Document:

<PAGE>

                                                                    EXHIBIT 10.7

                             EMPLOYMENT AGREEMENT

     THIS AGREEMENT, made on April 9, 1998 is between Lantronix, a California
corporation, ("Employer"), located at 15353 Barranca Parkway, Irvine, California
92714, and Frederick G. Thiel, a married individual, ("Employee"), residing at
25906 Portafino Drive, Mission Viejo, California 92691, by virtue of the
following facts, events, circumstances and desires:

                                    RECITALS

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

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

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

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

     E.  WHEREAS, Employer desires assurance that Employee will not compete with
it for a reasonable period of time after termination of employment, and Employee
is willing to refrain from competition.

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

                                   AGREEMENT

     1.  Term. Subject to this Agreement's terms and conditions, Employer agrees
to employ Employee, The employment term shall commence April 9, 1998 and
shall terminate April 9, 2001. The Employee will be employed by the Employer
until such time as either or both parties choose to discontinue the employment.
The employment relationship shall be that of an Employee at will.

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

                                       1
<PAGE>

     3.  Compensation

          3. l  Base Salary. The Employer shall pay to the Employee as base
                -----------
compensation the total sum of One Hundred Sixty Thousand Dollars ($160,000.00)
per year, payable at those intervals as the Employer shall pay other Executives,
commencing April 9, 1998. Said base salary shall be subject to annual review by
the Employer's Board of Directors.

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

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

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

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

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

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

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

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

                                       2
<PAGE>

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

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

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

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

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

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

     5.  Confidential Information.

          5.1  Definition. "Confidential information" means information that is
               ----------
proprietary to the Employer or proprietary to others and entrusted to the
Employer, whether or not trade secrets. Confidential information includes, but
is not limited to, information relating to business plans and to business as
conducted or anticipated to be conducted, and to past, current or anticipated
products. Confidential information also includes without limitation, Employer-
information concerning (a) price lists, (b) costs of production, and (c) raw
material costs, (d) selling costs, (e) delivery costs, (f) information
concerning new or proposed new products, including the nature and design of such
products and the plans for marketing such products, (g) internal procedures and
policies, (h) customer lists, account names, contacts, addresses and sales
activity, (i) names and addresses of suppliers and vendors, (j) tax and
financial information, (k) reserves, (1) intellectual property owned or leased
by the company, (m) banking relationships and arrangements (n) Employees, (o)
management personnel and policies, (p) quotation names, addresses, contacts and
quote workups, (q) all mailing lists, (r) company product training materials and
courses, and (s) company computer programs and printouts.

          5.2  Prohibitions Against Use. During or subsequent to the termination
               ------------------------
of Employee's employment, whether termination is voluntary or involuntary;
Employee will not use or disclose, other than in connection with employment with
the company, any confidential information to any person not employed by the
company or not authorized by the company to receive confidential information
without the prior written consent of the company. Employee will use reasonable
and prudent care to safeguard and protect and prevent  the unauthorized use and
disclosure of confidential information. The obligations contained in this
paragraph will survive for as long as the company in its sole judgment considers
the information to be confidential information.

                                       3
<PAGE>

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

     It is specifically agreed that during the Non-compete Period, Employee
shall not in any manner contact, solicit or cause to be solicited any of
Employer's customers, suppliers or clients or former or prospective customers or
suppliers for any purpose whatsoever, without the written consent of Employer.
Employee further agrees that during his employment and for one (1) year after
termination of his employment, he will not directly or indirectly, in any
manner, request or induce Employee of Employer to leave his employment with
Employer, unless expressly authorized or instructed to do so in writing by
Employer.

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

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

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

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

                                       4
<PAGE>

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

     11.  Entire Agreement. It is agreed that the provisions of the agreement
contain the entire agreement on the subject covered between the parties, and
cannot be modified orally, and can only be modified by written agreement signed
by Employee and Employer. This agreement shall be binding upon the parties and
their respective heirs, administrators and assigns.

