in re lantronix, inc. securities litigation 02-cv-3899...

UNITED STATES DISTRICT COURTCENTRAL DISTRICT OF CALIFORNIA

WESTERN DIVISION

IN RE LANTRONIX, INC. SECURITIESLITIGATION CASE NO.: CV 02-3899 GPS (JTLx)

CLASS ACTIONTHIS DOCUMENT RELATES TO:

ALL ACTIONS

NOTICE OF PENDENCY AND PROPOSED SETTLEMENTOF CLASS ACTION AND SETTLEMENT HEARING

TO: ALL PERSONS OR ENTITIES WHO PURCHASED OR ACQUIRED THE COMMONSTOCK OF LANTRONIX, INC. (“LANTRONIX” OR THE “COMPANY”) DURINGTHE SETTLEMENT CLASS PERIOD DEFINED BELOW.

PLEASE READ THIS NOTICE CAREFULLY. THIS NOTICE RELATES TO THEPENDENCY AND PROPOSED SETTLEMENT OF THIS CLASS ACTIONLITIGATION AND, IF YOU ARE A SETTLEMENT CLASS MEMBER, CONTAINSIMPORTANT INFORMATION AS TO YOUR RIGHTS TO OBTAIN A SHARE OFTHE SETTLEMENT FUND FURTHER DESCRIBED BELOW.

CLAIMS DEADLINE: CLAIMANTS MUST SUBMIT PROOFS OF CLAIM, ON THEFORM ACCOMPANYING THIS NOTICE POSTMARKED NO LATER THANJANUARY 6, 2007.

EXCLUSION DEADLINE: REQUESTS FOR EXCLUSION MUST BE SENT TO THECLAIMS ADMINISTRATOR POSTMARKED NO LATER THAN NOVEMBER 8, 2006.

SECURITIES BROKERS AND OTHER NOMINEES: PLEASE SEE INSTRUCTIONSIN §VIII BELOW.

YOU ARE HEREBY NOTIFIED, pursuant to Rule 23 of the Federal Rules of Civil Procedure, and anorder of the United States District Court for the Central District of California (the “Court”), that a settlementof the above-captioned action in the amount of $15,175,000 (the “Settlement” or the “Settlement Fund”) hasbeen reached by the parties, which Settlement is subject to approval by the Court, and which, if approved, willresult: (1) in the payment of the Settlement Fund, after certain deductions described below, to eligibleSettlement Class Members who file timely and valid Proof of Claim and Release forms and evidence arecognized loss; and (2) in the dismissal of the above referenced action (the “Litigation”) and the release ofthe Released Claims as against all Released Persons.1

YOU ARE FURTHER NOTIFIED, pursuant to an Order of the Court, dated September 8, 2006, that ahearing (the “Settlement Hearing”) will be held before the Honorable George P. Schiavelli, on November 22,2006, at 3:00 p.m., in the United States District Court for the Central District of California, located at 312 N.Spring Street, Los Angeles, CA 90012, Courtroom 7, to consider: (1) whether the Settlement described aboveshould be approved by the Court as fair, reasonable and adequate; (2) whether the Litigation should be

1 All capitalized terms are defined in §I below unless otherwise indicated.

dismissed on the merits with prejudice as set forth in the Stipulation of Settlement (the “Stipulation”) dated asof August 3, 2006, on file with the Court; (3) whether the proposed Plan of Allocation of Settlement proceedsshould be approved as fair and reasonable; (4) whether Lead Plaintiff’s Counsel’s application for fees andexpenses, including the award of reasonable costs and expenses (including lost wages directly relating to therepresentation of the Settlement Class to any representative plaintiff serving on behalf of the SettlementClass), and interest thereon, should be approved; and (5) whether the releases should be approved as fair,reasonable and adequate to the Members of the Settlement Class and the Defendants.

This Notice is not intended to be, and should not be construed as, an expression of any opinion by theCourt with respect to the truth of the allegations in the Litigation, or the merits of the claims or defensesasserted, or the fairness or adequacy of the Settlement. This Notice is merely to advise you of the pendencyand Settlement of the Litigation and of your rights in connection with the Settlement.

A. Statement of Plaintiffs’ Recovery

Pursuant to the Settlement described herein, a Settlement Fund in the amount of $15,175,000 has beenestablished. Plaintiffs estimate that there were approximately 20,601,982 million shares of Lantronix commonstock purchased and/or acquired during the Settlement Class Period, as defined in the Stipulation, which wereallegedly damaged as a result of the purported acts or omissions described below. Plaintiffs estimate that theaverage recovery per damaged share of Lantronix common stock under the Settlement will be $0.74 per sharebefore the deduction of attorneys’ fees, costs and expenses, as approved by the Court. Depending on: (1) thenumber of claims filed; (2) when the shares were purchased during the Settlement Class Period, and whetherthose shares were held at the end of the Settlement Class Period, or, if sold, when they were sold; and (3) theamounts awarded by the Court for attorneys’ fees, costs and expenses, an individual Settlement Class Membermay receive more or less than this average amount. A Settlement Class Member’s distribution from theSettlement Fund will be governed by the description set forth below.

B. Summary of Parties’ Positions and Reasons for Settlement

The Lead Plaintiff believes that the claims asserted in the Litigation have merit and that the evidencedeveloped to date supports the claims asserted. Defendants have denied and continue to deny each and all ofthe claims and contentions alleged by the Lead Plaintiff in the Litigation and do not believe any evidencesupports Lead Plaintiff’s claims and contentions. However, both the Lead Plaintiff and Defendants recognizeand acknowledge the inherent difficulties of continued proceedings necessary to see the Litigation throughtrial and possible appeals, and have determined that the Settlement set forth in the Stipulation is in the bestinterests of all parties involved.

The Lead Plaintiff and Defendants do not agree on the average amount of damages per share that wouldbe recoverable if plaintiffs were to have prevailed on each claim alleged. The issues on which the SettlingParties disagree include, but are not limited to: (1) the appropriate economic model for determining the amountby which Lantronix common stock was allegedly artificially inflated (if at all) during the Settlement ClassPeriod; (2) the amount by which Lantronix common stock was allegedly artificially inflated (if at all) duringthe Settlement Class Period; (3) the effect of various market forces influencing the trading price of Lantronixcommon stock at various times during the Settlement Class Period; (4) the extent to which external factors,such as general market conditions influenced the trading price of Lantronix common stock at various timesduring the Settlement Class Period; (5) the extent to which the various matters that plaintiffs alleged werematerially false or misleading influenced (if at all) the trading price of Lantronix common stock at varioustimes during the Settlement Class Period; (6) the extent to which the various allegedly adverse material factsthat plaintiffs alleged were omitted influenced (if at all) the trading price of Lantronix common stock atvarious times during the Settlement Class Period; and (7) whether the statements made or the facts allegedlyomitted were material or otherwise actionable under the federal securities laws.

The Lead Plaintiff believes that the Settlement is a good recovery under the circumstances and is in thebest interests of the Settlement Class. Because of the risks associated with continuing to litigate andproceeding to trial, there was a danger that plaintiffs would not have prevailed on any of their claims, in which

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case the Settlement Class would receive nothing. For example, plaintiffs faced the possibility that all or manyof the claims in this case could have been dismissed. In addition, the amount of damages recoverable wouldhave been subject to rigorous attack by Defendants. Recoverable damages are limited to losses caused byconduct actionable under applicable securities laws and, had the Litigation gone to trial, Defendants intendedto prove that all or most of the losses at issue were caused by non-actionable market, industry or generaleconomic factors.

C. Statement of Attorneys’ Fees and Costs Sought

Lead Plaintiff’s Counsel have not received any payment for prosecuting this case on behalf of the LeadPlaintiff and Members of the Settlement Class, nor have they been reimbursed for their out-of-pocketexpenses. Lead Plaintiff’s Counsel intend to apply for an award of attorneys’ fees in an amount up to 25% ofthe Settlement Fund (i.e., approximately $0.18 per share), as well as reimbursement for costs and expensesincurred in the prosecution of the Litigation of approximately $788,880.90 (i.e., approximately $0.04 pershare). Defendants take no position on the application for attorneys’ fees, costs and expenses.

D. Identification of Plaintiffs’ Lawyers

Any questions regarding the Settlement should be directed to the following counsel for the Lead Plaintiffand the Settlement Class:

Kevin J. YourmanVahn Alexander

YOURMAN ALEXANDER & PAREKH LLP3601 Aviation Boulevard

Suite 3000Manhattan Beach, CA 90266Telephone: (310) 725-6400

I. DEFINITIONS USED IN THIS NOTICE

As used in this Notice, the following terms have the meanings specified below:

“Authorized Claimant” means any Settlement Class Member whose claim for recovery has been allowedpursuant to the terms of the Stipulation.

“Claimant” means any Settlement Class Member who files a Proof of Claim in such form and manner, andwithin such time, as the Court shall prescribe.

“Claims Administrator” means Berdon Claims Administration LLC.

