Document:

<PAGE>

                                                                    EXHIBIT 10.7

                             EMPLOYMENT AGREEMENT

     THIS AGREEMENT, made on April   , 1998 is between Lantronix, a California
corporation, ("Employer"), located at 15353 Barranca Parkway, Irvine, California
92714, and Frederick G. Thiel, a married individual, ("Employee"), residing at
25906 Portafino Drive, Mission Viejo, California 92691, by virtue of the
following facts, events, circumstances and desires:

                                    RECITALS

     A  WHEREAS, Employee desires to work for Employer and receive compensation,
and Employer desires to employ Employee:

     B.  WHEREAS, Employer is engaged in the business of developing and selling
switches and other peripheral devices used in local area networking computer
systems;

     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 not compete with
     it for
a reasonable period of time after termination of employment, and Employee is
willing to refrain from competition.

     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 April   _____, 1998 and
shall terminate April ____, 2001. The Employee will be employed by the Employer
until such time as either or both parties choose to discontinue the employment.
The employment relationship shall be that of an Employee at will.

     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 Employer's Board of Directors, and shall in all rejects 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.

                                       1
<PAGE>

     3.  Compensation

          3. l  Base Salary. The Employer shall pay to the Employee as base
                -----------
compensation the total sum of One Hundred Sixty Thousand Dollars ($160,000.00)
per year, payable at those intervals as the Employer shall pay other Executives,
commencing April _____, 1998. Said base salary shall be subject to annual review
by the Employer's Board  of Directors.

          3.2  Bonus. In addition to said base salary, Employee shall also
               -----
receive a bonus amount calculated in accordance with the Executive Incentive
Compensation Program attached hereto and incorporated herewith as Exhibit "2"
Said bonus amount shall be paid quarterly and amount to up to 30% of the annual
base salary referenced in Paragraph 3.1 above.

          3.3  Automobile Allowance. Employee shall receive an automobile
               --------------------
allowance of $400 per month.

          3.4  Insurance Coverage. Employer shall make available to Employee and
               ------------------
his dependents whatever coverages 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.

          3.5  Expenses. Employee shall be reimbursed by Employer for all
               --------
reasonable entertainment promotion or other expenses advanced by him on behalf
of Employer.

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

          3.7   Vacation. Employee will initially be entitled to eighteen (18)
                --------
days of vacation per year accrued ratably on a monthly basis. Vacation time that
has accrued but is unused at the end of the calendar year will be compensated at
the base salary rate.

          3.8  Stock Options. Employer shall grant to Employee stock options as
               -------------
indicated in the subparagraphs below. Employee and Employer shall cooperate with
one another to maximize the tax advantaged position of Employee with respect to
the options to be granted to the extent feasible all of the options shall be
from Employer's Qualified Incentive Stock Option Plan, either the existing 1993
Plan or a new plan, which Employer shall cause to be adopted by its Board of
Directors and Shareholders. To the extent the intended options cannot be fit
within a qualified plan, they shall be made from Employer's Non-Qualified Stock
Option Plan. Understanding these conceptual parameters, the stock options to
which Employee shall be entitled consist of:

               3.8.1  One percent (1%) of the amount of shares of Employer's
common stock outstanding at execution of this Agreement, to vest over four
years, at the rate of 25% at the first anniversary hereof and ratably per month
thereafter;

                                       2
<PAGE>

               3.8.2  Two percent (2%) of the amount of shares of Employer's
common stock outstanding at. execution hereof, to vest at time of completion of
sale of Employer or completion of an initial public offering of Employer's
common stock; and

               3.8.3  One half percent (1/2%) of the amount of shares of
Employer's common stock outstanding at execution hereof, to vest at completion
of a yet to be determined milestone. Said milestone to be adopted by mutual
agreement of Employee and a majority of Employer's Board of Directors.

