
<PAGE>

    FINANCIAL INFORMATION


    17   MANAGEMENT'S DISCUSSION AND ANALYSIS

    21   CONSOLIDATED STATEMENTS OF OPERATIONS

    22   CONSOLIDATED BALANCE SHEETS

    23   CONSOLIDATED STATEMENTS OF CASH FLOWS

    24   CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

    25   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

    32   REPORT OF MANAGEMENT

    32   REPORT OF INDEPENDENT ACCOUNTANTS

    33   QUARTERLY FINANCIAL DATA

    34   DIRECTORS AND EXECUTIVE OFFICERS

    35   STOCKHOLDER AND INVESTOR INFORMATION

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS

RESULTS OF OPERATIONS

    The following table sets forth selected information derived from the
Company's Consolidated Statements of Operations, expressed as a percentage of
net sales.

<TABLE>
<CAPTION>
                                                   Year ended September 30                        Percentage increase/(decrease)

                                                                                                    1997 OVER         1996 OVER
                                            1997           1996           1995                           1996             1995
---------------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>           <C>            <C>                     <C>                 <C> 
NET SALES                                   100.0%         100.0%         100.0%                        (14.3)%            17.1%
COST OF SALES                                51.6           48.2           47.8                          (8.2)             18.0 
                                            -------------------------------------------------------------------------------------
GROSS MARGIN                                 48.4           51.8           52.2                         (19.9)             16.3 

OPERATING EXPENSES:
  SALES AND MARKETING                        22.1           22.5           19.1                         (15.6)             37.3
  RESEARCH AND DEVELOPMENT                   10.9           11.0            8.9                         (15.5)             43.6
  GENERAL AND ADMINISTRATIVE                 11.7            7.9            7.6                          27.0              24.9
  RESTRUCTURING                               6.3                                                       100.0                  
                                            -------------------------------------------------------------------------------------
                                             51.0           41.4           35.6                           5.6              36.3

OPERATING (LOSS) INCOME                      (2.6)          10.4           16.6                        (121.5)            (26.6)
OTHER INCOME, PRINCIPALLY INTEREST            0.1            0.2            1.2                         (53.6)            (83.1)
AETHERWORKS CORPORATION NET LOSS             (3.5)          (1.9)                                        59.1             100.0
AETHERWORKS CORPORATION WRITE OFF            (3.5)                                                      100.0

(LOSS) INCOME BEFORE INCOME TAXES            (9.5)           8.7           17.8                        (193.4)            (42.8)
PROVISION FOR INCOME TAXES                                   3.9            6.1                         (98.8)            (25.2)
                                            -------------------------------------------------------------------------------------
NET (LOSS) INCOME                            (9.5)%          4.8%          11.7%                       (269.0)%           (51.9)%
                                            -------------------------------------------------------------------------------------
                                            -------------------------------------------------------------------------------------
</TABLE>

                                          17
<PAGE>

NET SALES

    The decrease in net sales from 1996 to 1997 of $27.6 million and the
increase in net sales from 1995 to 1996 of $28.2 million were dispersed between
the Company's two principal product groups as follows:

<TABLE>
<CAPTION>
                                                                           Annual Sales
Product Market             Percent of Annual Net Sales                   Increase (Decrease)
                           1997          1996            1995           1997          1996
-----------------------------------------------------------------------------------------------
<S>                      <C>            <C>             <C>            <C>          <C>
SERVER BASED             75.7%          80.2%          81.6%         (19.1%)         15.1%
PHYSICAL LAYER           23.9%          18.9%          18.4%           8.2%          20.3%
OTHER                      .4%            .9%                        (56.5%)          N/A
</TABLE>

    Net sales for 1997 were lower than those for 1996 due to a conscious effort
by the Company to reduce inventory levels in the distribution channel. In
addition, sales for 1997 were net of customer rebates of $3.5 million, as
compared to rebates of $2.7 million for 1996. Net sales for 1996 were higher
than those for 1995, primarily due to increased volume.

    Net sales to original equipment manufacturers (OEMs), as a percentage of
total net sales, rose to 23.5% for 1997, as compared to 20.3% in 1996. Net sales
to OEMs for 1995 were 22.9%. The Company expects the OEM portion of the
Company's business for fiscal 1998 to remain relatively stable with the 1997
level.

    Net sales to the distribution market, as a percentage of total net sales,
declined to 64.1% for 1997, as compared to 65.5% in 1996. This decline was a
result of a conscious effort by the Company to reduce inventory levels in the
distribution channel. Net sales to the distribution market for 1995 represented
61.2% of total net sales.
    
    The effort by the Company to reduce inventory levels in the distribution
channel has continued through the first quarter of fiscal 1998, ending December
31, 1997.

    During fiscal years 1997, 1996 and 1995, the Company's net sales to
customers outside the United States, primarily in Europe, amounted to
approximately $39.6 million, $39.9 million and $33 million, respectively,
comprising approximately 23.9%, 20% and 20%.

GROSS MARGIN

    Gross margin for 1997 declined to 48.4%, as compared to 51.8% and 52.2% 
for 1996 and 1995, respectively. Such decline in 1997 was principally due to 
the increase of OEM and physical layer product net sales as a percentage of 
total net sales. OEM and physical layer products generally contribute lower 
gross margins, as compared to sales to the distribution channel and sales of 
multiuser and remote access products. In addition, the Company has increased 
its reserves for excess and obsolete inventories by approximately $1.5 
million in 1997 versus 1996. Such reserves increased by approximately $.7 
million in 1996, in comparison to 1995.

OPERATING EXPENSES

    Operating expenses for 1997 declined 7.5% from operating expenses for 1996,
without consideration of the approximately $10.5 million restructuring charge
recorded in 1997. Such decline was due to decreased marketing costs and cost
savings achieved through consolidation of research and development efforts, as
well as a reduction of funding levels for new product development. The 1996
operating expenses increased 36.3% over 1995 levels due to expansion of the
Company's infrastructure and increased product development costs.

    The restructuring charge of approximately $10.5 million, recorded in the
second quarter of fiscal 1997, related to a Board-approved plan that 
simplified operations, increased consolidation and reduced costs and 
expenses. The plan included the closing of the Cleveland, Ohio manufacturing 
facility, the reduction of selected product lines and the consolidation and 
closing of the Torrance, California and Nashville, Tennessee research and 
development facilities. These costs included: (i) write downs of the carrying 
values of fixed assets related to the closed manufacturing and research and 
development facilities, (ii) write downs of carrying values of goodwill and 
identifiable intangible assets (primarily licensing agreements related to the 
discontinued product lines) and related inventories and (iii) severance costs 
associated with the elimination of 105 positions.

    Subsequent to the actions covered by the restructuring charge, the Company
has made additional headcount reductions and has consolidated other research 
and development activities into its Minneapolis facilities. Actual headcount 
for the Company as of September 30, 1997 was 481, down from 714 at January 
31, 1997. 

    The Company expects that operating expenses for fiscal 1998 will remain 
at levels similar to or slightly higher than the $16.4 million incurred in 
the fourth quarter of fiscal 1997.

OTHER INCOME

    Other income for 1997 declined by 53.6% from 1996 levels due primarily to
increased losses on disposal of capital assets, principally at its research and
development location in Cleveland. Other income for 1996 declined by 83.0% from
1995 levels due primarily to lower interest income resulting from a decrease in
invested funds as well as losses on disposal of capital assets.

                                          18
<PAGE>

AETHERWORKS CORPORATION OPERATING LOSSES

    In connection with the purchase of convertible notes from AetherWorks
Corporation, a development stage company engaged in the development of wireless
and dial-up remote access technology, the Company has the ability, under certain
conditions, to convert its investment into a majority of AetherWorks' common
stock. The Company has reported its investment in AetherWorks on the equity
method and has recorded net losses of $5.8 million and $3.6 million,
respectively, for 1997 and 1996. These net losses represent 100% 
of AetherWorks' losses for such years. The percentage of AetherWorks' net losses
included in the Company's financial statements is based upon the percentage of
financial support provided by the Company (versus other investors) to
AetherWorks during such years.

