<PAGE>
                                                                   EXHIBIT 10.17

                                 CONFIDENTIAL
                       SEPARATION AGREEMENT AND RELEASE

     THIS CONFIDENTIAL SEPARATION AGREEMENT AND RELEASE ("Agreement") is made
and entered into on October 7, 1999, by and between Robert J. Netter, Jr. ("Mr.
Netter) and Lexar Media, Inc. (the "Company").

                                  WITNESSETH:

     Whereas, Mr. Netter and the Company desire to settle fully and finally any
and all differences between them, including, but in no way limited to, any
differences that might arise out of Mr. Netter's employment with the Company,
and the termination thereof; and

     N o w, T h e r e f o r e, in consideration of the premises and mutual
promises herein contained, the parties enter into this Confidential Separation
Agreement and Release.

     1.  The Company will maintain Mr. Netter as an employee and Chief Financial
Officer of the Company, through October 7, 1999 (or earlier, if Mr. Netter
voluntarily terminates his employment), at which time Mr. Netter will be
terminated (the "Termination Date"). During this period of employment, Mr.
Netter will be entitled to a continuation of present salary and benefits.

     During this period of employment, the Company will grant Mr. Netter
reasonable time off from work to seek other employment opportunities. For his
part, Mr. Netter, in his capacity as Chief Financial Officer, will use all
reasonable efforts to obtain and close a private placement financing ("Private
Placement") for the Company in the aggregate amount of twenty. million dollars
($20,000,000). The Company acknowledges that, to date, Mr. Netter has used all
reasonable efforts in performance of his duties regarding the Private Placement.
The Private Placement closing must occur on or before October 16, 1999 to be
considered successful ("Successful Private Placement Closing"); provided,
however, a closing later than October 16, 1999 shall also be considered
successful if such later closing is caused by circumstances beyond the control
of Mr. Netter. In the event the Private Placement closing does not occur on or
before October 16, 1999, the closing with be considered unsuccessful
("Unsuccessful Private Placement Closing"). In addition, if Mr. Netter
voluntarily terminates his employment prior to October 1, 1999, and the Private
Placement closing has not occurred, the closing will be considered an
Unsuccessful Private Placement Closing for purposes of this Agreement.

     The determination of the whether the Private Placement is successful or
unsuccessful materially determines the amount of benefits paid to Mr. Netter
upon his Termination Date. In addition, in the event of a Successful Private
Placement Closing, the valuation of the Company may also determine the amount of
benefits paid to Mr. Netter upon his Termination Date. The Schedule of Benefit
Values, based on these determining factors, is attached as Attachment A to this
Agreement, and is incorporated by reference herein.

     2.  Upon the Termination Date, the Company will provide to Mr. Netter the
following benefits:
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          (a) Vacation pay accrued through the Termination Date;

          (b) A home computer valued at approximately $500.00; and

          (c) Payment directly to the insurer on Mr. Netter's behalf equal to
              the cost of the applicable premiums for his present election of
              health insurance benefits for Mr. Netter and his dependents during
              the Consultancy Period (as defined in Paragraph 3, below) and
              contingent severance as specified below.

     3.   Upon the Termination Date, and in the event of a Successful Private
Placement Closing, Mr. Netter will provide to the Company consulting services
for a period of three (3) months (the "Consultancy Period") during which period
the Company will continue to pay Mr. Netter his base salary, less usual and
customary withholding and will provide Mr. Netter with office space or, if none
is available, an office cubicle. The Company will pay Mr. Netter an additional
hourly rate of $80.00 per hour for work the Company requests and Mr. Netter
accepts during the Consultancy Period, with no minimum or maximum service hours
required. In the event of an Unsuccessful Private Placement, Mr. Netter will not
provide consulting services to the Company and the provisions of this Paragraph
3 will not apply.

