Document:

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                                                                   EXHIBIT 10.25

                              EMPLOYMENT AGREEMENT

         This EMPLOYMENT AGREEMENT ("Agreement") effective as of January 1, 2001
(the "Effective Date"), by and between TERAFORCE TECHNOLOGY CORPORATION, a
Delaware corporation whose principal executive offices are in Richardson, Texas
("Company"), and ROBERT P. CAPPS ("Executive").

                                    RECITALS

         Company recognizes that Executive has made significant contributions to
the development and progress of the Company, and that Executive has certain
knowledge and business contacts in the Company's business.

         Company desires to continue Executive's employment and to obtain the
benefit of Executive's contacts and knowledge in the business as well as his
contacts, valuable judgment, extensive experience, good counsel and advice.

         In order to acknowledge Executive for his contributions to the progress
of the Company and to induce Executive to continue his employment with the
Company, the Company has agreed to provide Executive certain compensation and
management arrangements as set forth in this Agreement.

         The Board of Directors of the Company has determined that it is in the
best interests of the Company to retain the Executives's services and to
reinforce and encourage the continued attention and dedication of members of the
Company's management, including the Executive, to their assigned duties without
distraction in potentially disturbing circumstances arising from the possibility
of a change in control of the Company or the assertion of claims and actions
against employees.

         The Company desires to assure itself of the services of the Executive
for the period provided in this Agreement and the Executive desires to serve in
the employ of the Company on the terms and conditions hereinafter provided.

                                    AGREEMENT

         NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the Company and the Executive hereby agree as
follows:

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                                    ARTICLE I

                                   EMPLOYMENT

         1.1 Employment. The Company hereby employs the Executive and the
Executive hereby accepts employment by the Company for the period and upon the
terms and conditions contained in this Agreement.

         1.2 Office and Duties.

                  (a) Position. The Executive shall serve the Company as
         Executive Vice President and Chief Financial Officer with authority,
         duties and responsibilities not less than the Executive has on the date
         of this Agreement.

                  (b) Commitment. Throughout the term of this Agreement, the
         Executive shall devote substantially all of his time, energy, skill and
         best efforts to the performance of his duties hereunder in a manner
         that will faithfully and diligently further the business and interests
         of the Company. Subject to the foregoing, the Executive may serve, or
         continue to serve, on the boards of directors of, and hold any other
         offices or positions in, companies or organizations that will not
         materially affect the performance of the Executive's duties pursuant to
         this Agreement and that are disclosed to and approved by the Board of
         Directors.

         1.3 Term. The term of this Agreement shall commence on the Effective
Date and shall end on the third anniversary of the Effective Date ("Initial
Term"), and shall be automatically renewed thereafter for successive 1 year
terms (each a "Renewal Term") unless either party gives to the other written
notice of termination no fewer than 90 days prior to the expiration of the
Initial Term or any Renewal Term that it does not desire to extend this
Agreement (the Initial Term and any Renewal Term(s) shall be collectively
referred to herein as the "Term").

         1.4 Compensation. The Company shall pay the Executive as compensation
an aggregate salary ("Base Salary") of $205,000 per year during the Term, or
such greater amount as shall be approved by the Company's Board of Directors.
The Base Salary for each year shall be paid by the Company in accordance with
the regular payroll practices of the Company.

         The Board of Directors shall review the Executive's Base Salary at
least annually and shall take into account changes in the Consumer Price Index
for All Urban Consumers published by the Bureau of Labor Statistics (or if such
index is not available, such other index which the Trustee determines is a
reasonable measure of inflation) based on changes since 2000.

         1.5 Employment Benefits and Expense Reimbursement.

                  (a) Employment Benefits. In addition to the compensation to be
         paid by the Company to Executive pursuant to Section 1.4 hereof, during
         the Term of this Agreement, Executive shall also be entitled to receive
         the following benefits: (i) participation in a

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         comprehensive group medical and dental insurance plan of the Company
         and other benefit programs of the Company as set forth in Exhibit A and
         the Company's 401(k) Plan; (ii) paid holidays given by the Company to
         all of its employees; and (iii) paid vacation days as determined by the
         Company from time to time for its senior executives officers, but not
         less than three weeks per year.

                  (b) Life Insurance. During the Term of this Agreement, the
         Company agrees to maintain, at the Company's expense, a life insurance
         policy on the life of Executive, provided Executive is then insurable,
         in a face amount of one and one-half times the Executive's Base Salary
         for the benefit of such beneficiary or beneficiaries as may be
         designated by the Executive.

                  (c) Payment and Reimbursement of Expenses. During the Term,
         the Company shall pay or reimburse the Executive for all reasonable
         travel and other expenses incurred by the Executive in performing his
         obligations under this Agreement in accordance with the policies and
         procedures of the Company for its senior executive officers, provided
         that the Executive properly accounts therefor in accordance with the
         regular policies of the Company.

         1.6 Termination.

                  (a) Disability. The Company may terminate this Agreement for
         Disability. "Disability" shall exist if because of ill health, physical
         or mental disability, or any other reason beyond his control, and
         notwithstanding reasonable accommodations made by the Company, the
         Executive shall have been unable, unwilling or shall have failed to
         perform his duties under this Agreement, as determined in good faith by
         the Company's Board of Directors, for a period of 180 consecutive days,
         or if, in any 12-month period, the Executive shall have been unable or
         unwilling or shall have failed to perform his duties for a period of
         270 days, irrespective of whether or not such days are consecutive.

                  (b) Cause. The Company may terminate the Executive's
         employment for Cause. Termination for "Cause" shall mean termination
         because of the Executive's (i) willful gross misconduct that causes
         material economic harm to the Company or that brings substantial
         discredit to the Company's reputation, (ii) final, nonappealable
         conviction of a felony involving moral turpitude, or (iii) material
         breach of any provision of this Agreement. Item (iii) of this
         subsection shall not constitute Cause unless the Company notifies the
         Executive thereof, in writing, specifying in reasonable detail the
         basis therefor and stating that it is grounds for Cause, and unless the
         Executive fails to cure such matter within 60 days after such notice is
         sent or given under this Agreement. The Executive shall be permitted to
         respond and to defend himself before the Board of Directors or any
         appropriate committee thereof within a reasonable time after written
         notification of any proposed termination for Cause under item (i) or
         (iii) of this subsection.

