===============================================================================
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                    FORM 10-Q

[X] QUARTERLY  REPORT  UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
     OF  1934

                For the quarterly period ended September 30, 2003

                                       OR

[ ]  TRANSITION  REPORT  PURSUANT  TO  SECTION  13  OR  15(D)  OF THE SECURITIES
     EXCHANGE  ACT  OF  1934

            For the transition period from _________ to ___________.

                         Commission file number: 1-16027
                                   __________

                                 LANTRONIX, INC.
             (Exact name of registrant as specified in its charter)

                     DELAWARE                       33-0362767
        (State or other jurisdiction             (I.R.S. Employer
      of incorporation or organization)         Identification No.)

                 15353 Barranca Parkway Irvine, California 92618
              (Address of principal executive offices and zip code)
                                   __________

                                 (949) 453-3990
              (Registrant's Telephone Number, Including Area Code)

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

     As  of October 31, 2003, 57,430,096 shares of the Registrant's common stock
were  outstanding.

===============================================================================




                                 LANTRONIX, INC.

                                    FORM 10-Q
                    FOR THE QUARTER ENDED SEPTEMBER 30, 2003

                                      INDEX




                                                                                                         PAGE
                                                                                                         ----
                                                                                                   
PART I.   FINANCIAL INFORMATION                                                                             3

Item 1.   Financial Statements.                                                                             3

          Condensed Consolidated Balance Sheets at September 30, 2003 and June 30, 2002                     3

          Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended
          September 30, 2003 and 2002                                                                       4

          Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
          September 30, 2003 and 2002                                                                       5

          Notes to Unaudited Condensed Consolidated Financial Statements.                                   6

Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations            12

Item 3.   Quantitative and Qualitative Disclosures About Market Risk.                                      28

Item 4.   Controls and Procedures.                                                                         28

PART II.  OTHER INFORMATION                                                                                30

Item 1.   Legal Proceedings                                                                                30

Item 2.   Changes in Securities and Use of Proceeds.                                                       31

Item 3.   Defaults Upon Senior Securities                                                                  32

Item 4.   Submission of Matters to a Vote of Security Holders                                              32

Item 5.   Other Information                                                                                32

Item 6.   Exhibits and Reports on Form 8-K.                                                                32



                                        2



                          PART I. FINANCIAL INFORMATION

ITEM  1.  FINANCIAL  STATEMENTS

                                 LANTRONIX, INC.

                 UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)





                                           SEPTEMBER 30,  JUNE 30,
                                               2003         2003
                                           -----------  ----------
                                                  
                    ASSETS
------------------------------------------

Current assets:
Cash and cash equivalents                   $   8,867   $   7,328
Marketable securities                           4,600       6,750
Accounts receivable, net                        3,721       3,858
Inventories                                     6,112       6,011
Deferred income taxes                           7,909       7,909
Contract manufacturers receivable, net          1,065       1,744
Prepaid expenses and other current assets       2,501       3,861
                                            ----------  ----------
Total current assets                           34,775      37,461

Property and equipment, net                     2,090       2,541
Goodwill                                       11,726      11,726
Purchased intangible assets, net                4,653       5,394
Long-term investments                           5,249       5,458
Officer loans.                                    104         104
Other assets                                      176         172
                                            ----------  ----------
Total assets                                $  58,773   $  62,856
                                            ==========  ==========


  LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------------

Current liabilities:
Accounts payable                            $   3,741   $   4,801
Accrued payroll and related expenses            1,633       1,367
Due to Gordian                                      -       1,000
Accrued litigation settlement                       -       1,533
Warranty reserve                                1,301       1,193
Restructuring reserve                           3,168       3,235
Other current liabilities                       3,008       2,634
Convertible note payable                          867           -
                                            ----------  ----------
Total current liabilities                      13,718      15,763

Deferred income taxes                           8,509       8,509
Convertible note payable                            -         867

Stockholders' equity:
Common stock                                        6           6
Additional paid-in capital.                   180,246     178,628
Deferred compensation                            (446)       (695)
Accumulated deficit                          (143,473)   (140,424)
Accumulated other comprehensive loss              213         202
                                            ----------  ----------
Total stockholders' equity                     36,546      37,717
                                            ----------  ----------
Total liabilities and stockholders' equity  $  58,773   $  62,856
                                            ==========  ==========


                            See accompanying notes.

                                        3



                                 LANTRONIX, INC.

            UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)





                                                                THREE MONTHS ENDED
                                                                  SEPTEMBER 30,
                                                                -------------------
                                                                  2003      2002
                                                                --------  ---------
                                                                    

Net revenues (A)                                                $12,230   $ 12,681
Cost of revenues (B)                                              6,112      8,196
                                                                --------  ---------

Gross profit                                                      6,118      4,485
                                                                --------  ---------

Operating expenses:
  Selling, general and administrative (C)                         6,705      7,871
  Research and development (C)                                    1,984      2,430
  Stock-based compensation (B) (C)                                  155        445
  Amortization of purchased intangible assets                       144        228
  Restructuring charges                                               -      4,929
                                                                --------  ---------
Total operating expenses                                          8,988     15,903
                                                                --------  ---------
Loss from operations                                             (2,870)   (11,418)
Interest income (expense), net                                       24        192
Other income (expense), net                                        (170)       (90)
                                                                --------  ---------
Loss before income taxes                                         (3,016)   (11,316)
Provision for income taxes                                           33         86
                                                                --------  ---------
Net loss                                                        $(3,049)  $(11,402)
                                                                ========  =========

Basic and diluted net loss per share                            $ (0.05)  $  (0.21)
                                                                ========  =========

Weighted average shares (basic and diluted)                      55,484     53,935
                                                                ========  =========

(A)  Includes net revenues from related parties. . . . . . . .  $   311   $    467
                                                                ========  =========

(B)  Cost of revenues includes the following:
     Amortization of purchased intangible assets                $   597   $  1,028
     Stock-based compensation                                        16         19
                                                                --------  ---------
                                                                $   613   $  1,047
                                                                ========  =========

(C)  Stock-based compensation is excluded from the following:
     Selling, general and administrative expenses               $   113   $    363
     Research and development expenses                               42         82
                                                                --------  ---------
                                                                $   155   $    445
                                                                ========  =========


                             See accompanying notes.

                                        4



                                 LANTRONIX, INC.

            UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)




                                                                               THREE MONTHS ENDED
                                                                                  SEPTEMBER 30,
                                                                               ------------------
                                                                                2003      2002
                                                                              --------  ---------
                                                                                  
Cash flows from operating activities:
Net loss                                                                      $(3,049)  $(11,402)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation                                                                      504        616
Amortization of purchased intangible assets                                       741      1,256
Stock-based compensation.                                                         171        464
Provision for inventory reserves                                                 (914)       654
Provision for doubtful accounts                                                   142        231
Loss on sale of fixed assets                                                       31          -
Equity losses from unconsolidated businesses                                      209        329
Restructuring charges                                                               -      4,474
Changes in operating assets and liabilities, net of effect from acquisition:
Accounts receivable                                                                (5)       623
Inventories                                                                       813     (1,062)
Contract manufacturers receivable                                                 679        942
Prepaid expenses and other current assets                                       1,360        476
Other assets                                                                       (4)       (82)
Accounts payable.                                                              (1,060)      (111)
Due to related party                                                                -       (246)
Due to Gordian                                                                 (1,000)    (2,000)
Accrued Lightwave settlement                                                        -     (2,004)
Warranty reserve                                                                  108        277
Restructuring reserve                                                             (67)         -
Other current liabilities                                                         640       (257)
                                                                              --------  ---------
Net cash used in operating activities                                            (701)    (6,822)
                                                                              --------  ---------

Cash flows from investing activities:
Purchase of property and equipment, net                                           (84)      (216)
Purchases of marketable securities                                                  -     (9,250)
Acquisition of business, net of cash acquired                                       -     (2,114)
Proceeds from sale of marketable securities                                     2,150      3,000
                                                                              --------  ---------
Net cash provided by (used in) investing activities                             2,066     (8,580)
                                                                              --------  ---------

Cash flows from financing activities:
Net proceeds from other issuances of common stock                                 163          9
                                                                              --------  ---------
Net cash provided by financing activities                                         163          9
Effect of foreign exchange rates on cash.                                          11         23
                                                                              --------  ---------
Increase (decrease) in cash and cash equivalents                                1,539    (15,370)
Cash and cash equivalents at beginning of period.                               7,328     26,491
                                                                              --------  ---------
Cash and cash equivalents at end of period.                                   $ 8,867   $ 11,121
                                                                              ========  =========


                            See accompanying notes.

                                        5




                                 LANTRONIX, INC.

         NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                               SEPTEMBER 30, 2003

1.     BASIS  OF  PRESENTATION

      The  condensed  consolidated  financial  statements  included  herein  are
unaudited.  They contain all normal recurring accruals and adjustments which, in
the  opinion  of  management,  are  necessary to present fairly the consolidated
financial  position  of  Lantronix, Inc. and its subsidiaries (collectively, the
"Company") at September 30, 2003, and the consolidated results of its operations
and  its  cash flows for the three months ended September 30, 2003 and 2002. All
intercompany  accounts  and  transactions  have  been  eliminated.  It should be
understood  that  accounting  measurements  at  interim dates inherently involve
greater  reliance  on  estimates than at year-end. The results of operations for
the  three months ended September 30, 2003 are not necessarily indicative of the
results  to  be  expected  for  the  full  year  or  any future interim periods.

     These  financial  statements do not include certain footnotes and financial
presentations  normally required under generally accepted accounting principles.
Therefore,  they  should  be  read  in conjunction with the audited consolidated
financial  statements  and  notes  thereto  for  the  year  ended June 30, 2003,
included  in  the Company's Annual Report on Form 10-K filed with the Securities
and  Exchange  Commission  ("SEC")  on  September  29,  2003.


2.     RECENT  ACCOUNTING  PRONOUNCEMENTS

     In  January  2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation  No.  46, Consolidation of Variable Interest Entities ("FIN 46").
FIN 46 requires the primary beneficiary of a variable interest entity ("VIE") to
consolidate  the  entity  and  also  requires  majority and significant variable
interest  investors  to provide certain disclosures. A VIE is an entity in which
the  equity  investors  do  not  have  a  controlling interest, equity investors
participate  in  losses  or  residual  interests  of  the entity on a basis that
differs  from  its  ownership  interest,  or  the  equity  investment at risk is
insufficient  to  finance  the  entity's activities without receiving additional
subordinated  financial support from the other parties. For arrangements entered
into  with  VIEs created prior to January 31, 2003, the provisions of FIN 46 are
required  to  be  adopted at the beginning of the first interim or annual period
beginning  after  December  15,  2003.  The  Company  is currently reviewing its
investments  and  other  arrangements  to  determine whether any of its investee
companies are VIEs. The Company does not expect to identify any significant VIEs
that  would be consolidated, but may be required to make additional disclosures.


3.     NET  LOSS  PER  SHARE

     Basic net loss per share is calculated by dividing net loss by the weighted
average  number of common shares outstanding during the period. Diluted net loss
per  share  is  calculated by adjusting outstanding shares assuming any dilutive
effects  of  options.  However,  for periods in which the Company incurred a net
loss, these shares are excluded because their effect would be to reduce recorded
net  loss  per share. The following table sets forth the computation of net loss
per  share  (in  thousands,  except  per  share  amounts):






                                                   THREE MONTHS ENDED
                                                      SEPTEMBER 30,
                                                  -------------------
                                                    2003      2002
                                                  --------  ---------
                                                      
Numerator: Net loss                               $(3,049)  $(11,402)
                                                  ========  =========

Denominator:
Weighted-average shares outstanding                55,816     54,267
Less: non-vested common shares outstanding           (332)      (332)
                                                  --------  ---------
Denominator for basic and diluted loss per share   55,484     53,935
                                                  ========  =========

Basic and diluted net loss per share              $ (0.05)  $  (0.21)
                                                  ========  =========



4.     MARKETABLE  SECURITIES

     The  Company  defines  marketable securities as income yielding securities,
which  can  be  readily  converted  to  cash.  Marketable  securities consist of
obligations  of  U.S.  Government  agencies,  state,  municipal  and  county
governments'  notes  and  bonds.

                                        6



5.     INVENTORIES

     Inventories are stated at the lower of cost (first-in, first-out) or market
and  consist  of  the  following  (in  thousands):





                                            SEPTEMBER 30,    JUNE 30,
                                                2003           2003
                                           ---------------  ----------
                                                      
Raw materials . . . . . . . . . . . . . .  $        4,711   $   5,109
Finished goods. . . . . . . . . . . . . .           6,211       7,940
Inventory at distributors . . . . . . . .             874         959
                                           ---------------  ----------
                                                   11,796      14,008
Reserve for excess and obsolete inventory          (5,684)     (7,997)
                                           ---------------  ----------
                                           $        6,112   $   6,011
                                           ===============  ==========



6.     PURCHASED  INTANGIBLE  ASSETS

     The  composition  of  purchased  intangible  assets  is  as  follows  (in
thousands):







                                       SEPTEMBER 30, 2003                              JUNE 30, 2003
                                       ------------------                              -------------

                           USEFUL                    ACCUMULATED                       ACCUMULATED
                           LIVES         GROSS       AMORTIZATION    NET     GROSS     AMORTIZATION    NET
                         ----------  -------------  --------------  ------  --------  --------------  ------
                                                                                 

 Existing technology. .   1-5 years  $      8,060   $      (3,691)  $4,369  $ 8,060   $      (3,094)  $4,966
 Patent/core technology           5           405            (311)      94      405            (283)     122
 Tradename/trademark. .           5            32             (19)      13       32             (18)      14
 Non-compete agreements         2-3           940            (763)     177      940            (648)     292
                         ----------  -------------  --------------  ------  --------  --------------  ------

  Total . . . . . . . .              $      9,437   $      (4,784)  $4,653  $ 9,437   $      (4,043)  $5,394
                                     ============   ==============  ======  ========  ==============  ======




     The  amortization  expense  for  purchased  intangible assets for the three
months ended September 30, 2003 was $741,000, of which $597,000 was amortized to
cost  of  revenues  and  $144,000  was  amortized  to  operating  expenses.  The
amortization  expense for purchased intangible assets for the three months ended
September 30, 2002 was $1.3 million, of which $1.0 million was amortized to cost
of  revenues  and  $228,000 was amortized to operating expenses.   The estimated
amortization  expense  for the remainder of fiscal 2004 and the next three years
are  as  follows:





                                       COST OF    OPERATING
Fiscal year ending June 30:            REVENUES   EXPENSES   TOTAL
                                       ---------  ---------  ------
                                                    
      2004 (Remainder of fiscal year)  $   1,734  $     217  $1,951
      2005. . . . . . . . . . . . . .      1,690         65   1,755
      2006. . . . . . . . . . . . . .        816          2     818
      2007. . . . . . . . . . . . . .        129          -     129
                                       ---------  ---------  ------
      Total . . . . . . . . . . . . .  $   4,369  $     284  $4,653
                                       =========  =========  ======



7.     LONG-TERM  INVESTMENTS

     Long-term  investments  consist  of a 15.3% ownership interest in Xanboo at
September  30,  2003  and  June  30,  2003.  The  Company is accounting for this
long-term  investment  under  the equity method based upon the Company's ability
through  representation  on  Xanboo's board of directors to exercise significant
influence  over  its  operations. The Company's interest in the losses of Xanboo
aggregating  $209,000 and $329,000 for the three months ended September 30, 2003
and  2002,  respectively, have been recognized as other expense in the condensed
consolidated  statements  of  operations.


8.     RESTRUCTURING  CHARGES

     On  September  12,  2002  and  March  14,  2003,  the  Company  announced a
restructuring  plan to prioritize its initiatives around the growth areas of its
business,  focus  on profit contribution, reduce expenses, and improve operating
efficiency.  These  restructuring plans include a worldwide workforce reduction,
consolidation  of  excess  facilities  and  other  charges. The Company recorded
restructuring  costs  totaling  $5.7 million, which were classified as operating
expenses in the consolidated statement of operations for the year ended June 30,

                                        7



2003.  These  restructuring  plans resulted in the reduction of approximately 58
regular employees worldwide. The Company recorded workforce reduction charges of
approximately  $1.3  million  related  to  severance and fringe benefits for the
terminated employees. The Company recorded charges of approximately $4.4 million
related  to  the consolidation of excess facilities, relating primarily to lease
terminations,  non-cancelable  lease  costs, write-off of leasehold improvements
and  termination  of  a  contractual obligation. The restructuring costs will be
substantially paid in cash over the next five years. The remaining restructuring
reserve  is related to facility lease terminations and a contractual settlement.


