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

                                 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, 2001

     OR

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

     For the transition period from _________ to ___________.

                       Commission file number: 333-37508

                              ------------------

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

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


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

                                (949) 453-3990
             (Registrant's telephone number, including area code)

                              ------------------

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

  As of April 30, 2001, 39,710,771 shares of the Registrant's common stock were
outstanding.

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


                                LANTRONIX, INC.

                                   FORM 10-Q
                     FOR THE QUARTER ENDED MARCH 31, 2001

                                     INDEX



                                                                                                       Page
                                                                                                       ----
                                                                                               
PART I.    FINANCIAL INFORMATION......................................................................   2

Item 1.    Financial Statements.......................................................................   2

           Condensed Consolidated Balance Sheets at March 31, 2001 (unaudited) and June 30, 2000......   2

           Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months
           Ended March 31, 2001 and 2000..............................................................   3

           Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
           March 31, 2001 and 2000....................................................................   4

           Notes to Unaudited Condensed Consolidated Financial Statements.............................   5

Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations......   9

Item 3.    Quantitative and Qualitative Disclosures About Market Risk.................................  22

PART II.   OTHER INFORMATION..........................................................................  23

Item 1.    Legal Proceedings..........................................................................  23

Item 2.    Change in Securities and Use of Proceeds...................................................  23

Item 3.    Defaults Upon Senior Securities............................................................  23

Item 4.    Submission of Matters to a Vote of Security Holders........................................  23

Item 5.    Other Information..........................................................................  23

Item 6.    Exhibits and Reports on Form 8-K...........................................................  23



                        PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

                                LANTRONIX, INC.

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                (In thousands)


                                                                        March 31,        June 30,
                                                                        ---------        --------
                                                                          2001             2000
                                                                        ---------        --------
                                                                                  
                                                                       (Unaudited)
                                  ASSETS
                                  ------
Current assets:
  Cash and cash equivalents............................................   $22,117         $ 1,988
  Short-term investments...............................................    21,496              --
  Accounts receivable, net.............................................    10,097           6,072
  Inventories..........................................................     7,276           5,385
  Deferred income taxes................................................     1,484           1,425
  Prepaid expenses and other current assets............................     3,426           2,832
                                                                        ---------        --------
     Total current assets..............................................    65,896          17,702
Property and equipment, net............................................     4,024           1,348
Intangible assets, net.................................................     7,989             586
Long-term investments..................................................     2,972              --
Other assets...........................................................     2,247             574
                                                                        ---------        --------
                                                                          $83,128         $20,210
                                                                        =========        ========


                    LIABILITIES AND STOCKHOLDERS' EQUITY
                    ------------------------------------
Current liabilities:
  Accounts payable.....................................................   $ 2,523         $ 3,197
  Accrued payroll and related expenses.................................     1,427             764
  Other current liabilities............................................     4,556           2,603
                                                                        ---------        --------
     Total current liabilities.........................................     8,506           6,564
Deferred income taxes..................................................     1,003           1,003
Capital lease obligations, net of current portion......................        80              96
                                                                        ---------        --------
                                                                            9,589           7,663
                                                                        ---------        --------
Stockholders' equity:
  Common stock.........................................................         4               3
  Additional paid-in capital...........................................    73,253          13,221
  Employee notes receivable............................................      (804)           (152)
  Deferred stock-based compensation....................................    (7,154)         (8,942)
  Retained earnings....................................................     8,257           8,427
  Accumulated other comprehensive loss.................................       (17)            (10)
                                                                        ---------        --------
     Total stockholders' equity........................................    73,539          12,547
                                                                        ---------        --------
                                                                          $83,128         $20,210
                                                                        =========        ========


                            See accompanying notes.

                                       2


                                LANTRONIX, INC.

           UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                   (In thousands, except per share amounts)



                                            Three Months Ended    Nine Months Ended
                                            ------------------    -----------------
                                                  March 31,           March 31,
                                                  ---------           ---------
                                              2001       2000      2001      2000
                                            -------    -------   --------  --------
                                                               
Net revenues (A)........................... $14,125    $10,339   $ 38,628  $ 32,631
Cost of revenues (B).......................   6,382      5,426     17,421    15,644
                                            -------    -------   --------  --------
Gross profit...............................   7,743      4,913     21,207    16,987
                                            -------    -------   --------  --------
Operating expenses:
  Selling, general and administrative (B)..   6,212      4,089     17,591    11,904
  Research and development (B).............   1,171        897      3,243     2,330
  Stock-based compensation (B).............     848        587      2,185       587
                                            -------    -------   --------  --------
  Total operating expenses.................   8,231      5,573     23,019    14,821
                                            -------    -------   --------  --------
Income (loss) from operations..............    (488)      (660)    (1,812)    2,166
Minority interest..........................      --         --         --      (49)
Interest and other income (expense), net...     467        (71)     1,640        99
                                            -------    -------   --------  --------
Income (loss) before income taxes..........     (21)      (731)      (172)    2,216
Provision (benefit) for income taxes.......      78       (356)        --     1,081
                                            -------    -------   --------  --------
Net income (loss)..........................     (99)   $  (375)  $   (172) $  1,135
                                            =======    =======   ========  ========
Basic earnings (loss) per share............   (0.00)   $ (0.01)  $  (0.00) $   0.04
                                            =======    =======   ========  ========
Diluted earnings (loss) per share.......... $ (0.00)   $ (0.01)  $  (0.00) $   0.03
                                            =======    =======   ========  ========
Weighted average shares (basic)............  37,974     28,962     36,015    28,870
                                            =======    =======   ========  ========
Weighted average shares (diluted)..........  37,974     28,962     36,015    33,293
                                            =======    =======   ========  ========
- --------------------
(A) Includes revenues from related parties. $ 2,281    $   614   $  4,374  $  2,486
                                            =======    =======   ========  ========
(B) Excludes stock-based compensation as
     follows:
      Cost of revenues..................... $    11    $    21   $     36  $     21
      Selling, general and administrative
       expenses............................     748        560      1,897       560
      Research and development expenses....      89          6        252         6
                                            -------    -------   --------  --------
                                            $   848    $   587   $  2,185  $    587
                                            =======    =======   ========  ========


                            See accompanying notes.

                                       3


                                LANTRONIX, INC.

           UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (In thousands)



                                                                Nine Months Ended
                                                                -----------------
                                                                    March 31,
                                                                    ---------
                                                                 2001         2000
                                                               --------     --------
                                                                      
Cash flows from operating activities:
Net income (loss)............................................. $   (172)    $ 1,135
Adjustments to reconcile net income (loss) to
 net cash used in operating activities:
  Depreciation and amortization...............................    1,361         858
  Stock-based compensation....................................    2,185         587
  Provision for doubtful accounts.............................      184         (11)
  Deferred income taxes.......................................       --        (490)
  Loss on disposal of assets..................................       25          --
  Changes in operating assets and liabilities, net of
   effect from acquisitions:
     Accounts receivable......................................   (3,781)       (897)
     Inventories..............................................   (1,891)       (817)
     Prepaid expenses and other current assets................     (478)       (104)
     Other assets.............................................   (2,205)         40
     Accounts payable.........................................     (986)       (302)
     Other current liabilities................................      570        (442)
     Minority interest........................................       --          49
                                                               --------     -------
Net cash used in operating activities.........................   (5,188)       (394)
                                                               --------     -------
Cash flows from investing activities:
  Purchases of property and equipment, net....................   (3,200)       (480)
  Purchases of investments, net...............................  (22,681)         --
  Acquisitions of businesses, net of cash acquired............   (2,879)       (116)
                                                               --------     -------
Net cash used in investing activities.........................  (28,760)       (596)
                                                               --------     -------
Cash flows from financing activities:
  Net proceeds from initial public offering of common stock...   53,707          --
  Net proceeds from issuances of common stock.................      377          42
  Net repayment of bank line of credit........................       --        (766)
                                                               --------     -------
Net cash provided by (used in) financing activities...........   54,084        (724)
Effect of foreign exchange rates on cash......................       (7)         (1)
                                                               --------     -------
Increase (decrease) in cash and cash equivalents..............   20,129      (1,715)
Cash and cash equivalents at beginning of period..............    1,988       5,833
                                                               --------     -------
Cash and cash equivalents at end of period.................... $ 22,117     $ 4,118
                                                               ========     =======


                            See accompanying notes.

