##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                      to
 Commission File Number 0-13071
 INTERPHASE CORPORATION
  Texas
(State or other jurisdiction of incorporation or organization)
    
    75-1549797
(I.R.S. Employer Identification No.)
 2901 North Dallas Parkway, Suite 200, Plano, Texas 75093
   Name of each exchangeTitle of each class
    
    on which registeredCommon Stock, $.10 par value
    
    NASDAQ Global Market
  o þ
 o þ
 þ o
 þ
  Large accelerated filer o
Accelerated filer o
Non-accelerated filer o(Do not check if a smaller reporting company)
Smaller reporting company þ o þ
  DOCUMENTS INCORPORATED BY REFERENCE




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TABLE OF CONTENTS  PART IItem 1. Business.Item 1A. Risk Factors.Item 1B. Unresolved Staff Comments.Item 2. Properties.Item 3. Legal Proceedings.Item 4. Submission of Matters to a Vote of Security Holders.PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.Item 6. Selected Consolidated Financial Data.Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.ITEM 7A. Quantitative and Qualitative Disclosure about Market RiskItem 8. Financial Statements and Supplementary Data.Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.Item 9A. Controls and Procedures.Item 9B. Other Information.PART IIIItem 10. Directors, Executive Officers and Corporate Governance.Item 11. Executive Compensation.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.Item 13. Certain Relationships and Related Transactions, and Director Independence.Item 14. Principal Accountant Fees and Services.PART IVItem 15. Exhibits and Financial Statement Schedules.SIGNATURESINDEX TO EXHIBITSEX-10.(B)EX-23.(A)EX-31.(A)EX-31.(B)EX-32.(A)EX-32.(B)    Table of Contents  
 PART I
 
 Item 1. Business.
 Introduction
 ®
  Key Terms and Definitions
  3G
 3GPP
 1




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##### Table of Contents



Adapter
 AdvancedTCA ® or ATCA (Advanced Telecom Computing Architecture)
 AdvancedMC or AMC (Advanced Mezzanine Card)
 ASN Gateway or ASN-GW
 Asynchronous Transfer Mode (ATM)
 Backplane
 Base Station Controller (BSC)
 Blade
 2




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Broadband
 Building Blocks
 Code Division Multiple Access (CDMA)
 Communications Controller
 CompactPCI ® (cPCI)
 CompactPCI Packet Switching Backplane (cPSB)
 DSL xDSL
 Digital Signal Processing
 Ethernet
 European Telecommunications Standards Institute (ETSI)
 3




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Femtocell
 Gateway Appliances
 Gigabits per second (Gbps)
 Global System for Mobile Communications (GSM)
 General Packet Radio Service (GPRS)
 Input/output (I/O)
 International Mobile Telecommunications-2000 (IMT-2000)
 International Telecommunication Union (ITU
 Internet Engineering Task Force (IETF)
 Internet Protocol (IP)
 Inverse Multiplexing over ATM (IMA)
 4




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IP Multimedia Subsystem (IMS)
 IP-PBX
 IP Security (IPSec)
 I-TDM 
 Kilobits per second (Kbps)
 Local Area Network (LAN
 Long Term Evolution (LTE or 3GPP LTE)
 Media Gateway
 Megabits per second (Mbps)
 MicroTCA
 Multilink PPP (MLPPP)
 5




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Network Elements
 OC-3/STM-1
 OC-12/STM-4
 Operating System ® ® 
 Original Equipment Manufacturer (OEM)
 Packet Processing
 PCI Industrial Computer Manufacturers Group (PICMG)
 PCI Mezzanine Card (PMC)
 Peripheral Components Interconnect (PCI)
 Peripheral Components Interconnect Express (PCI-e)
 Peripheral Components Interconnect Extended (PCI-x
 6




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Point-to-Point Protocol (PPP) 
 Public Switched Telephone Network (PSTN)
 Protocol
 Radio Network Controller (RNC
 Router
 Real-time Transport Protocol (RTP)
 Session Initiation Protocol (SIP)
 Signaling Gateway
 Signaling System 7 (SS7
 Signaling Transport (SIGTRAN
 Softswitch (Software Switch)
 T1/E1
 7




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T3/E3/J3
 TCP/IP
 Time-division multiplexing (TDM)
 Telecommunications Equipment Manufacturer (TEM)
 Triple Play
 User Plane
 VersModule-Eurocard (VME)
 Voice over Internet Protocol (VoIP)
 Virtual Private Network (VPN)
 Wide Area Network (WAN)
 Worldwide Interoperability of Microwave Access (WiMAX)
 8




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Mission
    Recent Developments
   9




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General
  Professional Services
  Delivering advanced slot-optimization and security products for enterprise class applications
   Delivering a comprehensive environment-friendly product portfolio
  Delivering superior customer service
  10




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Establishing key strategic alliances and partnerships
     Enhancing operational efficiencies
  11




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Products
  Broadband Telecom Products
 Integrated Communications Controllers
  T1/E1/J1 Controllers
 ®
 i 4538 
 i 4539/4539F 
 i 5539F
 i
 iSPAN 3639
 iSPAN 5639
 iSPAN 5639E
 12




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##### Table of Contents



iSPAN 5639L
  
    
    Radio Network Controller (RNC)
    
    Mobile Switching Center (MSC)
    
    Short Message Service Center (SMSC)
    
    Home Location Register/Home Subscriber Subsystem (HLR/HSS)
    
    Signaling Gateway
    
    Softswitch
    
    Media Gateway
    
    Service Control Point
    
    Media Servers
    
    IP-PBX
 High Density Interface Controllers
  i 4532 
 i 4532Q 
 i 4533P 
 iSPAN 3650
  
    
    Radio Network Controller (RNC)
    
    Mobile Switching Center (MSC)
    
    DSL Access Multiplexers
    
    Cable Modem Termination System (CMTS)
 13




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ATM Network Interface Cards
  i 4575/4576
 i 5575/5576 PCI ATM Communications Interface Card
 i 3676 AdvancedMC ATM communications Interface Card
  
    
    Serving GPRS Service Node (SGSN)
    
    Gateway GPRS Service Node (GGSN)
    
    Operations, administration and management devices used for back-end services in
the telecommunications infrastructure
 Gateway Appliance Solutions
  i ® 9200 Broadband Access Gateway
 i ® 921x Media Converter
 Security Acceleration Cards  Telecom
  45NS 
  
    
    Firewall and VPN solutions
    
    On Line Transaction Processing (OLTP)
    
    Network Management solutions
 14




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Content Management and Packet Acceleration Cards
  i ® 55CA PCI-x
 i ® 55MC8 PCI-x
 i ® 36CA
 i ® 36MC1
 i ® 36MC2
   
    
    Radio Network Controller (RNC)
    
    Packet Access Gateway in 4G wireless networks
    
    ASN Gateway and BSCs in WiMax networks
    
    GGSN in Wideband CDMA networks
    
    Wireless LAN Access Concentrators
    
    Content Processing Appliances
    
    Security Appliances
 15




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Enterprise Products
 Gigabit Ethernet Network Interface Cards
  454G SlotOptimizer
  554GB SlotOptimizer
 564GB SlotOptimizer
 564GL SlotOptimizer
 562GL SlotOptimizer
  
    
    High performance computing servers for engineering applications
    
    Serving GPRS Service Node (SGSN)
    
    Softswitches
 Security Acceleration Cards  Enterprise
  5585 
 5556
 566
 16




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
    
    Firewall and VPN solutions
    
    On Line Transaction Processing (OLTP)
    
    Network Management solutions
 New Product Development
   
    
    Ethernet-based IP networks offer an inexpensive, ubiquitous broadband packet-based
delivery approach for carriers. The simplicity of IP-based networks are expected to
shorten the period of new service deployment and time to revenue.
    