     A  summary  of  the  activity  in  the  restructuring reserve account is as
follows  (in  thousands):




                                                    CHARGES AGAINST
                                                    ---------------
                                                        RESERVE
                                                       ---------
                                    RESTRUCTURING                      RESTRUCTURING
                                     RESERVE AT                         RESERVE AT
                                       JUNE 30,                        SEPTEMBER 30,
                                         2003       NON-CASH    CASH       2003
                                    --------------  ---------  ------  --------------
                                                           
Workforce reductions . . . . . . .  $          260  $       -  $   -   $          260
Contractual obligations. . . . . .           2,000          -      -            2,000
Consolidation of excess facilities             975          -    (67)             908
                                    --------------  ---------  ------  --------------

Total. . . . . . . . . . . . . . .  $        3,235  $       -  $ (67)  $        3,168
                                    ==============  =========  ======  ==============



9.     WARRANTY

     Upon shipment to its customers, the Company provides for the estimated cost
to  repair  or  replace  products  to  be returned under warranty. The Company's
current  warranty periods generally range from ninety days to two years from the
date  of shipment. The following table is a reconciliation of the changes to the
product  warranty  liability  for  the  periods  presented:





                                THREE MONTHS
                                    ENDED        YEAR ENDED
                                SEPTEMBER 30,     JUNE 30,
                                    2003            2003
                               ---------------  ------------
                                          
Balance beginning of period .  $        1,193   $       479
Charged to costs and expenses             414           878
Charged to other expenses . .            (306)         (153)
Deductions. . . . . . . . . .               -           (11)
                               ---------------  ------------
Balance end of period . . . .  $        1,301   $     1,193
                               ===============  ============



10.     PROVISION  FOR  INCOME  TAXES  AND  EFFECTIVE  TAX  RATE

     The Company utilizes the liability method of accounting for income taxes as
set  forth  in  Statement  of  Financial  Accounting Standards ("SFAS") No. 109,
"Accounting  for  Income  Taxes."  The Company's effective tax rate was (1)% for
both  the  three  month periods ended September 30, 2003 and September 30, 2002.
The  federal  statutory  rate  was  34% for both periods. The effective tax rate
associated  with  the  income tax expense for both the three month periods ended
September 30, 2003 and 2002, was lower than the federal statutory rate primarily
due  to  the  increase  in  valuation  allowance, as well as the amortization of
stock-based  compensation for which no current year tax benefit was provided. In
October  2003, the Internal Revenue Service completed its audit of the Company's
federal  income tax returns for the years ended June 30, 1999, 2000 and 2001. As
a  result, the Company will be required to pay approximately $500,000 in tax and
interest to the Internal Revenue Service and the California Franchise Tax Board,
in  fiscal  2004.  The  Company  had  accrued for this liability in prior fiscal
periods.


11.     BANK  LINE  OF  CREDIT  AND  DEBT

     In  January 2002, the Company entered into a two-year line of credit with a
bank  in  an  amount  not  to exceed $20.0 million. Borrowings under the line of
credit  bear  interest  at either (i) the prime rate or (ii) the LIBOR rate plus
2.0%.  The  Company was required to pay a $100,000 facility fee of which $50,000
was  paid  upon  the  closing  and  $50,000 was to be paid. The Company was also

                                        8



required  to  pay  a  quarterly  unused  line fee of .125% of the unused line of
credit  balance.  Since  establishing  the line of credit, the Company has twice
reduced  the  amount  of  the  line, modified customary financial covenants, and
adjusted  the  interest  rate to be charged on borrowings to the prime rate plus
..50%,  and  eliminated  the  LIBOR  option. Effective July 25, 2003, the Company
further  modified  this  line  of  credit,  reducing  the revolving line to $5.0
million,  and  adjusting  the  customary affirmative and negative covenants. The
Company  is also required to maintain certain financial ratios as defined in the
agreement.  The  agreement  has an annual revolving maturity date that renews on
the  effective  date.  The  $50,000  facility fee was reduced to $12,500 and was
paid.  Prior  to  any  advances being made under the line of credit, the bank is
required  to  complete  an  initial field examination to determine its borrowing
base.  To  date,  the  Company has not borrowed against this line of credit. The
Company  is  currently in compliance with the revised financial covenants of the
July  25,  2003  amended  line  of  credit.  Pursuant to the line of credit, the
Company  is  restricted  from  paying any dividends. The Company has secured two
deposits  totaling  approximately  $365,000  under  its  line  of  credit.

     The Company issued a two-year note in the principal amount of $867,000 as a
result  of  its acquisition of Stallion, accruing interest at a rate of 2.5% per
annum.  Interest  expense  related  to the note totaled approximately $5,400 and
$3,600 for the three months ended September 30, 2003 and 2002, respectively. The
note is convertible into the Company's common stock at any time, at the election
of  the  holders,  at  a $5.00 conversion price. The note is due in August 2004.


12.     COMPREHENSIVE  LOSS

     SFAS  No.  130,  "Reporting  Comprehensive  Income  (Loss),"  establishes
standards  for  reporting  and  displaying  comprehensive  income (loss) and its
components in the condensed consolidated financial statements. The components of
comprehensive  loss  are  as  follows  (in  thousands):





                                              THREE  MONTHS  ENDED
                                                 SEPTEMBER 30,
                                              --------------------
                                                 2003      2002
                                               --------  ---------
                                                   
Net loss                                       $(3,049)  $(11,402)
Other comprehensive loss:
Change in accumulated translation adjustments       11         23
                                               --------  ---------
Total comprehensive loss                       $(3,038)  $(11,379)
                                               ========  =========



13.     STOCK-BASED  COMPENSATION

     The  Company  has  in  effect  several  stock-based  plans  under  which
non-qualified  and  incentive  stock  options  have  been  granted to employees,
non-employee  board  members  and  other  non-employees. The Company also has an
employee  stock  purchase  plan for all eligible employees. The Company accounts
for  stock-based  awards  to  employees in accordance with Accounting Principles
Board ("APB") No. 25, "Accounting for Stock Issues to Employees" ("APB 25"), and
related interpretations, and has adopted the disclosure-only alternative of SFAS
No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") and SFAS No.
148,  "Accounting  for  Stock-Based  Compensation  Transition  and  Disclosure."
Options  granted  to  non-employees, as defined, have been accounted for at fair
market  value  in  accordance  with  SFAS  No.  123.

     In  accordance  with the disclosure requirements of SFAS No. 123, set forth
below are the assumptions used and pro forma statement of operations data of the
Company  giving  effect  to  valuing  stock-based  awards to employees using the
Black-Scholes option pricing model instead of the guidelines provided by APB No.
25.  Among other factors, the Black-Scholes model considers the expected life of
the  option and the expected volatility of the Company's stock price in arriving
at  an  option  valuation.

                                        9



     The results of applying the requirements of the disclosure-only alternative
of  SFAS  No.  123  to  the  Company's  stock-based  awards  to  employees would
approximate  the  following:




                                                                     THREE  MONTHS  ENDED
                                                                        SEPTEMBER  30,
                                                                     --------------------
                                                                        2003      2002
                                                                      --------  ---------
                                                                          
Net loss - as reported                                                $(3,049)  $(11,402)
Add: Stock-based compensation expense included in net loss - as
reported                                                                  171        464
Deduct: Stock-based compensation expense determined under fair value
method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     (953)    (1,902)
                                                                      --------  ---------
Net loss - pro forma                                                  $(3,831)  $(12,480)
                                                                      ========  =========
Net loss per share (basic and diluted) - as reported                  $ (0.05)  $  (0.21)
                                                                      ========  =========
Net loss per share (basic and diluted) - pro forma                    $ (0.07)  $  (0.24)
                                                                      ========  =========



14.     LITIGATION  SETTLEMENT

     On  August  23,  2002,  a complaint entitled Dunstan v. Lantronix, Inc., et
al., was filed in the Circuit Court of the State of Oregon, County of Multnomah,
against the Company and certain of its current and former officers and directors
by  the cofounders of United States Software Corporation ("USSC"). The complaint
and  subsequently  filed  arbitration demand alleged Oregon state law claims for
securities violations, fraud, and negligence, as well as other claims related to
the  Company's acquisition of USSC. Plaintiffs sought more than $14.0 million in
damages,  interest,  attorneys' fees, costs, expenses, and an unspecified amount
of  punitive  damages. The parties participated in a mediation on June 30, 2003,
and  subsequently  reached  an  agreement to settle the dispute. Pursuant to the
parties'  settlement  agreement,  the  Company  released  to  the  plaintiffs
approximately  $400,000  in cash and 49,038 shares of the Company's common stock
that  had  been held in an escrow since December 2000 as part of the acquisition
of  USSC.  On  September  15,  2003,  the  Company also issued to the plaintiffs
1,726,703  additional  shares  of  its  common  stock  worth  approximately $1.5
million, which was recorded in the Company's results of operations as litigation
settlement  costs  for the year ended June 30, 2003. In exchange, the plaintiffs
released  all  claims  against  all  defendants.


15.     LITIGATION

Government  Investigation

     The  SEC  is  conducting a formal investigation of the events leading up to
the  Company's  restatement  of  its  financial statements on June 25, 2002. The
Department  of  Justice  is  also  conducting an investigation concerning events
related  to  the  restatement.

Class  Action  Lawsuits

     On  May  15,  2002, Stephen Bachman filed a class action complaint entitled
Bachman  v. Lantronix, Inc., et al., No. 02-3899, in the U.S. District Court for
the  Central  District  of  California  against  the  Company and certain of its
current  and former officers and directors alleging violations of the Securities
Exchange  Act of 1934 and seeking unspecified damages. Subsequently, six similar
actions  were  filed  in the same court. Each of the complaints purports to be a
class  action  lawsuit  brought  on behalf of persons who purchased or otherwise
acquired  the Company's common stock during the period of April 25, 2001 through
May  30,  2002,  inclusive. The complaints allege that the defendants caused the
Company to improperly recognize revenue and make false and misleading statements
about  its  business.  Plaintiffs  further allege that the defendants materially
overstated the Company's reported financial results, thereby inflating its stock
price  during  its securities offering in July 2001, as well as facilitating the
use  of  its  common stock as consideration in acquisitions. The complaints have
subsequently  been consolidated into a single action and the court has appointed
a  lead  plaintiff. The lead plaintiff filed a consolidated amended complaint on
January  17,  2003.  The  amended  complaint  now  purports to be a class action
brought  on  behalf of persons who purchased or otherwise acquired the Company's
common  stock  during  the  period  of  August  4,  2000  through  May 30, 2002,
inclusive.  The  amended  complaint continues to assert that the Company and the
individual  officer  and  director  defendants  violated  the 1934 Act, and also
includes alleged claims that the Company and its officers and directors violated
the Securities Act of 1933 arising from the Company's Initial Public Offering in
August  2000.  The  Company  has  filed  a  motion  to  dismiss  the  additional
allegations  on  March 3, 2003. The Court has taken the motion under submission.

                                       10



The Company has not yet answered the complaint, discovery has not commenced, and
no  trial  date  has  been  established.

Derivative  Lawsuit

     On  July  26,  2002,  Samuel  Ivy  filed a shareholder derivative complaint
entitled  Ivy  v. Bernhard Bruscha, et al., No. 02CC00209, in the Superior Court
of  the  State of California, County of Orange, against certain of the Company's
current  and  former  officers  and directors. On January 7, 2003, the plaintiff
filed  an  amended complaint. The amended complaint alleges causes of action for
breach  of  fiduciary  duty,  abuse  of  control,  gross  mismanagement,  unjust
enrichment,  and  improper  insider stock sales. The complaint seeks unspecified
damages  against  the  individual  defendants on the Company's behalf, equitable
relief,  and  attorneys'  fees.

     The  Company  filed  a  demurrer/motion to dismiss the amended complaint on
February 13, 2003. The basis of the demurrer is that the plaintiff does not have
standing  to bring this lawsuit since plaintiff has never served a demand on the
Company's Board that the Board take certain actions on behalf of the Company. On
April  17, 2003, the Court overruled the Company's demurrer. All defendants have
answered  the  complaint  and  generally  denied  the allegations. Discovery has
commenced,  but  no  trial  date  has  been  established.

Employment  Suit  Brought  by Former Chief Financial Officer and Chief Operating
Officer  Steven  Cotton

     On  September  6,  2002,  Steven  Cotton, the Company's former CFO and COO,
filed  a complaint entitled Cotton v. Lantronix, Inc., et al., No. 02CC14308, in
the  Superior  Court of the State of California, County of Orange. The complaint
alleges  claims for breach of contract, breach of the covenant of good faith and
fair  dealing,  wrongful  termination,  misrepresentation,  and  defamation. The
complaint  seeks  unspecified  damages,  declaratory relief, attorneys' fees and
costs.  Discovery  has  not  commenced  and  no trial date has been established.

     The  Company  filed a motion to dismiss on October 16, 2002, on the grounds
that  Mr.  Cotton's complaints are subject to the binding arbitration provisions
in  Mr. Cotton's employment agreement. On January 13, 2003, the Court ruled that
five  of  the  six  counts  in  Mr.  Cotton's  complaint  are subject to binding
arbitration. The court is staying the sixth count, for declaratory relief, until
the  underlying  facts are resolved in arbitration. No arbitration date has been
set.

Securities  Claims  Brought  by Former Shareholders of Synergetic Micro Systems,
Inc.  ("Synergetic")

     On  October  17,  2002,  Richard  Goldstein  and  several  other  former
shareholders  of  Synergetic  filed  a  complaint  entitled  Goldstein, et al v.
Lantronix,  Inc., et al in the Superior Court of the State of California, County
of Orange, against the Company and certain of its former officers and directors.
Plaintiffs  filed an amended complaint on January 7, 2003. The amended complaint
alleges  fraud, negligent misrepresentation, breach of warranties and covenants,
breach  of  contract  and  negligence,  all  stemming  from  its  acquisition of
Synergetic.  The  complaint  seeks  an  unspecified amount of damages, interest,
attorneys' fees, costs, expenses, and an unspecified amount of punitive damages.
On  May  5,  2003,  the  Company answered the complaint and generally denied the
allegations in the complaint. Discovery has commenced but no trial date has been
established.

Suit  filed  by  Lantronix  Against  Logical  Solutions,  Inc.  ("Logical")

     On  March  25, 2003, the Company filed in Connecticut state court (Judicial
District  of  New  Haven)  a  complaint  entitled  Lantronix, Inc. and Lightwave
Communications,  Inc.  v. Logical Solutions, Inc., et. al. This is an action for
unfair  and  deceptive  trade  practices, unfair competition, unjust enrichment,
conversion,  misappropriation  of  trade  secrets and tortuous interference with
contractual  rights and business expectancies. The Company seeks preliminary and
permanent  injunctive  relief  and  damages.  The  individual defendants are all
former  employees  of  Lightwave  Communications,  a  company  that  the Company
acquired  in  June  2001.  The  Court held a non-jury trial October 10-17, 2003;
closing  arguments  are  set  for  November  14,  2003.

Other

     From  time  to  time, the Company is subject to other legal proceedings and
claims in the ordinary course of business. The Company is currently not aware of
any such legal proceedings or claims that it believes will have, individually or
in  the  aggregate,  a  material  adverse  effect  on  its  business, prospects,
financial  position,  operating  results  or  cash  flows.

     The  pending  lawsuits involve complex questions of fact and law and likely
will  continue to require the expenditure of significant funds and the diversion
of  other  resources to defend. Management is unable to determine the outcome of
its  outstanding legal proceedings, claims and litigation involving the Company,
its  subsidiaries,  directors  and  officers  and cannot determine the extent to
which  these  results  may  have  a  material  adverse  effect  on the Company's
business,  results  of  operations and financial condition taken as a whole. The
results  of  litigation  are  inherently  uncertain,  and  adverse  outcomes are
possible.  The  Company  is  unable  to estimate the range of possible loss from
outstanding  litigation,  and  no amounts have been provided for such matters in
the  condensed  consolidated  financial  statements.

