Document:

<PAGE>

                                                                    EXHIBIT 10.2

                              EMPLOYMENT AGREEMENT

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

                                    RECITALS

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

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

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

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

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

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

                                    AGREEMENT

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

                                       1

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

3.    COMPENSATION

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

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

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

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

<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

<PAGE>

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

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

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

         CONFIDENTIAL INFORMATION

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

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

<PAGE>

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

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

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

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

<PAGE>

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

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

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

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

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

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

<PAGE>

respective heirs, administrators and assigns.

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

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

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

                                            "Employee"

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

                                            "Employer"

                                            Lantronix

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

Approved as to Form and Content:

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

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

<PAGE>

                                   EXHIBIT "1"

TITLE:               Chief Financial Officer and Chief Operating Officer

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

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

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

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

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

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

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

                     [to be inserted]

<PAGE>

                                   EXHIBIT "2"

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

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

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

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

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

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

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

<PAGE>

                                   EXHIBIT "2"

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

Author:    Fred Thiel

Date:      October 1, 1999

Revision:  0.2x

Purpose

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

Scope

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

Program Overview

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

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

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

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

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

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

LANTRONIX MBO INCENTIVE PROGRAM DETAILS

Target Incentive Amount

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

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

Examples of suggested percentages for different positions:

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

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

Incentive Composition

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

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

Examples of relative weightings for different positions:

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

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

Corporate Financial Goals

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

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

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

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

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

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

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

*  less than
** greater than

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

Individual Objectives

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

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

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

MBO Worksheet

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

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

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

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

Partial Quarters

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

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

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

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

RECOMMENDING AN EMPLOYEE FOR INCLUSION

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

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

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

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

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

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

SUBMITTING MBO WORKSHEETS

Submitting Objectives

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

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

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

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

Submitting Results

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

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

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

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

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

<PAGE>

                                  EXHIBIT "3A"

                    Lantronix Non-Statutory Stock Option Plan

                       [Incorporation By Reference To S-8]

<PAGE>

                                  EXHIBIT "3B"

                                      NOTE

$___________                                             Irvine, California

___________

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

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

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

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

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

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

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

                                         ____________________________________
                                         Steve Cotton

<PAGE>

                                  EXHIBIT "3C"

                                Pledge Agreement

                               SECURITY AGREEMENT

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

                                    Recitals

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

         NOW, THEREFORE, it is agreed as follows:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

         "PLEDGOR"                _________________________________
                                  Signature

                                  _________________________________
                                  Print Name
                                  Address:

         ___________________________

         ___________________________

         "PLEDGEE"                Lantronix
                                  a California corporation

                                  _______________________________________
                                  Signature

                                  _______________________________________
                                  Print Name

                                  _______________________________________
                                  Title

         "PLEDGEHOLDER"           _______________________________________
                                  Secretary or Assistant Secretary of Lantronix

<PAGE>

                                   EXHIBIT "4"

                               SEVERANCE AGREEMENT

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

                                    RECITALS

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

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

                                    AGREEMENT

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

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

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

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

<PAGE>

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

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

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

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

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

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

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

<PAGE>

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

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

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

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

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

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

<PAGE>

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

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

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

<PAGE>

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

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

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

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

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

<PAGE>

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

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

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

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

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

<PAGE>

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

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

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

                                                "Employee"

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

"Company"

Lantronix

By:  ______________________________

Its: ______________________________

Approved as to Form and Content:

________________________________
Susan Roos
Attorney for Steve Cotton

________________________________
Marla Merhab Robinson
Attorney for Lantronix

<PAGE>

                                  EXHIBIT "4A"

                                 (Steve Cotton)

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

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

<PAGE>

                                   EXHIBIT "B"

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

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

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

<PAGE>

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

                                           "Employee"

________________________________________________
Dated: December __, 2001                   Steve Cotton<PAGE>

                                                                    EXHIBIT 10.3

         This LOAN AND SECURITY AGREEMENT (this "Agreement") dated December ___,
2001 between SILICON VALLEY BANK ("Bank") and Lantronix, Inc., UNITED STATES
SOFTWARE CORPORATION, LIGHTWAVE COMMUNICATION, INC. and SYNERGETIC MICRO
SYSTEMS, INC. (jointly and severally referred to herein as the "Borrower"),
provides the terms on which Bank will lend to Borrower and Borrower will repay
Bank. The parties agree as follows:

1.       ACCOUNTING AND OTHER TERMS
         --------------------------

         Accounting terms not defined in this Agreement will be construed
following GAAP. Calculations and determinations must be made following GAAP. The
term "financial statements" includes the notes and schedules. The terms
"including" and "includes" always mean "including (or includes) without
limitation" in this or any Loan Document. Capitalized terms in this Agreement
shall have the meanings set forth in Section 13.

2.       LOAN AND TERMS OF PAYMENT
         -------------------------

2.1      Credit Extensions. Borrower will pay Bank the unpaid principal amount
         -----------------
of all Credit Extensions and interest on the unpaid principal amount of the
Credit Extensions.

2.1.1    Revolving Advances.
         ------------------

         (a)  Bank will make Advances not exceeding (i) the Committed Revolving
Line, minus (ii) all amounts for services utilized under the Cash Management
Services Sublimit, minus (iii) the amount of all outstanding Letters of Credit
(including drawn but unreimbursed Letters of Credit), and minus (iv) the FX
Reserve. Amounts borrowed under this Section may be repaid and reborrowed during
the term of this Agreement.

         (b)  To obtain an Advance, Borrower must notify Bank by facsimile or
telephone by 12:00 p.m. Pacific time on the Business Day the Advance is to be
made. Borrower must promptly confirm the notification by delivering to Bank the
Payment/Advance Form attached as Exhibit B. Bank will credit Advances to
Borrower's deposit account. Bank may make Advances under this Agreement based on
instructions from a Responsible Officer or his or her designee or without
instructions if the Advances are necessary to meet Obligations which have become
due. Bank may rely on any telephone notice given by a person whom Bank believes
is a Responsible Officer or designee. Borrower will indemnify Bank for any loss
Bank suffers due to such reliance.

         (c)  The Committed Revolving Line terminates on the Revolving Maturity
Date, when all Advances are immediately payable.

2.1.2    Letters of Credit. Bank will issue or have issued letters of credit for
         -----------------
Borrower's account (individually referred as a "Letter of Credit" and
collectively referred to herein as the "Letters of Credit") not exceeding (i)
the Committed Revolving Line, minus (ii) the outstanding principal

<PAGE>

balance of the Advances, minus (iii) the Cash Management Sublimit, and minus
(iv) the FX Reserve; provided, however, the face amount of outstanding Letters
of Credit (including drawn but unreimbursed Letters of Credit) may not exceed
$1,000,000, on a joint basis for all Borrowers. Each Letter of Credit will have
an expiry date of no later than 180 days after the Revolving Maturity Date, but
Borrower's reimbursement obligation shall be secured by cash on terms acceptable
to Bank at any time after the Revolving Maturity Date if the term of this
Agreement is not extended by Bank. Borrower agrees to execute any further
documentation in connection with the Letters of Credit as Bank may reasonably
request.

2.1.3    Foreign Exchange Sublimit. If there is availability under the Committed
         -------------------------
Revolving Line for new Advances, then Borrower may enter in foreign exchange
forward contracts with the Bank under which Borrower commits to purchase from or
sell to Bank a set amount of foreign currency more than one business day after
the contract date (the "FX Forward Contract"). Bank will subtract 10% of each
outstanding FX Forward Contract from the foreign exchange sublimit which is a
maximum of $500,000, on a joint basis for all Borrowers (the "FX Reserve"). The
total FX Forward Contracts at any one time may not exceed 10 times the amount of
the FX Reserve and a proposed new FX Forward Contract may be entered into only
if the amount of the increase in the FX Reserve relating thereto would otherwise
be available for the making of an Advance in such amount. Bank may terminate the
FX Forward Contracts if an Event of Default occurs.