     4.  Termination. The Employer shall have the right to terminate employment
without cause, upon three weeks prior notice, or for cause, immediately after
notice. Employee Shall have the advantage of certain severance benefits on
termination provided in that certain Severance Agreement attached hereto and
incorporated herein as Exhibit "5" The term "cause" shall mean:

          4.1  Conduct on the Employee's part intended to or likely to injure
the Employer's business or reputation;

          4.2  The Employee's perpetration of a crime involving moral turpitude,
whether relating to employment or otherwise;

          4.3  Significant failure by the Employee to perform duties and
obligations as forth in this Agreement, resulting in substantial damage to the
Employer.

     5.  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) internal procedures and
policies, (h) customer lists, account names, contacts, addresses and sales
activity, (i) names and addresses of suppliers and vendors, (j) tax and
financial information, (k) reserves, (1) 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 confidential information
without the prior written consent of the company. Employee will use reasonable
and prudent care to safeguard and 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.

                                       3
<PAGE>

6.  Protective Covenant/Non-Competition. While employed by Employer and after
such. employment until the second anniversary of such cessation of employment
(the "Non-compete Period"), whether-termination is voluntary or involuntary,
Employee agrees not to accept employment, consult with or otherwise become
associated or affiliated with any person, firm. association or other entity that
is directly or indirectly in competition with the services, products. business
or activities of Employer.

     It is specifically agreed that during the Non-compete 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 his employment and for one (1) year after
termination of his employment, he will not directly or indirectly, in any
manner, request or induce Employee of Employer to leave his employment with
Employer, unless expressly authorized or instructed to do so in writing by
Employer.

     It is understood by both parties to this agreement that the protective
covenants meant for the reasonable protection of the business of Employer and
not to impair the ability of Employee to earn a living. Should any portion of
this covenant be construed by a court of law or equity as less than reasonable,
the parties agree to the establishment by such court of an obligation for the
protection of Employer's business that it deems reasonable.

     7.  Return of Property. All documents, drawings, lists, records or other
tenable 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.

     8.  Remedy. Employee acknowledges and agrees that the confidential
information, trade secrets and special `knowledge acquired by him or her during
his or her employment with Employer is valuable and unique, and that breach by
him or her 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. Employee expressly waives the claim or defense that
Employer has an adequate remedy at law.

     9.  Applicable Law. This agreement shall be governed, interpreted and
construed in accordance with the laws of the State of California.

                                       4
<PAGE>

     10.  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.

     11.  Entire Agreement. It is agreed that the provisions of the 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 respective heirs, administrators and assigns.

     12.  Voluntary Agreement. I understand I will have access to confidential
information and customer accounts while employed by Employer. I further
acknowledge that I have freely and voluntarily entered into this Agreement.
which contains restrictions on my ability to complete with Lantronix for any
reason I recognize that Lantronix has provided me adequate consideration for my
agreement herein.

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

                              "EMPLOYEE"

                              /s/ Frederick G. Thiel
                              ----------------------
                              Frederick G. Thiel

                              LANTRONIX

                              By: /s/ Bernhard Bruscha
                                 -------------------------

                              Its:
                                  --------------------------

                                       5
<PAGE>

                                  EXHIBIT "1"

TITLE:              CEO

RESPONSIBILITIES:   The responsibility of the CEO is to ensure the (1)
                    achievement of a reasonable interpretation of the
                    organizational results, beneficiaries, and cost of those
                    results as described in the board's ends policies, and (2)
                    avoidance of a reasonable interpretation of the unacceptable
                    conditions and actions described in the board's executive
                    limitation policies.

                    Ends policies are board policies that define the mission of
                    the company and the key priority result areas. These are
                    written as clearly measurable objectives with dates an
                    milestones.

                    Executive limitations are board policies that define and/or
                    limit activities and conditions for the operation of the
                    company, including budgets, financial conditions, staff
                    treatment, asset protection, staff compensation, and board
                    information.

AUTHORITY:          The CEO is empowered to make all decisions, create all
                    policies, and authorize all engagements that, upon board
                    request, he can demonstrate to be consistent with a
                    reasonable interpretation of the board's ends and executive
                    limitations.