                                       11



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

     You  should  read the following discussion and analysis in conjunction with
the  Unaudited  Condensed  Consolidated  Financial  Statements and related Notes
thereto  contained  elsewhere  in this Report. The information in this Quarterly
Report  on  Form 10-Q is not a complete description of our business or the risks
associated  with  an  investment  in  our common stock. We urge you to carefully
review  and  consider  the  various disclosures made by us in this Report and in
other  reports  filed  with  the  Securities  and  Exchange  Commission ("SEC"),
including our Annual Report on Form 10-K for the fiscal year ended June 30, 2003
and  our  subsequent  reports  on  Form 8-K that discuss our business in greater
detail.

     The  section  entitled  "Risk  Factors"  set  forth  below,  and  similar
discussions in our other SEC filings, discuss some of the important factors that
may  affect  our  business,  results  of operations and financial condition. You
should carefully consider those factors, in addition to the other information in
this  Report and in our other filings with the SEC, before deciding to invest in
our  company  or  to  maintain  or  increase  your  investment.

     This  report contains forward-looking statements which include, but are not
limited to, statements concerning projected net revenues, expenses, gross profit
and  income  (loss),  the  need for additional capital, market acceptance of our
products,  our ability to consummate acquisitions and integrate their operations
successfully,  our ability to achieve further product integration, the status of
evolving  technologies  and  their growth potential and our production capacity.
These  forward-looking  statements  are  based  on  our  current  expectations,
estimates  and  projections  about  our  industry,  our  beliefs,  and  certain
assumptions  made  by  us.  Words  such  as "anticipates," "expects," "intends,"
"plans," "believes," "seeks," "estimates," "may," "will" and variations of these
words  or  similar  expressions  are  intended  to  identify  forward-looking
statements.  In addition, any statements that refer to expectations, projections
or  other  characterizations  of  future  events or circumstances, including any
underlying assumptions, are forward-looking statements. These statements are not
guarantees of future performance and are subject to certain risks, uncertainties
and  assumptions  that  are  difficult to predict. Therefore, our actual results
could  differ  materially  and  adversely  from  those  expressed  in  any
forward-looking  statements  as  a  result  of  various factors. We undertake no
obligation  to  revise or update publicly any forward-looking statements for any
reason.


OVERVIEW

     Lantronix designs, develops and markets devices and software solutions that
make  it possible to access, manage, control and configure almost any electronic
product  over  the  Internet  or  other  networks.  We are a leader in providing
innovative  networking  solutions.  We  were  initially formed as "Lantronix," a
California  corporation, in June 1989. We reincorporated as "Lantronix, Inc.," a
Delaware  corporation  in  May  2000.

     We  have  a history of providing devices that enable information technology
("IT") equipment to network using standard protocols for connectivity, including
fiber  optic, Ethernet and wireless. Our first device was a terminal server that
allowed "dumb" terminals to connect to a network. Building on the success of our
terminal  servers,  we  introduced a complete line of print servers in 1991 that
enabled users to inexpensively share printers over a network. Over the years, we
have  continually  refined  our  core  technology  and have developed additional
innovative  networking  solutions that expand upon the business of providing our
customers  network  connectivity.  With  the  expansion  of  networking  and the
Internet,  our  technology  focus  is  increasingly  broader, so that our device
solutions  provide  a  product  manufacturer  with  the ability to network their
products  within  the  industrial,  sevice  and  consumer  markets.

     We  provide  three  broad  categories  of  products:  "device  networking
solutions,"  that  enable  almost  any  electronic  product to be connected to a
network;  "IT  management  solutions,"  that enable multiple pieces of hardware,
usually  IT-related  network  hardware  such  as servers, routers, switches, and
similar  pieces  of equipment to be managed over a network; and software that is
either embedded in the hardware devices that are mentioned above, or stand-alone
application  software.

     Today,  our  solutions  include  fully  integrated  hardware  and  software
devices,  as  well  as  software tools to develop related customer applications.
Because  we  deal  with  network  connectivity, we provide hardware solutions to
extremely  broad  market  segments,  including  industrial, medical, commercial,
financial,  governmental,  retail,  building and home automation, and many more.
Our  technology  is  used  with  products  such  as  networking routers, medical
instruments,  manufacturing equipment, bar code scanners, building HVAC systems,
elevators,  process  control  equipment, vending machines, thermostats, security
cameras,  temperature  sensors,  card  readers,  point  of  sale terminals, time
clocks,  and  virtually  any product that has some form of standard data control
capability.  Our  current  offerings include a wide range of hardware devices of
varying  size,  packaging  and, where appropriate, software solutions that allow
our  customers  to  network-enable  virtually  any  electronic  product.

                                       12



     We  sell  our  devices  through  a  global  network of distributors, system
integrators,  value  added  resellers (VARs), manufacturers' representatives and
original  equipment  manufacturers  (OEM's).  In  addition,  we sell directly to
selected accounts. One customer, Ingram Micro, accounted for approximately 13.4%
and  10.5% of our net revenues for the three months ended September 30, 2003 and
2002,  respectively.  Another  customer,  Tech Data, accounted for approximately
10.3% and 9.7% of our net revenues for the three months ended September 30, 2003
and  2002,  respectively.  Accounts  receivable  attributable  to these domestic
customers  accounted  for  approximately  12.2%  and  16.0%  of  total  accounts
receivable  at  September  30,  2003  and  June  30,  2003,  respectively.

     One  international  customer,  transtec AG, which is a related party due to
common  ownership by our largest stockholder and former Chairman of our Board of
Directors,  Bernhard  Bruscha,  accounted for approximately 2.5% and 3.7% of our
net  revenues  for  the  three  months  ended  September  30,  2003  and  2002,
respectively.  Accounts  receivable  attributable to this international customer
totaled $84,000  at  September  30, 2003. No amounts were receivable on June 30,
2003.


CRITICAL  ACCOUNTING  POLICIES  AND  ESTIMATES

     The  preparation  of  financial  statements  in  accordance with accounting
principles generally accepted in the United States requires us to make estimates
and  assumptions  that  affect the reported amounts of assets and liabilities at
the  date  of  the financial statements and the reported amounts of net revenues
and  expenses  during  the reporting period. We regularly evaluate our estimates
and assumptions related to net revenues, allowances for doubtful accounts, sales
returns  and  allowances,  inventory reserves, goodwill and purchased intangible
asset  valuations,  warranty reserves, restructuring costs, litigation and other
contingencies.  We  base  our estimates and assumptions on historical experience
and  on  various  other  factors  that  we  believe  to  be reasonable under the
circumstances,  the  results  of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other  sources.  To  the  extent  there  are  material  differences  between our
estimates  and  the  actual  results,  our  future results of operations will be
affected.

     We  believe  the  following critical accounting policies require us to make
significant  judgments  and  estimates  in  the  preparation  of  our  condensed
consolidated  financial  statements:

     Revenue  Recognition

     We  do  not  recognize revenue until all of the following criteria are met:
persuasive  evidence of an arrangement exists; delivery has occurred or services
have  been  rendered;  our  price  to  the  buyer  is fixed or determinable; and
collectibility  is reasonably assured. Commencing July 1, 2000, we adopted a new
accounting  policy  for revenue recognition such that recognition of revenue and
related  gross  profit  from  sales  to  distributors  are  deferred  until  the
distributor  resells  the product. Net revenue from certain smaller distributors
for  which  point-of-sale  information is not available, is recognized one month
after  the  shipment  date. This estimate approximates the timing of the sale of
the  product  by  the distributor to the end user. When product sales revenue is
recognized, we establish an estimated allowance for future product returns based
on  historical  returns  experience;  when  price  reductions  are  approved, we
establish  an  estimated  liability  for price protection payable on inventories
owned by product resellers. Should actual product returns or pricing adjustments
exceed  our  estimates,  additional reductions to revenues would result. Revenue
from  the licensing of software is recognized at the time of shipment (or at the
time  of  resale  in  the  case of software products sold through distributors),
provided  we  have  vendor-specific objective evidence of the fair value of each
element  of  the  software offering and collectibility is probable. Revenue from
post-contract customer support and any other future deliverables is deferred and
recognized  over  the  support period or as contract elements are delivered. Our
products  typically  carry a ninety day to two year warranty. Although we engage
in  extensive product quality programs and processes, our warranty obligation is
affected  by  product  failure rates, use of materials or service delivery costs
that  differ from our estimates. As a result, additional warranty reserves could
be  required,  which  could  reduce  gross  margins.

     Allowance  for  Doubtful  Accounts

     We  maintain  an  allowance  for  doubtful  accounts  for  estimated losses
resulting  from  the  inability  of our customers to make required payments. Our
allowance for doubtful accounts is based on our assessment of the collectibility
of  specific customer accounts, the aging of accounts receivable, our history of
bad  debts  and  the  general  condition  of the industry. If a major customer's
credit  worthiness  deteriorates,  or  our customers' actual defaults exceed our
historical  experience,  our  estimates  could  change  and  impact our reported
results. We also maintain a reserve for uncertainties relative to the collection
of officer notes receivable. Factors considered in determining the level of this
reserve  include  the value of the collateral securing the notes, our ability to
effectively  enforce collection rights and the ability of the former officers to
honor  their  obligations.

     Inventory  Valuation

     Our  policy  is  to  value  inventories at the lower of cost or market on a
part-by-part  basis.  This  policy  requires  us to make estimates regarding the
market  value of our inventories, including an assessment of excess and obsolete
inventories.  We  determine excess and obsolete inventories based on an estimate
of  the  future  sales  demand for our products within a specified time horizon,

                                       13



generally  three to twelve months. The estimates we use for demand are also used
for near-term capacity planning and inventory purchasing and are consistent with
our  revenue  forecasts.  In  addition,  specific reserves are recorded to cover
risks  in  the  area  of end of life products, inventory located at our contract
manufacturers,  deferred inventory in our sales channel and warranty replacement
stock.

     If our sales forecast is less than the inventory we have on hand at the end
of  an  accounting  period,  we  may  be  required  to  take excess and obsolete
inventory charges which will decrease gross margin and net operating results for
that  period.

     Valuation  of  Deferred  Income  Taxes

     We  have  recorded  a  valuation  allowance  to reduce our net deferred tax
assets  to  zero,  primarily  due  to  our  inability to estimate future taxable
income.  We  consider  estimated  future  taxable income and ongoing prudent and
feasible  tax  planning  strategies  in  assessing  the  need  for  a  valuation
allowance.  If we determine that it is more likely than not that we will realize
a  deferred  tax  asset,  which currently has a valuation allowance, we would be
required  to  reverse  the  valuation  allowance  which would be reflected as an
income  tax  benefit  at  that  time.


     Goodwill  and  Purchased  Intangible  Assets

     The  purchase  method of accounting for acquisitions requires extensive use
of accounting estimates and judgments to allocate the purchase price to the fair
value  of  the net tangible and intangible assets acquired, including in-process
research  and  development  ("IPR&D").  Goodwill and intangible assets deemed to
have  indefinite  lives  are  no  longer  amortized  but  are  subject to annual
impairment  tests.  The  amounts  and useful lives assigned to intangible assets
impact  future  amortization  and  the  amount  assigned  to  IPR&D  is expensed
immediately.  If  the  assumptions  and  estimates used to allocate the purchase
price  are  not  correct,  purchase price adjustments or future asset impairment
charges  could  be  required.


     Impairment  of  Long-Lived  Assets

     We  evaluate  long-lived  assets  used  in  operations  when  indicators of
impairment,  such as reductions in demand or significant economic slowdowns, are
present.  Reviews  are  performed  to  determine  whether the carrying values of
assets are impaired based on comparison to the undiscounted expected future cash
flows. If the comparison indicates that there is impairment, the expected future
cash flows using a discount rate based upon our weighted average cost of capital
is  used  to  estimate  the fair value of the assets. Impairment is based on the
excess  of  the carrying amount over the fair value of those assets. Significant
management judgment is required in the forecast of future operating results that
is  used  in the preparation of expected discounted cash flows. It is reasonably
possible  that  the  estimates  of anticipated future net revenue, the remaining
estimated economic lives of the products and technologies, or both, could differ
from  those used to assess the recoverability of these assets. In the event they
are  lower,  additional  impairment charges or shortened useful lives of certain
long-lived  assets  could  be  required.

     Strategic  Investments

     We  have  made  strategic  investments  in privately held companies for the
promotion of business and strategic investments. Strategic investments with less
than a 20% voting interest are generally carried at cost. We will use the equity
method  to  account for strategic investments in which we have a voting interest
of  20% to 50% or in which we otherwise have the ability to exercise significant
influence.  Under  the  equity  method, the investment is originally recorded at
cost  and  adjusted  to  recognize  our  share  of net earnings or losses of the
investee,  limited  to the extent of our investment in, advances to and adjusted
to  recognize  our share of net earnings or losses of the investee. From time to
time  we  are required to estimate the amount of our losses of the investee. Our
estimates  are  based on historical experience. The value of non-publicly traded
securities  is  difficult to determine. We periodically review these investments
for  other-than-temporary  declines  in  fair  value  based  on  the  specific
identification  method  and  write  down investments to their fair value when an
other-than-temporary  decline  has  occurred.  We  generally  believe  an
other-than-temporary  decline has occurred when the fair value of the investment
is below the carrying value for two consecutive quarters, absent evidence to the
contrary.  Fair values for investments in privately held companies are estimated
based  upon  the  values  of recent rounds of financing. Although we believe our
estimates  reasonably  reflect  the  fair  value  of  the  non-publicly  traded
securities  held  by  us,  had  there  been  an  active  market  for  the equity
securities,  the  carrying  values might have been materially different than the
amounts  reported. Future adverse changes in market conditions or poor operating
results of companies in which we have such investments could result in losses or
an  inability  to  recover the carrying value of the investments that may not be
reflected  in  an  investment's current carrying value and which could require a
future  impairment  charge.

Restructuring  Charges.

     Over  the  last several quarters we have undertaken, and we may continue to
undertake,  significant  restructuring  initiatives,  which  have required us to
develop formalized plans for exiting certain business activities. We have had to

                                       14



record  estimated expenses for lease cancellations, long-term asset write-downs,
severance  and  outplacement  costs  and  other  restructuring  costs. Given the
significance  of,  and  the  timing  of  the  execution of such activities, this
process  is complex and involves periodic reassessments of estimates made at the
time the original decisions were made. Through December 31, 2002, the accounting
rules  for  restructuring  costs  and  asset  impairments  required us to record
provisions  and  charges  when  we  had  a  formal and committed plan. Beginning
January  1,  2003,  the  accounting  rules  now  require us to record any future
provisions  and  changes at fair value in the period in which they are incurred.
In  calculating the cost to dispose of our excess facilities, we had to estimate
our  future  space  requirements and the timing of exiting excess facilities and
then  estimate for each location the future lease and operating costs to be paid
until  the  lease is terminated and the amount, if any, of sublease income. This
required  us  to  estimate  the timing and costs of each lease to be terminated,
including  the  amount of operating costs and the rate at which we might be able
to  sublease  the  site.  To form our estimates for these costs, we performed an
assessment  of  the  affected  facilities  and  considered  the  current  market
conditions  for  each  site.  Our  assumptions on future space requirements, the
operating  costs  until termination or the offsetting sublease revenues may turn
out  to  be incorrect, and our actual costs may be materially different from our
estimates,  which  could  result  in  the  need to record additional costs or to
reverse previously recorded liabilities. Our policies require us to periodically
evaluate  the  adequacy  of  the  remaining  liabilities under our restructuring
initiatives.  As  management  continues  to  evaluate the business, there may be
additional  charges  for  new  restructuring  activities  as  well as changes in
estimates  to  amounts  previously  recorded.