2.1.4    Cash Management Sublimit. Borrower may use up to $1,000,000 on a joint
         ------------------------
basis for all Borrowers (the "Cash Management Services Sublimit") for Bank's
cash management services, which may include merchant services, direct deposit of
payroll, business credit card, and check cashing services identified in various
cash management services agreements related to such services (the "Cash
Management Services"). The aggregate amounts utilized under the Cash Management
Services Sublimit will at all times reduce the amount otherwise available to be
borrowed under the Committed Revolving Line and new Cash Management Services may
be extended only if the amount of such proposed new extension of such services
would otherwise be available for the making of an Advance in such amount. Any
amounts Bank pays on behalf of Borrower or any amounts that are not paid by
Borrower for any Cash Management Services will be treated as Advances under the
Committed Revolving Line and will accrue interest at the rate for Advances

2.2      Overadvances. If Borrower's Obligations under Section 2.1.1, 2.1.2,
         ------------
2.1.3 or 2.1.4 exceed the applicable limitations set forth therein, Borrower
must immediately pay any such excess in cash to Bank.

2.3      Interest Rate; Payments.
         -----------------------

         (a)  Interest Rate. At Borrower's option, and all as more fully set
forth in the Interest Rate Supplement, Advances accrue interest on the
outstanding principal balance at a per annum rate equal to either (i) the Prime
Rate or (ii) the LIBOR Rate plus 200 basis points. Any prepayment of Advances
that is requested at the LIBOR Rate must include the applicable Prepayment Fee.
After an Event of Default, Obligations accrue interest at 5 percent above the

                                        2

<PAGE>

rate effective immediately before the Event of Default. If the applicable
interest rate is the Prime Rate, the interest rate increases or decreases when
the Prime Rate changes. Interest is computed on a 360 day year for the actual
number of days elapsed. Further, reference is made to the Interest Rate
Supplement, which is attached hereto as Exhibit A-1, and the terms and
provisions thereof are hereby incorporated herein by this reference, as if such
terms and provisions were fully set forth herein.

         (b) Payments. Interest is payable no later than the twenty-second
(22/nd/) day of each month. Bank may debit any of Borrower's deposit accounts
including Account Number _______________ for principal and interest payments or
any amounts Borrower owes Bank. Bank will notify Borrower when it debits
Borrower's accounts. These debits are not set-offs. Payments received after
12:00 noon Pacific time are considered received at the opening of business on
the next Business Day. When a payment is due on a day that is not a Business
Day, the payment is due the next Business Day and additional fees or interest
accrue.

2.4      Fees.  Borrower will pay to Bank:
         ----

         (a) Facility Fee. A fully earned, non-refundable facility fee of
$50,000 due on the Closing Date; and

         (b) Bank Expenses. All Bank Expenses (including reasonable attorneys'
fees and expenses) incurred through and after the Closing Date when due,
provided it is understood that the attorneys' fees and expenses incurred in
connection with the negotiation and documentation of the Loan Documents will not
exceed $16,000.

         (c) Unused Line Fee. Borrower shall pay Bank the "Unused Line Fee", in
addition to all interest and other fees payable hereunder. The "Unused Line Fee"
shall be .125% per annum multiplied by an amount equal to Committed Revolving
Line minus the average daily balance of the outstanding Advances, and shall be
computed and paid quarterly, in arrears, on the last day of March, June,
September and December, commencing on December 31, 2001 during the term of this
Agreement.

3.       CONDITIONS OF LOANS
         -------------------

3.1      Conditions Precedent to Initial Credit Extension. Bank's obligation to
         ------------------------------------------------
make the initial Credit Extension is subject to the condition precedent that it
receive the agreements, documents and fees it requires, including, without
limitation, the following:

         (a)      this Agreement;

         (b)      the Guaranty;

         (c)      Certificate of the Secretary of Borrower with respect to
incumbency and resolutions authorizing the execution and delivery of this
Agreement and the Guaranty;

                                        3

<PAGE>

         (d)      Legal opinion of counsel to Borrower, in form acceptable to
the Bank;

         (e)      financing statements (Forms UCC-1);

         (f)      insurance certificate;

         (g)      payment of the fees and Bank Expenses then due;

         (h)      Certificate(s) of good standing regarding Borrower in
applicable jurisdictions; and

         (i)      such other documents, and completion of such other matters, as
Bank may reasonably deem necessary or appropriate.

3.2      Conditions Precedent to all Credit Extensions. Bank's obligations to
         ---------------------------------------------
make each Credit Extension, including the initial Credit Extension, is subject
to the following:

         (a)  timely receipt of any Payment/Advance Form; and

         (b)  the representations and warranties in Section 5 must be materially
true on the date of the Payment/Advance Form and on the effective date of each
Credit Extension and no Event of Default may have occurred and be continuing, or
result from the Credit Extension. Each Credit Extension is Borrower's
representation and warranty on that date that the representations and warranties
in Section 5 remain true.

4.       CREATION OF SECURITY INTEREST
         -----------------------------

4.1      Grant of Security Interest. Borrower grants Bank a continuing security
         --------------------------
interest in all presently existing and later acquired Collateral to secure all
Obligations and performance of each of Borrower's duties under the Loan
Documents. Except for Permitted Liens, any security interest will be a first
priority security interest in the Collateral. Bank may place a "hold" on any
deposit account pledged as Collateral. If the Agreement is terminated, Bank's
lien and security interest in the Collateral will continue until Borrower fully
satisfies its Obligations.

5.       REPRESENTATIONS AND WARRANTIES
         ------------------------------

         Borrower represents and warrants as follows:

5.1      Due Organization and Authorization. Borrower and each Subsidiary is
         ----------------------------------
duly existing and in good standing in its state of formation and qualified and
licensed to do business in, and in good standing in, any state in which the
conduct of its business or its ownership of property requires that it be
qualified except where the failure to do so could not reasonably be expected to
cause a Material Adverse Change.

                                        4

<PAGE>

         The execution, delivery and performance of the Loan Documents have been
duly authorized, and do not conflict with Borrower's formations documents, nor
constitute an event of default under any material agreement by which Borrower is
bound. Borrower is not in default under any agreement to which or by which it is
bound in which the default could reasonably be expected to cause a Material
Adverse Change.

5.2      Collateral. Borrower has good title to the Collateral, free of Liens
         ----------
except Permitted Liens. All Inventory is in all material respects of good and
marketable quality, free from material defects. Borrower is the sole owner of
the Intellectual Property, except for non-exclusive licenses granted to its
customers in the ordinary course of business. Each Patent is valid and
enforceable and no part of the Intellectual Property has been judged invalid or
unenforceable, in whole or in part, and no claim has been made that any part of
the Intellectual Property violates the rights of any third party except to the
extent such claim could not reasonably be expected to cause a Material Adverse
Change.

5.3      Litigation. Except as shown in the Schedule, there are no actions or
         ----------
proceedings pending or, to Borrower's knowledge, to the knowledge of Borrower's
Responsible Officers and legal counsel, threatened by or against Borrower or any
Subsidiary in which an adverse decision could reasonably be expected to cause a
Material Adverse Change.

5.4      No Material Adverse Change in Financial Statements. All consolidated
         --------------------------------------------------
financial statements for Borrower and any Subsidiary delivered to Bank fairly
present in all material respects Borrower's consolidated financial condition and
Borrower's consolidated results of operations. There has not been any material
deterioration in Borrower's consolidated financial condition since the date of
the most recent financial statements submitted to Bank.

5.5      Solvency. The fair salable value of Borrower's assets (including
         --------
goodwill minus disposition costs) exceeds the fair value of its liabilities; the
Borrower is not left with unreasonably small capital after the transactions in
this Agreement; and Borrower is able to pay its debts (including trade debts) as
they mature.

