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EMPLOYMENT, CONFIDENTIALITY, AND NON-COMPETITION AGREEMENT
 James W. Gragg
 Background Statement
   Statement of Agreement
 1.
    
    Duties. Executive shall devote Executives best efforts to the business of the Company.
Executive shall perform such duties and responsibilities customary to the position of Vice
President of Operations & Fulfillment, including those described on Exhibit Ato this
Agreement. Executive shall also perform those duties assigned by the Company from time to
time.
 2.
    
    Terms.The initial term of employment under this Agreement shall terminate six (6) months
after the date of this Agreement. The initial term of this Agreement shall automatically
renew for successive six (6) month periods, referred to as successor terms, unless either
party gives thirty (30) days written notice of its intention not to renew prior to the
expiration of the initial or any successor term or Executive is terminated for cause.
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3.
    
    Terminable Only For Cause. This Agreement may be terminated by the Company prior to the
expiration of the initial term or any successor term as follows:
 (a)
    
    Due to the death of Executive;(b)
    
    Due to a physical or mental disability which prevents Executive from performing
the essential functions of his full duties for a period of ninety (90) consecutive days
during the term of this Agreement, as determined in good faith by a physician
reasonably acceptable to the Company; or,(c)
    
    For Cause, which is (i) fraud, misappropriation, embezzlement, dishonesty, or
other act of material misconduct against the Company or any affiliate of the Company;
(ii) failure to perform specific and lawful directives of Executives superiors; (iii)
violation of any rules or regulations of any governmental or regulatory body, which is
materially injurious to the financial condition of the Company; (iv) conviction of or
plea of guilty or nolo contendere to a felony; (v) violation of the provisions of 8, 9,
10, 11, 13, or 16; or, (vi) substantial failure to perform the duties and
responsibilities of Executive under this Agreement.
  4.
    
    Termination Without Cause or Nonrenewal.In the event the Company gives Executive thirty
days written notice of its intention not renew a term of this Agreement, or if Executive is
terminated without cause after the expiration of the initial term, the Executive shall receive
an amount equal to six-months severance pay based on the Executives base salary at the time
of termination, payable in bi-monthly or bi-weekly installments as dictated by the regular pay
dates of the Company. No accrued but unpaid bonuses or commissions shall be due to Executive
under this Paragraph. No other severance payment or benefits shall be due Executive other
than those provided for under this Agreement. Notwithstanding anything stated herein to the
contrary, in the event Executive becomes employed during the period in which the Executive is
eligible to receive post-employment payments under this Paragraph, any amounts received by
Executive in the form of compensation, salary, or other payments shall be offset or shall
reduce any amounts or liability owed by the Company to the Executive under this Paragraph.
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5.
    
    Compensation.Employer shall pay and provide benefits to Executive according to the
provisions of Executives compensation plan described in the attached Exhibit B.
Executives compensation plan shall be reviewed on a periodic basis. The Company reserves
the right, and Executive hereby authorizes Company, to make deductions from Executives pay
or bonuses to satisfy any outstanding obligations of Executive to the Company. The Company
may offset against the final payment of wages or bonuses owed to Executive any amounts due
the Company from Executive.
 6.
    
    Changes in Position, Location, or Compensation.If the Company transfers, promotes, or
reassigns Executive to another position or geographic area, or both parties agree to a change
in compensation or benefits during a term of this Agreement or upon the renewal of a term of
this Agreement, an updated employment agreement may be substituted by agreement of the parties
but is not required. Mutually-agreeable changes in compensation or benefits shall be effected
by amendment to and incorporation of a modified Exhibit B, initialed by the parties or their
authorized representative. All provisions, promises, terms or conditions not modified by an
amendment of ExhibitsA  C shall remain in effect and shall not be deemed revoked or
modified beyond the changes set forth in one or more amended Exhibits.
 7.
    
    Executive Representation/Warranty.Executive represents that Executive is not a party to any
agreement with a third party, or limited by a court order, containing a non-competition
provision or other restriction which would preclude Executives employment with Company or any
of the services which Executive will provide on the Companys behalf.
 8.
    
    Duty of Loyalty. Executive acknowledges the common law duties of reasonable care, loyalty,
and honesty which arise out of the principal/agent relationship of the parties. While
employed and thereafter for whatever term the law may impose, Executive shall not engage in
any activity to the detriment of the Company. By way of illustration and not as a limitation,
Executive shall not discuss with any customer or potential customer of the Company any plans
by Executive or any other Executives of the Company to leave the employment of the Company and
compete with the Company.
 9.
    
