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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
 THE SECURITIES EXCHANGE ACT OF 1934
 For the Fiscal Year Ended December 31, 2004
    
    Commission File Number 0-13071
 INTERPHASE CORPORATION (Exact name of registrant as specified in its charter)
 Texas(State or other jurisdiction of
    
    75-1549797(I.R.S. Employerincorporation or organization)
    
    Identification No.)
 2901 North Dallas Parkway, Suite 200
Plano, Texas 75093(Address of principal executive offices and zip code)
Registrants telephone number, including area code: (214) 654-5000
Securities registered pursuant to Section 12(b) of the Act:None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.10 par valueTitle of Class  Indicate by check mark whether the registrant (1) has filed all reports required by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. þ o
 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2). o þ
 The aggregate market value of the voting stock held by non-affiliates of the registrant as of June
30, 2004 was approximately $56,046,615. As of March 11, 2005, the registrant had 5,750,824 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Parts of the following document is incorporated by reference into this annual report on Form 10-K:
Portions of the Definitive Proxy Statement for Annual Meeting of Shareholders to be held on May 4,
2005 (Part III).




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TABLE OF CONTENTS  PART IITEM 1. BUSINESSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESITEM 6. SELECTED CONSOLIDATED FINANCIAL DATAITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM 9A. CONTROLS AND PROCEDURESITEM 9B. OTHER INFORMATIONPART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICESITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULESSIGNATURESINDEX TO EXHIBITSNote and Credit AgreementConsent of Independent Registered Public Accounting FirmConsent of Independent Registered Public Accounting FirmRule 13a-14(a)/15d-14(a) CertificationRule 13a-14(a)/15d-14(a) CertificationSection 1350 CertificationSection 1350 Certification    Table of Contents  
 PART I 
 ITEM 1. BUSINESS Introduction Interphase Corporation and subsidiaries (Interphase or the Company) enables rapid platform
design and integration for the global voice, video, and data communications markets through custom
and off-the-shelf communications equipment, embedded software development suites, and systems
integration and professional services for carrier and private networks. The Companys products
provide communications computing and connectivity of telecommunications and enterprise computer
systems to Wide Area Networks (WANs), Local Area Networks (LANs), and Storage Area Networks (SANs)
using Asynchronous Transfer Mode (ATM), Ethernet, Internet Protocol (IP), Point-to-Point Protocol
(PPP), Q.SAAL, Internet Protocol Security (IPSec), and protocol interworking technologies. The Company maintains a
website on the Internet with the address of www.interphase.com. Copies of
this Annual Report on Form 10-K for the year ended December 31, 2004 and copies of the Companys
Quarterly Reports on Form 10-Q for 2003 and 2004 and any Current Reports on Form 8-K for 2003 and
2004, and any amendments thereto, are or will be available free of charge as soon as reasonably
practical after they are filed with Securities and Exchange Commission (SEC) at such website.
The general public may obtain any materials the Company files with the SEC at 1-800-SEC-0330, or
since the Company is an electronic filer, the SEC maintains an
Internet website at www.sec.gov that
contains reports, proxy and information statements, and other information regarding issuers that
file electronically with the SEC. Key Terms and Definitions Interphase is a technology company and many terms used by the Company may be unfamiliar to those
outside the industry. The following are some key terms that may be useful in helping the reader
understand the products, technologies, and markets relevant for the Company. Adapter- Also called a host bus adapter (HBA) or network interface card (NIC). An adapter is a
device that connects a computer server to one or more peripheral devices (such as switches, hubs,
storage devices, etc.) or other computers. An adapter card typically plugs into the expansion bus
of a system and communicates with the operating system controlling the system via the use of
specific device drivers. Adapters generally refer to passive (non-intelligent) printed circuit
boards used for interfacing to a network. AdvancedTCA or ATCA(Advanced Telecom Computing Architecture)  The next generation of system
architecture beyond CompactPCI. It affords greater bandwidth, processing and board density,
cooling abilities, and memory to meet the growing needs of next generation applications. ATM(Asynchronous Transfer Mode)  A network technology used in WANs that supports real time voice,
real time video, and data. The topology uses switches that establish a logical circuit from end to
end, which guarantees a quality of service for that transmission. However, unlike telephone
switches that dedicate circuits end to end, unused bandwidth in ATM circuits can be appropriated
whenever available. For example, idle bandwidth in a videoconference circuit can be used to
transfer data. ATM is also highly 1




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scalable and supports transmission speeds of 1.5, 25, 100, 155, 622 and 2488 Megabits per second
(Mbps). Backplane- The interconnect mechanism that links all printed circuit boards within a system such
that various boards can communicate and work together for a common purpose as a system. The
backplane extends perpendicularly across all boards in a system and offers sockets for boards to be
plugged into. Blade- A subsystem within a system contained within a single system slot. A blade can operate as
a single board in a slot or with a multitude of boards, including mezzanine cards to a carrier
card. Broadband- A transmission facility (communications link) that has bandwidth (capacity) greater
than a traditional voice grade line. CDMA2000/1xRTT(Code Division Multiple Access 2000/one times Radio Transmission Technologies)  A
third generation wireless system, which is based on earlier versions of CDMA and used in certain
phone systems and Wireless Local Area Networks. CDMA2000 runs in the 800 MHz and 1.8-2.0 GHz
spectrum. Communications Controller- Communications controller modules (similar to a network interface card)
are designed specifically for carrier-grade computer systems that often support signaling,
switching and routing networks. Communication controllers must conform to specifications that
maintain overall system compliance to the rigorous performance and reliability standards that apply
to telecom service provider equipment into which they are integrated. Controllers are essentially
intelligent network interface cards. CompactPCI®- An industrial grade variation of the PCI bus standard that utilizes the Eurocard
(VME) form factor. CompactPCI has been widely adopted by telecom equipment suppliers because of
its high-density connectors, support for front or rear I/O access and hot-swap capabilities
important for Five 9s (99.999%) reliability. Often referred to as CPCI or cPCI, it is a
standardized architecture for printed circuit boards (governed by PICMG) used in the embedded
systems industry, particularly in carrier communications and industrial computing market segments. CompactPCI Packet Switching Backplane(CPSB) -The newest generation of the CompactPCI standard
that enables an Ethernet-based interconnection fabric across a system backplane in lieu of the
H.110 PCI bus. This backplane technology served as the foundation for the new AdvancedTCA standard
architecture from PICMG. CPU(Central Processing Unit)  The part of a computer that performs the logic, computational and
decision-making functions. Telephone systems typically have one CPU, which takes the form of a chip
that controls the various functions in a telephone. Ethernet A Local Area Network standard used for connecting computers, printers, workstations, and
servers. It operates over twisted wire and coaxial cable at speeds beginning at 10 Mbps. Fast Ethernet- A variation of the Ethernet standard (10Base-T) that provides 100 Mbps transmission
bandwidth, and up to 200 Mbps total I/O throughput with full duplex operation. Also known as
100Base-T Often 10/100Base-T is used to describe a link with the capability to support both
Ethernet (10 Mbps) and Fast Ethernet (100 Mbps). 2




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Frame Relay- A high-speed packet switching protocol used in wide area networks (WANs). Providing
a granular service of up to DS3 speed (45 Mbps), it has become very popular for LAN-to-LAN
connections across remote distances. All the major telecommunications carriers offer frame relay
services. Frame relay is much faster than X.25 networks, the first packet-switching WAN standard,
because frame relay was designed for todays reliable circuits and performs less rigorous error
detection. Gbps(Gigabits per second)  One thousand million bits per second. Gigabit Ethernet- An Ethernet technology that raises transmission speed to one Gigabit per second
(Gbps) and is used primarily for backbone networks and high-speed server-to-server connectivity.
Also known as 1000BaseT or 10/100/1000BaseT where line rates are negotiated to regular Ethernet,
Fast Ethernet, or Gigabit Ethernet speeds. IETF(Internet Engineering Task Force)  Formed in 1986, the IETF sets technical standards that run
the Internet such as routing, transport and security. I/O(Input/output)  The transfer of data or voice traffic into and out of a computing device.
The main function of an adapter, communications controller, or network interface card is to
regulate or control communications I/O. IP(Internet Protocol)  The standard method or protocol by which data is sent from one computer to
another on the Internet. IPSec(IP Security)  A security protocol from the Internet Engineering Task Force (IETF) that
provides authentication and encryption over the Internet. LAN(Local Area Network)  A short-distanced data communications network that is contained within a
building or complex. Its primary use is to link computers and peripheral devices (such as
printers) and to provide individuals with access to databases and applications running on servers
attached to the network. Anyone connected to the LAN can send messages to and work jointly with
others on the network. Media Gateway A networking device that converts data from the format required for one type of
network to the format required for another. The media gateway is controlled by the media gateway
controller. Both are a component of softswitch. Mbps(Megabits per second)  One million bits per second, when used as a measurement for the speed
of telecommunications, networking or local area networking. NEP (Network Equipment Provider) -A company which designs, builds and markets telecommunications
infrastructure platforms. OC-3/STM-1 The American and European standards (respectively) for ATM optical interconnect 3
traffic, which is a digital transmission link with capacity of 155 Mbps. This line speed is very
common in telecommunications access networks. 3




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Operating System- The master control program that runs the computer. It is the first program
loaded when the computer is turned on, and its main part, called the kernel, resides in memory at
all times. It may be developed by the vendor of the computer it is running in or by a third party.
It is an important component of the computer system because it sets the operational guidelines for
all application programs that run on the system. All programs must talk to the operating system.
Popular network operating systems today include Windows NT, XP and 2000, VxWorks, Solaris and
Linux. OEM(Original Equipment Manufacturer)  A manufacturer who resells other companys products under
their own name. PCI(Peripheral Components Interconnect)  A printed circuit board bus standard that is currently
the main general-purpose bus in many desktop computers and a majority of enterprise servers
throughout the world. Telecom servers generally use the newer generation of the PCI architecture
 CompactPCI. PICMG(PCI Industrial Computer Manufacturers Group) -The technical standards governing body
responsible for specifying technical requirements of specific systems architectures, including PCI,
CompactPCI, CPSB, and AdvancedTCA. Standardized architectures are intended to provide a common set
of rules and parameters for creating a system. The resulting benefit of such specifications is
interoperability among multiple vendors for complementary system components and marketplace of
cooperation and fair competition provided by commercial off the shelf (COTS) products, thereby
providing alternatives to the market monopolies created by proprietary system architectures. PMC(PCI Mezzanine Card)  a low profile mezzanine card that is electronically equivalent to the
Peripheral Component Interconnect (PCI) specification. PMC cards are used as a quick and
cost-effective method to add modular I/O to other card formats such as VME and CompactPCI, thus
expanding the processing or I/O density of a single system slot. PPP(Point-to-Point Protocol)  Provides router-to-router and host-to-network connections over
synchronous and asynchronous circuits. Protocol- The special set of common rules that end points in a telecommunication connection use
when they communicate. A protocol could be described as a common language for communication across
a network. Protocol Interworking A mechanism for protocol conversion or bridging in cases where computers or
networks lack a common communications medium. Could be considered a protocol language
translation mechanism so that disparate technologies can interconnect. PTMC(PCI Telecom Mezzanine Card)  A mezzanine card with connectors specific to telecom
applications, based on the industry standard PICMG 2.15. Q.SAAL A communications protocol used for signaling applications where the SS7 protocol runs over
ATM links. SAN(Storage Area Network)  Servers providing high speed data storage and retrieval in enterprise
environments. 4




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SCSI(Small Computer System Interface)  Pronounced skuzzy, SCSI is a widely used communications
technology for connecting computer servers to storage devices. Server- A computer in a network shared by multiple users. These are typically more powerful than
computers used by individuals (often referred to as desktops) and require advanced I/O
connectivity. Softswitch(Software Switch)  A generic term for an open application program interface software
used to bridge a public switched telephone network and the Internet Protocol by separating the call
control functions of a phone call from the media gateway (transport layer). SS7(Signaling System 7)  The protocols used in the U.S. telephone system for setting up calls and
providing modern transaction services such as caller ID, automatic recall and call forwarding. When
you dial 1 in front of a number, SS7 routes the call to your long distance carrier and it also
routes local calls based on the first three digits of the phone number. System- A collection of elements or components that are organized for a common purpose. A
computer system consists of hardware components that have been carefully chosen so that they work
well together and software components or programs that run in the computer. T1/E1- A digital transmission link with a capacity of 1.544 Mbps (1,544,000 bits per second) or
2.048 Mbps for the European E1 standard. T1 links normally handle 24 voice conversations, but with
digital encoding can handle many more voice channels. T1 lines are also used to connect networks
across remote distances. T3/E3- A digital transmission link equivalent to 28 T1 lines. Providing a capacity of 45 Mbps, a
T3 link is capable of handling 672 voice conversations. E3 is the European equivalent and J3 is
the Japanese equivalent to T3. VME(VersModule-Eurocard) -A mechanical and electrical bus standard developed in the late 70s,
with a backplane that runs at 80 Mbps and is most commonly used in commercial, military and
industrial applications. WAN(Wide Area Network)  A communications network that covers a wide geographic area, such as a
state or country. A WAN typically extends a LAN outside the building, over telephone common
carrier lines to link to other LANs in remote locations, such as branch offices or at-home workers
and telecommuters. WANs typically run over leased phone lines, but are increasingly also employing
the Internet for VPN (virtual private network) connectivity. 6U A standard size and design of printed circuit boards and the chassis that holds them. 5




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Mission The Companys mission is to provide innovative, high-performance connectivity solutions for the
telecommunications and enterprise embedded system markets. To achieve this, Interphase pursues
several key initiatives that include: Providing an advanced line of communication for next-generation telecom systems The Company offers original equipment manufacturers (OEMs) in the communications sector an
advanced, high quality, high performing, feature-rich, and broad portfolio of communications boards
and subsystems at competitive prices. The Company therefore maintains a valuestrategy while
maintaining the utmost commitment to customer service and flexibility to customer needs. OEMs, due to significant workforce reductions in recent years, have been outsourcing a greater
portion of the equipment that they traditionally made in-house. To capitalize on this trend,
Interphase offers a comprehensive line of standards-based, carrier-class communications controllers
and network interface solutions for:  
    2.5 and 3G Wireless Networks- controllers that provide enhanced mobile services
and integration with other networks.
    Broadband Network Telephony/Video Access- controllers
that enable high-speed network connectivity, i.e. Internet
access through ADSL, cable and fixed wireless providers.
    Intelligent (SS7) and Converging Networks- controllers
that help service providers migrate their intelligent network
facilities to more scalable and cost-effective architectures
and provide new platforms for softswitch and media gateway
convergence of voice and data networks. To further assist telecommunication server providers, Interphase offers professional services for
customizing software and third party applications to customer-specific designs. With
high-performance communication controllers, software development tools, protocol support,
experience with third party protocols and professional services, Interphase products and services
help decrease costs and improve time-to-market of OEMs building next-generation telecom equipment. A comprehensive line of private network I/O adapters and modules In order to provide Interphase customers with effective storage networking solutions, Interphase
offers a comprehensive line of networking adapters and security acceleration modules specifically
designed for use in demanding, enterprise class applications such as:  
    Private Networking/Enterprise Networking mission
critical backbone and Internet servers served with unique,
slot-saving designs.
    Network Security Enterprise devices, such as virtual
private networks (VPNs), which provide encryption and
decryption of data traffic for preventing security breaches.
Interphase serves this segment with network security
co-processor modules. 6




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
    Storage Area Networks servers providing high speed
data storage and retrieval in enterprise environments.
Interphase serves this segment with a legacy portfolio of
fibre channel host bus adapters. Currently, the Company is developing primarily specialized enterprise equipment due to the rapid
commoditization of unspecialized (or standardized) equipment in this segment. Delivering superior customer service Over the past 28 years, Interphase has established strong relationships with key Fortune 500
suppliers of enterprise computer and telecommunication servers. Much of this success has been due
to the superior pre-sale and post-sale service the Company delivers to customers. With a
vertically integrated account perspective, Interphase provides flexibility, timely response and
other customized account service features. Further, the Companys technical support is staffed by
experts for both Telecom and Enterprise products, allowing Interphase to specifically focus its
support efforts for the different needs and requirements of its customers in these differing market
segments. Developing strategic partnerships Interphase designs and tests products for multi-vendor interoperability. The Company leverages
these efforts towards building more effective strategic partnerships. Through its partner program,
Interphase builds synergistic marketing and technical relationships with other key suppliers in its
respective markets. Rigorous product testing and early access to new partner product releases
allows tighter product integration and helps assure compatibility for end-users of the Companys
products. Also, Interphases joint software development, particularly with third party protocol
vendors, decreases the integration time for customers by offering a pre-integrated solution. Products Interphase offers an advanced line of telecom communication controllers, a comprehensive portfolio
of specialized enterprise connectivity and storage adapters, and resource modules for security
acceleration. Telecom Products Interphase products designed for use in next-generation broadband telecommunication networks
include:  
    iNAV® 9200 Multiprotocol Gateway Appliance- designed to meet the needs of both
connection-oriented and connectionless packet switched networks, the new iNav®9200 series
of specialized appliances is by far the industrys most advanced,
price/performance-maximized solution for applications requiring multiprotocol interworking,
IP routing and classification and ATM SARing such as converging networks with those with
dissimilar network protocols.
    iNAV 4000 CompactPCI Network Processor Blade- a protocol interworking, network protocol
processing board with on-board intelligence suited to broadband convergence applications
such as wireless gateways and media gateways. 7