Settlement  Costs

     From time to time, we are involved in legal actions arising in the ordinary
course of business. We cannot assure you that these actions or other third party
assertions  against  us  will be resolved without costly litigation, in a manner
that  is  not  adverse  to our financial position, results of operations or cash
flows.  As facts concerning contingencies become known, we reassess our position
and  make  appropriate  adjustments  to  the  financial  statements.  We  are
aggressively  defending these litigation matters and believe no material adverse
outcome  will  result. However, there are many uncertainties associated with any
litigation.  If our assessments prove to be wrong, our results of operations and
financial  condition could be materially and adversely affected. In addition, if
further  information becomes available that causes us to determine a loss in any
of  our pending litigation is probable and we can reasonably estimate a range of
loss  associated with such litigation, then we would record at least the minimum
estimated liability. However, the actual liability in any such litigation may be
materially  different  from  our  estimates,  which  could result in the need to
record  additional  costs.


CONSOLIDATED  RESULTS  OF  OPERATIONS

     The  following  table sets forth, for the periods indicated, the percentage
of net revenues represented by each item in our condensed consolidated statement
of  operations:




                                                 THREE MONTHS
                                                    ENDED
                                                SEPTEMBER 30,
                                              ----------------
                                               2003     2002
                                              -------  -------
                                                 
Net revenues                                   100.0%   100.0%
Cost of revenues                                50.0     64.6
                                              -------  -------
Gross profit                                    50.0     35.4
                                              -------  -------
Operating expenses:
  Selling, general and administrative. . . .    54.8     62.1
  Research and development . . . . . . . . .    16.2     19.2
  Stock-based compensation . . . . . . . . .     1.3      3.5
 Amortization of purchased intangible assets     1.2      1.8
  Restructuring charges. . . . . . . . . . .       -     38.9
                                              -------  -------
Total operating expenses                        73.5    125.4
                                              -------  -------
Loss from operations                           (23.5)   (90.0)
Interest income (expense), net                   0.2      1.5
Other income (expense), net                     (1.4)    (0.7)
                                              -------  -------
Loss before income taxes                       (24.7)   (89.2)
Provision for income taxes                       0.3      0.7
                                              -------  -------
Net loss                                      (24.9)%  (89.9)%
                                              =======  =======


                                       15



NET  REVENUES

     Net  revenues  decreased  $451,000, or 3.6%, to $12.2 million for the three
months  ended  September  30, 2003 from $12.7 million for the three months ended
September  30,  2002. The decrease for the three months ended September 30, 2003
was  primarily attributable to a decrease in net revenues of our other products.
IT  management solutions net revenues were flat at $3.1 million, or 25.1% of net
revenues,  for  the  three  months ended September 30, 2003 and $3.1 million, or
24.2%  of  net  revenues,  for the three months ended September 30, 2002. Device
networking  solutions  net  revenues  were flat at $6.6 million, or 53.9% of net
revenues,  for  the  three  months ended September 30, 2003 and $6.6 million, or
52.1%  of  net  revenues,  for  the three months ended September 30, 2002. Other
products net revenues decreased $432,000, or 14.4%, to $2.6 million, or 21.0% of
net  revenues,  for the three months ended September 30, 2003 from $3.0 million,
or  23.6%  of  net  revenues, for the three months ended September 30, 2002. The
decrease  in  other  product  net revenues is primarily due to a decrease in our
legacy  Print Server product line. We are no longer investing in the development
of  Print  Server  product lines and expect net revenues related to this product
line  to  continue to decline in the future as we focus our investment in device
networking  and  IT management products. Net revenues for the three months ended
September  30,  2003  includes  $52,000  of  revenues from one of our industrial
controller  product  lines that we exited during the quarter ended September 30,
2003.  Net  revenues  for  the  three  months  ended September 30, 2002 included
$530,000  of  revenues  from  this  exited  industrial  controller product line.

     Net  revenues  generated  from sales in the Americas decreased $308,000, or
3.1%,  to  $9.5  million,  or  77.8% of net revenues, for the three months ended
September  30,  2003  from $9.8 million, or 77.4% of net revenues, for the three
months ended September 30, 2002. Our net revenues derived from customers located
in  Europe  decreased  $204,000,  or  8.6%,  to  $2.2  million,  or 17.8% of net
revenues,  for  the  three months ended September 30, 2003 from $2.4 million, or
18.7%  of  net  revenues,  for  the  three  months ended September 30, 2002. The
decrease in net revenues in the Americas and Europe is primarily attributable to
a  decrease  in  industry  technology  spending.  Our  net revenues derived from
customers  located  in other geographic areas increased slightly to $549,000, or
4.5%  of  net  revenues,  for  the  three  months  ended September 30, 2003 from
$488,000,  or  3.8%  of  net  revenues, for the three months ended September 30,
2002.

     We experienced a slight decline in our quarterly net revenues during fiscal
2003,  although  we began to show a year over year quarterly revenue improvement
in  the  fourth  quarter of fiscal 2003. In the first quarter of fiscal 2004, we
showed  a  slight  increase  over the fourth quarter of fiscal 2003 and a slight
decrease  from  the  same  period  last  year.

GROSS  PROFIT

     Gross  profit  represents  net  revenues  less  cost  of  revenues. Cost of
revenues  consists primarily of the cost of raw material components, subcontract
labor  assembly from outside manufacturers, amortization of purchased intangible
assets,  establishing  or  relieving  inventory reserves for excess and obsolete
products or raw materials, overhead and warranty costs. Cost of revenues for the
three  months  ended  September 30, 2003 and 2002 consisted of $597,000 and $1.0
million  of  amortization  of  purchased  intangible  assets,  respectively.  At
September  30,  2003 the unamortized balance of purchased intangible assets that
will  be  amortized  to cost of revenues was $4.4 million, of which $1.7 million
will  be amortized in the remainder of fiscal 2004, $1.7 million in fiscal 2005,
$816,000  in  fiscal  2006  and  $129,000  in  fiscal  2007.

     Gross profit increased by $1.6 million, or 36.4%, to $6.1 million, or 50.0%
of  net  revenues,  for  the  three  months  ended  September 30, 2003 from $4.5
million,  or  35.4%  of  net  revenues, for the three months ended September 30,
2002.  The  increase  in gross profit in absolute dollars and as a percentage of
net  revenues  for  the  three  months  ended  September  30,  2003  was  mainly
attributable to a decrease in our inventory reserve of $914,000 and the decrease
in  amortization  of  purchased intangible assets charged to cost of revenues of
$431,000.  The  decrease  in  the amortization of purchased intangible assets is
primarily  due  to  the  impairment write-down of $3.9 million during the fourth
quarter  of  fiscal 2003. The decrease in our inventory reserve is primarily due
to  the  sale  of  products during the period for which reserves were previously
recorded.

SELLING,  GENERAL  AND  ADMINISTRATIVE

     Selling,  general  and  administrative  expenses  consist  primarily  of
personnel-related  expenses  including  salaries  and  commissions,  facility
expenses,  information  technology,  trade  show  expenses,  advertising,  and
professional  legal  and  accounting  fees.  Selling, general and administrative
expenses  decreased  $1.2  million,  or  14.8%, to $6.7 million, or 54.8% of net
revenues,  for  the  three months ended September 30, 2003 from $7.9 million, or
62.1%  of  net revenues, for the three months ended September 30, 2002. Selling,
general  and  administrative  expense  decreased  primarily due to reductions in
headcount  and  facility costs as a result of our fiscal 2003 restructurings and
the  decrease  in  legal  and  other professional fees. The legal fees primarily
relate  to  our  defense  of the shareholder lawsuits and the SEC investigation.
Legal  fees incurred in defense of the shareholder suits are reimbursable to the
extent  provided in our directors and officers liability insurance policies, and
subject  to  the coverage limitations and exclusions contained in such policies.
For  the three months ended September 30, 2003, we have been reimbursed $325,000
of these expenses. We expect to receive additional reimbursements for legal fees
in  the  future.

                                       16



RESEARCH  AND  DEVELOPMENT

     Research  and  development  expenses consist primarily of personnel-related
costs  of employees, as well as expenditures to third-party vendors for research
and  development  activities.  Research  and  development  expenses  decreased
$446,000,  or  18.4%,  to  $2.0 million, or 16.2% of net revenues, for the three
months ended September 30, 2003 from $2.4 million, or 19.2% of net revenues, for
the three months ended September 30, 2002. This decrease resulted primarily from
our  fiscal  2003 restructurings which resulted in the closing of the Hillsboro,
Oregon;  Milford,  Connecticut;  and  Germany  offices.  Generally, research and
development  expenses  are  expected  to increase during the remainder of fiscal
2004  as  we  increase  headcount  to  support  new  product  development.

STOCK-BASED  COMPENSATION

     Stock-based  compensation generally represents the amortization of deferred
compensation.  We  recorded  no deferred compensation for the three months ended
September 30, 2003 and recorded deferred compensation forfeitures of $78,000 for
the  three months ended September 30, 2003. Deferred compensation represents the
difference  between the fair value of the underlying common stock for accounting
purposes  and  the  exercise  price of the stock options at the date of grant as
well  as  the  fair  market  value  of  the vested portion of non-employee stock
options  utilizing the Black-Scholes option pricing model. Deferred compensation
also includes the value of employee stock options assumed in connection with our
acquisitions  calculated  in  accordance  with  current  accounting  guidelines.
Deferred compensation is presented as a reduction of stockholders' equity and is
amortized ratably over the respective vesting periods of the applicable options,
which  is  generally  four  years.

     Included  in  cost  of  revenues is stock-based compensation of $16,000 and
$19,000  for  the  three months ended September 30, 2003 and 2002, respectively.
Stock-based  compensation  included in operating expenses decreased $290,000, or
65.2%,  to  $155,000,  or  1.3%  of  net  revenues,  for  the three months ended
September  30, 2003 from $445,000, or 3.5% of net revenues, for the three months
ended September 30, 2002. The decrease in stock-based compensation for the three
months  ended  September 30, 2003 is primarily attributable to the restructuring
plans  whereby  options  for  which  deferred compensation has been recorded are
forfeited  for  terminated  employees.  Additionally, the decrease is due to the
acceleration  of  approximately  $239,000 of stock-based compensation in January
2003 as a result of our completion of an offer whereby employees holding options
to  purchase  our  common  stock were given the opportunity to cancel certain of
their  existing  options in exchange for the opportunity to receive new options.
At  September  30,  2003, a balance of $446,000 remains and will be amortized as
follows:  $343,000  for the remainder of fiscal 2004, $86,000 in fiscal 2005 and
$17,000  in  fiscal  2006.

AMORTIZATION  OF  PURCHASED  INTANGIBLE  ASSETS

     Purchased  intangible assets primarily include existing technology, patents
and  trademarks  and  are  amortized on a straight-line basis over the estimated
useful  lives  of  the  respective  assets,  ranging  from one to five years. We
obtained  independent  appraisals  of  the fair value of tangible and intangible
assets  acquired  in  order  to allocate the purchase price. The amortization of
purchased intangible assets decreased $84,000, or 36.8%, to $144,000, or 1.2% of
net  revenues,  for  the three months ended September 30, 2003 from $228,000, or
1.8%  of  net  revenues,  for  the  three  months  ended  September 30, 2002. In
addition,  approximately  $597,000 and $1.0 million of amortization of purchased
intangible  assets  has been classified as cost of revenues for the three months
ended September 30, 2003 and 2002, respectively. The decrease in amortization of
purchased  intangible  assets  is  primarily due to the impairment write-down of
$2.4  million  during  the fourth quarter of fiscal 2003. At September 30, 2003,
the unamortized balance of purchased intangible assets that will be amortized to
future  operating  expense  was $284,000, of which $217,000 will be amortized in
the  remainder of fiscal 2004, $65,000 in fiscal 2005 and $2,000 in fiscal 2006.

RESTRUCTURING  CHARGES

     On  September 12, 2002, we announced a restructuring plan to prioritize our
initiatives  around  the  growth  areas  of  our  business,  focus  on  profit
contribution,  reduce  expenses,  and  improve  operating  efficiency.  This
restructuring  plan  included  a worldwide workforce reduction, consolidation of
excess  facilities  and  other charges. We recorded restructuring costs totaling
$4.9  million,  which  were  classified  as  operating expenses in the condensed
consolidated  statement  of  operations for the three months ended September 30,
2002.  This  restructuring  plan  resulted  in the reduction of approximately 50
regular  employees  worldwide.  We  recorded  workforce  reduction  charges  of
approximately  $1.2  million  related  to  severance and fringe benefits for the
terminated  employees. We recorded charges of approximately $3.7 million related
to  the  consolidation  of  excess  facilities,  relating  primarily  to  lease
terminations,  non-cancelable  lease  costs, write-off of leasehold improvements
and  termination  of  a  contractual obligation. The restructuring costs will be
substantially paid in cash over the next five years. The remaining restructuring
reserve  is related to facility lease terminations and a contractual settlement.
There  was no restructuring charge recorded for the three months ended September
30,  2003.

                                       17



INTEREST  INCOME  (EXPENSE),  NET

     Interest  income  (expense),  net  consists primarily of interest earned on
cash, cash equivalents and marketable securities. Interest income (expense), net
was $24,000 and $192,000 for the three months ended September 30, 2003 and 2002,
respectively. The decrease is primarily due to lower average investment balances
and interest rates. Additionally, the decrease in the average investment balance
is  due  to  increased  legal  and  other  professional  fees resulting from our
financial  statement  restatements  in  fiscal 2002 and defense of our lawsuits.
Also,  the  decrease  is  due  to the settlement of the Milford lease obligation
included  in  our  restructuring  charge,  the  purchase  of a joint interest in
intellectual  property  from  Gordian,  our  acquisition of Stallion and to fund
current  operations.

OTHER  INCOME  (EXPENSE),  NET

     Other  income  (expense),  net  was  $(170,000) and $(90,000) for the three
months  ended  September  30, 2003 and 2002, respectively. The increase in other
expense is primarily attributable to our share of the losses from our investment
in  Xanboo.

PROVISION  FOR  INCOME  TAXES-EFFECTIVE  TAX  RATE

     We utilize the liability method of accounting for income taxes as set forth
in FASB Statement No. 109, "Accounting for Income Taxes." Our effective tax rate
was  (1)%  for  both the three month periods ended  September 30, 2003 and 2002.
The  federal  statutory  rate  was  34% for both periods. Our effective tax rate
associated  with  the  income tax expense for both the three month periods ended
September 30, 2003 and 2002, was lower than the federal statutory rate primarily
due  to  the  increase  in  valuation  allowance, as well as the amortization of
stock-based  compensation for which no current year tax benefit was provided. In
October  2003,  the  Internal Revenue Service completed its audit of our federal
income  tax  returns  for  the  years  ended  June 30, 1999, 2000 and 2001. As a
result, we will be required to pay approximately $500,000 in tax and interest to
the  Internal  Revenue Service and the California Franchise Tax Board, in fiscal
2004.  We  accrued  for  this  liability  in  prior  fiscal  periods.

IMPACT  OF  ADOPTION  OF  NEW  ACCOUNTING  STANDARDS

     In  January  2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation  No.  46, Consolidation of Variable Interest Entities ("FIN 46").
FIN 46 requires the primary beneficiary of a variable interest entity ("VIE") to
consolidate  the  entity  and  also  requires  majority and significant variable
interest  investors  to provide certain disclosures. A VIE is an entity in which
the  equity  investors  do  not  have  a  controlling interest, equity investors
participate  in  losses  or  residual  interests  of  the entity on a basis that
differs  from  its  ownership  interest,  or  the  equity  investment at risk is
insufficient  to  finance  the  entity's activities without receiving additional
subordinated  financial support from the other parties. For arrangements entered
into  with  VIEs created prior to January 31, 2003, the provisions of FIN 46 are
required  to  be  adopted at the beginning of the first interim or annual period
beginning  after  December  15, 2003. We are currently reviewing our investments
and  other  arrangements  to determine whether any of its investee companies are
VIEs.  We  do  not  expect  to  identify  any  significant  VIEs  that  would be
consolidated,  but  may  be  required  to  make  additional  disclosures.


LIQUIDITY  AND  CAPITAL  RESOURCES

     Since  inception,  we  have financed our operations through the issuance of
common  stock  and  through  net cash generated from operations. We consider all
highly  liquid investments purchased with original maturities of 90 days or less
to  be  cash  equivalents.  Cash and cash equivalents consisting of money-market
funds  and  commercial  paper  totaled  $8.9  million  at  September  30,  2003.
Marketable  securities  are  income  yielding  securities  which  can be readily
converted  to  cash.  Marketable  securities  consist  of  obligations  of  U.S.
Government  agencies, state, municipal and county government notes and bonds and
totaled  $4.6  million  at  September  30, 2003. Long-term investments primarily
consist  of  an equity security of a privately held company, Xanboo, and totaled
$5.2  million  at  September  30,  2003.