     4.   The Company will provide to Mr. Netter "Contingent Severance Payments"
(less applicable state and federal payroll deductions), payable bi-weekly in
accordance with the Company's normal payroll procedure. The "Contingent
Severance Payments" will begin following the conclusion of the Consultancy
                         ------
Period set forth in Paragraph 3, above, or the Termination Date in the event of
an Unsuccessful Private Placement Closing. The "Contingent Severance Payments"
will cease upon the earlier of the following two dates: (1) the length of time
     -----
set forth in the attached Schedule of Benefits; or (2) the date upon which Mr.
Netter obtains Comparable Employment (the "Contingent Severance Period"). For
the purposes of this Agreement, Comparable Employment is any employment or
consulting arrangement that pays Mr. Netter $2,000.00 or more in any month. In
the event Mr. Netter obtains Comparable Employment at a lower salary than his
base salary as of the date of this Agreement, the Company will pay the
difference in salary for the remainder of the "Contingent Severance Period" as
set forth in the attached Schedule of Benefits. The Company will not require Mr.
Netter to submit receipts, invoices, IRS Form W-2 or Form 1099, etc. on a
regular basis. However, the Company reserves the right to inquire of Mr. Netter
regarding Comparable Employment and, in its discretion demand that Mr. Netter
produce invoices, receipts, IRS Form W-2 or Form 1099 for inspection.

     5.   In the event of a Successful Private Placement Closing, Mr. Netter
will receive a cash bonus (less applicable state and federal payroll deductions)
in an amount set forth in the attached Schedule of Benefits.

     6.   On March 24, 1998, Mr. Netter executed a "Secured Full Recourse
Promissory Note" as Exhibit 1 to the "Lexar Media, Inc. Restricted Stock
Purchase Agreement," in the amount of $24,000 from the Company. In the event of
a Successful Private Placement Closing, the Company will forgive a portion of
the amount due on the Promissory Note, in an amount set forth in the attached
Schedule of Benefits.

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<PAGE>

     7.  On March 24, 1998, Mr. Netter and the Company entered into the "Lexar
Media, Inc. Restricted Stock Purchase Agreement," a copy of which is attached
hereto as Attachment B. As further consideration for this Agreement, the Company
shall grant to Mr. Netter an additional twelve months vesting toward the
Termination of the Company's Repurchase Right set forth in Section D, Paragraph
3, regardless of Private Placement Closing.

     In the event of Successful Private Placement Closing, the Company shall
grant to Mr. Netter an additional vesting period in an amount set forth in the
attached Schedule of Benefits.

     8.  The Company shall grant to Mr. Netter vested shares in an amount set
forth in the attached Schedule of Benefits.

     9.  The Company, in conjunction with Mr. Netter's input and final approval,
will provide to Mr. Netter an employment letter of reference.

     10. This Agreement supersedes, replaces, and revokes the terms contained
in the offer of Employment letter dated September 8, 1997, executed by and
between the Company and Mr. Netter, a copy of which is attached hereto as
Attachment C.

     11. Mr. Netter, on the one hand, and the Company, on the other hand,
hereby release and forever discharge each other, and the other's past and
present directors, managers, officers, shareholders, partners, agents,
employees, attorneys, servants, parent corporations, subsidiaries, successors,
assigns, family members, executors, administrators, and each of them, separately
and collectively (hereinafter "Releasees"), from any and all existing claims,
liens, demands, causes of action, obligations, damages and liabilities of any
nature whatsoever, known or unknown, including claims for costs and attorneys'
fees that either party ever had, now has or may claim to have had against
Releasees for any reason, including but not limited to, claims relating to any
oral or written employment or other agreement with the Company, to any services
performed for the Company, to employment or non-employment with the Company, to
any status, term or condition in such employment, or to any physical or mental
harm or distress from such employment or non-employment or claim to any hire,
rehire or future employment of any kind by the Company as a result of this
Agreement or the consideration referred to above.

     12. Mr. Netter will indemnify and hold the Company harmless from and
against any and all tax obligations for which Mr. Netter or the Company may
become liable as a result of this Agreement.

     13. This Agreement shall not in any way be construed as an admission by
any party that it acted wrongfully with respect to each other or any other
person. The parties specifically disclaim any liability to or wrongful acts
against the other, on the part of itself, its employees or its agents. Rather
the parties have entered into this settlement to resolve any and all disputed
claims which are raised or could be raised by Mr. Netter or the Company. This
Agreement does not constitute an admission or concession by either Mr. Netter or
Company of any liability on account of any of such claims.