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
    iSPAN® 1635 CompactPCI Packet Switched Backplane T1/E1/J1 Communications Controller-
a 6U CompactPCI communications controller, based on the PICMG 2.16 Ethernet backplane
standard, with an advanced architecture featuring the Motorola MPC8264 RISC CPU that offers
superior performance over T1/E1/J1 communication links. The 1635 also offers dual Ethernet
interfaces to 2.16 backplanes, and is capable of supporting a variety of network protocols
including ATM, Frame Relay, SS7, Q.SAAL, PPP, Ethernet, and HDLC.
    iSPAN 4531 PMC ATM over T3/E3 Communications Controller- a PCI Mezzanine Card that
provides reliable, high performance ATM communications over T3/E3 connections for
applications such as aggregating Internet traffic for transport over the public ATM
backbone network.
    iSPAN 4532 PMC OC-3/STM-1 Communications Controller an intelligent, high-performance,
PCI Mezzanine Card that provides direct access to SONET networks and software selectable
access to an OC-3/STM-1 ATM network, as well as a 10/100 Ethernet interface. The 4532 is
ideally suited for 3G networks that define ATM as the interconnect between radio network
controllers and cell sites, for example. It also targets broadband access networks and
gateways that require on-board ATM to Ethernet interworking. The 4532 has been recently
leveraged to target a growing market niche, supporting the Q.SAAL protocol for SS7 over ATM
traffic processing.
    iSPAN 4532P PMC ATM over OC-3/STM-1 Communications Interface Card A passive interface
module providing 155 Mbps connectivity for use with the iNAV 4000.
    iSPAN 4534 PMC Quad-port Serial Communications Controller- a PCI Mezzanine Card that
provides reliable, high performance serial communications for multiple telecommunication
protocols including ATM, ISDN, Frame Relay, X.25 and PPP.
    iSPAN 4535 PMC Multiprotocol T1/E1 Communications Controller- a cost-effective PCI
Mezzanine Card that provides two high-speed serial communication links to provide
connection to the Public Switch Telephone Network to support advanced SS7 or converged
network applications.
    iSPAN 4538 PMC T1/E1/J1 Communications Controller- a PCI Mezzanine Card with 2 software
selectable T1/E1/J1 interfaces on the front faceplate plus a 10/100 Ethernet port. It is
targeted for signaling and control plane applications in wireless and converged voice and
data telecom networks. With its on-board SS7 protocol processing, excellent SS7
performance, and its Ethernet access, it is a modular solution for signaling platforms and
signaling gateway applications.
    iSPAN 4539/4539F PMC T1/E1/J1 Communications Controller- a PCI Mezzanine Card targeted
for signaling/control plane and broadband/user plane telecom networks. The 4539 offers
four software selectable T1/E1/J1 interfaces via front or rear access, and a 10/100
Ethernet interface on the front with an on-board CPU to offload host processors. The
4539/4539F supports multiple protocols on board, including ATM, and it can serve both
narrowband and broadband networks in one solution. 8




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
    iSPAN 4575 PMC ATM Communications Interface Card a PCI Mezzanine Card that provides
cost-effective, reliable, high performance ATM over OC-3/STM-1 155 Mbps connectivity.
    iSPAN 4576 PMC ATM Communications Interface Card the next generation of the 4575
product.
    iSPAN 5539F PCI T1/E1/J1 Communications Controller- a PCI version of the 4539 for use
in traditional PCI-based systems.
    iSPAN 5575 PCI ATM Communications Interface Card- a PCI adapter card that provides full
duplex ATM connectivity for systems running Windows NT, Novell NetWare, UnixWare, Solaris
and AIX.
    iSPAN 5576 PCI ATM Communications Interface Card the next generation of the 5575
product.
    iSPAN 6535 CompactPCI T1/E1/J1 Communications Controller- a 6U CompactPCI
communications controller with an advanced architecture featuring the Motorola MPC8264 RISC
CPU that offers superior multiprotocol processing performance over T1/E1/J1 communication
links.
    iSPAN 6575 CompactPCI ATM Communications Controller a 3U or 6U CompactPCI adapter that
provides full duplex ATM connectivity at OC-3/STM-1 data rates for industrial and
telecommunication systems.
    iWARE®   a software development suite that complements the intelligent communications
controllers. It offers an application programming interface for developers to develop
applications on the Interphase communications controllers and provides software for various
protocols to be run on the Interphase controllers. Enterprise Network Products Interphase enterprise products targeted for use in enterprise applications include the following:  
    454E SlotOptimizer (Combo) PMC Fast Ethernet Interface Card- a quad-port 10/100
Ethernet card enables slot conservation where high density Ethernet connectivity is
required.
    4526T PowerSAN PCI Fibre Channel Adapter- a 33Mhz PMC adapter which provides single
port 1-Gbps Fibre Channel connectivity.
    552C SlotOptimizer (Combo) PCI Storage Networking Adapter- a 64-bit PCI multifunction
adapter card combining dual channel Ultra2 SCSI connectivity with two 10/100 Ethernet
ports.
    551E SlotOptimizer (Combo) Single-port Fast Ethernet Adapter a 64-bit PCI adapter card
with a Fast Ethernet interface.
    554E SlotOptimizer (Combo) Quad-port Fast Ethernet Adapter a 64-bit PCI adapter card
that provides four independent full-duplex Fast Ethernet ports. 9




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
    45NS PMC Network Security Acceleration Adapter a PCI mezzanine card designed for IPSec
processing acceleration for use in encryption and decryption of security protocols.
    55NS PCI Network Security Acceleration Adapter- a PCI card designed for IPSec
processing acceleration for use in encryption and decryption of security protocols. New Product Development As stated previously, the primary target markets for the Companys products are characterized by
those areas of a telecom network that can reduce cost for service providers (carriers), decrease
their time to market for deployment of new and existing services and finally, preserve carriers
prior network equipment investment. The economic downturn in the telecom business sector has
motivated telecom service providers and network equipment providers (NEPs), to reexamine their
areas of competitive value add and streamline their business operations. In particular, NEPs, and
carriers as well, have been consolidating their product development and manufacturing groups,
actions which generally lead to an increase in the use of off-the-shelf products, such as the
products sold by Interphase. Consequently, the Companys new product development is driven by a
focus on providing NEPs with off the shelf designs built from emerging standards that improve the
performance and reliability of standard designs, while continuing to offer greater speed to market.
See the research and development discussion in the Results of Operations section of Item 7.
(Managements Discussion and Analysis of Financial Condition and Results of Operations. Enterprise/Private Network Initiatives In the enterprise network segment, Interphase will invest product development resources into
product additions to the existing security acceleration product line. These security modules are
designed to work as co-processor resources for servers required to perform compute-intensive
security encryption and decryption functions. Use of these security modules offloads host Central
Processing Units (CPUs) of encryption/decryption processing burdens and therefore improves overall
system performance. Based upon interest from customers in the currently-available 45NS and 55NS
security products, new additions to this line are expected to offer customers even greater
throughput by way of a newer, more powerful co-processor chipset. New generations of these
products will be announced in early 2005. Additionally, Interphase has enhanced its SlotOptimizer product line, a portfolio of products
that enable maximized port density, enabling OEMs and enterprises alike to consolidate multiple
network interfaces on to a single slot. The end result is conservative usage of system slots for
network I/O and real estate preservation within the server chassis. The SlotOptimizer line will be
expanded to include PMC architectures. With the addition of a variety of new PMC-based designs in
2004 and early 2005, maximized slot density solutions were brought to market for use with a broader
set of system architectures, including CompactPCI, VersaModule-Eurocard (VME), and proprietary
systems. This move is intended to broaden the list of suitable applications for the SlotOptimizer
line to include carrier-grade and military uses in addition to a wide variety of enterprise
networking applications. Telecom Segment Initiatives Interphase continues to build on its existing portfolio of telecom solutions by diversifying into
an even broader set of capabilities. The Company continues to target three main carrier segments
(via OEM 10




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channels) with the greatest opportunity for intelligent communications solutions including
wireless, convergence/next generation public network equipment, and broadband network/telephony
access. Expansion of the iSPAN and iNAV lines will continue in several ways, described below. Migration to Pre-integrated Frameworks.Interphase has evolved from offering passive line
interface modules to intelligent communications controllers in the last few years. In keeping with
the same initiative, Interphase has made several pre-integrated frameworks available to customers.
These solutions are generally a combination of multiple hardware and software modules which enable
customers to spend less time and development resources for integrating their blade-level
subsystems. This affords OEMs a better focus on their true core competencies (i.e. applications
development), faster time to market, and a reduction in development costs. More of these
frameworks, using a combination of Interphase products and partner components, are expected to
become available in the coming year. AdvancedTCA.The widely accepted telecom platform form factor, CompactPCI, is beginning to reach a
performance peak, and NEPs and carriers alike are developing applications that are expected to
outgrow the architecture. Vendors seeking to provide solutions with greater bandwidth, processing
and board density, cooling abilities, and memory to meet the needs of next generation applications
have initiated a new technology standard. Governed by the PICMG standards body, the PICMG 3.0
subcommittee has standardized the Advanced Telecom Computing Architecture (AdvancedTCA or ATCA)
specification. Interphase is an active participant in this standards group, and it has developed
two AdvancedTCA products to date with numerous products in development. In keeping with the
blade-mezzanine solution strategy, Interphase is additionally developing ATCA-compliant PTMC Cards
as well as a new generation of ATCA-specific mezzanine cards known as AdvancedMCs or AMCs. This
new architecture has already begun acceptance by network OEMs, and full production units are
expected to slowly replace CompactPCI systems in the next two to three years. Appliances.Interphase has maintained a specialty in interworking multiple protocols and
gateway-on-a-card technologies for several years and has begun to expand its product line upon this
concept. The Companys interworking solutions based on a single card (as opposed to previous
methods requiring the use of multiple boards) have paved the way for compact, specialized
appliances for bridging multiple protocols and routing communications traffic. The first product
in this line of appliances, the iNAV 9200 Multiprotocol Gateway Appliance, is designed for bridging
ATM and Ethernet protocols. Based on network processors, the 9200 offers numerous advantages to
the network equipment OEMs and carriers alike, including improved performance, a hardware-based
architecture (a substantial improvement in reliability and development time over software-based
alternatives), reduced footprint, and significantly reduced cycles for applications development due
to the pre-development of protocol software. Protocol interworking is a widespread practice
throughout the public network, because it enables carriers to migrate existing infrastructures to
next generation technologies without forklift upgrades. Convergence of voice and video is a common
theme today and Interphase appliances provide a higher performing, more cost effective solution in
specific convergence applications requiring simple protocol conversions. Building on this gateway
solution, Interphase is developing enhanced specialty appliances for IP routing in broadband access
environments where video services are being deployed to the end user. 2005 could be an exciting
year for Interphase appliances as the telecom carrier video market is in its infancy and projected
to be very large. 11




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Industry Standards Participation The Company has been engaged in the development of new products and the refinement of its existing
products since its inception. Throughout its history, Interphase has been active in the
formulation of industry standards sanctioned by groups such as PICMG and the AdvancedTCA
subcommittee in particular, IEEE, ANSI, VME International Trade Association (VITA), Fast Ethernet
Alliance, SCSI Committee, the LADDIS Group, ONC/NFS Consortium, and Storage Networking
Interoperability Association (SNIA), and FC-Open (Fibre Channel) Consortium. Throughout 2004 and
into 2005, Interphase has been and continues to be a very active member of the PICMG standards body
particularly for AdvancedTCA. Additionally, the AMC mezzanine subcommittee will be hosting a
variety of industry interoperability plugfests that Interphase will be heavily engaged in. Marketing and Customers The Companys products are sold to network equipment OEMs for inclusion in embedded systems
designed for use in carrier networks and enterprise data networks. These purchasers incorporate
the Companys products into proprietary or standards-based systems for resale to either telecom
carriers directly, or in cases of enterprise equipment, to distributors, system integrators or
Value Added Resellers (VARs), (which may add specially designed software) prior to resale to the
enterprise end-users. Also, the Company sells products directly to sophisticated end-users such as
the military. During 2004, sales to Lucent Technologies and Hewlett Packard accounted for $12.6 million or 36%
and $9.6 million or 27% of the Companys consolidated revenues, respectively. During 2003, sales
to Lucent Technologies and Hewlett Packard accounted for $13.5 million or 42% and $9.7 million or
30% of the Companys consolidated revenues, respectively. During 2002, sales to Hewlett Packard
and Lucent Technologies accounted for $8.7 million or 35% and $7.2 million or 29% of the Companys
consolidated revenues, respectively. No other customers accounted for more than 10% of the
Companys consolidated revenues in the periods presented. The Company markets its products through its direct sales force, manufacturers representatives and
value-added distribution partners. In addition to the Companys headquarters in Plano, Texas; the
Company has sales offices located in or near Boca Raton, Florida; Santa Clara, California;
Minneapolis, Minnesota; Newark, New Jersey; Munich, Germany; Helsinki, Finland; Sydney, Australia;
and Paris, France. The Companys direct sales force markets products directly to key customers and
support manufacturers representatives and the distribution channel. In addition, the Company has
entered into distribution agreements with key national and international distribution partners
located in countries in North America, Asia and Europe. See Note 13 of the accompanying notes to
the consolidated financial statements for information regarding the Companys geographic assets and
revenues. Manufacturing and Supplies Manufacturing operations are currently conducted at the Companys manufacturing facility located in
Carrollton, Texas. The Companys products consist primarily of various integrated circuits, other
electronic components and firmware assembled onto an internally designed printed circuit board. The Company uses internally designed applications or specific integrated circuits (ASIC), some of
which are sole-sourced, on some of its products, as well as standard off-the shelf items presently
available from 12




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two or more suppliers. Historically, the Company has not experienced any significant problems in
maintaining an adequate supply of these parts sufficient to satisfy customer demand. The Company
believes that it has good relations with its vendors. The Company generally does not manufacture products to stock finished goods inventory, as
substantially all of the Companys production is dedicated to specific customer purchase orders.
As a result, the Company has limited requirements to maintain significant finished goods
inventories. Intellectual Property and Patents While the Company believes that its success is ultimately dependent upon the innovative skills of
its personnel and its ability to anticipate technological changes, its ability to compete
successfully will depend, in part, upon its ability to protect proprietary technology contained in
its products. The Company does not currently hold any patents relative to its current product
lines. Instead, the Company relies upon a combination of trade secret, copyright and trademark
laws and contractual restrictions to establish and protect proprietary rights in its products. The
development of alternative, proprietary and other technologies by third parties could adversely
affect the competitiveness of the Companys products. Further, the laws of some countries do not
provide the same degree of protection of the Companys proprietary information, as do the laws of
the United States. Finally, the Companys adherence to industry-wide technical standards and
specifications may limit the Companys opportunities to provide proprietary product features
capable of protection. The Company is also subject to the risk of litigation alleging infringement of third party
intellectual property rights. Infringement claims could require the Company to expend significant
time and money in litigation, pay damages, develop noninfringing technology or acquire licenses to
the technology, which is the subject of asserted infringement. The Company has entered into several nonexclusive software licensing agreements that allow the
Company to incorporate third-party software into its product line thereby increasing its
functionality, performance and interoperability. Employees At December 31, 2004, the Company had 159 full-time employees, of which 40 were engaged in
manufacturing and quality assurance, 60 in research and development, 34 in sales, sales support,
customer service and marketing and 25 in general management and administration. The Companys success to date has been significantly dependent on the contributions of a number of
its key technical and management employees. The loss of the services of one or more of these key
employees could have a material adverse effect on the Company. In addition, the Company believes
that its future success will depend in a large part upon its ability to attract and retain highly
skilled and motivated technical, managerial, sales and marketing personnel. Competition for such
personnel is intense. None of the Companys employees are covered by a collective bargaining agreement and there have
been no work stoppages. The Company considers its relationship with its employees to be good. 13




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##### Table of Contents



Competition The Companys competition includes vendors specifically dedicated to the enterprise I/O and
telecommunication product markets. Most of the Companys major OEM customers have chosen to
outsource the design, manufacture and software integration of certain communications controllers
and protocol processing, and the recent market conditions and reduction in resources have forced
some network equipment providers to utilize off the shelf products for their product design.
Increased competition and commoditization of network interface technologies could result in price
reductions, reduced margins and loss of market share. Risk Factors Potential Fluctuations in Period-to-Period Results Interphase has experienced fluctuations in its period-to-period revenue and operating results in
the past and may experience fluctuations in the future. The Companys sales on both an annual and
a quarterly basis can fluctuate as a result of a variety of factors, many of which are beyond its
control. The Company may have difficulty predicting the volume and timing of orders for products,
and delays in closing orders can cause the Companys operating results to fall short of anticipated
levels for any period. Delays by Interphases OEM customers in producing products that incorporate
the Companys products could also cause operating results to fall short of anticipated levels.
Other factors that may particularly contribute to fluctuations in the Companys revenue and
operating results include success in achieving design wins, the market acceptance of the OEM
products that incorporate the Companys products, the rate of adoption of new products, competition
from new technologies and other companies, and the variability of the life cycles of Interphases
customers products. Because fluctuations can happen, Interphase believes that comparisons of the results of its
operations for preceding quarters are not necessarily predictive of future quarters and that
investors should not rely on the results for any one quarter as an indication of how Interphase
will perform in the future. Investors should also understand that, if the Companys revenue or
operating results for any quarter are less than the level expected by securities analysts or the
market in general, the market price for the Companys common stock could immediately and
significantly decline. Technological Change and New Product Introductions
The market for the Companys products is characterized by rapid technological change and frequent
introduction of products based on new technologies. As these products are introduced, the industry
standards change. Additionally, the overall telecommunications and networking industry is volatile
as the effects of new technologies, new standards, new products and short life cycles contribute to
changes in the industry and the performance of industry participants. The Companys future revenue
will depend upon the Companys ability to anticipate technological change and to develop and
introduce enhanced products of its own on a timely basis that comply with new industry standards.
New product introductions, or the delays thereof, could contribute to quarterly fluctuations in
operating results as orders for new products commence and orders for existing products decline.
Moreover, significant delays can occur between a product introduction and commencement of volume
production. A typical time period from design in of one of our products to actual production is 12
to 24 months. The inability to develop and manufacture 14