     Our  operating  activities used cash of $701,000 for the three months ended
September  30,  2003. We incurred a net loss of $3.0 million, which includes the
following  adjustments: benefit from inventory reserve of $914,000, amortization
of  purchased  intangible  assets  of  $741,000,  depreciation  of  $504,000,
amortization  of  stock-based  compensation  of  $171,000,  equity  losses  from
unconsolidated  businesses  of $209,000 and a provision for doubtful accounts of
$142,000. The changes in our operating assets consist of a decrease in inventory

                                       18



of  $813,000, decrease in contract manufacturer receivable of $679,000, decrease
in  prepaid  expenses  and other assets of $1.4 million and an increase in other
current  liabilities  of $640,000 which was reduced by a decrease in the balance
due  to  Gordian  of  $1.0  million  and  a decrease in accounts payable of $1.1
million.  The  decrease  in  the  balance  due  to Gordian is due to payments in
accordance  with  the  agreement.  The  decrease  in  prepaid expenses and other
current  assets  is primarily due to the Gordian payment whereby we maintained a
time  deposit  for  $1.0  million.  The  decrease  in  inventory  is  primarily
attributable  to a concentrated effort by management to reduce inventory levels.
The  increase  in  other current liabilities is primarily due to the issuance of
stock  in  satisfaction of the $1.5 million Dunstan settlement. On September 15,
2003,  1,726,703  shares  were  issued following a fairness determination by the
state  court in Oregon. The decrease in contract manufacturer receivables is due
to  improved  collections. The decrease in accounts payable is due to the timing
of  payments  to  our  suppliers.

     Cash provided by investing activities was $2.1 million for the three months
ended  September 30, 2003 compared with a $8.6 million use of cash for the three
months  ended  September 30, 2002. We received $2.2 million in proceeds from the
sales  of  marketable  securities. We also used $84,000 to purchase property and
equipment.

     Cash  provided  by  financing  activities was $163,000 for the three months
ended  September  30,  2003,  primarily  related to the purchase by the employee
stock  purchase  plan.  Cash provided by financing activities was $9,000 for the
three  months  ended  September  30,  2002.

     In  January  2002, we entered into a two-year line of credit with a bank in
an  amount not to exceed $20.0 million. Borrowings under the line of credit bear
interest  at either (i) the prime rate or (ii) the LIBOR rate plus 2.0%. We were
required  to  pay  a  $100,000  facility  fee of which $50,000 was paid upon the
closing  and  $50,000  was  to  be paid. We are also required to pay a quarterly
unused  line  fee  of  .125%  of  the  unused  line  of  credit  balance.  Since
establishing  the  line of credit, we have twice reduced the amount of the line,
modified  customary  financial  covenants,  and adjusted the interest rate to be
charged  on  borrowings  to  the  prime rate plus .50%, and eliminated the LIBOR
option.  Effective  July  25,  2003,  we  further  modified this line of credit,
reducing  the  revolving  line  to  $5.0  million,  and  adjusting the customary
affirmative  and  negative  covenants.  We are also required to maintain certain
financial  ratios  as  defined  in  the  agreement.  The agreement has an annual
revolving  maturity  date that renews on the effective date. The renewal $50,000
facility  fee  was  reduced to $12,500 and was paid. Prior to any advances being
made  under  the  line  of  credit,  the  bank  is  required to complete a field
examination  to  determine  its  borrowing  base.  To date, we have not borrowed
against  this  line  of  credit. We are currently in compliance with the revised
financial covenants of the July 25, 2003 amended line of credit. Pursuant to our
line of credit, we are restricted from paying any dividends. We have secured two
deposits  totaling  approximately  $365,000  under  our  line  of  credit.

     The  following  table  summarizes  our  contractual payment obligations and
commitments:





         REMAINDER  OF  FISCAL  YEAR              FISCAL  YEARS
       ------------------------------  -----------------------------------
                                2004    2005   2006   2007   2008   TOTAL
                               ------  ------  -----  -----  -----  ------
                                                  
Operating leases. . . . . . .  $1,302  $1,348  $ 493  $ 336  $ 202  $3,681

Convertible note payable. . .     867       -      -      -      -     867

Other contractual obligations     205       -      -      -      -     205
                               ------  ------  -----  -----  -----  ------

Total . . . . . . . . . . . .  $2,374  $1,348  $ 493  $ 336  $ 202  $4,753
                               ======  ======  =====  =====  =====  ======


     In  October  2003,  the Internal Revenue Service completed its audit of our
federal  income tax returns for the years ended June 30, 1999, 2000 and 2001. As
a  result, we will be required to pay approximately $500,000 in tax and interest
to  the  Internal  Revenue  Service  and  the California Franchise Tax Board, in
fiscal  2004.  We  accrued  for  this  liability  in  prior  fiscal  periods.

     We  believe  that  our  existing  cash,  cash  equivalents  and  marketable
securities  and  any available borrowings under our line of credit facility will
be  adequate to meet our anticipated cash needs through at least the next twelve
months.  Our  future capital requirements will depend on many factors, including
the  timing  and  amount  of  our  net  revenues,  research  and development and
infrastructure  investments,  and  expenses  related  to  on-going  government
investigations and pending litigation, which will affect our ability to generate
additional  cash.  If cash generated from operations and financing activities is
insufficient  to satisfy our working capital requirements, we may need to borrow
funds  through  bank  loans, sales of securities or other means. There can be no
assurance  that we will be able to raise any such capital on terms acceptable to
us,  if  at  all. If we are unable to secure additional financing, we may not be
able to develop or enhance our products, take advantage of future opportunities,
respond  to  competition  or  continue  to  operate  our  business.

                                       19



RISK  FACTORS

      You  should  carefully consider the risks described below before making an
investment  decision.  The  risks  and uncertainties described below are not the
only  ones  facing  our  company.  Our  business  operations  may be impaired by
additional  risks and uncertainties of which we are unaware or that we currently
consider  immaterial.

     Our business, results of operations or cash flows may be adversely affected
if any of the following risks actually occur. In such case, the trading price of
our common stock could decline, and you may lose all or part of your investment.

     VARIATIONS IN QUARTERLY OPERATING RESULTS, DUE TO FACTORS INCLUDING CHANGES
IN  DEMAND  FOR OUR PRODUCTS AND CHANGES IN OUR MIX OF NET REVENUES, COULD CAUSE
OUR  STOCK  PRICE  TO  DECLINE.

     Our  quarterly  net revenues, expenses and operating results have varied in
the  past and might vary significantly from quarter to quarter in the future. We
therefore  believe  that quarter-to-quarter comparisons of our operating results
are  not a good indication of our future performance, and you should not rely on
them  to  predict  our future performance or the future performance of our stock
price.  Our  short-term expense levels are relatively fixed and are based on our
expectations of future net revenues. If we were to experience a reduction in net
revenues  in  a  quarter,  we  would  likely  be unable to adjust our short-term
expenditures.  If  this  were  to  occur, our operating results for that quarter
would  be  harmed.  If  our  operating results in future quarters fall below the
expectations  of  market  analysts  and investors, the price of our common stock
would  likely  fall.  Other  factors  that  might cause our operating results to
fluctuate  on  a  quarterly  basis  include:

-     changes  in  the  mix  of  net  revenues attributable to higher-margin and
      lower-margin  products;

-     customers'  decisions  to  defer  or  accelerate  orders;

-     variations  in  the  size  or  timing  of  orders  for  our  products;

-     short-term  fluctuations  in  the  cost  or  availability  of our critical
      components;

-     changes  in  demand  for  our  products  generally;

-     loss  or  gain  of  significant  customers;

-     announcements  or  introductions  of  new  products  by  our  competitors;

-     defects  and  other  product  quality  problems;  and

-     changes  in  demand  for  devices  that  incorporate  our  products.

     WE  ARE  CURRENTLY  ENGAGED IN MULTIPLE SECURITIES CLASS ACTION LAWSUITS, A
STATE  DERIVATIVE  SUIT, A LAWSUIT BY OUR FORMER CFO AND COO STEVEN V. COTTON, A
LAWSUIT  BY  FORMER  SHAREHOLDERS  OF  OUR  SYNERGETIC SUBSIDIARY, AND A LAWSUIT
AGAINST  THE  FORMER  OWNERS  OF OUR LIGHTWAVE COMMUNICATIONS SUBSIDIARY, ANY OF
WHICH,  IF  IT  RESULTS IN AN UNFAVORABLE RESOLUTION, COULD ADVERSELY AFFECT OUR
BUSINESS,  RESULTS  OF  OPERATIONS  OR  FINANCIAL  CONDITION.

     Government  Investigation

     The  SEC  is  conducting a formal investigation of the events leading up to
our  restatement of our financial statements on June 25, 2002. The Department of
Justice  is  also  conducting an investigation concerning events related to this
restatement.

     Class  Action  Lawsuits

     On  May  15,  2002, Stephen Bachman filed a class action complaint entitled
Bachman  v. Lantronix, Inc., et al., No. 02-3899, in the U.S. District Court for
the  Central  District  of  California against us and certain of our current and
former officers and directors alleging violations of the Securities Exchange Act
of  1934 and seeking unspecified damages. Subsequently, six similar actions were
filed  in  the  same court. Each of the complaints purports to be a class action
lawsuit  brought  on  behalf  of persons who purchased or otherwise acquired our
common  stock  during  the  period  of  April  25,  2001  through  May 30, 2002,
inclusive.  The  complaints  allege  that the defendants caused us to improperly
recognize  revenue  and make false and misleading statements about our business.
Plaintiffs further allege that the defendants materially overstated our reported
financial  results,  thereby  inflating  our  stock  price during our securities
offering  in  July  2001, as well as facilitating the use of our common stock as
consideration  in  acquisitions.  The  complaints  have  subsequently  been
consolidated  into a single action and the court has appointed a lead plaintiff.
The  lead  plaintiff filed a consolidated amended complaint on January 17, 2003.
The  amended  complaint  now  purports to be a class action brought on behalf of

                                       20



persons  who  purchased or otherwise acquired our common stock during the period
of  August  4,  2000  through  May  30,  2002,  inclusive. The amended complaint
continues  to  assert that we and the individual officer and director defendants
violated  the  1934  Act,  and  also  includes  alleged claims that we and these
officers  and  directors  violated  the  Securities Act of 1933 arising from our
Initial  Public  Offering  in  August  2000.  We  filed  a motion to dismiss the
additional  allegations  on  March 3, 2003. The Court has taken the motion under
submission. We have not yet answered the complaint, discovery has not commenced,
and  no  trial  date  has  been  established.

     Derivative  Lawsuit

     On  July  26,  2002,  Samuel  Ivy  filed a shareholder derivative complaint
entitled  Ivy  v. Bernhard Bruscha, et al., No. 02CC00209, in the Superior Court
of the State of California, County of Orange, against certain of our current and
former  officers  and  directors.  On  January  7,  2003, the plaintiff filed an
amended  complaint. The amended complaint alleges causes of action for breach of
fiduciary  duty,  abuse  of control, gross mismanagement, unjust enrichment, and
improper  insider  stock  sales. The complaint seeks unspecified damages against
the  individual defendants on our behalf, equitable relief, and attorneys' fees.

     We filed a demurrer/motion to dismiss the amended complaint on February 13,
2003.  The basis of the demurrer is that the plaintiff does not have standing to
bring  this  lawsuit since plaintiff has never served a demand on our Board that
our  Board  take  certain  actions  on  our behalf. On April 17, 2003, the Court
overruled our demurrer. All defendants have answered the complaint and generally
denied  the  allegations.  Discovery  has  commenced, but no trial date has been
established.

     Employment  Suit  Brought  by  Former  Chief  Financial  Officer  and Chief
Operating  Officer  Steven  Cotton

     On  September  6,  2002,  Steven  Cotton,  our  former CFO and COO, filed a
complaint  entitled  Cotton  v.  Lantronix,  Inc., et al., No. 02CC14308, in the
Superior  Court  of  the  State  of  California, County of Orange. The complaint
alleges  claims for breach of contract, breach of the covenant of good faith and
fair  dealing,  wrongful  termination,  misrepresentation,  and  defamation. The
complaint  seeks  unspecified  damages,  declaratory relief, attorneys' fees and
costs.  Discovery  has  not  commenced  and  no trial date has been established.

     We  filed  a motion to dismiss on October 16, 2002, on the grounds that Mr.
Cotton's  complaints  are  subject  to the binding arbitration provisions in Mr.
Cotton's employment agreement. On January 13, 2003, the Court ruled that five of
the six counts in Mr. Cotton's complaint are subject to binding arbitration. The
court  is  staying the sixth count, for declaratory relief, until the underlying
facts  are  resolved  in  arbitration.  No  arbitration  date  has  been  set.

     Securities  Claims  Brought  by  Former  Shareholders  of  Synergetic Micro
Systems,  Inc.

     On  October  17,  2002,  Richard  Goldstein  and  several  other  former
shareholders  of  Synergetic  filed  a  complaint  entitled  Goldstein, et al v.
Lantronix,  Inc., et al in the Superior Court of the State of California, County
of  Orange,  against  us  and  certain  of  our  former  officers and directors.
Plaintiffs  filed an amended complaint on January 7, 2003. The amended complaint
alleges  fraud, negligent misrepresentation, breach of warranties and covenants,
breach  of  contract  and  negligence,  all  stemming  from  our  acquisition of
Synergetic.  The  complaint  seeks  an  unspecified amount of damages, interest,
attorneys' fees, costs, expenses, and an unspecified amount of punitive damages.
On  May  5, 2003, we answered the complaint and generally denied the allegations
in  the  complaint.  Discovery  has  commenced  but  no  trial  date  has  been
established.

     Suit  filed  by  Lantronix  Against  Logical  Solutions,  Inc.

     On  March  25, 2003, we filed in Connecticut state court (Judicial District
of New Haven) a complaint entitled Lantronix, Inc. and Lightwave Communications,
Inc.  v.  Logical  Solutions,  Inc.,  et.  al.  This is an action for unfair and
deceptive  trade  practices,  unfair competition, unjust enrichment, conversion,
misappropriation  of  trade  secrets  and tortuous interference with contractual
rights  and  business expectancies. We seek preliminary and permanent injunctive
relief  and  damages.  The  individual  defendants  are  all former employees of
Lightwave  Communications,  a  company  that we acquired in June 2001. The Court
held  a  non-jury  trial  October  10-17,  2003;  closing  arguments are set for
November  14,  2003.

     Other

     From  time to time, we are subject to other legal proceedings and claims in
the  ordinary  course  of business. We currently are not aware of any such legal
proceedings  or  claims  that  we  believe  will  have,  individually  or in the
aggregate,  a  material  adverse  effect  on  our business, prospects, financial
position,  operating  results  or  cash  flows.

     The  pending  lawsuits involve complex questions of fact and law and likely
will  continue to require the expenditure of significant funds and the diversion
of  other  resources  to  defend.  We are unable to determine the outcome of its
outstanding  legal  proceedings,  claims  and  litigation  involving  us,  our

                                       21



subsidiaries,  directors  and  officers and cannot determine the extent to which
these  results  may  have  a material adverse effect on our business, results of
operations  and  financial condition taken as a whole. The results of litigation
are  inherently  uncertain,  and adverse outcomes are possible. We are unable to
estimate  the range of possible loss from outstanding litigation, and no amounts
have  been  provided  for such matters in the consolidated financial statements.

     THERE  IS A RISK THAT THE SEC COULD LEVY FINES AGAINST US, OR DECLARE US TO
BE OUT OF COMPLIANCE WITH THE RULES REGARDING OFFERING SECURITIES TO THE PUBLIC.