    Company Documents.Executive agrees and acknowledges that Executive holds as the Companys
property all memoranda, books, papers, letters, and other data, including duplicates, relating
to the Companys business and affairs (Company Documents). This includes Company Documents
created or used by Executive or otherwise coming into Executives possession in connection
with the performance of Executives job duties. All Company Documents in the possession,
custody, or control of Executive shall be returned to the Company at the time of termination
of employment.
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Confidential Information and Non-Competition
 10.
    
    In exchange for the mutual promises and obligations contained in this Agreement, and
contemporaneous with its execution or soon thereafter, Employer promises to deliver to
Executive or permit Executive to acquire, be exposed to, and/or have access to material, data,
and information of the Company and/or its customers or clients that is confidential,
proprietary and/or a trade secret (Confidential Information). At all times, both during and
after the termination of employment, the Executive shall keep and retain in confidence and
shall not disclose, except as required in the course of the Executives employment with the
Company, to any person, firm or corporation, or use for the Executives own purposes, any
Confidential Information. For the purposes of this paragraph, such information shall include,
but is not limited to:
 1.
    
    The Companys standard operating procedures, processes, formulae, know-how,
scientific, technical, or product information, whether patentable or not, which is of
value to the Company and not generally known by the Companys competitors;2.
    
    All confidential information obtained from third parties and customers
concerning their products, business, or equipment specifications;3.
    
    Confidential business information of the Company, including, but not limited
to, marketing and business plans, strategies, projections, business opportunities,
client identities or lists, sales and cost information, internal financial statements
or reports, profit, loss, or margin information, customer price information; and,4.
    
    Other information designated by the Company or deemed by law to be confidential
information.
 11.
    
    Non-Competition. In consideration of the mutual promises contained in this Agreement,
the sufficiency of which is acknowledged by the parties, Executive agrees that during the term
of his employment and for a period of twelve (12) calendar months after termination of
employment from the Company (whether voluntary or involuntary), Executive shall not, directly
or indirectly, either as principal, agent, manager, employee, partner, shareholder, director,
officer, consultant or otherwise:
 1.
    
    Become associated or affiliated with, employed by, or financially interested in
any business operation which competes in the business currently engaged in by Company.
(The phrase business currently engaged in by the Company includes, but is not limited
to, the type of activities in which the Company was engaged during Executives tenure,
such as designs and delivers high performance connectivity adapters for computer and
telecommunication networks.)
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2.
    
    Solicit or attempt to solicit the business or patronage of any person, firm,
corporation, partnership, association, department of government or other entity with
whom the Company has had any contact during a period of twelve (12) calendar months
preceding the date of this Agreement (Customers), or otherwise induce such Customers
to reduce, terminate, restrict or otherwise alter business relationships with the
Company in any fashion; or,3.
    
    In any way solicit or attempt to solicit the business or patronage of any
Customers.4.
    
    The parties intend the above restrictions on competition to be completely
severable and independent, and any invalidity or unenforceability of any one or more
such restrictions shall not render invalid or unenforceable any one or more
restrictions.
 12.
    
    Limitations on Scope.In recognition of the broad geographic scope of the Companys business
and the ease of competing with the Company in any part of the United States, the restrictions
on competition set forth herein are intended to cover the following geographic areas:
 1.
    
    The geographic territory identified on the attached Exhibit C;2.
    
    The cities containing a facility or operation owned or managed by the Company;
and,3.
    
    A fifty (50) mile radius outside the boundary limits of each such city.
  13.
    
    Non-Solicitation of Employees.During employment and for a period of twelve (12) months
after termination, Executive agrees not to hire, employ, solicit, divert, recruit, or attempt
to induce, directly or indirectly, any existing or future employee of the Company to leave
their position with the Company or to become associated with a competing business.
 Remedies for Breach
 14.
    
    Companys Right to Obtain an Injunction. Executive acknowledges that the Company will have
no adequate means of protecting its rights under Paragraphs 10, 11, 12, or 13 of this
Agreement other than be securing an injunction (a court order prohibiting the Executive from
violating the Agreement). Accordingly, the Executive agrees that the Company is entitled to
enforce this Agreement by obtaining a temporary, preliminary, and permanent injunction and any
other appropriate equitable relief. Executive acknowledges that the Companys recovery of
damages will not be an adequate means to redress a breach of this Agreement. Nothing
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15.
    