5.6      Regulatory Compliance. Borrower is not an "investment company" or a
         ---------------------
company "controlled" by an "investment company" under the Investment Company
Act. Borrower is not engaged as one of its important activities in extending
credit for margin stock (under Regulations T and U of the Federal Reserve Board
of Governors). Borrower has complied in all material respects with the Federal
Fair Labor Standards Act. Borrower has not violated any laws, ordinances or
rules, the violation of which could cause a Material Adverse Change. None of
Borrower's or any Subsidiary's properties or assets has been used by Borrower or
any Subsidiary or, to the best of Borrower's knowledge, by previous Persons, in
disposing, producing, storing, treating, or transporting any hazardous substance
other than legally. Borrower and each Subsidiary has timely filed all required
tax returns and paid, or made adequate provision to pay, all material taxes,
except those being contested in good faith with adequate reserves under GAAP.
Borrower and each Subsidiary has obtained all consents, approvals and
authorizations of, made all declarations or filings with, and given all notices
to, all government authorities that

                                        5

<PAGE>

are necessary to continue its business as currently conducted except where the
failure to do so could not reasonably be expected to cause a Material Adverse
Change.

5.7  Subsidiaries. Borrower does not own any stock, partnership interest or
     ------------
other equity securities except for Permitted Investments.

5.8  Full Disclosure. No written representation, warranty or other written
     ---------------
statement of Borrower in any certificate or written statement given to Bank
taken together with all such certificates and written statements given to Bank
contains any untrue statement of a material fact or omits to state a material
fact necessary to make the statements contained in the certificates or
statements not misleading (it being recognized by Bank that the projections and
forecasts provided by Borrower in good faith and based upon reasonable
assumptions are not to be viewed as facts and that actual results during the
period or periods covered by any such projections and forecasts may differ from
the projected or forecasted results).

6.   AFFIRMATIVE COVENANTS
     ---------------------

     Borrower will do all of the following:

6.1  Government Compliance. Borrower will maintain its and all Subsidiaries'
     ---------------------
corporate existence and good standing in its jurisdiction of incorporation and
maintain qualification in each jurisdiction in which the failure to so qualify
could have a material adverse effect on Borrower's business or operations.
Borrower will comply, and have each Subsidiary comply, with all laws, ordinances
and regulations to which it is subject, noncompliance with which could have a
material adverse effect on Borrower's business or operations or cause a Material
Adverse Change.

6.2  Financial Statements, Reports, Certificates.
     -------------------------------------------

     (a) Borrower will deliver to Bank: (i) within 5 days of filing, copies of
all statements, reports and notices made available to Borrower's security
holders or to any holders of Subordinated Debt and all reports and all related
financial statements on each of Forms 10-K and 10-Q filed with the Securities
and Exchange Commission regarding Lantronix, Inc. together with, if not already
included in the foregoing, consolidating and consolidated financial statements;
(ii) a prompt report of any legal actions pending or threatened against Borrower
or any Subsidiary that could result in damages or costs to Borrower or any
Subsidiary of $100,000 or more; (iii) prompt notice of any material change in
the composition of the Intellectual Property, including any subsequent ownership
right of Borrower in or to any Copyright, Patent or Trademark not shown in any
intellectual property security agreement between Borrower and Bank or knowledge
of an event that materially adversely affects the value of the Intellectual
Property; and (iv) budgets, sales projections, operating plans or other
financial information Bank requests.

                                       6

<PAGE>

     (b) At all times that any Advances are outstanding, Lantronix, Inc. will
deliver to Bank a monthly Compliance Certificate signed by a Responsible
Officer, within 30 days of each month end, and such Certificate shall also be
delivered to the Bank immediately prior to the time that any new Advances are
being requested when none are then outstanding.

     (c) Bank has the right to audit Borrower's Accounts at Borrower's expense,
but such audits at Borrower's expense will be conducted no more often than once
every 12 months, unless an Event of Default has occurred and is continuing.
Audits may otherwise be conducted at the Bank's expense at reasonable intervals.

6.3  Inventory; Returns. Borrower will keep all Inventory in good and marketable
     ------------------
condition, free from material defects. Returns and allowances between Borrower
and its account debtors will follow Borrower's customary practices as they exist
at the Closing Date. Borrower must promptly notify Bank of all returns,
recoveries, disputes and claims that involve more than $100,000. Stock rotations
that are in the ordinary course of business and are in accordance with a
contractual obligation shall be excluded from this requirement.

6.4  Taxes. Borrower will make, and cause each Subsidiary to make, timely
     -----
payment of all material federal, state, and local taxes or assessments and will
deliver to Bank, on demand, appropriate certificates attesting to the payment.

6.5  Insurance. Borrower will keep its business and the Collateral insured for
     ---------
risks and in amounts, as Bank requests. Insurance policies will be in a form,
with companies, and in amounts that are satisfactory to Bank. All property
policies will have a lender's loss payable endorsement showing Bank as a loss
payee and all liability policies will show the Bank as an additional insured and
provide that the insurer must give Bank at least 20 days notice before canceling
its policy. At Bank's request, Borrower will deliver certified copies of
policies and evidence of all premium payments. Proceeds payable under any policy
will, at Bank's option, be payable to Bank on account of the Obligations.

6.6  Minimum Bank Deposits. Borrower will maintain in its bank or investment
     ---------------------
accounts at Bank or held through Bank minimum unrestricted cash deposits equal
to the lesser of: (A) $7,000,000 or (B) 30% of the aggregate amount of all of
its cash and cash equivalents, on a consolidated basis for all Borrowers.

6.7  Financial Covenants.
     -------------------

     Lantronix, Inc. will maintain, on consolidated basis, as of the last day of
each quarter:

          (A) Quick Ratio Adjusted. A ratio of Quick Assets to Current
Liabilities minus deferred revenue of at least 1.75 to 1.0.

          (B) Net Income. Borrower will have a minimum net income (after taxes)
plus non-cash charges of $1.00 for each fiscal quarter.

                                       7

<PAGE>

6.8  Further Assurances. Borrower will execute any further instruments and take
     ------------------
further action as Bank requests to perfect or continue Bank's security interest
in the Collateral or to effect the purposes of this Agreement.

7.   NEGATIVE COVENANTS
     ------------------

     Borrower will not do any of the following without the Bank's written
consent, which will not be unreasonably withheld:

7.1  Dispositions. Convey, sell, lease, transfer or otherwise dispose of
     ------------
(collectively a "Transfer"), or permit any of its Subsidiaries to Transfer, all
or any part of its business or property, other than a Transfer (i) of Inventory
in the ordinary course of business; (ii) of non-exclusive licenses and similar
arrangements for the use of the property of Borrower or its Subsidiaries in the
ordinary course of business; or (iii) of worn-out or obsolete Equipment.

7.2  Changes in Business, Ownership, Management or Business Locations. Engage in
     ----------------------------------------------------------------
or permit any of its Subsidiaries to engage in any business other than the
businesses currently engaged in by Borrower or reasonably related thereto, or
have a material change in its ownership (other than the sale of Borrower's
equity securities in a public offering or to venture capital investors
identified to Bank) of greater than 25%. Borrower will not, without at least 30
days prior written notice to Bank, relocate its principal executive office or
add any new offices or business locations.

7.3  Mergers or Acquisitions. Merge or consolidate, or permit any of its
     -----------------------
Subsidiaries to merge or consolidate, with any other Person, or acquire, or
permit any of its Subsidiaries to acquire, all or substantially all of the
capital stock or property of another Person except where (i) such transactions
do not in the aggregate result in a decrease of more than 25% of Tangible Net
Worth and (ii) no Default or Event of Default has occurred and is continuing or
would exist after giving effect to the transactions. A Subsidiary may merge or
consolidate into another Subsidiary or into Borrower as long as no Default or
Event of Default has occurred and is continuing or would exist after giving
effect thereto.