    The second promise of this network architecture is greatly reduced cost of purchasing,
provisioning and maintaining their networks.
    
    Another significant trend in the COTS market is the move to AdvancedTCA platforms.
Sponsored primarily by Intel, a number of AdvancedTCA suppliers have emerged to address
the ever-growing needs of TEMs. TEMs have been reducing their internal development
infrastructure over the past several years and are now more dependent on outsourced
solutions to meet their product development needs.
    
    With the transition to the packet infrastructure modules that provide multi-gigabit
Ethernet and 10 gigabit Ethernet line rate switching, processing and classification of
packet data are becoming very important for a wide range of applications including secure
data transport, micro-billing and high speed multi-media content delivery.
  Telecom Segment Initiatives
  17




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Packet Accelerator Products
  ®
  AdvancedTCA,MicroTCA and AdvancedMC
    18




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i 3639
 364G
 3602
 i 3650
 i 36CA
 i 31K
 i 74PF
   Cost Reduction Services
  19




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PCI Rack Mounted Server Solutions
 i i i
 Appliance Solutions
 i
 i i
 Enterprise Networking Initiatives
  20




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Industry Standards Participation
   Investment in New Product Development
  Marketing and Customers
    21




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Manufacturing and Supplies
    Intellectual Property and Patents
   22




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Employees
    Competition
  
 Item 1A. Risk Factors.
 The current crisis in global credit and financial markets could materially and adversely affect our
business and results of operations.
  23




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The marketing and sale of our products involve lengthy sales cycles. This and other factors make
business forecasting extremely difficult and can lead to significant fluctuations in
period-to-period results.
   The telecommunications signaling and networking business is characterized by rapid technological
change and frequent introduction of new products.
  24




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We operate in an intensely competitive marketplace and many of our competitors have greater
resources than we do.
  The loss of one or more key customers or reduced spending by customers could significantly impact
our operating results, financial condition and cash flows.
  Schedule delays, cancellations of programs and changes in customer markets can delay or prevent a
design win from reaching the production phase, which could negatively impact our operating results,
financial condition and cash flows.
  Design defects, errors or problems in our products could harm our reputation, revenue and
profitability.
  25




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If our third party suppliers fail to produce quality products or parts in a timely manner, we may
not be able to meet our customers demands.
  We are dependent on one manufacturing facility and if there is an interruption in production we may
not be able to deliver products on a timely basis.
  If we fail to accurately forecast demand for our products, we would be exposed to risk associated
with inventory.
  26




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We may be unable to effectively protect our proprietary technology, which would negatively affect
our ability to compete. Also, if our products are alleged to violate the proprietary rights of
others, our ability to compete would be negatively impacted.
    We depend on key personnel to manage our business effectively.
  We have substantial international activities, which expose us to additional business risks
including political, economic and currency risks.
  27




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We may require additional working capital to fund operations and expand our business.
  
    
    fund research and development of new products beyond what is expected in 2009;
    
    expand product and service offerings beyond what is contemplated in 2009 if unforeseen
opportunities arise;
    
    take advantage of potential acquisition opportunities in the current economic
environment;
    
    invest in businesses and technologies that complement our current operations; or
    
    respond to unforeseen competitive pressures.
  We have incurred significant losses.
  We may experience significant period-to-period quarterly and annual fluctuations in our revenue and
operating results, which may result in volatility in our stock price.
  28




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2009 is expected to be the first year that our internal controls over financial reporting will be
audited by our independent registered public accounting firm in accordance with Section 404 of the
Sarbanes-Oxley Act of 2002.
  
 Item 1B. Unresolved Staff Comments.
  
 Item 2. Properties.
  
 Item 3. Legal Proceedings.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  29




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PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
  2007
    
    High
    
    LowFirst Quarter
    
    
    11.85
    
    
    
    8.20Second Quarter
    
    
    13.66
    
    
    
    8.91Third Quarter
    
    
    12.52
    
    
    
    8.99Fourth Quarter
    
    
    12.43
    
    
    
    9.27
 2008
    
    High
    
    LowFirst Quarter
    
    
    9.93
    
    
    
    4.52Second Quarter
    
    
    4.90
    
    
    
    3.20Third Quarter
    
    
    3.45
    
    
    
    2.80Fourth Quarter
    
    
    2.99
    
    
    
    1.59
   Number of securities inthousands remainingavailable for futureNumber of securities in
    
    
    
    
    
    issuance under equitythousands to be issued
    
    Weighted-average
    
    compensation planupon exercise of
    
    exercise price of
    
    (excluding securitiesoutstanding options,
    
    outstanding options,
    
    reflected in columnPlan Category
    
    warrants and rights
    
    warrants and rights
    
    (a))(a)
    
    (b)
    
    (c)Equity Compensation
plans approved by
security holders
    
    
    1,634
    
    
    $
    9.65
    
    
    
    1,314Equity Compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    1,634
    
    
    $
    9.65
    
    
    
    1,314
 30




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31




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Stock Performance Graph
   12/03
    
    12/04
    
    12/05
    
    12/06
    
    12/07
    
    12/08Interphase Corporation
    
    
    100
    
    
    
    65
    
    
    
    34
    
    
    
    64
    
    
    
    80
    
    
    
    13NASDAQ Composite
    
    
    100
    
    
    
    110
    
    
    
    113
    
    
    
    127
    
    
    
    138
    
    
    
    80DJ Wilshire
Telecommunications
Equipment Index
    
    
    100
    
    
    
    104
    
    
    
    105
    
    
    
    121
    
    
    
    125
    
    
    
    73
 COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
 
 
 *
    
    $100 invested on 12/31/03 in stock & index-including reinvestment of dividends.
Fiscal year ending December 31.  32




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Item 6. Selected Consolidated Financial Data.
   