    Arbitration. Executive and the Company agree that any unresolved dispute or controversy
involving a claim for monetary damages and/or declaratory or injunctive relief arising under
or in connection with this Agreement shall be settled exclusively by arbitration, conducted
before a single arbitrator in Dallas, Texas, according to the rules of the American
Arbitration Association then in effect. Judgment may be entered on the arbitrators award in
any court having jurisdiction. The direct expense of any arbitration proceeding shall be
borne by the Company. Notwithstanding the foregoing, nothing in this Paragraph is intended to
subject a claim by either party arising under Paragraphs 10, 11, 12, or 13 to mandatory
arbitration. Any claim arising under Paragraphs 10, 11, 12, or 13 shall be litigated in the
courts of the relevant jurisdiction and venue.
 Inventions and Discoveries
 16.
    
    Discoveries, Inventions, & Copyrights. Executive shall disclose promptly to the Company any
and all conceptions and ideas for inventions, improvements, and valuable discoveries, whether
patentable or not, which are conceived or made by the Executive, solely or jointly, during
Executives term of employment and which pertain to the business activities of the Company.
Executive hereby assigns and agrees to assign all his interest therein to the Company or to
its nominee. Whenever requested to do so by the Company, Executive shall execute any and all
applications, assignments, or other instruments which the Company shall deem necessary to
apply for and obtain Letters of Patent of the United States or any foreign country or to
otherwise protect the Companys interest therein.
 General Provisions
 17.
    
    Condition to Seeking Subsequent Employment. Executive agrees to show a copy of this
Agreement to any Competitor with whom Executive interviews during the Executives employment
with the Company or with whom the Executive interviews within twelve (12) months following the
effective date of the termination of the Executives employment with the Company.
 18.
    
    Attorneys Fees. If any party shall obtain a final judgment of a court of competent
jurisdiction, subject to no further appeal, pursuant to which any other party shall be
determined to have breached its obligations hereunder or made any misrepresentations, such
prevailing party shall be entitled to recover, in addition to any award of damages, reasonable
attorneys fees, costs, and expenses incurred by such party in obtaining such judgment.
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19.
    
    Non-Disparagement and Confidentiality. Except as may be required by law or as consented to
in writing by an authorized officer or agent of the Company, Executive agrees not to make any
statements whatsoever, directly or indirectly, written or oral, which could reasonably become
public, which could be interpreted as embarrassing, disparaging, prejudicial, or in any way
detrimental or inimical to the interests of the Company. Furthermore, Executive agrees to
hold confidential and not to disclose, make public, or to communicate orally or in writing to
any person or entity (other than Executives significant other and immediate family), directly
or indirectly, the terms of this Agreement or any matters set forth herein, except only: (a)
as may be compelled by court orders; (b) as may be necessary to enforce the terms of this
Agreement; (c) to legal, accounting, and financial advisors; (d) as may be necessary in
connection with the application for or obtaining loans or credit; (e) as may be necessary to
comply with applicable laws and government regulations; or, (f) as may be necessary or
desirable in obtaining future employment.
 20.
    
    Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the
Company, its subsidiaries, affiliates, successors, and assigns.
 21.
    
    Nonwaiver. Any waiver by the Company of a breach of any provision of this Agreement must be
in writing and signed by the Company to be effective. Any waiver by the Company of a breach
of any provision of this Agreement shall not operate or be construed as a waiver by the
Company of any different or subsequent breach of this Agreement by Executive.
 22.
    
    Applicable Law. This Agreement shall be construed in accordance with and governed by the
laws of the State of Texas, without giving effect to the conflict of laws provisions thereof.
 23.
    
    Forum Selection Clause. Any and all causes of action for equitable relief relating to the
enforcement of this Agreement and not otherwise subject to the mandatory arbitration
provisions of Paragraph 15 may, in the Employers sole discretion, be brought in the
United States District Court for the Northern District of Texas or the Dallas County District
of the Texas State Courts. The parties agree that the provisions of this paragraph benefit
both Employer and Executive. Any and all causes of action by and between Employer and
Executive can be quickly and efficiently resolved in the agreed-upon forum, which will not
unduly burden either Employer or Executive, and which will substantially aid Employer and
Executive in providing the opportunity for uniform treatment with respect to any issues
relating to the covenants contained in this Agreement.
 24.
    
    Entire Agreement. This Agreement represents the entire agreement between the Company and the
Executive with respect to the subject matter hereof, supersedes all prior agreements dealing
with the same subject matter, and may not be changed except in a writing signed by the party
against whom enforcement of the Agreement, as so changed, is sought.
 25.
    
    Severability. The invalidity of any term or provision of this Agreement, including any term
or provision of paragraphs 10, 11, 12, or 13 shall not invalidate or otherwise affect any
other
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26.
    