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

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

                              "EMPLOYEE"

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

                              LANTRONIX

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

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

                                       5
<PAGE>

                                  EXHIBIT "1"

TITLE:              CEO

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

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

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

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

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

                                  EXHIBIT "2"

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

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

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

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

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

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

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

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

Revenue             20%
Gross Margin        50%
Net                 30%

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

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

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

Example:
-------

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

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

                                       8
<PAGE>

Rules:
-----

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

14.  Circumstance beyond the control of the executive, or not contemplated by
the parties when setting goals, should not negatively affect the incentive
compensation calculation. As such circumstances arise, expectations as to the
potential effect should be negotiated between the executive and his
supervisor(s). Disputes should be resolved solely at the discretion of the Board
of Directors.

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

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

                                       9
<PAGE>

                                  EXHIBIT "3"

                   LANTRONIX 1993 INCENTIVE STOCK OPTION PLAN

                                [To Be Attached]
<PAGE>

                                  EXHIBIT "4"

                   LANTRONIX INCENTIVE STOCK OPTION AGREEMENT

                                [To Be Attached]
<PAGE>

                                  EXHIBIT "5"

                              SEVERANCE AGREEMENT

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

                                    RECITALS

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

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

                                   AGREEMENT

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

     1.   Termination or Resignation Following a Change in Control. If a
          --------------------------------------------------------
"Change in Control" (as hereinafter defined) of the Company occurs after the
date hereof, and after such Change in Control either (i) the Company terminates
Executive without "Cause" ( as hereinafter defined) on or before the two year
anniversary of the date of the Change in Control, or (ii) Executive resigns with
"Good Reason" (as hereinafter defined on or before the two year anniversary of
the date of the Change in Control, then as a severance benefit and in lieu of
all other compensation or damages (except as set forth in Section 3 hereof)
the Company shall:

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

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

                                       1
<PAGE>

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

          d.   Accelerate the vesting of all unvested stock options granted to
Executive under the Company's stock options ,granted to Executive under the
Company's stock option or other benefit plans so that all such stock options
will vest and

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

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

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

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

          b.   Termination without Cause. The Company in its sole discretion may
               -------------------------
termination Executive's employment at any time with or without Cause. For
purposes of this Agreement, the Company shall be deemed to have terminated
Executive without "Cause" following a Change in Control if Executive's
employment is terminated for any reason other than

                                       2
<PAGE>

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

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

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

                                       3
<PAGE>

Company. The benefits on termination or resignation provided in this Agreement
are in substitution for any severance or termination benefits otherwise
agreeable under Company policies of general application. The benefits on
termination or resignation provided in this Agreement shall not be reduced by
any compensation or benefits received by Executive from any subsequent employer
or any other third party.

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

     5.   Assignment. This Agreement may not be assigned by Executive. The
          ----------
Company shall be entitled to assign this Agreement to any successor in interest
to its business. The Company will obtain an assumption of this Agreement by any
successor or assign to all or substantially all of the business and/or assets of
the Company (whether direct or indirect, by acquisition, merger, consolidation
or otherwise), but the failure to obtain such assumption shall not prevent or
delay such acquisition, merger, consolidation or other transaction or relieve
the Company of its obligations under the Agreement. This Agreement shall bind
and inure to the benefit of the Company's successors and assigns, as well as
Executive heirs, executors, administrators, and legal representatives.

     6.   Notices. Any notice, request, demand or other communication
          -------
required or permitted hereunder shall be deemed to be properly given when
personally served or three (3) days after deposit in the United States mail,
registered or certified, postage prepaid, return receipt requested, addressed to
the Company at its principal office or to Executive at his last known address.
Either party may change its address by written notice in accordance with the
Section 7.

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

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

                                       4
<PAGE>

     9.   Arbitration. if any dispute hereafter arises between the parties
          -----------
hereto and/or their agents or employees relating to the terms and provisions of
this Agreement or otherwise, including but not limited to any claim for breach
of any contract or covenant (express or implied), tort claims, claims for
discrimination or harassment (including, but not limited to race, sex, religion,
national origin, age, handicap or disability), claims for compensation or
benefits (except where a benefit plan or pension plan or insurance policy
specifies a different claims procedure) and claims for violations of any
federal, state or other governmental law, statute, regulation or ordinance
(except for claims involving worker's compensation benefits), then either party
may initiate arbitration proceedings in accordance with the Employment Rules of
JAMS ENDispute, as the exclusive remedy for such dispute and in lieu of any
court action, which is hereby consent to such arbitration, and any arbitration
award shall be final and binding. Neither party shall disclose the existence of
any dispute or the terms of any arbitration decision to any third party, other
than legal-counsel, accountants, financial advisors or as required by law.

