<PAGE>   1
                                                                  EXHIBIT 10.4

October 22,1996



Mr. John P. Grazer
22646 Sacedon
Mission Viejo, CA  92691

Dear John:

This letter covers your position as the President, and Chief Financial Officer
of Aurora Electronics, Inc. and Aurora Electronics Group, Inc.

This letter is effective immediately upon signing. You will report to the Chief
Executive Officer and the Board of Directors of Aurora. Your duties will be,
among other things, to have primary responsibility for the financial and
administrative functions in the Company, including without limitation, (a)
primary responsibility for the operations of the Company; (b) execution of the
Company's strategy and growth of the Company's business; and (c) financial
reporting to the SEC, shareholders, lenders, etc. These duties may be expanded
or modified from time to time by the CEO and/or Board, and you will carry them
out either directly or through other members of the management team as
appropriate. You will be expected to devote your full business time and best
efforts to the performance of your duties and responsibilities for the Company,
and as a corporate officer you will assume the associated fiduciary duties to
shareholders.

The terms of your employment include:

BASE SALARY:               $175,000 (annualized rate) subject to adjustment 
                           from time to time.

PROMOTION BONUS:           $150,000 one-time bonus upon accepting the position.

PERFORMANCE AND
  DISCRETIONARY
  BONUSES:                 You will be eligible for a performance and a 
                           discretionary bonus, initially targeted at 50% of 
                           base salary (annualized rate) to be determined from 
                           time to time by the Compensation Committee of the 
                           Board of Directors. The Performance Measure for each
                           period of time is determined during the Company's 
                           annual planning cycle, and is approved by the
                           Compensation Committee of the Board of Directors. To
                           receive a performance based bonus for a period, you 
                           must be employed by the Company at the end of the 
                           period for which the bonus is payable and on the date
                           the bonus is payable (provided that your performance
                           bonus for each period shall be paid on or before the
                           date the Company files its 10-Q for the quarter or
                           10-K for the year). The FY97 Incentive Plan is
                           currently being finalized.

STOCK OPTIONS:             The recapitalization completed on March 29, 1996 
                           includes a substantial change in the stock options
                           for senior executives. As discussed in that plan, you
                           have been awarded 899,669 options to purchase Aurora
                           common stock, including 154,987 Tranche A options,
                           154,987 Tranche A1 options, 294,847 Tranche B options
                           and 294,847 Tranche C options. Your Tranche A
<PAGE>   2
                           options were fully be vested upon issuance. Your
                           Tranche A1 options are vesting ratably on the first
                           day of each month for the 24 months beginning July
                           1997. One-eighth of your Tranche B options vested on
                           September 30, 1996, and will continue vesting each
                           March 31 and September 30 through March 31, 2000, and
                           your Tranche C options will vest either with
                           performance (over years 1-4) or with time (over later
                           years). All Tranche A options and all vested Tranche
                           A1 options that you own on leaving the Company will
                           remain exercisable for 90 days, provided that if your
                           employment is terminated as a result of death,
                           disability or termination by the Company which is not
                           for cause, your Tranche A and vested Tranche A1
                           Options will remain exercisable for 12 months or the
                           remaining term of the option (whichever is less). All
                           vested Tranche B and Tranche C Options that you own
                           on leaving the Company will remain exercisable for 90
                           days, provided that if your employment is terminated
                           as a result of death or disability, your Tranche B
                           and C Options will remain exercisable for 12 months
                           or the remaining term of the option (whichever is
                           less).

PUT ON OPTIONS:            On December 31, 1999, you have a right to sell to the
                           Company for $2.00 per share all stock options
                           assuming employment as of that date. To exercise this
                           put, you will need to make an irrevocable notice to
                           the Company of you intent to do so between November 1
                           and 15, 1999.

                           In the event of termination not for cause prior to
                           December 31, 1999, a one-time right to sell to the
                           Company for $2.00 per share all stock options vested
                           to the date of termination or at the end of the
                           severance period described below, whichever period is
                           longer.

SEVERANCE:                 This letter and your response do not constitute a
                           contract of employment for a stated term. As always
                           since you joined Aurora, you have the right to
                           terminate your employment at any time, and Aurora
                           retains a similar right to terminate your employment
                           at will. Termination by the Company may be for (1)
                           cause, or (2) other than for cause. In the event that
                           you are terminated for cause or you terminate
                           voluntarily, your compensation will end on the date
                           of termination. For these purposes, "cause" means
                           termination by the Company of your relationship as
                           employee of the Company: (a) for committing an act of
                           fraud or willful misconduct against the Company; (b)
                           for conviction of, or entry of a plea by the Optionee
                           of nolo contendere to, a felony; (c) for breach of
                           your fiduciary duties to the Company or its
                           Stockholders; or (d) for committing a material act of
                           personal dishonesty or willful misconduct. (For
                           purposes of this agreement, "compensation" includes
                           salary, bonus, insurance and other employee benefits
                           and auto-related benefits.) If you are terminated for
                           any other reason (other than death or disability),
                           your compensation will continue (as salary and
                           benefit continuation, and not as a lump-sum payment))
                           for 15 months. The Company further agrees that if
                           your duties and compensation are reduced below the
                           levels of those discussed above, you will have a 30
                           day period during which you may notify the Company
                           that such reduction is a constructive termination
                           which will entitle you to the benefits of this
                           severance paragraph.