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                  (c) Without Cause. During the Term, the Company may terminate
         the Executive's employment Without Cause, subject to the provisions of
         subsection 1.7(d) (Termination Without Cause or for Good Reason).
         Termination "Without Cause" shall mean termination of the Executive's
         employment by the Company other than termination for Cause or for
         Disability.

                  (d) Termination by Executive. The Executive may terminate his
         employment hereunder for Good Reason. For purposes of this Agreement,
         the termination of Executive's employment hereunder by Executive
         because of the occurrence of one or more of the following events shall
         be deemed to have occurred for "Good Reason":

                           (i) any material breach of this Agreement by the
                  Company; provided, however, that a material breach of this
                  Agreement by the Company shall not constitute Good Reason
                  unless the Executive notifies the Company in writing of the
                  breach, specifying in reasonable detail the nature of the
                  breach and stating that such breach is grounds for Good
                  Reason, and unless the Company fails to cure such breach
                  within 60 days after such notice is sent or given under this
                  Agreement;

                           (ii) a relocation of the Company's principal
                  executive offices to any county other than Dallas County or
                  Collin County, Texas; provided, however, that no relocation
                  shall constitute Good Reason unless the Executive advises the
                  Board of Directors, in writing and prior to the relocation, of
                  the Executive's objection to such relocation;

                           (iii) a material change in the nature or scope of
                  Executive's authorities, powers, functions, duties or
                  responsibilities that the Executive has on the date of this
                  Agreement and that is reasonably determined by Executive in
                  good faith to be adverse to Executive; or

                           (iv) any reduction in Executive's Base Salary or any
                  other failure by the Company to comply with Sections 1.4 or
                  1.5 hereof that is not consented to or approved by Executive.

                  (e) Change in Control. If, within 12 months of a Change in
         Control, either (i) the Executive's employment is terminated by the
         Company Without Cause, or (ii) the Executive terminates his employment
         for Good Reason, then the provisions of subsection 1.7(e) (Termination
         Upon a Change in Control) shall apply. For purposes of this Agreement,
         "Change in Control" shall mean any of the following:

                           (i) any consolidation or merger of TERAFORCE
                  TECHNOLOGY CORPORATION, a Delaware corporation ("TERA") in
                  which Tera is not the continuing or surviving corporation or
                  pursuant to which shares of Tera's common stock would be
                  converted into cash, securities or other property, other than
                  a merger

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                  of Tera in which the holders of Tera's common stock
                  immediately prior to the merger, own more than 50% of the
                  combined voting power of the merged or consolidated company's
                  then outstanding voting securities entitled to vote generally
                  in the election of directors;

                           (ii) any approval by the stockholders of the Company
                  of any plan or proposal for the liquidation or dissolution of
                  the Company;

                           (iii) the acquisition of beneficial ownership (within
                  the meaning of Rule 13d-3 under the Securities Exchange Act of
                  1934, as amended) of an aggregate of 50% or more of the voting
                  power of Tera's outstanding voting securities by any person or
                  group (as such term is used in Rule 13d-5 under such Act);
                  provided, however, that notwithstanding the foregoing, an
                  acquisition shall not constitute a Change in Control hereunder
                  if the acquiror is (w) the Executive, (x) a trustee or other
                  fiduciary holding securities under an employee benefit plan of
                  Tera and acting in such capacity, (y) a corporation owned,
                  directly or indirectly, by the stockholders of Tera in
                  substantially the same proportions as their ownership of
                  voting securities of Tera or (z) any other person whose
                  acquisition of shares of voting securities is approved in
                  advance by a majority of the Continuing Directors;

                           (iv) subject to applicable law, in a Chapter 11
                  bankruptcy proceeding, the appointment of a trustee or the
                  conversion of a case involving the Company to a case under
                  Chapter 7.

                  (f) Without Good Reason. During the Term, the Executive may
         terminate his employment Without Good Reason. Termination "Without Good
         Reason" shall mean termination of the Executive's employment by the
         Executive other than termination for Good Reason.

                  (g) Explanation of Termination of Employment. Any party
         terminating this Agreement shall give prompt written notice ("Notice of
         Termination") to the other party hereto advising such other party of
         the termination of this Agreement. Within 30 days after notification
         that the Agreement has been terminated, the terminating party shall
         deliver to the other party hereto a written explanation (the
         "Explanation of Termination of Employment"), which shall state in
         reasonable detail the basis for such termination and shall indicate
         whether termination is being made for Cause, Without Cause or for
         Disability (if the Company has terminated the Agreement) or for Good
         Reason, upon a Change in Control, or Without Good Reason (if the
         Executive has terminated the Agreement).

                  (h) Date of Termination. "Date of Termination" shall mean the
         date on which Notice of Termination is sent or given under this
         Agreement.

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         1.7 Compensation During Disability or Upon Termination.

                  (a) During Disability. During any period that the Executive
         fails to perform his duties hereunder because of ill health, physical
         or mental disability, or any other reason beyond his control, he shall
         continue to receive his full compensation and benefits pursuant to
         Sections 1.4 (Compensation) and 1.5 (Employment Benefits) until the
         Date of Termination.

                  (b) Termination for Disability. If the Company shall terminate
         the Executive's employment for Disability, the Company's obligation to
         pay compensation and benefits pursuant to Sections 1.4 (Compensation)
         and 1.5 (Employment Benefits) shall terminate, except that the Company
         shall pay the Executive (i) accrued but unpaid compensation and
         benefits pursuant to Sections 1.4 (Compensation) and 1.5 (Employment
         Benefits) through the Date of Termination.