“Defendants” means Lantronix, Inc., Frederick G. Thiel, Steven V. Cotton, Bernhard Bruscha, Thomas W.Burton, W. Brad Freeburg, Credit Suisse Securities (USA) LLC (“Credit Suisse”) and Ernst & Young LLP(“E&Y”).

“Effective Date” means the first date by which all of the events and conditions specified in §V-8.1 of theStipulation have been met and have occurred.

“Escrow Agent” means the firm of Yourman Alexander & Parekh LLP or its successors.

“Lantronix” or the “Company” means Lantronix, Inc. and all of its predecessors, successors, parents,subsidiaries, divisions and related or affiliated entities.

“Lead Plaintiff” means John B. Lindsay.

“Lead Plaintiff’s Counsel” means counsel for the Lead Plaintiff and the Settlement Class in the Litigation:Kevin J. Yourman and Vahn Alexander, Yourman Alexander & Parekh LLP, 3601 Aviation Blvd., Suite 3000,Manhattan Beach, CA 90266.

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“Person” means an individual, corporation, partnership, limited partnership, limited liability company orpartnership, association, joint stock company, estate, legal representative, trust, unincorporated association,government or any political subdivision or agency thereof, and any business or legal entity and their spouses,heirs, predecessors, successors, representatives, or assignees.

“Related Parties” means each of Defendants’ past and present directors, managing directors, officers,employees, partners, principals, agents, distributors, customers, underwriters, issuers, insurers, co-insurers,reinsurers, controlling shareholders, attorneys, accountants, auditors, banks or investment bankers, advisors,personal or legal representatives, predecessors, successors, parent companies, subsidiaries, divisions, jointventures, assigns, spouses, heirs, associates, related or affiliated entities, any entity in which any Defendanthas a controlling interest, any members of their immediate families, and any trust of which any Defendant isthe settlor or which is for the benefit of any Defendant and/or member(s) of his family.

“Released Claims” means and includes any and all claims, actions, causes of action, allegations, rights andliabilities, including, but not limited to, claims under the federal securities laws, including the SecuritiesExchange Act of 1934 and the Securities Act of 1933, or for negligence, gross negligence, recklessness,breach of duty of care and/or breach of duty of loyalty, breach of fiduciary duty, fraud, misrepresentation,mismanagement, breach of contract, violations of any state or federal statute, rules or regulations, including“Unknown Claims,” as defined herein, that have been or could have been asserted against the ReleasedPersons in the Litigation by or on behalf of the Lead Plaintiff, named plaintiff Linda Pauwels, or anySettlement Class Member against the Released Persons which are based upon, arising out of, or related to both:(A) the purchase, acquisition and/or disposition of Lantronix common stock by any Settlement Class Memberduring the relevant time periods; and (B) the facts, transactions, events, occurrences, acts, disclosures,statements, omissions or failures to act which were or could have been alleged in the Litigation or any otherforum, based upon, relating to or arising from the facts which were or could have been alleged. However, asto Defendant Credit Suisse only, “Released Claims” does not include the claims asserted against Credit Suisseand Kevin A. McCarthy as set forth in the Consolidated Amended Class Action Complaint in In re CreditSuisse First Boston Corp. (Lantronix, Inc.) Analyst Securities Litigation, Case No. 03-CV-2467 (JES),currently pending in Federal District Court for the Southern District of New York (“Credit Suisse Carve-Out”).The Credit Suisse Carve-Out is not applicable to any other party to the Stipulation.

“Released Persons” means each and all of the Defendants and their Related Parties.

“Settlement Class” means:

A. A class consisting of all Persons and entities who purchased Lantronix, Inc. common stock fromAugust 4, 2000 through November 2, 2000, inclusive (the “Securities Act Class”), and who weredamaged thereby. Excluded from the Securities Act Class are Defendants, their officers anddirectors, members of their immediate families, and their legal representatives, heirs, successorsor assigns and any entity in which Defendants have or had a controlling interest. Also excludedfrom the Securities Act Class are those Persons who request exclusion pursuant to the Notice; and

B. A class consisting of all Persons and entities who purchased or otherwise acquired Lantronix, Inc.common stock from November 1, 2000 through May 30, 2002, inclusive (including thoseindividuals who acquired their Lantronix, Inc. common stock in exchange for shares, ADRs, oroptions in other companies which were acquired by the Company) (the “Exchange Act Class”),and who were damaged thereby. Excluded from the Exchange Act Class are Defendants, theirofficers and directors, members of their immediate families, and their legal representatives, heirs,successors or assigns and any entity in which Defendants have or had a controlling interest. Alsoexcluded from the Exchange Act Class are those Persons who request exclusion pursuant to the Notice.

“Settlement Class Member” or “Member of the Settlement Class” means a Person who falls within thedefinition of the Settlement Class as set forth above.

“Settlement Class Period” means August 4, 2000 through May 30, 2002, inclusive.

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“Settlement Hearing” means that hearing the Court schedules after notice to Lantronix’s stockholders ofthe pendency of the Litigation and of the preliminary approval of the Settlement to approve the Settlementherein and the application for fees and reimbursement of expenses submitted by Lead Plaintiff’s Counsel.

“Settling Parties” means, collectively, each of the Defendants, the Lead Plaintiff on behalf of himself andthe Members of the Settlement Class, and named plaintiff Linda Pauwels on behalf of herself and the Membersof the Settlement Class.

“Unknown Claims” means any Released Claims which the Lead Plaintiff, named plaintiff Linda Pauwelsor any Settlement Class Member does not know or suspect to exist in his, her or its favor at the time of therelease of the Released Persons which, if known by him, her or it, might have affected his, her or its settlementwith and release of the Released Persons, or might have affected his, her or its decision not to object to thisSettlement. With respect to any and all Released Claims, the Settling Parties stipulate and agree that, upon theEffective Date, the Lead Plaintiff and named plaintiff Linda Pauwels shall expressly, and each of theSettlement Class Members shall be deemed to have, and by operation of the Judgment shall have, waived andrelinquished, to the fullest extent permitted by law, the provisions, rights, and benefits of §1542 of theCalifornia Civil Code, which provides:

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THECREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR ATTHE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HERMUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THEDEBTOR.

The Lead Plaintiff and named plaintiff Linda Pauwels expressly shall have, and the Settlement ClassMembers, upon the Effective Date, shall be deemed to have, and by operation of the Judgment shall havewaived any and all provisions, rights and benefits conferred by any law of any state or territory of the UnitedStates, or principle of common law, which is similar, comparable or equivalent to §1542 of the California CivilCode. The Lead Plaintiff and named plaintiff Linda Pauwels and Settlement Class Members may hereafterdiscover facts in addition to or different from those which he, she or it now knows or believes to be true withrespect to the subject matter of the Released Claims, but the Lead Plaintiff and named plaintiff Linda Pauwelsexpressly shall have, and each Settlement Class Member, upon the Effective Date, shall be deemed to have,and by operation of the Judgment shall have, fully, finally, and forever settled and released any and allReleased Claims, known or unknown, suspected or unsuspected, contingent or non-contingent, whether or notconcealed or hidden, which now exist, or heretofore have existed upon any theory of law or equity nowexisting or coming into existence in the future, including, but not limited to, conduct which is negligent,intentional, with or without malice, or a breach of any duty, law or rule, without regard to the subsequentdiscovery or existence of such different or additional facts. The Settling Parties acknowledge that theforegoing waiver was bargained for and a key element of the Settlement of which this release is a part.

II. NATURE OF THE ACTION

This is a putative class action brought on behalf of certain purchasers of the common stock of Lantronix,Inc. (“Lantronix” or the “Company”) alleging: (A) claims under §11 and §15 of the Securities Act of 1933(“Securities Act”); and (B) claims under §10(b) and §20(a) of the Exchange Act of 1934 (“Exchange Act”).The Lead Plaintiff in this case is John B. Lindsay. The Securities Act Defendants include Lantronix, FrederickG. Thiel (“Thiel”), Steven V. Cotton (“Cotton”), Bernhard Bruscha (“Bruscha”), Thomas W. Burton(“Burton”), W. Brad Freeburg (“Freeburg”), Credit Suisse and E&Y. The Exchange Act Defendants includeLantronix, Thiel, Cotton, and Bruscha.

The Securities Act claims in the Third Amended Complaint (“TAC”) are brought on behalf of a putativeclass of persons who acquired Lantronix common stock pursuant to its August 4, 2000 initial public offering(“IPO”). These claims allege the issuance of false and misleading statements in the IPO registration statementand prospectus (collectively, the “Prospectus”). The TAC alleges that Lantronix’s Prospectus was false andmisleading because the financial results contained therein were overstated.

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The Exchange Act claims in the TAC are brought on behalf of a putative class of persons who purchasedor otherwise acquired Lantronix securities between November 1, 2000 and May 30, 2002, inclusive. Theseclaims are primarily based on allegations that certain Defendants knowingly issued false financial results forLantronix during this class period.

