<PAGE>

                                                                    EXHIBIT 10.2

                              EMPLOYMENT AGREEMENT

     This Employment Agreement ("Agreement") made on December___, 2001, is
between LANTRONIX, a California corporation ("Employer"), located at 15353
Barranca Parkway, Irvine, California 92616 and STEVE COTTON, an individual
("Employee") residing at _____________________________________________________
by virtue of the following facts, events, circumstances and desires:

                                    RECITALS

     A.  WHEREAS, Employee desires to continue to work for Employer and receive
compensation and Employer desires to continue to employ Employee;

     B.  WHEREAS, Employer is engaged in the business of developing network
attached technology;

     C.  WHEREAS, Employee, in the course of employment, will obtain or develop
confidential information and trade secrets;

     D.  WHEREAS, Employee recognizes and acknowledges that Employer must
maintain and preserve all such confidential information and trade secrets for
the protection of its business, competitive position and goodwill; and,

     E.  WHEREAS, Employer desires assurance that Employee will maintain and
preserve Employer's confidential information and trade secrets both during and
after employment and Employee is willing to provide same.

     NOW, THEREFORE, in consideration of the promises and mutual covenants
contained in this Agreement and in consideration of Employee's employment and
continued employment by Employer, it is agreed as follows:

                                    AGREEMENT

1.   TERM. Subject to this Agreement's terms and conditions, Employer agrees
to employ Employee. The employment term shall commence on the date first written
above. The Employer shall employ the Employee until such time as either or both
parties choose to discontinue the employment. The employment relationship shall
be that of an Employee at-will.

                                       1

<PAGE>

2.  DUTIES. While employed by Employer, Employee shall devote his entire working
time, skill and attention exclusively to the interests and business of Employer,
shall perform such duties as may be assigned to him from time to time by
Employer, shall comply to the best of his ability with all policies and
directives issued by the Employer's Board of Directors, and shall in all
respects do his utmost to further enhance and develop the best interests and
welfare of the Employer. Employee's specific title, responsibility, authority
and reporting shall be as detailed on Exhibit "1" attached hereto and
incorporated herein.

3.    COMPENSATION

      3.1 Base Salary. The Employer shall pay to Employee as base compensation
          -----------
the total sum of Two Hundred Sixty-Two Thousand Five Dollars ($262,500) per
year, payable at those intervals as the Employer shall pay other Executives.
Said Base Salary shall be subject to annual review by the Employer's Board of
Directors.

          3.2 Target Bonus. In addition to said Base Salary, Employee shall also
              ------------
receive a bonus of up to 50% of Employee's Base Salary via standard management
metrics ("Target Bonus"). The Target Bonus shall be calculated in accordance
with the Lantronix MBO Incentive Program, revision 0.2x, attached hereto and
incorporated herein as Exhibit "2." Bonus can be equal to 200% of Target Bonus,
if appropriate metrics are obtained. Said bonus amount shall be paid quarterly.

          3.3 Insurance Coverage. Employer shall make available to Employee and
              ------------------
his dependents whatever coverage Employee shall elect under Employer's standard
corporate medical, dental, life and disability insurance programs as each such
respective benefit is made available to any other Executive employee of Employer
at a comparable level within the organization.

          3.4 Expenses. Employer shall reimburse Employee for all reasonable
              --------
entertainment, promotion or other expenses advanced by him in the scope of his
employment in connection with the business of Employer on behalf of Employer.
Each such expenditure shall be reimbursed only if it is of a nature qualifying
it as a proper deduction on the federal and state income tax return of Employer.
In addition, each such expenditure shall be reimbursable only if Employee
furnishes to Employer adequate records and other documentary evidence required
by federal and state statutes for the substantiation of each such expenditure as
an income tax deduction.

<PAGE>


         3.5  Signing Bonus. In addition to Base Salary, Employee shall also
              -------------
receive a signing bonus in an amount equal to $144,722 and earned, due and
payable January 2, 2002.

         3.6  Car  Allowance.  Employee shall receive a car allowance of $1,000
              --------------
per month in addition to the expense reimbursements in section 3.4.

         3.7  Other Incentives. Employee shall be entitled to participate in any
              ----------------
other employee incentive programs offered by Employer, including but not limited
to such programs as a section 401(k) plan.

         3.8  Vacation. Employee will be entitled to accrue twenty (20) vacation
              --------
days each year in accordance with Employer's vacation policy.

         3.9  Stock Options. Employer shall grant Employee substantially
              -------------
concurrent with the execution of this Agreement stock options as indicated in
the subparagraphs below:

              3.9.1     250,000 Non-Qualified Stock Options to vest according
to the following schedule:

                   i.   45,000 options to vest on January 1, 2002.

                   ii.  135,000 options to vest ratably monthly over a period of
36 months commencing February 1, 2002.

                   iii. 17,500 options to vest on July 1, 2002

                   iv.  52,500 options to vest ratably over a period of 36
months commencing August 1, 2002. The options shall be priced based on fair
market at date of grant.

                   v.   Employee shall have the right to exercise vested options
for a period of ten years from the date of grant.

                   vi.  Employer agrees to lend Employee an amount equal to the
option exercise price and any tax liability associated with exercise of all
options listed above on a full recourse with a pledge of the shares and on such
other terms as are set forth on Exhibit 3C attached hereto and incorporated
herein by reference. Proceeds from the market sale of any pledged shares shall
be allocated to repayment of such loan proratably based on the number of shares
sold to total number of shares pledged.

<PAGE>


                        3.9.2     The Non-Statutory Stock Option Agreement, Note
and Pledge Agreement are attached hereto and incorporated herewith as Exhibits
"3A, 3B and 3C."

                   3.10 Provisions. The foregoing compensation provisions shall
                        ----------
remain in effect until June 30, 2003, unless Employee is terminated earlier as
provided in section 4.

         TERMINATION. The Employer shall have the right to terminate employment
of Employee at any time, with or without cause. Employee shall have the
advantage of certain severance benefits on termination provided in that certain
Severance Agreement executed substantially concurrent with this Agreement
attached hereto and incorporated herein as Exhibit "4."