 Year ended December 31,2008
    
    2007
    
    2006
    
    2005
    
    2004Revenues
    
    $
    26,231
    
    
    $
    30,780
    
    
    $
    33,403
    
    
    $
    30,852
    
    
    $
    35,015Gross margin
    
    
    14,031
    
    
    
    17,591
    
    
    
    18,126
    
    
    
    16,097
    
    
    
    19,171Research and development
    
    
    9,198
    
    
    
    10,216
    
    
    
    8,226
    
    
    
    7,974
    
    
    
    8,033Sales and marketing
    
    
    5,237
    
    
    
    5,614
    
    
    
    5,405
    
    
    
    6,310
    
    
    
    6,107General and administrative
    
    
    4,100
    
    
    
    4,692
    
    
    
    3,926
    
    
    
    3,531
    
    
    
    3,675Restructuring charge
    
    
    403
    
    
    
    
    
    
    
    
    
    
    
    600
    
    
    
    (Loss) income from operations
    
    
    (4,907
    )
    
    
    (2,931
    )
    
    
    569
    
    
    
    (2,318
    )
    
    
    1,356Other income, net
    
    
    618
    
    
    
    1,128
    
    
    
    1,112
    
    
    
    237
    
    
    
    240(Loss) income before income tax
    
    
    (4,289
    )
    
    
    (1,803
    )
    
    
    1,681
    
    
    
    (2,081
    )
    
    
    1,596Income tax (benefit) provision
    
    
    (1,263
    )
    
    
    (609
    )
    
    
    (405
    )
    
    
    218
    
    
    
    (122
    )Net (loss) income
    
    $
    (3,026
    )
    
    $
    (1,194
    )
    
    $
    2,086
    
    
    $
    (2,299
    )
    
    $
    1,718Net (loss) income per shareBasic EPS
    
    $
    (0.48
    )
    
    $
    (0.19
    )
    
    $
    0.36
    
    
    $
    (0.40
    )
    
    $
    0.30Diluted EPS
    
    $
    (0.48
    )
    
    $
    (0.19
    )
    
    $
    0.33
    
    
    $
    (0.40
    )
    
    $
    0.27Weighted average common shares
    
    
    6,320
    
    
    
    6,161
    
    
    
    5,854
    
    
    
    5,758
    
    
    
    5,719Weighted average common and dilutive shares
    
    
    6,320
    
    
    
    6,161
    
    
    
    6,254
    
    
    
    5,758
    
    
    
    6,312
 
 December 31,2008
    
    2007
    
    2006
    
    2005
    
    2004Working capital
    
    $
    25,301
    
    
    $
    27,030
    
    
    $
    26,604
    
    
    $
    24,554
    
    
    $
    26,450Total assets
    
    
    31,248
    
    
    
    36,180
    
    
    
    34,062
    
    
    
    29,194
    
    
    
    32,098Total liabilities
    
    
    6,962
    
    
    
    8,918
    
    
    
    8,262
    
    
    
    6,696
    
    
    
    7,310Shareholders equity
    
    $
    24,286
    
    
    $
    27,262
    
    
    $
    25,800
    
    
    $
    22,498
    
    
    $
    24,788
 33




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
  APPLICATION OF CRITICAL ACCOUNTING POLICIES
  Revenue Recognition:
 Warranty Reserve:
 Accounts Receivable and Allowance for Doubtful Accounts:
 34




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Allowance for Returns:
 Inventories:
 Long-Lived Assets:
 Fair Value of Financial Instruments:
 Stock-Based Compensation:
 35




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Tax Assessments:
 Income Taxes:
 CONSOLIDATED STATEMENT OF OPERATIONS AS A PERCENTAGE OF REVENUE
 Year ended December 31,2008
    
    2007
    
    2006Revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    46.5
    %
    
    
    42.8
    %
    
    
    45.7
    %Gross margin
    
    
    53.5
    %
    
    
    57.2
    %
    
    
    54.3
    %Research and development
    
    
    35.1
    %
    
    
    33.2
    %
    
    
    24.6
    %Sales and marketing
    
    
    20.0
    %
    
    
    18.2
    %
    
    
    16.2
    %General and administrative
    
    
    15.6
    %
    
    
    15.2
    %
    
    
    11.8
    %Restructuring charge
    
    
    1.5
    %
    
    
    
    
    
    
    (Loss) income from operations
    
    
    (18.7
    )%
    
    
    (9.5
    )%
    
    
    1.7
    %Interest income, net
    
    
    2.0
    %
    
    
    2.5
    %
    
    
    1.9
    %Other income, net
    
    
    0.4
    %
    
    
    1.2
    %
    
    
    1.4
    %(Loss) income before income tax
    
    
    (16.3
    )%
    
    
    (5.9
    )%
    
    
    5.0
    %Income tax benefit
    
    
    (4.8
    )%
    
    
    (2.0
    )%
    
    
    (1.2
    )%Net (loss) income
    
    
    (11.5
    )%
    
    
    (3.9
    )%
    
    
    6.2
    %
 36




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OVERVIEW
  RESULTS OF OPERATIONS
 Revenues:
  Gross Margin:
 37




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Research and Development:
  38




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Sales and Marketing:
  General and Administrative:
  Restructuring Charge:
 39




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Interest Income, Net:
 Other Income, Net:
 Income Taxes:
   Net (Loss) Income:
 LIQUIDITY AND CAPITAL RESOURCES
 Consolidated Cash Flows
  Operating Activities:
 40




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Investing Activities:
 Financing Activities:
 41




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Commitments
   Contractual Obligation
    
    Payments due by periodTotal
    
    <1 year
    
    1 -3 years
    
    3- 5 years
    
    > 5 yearsLong-term debt obligation (1,2)
    
    $
    3,885
    
    
    $
    77
    
    
    $
    154
    
    
    $
    3,654
    
    
    $
    Operating lease obligations (3,4)
    
    $
    3,511
    
    
    $
    562
    
    
    $
    1,626
    
    
    $
    1,208
    
    
    $
    115Total
    
    $
    7,396
    
    
    $
    639
    
    
    $
    1,780
    
    
    $
    4,862
    
    
    $
    115
 
 (1)
    
    At December 31, 2008, we had borrowings of $3.5 million under a $5.0 million
revolving credit facility with a bank. The revolving credit facility matures on
December 19, 2013 and is secured throughout the term of the credit facility by
marketable securities.(2)
    
    We incur interest expense on the borrowings from the revolving credit facility
at a rate of LIBOR plus 1%, if LIBOR is greater than 2.5%, otherwise the applicable
margin is 1.5%. At December 31, 2008, our interest rate on the borrowings from the
revolving credit facility was 2.2%. We used the 2.2% rate to estimate interest expense
for 2009 through December 2013. The interest expense estimate is $77,000 annually for
the years 2009 through December 2013.(3)
    
    We lease our facilities under non-cancelable operating leases with the longest
terms extending to March 2014.(4)
    
    Our operating lease at our headquarters location includes a $350,000 letter of
credit issued to our landlord which can only be used in the case of non-payment of such
lease. The letter of credit, if accessed, would be funded by our existing revolving
credit facility. Off-Balance Sheet Arrangements
  Other
  42




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Recently Issued Accounting Pronouncements
   
 ITEM 7A. Quantitative and Qualitative Disclosure about Market Risk
 Foreign Currency Risk
   43




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Market Price Risk
  Interest Rate Risk
    
 Item 8. Financial Statements and Supplementary Data.
  