7.4  Indebtedness. Create, incur, assume, or be liable for any Indebtedness, or
     ------------
permit any Subsidiary to do so, other than Permitted Indebtedness; and the
foregoing shall mean and include without limitation, that no Foreign Subsidiary
shall incur additional Indebtedness other than as is now incurred and
outstanding as of the date hereof.

7.5  Encumbrance. Create, incur, or allow any Lien on any of its property, or
     -----------
assign or convey any right to receive income, including the sale of any
Accounts, or permit any of its Subsidiaries to do so, except for Permitted
Liens, or permit any Collateral not to be subject to Bank's first priority
security interest in the Collateral granted herein, subject only to Permitted
Liens. Borrower currently has approximately $2,000,000.00 in capital equipment
lease facilities. Borrower shall be permitted to maintain an equivalent amount
of such indebtedness, and shall be

                                       8

<PAGE>

permitted to increase such indebtedness for capital acquisitions by up to 10%
per annum (compounded annually) without obtaining Bank's consent.

7.6  Investments; Distributions. (i) Directly or indirectly acquire or own any
     --------------------------
Person, or make any Investment in any Person, other than Permitted Investments,
or permit any of its Subsidiaries to do so; or (ii) pay any dividends or make
any distribution or payment or redeem, retire or purchase any capital stock.

7.7  Transactions with Affiliates. Directly or indirectly enter or permit any
     ----------------------------
material transaction with any Affiliate, except transactions that are in the
ordinary course of Borrower's business, on terms less favorable to Borrower than
would be obtained in an arm's length transaction with a non-affiliated Person.

7.8  Subordinated Debt. Make or permit any payment on any Subordinated Debt,
     -----------------
except under the terms of the Subordinated Debt, or amend any provision in any
document relating to the Subordinated Debt, without Bank's prior written
consent.

7.9  Compliance. Become an "investment company" or a company controlled by an
     ----------
"investment company" under the Investment Company Act of 1940 or undertake as
one of its important activities extending credit to purchase or carry margin
stock, or use the proceeds of any Advance for that purpose; fail to meet the
minimum funding requirements of ERISA, permit a Reportable Event or Prohibited
Transaction, each as defined in ERISA, to occur; fail to comply with the Federal
Fair Labor Standards Act or violate any other law or regulation, if the
violation could reasonably be expected to have a material adverse effect on
Borrower's business or operations or cause a Material Adverse Change, or permit
any of its Subsidiaries to do so.

8.   EVENTS OF DEFAULT
     -----------------

     Any one of the following is an event of default hereunder (referred to as
an "Event of Default"):

8.1  Payment Default. Borrower fails to pay any of the Obligations within 5 days
     ----------------
after their due date. During the additional period the failure to cure the
default is not an Event of Default (but no Credit Extensions will be made during
the cure period);

8.2  Covenant Default. If Borrower does not perform any obligation in Section 6
     ----------------
or violates any covenant in Section 7; or

     If Borrower does not perform or observe any other material term, condition
or covenant in this Agreement, any Loan Documents, or in any agreement between
Borrower and Bank and as to any default under such other term, condition or
covenant that can be cured, has not cured the default within 10 days after it
occurs, or if the default relating thereto cannot be cured within 10 days or
cannot be cured after Borrower's attempts within 10 day period, and the default
may be cured within a reasonable time, then Borrower has an additional period
(of not more than 30

                                       9

<PAGE>

days) to attempt to cure the default. During the additional time, the failure to
cure the default is not an Event of Default (but no Credit Extensions will be
made during the cure period);

8.3  Material Adverse Change. If there (i) occurs a material adverse change in
     -----------------------
the business, operations, or condition (financial or otherwise) of the Borrower,
or (ii) is a material impairment of the prospect of repayment of any portion of
the Obligations or (iii) is a material impairment of the value or priority of
Bank's security interests in the Collateral (any of the foregoing events or
occurrences is referred to herein as a "Material Adverse Change");

8.4  Attachment. (i) Any material portion of Borrower's assets is attached,
     ----------
seized, levied on, or comes into possession of a trustee or receiver and the
attachment, seizure or levy is not removed in 10 days; (ii) Borrower is
enjoined, restrained, or prevented by court order from conducting a material
part of its business; (iii) a judgment or other claim becomes a Lien on a
material portion of Borrower's assets; or (iv) a notice of lien, levy, or
assessment is filed against any of Borrower's assets by any government agency
and not paid within 10 days after Borrower receives notice. These are not Events
of Default if stayed or if a bond is posted pending contest by Borrower (but no
Credit Extensions will be made during the cure period);

8.5  Insolvency. (i) Borrower becomes insolvent; (ii) Borrower begins an
     ----------
Insolvency Proceeding; or (iii) an Insolvency Proceeding is begun against
Borrower and not dismissed or stayed within 30 days (but no Credit Extensions
will be made before any Insolvency Proceeding is dismissed);

8.6  Other Agreements. If there is a default in any agreement between Borrower
     -----------------
and a third party that gives the third party the right to accelerate any
Indebtedness exceeding $100,000 or that could cause a Material Adverse Change;

8.7  Judgments. If a money judgment or judgments in the aggregate of at least
     ---------
$100,000 is rendered against the Borrower and is unsatisfied and unstayed for 10
days (but no Credit Extensions will be made before the judgment is stayed or
satisfied);

8.8  Misrepresentations. If Borrower or any Person acting for Borrower makes any
     ------------------
material misrepresentation or material misstatement now or later in any warranty
or representation in this Agreement or in any communication delivered to Bank or
to induce Bank to enter this Agreement or any Loan Document; or

8.9  Guaranty. Any guaranty of any Obligations ceases for any reason to be in
     --------
full force or any Guarantor does not perform any obligation under any guaranty
of the Obligations, or any material misrepresentation or material misstatement
exists now or later in any warranty or representation in any guaranty of the
Obligations or in any certificate delivered to Bank in connection with the
guaranty, or any circumstance described in Sections 8.4, 8.5 or 8.7 occurs to
any Guarantor.

9.   BANK'S RIGHTS AND REMEDIES
     --------------------------

                                       10

<PAGE>

9.1  Rights and Remedies. When an Event of Default occurs and continues Bank
     -------------------
may, without notice or demand, do any or all of the following:

     (a)  Declare all Obligations immediately due and payable (but if an Event
of Default described in Section 8.5 occurs all Obligations are immediately due
and payable without any action by Bank);

     (b)  Stop advancing money or extending credit for Borrower's benefit under
this Agreement or under any other agreement between Borrower and Bank;

     (c)  Settle or adjust disputes and claims directly with account debtors for
amounts, on terms and in any order that Bank considers advisable;

     (d)  Make any payments and do any acts it considers necessary or reasonable
to protect its security interest in the Collateral. Borrower will assemble the
Collateral if Bank requests and make it available as Bank designates. Bank may
enter premises where the Collateral is located, take and maintain possession of
any part of the Collateral, and pay, purchase, contest, or compromise any Lien
which appears to be prior or superior to its security interest and pay all
expenses incurred. Borrower grants Bank a license to enter and occupy any of its
premises, without charge, to exercise any of Bank's rights or remedies;

     (e)  Apply to the Obligations any (i) balances and deposits of Borrower it
holds, or (ii) any amount held by Bank owing to or for the credit or the account
of Borrower;

     (f)  Ship, reclaim, recover, store, finish, maintain, repair, prepare for
sale, advertise for sale, and sell the Collateral. Bank is granted a
non-exclusive, royalty-free license or other right to use, without charge,
Borrower's labels, Patents, Copyrights, Mask Works, rights of use of any name,
trade secrets, trade names, Trademarks, service marks, and advertising matter,
or any similar property as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and, in
connection with Bank's exercise of its rights under this Section, Borrower's
rights under all licenses and all franchise agreements inure to Bank's benefit;
and

     (g)  Dispose of the Collateral according to the Code.