                                       4


                                LANTRONIX, INC.

        NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                MARCH 31, 2001

1.   Basis of Presentation

     The condensed consolidated financial statements included herein are
unaudited. They contain all normal recurring accruals and adjustments which, in
the opinion of management, are necessary to present fairly the consolidated
financial position of Lantronix, Inc. and its subsidiaries (collectively, the
"Company") at March 31, 2001 and 2000, the consolidated results of its
operations for the three and nine months ended March 31, 2001 and 2000 and the
consolidated cash flows for the nine months ended March 31, 2001 and 2000. 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, 2001 are not necessarily indicative of
the results to be expected for the full year or any future interim periods.

     The accompanying unaudited condensed consolidated financial statements do
not include certain footnotes and financial presentations normally required
under generally accepted accounting principles. Therefore, these financial
statements should be read in conjunction with the audited consolidated financial
statements and notes thereto for the year ended June 30, 2000, included in the
Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission ("SEC").

2.   Summary of Significant Accounting Policies

Revenue Recognition

     Revenue is recognized upon product shipment. The Company grants certain
distributors limited rights to return products and provides price protection for
inventories held by resellers at the time of published price reductions. Revenue
from licensed software is recognized at the time of shipment, provided the
Company has vendor-specific objective evidence of the fair value of each element
of the software offering and collectibility is probable. Revenue from post-
contract customer support and any other future deliverables is deferred and
earned over the support period or as contract elements are delivered. The
Company establishes an estimated allowance for future product returns based on
historical returns experience when the related revenue is recorded and provides
for appropriate price protection reserves when pricing adjustments are approved.

Investments

     The Company accounts for its investments in debt and equity securities
under FASB Statement No. 115, Accounting for Certain Investments in Debt and
Equity Securities. Management determines the appropriate classification of such
securities at the time of purchase and reevaluates such classification as of
each balance sheet date. Debt securities, which are classified as held-to-
maturity, are stated at cost, adjusted for amortization of premiums and
discounts to maturity. Realized gains and losses and declines in value judged to
be other than temporary are determined based on the specific identification
method and are reported in the statement of operations.

     The Company also has certain other minority investments in nonpublic
companies for the promotion of business and strategic objectives. These
investments are included in long-term investments on the Company's balance sheet
and are carried at fair value or cost, as appropriate. The Company monitors
these investments for impairment and makes appropriate reductions in carrying
values when necessary. No impairment has been indicated to date.

Income Taxes

     Income taxes are computed under the liability method. This method requires
the recognition of deferred tax assets and liabilities for temporary differences
between the financial reporting basis and the tax basis of the Company's assets
and liabilities. The impact on deferred taxes of changes in tax rates, and laws,
if any, are

                                       5


applied to the years during which temporary differences are expected to be
settled and are reflected in the consolidated financial statements in the period
of enactment. There is no valuation allowance provided for deferred tax assets
because the Company believes that it is more likely than not that these assets
will be realized.


3.   Business Combinations

     On December 29, 2000, the Company completed the acquisition of United
States Software Corporation ("USSC"), a software solutions provider of embedded
technology applications. In connection with the acquisition, the Company issued
653,846 shares of common stock and paid $2.5 million in cash in exchange for all
outstanding shares of USSC common stock. Additionally, the Company reserved
133,333 shares of its common stock for issuance upon exercise of outstanding
stock options assumed by the Company. If certain revenue targets for the period
from December 1, 2000 to June 30, 2004 are satisfied, the Company will issue up
to a maximum of 1,625,000 additional shares of common stock to the shareholders
of USSC.

     This acquisition has been accounted for under the purchase method of
accounting. An independent valuation of the tangible and intangible assets and
in-process research and development ("IPR&D") acquired is being performed and
will be recorded in the fourth quarter of fiscal 2001. The allocation of
purchase price reflected in the March 31, 2001 condensed consolidated balance
sheet is preliminary. The preliminary purchase price was allocated, based upon
management's best estimate of the tangible and intangible assets acquired as
follows:



                                                (in thousands)
                                           
      Net tangible assets........................       $   24
      Acquisition costs..........................          708
      Goodwill...................................        8,084
      Deferred compensation......................          538
                                                        ------
      Total consideration........................       $9,354
                                                        ======


  Deferred stock-based compensation, which is included in the purchase price of
the acquisition, has been valued in accordance with FASB Interpretation No. 44,
Accounting For Certain Transactions Involving Stock Compensation (FIN 44). This
amount is being amortized over the remaining vesting period, generally four
years, of the underlying stock options assumed. Goodwill is being amortized on a
straight-line basis over its estimated remaining useful life of seven years.

                                       6


                                LANTRONIX, INC.

  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

     The results of operations of USSC are included in the consolidated
financial statements from the date of acquisition.

     The pro forma statements of operations data below gives effect to the
acquisition as if it had occurred at the beginning of fiscal year 1999. The
following unaudited pro forma statements of operations data include amortization
of goodwill and identified intangibles but excludes the charge for acquired
IPR&D. This pro forma data is presented for informational purposes only and does
not purport to be indicative of the results of future operations nor of the
results that would have occurred had the acquisition taken place at the
beginning of fiscal 1999.



                                                   Nine Months Ended
                                                   -----------------
                                                        March 31,
                                                        ---------
                                                    2001         2000
                                                    ----         ----
                                                           
  Pro forma net revenues..........................  $40,438      $32,631
                                                    =======      =======
  Net income (loss) as reported...................  $  (172)     $ 1,135
    Pro forma adjustments:
     Amortization of goodwill.....................     (866)        (866)
     Pro forma results of USSC....................      445          171
                                                    -------      -------
        Pro forma, net income (loss)..............  $  (593)     $   440
                                                    =======      =======
  Pro forma, net income (loss) per share..........  $ (0.02)     $  0.01
                                                    =======      =======


On March 21, 2001, the Company committed to invest $2.0 million in Premise
Systems, Inc. ("Premise"), a developer of software that connects digital devices
and appliances in homes, businesses, and communities across the Internet, to
enhance productivity and reduce costs. The investment is being accounted for
under the equity method in accordance with FASB Statement No. 115, Accounting
for Certain Investments in Debt and Equity Securities. In addition, the Company
entered into an agreement on March 21, 2001 to acquire the remaining ownership
interest in Premise upon Premise attaining certain revenue targets.