         CONFIDENTIAL INFORMATION

                   5.1  Definition. "Confidential Information" means information
                        ----------
that is proprietary to the Employer or proprietary to others and entrusted to
the Employer, whether or not trade secrets. Confidential Information includes,
but is not limited to, information relating to business plans and to business as
conducted or anticipated to be conducted, and to past, current or anticipated
products. Confidential Information also includes, without limitation, Employer
information concerning (a) price lists, (b) costs of production, and (c) raw
material costs, (d) selling costs, (e) delivery costs, (f) information
concerning new or proposed new products, including the nature and design of such
products and the plans for marketing such products, (g) international procedures
and policies, (h) customer lists, account names, contacts, addresses, buying
habits and sales activity; (i) names and addresses of suppliers and vendors, (j)
tax and financial information, (k) reserves, (l) intellectual property owned or
leased by the company, (m) banking relationships and arrangements, (n)
Employees, (o) management personnel and policies, (p) quotation names,
addresses, contacts and quote workups, (q) all mailing lists, (r) company
product training materials and courses, and (s) company computer programs and
printouts.

                   5.2  Prohibitions Against Use. During or subsequent to the
                        ------------------------
termination of Employee's employment, whether termination is voluntary or
involuntary, Employee will not use or disclose, other than in connection with
employment with the company, any Confidential Information to any person not
employed by the company or not authorized by the company to receive such


<PAGE>


Confidential Information without the prior written consent of the company.
Employee will use reasonable and prudent care to safeguard an protect and
prevent the unauthorized use and disclosure of Confidential Information. The
obligations contained in this paragraph will survive for as long as the company,
in its sole judgment, considers the information to be Confidential Information.

         PROTECTIVE COVENANT. It is specifically agreed that for a period of two
years after cessation of employment (the "Protective Period"), Employee shall
not in any manner contact, solicit or cause to be solicited any of Employer's
customers, suppliers or clients or former or prospective customers or suppliers
for any purpose whatsoever, without the written consent of Employer. Employee
further agrees that during the Protective Period he will not directly or
indirectly, solicit any Employee of Employer to leave his employment with
Employer, unless expressly authorized or instructed to do so in writing by
Employer.

         RETURN OF PROPERTY. All documents, drawings, lists, records or other
tangible or intangible thing relating to the business of Employer that Employee
originates or comes into the Employee's possession in any way during the
employment period shall remain the sole property of Employer. Any copies,
abstracts or summaries of such items are likewise the sole property of Employer.
Employee shall not make copies or prepare abstracts or summaries of such items
except for the sole use and account of Employer and with the consent and
instruction of Employer's management. Upon termination of employment of
Employee, he or she shall immediately return to Employer all such items in his
or her possession, as well as all of Employer's property he or she has received
for assistance in performing work duties, including but not limited to those
items outlined above, as well as any of Employer's equipment or supplies.
Employee shall be liable for damages to Employer for any such property not so
returned.

         ARBITRATION. If any dispute hereafter arises between the parties hereto
and/or their agents or employees relating to the terms and provisions of this
Agreement or otherwise, including but not limited to any claim for breach of any
contract or covenant (express or implied), tort claims, claims for
discrimination or harassment (including but not limited to race, sex, religion,
national origin, age, handicap or disability), claims for compensation or
benefits (except where a benefit plan or pension plan or insurance policy
specifies a different claims procedure) and claims for violations of any federal
state or

<PAGE>


other governmental law, statute, regulation or ordinance (except for claims
involving worker's compensation benefits), then either party may initiate
arbitration proceedings in accordance with the Employment Rules of JAMS
ENDispute, as the exclusive remedy for such dispute and in lieu of any court
action, which is hereby consent to such arbitration, and any arbitration award
shall be final and binding. Neither party shall disclose the existence of any
dispute or the terms of any arbitration decision to any third party, other than
legal counsel, accountants and financial advisors, or as required by law. All
fees relating to the arbitration, exclusive of Employee's attorney's fees, shall
be borne by Employer.

     ATTORNEY'S FEES. in the event of any arbitration arising out of the subject
matter hereof, the prevailing party shall be entitled to recover from the
non-prevailing party its fees, costs and expenses (including reasonable
attorney's fees) incurred in such arbitration.

     REMEDY. Employee acknowledges and agrees that the confidential information,
trade secrets and special knowledge acquired by him during his employment with
Employer is valuable and unique, and that breach by him of the provisions of
this Agreement will cause Employer irreparable injury and damage. It cannot be
reasonably or adequately compensated by money damages. Employee, therefore,
expressly agrees that Employer shall be entitled to injunctive or other
equitable relief in order to prevent a breach of this Agreement or any part
thereof, in addition to such other remedies legally available to Employer and
notwithstanding the provisions of paragraph 8 above. Employee expressly waives
the claim or defense that Employer has an adequate remedy at law.

     APPLICABLE LAW. This Agreement shall be governed, interpreted and construed
in accordance with the laws of the State of California.

     SEVERABILITY. In the event that any portion of this Agreement shall be
deemed unenforceable or void, such invalidity or unenforceability shall not
affect the validity or enforceability of any other provision of this Agreement.

     ENTIRE AGREEMENT. It is agreed that the provisions of this Agreement
contain the entire agreement on the subject covered between the parties, and
cannot be modified orally, and can only be modified by written agreement signed
by Employee and Employer. This Agreement shall be binding upon the parties and
their

<PAGE>

respective heirs, administrators and assigns.

     VOLUNTARY AGREEMENT. Employee acknowledges he understands that he will have
access to Confidential Information and customer accounts while employed by
Employer. Employee further acknowledges that he understands the nature of the
burdens imposed by the restrictive covenants contained in this Agreement.
Employee acknowledges and represents that such covenants are reasonable and
proper in scope and effect. Employee acknowledges that Lantronix has provided
him adequate consideration for his agreements herein.

     ADVICE OF COUNSEL. Employee acknowledges he has had the opportunity and has
consulted with independent counsel with respect to Employee's rights and
obligations hereunder.

     IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
identified at the beginning of this Agreement.