    In connection with the financing arrangement, the Company has also
guaranteed $3,060,000 of lease obligations of AetherWorks. In addition, the
Company has also leased to AetherWorks $1,325,000 of computer equipment under a
three-year direct financing lease.

    On October 14, 1997, the Company entered into a revised note agreement with
AetherWorks, that clarifies and limits the Company's financial commitment for
the purchase of convertible notes of up to a maximum of $13.8 million, which
would result in the Company's ownership interest upon conversion 
of 62.7% based on AetherWorks' present capitalization. The revised agreement,
however, also provides for payments, at the discretion of AetherWorks, on the
outstanding convertible notes of up to $7.2 million in exchange for a reduction
in the Company's potential ownership interest, upon conversion, to 19%. The
revised note agreement, among other things, rescinded previous technology
transfer and manufacturing agreements.

    Because of the significant uncertainty of the future of AetherWorks
Corporation, as demonstrated by its lack of generating positive cash flow,
obtaining other sources of equity financing and its continued uncertainty in
developing commercially marketable products, the Company decided, as of
September 30, 1997, to write off its remaining investment of $2.4 million in
AetherWorks, and to accrue and expense its remaining future obligation to
purchase additional notes of $2.0 million. In addition, the Company has also
accrued $1.4 million for its probable obligations resulting from its guarantees
of certain AetherWorks' lease obligations.

INCOME TAXES

    The Company recorded a $.1 million tax provision for 1997, even though it
has reported a pre-tax loss for the year. Such provision was necessary due to
the non-deductibility of certain intangible assets written off as part of the
restructuring charge, the AetherWorks operating losses, and the related
investment write off. In addition, the Company has also provided additional
provision in connection with an IRS examination of certain tax returns filed in
prior years. The Company's effective income tax rate increased from 34.2% 
in 1995 to 44.7% in 1996 due primarily to the non-deductibility of the 
AetherWorks losses.

INFLATION

    The Company believes inflation has not had a material effect on its
operations or on its financial condition.

LIQUIDITY AND CAPITAL RESOURCES

    The Company has financed its operations principally with funds generated
from operations, and in prior years, with proceeds from earlier public
offerings. Investing activities for 1997 consisted of purchases of $8.8 million
of equipment and capital improvements, including a new enterprise-wide computer
system, which will provide Year 2000 capabilities, and the purchase of $6.5
million of additional convertible notes from AetherWorks Corporation.

    During 1997, the Company has increased its cash balances by approximately 
$22.4 million, through cash flow from operations, principally due to 
reductions in its outstanding accounts receivable and inventory levels.

    Investing activities for 1996 consisted primarily of the redemption of
maturing investments offset by purchases of property and equipment, and
purchases of $5.3 million of convertible notes from AetherWorks Corporation.

    During 1996, the Company made open market purchases of the Company's 
common stock aggregating $7.3 million pursuant to a one million share 
repurchase program authorized by the Company's Board of Directors on March 
27, 1995. On January 31, 1996, the Board of Directors authorized a separate 
500,000 share repurchase program for the purpose of purchasing common stock 
to be utilized for the Company's Employee Stock Purchase Plan, which purchase 
was funded through employee withholding. The Company suspended all existing 
stock purchase programs at its October 1996 board meeting, and does not 
presently contemplate any such stock purchase programs in the near future.

    At September 30, 1997, the Company had working 

                                          19
<PAGE>

capital of $62 million and no debt. The Company has negotiated a $5 million
unsecured line of credit with its bank, but has not utilized such line. The
Company's management believes that current financial resources, cash generated
from operations and the Company's potential capacity for debt and/or equity
financing will be suficient to fund current and anticipated business operations.

FOREIGN CURRENCY TRANSLATION

    Substantially all of the Company's foreign transactions are negotiated,
invoiced and paid in U.S. dollars.

NEW ACCOUNTING STANDARD

    In March 1997, the Statement of Financial Accounting Standards No. 128
(SFAS No. 128), Earnings Per Share, was issued by the Financial Accounting
Standards Board. This standard, which the Company must adopt for its 1998 fiscal
interim and year-end reporting, requires dual presentation of basic and diluted
EPS on the face of the Statement of Operations. Net income or loss per share
currently (except for 1997) includes both common shares outstanding and common
stock equivalents. The basic income or loss per share under SFAS No. 128 will be
calculated based on only common shares outstanding. Diluted income or loss per
share would be calculated based on both common shares outstanding and
consideration of the dilutive effect of common stock equivalents.

FORWARD-LOOKING STATEMENTS

    Certain statements made in this annual report, which are summarized here,
are forward-looking statements that involve risk and uncertainties, and actual
results may be materially different. Factors that could cause actual results to
differ include, but are not limited to those identified:

-   DIGI'S OPEN SYSTEM SERVER-BASED COMMUNICATIONS STRATEGY SHOULD BE
    CHARACTERIZED AS FORWARD LOOKING AND, AS SUCH, MAY INVOLVE RISKS AND
    UNCERTAINTIES.

-   CONTINUED GROWTH IN SALES OF THE COMPANY'S MULTIUSER, REMOTE ACCESS AND
    LAN PRODUCTS -- General market conditions and competitive conditions within
    these markets, development and acceptance of new products offered by the
    Company, and the introduction of products by competitors in these markets.

-   THE EXPECTATION THAT STEPS TAKEN BY THE COMPANY WILL BRING IT BACK TO
    CONSISTENT PROFITABILITY -- This expectation may be impacted by
    unanticipated expenses or general market conditions and competitive
    conditions that may be encountered.

-   THE EXPECTATION THAT OPERATING EXPENSES IN FISCAL 1998 WILL REMAIN AT
    LEVELS SIMILAR TO OR SLIGHTLY HIGHER THAN THOSE INCURRED IN THE FISCAL
    FOURTH QUARTER OF 1997 -- This expectation may be impacted by presently
    unanticipated revenue opportunities or by unanticipated expenses.

-   THE EXPECTATION THAT AETHERWORKS CORPORATION WILL NOT GENERATE POSITIVE
    CASH FLOW, OBTAIN OTHER SOURCES OF EQUITY FINANCING OR DEVELOP COMMERCIALLY
    MARKETABLE PRODUCTS -- This expectation may be impacted by presently
    unanticipated revenue opportunities, securing other investors or developing
    commercially marketable products.

-   THE EXPECTATION THAT OEM SALES FOR FISCAL 1998 WILL REMAIN RELATIVELY STABLE
    WITH 1997 LEVELS-- OEM orders are subject to cancellation at the option of 
    the customer, and are subject to greater quarterlyfluctuations than sales 
    through the Company's other channels, as well as competitive conditions in 
    markets served by the Company's OEM customers. OEM sales could also be 
    adversely impacted by component shortages.

-   THE EXPECTATION THAT THE COMPANY DOES NOT CONTEMPLATE ANY STOCK PURCHASE
    PROGRAMS IN THE NEAR FUTURE -- Changes in operating results, credit
    availability and equity market conditions may impact the Company's decision
    to resume such stock purchase programs.

-   THE BELIEF THAT THE COMPANY'S CURRENT FINANCIAL RESOURCES, CASH GENERATED
    FROM OPERATIONS AND THE COMPANY'S POTENTIAL CAPACITY FOR DEBT AND/OR EQUITY
    FINANCING WILL BE SUFICIENT TO FUND CURRENT AND ANTICIPATED BUSINESS 
    OPERATIONS -- Changes in anticipated operating results, credit availability
    and equity market conditions may further enhance or inhibit the Company's 
    ability to maintain or raise appropriate levels of cash.

