    
    During 2007 and 2006, we recorded discrete income tax benefits of $4.3 million and $1.6
million, respectively. 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 the filing of U.S. amended tax returns, enactment of the extension of the
research and development tax credit, and adjustments to actual for items reported on the tax return
filed for fiscal 2006. Discrete income tax benefits for fiscal 2006 were recorded of $0.6 million
in the third quarter and $1.0 million in the fourth quarter related to the reversal of income tax
reserves of $1.6 million primarily due to a settlement of tax audits with the French government.(2)
    
    During the fourth quarter of fiscal 2006, we incurred a $2.0 million pre-tax charge related to
in-process research and development. 70




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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
  71




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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
    
    
    49
    
    
    Chairman, President and Chief Executive OfficerSubramanian Krishnan
    
    
    53
    
    
    Senior Vice President, Chief Financial Officer and TreasurerLawrence A. Kraft
    
    
    41
    
    
    Senior Vice President of Sales and MarketingJoel K. Young
    
    
    43
    
    
    Senior Vice President of Research and Development and Chief Technical Officer
     72




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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)
    
    
    
    
    
    RemainingNumber of
    
    (b)
    
    Available forSecurities to
    
    Weighted-
    
    Future Issuancebe Issued Upon
    
    Average
    
    Under EquityExercise of
    
    Exercise Price
    
    CompensationOutstanding
    
    of Outstanding
    
    Plans (ExcludingOptions,
    
    Options,
    
    SecuritiesWarrants and
    
    Warrants and
    
    Reflected inPlan Category
    
    Rights
    
    Rights
    
    Column (a))Equity Compensation
Plans Approved by
Security Holders
    
    
    2,333,406
    
    
    $
    11.64
    
    
    
    4.293.973
    (1)Equity Compensation
Plans Not Approved
by Security Holders
(2)
    
    
    1,205,949
    
    
    $
    9.33
    
    
    
    -0-Total (3)
    
    
    3,539,355
    
    
    $
    10.85
    
    
    
    4,293,973
 
 (1)
    
    Includes securities available for future issuance under stockholder
approved compensation plans other than upon the exercise of options,
warrants or rights, as follows: 2,479,966 shares under the Companys 2000
Omnibus Stock Plan and 1,814,007 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. by
the Company 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, 2007, 886,606 options remained outstanding at a
weighted average exercise price of $12.15. The Company cannot grant
additional awards under these assumed plans. 73




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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
  74




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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
  75




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##### Table of Contents



PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 (a) Consolidated Financial Statements and Schedules of the Company
 1.
    
    Consolidated Statements of Operations for the fiscal years ended September 30, 2007, 2006 and 2005Consolidated Balance Sheets as of September 30, 2007 and 2006Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2007, 2006 and 2005Consolidated Statements of Stockholders Equity and Comprehensive Income for the fiscal years ended September 30, 2007, 2006 and 2005Notes to Consolidated Financial Statements2.
    
    Schedule of Valuation and Qualifying Accounts3.
    
    Report of Independent Registered Public Accounting Firm
 (b) Exhibits
 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)3(a)
    
    Restated Certificate of Incorporation of the Company, as amended (5)3(b)
    
    Amended and Restated By-Laws of the Company, as amended (6)4(a)
    
    Form of Rights Agreement, dated as of June 10, 1998 between Digi International
Inc. and Wells Fargo Bank Minnesota, National Association (formerly known as Norwest
Bank Minnesota, National Association), as Rights Agent (7)4(b)
    
    Amendment dated January 26, 1999, to Share Rights Agreement, dated as of June 10,
1998 between Digi International Inc. and Wells Fargo Bank Minnesota, National
Association (formerly known as Norwest Bank Minnesota, National Association), as Rights
Agent (8)
 76




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##### Table of Contents



ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)
 Exhibits (continued)
 ExhibitNumber
    
    Description10(a)
    
    Digi International Inc. Stock Option Plan as Amended and Restated as of November 27, 2006* (9)10(b)
    
    Form of indemnification agreement with directors and officers of the Company (10)10(c)
    
    Agreement between the Company and Subramanian Krishnan dated March 26, 1999 (11)10(c)(i)
    
    Amendment to Agreement between the Company and Subramanian Krishnan dated February 5, 2001* (12)10(d)
    
    Employment Agreement between the Company and Joseph T. Dunsmore dated September 27, 2006* (13)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*(14)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* (15)10(g)
    
    Digi International Inc. Non-Officer Stock Option Plan, as Amended and
Restated as of November 27, 2006 (16)10(h)
    
    NetSilicon, Inc. Amended and Restated 1998 Director Stock Option Plan (17)10(i)
    
    NetSilicon, Inc. Amended and Restated 1998 Incentive and Non-Qualified Stock Option Plan (18)10(j)
    
    NetSilicon, Inc. 2001 Stock Option and Incentive Plan (19)10(k)
    
    Form of Notice of Grant of Stock Options and Option Agreement and Terms
and Conditions of Nonstatutory Stock Option Agreement* (20)10(l)
    
    Fiscal 2007 Executive Officer Compensation* (21)10(m)
    