4.   Earnings (Loss) per Share

     Basic earnings (loss) per share is calculated by dividing net income (loss)
by the weighted average number of common shares outstanding during the period.
Diluted earnings per share is calculated by adjusting outstanding shares
assuming any dilutive effects of options. However, these shares are excluded due
to the extent of their antidilutive effect for periods in which the Company
incurred a net loss. The following table sets forth the computation of earnings
(loss) per share:



                                                                 Three Months Ended      Nine Months Ended
                                                                 ------------------      ------------------
                                                                      March 31,              March 31,
                                                                      ---------              ---------
                                                                    (In thousands, except per share data)
                                                                   2001       2000        2001        2000
                                                                 -------    -------      -------    -------
                                                                                        
  Numerator: Net income (loss)...............................    $   (99)   $  (375)     $  (172)   $ 1,135
                                                                 =======    =======      =======    =======
  Denominator:
     Weighted-average shares outstanding.....................     38,068     28,962       36,047     28,870
     Less: Non-vested common shares outstanding..............        (94)        --          (32)        --
                                                                 -------    -------      -------    -------
  Denominator for basic earnings (loss) per share............     37,974     28,962       36,015     28,870
  Effect of dilutive securities:
     Stock options...........................................         --         --           --      4,423
                                                                 -------    -------      -------    -------
  Denominator for diluted earnings (loss) per common share...     37,974     28,962       36,015     33,293
                                                                 =======    =======      =======    =======

  Basic earnings (loss) per share............................    $ (0.00)   $ (0.01)     $ (0.00)   $  0.04
                                                                 =======    =======      =======    =======
  Diluted earnings (loss) per share..........................    $ (0.00)   $ (0.01)     $ (0.00)   $  0.03
                                                                 =======    =======      =======    =======


                                       7


                                LANTRONIX, INC.

  NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

5.   Inventories

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



                                                          March 31,     June 30,
                                                            2001          2000
                                                          ---------     --------
                                                         (Unaudited)
                                                               (In thousands)
                                                                     
   Raw materials.......................................   $   4,862     $  4,766
   Finished goods......................................       3,310        1,488
                                                          ---------     --------
                                                              8,172        6,254
   Reserve for excess and obsolete inventory...........        (896)        (869)
                                                          ---------     --------
                                                          $   7,276     $  5,385
                                                          =========     ========


6.   Other Assets

     Other assets includes $1.6 million of officer loans related to taxes on
exercised non-qualified stock options.

7.   Stockholders' Equity

     On August 4, 2000, the Company completed its initial public offering (the
"Offering") of common stock. The Company sold 6,000,000 shares, at a price of
$10.00 per share and received aggregate net proceeds from the Offering of $53.7
million. On December 29, 2000, in connection with the acquisition of USSC the
Company issued an aggregate of 653,846 shares of common stock and agreed to pay
$2.5 million in cash in exchange for all the outstanding shares of USSC.

8.   Comprehensive Income (Loss)

     Total comprehensive income (loss) was $(113,000) and $(179,000) for the
three and nine months ended March 31, 2001, respectively, and $(380,000) and
$1.1 million for the three and nine months ended March 31, 2000, respectively.

9.   Segment, Geographic, and Revenue by Product Family

     The Company designs and markets three major distinct product families
within one industry segment: network and Internet connectivity products.

     Net revenue by product family consists of the following:



                                           Three Months ended       Nine Months ended
                                           ------------------       -----------------
                                                March 31,               March 31,
                                                ---------               ---------
                                                                  
                                              2001      2000          2001      2000
                                            -------   -------       -------   -------
                                                         (In thousands)
  Device servers.....................       $ 9,083   $ 6,402       $25,668   $17,043
  Multiport device servers...........         4,010     1,446         9,920     7,520
  Print servers and other............         1,032     2,491         3,040     8,068
                                            -------   -------       -------   -------
     Total net revenues..............       $14,125   $10,339       $38,628   $32,631
                                            =======   =======       =======   =======


                                       8


Revenue by Geographic Area

     Revenue by geographic area is based on where products are shipped. Net
revenue by geographic area consists of the following:



                             Three Months ended           Nine Months ended
                             ------------------           -----------------
                                 March 31,                    March 31,
                                 ---------                    ---------
                             2001           2000          2001          2000
                           -------        -------       -------       -------
                                          (Amounts in thousands)
                                                          
  Americas................ $ 9,152        $ 6,820       $26,067       $21,410
  Europe..................   4,558          3,031        10,878         9,590
  Other...................     415            488         1,683         1,631
                           -------        -------       -------       -------
                           $14,125        $10,339       $38,628       $32,631
                           =======        =======       =======       =======


10.  Subsequent Events

     On April 10, 2001, the Company announced that it had signed a letter of
intent to acquire Lightwave Communications, Inc. ("Lightwave"), an industry
leader in console management solutions offering a complete line of KVM
(keyboard, video, mouse) and serial switches and extension systems for an
undisclosed amount. The acquisition is subject to completion of a final
definitive agreement as well as results of customary due diligence procedures.

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

     The following discussion and analysis should be read in conjunction with
the Condensed Consolidated Financial Statements and related notes thereto
contained elsewhere in this report. The information in this report is not a
complete description of our business or the risks associated with an investment
in our common stock. We urge you to carefully review and consider the various
disclosures made by us in this Report and in other reports filed with the SEC,
including our Registration Statement on Form S-1 for our Initial Public Offering
and our Annual Report on Form 10-K for the year ended June 30, 2000.

     The sections entitled "Risk Factors" set forth in this Form 10-Q and in our
Registration Statement on Form S-1 and our Annual Report on Form 10-K for the
year ended June 30, 2000, discuss some of the important risk factors that may
affect our business, results of operations and financial condition. You should
carefully consider those risks, in addition to the other information in this
report and in our other filings with the SEC, before deciding to invest in our
company or to maintain or increase your investment.

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

Overview

     Lantronix designs, develops and markets network device servers that enable
almost any electronic device to be accessed, managed, controlled, reprogrammed
and configured or reconfigured over the Internet or other networks

                                       9


using standard protocols for connectivity, including fiber optic, Ethernet and
wireless. Since our inception in 1989, we have developed an array of network-
enabling products including Device Servers, Multiport Device Servers, Print
Servers and other products. Beginning in fiscal year 1999, we began to
experience an increase in sales of our Device Servers reflecting our focus on
this higher margin product line. At

                                       10


the same time, we began to experience a decline in sales of Print Server and
other products as we shifted resources to our Device Server business, which we
believe represents a greater opportunity for long-term growth. This trend
continued into Q3 2001. We believe sales of our Device Server products will
continue to represent an increasing percentage of our net revenues in the
future. Our strategy for continuing to increase sales of our Device Server
product line involves a two-fold approach. First, we intend to substantially
increase our research and development expenditures over the next two years to
enhance our Device Server product line and develop new products. Second, we
intend to grow our Device Server business through strategic acquisitions,
investments and partnerships, which we believe will support our product lines
and allow us to secure additional intellectual property, increase our customer
base and provide access to new markets.

     Our products are sold to original equipment manufacturers (OEMs), value
added resellers (VARs), systems integrators and distributors, as well as
directly to end-users. We have two customers that accounted for more than 10% of
our net revenues for the nine months ended March 31, 2001 and 2000. One of our
distributors, Ingram Micro, accounted for 14.3% of our net revenues for the nine
months ended March 31, 2001, compared to 12.2% for the nine months ended March
31, 2000. Another distributor, Tech Data, accounted for 10.7% of our net
revenues for the nine months ended March 31, 2001, compared to 12.1% for the
nine months ended March 31, 2000. Transtec AG, an international OEM and related
party due to common ownership by our Chairman and major stockholder, accounted
for 11.3% of our net revenues for the nine months ended March 31, 2001, compared
to 7.6% for the nine months ended March 31, 2000.