III. PRETRIAL PROCEEDINGS IN THE LITIGATION

A. Procedural History

On May 15, 2002, the first of several securities class action complaints was filed against Lantronix andcertain other Defendants. These complaints were filed after Lantronix announced that it had changed itsaccounting method for recognizing revenue on shipments to distributors, retroactively effective to July 1,2001, and that the Company would record a charge to its 1Q2002 financial results, miss its forecasts for2Q2002, and lower its outlook for 3Q2002 and fiscal 2002.2

On May 30, 2002, Lantronix further announced that, after conducting an internal review of the Company, itwould restate its previously issued financial reports for FY2001 and FY2002. Following that announcement,additional securities class action complaints were filed, and the previously filed complaints against Lantronix wereamended to allege that during November 1, 2000 through May 30, 2002, the restated financial periods, Lantronixand other Defendants violated certain federal securities laws.3 On August 12, 2002, the Court consolidated thevarious securities cases. On November 1, 2002, the Court appointed John B. Lindsay as Lead Plaintiff.

The First Consolidated Complaint (“FCC”) was filed on January 17, 2003. The FCC alleged that fromAugust 4, 2000, the date of Lantronix’s IPO, through May 30, 2002, the date of Lantronix’s disclosureregarding its restatement, Defendants knowingly, or with conscious recklessness, issued false and misleadingfinancial results for Lantronix, thereby violating §10(b) and §20(a) of the Exchange Act. The FCC also allegedthat false and misleading statements were contained in Lantronix’s August 4, 2000 Prospectus, including thatthe offering price was not based on stated factors set forth in the Prospectus and that the financial resultscontained in the Prospectus were false, and that Defendants therefore violated §11 and §15 of the Securities Act.

On March 3, 2003, Defendants filed various motions to dismiss the FCC. Defendant Lantronix challengedthe Securities Act claims but did not challenge the Exchange Act claims alleged against it, although it arguedthat the class period alleged in connection with the Exchange Act claims should have started at November 1,2000 (the period when Lantronix first restated its financial results) instead of August 4, 2000 (the time ofLantronix’s IPO). Certain other Defendants, including Cotton (former Chief Financial Officer) and Bruscha(former Chairman of the Board), joined in Lantronix’s motion, and likewise did not challenge the ExchangeAct claims but did challenge the Securities Act claims brought against them. Thomas W. Burton and W. BradFreeburg (Lantronix board members), as well as Defendant Credit Suisse (underwriter for Lantronix’s IPO),were named as Defendants as to the Securities Act claims only, and challenged those claims.4 DefendantsThiel (former CEO) and E&Y (the outside auditor), were named in both the Securities Act and Exchange Actclaims, and challenged all of the claims asserted against them.

On December 31, 2003, the Court issued an Order concerning Defendants’ motions to dismiss. The Courtheld that the FCC adequately alleged §10(b) violations against Lantronix, Thiel, Cotton and Bruscha for theperiod from November 1, 2000 through May 30, 2002, and §20(a) violations against Thiel, Cotton and Bruscha

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2 Lantronix is not on a calendar fiscal year. Each financial quarter is as follows: 1Q (July, August, September); 2Q (October,November, December); 3Q (January, February, March); and 4Q (April, May, June).3 Several state court actions were also filed concerning the foregoing: (a) Ivy v. Bruscha, et al., Case No. 02CC00209, a deriva-tive lawsuit alleging breach of fiduciary duty against certain officers and directors of Lantronix, was filed on July 26, 2002, in OrangeCounty Superior Court; (b) Goldstein v. Lantronix, Inc., et al., Case No. 02CC15997, filed on October 17, 2002, in Orange CountySuperior Court, which was brought by certain principals of Synergetic Micro Systems, Inc., who sold their company to Lantronixprimarily for stock, alleging fraud, negligent misrepresentation, breach of warranties and breach of contract; and (c) Dunstan v.Lantronix, Inc., et al., Case No. 0208-08158, filed on August 14, 2002, in Multnomah Superior Court, brought by the principals ofUnited States Software Corporation who alleged that when they sold their company to Lantronix in part for stock, they were defrauded.4 Credit Suisse acquired Donaldson, Lufkin & Jenrette (“DLJ”), the Lead Underwriter for the IPO, after the IPO was concluded.

for the same time period. The Court granted E&Y’s motion to dismiss the §10(b) claim against it, as well asall claims against E&Y under the Exchange Act for any period prior to November 1, 2000. The Court furtherdismissed the §11 and §15 claims under the Securities Act against all Defendants. The Court ordered the filingof an amended consolidated complaint.

After certain motions practice, on February 6, 2004, plaintiffs’ Second Amended Complaint (“SAC”) wasfiled with the Court. The SAC includes claims under the Securities Act and claims under the Exchange Act.The Securities Act claims in the SAC included all of the allegations previously contained in the FCC and alsoincluded new facts from former Lantronix employees. The Exchange Act claims alleged in the SAC alsoincluded new information from former Lantronix employees. Further, the Exchange Act claims included newallegations concerning E&Y. As ordered by the Court, the Exchange Act claims in the SAC also differed fromthe FCC in that the allegations against Defendants Lantronix, Thiel, Cotton, Bruscha and E&Y were for ashorter class period of November 1, 2000 through May 30, 2002.

Defendants challenged certain allegations in the SAC through motions to dismiss. Ultimately, the Courtdenied in part and granted in part Defendants’ motions on August 19, 2004, which included dismissal of the§10(b) claims against E&Y with prejudice. As a result, plaintiffs conformed their allegations in the SAC tocomply with the Court’s Order which resulted in the filing of the TAC on September 13, 2004. Defendantsanswered the TAC on October 18, 2004.

On November 15, 2004, plaintiffs filed their Motion for Certification of Plaintiff Classes (“Motion forClass Certification”). On January 14, 2005, certain Defendants filed their opposition to the Motion for ClassCertification. A reply in further support of the Motion for Class Certification was filed on February 15, 2005.A hearing was held concerning the motion on June 2, 2005, and the class certification motion has been pendingsince that time.

On April 4, 2005, the parties filed a Joint Stipulation re Defendant Lantronix, Inc.’s Motion to CompelPlaintiffs’ Further Response to Interrogatory No. 5 of Defendant Lantronix’s First Set of Interrogatories (the“Motion to Compel”). Plaintiffs filed a Supplemental Memorandum in opposition to the Motion to Compel onApril 12, 2005, as well as an Objection to the joinder of Defendant Thiel to the motion on April 20, 2005. OnMay 24, 2005, the Magistrate Judge issued an Order granting the Motion to Compel.

On May 17, 2005, plaintiffs and certain defendants filed a Joint Stipulation for Motion for Entry ofProtective Order. The Court granted the motion on May 20, 2005.

On June 8, 2005, plaintiffs filed their Motion for Review and Reconsideration of the Magistrate Judge’sOrder granting the Motion to Compel (the “Motion for Reconsideration”). Defendants filed an opposition tothe Motion for Reconsideration on June 27, 2005. On July 1, 2005, plaintiffs filed their reply in further supportof the Motion for Reconsideration. The motion is currently pending before the Court.

B. Discovery, Investigation and Research

Prior to and during the Litigation, Lead Plaintiff’s Counsel conducted an extensive investigation, as wellas informal discovery, concerning this matter. These efforts included, but were not limited to: (1) a review andanalysis of Lantronix’s public disclosures (to the Securities and Exchange Commission (“SEC”) andotherwise); (2) an analysis of Lantronix’s financial statements; (3) hiring an investigator to locate formeremployees of the Company and other witnesses who would have knowledge concerning the allegations in thepleadings; (4) consulting with damages experts; (5) consulting with accounting experts; and (6) research of theapplicable law with respect to the claims asserted in the pleadings and Defendants’ potential defenses thereto.

The parties also engaged in formal discovery subsequent to the filing of the TAC. On October 21, 2004,Lantronix served its First Request for Production of Documents and First Set of Interrogatories Related toClass Certification. Lead Plaintiff, and proposed class representative Linda Pauwels, responded and objectedto the Company’s discovery on or about November 12 and 22, 2004, respectively. Thereafter, Mr. Lindsay hadhis deposition taken by Defendants on November 19, 2004, and Ms. Pauwels had her deposition taken onDecember 16 and 20, 2004.

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The parties filed their disclosures pursuant to Rule 26 of the Federal Rules of Civil Procedure on or aboutDecember 10, 2004. On December 21, 2004, plaintiffs served their First Set of Requests for Production ofDocuments on Defendants. In the following months, plaintiffs also served numerous subpoenas for theproduction of documents on non-parties which included Agilent Technologies, Inc., Arrow Electronics, Inc.,Ingram Micro, Inc., KMJ Communications, Inc., Tech Data Corporation, and Zebra Technologies Corporation.

In response to the discovery requests served by plaintiffs, Defendant Lantronix produced over 300,000electronic files. In addition, over 140 boxes of documents were produced for plaintiffs’ review by Defendantsand certain non-parties.

