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 March 31, 2010





OR





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





For
the transition period from _________ to ___________.





Commission
file number: 1-16027








LANTRONIX,
INC.


(Exact
name of registrant as specified in its charter)





Delaware
            33-0362767(State
      or other jurisdiction
            (I.R.S.
      Employerof
      incorporation or organization)
            Identification
      No.)





167
Technology Drive, Irvine, California


(Address
of principal executive offices)





92618


(Zip
Code)








(949)
453-3990


(Registrant’s
telephone number, including area code)





Former
name, former address and former fiscal year, if changed since last report:
N/A





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 xNo o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).


Yes o No x





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





Large
accelerated filer o                                                Accelerated
filer o                                Non-accelerated
filer o                                                      Smaller
reporting company x


(do not
check if a smaller reporting company)





Indicate
by check mark whether the registrant is a shell company (as defined by Rule
12b-2 of the Exchange Act). Yes o No x.





As of
April 27, 2010, 10,321,208, shares of the Registrant’s common stock were
outstanding.








LANTRONIX,
INC.





FORM
10-Q


FOR
THE FISCAL QUARTER ENDED


March
31, 2010





INDEX





PagePART
      I.
            FINANCIAL
      INFORMATION
            
            1Item
      1.
            Financial
      Statements
            
            1Unaudited
      Condensed Consolidated Balance Sheets at March 31, 2010 and June 30,
      2009
            
            1Unaudited
      Condensed Consolidated Statements of Operations for the Three and Nine
      Months EndedMarch
      31, 2010 and 2009
            
            2Unaudited
      Condensed Consolidated Statements of Cash Flows for the Nine Months
      EndedMarch
      31, 2010 and 2009
            
            3Notes
      to Unaudited Condensed Consolidated Financial Statements
            
            4Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            
            8Item
      4.
            Controls
      and Procedures
            
            18PART
      II.
            OTHER
      INFORMATION
            
            19Item
      1.
            Legal
      Proceedings
            
            19Item
      1A.
            Risk
      Factors
            
            19Item
      2.
            Unregistered
      Sales of Equity Securities and Use of
Proceeds.
            
            27Item
      3.
            Defaults
      Upon Senior Securities
            
            27Item
      4.
            Reserved
            
            27Item
      5.
            Other
      Information
            
            28Item
      6.
            Exhibits
            
            32











PART
I. FINANCIAL INFORMATION





Item
1.  Financial Statements




LANTRONIX,
INC.
 UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands)


March
      31,
              
              
              June
      30,2010
              
              
              2009AssetsCurrent
      assets:Cash
      and cash equivalents
              
              $
              9,313
              
              
              $
              9,137Accounts
      receivable, net
              
              
              2,575
              
              
              
              1,851Contract
      manufacturers' receivable
              
              
              1,002
              
              
              
              655Inventories,
      net
              
              
              6,449
              
              
              
              6,479Prepaid
      expenses and other current assets
              
              
              542
              
              
              
              529Total
      current assets
              
              
              19,881
              
              
              
              18,651Property
      and equipment, net
              
              
              2,424
              
              
              
              2,230Goodwill
              
              
              9,488
              
              
              
              9,488Purchased
      intangible assets, net
              
              
              177
              
              
              
              265Other
      assets
              
              
              134
              
              
              
              122Total
      assets
              
              $
              32,104
              
              
              $
              30,756Liabilities
      and stockholders' equityCurrent
      liabilities:Accounts
      payable
              
              $
              7,230
              
              
              $
              5,626Accrued
      payroll and related expenses
              
              
              1,137
              
              
              
              1,414Warranty
      reserve
              
              
              224
              
              
              
              224Restructuring
      reserve
              
              
              -
              
              
              
              76Short-term
      debt
              
              
              667
              
              
              
              667Other
      current liabilities
              
              
              3,247
              
              
              
              3,221Total
      current liabilities
              
              
              12,505
              
              
              
              11,228Non-current
      liabilities:Long-term
      liabilities
              
              
              657
              
              
              
              117Long-term
      capital lease obligations
              
              
              188
              
              
              
              309Long-term
      debt
              
              
              278
              
              
              
              778Total
      non-current liabilities
              
              
              1,123
              
              
              
              1,204Total
      liabilities
              
              
              13,628
              
              
              
              12,432Commitments
      and contingenciesStockholders'
      equity:Common
      stock
              
              
              1
              
              
              
              1Additional
      paid-in capital
              
              
              190,773
              
              
              
              189,584Accumulated
      deficit
              
              
              (172,697
              )
              
              
              (171,687
              )Accumulated
      other comprehensive income
              
              
              399
              
              
              
              426Total
      stockholders' equity
              
              
              18,476
              
              
              
              18,324Total
      liabilities and stockholders' equity
              
              $
              32,104
              
              
              $
              30,756See
      accompanying notes.





1


LANTRONIX,
INC.
 UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In
thousands, except per share data)





Three
      Months Ended
              
              
              Nine
      Months EndedMarch
      31,
              
              
              March
      31,2010
              
              
              2009
              
              
              2010
              
              
              2009Net
      revenue (1)
              
              $
              12,124
              
              
              $
              10,655
              
              
              $
              34,556
              
              
              $
              37,752Cost
      of revenue
              
              
              5,772
              
              
              
              5,086
              
              
              
              16,438
              
              
              
              17,716Gross
      profit
              
              
              6,352
              
              
              
              5,569
              
              
              
              18,118
              
              
              
              20,036Operating
      expenses:Selling,
      general and administrative
              
              
              4,804
              
              
              
              4,446
              
              
              
              14,279
              
              
              
              14,969Research
      and development
              
              
              1,643
              
              
              
              1,367
              
              
              
              4,638
              
              
              
              4,419Restructuring
      charges
              
              
              -
              
              
              
              (23
              )
              
              
              -
              
              
              
              698Amortization
      of purchased intangible assets
              
              
              18
              
              
              
              18
              
              
              
              54
              
              
              
              54Total
      operating expenses
              
              
              6,465
              
              
              
              5,808
              
              
              
              18,971
              
              
              
              20,140Loss
      from operations
              
              
              (113
              )
              
              
              (239
              )
              
              
              (853
              )
              
              
              (104
              )Interest
      expense, net
              
              
              (29
              )
              
              
              (51
              )
              
              
              (118
              )
              
              
              (134
              )Other
      income (expense), net
              
              
              17
              
              
              
              37
              
              
              
              (8
              )
              
              
              43Loss
      before income taxes
              
              
              (125
              )
              
              
              (253
              )
              
              
              (979
              )
              
              
              (195
              )Provision
      for income taxes
              
              
              11
              
              
              
              10
              
              
              
              31
              
              
              
              32Net
      loss
              
              $
              (136
              )
              
              $
              (263
              )
              
              $
              (1,010
              )
              
              $
              (227
              )Net
      loss per share (basic and diluted)
              
              $
              (0.01
              )
              
              $
              (0.03
              )
              
              $
              (0.10
              )
              
              $
              (0.02
              )Weighted-average
      shares (basic and diluted)
              
              
              10,318
              
              
              
              10,087
              
              
              
              10,262
              
              
              
              10,078(1)  Includes
      net revenue from related parties
              
              $
              214
              
              
              $
              244
              
              
              $
              481
              
              
              $
              804See
      accompanying notes.











2


LANTRONIX,
INC. UNAUDITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (In
thousands)





Nine
      Months EndedMarch
      31,2010
              
              
              2009Operating
      activitiesNet
      loss
              
              $
              (1,010
              )
              
              $
              (227
              )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Share-based
      compensation
              
              
              1,527
              
              
              
              1,359Depreciation
              
              
              658
              
              
              
              568(Recovery)
      provision for inventories
              
              
              (132
              )
              
              
              9Amortization
      of purchased intangible assets
              
              
              88
              
              
              
              87Provision
      for doubtful accounts
              
              
              12
              
              
              
              54Restructuring
      charge
              
              
              -
              
              
              
              698Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              (736
              )
              
              
              2,764Contract
      manufacturers' receivable
              
              
              (347
              )
              
              
              159Inventories
              
              
              162
              
              
              
              69Prepaid
      expenses and other current assets
              
              
              (53
              )
              
              
              (350
              )Other
      assets
              
              
              (12
              )
              
              
              10Accounts
      payable
              
              
              1,603
              
              
              
              (1,671
              )Accrued
      payroll and related expenses
              
              
              (287
              )
              
              
              (880
              )Warranty
      reserve
              
              
              -
              
              
              
              (118
              )Restructuring
      reserve
              
              
              (76
              )
              
              
              (1,388
              )Other
      liabilities
              
              
              (15
              )
              
              
              (129
              )Cash
      received related to tenant incentives
              
              
              280
              
              
              
              -Net
      cash provided by operating activities
              
              
              1,662
              
              
              
              1,014Investing
      activitiesPurchases
      of property and equipment, net
              
              
              (644
              )
              
              
              (495
              )Net
      cash used in investing activities
              
              
              (644
              )
              
              
              (495
              )Financing
      activitiesMinimum
      tax withholding paid on behalf of employees for restricted
      shares
              
              
              (263
              )
              
              
              -Payment
      of term loan
              
              
              (499
              )
              
              
              (389
              )Net
      proceeds from issuances of common stock
              
              
              155
              
              
              
              88Payment
      of capital lease obligations
              
              
              (209
              )
              
              
              (252
              )Proceeds
      from term loan
              
              
              -
              
              
              
              2,000Net
      cash (used in) provided by financing activities
              
              
              (816
              )
              
              
              1,447Effect
      of foreign exchange rate changes on cash
              
              
              (26
              )
              
              
              (244
              )Increase
      in cash and cash equivalents
              
              
              176
              
              
              
              1,722Cash
      and cash equivalents at beginning of period
              
              
              9,137
              
              
              
              7,434Cash
      and cash equivalents at end of period
              
              $
              9,313
              
              
              $
              9,156See
      accompanying notes.





3





LANTRONIX,
INC.





NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





March
31, 2010





1.           Basis
of Presentation





The
accompanying unaudited condensed consolidated financial statements of Lantronix,
Inc. (the “Company” or “Lantronix”) have been prepared by the Company in
accordance with generally accepted accounting principles (“GAAP”) for interim
financial information and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X.  Accordingly, they should be read
in conjunction with the audited consolidated financial statements and notes
thereto for the fiscal year ended June 30, 2009, included in the Company’s
Annual Report on Form 10-K filed with the Securities and Exchange Commission
(“SEC”) on September 28, 2009. They contain all normal recurring accruals and
adjustments which, in the opinion of management, are necessary to present fairly
the consolidated financial position of the Company at March 31, 2010, and the
consolidated results of its operations and cash flows for the three and nine
months ended March 31, 2010 and 2009. 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 and nine months ended
March 31, 2010 are not necessarily indicative of the results to be expected for
the full year or any future interim periods.





In
June 2009, the Financial Accounting Standards Board (“FASB”) established
the Accounting Standards Codification, or Codification, as the source of
authoritative GAAP recognized by the FASB. The Codification is effective in the
first interim and annual periods ending after September 15, 2009 and had no
effect on our unaudited condensed consolidated financial
statements.