                  (c) Termination for Cause or Without Good Reason. If the
         Company shall terminate the Executive's employment for Cause or if the
         Executive shall terminate his employment Without Good Reason, then the
         Company's obligation to pay compensation and benefits pursuant to
         Sections 1.4 (Compensation) and 1.5 (Employment Benefits) shall
         terminate, except that the Company shall pay the Executive his accrued
         but unpaid compensation and benefits pursuant to Sections 1.4
         (Compensation) and 1.5 (Employment Benefits) through the Date of
         Termination.

                  (d) Termination Without Cause or for Good Reason. If the
         Company shall terminate the Executive's employment Without Cause or if
         the Executive shall terminate his employment for Good Reason, then the
         Company shall pay to the Executive as severance pay, either in
         accordance with the provisions of Section 1.4 (Compensation) or in a
         lump sum within 15 days following the Date of Termination (at the
         Company's option), in cash, the Executive's Base Salary the greater
         of (i) two (2) years following the Date of Termination or (ii) the
         balance of the Term.

                  (e) Termination Upon a Change in Control. If, within twelve
         (12) months of a Change of Control pursuant to subsection 1.6(e)
         (Change in Control), either (i) the Executive's employment is
         terminated by the Company Without Cause, or (ii) if the Executive
         terminates his employment for Good Reason, then the Company shall pay
         to the Executive as severance pay and as liquidated damages (because
         actual damages are difficult to ascertain), in accordance with the
         provisions of Section 1.4 (Compensation) or in a lump sum within 15
         days following the Date of Termination (at the Company's option), in
         cash, an amount equal to $100 less than three times the Executive's
         "annualized includable compensation for the base period" (as defined in
         Section 280G of the Internal Revenue Code of 1986). Anything in this
         Agreement to the contrary notwithstanding and except as set forth
         below, in the event it shall be determined that any payment or
         distribution by the Company to or for the benefit of the Executive
         (whether paid or payable or distributed or distributable

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         pursuant to the terms of this Agreement or otherwise, including, but
         not limited to, accelerated vesting or payment of any deferred
         compensation, options, stock appreciation rights or any benefits
         payable to the Executive under any plan for the benefit of employees,
         but determined without regard to any additional payments required under
         this Section (a "Payment")) would be subject to the excise tax imposed
         by Section 4999 of the Code or any interest or penalties are incurred
         by the Executive with respect to such excise tax (such excise tax,
         together with any such interest and penalties, are hereinafter
         collectively referred to as the "Excise Tax"), then the Executive shall
         be entitled to receive an additional payment (a "Gross-Up Payment") in
         an amount such that after payment by the Executive of all taxes
         (including any interest or penalties imposed with respect to such
         taxes), including, without limitation, any income taxes (and any
         interest and penalties imposed with respect thereto) and Excise Tax
         imposed upon the Gross-Up Payment, the Executive retains an amount of
         the Gross-Up Payment equal to the Excise Tax imposed upon the Payments.

                  (f) Employee Benefits. Unless the Company terminates the
         Executive's employment for Cause or the Executive terminates his
         employment Without Good Reason, the Company shall maintain in full
         force and effect (to the extent consistent with past practice) for the
         continued benefit of the Executive and, if applicable, his wife and
         children, the employee benefits that he was entitled to receive
         immediately prior to the Date of Termination (subject to the general
         terms and conditions of the plans and programs under which he receives
         such benefits) for the balance of the applicable period set forth in
         subsections 1.7(d) (Termination Without Cause or for Good Reason) or
         1.7(e) (Termination Upon a Change in Control), as applicable, or for
         the period provided for under the terms and conditions of such plans
         and programs, whichever is longer, provided that his continued
         participation or, if applicable, the participation of his wife and
         children, is possible under the general terms and conditions of such
         plans and programs.

                  (g) No Mitigation. The Executive shall not be required to
         mitigate the amount of any payment provided for in this Section 1.7
         (Compensation During Disability or Upon Termination) by seeking other
         employment or otherwise.

                  (h) Reduction in Compensation. If the Executive terminates
         his employment for Good Reason or upon a Change in Control based upon a
         reduction by the Company of the Executive's Base Salary, then for
         purposes of subsections 1.7(d) (Termination Without Cause or for Good
         Reason) and 1.7(e) (Termination Upon a Change in Control), the
         Executive's Base Salary as of the Date of Termination shall be deemed
         to be the Executive's Base Salary immediately prior to the reduction
         that the Executive claims as grounds for Good Reason.

         1.8 Death of Executive. If the Executive dies prior to the expiration
of this Agreement, the Executive's employment and other obligations under this
Agreement shall automatically terminate and all compensation to which the
Executive is or would have been entitled hereunder (including without limitation
under subsections 1.5(a) (Base Salary)), shall terminate as of the end of the
month in which the Executive's death occurs; provided, however, that (i) for the
balance of

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the Term then in effect, the Executive's wife and children shall be entitled to
receive their benefits under Subsection 1.5(a) (Employment Benefits); (ii) the
Executive's beneficiary or beneficiaries shall receive the benefits payable
pursuant to subsection 1.5(b) (Life Insurance) and (iii) the Executive's named
beneficiary or beneficiaries shall receive such reimbursement as may have been
due to the Executive pursuant to subsection 1.5(c) (Payment and Reimbursement of
Expenses) hereof

                                    ARTICLE 2

                       CONFIDENTIALITY AND NON-DISCLOSURE

                  2.1. (a) Description of Proscribed Actions. During the Term
         and for a period of two (2) years thereafter, in consideration for the
         Company's obligations hereunder, including without limitation the
         Company's disclosure of Confidential Information (pursuant to
         Subsection 2.2(a) (Confidential Information and Subsection 2.2(b)
         (Obligation of The Company) below) and the Company's agreement to
         indemnify the Executive (pursuant to Article 3 (Indemnification)
         hereof), the Executive shall comply with the following Restrictions:

                                    (i) Confidentiality. The Executive
                           acknowledges, understands and agrees that all
                           Confidential Information, whether developed by the
                           Company or others or whether developed by the
                           Executive while carrying out the terms and provisions
                           of this Agreement (or previously while serving as an
                           officer of the Company), shall be the exclusive and
                           confidential property of the Company and (i) shall
                           not disclose to any person other than employees of
                           the Company and professionals engaged on behalf of
                           the Company, and other than disclosure in the scope
                           of the Company's business in accordance with the
                           Company's policies for disclosing information, (ii)
                           shall be safeguarded and kept from unintentional
                           disclosure and (iii) shall not be used for the
                           Executive's personal benefit. Subject to the terms of
                           the preceding sentence, the Executive shall not use,
                           copy or transfer Confidential Information other than
                           as is necessary in carrying out his duties under this
                           Agreement.