C. Settlement Negotiations

The Settlement proposed in the Stipulation was achieved after intense arm’s-length negotiations, whichincluded a mediation between the parties, conducted by the Honorable Nicholas H. Politan (Ret.), on October 3,2005, in New York, New York. Moreover, negotiations continued between the parties, with the assistance ofJudge Politan, in the months following the mediation. Throughout the negotiation process, Lead Plaintiff’sCounsel and counsel for Defendants presented, among other things, their respective views regarding the meritsof the Litigation including the defenses, the claims and the damages sought in the Litigation.

IV. CLAIMS OF THE LEAD PLAINTIFF AND BENEFITS OF SETTLEMENT

The Lead Plaintiff believes that the claims asserted in the Litigation have merit and that the evidencedeveloped to date supports the claims asserted. However, the Lead Plaintiff and Lead Plaintiff’s Counselrecognize and acknowledge the expense and length of continued proceedings necessary to prosecute theLitigation against Defendants through trial and through appeals. The Lead Plaintiff and Lead Plaintiff’sCounsel also have taken into account the uncertain outcome and the risk of any litigation, especially incomplex actions such as this Litigation, as well as the difficulties and delays inherent in such litigation. TheLead Plaintiff and Lead Plaintiff’s Counsel are mindful of the inherent problems of proof under, and possibledefenses to, the federal securities law violations and other claims asserted in the complaints, including thedefenses alleged by Defendants in the pleadings filed in the Litigation. The Lead Plaintiff and Lead Plaintiff’sCounsel believe that the Settlement set forth in the Stipulation confers substantial benefits upon the SettlementClass and each of the Settlement Class Members. Based on their evaluation, the Lead Plaintiff and LeadPlaintiff’s Counsel have determined that the Settlement set forth in the Stipulation is in the best interests ofthe Lead Plaintiff and the Settlement Class and each of the Settlement Class Members.

V. DEFENDANTS’ STATEMENT AND DENIALS OF WRONGDOING AND LIABILITY

Defendants have expressly denied, and continue to deny, each and all of the claims and contentions allegedby the Lead Plaintiff on behalf of the Settlement Class in the Litigation. Defendants expressly have denied,and continue to deny, all charges of wrongdoing or liability against them arising out of any of the conduct,statements, acts or omissions alleged, or that could have been alleged, in the Litigation. Defendants also haveexpressly denied, and continue to deny, inter alia, the allegations that the Lead Plaintiff and the SettlementClass have suffered damage, that the price of Lantronix common stock was artificially inflated by reasons ofalleged misrepresentations, non-disclosures or otherwise, and that the Lead Plaintiff or the Settlement Classwere harmed by the conduct alleged in the Complaint. Defendants believe that the claims asserted in theLitigation do not have merit and that the evidence developed to date does not support any of the claimsasserted. This Settlement shall in no event be constituted or deemed to be evidence of or an admission orconcession on the part of any Defendant with respect to any claim or any fault or liability or wrongdoing ordamage whatsoever, or any infirmity in the contentions and defenses that the Defendants have or could have asserted.

Nonetheless, Defendants have concluded that it is desirable that the Litigation be fully and finally settledin the manner and upon the terms and conditions set forth in the Stipulation in order to limit further expense,inconvenience, distraction and diversion of personnel with respect to matters at issue in the Litigation.

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Defendants also have taken into account the uncertainty and risks inherent in any litigation, especially incomplex cases like this Litigation. Defendants have, therefore, determined that it is desirable and beneficial tothem that the Litigation be settled in the manner and upon the terms and conditions set forth in the Stipulation.

VI. THE PROPOSED SETTLEMENT

A Settlement has been reached in the Litigation between the Lead Plaintiff, on behalf of himself and theMembers of the Settlement Class, named plaintiff Linda Pauwels, on behalf of herself and the SettlementClass, and Defendants, which is embodied in the Stipulation on file with the Court. The Lead Plaintiff andLead Plaintiff’s Counsel, on the basis of a thorough investigation of the facts and the law relating to the acts,events, and conduct complained of in the Litigation, among other things, have concluded that the Settlementis fair to, and in the best interests of, the Members of the Settlement Class. While Defendants deny all chargesof wrongdoing and do not concede liability, they have agreed to settle the Litigation on the basis proposed inorder to put to rest all further controversy and to limit further expense, inconvenience, distraction anddiversion of personnel with respect to matters at issue in the Litigation.

The following description of the Settlement of the Litigation is only a summary, and reference is made tothe text of the Stipulation, on file with the Court, for a full statement of its provisions. The Stipulation, as wellas other related Settlement documents, may also be viewed and printed from Lead Plaintiff’s Counsel’s websiteat www.yaplaw.com, as well as from the Claims Administrator’s website at www.berdonllp.com/claims.

A. The total value of the Settlement Fund will be $15,175,000, which includes a cash component of$14,325,000 from Defendants, as well as a cash and/or securities component from the Company totaling$850,000, which shall be determined according to the terms of the Stipulation. Of this amount, $2,000,000 isallocated to the Securities Act Class (the “Securities Act Fund”) and $13,175,000 is allocated to the ExchangeAct Class (the “Exchange Act Fund”) (collectively the “Settlement Fund”). The Settlement will be non-recapture, i.e., it is not a “claims-made” settlement. Once the Settlement becomes Final, Defendants and theirinsurers shall not recoup any of the money paid to settle the Litigation under any circumstances.

B. Upon approval of the Settlement by the Court, and when the Judgment has become final and all otherconditions to the Settlement are satisfied, including those set forth in §V-8.1 of the Stipulation, the SettlementFund shall be distributed as follows:

1. To pay all the costs and expenses reasonably and actually incurred in connection with providingnotice to the Members of the Settlement Class (which are to be allocated proportionately between theSecurities Act Fund and the Exchange Act Fund), locating Settlement Class Members, soliciting SettlementClass claims, assisting with the filing of claims, administering and distributing the Settlement Fund to theSettlement Class, processing Proofs of Claim and Release and paying escrow fees and costs, if any;

2. To pay plaintiffs’ counsel’s fees, expenses and costs (including the award of reasonable costs andexpenses, including lost wages, directly relating to the representation of the Settlement Class to anyrepresentative plaintiff serving on behalf of the Settlement Class) with interest thereon (the “Fee and ExpenseAward”) to the extent allowed by the Court;

3. To pay the taxes and tax expenses owed by the Settlement Fund; and

4. To pay to Settlement Class Members the remainder of the Settlement Fund, as described in thePlan of Allocation below.

C. Plan of Allocation — Subject to the approval and further Order(s) of the Court as may be necessary,the balance of the Settlement Fund (the “Net Settlement Fund”) shall be distributed to Authorized Claimantspursuant to the following Plan of Allocation:

1. Each Person claiming to be an Authorized Claimant shall be required to timely submit a separateProof of Claim (that shall include a general release of all Released Claims, including Unknown Claims, againstthe Released Persons) in the form set forth in the Proof of Claim and Release accompanying this Notice,

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signed under penalty of perjury and supported by proof of all sales and purchases or acquisitions of Lantronixcommon stock during the Settlement Class Period.

2. All Proof of Claim and Release forms must be sent to the Claims Administrator and postmarkedon or before January 6, 2007. Unless otherwise ordered by this Court, any Settlement Class Member whofails to submit a Proof of Claim and Release within that period, or such other period as may be ordered by theCourt, shall be forever barred from receiving any payments pursuant to the Stipulation, but will, in all otherrespects, be subject to the provisions of the Stipulation and the final Judgment entered by the Court.

3. To the extent there are sufficient funds in the Net Securities Act Fund, each Authorized Claimantwill receive an amount equal to the Authorized Claimant’s claim. In the event that the claims of AuthorizedClaimants of the Net Securities Act Fund have been fully compensated, and funds still remain, these fundsshall be included in the Net Exchange Act Fund. If, however, the amount in the Net Securities Act Fund is notsufficient to permit payment of the total claim of each Authorized Claimant, then each Authorized Claimantshall be paid the percentage that each Authorized Claimant’s claim bears to the total of the claims of allAuthorized Claimants. A claim will be computed as follows: the claim shall be equal to the amount paid forshares of Lantronix common stock purchased or acquired by Authorized Claimants of the Securities Act Class,less: (a) the amount realized from the sale of any such shares from August 4, 2000 through November 2, 2000,inclusive; or (b) the number of any such shares held at the close of business on November 2, 2000, multipliedby $1.02. YOUR CLAIM WILL NOT BE VALID IF YOU DID NOT SUFFER A LOSS.