     The  SEC  is investigating the events surrounding our recent restatement of
our  financial  statements. The SEC could conclude that we violated the rules of
the Securities Act of 1933 or the Securities and Exchange Act of 1934. In either
event, the SEC might levy civil fines against us, or might conclude that we lack
sufficient  internal  controls to warrant our being allowed to continue offering
our shares to the public. This investigation involves substantial cost and could
significantly  divert  the attention of management. These costs, and the cost of
any  fines  imposed  by  the  SEC,  are not covered by insurance. In addition to
sanctions  imposed  by  the  SEC,  an  adverse determination could significantly
damage  our  reputation  with  customers  and  vendors,  and harm our employees'
morale.

     WE MIGHT BECOME INVOLVED IN LITIGATION OVER PROPRIETARY RIGHTS, WHICH COULD
BE  COSTLY  AND  TIME  CONSUMING.

     Substantial litigation regarding intellectual property rights exists in our
industry.  There  is  a risk that third-parties, including current and potential
competitors,  current developers of our intellectual property, our manufacturing
partners, or parties with which we have contemplated a business combination will
claim  that  our  products,  or  our  customers'  products,  infringe  on  their
intellectual  property rights or that we have misappropriated their intellectual
property. In addition, software, business processes and other property rights in
our industry might be increasingly subject to third-party infringement claims as
the  number  of competitors grows and the functionality of products in different
industry  segments  overlaps.  Other  parties  might  currently  have,  or might
eventually  be  issued,  patents that infringe on the proprietary rights we use.
Any  of  these  third  parties  might  make  a claim of infringement against us.

     For  example,  in  July  2001,  Digi International, Inc., filed a complaint
alleging  that  we  directly  and/or  indirectly  infringed  upon a Digi Patent.
Following extensive and costly pre-trial preparation, we settled the matter with
Digi  in November 2002. From time to time in the future we could encounter other
disputes over rights and obligations concerning intellectual property. We cannot
assume  that  we  will  prevail  in  intellectual  property  disputes  regarding
infringement,  misappropriation  or  other  disputes. Litigation in which we are
accused  of  infringement  or  misappropriation  might  cause  a  delay  in  the
introduction  of  new products, require us to develop non-infringing technology,
require  us  to  enter  into  royalty  or license agreements, which might not be
available  on  acceptable  terms,  or  at  all, or require us to pay substantial
damages, including treble damages if we are held to have willfully infringed. In
addition,  we  have obligations to indemnify certain of our customers under some
circumstances  for  infringement of third-party intellectual property rights. If
any  claims  from  third-parties were to require us to indemnify customers under
our  agreements,  the  costs  could  be  substantial,  and our business could be
harmed.  If a successful claim of infringement were made against us and we could
not  develop  non-infringing  technology  or  license  the  infringed or similar
technology  on  a  timely  and  cost-effective  basis,  our  business  could  be
significantly  harmed.

     WE  INCORPORATE  SOFTWARE  LICENSED  FROM  THIRD  PARTIES  INTO SOME OF OUR
PRODUCTS  AND  ANY  SIGNIFICANT  INTERRUPTION  IN  THE  AVAILABILITY  OF  THESE
THIRD-PARTY  SOFTWARE  PRODUCTS  OR  DEFECTS  IN THESE PRODUCTS COULD REDUCE THE
DEMAND  FOR,  OR  PREVENT  THE  SALE  OR  USE  OF,  OUR  PRODUCTS

Certain  of  our  products  contain  components  developed  and  maintained  by
third-party  software  vendors  or  available through the "open source" software
community.  We  also  expect  that  we may incorporate software from third-party
vendors  and  open source software in our future products. Our business would be
disrupted  if  this  software,  or functional equivalents of this software, were
either  no  longer  available  to  us or no longer offered to us on commercially
reasonable  terms.  In  either case, we would be required to either redesign our
products  to  function  with  alternate  third-party  software  or  open  source
software, or develop these components ourselves, which would result in increased
costs and could result in delays in our product shipments. Furthermore, we might
be  forced  to  limit  the  features  available in our current of future product
offerings.  We  presently are developing products for use on the Linux platform.
The  SCO Group (SCO) has filed and threatened to file lawsuits against companies
that  operate  Linux  for  commercial  purposes, alleging that such use of Linux
infringes  SCO's  rights.  These allegations may adversely affect the demand for
the  Linux  platform  and,  consequently, the sales of our Linux-based products.

                                       22



     FOUR OF THE FORMER STOCKHOLDERS OF LIGHTWAVE COMMUNICATIONS ARE OPERATING A
BUSINESS THAT COMPETES WITH US. IF WE ARE UNSUCCESSFUL IN OUR PENDING LITIGATION
AGAINST  THIS COMPANY, AND THESE FORMER LIGHTWAVE STOCKHOLDERS, OUR BUSINESS MAY
BE  HARMED

     In  June  2001, we acquired Lightwave Communications. Since that time, four
of  the  founding  stockholders  and executive officers of Lightwave, as well as
several  other  former  employees  of Lightwave, have begun operating a business
that  competes  with  us.  Because  these  individuals  held senior positions at
Lightwave, and were exposed to confidential information about Lightwave, as well
as  Lantronix,  if  we  are  unsuccessful in our litigation against them, we may
suffer  substantial  harm.

     We  filed  this  suit  to  protect the value of the assets we bought in the
Lightwave  acquisition.  If  the  court  refuses  to  enjoin  their  use  of our
confidential  information,  the former employees will be able to compete against
us  in  our  markets  for  console  servers,  KVM  and  video display extenders.

     STOCK-BASED  COMPENSATION  WILL  NEGATIVELY  AFFECT  OUR OPERATING RESULTS.

     We  have  recorded  deferred  compensation  in connection with the grant of
stock  options  to  employees  where  the option exercise price is less than the
estimated  fair value of the underlying shares of common stock as determined for
financial  reporting  purposes. We recorded deferred compensation forfeitures of
$78,000  for the three months ended September 30, 2003. At September 30, 2003, a
balance  of  $446,000 remains and will be amortized as follows: $343,000 for the
remainder  of  fiscal  2004,  $86,000 in fiscal 2005 and $17,000 in fiscal 2006.

     The  amount  of stock-based compensation in future periods will increase if
we  grant  stock options where the exercise price is less than the quoted market
price  of  the  underlying  shares.  The  amount  of  stock-based  compensation
amortization  in future periods could decrease if options for which accrued, but
unvested  deferred  compensation  has  been  recorded,  are  forfeited.

     WE  HAVE EXCESS INVENTORIES AND THERE IS A RISK WE MAY BE UNABLE TO DISPOSE
OF  THEM.

     Our  products  and  therefore  our inventories are subject to technological
risk  at  any  time  either  new  products  may  enter  the  market or prices of
competitive products may be introduced with more attractive features or at lower
prices than ours. There is a risk that we may be unable to sell our inventory in
a  timely manner to avoid their becoming obsolete. As of September 30, 2003, our
inventories  including  raw  materials,  finished  goods  and  inventory  at
distributors  were  valued  at  $11.8  million  and we had reserved $5.7 million
against  these  inventories. As of June 30, 2003, our inventories, including raw
materials,  finished  goods  and  inventory at distributors were valued at $14.0
million and we had reserved $8.0 million against these inventories. In the event
we  are  required  to substantially discount our inventory or are unable to sell
our  inventory  in a timely manner, our operating results could be substantially
harmed.

     WE  PRIMARILY  DEPEND  ON  FOUR  THIRD-PARTY  MANUFACTURERS  TO MANUFACTURE
SUBSTANTIALLY  ALL  OF  OUR  PRODUCTS,  WHICH  REDUCES  OUR  CONTROL  OVER  THE
MANUFACTURING  PROCESS.  IF  THESE  MANUFACTURERS  ARE  UNABLE  OR  UNWILLING TO
MANUFACTURE  OUR  PRODUCTS  AT THE QUALITY AND QUANTITY WE REQUEST, OUR BUSINESS
COULD  BE  HARMED  AND  OUR  STOCK  PRICE  COULD  DECLINE.

     We  outsource  substantially  all  of our manufacturing to four third-party
manufacturers,  Varian,  Inc., Irvine Electronics, Technical Manufacturing Corp.
and  Uni  Precision  Industrial  Ltd.  Our  reliance  on  these  third-party
manufacturers  exposes  us  to  a  number  of  significant  risks,  including:

-     reduced  control over delivery schedules, quality assurance, manufacturing
      yields  and  production  costs;

-     lack  of  guaranteed  production  capacity  or  product  supply;  and

-     reliance  on  third-party  manufacturers  to  maintain  competitive
      manufacturing  technologies.

     Our  agreements with these manufacturers provide for services on a purchase
order basis. If our manufacturers were to become unable or unwilling to continue
to  manufacture  our  products  in  required  volumes,  at  acceptable  quality,
quantity,  yields  and  costs,  or  in  a  timely  manner, our business would be
seriously  harmed. As a result, we would have to attempt to identify and qualify
substitute manufacturers, which could be time consuming and difficult, and might
result  in  unforeseen  manufacturing  and  operations problems. Moreover, if we
shift  products  among  third-party  manufacturers,  we  may  incur  substantial
expenses,  risk  material  delays,  or  encounter  other  unexpected issues. For
example,  in  the  third quarter of fiscal 2003 we encountered product shortages
related  to  the transition to a third-party manufacturer. This product shortage
contributed  to our net revenues falling below our publicly announced estimates.

                                       23



     In addition, a natural disaster could disrupt our manufacturers' facilities
and  could  inhibit  our manufacturers' ability to provide us with manufacturing
capacity on a timely basis, or at all. If this were to occur, we likely would be
unable to fill customers' existing orders or accept new orders for our products.
The  resulting  decline in net revenues would harm our business. In addition, we
are  responsible  for  forecasting the demand for our individual products. These
forecasts  are  used  by our contract manufacturers to procure raw materials and
manufacture  our  finished  goods. If we forecast demand too high, we may invest
too  much  cash  in  inventory  and we may be forced to take a write-down of our
inventory  balance,  which would reduce our earnings. If our forecast is too low
for one or more products, we may be required to pay expedite charges which would
increase  our  cost  of revenues or we may be unable to fulfill customer orders,
thus  reducing  net  revenues  and  therefore  earnings.

     WE  HAVE  ELECTED  TO  USE A CONTRACT MANUFACTURER IN CHINA, WHICH INVOLVES
SIGNIFICANT  RISKS.

     One  of our contract manufacturers is based in China. There are significant
risks  of  doing  business  in  China,  including:

-    Delivery  times  are extended due to the distances involved, requiring more
     lead-time  in  ordering  and  increasing  the  risk  of excess inventories.

-    We  could  incur  ocean  freight  delays because of labor problems, weather
     delays  or  expediting  and  customs  problems.

-    China does not afford the same level of protection to intellectual property
     as  domestic  or  many  other  foreign  countries.  If  our  products  were
     reverse-engineered  or  our  intellectual  property  were  otherwise
     pirated-reproduced  and  duplicated  without our knowledge or approval, our
     revenues  would  be  reduced.

-    China and U.S foreign relations have, historically, been subject to change.
     Political considerations and actions could interrupt our expected supply of
     products  from  China.


     INABILITY,  DELAYS  IN  DELIVERIES  OR  QUALITY PROBLEMS FROM OUR COMPONENT
SUPPLIERS  COULD  DAMAGE  OUR  REPUTATION  AND  COULD  CAUSE OUR NET REVENUES TO
DECLINE  AND  HARM  OUR  RESULTS  OF  OPERATIONS.

     Our  contract  manufacturers  and  we  are  responsible  for  procuring raw
materials  for our products. Our products incorporate components or technologies
that are only available from single or limited sources of supply. In particular,
some of our integrated circuits are available from a single source. From time to
time  in  the  past, integrated circuits we use in our products have been phased
out  of  production.  When  this  happens,  we  attempt  to  purchase sufficient
inventory  to  meet  our  needs until a substitute component can be incorporated
into  our  products.  Nonetheless,  we  might  be  unable to purchase sufficient
components  to  meet  our demands, or we might incorrectly forecast our demands,
and  purchase  too  many  or  too  few components. In addition, our products use
components  that  have  in  the  past  been  subject  to  market  shortages  and
substantial  price  fluctuations. From time to time, we have been unable to meet
our  orders  because  we  were  unable  to purchase necessary components for our
products.  We  rely  on a number of different component suppliers. Because we do
not  have  long-term  supply  arrangements  with  any vendor to obtain necessary
components  or  technology  for  our  products,  if  we  are  unable to purchase
components  from  these  suppliers,  product  shipments  could  be  prevented or
delayed,  which  could  result  in  a  loss  of  sales. If we are unable to meet
existing orders or to enter into new orders because of a shortage in components,
we  will  likely  lose  net  revenues  and risk losing customers and harming our
reputation  in  the  marketplace.

     IF  WE  MAKE  UNPROFITABLE  ACQUISITIONS  OR  ARE  UNABLE  TO  SUCCESSFULLY
INTEGRATE  OUR  ACQUISITIONS,  OUR  BUSINESS  COULD  SUFFER.

     We  have  in the past and may continue in the future to acquire businesses,
client  lists, products or technologies that we believe complement or expand our
existing  business.  In December 2000, we acquired USSC, a company that provides
software solutions for use in embedded technology applications. In June 2001, we
acquired  Lightwave,  a  company  that provides console management solutions. In
October  2001,  we  acquired  Synergetic,  a  provider  of  embedded  network
communication  solutions.  In  January 2002, we acquired Premise, a developer of
client-side  software  applications.  In  August  2002, we acquired Stallion, an
Australian  based  provider  of  solutions  that  enable Internet access, remote
access  and  serial  connectivity. Acquisitions of this type involve a number of
risks,  including:

-    difficulties  in  assimilating  the  operations  and  employees of acquired
     companies;

-    diversion  of  our  management's  attention from ongoing business concerns;

                                       24



-    our  potential  inability  to maximize our financial and strategic position
     through the successful incorporation of acquired technology and rights into
     our  products  and  services;

-    additional  expense  associated  with  amortization  of  acquired  assets;

-    maintenance  of  uniform  standards, controls, procedures and policies; and

-    impairment  of  existing  relationships  with  employees,  suppliers  and
     customers  as  a  result  of  the  integration of new management employees.

     Any  acquisition  or  investment could result in the incurrence of debt and
the  loss  of  key employees. Moreover, we often assume specified liabilities of
the companies we acquire. Some of these liabilities, are difficult or impossible
to quantify. If we do not receive adequate indemnification for these liabilities
our  business may be harmed. In addition, acquisitions are likely to result in a
dilutive  issuance of equity securities. For example, we issued common stock and
assumed  options to acquire our common stock in connection with our acquisitions
of  USSC,  Lightwave,  Synergetic  and  Premise.  We  cannot assure you that any
acquisitions  or  acquired  businesses,  client  lists, products or technologies
associated  therewith  will  generate  sufficient  net  revenues  to  offset the
associated  costs  of  the  acquisitions  or  will  not  result in other adverse
effects.  Moreover,  from  time  to  time we may enter into negotiations for the
acquisition of businesses, client lists, products or technologies, but be unable
or unwilling to consummate the acquisition under consideration. This could cause
significant  diversion of managerial attention and out of pocket expenses to us.
We  could  also  be  exposed  to  litigation  as  a  result  of an unconsummated
acquisition,  including  claims  that  we  failed  to  negotiate  in good faith,
misappropriated  confidential  information  or  other  claims.

     In  addition, from time to time we may invest in businesses that we believe
present  attractive  investment  opportunities,  or  provide  other  synergetic
benefits. In September and October 2001, we paid an aggregate of $3.0 million to
Xanboo  for  convertible  promissory  notes, which have converted, in accordance
with  their  terms,  into  Xanboo  preferred stock. In addition, we purchased an
additional  $4.0 million of preferred stock in Xanboo. As of September 30, 2003,
we  hold  a  15.3%  ownership interest with a net book value of $5.2 million, in
Xanboo.  This  investment  is  speculative  in nature, and there is risk that we
could  lose  part  or  all  of  our  investment.


     OUR  EXECUTIVE  OFFICERS  AND  TECHNICAL  PERSONNEL  ARE  CRITICAL  TO  OUR
BUSINESS,  AND  WITHOUT  THEM  WE  MIGHT  NOT  BE  ABLE  TO EXECUTE OUR BUSINESS
STRATEGY.