REPORTING:          The CEO reports to the board of directors as a whole -- not
                    to any individual member of the board.
<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
and 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 Management Objectives
   --------------------------------

Following is a matrix of the mix of annual incentive compensation elements for
selected management levels:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
LEVEL                                   Financial                    MBO's                    % of $base
--------------------------------------------------------------------------------------------------------------
<S>                              <C>                        <C>                        <C>
CEO/President                              60%                        40%                        30%
--------------------------------------------------------------------------------------------------------------
</TABLE>

Weighting and Factors:
---------------------

Financial goals consist of revenues, gross margin and net operating income in
dollars and are weighed as follows:

Revenue             20%
Gross Margin        50%
Net                 30%

Gross margin carries the greatest weight, due to its importance in providing the
fuel that powers the company.
<PAGE>

As a further incentive, each goal uses a step function factor with thresholds to
determine actual bonus amount as follows:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
Element                                     Percentage of Goal                          Factor
------------------------------------------------------------------------------------------------------------
<S>                                 <C>                                   <C>
Revenue                                      Lesser than 85%                              0.0x
                                    ------------------------------------------------------------------------
                                                 85-95%                                   0.5x
                                    ------------------------------------------------------------------------
                                                96-110%                                   1.0x
                                    ------------------------------------------------------------------------
                                             Greater than 110%                            2.0x
------------------------------------------------------------------------------------------------------------
Gross Margin                                 Lesser than  80%                             0.0x
                                    ------------------------------------------------------------------------
                                                 81-90%                                   0.5x
                                    ------------------------------------------------------------------------
                                                91-115%                                   1.0x
                                    ------------------------------------------------------------------------
                                             Greater than 115%                            2.0x
------------------------------------------------------------------------------------------------------------
Net                                          Lesser than 60%                              0.0x
                                    ------------------------------------------------------------------------
                                                61-80%                                    0.5x
                                    ------------------------------------------------------------------------
                                                81-120%                                   1.0x
                                    ------------------------------------------------------------------------
                                             Greater than 120%                            2.0x
------------------------------------------------------------------------------------------------------------
</TABLE>

Example:
-------

MBO Baseline $/qtr:      $15,000   Fin. %     60%   MBO %   40%
    Period:   Q3 1997

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
FINANCIAL                   TARGET              ACTUAL                 RESULT/           BASELINE           (R/F)*
GOALS:                                                                 FACTOR                              BASELINE
---------------------------------------------------------------------------------------------------------------------
<S>                         <C>                 <C>                     <C>               <C>              <C>
REVENUE                     $10,000             $10,500                 105%              $1,800           $1,8000.00
                                                                        1.0               20%
---------------------------------------------------------------------------------------------------------------------
GROSS MARGIN                $ 4,600             $ 5,500                 120%              $4,500           $ 9,000.00
                                                                        2.0               50%
---------------------------------------------------------------------------------------------------------------------
PROFIT                      $ 1,100             $   800                 73%               $2,700           $ 1,350.00
                                                                        0.5               30%
---------------------------------------------------------------------------------------------------------------------
                                                                     SUBTOTAL  FINANCIAL  $9,000           $12,150.00
---------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       8
<PAGE>

Rules:
-----

13.  Incentive compensation is to be paid quarterly based on targeted quarterly
financial goals and MBO's.

14.  Circumstance beyond the control of the executive, 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 negotiated between the executive and his
supervisor(s). Disputes should be resolved solely at the discretion of the Board
of Directors.

15.  Financial goal targets should be based on the Board approved operating plan
and any periodic updates that may be made.

16.  MBO's need to be specifically defined, measurable, subject to partial
credit or all or none, reasonably able to be accomplished, support the overall
goals of the Company and the Operating Plan, and negotiated and agreed to by
supervisor and executive.

                                       9
<PAGE>

                                  EXHIBIT "3"

                   LANTRONIX 1993 INCENTIVE STOCK OPTION PLAN

                                [To Be Attached]
<PAGE>

                                  EXHIBIT "4"

                   LANTRONIX INCENTIVE STOCK OPTION AGREEMENT

                                [To Be Attached]
<PAGE>

                                  EXHIBIT "5"

                              SEVERANCE AGREEMENT

     This Severance Agreement ("Agreement") is made and entered into by
LANTRONIX, a California corporation ("Company"), and FREDERICK G. THIEL
("Executive")