2.           Computation
of Net Loss per Share





Basic and
diluted net loss per share is calculated by dividing net loss by the
weighted-average number of common shares outstanding during the year, adjusted
to reflect the December 2009 one-for-six reverse stock split.





The
following table presents the computation of net loss per share:





Three
      Months Ended
              
              
              Nine
      Months EndedMarch
      31,
              
              
              March
      31,2010
              
              
              2009
              
              
              2010
              
              
              2009(In
      thousands, except per share data)Numerator:Net
      loss
              
              $
              (136
              )
              
              $
              (263
              )
              
              $
              (1,010
              )
              
              $
              (227
              )Denominator:Weighted-average
      shares outstanding
              
              
              10,611
              
              
              
              10,580
              
              
              
              10,555
              
              
              
              10,571Less:
      Unvested common shares outstanding
              
              
              (293
              )
              
              
              (493
              )
              
              
              (293
              )
              
              
              (493
              )Weighted-average
      shares (basic and diluted)
              
              
              10,318
              
              
              
              10,087
              
              
              
              10,262
              
              
              
              10,078Net
      loss per share (basic and diluted)
              
              $
              (0.01
              )
              
              $
              (0.03
              )
              
              $
              (0.10
              )
              
              $
              (0.02
              )





The
following table presents the common stock equivalents excluded from the diluted
net loss per share calculation, because they were anti-dilutive as of such
dates. These excluded common stock equivalents could be dilutive in the
future.





Three
      Months Ended
              
              Nine
      Months EndedMarch
      31,
              
              March
      31,2010
              
              
              2009
              
              
              2010
              
              
              2009(In
      thousands)Common
      stock equivalents
              
              
              1,143
              
              
              
              1,281
              
              
              
              1,184
              
              
              
              1,379


4


3.           Inventories





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





March
      31,
              
              
              June
      30,2010
              
              
              2009(In
      thousands)Finished
      goods
              
              $
              4,169
              
              
              $
              4,421Raw
      materials
              
              
              1,667
              
              
              
              1,537Inventory
      at distributors
              
              
              1,523
              
              
              
              1,355Large
      scale integration chips *
              
              
              526
              
              
              
              909Inventories,
      gross
              
              
              7,885
              
              
              
              8,222Reserve
      for excess and obsolete inventory
              
              
              (1,436
              )
              
              
              (1,743
              )Inventories,
      net
              
              $
              6,449
              
              
              $
              6,479*
      This item is sold individually and embedded into the Company's
      products.





4.           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 products
typically carry a one- or two-year warranty. Although the Company engages in
extensive product quality programs and processes, its warranty obligation is
affected by product failure rates, use of materials or service delivery costs
that differ from the Company’s estimates. As a result, additional warranty
reserves could be required, which could reduce gross margins. Additionally, the
Company sells extended warranty services, which extend the warranty period for
an additional one to three years, depending upon the product.





The
following table is a reconciliation of the changes to the product warranty
liability for the periods presented:





Nine
      Months
                Ended
              
              
              Year
      EndedMarch
      31,
              
              
              June
      30,2010
              
              
              2009(In
      thousands)Beginning
      balance
              
              $
              224
              
              
              $
              342Charged
      to cost of revenues
              
              
              142
              
              
              
              116Usage
              
              
              (142
              )
              
              
              (234
              )Ending
      balance
              
              $
              224
              
              
              $
              224





5.           Restructuring
Reserve





During
the fourth fiscal quarter ended June 30, 2008, the Company implemented a
restructuring plan to optimize its organization to better leverage existing
customer and partner relationships in order to drive revenue growth and
profitability. As part of the restructuring plan, 10 employees from the
senior-level ranks of the sales, marketing, operations and engineering groups
were terminated. During the first fiscal quarter ended September 30, 2008,
the Company implemented a second restructuring plan. As part of the second
restructuring plan, an additional 29 employees from all ranks and across
all functional groups of the Company were terminated. During the second
fiscal quarter ended December 31, 2008, the Company incurred additional
restructuring charges related to the termination of a senior-level employee and
closure of a sales office in France. During the fourth fiscal quarter ended June
30, 2009, the Company incurred restructuring charges related to the
consolidation of its corporate headquarters.





5


The following table presents a summary
of the activity in the Company’s restructuring reserve:





Facilities
              
              
              Severance
              
              
              TotalTermination
              
              
              Related
              
              
              RestructuringCosts
              
              
              Costs
              
              
              Costs(In
      thousands)Restructuring
      reserve at June 30, 2009
              
              $
              73
              
              
              $
              3
              
              
              $
              76Restructuring
      charge
              
              
              -
              
              
              
              -
              
              
              
              -Cash
      payments
              
              
              (73
              )
              
              
              (3
              )
              
              
              (76
              )Restructuring
      reserve at March 31, 2010
              
              $
              -
              
              
              $
              -
              
              
              $
              -





6.           Bank
Line of Credit and Debt





In August
2008, the Company entered into an Amendment to Loan and Security Agreement,
which provides for a three-year $2.0 million Term Loan and a two-year $3.0
million Revolving Credit Facility (the “Term Loan and Revolving Credit Facility”
or “Loan Agreement”). The Term Loan was funded on August 26, 2008 and is payable
in 36 equal installments of principal and monthly accrued interest. There are no
borrowings outstanding on the Revolving Credit Facility as of the fiscal quarter
end.





Borrowings
under the Term Loan and Revolving Credit Facility bear interest at the greater
of 6.25% or prime rate plus 1.25% per annum. If the Company achieves two
consecutive quarters of positive EBITDAS (as defined in the Loan Agreement)
greater than $1.00, and only for so long as the Company maintains EBITDAS
greater than $1.00 at the end of each subsequent fiscal quarter, then the
borrowings under the Term Loan and Revolving Credit Facility will bear interest
at the greater of 5.75% or prime rate plus 0.75% per annum. Upon entering into
the agreement, the Company paid a fully earned, non-refundable commitment fee of
$35,000 and paid an additional $35,000 on the first anniversary of the effective
date of the Term Loan.





The
Company's obligations under the Term Loan and Revolving Credit Facility are
secured by substantially all of the Company's assets, including its intellectual
property.





The
following table presents our available borrowing capacity and outstanding
letters of credit, which were used to secure equipment leases, purchase of
materials, deposits for a building lease and security deposits:




March
      31,
              
              
              June
      30,2010
              
              
              2009(In
      thousands)Available
      borrowing capacity
              
              $
              1,445
              
              
              $
              426Outstanding
      letters of credit
              
              $
              729
              
              
              $
              732
  7.           Stockholders’
Equity





Common
Stock





On November 18, 2009, Lantronix
stockholders approved a proposal to authorize the Company’s board of directors
to implement, at its discretion, a reverse stock split of the Company’s
outstanding shares of common stock within a range of one-third to one-sixth of a
share for each outstanding share of common stock, and to file an Amendment to
the Company’s Certificate of Incorporation (the “Certificate of Amendment”) to
effect such a reverse stock split. On November 18, 2009, the board of directors
authorized a one-for-six reverse stock split of the Company’s common stock. On
December 18, 2009, the Company filed the Certificate of Amendment. All
references to common shares and per-share data for all periods presented in this
report have been retrospectively adjusted to give effect to this reverse stock
split. As no change was made to the par value of the common shares, $5,000 was
reclassified from common stock to additional paid-in capital.





6


Share-Based
Compensation





The Company has one active share-based
plan under which non-qualified and incentive stock options have been granted to
employees, non-employees and its board of directors. In addition, the Company
has granted restricted stock awards to employees and its board of directors
under this share-based plan. The compensation committee of the board of
directors determines eligibility, vesting schedules and exercise prices for
options and restricted stock awards granted under the plans. The Company issues
new shares to satisfy stock option exercises, restricted stock grants, and stock
purchases under its share-based plans.





On August
18, 2009, eligible employees were granted awards of options to purchase common
stock under the Company’s Long Term Incentive Plan (“LTIP”). Under the
terms of the LTIP, eligible employees were granted a total of 679,038 options to
purchase common shares. Twenty-five percent of the options vest on September 1,
2010, and an additional 25% of the options vest each year thereafter, all
subject to the recipients’ continued employment. The LTIP option awards were
made from the Company’s 2000 Stock Plan. The exercise price was equal to the
fair market value of the Company’s common stock on the date of grant as listed
on the Nasdaq Capital Market.





On
September 15, 2009, Jerry D. Chase, President and Chief Executive Officer and
Reagan Y. Sakai, Chief Financial Officer and Secretary were granted 76,724 and
44,400 options, respectively, to purchase common stock under the Company’s LTIP
plan.  Twenty-five percent of the options vest on September 1, 2010,
and an additional 25% of the options vest each year thereafter, all subject to
the recipients’ continued employment. The LTIP option awards were made from the
Company’s 2000 Stock Plan. The exercise price was equal to the fair market value
of the Company’s common stock on the date of grant as listed on the Nasdaq
Capital Market.





The
compensation committee of the board of directors approved a performance plan for
the fiscal year ended June 30, 2010 (“Performance Plan”), which will be paid in
vested common shares if minimum revenue, non-GAAP income and management
objectives are met. If the Company achieves its estimated attainment, it will
record share-based compensation of approximately $306,000 for the fiscal year
ending June 30, 2010. During the nine months ended March 31, 2010, the Company
recorded $230,000 of share-based compensation in connection with this
Performance Plan, which is recorded as long-term liability on the consolidated
balance sheet.