                                    (ii) Non-Solicitation. The Executive will
                           not solicit with respect to hiring any employee of
                           the Company or any Affiliate thereof

                  (b) Judicial Modification. The Executive agrees that if a
         court of competent jurisdiction determines that the length of time or
         any other restriction, or portion thereof, set forth in this Section
         2.1 is overly restrictive and unenforceable, the court may reduce or
         modify such restrictions to those which it deems reasonable and
         enforceable under the circumstances, and as so reduced or modified, the
         parties hereto agree that the restrictions of this Section 2.1 shall
         remain in full force and effect. The Executive further agrees that if a
         court of competent jurisdiction determines that any provision of this
         Section 2.1 is

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         invalid or against public policy, the remaining provisions of this
         Section 2.1 and the remainder of this Agreement shall not be affected
         thereby, and shall remain in full force and effect.

                  (c) Nature of Restrictions. The Executive acknowledges that
         the business of the Company and its Affiliates is international in
         scope and that the Restrictions imposed by this Agreement are
         legitimate, reasonable and necessary to protect the Company's and its
         Affiliates' investment in their businesses and the goodwill thereof

                  (d) Affiliate. When used with reference to the Company,
         "Affiliate" shall mean any person or entity that directly or indirectly
         through one or more intermediaries controls or is controlled by or is
         under common control with the Company, including but not limited to
         such person or entity that is no longer under the common control of the
         Company but was at one time controlled by the Company.

                  2.2 (a) Confidential Information. For the purposes of this
         Section 2.2 (Confidential Information), the term "the Company" shall be
         construed also to include any and all Affiliates of the Company.
         "Confidential Information" shall mean information that is used in the
         Company's business and

                  (i) is proprietary to, about or created by the Company;

                  (ii) gives the Company some competitive advantage, the
         opportunity of obtaining such advantage or the disclosure of which
         could be detrimental to the interests of the Company;

                  (iii) is not typically disclosed to non-employees by the
         Company, or otherwise is treated as confidential by the Company; or

                  (iv) is designated as Confidential Information by the Company
         or from all the relevant circumstances should reasonably be assumed by
         the Executive to be confidential to the Company.

         Confidential Information shall not include information publicly known
         (other than as a result of a disclosure by the Executive). The phrase
         "publicly known" shall mean readily accessible to the public in a
         written publication and shall not include information that is only
         available by a substantial searching of the published literature or
         information the substance of which must be pieced together from a
         number of different publications and sources, or by focused searches of
         literature guided by Confidential Information.

                  (b) Obligation of The Company. During the Term, the Company
         shall provide access to, or furnish to, the Executive Confidential
         Information of the Company necessary to enable the Executive properly
         to perform his obligations under this Agreement.

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         2.3 Injunctive Relief. Because of the Executive's experience and
reputation in the industries in which the Company operates, and because of the
unique nature of the Confidential Information, the Executive acknowledges,
understands and agrees that the Company will suffer immediate and irreparable
harm if the Executive fails to comply with any of his obligations under Article
2 (Confidentiality and Non-Disclosure) of this Agreement, and that monetary
damages will be inadequate to compensate the Company for such breach.
Accordingly, the Executive agrees that the Company shall, in addition to any
other remedies available to it at law or in equity, be entitled to injunctive
relief to enforce the terms of Article 2 (Confidentiality and Non-Disclosure),
without the necessity of proving inadequacy of legal remedies or irreparable
harm.

                                    ARTICLE 3

                                 INDEMNIFICATION

         Company shall, upon Executive's demand and to the fullest extent
permitted by law, indemnify and hold Executive harmless from and against any and
all losses, damages, liabilities, expenses (including reasonable legal fees and
expenses), judgments, fines, settlements and other amounts arising from any and
all claims, costs, demands, actions, suits or proceedings, civil, criminal,
administrative or investigative, in which Executive may become involved, or
threatened to be involved, as a party or otherwise by reason of the Executive's
status as a director, officer, employee or other agent of Company, or as a
director, officer, employee or agent of a business concern in which the Company
has an investment, and of employees benefit plans and other entities, and
regardless if brought by a third party or by a shareholder of Company or by or
on behalf of Company if (A) (i) Executive acted in good faith and in a manner
Executive reasonably believed to be in, or not opposed to, the best interests of
Company, and with respect to any criminal proceeding, had no reasonable cause to
believe his conduct was unlawful, and (ii) Executive's conduct did not
constitute willful or wanton misconduct or (B) Executive has been successful on
the merits or otherwise in defense of any action, suit or proceeding referred to
in this Article III, or in defense of any claim, issue or matter herein.

         The termination of a proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendre, or its equivalent, shall not, of
itself, create a presumption that Executive did not act in good faith and in a
manner that Executive reasonably believed to be in, or not opposed to, the best
interests of Company or a presumption that Executive had reasonable cause to
believe that Executive's conduct was unlawful.

         Except as provided herein, expenses incurred in defending a civil or
criminal action, suit or proceeding shall be paid by Company in advance of the
final disposition of such proceedings on the receipt of an undertaking by or on
behalf of the Executive to repay such amount in the event it shall ultimately be
determined that the Executive is not entitled to be indemnified by Company as
authorized in this Article III.