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new products in a timely manner, the existence of reliability, quality or availability problems in
its products or their component parts, or the failure to achieve market acceptance for its products
could have a material adverse effect on the Companys operating results, financial condition and
cash flows. Competition The telecommunications, signaling and networking business is extremely competitive, and the Company
faces competition from a number of established and emerging start-up companies both public and
private. Many of the Companys principal competitors have established brand name recognition and
market positions and have substantially greater financial resources to deploy on promotion,
advertising and research and product development than the Company. In addition, as the Company
broadens its product offerings, it may face competition from new competitors. Companies in related
markets could offer products with functionality similar or superior to that offered by the
Companys products. Increased competition could result in significant pricing pressures. These
pricing pressures could result in significantly lower average selling prices for the Companys
products. The Company may not be able to offset the effects of any price reductions with an
increase in the number of customers, cost reductions or otherwise. The Company expects that
competition will increase as a result of industry consolidations and alliances, as well as the
emergence of new competitors. There can be no assurance that the Company will be able to compete
successfully with its existing or new competitors or that competitive pressures faced by the
Company will not have a material adverse effect on the Companys operating results, financial
condition and cash flows. Dependence on Key Customers While the Company enjoys a very good relationship with its customers, there can be no assurance
that the Companys principal customers will continue to purchase products from the Company at
current levels. Orders from our customers are affected by factors such as new product
introductions, product life cycles, inventory levels, manufacturing strategies, contract awards,
competitive conditions and general economic conditions. Customers typically do not enter into
long-term volume purchase contracts with the Company, and customers have certain rights to extend
or delay the shipment of their orders. The loss of one or more of the Companys major customers, or
the reduction, delay or cancellation of orders or a delay in shipment of the Companys products to
such customers could have a material adverse effect on the Companys operating results, financial
condition and cash flows. Design Wins A design win occurs when a customer or prospective customer notifies the Company that its product
has been selected to be integrated with their product. Ordinarily, there are a number of steps
between the design win and when customers initiate production shipments. Design wins reach
production volumes at varying rates, typically beginning approximately 12 to 24 months after the
design win occurs. A variety of risks such as schedule delays, cancellations of programs and
changes in customer markets can delay or prevent the design win from reaching the production phase.
The customers failure to bring their product to the production phase could have an adverse effect
on the Companys operating results, financial condition and cash flows. 15




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Product Liability If the Company delivers products with errors, defects or problems, its credibility and the market
acceptance and sales of its products could be harmed. Further, if Interphases products contain
errors, defects and problems, then the Company may be required to expend significant capital and
resources to alleviate such problems. Defects could also lead to product liability as a result of
product liability lawsuits against Interphase or against its customers. Interphase has agreed to
indemnify its customers in some circumstances against liability from defects in its products. While
no such litigation currently exists, product liability litigation arising from errors, defects or
problems, even if it resulted in an outcome favorable to Interphase, would be time consuming and
costly to defend. Existing or future laws or unfavorable judicial decisions could negate any
limitation of liability provisions that are included in the Companys license agreements. A
successful product liability claim could seriously harm the Companys business, financial condition
and results of operations. Interphase maintains insurance coverage for product liability claims. Although management believes
this coverage is adequate, it is not assured that coverage under insurance policies will be
adequate to cover product liability claims against the Company. In addition, product liability
insurance could become more expensive and difficult to maintain and may not be available in the
future on commercially reasonable terms or at all. The amount and scope of any insurance coverage
may be inadequate if a product liability claim is successfully asserted against the Company. Dependence on Third-Party Suppliers Certain components used in the Companys products are currently available to the Company from one
or a limited number of sources. There can be no assurance that future supplies will be adequate for
the Companys needs or will be available on prices and terms acceptable to the Company. The
Companys inability in the future to obtain sufficient limited-source components, or to develop
alternative sources, could result in delays in product introduction or shipments, and increased
component prices could negatively affect the Companys gross margins, either of which could have a
material adverse effect on the Companys operating results, financial condition and cash flows. Dependence on Internal Manufacturing The Company manufactures its products at its Carrollton, Texas facility, and is currently in
negotiations to establish alternative manufacturing capabilities through a third party in the event
of a disaster in its current facility. If the Company is successful in establishing an alternative
third-party contract manufacturer, there can be no assurance that the Company would be able to
retain their services at the same costs that the Company currently enjoys. In the event of an
interruption in production, the Company may not be able to deliver products on a timely basis,
which could have a material adverse effect on the Companys revenue and operating results. Although
the Company currently has business interruption insurance and a disaster recovery plan to minimize
the effect of the interruption, no assurances can be given that such insurance or recovery plan
will adequately cover the Companys lost business as a result of such an interruption. 16




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Dependence on Proprietary Technology The Companys success depends partly upon certain proprietary technologies developed in its
software. To date, the Company has relied principally upon trademark, copyright and trade secret
laws to protect its proprietary technologies. The Company generally enters into confidentiality or
license agreements with its customers, distributors and potential customers and limits access to
and distribution of the source code to its software and other proprietary information. The
Companys employees are subject to the Companys employment policy regarding confidentiality. There
can be no assurance that the steps taken by the Company in this regard will be adequate to prevent
misappropriation of its technologies or to provide an effective remedy in the event of a
misappropriation by others. Although management believes that the Companys products do not infringe on the proprietary rights
of third parties, there can be no assurance that infringement claims will not be asserted, possibly
resulting in costly litigation in which the Company may not ultimately prevail. Adverse
determinations in such litigation could result in the loss of the Companys proprietary rights,
subject the Company to significant liabilities, require that the Company seek licenses from third
parties or prevent the Company from manufacturing or selling its products, any of which could have
a material adverse effect on the Companys operating results, financial condition and cash flows. It may be necessary for the Company to obtain technology licenses from others due to the large
number of patents in the computer networking industry and the rapid rate of issuance of new patents
and new standards or to obtain important new technology. There can be no assurance that these
third party technology licenses will be available to the Company on commercially reasonable terms.
The loss of or inability to obtain any of these technology licenses could result in delays or
reductions in product shipments. Such delays or reductions in product shipments could have a
material adverse effect on the Companys operating results, financial condition and cash flows. Dependence on Employees The Companys success depends on the continued contributions of its personnel and on its ability to
attract and retain skilled employees. Changes in personnel could adversely affect the Companys
operating results, financial condition and cash flows. Foreign Currency The Company is exposed to adverse movements in foreign currency exchange rates because it conducts
business on a global basis and in some cases in foreign currencies. The Companys operations in
France are measured in the local currency and converted into U.S. Dollars based on published
exchange rates for the periods reported and are therefore subject to risk of exchange rate
fluctuations (See Item 7A  Foreign Currency Risk). The Company has Incurred Significant Losses in the Past Although the Company posted net income of approximately $1.7 million for the year ended December
31, 2004, the Company has incurred net losses of approximately $769,000 for the year ended December
31, 2003, $8.4 million for the year ended December 31, 2002, and $9.6 million for the year ended
December 17




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31, 2001. As part of a broader strategic refocusing, the Company developed a strategy to
end-of-life many of its legacy products in an effort to focus its resources on its new product
lines. This strategy resulted in increased sales of legacy products in 2000, however legacy
product revenues have consistently declined since. Management does not expect significant revenues
from its legacy product lines in future periods. In order to sustain its profitability, the
Company will need to generate higher revenues while containing costs and operating expenses.
Management cannot be certain that the Companys revenues will continue to grow or that the Company
will achieve sufficient revenues to maintain profitability on a long-term, sustained basis. The Company May Need More Working Capital to Fund Operations and Expand the Business Management believes the Companys current financial resources will be sufficient to meet the
present working capital and capital expenditure requirements for the next twelve months. However,
the Company may need to raise additional capital before this period ends to further:  
    fund research and development of new products beyond what is expected in 2005;
    expand the Companys product and service offerings beyond what is contemplated in 2005
if unforeseen opportunities arise;
    respond to unforeseen competitive pressures. The Companys future liquidity and capital requirements will depend upon numerous factors,
including the success of the existing and new product and service offerings and potentially
competing technological and market developments. However, any projections of future cash flows are
subject to substantial uncertainty. If current cash, marketable securities, lines of credit and
cash generated from operations are insufficient to satisfy the liquidity requirements, the Company
may seek to sell additional equity securities, issue debt securities or increase the Companys
working capital line of credit. The sale of additional equity securities could result in
additional dilution to the Companys shareholders. From time to time, management expects to
evaluate the acquisition of, or investment in businesses and technologies that complement the
Company. Acquisitions or investments might impact the Companys liquidity requirements or cause
the Company to sell additional equity securities or issue debt securities. There can be no
assurance that financing will be available in amounts or on terms acceptable to the Company, if at
all. If adequate funds were not available on acceptable terms, the Companys ability to develop or
enhance products and services, take advantage of future opportunities or respond to competitive
pressures would be limited. This limitation could negatively impact the results of operations,
financial condition and cash flows of the Company. The Market Price of the Companys Common Stock is Likely to Continue to be Volatile The trading price of the Companys common stock is subject to wide fluctuations in response to
quarter-to-quarter fluctuations in operating results, general conditions in the computer and
communications industries and other events or factors. In addition, stock markets have experienced
extreme price and trading volume volatility in recent years. This volatility has had a substantial
effect on the market price of the securities of many high technology companies for reasons
frequently unrelated to the operating performance of the specific companies. These broad market
fluctuations may adversely affect the market price of the Companys common stock. The Companys
common stock has historically had relatively 18




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small trading volumes. As a result, small transactions in the Companys common stock can have a
disproportionately large impact on the quoted price of the Companys common stock. 2006 will be the First Year That the Companys 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 unless the Company becomes an accelerated filer in 2005. The year ending December 31, 2006 will be the first year that the Companys internal controls over
financial reporting will be audited by the Companys independent registered public accounting firm
in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 (Section 404). However, if the
Company becomes an accelerated filer in 2005 then the year ending December 31, 2005 will be the
first year that the Companys internal controls over financial reporting will be audited in
accordance with Section 404. As a result of the ongoing interpretation of new guidance issued by
the standards-setting community and the audit testing yet to be completed, the Companys internal
controls over financial reporting may include an unidentified material weakness which would result
in receiving an adverse opinion on the Companys internal controls over financial reporting from
the Companys independent registered public accounting firm. This could result in significant
additional expenditures responding to the Section 404 internal control audit, heightened regulatory
scrutiny and potentially an adverse effect to the price of the Companys stock. 
 ITEM 2. PROPERTIES The Companys executive offices are located in a 22,000-square foot leased facility located in
Plano, Texas. The executive offices serve as the primary location for the Companys
administrative, engineering and marketing functions. The Companys manufacturing and operations
center is located in a 24,000-square foot leased facility in Carrollton, Texas. The executive
offices lease extends through the end of 2008 and the manufacturing and operations center lease
extends through the end of 2005. The Company also leases a 3,000-square foot facility in Lisle,
Illinois that supports an engineering laboratory. The Lisle, Illinois lease extends through
October 2006. In addition, the Company leases a 9,000-square foot facility in Chaville, France
(near Paris) that primarily supports an engineering team. The Chaville, France lease which the
Company is in the process of renewing, expires in June 2005. The Company believes that its
facilities and equipment are in good operating condition and are adequate for its operations. The
Company owns most of the equipment used in its operations. Such equipment consists primarily of
engineering equipment, manufacturing and test equipment and fixtures. 
 ITEM 3. LEGAL PROCEEDINGS None 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable 19




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##### Table of Contents



PART II 
  ITEM 5.
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Since January 1984, shares of the Companys common stock have been traded on the Nasdaq National
Market, or its predecessors, under the symbol INPH. The following table summarizes its high and
low closing price for each quarter during 2004 and 2003 as reported by Nasdaq. 2004
    
    High
    
    
    LowFirst Quarter
    
    
    19.17
    
    
    
    11.30Second Quarter
    
    
    12.67
    
    
    
    8.36Third Quarter
    
    
    12.65
    
    
    
    9.21Fourth Quarter
    
    
    10.22
    
    
    
    6.70
 2003
    
    High
    
    
    LowFirst Quarter
    
    
    4.25
    
    
    
    3.17Second Quarter
    
    
    7.69
    
    
    
    3.97Third Quarter
    
    
    10.58
    
    
    
    6.50Fourth Quarter
    
    
    18.05
    
    
    
    8.77
 On March 10, 2005 there were approximately 56 shareholders of record of the Companys common stock. The Company has not paid dividends on its common stock since its inception. The Board of Directors
does not anticipate payment of any dividends in the foreseeable future and intends to continue its
present policy of retaining earnings for reinvestment in the operations of the Company. The Board of Directors has adopted a Shareholder Rights Plan whereby each holder of record as of
December 29, 2000 received a right to purchase from the Company one share of common stock of the
Company at a price of $93 per share for each share held. These rights can only be exercised after
certain events occur, such as if a person or entity acquires, or makes a tender or exchange offer
to acquire 15% or more of the Companys common stock and the rights expire ten years from the
record date. Upon acquisition of 15% or more of the Companys common stock, each right not owned
by the acquiring person or group will be adjusted to allow the purchase for $93 of a number of
shares having a then market value of $186. These rights are intended to provide the Company
certain anti-takeover protections. The Board of Directors may terminate the Rights Plan, or redeem
the rights for $0.01 per right, at any time until the tenth business day following a public
announcement of a 15% or more stock acquisition. The Company has reserved 7,000,000 shares of
common stock for this plan. The rights were distributed to shareholders as of the record date as a
nontaxable dividend. The rights are attached to and trade with Interphase common stock until the
occurrence of one of the triggering events, at which time the rights would become detached from the
common stock. In November 2001, the Board of Directors authorized the repurchase of up to $5 million of the
Companys common stock. Purchases were authorized to be made from time to time during a
twenty-four 20




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month period, ending in November 2003, in the open market or in privately negotiated transactions
depending on market conditions. The Company canceled all shares that it repurchased. See Note 8 of the accompanying notes to the consolidated financial statements for information
regarding the Companys shareholder approved stock incentive plans. 
 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data presented below under the captions Statement of
Operations Data and Balance Sheet Data have been derived from the consolidated balance sheets
and the related statements of operations for the years ended December 31, 2004, 2003, 2002, 2001
and 2000, and the notes thereto appearing elsewhere herein, as applicable. It is important that you also read Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations and the consolidated financial statements, including the
notes, for the years ended December 31, 2004, 2003, and 2002. 21




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Statement of Operations Data:
(In thousands, except per share data) Year ended December 312004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Revenue
    
    $
    35,015
    
    
    $
    32,490
    
    
    $
    25,123
    
    
    $
    28,732
    
    
    $
    55,697Gross margin
    
    
    19,171
    
    
    
    16,909
    
    
    
    9,792
    
    
    
    9,004
    
    
    
    29,688Research and development
    
    
    8,033
    
    
    
    7,719
    
    
    
    7,005
    
    
    
    7,757
    
    
    
    10,359Sales and marketing
    
    
    6,107
    
    
    
    6,929
    
    
    
    5,991
    
    
    
    6,812
    
    
    
    10,731General and administrative
    
    
    3,675
    
    
    
    3,547
    
    
    
    3,285
    
    
    
    3,759
    
    
    
    4,824Restructuring costs and other special charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,091
    
    
    
    Goodwill impairment charge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,350
    
    
    
    Income (loss) from operations
    
    
    1,356
    
    
    
    (1,286
    )
    
    
    (6,489
    )
    
    
    (13,765
    )
    
    
    3,774Other, net
    
    
    240
    
    
    
    305
    
    
    
    611
    
    
    
    (20
    )
    
    
    333Income (loss) from continuing operations before income taxes
    
    
    1,596
    
    
    
    (981
    )
    
    
    (5,878
    )
    
    
    (13,785
    )
    
    
    4,107Income tax (benefit) provision
    
    
    (122
    )
    
    
    (212
    )
    
    
    2,523
    
    
    
    (4,213
    )
    
    
    1,707Income (loss) from continuing operations
    
    
    1,718
    
    
    
    (769
    )
    
    
    (8,401
    )
    
    
    (9,572
    )
    
    
    2,400Discontinued operations, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    571Net income (loss)
    
    $
    1,718
    
    
    $
    (769
    )
    
    $
    (8,401
    )
    
    $
    (9,572
    )
    
    $
    2,971Income (loss) from continuing operations per shareBasic EPS
    
    $
    0.30
    
    
    $
    (0.14
    )
    
    $
    (1.51
    )
    
    $
    (1.68
    )
    
    $
    0.41Diluted EPS
    
    $
    0.27
    
    
    $
    (0.14
    )
    
    $
    (1.51
    )
    
    $
    (1.68
    )
    
    $
    0.38Net income (loss) income per shareBasic EPS
    
    $
    0.30
    
    
    $
    (0.14
    )
    