The following table presents a summary
of option activity under all of the Company’s stock option plans:





Number
      ofSharesBalance
      of options outstanding at June 30, 2009
              
              
              1,278,505Options
      granted
              
              
              1,008,137Options
      forfeited
              
              
              (132,695
              )Options
      expired
              
              
              (95,556
              )Options
      exercised
              
              
              (51,000
              )Balance
      of options outstanding at March 31, 2010
              
              
              2,007,391





The
following table presents stock option grant date information:





Three
      Months Ended
              
              
              Nine
      Months EndedMarch
      31,
              
              
              March
      31,2010
              
              
              2009
              
              
              2010
              
              
              2009Weighted-average
      grant date fair value per share
              
              $
              2.30
              
              
              $
              2.34
              
              
              $
              1.89
              
              
              $
              2.22Weighted-average
      grant date exercise price per share
              
              $
              3.24
              
              
              $
              3.36
              
              
              $
              2.67
              
              
              $
              3.30


7


The following table presents a summary
of restricted stock activity:





WeightedAverageNumber
      of
              
              
              Grant
      - DateShares
              
              
              Fair
      ValueBalance
      of restricted shares at June 30, 2009
              
              
              472,065
              
              
              $
              3.12Granted
              
              
              -
              
              
              
              -Forfeited
              
              
              (42,871
              )
              
              
              3.00Vested
              
              
              (135,763
              )
              
              
              3.16Balance
      of restricted shares at March 31, 2010
              
              
              293,431
              
              
              $
              3.11





The
following table presents a summary of the total fair value of shares vested for
all of the Company’s restricted share awards:




Three
      Months Ended
              
              
              Nine
      Months EndedMarch
      31,
              
              
              March
      31,2010
              
              
              2009
              
              
              2010
              
              
              2009(In
      thousands)Fair
      value of shares vested
              
              $
              18
              
              
              $
              15
              
              
              $
              443
              
              
              $
              15




The following table presents a summary
of remaining unrecognized share-based compensation by the vesting condition for
the Company’s share-based plans:





Remaining
                  Unrecognized
                
                RemainingCompensation
                
                YearsVesting
      Condition
                
                Cost
                
                To
      Vest(In
      thousands)Stock
      Option Awards:Service
      based
                
                $
                1,906Market
      and service based
                
                
                465Stock
      option awards
                
                $
                2,371
                
                
                
                2.8Restricted
      Stock Awards:Service
      based
                
                
                710Market
      and service based
                
                
                29Restricted
      stock awards
                
                $
                739
                
                
                
                2.2





The following table presents a summary
of share-based compensation by functional line item:





Three
      Months Ended
              
              
              Nine
      Months EndedMarch
      31,
              
              
              March
      31,2010
              
              
              2009
              
              
              2010
              
              
              2009(In
      thousands)Cost
      of revenues
              
              $
              11
              
              
              $
              2
              
              
              $
              30
              
              
              $
              49Selling,
      general and administrative
              
              
              257
              
              
              
              242
              
              
              
              1,108
              
              
              
              956Research
      and development
              
              
              116
              
              
              
              51
              
              
              
              389
              
              
              
              354Total
      share-basd compensation
              
              $
              384
              
              
              $
              295
              
              
              $
              1,527
              
              
              $
              1,359





Warrants
to Purchase Common Stock





During
March 2008, the Company distributed warrants to purchase 179,935 shares of
Lantronix common stock as consideration for settlement of a shareholder lawsuit.
The warrants have a contractual life of four years and a strike price of
$28.08.





8


8.           Income
Taxes




At July
1, 2009, the Company’s fiscal 2002 through fiscal 2009 tax years remain open to
examination by the federal and state taxing authorities. The Company has net
operating losses (“NOLs”) beginning in fiscal 2002 which cause the statute of
limitations to remain open for the year in which the NOL was
incurred.




The
Company utilizes the liability method of accounting for income taxes. The
following table presents the Company’s effective tax rates based upon the income
tax provision for the periods shown:





Three
      Months Ended
              
              
              Nine
      Months EndedMarch
      31,
              
              
              March
      31,2010
              
              
              2009
              
              
              2010
              
              
              2009Effective
      tax rate
              
              
              9%
              
              
              
              4%
              
              
              
              3%
              
              
              
              16%





The
federal statutory rate was 34% for all periods. The difference between the
Company’s effective tax rate and the federal statutory rate resulted primarily
from the effect of its domestic losses recorded with a fully reserved tax
benefit, as well as the effect of foreign earnings taxed at rates differing from
the federal statutory rate.





9.           Comprehensive
Income (Loss)





The
components of comprehensive income (loss) are as follows:





Three
      Months Ended
              
              
              Nine
      Months EndedMarch
      31,
              
              
              March
      31,2010
              
              
              2009
              
              
              2010
              
              
              2009(In
      thousands)Net
      loss
              
              $
              (136
              )
              
              $
              (263
              )
              
              $
              (1,010
              )
              
              $
              (227
              )Other
      comprehensive income (loss):Change
      in translation adjustments, net of taxes of $0
              
              
              (49
              )
              
              
              2
              
              
              
              (27
              )
              
              
              (94
              )Total
      comprehensive loss
              
              $
              (185
              )
              
              $
              (261
              )
              
              $
              (1,037
              )
              
              $
              (321
              )





10.           Litigation





From time to time, the Company is
subject to 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.








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





Cautionary
Statement
 
 You should read the following
discussion and analysis in conjunction with our unaudited condensed consolidated
financial statements and the related notes thereto contained elsewhere in this
Quarterly Report on Form 10-Q. The information contained in this Report is not a
complete description of our business. We urge you to carefully review and
consider the various disclosures made by us in this Report and in our 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, 2009 and
subsequent reports on our Current Reports on Form 8-K.





This
Report contains forward-looking statements which include, but are not limited
to, statements concerning projected net revenues, expenses, gross profit and net
income (loss), the need for additional capital, market acceptance of our
products, our ability to achieve further product integration, the status of
evolving technologies and their growth potential and our production capacity.
Among these forward-looking statements are statements regarding a potential
decline in net revenue from non-core product lines, potential variances in
quarterly operating expenses, the adequacy of existing resources to meet cash
needs, some reduction in the average selling prices and gross margins of
products, need to incorporate software from third-party vendors and open source
software in our future products and the potential impact of an increase in
interest rates or fluctuations in foreign exchange rates on our financial
condition or results of operations. 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, including but not limited to those identified under the heading “Risk
Factors” set forth in Part II, Item 1A hereto. We undertake no obligation to
revise or update publicly any forward-looking statements for any reason.





9


Overview





We
design, develop and market devices that make it possible to access, manage,
control and configure electronic products 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 Ethernet and
wireless. Our first device was a terminal server that allowed ASCII terminals to
connect to a network. Building on the success of our terminal servers, in 1991
we introduced a complete line of print servers that enabled users to
inexpensively share printers over a network. Since then, 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 has been increasingly expanded beyond IT equipment, so that our device
solutions provide a product manufacturer with the ability to network its
products within the industrial, service and commercial markets referred to as
machine-to-machine (“M2M”) networking.





The
following describes our M2M device networking product lines:





·
            Device Enablement (DeviceLinx) – We offer
      an array of embedded and external device enablement solutions that enable
      integrators and manufacturers of electronic and electro-mechanical
      products to add network connectivity, manageability and control. Our
      customers’ products emanate from a wide variety of applications within the
      M2M market, from blood analyzers that relay critical patient information
      directly to a hospital’s information system, to simple devices such as
      time clocks, allowing the user to obtain information from these devices
      and to improve how they are managed and controlled. We also offer
      products such as multi-port device servers that enable devices outside the
      data center to effectively share the costs of the network connection and
      convert various protocols to industry standard interfaces such as Ethernet
      and the Internet.





·
            Device Management (SecureLinx
      and ManageLinx)–We
      offer off-the-shelf appliances such as console servers, digital remote
      keyboard, video, mouse extenders, and power control products that enable
      IT professionals to remotely connect, monitor and control network
      infrastructure equipment, distributed branch office equipment and large
      groups of servers using highly secure out-of-band management
      technology. In addition, our ManageLinx solution provides secure
      remote Internet access to virtually any piece of IP-enabled equipment,
      including our DeviceLinx products – even behind remote firewalls or
      virtual private networks.





The
following describes our non-core product line:





·
            Non-core – Over the
      years, we have innovated or acquired various product lines that are no
      longer part of our primary, core markets described above. In general,
      these non-core product lines represent decreasing markets and we minimize
      research and development in these product lines. Included in this category
      are terminal servers, visualization solutions, legacy print servers,
      software and other miscellaneous products. We have announced the
      end-of-life for almost all of our non-core products and expect a steep
      decline in non-core revenues in fiscal 2010 while we complete the exit of
      this product category.





Financial
Highlights and Other Information for the Fiscal Quarter Ended March 31,
2010





The
following is a summary of the key factors and significant events that impacted
our financial performance during the fiscal quarter ended March 31,
2010:





·
                    Net
      revenue was $12.1 million for the fiscal quarter ended March 31, 2010, an
      increase of $1.5 million or 14%, compared to $10.7 million for the fiscal
      quarter ended March 31, 2009. The increase was primarily the result of a
      $1.6 million, or 15.6%, increase in our device networking product lines,
      offset by a $142,000, or 46.0%, decrease in our non-core product
      lines.


10





·
                Gross
      profit margin was 52.4% for the fiscal quarter ended March 31, 2010,
      compared to 52.3% for the fiscal quarter ended March 31, 2009. The
      increase in gross profit margin percent was primarily attributable to
      lower inventory reserve costs offset by an increase in freight costs
      compared to the prior year
quarter.





·
                Loss
      from operations was $113,000 for the fiscal quarter ended March 31, 2010,
      compared to $239,000 for the fiscal quarter ended March 31,
      2009.





·
                Net
      loss was $136,000, or $0.01 per basic and diluted share, for the fiscal
      quarter ended March 31, 2010, compared to $263,000, or $0.03 per basic and
      diluted share, for the fiscal quarter ended March 31,
  2009.





·
                Cash
      and cash equivalents were $9.3 million as of March 31, 2010, an increase
      of $176,000, compared to $9.1 million as of June 30,
  2009.





·
                Net
      accounts receivable were $2.6 million as of March 31, 2010, an increase of
      $724,000, compared to $1.9 million as of June 30, 2009. Days sales
      outstanding (“DSO”) in receivables were 16 days for the fiscal quarter
      ended March 31, 2010 compared to 22 days for the fiscal quarter ended June
      30, 2009. Our accounts receivable and DSO are primarily affected by the
      timing of shipments within a quarter, our collections performance and the
      fact that a significant portion of our revenues are recognized on a
      sell-through basis (upon shipment from distributor inventories rather than
      as goods are shipped to
distributors).





·
                Net
      inventories were $6.4 million as of March 31, 2010, compared to $6.5
      million as of June 30, 2009. Inventory turns were 3.6 turns for the fiscal
      quarter ended March 31, 2010, compared to 3.2 turns for the fiscal quarter
      ended June 30, 2009.





Critical
Accounting Policies and Estimates





The
accounting policies that have the greatest impact on our financial condition and
results of operations and that require the most judgment are those relating to
revenue recognition, warranty reserves, allowance for doubtful accounts,
inventory valuation, valuation of deferred income taxes, and goodwill. These
policies are described in further detail in our Annual Report on Form 10-K for
the fiscal year ended June 30, 2009. There have been no significant changes in
our critical accounting policies and estimates during the fiscal quarter ended
March 31, 2010 as compared to what was previously disclosed in our Annual Report
on Form 10-K for the fiscal year ended June 30, 2009.





Recent
Accounting Pronouncements





In
September 2009 the FASB reached a consensus on Accounting Standards Update
(“ASU”), 2009-13, Revenue
Recognition (Topic 605) – Multiple-Deliverable Revenue Arrangements (“ASU
2009-13”) and ASU 2009-14, Software (Topic 985) – Certain
Revenue Arrangements That Include Software Elements(“ASU 2009-14”). ASU
2009-13 modifies the requirements that must be met for an entity to recognize
revenue from the sale of a delivered item that is part of a multiple-element
arrangement when other items have not yet been delivered. ASU 2009-13 eliminates
the requirement that all undelivered elements must have either: i)
vendor-specific objective evidence (“VSOE”) or ii) third-party evidence (“TPE”)
before an entity can recognize the portion of an overall arrangement
consideration that is attributable to items that already have been delivered. In
the absence of VSOE or TPE of the standalone selling price for one or more
delivered or undelivered elements in a multiple-element arrangement, entities
will be required to estimate the selling prices of those elements. Overall
arrangement consideration will be allocated to each element (both delivered and
undelivered items) based on their relative selling prices, regardless of whether
those selling prices are evidenced by VSOE or TPE or are based on the entity’s
estimated selling price. The residual method of allocating arrangement
consideration has been eliminated. ASU 2009-14 modifies the software revenue
recognition guidance to exclude from its scope tangible products that contain
both software and non-software components that function together to deliver a
product’s essential functionality. These new updates are effective for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010. Early adoption is permitted. We are currently
evaluating the impact that the adoption of these ASUs will have on our
consolidated financial statements.