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

                              EXECUTIVE:

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

                              COMPANY:

                              LANTRONIX
                              a California corporation

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

                                       5
<PAGE>

                                   EXHIBIT A
                                   ---------

                               (Frederick Thiel)

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

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

                                FIRST AMENDMENT
                            TO EMPLOYMENT AGREEMENT

     This First Amendment to the Employment Agreement dated April 9, 1998, is
made and executed by between Frederick G. Thiel ("Employee") and Lantronix,
Inc., a California corporation ("Employer"). The following changes only are made
to the Agreement:

     1.  Paragraph 3.1, Base Salary, is revoked in its entirety and the
                        -----------
following inserted in its place and stead:

         "The Employer shall pay to the Employee as base compensation the total
         sum of Two Hundred Thousand Dollars ($200,000.00) per year, payable at
         those intervals as the Employer shall pay other Executives, commencing
         April 9, 1999.  Said base salary shall be subject to annual review by
         the Employer's Board of Directors."

     2.  Paragraph 3.2, Bonus, is revoked in its entirety and the following
                        -----
paragraph inserted in its place and stead:

         "In addition to said base salary, Employee shall also receive a bonus
         amount calculated in accordance with the Executive Incentive
         Compensation Program attached hereto and incorporated herewith as
         Exhibit `2.'  Said bonus amount shall be paid quarterly and amount up
         to 50% of the annual base salary referenced in Paragraph 3.1 above."

     3.  Paragraph 3.3, Automobile Allowance, is revoked in its entirety and the
                        --------------------
following paragraph inserted in its place and stead:

         "Employee shall receive an automobile allowance of $800 per month."

     4.  In all other respects, the Employment Agreement dated April 9,
1998, as amended above shall remain unchanged and is hereby ratified, reaffirmed
and approved.

"EMPLOYEE"                             "EMPLOYER"

                                       LANTRONIX, INC.

 /s/ FREDERICK G. THIEL
-----------------------
FREDERICK G. THIEL                     By:       /s/ BERNHARD BRUSCHA
                                          -----------------------------------

                                       Its:         Chairman
                                          -----------------------------------

<PAGE>

                                SECOND AMENDMENT
                            TO EMPLOYMENT AGREEMENT

     This Second Amendment to the Employment Agreement dated April 9, 1998, is
made and executed by and between Frederick G. Thiel ("Employee") and Lantronix,
Inc., a Delaware corporation ("Employer").  The following changes only are made
to the Agreement:

     1. Paragraph 1, Term, is hereby amended in its entirety to read as follows:
                     ----

        "Subject to this Agreement's terms and conditions, Employer agrees to
        employ Employee.  The employment term shall commence April 9, 1998 and
        shall terminate September 30, 2001.  The Employee will be employed by
        the Employer until such time as either or both parties choose to
        discontinue the employment.  The employment relationship shall be that
        of an Employee at will."

     In all other respects, the Employment Agreement dated April 9, 1998, as
amended above and as amended by the First Amendment to Employment Agreement,
shall remain unchanged and is hereby ratified, reaffirmed and approved.

"EMPLOYEE"                               "EMPLOYER"

                                         LANTRONIX, INC.
/s/ FREDERICK G. THIEL
---------------------------
FREDERICK G. THIEL                       By: /s/ STEVEN V. COTTON
                                            -----------------------------------

                                         Its: Chief Financial Officer
                                              ---------------------------------<PAGE>

                                                                   EXHIBIT 10.18

                               Letter of Intent

                                 May 31, 2001

Ladies and Gentlemen:

     This letter confirms our agreement on the principal terms and conditions of
Lantronix, Inc.'s (the "Acquirer") proposed option to acquire Synergetic Micro
                        --------
Systems, Incorporated (the "Target").  Each party understands and agrees that
                            ------
preparation and execution of formal, comprehensive agreements is required,
containing the terms set forth in Exhibit A and such additional terms as
                                  ---------
Acquirer and Target might agree following good faith negotiation.  This Letter
of Intent is intended to be non-binding with respect to the matters discussed in
Exhibit A, except for Sections 14, 15, 16 and 17, which are intended to be
---------
binding.  This letter of intent may be executed in one or more counterparts,
each of which shall be deemed an original for all purposes.