    $
    (1.51
    )
    
    $
    (1.68
    )
    
    $
    0.51Diluted EPS
    
    $
    0.27
    
    
    $
    (0.14
    )
    
    $
    (1.51
    )
    
    $
    (1.68
    )
    
    $
    0.48Weighted average common shares
    
    
    5,719
    
    
    
    5,544
    
    
    
    5,551
    
    
    
    5,705
    
    
    
    5,805Weighted average common and dilutive shares
    
    
    6,312
    
    
    
    5,544
    
    
    
    5,551
    
    
    
    5,705
    
    
    
    6,237
 Balance Sheet Data:
(In thousands) December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Working capital
    
    $
    26,450
    
    
    $
    24,255
    
    
    $
    24,254
    
    
    $
    31,601
    
    
    $
    37,502Total assets
    
    
    32,098
    
    
    
    30,743
    
    
    
    30,749
    
    
    
    39,243
    
    
    
    54,473Total liabilities
    
    
    7,310
    
    
    
    7,930
    
    
    
    7,931
    
    
    
    7,323
    
    
    
    12,534Redeemable common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    762
    
    
    
    1,780Shareholders equity
    
    
    24,788
    
    
    
    22,813
    
    
    
    22,818
    
    
    
    31,158
    
    
    
    40,159
 22




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##### Table of Contents



ITEM 7.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report contains forward-looking statements about the business, financial condition and
prospects of the Company. These statements are made under the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. The actual results of the Company could differ
materially from those indicated by the forward-looking statements because of various risks and
uncertainties, including without limitation, our reliance on a limited number of customers, failure
to see spending improvements in the telecommunications and computer networking industries,
significant changes in product demand, the availability of products,
changes in competition,
various inventory risks due to changes in market conditions and other risks and uncertainties
indicated in the Companys filings and reports with the Securities and Exchange Commission. All
the foregoing risks and uncertainties are beyond the ability of the Company to control, and in many
cases, the Company cannot predict the risks and uncertainties that could cause its actual results
to differ materially from those indicated by the forward-looking statements. When used in this
report, the words believes, plans, expects, intends, and anticipates and similar
expressions as they relate to the Company or its management are intended to identify
forward-looking statements. APPLICATION OF CRITICAL ACCOUNTING POLICIES The Companys consolidated financial statements are based on the selection and application of
significant accounting policies, which require management to make significant estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates.
Management believes the following are some of the more critical judgment areas in the application
of the Companys accounting policies that affect the Companys financial condition and results of
operations. Management has discussed the application of these critical accounting policies with
the Board of Directors and Audit Committee. Revenue Recognition:Revenues consist of product and service revenues and are recognized in
accordance with SEC Staff Accounting Bulletin (SAB) 104, Revenue Recognition. Product revenues
are recognized upon shipment, provided fees are fixed and determinable, a customer purchase order
is obtained (when applicable), and collection is probable. Revenues from reseller agreements are
recognized when the product is sold through to the end customer unless an established return
history supports recognizing revenue upon shipment, less a provision for estimated sales returns.
Deferred revenue consists primarily of revenue from reseller arrangements, service revenue and
certain arrangements with extended payment terms. Revenue from extended payment terms is
recognized in the period the payment becomes due if all other revenue recognition criteria have
been met. Service revenue is recognized as the services are performed. Revenue derived from the development and installation of highly customized software packages under
a professional services contract is recognized on a percentage of completion basis measured by the
relationship of hours worked to total estimated contract hours and the costs incurred as of the
date of measurement. The Company follows this method since reasonably dependable estimates of the
revenue and contract hours applicable to various elements of a contract can be made. Since the
financial reporting of these contracts depends upon estimates, which are assessed continually
during the term of these contracts, recognized revenue and profit are subject to revisions as the
contract progresses to completion. 23




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##### Table of Contents



Revisions in profit estimates are reflected in the period in which the facts that give rise to the
revisions become known. Accordingly, favorable changes in estimates result in additional revenue
recognition and net income, and unfavorable changes in estimates result in a reduction of
recognized revenue and net income. If estimates were to indicate that a loss would be incurred on
a contract upon completion, a provision for the expected loss would be recorded in the period in
which the loss became evident. Warranty Reserve:The Company offers to its customers a limited warranty that its products will be
free from defect in the materials and workmanship for a specified period. The Company has
established a warranty reserve, as a component of accrued liabilities, for any potential claims.
The Company estimates its warranty reserve based upon an analysis of all identified or expected
claims and an estimate of the cost to resolve those claims. Changes in claim rates and differences
between actual and expected warranty costs could impact the warranty reserve estimates. Allowance for Doubtful Accounts:Management is required to estimate the collectibility of the
Companys trade receivables. A considerable amount of judgment is required in assessing the
realization of these receivables, including the current creditworthiness of each customer and
related aging of the past due balances. Management evaluates all accounts periodically and a
reserve is established based on the best facts available to management and reevaluated and adjusted
as additional information is received. The reserves also are determined by using percentages
applied to certain aged receivable categories based on historical results. Allowance for Returns:The Company estimates its allowance for returns based upon expected return
rates. The estimates of expected return rates are generally a factor of historical returns.
Changes in return rates could impact allowance for return estimates. Inventories:Inventories are valued at the lower of cost or market and include material, labor and
manufacturing overhead. Cost is determined on a first-in, first-out basis. Valuing inventories at
the lower of cost or market involves an inherent level of risk and uncertainty due to technology
trends in the industry and customer demand for our products. In assessing the ultimate realization
of inventories, management is required to make judgments as to future demand requirements and
compare that with the current or committed inventory levels. Reserve requirements generally
increase as projected demand requirements decrease due to market conditions, technological and
product life cycle changes as well as longer than previously expected usage periods. The Company
has experienced significant changes in required reserves in the past due to changes in strategic
direction, such as discontinuances of product lines as well as declining market conditions. It is
possible that significant changes in this estimate may continue to occur in the future as market
conditions change. Long-Lived Assets:Property and Equipment and other long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount may not be
recoverable. Such determination is made in accordance with the applicable Generally Accepted
Accounting Principles (GAAP) requirements associated with the long-lived asset, and is based
upon, among other things, estimates of the amount of future net cash flows to be generated by the
long-lived asset and estimates of the current fair value of the asset. Adverse changes in such
estimates could result in an inability to recover the carrying value of the long-lived asset,
thereby possibly requiring an impairment charge to be recognized in the future. All impairments
are recognized in operating results when a permanent reduction in value occurs. 24




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Tax Assessments:The Company is periodically engaged in various tax audits by federal and state
governmental authorities incidental to its business activities. The Company records reserves for
its estimated probable losses of these proceedings, if applicable. Deferred Taxes:The Company records a valuation allowance to reduce its deferred income tax assets
to the amount that is believed to be realizable under the guidance of Statement of Financial
Accounting Standards No. 109 Accounting for Income Taxes. The Company considers recent
historical losses, future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for a valuation allowance. Management is required to make a continuous
assessment as to the realizability of the deferred tax assets. CONSOLIDATED STATEMENT OF OPERATIONS AS A PERCENTAGE OF REVENUE Year ended December 31,2004
    
    
    2003
    
    
    2002Revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    45.2
    %
    
    
    48.0
    %
    
    
    61.0
    %Gross margin
    
    
    54.8
    %
    
    
    52.0
    %
    
    
    39.0
    %Research and development
    
    
    22.9
    %
    
    
    23.8
    %
    
    
    27.9
    %Sales and marketing
    
    
    17.5
    %
    
    
    21.3
    %
    
    
    23.8
    %General and administrative
    
    
    10.5
    %
    
    
    10.9
    %
    
    
    13.1
    %Income (loss) from operations
    
    
    3.9
    %
    
    
    (4.0
    )%
    
    
    (25.8
    )%Interest income, net
    
    
    0.7
    %
    
    
    0.7
    %
    
    
    2.0
    %Other income, net
    
    
    0.0
    %
    
    
    0.3
    %
    
    
    0.4
    %Income (loss) before income taxes
    
    
    4.6
    %
    
    
    (3.0
    )%
    
    
    (23.4
    )%Income tax (benefit) provision
    
    
    (0.3
    )%
    
    
    (0.6
    )%
    
    
    10.0
    %Net income (loss)
    
    
    4.9
    %
    
    
    (2.4
    )%
    
    
    (33.4
    )%
 25




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##### Table of Contents



OVERVIEW During 2004, we recorded our second consecutive year of revenue growth and our first full year of
profitable operations since 2000. As we continue to add value to our product offerings, through
innovative new technologies, we have been able to improve our gross margin three consecutive years
due to lower excess and obsolete inventory charges, improved product mix, improved manufacturing
efficiencies and achieved reductions in material costs of certain product lines due to increased
production volumes. Total operating expenses decreased slightly in 2004 compared to 2003 as we
continued to manage resources very judiciously throughout the year. The Company continues to enjoy a strong and extremely liquid balance sheet. Cash and securities
increased to their highest year-end level in the Companys history. Total liabilities decreased to
their lowest levels since 1995 and working capital reached its highest level since 2001. RESULTS OF OPERATIONS Revenue:Total revenue for the years ended December 31, 2004, 2003 and 2002 were $35 million,
$32.5 million and $25.1 million, respectively. Revenue increased 8% in 2004 compared to 2003. This increase was primarily attributable to
broadband telecom product revenue. Broadband telecom revenue increased approximately 13% to $20.2
million for the year ended December 31, 2004 compared to $17.8 million for the year ended December
31, 2003. This increase was partially offset by SlotOptimizer revenue which declined approximately
6% to $10.7 million for the year ended December 31, 2004 compared to $11.4 million for the year
ended December 31, 2003. The Company anticipates that SlotOptimizer revenue will continue to
decline as the product line ages. All other revenue, composed primarily of security, professional
services and legacy networking and storage product lines, increased approximately 26% for the year
ended December 31, 2004 to $4.1 million compared to $3.3 million for the year ended December 31,
2003. One of the Companys major challenges in 2005 will be to replace the revenue impacted by our
largest telecom customer migrating to a more cost effective Interphase controller board for their
application. This migration makes for a more competitive solution offering which our customer will
be selling in very price sensitive markets. Although we anticipate some volume growth due to this
migration, we do not anticipate that growth to be sufficient enough to replace the revenue impacted
by the transition. However, the company anticipates that revenue levels for 2005 will be
comparable or higher as certain design wins from prior periods move into production and that
customers will increase the part of product rollout. Revenue increased 29% in 2003 compared to 2002. The increase was primarily attributable to
broadband telecom and SlotOptimizer product revenue. Broadband telecom revenue increased
approximately 51% to $17.8 million for the year ended December 31, 2003 compared to $11.8 million
for the year ended December 31, 2002. In addition, SlotOptimizer revenue increased approximately
33% to $11.4 million for the year ended December 31, 2003 compared to $8.6 million for the year
ended December 31, 2002. The increase in revenue related to these product lines was partially
offset by the continued decrease in revenue related to legacy networking and storage product lines,
which decreased approximately 72% to $1.0 million for the year ended December 31, 2003, compared to
$3.7 million for the year ended December 31, 2002. 26




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##### Table of Contents



Gross Margin:Gross margin as a percentage of sales for the years ended December 31, 2004, 2003
and 2002 was 55%, 52% and 39%, respectively. The increase in the gross margin percentage in 2004
compared to 2003 is partially due to a continued shift toward more complex, and thus, higher margin
products. In addition, the Companys excess and obsolete inventory charges decreased to $300,000
for the year ended December 31, 2004, compared to $700,000 for the year ended December 31, 2003.
The Company also improved manufacturing efficiencies and achieved reductions in material costs for
certain product lines due to increased production volumes. The Company believes that pricing
pressures in the industry may dampen gross margins in future periods and it may become increasingly
challenging to offset these pressures with incremental supplier cost reductions and factory
productivity improvements. The increase in the gross margin percentage in 2003 compared to 2002 is partially due to a
continued shift in product mix toward more complex, and thus, higher margin products. In addition,
the Companys excess and obsolete inventory charges decreased to $700,000 for the year ended
December 31, 2003, compared to $1.8 million for the year ended December 31, 2002. Research and Development:The Companys investment in the development of new products through
research and development was $8.0 million, $7.7 million and $7.0 million in 2004, 2003 and 2002,
respectively. As a percentage of revenue, research and development expenses were 23%, 24% and 28%
for 2004, 2003 and 2002, respectively. The Company anticipates that spending on research and
development will remain steady in 2005, except for fluctuations in currency exchange rates because
much of the Companys development expenses are associated with is engineering lab in France (see
Item 7A  Foreign Currency Risk), as the Company continues to invest in development of our current
and future products, however, the Company will continue to monitor the level of its investments
concurrently with actual revenue results. Research and development expenses increased $314,000 in 2004 compared to 2003. The increase in
research and development expense primarily is due to foreign currency changes as the dollar dropped
significantly in value relative to the Euro (see Item 7A  Foreign Currency Risk) partially offset
by reduced general overhead spending as the Company continues to work toward keeping break even
levels as low as possible. The decrease in research and development costs as a percentage of total
revenue is due to revenue increasing at a higher rate than research and development costs for the
year. Research and development expenses increased $714,000 in 2003 compared to 2002. Approximately 78%
of the increase in research and development expenses year over year is due to foreign currency
changes as the dollar dropped significantly in value relative to the Euro (see Item 7A  Foreign
Currency Risk). The remaining portion of the increase is primarily due to an increase in the
development of new Broadband telecom products. The decrease in research and development costs as a
percentage of total revenue is due to revenue increasing at a higher rate than research and
development costs for the year. Sales and Marketing:Sales and marketing expenses were $6.1 million, $6.9 million and $6.0 million
in 2004, 2003 and 2002, respectively. As a percentage of revenue, sales and marketing expenses
were 18%, 21% and 24% for 2004, 2003 and 2002, respectively. Sales and marketing expense decreased $822,000 in 2004 compared to 2003. Approximately 82% of the
decrease in sales and marketing expenses for the twelve months ended December 31, 2004 compared to
the twelve months ended December 31, 2003 related to a reduction in sales and marketing headcount
related expenses, including contract labor and sales commissions. The remaining portion of the
decrease 27




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##### Table of Contents



primarily relates to reductions in advertising and promotional activities. The decrease in sales
and marketing expense as a percentage of total revenue is due to revenue increasing while sales and
marketing expenses decreased. Sales and marketing expense increased $938,000 in 2003 compared to 2002. Approximately 66% of the
increase in sales and marketing year over year is due to higher sales commissions and bonuses due
to higher revenue levels and other headcount related expenses in the sales organization.
Additionally, approximately 23% of the increase in sales and marketing expense relates to higher
marketing expenditures, including headcount. The remaining portion of the increase is due to
increased travel and related expenses. The decrease in sales and marketing expense as a percentage
of total revenue is due to revenue increasing at a higher rate than sales and marketing expense for
the year. General and Administrative:General and administrative expenses were $3.7 million, $3.5 million
and $3.3 million in 2004, 2003 and 2002, respectively. As a percentage of revenue, general and
administrative expenses were 11%, 11% and 13% for 2004, 2003 and 2002, respectively. General and administrative expenses increased $128,000 in 2004 compared to 2003. The increase in
general and administrative expenses primarily relates to increased employee compensation including
bonuses tied to increased revenues and profits. General and administrative expenses increased $262,000 in 2003 compared to 2002. Approximately 84%
of the increase in general and administrative expenses year over year is due to an increase in
insurance premiums and other legal and accounting related expenses. The remaining portion of the
increase is due to headcount related expenses partially offset by reductions in corporate spending
related to the change in facilities in November of 2002. The decrease as a percentage of total
revenue is due to revenue for the period increasing at a higher rate than general and
administrative expenses. Interest, Net:Interest income, net of interest expense, was $232,000, $226,000 and $517,000 in
2004, 2003 and 2002, respectively. The decrease in interest income, net of interest expense in 2003 compared to 2002 is primarily due
to lower cash levels during 2003 as well as lower investment rates of return. Other Income, Net:Other income, net, was $8,000, $79,000 and $94,000 in 2004, 2003 and 2002,
respectively. Income Taxes:The Companys effective income tax rates were (8%) in 2004, (22%) in 2003 and 43% in
2002. The effective tax rates for the periods presented differ from the U.S. statutory rate as the
Company continues to provide a full valuation allowance for its net deferred tax assets at December
31, 2004, 2003 and 2002. During the first quarter of 2004, after conducting a thorough review of the Companys Internal
revenue Service (IRS) transcripts, the Company discovered that the IRS had not paid allowable
interest on the refund from the IRS audit described below. As a result, the Company recognized a
tax benefit of approximately $100,000 in 2004. 28