     Our  financial  performance depends substantially on the performance of our
executive  officers  and  key  employees. We are dependent in particular on Marc
Nussbaum,  who  serves  as  our President and Chief Executive Officer, and James
Kerrigan,  who  serves  as  our  Chief  Financial Officer. We have no employment
contracts with those executives who are at-will employees. We are also dependent
upon  our  technical  personnel,  due to the specialized technical nature of our
business.  If  we  lose the services of Mr. Nussbaum, Mr. Kerrigan or any of our
key  personnel  and  are  not  able to find replacements in a timely manner, our
business  could  be disrupted, other key personnel might decide to leave, and we
might  incur  increased  operating  expenses  associated  with  finding  and
compensating  replacements.

     THERE  IS  A  RISK  THAT  OUR OEM CUSTOMERS WILL DEVELOP THEIR OWN INTERNAL
EXPERTISE  IN  NETWORK-ENABLING PRODUCTS, WHICH COULD RESULT IN REDUCED SALES OF
OUR  PRODUCTS.

     For  most of our existence, we primarily sold our products to distributors,
VARs  and system integrators. Although we intend to continue to use all of these
sales  channels,  we have begun to focus more heavily on selling our products to
OEMs.  Selling  products  to OEMs involves unique risks, including the risk that
OEMs  will  develop  internal  expertise  in  network-enabling  products or will
otherwise  provide  network  functionality  to  their products without using our
device  server  technology. If this were to occur, our stock price could decline
in  value  and  you  could  lose  part  or  all  of  your  investment.

     OUR  ENTRY  INTO,  AND  INVESTMENT  IN,  THE  HOME NETWORK MARKET HAS RISKS
INHERENT  IN  RELYING  ON  ANY  EMERGING  MARKET  FOR  FUTURE  GROWTH.

     The  success  of  our Premise SYS software and our investment in Xanboo are
dependent  on  the  development  of a market for home networking. It is possible
this home network market may develop slowly, or not at all, or that others could
enter  this  market  with  superior  product offerings that would impair our own
success.  We  could  lose  some  or all of our investment, or be unsuccessful in
achieving  significant  revenues  and  therefore  profitability,  in  these
initiatives.  If  this were to occur, our operating results could be harmed, and
our  stock  price  could  decline.

                                       25



     IF OUR RESEARCH AND DEVELOPMENT EFFORTS ARE NOT SUCCESSFUL OUR NET REVENUES
COULD  DECLINE  AND  BUSINESS  COULD  BE  HARMED.

     For  the three months ended September 30, 2003, we incurred $2.0 million in
research and development expenses, which comprised 16.2% of our net revenues. If
we  are  unable  to  develop  new products as a result of this effort, or if the
products we develop are not successful, our business could be harmed. Even if we
do  develop new products that are accepted by our target markets, we do not know
whether  the  net  revenue from these products will be sufficient to justify our
investment  in  research  and  development.

     IF A MAJOR CUSTOMER CANCELS, REDUCES, OR DELAYS PURCHASES, OUR NET REVENUES
MIGHT  DECLINE  AND  OUR  BUSINESS  COULD  BE  ADVERSELY  AFFECTED.

     Our  top  five  customers  accounted  for 39.6% of our net revenues for the
three  months  ended  September  30,  2003.  One  customer.  Ingram Micro, Inc.,
accounted  for  approximately  13.4% and 10.5% of our net revenues for the three
months  ended  September 30, 2003 and 2002, respectively. Another customer, Tech
Data Corporation, accounted for approximately 10.3% and 9.7% of our net revenues
for  the  three months ended September 30, 2003 and 2002, respectively. Accounts
receivable  attributable  to  these  two  domestic  customers  accounted  for
approximately 12.2% and 16.0% of total accounts receivable at September 30, 2003
and  June  30,  2003,  respectively.  The  number  and  timing  of  sales to our
distributors  have been difficult for us to predict. The loss or deferral of one
or more significant sales in a quarter could harm our operating results. We have
in  the  past,  and might in the future, lose one or more major customers. If we
fail to continue to sell to our major customers in the quantities we anticipate,
or  if  any  of  these customers terminate our relationship, our reputation, the
perception  of  our products and technology in the marketplace and the growth of
our  business could be harmed. The demand for our products from our OEM, VAR and
systems  integrator customers depends primarily on their ability to successfully
sell their products that incorporate our device networking solutions technology.
Our  sales  are  usually  completed  on  a  purchase  order basis and we have no
long-term  purchase  commitments  from  our  customers.

     Our  future  success  also depends on our ability to attract new customers,
which  often  involves  an  extended  process.  The  sale  of our products often
involves a significant technical evaluation, and we often face delays because of
our customers' internal procedures used to evaluate and deploy new technologies.
For  these  and  other  reasons, the sales cycle associated with our products is
typically  lengthy,  often  lasting  six  to  nine  months and sometimes longer.
Therefore,  if we were to lose a major customer, we might not be able to replace
the  customer  on a timely basis or at all. This would cause our net revenues to
decrease  and  could  cause  the  price  of  our  stock  to  decline.

     WE HAVE ESTABLISHED CONTRACTS AND OBLIGATIONS THAT WERE IMPLEMENTED WHEN WE
ANTICIPATED  HIGHER  REVENUES  AND  ACTIVITIES.

     We  have several agreements that obligate us to facilities or services that
are  in excess of our current requirements and are at higher rates than could be
obtained  today.  It  may  be  necessary that we sublease or otherwise negotiate
settlement  of  our  obligations  rather  than  perform on them as we originally
expected.  If  we  are  unable  to  negotiate  a  favorable  resolution to these
contracts,  we  may  be required to pay the entire cost of our obligations under
the  agreement,  which  could  harm  our  business.

     THE  AVERAGE  SELLING  PRICES  OF  OUR PRODUCTS MIGHT DECREASE, WHICH COULD
REDUCE  OUR  GROSS  MARGINS.

     In  the  past,  we  have  experienced some reduction in the average selling
prices  and  gross margins of products and we expect that this will continue for
our  products  as they mature. In the future, we expect competition to increase,
and  we  anticipate  this could result in additional pressure on our pricing. In
addition,  our average selling prices for our products might decline as a result
of  other  reasons,  including  promotional programs and customers who negotiate
price  reductions in exchange for longer-term purchase commitments. In addition,
we might not be able to increase the price of our products in the event that the
prices  of components or our overhead costs increase. If this were to occur, our
gross  margins would decline. In addition, we may not be able to reduce the cost
to  manufacture  our  products  to  keep  up  with  the  decline  in  prices.

     NEW  PRODUCT  INTRODUCTIONS AND PRICING STRATEGIES BY OUR COMPETITORS COULD
ADVERSELY  AFFECT  OUR  ABILITY TO SELL OUR PRODUCTS AND COULD REDUCE OUR MARKET
SHARE  OR  RESULT  IN  PRESSURE  TO  REDUCE  THE  PRICE  OF  OUR  PRODUCTS.

     The  market  for  our  products  is intensely competitive, subject to rapid
change  and  is  significantly affected by new product introductions and pricing
strategies of our competitors. We face competition primarily from companies that
network-enable  devices, companies in the automation industry and companies with
significant  networking  expertise  and  research and development resources. Our
competitors  might  offer  new  products with features or functionality that are
equal  to  or  better  than  our  products. In addition, since we work with open

                                       26



standards,  our  customers  could  develop products based on our technology that
compete  with  our  offerings. We might not have sufficient engineering staff or
other  required  resources  to  modify  our  products  to match our competitors.
Similarly,  competitive  pressure  could  force  us  to  reduce the price of our
products.  In  each  case,  we  could  lose  new  and  existing customers to our
competition.  If  this  were  to  occur,  our net revenues could decline and our
business  could  be  harmed.


     OUR  INTELLECTUAL  PROPERTY  PROTECTION  MIGHT  BE  LIMITED.

     We  have  not  historically  relied  on  patents to protect our proprietary
rights,  although  we  have  recently begun to build a patent portfolio. We rely
primarily  on  a  combination  of  laws,  such as copyright, trademark and trade
secret  laws,  and  contractual restrictions, such as confidentiality agreements
and  licenses,  to  establish  and  protect  our proprietary rights. Despite any
precautions  that  we  have  taken:

-    laws  and  contractual  restrictions  might  not  be  sufficient to prevent
     misappropriation  of our technology or deter others from developing similar
     technologies;

-    other companies might claim common law trademark rights based upon use that
     precedes  the  registration  of  our  marks;

-    policing  unauthorized  use  of  our  products and trademarks is difficult,
     expensive  and  time-consuming,  and  we  might  be unable to determine the
     extent  of  this  unauthorized  use;

-    current  federal  laws  that prohibit software copying provide only limited
     protection  from  software  pirates;  and

-    the  companies we acquire may not have taken similar precautions to protect
     their  proprietary  rights.

     Also,  the  laws  of other countries in which we market and manufacture our
products  might  offer  little  or  no  effective  protection of our proprietary
technology.  Reverse engineering, unauthorized copying or other misappropriation
of  our  proprietary  technology  could enable third parties to benefit from our
technology  without  paying  us  for  it,  which  could  significantly  harm our
business.

     UNDETECTED  PRODUCT ERRORS OR DEFECTS COULD RESULT IN LOSS OF NET REVENUES,
DELAYED  MARKET  ACCEPTANCE  AND  CLAIMS  AGAINST  US.

     We currently offer warranties ranging from ninety days to two years on each
of  our  products.  Our  products could contain undetected errors or defects. If
there  is  a  product  failure,  we  might have to replace all affected products
without  being  able  to  book  revenue for replacement units, or we may have to
refund  the  purchase price for the units. Because of our recent introduction of
our  line  of device servers, we do not have a long history with which to assess
the  risks  of  unexpected  product  failures  or defects for this product line.
Regardless  of  the  amount  of  testing  we  undertake,  some  errors  might be
discovered  only  after  a product has been installed and used by customers. Any
errors  discovered after commercial release could result in loss of net revenues
and claims against us. Significant product warranty claims against us could harm
our  business, reputation and financial results and cause the price of our stock
to  decline.

     BECAUSE WE ARE DEPENDENT ON INTERNATIONAL SALES FOR A SUBSTANTIAL AMOUNT OF
OUR  NET  REVENUES,  WE  FACE THE RISKS OF INTERNATIONAL BUSINESS AND ASSOCIATED
CURRENCY  FLUCTUATIONS,  WHICH  MIGHT  ADVERSELY  AFFECT  OUR OPERATING RESULTS.

     Net  revenues  from  international sales represented 22.2% and 22.6% of net
revenues  for  the three months ended September 30, 2003 and 2002, respectively.
Net revenues from Europe represented 17.8% and 18.7% of our net revenues for the
three  months  ended  September  30,  2003  and  2002,  respectively.

     We  expect  that  international  revenues  will  continue  to  represent  a
significant  portion  of  our  net  revenues  in  the  foreseeable future. Doing
business internationally involves greater expense and many additional risks. For
example,  because  the  products we sell abroad and the products and services we
buy  abroad  are  priced  in  foreign currencies, we are affected by fluctuating
exchange  rates.  In  the  past, we have from time to time lost money because of
these fluctuations. We might not successfully protect ourselves against currency
rate fluctuations, and our financial performance could be harmed as a result. In
addition,  we  face  other  risks  of doing business internationally, including:

-     unexpected  changes  in  regulatory  requirements,  taxes,  trade laws and
      tariffs;

-     reduced  protection  for  intellectual  property rights in some countries;

                                       27



-     differing  labor  regulations;

-     compliance  with  a  wide  variety  of  complex  regulatory  requirements;

-     changes  in  a  country's  or  region's  political or economic conditions;

-     greater  difficulty  in  staffing  and  managing  foreign  operations; and

-     increased  financial  accounting  and  reporting burdens and complexities.

     Our  international  operations  require  significant  attention  from  our
management  and  substantial  financial  resources.  We  do not know whether our
investments  in  other  countries will produce desired levels of net revenues or
profitability.

     THE MARKET FOR OUR PRODUCTS IS NEW AND RAPIDLY EVOLVING. IF WE ARE NOT ABLE
TO DEVELOP OR ENHANCE OUR PRODUCTS TO RESPOND TO CHANGING MARKET CONDITIONS, OUR
NET  REVENUES  WILL  SUFFER.

     Our  future  success  depends  in  large part on our ability to continue to
enhance  existing  products,  lower  product  cost and develop new products that
maintain  technological competitiveness. The demand for network-enabled products
is  relatively  new  and  can  change as a result of innovations or changes. For
example,  industry  segments might adopt new or different standards, giving rise
to  new  customer  requirements.  Any failure by us to develop and introduce new
products  or  enhancements  directed  at  new  industry standards could harm our
business,  financial  condition  and  results  of  operations.  These  customer
requirements might or might not be compatible with our current or future product
offerings.  We might not be successful in modifying our products and services to
address  these  requirements  and  standards. For example, our competitors might
develop  competing  technologies based on Internet Protocols, Ethernet Protocols
or other protocols that might have advantages over our products. If this were to
happen,  our  net  revenue  might  not  grow at the rate we anticipate, or could
decline.

ITEM  3.   QUANTITATIVE  AND  QUALITATIVE  DISCLOSURES  ABOUT  MARKET  RISK

     Our exposure to market risk for changes in interest rates relates primarily
to  our investment portfolio. We do not use derivative financial instruments for
speculative  or  trading  purposes. We place our investments in instruments that
meet  high  credit  quality  standards,  as  specified in our investment policy.
Information  relating  to  quantitative  and qualitative disclosure about market
risk  is  set  forth  below  and  in  "Management's  Discussion  and Analysis of
Financial  Condition and Results of Operations-Liquidity and Capital Resources."

INTEREST  RATE  RISK

     Our  exposure  to  interest rate risk is limited to the exposure related to
our  cash and cash equivalents, marketable securities and our credit facilities,
which  is  tied  to market interest rates. As of September 30, 2003 and June 30,
2003,  we  had  cash  and  cash  equivalents  of  $8.9 million and $7.3 million,
respectively,  which  consisted of cash and short-term investments with original
maturities  of ninety days or less, both domestically and internationally. As of
September  30,  2003  and  June  30,  2003, we had marketable securities of $4.6
million  and  $6.8  million,  respectively,  consisting  of  obligations of U.S.
Government  agencies, state, municipal and county government notes and bonds. We
believe  our  marketable  securities  will  decline in value by an insignificant
amount  if  interest  rates  increase,  and  therefore would not have a material
effect  on  our  financial  condition  or  results  of  operations.

FOREIGN  CURRENCY  RISK

     We  sell products internationally. As a result, our financial results could
be  harmed by factors such as changes in foreign currency exchange rates or weak
economic  conditions  in  foreign  markets.

INVESTMENT  RISK

     As of September 30, 2003 and June 30, 2003, we had a net investment of $5.2
million  and  $5.4  million,  respectively,  in Xanboo, a privately held company
which  can  still  be  considered  in  the  start-up or development stages. This
investment  is  inherently  risky as the market for the technologies or products
they  have  under  development  are  typically in the early stages and may never
materialize.  There  is a risk that we could lose part or all of our investment.

ITEM  4.     CONTROLS  AND  PROCEDURES

     (a)  Evaluation  of  disclosure  controls  and  procedures.

                                       28



     Our  chief  executive  officer  and  our  chief  financial  officer,  after
evaluating  our  "disclosure  controls and procedures" (as defined in Securities
Exchange  Act of 1934 (the "Exchange Act") Rules 13a-14(c) and 15-d-14(c)) as of
a  date  (the  "Evaluation  Date") within 90 days before the filing date of this
Quarterly  Report  on  Form 10-Q, have concluded that as of the Evaluation Date,
our  disclosure controls and procedures are effective to ensure that information
we are required to disclose in reports that we file or submit under the Exchange
Act  is  recorded,  processed,  summarized  and reported within the time periods
specified  in  Securities  and  Exchange  Commission  rules  and  forms.

(b)  Changes  in  internal  controls.

     Prior  to the evaluation date, we had identified material weaknesses in our
disclosure controls and procedures and have taken corrective actions. In certain
cases, we have identified disclosure control and procedural process improvements
that  have  been  implemented,  and  will  continue  to be implemented after the
evaluation  date.  For  example,  we have revised our process controls that will
facilitate  timely  Securities  and  Exchange  Commission  filings  and  have
implemented  additional  training.  We  continue  to  study, plan, and implement
process  changes  in  anticipation of new requirements related to Sarbanes-Oxley
legislation  and  SEC  and  Nasdaq  rules.