11





Consolidated
Results of Operations





The
following table presents the percentage of net revenues represented by each item
in our condensed consolidated statement of operations:





Three
      Months Ended
              
              
              Nine
      Months EndedMarch
      31,
              
              
              March
      31,2010
              
              
              2009
              
              
              2010
              
              
              2009Net
      revenues
              
              100.0%
              
              
              100.0%
              
              
              100.0%
              
              
              100.0%Cost
      of revenues
              
              47.6%
              
              
              47.7%
              
              
              47.6%
              
              
              46.9%Gross
      profit
              
              52.4%
              
              
              52.3%
              
              
              52.4%
              
              
              53.1%Operating
      expenses:Selling,
      general and administrative
              
              39.6%
              
              
              41.7%
              
              
              41.3%
              
              
              39.7%Research
      and development
              
              13.6%
              
              
              12.8%
              
              
              13.4%
              
              
              11.7%Restructuring
      charges
              
              0.0%
              
              
              (0.2%
              )
              
              0.0%
              
              
              1.8%Amortization
      of purchased intangible assets
              
              0.1%
              
              
              0.2%
              
              
              0.2%
              
              
              0.1%Total
      operating expenses
              
              53.3%
              
              
              54.5%
              
              
              54.9%
              
              
              53.3%Loss
      from operations
              
              (0.9%
              )
              
              (2.2%
              )
              
              (2.5%
              )
              
              (0.3%
              )Interest
      expense, net
              
              (0.2%
              )
              
              (0.5%
              )
              
              (0.3%
              )
              
              (0.4%
              )Other
      income (expense), net
              
              0.1%
              
              
              0.3%
              
              
              (0.0%
              )
              
              0.1%Loss
      before income taxes
              
              (1.0%
              )
              
              (2.4%
              )
              
              (2.8%
              )
              
              (0.5%
              )Provision
      for income taxes
              
              0.1%
              
              
              0.1%
              
              
              0.1%
              
              
              0.1%Net
      loss
              
              (1.1%
              )
              
              (2.5%
              )
              
              (2.9%
              )
              
              (0.6%
              )











12


Comparison
of the Fiscal Quarters Ended March 31, 2010 and 2009





Net
Revenue by Product Line





The following table presents fiscal
quarter net revenue by product line:





Three
      Months Ended March 31,%
      of Net
              
              
              
              
              
              %
      of Net
              
              
              Change2010
              
              
              Revenue
              
              
              2009
              
              
              Revenue
              
              
              $
              
              
              %(In
      thousands, except percentages)Device
      enablement
              
              $
              9,572
              
              
              
              79.0%
              
              
              $
              8,737
              
              
              
              82.0%
              
              
              $
              835
              
              
              
              9.6%Device
      management
              
              
              2,385
              
              
              
              19.7%
              
              
              
              1,609
              
              
              
              15.1%
              
              
              
              776
              
              
              
              48.2%Device
      networking
              
              
              11,957
              
              
              
              98.7%
              
              
              
              10,346
              
              
              
              97.1%
              
              
              
              1,611
              
              
              
              15.6%Non-core
              
              
              167
              
              
              
              1.3%
              
              
              
              309
              
              
              
              2.9%
              
              
              
              (142
              )
              
              
              (46.0%
              )Net
      revenue
              
              $
              12,124
              
              
              
              100.0%
              
              
              $
              10,655
              
              
              
              100.0%
              
              
              $
              1,469
              
              
              
              13.8%





The
increase in net revenue for the three months ended March 31, 2010, compared to
the three months ended March 31, 2009 was the result of an increase in net
revenue from our device enablement and device management product lines, offset
by a decrease in our non-core product lines. The increase in our device
enablement product line was due to a increase in our embedded device enablement
products, and more specifically, our XPort, Micro and MatchPort product
families,  offset by a decrease in our external device enablement
products, more specifically, our WiBox product family. The increase in our
device management product line was due to an increase in our SLC and SLS product
families, which were impacted by a sale of SLCs to a single U.S. customer. We
are no longer investing in the development of our non-core product lines and
expect net revenue related to these products to continue to decline in the
future as we focus our investment on our device networking product
lines.





The
following table presents fiscal year-to-date net revenue by product
line:





Nine
      Months Ended March 31,%
      of Net
              
              
              
              
              
              %
      of Net
              
              
              Change2010
              
              
              Revenue
              
              
              2009
              
              
              Revenue
              
              
              $
              
              
              %(In
      thousands, except percentages)Device
      enablement
              
              $
              27,567
              
              
              
              79.8%
              
              
              $
              30,405
              
              
              
              80.5%
              
              
              $
              (2,838
              )
              
              
              (9.3%
              )Device
      management
              
              
              6,287
              
              
              
              18.2%
              
              
              
              5,828
              
              
              
              15.4%
              
              
              
              459
              
              
              
              7.9%Device
      networking
              
              
              33,854
              
              
              
              98.0%
              
              
              
              36,233
              
              
              
              95.9%
              
              
              
              (2,379
              )
              
              
              (6.6%
              )Non-core
              
              
              702
              
              
              
              2.0%
              
              
              
              1,519
              
              
              
              4.1%
              
              
              
              (817
              )
              
              
              (53.8%
              )Net
      revenue
              
              $
              34,556
              
              
              
              100.0%
              
              
              $
              37,752
              
              
              
              100.0%
              
              
              $
              (3,196
              )
              
              
              (8.5%
              )





The
decrease in net revenue for the nine months ended March 31, 2010, compared to
the nine months ended March 31, 2009 was the result of a decrease in net revenue
from our device enablement and non-core product lines, offset by an increase in
our device management product lines. The decrease in our device enablement
product line was due to a decrease in our embedded device enablement products,
and more specifically, our XPort, ASIC and Micro product families, offset by an
increase in our MatchPort product families, and a decrease in our external
device enablement products, more specifically, our EDS, UDS, WiBox, MSS and
WiBridge product families. The increase in our device management product line
was due to an increase in our SLC and SLS product families, offset by a decrease
in our SCS, SLB and SLP product families. We are no longer investing in the
development of our non-core product lines and expect net revenue related to
these products to continue to decline in the future as we focus our investment
on our device networking product lines.





Net
Revenue by Geographic Region





The following table presents fiscal
quarter net revenue by geographic region:





Three
      Months Ended March 31,%
      of Net
              
              
              
              
              
              %
      of Net
              
              
              Change2010
              
              
              Revenue
              
              
              2009
              
              
              Revenue
              
              
              $
              
              
              %(In
      thousands, except percentages)Americas
              
              $
              7,027
              
              
              
              58.0%
              
              
              $
              5,715
              
              
              
              53.6
              %
              
              $
              1,312
              
              
              
              23.0%EMEA
              
              
              3,185
              
              
              
              26.3%
              
              
              
              3,200
              
              
              
              30.0
              %
              
              
              (15
              )
              
              
              (0.5%
              )Asia
      Pacific
              
              
              1,912
              
              
              
              15.7%
              
              
              
              1,740
              
              
              
              16.4
              %
              
              
              172
              
              
              
              9.9%Net
      revenue
              
              $
              12,124
              
              
              
              100.0%
              
              
              $
              10,655
              
              
              
              100.0
              %
              
              $
              1,469
              
              
              
              13.8%


13


The
increase in net revenue for the three months ended March 31, 2010 compared to
the three months ended March 31, 2009 was primarily the result of an increase in
the Americas region. The increase in the Americas region was due to the increase
in our device management and device enablement product lines, offset by a
decrease in our non-core product lines. The increase in America’s device
management net revenue was due to an increase in the SLC and SLS families, which
were impacted by a sale of SLC’s to a single U.S. customer in the amount of
$764,000. The increase in America’s device enablement net revenue was due to an
increase in the XPort, Micro, EDS, MatchPort product families, offset by a
decrease in our WiBox product family. We are no longer investing in the
development of our non-core product lines.





The
following table presents fiscal year-to-date net revenue by geographic
region:





Nine
      Months Ended March 31,%
      of Net
              
              
              
              
              
              %
      of Net
              
              
              Change2010
              
              
              Revenue
              
              
              2009
              
              
              Revenue
              
              
              $
              
              
              %(In
      thousands, except percentages)Americas
              
              $
              19,413
              
              
              
              56.2%
              
              
              $
              21,687
              
              
              
              57.4%
              
              
              $
              (2,274
              )
              
              
              (10.5%
              )EMEA
              
              
              9,642
              
              
              
              27.9%
              
              
              
              10,680
              
              
              
              28.3%
              
              
              
              (1,038
              )
              
              
              (9.7%
              )Asia
      Pacific
              
              
              5,501
              
              
              
              15.9%
              
              
              
              5,385
              
              
              
              14.3%
              
              
              
              116
              
              
              
              2.2%Net
      revenue
              
              $
              34,556
              
              
              
              100.0%
              
              
              $
              37,752
              
              
              
              100.0%
              
              
              $
              (3,196
              )
              
              
              (8.5%
              )





The
decrease in net revenue for the nine months ended March 31, 2010 compared to the
nine months ended March 31, 2009 was primarily the result of a decrease in the
Americas and EMEA (“Europe, Middle East and Africa”) regions. The decrease in
the Americas region was due to the decrease in our device enablement and
non-core product lines, offset by an increase in our device management product
lines. The decrease in America’s device enablement net revenue was due to a
decrease in the Micro, ASIC, EDS, MSS, WiBox, and UDS product families. The
increase in the Americas device management net revenue was due to an increase in
our SLC and SLS product families. We are no longer investing in the development
of our non-core product lines. The decrease in our EMEA region was primarily due
to a decrease in our device enablement product lines, and more specifically, the
ASIC, UDS, EDS, MSS and XPress product families.





Gross
Profit





Gross
profit represents net revenue less cost of revenue. Cost of revenue consisted
primarily of the cost of raw material components, subcontract labor assembly
from contract manufacturers, manufacturing overhead, amortization of purchased
intangible assets, establishing or relieving inventory reserves for excess and
obsolete products or raw materials, warranty costs, royalties and share-based
compensation.