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##### Table of Contents



During the third quarter 2003, the IRS concluded a federal income tax audit of the Company related
to the tax years 1996 through 2001. In addition, the French tax administration also concluded a
tax audit of the Companys French subsidiary covering the same periods resulting in a finding of no
tax due. Due to the finalization of both tax audits, the Company recognized a benefit of
approximately $245,000 during the year ended December 31, 2003. This benefit was partially offset
by taxes on foreign income. The effective tax provision rate for 2002 was significantly more than the U.S. statutory rate due
to a non-cash charge of approximately $4.9 million to provide a full valuation allowance for the
net deferred tax assets at December 31, 2002. The effective tax benefit rate excluding this charge
would have been (40%), which differed from the U.S. statutory rate primarily due to the benefit of
a foreign tax loss carry forward. The foreign tax loss carry forward expired at December 31, 2002. Net Income (Loss):The Company reported net income of $1.7 million for the twelve months ended
December 31, 2004. The Company reported a net loss of $769,000 in 2003 and $8.4 million in 2002. LIQUIDITY AND CAPITAL RESOURCES Consolidated Cash Flows During 2004 the Company purchased approximately $14.0 million in marketable securities, which
decreased cash and cash equivalents by $9.3 million for the year ended December 31, 2004. Cash and
cash equivalents increased $4.3 million for the year ended December 31, 2003 and decreased $558,000
for the year ended December 31, 2002. Cash flows are impacted by operating, investing and
financing activities. Operating Activities:Trends in cash flows from operating activities for 2004, 2003 and 2002, are
generally similar to the trends in the Companys earnings except for noncash realized holding
period loss on marketable securities, provision for uncollectible accounts and returns, provision
for excess and obsolete inventory, depreciation and amortization and deferred income taxes. Cash
provided by operating activities totaled $1.5 million, $385,000 and $1.9 million for the years
ended December 31, 2004, 2003 and 2002, respectively, compared to net income of $1.7 million, a net
loss of $769,000 and a net loss of $8.4 million in 2004, 2003 and 2002, respectively. The Company
incurred noncash realized holding period losses on marketable securities in 2002 related to the
other than temporary impairment of certain marketable securities received in the sale of the
Companys Voice Over Internet Protocol (VOIP) business. Provisions for uncollectible accounts
and returns decreased during all three years due to the reduction in accounts receivable, an
increased focus on credit evaluation and improved returns experience. Provision for excess and
obsolete inventories has decreased in 2004 and 2003. Depreciation and amortization decreased
slightly in 2004. Deferred income taxes decreased in 2002, due to the establishment of a full
valuation allowance for the Companys domestic deferred tax
assets (See Note 5 to the consolidated
financial statements). Changes in assets and liabilities result primarily from the timing of production, sales and
purchases. Such changes in assets and liabilities generally tend to even out over time and result
in trends in cash flows from operating activities generally reflecting earnings trends. Investing Activities:The Companys investing activities resulted in a net cash use of $11.3
million, $484,000 and $1.8 million in 2004, 2003 and 2002, respectively. Cash used in investing
activities in each 29




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##### Table of Contents



of the three years related principally to additions to property and equipment, capitalized software
and the Companys investments in marketable securities. Additions to property and equipment and
capitalized software in each of the three years focused on the manufacturing, sales and engineering
functions of the Company. The expenditures in 2004 were focused on software and equipment
purchases for the sales, engineering and information technology functions of the Company. The
expenditures in 2003 related primarily to manufacturing equipment and capitalized software used in
the engineering and sales functions. Expenditures in 2002 related primarily to leasehold
improvements made to the Companys new corporate offices and manufacturing facility and to the
purchase of new manufacturing equipment which utilizes new technologies and increases automation of
the manufacturing process to provide improved productivity and efficiency. Purchases of marketable
securities significantly increased to $14.0 million in 2004 compared to $1.7 million in 2003 as the
Company adjusted its investment strategy in 2004. Proceeds from the sale of marketable securities
increased slightly and was $3.3 million in 2004 compared to $2.1 million in 2003. Financing Activities:Net cash provided by financing activities totaled $422,000 for the year
ended December 31, 2004 and $4.4 million for the year ended December 31, 2003. Net cash used by
financing activities totaled $783,000 for the year ended December 31, 2002. Cash provided by
financing activities in 2004 is comprised of $422,000 in proceeds from the exercise of stock
options. Cash provided by financing activities in 2003 includes the removal of $3.5 million of
restrictions on cash in 2003 and $931,000 in proceeds from the exercise of stock options due to the
increase in stock option exercises as a result of the Companys increased stock price during the
second half of 2003. Cash used from financing activities in 2002 includes the purchase of
redeemable common stock of $762,000 and the purchase of common stock of $21,000. Commitments At December 31, 2004, the Company had no material commitments to purchase capital assets, however,
planned capital expenditures for 2005 are estimated at approximately $1.0 million, the majority of
which relate to the Companys engineering tools and general office equipment. The Companys
significant long-term obligations are its operating leases on its facilities and future debt
payments. The Company has not paid any dividends since its inception and does not anticipate
paying any dividends in 2005. 30




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##### Table of Contents



The following table summarizes the Companys future contractual obligations and payment commitments
as of December 31, 2004. Contractual Obligation
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    TotalOperating leases (1)
    
    $
    604
    
    
    $
    410
    
    
    $
    403
    
    
    $
    411
    
    
    $
    1,828Long-term debt (2,3)
    
    $
    123
    
    
    $
    123
    
    
    $
    3,571
    
    
    
    
    
    
    $
    3,817Total
    
    $
    727
    
    
    $
    533
    
    
    $
    3,974
    
    
    $
    411
    
    
    $
    5,645
   (1)
    
    The Company leases its facilities under non-cancelable operating leases with
the longest terms extending to December 2008.(2)
    
    At December 31, 2004, the Company had borrowings of $3.5 million under a $5
million revolving credit facility with a bank. The revolving credit facility matures
on July 31, 2007 and is secured throughout the term of the credit facility by
marketable securities.(3)
    
    The Company incurs interest expense on the borrowings from the revolving credit
facility at a rate of LIBOR + 1% (3.5% at December 31, 2004). The Company used the
3.5% rate to estimate interest expense for 2005 through July 2007. The interest
expense estimate is $123,000, $123,000 and $71,000 for years 2005, 2006 and 2007,
respectively. Contingencies The Company has agreed to perform a minor repair, at no cost to a customer, of approximately 1,800
units that were shipped between December 2003 and April 2004. The actual cost to repair the units
is insignificant. However, the Company has estimated that other costs including shipping related
charges and installation related charges could be more significant. The Company has estimated that
the range of the potential liability is between approximately $225,000 and $650,000 but cannot
determine an amount within that range which is more likely than another. Therefore, in accordance
with Financial Accounting Standards Board Interpretation No. 14 Reasonable Estimation of the
Amount of a Loss  an Interpretation of FASB Statement No. 5, the Company has recorded, in accrued
liabilities, the minimum liability amount of approximately $225,000 at December 31, 2004. Other Management believes that cash generated from operations and borrowing availability under the
revolving credit facility, together with cash on hand, will be sufficient to meet the Companys
liquidity needs for working capital, capital expenditures and debt services. To the extent that
the Companys actual operating results or other developments differ from the Companys
expectations, Interphases liquidity could be adversely affected. The Company periodically evaluates its liquidity requirements, alternative uses of capital, capital
needs and available resources in view of, among other things, its capital expenditure requirements,
and estimated future operating cash flows. As a result of this process, the Company has in the
past and may in the future seek to raise additional capital, refinance or restructure indebtedness,
issue additional securities, repurchase shares of its common stock or take a combination of such
steps to manage its liquidity and capital resources. In the normal course of business, the Company
may review opportunities for acquisitions, joint ventures or other business combinations in the
component products industry. In the event of any such transaction, the Company may consider using
available cash, issuing additional equity securities or increasing the indebtedness of the Company
or its subsidiaries. 31




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##### Table of Contents



Recently Issued Accounting Pronouncements In October 2004, the
American Jobs Creation Act of 2004 was enacted into law. The new law provides
for a special 85% deduction for certain dividends received in 2005 from controlled foreign
corporations. Because certain details in the new law lack clarification, and the impact of the
special dividend received deduction to the Company is dependent, in part, on the Companys 2005
foreign and domestic taxable income, the Company has not yet determined whether it will benefit
from the new law. In 2005, the Company plans to evaluate both clarifying guidance on the new law
from the Internal Revenue Service and its year-to-date taxable income activity to determine the
level of benefit, if any, the Company will derive from the special dividend received deduction. Beginning in 2005, the new law also provides for a special deduction from U.S. taxable income equal
to a stipulated percentage of a U.S. companys qualified income from domestic manufacturing
activities (as defined). Although the Company believes that the majority of its operations meet
the definition of qualified domestic manufacturing activities, the Company does not expect to
benefit from the special manufacturing deduction in 2005, primarily because the Company projects
its U.S. taxable income in 2005 will be fully offset by its existing U.S. NOL carryforwards. In December 2004, the
FASB issued SFAS No. 123(R), Share Based Payments, which replaces SFAS No.
123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees and amends SFAS No. 95,
Statement of Cash Flows. SFAS No. 123(R)
requires all share-based payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values. As such, pro forma disclosure in
lieu of expensing is no longer an alternative. The new standard is effective in the first interim
or annual reporting period beginning after June 15, 2005. The Company is currently assessing the
impact that the statement may have on its financial statements. In December 2004, the FASB issued SFAS No. 151 Inventory Costs, an Amendment of ARB No. 43,
Chapter 4. SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense,
freight, handling costs and wasted material and requires that these items be recognized as current
period charges. SFAS No. 151 applies only to inventory costs incurred during periods beginning
after the effective date and also requires that the allocation of fixed production overhead to
conversion costs be based on the normal capacity of the production facilities. SFAS No. 151 is
effective for the Companys fiscal year beginning January 1, 2006. The Company is currently
assessing the impact, if any, of the adoption of the provisions of SFAS No. 151. In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, which amends APB
Opinion No. 29. The guidance in APB No. 29, Accounting for Nonmonetary Transactions, is based on
the principle that exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged. The amendment made by SFAS No. 153 eliminates the exception for exchanges of
similar productive assets and replaces it with a broader exception for exchanges of nonmonetary
assets that do not have commercial substance. The provisions of the statement are effective for
exchanges taking place in fiscal periods beginning after June 15, 2005. The Company does not
believe the adoption of this statement will have a material impact on our financial statements. 32




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ITEM 7A.
    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Foreign Currency Risk The Company is exposed to adverse movements in foreign currency exchange rates because it conducts
business on a global basis and in some cases in foreign currencies. The Companys operations in
France are measured in the local currency and converted into U.S. Dollars based on published
exchange rates for the periods reported and are therefore subject to risk of exchange rate
fluctuations. The Euro to U.S. Dollar translation accounted for a charge of approximately $1.1
million and $595,000 for the years ended December 31, 2004 and 2003, respectively. The Euro to
U.S. Dollar translation accounted for a benefit of $255,000 for the year ended December 31, 2002. Market Price Risk In 2002 the Company maintained a minority equity investment in a publicly traded company and
recorded a net after tax loss on this investment of $20,000 thus eliminating the Companys
investment. The Company has no equity hedge contracts outstanding as of December 31, 2004 or
December 31, 2003. Interest Rate Risk The Companys investments are subject to interest rate risk. Interest rate risk is the risk that
the Companys financial condition and results of operations could be adversely affected due to
movements in interest rates. The Company invests its cash in a variety of interest-earning
financial instruments, including bank time deposits, money market funds, and variable rate and
fixed rate obligations of corporations and national governmental entities and agencies. Due to the
demand nature of the Companys money market funds and the short-term nature of the Companys time
deposits and debt securities portfolio, these assets are particularly sensitive to changes in
interest rates. The Company manages this risk through investments with shorter-term maturities and
varying maturity dates. A hypothetical 50 basis point increase in interest rates would result in an approximate decrease of
less than 1% in the fair value of our available-for-sale securities at December 31, 2004. This
potential change is based on sensitivity analyses performed on our marketable securities at
December 31, 2004. Actual results may differ materially. The same hypothetical 50 basis point
increase in interest rates would have resulted in an approximate decrease of less than 1%, in the
fair value of our available-for-sale securities at December 31, 2003. The Companys credit facility, bears interest at a variable rate tied to the London Interbank
Offered Rate (LIBOR). In an effort to mitigate interest rate fluxations the Company typically
locks in the rate under one year agreements. The current agreement which expires in October 2005
is at 3.5% (LIBOR + 1%). A hypothetical 100 basis point increase in LIBOR would increase annual
interest expense on this credit facility by approximately $32,000. 
  ITEM 8.
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Item 15 (a) below. 33




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##### Table of Contents



ITEM 9.
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 
 ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures The Companys management, under the supervision of our Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), performed an evaluation of the effectiveness of the design and operation
of the Companys disclosure controls and procedures as of the end of the period covered by this
annual report. Based on that evaluation, the CEO and CFO concluded that the Companys disclosure
controls and procedures are effective. Changes in Internal Controls The Company maintains a system of internal controls that are designed to provide reasonable
assurance that its books and records accurately reflect, in all material respects, the transactions
of the Company and that its established policies and procedures are adhered to. There were no
changes to the Companys internal controls or in other factors that could significantly affect the
Companys internal controls subsequent to the date of the evaluation by the Companys CEO and CFO,
including any corrective actions with regard to significant deficiencies and material weaknesses. 
  ITEM 9B.
    OTHER INFORMATION None. 
 PART III 
 ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors See information regarding the directors and nominees for director under the heading Election of
Directors of the Proxy Statement for the Annual Meeting of Shareholders to be held May 4, 2005,
which is incorporated herein by reference. Executive Officers See information regarding the executive officers under the heading Executive Officers of the
Proxy Statement for the Annual Meeting of Shareholders to be held May 4, 2005, which is
incorporated herein by reference. 34




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##### Table of Contents



Code of Ethics The Company has adopted a Code of Business Conduct, which applies to all of its employees,
including its Chairman and Chief Executive Officer, its Chief Financial Officer and its Controller.
The Code of Ethics is available on the Companys website at www.interphase.com. The Company
intends to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment
to, or waiver from, a provision of this Code of Ethics by posting such information on its website,
at the address specified above, and to the extent required by the listing standards of the Nasdaq
Stock Market, by filing a Current Report on Form 8-K with the Securities and Exchange Commission
disclosing such information. 
 ITEM 11. EXECUTIVE COMPENSATION See information regarding executive compensation under the heading Executive Compensation of the
Proxy Statement for the Annual Meeting of Shareholders to be held May 4, 2005, which is
incorporated herein by reference. 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT See information regarding security ownership of certain beneficial owners and management under the
headings Principal Shareholders and Executive Compensation of the Proxy Statement for the
Annual Meeting of Shareholders to be held May 4, 2005, which is incorporated herein by reference. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See information regarding certain relationships and related transactions under the headings
Principal Shareholders and Certain Related Transactions of the Proxy Statement for the Annual
Meeting of Shareholders to be held May 4, 2005, which is incorporated herein by reference. 
 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES See information regarding principal accountant fees and services under the heading Relationship
with Independent Public Accountants of the Proxy Statement for the Annual Meeting of Shareholders
to be held May 4, 2005, which is incorporated herein by reference. 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES  (a)
    (1) and (2) Financial Statements and Schedules. Reference is made to the listing on page F-1 of all financial statements and schedules filed as a
part of this report. (3) Exhibits. Reference is made to the Index to Exhibits on page E-1 for a list of all exhibits filed during the
period covered by this report. 35




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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized. INTERPHASE CORPORATIONDate:     March 18, 2005
    By:
    /s/ Gregory B. KalushGregory B. KalushChairman of the Board,
Chief Executive Officer and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities indicated on March
18, 2005. Name
    

Title/s/ Gregory B. Kalush

Gregory B. Kalush
    
    Chairman of the Board,
Chief Executive Officer and President
(Principal executive officer)/s/ Steven P. Kovac

Steven P. Kovac
    
    Chief Financial Officer, Treasurer and
Vice President of Finance
(Principal financial officer)/s/ Paul N. Hug

Paul N. Hug
    
    Director/s/ Randall D. Ledford

Randall D. Ledford
    
    Director/s/ Michael J. Myers

Michael J. Myers
    
    Director/s/ Kenneth V. Spenser

Kenneth V. Spenser
    
    Director/s/ S. Thomas Thawley

S. Thomas Thawley
    
    Vice Chairman, Director
and Secretary
 36




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##### Table of Contents



INDEX TO FINANCIAL STATEMENTS Report of Grant Thornton LLP
    
    F-2Report of PricewaterhouseCoopers LLP
    
    F-3Consolidated Balance Sheets  As of December 31, 2004 and 2003
    
    F-4Consolidated Statements of Operations  Years Ended December 31, 2004, 2003 and 2002
    
    F-5Consolidated Statements of Shareholders Equity  Years Ended December 31, 2004, 2003 and 2002
    
    F-6Consolidated Statements of Cash Flows  Years Ended December 31, 2004, 2003 and 2002
    
    F-7Notes to Consolidated Financial Statements
    
    F-8 to F-23
   *
    
    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




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Report of Independent Registered Public Accounting Firm The Board of Directors
Interphase Corporation We have audited the accompanying consolidated balance sheet of Interphase Corporation and
subsidiaries (the Company) as of December 31, 2004 and the related consolidated statement of
operations, shareholders equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Interphase Corporation and subsidiaries as of December
31, 2004, and the results of their operations and cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States of America. /s/ Grant Thornton LLP Dallas, Texas
March 7, 2005 F-2




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Interphase Corporation: In our opinion, the accompanying consolidated balance sheets as of December 31, 2003 and 2002 and
the related consolidated statements of operations, of shareholders equity, and of cash flows
present fairly, in all material respects, the financial position of Interphase Corporation and its
subsidiaries (the Company) at December 31, 2003 and 2002, and the results of their operations and
their cash flows for the years then ended in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the responsibility of the
Companys management; our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these statements in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion. /s/ PricewaterhouseCoopers LLP Dallas, Texas
March 5, 2004 F-3




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##### Table of Contents



INTERPHASE CORPORATION
CONSOLIDATED BALANCE SHEETS  December 31,2004
    
    
    2003ASSETSCash and cash equivalents
    
    $
    4,928
    
    
    $
    14,204Marketable securities
    
    
    15,585
    
    
    