9.2  Power of Attorney. When an Event of Default occurs and continues, Borrower
     -----------------
irrevocably appoints Bank as its lawful attorney to: (i) endorse Borrower's name
on any checks or other forms of payment or security; (ii) sign Borrower's name
on any invoice or bill of lading for any Account or drafts against account
debtors, (iii) make, settle, and adjust all claims under Borrower's insurance
policies; (iv) settle and adjust disputes and claims about the Accounts directly
with account debtors, for amounts and on terms Bank determines reasonable; and
(v) transfer the Collateral into the name of Bank or a third party as the Code
permits. Bank may exercise the power of attorney to sign Borrower's name on any
documents necessary to perfect or continue the perfection of any security
interest regardless of whether an Event of Default has occurred. Bank's
appointment as Borrower's attorney in fact, and all of Bank's rights and

                                       11

<PAGE>

powers, coupled with an interest, are irrevocable until all Obligations have
been fully repaid and performed and Bank's obligation to provide Credit
Extensions terminates. `

9.3  Accounts Collection. When an Event of Default occurs and continues, Bank
     -------------------
may notify any Person owing Borrower money of Bank's security interest in the
funds and verify the amount of the Account. Borrower must collect all payments
in trust for Bank and, if requested by Bank, immediately deliver the payments to
Bank in the form received from the account debtor, with proper endorsements for
deposit.

9.4  Bank Expenses. If Borrower fails to pay any amount or furnish any required
     -------------
proof of payment to third persons Bank may make all or part of the payment or
obtain insurance policies required in Section 6.5, and take any action under the
policies Bank deems prudent. Any amounts paid by Bank are Bank Expenses and
immediately due and payable, bearing interest at the then applicable rate and
secured by the Collateral. No payments by Bank are deemed an agreement to make
similar payments in the future or Bank's waiver of any Event of Default.

9.5  Bank's Liability for Collateral. If Bank complies with reasonable banking
     -------------------------------
practices and the applicable provisions of the Code, it is not liable or
responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage
to the Collateral; (c) any diminution in the value of the Collateral; or (d) any
act or default of any carrier, warehouseman, bailee, or other person. Borrower
bears all risk of loss, damage or destruction of the Collateral.

9.6  Remedies Cumulative. Bank's rights and remedies under this Agreement, the
     -------------------
Loan Documents, and all other agreements are cumulative. Bank has all rights and
remedies provided under the Code, by law, or in equity. Bank's exercise of one
right or remedy is not an election, and Bank's waiver of any Event of Default is
not a continuing waiver. Bank's delay is not a waiver, election, or
acquiescence. No waiver is effective unless signed by Bank and then is only
effective for the specific instance and purpose for which it was given.

9.7  Demand Waiver. Borrower waives demand, notice of default or dishonor,
     -------------
notice of payment and nonpayment, notice of any default, nonpayment at maturity,
release, compromise, settlement, extension, or renewal of accounts, documents,
instruments, chattel paper, and guaranties held by Bank on which Borrower is
liable.

10.  NOTICES
     -------

     Unless otherwise provided in this Agreement, all notices or demands by any
party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements and
other informational documents which may be sent by first-class mail, postage
prepaid) shall be personally delivered or sent by a recognized overnight
delivery service, by certified mail, postage prepaid, return receipt requested,
or by telefacsimile to Borrower or to Bank, as the case may be, at its addresses
set forth below:

     If to Borrower:   c/o Lantronix, Inc.

                                       12

<PAGE>

                      15353 Barranca Parkway
                      Irvine, California  92618
                      Attention: Kathy McDermott
                      Fax: 949-450-7216

     If to Bank:      Silicon Valley Bank
                      38 Technology Drive, Suite 150
                      Irvine, California  92618
                      Attn: Manager
                      Fax:  949-789-1930

     With a copy to:  Silicon Valley Bank
                      3003 Tasman Drive
                      Santa Clara, California  95054
                      Attn: General Counsel
                      Fax:  408-496-2419

11.  CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER
     -------------------------------------------

     California law governs the Loan Documents without regard to principles of
conflicts of law. Borrower and Bank each submit to the exclusive jurisdiction of
the State and Federal courts in Orange County, California. BORROWER AND BANK
EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING
OUT OF OR BASED UPON THIS AGREEMENT, THE LOAN DOCUMENTS OR ANY CONTEMPLATED
TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS
WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT.
EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.

12.  GENERAL PROVISIONS
     ------------------

12.1 Successors and Assigns. This Agreement binds and is for the benefit of the
     ----------------------
successors and permitted assigns of each party. Borrower may not assign this
Agreement or any rights or Obligations under it without Bank's prior written
consent which may be granted or withheld in Bank's discretion. Bank has the
right, without the consent of or notice to Borrower, to sell, transfer,
negotiate, or grant participation in all or any part of, or any interest in,
Bank's obligations, rights and benefits under this Agreement, the Loan Documents
or any related agreement.

12.2 Indemnification. Borrower will indemnify, defend and hold harmless Bank and
     ---------------
its officers, employees and agents against: (a) all obligations, demands,
claims, and liabilities asserted by any other party in connection with the
transactions as contemplated by the Loan Documents; and (b) all losses or Bank
Expenses incurred, or paid by Bank from, following, or

                                       13

<PAGE>

consequential to transactions as contemplated by the Loan Documents (including
reasonable attorneys' fees and expenses), except for losses caused by Bank's
gross negligence or willful misconduct.

12.3 Time of Essence. Time is of the essence for the performance of all
     ---------------
Obligations in this Agreement.

12.4 Severability of Provision. Each provision of this Agreement is severable
     -------------------------
from every other provision in determining the enforceability of any provision.

12.5 Amendments in Writing, Integration. All amendments to this Agreement must
     ----------------------------------
be in writing signed by both Bank and Borrower. This Agreement and the Loan
Documents represent the entire agreement about this subject matter, and
supersedes prior or contemporaneous negotiations or agreements. All prior or
contemporaneous agreements, understandings, representations, warranties, and
negotiations between the parties about the subject matter of this Agreement and
the Loan Documents merge into this Agreement and the Loan Documents.

12.6 Counterparts. This Agreement may be executed in any number of counterparts
     ------------
and by different parties on separate counterparts, each of which, when executed
and delivered, are an original, and all taken together, are one Agreement.

12.7 Survival. All covenants, representations and warranties made in this
     --------
Agreement continue in full force while any Obligations remain outstanding. The
obligations of Borrower in Section 12.2 to indemnify Bank will survive until all
statutes of limitations for actions that may be brought against Bank have run.

12.8 Confidentiality. In handling any confidential information, Bank will
     ---------------
exercise the same degree of care that it exercises for its own proprietary
information, but disclosure of information may be made: (i) to Bank's
subsidiaries or affiliates in connection with their present or prospective
business relations with Borrower; (ii) to prospective transferees or purchasers
of any interest in the Loans; (iii) as required by law, regulation, subpoena, or
other order (with the understanding that Bank will undertake reasonable efforts
to provide notice to Borrower of any such requirement as may be appropriate
under the then existing circumstances, although Bank shall acquire no liability
if it fails to do so or if Borrower otherwise is unable to take actions to
prevent disclosure under such circumstances), (iv) as required in connection
with Bank's examination or audit; Confidential information does not include
information that either: (a) is in the public domain or in Bank's possession
when disclosed to Bank, or becomes part of the public domain after disclosure to
Bank through no fault of Bank; or (b) is disclosed to Bank by a third party, if
Bank does not know, or Bank is not in a position reasonably to know, that the
third party is prohibited from disclosing the information.

12.9 Attorneys' Fees, Costs and Expenses. In any action or proceeding between
     -----------------------------------
Borrower and Bank arising out of the Loan Documents, the prevailing party will
be entitled to recover its reasonable attorneys' fees and other costs and
expenses incurred, in addition to any other relief to which it may be entitled,
whether or not a lawsuit is filed.