The following table presents fiscal
quarter gross profit:





Three Months Ended March
      31,%
      of Net
              
              
              
              
              
              %
      of Net
              
              
              Change2010
              
              
              Revenue
              
              
              2009
              
              
              Revenue
              
              
              $
              
              
              %(In
      thousands, except percentages)Gross
      profit
              
              $
              6,352
              
              
              
              52.4%
              
              
              $
              5,569
              
              
              
              52.3%
              
              
              $
              783
              
              
              
              14.1%


The
increase in gross profit margin for the three months ended March 31, 2010,
compared to the three months ended March 31, 2009 was primarily attributable to
lower inventory reserve costs offset by an increase in freight
costs.
  The
following table presents fiscal year-to-date gross profit:
 
 Nine
      Months Ended March 31,%
      of Net
                
                
                
                
                
                %
      of Net
                
                
                Change2010
                
                
                Revenue
                
                
                2009
                
                
                Revenue
                
                
                $
                
                
                %(In
      thousands, except percentages)Gross
      profit
                
                $
                18,118
                
                
                
                52.4%
                
                
                $
                20,036
                
                
                
                53.1%
                
                
                $
                (1,918
                )
                
                
                (9.6%
                )
 
 The
decrease in gross profit margin for the nine months ended March 31, 2010,
compared to the nine months ended March 31, 2009 was primarily attributable to
product mix, increased freight costs and employee severance.





14


Selling, General and
Administrative





Selling,
general and administrative expenses consisted of personnel-related expenses
including salaries and commissions, share-based compensation, facility expenses,
information technology, trade show expenses, advertising, and legal and
accounting fees offset by reimbursement of legal fees from insurance
proceeds.





The following table presents fiscal
quarter selling, general and administrative expenses:





Three
      Months Ended March 31,%
      of Net
              
              
              
              %
      of Net
              
              Change2010
              
              Revenue
              
              2009
              
              Revenue
              
              $
              
              
              %(In
      thousands, except percentages)Personnel-related
      expenses
              
              $
              2,561
              
              
              
              $
              2,420
              
              
              
              $
              141
              
              
              
              5.8%Professional
      fees & outside services
              
              
              443
              
              
              
              
              438
              
              
              
              
              5
              
              
              
              1.1%Advertising
      and marketing
              
              
              570
              
              
              
              
              522
              
              
              
              
              48
              
              
              
              9.2%Facilities
              
              
              319
              
              
              
              
              327
              
              
              
              
              (8
              )
              
              
              (2.4%
              )Share-based
      compensation
              
              
              257
              
              
              
              
              242
              
              
              
              
              15
              
              
              
              6.2%Depreciation
              
              
              179
              
              
              
              
              153
              
              
              
              
              26
              
              
              
              17.0%Bad
      debt expense
              
              
              -
              
              
              
              
              91
              
              
              
              
              (91
              )
              
              
              (100.0%
              )Other
              
              
              475
              
              
              
              
              253
              
              
              
              
              222
              
              
              
              87.7%Selling,
      general and administrative
              
              $
              4,804
              
              39.6%
              
              $
              4,446
              
              41.7%
              
              $
              358
              
              
              
              8.1%





In order
of significance, the increase in selling, general and administrative expenses
for the three months ended March 31, 2010, compared to the three months ended
March 31, 2009 was primarily due to: (i) an increase in other expenses mainly
due to increased state franchise tax fees and (ii) an increase in personnel
–related expenses due to recruiting fees related to sales personnel upgrades in
our Japan and Hong Kong offices, employee severance and sales commissions due to
the higher net revenue; offset by (iii) a decrease in bad debt expense due a
specific reserve in the prior year quarter.





The
following table presents fiscal year-to-date selling, general and administrative
expenses:





Nine
      Months Ended March 31,%
      of Net
              
              
              
              %
      of Net
              
              Change2010
              
              Revenue
              
              2009
              
              Revenue
              
              $
              
              
              %(In
      thousands, except percentages)Personnel-related
      expenses
              
              $
              7,499
              
              
              
              $
              7,960
              
              
              
              $
              (461
              )
              
              
              (5.8%
              )Professional
      fees & outside services
              
              
              1,550
              
              
              
              
              1,771
              
              
              
              
              (221
              )
              
              
              (12.5%
              )Advertising
      and marketing
              
              
              1,624
              
              
              
              
              1,790
              
              
              
              
              (166
              )
              
              
              (9.3%
              )Facilities
              
              
              953
              
              
              
              
              1,027
              
              
              
              
              (74
              )
              
              
              (7.2%
              )Share-based
      compensation
              
              
              1,108
              
              
              
              
              956
              
              
              
              
              152
              
              
              
              15.9%Depreciation
              
              
              459
              
              
              
              
              422
              
              
              
              
              37
              
              
              
              8.8%Bad
      debt expense (recovery)
              
              
              12
              
              
              
              
              54
              
              
              
              
              (42
              )
              
              
              (77.8%
              )Other
              
              
              1,074
              
              
              
              
              989
              
              
              
              
              85
              
              
              
              8.6%Selling,
      general and administrative
              
              $
              14,279
              
              41.3%
              
              $
              14,969
              
              39.7%
              
              $
              (690
              )
              
              
              (4.6%
              )





In order
of significance, the decrease in selling, general and administrative expenses
for the nine months ended March 31, 2010, compared to the nine months ended
March 31, 2009 was primarily due to: (i) a decrease in personnel-related
expenses as a result of the restructuring activities taken during the prior
fiscal year and a company-wide furlough program that was taken in response to
the economic downturn and (ii) a decrease in professional fees and advertising
and marketing expenses as a result of cost cutting measures and taking a more
focused spending approach; offset by (iii) an increase in share-based
compensation as a result of new option and share grants related to the fiscal
2010 share-based compensation plans.





15
  Research
and Development
 
 Research
and development expenses consisted of personnel-related expenses including
share-based compensation, as well as expenditures to third-party vendors for
research and development activities.





The following table presents fiscal
quarter research and development expenses:





Three
      Months Ended March 31,%
      of Net
              
              
              
              %
      of Net
              
              Change2010
              
              Revenue
              
              2009
              
              Revenue
              
              $
              
              
              %(In
      thousands, except percentages)Personnel-related
      expenses
              
              $
              998
              
              
              
              $
              910
              
              
              
              $
              88
              
              
              
              9.7%Facilities
              
              
              308
              
              
              
              
              222
              
              
              
              
              86
              
              
              
              38.7%Professional
      fees & outside services
              
              
              114
              
              
              
              
              74
              
              
              
              
              40
              
              
              
              54.1%Share-based
      compensation
              
              
              116
              
              
              
              
              51
              
              
              
              
              65
              
              
              
              127.5%Depreciation
              
              
              13
              
              
              
              
              17
              
              
              
              
              (4
              )
              
              
              (23.5%
              )Other
              
              
              94
              
              
              
              
              93
              
              
              
              
              1
              
              
              
              1.1%Research
      and development
              
              $
              1,643
              
              13.6%
              
              $
              1,367
              
              12.8%
              
              $
              276
              
              
              
              20.2%





In order
of significance, the increase in research and development expenses for the three
months ended March 31, 2010, compared to the three months ended March 31, 2009
was primarily due to: (i) an increase in personnel-related expenses as a result
of only one mandated furlough week in the current quarter as compared to two
furlough weeks in the year ago quarter and (ii) an increase in allocated
facilities costs.





The
following table presents fiscal year-to-date research and development
expenses:





Nine
      Months Ended March 31,%
      of Net
              
              
              
              %
      of Net
              
              Change2010
              
              Revenue
              
              2009
              
              Revenue
              
              $
              
              
              %(In
      thousands, except percentages)Personnel-related
      expenses
              
              $
              2,917
              
              
              
              $
              2,954
              
              
              
              $
              (37
              )
              
              
              (1.3%
              )Facilities
              
              
              830
              
              
              
              
              706
              
              
              
              
              124
              
              
              
              17.6%Professional
      fees & outside services
              
              
              257
              
              
              
              
              162
              
              
              
              
              95
              
              
              
              58.6%Share-based
      compensation
              
              
              389
              
              
              
              
              354
              
              
              
              
              35
              
              
              
              9.9%Depreciation
              
              
              45
              
              
              
              
              54
              
              
              
              
              (9
              )
              
              
              (16.7%
              )Other
              
              
              200
              
              
              
              
              189
              
              
              
              
              11
              
              
              
              5.8%Research
      and development
              
              $
              4,638
              
              13.4%
              
              $
              4,419
              
              11.7%
              
              $
              219
              
              
              
              5.0%





In order
of significance, the increase in research and development expenses for the nine
months ended March 31, 2010, compared to the nine months ended March 31, 2009
was primarily due to: (i) an increase in allocated facilities costs and (ii) an
increase in professional fees and outside services for engineering
projects.




Restructuring
Charges
 
 During
the fourth fiscal quarter ended June 30, 2008, we implemented a restructuring
plan to optimize our organization to better leverage existing customer and
partner relationships to drive revenue growth and profitability. As part of the
restructuring plan, 10 employees from the senior-level ranks of the sales,
marketing, operations and engineering groups were terminated. During the first
fiscal quarter ended September 30, 2008, we implemented a second restructuring
plan. As part of the second restructuring plan, an additional 29 employees
from all ranks and across all functional groups of the Company were terminated.
During the second fiscal quarter ended December 31, 2008, we incurred additional
restructuring expenses related to settling with a senior-level employee in
France and closing the France sales office.





16







The
following table presents fiscal quarter restructuring charges:


Three
      Months Ended March 31,%
      of Net
                
                
                
                
                
                %
      of Net
                
                
                Change2010
                
                
                Revenue
                
                
                2009
                
                
                Revenue
                
                
                $
                
                
                %(In
      thousands, except percentages)Restructuring
      charges
                
                $
                -
                
                
                
                0.0%
                
                
                $
                (23
                )
                
                
                -0.2%
                
                
                $
                23
                
                
                
                100.0%





The
following table presents fiscal year-to-date restructuring charges:





Nine
      Months Ended March 31,%
      of Net
              
              
              
              
              
              %
      of Net
              
              
              Change2010
              
              
              Revenue
              
              
              2009
              
              
              Revenue
              
              
              $
              
              
              %(In thousands, except
    percentages)Restructuring
      charge
              
              $
              -
              
              
              
              0.0%
              
              
              $
              698
              
              
              
              1.8%
              
              
              $
              (698
              )
              
              
              (100.0%
              )





Provision
for Income Taxes




At July
1, 2009, our fiscal 2002 through fiscal 2009 tax years remain open to
examination by the Federal and state taxing authorities. We have net operating
losses (“NOLs”) beginning in fiscal 2002 which cause the statute of limitations
to remain open for the year in which the NOL was incurred.




The
following table presents our effective tax rate based upon our income tax
provision:





Three
      Months Ended
              
              
              Nine
      Months EndedMarch
      31,
              
              
              March
      31,2010
              
              
              2009
              
              
              2010
              
              
              2009Effective
      tax rate
              
              
              9%
              
              
              
              4%
              
              
              
              3%
              
              
              
              16%





We
utilize the liability method of accounting for income taxes. The federal
statutory rate was 34% for all periods. The difference between our effective tax
rate and the federal statutory rate resulted primarily from the effect of our
domestic losses recorded with a fully reserved tax benefit, as well as the
effect of foreign earnings taxed at rates differing from the federal statutory
rate. We record net deferred tax assets to the extent we believe these assets
will more likely than not be realized. As a result of our cumulative losses, we
provided a full valuation allowance against our domestic net deferred tax assets
for the fiscal quarters ended March 31, 2010 and 2009.