         Promptly after receipt by the Executive of notice of the commencement
of any such action, suit or proceeding, the Executive shall notify Company in
writing of the commencement thereof.

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In case such action shall be brought against the Executive and the Executive
shall notify Company of the commencement thereof, Company shall be entitled to
participate and, to the extent that it shall wish, to assume the defense thereof
and after notice from Company to the Executive of its election so to assume the
defense thereof, Company shall not be liable to the Executive under this
Agreement for any legal expenses subsequently incurred by the Executive in
connection with the defense thereof; provided, that, if Company and the
Executive are advised by counsel selected by the Executive that there may be one
or more legal defenses available to the Executive which are different from or
additional to those available to Company, and, if the Executive notifies Company
in writing that he elects to employ separate counsel at the expense of the
Company, Company shall not have the right to assume the defense of such actions
or proceeding on behalf of the Executive. Company shall not be liable for any
settlement by the Executive of any actions, suit or proceeding effected without
its written consent.

         Notwithstanding the foregoing, Company shall indemnify and advance
expenses to the Executive to an extent greater than that provided herein if
Company is required or permitted to do so pursuant to Texas law.

         The indemnification provided by this Article III shall be in addition
to any other rights which Executives may be entitled under any Bylaw or
provision of the Articles of Incorporation of Company, any agreement or any vote
of the shareholders of Company, as a matter of law or otherwise, both as to
actions in the Executive's capacity as a director, officer, employee or agent of
Company, or other specified enterprise and to actions in another capacity. This
indemnification shall continue as to the Executive even though he may have
ceased to serve in such capacity and even though the Term of this Agreement has
expired or has been terminated, and shall inure to the benefit of the heirs,
executors, successors, assigns and administrators of the Executive.

                  THE FOREGOING INDEMNIFICATION SPECIFICALLY INCLUDES THOSE
         CLAIMS THAT ARISE OUT OF THE INDEMNIFIED PARTY'S SOLE, JOINT OR
         CONTRIBUTORY NEGLIGENCE, BUT SPECIFICALLY EXCLUDES THOSE CLAIMS THAT
         ARISE OUT OF THE INDEMNIFIED PARTY'S WILLFUL MISCONDUCT. THE
         INDEMNIFIED PARTY WOULD NOT HAVE ENTERED INTO THIS AGREEMENT IF NOT
         FOR THIS INDEMNIFICATION.

                                    ARTICLE 4

                                  MISCELLANEOUS

         4.1 Period of Limitations. No legal action shall be brought and no
cause of action shall be asserted by or on behalf of the Company or any
affiliate of the Company against the Executive, the Executive's spouse, heirs,
executors or personal or legal representatives after the expiration of two years
from the date of accrual of such cause of action, and any claim or cause of
action of the Company or any affiliate shall be extinguished and deemed released
unless asserted by the timely filing of a legal action within such two-year
period; provided, however, that if any shorter period of limitations is
otherwise applicable to any such cause of action such shorter period shall
govern.

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         4.2 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.

         4.3 Indulgences, Etc. Neither the failure nor any delay on the part of
either party to exercise any right, remedy, power or privilege under this
Agreement shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, remedy, power or privilege preclude any other or further
exercise of the same or of any right, remedy, power or privilege, nor shall any
waiver of any right, remedy, power, or privilege with respect to any occurrence
be construed as a waiver of such right, remedy, power or privilege with respect
to any other occurrence.

         4.4 Notices. All notices, requests, demands and other communications
required or permitted under this Agreement and the transactions contemplated
herein shall be in writing and shall be deemed to have been duly given, made and
received when sent by telecopy (with a copy sent by mail) or when personally
delivered or one business day after it is sent by overnight service, addressed
as set forth below:

             If to the Executive:

             If to the Company:    Delila Cuddy, Assistant Secretary
                                   TeraForce Technology Corporation
                                   1240 East Campbell Road
                                   Richardson, Texas 75081

Any party may alter the address to which communications or copies are to be sent
by giving notice of such change of address in conformity with the provisions of
this subsection for the giving of notice, which shall be effective only upon
receipt.

         4.5 Provisions Separable. The provisions of this Agreement are
independent of and separable from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other or others of them may be invalid or unenforceable in whole or in part.

         4.6 Entire Agreement. This Agreement contains the entire understanding
between the parties hereto with respect to the subject matter hereof, and
supersedes all prior and contemporaneous agreements and understandings,
inducements or conditions, express or implied, oral or written, except as herein
contained, which shall be deemed terminated effective immediately. The express
terms hereof control and supersede any course of performance and/or usage of the
trade inconsistent with any of the terms hereof. This Agreement may not be
modified or amended other than by an agreement in writing.

                                      -12-
<PAGE>

         4.7 Headings; Index. The headings of paragraphs are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.

         4.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas, without giving effect to
principles of conflict of laws.

         4.9 Dispute Resolution. Any dispute, controversy or claim arising out
of or in relation to or connection to this Agreement, including without
limitation any dispute as to the construction, validity, interpretation,
enforceability or breach of this Agreement, shall be exclusively and finally
settled by arbitration, and any party may submit such dispute, controversy or
claim to arbitration (Dispute Resolution).