                                    RECITALS

     WHEREAS, Executive is employed as Chief Executive Officer of the Company;
and

     WHEREAS, the Company desires to provide certain benefits to Executive as
described herein as an incentive for Executive 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
Executive without "Cause" ( as hereinafter defined) on or before the two year
anniversary of the date of the Change in Control, or (ii) Executive 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 3 hereof)
the Company shall:

          a.   Continue to pay Executive his current base salary and automobile
allowance 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 fifteen months, payable either monthly
installments within five days after the end of each month, or at the option of
Executive (i) 50% in a lump sum within 45 days after the date of termination or
resignation and (ii) 50% in fifteen equal monthly installments, commencing
within fifteen days following termination or resignation and continuing
thereafter on the same day of each month.

          b.   Pay Executive an amount equal to 125% of the average of the two
highest annual bonuses that were actually paid to Executive by the Company
(under all bonus plans available to Executive) during the three bonus years
preceding the date of termination or resignation, payable in a lump sum within
45 days after the date of termination or resignation;

                                       1
<PAGE>

          c.   Continue to provide Executive at Company 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 Executive,
immediately prior to the date of the Change in Control) for a period of fifteen
months following the date of such termination or resignation, or, if any of such
benefits cannot be provided to Executive for such fifteen month period under the
Companies policies as then in effect or under applicable law, then the Company
shall pay Executive an amount equal to the monthly premiums paid on behalf of
Executive for such benefits at the time of such termination or resignation for a
period beginning on the date the Executive's participation in such benefits is
prohibited and ending on the date that is fifteen 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
Executive under the Company's stock options ,granted to Executive under the
Company's stock option or other benefit plans so that all such stock options
will vest and

          e.   Extend the post-termination exercise period for all unexercised
stock options granted to Executive under the Company's stock option and other
benefit plans so that all such stock options will be exercisable for the longer
of (A) the period ending fifteen months following the date of such termination
or resignation, or (B) the post-termination exercise period provided in such
plan; and

          f.   Reimbursement Executive for third party, out placement services
actually incurred by Executive in an amount not to exceed $15,000, provided such
expenses are accounted for by Executive m accordance with the policies and
procedures by the Company.

     2.   Definitions.
          ------------

          a.   Change in Control: For purposes of this Agreement, the term
               -----------------
"Chang 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 (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
               -------------------------
termination Executive's employment at any time with or without Cause. For
purposes of this Agreement, the Company shall be deemed to have terminated
Executive without "Cause" following a Change in Control if Executive's
employment is terminated for any reason other than

                                       2
<PAGE>

the following: (i) Executive commits a felony or possesses, uses or sells
illegal drugs; (ii) Executive significantly neglects, or materially inadequately
performs, his duties as a employee of the Company, (iii) Executive breaches a
fiduciary duty to the Company or its shareholders involving personal profit to
Executive; (iv) Executive is deceased: or (v) Executive is disabled.
Notwithstanding the foregoing, Executive shall be deemed to have been terminated
without Cause (except in the case of death) unless the Company delivers to the
Executive a copy of a resolution duly adopted by the affirmative vote of not
less a majority of the entire membership of the company's Board of Directors
finding that in the opinion of the Board Executive engaged in the applicable
conduct set forth in subsection (i), (if) or (iii) above or Executive is
disabled. For purposes of this Agreement Executive shall-be considered disabled
if he has been physically or mentally incapable of performing his duties
hereunder for (i) a continuous period of at least one hundred twenty (120) days
or (if) a total of one hundred fifth (150) days during any one hundred and
eighty (180) day period, and Executive has not recovered and returned to the
full time performance of his duties within thirty days after written notice is
given to him by the Company following such 120 day period or 180 day period, as
the case may be.

          c.   Resignation with Good Reason. Executive may resign at any time
               ----------------------------
with or without Good Reason. For purposes of the Agreement, Executive 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 Executive's express written consent; (i) the Company
"Substantially Lessens Executive's Title" (as defined on Exhibit A attached
hereto); (if) the Company assigns material duties To Executive's Senior
Authority (as defined on Exhibit A attached hereto); (if) the Company assigns
material duties to Executive which are materially inconsistent with Executive's
status as an office of the Company; (iii) the Company reduces Executive'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); (iv) the Company
requires Executive to be based more than fifty (50) miles from his present
office location, except for required travel consistent with Executive's business
travel obligations; or (v) the Company fails to obtain the assumption of this
Agreement by any successor or assign of the Company.