                                          20
<PAGE>

                               DIGI INTERNATIONAL INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

FOR THE FISCAL YEARS ENDED SEPTEMBER 30                    1997                1996                1995
----------------------------------------------------------------------------------------------------------
<S>                                               <C>                 <C>                 <C>
NET SALES                                          $ 165,597,937       $ 193,150,898       $ 164,978,018
COST OF SALES                                         85,482,536          93,108,624          78,933,221
                                                   -------------------------------------------------------
GROSS MARGIN                                          80,115,401         100,042,274          86,044,797

OPERATING EXPENSES:

    SALES AND MARKETING                               36,671,271          43,449,864          31,643,800
    RESEARCH AND DEVELOPMENT                          17,978,135          21,279,551          14,816,413
    GENERAL AND ADMINISTRATIVE                        19,324,777          15,215,512          12,186,056
    RESTRUCTURING                                     10,471,482                                        
                                                   -------------------------------------------------------

TOTAL OPERATING EXPENSES                              84,445,665          79,944,927          58,646,269
                                                   -------------------------------------------------------

OPERATING (LOSS) INCOME                               (4,330,264)         20,097,347          27,398,528
OTHER INCOME, NET                                        153,809             331,789           1,967,565
AETHERWORKS CORPORATION NET LOSS                      (5,764,201)         (3,623,776)                   
AETHERWORKS CORPORATION WRITE OFF                     (5,758,548)                                       
                                                   -------------------------------------------------------

(LOSS) INCOME BEFORE INCOME TAXES                    (15,699,204)         16,805,360          29,366,093
PROVISION FOR INCOME TAXES                                91,640           7,505,140          10,035,000
                                                   -------------------------------------------------------

NET (LOSS) INCOME                                  $ (15,790,844)       $  9,300,220       $  19,331,093
                                                   -------------------------------------------------------
                                                   -------------------------------------------------------

(LOSS) INCOME PER COMMON AND COMMON
    EQUIVALENT SHARE                               $       (1.18)       $        .69       $        1.38
                                                   -------------------------------------------------------
                                                   -------------------------------------------------------

WEIGHTED AVERAGE COMMON AND COMMON
    EQUIVALENT SHARES OUTSTANDING                     13,393,408          13,522,905          14,057,109
                                                   -------------------------------------------------------
                                                   -------------------------------------------------------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.

                                          21
<PAGE>

                               DIGI INTERNATIONAL INC.


CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                         SEPTEMBER 30       SEPTEMBER 30
                                                                                 1997               1996
--------------------------------------------------------------------------------------------------------
<S>                                                                      <C>                 <C>
ASSETS
CURRENT ASSETS:
    CASH AND CASH EQUIVALENTS                                          $  31,329,666       $   8,943,390
    ACCOUNTS RECEIVABLE, NET                                              25,658,522          42,874,898
    INVENTORIES, NET                                                      23,683,312          33,372,164
    INCOME TAX REFUND RECEIVABLE                                                               1,675,626
    OTHER                                                                  4,147,942           2,825,828
                                                                      ----------------------------------
      TOTAL CURRENT ASSETS                                                84,819,442          89,691,906

PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET                                 23,617,696          24,230,101
INTANGIBLE ASSETS, NET                                                     6,876,597          10,854,845
INVESTMENT IN AETHERWORKS CORPORATION                                                          1,672,749
OTHER                                                                      2,997,601           3,489,228
                                                                      ----------------------------------
      TOTAL ASSETS                                                     $ 118,311,336       $ 129,938,829
                                                                      ----------------------------------
                                                                      ----------------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
    ACCOUNTS PAYABLE                                                   $  10,118,921       $  12,549,738
    INCOME TAXES PAYABLE                                                   1,771,986                    
    ACCRUED EXPENSES:
      ADVERTISING                                                          2,847,672           3,761,619
      COMPENSATION                                                         2,388,468           1,622,549
      ACCRUED AETHERWORKS CORPORATION FUNDING OBLIGATIONS                  3,350,000                    
      OTHER                                                                2,363,258           2,061,782
                                                                      ----------------------------------
      TOTAL CURRENT LIABILITIES                                           22,840,305          19,995,688
                                                                      ----------------------------------
                                                                      ----------------------------------

COMMITMENTS AND CONTINGENCY

STOCKHOLDERS' EQUITY:

    PREFERRED STOCK, $.01 PAR VALUE: 2,000,000 SHARES 
      AUTHORIZED; NONE OUTSTANDING 
    COMMON STOCK, $.01 PAR VALUE; 60,000,000 SHARES AUTHORIZED;
      14,727,256 AND 14,677,150 SHARES ISSUED                                147,273             146,772
    ADDITIONAL PAID-IN CAPITAL                                            44,403,102          42,866,758
    RETAINED EARNINGS                                                     75,113,902          90,904,746
                                                                      ----------------------------------
                                                                         119,664,277         133,918,276

UNEARNED STOCK COMPENSATION                                               (1,787,658)           (295,156)
TREASURY STOCK, AT COST, 1,269,492 AND 1,338,894 SHARES                  (22,405,588)        (23,679,979)
                                                                      ----------------------------------
    TOTAL STOCKHOLDERS' EQUITY                                            95,471,031         109,943,141
                                                                      ----------------------------------
    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                         $ 118,311,336       $ 129,938,829
                                                                      ----------------------------------
                                                                      ----------------------------------
</TABLE>


THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.

                                          22
<PAGE>

                               DIGI INTERNATIONAL INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

FOR THE FISCAL YEARS ENDED SEPTEMBER 30                                    1997                1996                1995
-----------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>                 <C>                 <C>
OPERATING ACTIVITIES:
 NET (LOSS) INCOME                                                $ (15,790,844)       $  9,300,220        $ 19,331,093
 ADJUSTMENTS TO RECONCILE NET (LOSS) INCOME TO
 CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES:
    PROVISION FOR RESTRUCTURING                                       9,211,713                    
    DEPRECIATION OF PROPERTY AND EQUIPMENT                            5,587,132           5,017,735           2,289,554
    AETHERWORKS CORPORATION NET LOSS                                  5,764,201           3,623,776
    AETHERWORKS CORPORATION WRITE OFF                                 5,758,548                                        
    AMORTIZATION OF INTANGIBLES                                       1,114,023           1,320,457           1,132,006
    LOSS ON SALE OF FIXED ASSETS                                        760,555             238,222
    PROVISION FOR LOSSES ON ACCOUNTS RECEIVABLE                       1,933,251             262,164             243,895
    PROVISION FOR INVENTORY OBSOLESCENCE                              2,910,988           1,455,895             716,300
    DEFERRED INCOME TAXES                                            (1,787,933)           (393,153)            (84,750)
    STOCK COMPENSATION                                                  244,569             204,973             166,667
    CHANGES IN OPERATING ASSETS AND LIABILITIES:
      ACCOUNTS RECEIVABLE                                            15,283,125         (11,176,126)        (10,457,106)
      INVENTORIES                                                     3,780,241          (7,808,974)         (4,043,377)
      INCOME TAXES PAYABLE/RECEIVABLE                                 3,447,612          (1,545,461)         (1,157,823)
      OTHER ASSETS                                                      713,772          (1,953,252)         (1,266,098)
      ACCOUNTS PAYABLE                                               (2,430,817)            443,223           7,420,550
      ACCRUED EXPENSES                                                  153,448            (664,452)          1,365,901
                                                                   -----------------------------------------------------
        TOTAL ADJUSTMENTS                                            52,444,428         (10,974,973)         (3,674,281)
                                                                   -----------------------------------------------------
        NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES          36,653,584          (1,674,753)         15,656,812
                                                                   -----------------------------------------------------