                                       29



PART  II.  OTHER  INFORMATION

ITEM  1.   LEGAL  PROCEEDINGS

Intellectual  Property

     From  time  to  time  we  could  encounter  other  disputes over rights and
obligations  concerning  intellectual  property.  We  cannot assume that we will
prevail  in  intellectual  property  disputes  regarding  infringement,
misappropriation  or  other  disputes.  Litigation  in  which  we are accused of
infringement  or misappropriation might cause a delay in the introduction of new
products,  require  us to develop non-infringing technology, require us to enter
royalty or license agreements, which might not be available on acceptable terms,
or at all, or require us to pay substantial damages, including treble damages if
we  are  held  to  have willfully infringed. In addition, we have obligations to
indemnify  certain of our customers under some circumstances for infringement of
third-party  intellectual property rights. If any claims from third-parties were
to  require  us  to indemnify customers under our agreements, the costs could be
substantial,  and  our  business  could  be  harmed.  If  a  successful claim of
infringement  were  made  against  us  and  we  could not develop non-infringing
technology  or  license  the  infringed  or  similar  technology on a timely and
cost-effective  basis,  our  business  could  be  significantly  harmed.

SEC  Investigation

     The  SEC  is  conducting a formal investigation of the events leading up to
our restatement of our financial statements on June 25, 2002.  The Department of
Justice  is  also  conducting an investigation concerning events related to this
restatement.

Class  Action  Lawsuits

     On  May  15,  2002, Stephen Bachman filed a class action complaint entitled
Bachman  v. Lantronix, Inc., et al., No. 02-3899, in the U.S. District Court for
the  Central  District  of  California against us and certain of our current and
former officers and directors alleging violations of the Securities Exchange Act
of  1934 and seeking unspecified damages. Subsequently, six similar actions were
filed  in  the  same court. Each of the complaints purports to be a class action
lawsuit  brought  on  behalf  of persons who purchased or otherwise acquired our
common  stock  during  the  period  of  April  25,  2001  through  May 30, 2002,
inclusive.  The  complaints  allege  that the defendants caused us to improperly
recognize  revenue  and make false and misleading statements about our business.
Plaintiffs further allege that the defendants materially overstated our reported
financial  results,  thereby  inflating  our  stock  price during our securities
offering  in  July  2001, as well as facilitating the use of our common stock as
consideration  in  acquisitions.  The  complaints  have  subsequently  been
consolidated  into a single action and the court has appointed a lead plaintiff.
The  lead  plaintiff filed a consolidated amended complaint on January 17, 2003.
The  amended  complaint  now  purports to be a class action brought on behalf of
persons  who  purchased or otherwise acquired our common stock during the period
of  August  4,  2000  through  May  30,  2002,  inclusive. The amended complaint
continues  to  assert that we and the individual officer and director defendants
violated  the  1934  Act,  and  also  includes  alleged claims that we and these
officers  and  directors  violated  the  Securities Act of 1933 arising from our
Initial  Public  Offering  in  August  2000.  We  filed  a motion to dismiss the
additional  allegations  on  March 3, 2003. The Court has taken the motion under
submission. We have not yet answered the complaint, discovery has not commenced,
and  no  trial  date  has  been  established.

Derivative  Lawsuit

     On  July  26,  2002,  Samuel  Ivy  filed a shareholder derivative complaint
entitled  Ivy  v. Bernhard Bruscha, et al., No. 02CC00209, in the Superior Court
of the State of California, County of Orange, against certain of our current and
former  officers  and  directors.  On  January  7,  2003, the plaintiff filed an
amended  complaint. The amended complaint alleges causes of action for breach of
fiduciary  duty,  abuse  of control, gross mismanagement, unjust enrichment, and
improper  insider  stock  sales. The complaint seeks unspecified damages against
the  individual defendants on our behalf, equitable relief, and attorneys' fees.

     We filed a demurrer/motion to dismiss the amended complaint of February 13,
2003.  The basis of the demurrer is that the plaintiff does not have standing to
bring  this  lawsuit  since plaintiff has never served a demand on our Board the
our  Board  take  certain  actions  on  our behalf. On April 17, 2003, the Court
overruled our demurrer. All defendants have answered the complaint and generally
denied  the  allegations.  Discovery  has  commenced, but no trial date has been
established.

Securities  Claims  and  Employment  Claims  Brought  by the Co-Founders of USSC

     On  August  23,  2002,  a complaint entitled Dunstan v. Lantronix, Inc., et
al., was filed in the Circuit Court of the State of Oregon, County of Multnomah,
against  us  and certain of our current and former officers and directors by the
cofounders  of  USSC.  The  complaint  and subsequently filed arbitration demand
alleged  Oregon  state  law  claims  for  securities  violations,  fraud,  and
negligence,  as  well  as  other  claims  related  to  our  acquisition of USSC.
Plaintiffs sought more than $14.0 million in damages, interest, attorneys' fees,

                                       30



costs,  expenses,  and  an  unspecified  amount of punitive damages. The parties
participated  in  a  mediation  on  June  30,  2003, and subsequently reached an
agreement  to settle the dispute. Pursuant to the parties' settlement agreement,
we  released  to the plaintiffs approximately $400,000 in cash and 49,038 shares
of  our common stock that had been held in an escrow since December 2000 as part
of  the  acquisition  of  USSC.  On  September  15,  2003, we also issued to the
plaintiffs  1,726,703  additional shares of our common stock worth approximately
$1.5  million,  which  was  recorded  in our results of operations as litigation
settlement  costs  for the year ended June 30, 2003. In exchange, the plaintiffs
released  all  claims  against  all  defendants.

Employment  Suit  Brought  by  Former  CFO  and  COO  Steven  Cotton

     On  September  6,  2002,  Steven  Cotton,  our  former CFO and COO, filed a
complaint  entitled  Cotton  v.  Lantronix,  Inc., et al., No. 02CC14308, in the
Superior  Court  of  the  State  of  California, County of Orange. The complaint
alleges  claims for breach of contract, breach of the covenant of good faith and
fair  dealing,  wrongful  termination,  misrepresentation,  and  defamation. The
complaint  seeks  unspecified  damages,  declaratory relief, attorneys' fees and
costs.  Discovery  has  not  commenced  and  no trial date has been established.

     We  filed  a motion to dismiss on October 16, 2002, on the grounds that Mr.
Cotton's  complaints  are  subject  to the binding arbitration provisions in Mr.
Cotton's  employment  agreement.  On January 13, 2003, the Court ruled that five
of  the six counts in Mr. Cotton's complaint are subject to binding arbitration.
The  court  is  staying  the  sixth  count,  for  declaratory  relief, until the
underlying  facts are resolved in arbitration. No arbitration date has been set.

     Securities  Claims  Brought  by  Former  Shareholders  of  Synergetic

On  October 17, 2002, Richard Goldstein and several other former shareholders of
Synergetic filed a complaint entitled Goldstein, et al v. Lantronix, Inc., et al
in  the  Superior  Court  of  the State of California, County of Orange, against
certain  of  our  former  officers  and  directors.  Plaintiffs filed an amended
complaint  on  January  7,  2003. The amended complaint alleges fraud, negligent
misrepresentation,  breach  of  warranties and covenants, breach of contract and
negligence,  all  stemming  from  our  acquisition of Synergetic.  The complaint
seeks  an  unspecified  amount  of  damages,  interest,  attorneys' fees, costs,
expenses,  and  an  unspecified  amount of punitive damages. On May 5, 2003, the
Company  answered  the  complaint  and  generally  denied the allegations in the
complaint.  Discovery  has  commenced  but  no  trial date has been established.

     Suit  filed  by  Lantronix  Against  Logical  Solutions,  Inc.

     On  March  25, 2003, we filed in Connecticut state court (Judicial District
of New Haven) a complaint entitled Lantronix, Inc. and Lightwave Communications,
Inc.  v.  Logical  Solutions,  Inc.,  et.  al.  This is an action for unfair and
deceptive  trade  practices,  unfair competition, unjust enrichment, conversion,
misappropriation  of  trade  secrets  and tortuous interference with contractual
rights  and  business expectancies. We seek preliminary and permanent injunctive
relief  and  damages.  The  individual  defendants  are  all former employees of
Lightwave  Communications,  a  company  that we acquired in June 2001. The Court
held  a  non-jury  trial  October  10-17,  2003;  closing  arguments are set for
November  14,  2003.

Other

     From  time to time, we are subject to other legal proceedings and claims in
the  ordinary  course  of business. We currently are not aware of any such legal
proceedings  or  claims  that  we  believe  will  have,  individually  or in the
aggregate,  a  material  adverse  effect  on  our business, prospects, financial
position,  operating  results  or  cash  flows.

     Although  we  believe  that  the claims or any litigation arising therefrom
will  have  no  material impact on our business, all of the above matters are in
either  the  pleading  stage or the discovery stage, and we cannot predict their
outcomes  with  certainty.


ITEM  2.   CHANGES  IN  SECURITIES  AND  USE  OF  PROCEEDS

     On  August  23,  2002,  a complaint entitled Dunstan v. Lantronix, Inc., et
al., was filed in the Circuit Court of the State of Oregon, County of Multnomah,
against  us  and certain of our current and former officers and directors by the
cofounders  of  USSC.  The  complaint  and subsequently filed arbitration demand
alleged  Oregon  state  law  claims  for  securities  violations,  fraud,  and
negligence,  as  well  as  other  claims  related  to  our  acquisition of USSC.
Plaintiffs sought more than $14.0 million in damages, interest, attorney's fees,
costs,  expenses,  and  an  unspecified  amount of punitive damages. The parties
participated  in  a  mediation  on  June  30,  2003, and subsequently reached an
agreement to settle the dispute. Pursuant to the parities' settlement agreement,
we  released  to the plaintiffs approximately $400,000 in cash and 49,038 shares
of  our common stock that had been held in an escrow since December 2000 as part
of  the  acquisition  of  USSC.  On  September  15,  2003, we also issued to the
plaintiffs  1,726,703  additional shares of our common stock worth approximately

                                       31



$1.5  million,  which  was  recorded  in our results of operations as litigation
settlement  costs  for the year ended June 30, 2003. In exchange, the plaintiffs
released  all  claims  against  all  defendants.

     In  January  2002, we entered into a two-year line of credit with a bank in
an  amount not to exceed $20.0 million. Borrowings under the line of credit bear
interest  at either (i) the prime rate or (ii) the LIBOR rate plus 2.0%. We were
required  to  pay  a  $100,000  facility  fee of which $50,000 was paid upon the
closing  and  $50,000  was  to  be paid. We are also required to pay a quarterly
unused  line  fee  of  .125%  of  the  unused  line  of  credit  balance.  Since
establishing  the  line of credit, we have twice reduced the amount of the line,
modified  customary  financial  covenants,  and adjusted the interest rate to be
charged  on  borrowings  to  the  prime rate plus .50%, and eliminated the LIBOR
option.  Effective  July  25,  2003,  we  further  modified this line of credit,
reducing  the  revolving  line  to  $5.0  million,  and  adjusting the customary
affirmative  and  negative  covenants.  We are also required to maintain certain
financial  ratios  as  defined  in  the  agreement.  The agreement has an annual
revolving  maturity  date that renews on the effective date. The renewal $50,000
facility  fee  was  reduced to $12,500 and was paid. Prior to any advances being
made  under  the  line  of  credit,  the  bank  is  required to complete a field
examination  to  determine  its  borrowing  base.  To date, we have not borrowed
against  this  line  of  credit. We are currently in compliance with the revised
financial covenants of the July 25, 2003 amended line of credit. Pursuant to our
line of credit, we are restricted from paying any dividends. We have secured two
deposits  totaling  approximately  $365,000  under  our  line  of  credit.

ITEM  3.   DEFAULTS  UPON  SENIOR  SECURITIES

None.

ITEM  4.   SUBMISSION  OF  MATTERS  TO  A  VOTE  OF  SECURITY  HOLDERS

None

ITEM  5.   OTHER  INFORMATION

     In accord with Section 10A(i)(2) of the Securities Exchange Act of 1934, as
added  by  Section  202  of  the  Sarbanes-Oxley  Act  of  2002,  the company is
responsible  for  listing  the  non-audit  services approved in the three months
ended  September  30,  2003, by the company's Audit Committee to be performed by
the  company's  external  auditor.  Non-audit services are defined in the law as
services  other  than  those provided in connection with an audit or a review of
the  financial statements of the company. The Audit Committee did not engage the
outside  auditors  in  any  non-audit related services in the three months ended
September  30,  2003.

ITEM  6.   EXHIBITS  AND  REPORTS  ON  FORM  8-K

(a)  Exhibits

EXHIBIT
NUMBER     DESCRIPTION  OF  DOCUMENT
------     -------------------------


99.1       Certification  of  CEO  Pursuant  to  18  U.S.C.  Section  1350, as
           adopted pursuant to Section 906 of the Sarbanes-Oxley Act  of  2002


99.2       Certification  of  CFO  Pursuant  to  18  U.S.C.  Section  1350, as
           adopted pursuant to Section 906 of the Sarbanes-Oxley Act  of  2002


(b)  Reports  on  Form  8-K
None.

                                       32



                                   SIGNATURES

     Pursuant  to  the  requirements  of the Securities Act of 1934, as amended,
Lantronix  has  duly  caused  this  report  to  be  signed  on its behalf by the
undersigned,  thereunto  duly  authorized,  in  the  City  of  Irvine,  State of
California,  on  the  7th  day  of  November,  2003.

                          LANTRONIX,  INC.

                          By:     /s/ James W. Kerrigan
                                  ---------------------
                                  JAMES W. KERRIGAN
                                  -----------------
                                  CHIEF FINANCIAL OFFICER


                  CERTIFICATION BY PRINCIPAL EXECUTIVE OFFICER

I,  Marc  H.  Nussbaum,  certify  that:

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

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

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

     4.  The  registrant's other certifying officer(s) and I are responsible for
establishing  and  maintaining disclosure controls and procedures (as defined in
Exchange  Act  Rules  13a-15(e)  and  15d-15(e))  for  the  registrant and have:

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

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

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

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

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

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

Date:  November  10,  2003

/s/  Marc  H.  Nussbaum
________________________
Marc  H.  Nussbaum
Chief  Executive  Officer


                                       33



                  CERTIFICATION BY PRINCIPAL FINANCIAL OFFICER

I,  James  W.  Kerrigan,  certify  that:

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

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

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

     4.  The  registrant's other certifying officer(s) and I are responsible for
establishing  and  maintaining disclosure controls and procedures (as defined in
Exchange  Act  Rules  13a-15(e)  and  15d-15(e))  for  the  registrant and have:

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

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

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

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

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

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

Date:  November  10,  2003

/s/  James  W.  Kerrigan
________________________
James  W.  Kerrigan
Chief  Financial  Officer



                                       34



================================================================================

      CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
                                   PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I,  Marc  H.  Nussbaum,  certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant  to  Section  906 of the Sarbanes-Oxley Act of 2002, that the Quarterly
Report  of  Lantronix,  Inc. on Form 10-Q for the fiscal quarter ended September
30,  2003, fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and that information contained in such Quarterly
Report  on  Form  10-Q  fairly  presents  in all material respects the financial
condition  and  results  of  operations  of  Lantronix,  Inc.


     By:     /s/  Marc  H.  Nussbaum
             -------------------------
     Name:   Marc  Nussbaum
     Title:  Chief  Executive  Officer

I,  James  W.  Kerrigan, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant  to  Section  906 of the Sarbanes-Oxley Act of 2002, that the Quarterly
Report  of  Lantronix,  Inc. on Form 10-Q for the fiscal quarter ended September
30,  2003, fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and that information contained in such Quarterly
Report  on  Form  10-Q  fairly  presents  in all material respects the financial
condition  and  results  of  operations  of  Lantronix,  Inc.

     By:     /s/  James  W.  Kerrigan
             -------------------------
     Name:   James  W.  Kerrigan
     Title:  Chief  Financial  Officer

                                       35