    5,047Trade accounts receivable, less allowances
of $141 and $194, respectively
    
    
    4,976
    
    
    
    5,634Inventories
    
    
    3,509
    
    
    
    2,961Prepaid expenses and other current assets
    
    
    956
    
    
    
    751Income taxes receivable
    
    
    246
    
    
    
    Total current assets
    
    
    30,200
    
    
    
    28,597Machinery and equipment
    
    
    6,170
    
    
    
    5,626Leasehold improvements
    
    
    377
    
    
    
    392Furniture and fixtures
    
    
    572
    
    
    
    5607,119
    
    
    
    6,578Less-accumulated depreciation and amortization
    
    
    (5,729
    )
    
    
    (5,018
    )Total property and equipment, net
    
    
    1,390
    
    
    
    1,560Capitalized software, net
    
    
    310
    
    
    
    355Other assets
    
    
    198
    
    
    
    231Total assets
    
    $
    32,098
    
    
    $
    30,743LIABILITIES AND SHAREHOLDERS EQUITYLiabilitiesAccounts payable
    
    $
    529
    
    
    $
    1,106Deferred revenue
    
    
    244
    
    
    
    373Accrued liabilities
    
    
    1,423
    
    
    
    1,684Accrued compensation
    
    
    1,554
    
    
    
    1,179Total current liabilities
    
    
    3,750
    
    
    
    4,342Deferred lease obligations
    
    
    60
    
    
    
    88Long term debt
    
    
    3,500
    
    
    
    3,500Total liabilities
    
    
    7,310
    
    
    
    7,930Commitments and contingenciesShareholders EquityCommon stock, $.10 par value; 100,000,000
shares authorized; 5,750,824 and 5,680,179
shares issued and outstanding, respectively
    
    
    575
    
    
    
    568Additional paid in capital
    
    
    38,633
    
    
    
    38,218Retained deficit
    
    
    (13,846
    )
    
    
    (15,564
    )Cumulative other comprehensive loss
    
    
    (574
    )
    
    
    (409
    )Total shareholders equity
    
    
    24,788
    
    
    
    22,813Total liabilities and shareholders equity
    
    $
    32,098
    
    
    $
    30,743
 The accompanying notes are an integral part of these consolidated financial statements. F-4




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##### Table of Contents



INTERPHASE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS  Years ended December 31,2004
    
    
    2003
    
    
    2002Revenues
    
    $
    35,015
    
    
    $
    32,490
    
    
    $
    25,123Cost of sales
    
    
    15,844
    
    
    
    15,581
    
    
    
    15,331Gross margin
    
    
    19,171
    
    
    
    16,909
    
    
    
    9,792Research and development
    
    
    8,033
    
    
    
    7,719
    
    
    
    7,005Sales and marketing
    
    
    6,107
    
    
    
    6,929
    
    
    
    5,991General and administrative
    
    
    3,675
    
    
    
    3,547
    
    
    
    3,285Total operating expenses
    
    
    17,815
    
    
    
    18,195
    
    
    
    16,281Income (loss) from operations
    
    
    1,356
    
    
    
    (1,286
    )
    
    
    (6,489
    )Interest income, net
    
    
    232
    
    
    
    226
    
    
    
    517Other income, net
    
    
    8
    
    
    
    79
    
    
    
    94Income (loss) before income tax
    
    
    1,596
    
    
    
    (981
    )
    
    
    (5,878
    )Income tax (benefit) provision
    
    
    (122
    )
    
    
    (212
    )
    
    
    2,523Net income (loss)
    
    $
    1,718
    
    
    $
    (769
    )
    
    $
    (8,401
    )Net income (loss) per share:Basic EPS
    
    $
    0.30
    
    
    $
    (0.14
    )
    
    $
    (1.51
    )Diluted EPS
    
    $
    0.27
    
    
    $
    (0.14
    )
    
    $
    (1.51
    )Weighted average common shares
    
    
    5,719
    
    
    
    5,544
    
    
    
    5,551Weighted average common and dilutive
shares
    
    
    6,312
    
    
    
    5,544
    
    
    
    5,551
 The accompanying notes are an integral part of these consolidated financial statements. F-5




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##### Table of Contents



INTERPHASE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY  CumulativeAdditional
    
    
    Retained
    
    
    OtherCommon Stock
    
    
    Paid in
    
    
    Earnings
    
    
    Comprehensive
    
    
    
    
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Capital
    
    
    (Deficit)
    
    
    Income (Loss)
    
    
    Total
    
    
    Income (Loss)Balance at December 31, 2001
    
    
    5,518
    
    
    $
    552
    
    
    $
    37,324
    
    
    $
    (6,394
    )
    
    $
    (324
    )
    
    $
    31,158Stock repurchase
    
    
    (4
    )
    

    
    (1
    )
    
    
    (20
    )
    
    
    
    
    
    
    
    
    
    
    (21
    )Comprehensive income:Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32
    
    
    
    32
    
    
    
    32Unrealized holding period gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50
    
    
    
    50
    
    
    
    50Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,401
    )
    
    
    
    
    
    
    (8,401
    )
    
    
    (8,401
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (8,319
    )Balance at December 31, 2002
    
    
    5,514
    
    
    $
    551
    
    
    $
    37,304
    
    
    $
    (14,795
    )
    
    $
    (242
    )
    
    $
    22,818Option exercises
    
    
    166
    
    
    
    17
    
    
    
    914
    
    
    
    
    
    
    
    
    
    
    
    931Comprehensive loss:Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (46
    )
    
    
    (46
    )
    
    
    (46
    )Unrealized holding period loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (121
    )
    
    
    (121
    )
    
    
    (121
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (769
    )
    
    
    
    
    
    
    (769
    )
    
    
    (769
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (936
    )Balance at December 31, 2003
    
    
    5,680
    
    
    $
    568
    
    
    $
    38,218
    
    
    $
    (15,564
    )
    
    $
    (409
    )
    
    $
    22,813Option exercises
    
    
    71
    
    
    
    7
    
    
    
    415
    
    
    
    
    
    
    
    
    
    
    
    422Comprehensive income (loss):Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21
    
    
    
    21
    
    
    
    21Unrealized holding period loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (186
    )
    
    
    (186
    )
    
    
    (186
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,718
    
    
    
    
    
    
    
    1,718
    
    
    
    1,718Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,553Balance at December 31, 2004
    
    
    5,751
    
    
    $
    575
    
    
    $
    38,633
    
    
    $
    (13,846
    )
    
    $
    (574
    )
    
    $
    24,788
 The accompanying notes are an integral part of these consolidated financial statements. F-6




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INTERPHASE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS  Years ended December 31,2004
    
    
    2003
    
    
    2002Cash flows from operating activities:Net income (loss)
    
    $
    1,718
    
    
    $
    (769
    )
    
    $
    (8,401
    )Adjustments to reconcile net income (loss) to net cash provided by operating activities:Non-cash realized holding period loss on marketable securities
    
    
    
    
    
    
    
    
    
    
    20Provision for uncollectible accounts and returns
    
    
    (3
    )
    
    
    (42
    )
    
    
    (77
    )Provision for excess and obsolete inventories
    
    
    300
    
    
    
    700
    
    
    
    1,849Depreciation and amortization
    
    
    788
    
    
    
    902
    
    
    
    845Deferred income taxes
    
    
    
    
    
    
    
    
    
    
    4,009Change in assets and liabilities:Trade accounts receivable
    
    
    661
    
    
    
    91
    
    
    
    (558
    )Inventories
    
    
    (848
    )
    
    
    (540
    )
    
    
    1,685Prepaid expenses and other current assets
    
    
    (187
    )
    
    
    (62
    )
    
    
    (185
    )Income taxes receivable
    
    
    (246
    )
    
    
    247
    
    
    
    2,229Other assets
    
    
    44
    
    
    
    1
    
    
    
    (25
    )Accounts payable, deferred revenue and accrued liabilities
    
    
    (976
    )
    
    
    (183
    )
    
    
    638Accrued compensation
    
    
    309
    
    
    
    37
    
    
    
    (252
    )Deferred lease obligations
    
    
    (28
    )
    
    
    3
    
    
    
    85Net adjustments
    
    
    (186
    )
    
    
    1,154
    
    
    
    10,263Net cash provided by operating activities
    
    
    1,532
    
    
    
    385
    
    
    
    1,862Cash flows from investing activities:Purchase of property and equipment
    
    
    (454
    )
    
    
    (504
    )
    
    
    (1,448
    )Purchase of capitalized software
    
    
    (86
    )
    
    
    (329
    )
    
    
    (34
    )Proceeds from the sale of marketable securities
    
    
    3,322
    
    
    
    2,068
    
    
    
    2,219Purchases of marketable securities, net of unrealized holding period gain or loss
    
    
    (14,047
    )
    
    
    (1,719
    )
    
    
    (2,491
    )Net cash used in investing activities
    
    
    (11,265
    )
    
    
    (484
    )
    
    
    (1,754
    )Cash flows from financing activities:Decrease in restricted cash
    
    
    
    
    
    
    3,500
    
    
    
    Purchase of redeemable common stock
    
    
    
    
    
    
    
    
    
    
    (762
    )Purchase of common stock
    
    
    
    
    
    
    
    
    
    
    (21
    )Proceeds from the excerise of stock options
    
    
    422
    
    
    
    931
    
    
    
    Repayment of long-term debt
    
    
    
    
    
    
    (3,500
    )
    
    
    Borrowings under new revolving credit facility
    
    
    
    
    
    
    3,500
    
    
    
    Net cash provided by (used in) financing activities
    
    
    422
    
    
    
    4,431
    
    
    
    (783
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    35
    
    
    
    15
    
    
    
    117Net (decrease) increase in cash and cash equivalents
    
    
    (9,276
    )
    
    
    4,347
    
    
    
    (558
    )Cash and cash equivalents at beginning of year
    
    
    14,204
    
    
    
    9,857
    
    
    
    10,415Cash and cash equivalents at end of year
    
    $
    4,928
    
    
    $
    14,204
    
    
    $
    9,857Supplemental Disclosure of Cash Flow Information:Income taxes paid
    
    $
    
    
    
    $
    
    
    
    $
    22Interest paid
    
    $
    111
    
    
    $
    72
    
    
    $
    88
 The accompanying notes are an integral part of these consolidated financial statements. F-7




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INTERPHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of the Business:Interphase Corporation and subsidiaries (Interphase or the
Company) enables rapid platform design and integration for the global voice, video, and data
communications markets through custom and off-the-shelf communications equipment, embedded software
development suites, and systems integration and consulting services for carrier and private
networks. The Companys products provide communications computing and connectivity of
telecommunications and computer systems to Wide Area Networks (WANs), Local Area Networks (LANS),
and Storage Area Networks (SANs) using Asynchronous Transfer Mode (ATM), Ethernet, Signaling System
7 (SS7), IP, Fibre Channel, HDLC, Frame Relay and multi-protocol interworking technologies. See
Note 13 for information regarding the Companys revenues related to North America and foreign
countries. Principles of Consolidation and Basis of Presentation:The accompanying consolidated financial
statements include the accounts of Interphase Corporation and its wholly owned subsidiaries.
Significant intercompany accounts and transactions have been eliminated. The Company has no
involvement with any variable interest entity covered by the scope of FASB Interpretation (FIN)
No. 46R, Consolidation of Variable Interest Entities. Cash and Cash Equivalents:The Company considers cash and temporary investments with original
maturities of less than three months, as well as interest bearing money market accounts, to be cash
equivalents. Marketable Securities:Investments in debt and equity securities are classified as available for
sale with unrealized holding gains and losses reported in other comprehensive income. Gains and
losses from securities are calculated using the specific identification method. Management
determines the appropriate classification of securities at the time of purchase. Earnings from
debt securities are calculated on a yield to maturity basis and recorded in the results of
operation. Allowance for Doubtful Accounts:Management is required to estimate the collectibility of the
Companys trade receivables. A considerable amount of judgment is required in assessing the
realization of these receivables, including the current creditworthiness of each customer and
related aging of the past due balances. Management evaluates all accounts periodically and a
reserve is established based on the best facts available to management and reevaluated and adjusted
as additional information is received. The reserves also are determined by using percentages
applied to certain aged receivable categories based on historical results. The activity in this
account was as follows (in thousands): Balance at
    
    
    
    
    
    
    Write-offs,
    
    
    BalanceBeginning
    
    
    Charged to
    
    
    Net of
    
    
    at EndYear Ended:
    
    of Period
    
    
    (Income) Expense
    
    
    Recoveries
    
    
    of PeriodDecember 31, 2004
    
    $
    89
    
    
    $
    9
    
    
    $
    (62
    )
    
    $
    36December 31, 2003
    
    
    30
    
    
    
    53
    
    
    
    6
    
    
    
    89December 31, 2002
    
    
    170
    
    
    
    (77
    )
    
    
    (63
    )
    
    
    30
 F-8




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Allowance for Returns:The Company maintains an allowance for returns based upon expected
return rates. The estimates of expected return rates are generally a factor of historical returns
experience. Changes in return rates could impact allowance for return estimates. As of December
31, 2004, 2003 and 2002, the allowance for returns was $105,000, $105,000, and $200,000
respectively maintained as a reduction to accounts receivable. Inventories:Inventories are valued at the lower of cost or market and include material, labor and
manufacturing overhead. Cost is determined on a first-in, first-out basis (in thousands): Years ended December 31,2004
    
    
    2003Raw Materials
    
    $
    1,818
    
    
    $
    1,907Work-in-Process
    
    
    747
    
    
    
    745Finished Goods
    
    
    944
    
    
    
    309Total
    
    $
    3,509
    
    
    $
    2,961
 Valuing inventory at the lower of cost or market involves an inherent level of risk and uncertainty
due to technology trends in the industry and customer demand for the Companys products. Future
events may cause significant fluctuations in the Companys operating results. Property and Equipment:Property and equipment are recorded at cost. Depreciation is provided
over the estimated useful lives of depreciable assets using the straight-line method. When
property and equipment are sold or otherwise retired, the cost and accumulated depreciation
applicable to such assets are eliminated from the accounts, and any resulting gain or loss is
reflected in current operations. Related depreciation expense was as follows (in thousands): Year ended December 31:
    
    Depreciation Expense2004
    
    $
    6562003
    
    $
    7212002
    
    $
    671
 The depreciable lives of property and equipment are as follows: Machinery and equipment
    
    3-5yearsLeasehold improvements
    
    Term of the respective
leases (up to 3 years)Furniture and fixtures
    
    3-10years
 F-9




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Capitalized Software:Capitalized software represents various software licenses purchased by the
Company and utilized in connection with the Companys network and mass storage products as well as
the general operations of the Company. Capitalized software is amortized over three to five years
utilizing the straight-line method. Related amortization expense and accumulated amortization were
as follows (in thousands): Year ended December 31:
    
    Amortization expense
    
    
    Accumulated Amortization2004
    
    $
    132
    
    
    $
    2,4292003
    
    $
    181
    
    
    $
    2,2682002
    
    $
    174
    
    
    $
    2,190
 Long-Lived Assets:Property and equipment and other long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount may not be
recoverable. All impairments are recognized in operating results when a permanent reduction in
value occurs. Revenue Recognition:Revenues consist of product and service revenues and are recognized in
accordance with SEC Staff Accounting Bulletin (SAB) 104, Revenue Recognition. Product
revenues are recognized upon shipment, provided fees are fixed and determinable, a customer
purchase order is obtained (when applicable), and collection is probable. Revenues from reseller
agreements are recognized when the product is sold through to the end customer unless an
established return history supports recognizing revenue upon shipment, less a provision for
estimated sales returns. Deferred revenue consists primarily of revenue from reseller
arrangements, service revenue and certain arrangements with extended payment terms. Revenue from
extended payment terms is recognized in the period the payment becomes due if all other revenue
recognition criteria have been met. Service revenue is recognized as the services are performed. Revenue derived from the development and installation of highly customized software packages under
a professional services contract is recognized on a percentage of completion basis measured by the
relationship of hours worked to total estimated contract hours and the costs incurred as of the
date of measurement. The Company follows this method since reasonably dependable estimates of the
revenue and contract hours applicable to various elements of a contract can be made. Since the
financial reporting of these contracts depends upon estimates, which are assessed continually
during the term of these contacts, recognized revenue and profit are subject to revisions as the
contract progresses to completion. Revisions in profit estimates are reflected in the period in
which the facts that give rise to the revisions become known. Accordingly, favorable changes in
estimates result in additional revenue recognition and net income, and unfavorable changes in
estimates result in a reduction of recognized revenue and net income. If estimates were to
indicate that a loss would be incurred on a contract upon completion, a provision for the expected
loss would be recorded in the period in which the loss became evident. At December 31, 2004, the Company had recognized revenue of approximately $549,000 and had deferred
revenue of $51,000 related to a fixed price contract to provide services at a price of
approximately $800,000. Warranty Reserve:The Company offers to its customers a limited warranty that its products will be
free from defect in the materials and workmanship for a specified period. The F-10