4. To the extent there are sufficient funds in the Net Exchange Act Fund, each Authorized Claimantwill receive an amount equal to the Authorized Claimant’s claim. If, however, the amount in the Net ExchangeAct Fund is not sufficient to permit payment of the total claim of each Authorized Claimant, then eachAuthorized Claimant shall be paid the percentage that each Authorized Claimant’s claim bears to the total ofthe claims of all Authorized Claimants. A claim will be computed as follows: the claim shall be equal to theamount paid for shares of Lantronix common stock purchased or acquired by Authorized Claimants of theExchange Act Class, less: (a) the amount realized from the sale of any such shares from November 1, 2000through May 30, 2002, inclusive; or (b) the number of any such shares held at the close of business on May 30,2002, multiplied by $1.02. YOUR CLAIM WILL NOT BE VALID IF YOU DID NOT SUFFER A LOSS.

a. The date of purchase, acquisition or sale is the “contract” or “trade” date and not the“settlement” date.

b. All profits will be subtracted from all losses to determine the net recognized loss of eachSettlement Class Member.

c. In processing claims, the first-in, first-out basis (“FIFO”) will be applied to purchases,acquisitions and sales. Sales will be matched in chronological order, by trade date, first against the commonstock held as of the last day before the relevant class period begins and then against the purchases during thattime period.

d. The date of covering a “short sale” is deemed to be the date of purchase of Lantronix commonstock. The date of a “short sale” is deemed to be the date of sale of Lantronix common stock.

e. Where common stock was purchased/sold by reason of having exercised an option, the optionpremium should be incorporated into the price accordingly.

f. If an Authorized Claimant’s trading activity during the Settlement Class Period exceeds 50transactions, he/she/it must provide, in an electronic file, all purchase and sales information required in theProof of Claim and Release. For a copy of instructions and parameters concerning such a submission, contactthe Claims Administrator by phone: (800) 766-3330; by fax (516) 931-0810 or via the website:www.berdonllp.com/claims.

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g. No cash payment will be made on a claim where the payable loss is $10.00 or less, but theAuthorized Claimant will otherwise be bound by the final Judgment of the Court.

h. Brokerage commissions and transfer taxes paid by you in connection with your purchase andsale of Lantronix common stock should be included in the “total purchase price” and net of the “totalproceeds.”

i. The Court has reserved jurisdiction to allow, disallow or adjust the claim of any SettlementClass Member on equitable grounds.

5. Although the Net Settlement Fund is being allocated among the Settlement Class Members basedon the formula stated above (subject to Court approval), it should not be assumed that an AuthorizedClaimant’s claim is equal to the amount of damages, if any, which could have been recovered had thisLitigation been fully tried instead of settled. The amount of damages which the Lead Plaintiff could prove, ifany, is a matter of serious dispute, and the Settlement’s use of the formula set forth above does not constitutea concession, finding or admission that any damages could be proven or that provable damages, if any, wouldbe commensurate with a claim. No determination has been made by the Court as to whether any SettlementClass Member suffered any damages, or as to the proper measure of any damages. The determination ofdamages, like the determination of liability, is a complicated and uncertain process, typically involvingconflicting expert opinions. During the course of the Litigation, Defendants, in addition to denying anyliability, denied that the Settlement Class Members suffered any legally compensable harm. The Settlementavoids the risks to the Settlement Class Members that liability or damages might not have been proven at trial.

6. Payment pursuant to the Plan of Allocation set forth herein shall be deemed conclusive against allAuthorized Claimants. No Person shall have any claim against any plaintiffs’ counsel, or any ClaimsAdministrator or other agent designated by Lead Plaintiff’s Counsel, or against Released Persons orDefendants’ counsel based on distributions made substantially in accordance with the Stipulation and theSettlement contained therein, the Plan of Allocation, or further Orders of the Court. The Released Persons shallhave no responsibility for, or any liability whatsoever with respect to, any payment, the timing of any payment,or the failure of any payment to be made, to Lead Plaintiff’s Counsel from the Settlement Fund, nor shall theReleased Persons have any responsibility for, or any liability whatsoever, with respect to the refunding of orfailure of Lead Plaintiff’s Counsel to refund to the Settlement Fund any money Lead Plaintiff’s Counsel maybe ordered to refund. The Released Persons shall have no responsibility for, or any liability whatsoever withrespect to, the allocation of the Settlement Fund among Lead Plaintiff’s Counsel and any other Person whomay assert some claim thereto, or for any Fee and Expense Awards that the Court may make in this Litigation.

7. All Settlement Class Members who fail to complete and file a valid and timely Proof of Claim andRelease shall be barred from participating in distributions from the Net Settlement Fund, unless otherwiseordered by the Court, but otherwise shall be bound by all of the terms of the Stipulation, including the termsof any Judgment entered and the releases given.

VII. DISMISSAL AND RELEASES

If the Settlement is approved by the Court, the Court will enter a Judgment which will:

A. Dismiss the Litigation in its entirety as against Defendants with prejudice and without costs to anyparty as against any other party;

B. Adjudge that the Lead Plaintiff, and named plaintiff Linda Pauwels and each Settlement ClassMember, except those who both timely and validly request exclusion in accordance with the proceduresdetailed herein, shall be deemed conclusively to have fully, finally and forever settled any and all ReleasedClaims and Unknown Claims (described above and in the Stipulation) against the Released Persons.Notwithstanding that the Lead Plaintiff, or named plaintiff Linda Pauwels or one or more Settlement ClassMembers, may hereafter discover facts in addition to, or different from, those which the Lead Plaintiff ornamed plaintiff Linda Pauwels or Settlement Class Members now know, or believe to be true, with respect to

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the Litigation and Released Claims or to the subject matter of the Litigation or Released Claims, which, ifknown, might have affected his, her, or its settlement with and release of the Released Persons, or might haveaffected his, her or its decision not to object to the Settlement, the Lead Plaintiff and named plaintiff LindaPauwels and each of the Settlement Class Members shall be deemed, upon the Effective Date of theSettlement, to have fully, finally and forever settled and released as against any of the Released Persons, andall Released Claims and Unknown Claims, that have been, or might have been, asserted by the Lead Plaintiffor named plaintiff Linda Pauwels or Settlement Class Members, or any of them, against Defendants, or any ofthem, based upon or related to the purchase or acquisition of Lantronix common stock by the Lead Plaintiff ornamed plaintiff Linda Pauwels or Settlement Class Members during the Settlement Class Period, and the facts,transactions, events, occurrences, acts or omissions which were, or could have been, alleged in the Litigation;

C. Bar and permanently enjoin the Lead Plaintiff and named plaintiff Linda Pauwels and theSettlement Class Members from prosecuting the Released Claims (including Unknown Claims) against theReleased Persons; and

D. Reserve jurisdiction, without affecting the finality of the Judgment entered, over:

1. Implementation and enforcement of this Settlement and any award or distribution of the NetSettlement Fund, including interest earned or accrued thereon;

2. Disposition of the Settlement Fund and the Net Settlement Fund;

3. Hearing and determining Lead Plaintiff’s Counsel’s applications for attorneys’ fees, costs,interest, and expenses, including fees and costs of experts and/or consultants and the award of reasonable costsand expenses (including lost wages) directly relating to the representation of the Settlement Class to anyrepresentative plaintiff serving on behalf of the Settlement Class;

4. Enforcing and administering the Stipulation, including any releases executed in connectiontherewith; and

5. Other matters related or ancillary to any of the foregoing.

VIII. SPECIAL NOTICE TO BANKS, BROKERS, AND OTHER NOMINEES

A. To all banks, brokerage firms, institutions, and other Persons that are nominees who purchased orotherwise acquired the common stock of Lantronix for the beneficial interest of other Persons during theSettlement Class Period defined herein, within ten (10) days after you receive this Notice and theaccompanying Proof of Claim and Release, you must either: (1) provide the Claims Administrator with thenames and addresses of such beneficial owners, preferably in an MS Excel data table setting forth (a) title/registration, (b) street address, (c) city/state/zip; electronically, in MS Word or WordPerfect files(label size Avery® # 5162); or on computer-generated mailing labels, or (2) send a copy of this Notice andthe Proof of Claim form to all beneficial owners by first-class mail and provide the Claims Administrator withwritten confirmation of having done so. Additional copies of the Notice may be obtained by contacting theClaims Administrator at:

Lantronix Securities Litigationc/o Berdon Claims Administration LLC

P.O. Box 9014Jericho, NY 11753-8914

Telephone: (800) 766-3330Fax: (516) 931-0810

Website: www.berdonllp.com/claims

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B. You are entitled to the reimbursement of any reasonable expenses actually incurred only in connectionwith the research of records and: (1) the generating of labels or electronic media; or (2) the mailing of thisNotice, upon submission to the Claims Administrator of a written request together with all appropriatesupporting documentation.

IX. APPLICATION FOR ATTORNEYS’ FEES AND COSTS

Lead Plaintiff’s Counsel will apply to the Court, at the conclusion of the Settlement Hearing describedbelow, for an aggregate award of counsel fees of up to 25% of the Settlement Fund, plus litigation expensesof approximately $788,880.90, together with interest earned on said sums at the same rate, and for the sameperiods, as earned by the Settlement Fund. Such awards as may be granted by the Court will be paid from theSettlement Fund, and Lead Plaintiff’s Counsel have reserved the right to make additional applications for feesand expenses incurred relating to the Settlement.