                  (a) Arbitrators. The arbitration shall be heard and determined
         by one arbitrator, who shall be impartial and who shall be selected by
         mutual agreement of the parties; provided, however, that if the dispute
         involves more than $2,000,000, then the arbitration shall be heard and
         determined by three (3) arbitrators. If three (3) arbitrators are
         necessary as provided above, then (i) each side shall appoint an
         arbitrator of its choice within thirty (30) days of the submission of a
         notice of arbitration and (ii) the party-appointed arbitrators shall in
         turn appoint a presiding arbitrator of the tribunal within thirty (30)
         days following the appointment of the last party-appointed arbitrator.
         If(x) the parties cannot agree on the sole arbitrator, (y) one party
         refuses to appoint its party-appointed arbitrator within said thirty
         (30) day period or (z) the party-appointed arbitrators cannot reach
         agreement on a presiding arbitrator of the tribunal, then the
         appointing authority for the implementation of such procedure shall be
         the Senior United States District Judge for the Northern District of
         Texas, who shall appoint an independent arbitrator who does not have
         any financial interest in the dispute, controversy or claim. If the
         Senior United States District Judge for the Northern District of Texas
         refuses or fails to act as the appointing authority within ninety (90)
         days after being requested to do so, then the appointing authority
         shall be the Chief Executive Officer of the American Arbitration
         Association, who shall appoint an independent arbitrator who does not
         have any financial interest in the dispute, controversy or claim. All
         decisions and awards by the arbitration tribunal shall be made by
         majority vote.

                  (b) Proceedings. Unless otherwise expressly agreed in writing
         by the parties to the arbitration proceedings:

                           (i) The arbitration proceedings shall be held in
                  Dallas, Texas, at a site chosen by mutual agreement of the
                  parties, or if the parties cannot reach agreement on a
                  location within thirty (30) days of the appointment of the
                  last arbitrator, then at a site chosen by the arbitrators;

                           (ii) The arbitrators shall be and remain at all times
                  wholly independent and impartial;

                                      -13-
<PAGE>

                           (iii) The arbitration proceedings shall be conducted
                  in accordance with the Commercial Arbitration Rules of the
                  American Arbitration Association, as amended from time to
                  time;

                           (iv) Any procedural issues not determined under the
                  arbitral rules selected pursuant to item (iii) above shall be
                  determined by the law of the place of arbitration, other than
                  those laws which would refer the matter to another
                  jurisdiction;

                           (v) The costs of the arbitration proceedings
                  (including attorneys' fees and costs) shall be borne in the
                  manner determined by the arbitrators;

                           (vi) The decision of the arbitrators shall be reduced
                  to writing; final and binding without the right of appeal; the
                  sole and exclusive remedy regarding any claims, counterclaims,
                  issues or accounting presented to the arbitrators; made and
                  promptly paid in United States dollars free of any deduction
                  or offset; and any costs or fees incident to enforcing the
                  award shall, to the maximum extent permitted by law, be
                  charged against the party resisting such enforcement;

                           (vii) The award shall include interest from the date
                  of any breach or violation of this Agreement, as determined by
                  the arbitral award, and from the date of the award until paid
                  in full, at 7% per annum; and

                           (viii) Judgment upon the award may be entered in any
                  court having jurisdiction over the person or the assets of the
                  party owing the judgment or application may be made to such
                  court for a judicial acceptance of the award and an order of
                  enforcement, as the case may be.

         4.10 Survival. The covenants and agreements of the parties set forth in
Article 4 (Miscellaneous) are of a continuing nature and shall survive the
expiration, termination or cancellation of this Agreement, regardless of the
reason therefor.

         4.11 Binding Effect, Etc. This Agreement shall be binding upon and
inure to the benefit of and be enforceable by the parties hereto and their
respective successors, assigns, including any direct or indirect successor by
purchase, merger, consolidation or otherwise to all or substantially all of the
business or assets of the Company, spouses, heirs, and personal and legal
representatives. The Company shall require and cause any successor (whether
direct or indirect by purchase, merger, consolidation or otherwise) to all,
substantially all, or a substantial part, of the business or assets of the
Company, by written agreement in form and substance satisfactory to the
Executive, expressly to assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform if
no such succession had taken place. Failure of the Company to obtain such
agreement prior to the effectiveness of any such succession shall be a breach of
this Agreement and shall entitle the Executive to terminate his employment and
this Agreement for Good Reason except for purposes of implementing this
termination, the effective date of such succession shall be deemed the date of
termination.

                                      -14-
<PAGE>

          IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its officer thereunto duly authorized, and Executive has signed this
Agreement, all as of the day and year first above written.

                                 By: /s/ HERMAN M. FRIETSCH
                                    --------------------------------------------
                                    Herman M. Frietsch, Chairman and CEO

                                     /s/ ROBERT P. CAPPS
                                 -----------------------------------------------
                                    Robert P. Capps

                                      -15-<PAGE>

                                                                   EXHIBIT 10.26

                        RELEASE AND SETTLEMENT AGREEMENT

         THIS AGREEMENT dated this 19th day of January, 2001 by and between
SAVAGE ARMS, INC. (hereinafter referred to as "Savage") and INTELECT
COMMUNICATIONS, INC. (hereinafter referred to as "Intelect").

         WHEREAS, Savage is a wholly owned subsidiary of Savage Sports
Corporation, a corporation organized and existing under the laws of the state of
Delaware with its principal place of business in Westfield, Hampden County,
Massachusetts; and

         WHEREAS, Intelect is a corporation organized and existing under the
laws of the state of Delaware, with its principal place of business in
Richardson, Texas; and

         WHEREAS, on or about June 21, 2000, Savage commenced an action against
Intelect in the Superior Court Department of the Trial Court in Hampden County,
Massachusetts, in which it seeks, inter alia, a declaration that Intelect is
obligated to indemnify Savage for Savage's costs, expenses and liabilities
incurred in connection with certain litigation commonly known and referred to by
Savage and Intelect as "the Emhart Litigation, the Taylor Litigation and the
Gower Litigation", as well as all future product liability claims (the
"Action"); and

         WHEREAS, Intelect has at all times and in all pleadings filed in the
Action denied liability to Savage; and

         WHEREAS, the parties desire to avoid further controversy and to resolve
amicably the Action without further litigation.