                                            "Employee"


                                                /s/ Steve Cotton
                                            ---------------------------------
                                            Steve Cotton

                                            "Employer"

                                            Lantronix

                                            By:  /s/ Tom Burton
                                               ------------------------------
                                            Its: Director - Chair
                                                -----------------------------
                                                 Compensation Committee

Approved as to Form and Content:

   /s/ Susan Roos
------------------------------
Susan Roos
Attorney for Steve Cotton

   /s/ Marla Merhab Robinson
------------------------------
Marla Merhab Robinson
Attorney for Lantronix


<PAGE>


                                   EXHIBIT "1"

TITLE:               Chief Financial Officer and Chief Operating Officer

RESPONSIBILITIES:    The responsibilities of the Chief Financial Officer are as
                     follows:

                     .   Manage the entire range of financial activity for the
                         Company, including both the treasury and accounting
                         functions

                     .   Formulate and recommend policies on banking, receipt
                         and disbursement of funds, and fiscal and accounting
                         matters;

                     .   Develop procedures for standard accounting, analysis
                         and reporting and overall financial controls

AUTHORITY:           The Chief Financial Officer is empowered, regarding the
                     financial and accounting activities, to make all decisions,
                     create all policies and authorize all engagements that,
                     upon the Chief Executive Officer's request, he can
                     demonstrate to be consistent with a reasonable
                     interpretation of the Company's objectives.

REPORTING:           The Chief Financial officer reports to the President and
                     Chief Executive Officer of the Company.

RESPONSIBILITIES:    The responsibilities of the Chief Operating Officer are as
                     follows:

                     [to be inserted]

<PAGE>

                                   EXHIBIT "2"

                    EXECUTIVE INCENTIVE COMPENSATION PROGRAM
                    ----------------------------------------

The purpose of the Executive Incentive Compensation Plan is to enhance and
reinforce the goals of Lantronix (the "Company") for profitable growth and
continuance of a sound overall condition by providing selected employees with
additional financial rewards for attainment of such growth and stable financial
an operating condition. Final approval of the payment of any awards made under
the Plan is subject to the discretion of the Board of Directors.

The Plan will take into account two major categories in determining incentive
compensation:

..        Corporate Financial Goals
         -------------------------
..        Individual Objectives
         ---------------------

The following is a matrix of the mix of annual incentive elements for selected
management levels:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------
    LEVEL              FINANCIAL         MBO'S        % OF TOTAL COMP.
---------------------------------------------------------------------------
<S>                    <C>               <C>          <C>
Vice-President           60%              40%              23.1%
---------------------------------------------------------------------------
</TABLE>

The details of the MBO portion of the compensation plan are contained in the
LANTRONIX MBO INCENTIVE PROGRAM, Revision 0.2x, attached as Exhibit 2.
-------------------------------

<PAGE>


                                   EXHIBIT "2"

                         LANTRONIX MBO INCENTIVE PROGRAM
                         -------------------------------

Author:    Fred Thiel

Date:      October 1, 1999

Revision:  0.2x

Purpose

The purpose of the Lantronix MBO incentive program is to provide selected
employees with an incentive to focus their efforts on achieving designated
quarterly objectives which contribute to the achievement of overall departmental
and/or corporate goals.

Scope

The Lantronix MBO incentive program is applicable to any employee as a component
of their total compensation package upon recommendation by their supervising
manager. Employees must be approved by the President/CEO before they may
participate in the program.

Program Overview

The target incentive is paid quarterly as part of the employee's total target
compensation. It is targeted as a percentage of the employee's total target
compensation and consists of two components: the achievement of quarterly
corporate financial goals defined in the operating plan and individual
objectives determined by the employee and the supervising manager.

Prior to the start of each quarter, the employee and the supervising manager
agree on the individual objectives to be performed be the employee during the
quarter and submit an MBO worksheet to HR for approval by senior management.
Once approved, a copy of the worksheet is returned to the employee and
supervising manager.

After the close of the quarter, the MBO worksheet is updated with the employee's
results for the quarter and submitted to HR for approval by senior management
prior to being forwarded to Payroll for payment.

The incentive payment is considered supplemental income and is subject to
specific withholding requirements determined by state and federal tax law.

Senior management is defined as the Vice President responsible for the
functional area to whom both employee and supervisor report -- except in the
event that the Vice President is the supervisor of the employee, in which case
senior management will mean the President/CEO.

This program is subject to change, including revocation, at any time. This
program is offered at the sole discretion of the President/CEO.

LANTRONIX MBO INCENTIVE PROGRAM DETAILS

Target Incentive Amount

The target incentive amount is defined as a percentage of the employee's total
target compensation and is dependent on the employee's responsibilities and
impact on the Company's results.

Employees with greater responsibilities and whose efforts have a greater impact
on corporate financial results should have a higher percentage of their
compensation dependent on the achievement of corporate goals.

Examples of suggested percentages for different positions:

     Database Programmer       10% of total target compensation
     Product Manager           10% of total target compensation
     Director Marcom           15% of total target compensation
     Vice President            25% of total target compensation

HR will recommend a percentage to the supervising manager at the time when the
employee is recommended for inclusion in this program.

Incentive Composition

The Lantronix MBO incentive program consists of two components: corporate
financial goals (CFG), and individual objectives (IO). The relative weighting of
these two components is determined by the employee's direct responsibilities and
their impact on the Company's results.

Employees whose individual efforts primarily impact one department's objectives
have a higher weighting on individual objectives. Employees with more senior and
general responsibilities whose efforts have a great impact on corporate
financial results or many departments of the Company have a higher weighting on
corporate financial goals.

Examples of relative weightings for different positions:

  Database Programmer  90% individual objectives / 10% corporate financial goals
  Product Manager      80% individual objectives / 20% corporate financial goals
  Director Marcom      65% individual objectives / 35% corporate financial goals
  Vice President       40% individual objectives / 60% corporate financial goals

HR will recommend the composition to the supervising manager at the time when
the employee is recommended for inclusion in this program.

Corporate Financial Goals

The corporate financial goals are based on the approved operating plan and any
periodic updates that may be made.

The corporate financial goals (CFG) component consists of three elements: gross
margin (50% of CFG), pre-tax profit (30% of CFG), and net revenue (20% of CFG).

Gross margin is weighted heavily because achievement of this objective has the
greatest impact on the Company's ability to fund operations and development
efforts. Gross margin is the fuel upon which the Company runs.

