Kafelnikov, the 1996 champion from Russia, was felled by crowd favorite Nicolas Escude of France, 7-6 (7-5), 6-4. Escude, who recently returned from an abdominal injury, will meet Kristian Pless, who upset eighth seed Ivan Ljubicic, in the quarterfinals of the indoor event.
Grosjean manhandled Brazil's Andre Sa, 6-0, 6-1, to reach the quarterfinals. The Frenchman awaits compatriot Arnaud Clement, the 2000 titleist, in the round of eight after Clement knocked off sixth seed Fernando Gonzalez on Wednesday.
"The winner will be the one who is the most motivated," Grosjean said. "It is tough to play against a great friend, but at least there will be one French player guaranteed in the semifinal. I have been playing well here in Lyon so far and look forward to the match tomorrow."
Also advancing to the quarterfinals Thursday were Gustavo Kuerten of Brazil, a 7-6 (7-5), 7-6 (7-5) winner over Marc Rosset of Switzerland; Sweden's Jonas Bjorkman, who eliminated Max Mirnyi of Belarus, 6-3, 6-4; and Paul-Henri Mathieu of France, who moved on when fourth seed Thomas Johansson of Sweden retired due to back spasms after splitting the first two sets.
"I was fine at the beginning," Johansson said. "It was at the middle of the second set that I started to feel it. I decided to play on until the end of the second set. I then called the trainer out and we decided that I should retire from the match. I don't know if I will be able to play in Madrid next week."
In the quarterfinals, Kuerten meets top seed Marat Safin of Russia, who edged Wayne Arthurs of Australia in three sets Wednesday, and Bjorkman plays Mathieu, who won last week in Moscow.