                              "ACQUIRER"

                              LANTRONIX, INC.

                                    By:     /s/ STEVEN V. COTTON
                                       -----------------------------------------
                                    Name:   Steven V. Cotton
                                    Title:  Chief Financial Officer

                              "TARGET"

                              SYNERGETIC MICRO SYSTEMS, INCORPORATED

                                    By:     /s/ MICHAEL JUSTICE
                                       -----------------------------------------
                                    Name:   Michael Justice
                                    Title:  Chief Executive Officer
<PAGE>

                                   Exhibit A
                                   ---------

            Lantronix, Inc./ Synergetic Micro Systems, Incorporated

                                  TERM SHEET

                                 May 31, 2001

     This term sheet sets forth the proposed terms and structure of a potential
transaction in which Lantronix, Inc. (the "Acquirer") will obtain an option to
                                           --------
acquire all of the capital stock of Synergetic Micro Systems, Incorporated (the
"Target") (including any and all options or other rights to acquire capital
 ------
stock) of Target (the "Option").  This term sheet is for discussion purposes
                       ------
only and does not constitute a binding agreement or commitment of any nature
whatsoever between the parties, with the exception of Sections 14, 15, 16, and
17, which the parties intend to be binding.  Any transaction will be subject in
all respects to a fully negotiated and executed definitive option and merger
agreement (together, the "Definitive Agreements") and approval by the board of
                          ---------------------
directors and Shareholders of Target (the "Shareholders") and the board of
                                           ------------
directors of Acquirer.  A description of the capitalization of the Target is
attached hereto as Annex A.

1.  Stock Purchase/Option     Acquirer shall deposit in an escrow account
                              established with a mutually acceptable third party
                              the amount of eight hundred thousand dollars
                              ($800,000) (the "Initial Consideration"). Upon
                                               ---------------------
                              exercise of the Option by the Acquirer, the
                              initial consideration shall be delivered as a
                              portion of the purchase price. If the Option
                              Period, as defined below, expires or is terminated
                              by Acquirer without Acquirer exercising the
                              Option, the Initial Consideration will be released
                              from escrow and applied to purchase from Target
                              three hundred thirty-six thousand seven hundred
                              (336,700) newly issued shares of the Target's
                              Common Stock.

                              The Option shall be exercisable at any time on or
                              before December 17, 2001 (the "Option Period") for
                                                             -------------
                              the Option Exercise Price (as defined below). Upon
                              the exercise of the Option, the parties shall use
                              commercially reasonable efforts to close the
                              Merger (as defined below) on or before December
                              31, 2001.

2.  Form of Acquisition       In connection with exercise of the Option,
                              Acquirer will create a new, wholly-owned
                              subsidiary of Acquirer ("Merger Sub"). The form of
                                                       ----------
                              the transaction will be a merger of Merger Sub
                              with and into Target (the "Merger"). As a result
                                                         ------
                              of the Merger, Lantronix will be the sole
                              stockholder of Target and as a result of the
                              Merger, will have indirectly acquired all right,
                              title and interest in and to all intangible and
                              tangible assets of Target, including, but not
                              limited to, all contracts, trademarks, domain
                              names, website rights, know-how, patents, other
                              intellectual
<PAGE>

                              property, and any confidential or proprietary
                              information owned by Target, and have indirectly
                              assumed all liabilities of the Target. The date on
                              which the Merger is consummated shall be referred
                              to as the "Closing Date."
                                         ------------

                              At Acquirer's request, Target will cause each
                              Shareholder to enter into an irrevocable proxy or
                              a voting trust at the time the Definitive
                              Agreements are executed.

3.  Purchase Price            The aggregate consideration to be paid by Acquirer
                              within three (3) business days of the Closing Date
                              shall equal $16,500,000 consisting of:

                              $3,300,000 in cash delivered by wire transfer,
                              including the Initial Consideration (the "Cash
                                                                        ----
                              Purchase Price"); and
                              --------------

                              $13,200,000 of unregistered Common Stock of the
                              Acquirer (the "Merger Shares").
                                             -------------

                              In addition, the Acquirer shall assume the options
                              of Target, including approximately $1,500,000 of
                              value as set forth in Section 5 below, subject to
                              final option calculations.