Liquidity
and Capital Resources





The
following table presents details of our working capital and cash:





March
      31,
              
              
              June
      30,
              
              
              Increase2010
              
              
              2009
              
              
              (Decrease)(In
      thousands)Working
      capital
              
              $
              7,376
              
              
              $
              7,423
              
              
              $
              (47
              )Cash
      and cash equivalents
              
              $
              9,313
              
              
              $
              9,137
              
              
              $
              176





Our
working capital remained consistent between June 30, 2009 and March 31, 2010.
Our cash balance increased by $176,000 as of March 31, 2010, compared to the
quarter ended June 30, 2009.





We
believe that our existing cash and cash equivalents and funds available from our
line of credit will be adequate to meet our anticipated cash needs through at
least the next 12 months. Our future capital requirements will depend on many
factors, including the timing and amount of our net revenue, research and
development, expenses associated with any strategic partnerships or acquisitions
and infrastructure investments, and expenses related to litigation, which could
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 raise capital by borrowing additional funds
through bank loans, the selling 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.





In August
2008, we entered into an amendment to Loan and Security Agreement (the
“Amendment to Loan and Security Agreement”), which provides for a three-year
$2.0 million Term Loan and a two-year $3.0 million Revolving Credit Facility
(the “Term Loan and Revolving Credit Facility” or “Loan Agreement”). The Term
Loan was funded on August 26, 2008 and is payable in 36 equal installments of
principal and monthly accrued interest. There are no borrowings outstanding on
the Revolving Credit Facility as of the fiscal quarter end.





17


Borrowings
under the Term Loan and Revolving Credit Facility bear interest at the greater
of 6.25% or prime rate plus 1.25% per annum. If we achieve two consecutive
quarters of positive EBITDAS (as defined in the Loan Agreement) greater than
$1.00, and only for so long as we maintain EBITDAS greater than $1.00 at the end
of each subsequent fiscal quarter, then the borrowings under the Term Loan and
Revolving Credit Facility will bear interest at the greater of 5.75% or prime
rate plus 0.75% per annum. Upon entering into the agreement, we paid a fully
earned, non-refundable commitment fee of $35,000 and paid an additional $35,000
on the first anniversary of the effective date of the Term Loan.





The
following table presents our available borrowing capacity and outstanding
letters of credit, which were used to secure equipment leases, purchase of
materials, deposits for a building lease and security deposits:





March
      31,
              
              
              June
      30,2010
              
              
              2009(In
      thousands)Available
      borrowing capacity
              
              $
              1,445
              
              
              $
              426Outstanding
      letters of credit
              
              $
              729
              
              
              $
              732





As of
March31, 2010 and June 30, 2009, approximately $410,000 and $666,000,
respectively, of our cash was held by our foreign subsidiaries in foreign bank
accounts. Such cash may be unrestricted with regard to foreign liquidity needs;
however, our ability to utilize a portion of this cash to satisfy liquidity
needs outside of such foreign locations may be subject to approval by the
foreign subsidiaries’ board of directors.





Cash
Flows for the Three and Nine Months Ended





The
following table presents the major components of the consolidated statements of
cash flows:





Three
      Months Ended
              
              
              Nine
      Months EndedMarch
      31,
              
              
              March
      31,2010
              
              
              2009
              
              
              2010
              
              
              2009(In
      thousands)Net
      cash provided by (used in):Net
      loss
              
              $
              (136
              )
              
              $
              (263
              )
              
              $
              (1,010
              )
              
              $
              (227
              )Non-cash
      operating expenses, net
              
              
              651
              
              
              
              502
              
              
              
              2,153
              
              
              
              2,775Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              (813
              )
              
              
              707
              
              
              
              (736
              )
              
              
              2,764Contract
      manufacturers' receivable
              
              
              24
              
              
              
              615
              
              
              
              (347
              )
              
              
              159Inventories
              
              
              170
              
              
              
              259
              
              
              
              162
              
              
              
              69Prepaid
      expenses and other current assets
              
              
              299
              
              
              
              (229
              )
              
              
              (53
              )
              
              
              (350
              )Other
      assets
              
              
              (7
              )
              
              
              -
              
              
              
              (12
              )
              
              
              10Accounts
      payable
              
              
              (325
              )
              
              
              (449
              )
              
              
              1,603
              
              
              
              (1,671
              )Accrued
      payroll and related expenses
              
              
              191
              
              
              
              21
              
              
              
              (287
              )
              
              
              (880
              )Warranty
      reserve
              
              
              -
              
              
              
              (42
              )
              
              
              -
              
              
              
              (118
              )Restructuring
      reserve
              
              
              -
              
              
              
              3
              
              
              
              (76
              )
              
              
              (1,388
              )Other
      liabilities
              
              
              (74
              )
              
              
              (617
              )
              
              
              (15
              )
              
              
              (129
              )Cash
      received related to tenant incentives
              
              
              280
              
              
              
              -
              
              
              
              280
              
              
              
              -Net
      cash provided by operating activities
              
              
              260
              
              
              
              507
              
              
              
              1,662
              
              
              
              1,014Net
      cash used in investing activities
              
              
              (19
              )
              
              
              (141
              )
              
              
              (644
              )
              
              
              (495
              )Net
      cash (used in) provided by financing activities
              
              
              (232
              )
              
              
              (240
              )
              
              
              (816
              )
              
              
              1,447Effect
      of foreign exchange rate changes on cash
              
              
              (75
              )
              
              
              (121
              )
              
              
              (26
              )
              
              
              (244
              )Increase
      in cash and cash equivalents
              
              $
              (66
              )
              
              $
              5
              
              
              $
              176
              
              
              $
              1,722





Cash
Flows for the Three Months Ended





Operating
activities provided cash during the three months ended March 31, 2010. This was
the result of non-cash operating expenses offset by cash used by operating
assets and liabilities and a net loss. Significant non-cash items included
share-based compensation and depreciation. In order of significance, the changes
in operating assets and liabilities that had a significant impact on the cash
provided by operating activities included (i) a decrease in prepaid expenses and
other current assets due to the payment of a large receivable from the Company’s
landlord for reimbursements related to improvements on the new corporate
headquarters and (ii) cash received related to tenant incentives on the new
corporate headquarters and (iii) an increase in accrued payroll and related
expenses due to the timing of payroll periods and (iv) a decrease in inventories
due to the timing of shipments and receipts; offset by (v) an increase in
accounts receivable due to the timing of collections and linearity of sales and
(vi) a decrease in accounts payable due to the timing of payments.





18


Operating
activities provided cash during the three months ended March 31, 2009. This was
the result of cash provided by operating assets and liabilities and non-cash
operating expenses offset by a net loss. Significant non-cash items included
share-based compensation and depreciation. In order of significance, the changes
in operating assets and liabilities that had a significant impact on the cash
provided by operating activities included (i) a decrease in accounts receivable
due to the timing of collections and linearity of sales and (ii) a decrease in
contract manufactures’ receivables due to the timing of collections and
linearity of shipments and (iii) a decrease in inventories due to the timing of
shipments and receipts; offset by (iv) a decrease in other liabilities mainly
due to a decrease in customer prepayments and (v) a decrease in accounts
payable.





Investing
activities used cash during the three months ended March 31, 2010 and 2009, due
to the purchase of property and equipment.





Financing
activities used cash during the three months ended March 31, 2010 and 2009, due
to payments on capital lease obligations and the term loan.





Cash
Flows for the Nine Months Ended





Operating
activities provided cash during the nine months ended March 31, 2010. This was
the result of cash provided by operating assets and liabilities and non-cash
operating expenses offset by a net loss. Significant non-cash items included
share-based compensation and depreciation. In order of significance, the changes
in operating assets and liabilities that had a significant impact on the cash
provided by operating activities included (i) an increase in accounts payable
due to the timing of payments and (ii) cash received related to tenant
incentives on the new corporate headquarters;offset by (iii) an increase in
accounts receivable due to the timing of collections and linearity of sales and
(iv) an increase in contract manufacturers’ receivables due to the timing of
collections and shipments and (v) a decrease in accrued payroll and related
expenses due to the timing of payroll periods.





Operating
activities provided cash during the nine months ended March 31, 2009. This was
the result of cash provided by operating assets and liabilities and non-cash
operating expenses offset by a net loss. Significant non-cash items
included share-based compensation, a restructuring charge and depreciation. In
order of significance, the changes in operating assets and liabilities that had
a significant impact on the cash provided by operating activities included (i) a
decrease in accounts receivable due to the timing of collections and linearity
of sales; offset by (ii) an increase in accounts receivable due to the timing of
collections and linearity of sales and (iii) an increase in contract
manufactures’ receivables due to the timing of collections and linearity of
shipments and (iv) a decrease in accrued payroll as a result of the timing of
payroll cycles at quarter end.





Investing
activities used cash during the nine months ended March 31, 2010 and 2009, due
to the purchase of property and equipment.





Financing
activities used cash during the nine months ended March 31, 2010 due to (i)
payments for the minimum tax withholdings on behalf of employees for vested
restricted shares and (ii) payments on capital lease obligations and the term
loan; offset by (iii) proceeds from the sale of common shares through employee
stock option exercises.





Financing
activities provided cash during the nine months ended March 31, 2009. This was
due to proceeds from the new term loan and sale of common shares through the
2000 Employee Stock Purchase Plan (the “ESPP”) offset by payments on capital
lease obligations and the term loan.





Off-Balance
Sheet Arrangements





We did not have any off balance sheet
arrangements as of March 31, 2010.




Item
4.   Controls and Procedures





(a)
Evaluation of disclosure controls and procedures




We
carried out an evaluation, under the supervision and with the participation of
our management, including our Chief Executive Officer and our Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act) as of the end of our fiscal quarter. Based upon that evaluation,
our Chief Executive Officer and our Chief Financial Officer concluded that our
disclosure controls and procedures are effective in ensuring that information
required to be disclosed by us in reports that we file or submit under the
Exchange Act (i) is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms and (ii) is accumulated and
communicated to our management, including our Chief Executive Officer and our
Chief Financial Officer to allow timely decisions regarding required
disclosure.




19


(b) Changes in internal controls over
financial reporting




There
have been no changes in our internal controls over financial reporting
identified during the fiscal quarter that ended March 31, 2010 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.




PART
II. OTHER INFORMATION





Item
1.   Legal Proceedings





The
information set forth in Note 10 to our notes to the unaudited condensed
consolidated financial statements of Part I, Item 1 of this Form 10-Q is hereby
incorporated by reference.