The fees sought by Lead Plaintiff’s Counsel are customary in actions brought on a contingency fee basis,and Lead Plaintiff’s Counsel believe they are justified by the time and effort already invested in theprosecution of the Litigation and the result achieved, as well as the time and effort that will be required of LeadPlaintiff’s Counsel prior to final approval of this Settlement.

X. CONDITIONS OF SETTLEMENT

The Settlement Hearing will be held on November 22, 2006, at 3:00 p.m., before the Honorable George P.Schiavelli, in the United States District Court for the Central District of California, located at 312 N. SpringStreet, Los Angeles, CA 90012, Courtroom 7. The Settlement is conditioned upon the occurrence of a numberof events, any of which may be waived by the mutual agreement of the Settling Parties. Those events include,among other things: (A) entry of the final Judgment by the Court, as provided for in the Stipulation; and (B) expiration of the time to appeal from the final Judgment. If, for any reason, any one of the conditionsdescribed in §V-8.1 of the Stipulation is not met, the Stipulation and the Settlement it proposes might beterminated and, if terminated, will become null and void, and the Settling Parties to the Stipulation will berestored to their respective positions as of August 3, 2006. Likewise, if Defendants exercise their right towithdraw from the Settlement in accordance with the terms of the Stipulation, or if the Settlement is notconsummated for any other reason, the Stipulation will become null and void, and the parties will resume theirformer positions in this action.

XI. THE RIGHTS OF SETTLEMENT CLASS MEMBERS

A. If you are a Member of the Settlement Class, you may receive the benefit of, and you will be boundby, the terms of the Settlement described in §VI of this Notice, upon approval of the Settlement by the Court.

B. If you are eligible to be a Member of the Settlement Class (that is, if you purchased or otherwiseacquired Lantronix common stock during the Settlement Class Period), you have the following options:

1. You may file a Proof of Claim and Release. If you choose this option: (a) you will remain aMember of the Settlement Class; (b) you will share in the proceeds of the Settlement, if your claim is timelyand validly filed and if the Settlement is finally approved by the Court; and (c) you will be bound by theJudgment and releases.

2. If you do not wish to be included in the Settlement Class, and you do not wish to participate in theSettlement described in this Notice, you may request to be excluded. To do so, you must state in writing thatyou wish to be excluded from the Settlement. Your written request for exclusion must also set forth the nameof this Litigation, In re Lantronix Securities Litigation, Case No. CV 02-3899 GPS (JTLx), your name, addressand telephone number, and the name, address and telephone number of the record owner of Lantronix commonstock, if different from your own as the beneficial owner. The exclusion request must also state the number ofshares of Lantronix common stock you purchased or otherwise acquired during the Settlement Class Period,

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and the number of shares of Lantronix common stock you sold during the Settlement Class Period, along withthe dates of your purchase(s) and sale(s). The written exclusion request must be sent to the ClaimsAdministrator at:



To be considered valid, the exclusion request must be postmarked no later than November 8, 2006. NOREQUEST FOR EXCLUSION WILL BE CONSIDERED VALID UNLESS ALL OF THEINFORMATION DESCRIBED ABOVE IS INCLUDED IN THE REQUEST.

3. If you validly request exclusion from the Settlement Class: (a) you will be excluded from theSettlement Class; (b) you will not share in the proceeds of the Settlement described herein; (c) you will not bebound by any Judgment entered in the Litigation; and (d) you will not be precluded from otherwise prosecutingan individual claim at your own expense, if timely, against Defendants based on the matters complained of inthe Litigation.

4. If you do not request to be excluded from the Settlement Class, you will be bound by any and alldeterminations or judgments in the Litigation concerning the Settlement entered or approved by the Court,whether favorable or unfavorable to the Settlement Class Members, including, without limitation, theJudgment described above.

5. If you do not request to be excluded from the Settlement Class, you may object to the Settlement,the Plan of Allocation and/or the application of Lead Plaintiff’s Counsel for an award of attorneys’ fees andreimbursement of expenses in the manner set forth below. The filing of a Proof of Claim and Release form bya Settlement Class Member does not preclude a Settlement Class Member from objecting to the Settlement,the Plan of Allocation, or the fees and expenses applied for by Lead Plaintiff’s Counsel. However, if yourobjection is rejected, you will be bound by the Settlement and the Judgment just as if you had not objected.

6. You may do nothing at all. If you choose this option, you will not share in the proceeds of theSettlement, but you will be bound by the Judgment just as if you had filed a Proof of Claim and Release form.

7. If you are a Member of the Settlement Class, you may, but are not required to, enter an appearancein writing through counsel of your own choosing at your own expense. If you do not do so, you will berepresented by counsel for the Lead Plaintiff.

XII. THE RIGHT TO BE HEARD AT THE SETTLEMENT HEARING

A. At the Settlement Hearing, the Court will consider: (1) whether the Settlement is fair, reasonable andadequate; (2) whether it should be approved by the Court; (3) whether Judgment should be entered dismissingthe Litigation on the merits and with prejudice as against Defendants; (4) whether the proposed Plan ofAllocation is fair and reasonable; and (5) whether Lead Plaintiff’s Counsel’s application for attorneys’ feesand reimbursement of costs and expenses should be approved. However, any objections or oppositions mustbe made in advance, in writing, setting forth each objection and the basis therefore, as set forth below. TheSettlement Hearing may be continued or adjourned, from time to time and without further notice to theSettlement Class, by Order of the Court.

B. Any Member of the Settlement Class who has not requested exclusion may appear at the SettlementHearing to show cause why the Settlement should or should not be approved and the Litigation should orshould not be dismissed on the merits with prejudice, and/or to present any opposition to the Plan of Allocationor the application of Lead Plaintiff’s Counsel for fees and expenses. However, no such Person shall be heard,unless his, her, or its objection or statement of support is made in writing and is filed, together with copies ofall other papers and briefs, and submitted by him, her, or it with the Court no later than November 8, 2006 andshowing due proof of service on:

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Kevin J. Yourman Keith E. EggletonVahn Alexander Daniel W. TurbowYOURMAN ALEXANDER WILSON SONSINI GOODRICH

& PAREKH LLP & ROSATI3601 Aviation Blvd. Professional CorporationSuite 3000 650 Page Mill RoadManhattan Beach, CA 90266 Palo Alto, CA 94304-1050Telephone: (310) 725-6400 Telephone: (650) 493-9300Facsimile: (310) 725-6420 Facsimile: (610) 565-5100

Counsel for Lead Plaintiff Counsel for Defendants Lantronix, Inc.,John Lindsay Thomas W. Burton, and W. Brad Freeburg

Any Member of the Settlement Class who does not make his, her or its objection or statement of supportin the manner provided shall be deemed to have waived all objections and opposition to the fairness,reasonableness and adequacy of the Settlement, the Plan of Allocation, or to the request of Lead Plaintiff’sCounsel for attorneys’ fees and expenses.

XIII. EXAMINATION OF PAPERS AND INQUIRIES

For a more detailed statement of the matters involved in the Litigation and the Settlement thereof,reference is made to the pleadings, to the Stipulation and to other papers filed in the Litigation, which may be inspected at the Office of the Clerk of the United States District Court, located at 312 N. Spring Street, Los Angeles, CA 90012, during the business hours of each business day. A copy of the Stipulation, and otherrelated Settlement papers, such as this Notice and the Proof of Claim form, may also be viewed at and printedfrom Lead Plaintiff’s Counsel’s website at www.yaplaw.com, as well as from the Claims Administrator’swebsite, below.

Inquiries regarding the Litigation or this Notice should be made to the Claims Administrator at:



Telephone: (800) 766-3330Fax: (516) 931-0810


However, communications which convey confidential information should be sent directly to LeadPlaintiff’s Counsel, or to your own attorney.

DO NOT CONTACT THE COURT OR THE CLERK’S OFFICE REGARDING THIS NOTICE.

Dated: September 22, 2006 BY ORDER OFTHE UNITED STATES DISTRICT COURTFOR THE CENTRAL DISTRICT OF CALIFORNIA

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WESTERN DIVISION

IN RE LANTRONIX, INC. SECURITIESLITIGATION CASE NO.: CV 02-3899 GPS (JTLx)

CLASS ACTIONTHIS DOCUMENT RELATES TO:

ALL ACTIONS

PROOF OF CLAIM AND RELEASE

DEADLINE FOR SUBMISSION: JANUARY 6, 2007.

IF YOU PURCHASED OR ACQUIRED LANTRONIX (“LANTRONIX” OR THE“COMPANY”) COMMON STOCK DURING THE SETTLEMENT CLASS PERIOD, YOUMAY BE A SETTLEMENT CLASS MEMBER, AND YOU MAY BE ENTITLED TOSETTLEMENT PROCEEDS. (EXCLUDED FROM THE SETTLEMENT CLASS AREDEFENDANTS, THE OFFICERS AND DIRECTORS OF LANTRONIX AND/OR ANY OFITS SUBSIDIARIES, MEMBERS OF THEIR IMMEDIATE FAMILIES AND THEIRLEGAL REPRESENTATIVES, HEIRS, SUCCESSORS, OR ASSIGNS, AND ANYENTITY IN WHICH ANY DEFENDANT HAS, OR HAD, A MAJORITY EQUITYINTEREST.)