                              The number of Merger Shares shall be determined by
                              dividing $13,200,000 by the closing price of
                              Acquirer common stock on the Closing Date (the
                              "Closing Price"); provided, however, that the
                               -------------
                              actual number of Merger Shares to be issued shall
                              be automatically adjusted at the Closing Date to
                              the extent necessary both to achieve a tax-free
                              transaction and to maintain the value of the Cash
                              Purchase Price plus the value of the Merger Shares
                              (valued at the Closing Price) equal to
                              $16,500,000.

4.  Net Worth True-Up         No later than five (5) business days prior to the
                              Closing Date, Target shall deliver to Acquirer an
                              estimated statement, prepared in good faith, of
                              the Closing Date Net Worth of Target (defined as
                              total assets less total liabilities of Target,
                              determined in accordance with generally accepted
                              accounting principles of the United States
                              ("GAAP"), except that GAAP Notes will not be
                                ----
                              required and adjustments that would be made at
                              year-end under GAAP will be estimated on a pro-
                              rata basis). On the Closing Date, the Cash
                              Purchase Price and the Merger Shares (together the
                              "Purchase Price") shall be reduced pro rata as
                               --------------
                              applicable, by the amount, if any, by which the
                              Closing Date Net Worth of Target is less than the
                              sum (or remainder) of three hundred thousand
                              dollars ($300,000) plus (or minus) any accumulated
                              earnings (or loss) from and after January 1, 2001.
                              Any Purchase Price reduction shall be satisfied
                              from the Cash Purchase Price and Merger Shares (on
                              a pro rata basis) that otherwise would be paid at
                              the Closing.

                                      -2-
<PAGE>

                              At its election, Acquirer may have such Closing
                              Date Net Worth reviewed by Acquirer's internal
                              accountants (and to the extent a dispute arises,
                              by Acquirer's independent auditors). In the event
                              that Acquirer and a representative designated by
                              the Shareholders cannot agree upon a net worth
                              adjustment, Acquirer's auditors and the
                              Shareholder representative's auditors shall select
                              an independent auditor to resolve such dispute,
                              and any resulting decrease in the Closing Net
                              Worth of Target shall result in a post-Closing
                              purchase price adjustment in favor of Acquirer.

5.  Options                   The Acquirer shall assume the outstanding but
                              unexercised options of the Target (the "Acquired
                                                                      --------
                              Options"), provided, that the Purchase Price shall
                              -------
                              be reduced (in cash and Merger Shares, on a pro
                              rata basis) to the extent the Aggregate FMV of the
                              Acquired Options minus the Aggregate FMV of the
                              Acquirer Stock for which such Acquired Options
                              could be exercised (calculating using the Closing
                              Price, and assuming such options are fully vested)
                              exceeds one million five hundred thousand dollars
                              ($1,500,000). The Aggregate FMV of the Acquired
                              Options shall equal the weighted average exercise
                              price of such options (on a post-assumption basis)
                              multiplied by the number of shares of Acquirer
                              Common Stock for which such options shall be
                              exercisable upon their assumption.

                              The Acquired Options will become exercisable for
                              Common Stock of Acquirer, consistent with the
                              existing option terms of the Target (including
                              vesting).

6.  Indemnification and       Twenty percent (20%) of the Cash Purchase Price
    Escrow                    shall be placed in escrow with a third party
                              mutually acceptable to the Target and the Acquirer
                              (the "Escrow Cash") for a period ending eighteen
                                    -----------
                              (18) months from the Closing Date to provide an
                              exclusive remedy against which Acquirer shall
                              exercise any claims for any breaches of
                              Shareholders' or Target's representations,
                              warranties or covenants in the Definitive
                              Agreement. In addition, twenty percent (20%) of
                              the Merger Shares (the "Escrow Shares") issued
                                                      -------------
                              pursuant to the Merger will be placed in escrow
                              for a period ending eighteen (18) from the Closing
                              Date to provide an exclusive remedy against which
                              Acquirer shall exercise any claims for any
                              breaches of Shareholders' or Target's
                              representations, warranties or covenants in the
                              Definitive Agreements. Notwithstanding the above,
                              Shareholders shall remain personally liable for
                              any liability arising from Excluded Claims (as
                              defined below), limited to such Shareholder's pro
                              rata portion of the Aggregate Consideration
                              (except in the case of Shareholder fraud, where
                              such Shareholder's liability shall not be so
                              limited).