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
  44




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Item 9A. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
  Managements Report on Internal Control Over Financial Reporting
  (1)
    
    Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the assets of
the Company;(2)
    
    Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America, and
that receipts and expenditures of the Company are being made only in accordance
with authorizations of management and directors of the Company; and(3)
    
    Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the Companys
assets that could have a material effect on the financial statements.
  45




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Item 9B. Other Information.
  
 PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance.
 Directors
  Executive Officers
  Code of Ethics
 www.interphase.com
 
 Item 11. Executive Compensation.
  46




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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
  
 Item 13. Certain Relationships and Related Transactions, and Director Independence.
  
 Item 14. Principal Accountant Fees and Services.
 
  
 PART IV
 
 Item 15. Exhibits and Financial Statement Schedules.
 (a)
    
    (1) Financial Statements.
  (2) Financial Statement Schedules
  (3) Exhibits.
  47




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SIGNATURES
  INTERPHASE CORPORATIONDate: March 20, 2009
    By:
    /s/ Gregory B. KalushGregory B. KalushChairman of the Board,
Chief Executive Officer and President  Name
    
    Title/s/ Gregory B. Kalush
    
    Chairman of the Board,Gregory B. Kalush
    
    Chief Executive Officer and President
(Principal executive officer)/s/ Thomas N. Tipton, Jr.
    
    Chief Financial Officer,Thomas N. Tipton, Jr.
    
    Vice President of Finance and Treasurer
(Principal financial and accounting officer)/s/ Paul N. Hug
    
    DirectorPaul N. Hug/s/ Michael J. Myers
    
    DirectorMichael J. Myers/s/ Kenneth V. Spenser
    
    DirectorKenneth V. Spenser/s/ Christopher B. Strunk
    
    DirectorChristopher B. Strunk/s/ S. Thomas Thawley
    
    Vice Chairman, DirectorS. Thomas Thawley
    
    and Secretary
 48




---



##### Table of Contents



INDEX TO FINANCIAL STATEMENTS
 Report of Grant Thornton LLP
    
    F-2Consolidated Balance Sheets  As of December 31, 2008 and 2007
    
    F-3Consolidated Statements of Operations  Years Ended
December 31, 2008, 2007 and 2006
    
    F-4Consolidated Statements of Shareholders Equity  Years Ended
December 31, 2008, 2007 and 2006
    
    F-5Consolidated Statements of Cash Flows  Years Ended
December 31, 2008, 2007 and 2006
    
    F-6Notes to Consolidated Financial Statements
    
    F-7 to F-24
 
 *
    
    All schedules are omitted because they are not applicable or the required information is
presented in the consolidated financial statements or notes thereto. F-1




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     /s/ GRANT THORNTON LLP 
 F-2




---



##### Table of Contents



December 31,2008
    
    2007ASSETSCash and cash equivalents
    
    $
    7,383
    
    
    $
    6,384Marketable securities
    
    
    11,563
    
    
    
    14,185Trade accounts receivable, less allowances
of $159 and $173, respectively
    
    
    4,758
    
    
    
    7,550Inventories
    
    
    2,329
    
    
    
    2,886Prepaid expenses and other current assets
    
    
    2,729
    
    
    
    1,391Total current assets
    
    
    28,762
    
    
    
    32,396Machinery and equipment
    
    
    6,929
    
    
    
    6,962Leasehold improvements
    
    
    422
    
    
    
    427Furniture and fixtures
    
    
    580
    
    
    
    5747,931
    
    
    
    7,963Less-accumulated depreciation and amortization
    
    
    (7,056
    )
    
    
    (6,879
    )Total property and equipment, net
    
    
    875
    
    
    
    1,084Capitalized software, net
    
    
    1,408
    
    
    
    1,817Other assets
    
    
    203
    
    
    
    883Total assets
    
    $
    31,248
    
    
    $
    36,180LIABILITIES AND SHAREHOLDERS EQUITYLiabilitiesAccounts payable
    
    $
    1,328
    
    
    $
    2,304Deferred revenue
    
    
    28
    
    
    
    30Accrued liabilities
    
    
    942
    
    
    
    1,387Accrued compensation
    
    
    1,163
    
    
    
    1,645Total current liabilities
    
    
    3,461
    
    
    
    5,366Deferred lease obligations
    
    
    1
    
    
    
    52Long term debt
    
    
    3,500
    
    
    
    3,500Total liabilities
    
    
    6,962
    
    
    
    8,918Commitments and contingenciesShareholders EquityCommon stock, $.10 par value; 100,000,000 shares
authorized; 6,573,294 and 6,500,294 shares issued
and outstanding, respectively
    
    
    657
    
    
    
    650Additional paid in capital
    
    
    42,652
    
    
    
    42,267Retained deficit
    
    
    (18,230
    )
    
    
    (15,204
    )Cumulative other comprehensive loss
    
    
    (793
    )
    
    
    (451
    )Total shareholders equity
    
    
    24,286
    
    
    
    27,262Total liabilities and shareholders equity
    
    $
    31,248
    
    
    $
    36,180
 The accompanying notes are an integral part of these consolidated financial statements.
 F-3




---



##### Table of Contents



Years ended December 31,2008
    
    2007
    
    2006Revenues
    
    $
    26,231
    
    
    $
    30,780
    
    
    $
    33,403Cost of sales
    
    
    12,200
    
    
    
    13,189
    
    
    
    15,277Gross margin
    
    
    14,031
    
    
    
    17,591
    
    
    
    18,126Research and development
    
    
    9,198
    
    
    
    10,216
    
    
    
    8,226Sales and marketing
    
    
    5,237
    
    
    
    5,614
    
    
    
    5,405General and administrative
    
    
    4,100
    
    
    
    4,692
    
    
    
    3,926Restructuring charge
    
    
    403
    
    
    
    
    
    
    
    Total operating expenses
    
    
    18,938
    
    
    
    20,522
    
    
    
    17,557(Loss) income from operations
    
    
    (4,907
    )
    
    
    (2,931
    )
    
    
    569Interest income, net
    
    
    526
    
    
    
    764
    
    
    
    637Other income, net
    
    
    92
    
    
    
    364
    
    
    
    475(Loss) income before income tax
    
    
    (4,289
    )
    
    
    (1,803
    )
    
    
    1,681Income tax benefit
    
    
    (1,263
    )
    
    
    (609
    )
    
    
    (405
    )Net (loss) income
    
    $
    (3,026
    )
    
    $
    (1,194
    )
    
    $
    2,086Net (loss) income per share:Basic EPS
    
    $
    (0.48
    )
    
    $
    (0.19
    )
    
    $
    0.36Diluted EPS
    
    $
    (0.48
    )
    
    $
    (0.19
    )
    
    $
    0.33Weighted average common shares
    
    
    6,320
    
    
    
    6,161
    
    
    
    5,854Weighted average common and dilutive
shares
    
    
    6,320
    
    
    
    6,161
    
    
    
    6,254
 The accompanying notes are an integral part of these consolidated financial statements.
 F-4