IF YOU ARE A SETTLEMENT CLASS MEMBER, IN ORDER TO BE ELIGIBLEFOR ANY SETTLEMENT BENEFITS, YOU MUST COMPLETE AND SIGN THISPROOF OF CLAIM AND RELEASE AND MAIL IT BY PRE-PAID, FIRST CLASSMAIL, POSTMARKED NO LATER THAN JANUARY 6, 2007 TO THE CLAIMSADMINISTRATOR AT:



YOUR FAILURE TO SUBMIT YOUR CLAIM POSTMARKED BY JANUARY 6, 2007MAY SUBJECT YOUR CLAIM TO REJECTION AND PRECLUDE YOUR RECEIVINGANY MONEY IN CONNECTION WITH THE SETTLEMENT OF THIS LITIGATION. DONOT MAIL OR DELIVER YOUR CLAIM TO THE COURT OR TO ANY OF THEPARTIES OR THEIR COUNSEL AS ANY SUCH CLAIM WILL BE DEEMED NOT TOHAVE BEEN SUBMITTED. SUBMIT YOUR CLAIM ONLY TO THE CLAIMSADMINISTRATOR. YOU WILL BEAR ALL RISKS OF THE DELAY OR NON-DELIVERY OF YOUR CLAIM.

Submission of this Proof of Claim and Release, however, does not assure that you will share in theproceeds of Settlement in the Litigation.

If you are a Settlement Class Member, and you do not properly and timely request exclusion in connectionwith the Settlement, you will be bound by the terms of any judgment entered in the Litigation, WHETHEROR NOT YOU SUBMIT A PROOF OF CLAIM AND RELEASE.

If you are NOT a Settlement Class Member (or legal representative of a Settlement Class Member), DONOT submit a Proof of Claim and Release.

All terms herein are as defined in the Notice of Pendency and the Stipulation of Settlement on file withthe Court, which may also be viewed on Lead Plaintiff’s Counsel’s website, www.yaplaw.com and on theClaims Administrator’s website, www.berdonllp.com/claims.

A. CLAIM FORM INSTRUCTIONS

1. If you purchased or acquired Lantronix common stock and held the certificate(s) in your name, youare the beneficial owner as well as the record owner. If, however, you purchased or acquired Lantronixcommon stock and the certificate(s) were registered in the name of a third party, such as a nominee orbrokerage firm, you are the beneficial owner and the third party is the record owner.

2. Use Section B of this form entitled “Claimant Information” to identify each beneficial owner and, ifdifferent, each record owner, of Lantronix common stock which form the basis of this claim.

THIS CLAIM MUST BE FILED BY THE ACTUAL BENEFICIAL OWNER OR OWNERS,OR THE LEGAL REPRESENTATIVE OF SUCH OWNER OR OWNERS, OF THELANTRONIX COMMON STOCK UPON WHICH THIS CLAIM IS BASED.

3. All joint owners must sign this claim. Executors, administrators, guardians, conservators and trusteesmust complete and sign this claim on behalf of Persons represented by them, documentation establishing theirauthority must accompany this claim, and their titles or capacities must be stated.

4. The Social Security or Tax ID number and telephone number of the beneficial owner may be used inverifying the claim. Failure to provide the foregoing information could delay verification of your claim orresult in rejection of your claim.

5. Use Section C, ¶¶1, 2, 3, and 4 of this form entitled “Schedule of Transactions in Lantronix CommonStock” to supply all required details of your transaction(s) in Lantronix common stock. If you need morespace, attach separate, numbered sheets giving all of the required information in substantially the same form.Print your name and Social Security or Tax ID number at the top of each additional sheet.

6. On the schedules, provide all of the requested information with respect to all of your purchases andacquisitions and all of your sales of Lantronix common stock which took place during the Settlement ClassPeriod, whether such transactions resulted in a profit or a loss. Failure to report all such transactions may resultin the rejection of your claim.

7. List each transaction in the Settlement Class Period separately and in chronological order, by tradedate, beginning with the earliest. You must accurately provide the month, day and year of each transaction you list.

8. The date of purchase, acquisition or sale is the “contract” or “trade” date and not the “settlement” date.

9. All profits will be subtracted from all losses to determine the net recognized loss of each SettlementClass Member.

10. In processing claims, the first-in, first-out basis (“FIFO”) will be applied to both purchases,acquisitions and sales. Sales will be matched in chronological order, by trade date, against the purchasesduring the Settlement Class Period.

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11. The date of covering a “short sale” is deemed to be the date of purchase of Lantronix common stock.The date of a “short sale” is deemed to be the date of sale of Lantronix common stock.

12. Where common stock was purchased/sold by reason of having exercised an option, the optionpremium should be incorporated into the price accordingly.

13. If your trading activity during the Settlement Class Period exceeds 50 transactions, you must provide,in an electronic file, all purchase and sales information required in the Schedule of Transactions. For a copyof instructions and parameters concerning such a submission, contact the Claims Administrator by phone:(800) 766-3330; by fax (516) 931-0810 or via the website: www.berdonllp.com/claims.

14. No cash payment will be made on a claim where the payable loss is $10.00 or less, but the AuthorizedClaimant will otherwise be bound by the final judgment of the Court.

15. Brokerage commissions and transfer taxes paid by you in connection with your purchase and sale ofLantronix common stock should be included in the “total purchase price” and net of the “total proceeds.”

16. You must attach to your claim form copies of brokerage confirmations, monthly statements or otherdocumentation of your transactions in Lantronix common stock in order for your claim to be valid. If suchdocuments are not available, a complete list of acceptable supporting documentation can be found on theClaims Administrator’s website: www.berdonllp.com/claims. Failure to provide acceptable documentationcould delay verification of your claim or result in rejection of your claim.

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Lantronix Securities Litigation

B. CLAIMANT INFORMATION

Must be received by Claims Administrator postmarked no later than January 6, 2007

Please Type or Print

_______________________________________________________________________________________Beneficial Owner’s Name (as it appears on your brokerage statement)

_______________________________________________________________________________________Joint Beneficial Owner’s Name (as it appears on your brokerage statement)

_______________________________________________________________________________________Street Address

_________________________________________ __________________ ______________________City State Zip Code

_________________________________________ _________________________________________Foreign Province Foreign Country

_________________________________________ or _________________________________________Social Security No. Taxpayer Identification No.

Specify one of the following:

_____ Individual(s) _____ Corporation _____ UGMA Custodian _____ IRA

_____ Partnership _____ Estate _____ Trust _____ Other: _________________________

__________ _________________________ (Day) ___________ ______________________ (Evening)Area Code Telephone Number Area Code Telephone Number

_________________________________________ ___________________________________________Facsimile Number E-Mail Address

_______________________________________________________________________________________Record Owner’s Name and Address (if different from beneficial owner listed above)

_______________________________________________________________________________________

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LANTRONIX

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C. SCHEDULE OF TRANSACTIONS IN LANTRONIX COMMON STOCK

1. Separately list each and every purchase or acquisition of Lantronix common stock during the periodAugust 4, 2000 through May 30, 2002, inclusive, and provide the following information (must bedocumented):

Trade Date Total Cost(list chronologically) (including commissions,

Month/Day/Year Number of Shares Purchased taxes, and fees)

2. Separately list each and every sale of Lantronix common stock during the period August 4, 2000through May 30, 2002, inclusive, and provide the following information (must be documented):

Trade Date Net Proceeds(list chronologically) (net of commissions,

Month/Day/Year Number of Shares Purchased taxes, and fees)

3. State the total number of shares of Lantronix common stock owned at the close of trading on May 30,2002 (long or short) (must be documented): ____________.

If additional space is needed, attach separate, numbered sheets in the same format,and print your name and Social Security or Tax ID number at the top of each sheet.

YOU MUST ALSO READ, SIGN AND SUBMIT THESUBMISSION TO JURISDICTION AND RELEASE WHICH FOLLOW.

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D. SUBMISSION TO JURISDICTION OF COURT AND ACKNOWLEDGMENTS

I/We submit this Proof of Claim and Release (“Proof of Claim”) under the terms of the Stipulation ofSettlement (the “Stipulation”) described in the Notice of Pendency and Proposed Settlement of Class Action andSettlement Hearing (the “Notice”). By submitting this Proof of Claim, I/we state that I/we believe in good faiththat I am/we are a Settlement Class Member as defined above and in the Notice, or I am/we are acting for suchPerson; that I/we have read and understand the Notice; that I/we believe that I am/we are entitled to receive ashare of the Net Settlement Fund; and that I/we elect to participate in the Settlement described in the Notice.

I/We also submit to the jurisdiction of the United States District Court for the Central District of Californiawith respect to my/our claim as a Settlement Class Member and for purposes of enforcing the release set forthherein and any judgment that may be entered in the Litigation. I/We further acknowledge that I am/we are boundby, and subject to, the terms of any judgment that may be entered in the Litigation.