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<PAGE>

     14.  This Agreement shall not affect the obligations imposed upon Mr.
Netter by virtue of the "Lexar Microsystems, Inc. Employee Nondisclosure and
Invention Assignment Agreement," dated September 8, 1997, and which was
previously executed by Mr. Netter.

     15.  Mr. Netter and the Company represent and agree to keep the terms of
this Agreement completely confidential, and that he will not disclose any
information concerning this Agreement to anyone other than Mr. Netter's doctor,
tax preparer and attorney, if any, or as otherwise required by law. The Company
reserves the right to disclose the existence of and the terms of this Agreement
internally on a "need-to-know" basis, and to its attorneys, tax advisers, and
other agents as necessary or as required by law.

     16.  Mr. Netter covenants and agrees never, individually or with any person
or in any way, to commence, aid in any way, prosecute or cause or permit to be
commenced or prosecuted against the Company, any action or other proceeding
based upon any claim, demand, cause of action, obligation, damage or liability
which is the subject of this Release, except as required by law. Mr. Netter
further agrees to aid the Company in the event of litigation against the
Company. The Company represents and agrees to reimburse Mr. Netter at the rate
of two times his base salary and for any necessary expenses incurred by Mr.
Netter in the event of such litigation. The Company agrees to indemnify Mr.
Netter and hold him harmless from any third party claims brought against him
arising out of his employment with the Company.

     17.  Each party agrees not to engage in conduct or undertake speech
derogatory about or detrimental to the other party.

     18.  The provisions of this Agreement are severable, and if any part of it
is found to be unenforceable, the other paragraphs shall remain fully valid and
enforceable. This Agreement shall survive the termination of any arrangements
contained herein.

     19.  The Parties expressly waives any right or benefit available to them in
any capacity under the provisions of section 1542 of the Civil Code of
California, which provides:

          "A Release does not extend to claims which the creditor does not know
          or suspect to exist in Employee's favor at the time of executing the
          release, which if known by him must have materially affected
          Employee's settlement with the debtor."

     20.  The Parties acknowledge and agree that no other consideration other
than as provided for by this Agreement has been or will be paid or furnished;
acknowledge and agree that they will make no claim and hereby waive any right
they may now have or may hereinafter have, based upon any alleged oral
alteration, amendment, modification or any other alleged change in this
Agreement outside of the Agreement; and that they have freely and voluntarily
entered into and executed this Agreement.

     21.  Mr. Netter understands that various federal, state and local laws
prohibit age, sex, race, disability, benefits, pension, health and other forms
of discrimination and that these laws can be enforced through the U.S. Equal
Employment Opportunity Commission, California state and local human rights
agencies and federal and state courts. Mr. Netter understands that if he
believes his treatment by the Company was discriminatory, he has had the right
to consult with

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<PAGE>

these agencies and to file a charge with them or file a lawsuit. Mr. Netter
states and confirms that he has filed no Charges or Claims with any state or
federal agency or any other body, institution or tribunal. Mr. Netter has
decided voluntarily to enter into this Agreement, and waive the right to recover
any amounts to which he may have been entitled under such laws, including, but
not limited to: the Age Discrimination in Employment Act, 29 U.S.C. (S) 621 et
                --------------------------------------------------------------
sec. (as amended by the Older Workers' Benefit Protection Act, 29 U.S.C.(S)
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626(f)); the California Fair Employment and Housing Act, California Government
Code (S) 12900 et seq.; the Employee Retirement Income Security Act (ERISA), 29
U.S.C. (S) 1001 et seq.; Title VII of the Civil Rights Act of 1964, 42 U.S.C.
(S) 2000e et seq.; and 42 U.S.C. (S) 1981.