---



##### Table of Contents



CumulativeAdditional
    
    
    
    
    
    
    OtherCommon Stock
    
    
    Paid in
    
    
    Retained
    
    
    Comprehensive
    
    
    
    
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Loss
    
    
    Total
    
    
    Income (loss)Balance at December 31, 2005
    
    
    5,902
    
    
    $
    590
    
    
    $
    38,817
    
    
    $
    (16,145
    )
    
    $
    (764
    )
    
    $
    22,498Option exercises
    
    
    144
    
    
    
    15
    
    
    
    782
    
    
    
    
    
    
    
    
    
    
    
    797Stock issued under restricted stock
plan, net forefeitures
    
    
    106
    
    
    
    10
    
    
    
    (10
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of restricted stock
plan compensation
    
    
    
    
    
    
    
    
    
    
    295
    
    
    
    
    
    
    
    
    
    
    
    295Comprehensive income:Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61
    
    
    
    61
    
    
    
    61Unrealized holding period gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63
    
    
    
    63
    
    
    
    63Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,086
    
    
    
    
    
    
    
    2,086
    
    
    
    2,086Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,210Balance at December 31, 2006
    
    
    6,152
    
    
    $
    615
    
    
    $
    39,884
    
    
    $
    (14,059
    )
    
    $
    (640
    )
    
    $
    25,800FIN48 Tax Adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49
    
    
    
    
    
    
    
    49Option exercises
    
    
    320
    
    
    
    32
    
    
    
    2,010
    
    
    
    
    
    
    
    
    
    
    
    2,042Stock issued under restricted stock
plan, net forefeitures
    
    
    28
    
    
    
    3
    
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of restricted stock
plan compensation
    
    
    
    
    
    
    
    
    
    
    376
    
    
    
    
    
    
    
    
    
    
    
    376Comprehensive income:Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    98
    
    
    
    98
    
    
    
    98Unrealized holding period gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    91
    
    
    
    91
    
    
    
    91Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,194
    )
    
    
    
    
    
    
    (1,194
    )
    
    
    (1,194
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (1,005
    )Balance at December 31, 2007
    
    
    6,500
    
    
    $
    650
    
    
    $
    42,267
    
    
    $
    (15,204
    )
    
    $
    (451
    )
    
    $
    27,262Option exercises
    
    
    1
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    2Stock issued under restricted stock
plan, net forefeitures
    
    
    72
    
    
    
    7
    
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    1Amortization of restricted stock
plan compensation
    
    
    
    
    
    
    
    
    
    
    389
    
    
    
    
    
    
    
    
    
    
    
    389Comprehensive income:Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (256
    )
    
    
    (256
    )
    
    
    (256
    )Unrealized holding period loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (86
    )
    
    
    (86
    )
    
    
    (86
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,026
    )
    
    
    
    
    
    
    (3,026
    )
    
    
    (3,026
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (3,368
    )Balance at December 31, 2008
    
    
    6,573
    
    
    $
    657
    
    
    $
    42,652
    
    
    $
    (18,230
    )
    
    $
    (793
    )
    
    $
    24,286
 The accompanying notes are an integral part of these consolidated financial statements.
 F-5




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##### Table of Contents



Years ended December 31,2008
    
    2007
    
    2006Cash flows from operating activities:Net (loss) income
    
    $
    (3,026
    )
    
    $
    (1,194
    )
    
    $
    2,086Adjustments to reconcile net (loss) income to net cash provided by operating activities:Provision for uncollectible accounts and returns
    
    
    (14
    )
    
    
    55
    
    
    
    (8
    )Provision for excess and obsolete inventories
    
    
    200
    
    
    
    300
    
    
    
    500Depreciation and amortization
    
    
    868
    
    
    
    916
    
    
    
    695Amortization of restricted stock
    
    
    389
    
    
    
    376
    
    
    
    295Write-off of impaired capitalized software
    
    
    185
    
    
    
    218
    
    
    
    Change in assets and liabilities:Trade accounts receivable
    
    
    2,806
    
    
    
    (1,781
    )
    
    
    (621
    )Inventories
    
    
    357
    
    
    
    (1,265
    )
    
    
    688Prepaid expenses and other current assets
    
    
    (1,480
    )
    
    
    18
    
    
    
    (236
    )Other assets
    
    
    671
    
    
    
    (637
    )
    
    
    (274
    )Accounts payable, deferred revenue and accrued liabilities
    
    
    (1,286
    )
    
    
    1,091
    
    
    
    455Accrued compensation
    
    
    (424
    )
    
    
    (541
    )
    
    
    1,030Other non-current liabilities
    
    
    
    
    
    
    
    
    
    
    (34
    )Deferred lease obligations
    
    
    (51
    )
    
    
    (33
    )
    
    
    (5
    )Net adjustments
    
    
    2,221
    
    
    
    (1,283
    )
    
    
    2,485Net cash (used in) provided by operating activities
    
    
    (805
    )
    
    
    (2,477
    )
    
    
    4,571Cash flows from investing activities:Purchase of property and equipment
    
    
    (236
    )
    
    
    (674
    )
    
    
    (358
    )Purchase of capitalized software
    
    
    (336
    )
    
    
    (1,045
    )
    
    
    (1,178
    )Proceeds from the sale of marketable securities
    
    
    8,585
    
    
    
    14,958
    
    
    
    14,860Purchases of marketable securities
    
    
    (6,049
    )
    
    
    (15,583
    )
    
    
    (12,878
    )Net cash provided by (used in) investing activities
    
    
    1,964
    
    
    
    (2,344
    )
    
    
    446Cash flows from financing activities:Borrowings under credit facility
    
    
    3,500
    
    
    
    
    
    
    
    Payments on debt
    
    
    (3,500
    )
    
    
    
    
    
    
    Proceeds from the excerise of stock options
    
    
    2
    
    
    
    2,042
    
    
    
    797Net cash provided by financing activities
    
    
    2
    
    
    
    2,042
    
    
    
    797Effect of exchange rate changes on cash and cash equivalents
    
    
    (162
    )
    
    
    102
    
    
    
    67Net increase (decrease) in cash and cash equivalents
    
    
    999
    
    
    
    (2,677
    )
    
    
    5,881Cash and cash equivalents at beginning of year
    
    
    6,384
    
    
    
    9,061
    
    
    
    3,180Cash and cash equivalents at end of year
    
    $
    7,383
    
    
    $
    6,384
    
    
    $
    9,061Supplemental Disclosure of Cash Flow Information:Income taxes paid
    
    $
    
    
    
    $
    185
    
    
    $
    359Interest paid
    
    $
    236
    
    
    $
    225
    
    
    $
    160
 The accompanying notes are an integral part of these consolidated financial statements.
 F-6




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##### Table of Contents



INTERPHASE CORPORATION  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Description of the Business: ®
 Principles of Consolidation and Basis of Presentation:
 Fair Value of Financial Instruments:
 1.
    
    Level 1  Valuations based on quoted prices in active markets for identical
assets and liabilities that the reporting entity has the ability to obtain at the
measurement date. This level provides the most reliable evidence of fair value.2.
    