Item
1A. Risk Factors





We
operate in a rapidly changing environment that involves numerous risks and
uncertainties. Before deciding to purchase, hold or sell our common stock, you
should carefully consider the risks described in this section. This section
should be read in conjunction with the consolidated financial statements and
accompanying notes thereto, and Management’s Discussion and Analysis of
Financial Condition and Results of Operations included in this Quarterly Report
on Form 10-Q and in the risks described in our Annual Report on Form 10-K. If
any of these risks or uncertainties actually occurs with material adverse
effects on Lantronix, our business, financial condition and results of
operations could be seriously harmed. In that event, the market price for our
common stock could decline and you may lose all or part of your
investment.





Our
quarterly operating results may fluctuate, which could cause our stock price to
decline.




We have experienced, and expect to
continue to experience, significant fluctuations in net revenues, expenses and
operating results from quarter to quarter. 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. A high percentage
of our operating expenses are relatively fixed and are based on our expectations
of future net revenue. If we were to experience a reduction in revenue in a
quarter, we would likely be unable to adjust our short-term expenditures. If
this were to occur, our operating results for that fiscal quarter would be
harmed. If our operating results in future fiscal 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 business and economic conditions, including the recent global economic
      recession;





·
            changes
      in the mix of net revenue 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;





·
            changes
      in demand for our products;





·
            fluctuations
      in exchange rates;





·
            defects
      and other product quality problems;





·
            loss
      or gain of significant customers;





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





·
            announcements
      or introductions of new products by our
  competitors;





·
            effects
      of terrorist attacks in the U.S. and
abroad;





·
            natural
      disasters in the U.S. and abroad;





·
            changes
      in demand for devices that incorporate our products;
  and





·
            our
      customers’ decisions to integrate network access and control directly onto
      their platforms.


20





If a major distributor or customer
cancels, reduces or delays purchases, our net revenues might decline and our
business could be adversely affected.





The number and timing of sales to our
distributors have been difficult for us to predict. While our distributors are
customers in the sense they buy our products, they are also part of our product
distribution system. Some of our distributors could be acquired by a competitor
and stop buying product from us.





The
following table presents sales to our significant customers as a percentage of
net revenue:





Nine
      Months EndedMarch
      31,2010
              
              
              2009Top five customers(1)
              
              
              39.4%
              
              
              
              37.7%Tech
      Data
              
              
              10.7%
              
              
              
              7.5%Ingram
      Micro
              
              
              9.0%
              
              
              
              12.3%(1)Includes Ingram Micro
      and Tech Data





The loss
or deferral of one or more significant customers 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, 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 few long-term purchase commitments from our customers.





Our future success also depends on our
ability to attract new customers, which often involves an extended selling
process. The sale of our products often involves a significant technical
evaluation, and we often face delays because of our customers’ internal
procedures for evaluating and deploying 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 in a timely
manner, or at all. This would cause our net revenue to decrease and could cause
our stock price to decline.




We
may experience difficulties in transitioning to third party logistics
providers.
 
 We are
currently in the process of transitioning to third party logistics providers to
handle our inventory management process as well as the shipping and receiving of
our inventory.  There is a possibility that during our migration to these
third party logistics providers, we could experience delays in our ability to
ship, receive, and process the related data timely.   This could
adversely affect our financial position, results of operations, cash flows and
the market price of our common stock.
 
 Relying
on third party logistics providers could increase the risk of the following:
receiving accurate and timely inventory data, theft or poor physical security of
our inventory, inventory damage, ineffective internal controls over inventory
processes or other similar business risks out of our immediate control.





If we fail to develop or enhance our
products to respond to changing market conditions and government and industry
standards, our competitive position will suffer and our business will be
adversely affected.





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 and meet
government and industry standards. The demand for network-enabled products is
relatively new and can change as a result of innovations, new technologies or
new government and industry standards. For example, a directive in the European
Union banned the use of lead and other heavy metals in electrical and electronic
equipment after July 1, 2006. As a result, in advance of this deadline,
some of our customers selling products in Europe demanded product from component
manufacturers that did not contain these banned substances. Any failure by us to
develop and introduce new products or enhancements in response to new government
and industry standards could harm our business, financial condition or results
of operations. These 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.





Delays
in deliveries or quality problems with our component suppliers could damage our
reputation and could cause our net revenue to decline and harm our results of
operations.




We and our contract manufacturers 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
only available from a single source and in some cases are no longer being
manufactured. From time to time, integrated circuits used in our products will
be 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. Due to the downturn in the
economy, we have been experiencing higher component shortages and extended
lead-times. 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 do not have long-term supply
arrangements with most of our vendors 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, which
could adversely affect our business, financial condition or results of
operations.





21


If
we lose the services of any of our contract manufacturers or suppliers, we may
not be able to obtain alternate sources in a timely manner, which could harm our
customer relations and adversely affect our net revenue and harm our results of
operations.





We do not
have long-term agreements with our contract manufacturers or suppliers. If any
of these subcontractors or suppliers ceased doing business with us, we may
not be able to obtain alternative sources in a timely or cost-effective manner.
Due to the amount of time that it usually takes us to qualify contract
manufacturers and suppliers, we could experience delays in product shipments if
we are required to find alternative subcontractors and suppliers. Some of our
suppliers have or provide technology or trade secrets, the loss of which could
be disruptive to our procurement and supply processes. If a competitor should
acquire one of our contract manufacturers or suppliers, we could be subjected to
more difficulties in maintaining or developing alternative sources of supply of
some components or products. Any problems that we may encounter with the
delivery, quality or cost of our products could damage our customer
relationships and materially and adversely affect our business, financial
condition or results of operations.





Environmental
regulations such as the Waste Electrical and Electronic Equipment (“WEEE”)
directive may require us to redesign our products and to develop compliance
administration systems.




Various
countries have begun to require companies selling a broad range of electrical
equipment to conform to regulations such as the WEEE directive and we expect
additional countries and locations to adopt similar regulations in the future.
New environmental standards such as these could require us to redesign our
products in order to comply with the standards, and require the development of
compliance administration systems. We have already invested significant
resources into developing compliance tracking systems, and further investments
may be required. Additionally, we may incur significant costs to redesign our
products and to develop compliance administration systems; however alternative
designs may have an adverse effect on our gross profit margin. If we cannot
develop compliant products timely or properly administer our compliance
programs, our revenue may also decline due to lower sales, which would adversely
affect our operating results.





If our research and development
efforts are not successful, our net revenue could decline and our business could
be harmed.





If we are unable to develop new
products as a result of our research and development efforts, 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. In addition, if we do not invest
sufficiently in research and development, we may be unable to maintain our
competitive position. Our investment in research and development may decrease,
which may put us at a competitive disadvantage compared to our competitors and
adversely affect our market position.





We
expect the average selling prices of our products to decline and material costs
to increase, which could reduce our net revenue, gross margins and
profitability.





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. We expect
competition to continue to increase, and we anticipate this could result in
additional downward pressure on our pricing. 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. We also may not be able to increase the price
of our products if the prices of components or our overhead costs increase. In
addition, we may be unable to adjust our prices in response to currency exchange
rate fluctuations resulting in lower gross margins. We also may be unable to
adjust our prices in response to price increases by our suppliers resulting in
lower gross margins. Further, as is characteristic of our industry, the average
selling prices of our products have historically decreased over the products’
life cycles and we expect this pattern to continue. If any of these were to
occur, our gross margins could decline and we may not be able to reduce the cost
to manufacture our products to keep up with the decline in prices.





22


Current
or future litigation could adversely affect us.





We are
subject to a wide range of claims and lawsuits in the course of our business.
For example, we recently concluded multiple securities lawsuits with our
stockholders and litigation with a former executive officer.  Any
lawsuit may involve complex questions of fact and law and may require the
expenditure of significant funds and the diversion of other resources. The
results of litigation are inherently uncertain, and adverse outcomes are
possible.





Our products may contain undetected
software or hardware errors or defects that could lead to an increase in our
costs, reduce our net revenue or damage our reputation.





We currently offer warranties ranging
from one or 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. We do not have
a long history with which to assess the risks of unexpected product failures or
defects for our device server 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 revenue 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.





If
software that we license or acquire from the open source software community and
incorporate into our products were to become unavailable or no longer available
on commercially reasonable terms, it could adversely affect sales of our
products, which could disrupt our business and harm our financial
results.





Certain
of our products contain components developed and maintained by third-party
software vendors or are 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 or future product offerings.





If
our contract manufacturers are unable or unwilling to manufacture our products
at the quality and quantity we request, our business could be
harmed.





We outsource substantially all of our
manufacturing to four manufacturers in Asia: Venture Electronics Services, Uni
Precision Industrial Ltd., Universal Scientific Industrial Company, LTD and Hana
Microelectronics, Inc. In addition, two independent third party foundries
located in Asia manufacture substantially all of our large scale integration
chips. 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 these 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 at requested
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. For
example, Jabil Circuit, Inc. acquired Varian, Inc. in March 2005 and closed the
facility that manufactured our products. We transferred this production to
another contract manufacturer. Due to the downturn in the economy, we have been
experiencing higher component shortages.  As we shift products among
third-party manufacturers, we may incur substantial expenses, risk material
delays or encounter other unexpected issues.





In addition, a natural disaster could
disrupt our manufacturers’ facilities and could inhibit our manufacturers’
ability to provide us with manufacturing capacity in a timely manner 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
revenue would harm our business. We also 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 charges that would increase our cost of revenue or we may be
unable to fulfill customer orders, thus reducing net revenue and therefore
earnings.





23


Our
international activities are subject to uncertainties, which include
international economic, regulatory, political and other risks that could harm
our business, financial condition or results of operations.





The following table presents our sales
within geographic regions:





Three
      Months Ended March 31,%
      of Net
              
              
              
              
              
              %
      of Net
              
              
              Change2010
              
              
              Revenue
              
              
              2009
              
              
              Revenue
              
              
              $
              
              
              %(In
      thousands, except percentages)Americas
              
              $
              7,027
              
              
              
              58.0%
              
              
              $
              5,715
              
              
              
              53.6%
              
              
              $
              1,312
              
              
              
              23.0%EMEA
              
              
              3,185
              
              
              
              26.3%
              
              
              
              3,200
              
              
              
              30.0%
              
              
              
              (15
              )
              
              
              (0.5%
              )Asia
      Pacific
              
              
              1,912
              
              
              
              15.7%
              
              
              
              1,740
              
              
              
              16.4%
              
              
              
              172
              
              
              
              9.9%Net
      revenue
              
              $
              12,124
              
              
              
              100.0%
              
              
              $
              10,655
              
              
              
              100.0%
              
              
              $
              1,469
              
              
              
              13.8%





We expect
that international revenue will continue to represent a significant portion of
our net revenue in the foreseeable future. Doing business internationally
involves greater expense and many risks. For example, because the products we
sell abroad and the products and services we buy abroad may be priced in foreign
currencies, we could be affected by fluctuating exchange rates. In the past, we
have 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 use contract manufacturers based in
Asia to manufacture substantially all of our products. International revenue and
operations are subject to numerous risks, including:





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





·
            reduced
      protection for intellectual property rights in some
    countries;





·
            differing
      labor regulations;





·
            compliance
      with a wide variety of complex regulatory
  requirements;





·
            fluctuations
      in currency exchange rates;





·
            changes
      in a country’s or region’s political or economic
    conditions;





·
            effects
      of terrorist attacks in the U.S. and
abroad;





·
            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.