                                       14

<PAGE>

13.  DEFINITIONS
     -----------

13.1 Definitions.
     -----------

     "Accounts" are all existing and later arising accounts, contract rights,
and other obligations owed Borrower in connection with its sale or lease of
goods (including licensing software and other technology) or provision of
services, all credit insurance, guaranties, other security and all merchandise
returned or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.

     "Advance" or "Advances" is a loan advance (or advances) under the Committed
Revolving Line.

     "Affiliate" of a Person is a Person that owns or controls directly or
indirectly the Person, any Person that controls or is controlled by or is under
common control with the Person, and each of that Person's senior executive
officers, directors, partners and, for any Person that is a limited liability
company, that Person's managers and members.

     "Bank Expenses" are all audit fees and expenses and reasonable costs or
expenses (including reasonable attorneys' fees and expenses) for preparing,
negotiating, administering, defending and enforcing the Loan Documents
(including appeals or Insolvency Proceedings).

     "Borrower's Books" are all Borrower's books and records including ledgers,
records regarding Borrower's assets or liabilities, the Collateral, business
operations or financial condition and all computer programs or discs or any
equipment containing the information.

     "Business Day" is any day that is not a Saturday, Sunday or a day on which
the Bank is closed.

     "Cash Management Services" shall have the meaning ascribed to such term in
Section 2.1.4 hereof.

     "Closing Date" is the date of this Agreement.

     "Code" is the California Uniform Commercial Code, as amended or modified
from time to time.

     "Collateral" is the property described on Exhibit A.

     "Committed Revolving Line" is a Credit Extension of up to Twenty Million
Dollars ($20,000,000) on a joint, and not several, basis for all Borrowers.

     "Compliance Certificate" shall mean that certain compliance certificate in
the form of

                                       15

<PAGE>

Exhibit D attached hereto.

         "Contingent Obligation" is, for any Person, any direct or indirect
liability, contingent or not, of that Person for (i) any indebtedness, lease,
dividend, letter of credit or other obligation of another such as an obligation
directly or indirectly guaranteed, endorsed, co-made, discounted or sold with
recourse by that Person, or for which that Person is directly or indirectly
liable; (ii) any obligations for undrawn letters of credit for the account of
that Person; and (iii) all obligations from any interest rate, currency or
commodity swap agreement, interest rate cap or collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; but "Contingent
Obligation" does not include endorsements in the ordinary course of business.
The amount of a Contingent Obligation is the stated or determined amount of the
primary obligation for which the Contingent Obligation is made or, if not
determinable, the maximum reasonably anticipated liability for it determined by
the Person in good faith; but the amount may not exceed the maximum of the
obligations under the guarantee or other support arrangement.

         "Copyrights" are all copyright rights, applications or registrations
and like protections in each work of authorship or derivative work, whether
published or not (whether or not it is a trade secret) now or later existing,
created, acquired or held.

         "Credit Extension" is each Advance, Letter of Credit, Exchange Contract
and each other extension of credit by Bank for Borrower's benefit.

         "Current Liabilities" are the aggregate amount of Borrower's Total
Liabilities which mature within one (1) year and shall also include all
Obligations outstanding hereunder from time to time.

         "Default" means any event which with the passing of time or the giving
of notice or both would become an Event of Default hereunder.

         "Equipment" is all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments in
which Borrower has any interest.

         "ERISA" is the Employment Retirement Income Security Act of 1974, and
its regulations.

         "Foreign Subsidiaries" shall mean all Subsidiaries of Borrower that are
organized under the law of a jurisdiction outside of the United States of
America.

         "FX Forward Contract" is defined in Section 2.1.3.

         "FX Reserve" is defined in Section 2.1.3.

         "GAAP" is generally accepted accounting principles, consistently
applied.

                                       16

<PAGE>

         "Guarantor" is any present or future guarantor of the Obligations.

         "Guaranty" shall mean the cross corporate continuing guaranty by each
Borrower relating to each other Borrower in form acceptable to the Bank.

         "Indebtedness" is (a) indebtedness for borrowed money or the deferred
price of property or services, such as reimbursement and other obligations for
surety bonds and letters of credit, (b) obligations evidenced by notes, bonds,
debentures or similar instruments, (c) capital lease obligations and (d)
Contingent Obligations.

         "Insolvency Proceeding" is any proceeding by or against any Person
under the United States Bankruptcy Code, or any other bankruptcy or insolvency
law, including assignments for the benefit of creditors, compositions,
extensions generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.

         "Intellectual Property" is:

         (a) Copyrights, Trademarks, Patents, and Mask Works including
amendments, renewals, extensions, and all licenses or other rights to use and
all license fees and royalties from the use;

         (b) Any trade secrets and any Intellectual Property Rights in computer
software and computer software products now or later existing, created, acquired
or held;

         (c) All design rights which may be available to Borrower now or later
created, acquired or held;

         (d) Any claims for damages (past, present or future) for infringement
of any of the rights above, with the right, but not the obligation, to sue and
collect damages for use or infringement of the intellectual property rights
above; and

         (e) All proceeds and products of the foregoing, including all
insurance, indemnity or warranty payments.

         "Interest Rate Supplement" shall mean that certain LIBOR Supplement to
Loan and Security Agreement dated as of the date hereof as attached hereto as
Exhibit A-1.

         "Inventory" is present and future inventory in which Borrower has any
interest, including merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products intended for sale or
lease or to be furnished under a contract of service, of every kind and
description now or later owned by or in the custody or possession, actual or
constructive, of Borrower, including inventory temporarily out of its custody or
possession or in transit and including returns on any accounts or other proceeds
(including insurance proceeds) from the sale or disposition of any of the
foregoing and any documents of title.

         "Investment" is any beneficial ownership of (including stock,
partnership interest or

                                       17

<PAGE>

other securities) any Person, or any loan, advance or capital contribution to
any Person.

         "Letter of Credit" and "Letters of Credit" shall have the meaning
ascribed to such terms in Section 2.1.2 hereof.

         "LIBOR Rate" shall have the meaning ascribed to such term as is set
forth in the Interest Rate Supplement.

         "Lien" is a mortgage, lien, deed of trust, charge, pledge, security
interest or other encumbrance.

         "Loan Documents" are, collectively, this Agreement, the Interest Rate
Supplement, any note, or notes or guaranties executed by Borrower or Guarantor,
and any other present or future agreement between Borrower and/or for the
benefit of Bank in connection with this Agreement, all as amended, extended or
restated.

         "Mask Works" are all mask works or similar rights available for the
protection of semiconductor chips, now owned or later acquired.

         "Material Adverse Change" has the meaning set forth in Section 8.3
hereof.

         "Obligations" are debts, principal, interest, Bank Expenses and other
amounts Borrower owes Bank now or later, including letters of credit and foreign
exchange contracts, if any, and including interest accruing after Insolvency
Proceedings begin and debts, liabilities, or obligations of Borrower assigned to
Bank.

         "Patents" are patents, patent applications and like protections,
including improvements, divisions, continuations, renewals, reissues, extensions
and continuations-in-part of the same.

         "Permitted Indebtedness" is:

         (a) Borrower's indebtedness to Bank under this Agreement or the Loan
Documents;

         (b) Indebtedness existing on the Closing Date and shown on the
Schedule;

         (c) Subordinated Debt;

         (d) Indebtedness to trade creditors incurred in the ordinary course of
business

         (e) Indebtedness consisting of Contingent Obligations in aggregate
amounts not the exceed the dollar amount limitations set forth in clause (g) of
the definition of Permitted Investments, with the understanding that the
aggregate amount of Contingent Indebtedness incurred pursuant hereto shall be
counted in and limited by the aggregate amount of Permitted Investments as set
forth in such clause (g) and thus no additional Contingent Indebtedness may be
incurred unless a new Investment in the same amount would otherwise be permitted
to be

                                       18

<PAGE>

made and funded pursuant to the terms and conditions of such clause (g);
provided that no such Indebtedness shall be permitted to be made or otherwise
--------
funded upon the occurrence and during the continuance of a Default or an Event
of Default; and

         (f) Indebtedness secured by Permitted Liens.