CHANGE OF
  CONTROL:                 A "Change in Control" shall be defined as (i) the
                           sale, lease or transfer, whether direct or indirect,
                           of all or substantially all of the assets of the
                           Company and its subsidiaries, taken as a whole, in
                           one transaction or a series of related transactions,
                           to any "person" or "group" (other than the WCAS Group
                           as defined below), (ii) the liquidation or
                           dissolution of the Company or the adoption of a plan
                           of liquidation or dissolution of the Company, (iii)
                           the acquisition of "beneficial ownership" by any
<PAGE>   3
                           "person" or "group" (other than the WCAS Group) of
                           voting stock of the Company representing more than
                           50% of the voting power of all outstanding shares of
                           such voting stock, whether by way of merger or
                           consolidation or otherwise, or (iv) during any period
                           of two consecutive years, the failure of those
                           individuals who at the beginning of such period
                           constituted the Company's Board of Directors
                           (together with any new directors whose election or
                           appointment by such Board or whose nomination for
                           election or appointment by the shareholders of the
                           Company was approved by a vote of a majority of the
                           directors then still in office who were either
                           directors at the beginning of such period or whose
                           election or nomination for election was previously so
                           approved) to constitute a majority of the Company's
                           Board of Directors then in office.

                           For purposes of this definition, (i) the terms
                           "person" and "group" shall have the meaning set forth
                           in Section 13(d)(3) of the Securities Exchange Act of
                           1934, as amended (the "Exchange Act"), whether or not
                           applicable, (ii) the term "beneficial owner" shall
                           have the meaning set forth in Rules 13d-3 and 13d-5
                           under the Exchange Act, whether or not applicable,
                           except that a person shall be deemed to have
                           "beneficial ownership" of all shares that any such
                           person has the right to acquire, whether such right
                           is exercisable immediately or only after the passage
                           of time or upon the occurrence of certain events,
                           (iii) any "person" or "group" will be deemed to
                           beneficially own any voting stock of the Company so
                           long as such person or group beneficially owns,
                           directly or indirectly, in the aggregate a majority
                           of the voting stock of a registered holder of the
                           voting stock of the Company, and (iv) the term "WCAS
                           Group" shall mean Welsh, Carson, Anderson & Stowe
                           VII, L.P., WCAS Capital Partners II, L.P. and any
                           general partners thereof.

                           In the event of a Change in Control of the Company,
                           the following will occur:

                           Stock Options

                           If the WCAS Group has Compensation Committee Control
                           (defined below) before the Change in Control, all
                           options held by you shall vest immediately with the
                           approval of the Compensation Committee unless it is
                           the judgment of the Compensation Committee members
                           who are appointees of the WCAS Group that the
                           investment by the WCAS Group in the Company through
                           the date of such Change in Control has been less than
                           successful. "Compensation Committee Control" exists
                           if (i) the WCAS Group has the ability to elect at
                           least one-half of the members of the board of
                           directors of the Company, (ii) at least one-half of
                           the Compensation Committee members are WCAS Group
                           representatives to the board of directors, or (iii)
                           the WCAS Group owns at least one-half of the voting
                           stock of the Company.

                           If the WCAS Group does not have Compensation
                           Committee Control before the Change in Control of the
                           Company, all of your outstanding unvested options
                           shall vest.

                           Failure to Offer Employment

                           If within 90 days following a Change of Control you
                           are not offered employment from the surviving company
                           under terms and conditions acceptable to you, or you
                           are terminated by the surviving company within those
                           90 days, you may elect to terminate your employment
                           and shall be entitled, following such termination,
                           (i) to receive the severance benefits described in
                           the last sentence of the "Severance" clause above and
                           (ii) to receive a full payout of all earned but
                           unpaid bonuses and deferred compensation accrued
                           through the date of each such termination. For
<PAGE>   4
                           purposes of determining your earned but unpaid
                           bonuses and deferred compensation, all vested
                           benefits shall be included. Any unvested benefits
                           shall be treated as vested on a pro rata basis. For
                           example, if you are severed on July 1, xxx9, and you
                           have a bonus plan based on one year's performance
                           beginning January 1, xxx9 and ending January 1, xx10,
                           and the performance measure for the period has been
                           achieved for 102%, one-half of the amount that would
                           have been payable for a full year's performance of
                           102% will be payable.

