EMPLOYMENT AGREEMENT

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EXHIBIT 10.3

EMPLOYMENT AGREEMENT

This Employment Agreement ("Agreement") is made and entered into on this

1st day of October, 2003 ("Effective Date") by and between Kona Grill, Inc., a

Delaware corporation (the "Company"), and Jason J. Merritt (hereinafter, the

"Executive").

RECITALS

A. The Executive is highly knowledgeable regarding the business and

affairs of the Company, its policies, methods and personnel, and is currently

employed as the Vice President of the Company.

B. The Board of Directors of the Company (the "Board") recognizes that

the Executive has contributed to the growth of the Company, and desires to

assure the Executive of continued employment.

C. The Executive is willing to make his services available to the

Company and on the terms and conditions hereinafter set forth.

AGREEMENT

NOW, THEREFORE, in consideration of the premises and mutual covenants set

forth herein, the parties agree as follows:

1. Employment Duties.

1.1 During the Term of Employment under this Agreement ("Term of

Employment"), the Executive shall serve as Chief Operating Officer of the

Company, shall faithfully and diligently perform all services as may be assigned

to him by the Board, and shall exercise such power and authority as may from

time to time be delegated to him by the Board. The Executive shall devote his

full time and attention to the business and affairs of the Company, render such

services to the best of his ability, and promote the interests of the Company.

2. Term.

2.1 Initial Term. The initial term of this Agreement shall be five

(5) years, commencing on the Effective Date, unless sooner terminated in

accordance with Section 5 hereof ("Initial Term").

2.2 Renewal Terms. At the end of the Initial Term, the Term of

Employment automatically shall renew for successive one (1) year terms ("Renewal

Term"), subject to earlier termination as set forth herein.

3. Compensation.

3.1 Base Salary. During the Executive's first year of employment

under this Agreement, the Executive shall receive a base salary at the annual

rate of $175,000 (the "Base

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Salary") retroactive to October 1, 2003, with such Base Salary payable in

installments consistent with the Company's normal payroll schedule, subject to

applicable withholding and other taxes. Thereafter, the Base Salary shall be

reviewed, at least annually, by the Board for merit increases and shall increase

on October 1, 2004, to $200,000 per annum. At no time after October 1, 2004,

shall Executive's Base Salary fall below $200,000.

3.2 Bonuses

a. During each year of the Term of Employment, the Executive

shall be eligible to receive discretionary bonuses in annual amounts as

determined by the Board in its sole discretion. For the calendar year ending

December 31, 2003, Executive shall receive a bonus payable by April 1, 2004,

which shall consist of (i) a performance bonus to be determined by the Company's

Board in its sole discretion plus (ii) an additional amount ("Stock Grant Tax

Amount") equal to the full amount of federal, state and local income taxes and

any associated interest, penalties and other additions to tax payable by

Executive on account of the stock grant contemplated in Section 4.2(a) of this

Agreement so that after grossing up all payments for the Stock Grant Tax Amount

payable by Executive on account of the receipt of the Stock Grant Tax Amount

under this Section 3.2(a) the Executive will be in the same economic position

that he would have been if the stock grant contemplated in Section 4.2(a) of

this Agreement had not occurred. To the extent any taxing authority later

determines that the Stock Grant Tax Amount is greater than originally reported

by Executive, the Company shall, within ten (10) days after Executive delivers a

written request for reimbursement, pay Executive all such additional amounts

payable by Executive to such taxing authorities on a grossed-up basis as

contemplated by this Section 3.2(a).

b. For the Bonus Period in which the Executive's employment

with the Company terminates for any reason, the Company shall pay the Executive

a pro rata portion (based upon the period ending on the date on which the

Executive's employment with the Company terminates) of the annual bonus

otherwise payable under Section 3.2(a) for the Bonus Period in which such

termination of employment occurs; provided, however, that the Bonus Period for

purposes of this Section 3.2(b) shall be deemed to end on the last day of the

fiscal quarter of the Company in which the Executive's employment so terminates.

c. The Executive shall receive such additional bonuses, if

any, as the Board may in its sole and absolute discretion determine.

d. Any bonuses payable pursuant to this Section 3.2 are

sometimes hereinafter referred to as "Incentive Compensation." Each period for

which Incentive Compensation is payable under the Agreement is sometimes

hereinafter referred to as a Bonus Period. Unless otherwise specified by the

Board or provided under this Agreement, the Bonus Period shall be the fiscal

year of the Company.