                                      -3-
<PAGE>

                              All such claims of Acquirer shall be satisfied pro
                              rata from the Cash Purchase Price and Merger
                              Shares (i.e., twenty percent (20%) shall be paid
                              from cash and eighty percent (80%) shall be paid
                              from Escrow Shares), with Merger Shares valued at
                              the Closing Price for the purposes of satisfying
                              any claims.

                              Except for claims relating to environmental, tax
                              and fraud ("Excluded Claims"), claims for
                                          ---------------
                              indemnification shall be recoverable if such
                              claims in the aggregate exceed $100,000, and in
                              such event $50,000 of the first $100,000 of such
                              claims shall be recoverable and the entire amount
                              of such claims in excess of $100,000 shall be
                              recoverable. Except for claims relating to any of
                              the Excluded Claims (which shall survive until
                              expiration of applicable statute of limitations)
                              and all pending claims of which written notice to
                              the Shareholder's representative has been
                              delivered by Acquirer all of the Target's and the
                              Shareholder's obligations under the Definitive
                              Agreements shall expire on the eighteen (18) month
                              anniversary of the Closing Date (the "Release
                                                                    -------
                              Date").
                              ----

                              Acquirer shall take commercially reasonable
                              efforts to mitigate its losses and damages from
                              any indemnification claim. The amounts of all
                              indemnification claims shall be reduced by amounts
                              actually received from insurance relating to such
                              claims; provided that the Acquirer shall take
                              commercially reasonable efforts to collect any
                              sums payable from such insurance.

                              No later than fourteen (14) days after the Release
                              Date, the Escrow Shares and Escrow Cash not
                              transferred to Acquirer or reserved for then
                              pending or threatened claim (for which written
                              notice to the Shareholder's representative has
                              been delivered by Acquirer) will be distributed to
                              the Shareholders by way of joint escrow
                              instructions. All interest on the Escrow Cash
                              shall be distributed to the Shareholders upon
                              distribution of the escrow. All dividends and
                              distributions, if any, on the Escrow Shares, shall
                              be distributed to the Shareholders as earned.

                              Acquirer on the one hand and Target's Shareholders
                              in the aggregate on the other hand each shall bear
                              fifty percent (50%) of the cost of a third party
                              escrow agent.

7.  Tax and Accounting        The parties intend that the proposed Merger will
                              qualify as a tax-free reorganization, and that the
                              proposed Merger will be accounted for as a
                              purchase. The parties will negotiate in good faith
                              any modifications to this term sheet with the
                              intent that the proposed Merger qualifies as a

                                      -4-
<PAGE>

                              tax-free reorganization.

8.  Securities Law Matters    The Merger Shares will be issued pursuant to an
                              exemption from registration under the `33 Act. The
                              shares will be restricted securities, and shall be
                              subject to customary share legends and resale
                              restrictions.

                              Acquirer shall use commercially reasonable efforts
                              to file a Form S-8 registration statement with
                              respect to the Acquired Options within 90 days of
                              the close of the Merger (the "Registration Date")
                                                            -----------------
                              or as soon thereafter as reasonably practicable.

                              The Shareholders shall have Piggyback Rights with
                              respect to public offerings by Acquirer that are
                              on par with existing Piggyback Rights granted by
                              Acquirer.

9.  Due Diligence             Both parties agree to make available and grant
    Investigation             access to any corporate or financial information
                              as is reasonably necessary to conduct a due
                              diligence review. Both parties shall take
                              reasonable good faith efforts promptly to provide
                              the other party or its counsel such documents as
                              may reasonably be requested in writing. The
                              parties will enter into a mutually agreeable
                              confidentiality agreement promptly after execution
                              of this term sheet.