NON-COMPETITION
  AND CONFIDENTIALITY:     During the course of your employment by the Company,
                           you will represent the Company and its subsidiaries
                           and develop contacts and relationships on their
                           behalf, including customers, suppliers, potential
                           customers and suppliers, and other employees. To
                           protect the Company's and its subsidiaries' interests
                           in these contacts and relationships, you agree that
                           if you are terminated for cause or you voluntarily
                           resign, for a period of two years after such
                           termination or resignation, without the Company's
                           prior written approval, you will not, in connection
                           with any business that provides spare parts
                           distribution or electronics recycling services to
                           major personal computer manufacturers and field
                           service organizations, as an employee, consultant,
                           principal or otherwise, (1) conduct or assist others
                           in conducting a business that competes with the
                           Company's or its subsidiaries' businesses of
                           providing the same services for such customers in the
                           United States, Canada, the United Kingdom or the
                           Netherlands, or (2) recruit, hire or assist others in
                           recruiting or hiring any person who is or within the
                           preceding 12 months was an employee of the Company or
                           its subsidiaries.

                           You agree that the scope of the foregoing agreement
                           is reasonable as to time, area and persons and is
                           necessary to protect the legitimate business
                           interests of the Company and its subsidiaries. You
                           further agree that such agreement will be regarded as
                           divisible and will be operative as to time, area and
                           persons to the extent that it may be so operative,
                           and if any part of such agreement is declared
                           invalid, unenforceable, or void as to time, area or
                           persons, the validity and enforceability of the
                           remainder will not be affected.

                           You also agree that the trade secrets, plans,
                           strategies, and technology and processes of the
                           Company and its subsidiaries, and information
                           concerning the products, services, production,
                           reconditioning, development, technology, and all
                           technical information, procurement and sales
                           activities and procedures, customer, supplier, or
                           distributor lists, promotion and pricing techniques
                           and credit and financial data concerning customers,
                           suppliers, and distributors of the Company and its
                           subsidiaries are valuable, special, and unique assets
                           of the Company and its subsidiaries (collectively,
                           the "Confidential Information"). In light of the
                           competitive nature of the industry in which the
                           business of the Company and its subsidiaries is
                           conducted, you agree that all your knowledge and
                           information about the Confidential Information will
                           be considered Confidential Information. In
                           recognition of this, you agree that except as
                           specifically authorized in writing by the Company,
                           you will not, in whole or in part, (1) disclose any
                           Confidential Information to any person, other than
                           the Company or its subsidiaries, or (2) make use of
                           any Confidential Information for your own purposes or
                           for the benefit of any other person, other than the
                           Company or its subsidiaries.

                           You also acknowledge and agree that all manuals,
                           drawings, blueprints, letters, notes, notebooks,
                           reports, books, procedures, forms, documents,
                           records, or paper or copies thereof pertaining to the
                           operations or business of the Company and its
                           subsidiaries that you have made or received or are
                           known to you in any
<PAGE>   5
                           way in connection with your employment and any other
                           Confidential Information are and will be the
                           exclusive property of the Company or the relevant
                           subsidiary. You acknowledge that all such papers and
                           records will at all times be subject to the control
                           of the Company or the relevant subsidiary, and you
                           agree to surrender the same upon request of the
                           Company, and will surrender such no later than any
                           termination of your employment with the Company or
                           the relevant subsidiary, whether voluntary or
                           involuntary. The Company and each subsidiary may
                           notify anyone employing you at any time of the
                           provisions of this Agreement.

HEALTH AND LIFE
  INSURANCE:               The Company will pay for its standard health and
                           dental coverage policy for you and your family. You
                           will also receive the same life and disability
                           insurance and employee benefits as the other senior
                           executives of Aurora.

VACATION:                  You will initially be entitled to approximately 3
                           weeks vacation per year.

OTHER BENEFITS
  AND EXPENSES:            You will be compensated for expenses incurred in the
                           performance of your duties (e.g. travel and 
                           entertainment, car phone, etc.), including an 
                           automobile allowance of $600 per month, and you
                           will be eligible for all of the benefits for which
                           other senior executives are eligible.

Payment of all of the above compensation and benefits will, of course, be
subject to (1) normal Company policies, and (2) the various laws and regulations
applicable to the Company and your employment both at present and as they are
changed from time to time. Any post-employment compensation (severance, stock
option ownership, etc.) will be payable to your estate in the event of your
death. In signing this letter, you represent that you have not relied on any
agreements or representations that are not set forth herein, and that any and
all disputes that arise between the parties hereto will be resolved through
binding arbitration rather than litigation.

Best personal regards,                                   Accepted and agreed:


/s/ Jim C. Cowart
Jim C. Cowart                                            /s/ John P. Grazer
Chairman and CEO                                         _______________________
                                                         John P. Grazer
                                                         _______________________
                                                         Date