INVESTING ACTIVITIES:
 PURCHASE OF PROPERTY AND EQUIPMENT                                  (8,841,473)        (12,902,436)         (9,573,995)
 PROCEEDS FROM SALE OF FIXED ASSETS                                                       1,133,197
 PROCEEDS FROM HELD-TO-MATURITY MARKETABLE SECURITIES                                    20,640,962          25,004,985
 PROCEEDS FROM AVAILABLE-FOR-SALE MARKETABLE SECURITIES                                  13,060,000
 PURCHASE OF HELD-TO-MATURITY MARKETABLE SECURITIES                                        (482,187)        (21,751,326)
 PURCHASE OF AVAILABLE-FOR-SALE MARKETABLE SECURITIES                                    (5,250,000)         (7,810,000)
 BUSINESS ACQUISITIONS, NET OF CASH REQUIRED                                                                 (5,487,374)
 INVESTMENT IN AETHERWORKS CORPORATION                               (6,500,000)         (5,296,525)                   
                                                                   -----------------------------------------------------
   NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES              (15,341,473)         10,903,011         (19,617,710)
                                                                   -----------------------------------------------------

FINANCING ACTIVITIES:
 PURCHASE OF TREASURY STOCK                                                              (7,249,325)         (5,930,313)
 STOCK OPTION TRANSACTIONS, NET                                         539,838           1,659,838           1,145,925
 EMPLOYEE STOCK PURCHASE PLAN TRANSACTIONS, NET                         534,327             200,888                    
                                                                   -----------------------------------------------------
 NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                  1,074,165          (5,388,599)         (4,784,388)
                                                                   -----------------------------------------------------
 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                22,386,276           3,839,659          (8,745,286)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                     $  8,943,390        $  5,103,731        $ 13,849,017
                                                                   -----------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD                           $ 31,329,666        $  8,943,390        $  5,103,731
                                                                   -----------------------------------------------------
SUPPLEMENTAL CASH FLOW DISCLOSURE: INCOME TAXES PAID               $    238,439        $  8,944,627        $ 10,815,846
                                                                   -----------------------------------------------------
                                                                   -----------------------------------------------------
</TABLE>


THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.

                                          23
<PAGE>

                               DIGI INTERNATIONAL INC.


CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>

FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
                                                                                                                        
                                                          COMMON STOCK                       TREASURY STOCK            
                                                     SHARES           PAR VALUE          SHARES           VALUE       
------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>                 <C>             <C>              <C>              
BALANCES, SEPTEMBER 30, 1994                     14,474,663           $144,747         755,229        $(10,701,229)     

TREASURY STOCK, AT COST                                                                277,500          (5,930,313)     
ISSUANCE OF STOCK OPTIONS BELOW
 MARKET PRICES                                                                                                          
STOCK COMPENSATION                                                                                                      
ISSUANCE OF STOCK UPON EXERCISE OF
 STOCK OPTIONS, NET OF WITHHOLDING                   88,295                883                                          
TAX BENEFIT REALIZED UPON EXERCISE
 OF STOCK OPTIONS                                                                                                       
FORFEITURE OF STOCK OPTIONS                                                                                             
NET INCOME                                                                                                              
------------------------------------------------------------------------------------------------------------------------
BALANCES, SEPTEMBER 30, 1995                     14,562,958            145,630       1,032,729         (16,631,542)     

TREASURY STOCK, AT COST                                                                315,000          (7,249,325)     
EMPLOYEE STOCK PURCHASE ISSUANCES                                                       (8,835)            200,888      
ISSUANCE OF STOCK OPTIONS BELOW
 MARKET PRICES                                                                                                          
STOCK COMPENSATION                                                                                                      
ISSUANCE OF STOCK UPON EXERCISE
 OF STOCK OPTIONS                                   114,192              1,142                                          
TAX BENEFIT REALIZED UPON EXERCISE
 OF STOCK OPTIONS                                                                                                       
FORFEITURE OF STOCK OPTIONS                                                                                             
NET INCOME                                                                                                              
------------------------------------------------------------------------------------------------------------------------
BALANCES, SEPTEMBER 30, 1996                     14,677,150            146,772       1,338,894         (23,679,979)     

EMPLOYEE STOCK PURCHASE ISSUANCES                                                      (69,402)          1,274,391      
ISSUANCE OF STOCK OPTIONS BELOW
 MARKET PRICES                                                                                                          
STOCK COMPENSATION                                                                                                      
ISSUANCE OF STOCK UPON EXERCISE OF
  STOCK OPTIONS, NET OF WITHHOLDING                  50,106                501                                          
TAX BENEFIT REALIZED UPON EXERCISE
 OF STOCK OPTIONS                                                                                                       
FORFEITURE OF STOCK OPTIONS                                                                                             
NET LOSS                                                                                                                
------------------------------------------------------------------------------------------------------------------------
BALANCES, SEPTEMBER 30, 1997                     14,727,256           $147,273       1,269,492        $(22,405,588)     
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------


<CAPTION>
                                                 ADDITIONAL                  UNEARNED                  TOTAL    
                                                  PAID-IN-      RETAINED       STOCK            STOCKHOLDERS' 
                                                  CAPITAL       EARNINGS     COMPENSATION             EQUITY  
-------------------------------------------------------------------------------------------------------------   
<S>                                           <C>           <C>             <C>                <C>           
BALANCES, SEPTEMBER 30, 1994                   $39,788,556   $62,273,433     $  (392,332)       $ 91,113,175   
                                                                                                               
TREASURY STOCK, AT COST                                                                           (5,930,313)  
ISSUANCE OF STOCK OPTIONS BELOW                                                                                
 MARKET PRICES                                     448,750                      (448,750)                      
STOCK COMPENSATION                                                               166,667             166,667   
ISSUANCE OF STOCK UPON EXERCISE OF                                                                             
 STOCK OPTIONS, NET OF WITHHOLDING                 683,315                                           684,198   
TAX BENEFIT REALIZED UPON EXERCISE                                                                             
 OF STOCK OPTIONS                                  461,727                                           461,727   
FORFEITURE OF STOCK OPTIONS                        (76,028)                       76,028                       
NET INCOME                                                    19,331,093                          19,331,093   
------------------------------------------------------------------------------------------------------------- 
BALANCES, SEPTEMBER 30, 1995                    41,306,320    81,604,526        (598,387)        105,826,547   
                                                                                                               
TREASURY STOCK, AT COST                                                                           (7,249,325)  
EMPLOYEE STOCK PURCHASE ISSUANCES                                                                    200,888   
ISSUANCE OF STOCK OPTIONS BELOW                                                                                
 MARKET PRICES                                      12,500                       (12,500)                      
STOCK COMPENSATION                                                               204,973             204,973   
ISSUANCE OF STOCK UPON EXERCISE                                                                                
 OF STOCK OPTIONS                                1,159,569                                         1,160,711   
TAX BENEFIT REALIZED UPON EXERCISE                                                                             
 OF STOCK OPTIONS                                  499,127                                           499,127   
FORFEITURE OF STOCK OPTIONS                       (110,758)                      110,758                       
NET INCOME                                                     9,300,220                           9,300,220   
-------------------------------------------------------------------------------------------------------------- 
BALANCES, SEPTEMBER 30, 1996                    42,866,758    90,904,746        (295,156)        109,943,141   
                                                                                                               
EMPLOYEE STOCK PURCHASE ISSUANCES                 (740,064)                                          534,327   
ISSUANCE OF STOCK OPTIONS BELOW                                                                                
 MARKET PRICES                                   1,892,015                    (1,892,015)                      
STOCK COMPENSATION                                                               244,569             244,569   
ISSUANCE OF STOCK UPON EXERCISE OF                                                                             
 STOCK OPTIONS, NET OF WITHHOLDING                 379,720                                           380,221   
TAX BENEFIT REALIZED UPON EXERCISE                                                                             
 OF STOCK OPTIONS                                  159,617                                           159,617   
FORFEITURE OF STOCK OPTIONS                       (154,944)                      154,944                       
NET LOSS                                                     (15,790,844)                        (15,790,844)  
-------------------------------------------------------------------------------------------------------------- 
BALANCES, SEPTEMBER 30, 1997                   $44,403,102   $75,113,902     $(1,787,658)       $ 95,471,031   
-------------------------------------------------------------------------------------------------------------- 
---------------------------------------------------------------------------------------------------------------
</TABLE>


THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.