     In October 1998, we acquired ProNet GmbH, a German company that is a
supplier of industrial automation device server technology. In connection with
this acquisition, we acquired exclusive marketing rights to CoBox technology in
the United States and Canada from Dr. Peter Weisser, Sr. We also acquired non-
exclusive marketing rights to this technology world-wide, excluding Germany and
Switzerland. Under this agreement, we were required to make royalty payments to
Dr. Weisser through December 31, 2000. We recognized approximately $726,000 of
royalty expense and amortization relating to the marketing rights agreement for
the six months ended December 31, 2001. No amounts have been incurred after
December 31, 2000.

     In December 2000, we completed the acquisition of United States Software
Corporation ("USSC"), a software solutions provider for embedded technology
applications. This acquisition was accounted for as a purchase transaction.
Accordingly, the accompanying financial statements include the results of
operations of USSC as of its acquisition date. See Note 3 of Notes to Unaudited
Condensed Consolidated Financial Statements.

     We recognize revenues upon product shipment. We have granted several
customers limited return privileges, as well as limited price protection for
inventories held at the time of published price reductions. Estimated reserves
have been recorded in the accompanying unaudited condensed consolidated
financial statements to reflect these agreements, as well as potential warranty
expenses, based on our five-year warranty policy from the date of shipment.

     Stock-based compensation primarily relates to deferred compensation
recorded in connection with the grant of stock options to employees where the
option exercise price is less than the estimated fair value of the underlying
shares of common stock at the grant date as determined for financial reporting
purposes. Stock-based compensation also relates to the fair market value of the
vested portion of non-employee stock options utilizing the Black-Scholes option
pricing model. We have recorded deferred stock-based compensation within
stockholders' equity of approximately $10.9 million, that is being amortized
over the vesting period of the related stock options, generally four years. At
March 31, 2001, a balance of $7.2 million remains and will be amortized as
follows: $732,000 in the remainder of fiscal 2001, $2.8 million in fiscal 2002,
$1.8 million in fiscal 2003, $1.4 million in fiscal 2004, $307,000 in fiscal
2005 and $153,000 in fiscal 2006. The amount of stock-based compensation in
future periods could decrease if unvested options are forfeited.

                                       11


Results of Operations for the Three and Nine Months Ended March 31, 2001
compared to the Three and Nine Months Ended March 31, 2000

  The following table sets forth certain statement of operations data expressed
as a percentage of total net revenues:



                                           Three Months      Nine Months
                                           ------------      -----------
                                              Ended             Ended
                                              -----             -----
                                             March 31,         March 31,
                                             ---------         ---------
                                                         
                                          2001     2000     2001     2000
                                          -----    -----    -----    -----
Net revenues............................. 100.0%   100.0%   100.0%   100.0%
Cost of revenues.........................  45.2     52.5     45.1     47.9
                                          -----    -----    -----    -----

Gross profit.............................  54.8     47.5     54.9     52.1
                                          -----    -----    -----    -----
Operating expenses:
  Selling, general and administrative....  44.0     39.5     45.5     36.5
  Research and development...............   8.3      8.7      8.4      7.1
  Stock-based compensation...............   6.0      5.7      5.7      1.8
                                          -----    -----    -----    -----

  Total operating expenses...............  58.3     53.9     59.6     45.4
                                          -----    -----    -----    -----
Income (loss) from operations............  (3.5)    (6.4)    (4.7)     6.6
Minority interest........................    --       --       --     (0.2)
Interest and other income (expense), net.   3.3     (0.7)     4.2      0.3
                                          -----    -----    -----    -----

Income (loss) before income taxes........  (0.1)    (7.1)    (0.4)     6.8
Provision (benefit) for income taxes.....   0.6     (3.4)      --      3.3
                                          -----    -----    -----    -----

Net income (loss)........................ (0.7)%   (3.6)%   (0.4)%     3.5%
                                          =====    =====    =====    =====


Net Revenues

  Net revenues increased $3.8 million, or 36.6%, to $14.1 million for the three
months ended March 31, 2001 from $10.3 million for the three months ended March
31, 2000. Net revenues increased $6.0 million, or 18.4%, to $38.6 million for
the nine months ended March 31, 2001 from $32.6 million for the nine months
ended March 31, 2000. The increase was primarily attributable to an increase in
net revenues of our Device Server and Multiport Device Server products,
partially offset by a decline in our Print Server and other products. Device
Server net revenues increased $2.7 million, or 41.9%, to $9.1 million or 64.3%
of net revenues for the three months ended March 31, 2001 from $6.4 million or
61.9% of net revenues for the three months ended March 31, 2000. Device Server
net revenues for the three months ended March 31, 2001 includes $658,000 of
software revenue generated from USSC. Device Server net revenues increased $8.6
million, or 50.6%, to $25.7 million or 66.4% of net revenues for the nine months
ended March 31, 2001 from $17.0 million or 52.2% of net revenues for the nine
months ended March 31, 2000. This increase is attributable to the rapid adoption
rates of OEMs, as well as strong sales of our UDS-10 Device Server product,
which was introduced during the fourth quarter of fiscal 2000. Device Server net
revenues for the nine months ended March 31, 2001 includes $896,000 of software
revenue generated from USSC. Multiport Device Server net revenues increased $2.6
million, or 177.3%, to $4.0 million or 28.4% of net revenues for the three
months ended March 31, 2001 from $1.4 million or 14.0% of net revenues for the
three months ended March 31, 2000. Multiport Device Server net revenues
increased $2.4 million, or 31.9%, to $9.9 million or 25.7% of net revenues for
the nine months ended March 31, 2001 from $7.5 million or 23.0% of net revenues
for the nine months ended March 31, 2000. Print Server and other revenues
decreased $1.5 million, or 58.6%, to $1.0 million, or 7.3% of net revenues for
the three months ended March 31, 2001 from $2.5 million, or 24.1% of net
revenues for the three months ended March 31, 2000. Print Server and other
revenues decreased $5.0 million, or 62.3%, to $3.0 million, or 7.9% of net
revenues for the nine months ended March 31, 2001 from $8.1 million, or 24.7% of
net revenues for the nine months ended March 31, 2000. The decreases in our
Print Server and other products are due to a more rapid transition to Device
Server products.

                                       12


  Net revenues generated from sales in the Americas increased $2.3 million, or
34.2%, to $9.2 million or 64.8% of net revenues for the three months ended March
31, 2001 from $6.8 million or 66.0% of net revenues for the three months ended
March 31, 2000. Net revenues generated from sales in the Americas increased $4.7
million, or 21.8%, to $26.1 million or 67.5% of net revenues for the nine months
ended March 31, 2001 from $21.4 million, or 65.6% of net revenues for the nine
months ended March 31, 2000. Our net revenues derived from customers located in
Europe increased $1.5 million, or 50.4%, to $4.6 million or 32.3% of net
revenues for the three months ended March 31, 2001 from $3.0 million or 29.3% of
net revenues for the three months ended March 31, 2000. Our net revenues derived
from customers located in Europe increased $1.3 million, or 13.4%, to $10.9
million or 28.2% of net revenues for the nine months ended March 31, 2001 from
$9.6 million, or 29.4% of net revenues for the nine months ended March 31, 2000.
Our net revenues derived from customers located in other geographic areas
decreased slightly to $415,000 or 2.9% of net revenues for the three months
ended March 31, 2001 from $488,000 or 4.7% of net revenues for the three months
ended March 31, 2000. Our net revenues derived from customers located in other
geographic areas increased slightly to $1.7 million or 4.4% of net revenues for
the nine months ended March 31, 2001 from $1.6 million or 5.0% of net revenues
for the nine months ended March 31, 2000.