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Company has established a warranty reserve, as a component of accrued liabilities, for any potential claims.
The Company estimates its warranty reserve based upon an analysis of all identified or expected
claims and an estimate of the cost to resolve those claims. Concentration of Credit Risks:Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of trade accounts receivable. The majority of the
Companys sales have been to original equipment manufacturers of computer systems or
telecommunication networks. The Company conducts credit evaluations of its customers financial
condition and limits the amount of trade credit extended when necessary. Research and Development:Research and development costs are charged to expense as incurred. Advertising Expense:Advertising costs are charged to expense as incurred. Advertising expense
was approximately $14,000, $156,000 and $102,000 during the years ended December 31, 2004, 2003 and
2002, respectively. Foreign Currency Translation:Assets and liabilities of the Companys French subsidiary, whose
functional currency is other than the U.S. Dollar, are translated at year-end rates of exchange,
and revenues and expenses are translated at average exchange rates prevailing during the year.
Foreign currency transaction gains and losses are recognized in income as incurred. The Company accounts for unrealized gains or losses on its foreign currency translation adjustments
in accordance with Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income, which requires the adjustments be accumulated in shareholders equity as part of other
comprehensive income. Income Taxes:The Company determines its deferred taxes using the liability method. Deferred tax
assets and liabilities are based on the estimated future tax effects of differences between the
financial statement and tax basis of assets and liabilities given the provisions of enacted tax
law. The Companys consolidated financial statements include deferred income taxes arising from
the recognition of revenues and expenses in different periods for income tax and financial
reporting purposes. The Company records a valuation allowance to reduce its deferred income tax assets to the amount
that is believed to be realizable under the guidance of Statement of Financial Accounting Standards
No. 109 Accounting for Income Taxes. The Company considers recent historical losses, future
taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a
valuation allowance. Management is required to make a continuous assessment as to the
realizability of the deferred tax assets. Other Comprehensive Income (Loss):Other comprehensive income (loss) is recorded directly to a
separate section of shareholders equity in cumulative other comprehensive loss and includes
unrealized gains and losses excluded from the consolidated Statements of Operations. These
unrealized gains and losses consist of holding period gains and losses related to marketable
securities, net of income taxes, and foreign currency translation, which are not adjusted for
income taxes since they relate to indefinite investments in a non-U.S. subsidiary. F-11




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Stock-Based Compensation:The Company has elected to follow Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, (APB 25) and related interpretations in
accounting for its employee stock options. Under APB 25, compensation expense is recorded when the
exercise price of employee stock options is less than the fair value of the underlying stock on the
date of grant. The Company has implemented the disclosure-only provisions of Statement of
Financial Accounting Standards Board No. (SFAS) 123, Accounting for Stock-Based Compensation,
and SFAS 148, Accounting for Stock-Based Compensation Transition and Disclosure. Had the Company
elected to adopt the expense recognition provisions of SFAS 123, the pro forma impact on net income
and earnings per share would have been as follows (in thousands, except per share data): Years ended December 31,2004
    
    
    2003
    
    
    2002Net income (loss) as reported
    
    
    1,718
    
    
    
    (769
    )
    
    
    (8,401
    )Add: APB 25 expense
    
    
    
    
    
    
    
    
    
    
    Less: Total stock based employee compensation expense
determined under fair value methods for all awards
    
    
    (1,863
    )
    
    
    (2,084
    )
    
    
    (4,192
    )Pro forma net (loss)
    
    
    (145
    )
    
    
    (2,853
    )
    
    
    (12,593
    )Income (loss) per common share:As reported  basic
    
    $
    0.30
    
    
    $
    (0.14
    )
    
    $
    (1.51
    )Pro forma  basic
    
    $
    (0.03
    )
    
    $
    (0.53
    )
    
    $
    (2.88
    )As reported  diluted
    
    $
    0.27
    
    
    $
    (0.14
    )
    
    $
    (1.51
    )Pro forma  diluted
    
    $
    (0.03
    )
    
    $
    (0.53
    )
    
    $
    (2.88
    )
 Certain Reclassifications:Certain reclassifications have been made for consistent presentation
among periods presented. Use of Estimates:The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States of America, requires Company management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from
those estimates. Areas involving estimates are the allowance for doubtful accounts and returns,
warranty and inventory reserves and income tax accounts. 2. MARKETABLE SECURITIES Marketable securities primarily consist of investments in debt securities. As of December 31, 2004
the fair market value of marketable securities was $15.6 million, of which $9.3 million matures in
one year or less, $6.3 million matures in one to five years. As of December 31, 2003 the fair
market value of marketable securities was $5.0 million, of which $1.2 million matures in one year
or less, $3.8 million matures in one to five years. The Company recorded charges due to the other
than temporary impairment of certain marketable securities received in the sale of the Companys
VOIP business of $20,000 in 2002. Gains and losses on marketable securities sold are recognized on
a specific identification basis. The Company recorded an unrealized loss with respect to certain
available-for- F-12




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##### Table of Contents



sale securities of $186,000 and $121,000 in 2004 and 2003 respectively and an unrealized gain of
$50,000 in 2002. 3. ACCRUED LIABILITIES Accrued liabilities consisted of the following (in thousands): 2004
    
    
    2003Accrued audit fees
    
    $
    170
    
    
    $
    125Loss contingency
    
    
    225
    
    
    
    Accrued outside commissions
    
    
    15
    
    
    
    191Accrued property tax
    
    
    56
    
    
    
    185Accrued other
    
    
    957
    
    
    
    1,183$
    1,423
    
    
    $
    1,684
 4. CREDIT FACILITY The Company maintains a $5.0 million revolving bank credit facility with a maturity date of July
31, 2007 and interest rate of LIBOR plus 1.0% (3.5% at December 31, 2004). All borrowings under
this facility are secured by marketable securities. The borrowings of $3.5 million are classified
as long-term debt on the accompanying balance sheet. 5. INCOME TAXES The provision for income taxes applicable to continuing operations for each period presented was as
follows (in thousands): Year ended December 31,2004
    
    
    2003
    
    
    2002Current benefit
    
    $
    (122
    )
    
    $
    (212
    )
    
    $
    (1,486
    )Deferred provision
    
    
    
    
    
    
    
    
    
    
    4,009Income tax (benefit) expense
    
    $
    (122
    )
    
    $
    (212
    )
    
    $
    2,523
 F-13




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Tax effect of temporary differences that give rise to significant components of the deferred
tax assets as of December 31, 2004 and 2003, are presented as follows (in thousands): Year ended December 31,2004
    
    
    2003Current deferred tax assets:Inventory
    
    $
    1,249
    
    
    $
    1,278Accounts receivable
    
    
    14
    
    
    
    34Deferred revenue
    
    
    34
    
    
    
    46Other accruals
    
    
    610
    
    
    
    510Total current deferred tax assets
    
    $
    1,907
    
    
    $
    1,868Noncurrent deferred tax assets, net:Assets:Depreciation
    
    $
    4
    
    
    $
    191Amortization
    
    
    433
    
    
    
    496Net operating loss
    
    
    4,169
    
    
    
    3,844Total noncurrent deferred tax assets, net
    
    $
    4,606
    
    
    $
    4,531Valuation allowance for deferred tax assets
    
    
    (6,513
    )
    
    
    (6,399
    )Deferred tax
assets, net of valuation allowance
    
    $
    -
    
    
    $
    
 SFAS 109, Accounting for Income Taxes, requires that a valuation allowance be established
when it is more likely than not that all or a portion of a deferred tax asset will not be
realized. A review of all available positive and negative evidence needs to be considered,
including a companys current and past performance, the market environment in which the company
operates, the utilization of past tax credits, length of carry back and carry forward periods,
existing contracts or sales backlog that will result in future profits, as well as other factors. Forming a conclusion that a valuation allowance is not needed is difficult when there is negative
evidence such as cumulative losses in recent years. Cumulative losses weigh heavily in the overall
assessment. As a result of a review undertaken at December 31, 2002, the Company concluded that it
was appropriate to establish a full valuation allowance for its net deferred tax assets. The
Company continues to maintain a valuation allowance on all of the net deferred tax assets. Until
an appropriate level of profitability is sustained, the Company expects to continue to maintain a
valuation allowance on substantially all of the future tax benefits and does not expect to
recognize any significant tax benefits in future results of operations. At December 31, 2004, the
amount of valuation allowance is approximately $6.5 million. Approximately $500,000 of this total,
if reversed, would be allocated directly to additional paid-in capital as it relates to
non-qualified stock option deductions. During the first quarter of 2004, after conducting a thorough review of the Companys IRS
transcripts, the Company discovered that the IRS had not paid allowable interest on the refund from
the IRS audit described below. As a result, the Company recognized a tax benefit of approximately
$100,000 in 2004. During the third quarter of 2003, the Internal Revenue Service concluded a federal income tax audit
of the Company related to the tax years 1996 through 2001. In addition, the French tax
administration also concluded a tax audit of the Companys French subsidiary covering the same
periods resulting in a finding of no tax due. Due to the finalization of both tax audits, the
Company recognized a tax benefit of approximately $245,000. This benefit was partially offset by
taxes on foreign income. F-14




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##### Table of Contents



The differences between the provision for income taxes computed on income before income taxes at
the U.S. federal statutory income tax rate (34%) and the amount shown in the Consolidated
Statements of Operations are presented below (in thousands): Year ended December 31,2004
    
    
    2003
    
    
    2002Income taxes at statutory rate
    
    $
    543
    
    
    $
    (334
    )
    
    $
    (1,999
    )Benefit of foreign tax loss carry-forward
    
    
    
    
    
    
    
    
    
    
    (383
    )Benefit for French research and development tax credit
    
    
    (144
    )
    
    
    
    
    
    
    Benefit recorded for favorable outcome of tax audits
    
    
    (102
    )
    
    
    (245
    )
    
    
    French permanent items
    
    
    (133
    )
    
    
    (292
    )
    
    
    Extraterritorial income exclusion benefit
    
    
    (389
    )
    
    
    (386
    )Other
    
    
    (11
    )
    
    
    
    
    
    
    39Change in valuation allowance
    
    
    114
    
    
    
    1,045
    
    
    
    4,866(Benefit) provision for income taxes
    
    $
    (122
    )
    
    $
    (212
    )
    
    $
    2,523
 At December 31, 2004, the Company had net operating loss carryforwards for federal income tax
purposes of approximately $11.7 million, $1.6 million of which are related to non-qualified stock
option deductions. These net operating loss carryforwards will begin to expire in 2022. A
valuation allowance against the entire net operating loss carryforward has been established as the
realizability of this asset is uncertain. The earnings of the Companys foreign subsidiary are considered to be indefinitely reinvested and,
accordingly, no provision for U.S. federal and state income taxes have been provided thereon. Upon
distribution of those earnings in the form of dividends or otherwise, the Company would be subject
to both U.S. income taxes (subject to foreign tax credits) and withholding taxes payable to foreign
countries. F-15




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6. EXIT ACTIVITIES During the second quarter of 2003, the Company committed to an exit plan regarding one of its
leased facilities, the lease was scheduled to expire during the first quarter of 2005. The Company
had previously held this facility open for storage, overflow use, and anticipated growth. However,
it was determined that the facility would not be needed for such uses and the Company began
pursuing subleasing opportunities. As a result of this exit plan, the Company recorded a charge of
approximately $109,000 during the second quarter of 2003, classified as operating expenses, related
to net termination costs associated with the lease of the facility. In May 2004, the Company
entered into a sublease termination agreement with the landlord of the leased facility resulting in
an additional charge of approximately $42,000. A reconciliation showing the changes to the
liability account during 2004 is as follows (in thousands): Liability at December 31, 2002
    
    $
    Exit plan net termination costs
    
    
    109Rent payments
    
    
    (78
    )Cost of not subleasing
    
    
    45Liability at December 31, 2003
    
    $
    76Exit plan net termination costs
    
    
    (178
    )Rent payments
    
    
    60Cost of not subleasing
    
    
    42Liability at December 31, 2004
    
    $
    Total costs to date
    
    $
    256
 7. EARNINGS PER SHARE Basic earnings per share are computed by dividing reported earnings available to common
shareholders by weighted average common shares outstanding. Diluted earnings per share give effect
to dilutive potential common shares. Earnings per share are calculated as follows (in thousands,
except per share data): Years ended December 31,2004
    
    
    2003
    
    
    2002Basic income (loss) per share:Net income (loss)
    
    $
    1,718
    
    
    $
    (769
    )
    
    $
    (8,401
    )Weighted average common shares outstanding
    
    
    5,719
    
    
    
    5,544
    
    
    
    5,551Basic income (loss) per share
    
    $
    0.30
    
    
    $
    (0.14
    )
    
    $
    (1.51
    )Diluted income (loss) per share:Net income (loss)
    
    $
    1,718
    
    
    $
    (769
    )
    
    $
    (8,401
    )Weighted average common shares outstanding
    
    
    5,719
    
    
    
    5,544
    
    
    
    5,551Dilutive stock options
    
    
    593
    
    
    
    
    
    
    
    Weighted average common shares outstanding  assuming dilution
    
    
    6,312
    
    
    
    5,544
    
    
    
    5,551Diluted income (loss) per share
    
    $
    0.27
    
    
    $
    (0.14
    )
    
    $
    (1.51
    )Outstanding
stock options that were not included in the diluted calculation because their effect would be anti-dilutive
    
    
    808
    
    
    
    1,199
    
    
    
    2,091
 F-16




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##### Table of Contents



8. COMMON STOCK 2004 Long-Term Stock Incentive Plan:The Interphase Corporation Amended and Restated Stock Option
Plan and the Interphase Corporation Directors Stock Option Plan have been collectively amended and
restated as the Interphase Corporation 2004 Long-Term Stock Incentive Plan, effective May 5,
2004. Options granted under the separate plans prior to the effective date shall be subject to the
terms and conditions of the separate plans in effect with respect to such options prior to the
effective date and awards granted after the effective date shall be subject to the terms and
conditions of the 2004 Long-Term Stock Incentive Plan. Awards granted under this plan may be (a)
incentive stock options, (b) non-qualified stock options, (c) bonus stock awards, (d) stock
appreciation rights, (e) performance share awards and performance unit awards, (f) phantom stock
awards, and (g) any other type of award established by the committee which is consistent with the
Plans purposes, as designated at the time of grant. The total amount of Common Stock with respect
to which awards may be granted under the Plan is 5,250,000 shares. Amended and Restated Stock Option Plan:The exercise price of the incentive stock options must be
at least equal to the fair market value of the Companys common stock on the date of the grant,
while the exercise price of nonqualified stock options may be less than fair market value on the
date of
grant, as determined by the Board of Directors. The Board of Directors may provide for the
exercise of options in installments and upon such terms, conditions and restrictions as it may
determine. Options granted prior to January 1, 1999 generally vest ratably over a five-year period
from the date of grant. Options granted since January 1, 1999 generally vest ratably over a
three-year period from the date of grant. The term of option grants may be up to ten years.
Options are canceled upon the lapse of three months following termination of employment except in
the event of death or disability, as defined. France Stock Option Sub-Plan:This plan was adopted in 2000 for the benefit of the Companys
employees located in France. This plan authorizes the issuance of options to purchase common stock
of the Company at prices at least equal to the fair market value of the common stock on the date of
the grant. Unless otherwise decided at the sole discretion of the Board, the options vest (i) 75%
after the expiration of a two-year period from the date of grant and (ii) 25% after the expiration
of a three-year period from the date of grant. Except for the events provided under the French tax
code, the shares cannot be sold or otherwise disposed of for a period of four years from the date
of grant. The term of option grants may be up to ten years. Options are canceled upon the lapse of
three months following termination of employment except in the event of death or disability, as
defined. Amended and Restated Director Stock Option Plan:Stock option grants pursuant to the directors
plan will vest in one year and have a term of ten years. The exercise prices related to these
options are equal to the market value of the Companys stock on the date of grant. F-17




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##### Table of Contents



The following table summarizes the combined transactions under the all of the plans (in thousands,

except option prices): Number of
    
    
    Weighted AverageOptions
    
    
    Option PriceBalance, December 31, 2001
    
    
    2,095
    
    
    $
    10.38Granted
    
    
    402
    
    
    
    4.71Exercised
    
    
    
    
    
    
    Canceled
    
    
    (82
    )
    
    
    8.78Balance, December 31, 2002
    
    
    2,415
    
    
    
    9.49Granted
    
    
    413
    
    
    
    6.25Exercised
    
    
    (166
    )
    
    
    5.61Canceled
    
    
    (84
    )
    
    
    10.66Balance, December 31, 2003
    
    
    2,578
    
    
    
    9.18Granted
    
    
    226
    
    
    
    10.84Exercised
    
    
    (71
    )
    
    
    5.97Canceled
    
    
    (79
    )
    
    
    10.92Balance, December 31, 2004
    
    
    2,654
    
    
    
    9.35Exercisable at December 31, 2004
    
    
    2,095
    
    
    $
    9.75
 The following table summarizes information about options granted under the plans that were
outstanding at December 31, 2004 (in thousands, except option prices): Options Outstanding
    
    
    Options ExercisableWeighted-AverageNumber
    
    
    Remaining
    
    
    Weighted
    
    
    Number
    
    
    WeightedRange of
    
    Outstanding at
    
    
    Contractual Life
    
    
    Average Exercise
    
    
    Exercisable at
    
    
    Average ExerciseExercise Prices
    
    12/31/04
    
    
    (years)
    
    
    Price
    
    
    12/31/04
    
    
    Price$3.09-$4.60
    
    
    323
    
    
    
    6.94
    
    
    $
    4.21
    
    
    
    304
    
    
    $
    4.24$4.65-$6.50
    
    
    718
    
    
    
    7.17
    
    
    
    5.59
    
    
    
    421
    
    
    
    5.57$7.20-$10.63
    
    
    786
    
    
    
    5.42
    
    
    
    8.19
    
    
    
    739
    
    
    
    8.18$11.25-$16.44
    
    
    498
    
    
    
    6.97
    
    
    