                              Acquirer shall have the right to continue due
                              diligence review after the Definitive Agreement is
                              entered into, which will provide, among other
                              things, that Acquirer and its representatives will
                              only speak with and otherwise contact regarding
                              the proposed transaction, those employees and
                              other representatives of Target as are designated
                              by Michael Justice. Subject to the foregoing,
                              Target will provide Acquirer and its consultants
                              access to the facilities of the Target after the
                              Definitive Agreement is entered into to perform
                              such investigations and tests as Acquirer deems
                              desirable.

10.  Employment,              Contemporaneous with the execution of the Merger
     Non-competition and      Agreement, Target will enter into employment, non-
     Other Agreements         competition and/or stock restriction agreements
                              with persons designated by Acquirer and on such
                              terms and conditions as are mutually acceptable to
                              Acquirer and Target. The Acquirer requires that
                              Michael Justice enter into an employment agreement
                              with Target with a term of three (3) years and
                              such other terms mutually acceptable to Mr.
                              Justice and Acquirer. Key employees shall enter
                              into non-compete agreements with terms not less
                              than five (5) years from the Closing Date (or
                              three (3) years if such employee is terminated
                              other than for cause).

                                      -5-
<PAGE>

11.  Transaction in           Each Shareholder shall agree that during the
     Acquirer Securities      period of the Option, and, in the event the Option
                              is exercised, for a period ending on the first
                              anniversary of the Closing Date, such Shareholder
                              will not sell any equity security nor establish or
                              increase a put equivalent position or liquidate or
                              decrease a call equivalent position (as such terms
                              are defined in Rule 16a-1 of the 1934 Act) or
                              enter into any hedging transaction with respect to
                              the Acquirer's capital stock, including without
                              limitation, equity swaps, pre-paid forward
                              contracts or zero cost collars; provided, however,
                              that (i) such non-employee Shareholders as Target
                              may designated with respect to no more than one
                              hundred thousand (100,000) shares of Merger Shares
                              and (ii) Michael Justice with respect to one-half
                              of the consideration he receives pursuant to the
                              Merger, may enter into hedging transactions and,
                              provided that any such transaction complies with
                              all applicable trading policies of the Acquirer
                              and all applicable laws.

                              Each Shareholder shall agree that during the
                              period of the Option, such Shareholder shall not
                              transfer his or her shares to any third party
                              other than to members of his or her immediate
                              family and trusts for his or their benefit.

12.  Merger Agreement         The Merger Agreement shall include, among other
                              things, representations and warranties by the
                              Acquirer, Shareholders and Target, covenants and
                              closing conditions customary for transactions of
                              this nature. The representations of Target shall
                              survive until the Release Date; provided, that
                              Excluded Claims shall survive until the expiration
                              of the applicable statute of limitations.
                              Representations and warranties of Acquirer shall
                              survive until the Closing Date, except that
                              representations and warranties of the Acquirer
                              relating to the Merger Shares shall survive until
                              the first anniversary of the Closing Date.

                              Conditions to closing shall include, without
                              limitation, (i) approval of this transaction by
                              the boards of directors of both parties,
                              Shareholders and any other necessary parties; (ii)
                              receipt of any necessary regulatory approvals
                              including an HSR filing, if necessary; and (iii)
                              completion of its diligence review to the
                              Acquirer's reasonable satisfaction.

                              The parties will use their reasonable efforts to
                              complete the Definitive Agreements within twenty
                              (20) days of the signing of the term sheet.

13.  Shareholder Agreement    At the time of the execution of the Definitive
                              Agreement, the Shareholders shall agree until
                              expiration or termination by Acquirer of the
                              Option without exercise, if applicable, to vote in
                              favor of the

                                      -6-
<PAGE>

                              transaction and not to transfer their shares to
                              any third party.

14.  Nondisclosure            The parties will keep the existence and terms of
                              this term sheet confidential and will not make any
                              public announcement regarding this term sheet or
                              any transaction contemplated hereby, provided,
                              that Acquirer may announce the execution of this
                              term sheet on a date mutually agreed by the
                              parties and provide a general description of the
                              contemplated transaction, with any press release
                              using text mutually agreed upon by Target and
                              Acquirer. Acquirer may make public disclosure
                              required by applicable securities laws and
                              regulations after the execution of the Definitive
                              Agreement, or such earlier date as agreed by
                              Acquirer and Target.