                                          24
<PAGE>
                               DIGI INTERNATIONAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1   SUMMARY OF SIGNIFICANT 
    ACCOUNTING POLICIES

BUSINESS DESCRIPTION

    Digi International Inc. (the "Company") is a leading ISO 9001-compliant
provider of data communications hardware and software that delivers seamless
connectivity solutions for multiuser environments, open systems server-based
remote access and LAN (Local Area Network) markets. The Company markets its
products through an international network of distributors and resellers, system
integrators and OEMs (original equipment manufacturers).

    The two major product areas include: 1) communications interface cards for
multiuser and remote access environments, and 2) "physical layer" and print
server products that enhance the data communications capabilities of a LAN.

PRINCIPLES OF CONSOLIDATION

    The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.

CASH EQUIVALENTS AND MARKETABLE SECURITIES

    The Company considers all highly liquid investments purchased with an 
original maturity of three months or less to be cash equivalents.

REVENUE RECOGNITION

    Sales are recognized at the date of shipment. Estimated warranty costs and
customer returns are recorded at the time of sale. 

INVENTORIES

    Inventories are stated at the lower of cost or fair market value, with cost
determined on the first-in, first-out method. Fair market value for raw
materials is based on replacement cost and for other inventory classifications
based on net realizable value. Appropriate consideration is given to
deterioration, obsolescence and other factors in evaluating net realizable
value.

PROPERTY, EQUIPMENT AND IMPROVEMENTS

    Property, equipment and improvements are carried at cost. Depreciation is
provided by charges to operations using the straight-line method based on
estimated useful lives, ranging from three to 39 years.

    Expenditures for maintenance and repairs are charged to operations as
incurred, while major renewals and betterments are capitalized. The assets and
related accumulated depreciation accounts are adjusted for asset retirements and
disposals with the resulting gain or loss included in operations.

INTANGIBLE ASSETS

    Purchased technology, license agreements, covenants not to compete and
other intangible assets are recorded at cost. Goodwill represents the excess of
cost over the fair value of assets acquired and is being amortized on a
straight-line basis over its estimated useful life of 15 years. All other
intangible assets are amortized on a straight-line basis over their estimated
useful lives of one to five years.

    The Company periodically, at least quarterly, analyzes intangible assets
for potential impairment, assessing the appropriateness of lives and
recoverability of unamortized balances through measurement of undiscounted
operating cash flows on a basis consistent with generally accepted accounting
principles.

RESEARCH AND DEVELOPMENT

    Research and development costs are expensed when incurred. Software
development costs are expensed as incurred. Such costs are required to be
expensed until the point that

                                          25
<PAGE>

                                DIGI INTERNATIONAL INC.

technological feasibility and proven marketability of the product are
established. Costs otherwise capitalizable after such point also are expensed
because they are insignificant.

INCOME TAXES

    Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Income tax expense is the tax payable for the
period and the change during the period in deferred tax assets and liabilities.

    Tax credits are accounted for under the flow-through method, which
recognizes the benefit in the year in which the credit is utilized.

INCOME (LOSS) PER COMMON SHARE

    Income (loss) per common share is computed by dividing net income (loss) by
the weighted average number of shares of common stock and common stock
equivalents outstanding during each period. Common stock equivalents result from
dilutive stock options. No common stock equivalents were included in determining
the net loss per common share for the year ended September 30, 1997, because
their effect would be antidilutive.
    
    In March 1997, the Statement of Financial Accounting Standards No. 128
(SFAS No. 128), Earnings Per Share, was issued by the Financial Accounting
Standards Board. This standard, which the Company must adopt for its 1998 fiscal
interim and year-end reporting, requires dual presentation of basic and diluted
EPS on the face of the Statement of Operations. Net income (loss) per share
currently (except for fiscal 1997) includes both common shares outstanding and
common stock equivalents. The basic income or loss per share under SFAS No. 128
will be calculated based on only common shares outstanding. Diluted income or
loss per share would be calculated based on both common shares outstanding and 
consideration of the dilutive effect of common stock equivalents.

USE OF ESTIMATES

    The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The most
significant areas which require the use of management's estimates relate to the
determination of the allowances for obsolete inventories and uncollectable
accounts receivable, sales returns and warranty cost accruals.

STOCK-BASED COMPENSATION

    The Company uses the intrinsic value-based method to measure compensation
cost for its stock option plan.

2   RESTRUCTURING

    On February 13, 1997, the Company's Board of Directors approved a
restructuring plan which resulted in a restructuring charge of $10,471,482
($8,283,681, net of tax benefits or $ .62 per share). This corporate
restructuring plan simplified operations, increased consolidation and reduced
costs and expenses. It included the closing of the Cleveland, Ohio 
manufacturing facility, the reduction of selected product lines and the
consolidation and closing of the Torrance, California and Nashville, Tennessee
research and development facilities. These costs included: (i) write downs of
the carrying values of fixed assets related to the closed manufacturing and
research and development facilities, (ii) write downs of the carrying values of
goodwill and identifiable intangible assets (primarily licensing agreements
related to the discontinued product lines) and related inventories and (iii)
severance costs associated with the elimination of 105 positions.

    The restructuring charge consisted of $1,259,769 in net cash expenditures 
(primarily severance), all of which has been paid as of September 30, 1997, 
and $9,211,713 resulting from the write down of asset carrying values.

3   RECLASSIFICATION OF CERTAIN EXPENSES

    Rebates to customers of $2,681,742 for the year ended September 30, 1996
now reflected as a reduction of sales, were previously included in sales and
marketing expenses. This reclassification had no impact on previously reported
operating income or net income. Rebates to customers for the year ended
September 30, 1995 were not significant.

    In addition, certain costs relating to systems support and communications
costs, which previously were included in general and administrative expenses,
have been reclassified into sales and marketing and research and development
expenses for all periods presented. Such amounts were $2,647,207, $2,707,024 and
$286,525 for the years ended September 30, 1997, 1996 and 1995, respectively.
These reclassifications had no impact on previously reported operating income or
net income.

                                          26
<PAGE>

                               DIGI INTERNATIONAL INC.

4   ACQUISITIONS 

    On September 29, 1995, the Company acquired LAN Access Corporation ("LAN
Access"), a provider of remote access products, for cash of approximately $5.5
million, substantially all of which was allocated to goodwill. This acquisition
was accounted for as a purchase. In connection with the restructuring plan
adopted in 1997 (see Note 2), the Company sold the assets related to the LAN
Access operations and wrote off all related goodwill.

5   INVESTMENT IN AETHERWORKS 
    CORPORATION

    During 1997 and 1996, under a note purchase agreement, the Company
purchased $6,500,000 and $5,296,525, respectively, of convertible notes from
AetherWorks Corporation, a development stage company engaged in the development
of wireless and dial-up remote access technology. The convertible notes
presently held by the Company at September 30, 1997 are convertible into 60% of
AetherWorks' common stock. In connection with the financing arrangement, the
Company has also guaranteed $3,060,000 of lease obligations of AetherWorks. In
addition, the Company has also leased to AetherWorks $1,325,000 of computer
equipment under a three-year direct financing lease.

    For the years 1997 and 1996, the Company has reported its investment in
AetherWorks on the equity method and has reported losses of $5,764,201 and
$3,623,776, respectively. Such losses, which exclude $5,758,548 of additional
charges related to the AetherWorks investment, as described below, represent
100% of AetherWorks' net losses for the two years. The percentage of
AetherWorks' net losses included in the Company's Statement of Operations was
based upon the percentage of financial support provided by the Company (versus
other investors) to AetherWorks during such years.