    12.86
    
    
    
    303
    
    
    
    13.69$17.25-$24.06
    
    
    318
    
    
    
    4.96
    
    
    
    19.75
    
    
    
    317
    
    
    
    19.76$25.88-$31.00
    
    
    11
    
    
    
    4.93
    
    
    
    30.53
    
    
    
    11
    
    
    
    30.53Total
    
    
    2,654
    
    
    
    6.31
    
    
    $
    9.35
    
    

    
    2,095
    
    
    $
    9.75
 Rights Agreement:The Board of Directors has adopted a Shareholder Rights Plan whereby each
holder of record as of December 29, 2000 received a right to purchase from the Company one share of
common stock of the Company at a price of $93 per share for each share held. These rights can only
be exercised after certain events occur, such as if a person or entity acquires, or makes a tender
or exchange offer to acquire, 15% or more of the Companys common stock and the rights expire ten
years from the record date. Upon acquisition of 15% or more of the Companys common stock, each F-18




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right not owned by the acquiring person or group will be adjusted to allow the purchase for $93 of
a number of shares having a then market value of $186. These rights are intended to provide the
Company certain antitakeover protections. The Board of Directors may terminate the Rights Plan, or
redeem the rights for $0.01 per right, at any time until the tenth business day following a public
announcement of a 15% or more stock acquisition. The Company had reserved 7,000,000 shares of
common stock for this plan. The rights were distributed to shareholders as of the record date as a nontaxable dividend. The
rights are attached to and trade with Interphase common stock until the occurrence of one of the
triggering events, at which time the rights would become detached from the Companys common stock. Pro Forma Net Income (Loss):The Black-Scholes model was not developed for use in valuing employee
stock options, but was developed for use in estimating the fair value of traded options that have
no vesting restrictions and are fully transferable. In addition, it requires the use of subjective
assumptions including expectations of future dividends and stock price volatility. Such
assumptions are only used for making the required fair value estimate and should not be considered
as indicators of future dividend policy or stock price appreciation. Because changes in the
subjective assumptions can materially affect the fair value estimate, and because employee stock
options have characteristics
significantly different from those of traded options, the use of the Black-Scholes option-pricing
model may not provide a reliable estimate of the fair value of employee stock options. The fair value of each option grant is estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted-average assumptions used for options granted in
2004, 2003 and 2002: 2004
    
    
    2003
    
    
    2002Weighted average risk free interest rates
    
    
    2.39
    %
    
    
    2.36
    %
    
    
    3.51
    %Weighted average life (in years)
    
    
    4.10
    
    
    
    3.87
    
    
    
    6.81Volatility
    
    
    88
    %
    
    
    130
    %
    
    
    160
    %Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    Weighted
average grant-date fair value per share of options granted
    
    $
    6.99
    
    
    $
    5.02
    
    
    $
    4.54
 9. RELATED PARTY TRANSACTIONS The Company paid approximately $104,000, $68,000 and $146,000 for the years ended December 31,
2004, 2003 and 2002, respectively to certain outside directors of the Company or their firms for
professional services. The Company believes the terms were equivalent to those of unrelated
parties. 10. EMPLOYEE BENEFIT PLAN The Company maintains a defined contribution plan for those employees who meet the plans length of
service requirements. Under the defined contribution plan, employees may make voluntary
contributions to the plan, subject to certain limitations, and the Company matches 50% of the first
6% of the employees contributions up to a maximum of $6,150 per employee for the year ended
December 31, 2004. The total expense under this plan was $295,000, $270,000 and $261,000 for the
years ended December 31, 2004, 2003 and 2002, respectively. The Company offers no post-retirement
or post-employment benefits. F-19




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##### Table of Contents



11. OTHER FINANCIAL INFORMATION Major Customers: During 2004, sales to Lucent Technologies and Hewlett Packard accounted for $12.6
million or 36% and $9.6 million or 27% of the Companys consolidated revenues, respectively.
During 2003, sales to Lucent Technologies and Hewlett Packard accounted for $13.5 million or 42%
and $9.7 million or 30% of the Companys consolidated revenues, respectively. During 2002, sales
to Hewlett Packard and Lucent Technologies accounted for $8.7 million or 35% and $7.2 million or
29% of the Companys consolidated revenues, respectively. No other customers accounted for more
than 10% of the Companys consolidated revenues in the periods presented. Included in accounts receivable at December 31, 2004, was approximately $1.4 million due from
Hewlett Packard, approximately $710,000 due from Lucent Technologies and approximately $660,000 due
from Macnica Networks Corporation. Included in accounts receivable at December 31, 2003, was
approximately $2.5 million due from Lucent Technologies and approximately $1.2 million due from
Hewlett Packard. No other customers accounted for more than 10% of the Companys accounts
receivable at the balance sheet dates presented. Commitments:The Company leases its facilities under noncancelable operating leases with the
longest terms extending to December of 2008. Rent expense related to these leases is recorded on a
straight-line basis. As of December 31, 2004, operating lease commitments having noncancelable
terms of more than one year are as follows (in thousands): Commitments Year ending December 31:2005
    
    $
    6042006
    
    $
    4102007
    
    $
    4032008
    
    $
    411
 Total rent expense for operating leases was as follows (in thousands): Year ending December 31:2004
    
    $
    7912003
    
    $
    9322002
    
    $
    1,336
 Contingencies:The Company has agreed to perform a minor repair, at no cost to a customer, of
approximately 1,800 units that were shipped between December 2003 and April 2004. The actual cost
to repair the units is insignificant. However, the Company has estimated that other costs
including shipping related charges and installation related charges could be more significant. The
Company has estimated that the range of the potential liability is between approximately $225,000
and $650,000 but cannot determine an amount within that range which is more likely than another.
Therefore, in accordance with Financial Accounting Standards Board Interpretation No. 14
Reasonable Estimation of the Amount of a Loss  an Interpretation of FASB Statement No. 5, the
Company has recorded, in accrued liabilities, the minimum liability amount of approximately
$225,000 at December 31, 2004. F-20




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##### Table of Contents



The Company is involved in various legal actions and claims arising in the ordinary course of
business. Management believes that such litigation and claims will be resolved without material
effect on the Companys financial position or results of operations. 12. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In October 2004, the
American Jobs Creation Act of 2004 was enacted into law. The new law provides
for a special 85% deduction for certain dividends received in 2005 from controlled foreign
corporations. Because certain details in the new law lack clarification, and the impact of the
special dividend received deduction to the Company is dependent, in part, on the Companys 2005
foreign and domestic taxable income, the Company has not yet determined whether it will benefit
from the new law. In 2005, the Company plans to evaluate both clarifying guidance on the new law
from the Internal Revenue Service and its year-to-date taxable income activity to determine the
level of benefit, if any, the Company will derive from the special dividend received deduction. Beginning in 2005, the new law also provides for a special deduction from U.S. taxable income equal
to a stipulated percentage of a U.S. companys qualified income from domestic manufacturing
activities (as defined). Although the Company believes that the majority of its operations meet
the definition of qualified domestic manufacturing activities, the Company does not expect to
benefit from the special manufacturing deduction in 2005, primarily because the Company projects
its U.S. taxable income in 2005 will be fully offset by its existing U.S. NOL carryforwards. In December 2004, the
FASB issued SFAS No. 123(R), Share Based Payments, which replaces SFAS No.
123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees and amends SFAS No. 95, Statement of Cash Flows. SFAS No. 123(R)
requires all share-based payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values. As such, pro forma disclosure in
lieu of expensing is no longer an alternative. The new standard is effective in the first interim
or annual reporting period beginning after June 15, 2005. The Company is currently assessing the
impact that the statement may have on its financial statements. In December 2004, the FASB issued SFAS No. 151 Inventory Costs, an Amendment of ARB No. 43,
Chapter 4. SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense,
freight, handling costs and wasted material and requires that these items be recognized as current
period charges. SFAS No. 151 applies only to inventory costs incurred during periods beginning
after the effective date and also requires that the allocation of fixed production overhead to
conversion costs be based on the normal capacity of the production facilities. SFAS No. 151 is
effective for the Companys fiscal year beginning January 1, 2006. The Company is currently
assessing the impact, if any, of the adoption of the provisions of SFAS No. 151. In December 2004, the FASB issued SFAS 153, Exchanges of Nonmonetary Assets, which amends APB
Opinion No. 29. The guidance in APB 29, Accounting for Nonmonetary Transactions, is based on the
principle that exchanges of nonmonetary assets should be measured based on the fair value of the
assets exchanged. The amendment made by SFAS 153 eliminates the exception for exchanges of similar
productive assets and replaces it with a broader exception for exchanges of nonmonetary assets that
do not have commercial substance. The provisions of the statement are effective for exchanges
taking place in fiscal periods beginning after June 15, 2005. The Company does not believe the
adoption of this statement will have a material impact on our financial statements. F-21




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##### Table of Contents



13. SEGMENT DATA The Company is principally engaged in the design, development, and manufacturing of
high-performance connectivity products utilizing advanced technologies being used in next
generation telecommunication networks and enterprise data/storage networks. Except for revenue
performance, which is monitored by product line, the chief operating decision-makers review
financial information presented on a consolidated basis for purposes of making operating decisions
and assessing financial performance. Accordingly, the Company considers itself to be in a single
industry segment. Geographic long lived assets and revenue related to North America and foreign countries as of
December 31, 2004 and 2003 and for the years ended December 31, 2004, 2003 and 2002 is as follows
(in thousands): Long Lived Assets
    
    2004
    
    
    2003North America
    
    $
    1,321
    
    
    $
    1,639Europe
    
    
    379
    
    
    
    276Total
    
    $
    1,700
    
    
    $
    1,915
 Revenues
    
    2004
    
    
    2003
    
    
    2002North America
    
    $
    21,049
    
    
    $
    23,037
    
    
    $
    18,525Europe
    
    
    8,528
    
    
    
    4,312
    
    
    
    4,011Pacific Rim
    
    
    5,438
    
    
    
    5,141
    
    
    
    2,587Total
    
    $
    35,015
    
    
    $
    32,490
    
    
    $
    25,123
 Additional information regarding revenue by product-line is as follows (in thousands): Product Revenue
    
    2004
    
    
    2003
    
    
    2002Broadband telecom
    
    $
    20,151
    
    
    $
    17,773
    
    
    $
    11,767SlotOptimizer
    
    
    10,713
    
    
    
    11,422
    
    
    
    8,589LAN
    
    
    1,088
    
    
    
    1,368
    
    
    
    2,027Storage
    
    
    814
    
    
    
    522
    
    
    
    1,505WAN
    
    
    188
    
    
    
    152
    
    
    
    167Other
    
    
    2,061
    
    
    
    1,253
    
    
    
    1,068Total
    
    $
    35,015
    
    
    $
    32,490
    
    
    $
    25,123
 F-22




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14. QUARTERLY FINANCIAL DATA (Unaudited) Quarterly results of operations for 2004 (unaudited)
(In thousands, except per share amounts) Quarter EndedMarch 31
    
    
    June 30
    
    
    September 30
    
    
    December 31Revenues
    
    $
    9,198
    
    
    $
    10,129
    
    
    $
    8,294
    
    
    $
    7,394Gross margin
    
    
    4,903
    
    
    
    5,613
    
    
    
    4,666
    
    
    
    3,989Income (loss) before
income taxes
    
    
    218
    
    
    
    1,134
    
    
    
    525
    
    
    
    (281
    )Net income (loss)
    
    
    275
    
    
    
    1,095
    
    
    
    500
    
    
    
    (152
    )Earnings per
share: (loss)Basic EPS
    
    $
    0.05
    
    
    $
    0.19
    
    
    $
    0.09
    
    
    $
    (0.03
    )Diluted EPS
    
    $
    0.04
    
    
    $
    0.18
    
    
    $
    0.08
    
    
    $
    (0.03
    )
 Quarterly results of operations for 2003 (unaudited)
(In thousands, except per share amounts) Quarter EndedMarch 31
    
    
    June 30
    
    
    September 30
    
    
    December 31Revenues
    
    $
    7,513
    
    
    $
    7,357
    
    
    $
    8,571
    
    
    $
    9,049Gross margin
    
    
    3,791
    
    
    
    3,696
    
    
    
    4,479
    
    
    
    4,943(Loss) income before
income taxes
    
    
    (769
    )
    
    
    (578
    )
    
    
    146
    
    
    
    220Net (loss) income
    
    
    (826
    )
    
    
    (521
    )
    
    
    366
    
    
    
    212Earnings per share: (loss)Basic EPS
    
    $
    (0.15
    )
    
    $
    (0.09
    )
    
    $
    0.07
    
    
    $
    0.04Diluted EPS
    
    $
    (0.15
    )
    
    $
    (0.09
    )
    
    $
    0.06
    
    
    $
    0.03
 Due to changes in the weighted average common shares outstanding per quarter, the sum of basic and
diluted earnings per common share per quarter may not equal the basic and diluted earnings (loss)
per common share for the applicable year. F-23




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##### Table of Contents



INDEX TO EXHIBITS Exhibits 2 (a)
    
    Stock Purchase Agreement, dated as of June 29, 1996, among Interphase Corporation,
Synaptel and Philippe Oros, Xavier Sutter, Francois Lecerf, Schroder Ventures French
Enterprise Fund LPI (USA), Schroder ventures French Enterprise Fund UKLP (UK) and Schroder
Ventures Holding Limited (UK). (7)3 (a)
    
    Certificate of Incorporation of the registrant. (1)3 (b)
    
    Amendment to Articles of Incorporation of the registrant. (10)3 (c)
    
    Amended and Restated Bylaws of the registrant adopted on December 5, 1995 and
amended on January 19, 1999. (12)4 (a)
    
    Rights Agreement dated as of December 7, 2000 by and between the Company and
Computershare Investor Services, LLC as Rights Agent. (11)10 (a)
    
    Registrants Amended and Restated Stock Option Plan and Amendment No. 1 and 2 thereto. (9)10 (b)
    
    Registrants Amended and Restated Stock Option Plan Amendment No. 4. (10)10 (c)
    
    Registrants United Kingdom Incentive Stock Option Sub-Plan. (3)10 (d)
    
    Stock Purchase Warrant issued to Motorola, Inc. (4)10 (e)
    
    Lease on Dallas facility. (5)10 (f)
    
    Directors Stock Option Plan and Amendment No. 1 thereto. (6)10 (g)
    
    Directors Stock Option Plan Amendment No. 2. (10)10 (h )
    
    Loan Agreement between Interphase Corporation and BankOne Texas, N.A. (8)10 (i)
    
    Purchase Agreement between Interphase Corporation and Cisco Systems Inc. (9)10 (j)
    
    Motorola Stock Repurchase Agreement. (2)10 (k)
    
    Registrants France Incentive Stock Option Sub-Plan. (12)10 (l)
    
    Sublease on Plano facility. (12)10 (m)
    
    Credit Agreement between Interphase Corporation and Bank One, NA. (12)10 (n)
    
    Lease on Facility at Parkway Center, Phase I, Plano, Texas. (13)10 (o)
    
    Lease on Facility at 2105 Luna Road, Carrolton, Texas. (13)10 (p)
    
    Note and Credit Agreement between
Interphase Corporation and Comerica Bank, including
Amendment dated November 5, 2004. (16)16 (a)
    
    Letter regarding change in certifying accountant. (15)21 (a)
    
    Subsidiaries of the Registrant. (14)23 (a)
    
    Consent of Independent Registered Public Accounting Firm. (16)23 (b)
    
    Consent of Independent Registered Public Accounting Firm. (16)31 (a)
    
    Rule 13a-14(a)/15d-14(a) Certification. (16)31 (b)
    
    Rule 13a-14(a)/15d-14(a) Certification. (16)32 (a)
    
    Section 1350 Certification. (16)32 (b)
    
    Section 1350 Certification. (16)
 E-1




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##### Table of Contents



(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 8-K on October 15, 1998, and incorporated
herein by reference.(3)
    
    Filed as an exhibit to Report on Form 10-K for the year ended October 31, 1988, and
incorporated herein by reference.(4)
    
    Filed as an exhibit to Report on Form 10-Q for the quarter ended April 30, 1989, and
incorporated herein by reference.(5)
    
    Filed as an exhibit to Report on Form 10-K for the year ended October 31, 1994, and
incorporated herein by reference.(6)
    
    Filed as an exhibit to Report on Form 10-K for the year ended October 31, 1995, and
incorporated herein by reference.(7)
    
    Filed as an exhibit to Report on Form 8-K on August 6, 1996, and incorporated herein by
reference.(8)
    
    Filed as an exhibit to Report on Form 8-K on October 4, 1996, and incorporated herein by
reference.(9)
    
    Filed as an exhibit to Report on Form 10-K for the year ended December 31, 1996, and
incorporated herein by reference.(10)
    
    Filed as an exhibit to Report on Form 10-K for the year ended December 31, 1999, and
incorporated herein by reference.(11)
    
    Filed as an exhibit to Form 8-K on January 9, 2001, and incorporated herein by reference.(12)
    
    Filed as an exhibit to Report on Form 10-K for the year ended December 31, 2001, and
incorporated herein by reference.(13)
    
    Filed as an exhibit to Report on Form 10-Q for the quarter ended September 30, 2002, and
incorporated herein by reference.(14)
    
    Filed as an exhibit to Report on Form 10-K for the year ended December 31, 2002, and
incorporated herein by reference.(15)
    
    Filed as an exhibit to Form 8-K on September 13, 2004, and incorporated herein by reference.(16)
    
    Filed herein. E-2