Gross Profit

  Gross profit represents net revenues less cost of revenues. Cost of revenues
consists primarily of the cost of raw material components, subcontract labor
assembly from outside manufacturers and associated overhead costs. As part of
our agreement with Gordian, Inc., an outside research and development firm, a
royalty charge is included in cost of revenues and is calculated based on the
related products sold. Gross profit increased by $2.8 million, or 57.6%, to $7.7
million or 54.8% of net revenues for the three months ended March 31, 2001 from
$4.9 million or 47.5% of net revenues for the three months ended March 31, 2000.
Gross profit increased by $4.2 million, or 24.8%, to $21.2 million or 54.9% of
net revenues for the nine months ended March 31, 2001 from $17.0 million, or
52.1% of net revenues for the nine months ended March 31, 2000. For the three
months ended March 31, 2001 and 2000, Gordian royalties were $591,000 and
$381,000, respectively. For the nine months ended March 31, 2001 and 2000,
Gordian royalties were $1.6 million and $1.5 million, respectively. The increase
in gross profit as a percentage of net revenues is primarily attributable to
increased sales volume of our Device Server product line and cost containment
initiatives partially offset by competitive pricing strategies.

Selling, General and Administrative

  Selling, general and administrative expenses consist primarily of personnel-
related expenses including salaries and commissions, facilities expenses,
information technology, trade show expenses, advertising, and professional fees.
Selling, general and administrative expenses increased $2.1 million, or 51.9%,
to $6.2 million or 44.0% of net revenues for the three months ended March 31,
2001 from $4.1 million or 39.5% of net revenues for the three months ended March
31, 2000. Selling, general and administrative expenses increased $5.7 million or
47.8%, to $17.6 million or 45.5% of net revenues for the nine months ended March
31, 2001 from $11.9 million or 36.5% of net revenues for the nine months ended
March 31, 2000. This increase is due primarily to an increase in our sales
force, including new offices in Europe and Asia, and an increase in marketing
and advertising expenses to increase brand awareness. We expect selling, general
and administrative expenses in absolute dollars will continue to increase in the
foreseeable future to support the global expansion of our operations and
decrease as a percentage of net revenues due to increased revenue.

Research and Development

  Research and development expenses consist primarily of salaries and the
related costs of employees, as well as expenditures to third-party vendors for
research and development activities. Research and development expenses increased
$274,000, or 30.5%, to $1.2 million or 8.3% of net revenues for the three months
ended March 31, 2001 from $897,000 or 8.7% of net revenues for the three months
ended March 31, 2000.

                                       13


Research and development expenses increased $913,000, or 39.2%, to $3.2 million
or 8.4% of net revenues for the nine months ended March 31, 2001 from $2.3
million or 7.1% of net revenues for the nine months ended March 31, 2000. This
increase resulted primarily from increased headcount and expenses related to new
product development and the acquisition of USSC.

Interest and Other Income (Expense), Net

  Interest and other income (expense), net consists primarily of interest earned
on cash, cash equivalents, short-term and long-term investments, less interest
on our capital lease obligations, the effects of exchange gains and losses from
foreign currency transactions, and gains and losses from disposals of fixed
assets. Interest and other income (expense), net was $467,000 and $(71,000) for
the three months ended March 31, 2001 and 2000, respectively. Interest and other
income (expense), net was $1.6 million and $99,000 for the nine months ended
March 31, 2001 and 2000, respectively. The increases are primarily due to higher
average investment balances for the three and nine months ended March 31, 2001,
as a result of the proceeds from our initial public offering completed in August
2000.

Provision for Income Taxes

  The Company utilizes the liability method of accounting for income taxes as
set forth in Financial Accounting Standards Board ("FASB") Statement No. 109,
Accounting for Income Taxes. The Company has recorded no income tax benefit for
the nine months ended March 31, 2001, due to the uncertainty surrounding the
realization of such benefits. The effective rates for the nine months ended
March 31, 2001 and 2000 are 0% and 49%, respectively.

Liquidity and Capital Resources

  Since inception, we have financed our operations through the issuance of
common stock and through net cash generated from operations. We consider all
highly liquid investments purchased with original maturities of 90 days or less
to be cash equivalents. Cash and cash equivalents consisting of money-market
funds and commercial paper totaled $22.1 million at March 31, 2001. Short-term
investments consist of investments maturing in twelve months or less and totaled
$21.5 million at March 31, 2001. Long-term investments consist of investments
maturing after twelve months and investments in two privately held companies and
totaled $3.0 million at March 31, 2001.

  Our operating activities used cash of $5.2 million for the nine months ended
March 31, 2001. We incurred a net loss of $172,000, which includes amortization
and depreciation of $3.5 million, which was reduced by increased inventory of
$1.9 million, increased accounts receivable of $3.8 million and increased other
assets of $2.2 million. The increase in accounts receivable was due to increased
sales in the last month of Q3 as well as slower collections from some of our
U.S. distributors and European customers. We increased our inventory to support
our increasing sales activity and to provide better service levels to our
customers. The increase in other assets is primarily attributable to officer
loans related to taxes on exercised non-qualified stock options, in the amount
of $1.6 million. Our operating activities used cash of $394,000 for the nine
months ended March 31, 2000.

  Our investing activities used $28.8 million of cash for the nine months ended
March 31, 2001. We used $22.7 million of our public offering proceeds to
purchase short-term and long-term investments. We used $2.9 million of cash for
the acquisition of USSC.  We also used cash to purchase property and equipment,
primarily computer hardware and software of $2.2 million pertaining to Oracle
software enhancements to support our Order Entry function, international
operations and a customer resource management (CRM) software package to support
our sales force. In addition, we invested $1.0 in furniture and leasehold
improvements for an office expansion project. Our investing activities used cash
of $596,000 for the nine months ended March 31, 2000, primarily related to the
purchase of property and equipment.

                                       14


     Cash provided by financing activities was $54.1 million for the nine months
ended March 31, 2001, primarily related to the net proceeds from our initial
public offering on August 4, 2000. Cash used for financing activities was
$724,000 for the nine months ended March 31, 2000, primarily for the repayment
on our bank line of credit related to our acquisition of ProNet GmbH.

     We intend to use a portion of the proceeds from our recent public offering
to substantially increase our research and development activities. Over the next
two years, we expect our research and development expenses to increase to
approximately 10% of our net revenues. Specific amounts allocated to future
research and development and sales and marketing expenditures will be budgeted
based upon market conditions existing at that time.

     We believe that the net proceeds from our public offering, our existing
cash and cash expected to be generated from operations 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 revenues and research and development and infrastructure
investments which will affect our ability to generate additional cash. If cash
generated from operations and financing activities is insufficient to satisfy
our working capital requirements, we may need to borrow funds through bank
loans, sales of securities or other means. There can be no assurance that we
will be able to raise any such capital on terms acceptable to us, if at all. If
we are unable to secure additional financing, we may not be able to develop or
enhance our products, take advantage of future opportunities, respond to
competition or continue to operate our business.