    Agreement between the Company and Lawrence A. Kraft, dated February 4, 2003* (22)10(m)(i)
    
    Amendment to Agreement between the Company and Lawrence A. Kraft dated July 30, 2007* (23)10(n)
    
    Agreement between the Company and Joel K. Young dated July 30, 2007* (24)14
    
    Code of Ethics (25)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 Officer
 77




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##### Table of Contents



ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (CONTINUED)
 Exhibits (continued)
 ExhibitNumber
    
    Description31(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 3(a) to the Companys Form 10-K for the year ended
September 30, 1993 (File no. 0-17972).(6)
    
    Incorporated by reference to Exhibit 3(b) to the Companys Form 10-Q for the quarter ended
March 31, 2007 (File no. 0-17972).(7)
    
    Incorporated by reference to Exhibit 1 to the Companys Registration Statement on Form 8-A
dated June 25, 1998 (File no. 0-17972).(8)
    
    Incorporated by reference to Exhibit 1 to Amendment No. 1 to the Companys Registration
Statement on Form 8-A dated February 5, 1999 (File no. 0-17972).(9)
    
    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).(10)
    
    Incorporated by reference to Exhibit 10(b) to the Companys Registration Statement on Form
S-1 (File no. 33-30725).(11)
    
    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).(12)
    
    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).(13)
    
    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).(14)
    
    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).(15)
    
    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).(16)
    
    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). 78




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(17)
    
    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).(18)
    
    Incorporated by reference to Exhibit 4.3 to the Companys Registration Statement on Form S-8
dated February 13, 2002 (File no. 333-82670).(19)
    
    Incorporated by reference to Exhibit 4.3 to the Companys Registration Statement on Form S-8
dated February 13, 2002 (File no. 333-82668).(20)
    
    Incorporated by reference to Exhibit 10(a) to the Companys Form 8-K dated September 13, 2004
(File no. 0-17972).(21)
    
    Incorporated by reference to Item 1.01 of the Companys Form 8-K dated September 29, 2006
(File no. 0-17972)(22)
    
    Incorporated by reference to Exhibit 10(m) to the Companys Form 10-K for the year ended
September 30, 2006 (File no. 0-17972).(23)
    
    Incorporated by reference to Exhibit 10(a) to the Companys Form 10-Q for the quarter ended
June 30, 2007 (File no. 0-17972)(24)
    
    Incorporated by reference to Exhibit 10(b) to the Companys Form 10-Q for the quarter ended
June 30, 2007 (File no. 0-17972)(25)
    
    Incorporated by reference to Exhibit 14 to the Companys Form 10-K for the year ended
September 30, 2003 (File no. 0-17972). 79




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SIGNATURES
  DIGI INTERNATIONAL INC.December 6, 2007
    By:
    /s/  Joseph T. DunsmoreJoseph T. DunsmorePresident, Chief Executive Officer, Chairman, and Director  December 6, 2007
    /s/  Joseph T. DunsmoreJoseph T. DunsmorePresident, Chief Executive Officer, Chairman, and Director
(Principal Executive Officer) December 6, 2007
    /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 6, 2007
    /s/ Joseph T. DunsmoreJoseph T. DunsmoreAttorney-in-fact 80




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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, 2007
    
    $
    495
    
    
    $
    73
    
    
    $
    89
    (1)
    
    $
    479September 30, 2006
    
    $
    872
    
    
    $
    (204
    )
    
    $
    173
    (1)
    
    $
    495September 30, 2005
    
    
    1,022
    
    
    
    (123
    )
    
    
    27
    (1)
    
    
    872
 
 (1)
    
    Uncollectible accounts charged against allowance, net of recoveries 81




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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
    
    Incorporated by Reference2(b)
    
    Purchase and assignment contract dated March 30, 2005
between Embedded Solutions AG, Klaus Flesch, Angelika
Flesch and Digi International GmbH
    
    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 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)
    
    Form of Rights Agreement, dated as of June 10, 1998
between Digi International Inc. and Wells Fargo Bank
Minnesota, National Association (formerly known as
Norwest Bank Minnesota, National Association), as
Rights Agent
    
    Incorporated by Reference4(b)
    
    Amendment dated January 26, 1999, to Share Rights
Agreement, dated as of June 10, 1998 between Digi
International Inc. and Wells Fargo Bank Minnesota,
National Association (formerly known as Norwest
Bank Minnesota, National Association), as Rights Agent
    
    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 the 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,
    
    Incorporated by Reference10(f)
    
    Digi International Inc. 2000 Omnibus Stock Plan as
Amended and Restated as of November 27, 2006
    
    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 Reference10(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
    
    Incorporated by Reference
 82




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EXHIBIT INDEX (CONTINUED)
 Exhibit
    
    Description
    
    Page10(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 Reference14
    
    Code of Ethics
    
    Incorporated by Reference21
    
    Subsidiaries of the Company
    
    Filed Electronically23
    
    Consent of Independent Registered Public Accounting Firm
    
    Filed Electronically24
    
    Powers of Attorney
    
    Filed Electronically31(a)
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer
    
    Filed Electronically31(b)
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
    
    Filed Electronically32
    
    Section 1350 Certification
    
    Filed Electronically
 83