    Level 2  Valuation based on one or more quoted prices in markets that are not
active; quoted prices for similar assets or liabilities in active markets; inputs that
are observable other than quoted prices for the asset or the liability; or inputs that
are derived principally from or corroborated by observable market data by correlation
or other means.3.
    
    Level 3  Valuations based on inputs that are unobservable and significant to
the overall fair value measurement.
 Cash and Cash Equivalents:
 F-7




---



##### Table of Contents



Marketable Securities:
 Accounts Receivable and Allowance for Doubtful Accounts:
 Balance at
    
    
    
    
    
    (Write-offs,)
    
    BalanceBeginning
    
    Charged to
    
    Net of
    
    at EndYear Ended December 31:
    
    of Period
    
    Expense
    
    Recoveries
    
    of Period2008
    
    $
    77
    
    
    $
    45
    
    
    $
    (9
    )
    
    $
    1132007
    
    
    33
    
    
    
    47
    
    
    
    (3
    )
    
    
    772006
    
    
    36
    
    
    
    (3
    )
    
    
    
    
    
    
    33
 Allowance for Returns:
 Derivative Financial Instruments and Hedging:
 F-8




---



##### Table of Contents



Inventories:
 Years ended December 31,2008
    
    
    2007Raw Materials
    
    $
    1,885
    
    
    $
    2,038Work-in-Process
    
    
    378
    
    
    
    594Finished Goods
    
    
    66
    
    
    
    254Total
    
    $
    2,329
    
    
    $
    2,886
  Property and Equipment:
 Year ended December 31:
    
    Depreciation Expense2008
    
    $
    4272007
    
    $
    5882006
    
    $
    567
   Machinery and equipment
    
    3-5 yearsLeasehold improvements
    
    Term of the respective leasesFurniture and fixtures
    
    3-10 years
 Capitalized Software:
 Year ended December 31:
    
    Amortization Expense
    
    Accumulated Amortization2008
    
    $
    441
    
    
    $
    2,3822007
    
    $
    328
    
    
    $
    1,9642006
    
    $
    128
    
    
    $
    1,670
 Long-Lived Assets:
 F-9




---



##### Table of Contents



Revenue Recognition:
 Warranty Reserve:
 Concentration of Credit Risks:
 Research and Development:
 Interest Income, net:
 Advertising Expense:
 Foreign Currency Translation:
  F-10




---



##### Table of Contents



Income Taxes:
   Other Comprehensive Income (loss):
 Stock-Based Compensation:
 Use of Estimates:
 2. MARKETABLE SECURITIES
  F-11




---



##### Table of Contents



Quoted Prices
    
    Significantin Active
    
    Other
    
    SignificantMarkets for
    
    Observable
    
    UnobservableIdentical Assets
    
    Inputs
    
    InputsLevel 1
    
    Level 2
    
    Level 3
    
    TotalAvailable-for-sale
    
    $
    
    
    
    $
    11,563
    
    
    $
    
    
    
    $
    11,563SecuritiesTotal
    
    $
    
    
    
    $
    11,563
    
    
    $
    
    
    
    $
    11,563
  Quoted Prices
    
    Significantin Active
    
    Other
    
    SignificantMarkets for
    
    Observable
    
    UnobservableIdentical Assets
    
    Inputs
    
    InputsLevel 1
    
    Level 2
    
    Level 3
    
    TotalAvailable-for-sale
    
    $
    
    
    
    $
    14,185
    
    
    $
    
    
    
    $
    14,185SecuritiesTotal
    
    $
    
    
    
    $
    14,185
    
    
    $
    
    
    
    $
    14,185
 3. PREPAID EXPENSES AND OTHER CURRENT ASSETS
  Years ended December 31,2008
    
    
    2007Research and development tax credit in France
    
    $
    2,388
    
    
    $
    435Prepaid other
    
    
    341
    
    
    
    956Total Prepaid Expenses and Other Current Assets
    
    $
    2,729
    
    
    $
    1,391
 F-12




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##### Table of Contents



4. ACCRUED LIABILITIES
  Years ended December 31,2008
    
    
    2007French corporate tax
    
    
    423
    
    
    
    Inventory receipts
    
    
    149
    
    
    
    364Consulting fees
    
    
    36
    
    
    
    298Accrued other
    
    
    334
    
    
    
    725Total Accrued Liabilities
    
    $
    942
    
    
    $
    1,387
 5. DERIVATIVE FINANCIAL INSTRUMENTS
   6. CREDIT FACILITY
  F-13




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##### Table of Contents



7. INCOME TAXES
  Year ended December 31,2008
    
    
    2007
    
    
    2006United States tax benefit
    
    $
    (2
    )
    
    $
    (133
    )
    
    $
    (55
    )Foreign tax benefit
    
    
    (1,261
    )
    
    
    (476
    )
    
    
    (350
    )Income tax benefit
    
    $
    (1,263
    )
    
    $
    (609
    )
    
    $
    (405
    )
  Year ended December 31,2008
    
    
    2007Current deferred tax assets:Inventories
    
    $
    735
    
    
    $
    659Accounts receivable
    
    
    43
    
    
    
    29Deferred revenue
    
    
    57
    
    
    
    11Other accruals
    
    
    256
    
    
    
    214Total current deferred tax assets
    
    $
    1,091
    
    
    $
    913Noncurrent deferred tax assets:Depreciation
    
    $
    (74
    )
    
    $
    (40
    )Amortization
    
    
    153
    
    
    
    216Other
    
    
    27
    
    
    
    25Net operating loss carryforwards
    
    
    8,988
    
    
    
    7,244Total noncurrent deferred tax assets
    
    $
    9,094
    
    
    $
    7,445Valuation allowance for deferred tax assets
    
    
    (10,185
    )
    
    
    (8,358
    )Deferred tax assets, net of valuation allowance
    
    $
    
    
    
    $
    
   F-14




---



##### Table of Contents



Year ended December 31,2008
    
    
    2007
    
    
    2006Income taxes at statutory rate
    
    $
    (1,458
    )
    
    $
    (615
    )
    
    $
    576Benefit for
French research and development tax credit
    
    
    (1,699
    )
    
    
    (497
    )
    
    
    (394
    )State (benefit) provision
    
    
    (7
    )
    
    
    47
    
    
    
    16French permanent items
    
    
    83
    
    
    
    (282
    )
    
    
    (218
    )Extraterritorial income exclusion benefit
    
    
    
    
    
    
    
    
    
    
    (56
    )Adjustment to deferred tax assets
    
    
    (17
    )
    
    
    129
    
    
    
    717Other
    
    
    9
    
    
    
    (289
    )
    
    
    (130
    )Change in valuation allowance
    
    
    1,827
    
    
    
    898
    
    
    
    (916
    )Benefit for income taxes
    
    $
    (1,262
    )
    
    $
    (609
    )
    