INVESTMENT IN AETHERWORKS CORPORATION

    The following represents condensed financial information from the audited
financial statements of AetherWorks for each of the years in the two-year period
ended September 30, 1997:


BALANCE SHEET DATA, AS OF SEPTEMBER 30 
                                                       1997             1996
-------------------------------------------------------------------------------

CURRENT ASSETS                                 $    955,695      $    104,307
FIXED ASSETS, NET                                 4,813,266         3,993,731
TOTAL ASSETS                                      5,578,887         4,407,779
CURRENT LIABILITIES                               1,467,836         3,942,032
NOTES PAYABLE                                    16,016,747         6,105,467
STOCKHOLDERS' DEFICIT                           (11,905,696)       (5,639,720)

OPERATING DATA FOR THE FISCAL YEAR ENDED SEPTEMBER 30

OPERATING EXPENSES:
  RESEARCH AND DEVELOPMENT                     $  3,505,134      $  2,567,844
  GENERAL AND ADMINISTRATIVE                      2,069,304           999,247
  OTHER                                           1,169,345           481,007
  ELIMINATIONS                                     (979,582)         (424,322)
                                               --------------------------------
NET LOSS                                       $ (5,764,201)     $ (3,623,776)
                                               --------------------------------
                                               --------------------------------

    On October 14, 1997, the Company entered into a revised note agreement with
AetherWorks, that clarifies and limits the Company's financial commitment for 
the purchase of convertible notes to a maximum of $13,800,000, which would 
result in the Company's ownership interest upon conversion of 62.7% based on 
AetherWorks' present capitalization. The revised note agreement, however, 
also provides for payments, at the discretion of AetherWorks, on the 
outstanding convertible notes of up to $7,200,000 in exchange for a reduction 
in the Company's potential ownership interest, upon conversion, to 19%. The 
revised note agreement, among other things, rescinded previous technology 
transfer and manufacturing agreements with AetherWorks.

    Because of the significant uncertainty of the future of AetherWorks
Corporation, as demonstrated by its lack of ability to generate positive cash
flow, obtaining other sources of equity financing and its continued uncertainty
in developing commercially marketable products, the Company decided, as of
September 30, 1997, to write off its remaining investment of $2,408,500 in
AetherWorks, and to accrue and expense its remaining future obligation to
purchase additional notes of $2,000,000. In addition, the Company has also
accrued $1,350,000 for its probable obligations resulting from its guarantees of
certain AetherWorks' lease obligations.

                                          27
<PAGE>
                               DIGI INTERNATIONAL INC.


6   SELECTED BALANCE SHEET AND STATEMENT OF CASH FLOWS DATA

<TABLE>
<CAPTION>
                                                                           1997                1996
-----------------------------------------------------------------------------------------------------
<S>                                                                 <C>              <C>
ACCOUNTS RECEIVABLE, NET:
TRADE ACCOUNTS RECEIVABLE                                         $  26,838,275       $  43,610,340
LESS RESERVE FOR RETURNS AND DOUBTFUL ACCOUNTS                        1,179,753             735,442
                                                                  -----------------------------------
                                                                  $  25,658,522       $  42,874,898
                                                                  -----------------------------------
                                                                  -----------------------------------
INVENTORIES, NET:
  RAW MATERIALS                                                   $  10,160,377       $  19,145,019
  WORK IN PROCESS                                                     8,704,357          10,469,315
  FINISHED GOODS                                                      7,011,357           4,925,930
                                                                  -----------------------------------
                                                                     25,876,091          34,540,264
  LESS RESERVE FOR OBSOLESCENCE                                       2,192,779           1,168,100
                                                                  -----------------------------------
                                                                  $  23,683,312       $  33,372,164
                                                                  -----------------------------------
                                                                  -----------------------------------
PROPERTY, EQUIPMENT AND IMPROVEMENTS:
  LAND                                                            $   1,800,000       $   1,800,000
  BUILDING                                                           10,522,285          10,519,731
  IMPROVEMENTS                                                          629,240             631,362
  EQUIPMENT                                                          18,377,899          18,629,353
  PURCHASED SOFTWARE                                                  5,186,787           1,968,127
  FURNITURE AND FIXTURES                                                927,859           1,899,928
                                                                  -----------------------------------
                                                                     37,444,070          35,448,501
  LESS ACCUMULATED DEPRECIATION                                      13,826,374          11,218,400
                                                                  -----------------------------------
                                                                  $  23,617,696       $  24,230,101
                                                                  -----------------------------------
                                                                  -----------------------------------
INTANGIBLE ASSETS:
  PURCHASED TECHNOLOGY                                            $     910,859       $   1,672,850
  LICENSE AGREEMENTS                                                  1,133,900           1,174,908
  COVENANTS NOT TO COMPETE                                                                  520,250
  GOODWILL                                                            6,364,242          11,185,506
  OTHER                                                               1,772,035              20,449
                                                                  -----------------------------------
                                                                     10,181,036          14,573,963
LESS ACCUMULATED AMORTIZATION                                         3,304,439           3,719,118
                                                                  -----------------------------------
                                                                  $   6,876,597       $  10,854,845
                                                                  -----------------------------------
                                                                  -----------------------------------
</TABLE>

Supplemental disclosure of non-cash financing and investing information:

    During fiscal 1997, the Company entered into a three-year direct financing
lease agreement with a related party. In connection with this transaction, the
Company has established a gross lease receivable of $1,430,000 (see Note 5).

7   STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN

    The Company has a stock option plan (the "Plan") that provides for the
issuance of nonstatutory stock options and incentive stock options (ISOs) to key
employees and non-employee board members holding less than 5% of the outstanding
shares of the Company's common stock.

    The option price for ISOs and non-employee directors options is set at fair
market value of the Company's common stock on the date of grant. The option
price for nonstatutory options is set by the Compensation Committee of the Board
of Directors. The authority to grant options and set other terms and conditions
rests with the Compensation Committee. The Plan terminates in 2007.

                                          28
<PAGE>
                               DIGI INTERNATIONAL INC.

    During the years ended September 30, 1997, 1996, and 1995, 50,106, 114,192,
and 88,295 shares of the Company's Common Stock, respectively, were issued upon
the exercise of options for 50,617, 123,959, and 95,367 shares, respectively.
The difference between shares issued and options exercised results from the
Plan's provision allowing employees to elect to pay their withholding obligation
through share reduction. Withholding taxes paid by the Company as a result of
the share withholding provision amounted to $5,171 in 1997, $186,927 in 1996,
and $413,000 in 1995.

    During the year ended September 30, 1997, the Board of Directors authorized
the cancellation and reissue of non-statutory stock options to certain employees
for the purchase of 823,326 shares, at an exercise price below the market value
of the stock. Under this authorization, the original option issues were canceled
and new options were issued with a new four-year vesting schedule. During the
years ended September 30, 1996 and 1995, the Board of Directors authorized the
issuance of nonstatutory stock options for the purchase of 2,500 and 50,000
shares, respectively, at prices below the market value of the stock on the grant
dates. The difference between the option price and market value at the date of
grant for the above option arrangements has been recorded as additional paid-in
capital with an offsetting debit within stockholders' equity to unearned stock
compensation. The compensation expense related to these option grants is
amortized to operations over the five-year vesting period in which the employees
perform services and amounted to $244,569 in 1997, $204,793 in 1996, and
$166,667 in 1995.