Pre-tax profit is an important factor in funding investments for long term
growth and increasing the value of the Company for the shareholders. Achieving
this objective is an indication of management's ability to operate within the
approved operating plan budgets and control spending relative to actual gross
margin contribution in order to achieve the pre-tax profit objective.

Net revenue is an indicator of business volume growth and market acceptance for
the Company's products.

Furthermore, each element has a step function factor with thresholds, which has
the effect of accelerating the incentive. This acts as an additional incentive
by focusing employees on striving to achieve the next higher threshold which
results in greatly increased incentive payment. The thresholds and step
functions are as follows:

        ------------------------------------------------------------------
              Element             Percent Achieved           Factor
        ------------------------------------------------------------------
        Net Revenue (20%)                 *85%                 0.0
                                        85-95%                 0.5
                                       96-110%                 1.0
                                        **110%                 2.0
        ------------------------------------------------------------------
        Gross Margin (50%)                *80%                 0.0
                                        81-90%                 0.5
                                       91-115%                 1.0
                                        **115%                 2.0
        ------------------------------------------------------------------
        Pre-tax Profit (30%)              *60%                 0.0
                                        86-80%                 0.5
                                       81-120%                 1.0
                                        **120%                 2.0
        ------------------------------------------------------------------

*  less than
** greater than

This step function factor with thresholds can result in an employee receiving an
incentive payment that is greater than the targeted amount when one or more of
the corporate financial goals are surpassed.

Individual Objectives

Individual objectives are negotiated and agreed upon between employee and
supervisor. They must be specifically defined, measurable and reasonably
achievable; can be subject to partial credit or not; and must support the
overall goals of the team and corporate operating plan.

Circumstances beyond the control of the employee, or not contemplated by the
parties when setting goals, should not negatively affect the incentive
compensation calculation. As such circumstances arise, expectations as to the
potential effect should be reviewed and negotiated by the employee and
supervisor. Any mid-quarter changes must be documented and forwarded to Human
Resources.

Any disputes are resolved solely at the discretion of the President/CEO.

MBO Worksheet

The MBO worksheet is an excel worksheet which is provided by HR. It is provided
with the corporate financial goals target numbers for the upcoming quarter.

The corporate financial goals are provided by Finance to HR 30 days prior to the
start of the quarter.

The actual corporate financial results are provided by Finance to HR 15 days
after the close of the quarter.

MBO Worksheets must be signed by both the employee and supervisor before
submittal to HR for executive approval.

Partial Quarters

If an employee is included in the program after the start of the quarter, the
total eligible incentive for the quarter will be prorated based on the
percentage of the quarter during which the employee was officially included. If
an employee is absent for an extended period of time during a quarter, the same
prorated calculation will be made.

Similarly, if a participating employee leaves the Company prior to the end of
the quarter, the employee will be eligible for a prorated bonus, based on the
percentage of the quarter during which the employee was officially included in
the Plan. An employee who leaves during the quarter will be entitled to a
prorated bonus based on individual objectives only. In order to receive a bonus
based on corporate financial goals, an employee must be an employee on the last
day of the applicable quarter.

Employees who work the entire quarter but leave prior to payment of the bonus
are entitled to receive the full bonus amount, subject to individual and Company
performance.

Upon separation from the Company, employees will be paid all wages due,
including the appropriate bonus amount. However, in the event that results of
the Company financial goals are not yet known at the time of the employee's
separation, the employee will receive payment based only upon completion of
individual objectives. Once corporate financial results are known, HR will be
responsible for submitting a check request for the remainder of the employee's
bonus. The secondary bonus payment shall be made within 35 days after the end of
a quarter.

RECOMMENDING AN EMPLOYEE FOR INCLUSION

The supervisor or hiring manager should discuss the appropriateness with HR
prior to submitting a recommendation for inclusion in this program.

A written recommendation for inclusion must be submitted to HR including the
following:

..  employee name
..  brief description of responsibilities and impact on department/corporate
   goals
..  supervisor's reasons for including the employee

HR will review the recommendation and resulting compensation package and submit
the recommendation to senior management for approval.

Upon senior management approval, HR will respond with recommendations for target
incentive amounts and composition.

Disputes regarding inclusion in this program are resolved solely at the
discretion of the President/CEO.

SUBMITTING MBO WORKSHEETS

Submitting Objectives

The supervisor will receive MBO worksheets for the upcoming quarter from HR with
the respective employee's name, title, target incentive amount, and composition
data, as well as corporate financial goals already entered, no later than 15
days before the start of the quarter.

Individual objectives are negotiated and agreed upon between employee and
supervisor. They must be specifically defined, measurable and reasonably
achievable; can be subject to partial credit or not; and must support the
overall goals of the team and corporate operating plan.

The supervisor will complete the individual objectives sections, noting
specifically if partial credit is not applicable, and set each objective's
weighting.

Once it has been approved by both the employee and supervisor, the worksheet
must be submitted to senior management for approval no later than seven days
before the start of the quarter. Senior management may request that objectives
be modified or eliminated, and may also recommend additional objectives. Any
changes must be agreed to by both the employee and supervisor. Senior management
will then forward the worksheet to HR for review. Once all approvals are
received, HR will return the worksheet to the supervisor and employee for later
submittal with results after the end of the quarter.

Submitting Results

After the close of the quarter, the supervisor will complete the results portion
of the individual objectives sections with complete details and enter the
percentage completion. Acceptable percentages are 0, 25, 75 or 100 percent. In
the event that an objective was not 100% completed, the supervisor must provide
sufficient justification for the partial credit. Both the employee and
supervisor should agree on the results, and the completed form must be submitted
to HR within 10 business days after the end of the quarter. HR will review the
form and update the actual results of the corporate financial goals before
submitting the worksheets to senior management for approval.

Senior management may request further clarification of results or proof of
completion before approval for payment.

Senior management may disapprove results and any disputes will be resolved
solely at the discretion of the President/CEO.

Approved worksheets are submitted to Payroll for payment and filed in the
employee's personnel file. A copy will be provided to the employee upon a
request to HR.

Incentives are targeted for payment within 30-45 days of the end of the quarter.
In the event that corporate financial results are not known within 30 days after
the end of the quarter, the Company may choose to pay the individual objective
portion of the bonus separately from the corporate financial results portion.