     3.   The Company's Obligations Under This Agreement. Executive shall
          ----------------------------------------------
not be entitled to any of the benefits of Section 1 if the Company terminates
Executive's employment or if Executive resigns under circumstances other than as
specifically set forth in Section 1. The Benefits set forth in Section 1
constitute the sole obligations of the Company to Executive upon any termination
or resignation and are in lieu of any damages or other compensation that
Executive may claim under other Company policies or otherwise, except for
Executive's salary which has been carnal up to 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 Executive after the date of termination or resignation under COBRA or
pursuant to any ERISA plans of the

                                       3
<PAGE>

Company. The benefits on termination or resignation provided in this Agreement
are in substitution for any severance or termination benefits otherwise
agreeable 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 Executive from any subsequent employer
or any other third party.

     4.   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 law.

     5.   Assignment. This Agreement may not be assigned by Executive. 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, 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
Executive heirs, executors, administrators, and legal representatives.

     6.   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 Executive at his last known address.
Either party may change its address by written notice in accordance with the
Section 7.

     7.   Entire Agreement. This Agreement, together with the documents
          ----------------
referenced herein, contains 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 mended by oral agreement, but only by an agreement in writing
signed by the Company and Executive.

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

                                       4
<PAGE>

     9.   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 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, financial advisors or as required by law.

     10.  Termination. Except as to any amounts already owed under this
          -----------
Agreement due to a termination or resignation, this ,agreement shall terminate
upon the closing of a public offering of the Company's stock pursuant to an
effective registration statement filed with the Securities and Exchange
Commission pursuant to the Securities Act of 1933.

                              EXECUTIVE:

                              /s/ Frederick G. Thiel
                              ----------------------
                              Frederick G. Thiel

                              COMPANY:

                              LANTRONIX
                              a California corporation

                              By:   /s/ Bernhard Bruscha
                                    --------------------
                                    BERNHARD BRUSCHA
                              Its:  Chairman

                                       5
<PAGE>

                                   EXHIBIT A
                                   ---------

                               (Frederick Thiel)

     "Substantially Lessens Executive's Title" shall mean that the Executive
does not have the title of Chief Executive officer or some higher title.

     The Company will be deemed to have Substantially Reduced Executive's Senior
Authority if Executive no longer has authority, for directing the business and
executive employees of the Company on a day-to-day basis.<PAGE>

                                                                    EXHIBIT 10.8

                             EMPLOYMENT AGREEMENT

     THIS AGREEMENT, made on December 6, 1999, is between Lantronix, a
California corporation, ("Employer"), located at 15353 Barranca Parkway, Irvine,
California 92618, and Steven Cotton, an individual, ("Employee"), residing at
6191 Gleneagles Circle, Huntington Beach, California, 92648, by virtue of the
following facts, events, circumstances and desires:

                                   RECITALS

     A.    WHEREAS, Employee desires to work for Employer and receive
compensation, and Employer desires 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 not compete
with it for a reasonable period of time after termination of employment, and
Employee is willing to refrain from competition.

     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 December 9, 1999.
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.

     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 Chief Executive Officer or 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.

                                       1
<PAGE>

     3.    Compensation.

           3.1  Base Salary.  The Employer shall pay to the Employee as base
                -----------
compensation the total sum of One Hundred Eighty Thousand Dollars ($180,000.00)
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  Bonus. In addition to said base salary, Employee shall also
                -----
receive a bonus amount calculated in accordance with the Lantronix MBO
Incentive Program, revision 0.2x, attached hereto and incorporated herewith as
Exhibit "2A." Said bonus amount shall be paid quarterly and in an amount up to
30% of the annual base salary referenced in Paragraph 3.1 above.

           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 on behalf of
Employer.

           3.5  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.