Stock options and common shares reserved for grant under the plan are as 
follows:

STOCK OPTIONS

<TABLE>
<CAPTION>
                                                            AVAILABLE                          OPTIONS WEIGHTED AVERAGE
                                                            FOR GRANT             OUTSTANDING           PRICE PER SHARE
---------------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>                   <C>                   <C>
BALANCES, SEPTEMBER 30, 1994                                    7,162                 903,338                   $ 13.30

ADDITIONAL SHARES APPROVED FOR GRANT                        2,000,000
GRANTED                                                      (808,375)                808,375                     18.74
EXERCISED                                                                             (95,367)                     9.06
CANCELLED                                                     119,251                (119,251)                    15.33
                                                           ----------------------------------
BALANCES, SEPTEMBER 30, 1995                                1,318,038               1,497,095                   $ 16.41

GRANTED                                                    (1,186,525)              1,186,525                     20.67
EXERCISED                                                                            (123,959)                    11.38
CANCELLED                                                     223,001                (223,001)                    22.18
                                                           ----------------------------------
BALANCES, SEPTEMBER 30, 1996                                  354,514               2,336,660                   $ 18.14


ADDITIONAL SHARES APPROVED FOR GRANT                          500,000
GRANTED                                                    (1,509,701)              1,509,701                      8.62
EXERCISED                                                                             (50,617)                     7.71
CANCELLED                                                   1,894,636              (1,894,636)                    19.01
                                                           ----------------------------------
BALANCES, SEPTEMBER 30, 1997                                1,239,449               1,901,108                   $ 10.01
                                                           ----------------------------------
                                                           ----------------------------------
</TABLE>

    Commencing in April 1996, the Company has sponsored an Employee Stock
Purchase Plan which covers all domestic employees with at least 90 days of
service. The plan allows eligible participants the right to purchase common
stock on a quarterly basis at the lower of 85% of the market price at the
beginning or end of each three month offering period. Employee contributions to
the plan were $534,327 and $200,888 for the fiscal years 1997 and 1996,
respectively. Pursuant to the plan, 69,402 and 8,835 shares were issued 
to employees during fiscal years 1997 and 1996, respectively.  As of September
30, 1997, 421,763 shares are available for future issuances.

                                          29
<PAGE>

                               DIGI INTERNATIONAL INC.

8   STOCK-BASED COMPENSATION

    In accordance with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123), the Company has chosen
to continue to account for stock-based compensation using the intrinsic value
method.

    Had the Company used the fair-value-based method of accounting for its
stock options granted in 1997 and 1996, and charged operations over the option
vesting periods based on the fair value of options at the date of grant, net
(loss) income and net (loss) income per common share would have been reduced to
the following pro forma amounts:

                                                       1997              1996
-----------------------------------------------------------------------------
NET (LOSS) INCOME
  AS REPORTED                                 $ (15,790,844)      $ 9,300,220
  PRO FORMA                                     (17,449,611)        8,536,111

NET (LOSS) INCOME PER SHARE
  AS REPORTED                                 $       (1.18)      $       .69
  PRO FORMA                                           (1.30)              .63


    The pro forma information presented includes only stock options granted in
fiscal years 1997 and 1996. Compensation expense, under the fair-value-based
method, will increase over the next few years as additional stock option grants
are considered.

    The weighted average fair value of options granted in fiscal years 1997 and
1996 was $8.57 and $20.67, respectively. The weighted average fair value was
determined based upon the fair value of each option on the grant date, utilizing
the Black-Scholes option-pricing model and the following assumptions:

                                                       1997              1996
-----------------------------------------------------------------------------
RISK-FREE INTEREST RATE                               6.02%             5.99%

EXPECTED OPTION HOLDING PERIOD                      4 YEARS           4 YEARS

EXPECTED VOLATILITY                                     40%               50%

EXPECTED DIVIDEND YIELD                                   0                 0

    At September 30, 1997, the weighted average exercise price and remaining
life of the stock options are as follows:

<TABLE>
<CAPTION>

RANGE OF EXERCISE PRICES                         $.50-10.75        $11.25-17.50        $19.25-29.25               TOTAL
-----------------------------------------------------------------------------------------------------------------------
<S>                                              <C>                <C>                 <C>                  <C>
TOTAL OPTIONS OUTSTANDING                         1,472,398             259,335             169,375           1,901,108

WEIGHTED AVERAGE REMAINING
  CONTRACTUAL LIFE (YEARS)                             6.21                6.42                6.90                6.51

WEIGHTED AVERAGE 
   EXERCISE PRICE                                     $7.92              $13.44              $22.84              $10.01

OPTIONS EXERCISABLE                                  86,438             181,840             141,825             410,103

WEIGHTED AVERAGE PRICE
   OF EXERCISABLE OPTIONS                             $5.45              $13.71              $22.82              $13.99
</TABLE>

9   LINE OF CREDIT

    During 1996, the Company negotiated a $5 million uncollateralized line of
credit with its bank, to be used to fund general corporate cash needs. The
interest rate varies depending on the "base" or "prime" rate established by the
bank. During fiscal 1997 and 1996, the Company did not use this line of credit. 

10  COMMITMENTS

    The Company has entered into various operating lease agreements, the last
of which expires in fiscal year 2002. Below is a schedule of future minimum
commitments under noncancelable operating leases:


FISCAL YEAR                                                            AMOUNT
-----------------------------------------------------------------------------
1998                                                                 $835,142

1999                                                                  591,358

2000                                                                  576,377

2001                                                                  491,990

2002                                                                  280,510


     Total rental expense for all operating leases for the years ended September
30, 1997, 1996 and 1995 was $1,405,582, $965,710 and $946,000, respectively.

11  INCOME TAXES

    The components of the provision for income taxes for the years ended 
September 30, 1997, 1996 and 1995 are as follows:


                                        1997              1996           1995
-----------------------------------------------------------------------------
CURRENT PAYABLE:

FEDERAL                          $ 1,737,116       $ 6,977,337   $  9,505,650

STATE                                142,457           920,956        614,100

DEFERRED                          (1,787,933)         (393,153)       (84,750)
                                 --------------------------------------------
                                 $    91,640       $ 7,505,140   $ 10,035,000
                                 --------------------------------------------
                                 --------------------------------------------

    The net deferred tax asset at September 30, 1997 and 1996 consists of the
following:

                                                          1997           1996
-----------------------------------------------------------------------------
VALUATION RESERVES                                 $ 1,791,903    $   615,631

INVENTORY VALUATION                                    800,364        432,225

VACATION COSTS                                         197,107        311,250

DEPRECIATION                                           193,525       (164,850)
                                                   --------------------------
NET DEFERRED TAX ASSET                             $ 2,982,899    $ 1,194,256
                                                   --------------------------
                                                   --------------------------

                                          30
<PAGE>
                               DIGI INTERNATIONAL INC.


    The reconciliation of the federal statutory income tax rate to the
effective income tax rate for the years ended September 30, 1997, 1996 and 1995,
are as follows:

                                              1997         1996         1995
-----------------------------------------------------------------------------
STATUTORY INCOME TAX RATE                   (34.0)%        35.0%        35.0%

INCREASE (REDUCTION) 
RESULTING FROM:

  UTILIZATION OF RESEARCH AND
    DEVELOPMENT TAX CREDITS                  (0.9)         (1.7)        (1.7)

  STATE TAXES, NET OF FEDERAL BENEFITS        1.0           3.6          2.5

  AETHERWORKS CORPORATION
    NET OPERATING LOSS                       12.5           8.0             

  AETHERWORKS CORPORATION 
    WRITE OFF                                 9.6                            

  RESTRUCTURING CHARGE                        9.3                            

  TAX CONTINGENCY                             4.7                            

  FOREIGN AND OTHER                          (2.1)         (0.2)        (1.6)
                                           ------------------------------------
                                               .1%         44.7%        34.2%
                                           ------------------------------------
                                           ------------------------------------

12  FOREIGN SALES AND MAJOR CUSTOMERS

    The Company maintains foreign sales offices but does not otherwise have any
foreign operations. Foreign export sales, primarily to Europe, comprised
approximately 23.9%, 20%, and 20% of net sales for the years ended September 30,
1997, 1996 and 1995, respectively.