<PAGE>

                                  EXHIBIT "3A"

                    Lantronix Non-Statutory Stock Option Plan

                       [Incorporation By Reference To S-8]

<PAGE>


                                  EXHIBIT "3B"

                                      NOTE

$___________                                             Irvine, California

___________

     FOR VALUE RECEIVED, Steve Cotton promises to pay to Lantronix, a California
corporation (the "Company"), or order, the principal sum of
_________________________, together with interest on the unpaid principal hereof
from the date hereof at the rate of ___% per annum, compounded annually.

     Principal and interest shall be paid quarterly and the entire unpaid
principal and interest accrued thereon shall be due and payable on ________.
Payment of principal and interest shall be made in lawful money of the United
States of America.

     The undersigned may at any time prepay all or any portion of the principal
or interest owing hereunder.

     This Note is subject to the terms of the Option, dated as of _________.
This Note is secured by a pledge of the Company's Common Stock under the terms
of a Security Agreement of even date herewith and is subject to all the
provisions thereof.

     The holder of this Note shall have full recourse against the undersigned,
and shall not be required to proceed against the collateral securing this Note
in the event of default.

     In the event the undersigned shall cease to be an employee, director or
consultant of the Company for any reason, this Note shall, at the option of the
Company, be accelerated, and the whole unpaid balance on this Note of principal
and accrued interest shall be immediately due and payable.

     Should any action be instituted for the collection of this Note, the
reasonable costs and attorneys' fees therein of the holder shall be paid by the
undersigned.

                                         ____________________________________
                                         Steve Cotton


<PAGE>

                                  EXHIBIT "3C"

                                Pledge Agreement

                               SECURITY AGREEMENT

         This Security Agreement is made as of __________ between Lantronix, a
California corporation ("Pledgee"), and Frederick Thiel ("Pledgor").

                                    Recitals

         Pursuant to Pledgor's election to purchase shares of Pledgee's Common
Stock (the "Shares"), under an Option Agreement dated __________ (the "Option"),
between Pledgor and Pledgee under Pledgee's ____ Incentive Stock Option Plan,
and Pledgor's election under the terms of the Option to pay for such Shares with
a promissory note (the "Note"), Pledgor has purchased _______ Shares, at a price
of $_____ per share, for a total purchase price of $_________. The Note and the
obligations thereunder are as set forth on Exhibit A to the Option.

         NOW, THEREFORE, it is agreed as follows:

         A. Creation and Description of Security Interest. In consideration of
the transfer of the Shares to Pledgor under the Option Agreement, Pledgor,
pursuant to the California Commercial Code, hereby pledges all of such Shares
(herein sometimes referred to as the "Collateral") represented by certificate
number 71, duly endorsed in blank or with executed stock powers, and herewith
delivers said certificate to the Secretary or Assistant Secretary of Pledgee
("Pledgeholder"), who shall hold said certificate subject to the terms and
conditions of this Security Agreement.

         The pledged stock (together with an executed blank stock assignment for
use in transferring all or a portion of the Shares to Pledgee if, as and when
required pursuant to this Security Agreement) shall be held by the Pledgeholder
as security for the repayment of the Note, and any extensions or renewals
thereof, to be executed by Pledgor pursuant to the terms of the Option, and the
Pledgeholder shall not encumber or dispose of such Shares except in accordance
with the provisions of this Security Agreement.

         B. Pledgor's Representations and Covenants. To induce Pledgee to enter
into this Security Agreement, Pledgor represents and covenants to Pledgee, its
successors and assigns, as follows:

            (A) Payment of Indebtedness. Pledgor will pay the principal sum of
the Note secured hereby, together with interest thereon, at the time and in the
manner provided in the Note.

            (B) Encumbrances. The Shares are free of all other encumbrances,
defenses and liens, and Pledgor will not further encumber the Shares without the
prior written consent of Pledgee.

            (C) Margin Regulations. In the event that Pledgee's Common Stock is
now or later becomes margin-listed by the Federal Reserve Board and Pledgee is
classified as a "lender" within the meaning of the regulations under Part 207 of
Title 12 of the Code of Federal Regulations ("Regulation G"), Pledgor agrees to
cooperate with Pledgee in making any amendments to the Note or providing any
additional collateral as may be necessary to comply with such regulations.

         C. Voting Rights. During the term of this pledge and so long as all
payments of principal and interest are made as they become due under the terms
of the Note, Pledgor shall have the right to vote all of the Shares pledged
hereunder.

         D. Stock Adjustments. In the event that during the term of the pledge
any stock dividend, reclassification, readjustment or other changes are declared
or made in the capital structure of Pledgee, all new, substituted and additional
shares or other securities issued by reason of any such change shall be
delivered to and held by the Pledgee under the terms of this Security Agreement
in the same manner as the Shares originally pledged hereunder. In the event of
substitution of such securities, Pledgor, Pledgee and Pledgeholder shall
cooperate and execute such documents as are reasonable so as to provide for the
substitution of such Collateral and, upon such substitution, references to
"Shares" in this Security Agreement shall include the substituted shares of
capital stock of Pledgor as a result thereof.

         E. Options and Rights. In the event that, during the term of this
pledge, subscription options or other rights or options shall be issued in
connection with the pledged Shares, such rights and options shall be the
property of Pledgor and, if exercised by Pledgor, all new stock or other
securities so acquired by Pledgor as it relates to the pledged Shares then held
by Pledgeholder shall be immediately delivered to Pledgeholder, to be held under
the terms of this Security Agreement in the same manner as the Shares pledged.

         F. Default. Pledgor shall be deemed to be in default of the Note and of
this Security Agreement in the event:

            (A) Payment of principal or interest on the Note shall be delinquent
for a period of ten days or more; or

            (B) Pledgor fails to perform any of the covenants set forth in the
Option or contained in this Security Agreement for a period of ten days after
written notice thereof from Pledgee.

         In the case of an event of Default, as set forth above, Pledgee shall
have the right to accelerate payment of the Note upon notice to Pledgor, and
Pledgee shall thereafter be entitled to pursue its remedies under the California
Commercial Code.

         G. Release of Collateral. Subject to any applicable contrary rules
under Regulation G, there shall be released from this pledge a portion of the
pledged Shares held by Pledgeholder hereunder upon payments of the principal of
the Note. The number of the pledged Shares which shall be released shall be that
number of full Shares which bears the same proportion to the initial number of
Shares pledged hereunder as the payment of principal bears to the initial full
principal amount of the Note.