                                       1
<PAGE>

         NOW THEREFORE, in consideration of the mutual promises hereinafter set
forth and for other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, Savage and Intelect agree as follows:

         1. Intelect and its affiliates shall defend Savage and indemnify and
         hold harmless Savage and its affiliates, directors, officers, agents,
         employees, stockholders, heirs, executors, administrators, legal
         representatives, predecessors, successors and assigns from all demands,
         claims, suits, actions, judgments, requests for relief, or proceedings
         related to or arising out of the Taylor Litigation, and in connection
         with the Gower Litigation, for up to twenty-five percent (25%) of the
         attorneys' fees, related costs and final judgment obligations, if any,
         ultimately attributable to Savage, to the extent such fees, costs
         and/or liability awards in such litigation matters are not covered or
         extinguished by available insurance coverage. The obligation to defend
         shall include, without limitation, legal fees, litigation expenses and
         costs, investigative expenses and costs, appeal costs (including bonds)
         incurred to the date of this Agreement and which may be incurred in the
         future. Intelect shall also reimburse Ronald Coburn for the reasonable
         time he dedicates in responding to those liability claims asserted
         against Intelect and/or Savage involving any Savage firearm that was
         manufactured during the time that Intelect or its predecessors owned
         the operations of Savage Arms. Intelect shall reimburse Mr. Coburn at
         the rate he has historically charged for such services or an amount
         that is reasonably related thereto.

                                       2
<PAGE>

         2. Intelect shall pay to Savage the sum of One Million One Hundred
         Fifty-two Thousand Two Hundred Thirty-two and 11/100 Dollars
         ($1,125,396.04) as follows:

                  a. Upon Execution of this Agreement       -    $568,896.04

                  b. Future Payments:

                         April 1, 2001                      -      79,500.00
                         July 1,2001                        -      79,500.00
                         September 1, 2001                  -      79,500.00
                         January 1,2002                     -      79,500.00
                         April 1,2002                       -      79,500.00
                         July 1,2002                        -      79,500.00
                         September 1, 2002                  -      79,500.00

                  All payments made by Intelect pursuant to this paragraph shall
         be credited against the judgment as defined in paragraph 5 of this
         Agreement.

         3. Savage will have Intelect listed as a named insured on three
         insurance policies purchased in connection with the Emhart Litigation:
         a primary liability policy with One Million Dollars ($1,000,000.00)
         coverage for an initial term of five (5) years, an umbrella policy in
         the amount of Five Million Dollars ($5,000,000.00) and a fully paid up
         tail policy in the amount of Five Million Dollars ($5,000,000.00),
         retroactive to the commencement of such policies. Intelect shall
         further pay to Savage its proportionate share of the renewal premium
         for the primary liability policy as set forth above, upon presentation
         of a statement by Savage, but in no event later than thirty (30) days
         prior to the due

                                       3
<PAGE>

         date for such insurance premiums. It is understood that the primary
         liability policy, under the requirements of the settlement by Savage of
         the Emhart Litigation, must be maintained by continuous payment of
         premiums five years in advance. Savage and Intelect hereby agree that
         the deductible for the liability policy may be increased to Five
         Hundred Thousand Dollars ($500,000.00), to reduce premium costs. It is
         also agreed that, based on such deductible, the current premium due for
         the fifth year of the policy is anticipated to be approximately Three
         Hundred Thousand Dollars ($300,000.00), of which Intelect will be
         responsible for One Hundred Eighty Thousand Dollars ($180,000.00) and
         Savage responsible for One Hundred Twenty Thousand Dollars
         ($120,000.00). If the premium for the fifth year of the policy is less
         than $300,000.00, Savage and Intelect's shares of the premium shall be
         the same percentage as they would have been if the premium had been
         $300,000.00. In the event that the premium for the fifth year of the
         policy is in excess of $300,000.00, Savage shall pay $120,000.00 and
         Intelect shall pay the balance of the premium. Intelect agrees that it
         shall be responsible for payment of any deductible up to Five Hundred
         Thousand Dollars ($500,000.00), in the event of any claim requiring
         payment of part or all of such deductible and involving any Savage
         firearm that was manufactured during the time that Intelect or its
         predecessors owned the operations of Savage Arms.

         4. Intelect will be involved and consulted in the process of selecting
         liability insurance on an annual basis. It is further agreed that for
         all subsequent years, the premium cost for the primary liability policy
         will be allocated between Savage

                                       4
<PAGE>

         and Intelect, based on an actuarial determination reasonably made by
         Savage's insurance brokers. Savage agrees to make reasonable efforts to
         obtain primary liability coverage for future years as required under
         the Emhart Settlement Agreement at the then-lowest cost available in
         the insurance market. Savage will use its best efforts to convince
         Black & Decker in the future to forego the strict insurance
         requirements of five years advance coverage as required under the
         Emhart settlement agreement.

         5. Intelect shall enter into an agreement for judgment in the present
         action between the parties pending in the Hampden County,
         Massachusetts, Superior Court, in the form attached hereto as Exhibit
         "A". So long as there is not an Event of Default as defined in
         paragraph 6 hereof, Savage shall forebear from taking any action to
         record, enforce, or otherwise execute upon the judgment.

         6. The occurrence of any one or more of the following events shall
         constitute an "Event of Default":

                  a.       Intelect fails to pay when due any amount due under
                           this Agreement and such failure to pay is not cured
                           within fifteen (15) days of Intelect receiving
                           written notice from Savage of an overdue payment;

                  b.       The filing by Intelect or any successor entity of any
                           voluntary petition seeking liquidation,
                           reorganization, arrangement, readjustment of debts or
                           for any other relief under the Bankruptcy Code or
                           under any other act or law pertaining to insolvency
                           or debtor relief, whether state, federal or foreign,
                           now or hereafter existing;

                                       5
<PAGE>

                  c.       The filing against Intelect or any successor entity
                           of any involuntary petition seeking liquidation,
                           reorganization, arrangement, readjustment of debts or
                           for any other relief under the Bankruptcy Code or
                           under any other act or law pertaining to insolvency
                           or debtor relief, whether state, federal or foreign,
                           now or hereafter existing, which petition is not
                           dismissed within sixty (60) days of the date of
                           filing;

                  d.       A custodian, trustee, receiver or assignee for the
                           benefit of creditors is appointed or takes possession
                           of all or any material portion of the assets of
                           Intelect or any of its Affiliates and such
                           appointment is not set aside within sixty (60) days
                           of the date of its issuance.