           3.6  Vacation.  Employee will initially be entitled to twenty (20)
                --------
days of vacation per year accrued ratably on a bi-weekly basis. Vacation time
may be accrued and used in accordance with the Employer's Vacation Policy.

           3.7  Stock Options.  Employer shall grant to Employee stock options
                -------------
as indicated in the subparagraph(s) below:

                3.7.1   85,000 Non-Qualified Stock Options to vest according to
the following schedule.

                (i)     12,143 options to vest on Employee's first day of
                        employment.
                (ii)    12,143 options to vest on the first anniversary of
                        Employee's date of employment.
                (iii)   The remaining 60,714 options to vest ratably per month
                        thereafter for a period of 60 months.

                3.7.2  The Non-Statutory Stock Option Agreement is attached
hereto and incorporated herewith as Exhibit "3."

     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 attached hereto and incorporated herein as Exhibit
"4."

           4.1  Termination without Cause.  For purposes of this Agreement, the
                -------------------------
Company shall be deemed to have terminated Executive's employment without
"Cause" if Executive's employment is terminated for any reason other then the
following:  (i) Executive commits a felony or possesses, uses or sells illegal
drugs; (ii) Executive significantly neglects, or materially inadequately
performs, his duties as an employee of the Company; (iii) Executive breaches a
fiduciary duty to the Company or its shareholders involving personal profit to
Executive; (iv) Executive is deceased; or (v) Executive is disabled.
Notwithstanding the foregoing, Executive shall be deemed to have been terminated
without Cause (except in the case of death) unless the Company delivers to the
Executive a copy of a resolution duly adopted by the affirmative vote of not
less a majority of the entire membership of the Company's

                                       2
<PAGE>

Board of Directors finding that, in the opinion of the Board, Executive engaged
in the applicable conduct set forth in subsection (i), (ii) or (iii) above or
Executive is disabled. For purposes of this Agreement, Executive 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 one hundred twenty (120) days or (ii) a total of one hundred fifth (150)
days during any one hundred and eighty (180) day period, and Executive has not
recovered and returned to the full time performance of his duties within thirty
days after written notice is given to him by the Company following such 120 day
period or 180 day period, as the case may be.

     5.    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) internal procedures and
policies, (h) customer lists, account names, contacts, addresses 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
confidential information without the prior written consent of the company.
Employee will use reasonable and prudent care to safeguard and 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.

     6.    Protective Covenant/Non-Competition.  While employed by Employer and
for a period of eighteen (18) months after cessation of employment (the "Non-
compete Period"), whether termination is voluntary or involuntary, Employee
agrees not to accept employment, consult with or otherwise become associated or
affiliated with any person, firm, association or other entity that is directly
or indirectly in competition with the services, products, business or activities
of Employer.

           It is specifically agreed that during the Non-compete 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 his employment and for one (1)
year after termination of his employment, he will not directly or indirectly, in
any manner, request or induce any Employee of Employer to leave his employment
with Employer, unless expressly authorized or instructed to do so in writing by
Employer.

           It is understood by both parties to this agreement that the
protective covenants meant for the reasonable protection of the business of
Employer and not to impair the ability of Employee to earn a living. Should any
portion of this covenant be construed by a court of law or equity as less than
reasonable, the parties agree to the establishment by such court of an
obligation for the protection of Employer's business that it deems reasonable.

                                       3
<PAGE>

     7.    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.

     8.    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 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.

     9.    Attorneys' 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 costs and expenses (including reasonable attorney's
fees) incurred in such arbitration.

     10.   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.
Employee expressly waives the claim or defense that Employer has an adequate
remedy at law.

     11.   Applicable Law.  This agreement shall be governed, interpreted and
construed in accordance with the laws of the State of California.

     12.   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.

     13.  Entire Agreement.  It is agreed that the provisions of the 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 respective heirs, administrators and assigns.

                                       4
<PAGE>

     14.   Voluntary Agreement.  I understand I will have access to confidential
information and customer accounts while employed by Employer. I further
acknowledge that I have freely and voluntarily entered into this Agreement,
which contains restrictions on my ability to compete with Lantronix for any
reason. I recognize that Lantronix has provided me adequate consideration for my
agreement herein.