         "Permitted Investments" are:

         (a) Investments shown on the Schedule and existing on the Closing Date;

         (b) (i) marketable direct obligations issued or unconditionally
guaranteed by the United States or its agency or any State maturing within 1
year from its acquisition, (ii) commercial paper maturing no more than 1 year
after its creation and having the highest rating from either Standard & Poor's
Corporation or Moody's Investors Service, Inc., (iii) Bank's certificates of
deposit issued maturing no more than 1 year after issue and (iv) any Investments
permitted by Borrower's investment policy, as amended from time to time,
provided that such investment policy has been provided to the Bank and such
Investment does not otherwise result in an Event of Default hereunder;

         (c) Investments consisting of the endorsement of negotiable instruments
for deposit or collection or similar transactions in the ordinary course of
Borrower;

         (d) Investments consisting of travel advances and employee relocation
loans made in the ordinary course of business;

                                       19

<PAGE>

         (e) Investments (including debt obligations) received in connection
with the bankruptcy or reorganization of customers or suppliers and in
settlement of delinquent obligations of, and other disputes with, customers or
suppliers arising in the ordinary course of business;

         (f) Other Investments consisting of the transfer of funds and other
transfers of consideration, whether as a loan, capital contribution or however
else characterized, to Foreign Subsidiaries in an aggregate amount for all of
the such transfers not to exceed the Excess Available Investment Amount (as
defined in clause (g) below) up to $2,500,000, determined and viewed on a joint
basis for all Borrowers with respect to each fiscal year of Lantronix, Inc.,
provided that no such Investment shall be permitted to be made or otherwise
--------
funded upon the occurrence and during the continuance of a Default or an Event
of Default;

         (g) Other Investments consisting of loans or other Investments in
entities that are not Affiliates in an amount per transaction not to exceed
$2,500,000, and $10,000,000 in the aggregate in each fiscal year of the
Borrower, with the understanding that the above amounts are to be determined on
a joint basis for all Borrowers (such dollar amounts that are not being used for
such Investments during any fiscal year of Lantronix, Inc. being referred to
herein as the "Excess Available Investment Amount"); provided that the available
                                                     --------
amounts for Investments otherwise permitted by the terms and conditions of this
clause (g) shall be reduced during any fiscal year by (i) the aggregate amount
of Investments made in such fiscal year pursuant to clause (f) above and (ii)
the aggregate amount of Indebtedness incurred under clause (e) of the definition
of Permitted Indebtedness and outstanding from time to time; provided, further,
                                                             --------  -------
that only $2,500,000 of the above amount may be used for Investments in entities
not organized or located in the United States of America; provided, further,
                                                          --------  -------
that the currently contemplated Investment in Xanboo in an aggregate amount of
up to $4,000,000 shall be permitted and shall not be included in the foregoing
dollar amount limitations, provided, further, no such Investment shall be
                           --------  -------
permitted to be made or otherwise funded upon the occurrence and during the
continuance of a Default or an Event of Default.

         (h) Other Investments by one Borrower in another Borrower, as long as
no Default or Event of Default is then existing upon the making of any such
Investment or would arise thereupon.

         "Permitted Liens" are:

         (a) Liens existing on the Closing Date and shown on the Schedule or
arising under this Agreement or other Loan Documents;

         (b) Liens for taxes, fees, assessments or other government charges or
levies, either not delinquent or being contested in good faith and for which
Borrower maintains adequate reserves on its Books, if they have no priority over
                                                   --
any of Bank's security interests;

         (c) Purchase money Liens (i) on Equipment acquired or held by Borrower
or its Subsidiaries incurred for financing the acquisition of the Equipment, or
(ii) existing on

                                       20

<PAGE>

equipment when acquired, if the Lien is confined to the property and
                         --
improvements and the proceeds of the equipment;

     (d)  Leases or subleases and non-exclusive licenses or non-exclusive
sublicenses granted in the ordinary course of Borrower's business, if the
                                                                   --
leases, subleases, licenses and sublicenses permit granting Bank a security
interest; and

     (e)  Liens incurred in the extension, renewal or refinancing of the
indebtedness secured by Liens described in (a) through (c), but any extension,
                                                            ---
renewal or replacement Lien must be limited to the property encumbered by the
existing Lien and the principal amount of the indebtedness may not increase.

     "Person" is any individual, sole proprietorship, partnership, limited
liability company, joint venture, company, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or government agency.

     "Prepayment Fee" is a fee on any portion of the Obligations with a fixed
interest rate (the "Fixed Obligations") paid before the payment due date. "Base
Interest Rate" means Bank's initial cost of funding the Fixed Obligations. The
Prepayment Fee is calculated as follows: First, Bank determines a "Current
Market Rate" based on what the Bank would receive if it loaned the remaining
amount on the prepayment date in a wholesale funding market matching maturity,
remaining principal and interest amounts and principal and interest payment
dates (the aggregate payments received are the "Current Market Rate Amount").
Bank may select any wholesale funding market rate as the Current Market Rate.
Second, Bank will take the prepayment amount and calculate the present value of
each remaining principal and interest payment which, without prepayment, the
Bank would have received during the term of the Fixed Obligations using the Base
Interest Rate. The sum of the present value calculations is the "Mark to Market
Amount." Third, the Bank will subtract the Current Market Rate Amount from the
Mark to Market Amount. Any amount greater than zero is the Prepayment Fee.

     "Prime Rate" is Bank's most recently announced "prime rate," even if it is
not Bank's lowest rate.

     "Quick Assets" is, on any date, the Borrower's consolidated, unrestricted
cash, cash equivalents, net billed accounts receivable and investments with
maturities of less than 12 months determined according to GAAP.

     "Responsible Officer" is each of the Chief Executive Officer, the
President, the Chief Financial Officer and the Controller of Borrower.

     "Revolving Maturity Date" is December ___, 2003.

     "Schedule" is any attached schedule of exceptions.

     "Subordinated Debt" is debt incurred by Borrower subordinated to Borrower's

                                       21

<PAGE>

indebtedness owed to Bank and which is reflected in a written agreement in a
manner and form acceptable to Bank and approved by Bank in writing.

     "Subsidiary" is for any Person, joint venture, or any other business entity
of which more than 50% of the voting stock or other equity interests is owned or
controlled, directly or indirectly, by the Person or one or more Affiliates of
the Person, and unless otherwise specifically indicated herein, reference to
"Subsidiary" shall mean and refer to a "Subsidiary" of Borrower.

     "Tangible Net Worth" is, on any date, the consolidated total assets of
Borrower and its Subsidiaries minus, without duplication, (i) any amounts
                              -----
attributable to (a) goodwill, (b) intangible items such as unamortized debt
discount and expense, Patents, trade and service marks and names, Copyrights and
research and development expenses except prepaid expenses, and (c) reserves not
already deducted from assets, and (ii) Total Liabilities plus Subordinated Debt.
                              ---

     "Total Liabilities" is on any day, obligations that should, under GAAP, be
classified as liabilities on Borrower's consolidated balance sheet, including
all Indebtedness, and current portion Subordinated Debt allowed to be paid, but
excluding all other Subordinated Debt.

     "Trademarks" are trademark and service mark rights, registered or not,
applications to register and registrations and like protections, and the entire
goodwill of the business of Assignor connected with the trademarks.

                                       22

<PAGE>

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.

                                             BORROWER:

                                             LANTRONIX, INC.