    $
    (405
    )
    F-15




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##### Table of Contents



UnrecognizedTax BenefitBalance as of January 1, 2007
    
    $
    365Additions based on tax positions  current year
    
    
    83Additions based on tax positions  previous years
    
    
    Reductions for tax positions  previous years
    
    
    (49
    )Reductions as a result of lapse of statute limitations
    
    
    (139
    )Settlements
    
    
    Effect of exchange rate changes
    
    
    6Balance as of December 31, 2007
    
    $
    266Additions based on tax positions  current year
    
    $
    285Additions based on tax positions  previous years
    
    
    25Reductions for tax positions  previous years
    
    
    Reductions as a result of lapse of statute limitations
    
    
    (69
    )Settlements
    
    
    Effect of exchange rate changes
    
    
    (4
    )Balance as of December 31, 2008
    
    $
    503
 F-16




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##### Table of Contents



8. RESTRUCTURING CHARGE
  9. EARNINGS PER SHARE
  Years ended December 31,2008
    
    2007
    
    2006Basic (loss) income per share:Net (loss) income
    
    $
    (3,026
    )
    
    $
    (1,194
    )
    
    $
    2,086Weighted average common shares outstanding
    
    
    6,320
    
    
    
    6,161
    
    
    
    5,854Basic (loss) income per share
    
    $
    (0.48
    )
    
    $
    (0.19
    )
    
    $
    0.36Diluted (loss) income per share:Net (loss) income
    
    $
    (3,026
    )
    
    $
    (1,194
    )
    
    $
    2,086Weighted average common shares outstanding
    
    
    6,320
    
    
    
    6,161
    
    
    
    5,854Dilutive stock options and restricted stock
    
    
    
    
    
    
    
    
    
    
    400Weighted average common shares outstanding  assuming dilution
    
    
    6,320
    
    
    
    6,161
    
    
    
    6,254Diluted (loss) income per share
    
    $
    (0.48
    )
    
    $
    (0.19
    )
    
    $
    0.33Outstanding stock options and restricted stock that were not
included in the diluted calculation because
their effect would be anti-dilutive
    
    
    1,676
    
    
    
    1,440
    
    
    
    1,251
 10. COMMON STOCK
 2004 Long-Term Stock Incentive Plan:
 F-17




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##### Table of Contents



Amended and Restated Stock Option Plan:
 France Stock Option Sub-Plan:
 Amended and Restated Director Stock Option Plan:
 F-18




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##### Table of Contents



Number of
    
    
    Weighted Average
    
    
    AggregateOptions
    
    
    Option Price
    
    
    Intrinsic ValueBalance, December 31, 2005
    
    
    2,586
    
    
    $
    9.38
    
    
    $
    73Granted
    
    
    
    
    
    
    N/AExercised
    
    
    (144
    )
    
    
    5.54Canceled
    
    
    (320
    )
    
    
    10.13Balance, December 31, 2006
    
    
    2,122
    
    
    
    9.52
    
    
    
    2,886Granted
    
    
    
    
    
    
    N/AExercised
    
    
    (320
    )
    
    
    6.37Canceled
    
    
    (103
    )
    
    
    16.90Balance, December 31, 2007
    
    
    1,699
    
    
    
    9.67
    
    
    
    4,366Granted
    
    
    
    
    
    
    N/AExercised
    
    
    (1
    )
    
    
    4.12Canceled
    
    
    (64
    )
    
    
    10.17Balance, December 31, 2008
    
    
    1,634
    
    
    
    9.65
    
    
    
    Exercisable at December
31, 2008
    
    
    1,634
    
    
    $
    9.65
    
    
    $
    
   Options Outstanding
    
    Options ExercisableWeighted-AverageNumber Outstanding
    
    Remaining
    
    Weighted
    
    Number ExercisableRange of
    
    at
    
    Contractual Life
    
    Average Exercise
    
    at
    
    Weighted AverageExercise Prices
    
    12/31/08
    
    (years)
    
    Price
    
    12/31/08
    
    Exercise Price$3.09-$4.60
    
    
    187
    
    
    
    2.97
    
    
    $
    4.31
    
    
    
    187
    
    
    $
    4.31$4.83-$6.45
    
    
    440
    
    
    
    3.85
    
    
    
    5.49
    
    
    
    440
    
    
    
    5.49$7.20-$10.63
    
    
    457
    
    
    
    1.84
    
    
    
    8.27
    
    
    
    457
    
    
    
    8.27$11.25-$13.88
    
    
    314
    
    
    
    3.00
    
    
    
    12.78
    
    
    
    314
    
    
    
    12.78$17.25-$24.06
    
    
    226
    
    
    
    1.00
    
    
    
    19.67
    
    
    
    226
    
    
    
    19.67$31.00
    
    
    10
    
    
    
    0.90
    
    
    
    31.00
    
    
    
    10
    
    
    
    31.00Total
    
    
    1,634
    
    
    
    2.61
    
    
    $
    9.65
    
    
    
    1,634
    
    
    $
    9.65
 Restricted Stock:
 F-19




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##### Table of Contents



Restricted Stock
    
    
    Weighted AverageShares
    
    
    Grant Date ValueNonvested restricted stock at December 31, 2006
    
    
    221,425
    
    
    $
    5.96Granted
    
    
    106,000
    
    
    
    10.94Vested
    
    
    (41,455
    )
    
    
    6.09Cancelled/Forefeited
    
    
    (78,410
    )
    
    
    6.07Nonvested restricted stock at December 31, 2007
    
    
    207,560
    
    
    $
    8.53Granted
    
    
    138,337
    
    
    $
    6.65Vested
    
    
    (47,811
    )
    
    
    7.50Cancelled/Forefeited
    
    
    (65,837
    )
    
    
    9.92Nonvested restricted stock at December 31, 2008
    
    
    232,249
    
    
    $
    7.24
 Rights Agreement:
 Option Valuation:
 F-20




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##### Table of Contents



11. RELATED PARTY TRANSACTIONS
  12. EMPLOYEE BENEFIT PLAN
  13. OTHER FINANCIAL INFORMATION
 Major Customers
  F-21




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##### Table of Contents



Commitments:
 Year ending December 31:2009
    
    $
    5622010
    
    $
    8832011
    
    $
    7432012
    
    $
    5992013
    
    $
    609Thereafter
    
    $
    115
  Year ending December 31:2008
    
    $
    8402007
    
    $
    8372006
    
    $
    738
 Contingencies
 14. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
   15. SEGMENT DATA
  F-22




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##### Table of Contents



Long Lived Assets
    
    2008
    
    
    2007North America
    
    $
    1,910
    
    
    $
    2,657Europe
    
    
    373
    
    
    
    244Total
    
    $
    2,283
    
    
    $
    2,901
 Revenues
    
    2008
    
    
    2007
    
    
    2006Pacific Rim
    
    $
    11,204
    
    
    $
    11,994
    
    
    $
    6,962North America
    
    
    8,598
    
    
    
    12,475
    
    
    
    11,226Europe
    
    
    6,429
    
    
    
    6,311
    
    
    