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

                                  "EMPLOYEE"

                                  /s/ Steven Cotton
                                  _______________________________________
                                  Steven Cotton

                                  LANTRONIX

                                       /s/ Fred Thiel
                                  By:  ___________________________________
                                        Fred Thiel
                                  Its:  Chief Executive Officer

                                       5
<PAGE>

                                  EXHIBIT "1"

TITLE:             Chief Financial 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 CFO is empowered, regarding the financial and accounting
                   activities, to make all decisions, create all policies, and
                   authorize all engagements that, upon the CEO'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.

                                       6
<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
and 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 compensation 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 2A.
-------------------------------

                                       7
<PAGE>

                                  EXHIBIT "2A"

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.

                                       8
<PAGE>

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:

                                       9
<PAGE>

<TABLE>
<CAPTION>
              Element                    Percent Achieved                         Factor
-------------------------------------------------------------------------------------------------------
<S>                                      <C>                                      <C>

Net Revenue (20%)                          less than 85%                            0.0
                                               85-95%                               0.5
                                              96-110%                               1.0
                                          greater than 110%                         2.0
-------------------------------------------------------------------------------------------------------
Gross Margin (50%)                         less than 80%                            0.0
                                               81-90%                               0.5
                                              91-115%                               1.0
                                          greater than 115%                         2.0
-------------------------------------------------------------------------------------------------------
Pre-tax Profit (30%)                       less than 60%                            0.0
                                               86-80%                               0.5
                                              81-120%                               1.0
                                          greater than 120%                         2.0
-------------------------------------------------------------------------------------------------------
</TABLE>

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.

                                       10
<PAGE>

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.

                                       11
<PAGE>

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.

                                       12
<PAGE>

                                  EXHIBIT "3"

                   Lantronix Non-Statutory Stock Option Plan

                                [To Be Attached]

                                       13
<PAGE>

                                  EXHIBIT "4"

                              SEVERANCE AGREEMENT

  This Severance Agreement ("Agreement") is made and entered into by LANTRONIX,
a California corporation ("Company"), and Steven Cotton ("Executive").

                                    RECITALS

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

  WHEREAS, the Company desires to provide certain benefits to Executive as
described herein as an incentive for Executive 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 Executive
without "Cause" (as hereinafter defined) on or before the two year anniversary
of the date of the Change in Control, or (ii) Executive 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 Executive 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 eighteen months, payable either in monthly installments within five days
after the end of each month, or at the option of Executive (i) 50% in a lump sum
within 45 days after the date of termination or resignation and (ii) 50% in
eighteen equal monthly installments, commencing within fifteen days following
termination or resignation and continuing thereafter on the same day of each
month;

      b.  Pay Executive an amount equal to 100% of his MBO bonus for the quarter
in which the separation of employment takes place;

      c.  Continue to provide Executive, at Company 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 Executive,
immediately prior to the date of the Change in Control) for a period of eighteen

                                       14
<PAGE>

months following the date of such termination or resignation, or, if any of such
benefits cannot be provided to Executive for such eighteen month period under
the Company's policies as then in effect or under applicable law, then the
Company shall pay Executive an amount equal to the monthly premiums paid on
behalf of Executive for such benefits at the time of such termination or
resignation for a period beginning on the date the Executive's participation in
such benefits is prohibited and ending on the date that is eighteen
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 50% of all unvested stock options granted to
Executive under the Company's stock option or other benefit plan; and

      e.  Reimburse Executive for third party out placement services actually
incurred by Executive in an amount not to exceed $10,000.00, provided such
expenses are accounted for by Executive in accordance with the policies and
procedures by the Company.

  2.  Termination For Reasons Not Associated with a "Change in Control".  If the
      -----------------------------------------------------------------
Company terminates Executive without "Cause," for reasons not associated with a
"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 Executive 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 nine months, payable either in monthly installments within five days after
the end of each month, or at the option of Executive (i) 50% in a lump sum
within 45 days after the date of termination or resignation and (ii) 50% in nine
equal monthly installments, commencing within fifteen days following termination
or resignation and continuing thereafter on the same day of each month;

      b.  Pay Executive his MBO bonus for the quarter in which the separation of
employment takes place pursuant to the terms of the Lantronix MBO Incentive
Program;

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

      d.  Extend the vesting period of all unvested stock options for a period
of three years beyond the date of termination. Extend the post-termination
exercise period for all vested stock options to coincide with this three-year
extension.