         H. Withdrawal or Substitution of Collateral. Pledgor shall not sell,
withdraw, pledge, substitute or otherwise dispose of all or any part of the
Collateral without the prior written consent of Pledgee.

         I. Term. The pledge of Shares shall continue until the payment of all
indebtedness secured hereby, at which time the remaining pledged stock shall be
promptly delivered to Pledgor, subject to the provisions for prior release of a
portion of the Collateral as provided in paragraph G above.

         J. Insolvency. Pledgor agrees that if a bankruptcy or insolvency
proceeding is instituted by or against it, or if a receiver is appointed for the
property of Pledgor, or if Pledgor makes an assignment for the benefit of
creditors, the entire amount unpaid on the Note shall become immediately due and
payable, and Pledgee may proceed as provided in the case of default.

         K. Pledgeholder Liability. In the absence of willful or gross
negligence, Pledgeholder shall not be liable to any party for any of his or her
acts, or omissions to act, as Pledgeholder.

         L. Invalidity of Particular Provisions. Pledgor and Pledgee agree that
the enforceability or invalidity of any provision or provisions of this Security
Agreement shall not render any other provision or provisions herein contained
unenforceable or invalid.

         M. Successors or Assigns. Pledgor and Pledgee agree that all of the
terms of this Security Agreement shall be binding on their respective successors
and assigns, and that the term "Pledgor" and the term "Pledgee"
as used herein shall be deemed to include, for all purposes, the respective
designees, successors, assigns, heirs, executors and administrators.

         N. Governing Law. This Security Agreement shall be interpreted and
governed under the internal substantive laws, but not the choice of law rules,
of California.

         IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.

         "PLEDGOR"                _________________________________
                                  Signature

                                  _________________________________
                                  Print Name
                                  Address:

         ___________________________


         ___________________________

         "PLEDGEE"                Lantronix
                                  a California corporation

                                  _______________________________________
                                  Signature

                                  _______________________________________
                                  Print Name

                                  _______________________________________
                                  Title

         "PLEDGEHOLDER"           _______________________________________
                                  Secretary or Assistant Secretary of Lantronix


<PAGE>

                                   EXHIBIT "4"

                               SEVERANCE AGREEMENT

         This Severance Agreement ("Agreement") is made and entered into by
LANTRONIX, a California corporation ("Company") and STEVE COTTON ("Employee").

                                    RECITALS

         WHEREAS, Employee is employed as Chief Financial Officer and Chief
Operating Officer of the Company; and,

         WHEREAS, the Company desires to provide certain benefits to Employee as
described herein as an incentive for Employee to continue to serve as an officer
of the Company.

                                    AGREEMENT

         NOW, THEREFORE, in consideration of the promises and covenants set
forth in this Agreement and for other valuable consideration, the parties agree
as follows:

1.         Termination or Resignation following a Change in Control. If a
           --------------------------------------------------------
"Change in Control" (as hereinafter defined) of the Company occurs after the
date hereof and after such Change in Control either (i) the Company terminates
Employee without "Cause" (as hereinafter defined) on or before the two year
anniversary of the date of the Change in Control or, (ii) Employee resigns with
"Good Reason" (as hereinafter defined) on or before the two year anniversary of
the date of the Change in Control, then as a severance benefit and in lieu of
all other compensation or damages (except as set forth in section 4 hereof) the
Company shall:

a.            Continue to pay Employee his current Base Salary as in effect on
the date of such termination or resignation through the end of the month in
which the applicable termination or resignation occurred and continuing for a
period of twenty-four months, payable monthly in accordance with Employer's then
payroll practice.

b.            Pay Employee to Employee's Target Bonus. Such amount shall be
calculated based on the two full months prior to cessation of employment
compared to the MBO Incentive Plan projected forward for a period of twenty-four
months. Said amount shall be paid quarterly.

<PAGE>

c.            Continue to provide Employee, at Company's expense, all medical,
disability and life insurance benefits provided to him immediately prior to the
date of such termination or resignation (or at the option of Employee,
immediately prior to the date of the Change in Control) for a period of
twenty-four months following the date of such termination or resignation, or, if
any of such benefits cannot be provided to Employee for such twenty-four month
period under the Company's policies as then in effect or under applicable law,
then the Company shall pay Employee an amount equal to the monthly premiums paid
on behalf of Employee for such benefits at the time of such termination or
resignation for a period beginning on the date the Employee's participation in
such benefits is prohibited and ending on the date that is twenty-four months
following the date of such termination or resignation, payable in monthly
installments within five days after the end of each month.

d.            Accelerate  the vesting of all unvested stock options  granted to
Employee under the Company's stock option or other benefit plan; and,

e.            Reimburse Employee for third party out placement services actually
incurred by Employee in an amount not to exceed $10,000 provided such expenses
are accounted for by Employee in accordance with the policies and procedures of
the Company.

f.            In the  event of the  imposition  of an excise  tax on  Employee,
Employer agrees to gross-up the above compensation to cover such tax liability.

2.       Termination For Reasons Not associated with a "Change in Control." If
         ------------------------------------------------------------------
the Company terminates Employee without "Cause," or for reasons not associated
with a "Change on Control," or Employee resigns with "Good Reason" (as
hereinafter defined) then as a severance benefit and in lieu of all other
compensation or damages (except as set forth in section 4 hereof) the Company
shall:

a.            Continue to pay employee his current Base Salary as in effect on
the date of such termination or resignation through the end of the month in
which the applicable termination or resignation occurred and continuing for a
period of twelve months, payable monthly in accordance with Employer's then
payroll practice.

b.            Pay Employee to Employee's Target Bonus. Such amount shall be
calculated based on the two full months prior to

<PAGE>

cessation of employment compared to the MBO Incentive Plan projected forward for
a period of twenty-four months. Said amount shall be paid quarterly.

c.            Continue to provide Employee, at Company's expense, all medical,
disability and life insurance benefits provided to him immediately prior to the
date of such termination or resignation (or at the option of Employee,
immediately prior to the date of the Change in Control) for a period of twelve
months following the date of such termination or resignation, or, if any of such
benefits cannot be provided to Employee for such twelve month period under the
Company's policies as then in effect or under applicable law, then the Company
shall pay Employee an amount equal to the monthly premiums paid on behalf of
Employee for such benefits at the time of such termination or resignation for a
period beginning on the date the Employee's participation in such benefits is
prohibited and ending on the date that is twelve months following the date of
such termination or resignation, payable in monthly installments within five
days after the end of each month; and

d.            Accelerate  the vesting of all unvested stock options  granted to
Employee under the Company's stock option and other benefit plan.

e.            Reimburse Employee for third party out placement services actually
incurred by Employee in an amount not to exceed $10,000, provided such expenses
are accounted for by Employee in accordance with the policies and procedures of
the Company.