         7.       Upon and at any time after the occurrence and during the
                  continuance of any Event of Default, Savage may take any or
                  all of the following actions:

                  a.       Declare all or any part of the amounts due under this
                           Agreement to be immediately due and payable whereupon
                           such outstanding amounts shall become immediately due
                           and payable without further demand or other notice of
                           any kind;

                  b.       Take any and all actions available to it to enforce
                           the Judgment.

         8.       This Agreement constitutes the entire understanding between
                  Savage and Intelect with respect to the Action and any
                  promises, representations or warranties not herein contained
                  shall have no force and effect.

         9.       This Agreement may be amended, modified, supplemented or
                  changed in whole or in part only by an agreement in writing
                  and executed by each of

                                       6
<PAGE>

                  the parties hereto. Any of the terms and conditions of this
                  Agreement may be waived in whole or in part, but only by an
                  agreement in writing and executed by the party that is
                  entitled to the benefit thereof.

         10.      Intelect and Savage acknowledge and agree that the October
                  3,1995 Stock Purchase Agreement and the January 3,1997
                  Commitment Agreement remain fully enforceable according to
                  their terms and the terms of this Agreement are intended to
                  supplement and amend such Agreements. The terms of this
                  Agreement shall not cause a novation nor shall it extinguish,
                  terminate or impair the respective rights and obligations of
                  Intelect and Savage under the 1995 Stock Purchase Agreement
                  and 1997 Commitment Agreement. Except to the extent
                  inconsistent with the terms of this Agreement, all other
                  provisions of the 1995 Stock Purchase Agreement and the 1997
                  Commitment Agreement shall remain unchanged and in full force
                  and effect.

         11.      RELEASES

                  Except as to any claims and obligations arising out of the
         October 3,1995 Stock Purchase Agreement, the January 3,1997 Commitment
         Agreement and this Release and Settlement Agreement, Savage hereby
         releases and discharges Intelect and its affiliates, predecessors,
         successors, assigns, officers, directors, employees, agents and
         attorneys from all actions, causes of actions suits, debts, dues, sums
         of money, accounts, reckonings, covenants, contracts, controversies,
         agreements, promises, damages, judgments, executions, claims and
         demands whatsoever, in law or equity, known or unknown, foreseen or

                                       7
<PAGE>

         unforeseen, which Savage and any of its assigns, affiliates,
         predecessors, successors, directors, shareholders, employees, agents,
         representatives, attorneys and insurers ever had, now have, or
         hereafter can, shall, or may have from, upon, or by reason of any
         matter, cause or thing whatsoever at any point in time up to and
         including the date of the Release and Settlement Agreement.

                  Except as to any claims and obligations arising out of the
         October 3,1995 Stock Purchase Agreement, the January 3,1997 Commitment
         Agreement and this Release and Settlement Agreement, Intelect hereby
         releases and discharges Savage and its affiliates, predecessors,
         assigns, officers, directors, employees, agents and attorneys from all
         actions, causes of action, suits, covenants, contracts, controversies,
         agreements, promises, damages, judgments, executions, claims and
         demands whatsoever, in law or equity, known or unknown, foreseen or
         unforeseen, which Intelect and any of its assigns, affiliates,
         predecessors, successors, directors, shareholders, employees, agents,
         representatives, attorneys and insurers ever had, now have, or
         hereafter can, shall, or may have from, upon, or by reason of any
         matter, cause or thing whatsoever at any point in time up to and
         including the date of this Release and Settlement Agreement.

         12. The terms of this Agreement and the discussions leading up to it
         concerning it shall be kept strictly confidential, should not be
         disclosed to any person other than the parties' business and legal
         advisors, or government agencies on an as-needed basis, for any reason,
         except on written consent of all

                                       8
<PAGE>

         parties or pursuant to a lawful court order as to which all parties to
         this Agreement have had prior notice and opportunity to be heard.

         13. This Agreement represents settlement of a disputed claim, and by
         entering into the Agreement, Intelect is not admitting to any liability
         or fault.

         14. This Agreement is binding upon and inures to the benefit of the
         parties hereto and their respective affiliates, directors, officers,
         agents, employees, stockholders, heirs, executors, administrators,
         legal representatives, predecessors, successors and assigns.

         15. This Agreement may be assigned by Savage to any of its Affiliates.

         16. The parties hereto represent that they have authority to enter into
         this Agreement, and acknowledge and agree that no other promises,
         covenants or agreements have been made by or on behalf of any of them
         in order to induce the execution of this Agreement.

         17. This Agreement shall be delivered in the Commonwealth of
         Massachusetts and shall be governed, construed and interpreted in all
         respects in accordance with the law of the Commonwealth of
         Massachusetts without regard to the conflict of laws and principles
         thereof.

         18. Any notice, request, instruction or other document or communication
         required or permitted to be given under this Agreement shall be in
         writing to the following addresses:

                Intelect Communications, Inc.
                Attn: Robert P. Capps
                1240 East Campbell Road
                Richardson, TX 75081

                                       9
<PAGE>

                with a copy to:

                Richard D. Anigian, Esq.
                Haynes and Boone, LLP
                901 Main Street, Suite 3100
                Dallas, TX 75202

                Savage Arms, Inc.
                Attn: Ronald Coburn
                100 Springdale Road
                Westfield, MA 01085

         NOW THEREFORE, the parties hereto set their hands and seals.

                                        SAVAGE ARMS, INC.

                                        By
                                          --------------------------------------
                                               Ronald Coburn, Its President

                                        INTELECT COMMUNICATIONS, INC.

                                        By /s/ ROBERT P. CAPPS
                                          --------------------------------------
                                               Robert P. Capps, Its Executive
                                                        Vice President

                                       10

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