We
are exposed to foreign currency exchange risks, which could harm our business
and operating results.





We hold a
portion of our cash balance in foreign currencies (particularly euros), and as
such are exposed to adverse changes in exchange rates associated with foreign
currency fluctuations. However, we do not currently engage in any hedging
transactions to mitigate these risks. Although from time to time we review our
foreign currency exposure and evaluate whether we should enter into hedging
transactions, we may not adequately hedge against any future volatility in
currency exchange rates and, if we engage in hedging transactions, the
transactions will be based on forecasts which later may prove to be inaccurate.
Any failure to hedge successfully or anticipate currency risks properly could
adversely affect our operating results.





If we are unable to sell our
inventory in a timely manner it could become obsolete, which could require us to
increase our reserves and harm our operating results.





At any time, 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 it becoming obsolete.





24


The
following table presents the components of our inventory, including the reserve
for excess and obsolete inventory:





March
      31,
              
              
              June
      30,2010
              
              
              2009(In
      thousands)Finished
      goods
              
              $
              4,169
              
              
              $
              4,421Raw
      materials
              
              
              1,667
              
              
              
              1,537Inventory
      at distributors
              
              
              1,523
              
              
              
              1,355Large
      scale integration chips *
              
              
              526
              
              
              
              909Inventories,
      gross
              
              
              7,885
              
              
              
              8,222Reserve
      for excess and obsolete inventory
              
              
              (1,436
              )
              
              
              (1,743
              )Inventories,
      net
              
              $
              6,449
              
              
              $
              6,479*
      This item is sold individually and embedded into the Company's
      products.





In the
event we are required to substantially discount our inventory or are unable to
sell our inventory in a timely manner, we would be required to increase our
reserves and our operating results could be substantially harmed.





We
are subject to export control regulations that could restrict our ability to
increase our international revenue and may adversely affect our
business.





Our
products and technologies are subject to U.S. export control laws, including the
Export Administration Regulations, administered by the Department of Commerce
and the Bureau of Industry Security, and their foreign counterpart laws and
regulations, which may require that we obtain an export license before we can
export certain products or technology to specified countries. These export
control laws, and possible changes to current laws, regulations and policies,
could restrict our ability to sell products to customers in certain countries or
give rise to delays or expenses in obtaining appropriate export licenses.
Failure to comply with these laws and regulations could result in government
sanctions, including substantial monetary penalties, denial of export
privileges, and debarment from government contracts. Any of these could
adversely affect our operations and, as a result, our financial results could
suffer.





If we are unable to attract, retain
or motivate key senior management and technical personnel, it could seriously
harm our business.





Our financial performance depends
substantially on the performance of our executive officers, key technical,
marketing and sales employees. We are also dependent upon our technical
personnel, due to the specialized technical nature of our business. If we were
to lose the services of our executive officers or any of our key personnel and
were 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.





If
our OEM customers develop their own expertise in network-enabling products, it
could result in reduced sales of our products and harm our operating
results.





We sell to both resellers and OEMs.
Selling products to OEMs involves unique risks, including the risk that OEMs
will develop internal expertise in network-enabling products or will otherwise
incorporate network functionality in their products without using our device
networking solutions. If this were to occur, our sales to OEMs would likely
decline, which could reduce our net revenue and harm our operating
results.





New
product introductions and pricing strategies by our competitors could reduce our
market share or cause us to reduce the prices of our products, which would
reduce our net revenue and gross margins.





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, semiconductor companies, 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 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 revenue could decline and our
business could be harmed.


25





Current
or future litigation over intellectual property rights could adversely affect
us.





Substantial
litigation regarding intellectual property rights exists in our industry. For
example, in May 2006 we settled a patent infringement lawsuit with Digi in which
we signed an agreement with Digi to cross-license each other’s patents for six
years. There is a risk that we will not be able to negotiate a new cross-license
agreement when the current cross-license agreement expires in May 2012. The
results of litigation are inherently uncertain, and adverse outcomes are
possible. Adverse outcomes may have a material adverse effect on our business,
financial condition or results of operations.





There is
a risk that other third parties could 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
pertain to the proprietary rights we use. Any of these third parties might make
a claim of infringement against us. The results of litigation are inherently
uncertain, and adverse outcomes are possible.





Responding
to any infringement claim, regardless of its validity, could;




·
            be
      time-consuming, costly and/or result in
  litigation;




·
            divert
      management’s time and attention from developing our
    business;




·
            require
      us to pay monetary damages, including treble damages if we are held to
      have willfully infringed;




·
            require
      us to enter into royalty and licensing agreements that we would not
      normally find acceptable;




·
            require
      us to stop selling or to redesign certain of our products;
    or




·
            require
      us to satisfy indemnification obligations to our
  customers.





If any of
these occur, our business, financial condition or results of operations could be
adversely affected.





We
may not be able to adequately protect or enforce our intellectual property
rights, which could harm our competitive position or require us to incur
significant expenses to enforce our rights.





We have not historically relied on
patents to protect our proprietary rights, although we are now building a patent
portfolio. In May 2006, we entered into a six-year patent cross-license
agreement with Digi in which the parties agreed to cross-license each other’s
patents, which could reduce the value of our existing 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;





·
            other
      companies might assert other rights to market products using our
      trademarks;





·
            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;





·
            courts
      may determine that our software programs use open source software in such
      a way that deprives the entire programs of intellectual property
      protection; and





·
            current
      federal laws that prohibit software copying provide only limited
      protection from software pirates.





Also, the laws of some of the countries
in which we market and manufacture our products 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.
Consequently, we may be unable to prevent our proprietary technology from being
exploited by others in the U.S. or abroad, which could require costly efforts to
protect our technology. Policing the unauthorized use of our products,
trademarks and other proprietary rights is expensive, difficult and, in some
cases, impracticable. Litigation may be necessary in the future to enforce or
defend our intellectual property rights, to protect our trade secrets or to
determine the validity and scope of the proprietary rights of others. Such
litigation could result in substantial costs and diversion of management
resources, either of which could harm our business. Accordingly, despite our
efforts, we may not be able to prevent third parties from infringing upon or
misappropriating our intellectual property, which may harm our business,
financial condition and results of operations.





26


Acquisitions,
strategic partnerships, joint ventures or investments may impair our capital and
equity resources, divert our management’s attention or otherwise negatively
impact our operating results.





We may
pursue acquisitions, strategic partnerships and joint ventures that we believe
would allow us to complement our growth strategy, increase market share in our
current markets and expand into adjacent markets, broaden our technology and
intellectual property and strengthen our relationships with distributors and
OEMs. Any future acquisition, partnership, joint venture or investment may
require that we pay significant cash, issue stock or incur substantial debt.
Acquisitions, partnerships or joint ventures may also result in the loss of key
personnel and the dilution of existing stockholders as a result of issuing
equity securities. In addition, acquisitions, partnerships or joint ventures
require significant managerial attention, which may be diverted from our other
operations. These capital, equity and managerial commitments may impair the
operation of our business. Furthermore, acquired businesses may not be
effectively integrated, may be unable to maintain key pre-acquisition business
relationships, may contribute to increased fixed costs and may expose us to
unanticipated liabilities and otherwise harm our operating results.





Business
interruptions could adversely affect our business.





Our
operations and those of our suppliers are vulnerable to interruption by fire,
earthquake, power loss, telecommunications failure, terrorist attacks and other
events beyond our control. A substantial portion of our facilities, including
our corporate headquarters and other critical business operations, are located
near major earthquake faults and, therefore, may be more susceptible to damage
if an earthquake occurs. We do not carry earthquake insurance for direct
earthquake-related losses. If a business interruption occurs, our business could
be materially and adversely affected.





If we fail to maintain an effective
system of disclosure controls or internal controls over financial reporting, our
business and stock price could be adversely affected.





Section 404
of the Sarbanes-Oxley Act of 2002 requires companies to evaluate periodically
the effectiveness of their internal controls over financial reporting, and to
include a management report assessing the effectiveness of their internal
controls as of the end of each fiscal year. Beginning with our annual report on
Form 10-K for our fiscal year ended June 30, 2008, we are required to comply
with the requirement of Section 404 of the Sarbanes-Oxley Act of 2002 to include
in each of our annual reports an assessment by our management of the
effectiveness of our internal controls over financial reporting. Beginning with
our annual report on Form 10-K for our fiscal year ending June 30,
2010,  our independent registered public accounting firm will issue a
report assessing the effectiveness of our internal controls.
 
 Our
management does not expect that our internal controls over financial reporting
will prevent all errors or frauds. A control system, no matter how well designed
and operated, can provide only reasonable, not absolute, assurance that the
control system’s objectives will be met. Further, the design of a control system
must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
involving us have been, or will be, detected. These inherent limitations include
the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple errors or mistakes. Controls can also be
circumvented by individual acts of a person, or by collusion among two or more
people, or by management override of the controls. The design of any system of
controls is based in part on certain assumptions about the likelihood of future
events, and we cannot assure you that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, controls may
become inadequate because of changes in conditions or deterioration in the
degree of compliance with policies and procedures. Because of the inherent
limitations in a cost-effective control system, misstatements due to errors or
frauds may occur and not be detected.





We cannot
assure you that we or our independent registered public accounting firm will not
identify a material weakness in our disclosure controls and internal controls
over financial reporting in the future. If our internal controls over financial
reporting are not considered adequate, we may experience a loss of public
confidence, which could have an adverse effect on our business and our stock
price.





Item
2.   Unregistered Sales of Equity Securities and Use of
Proceeds





None.





Item
3.   Defaults Upon Senior Securities





None.





27


Item
4.   Reserved





None.





Item
5.   Other Information




None.





Item
6.   Exhibits





ExhibitNumber
            Description of Document31.1
            Certification
      of Principal Executive Officer and Principal Financial Officer pursuant to
      Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant
      to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
            Certification
      of Principal Executive Officer and Principal Financial Officer pursuant to
      Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant
      to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
            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.*


*
Furnished, not filed.





28





SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.






LANTRONIX,
      INC.
                (Registrant)Date:
      April 30, 2010
              By:
              /s/ Jerry
      D. ChaseJerry
      D. ChasePresident
      and Chief Executive Officer(Principal
      Executive Officer)


By:
              /s/ Reagan
      Y. SakaiReagan
      Y. SakaiChief
      Financial Officer and Secretary(Principal
      Financial Officer)











29


Exhibit
Index








ExhibitNumber
            Description of Document31.1
            Certification of Principal Executive Officer and
      Principal Financial Officer pursuant to Securities Exchange Act Rules
      13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
            Certification of Principal Executive Officer and
      Principal Financial Officer pursuant to Securities Exchange Act Rules
      13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
            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.*


* Furnished, not filed.


























30