3.       Definitions
         -----------

a.            Change in Control. For purposes of this Agreement, the term"
              -----------------
Change in Control" shall be deemed to have occurred if (i) any transaction (or
series of transactions) is consummated whereby all, or substantially all, of the
assets of the Company are sold, leased, exchanged or transferred, (ii) any
person or entity, or group or affiliated persons or entities (other than any
person who on the date of this Agreement is a director or officer of the
Company, or their heirs, family members or trusts) becomes, directly or
indirectly, the owner of securities of the Company which represent 50% or more
of the combined voting power or equity of the Company's then outstanding
securities, (iii) any transaction is consummated whereby the Company merges or
consolidates with or into another entity and the owners of the Company
immediately prior to such merger or consolidation do not own, directly or
indirectly, 50% or more of the combined voting power and equity of the surviving
entity, or

<PAGE>


(iv)  the shareholders of the Company approve the dissolution or liquidation of
the Company.

b.               Termination Without Cause. The Company, in its sole discretion,
                 -------------------------
may terminate Employee's employment at any time, with or without Cause. For
purposes of this Agreement, the Company shall be deemed to have terminated
Employee's employment without "Cause" if Employee's employment is terminated for
other than just and reasonable cause including, without limitation, the
following: (i) Employee commits a felony or possesses, uses or sells illegal
drugs; (ii) Employee significantly neglects or materially inadequately performs
his duties as an employee of the Company; (iii) Employee breaches a fiduciary
duty to the Company, or its shareholders, involving personal profit to Employee;
(iv) Employee is deceased; or (v) Employee is disabled. Notwithstanding the
foregoing, Employee shall be deemed to have been terminated without Cause
(except in the case of death) unless the Company delivers to the Employee a copy
of a resolution duly adopted by the affirmative vote of not less than a majority
of the entire membership of the Company's Board of Directors finding that, in
the opinion of the Board, Employee engaged in the applicable conduct set forth
in subjection (i), (ii) or (iii) above or Employee is disabled. For purposes of
this Agreement, Employee shall be considered disabled if he has been physically
or mentally incapable of performing his essential job duties hereunder for (i) a
continuous period of at least ninety days, or (ii) a total of one hundred twenty
(120) days during any one hundred and fifty (150) day period.

c.               Resignation With Good Reason. Employee may resign at any time,
                 ----------------------------
with or without Good Reason. For purposes of this Agreement, Employee shall be
deemed to have resigned with "Good Reason" following a Change in Control if he
resigns within ninety days after the Company has taken any of the following
actions without Employee's express written consent: (i) The Company
"Substantially Lessens Employee's Title" (as defined on Exhibit 4A attached
hereto); (ii) The Company has substantially reduced Employee's Senior Authority
(as defined on Exhibit 4A attached hereto); (iii) The Company assigns material
duties to Employee which are materially inconsistent with Employee's status as
an officer of the Company; (iv) the Company reduces Employee's base salary or
benefits from that in effect at the time of the Change in Control (unless such
reduction is in connection with a salary or benefit reduction program of general
application to officers of the Company); (v) The Company requires Employee to be
based more than fifty (50) miles from his present office location, except for
required travel consistent with Employee's business travel obligations; or (vi)
the Company fails to obtain the

<PAGE>


assumption of this Agreement by any successor or assign of the Company.

4.               The Company's Obligations Under This Agreement. Employee shall
                 ----------------------------------------------
not be entitled to any of the benefits of sections 1 and 2 if the Company
terminated Employee's employment with Cause or if Employee resigns under
circumstances other than as specifically set forth in sections 1 and 2. The
Benefits set forth in sections 1 and 2 constitute the sole obligations of the
Company to Employee upon any termination or resignation and are in lieu of any
damages or other compensation that Employee may claim under other Company
policies or otherwise except for Employee's salary which has been earned up the
date of termination or resignation, compensation for any accrued and unused
vacation up to the date of termination or resignation, reimbursement for
business expenses incurred up to the date of termination or resignation (in
accordance with the customary policies of the Company), and any benefits that
the Company is required to provide to Employee after the date of termination or
resignation under COBRA or pursuant to any ERISA plans of the Company. The
benefits on termination or resignation provided in this Agreement are in
substitution for any severance or termination benefits otherwise available under
Company policies of general application. The benefits on termination or
resignation provided in this Agreement shall not be reduced by any compensation
or benefits received by Employee from any subsequent employer or any other third
party.

5.               Withholding of Taxes; Tax Reporting. The Company may withhold
                 -----------------------------------
from any amounts payable under this Agreement all such federal, state, city and
other taxes and may file with appropriate governmental authorities all such
information, returns or other reports with respect to the tax consequences of
any amounts payable under this Agreement, as may, in its judgment be required by
laws.

       6.        Payment-Timing. The Company will not be obligated to make any
                 --------------
payment to Employee hereunder until such time as the Company has received a
signed release from Employee in the form of Exhibit "B" attached hereto and
incorporated herein by reference.

       7.        Assignment.  This  Agreement may not be assigned by Employee.
                 ----------
The Company shall be entitled to assign this Agreement to any
successor-in-interest to its business. The Company will obtain an assumption of
this Agreement by any successor or assign to all or substantially all of the
business and/or assets of the Company (whether direct or indirect, by
acquisition, merger,

<PAGE>

consolidation or otherwise), but the failure to obtain such assumption shall not
prevent or delay such acquisition, merger, consolidation or other transaction or
relieve the Company of its obligations under the Agreement. This Agreement shall
bind and inure to the benefit of the Company's successors and assigns, as well
as Employee's heirs, executors, administrators and legal representatives.