                                       15
<PAGE>

      e.  Reimburse Executive for third party out placement services actually
incurred by Executive in an amount not to exceed $10000.00, provided such
expenses are accounted for by Executive in accordance with the policies and
procedures by 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 (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 Executive's employment at any time with or without Cause.  For
purposes of this Agreement, the Company shall be deemed to have terminated
Executive's employment without "Cause" if Executive's employment is terminated
for any reason other then the following:  (i) Executive commits a felony or
possesses, uses or sells illegal drugs; (ii) Executive significantly neglects,
or materially inadequately performs, his duties as an employee of the Company;
(iii) Executive breaches a fiduciary duty to the Company or its shareholders
involving personal profit to Executive; (iv) Executive is deceased; or (v)
Executive is disabled.  Notwithstanding the foregoing, Executive shall be deemed
to have been terminated without Cause (except in the case of death) unless the
Company delivers to the Executive a copy of a resolution duly adopted by the
affirmative vote of not less a majority of the entire membership of the
Company's Board of Directors finding that, in the opinion of the Board,
Executive engaged in the applicable conduct set forth in subsection (i), (ii) or
(iii) above or Executive is disabled.  For purposes of this Agreement, Executive
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 one hundred twenty (120) days or (ii) a total of one hundred fifth (150)
days during any one hundred and eighty (180) day period, and Executive has not
recovered and returned to the full time performance of his duties within thirty
days after written notice is given to him by the Company following such 120 day
period or 180 day period, as the case may be.

      c.  Resignation with Good Reason.  Executive may resign at any time with
          ----------------------------
or without Good Reason. For purposes of the Agreement, Executive 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 Executive's express written consent; (i) the Company "Substantially
Lessens Executive's Title" (as defined on Exhibit 4A attached hereto); (ii) the
Company assigns material duties to Executive's Senior Authority (as defined on
Exhibit 4A attached hereto); (ii) the Company

                                       16
<PAGE>

assigns material duties to Executive which are materially inconsistent with
Executive's status as an officer of the Company; (iii) the Company reduces
Executive'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);
(iv) the Company requires Executive to be based more than fifty (50) miles from
his present office location, except for required travel consistent with
Executive's business travel obligations; or (v) the Company fails to obtain the
assumption of this Agreement by any successor or assign of the Company.

  4.  The Company's Obligations Under This Agreement.  Executive shall not be
      ----------------------------------------------
entitled to any of the benefits of Sections 1 and 2 if the Company terminates
Executive's employment or if Executive 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 Executive upon any
termination or resignation and are in lieu of any damages or other compensation
that Executive may claim under other Company policies or otherwise, except for
Executive's salary which has been earned up to 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 Executive 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
Executive 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 law.

  6.  Assignment.  This Agreement may not be assigned by Executive.  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, 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
Executive heirs, executors, administrators, and legal representatives.

  7.  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 Executive at his last known address.

                                       17
<PAGE>

  8.  Entire Agreement.  This Agreement, together with the documents referenced
      ----------------
herein, contains 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 Executive.

  9.  Attorneys' 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 costs and expenses (including reasonable attorney's
fees) incurred in such arbitration.

  10. 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 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.

                                       18
<PAGE>

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

                                EXECUTIVE:

                                /s/ Steven Cotton
                                _______________________________________
                                Steven Cotton

                                COMPANY:

                                LANTRONIX,
                                A California corporation

                                    /s/ Fred Theil
                                By: ___________________________________
                                      Fred Thiel
                                Its:  Chief Executive Officer

                                       19
<PAGE>

                                  EXHIBIT "4A"

                                (Steven Cotton)

  "Substantially Lessens Executive's Title" shall mean that the Executive does
not have the title of Chief Financial Officer or some higher title.

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

                                       20

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00010-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00010-of-00352.parquet"}]]