    This agreement shall be effective November 1, 2004.
 Interphase CorporationBy: /s/ Gregory
B. KalushGregory B. KalushIts: President and Chief Executive Officer
 Executive/s/ James W.
GraggJames W. Gragg
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Exhibit A
 
 Job Description
 Job Title:Vice President, Operations & Fulfillment
    
    Department:ManufacturingReports To: CEO
    
    FLSA Status: ExemptPrepared By:D. Shute
    
    Approved By:CEO & HRPrepared Date:10/29/04
    
    Approved Date:10/29/04
  SUMMARY
 ESSENTIAL DUTIES AND RESPONSIBILITIESinclude the following. Other duties may be assigned.
Management reserves the right to change these duties at any time.1.
    
    Ensures Interphase manufactures an extremely high quality product to customer and/or company
specifications, and that the product is delivered on time and in the manner in which the
customer and/or company expects.2.
    
    Responsible for creating and maintaining a best-in-class manufacturing organization
consisting of quality people, processes, programs, and products.3.
    
    Responsible for ensuring the company satisfactorily maintains its ISO:9000 and TL9000 quality
certifications.4.
    
    Ensure effective communication, coordination, processes, and procedures between all
cross-functional areas in Operations & Fulfillment, particularly between order management,
contracts, configurations, production planning, and document control.5.
    
    Sets the long-term vision and mission of the organization, identifying short-term and
long-term objectives, and developing strategies and tactics to link those objectives to
corporate goals. Conveys initiatives, goals and values throughout the organization, and
ensure management team does as well.6.
    
    Ensures key departmental metrics are established and performance to goals are tracked and
reported on.7.
    
    Responsible for participating in
the companys annual planning process, including




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strategic
decision making on future direction of company, developing functional operational plan,
establishing budgets, etc.8.
    
    Personally manages the Engineering Departments associated with manufacturing including
Manufacturing Engineering, Test Engineering and Component Engineering.9.
    
    Assists Production Planning with determination of manufacturing schedules, capacity analysis
and inventory requirements. Involves detailed management of purchasing and inventory based on
input from Executive Master Schedules, Sales Outlooks, OEM forecasts and historical material
requirements.10.
    
    Ensures adequate training of managers and other manufacturing employees in related processes
to accepted industry standards and applicable laws.11.
    
    Provides tactical initiatives and solutions to the manufacturing processes to ensure the
ability to manufacture the advanced technology of LAN, SAN and WAN products.12.
    
    Maintains concise communications with the executive team to provide timely status and
important issues for their review and recommendations.13.
    
    Participates in contract reviews, customer audits, as well as ISO audits, providing
management responsibility representation and manufacturing process review.14.
    
    Leads the investigation and resolution efforts whenever product issues are determined to
exist with a customer.
  SUPERVISORY RESPONSIBILITIES
 QUALIFICATIONS To perform this job successfully, an individual must be able to perform each
essential duty satisfactorily. The requirements listed below are representative of the knowledge,
skill, and/or ability required. Reasonable accommodations may be made to enable individuals with
disabilities to perform the essential functions.EDUCATION and/or EXPERIENCEBachelors degree or higher in engineering or business, or equivalent, with 15 or more years
experience in the electronic manufacturing industry, or equivalent combination of education and
experience.OTHER SKILLS AND ABILITIESKnowledge of general business and accounting practices related to budgets, costing




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and inventory
management. Excellent interpersonal skills (written and verbal communication), ability to
effectively lead teams of people toward common goals even under difficult circumstances, and the
ability to motivate others. Strong negotiation and conflict resolution skills necessary. Ability
to effectively conduct presentations to the rest of the company, our customers, and our Board of
Directors. May be requested to participate in industry forums or associations on behalf of the
company.OTHER QUALIFICATIONSVery computer literate. Proficient with the Microsoft Suite of products to create Excel
spreadsheets and PowerPoint presentations, as well as do email and Word documents. Must be able
to conduct effective cost-benefit analyses on capital expenditure requests, automation
enhancements, department initiatives, etc.REASONING ABILITYMust demonstrate the ability to analyze and solve problems related to people and manufacturing
processes.
  PHYSICAL DEMANDS
  WORK ENVIRONMENT




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Exhibit B
 Compensation
 Base Salary . $5769.24 ($150,000
 Performance Bonus . $30,000
 Stock Options . 10,000
 Severance Pay.
 Vacation and Leave .
 Office Furnishings .
 Executive Benefit Plans .




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Exhibit C