         8.      Notices. Any notice, request, demand or other communication
                 -------
required or permitted hereunder shall be deemed to be properly given when
personally served or three (3) days after deposit in the United States mail,
registered or certified, postage prepaid, return receipt requested, addressed to
the Company at its principal office or to Employee at his last known address.

         9.      Entire Agreement. This Agreement, together with the documents
                 ----------------
referenced herein, contain the entire agreement of the parties hereto with
respect to the subject matter hereof, it supersedes any and all other
agreements, either oral or in writing, between the parties hereto with respect
to the subject matter hereof. Each party to this Agreement acknowledges that no
representations, inducements, promises or agreements, written, oral or
otherwise, have been made by any party, or anyone acting on behalf of any party,
which are not embodied herein, and that no other agreement, statement or promise
not contained in this Agreement shall be valid or binding. This Agreement may
not be modified or amended by oral agreement but only by an agreement in writing
signed by the Company and Employee.

         10.     Attorney's  Fees. In the event of any arbitration  arising out
                 ----------------
The Company shall be entitled to assign this Agreement to be entitled to recover
from the non-prevailing party, its costs and expenses, (including reasonable
attorney's fees) incurred in such arbitration.

         11.     Arbitration. If any dispute hereafter arises between the
                 -----------
parties hereto and/or their agents or employees relating to the terms and
provisions of this Agreement or otherwise, including but not limited to any
claim for breach of any contract or covenant (express or implied), tort claims,
claims for discrimination or harassment (including but not limited to race, sex,
religion, national origin, age, handicap or disability), claims for compensation
or benefits (except where a benefit plan or pension plan or insurance policy
specifies a different claims procedure) and claims for violations of any federal
state or other governmental law, statute, regulation or ordinance (except for
claims involving worker's compensation benefits), then either

<PAGE>

party may initiate arbitration proceedings in accordance with the Employment
Rules of JAMS ENDispute, as the exclusive remedy for such dispute and in lieu of
any court action, which is hereby consent to such arbitration, and any
arbitration award shall be final and binding. Neither party shall disclose the
existence of any dispute or the terms of any arbitration decision to any third
party, other than legal counsel, accountants and financial advisors, or as
required by law.

         12.     Advice of Counsel.  Employee acknowledges he has had the
                 -----------------
opportunity and has consulted with independent counsel with respect to
Employee's rights and obligations hereunder.

         IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date identified at the beginning of the Employment Agreement.

                                                "Employee"

                                                --------------------------------
                                                Steve Cotton

"Company"

Lantronix

By:  ______________________________

Its: ______________________________



Approved as to Form and Content:

________________________________
Susan Roos
Attorney for Steve Cotton

________________________________
Marla Merhab Robinson
Attorney for Lantronix

<PAGE>


                                  EXHIBIT "4A"

                                 (Steve Cotton)

         "Substantially Lessens Employee's Title" shall mean that the Employee
does not have the title of Chief Financial Officer and Chief Operating Officer,
or some equal or higher title.

         The Company will be deemed to have Substantially Reduced Employee's
Senior Authority if Employee no longer has authority for the entire range of
financial activity of the Company on a day-to-day basis.


<PAGE>


                                   EXHIBIT "B"

         Release. In consideration of the payments to be made under that certain
         -------
Severance Agreement dated December ___ 2001, Employee, for Employee, and
Employee's heirs, legal representatives, successors and assigns, hereby
releases, acquits and forever discharges Employer and all of Employer's
affiliate and subsidiary corporations, and their present and former, principals,
officers, agents, associates, representatives, directors, employees,
predecessors, successors and assigns and all persons acting by, through, under
or in concert with them, or any of them, jointly and individually, of and from
any and all claims, demands, causes of action, obligations, damages and
liabilities, whether known or unknown, which Employee has or may hereafter
obtain or accrue on account of Employee's employment, the termination of
employment and/or any fact, matter, incident, claim, injury, event,
circumstance, happening, occurrence and/or thing of any kind or nature
whatsoever which arose or occurred at any time prior to the date of Employee`s
execution of this Agreement, including but not limited to emotional distress;
any and all claims for wrongful discharge; breach of any implied or expressed
employment contract; negligent or intentional infliction of emotional distress;
defamation; fraud; unlawful discrimination based upon age, race, sex, marital
status, religion, national origin, medical condition, disability, handicap or
otherwise; breach of any implied covenant of good faith and fair dealing;
violation of any section of the Labor Code of the State of California, the
                                -------------------------------------
California Fair Employment and Housing Act ("FEHA"), Title VII of the Civil
------------------------------------------   ----    ----------------------
Rights Act of 1964 ("Title VII"), the Age Discrimination in Employment Act of
------------------   ---------        ---------------------------------------
1967, as amended ("ADEA"), the Americans With Disabilities Act (ADA), or any
----------------   ----        -------------------------------  ---
other federal, state or local law(s) or regulation(s); unpaid wages, salary,
bonuses, commissions or other compensation of any sort; damages of any nature,
including compensatory, general, special or punitive; and/or costs, fees or
other expenses, including attorney's fees, incurred in any of these matters.

         Employee understands and expressly waives any and all rights and
benefits conferred by the provisions of Section 1542 of the Civil Code of the
State of California, which reads as follows:

         "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
         NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
         RELEASE, WHICH, IF KNOWN BY HIM, MUST HAVE MATERIALLY AFFECTED HIS
         SETTLEMENT WITH THE DEBTOR."

<PAGE>


         Employee understands and acknowledges that the significance and
consequence of the foregoing waiver of Section 1542 of the Civil Code is that
even if Employee should eventually suffer additional damages arising out of his
employment with Employer, he will not be permitted to make any claim for those
damages. Furthermore, Employee acknowledges that Employee intends these
consequences even as to claims for injury or damages that may exist as of the
date of the Agreement but which Employee does not know exists, and which, if
known, would materially affect Employee's decision to execute the Agreement,
regardless of whether Employee's lack of knowledge is a result of ignorance,
oversight, error, negligence, or any other Employee cause.

                                           "Employee"


________________________________________________
Dated: December __, 2001                   Steve Cotton