Factors That May Affect Future Results of Operation

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

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

     Variations in quarterly operating results, due to factors including changes
in demand for our products and changes in our mix of net revenues, could cause
our stock price to decline.

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

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

     .  customers' decisions to defer or accelerate orders;

     .  varying size or timing of orders for our products;

     .  short-term fluctuations in the cost or availability of our critical
        components, such as flash memory;

     .  changes in demand for our products;

     .  loss of significant customers;

                                       15


     .  announcements or introductions of new products by our competitors;

     .  defects and other product quality problems;

     .  changes in demand for devices that incorporate our connectivity
        products; and

     .  foreign currency fluctuation.

If we make unprofitable acquisitions or are unable to successfully integrate
any future acquisitions, our business could suffer.

     We have in the past and from time to time in the future might acquire
businesses, client lists, products or technologies that we believe complement or
expand our existing business. For example, in October 1998, we acquired ProNet
GmbH, a German supplier of industrial application device server technology.
Also, in December 2000, we acquired United States Software Corporation, a
software solutions provider for embedded technology applications. Acquisitions
of this type involve a number of risks, including the possibility that the
operations of the acquired company will be unprofitable or that our management's
attention will be diverted from the day-to-day operation of our business. An
unsuccessful acquisition could reduce our margins or otherwise harm our
financial condition. Any acquisition could result in a dilutive issuance of
equity securities, the incurrence of debt and the loss of key employees. We
cannot assure you that any acquisitions will be successfully completed or that,
if one or more acquisitions are completed, the acquired businesses, client
lists, products or technologies will generate sufficient revenue to offset the
associated costs of other acquisitions or other adverse effects.

     Revenues from our Print Server line of products have decreased
significantly and we expect that revenues from our Print Server line of products
will continue to decline in the future as we focus our efforts on the
development of other product lines.

     Since 1993, revenues from our Print Server line have accounted for a
significant portion of our net revenues but have declined significantly
recently. For example, revenues from our Print Server line accounted for
approximately 8.4% and 15.8% of our total net revenues for the nine months ended
March 31, 2001 and 2000, respectively. Revenues from our Print Server line
decreased significantly for the nine months ended March 31, 2001 and 2000 to
approximately $3.2 million from approximately $5.2 million, respectively. We
anticipate that revenues from our Print Server line will continue to decline in
the future as we plan to turn our focus to the development of our current Device
Server product line which we introduced in mid 1998. We do not know if this
transition in product development will be successful. We do not know whether our
current and future target markets to the extent we anticipate will accept our
new product line. If the expected decline in net revenues attributable to our
Print Server line of products is not offset by increases in net revenues from
our Device Server line of products, our business could be harmed.

     We intend to substantially increase our research and development efforts,
which if not successful, could cause a decline in our revenues and could harm
our business.

     We intend to increase substantially our expenditures on research and
development in the next two years to enhance and develop additional products.
For the nine months ended March 31, 2001, research and development expenses
comprised 8.4% of our net revenues. Over the next two years, we expect our
research and development expenses to increase to approximately 10% of our net
revenues. If we are unable to develop new products as a result of this effort,
or if the products we develop are not successful, our business could be harmed.
Even if we do develop new products that are accepted by our target markets, we
cannot assure you that the revenue from these products will be sufficient to
justify our investment in research and development.

     There is a risk that our OEM customers will develop their own internal
expertise in network-enabling products, which could result in reduced sales of
our products.

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

     We might be unable to manage our growth, and if we cannot do so, it could
harm our business.

     Our business has grown rapidly in the last year. At March 31, 2001, we had
195 employees. As of March 31, 2000 we had 126 employees. In addition, we have
experienced expansion in our manufacturing and shipping requirements, our
product lines and our customer base. This rapid expansion has placed significant
strain on our administrative, operational and financial resources. These changes
have increased the complexity of managing our company. Our current systems,
management and other resources will need to grow rapidly in order to meet the
demands of our anticipated future growth. If we are unable to successfully
expand and improve our systems as required, or if we are otherwise unable to
manage our growth, our business will be harmed.

                                       16


New product introductions and pricing strategies by our competitors could
adversely affect our ability to sell our products and could reduce our market
share or result in pressure to reduce the price of our products.

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

We primarily depend on three third-party manufacturing facilities to manufacture
our products, which reduce our control over the manufacturing process. We have
secured two additional manufacturers APW, Inc. and Irvine Electronics in order
to meet our expected future commitments. These additional manufacturing
facilities began manufacturing a small percentage of our products late in Q3. We
expect to transition a significant portion of the workload to our new
manufacturing facilities over the next six months.

     We primarily outsource all of our manufacturing to three third-party
manufacturers, APW, Inc., Irvine Electronics and Express Manufacturing. Our
reliance on these third-party manufacturers exposes us to a number of
significant risks, including:

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

     . lack of guaranteed production capacity or product supply; and

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

     We have supply agreements with our manufacturers and obtain manufacturing
services on a purchase-order basis. If our manufacturers were to become unable
or unwilling to continue to manufacture our products in required volumes, at
acceptable quality, quantity, yields and costs, or in a timely manner, our
business would be seriously harmed. As a result, we would have to attempt to
identify and qualify substitute manufacturers for our current manufacturers,
which could be time consuming and difficult, and might result in unforeseen
manufacturing and operations problems. In addition, a natural disaster could
disrupt our manufacturers' facilities and could inhibit our manufacturers'
ability to provide us with manufacturing capacity on a timely basis, or at all.
If this were to occur, we likely would be unable to fill customers' existing
orders or accept new orders for our products. The resulting decline in revenue
would harm our business.

Inability or delays in deliveries from our component suppliers could damage
our reputation and could cause our net revenues to decline and harm our
results of operations.

     Although we outsource our manufacturing, we are responsible for procuring
raw materials for our products. Our products incorporate components or
technologies that are only available from limited sources of supply. In
particular, some of our integrated circuits are available from a single
source. In the past, from time to time, integrated circuits we used in our
products were phased out of production. When this happens, we attempt to
purchase sufficient inventory to meet our needs until a substitute component
can be incorporated into our products. Nonetheless, we might be unable to
purchase sufficient components to meet our demands, or we might incorrectly
forecast our demands, and purchase too many or too few components. In
addition, our products use components that have in the past been subject to
market shortages and substantial price fluctuations. For example, the price of
flash memory, a component used in our products, has fluctuated significantly.
From time to time, we have been unable to meet our orders because we were
unable to purchase necessary components for our

                                       17


products. We rely on a number of different component suppliers. Because we do
not have long-term supply arrangements with any vendor to obtain necessary
components or technology for our products, if we are unable to purchase
components from these suppliers, product shipments could be prevented or
delayed, which could result in a loss of sales. For example, recently our
supplier of gate array chips ended production of that component, which caused
an interruption in our ability to supply one of our multiport products. If we
are unable to meet existing orders or to enter into new orders because of a
shortage in components, we will likely lose net revenues and risk losing
customers and harming our reputation in the marketplace.