     22.  Mr. Netter acknowledges that he has been advised by the Company to
consult with an attorney prior to executing this Agreement. Mr. Netter
represents and agrees that he fully understands his right to discuss all aspects
of this Agreement with his private attorney, that to the extent, if any, he
desires, he has availed himself of this right, that he has carefully read and
fully understands all of the provisions of this Agreement, and that he is
voluntarily entering into this Agreement. Mr. Netter understands and agrees that
the waiver of rights contained in this Agreement is only in exchange for the
consideration specified herein, and that he would not otherwise be entitled to
such consideration. Mr. Netter acknowledges that he was offered a period of at
least twenty-one (21) days to consider the terms of this Agreement. For a period
of seven (7) days following execution of this Agreement, Mr. Netter may revoke
said Agreement. The Agreement shall not become effective or enforceable until
the seven (7) day period has expired. The "Effective Date" of this Agreement
shall be the eighth day following execution of this Agreement by all Parties.
The Parties understand that no payments or other consideration supporting this
Agreement will be made until the Effective Date of this Agreement.

     23.  Mr. Netter, and the Company represent and agree that this Agreement is
binding upon themselves and their estates, heirs and assigns.

     24.  This Agreement incorporates the entire understanding among the
parties, and recites the sole considerations for the promises exchanged herein.
In reaching this Agreement, no party has relied upon any representation or
promise except those expressly set forth herein.

     25.  This Agreement is governed by, and is to be interpreted according to,
the laws of the State of California. If any term of this Agreement or
application thereof shall be invalid or unenforceable, the remainder of the
Agreement shall remain in full force and effect.

     26.  The parties hereto agree that venue is proper in the California State
courts in Santa Clara County, California and in the Federal District Court for
the Northern District of California, and each party hereby consents to the
jurisdiction of such courts.

     27.  This document may be executed in duplicate originals, each of which is
equally admissible in evidence, and each original shall fully bind each party
who executed it.

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<PAGE>

     28.  Mr. Netter has read the foregoing Agreement and fully understand and
agree to it.

     PLEASE READ CAREFULLY. THIS CONFIDENTIAL SEPARATION AGREEMENT AND RELEASE
INCLUDES A RELEASE OF ALL KNOWN AND UNKNOWN CLAIMS.

     Executed at Fremont, CA this 13th day of October, 1999.

                              By: /s/ Robert J. Netter, Jr.
                                  --------------------------
                                  Robert J. Netter, Jr.

     Executed at Fremont, CA this 13th day of October, 1999.

                              By: /s/ John Reimer
                                  --------------------------
                                  John Reimer
                                  President and CEO Lexar Media, Inc.

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<PAGE>

                                 ATTACHMENT A
                                 ------------

                             SCHEDULE OF BENEFITS*
                             --------------------

<TABLE>
<CAPTION>
BENEFIT                  Unsuccessful       Successful Private      Successful Private      Successful Private    Successful Private
                       Private Placement    Placement Closing       Placement Closing       Placement Closing     Placement Closing
                            Closing        (valuation under $80    (valuation $80 up to    (valuation $90 up to    (valuation $100
                                                 million)            $89.999 million)        $99.999 million)      million or more
------------------------------------------------------------------------------------------------------------------------------------
<S>                    <C>                 <C>                     <C>                     <C>                    <C>
Consulting Services        0 months              3 months                3 months                3 months                3 months
------------------------------------------------------------------------------------------------------------------------------------
Contingent Severance   12 months salary      9 months salary         9 months salary         9 months salary         9 months salary
 Payment
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Cash Bonus                    0              3 months salary         4 months salary         5 months salary         6 months salary
------------------------------------------------------------------------------------------------------------------------------------
Forgiveness of                0                  $ 19,500                $ 20,000               $ 20,500               $ 21,000
 Promissory Note
------------------------------------------------------------------------------------------------------------------------------------
Vesting Bonus (in          0 months              3 months                4 months                5 months               6 months
 addition to 12
 month grant)
------------------------------------------------------------------------------------------------------------------------------------
Grant of Vested            243,750                250,000                256,250                 262,500                268,750
 Shares
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

__________________

*    For example, if the Company achieves a Successful Private Placement with a
     closing valued at $95 million, Mr. Nettter would receive 3 months
     consulting services, 9 months contingent severance payments, a cash bonus
     equal to 5 months base salary, forgiveness of the Promissory Note and a
     grant of 262,500 vested shares of Company Common Stock.  In addition, the
     valuation amount shall be determined by the per share price paid upon
     closing.


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