15.  No-Shop Provision and    Until ninety (90) days after the date of this term
     Termination Fee          sheet, or such earlier date as Acquirer and Target
                              mutually agree in writing to discontinue
                              discussions regarding the Merger (the "Expiration
                                                                     ----------
                              Date"), and in consideration for Acquirer's
                              ----
                              commitment of time and resources to perform due
                              diligence and enter into discussions regarding the
                              Merger, Target will not, directly or indirectly,
                              through any officer, director, employee, affiliate
                              or agent or otherwise, take any action to solicit,
                              initiate, seek, encourage or support any inquiry,
                              proposal or offer from, furnish any information
                              to, or participate in any negotiations with, any
                              third party regarding any acquisition of Target,
                              any merger or consolidation with or involving
                              Target, or any acquisition of any portion of the
                              stock or assets of Target (other than the sale of
                              inventory in the ordinary course of business) (an
                              "Acquisition Transaction"). Target agrees that any
                               -----------------------
                              such negotiations (other than negotiations with
                              Acquirer) in progress as of the date of this
                              letter will be suspended during such period and
                              that Target will not accept or enter into any
                              agreement, arrangement or understanding regarding
                              any Acquisition Transaction during such period.

                              If Target or any of its officers, directors,
                              employees, affiliates or agents receives any
                              proposal for, or inquiry respecting, any third
                              party acquisition transaction involving Target, or
                              any request for nonpublic information in
                              connection with any such proposal or inquiry,
                              Target will promptly notify Acquirer, describing
                              in detail the identity of the person making such
                              proposal or inquiry and the terms and conditions
                              of such proposal or inquiry.

16.  Break-up Fee             In the event that the transactions contemplated
                              hereby are not consummated due to Target's
                              violation of Section 15 Target will pay Acquirer a
                              five hundred thousand dollar ($500,000) cash
                              break-up fee.

                              In the event Target or any Shareholder refuses to
                              enter into an agreement substantially on the terms
                              provided herein and other

                                      -7-
<PAGE>

                              customary and commercially reasonable terms,
                              Target shall reimburse the Acquirer its reasonable
                              out-of-pocket expenses associated with the
                              negotiation of this term sheet and the definitive
                              documentation, including legal and accounting
                              expenses, such reimbursement under this provision
                              not to exceed thirty thousand dollars ($30,000).

                              In the event Acquirer refuses to enter into an
                              agreement substantially on the terms provided
                              herein and other customary and commercially
                              reasonable terms, Acquirer shall reimburse the
                              Target its reasonable out-of-pocket expenses
                              associated with the negotiation of this Term Sheet
                              and the definitive documentation, including legal
                              and accounting expenses, such reimbursement under
                              this provision not to exceed thirty thousand
                              dollars ($30,000).

17.  Expenses                 Except as expressly provided in Section 16,
                              Acquirer, Target and the Shareholders shall each
                              be liable for their own costs, including legal,
                              accounting, and other such costs, incurred by each
                              of them in the negotiation and closing of this
                              transaction, and the parties each shall indemnify
                              the other for any claims for brokerage or finders
                              fees by persons claiming to have been engaged by
                              such party; provided that upon exercise of the
                              Option, Acquirer shall pay for up to twenty-five
                              thousand ($25,000) of such legal fees. All other
                              out-of-pocket expenses of Target associated with
                              the negotiation and consummation of the
                              transaction, including but not limited to expenses
                              of counsel, accountants, finders fees and
                              investment banking fees, shall result in an
                              equivalent Cash Purchase Price reduction.

18.  Opinion                  Counsel for Target and Acquirer each will give a
                              legal opinion customary for a transaction of this
                              type.

     This term sheet represents only the current thinking of the parties with
respect to certain of the major issues relating to the proposed transaction.
Therefore, it is understood and acknowledged that except as to Sections 14, 15,
16 and 17 this term sheet is not intended and will not be deemed to be a legally
binding agreement among the parties for any purposes.  All rights and
obligations of the parties will be subject to negotiation and execution of a
definitive acquisition agreement among the parties and completion of the due
diligence and other matters set forth above.

                                      -8-

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