4. Benefits and Expense Reimbursement.

4.1 Compensation/Benefit Programs. During the Term of Employment,

the Executive shall be entitled to participate in all medical, dental, vision,

hospitalization, accidental death and dismemberment, disability, travel and life

insurance plans, and any and all other plans

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as are presently and hereinafter offered by the Company to its executive

personnel, including pension, profit-sharing and deferred compensation plans,

subject to the general eligibility and participation provisions set forth in

such plans.

4.2 Stock Grant and Stock Options.

a. Stock Grant. Upon the execution of this Agreement by the

parties hereto, the Company shall grant Executive 40,000 shares of Company's

Common Stock. For purposes of this Section 4.2(a), the Company acknowledges and

agrees that the fair market value of the Company's Common Stock on the date of

this Agreement is $1.20 per share. The shares of the Company's Common Stock

granted to Executive under this Section 4.2(a) shall be subject to certain

restrictions as defined from time to time by the Company in its sole discretion.

b. Stock Options. Upon the execution of this Agreement by the

parties hereto, the Company shall grant Executive Three Hundred Thousand

(300,000) stock options (the "Stock Options") to purchase Common Stock of the

Company under (and therefore subject to all terms and conditions of) the

Company's 2002 Stock Plan as attached hereto as Exhibit A (the "Company's Stock

Plan") at an exercise price equal to the current fair market value per share of

the Company's Common Stock which is $1.20 per share. The Stock Options will be

granted as incentive stock options to the extent possible under the Company's

Stock Plan and applicable law. Sixty Thousand (60,000) Stock Options shall vest

upon each anniversary date of this Agreement provided, however, upon the

occurrence of a Change in Control, all unvested Stock Options shall vest

immediately. All or any portion of the vested Stock Options may be exercised at

any one or more times by the Executive during the Term of Employment and for a

period of twelve (12) months following the Term of Employment. The Stock Options

shall be granted pursuant to certain restrictions as defined from time to time

by the Company in its sole discretion.

4.3 Vacation. The Executive shall be entitled to three (3) weeks

of paid vacation each calendar year during the Term of Employment, to be taken

at such times as the Executive and the Company shall mutually determine and

provided that no vacation time shall significantly interfere with the duties

required to be rendered by the Executive hereunder. Any vacation time not taken

by Executive during any calendar year may not be carded forward into any

succeeding calendar year. Any earned but unused vacation time will be paid out

to Executive at the time of his termination.

4.4 Reimbursement of Expenses. Upon the submission of proper

substantiation by the Executive, and subject to the Company's general policies,

the Company shall reimburse the Executive for all reasonable expenses actually

paid or incurred by Executive during the Term of Employment in the course of and

pursuant to the business of the Company.

4.5 Life Insurance. Executive agrees to cooperate with the Company

in obtaining all life insurance as the Board or any lender deems necessary.

4.6 Directors & Officers Insurance. At all times during the Term

of Employment, Executive shall be considered an officer of the Company and shall

be covered by D&O

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Insurance, or any other similar type of insurance, that provides coverage for

the Executive's acts or omissions undertaken during the course and scope of his

employment.

5. Termination.

5.1 Termination for Cause. The Company shall at all times have the

right, upon written notice to the Executive, to terminate the Term of Employment

for Cause as defined below. For purposes of this Agreement, the term "Cause"

shall mean (i) an action of the Executive which constitutes a willful and

material breach of, or willful and material failure or refusal (other than by

reason of his disability or incapacity) to perform his duties under, this

Agreement that is not cured within forty-five (45) days after receipt by the

Executive of written notice of same, (ii) fraud, embezzlement or

misappropriation of funds during the Term of Employment, or (iii) a conviction

of any crime during the Term of Employment which involves dishonesty or a breach

of trust or involves the Company or its executives. Any termination for Cause

shall be made by written notice to the Executive, which shall set forth in

reasonable detail all acts or omissions upon which the Company is relying for

the termination. The Executive shall have the right to address the Board

regarding the acts or omissions set forth in the notice of termination. Upon any

termination pursuant to this Section 5.1, the Company shall (i) pay to the

Executive any unpaid Base Salary and earned but unused vacation time through the

date of termination, (ii) pay to the Executive his accrued but unpaid Incentive

Compensation, if any, for any Bonus Period ending on or before the date of the

termination of Executive's employment with the Company in accordance with

Section 3.2(b).