    15,215Total
    
    $
    26,231
    
    
    $
    30,780
    
    
    $
    33,403
  Product Revenue
    
    2008
    
    
    2007
    
    
    2006Broadband telecom
    
    $
    23,218
    
    
    $
    26,071
    
    
    $
    26,507Enterprise
    
    
    867
    
    
    
    3,369
    
    
    
    4,730Professional services
    
    
    501
    
    
    
    603
    
    
    
    128Other
    
    
    1,645
    
    
    
    737
    
    
    
    2,038Total
    
    $
    26,231
    
    
    $
    30,780
    
    
    $
    33,403
 F-23




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##### Table of Contents



16. QUARTERLY FINANCIAL DATA (Unaudited)
 
 Quarter EndedMarch 31
    
    June 30
    
    September 30
    
    December 31Revenues
    
    $
    7,471
    
    
    $
    6,650
    
    
    $
    6,888
    
    
    $
    5,222Gross margin
    
    
    4,337
    
    
    
    3,103
    
    
    
    3,984
    
    
    
    2,607Loss before income tax
    
    
    (839
    )
    
    
    (1,628
    )
    
    
    (255
    )
    
    
    (1,567
    )Net loss
    
    
    (528
    )
    
    
    (1,161
    )
    
    
    (55
    )
    
    
    (1,282
    )Net loss per share:Basic EPS
    
    $
    (0.08
    )
    
    $
    (0.18
    )
    
    $
    (0.01
    )
    
    $
    (0.20
    )Diluted EPS
    
    $
    (0.08
    )
    
    $
    (0.18
    )
    
    $
    (0.01
    )
    
    $
    (0.20
    )
 
 Quarter EndedMarch 31
    
    June 30
    
    September 30
    
    December 31Revenues
    
    $
    5,104
    
    
    $
    8,241
    
    
    $
    8,429
    
    
    $
    9,006Gross margin
    
    
    2,699
    
    
    
    4,925
    
    
    
    5,180
    
    
    
    4,787(Loss) income before
income tax
    
    
    (1,912
    )
    
    
    301
    
    
    
    547
    
    
    
    (739
    )Net (loss) income
    
    
    (1,852
    )
    
    
    390
    
    
    
    698
    
    
    
    (430
    )Net (loss) earnings per share:Basic EPS
    
    $
    (0.30
    )
    
    $
    0.06
    
    
    $
    0.11
    
    
    $
    (0.07
    )Diluted EPS
    
    $
    (0.30
    )
    
    $
    0.06
    
    
    $
    0.10
    
    
    $
    (0.07
    )
  F-24




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##### Table of Contents



INDEX TO EXHIBITS
 Exhibits
 3
    
    (a)
    
    Certificate of Incorporation of the registrant. (1)3
    
    (b)
    
    Amendment to Articles of Incorporation of the registrant. (2)3
    
    (c)
    
    Amended and Restated Bylaws of the registrant adopted on July 27, 2007. (4)4
    
    (a)
    
    Rights Agreement dated as of December 7, 2000 by and between the Company and Computershare Investor Services, LLC as Rights Agent. (3)10
    
    (a)
    
    Lease on Facility at Parkway Center, Phase I, Plano, Texas. (5)10
    
    (b)
    
    Second Amendment to lease on Facility at Parkway Center, Phase I, Plano, Texas. (13)10
    
    (c)
    
    Lease on Facility at 2105 Luna Road, Carrollton, Texas. (6)10
    
    (d)
    
    Note and Credit Agreement between Interphase Corporation and Texas Capital Bank. (9)10
    
    (e)
    
    Amended and Restated Employment, Confidentiality, and Non-Competition Agreement with Gregory B. Kalush, dated December 30, 2008. *(10)10
    
    (f)
    
    Amended and Restated Employment, Confidentiality, and Non-Competition Agreement with Thomas N. Tipton, Jr. dated December 30, 2008. *(10)10
    
    (g)
    
    Amended and Restated Employment, Confidentiality, and Non-Competition Agreement with Randall E. McComas, dated December 30, 2008. *(10)10
    
    (h)
    
    Amended and Restated Employment, Confidentiality, and Non-Competition Agreement with Deborah A. Shute, dated December 30, 2008. *(10)10
    
    (i)
    
    Amended and Restated Employment, Confidentiality, and Non-Competition Agreement with James W. Gragg, dated December 30, 2008. *(10)10
    
    (j)
    
    Amended and Restated Employment, Confidentiality, and Non-Competition Agreement with Marc E. DeVinney, dated December 30, 2008. *(10)10
    
    (k)
    
    Amended and Restated Employment, Confidentiality, and Non-Competition Agreement with Yoram Solomon, dated December 30, 2008. *(10)10
    
    (l)
    
    Employment, Confidentiality, and Non-Competition Agreement with Marc E. DeVinney, dated August 31, 2007* (11)10
    
    (m)
    
    Employment, Confidentiality, and Non-Competition Agreement with Yoram Solomon, dated November 17, 2008* (12)10
    
    (n)
    
    Interphase Corporation 2004 Long-Term Stock Incentive Plan *(8)21
    
    (a)
    
    Subsidiaries of the Registrant. (7)23
    
    (a)
    
    Consent of Independent Registered Public Accounting Firm. (13)31
    
    (a)
    
    Rule 13a-14(a)/15d-14(a) Certification. (13)31
    
    (b)
    
    Rule 13a-14(a)/15d-14(a) Certification. (13)32
    
    (a)
    
    Section 1350 Certification. (13)32
    
    (b)
    
    Section 1350 Certification. (13)
 
 (1)
    
    Filed as an exhibit to Registration Statement No. 2-86523 on Form S-1 and incorporated
herein by reference.(2)
    
    Filed as an exhibit to Report on Form 10-K for the year ended December 31, 1999, and incorporated herein by reference.(3)
    
    Filed as an exhibit to Form 8-K on January 9, 2001, and incorporated herein by reference.(4)
    
    Filed as an exhibit to Report on Form 8-K on July 31, 2007, and incorporated herein by reference.(5)
    
    Filed as an exhibit to Report on Form 10-Q for the quarter ended September 30, 2002, and incorporated herein by reference. E-1




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##### Table of Contents



(6)
    
    Filed as an exhibit to Form 8-K on December 10, 2008, and incorporated herein by reference(7)
    
    Filed as an exhibit to Report on Form 10-K for the year ended December 31, 2002, and incorporated herein by reference.(8)
    
    Filed as an exhibit to Schedule 14a on March 31, 2004 and incorporated herein by reference.(9)
    
    Filed as an exhibit to Form 8-K on December 24, 2008, and incorporated herein by reference.(10)
    
    Filed as an exhibit to Form 8-K on December 31, 2008, and incorporated herein by reference.(11)
    
    Filed as an exhibit to Form 8-K on August 31, 2007, and incorporated herein by reference(12)
    
    Filed as an exhibit to Form 8-K on November 17, 2008, and incorporated herein by reference(13)
    
    Filed herewith*
    
    Management contract or compensatory plan or arrangement. E-2