    During 1997, one customer (customer A) accounted for 15.1% of net sales
while another (customer B) accounted for 10.5% of net sales. In addition,
customer A accounted for 28% of the trade accounts receivable outstanding at
September 30, 1997.
    
    During 1996, one customer (customer B) accounted for 13.9% of net sales and
11.8% of accounts receivable at September 30, 1996, while another (customer A)
accounted for 13.4% of net sales and 14.3% of accounts receivable at September
30, 1996. During 1995, one customer (customer A) accounted for 12.5% of net
sales and another customer (customer C) accounted for 11.7%. 

13  EMPLOYEE BENEFIT PLAN

    The Company has a savings and profit sharing plan pursuant to Section
401(k) of the Internal Revenue Code ("the Code"), whereby eligible employees may
contribute up to 15% of their earnings, not to exceed amounts allowed under the
Code. In addition, the Company may make contributions at the discretion of the
Board of Directors. No Company contribution was made in 1997 or 1996. During
1995, the Company provided for matching contributions totaling $125,000.

14  CONTINGENCIES

    During fiscal 1997, the Company and certain of its previous officers were
named as defendants in a series of putative securities class action lawsuits 
in the United States District Court for the District of Minnesota on behalf 
of an alleged class of purchasers of its common stock during the period 
January 25, 1996 through December 23, 1996, inclusive, which were 
consolidated, and a Consolidated Amended Complaint was filed in May 1997. 
Also in 1997, a similar, but separate action was filed by the Louisiana State 
Employees Retirement System. The Consolidated Amended Complaint and the 
Louisiana Complaint allege the Company and certain of its previous officers 
violated federal securities laws by, among other things, misrepresenting 
and/or omitting material information concerning the Company's operations and 
financial results. The Louisiana Complaint also alleges misrepresentations in 
violation of state common law.

    The defendants served motions to dismiss the Consolidated Amended Complaint
and the Louisiana Complaint on the ground, among others, that they fail to plead
claims in accordance with applicable law. The motions were argued before the
District Court at a hearing on October 31, 1997. No ruling has been received as
of December 15, 1997.

    Because the lawsuits are in their preliminary stages, the ultimate outcomes
cannot be determined at this time, and no potential assessment of the probable
or possible effects of such litigation, if any, on the Company's financial
position, liquidity or future operations can be made.

                                          31
<PAGE>
                               DIGI INTERNATIONAL INC.


REPORT OF MANAGEMENT

TO THE STOCKHOLDERS OF DIGI INTERNATIONAL INC.:

    The Company's management is responsible for the integrity, objectivity and
consistency of the financial information presented in this annual report. The
consolidated financial statements contained herein were prepared in accordance
with generally accepted accounting principles and were based on informed
judgments and management's best estimates as required. Financial information
elsewhere in this annual report is consistent with that contained in the
consolidated financial statements.

    The Company maintains a system of internal controls designed to provide
reasonable assurance that assets are safeguarded, transactions are properly
executed in accordance with management's authorization, and accounting records
may be relied upon for the preparation of financial statements and other
financial information. The system is monitored by direct management review.
Limitations exist in any system of internal control, based upon the recognition
that the cost of the system should not exceed the benefits derived.

    The Company's consolidated financial statements have been audited by
Coopers & Lybrand L.L.P., independent certified public accountants. Their audits
were conducted in accordance with generally accepted auditing standards. 
As part of their audits of the Company's consolidated financial statements,
these independent accountants considered the Company's internal controls to the
extent they deemed necessary to determine the nature, timing and extent of their
audit tests.

    The Audit Committee of the Board of Directors is composed entirely of 
non-employee directors and is responsible for monitoring and overseeing the 
quality of the Company's accounting and reporting policies, internal controls 
and other matters deemed appropriate. The independent certified public 
accountants have free access to the Audit Committee without management 
present.


/s/  Jerry Dusa

Jerry A. Dusa
President and Chief Executive Officer


/s/ Jonathon E. Killmer

Jonathon E. Killmer
Senior Vice President, Chief Financial Officer and Treasurer


REPORT OF INDEPENDENT ACCOUNTANTS

TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF 
DIGI INTERNATIONAL INC.:

    We have audited the consolidated balance sheets of Digi International Inc.
and subsidiaries as of September 30, 1997 and 1996, and the related consolidated
statements of operations, cash flows and stockholders' equity for each of the
three years in the period ended September 30, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. As
discussed in Note 5, the Company has recorded its investment in AetherWorks
Corporation (AetherWorks) on the equity method; the 1997 and 1996 consolidated
statements of operations include AetherWorks' net operating losses for the years
ended September 30, 1997 and 1996 of $5,764,201 and $3,623,776, respectively. We
did not audit the financial statements of AetherWorks, which statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for AetherWorks' net
operating losses, is based solely on the report of other auditors.

    We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to 
obtain reasonable assurance about whether the financial statements are free 
of material misstatement. An audit includes examining, on a test basis, 
evidence supporting the amounts and disclosures in the financial statements. 
An audit also includes assessing the accounting principles used and 
significant estimates made by management, as well as evaluating the overall 
financial statement presentation. We believe that our audits and the report 
of other auditors for the years ended September 30, 1997 and 1996, provide a 
reasonable basis for our opinion.

    In our opinion, based on our audits and the report of other auditors for
the years ended September 30, 1997 and 1996, the consolidated financial 
statements referred to above present fairly, in all material respects, the 
consolidated financial position of Digi International Inc. and subsidiaries 
as of September 30, 1997 and 1996, and the consolidated results of their 
operations and their cash flows for each of the three years in the period 
ended September 30, 1997, in conformity with generally accepted accounting 
principles.


/s/ Coopers & Lybrand L.L.P.

Coopers & Lybrand L.L.P.
Minneapolis, Minnesota
December 15, 1997

                                          32
<PAGE>
                               DIGI INTERNATIONAL INC.

QUARTERLY FINANCIAL DATA (UNAUDITED):

<TABLE>
<CAPTION>
                                                                                    QUARTER ENDED
                                                          DEC. 31             MAR. 31             JUNE 30            SEPT. 30 
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>                 <C>                 <C>                 <C>
1997
  NET SALES                                            $   42,236          $   40,393          $   40,843          $   42,125
  GROSS MARGIN                                             19,640              19,294              20,118              21,063
  RESTRUCTURING                                                               (10,471)                                       
  AETHERWORKS CORPORATION NET LOSS                         (1,520)             (1,590)             (1,525)             (1,130)
  AETHERWORKS CORPORATION WRITE OFF                                                                                    (5,759)
  NET (LOSS) INCOME                                        (2,578)             (9,400)                 67              (3,880)
  NET (LOSS) INCOME PER SHARE                                (.19)               (.70)                .01                (.29)

1996
  NET SALES                                            $   43,716(A)       $   47,973(A)       $   49,643(A)       $   51,819(A)
  GROSS MARGIN                                             23,729(A)           25,391(A)           24,451(A)           26,471(A)
  AETHERWORKS CORPORATION NET LOSS                           (279)               (656)             (1,204)             (1,485)
  NET (LOSS) INCOME                                         4,522               4,620                 (51)                209
  NET INCOME PER SHARE                                        .33                 .34                  .0                 .02

1995
  NET SALES                                            $   37,879          $   40,076          $   41,179          $   45,844
  GROSS MARGIN                                             19,745              21,169              22,131              23,000
  NET INCOME                                                4,491               4,597               4,847               5,396
  NET INCOME PER SHARE                                        .32                 .33                 .35                 .38
</TABLE>

THE SUMMATION OF QUARTERLY NET INCOME PER SHARE MAY NOT EQUATE TO THE YEAR-END 
CALCULATION AS QUARTERLY CALCULATIONS ARE PERFORMED ON A DISCRETE BASIS.

(A) RESTATED FOR THE RECLASSIFICATION OF REBATES.

                                          33