5.2 Disability.

a. In the event the Executive becomes disabled and shall be

unable, or fail, to perform the essential functions of his position with or

without reasonable accommodation, for any period of forty-five (45) days or

more, the Company shall have the option, in accordance with applicable law, to

terminate this Agreement upon written notice to the Executive. Upon termination

pursuant to this Section 5.2, the Company shall (i) pay to the Executive any

unpaid Base Salary and earned but unused vacation time through the effective

date of termination specified in such notice, (ii) pay to the Executive his

accrued but unpaid Incentive Compensation, if any, for any Bonus Period ending

on or before the date of termination of the Executive's employment with the

Company in accordance with Section 3.2(b), and (iii) pay to the Executive a

severance payment equal to nine (9) months of the Executive's Base Salary in

effect at the time of the termination of the Executive's employment with the

Company.

b. For purposes of this Section 5.2, the Executive shall be

considered Disabled or to be suffering from a Disability if the Executive is

unable, after any reasonable accommodations required by the Americans with

Disabilities Act or any applicable state law, to perform the essential functions

of his position because of a physical or mental impairment. In the absence of

agreement between Company and the Executive, whether the Executive is Disabled

or suffering from a Disability (and the date as of which Executive became

Disabled) will be determined by a licensed physician selected by Company. If a

licensed physician selected by the Executive disagrees with the determination of

the physician selected by Company, the two (2) physicians shall select a third

(3rd) physician. The decision of the third (3rd) physician concerning the

Executive's Disability then shall be binding and conclusive on all interested

parties.

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5.3 Death. Upon the death of the Executive during the Term of

Employment, the Company shall pay to the estate of the deceased Executive (i)

any unpaid Base Salary and earned but unused vacation time through the

Executive's date of death and (ii) any accrued but unpaid Incentive Compensation

for any Bonus Period ending on or before the Executive's date of death in

accordance with Section 3.2(b).

5.4 Termination Without Cause

a. At any time the Company shall have the right to terminate

the Term of Employment without cause by providing written notice not less than

sixty (60) days prior to the termination date, to the Executive. Upon any

termination pursuant to this Section 5.4, or in the event the Company elects not

to renew the Agreement at the end of the Initial or any Renewal Term (except if

the non-renewal is for cause pursuant to Section 5.1), the Company shall (i) pay

to the Executive any unpaid Base Salary and earned but unused vacation time

through the date of termination specified in the notice, (ii) pay to the

Executive the accrued but unpaid Incentive Compensation, if any, for any Bonus

Period ending on or before the date of the termination of the Executive's

employment with the Company in accordance with Section 3.2(b), (iii) continue to

pay the Executive's Base Salary in effect at the time of the termination for a

period (the "Continuation Period") of twelve (12) months following the

termination of the Executive's employment with the Company, in the manner and at

such times as the Base Salary otherwise would have been payable to the

Executive, and (iv) continue to provide the Executive with the benefits he was

receiving under Section 4.1 hereof (the "Benefits") through the end of the

Continuation Period in the manner and at such times as the Benefits otherwise

would have been payable or provided to the Executive. Further, all of

Executive's Stock Options in the Company, including, without limitation, the

Stock Options, shall continue to vest through the end of the Continuation Period

in the same manner and to the same extent as if his employment hereunder

terminated on the last day of the Continuation Period.

b. In the event that the Company is unable to provide the

Executive with any health-related Benefits required hereunder by reason of the

termination of the Executive's employment, coverage shall be continued under

COBRA beginning the first day of the month following the effective termination

date and shall continue for the duration of the Continuation Period and the

Company shall be responsible for paying the full cost of the COBRA premium

directly to the insurance carrier.

5.5 Termination by Executive

a. The Executive shall at all times have the right, by written

notice not less than (30) days prior to the termination date, to terminate the

Term of Employment.

b. Upon termination of the Term of Employment pursuant to this

Section 5.5 by the Executive without Good Reason (as defined below), the Company

shall pay to the Executive any unpaid Base Salary and earned but unused vacation

time through the effective date of termination specified in the notice.

c. Upon termination of the Term of Employment pursuant to this

Section 5.5 by the Executive for Good Reason, the Company shall pay to the

Executive the same

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amounts, and shall continue to compensate for Benefits in the same amounts, that

would have been payable or provided by the Company to the Executive under

Section 5.4 of this Agreement if the Term of Employment had been terminated by

the Company without Cause.

d. For purposes of this Agreement, "Good Reason" shall mean

(i) the adjustment downward of the Executive's compensation and/or benefits as

provided for by Section 3 of this Agreement; and (ii) any failure by the Company

to comply with any of the provisions of this Agreement, other than an isolated,

insubstantial and inadvertent failure not occurring in bad faith and which is

remedied by the Company promptly after receipt of notice thereof given by the

Executive. "Good Reason" shall not exist as a result of a change in the

Executive's job duties or job title.

5.6 Change in Contro