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

     For the nine months ended March 31, 2001, our two largest customers, each
of whom are distributors, accounted for 25.0% of our net revenues. Ingram
Micro and Tech Data domestic distributors accounted for 14.3% and 10.7%
respectively, of our net revenues for the nine months ended March 31, 2001.
Our top five and top ten customers accounted for 41.1% and 49.7% respectively,
of our net revenues for the nine months ended March 31, 2001. Transtec AG, a
major international customer, accounted for 11.3% of our net revenues for the
nine months ended March 31, 2001. Bernhard Bruscha, our Chairman of the Board,
is the majority stockholder and Chief Executive Officer of transtec AG. We
have in the past, and might in the future, lose one or more major customers.
If we fail to continue to sell to our major customers in the quantities we
anticipate, or if any of these customers terminate our relationship, our
reputation, the perception of our products and technology in the marketplace
and the growth of our business could be harmed. The demand for our products
from our OEM, VAR and systems integrator customers depends primarily on their
ability to successfully sell their products that incorporate our Device Server
technology. Our sales are usually completed on a purchase order basis and we
have no long-term purchase commitments from our customers.

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

The average selling prices of our products might decrease, which could reduce
our gross margins.

     We cannot assure you that we will be able to maintain our average selling
prices and gross margins at current levels. In the past, we have experienced
some reduction in the average sale prices of products. For example, Embedded
Device Servers, External Device Servers and Print Server average selling
prices have decreased 12.2%, 10.9% and 7.3%, respectively, for the nine months
ended March 31, 2001 compared to the nine months ended March 31, 2000. In the
future, we expect competition to increase, and we anticipate this could result
in additional pressure on our pricing. In addition, our average selling prices
for our products might decline as a result of other reasons, including
promotional programs and customers who negotiate price reductions in exchange
for longer-term purchase commitments. Average selling prices and gross
margins for our products also might decline as the products mature in their
life cycles. In addition, we might not be able to increase the price of our
products in the event that the price of components or our overhead costs
increase. If this were to occur, our gross margins would decline.

Because we are dependent on international sales for a substantial amount of
our net revenues, we face the risks of international business and associated
currency fluctuations, which might adversely affect our operating results.

     Net revenues from international sales represented 32.5% and 34.4% of net
revenues for the nine months ended March 31, 2001 and 2000, respectively. Net
revenues from Europe represented 28.2% and 29.4% of our net revenues for the
nine months ended March 31, 2001 and 2000, respectively. We expect that

                                       18


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

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

     . reduced protection for intellectual property rights in some countries;

     . differing labor regulations;

     . compliance with a wide variety of complex regulatory requirements;

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

     . greater difficulty in staffing and managing foreign operations; and

     . increased financial accounting and reporting burdens and complexities.

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

Our executive officers and technical personnel are critical to our business,
and without them we might not be able to execute our business strategy.

     Our financial performance depends substantially on the performance of our
executive officers and key employees. We are dependent in particular on our
Chief Executive Officer, Frederick G. Thiel, as well as our technical
personnel, due to the specialized technical nature of our business. If we lose
the services of Mr. Thiel or any of our key personnel and are not able to find
replacements in a timely manner, our business could be disrupted, other key
personnel might decide to leave, and we might incur increased operating
expenses associated with finding and compensating replacements.

We might be unable to hire and retain the skilled personnel necessary to
develop our operations, sales, technical and support capabilities in order to
continue to grow, which could harm our business.

     Our business cannot continue to grow if we do not hire and retain
qualified technical personnel. Competition for these individuals is intense,
and we might not be able to attract, assimilate or retain highly qualified
technical personnel in the future. In addition, we need to hire and retain
operations, sales and support personnel in the near future. We expect to face
greater difficulty attracting qualified personnel with equity incentives as a
public company than we did as a privately held company. Our failure to attract
and retain highly trained personnel in these areas might limit the rate at
which we can develop, which would harm our business.

                                       19


The market for our products is new and rapidly evolving. If we are not able to
develop or enhance our products to respond to changing market conditions, our
net revenues will suffer.

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

Undetected product errors or defects could result in loss of revenue, delayed
market acceptance and claims against us.

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

Our intellectual property protection might be limited.

     We do not rely on patents to protect our proprietary rights. We do rely
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 of marks that precede the registration of our marks;

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

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

     Also, the laws of other countries in which we market our products might
offer little or no effective protection of our proprietary technology. Reverse
engineering, unauthorized copying or other misappropriation

                                       20


of our proprietary technology could enable third parties to benefit from our
technology without paying us for it, which could significantly harm our
business.

If our agreement with Gordian, Inc. is terminated, we could lose the rights to
valuable intellectual property.

     Pursuant to an agreement dated February 29, 1989 between Gordian, Inc.,
and us, Gordian developed intellectual property used in our Micro Serial
Server, or MSS, Print Servers and ETS and LRS lines of Multiport Device Server
products. These products represent a substantial portion of our revenue. Under
the terms of this agreement, Gordian owns the rights to the intellectual
property developed by it but has agreed that for the term of the agreement it
will not develop products for any other party, which will directly compete with
a product Gordian developed for us. The agreement with Gordian currently
provides that we are required to pay royalties with respect to sales of products
covered by the agreement. For the nine months ended March 31, 2001 and 2000, we
paid Gordian approximately $1.6 million and $1.5 million in royalties,
respectively. In the event that the Gordian agreement is terminated, we could
lose our rights to the intellectual property developed under the Gordian
agreement and this might prevent us from marketing some or all of our MSS line
of products in the future. Although we believe that other products developed by
us using alternative technology can be substituted in the future for the
products sold by us using the technology developed by Gordian, there is no
guarantee that we will not lose customers and revenues which would harm our
business.

We might become involved in litigation over proprietary rights, which could be
costly and time consuming.

     Substantial litigation regarding intellectual property rights exists in
our industry. There is a risk that third parties, including current and
potential competitors and current developers of our intellectual property or
our manufacturing partners, will claim that our products, or our customers'
products, infringe on their intellectual property rights. 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 the proprietary rights we use infringe upon. Any of these
third parties might make a claim of infringement against us. Any litigation,
brought by us or others could result in the expenditure of significant
financial resources and the diversion of management's time and efforts. In
addition, from time to time we could encounter disputes over rights and
obligations concerning intellectual property. We cannot assume that we will
prevail in intellectual property disputes regarding infringement,
misappropriation or other disputes. Litigation in which we are accused of
infringement or misappropriation might cause a delay in the introduction of
new products, require us to develop non-infringing technology or require us
to enter into royalty or license agreements, which might not be available on
acceptable terms, or at all. In addition, we have obligations to indemnify
certain of our customers under some circumstances for infringement of third
party intellectual property rights. If any claims from third parties required
us to indemnify customers under our agreements, the costs could be
substantial, and our business could be harmed. If a successful claim of
infringement were made against us and we could not develop non-infringing
technology or license the infringed or similar technology on a timely and
cost-effective basis, our business could be significantly harmed.

As a result of recent unfavorable economic conditions and reduced consumer and
capital spending, our sales growth has slowed. If the markets into which we sell
our products experience recession or other cyclical effects that diminish or
delay our customers' networking product expenditures, our operating results
would be severely harmed.

     As a result of recent unfavorable economic conditions and reduced consumer
and capital spending, our sales growth has slowed. Other sectors in the
technology industry have experienced a dramatic decrease in sales, and we could
experience similar results. We cannot predict if or when the economy will
improve, but if the economic conditions in the United States worsen or if a
wider or global economic slowdown occurs, we would experience a material adverse
impact on our business, operating results and financial condition. In
particular, if the markets into which we sell our products experience recession
or other cyclical effects that diminish or delay our customers' networking
product expenditures, our operating results would be severely harmed.