I/We have set forth, where requested above, all relevant information with respect to each purchase oracquisition of Lantronix common stock during the Settlement Class Period, and each sale, if any, of suchcommon stock. I/We have also enclosed photocopies of the stockbroker’s confirmation slips, stockbroker’sstatements, or other documents evidencing each purchase, acquisition, sale or retention of Lantronix commonstock listed above in support of my/our claim. [NOTE: IF ANY SUCH DOCUMENTS ARE NOT IN YOURPOSSESSION, PLEASE OBTAIN COPIES OR EQUIVALENT DOCUMENTS FROM YOUR BROKER ORPORTFOLIO MANAGER. THESE DOCUMENTS ARE NECESSARY TO PROVE AND PROCESS YOURCLAIM.] I/We agree to furnish additional information to Lead Plaintiff’s Counsel or their agent to support thisclaim if required to do so.

I/We have not submitted any other claim covering the same purchases or acquisitions or sales of Lantronixcommon stock during the Settlement Class Period and know of no other Person having done so on my/our behalf.

E. RELEASE

1. I/We hereby acknowledge full and complete satisfaction of, and do hereby fully, finally and foreversettle, release and discharge each and all of the Released Persons from any and all Released Claims.

“Related Parties” means each of Defendants’ past and present directors, managing directors, officers,employees, partners, principals, agents, distributors, customers, underwriters, issuers, insurers, co-insurers,reinsurers, controlling shareholders, attorneys, accountants, auditors, banks or investment bankers, advisors,personal or legal representatives, predecessors, successors, parent companies, subsidiaries, divisions, jointventures, assigns, spouses, heirs, associates, related or affiliated entities, any entity in which any Defendant hasa controlling interest, any members of their immediate families, and any trust of which any Defendant is thesettlor or which is for the benefit of any Defendant and/or member(s) of his family.

“Released Claims” means and includes any and all claims, actions, causes of action, allegations, rights andliabilities, including, but not limited to, claims under the federal securities laws, including the SecuritiesExchange Act of 1934 and the Securities Act of 1933, or for negligence, gross negligence, recklessness, breachof duty of care and/or breach of duty of loyalty, breach of fiduciary duty, fraud, misrepresentation,mismanagement, breach of contract, violations of any state or federal statute, rules or regulations, including“Unknown Claims,” as defined herein, that have been or could have been asserted against the Released Personsin the Litigation by or on behalf of the Lead Plaintiff, named plaintiff Linda Pauwels, or any Settlement ClassMember against the Released Persons which are based upon, arising out of, or related to both: (i) the purchase,acquisition and/or disposition of Lantronix common stock by any Settlement Class Member during the relevanttime periods; and (ii) the facts, transactions, events, occurrences, acts, disclosures, statements, omissions orfailures to act which were or could have been alleged in the Litigation or any other forum, based upon, relatingto or arising from the facts which were or could have been alleged. However, as to defendant Credit SuisseSecurities (USA) LLC (“Credit Suisse”) only, “Released Claims” does not include the claims asserted againstCredit Suisse and Kevin A. McCarthy as set forth in the Consolidated Amended Class Action Complaint in In reCredit Suisse First Boston Corp. (Lantronix, Inc.) Analyst Securities Litigation, Case No. 03-CV-2467 (JES),currently pending in Federal District Court for the Southern District of New York (“Credit Suisse Carve-Out”).The Credit Suisse Carve-Out is not applicable to any other party to the Stipulation.

“Released Persons” means each and all of Defendants and their Related Parties.

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“Unknown Claims” means any Released Claims which the Lead Plaintiff, named plaintiff Linda Pauwels orany Settlement Class Member does not know or suspect to exist in his, her or its favor at the time of the releaseof the Released Persons which, if known by him, her or it, might have affected his, her or its settlement with andrelease of the Released Persons, or might have affected his, her or its decision not to object to this Settlement.With respect to any and all Released Claims, the Settling Parties stipulate and agree that, upon the Effective Date,the Lead Plaintiff and named plaintiff Linda Pauwels shall expressly, and each of the Settlement Class Membersshall be deemed to have, and by operation of the Judgment shall have, waived and relinquished, to the fullestextent permitted by law, the provisions, rights, and benefits of §1542 of the California Civil Code, which provides:

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITORDOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIMEOF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVEMATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.

The Lead Plaintiff and named plaintiff Linda Pauwels expressly shall have, and the Settlement ClassMembers, upon the Effective Date, shall be deemed to have, and by operation of the Judgment shall have waivedany and all provisions, rights and benefits conferred by any law of any state or territory of the United States, orprinciple of common law, which is similar, comparable or equivalent to §1542 of the California Civil Code. TheLead Plaintiff and named plaintiff Linda Pauwels and Settlement Class Members may hereafter discover facts inaddition to or different from those which he, she or it now knows or believes to be true with respect to the subjectmatter of the Released Claims, but the Lead Plaintiff and named plaintiff Linda Pauwels expressly shall have,and each Settlement Class Member, upon the Effective Date, shall be deemed to have, and by operation of theJudgment shall have, fully, finally, and forever settled and released any and all Released Claims, known orunknown, suspected or unsuspected, contingent or non-contingent, whether or not concealed or hidden, whichnow exist, or heretofore have existed upon any theory of law or equity now existing or coming into existence inthe future, including, but not limited to, conduct which is negligent, intentional, with or without malice, or abreach of any duty, law or rule, without regard to the subsequent discovery or existence of such different oradditional facts. The Settling Parties acknowledge that the foregoing waiver was bargained for and a key elementof the Settlement of which this release is a part.

2. When the Settlement becomes effective, the Lead Plaintiff, on behalf of himself and the SettlementClass, named plaintiff Linda Pauwels, on behalf of herself and the Settlement Class, each of the Settlement ClassMembers (except a Settlement Class Member who has been properly excluded from the Settlement Class),anyone claiming through or on behalf of any of them, and Lead Plaintiff’s Counsel, will be forever barred andenjoined from commencing, instituting or prosecuting any action or other proceeding in any court of law orequity, arbitration tribunal, or administrative forum, directly, representatively, or derivatively, against any of theReleased Parties raising or asserting in any manner, any of the Released Claims. Furthermore, pending finaldetermination as to whether the Settlement contained in the Stipulation should be approved, the Lead Plaintiff,named plaintiff Linda Pauwels, Settlement Class Members (except a Settlement Class Member who has beenproperly excluded from the Settlement Class) and Lead Plaintiff’s Counsel are barred and enjoined fromcommencing, instituting, or prosecuting any action or other proceeding in any court, tribunal, or forum, assertingany of the Released Claims, either directly, representatively, derivatively or in any other capacity, against any ofthe Released Parties.

3. This Release shall be of no force or effect unless and until the Court approves the Stipulation ofSettlement and the Stipulation of Settlement becomes effective as to all Defendants and all Released Parties onthe Settlement Effective Date.

4. I/We hereby warrant and represent that I/we have not assigned or transferred or purported to assign ortransfer, voluntarily or involuntarily, any matter released pursuant to this Release or any other part or portionthereof.

5. I/We hereby warrant and represent that I/we have included information about all of my/our transactionsin Lantronix common stock which occurred during the Settlement Class Period, as well as the number of sharesof Lantronix common stock held by me/us at the close of trading on May 30, 2002.

6. I/We certify that I am/we are NOT subject to backup withholding under the provisions of §3406(a)(1)(c)of the Internal Revenue Code.

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Note: If you have been notified by the Internal Revenue Service that you are subject tobackup withholding, please strike out the word “NOT” in the certification above.

I/We declare under penalty of perjury, under the laws of the United States of America, that the foregoinginformation supplied by the undersigned is true and correct and that this Proof of Claim and Release wasexecuted this ____ day of _______________, 200__, at _______________ __________________________.

(City) (State/Country)

____________________________________________(Signature of Claimant)

____________________________________________(Type or print your name here)

____________________________________________(Signature of Joint Claimant)

____________________________________________(Type or print your name here)

____________________________________________(Capacity of Persons signing, e.g., BeneficialPurchaser, Executor or Administrator)

ACCURATE CLAIMS PROCESSING TAKES A SIGNIFICANT AMOUNT OF TIME.THANK YOU FOR YOUR PATIENCE.

Reminder Checklist:

1. Please sign the above Release and declaration.

2. Remember to attach only copies of acceptable supporting documentation, a complete list of which canbe found on the website below.

3. Do not send originals of common stock certificates.

4. Keep a copy of the completed claim form and documentation for your records.

5. If you desire an acknowledgment of receipt of your claim form, please send it Certified Mail, ReturnReceipt Requested, or its equivalent. You will bear all risks of delay or non-delivery of your claim.

6. If your address changes in the future, or if these documents were sent to an old or incorrect address,please send us written notification of your new address.

7. If you have any questions or concerns regarding this claim form contact the Claims Administrator at:

Lantronix Securities Litigation.c/o Berdon Claims Administration LLC


Telephone: (800) 766-3330Fax: (516) 931-0810


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