                                             By: _______________________________

                                             Title: ____________________________

                                             UNITED STATES SOFTWARE CORPORATION

                                             By: _______________________________

                                             Title: ____________________________

                                             LIGHTWAVE COMMUNICATION, INC.

                                             By: _______________________________

                                             Title: ____________________________

                                             SYNERGETIC MICRO SYSTEMS, INC.

                                             By: _______________________________

                                             Title: ____________________________

                                             BANK:

                                             SILICON VALLEY BANK

                                       23

<PAGE>

                                                By: ____________________________

                                                Title: _________________________

                                       24

<PAGE>

                                    EXHIBIT A
                                    ---------

     The Collateral consists of all of Borrower's right, title and interest in
and to all of Borrower's personal property, including without limitation the
following:

     All goods and equipment now owned or hereafter acquired, including, without
limitation, all machinery, fixtures, vehicles (including motor vehicles and
trailers), and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located;

     All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above;

     All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks, servicemarks,
trade styles, trade names, patents, patent applications, leases, license
agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, infringements, claims, computer programs, computer
discs, computer tapes, literature, reports, catalogs, design rights, income tax
refunds, payments of insurance and rights to payment of any kind;

     All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods, the licensing of technology or the
rendering of services by Borrower, whether or not earned by performance, and any
and all credit insurance, guaranties, and other security therefor, as well as
all merchandise returned to or reclaimed by Borrower;

     All documents, cash, deposit accounts, securities, securities entitlements,
securities accounts, investment property, financial assets, letters of credit,
letter-of-credit rights, commercial tort claims, certificates of deposit,
instruments and chattel paper now owned or hereafter acquired and Borrower's
Books relating to the foregoing; and

     All copyright rights, copyright applications, copyright registrations and
like protections in each work of authorship and derivative work thereof, whether
published or unpublished, now owned or hereafter acquired; all trade secret
rights, including all rights to unpatented inventions, know-how, operating
manuals, license rights and agreements and confidential information, now owned
or hereafter acquired; all mask work or similar rights available for the
protection of semiconductor chips, now owned or hereafter acquired; all claims
for damages by way of any past, present and future infringement of any of the
foregoing; and

<PAGE>

All Borrower's Books relating to the foregoing and any and all claims, rights
and interests in any of the above and all substitutions for, additions and
accessions to and proceeds thereof.

                                       26

<PAGE>

                                    EXHIBIT B
                                    ---------

                   LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
             DEADLINE FOR SAME DAY PROCESSING IS 12:00 P.M., P.S.T.

TO:  CENTRAL CLIENT SERVICE DIVISION                          DATE:
FAX#:  (408) 496-2426                                         TIME:

--------------------------------------------------------------------------------
FROM: __________________________________________________________________________
                               CLIENT NAME (BORROWER)

REQUESTED BY: __________________________________________________________________
                              AUTHORIZED SIGNER'S NAME

AUTHORIZED SIGNATURE: __________________________________________________________

PHONE NUMBER: __________________________________________________________________

FROM ACCOUNT # ________________  TO ACCOUNT # __________________________________

REQUESTED TRANSACTION TYPE              REQUEST DOLLAR AMOUNT
--------------------------              ---------------------

PRINCIPAL INCREASE (ADVANCE)            $_______________________________________

PRINCIPAL PAYMENT (ONLY)                $_______________________________________

INTEREST PAYMENT (ONLY)                 $_______________________________________

PRINCIPAL AND INTEREST (PAYMENT)        $_______________________________________

OTHER INSTRUCTIONS: ____________________________________________________________

________________________________________________________________________________

All Borrower's representations and warranties in the Loan and Security Agreement
are true, correct and complete in all material respects on the date of the
telephone request for and Advance confirmed by this Borrowing Certificate; but
those representations and warranties expressly referring to another date shall
be true, correct and complete in all material respects as of that date.

--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
                                  BANK USE ONLY

TELEPHONE REQUEST:
-----------------

The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.

________________________________________     ___________________________________
          Authorized Requester                            Phone #

________________________________________     ___________________________________
           Received By (Bank)                             Phone #

                  _____________________________________________
                           Authorized Signature (Bank)

--------------------------------------------------------------------------------

<PAGE>

                                    EXHIBIT C

                                   [Reserved]

<PAGE>

                                    EXHIBIT D
                             COMPLIANCE CERTIFICATE

TO:     SILICON VALLEY BANK

FROM:   LANTRONIX, INC.

     The undersigned authorized officer of LANTRONIX, INC. certifies that under
the terms and conditions of the Loan and Security Agreement between Borrower and
Bank (the "Agreement"), (i) Borrower is in complete compliance for the period
ending _______________ with all required covenants except as noted below and
(ii) all representations and warranties in the Agreement are true and correct in
all material respects on this date. Attached are the required documents
supporting the certification. The Officer certifies that these are prepared in
accordance with Generally Accepted Accounting Principles (GAAP) consistently
applied from one period to the next except as explained in an accompanying
letter or footnotes. The Officer acknowledges that no borrowings may be
requested at any time or date of determination that Borrower is not in
compliance with any of the terms of the Agreement, and that compliance is
determined on an ongoing basis and not just as of the date this certificate is
delivered.

           Please indicate compliance status by circling Yes/No under
                               "Complies" column.

<TABLE>
<CAPTION>
     Reporting Covenant                   Required                                     Complies
     ------------------                   --------                                     --------
     <S>                                  <C>                                          <C>
     Compliance Certificate               Monthly within 30 days (when borrowing)      Yes     No
     10-Q, 10-K with
       consolidating statements           Within 5 days after filing with SEC          Yes     No

     Financial Covenant                   Required                  Actual             Complies
     ------------------                   --------                  ------             --------

     Maintain on a Quarterly Basis:
       Minimum Quick Ratio                1.75:1.0                  _____:1.0          Yes     No
       Profitability                      $1.00                     $________          Yes     No
</TABLE>

<TABLE>
<S>                                                    <C>
                                                       -------------------------------------------------
Comments Regarding Exceptions:  See Attached.                            BANK USE ONLY

                                                       Received by: __________________________________
Sincerely,                                                               AUTHORIZED SIGNER

______________________________________________         Date: _________________________________________
SIGNATURE
                                                       Verified: _____________________________________
______________________________________________                           AUTHORIZED SIGNER
TITLE
                                                       Date: _________________________________________
______________________________________________
DATE                                                   Compliance Status:                  Yes     No
                                                       -------------------------------------------------

</TABLE>

<PAGE>

                               Exhibit E- Schedule

5.1 - Litigation
----------------

Lantronix is a defendant in a patent infringement suit filed by Digi,
International, a Lantronix competitor.

Lantronix is also among the list of defendants in a 1996 patent infringement
suit filed by Datapoint, Inc. Other defendants include Intel, Cisco, Dayna, Sun
Microsystems, IBM and NBASE. The case was heard in New York, with the court
issuing a verdict of non-infringement (unpublished opinion). The plaintiff
appealed to the Court of Appeals for the Federal Circuit, which heard oral
arguments in the appeal on December 3, 2001.Lantronix has been represented by
counsel for NBASE under an indemnification agreement.

5.7 - Subsidiaries
------------------

Lantronix has the following subsidiaries:

Lantronix International A.G., including its subsidiaries:
 - Lantronix Networking Solutions Asia Pacific Pte Ltd (Singapore)
 - Lantronix Australia Pty Ltd.
 - Lantronix UK Ltd.
 - Lantronix France SARL
 - Lantronix Iberica S.L. (Spain)
 - Lantronix Netherlands B.V.

Lantronix International Inc. (Foreign Sales Corp.)

Lantronix Deutschland GmbH

Lantronix Europe GmbH and its subsidiary, Acola Kommunikation + LAN-Tecknik GmbH

United States Software Corp.

Lightwave Communication, Inc.

Synergetic Micro Systems, Inc.

Premise Systems (acquisition expected to close in January, 2002)

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