We and the contract manufacturing facilities we use rely on a continuous power
supply to conduct our operations, and California's current energy crisis could
disrupt our operations and increase our expenses.

     California is in the midst of an energy crisis that could disrupt our
operations and increase our expenses. In the event of an acute power shortage,
that is, when power reserves for the State of California fall below 1.5%,
California has on some occasions implemented, and may in the future continue to
implement, rolling blackouts throughout California. As a result of this crisis,
we may be unable to distribute sufficient quantities of our products, or our
distributors may increase the fees they charge us for their services. Any delay
in our ability to fulfill our customers' orders would harm our business, and any
increase in logistics fees could harm our financial condition.

     In addition, our corporate headquarters are located in California. We
currently do not have backup generators or alternate sources of power in the
event of a blackout. If blackouts interrupt our power supply, we would be
temporarily unable to continue operations at our corporate headquarters. Any
such interruption in our ability to continue operations at our facilities could
damage our reputation, harm our ability to retain existing customers and to
obtain new customers, and could result in lost revenue.

     Furthermore, the deregulation of the energy industry instituted in 1996 by
the California government has caused power prices to increase. Under
deregulation, utilities were encouraged to sell their plants, which
traditionally had produced most of California's power, to independent energy
companies that were expected to compete aggressively on price. Instead, due in
part to a shortage of supply, wholesale prices have skyrocketed over the past
year. If wholesale prices continue to increase, our operating expenses will
likely increase and this could substantially harm our business and results of
operations.

The amortization of deferred stock-based compensation will negatively affect our
operating results.

     We have recorded deferred stock-based compensation in connection with the
grant of stock options to employees where the option exercise price is less than
the estimated fair value of the underlying shares of common stock as determined
for financial reporting purposes. We have recorded deferred stock-based
compensation within stockholders' equity of approximately $7.2 million at March
31, 2001, which is being amortized over the vesting period of the

                                       21


related stock options, which is generally four years. A balance of $7.2
million remains at March 31, 2001 and will be amortized as follows: $732,000
in the remainder of fiscal 2001, $2.8 million in fiscal 2002, $1.8 million in
fiscal 2003, $1.4 million in fiscal 2004, $307,000 in fiscal 2005, and
$153,000 in fiscal 2006.

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

Item 3.   Quantitative and Qualitative Disclosure About Market Risk

     There has not been any material change in our exposure to interest rate
and foreign currency risks since the date of our Annual Report on Form 10-K
for the year ended June 30, 2000.

     Interest Rate Risk. Our exposure to interest rate risk is limited to the
exposure related to our cash, cash equivalents, short-term and long-term
investments and our credit facilities, which is tied to market interest rates.
As of March 31, 2001, we had cash, cash equivalents, short-term and long-term
financial investments of $44.1 million, which includes our initial public
offering proceeds. This consisted of cash equivalents with original maturities
of 90 days or less, short-term investments maturing within twelve months or less
and long-term investments maturing after twelve months, both domestically and
internationally. We believe our cash, cash equivalents short and long-term
investments will decline in value by an insignificant amount if interest rates
increase, and therefore would not have a material effect on our financial
condition or results of operations.

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

     Investment Risk. We have invested $2.5 million in two privately held
companies, both of which can still be considered in the start-up or
development stages. These investments are inherently risky as the market for
the technologies or products they have under development are typically in the
early stages and may never materialize. We could lose our entire initial
investment in these companies.

                                       22


                         PART II.   OTHER INFORMATION

Item 1.   Legal Proceedings

     None.

Item 2.   Changes in Securities and Use of Proceeds

     For the nine months ended March 31, 2001, we received net proceeds of $53.7
million. During the nine months ended March 31, 2001, we used $5.2 million of
the proceeds for working capital, primarily related to increased inventory
levels to support our projected sales increase, higher accounts receivable
balances related to increased sales in the last month of Q3 as well as slower
payment by some of our U.S. distributors and European customers and increase in
other assets of $2.2 million primarily attributable to officer loans related to
takes on exercised non-qualified stock options, in the amount of $1.6 million.
Additionally, we used $3.2 million for property and equipment purchases.

Item 3.   Defaults upon Senior Securities

     None.

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

     None

Item 5.   Other Information

     None

Item 6.   Exhibits and Reports on Form 8-K

     (a) Exhibits

  Exhibit
  -------                        Description of Document
  Number                         -----------------------
  ------
 2.1****    Agreement and Plan of Reorganization by and among Lantronix, Inc.,
            USS Acquisition Corporation, United States Software Corporation and
            Donald Dunstan and Diane Dunstan.
 3.2*       Certificate of Incorporation
 3.4*       Bylaws
 4.1**      Form of registrant's common stock certificate.
 10.1**     Form of Indemnification Agreement entered into by registrant with
            each of its directors and executive officers.
 10.2**     1993 Stock Option Plan and forms of agreements thereunder.
 10.3**     1994 Nonstatutory Stock Option Plan and forms of agreements
            thereunder.
 10.4**     2000 Stock Plan and forms of agreements thereunder.
 10.5**     2000 Employee Stock Purchase Plan.
 10.6**     Form of Warranty.
 10.7*      Employment Agreement between registrant and Frederick Thiel.
 10.8*      Employment Agreement between registrant and Steven Cotton.
 10.9*      Employment Agreement between registrant and Johannes Rietschel.

                                       23


  Exhibit
  -------                        Description of Document
  Number                         -----------------------
  ------
 10.10***   Lease Agreement between registrant and The Irvine Company.
 10.11**    Loan and Security Agreement between registrant and Silicon Valley
            Bank.
 10.12+**   Research and Development Agreement between registrant and Gordian.
 10.13+**   Distributor Contract between registrant and Tech Data Corporation.
 10.14+**   Distributor Contract between registrant and Ingram Micro Inc.
 10.15***** United States Software Corporation 2000 Stock Plan.
 10.16******Agreement and Plan of Reorganization between Registrant, Premise
            Systems, Inc. and certain parties.

- ---------------
 *        Incorporated by reference to the same numbered exhibit previously
          filed with Lantronix's Registration Statement on Form S-1 (SEC file
          no. 333-37508) originally filed May 19, 2000.

 **       Incorporated by reference to the same numbered exhibit previously
          filed with Lantronix's Registration Statement on Form S-1, Amendment
          No. 1, (SEC file no. 333-37508) originally filed June 13, 2000.

 ***      Incorporated by reference to the same numbered exhibit previously
          filed with Lantronix's Annual Report on Form 10-K, originally filed
          September 28, 2000.

 ****     Incorporated by reference to the same numbered exhibit previously
          filed with Lantronix's Report on Form 8-K, originally filed December
          29, 2000.

 *****    Incorporated by reference to Exhibit 4.1 of Lantronix's Registration
          Statement on Form S-8 filed February 2, 2001.

 ******   Incorporated by reference to Exhibit 5.1 previously filed with
          Lantronix's Report on Form 8-K, originally filed April 5, 2001.

 +   Confidential treatment granted as to portions of this exhibit.

     (b) Reports on Form 8-K

          None.

                                      24


                                  SIGNATURES

     Pursuant to the requirements of the Securities Act of 1934, as amended,
Lantronix has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Irvine, State of
California, on the 15th day of May, 2001.


                                          LANTRONIX, INC.


                                          By:    /s/  STEVEN V. COTTON
                                             -----------------------------------
                                                      Steven V. Cotton
                                              Chief Financial Officer and Chief
                                                      Operating Officer


                                       25