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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                      to
 Commission File Number 0-13071
 INTERPHASE CORPORATION
  Texas
    
    75-1549797(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 2901 North Dallas Parkway, Suite 200, Plano, Texas 75093
   Name of each exchangeTitle of each class
    
    on which registeredCommon Stock, $.10 par value
    
    NASDAQ Global Market
  o þ
 o þ
 þ o
 o
  o o þ
 o þ
  DOCUMENTS TO BE INCORPORATED BY REFERENCE




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TABLE OF CONTENTS  PART IItem 1. BusinessItem 1A.Risk FactorsItem 1B.Unresolved Staff CommentsItem 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, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership of Certain Beneficial Owners and Management and RelatedItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountanting Fees and ServicesPART IVItem 15. Exhibits and Financial Statement SchedulesSIGNATURESINDEX TO EXHIBITSConsent 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
 ®
 www.interphase.com www.sec.gov
 Key Terms and Definitions
  3G
 3GPP
 Adapter
 1




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




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Building Blocks
 Code Division Multiple Access (CDMA)
 Communications Controller
 CompactPCI ® (cPCI)
 CompactPCI Packet Switching Backplane (cPSB)
 DS3 
 DSL xDSL 
 Ethernet
 European
Telecommunications Standards Institute (ETSI)
 Gateway Appliances
 3




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Gigabits per second (Gbps)
 Global System for Mobile Communications (GSM)
 Input/output (I/O)
 International Mobile Telecommunications-2000 (IMT-2000)
 International Telecommunication Union (ITU
 Internet Engineering Task Force (IETF)
 Internet
Protocol (IP)
 Internet Protocol Television (IPTV )
 Inverse Multiplexing over ATM (IMA) 
 IP Multimedia Subsystem (IMS)
 IP-PBX
 4




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##### Table of Contents



IP Security (IPSec)
 I-TDM 
 Local Area Network (LAN
 Media Gateway
 Megabits per second (Mbps)
 MicroTCA
 Multilink PPP (MLPPP) 
 Network Elements
 OC-3/STM-1
 OC-12/STM-4
 Operating System ® ® 
 Original Equipment Manufacturer (OEM)
 5




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##### Table of Contents



Packet Processing
 PCI Industrial Computer Manufacturers Group (PICMG)
 PCI Mezzanine Card (PMC)
 Peripheral Components Interconnect (PCI)
 Peripheral Components InterconnectExpress (PCI-e)
 Peripheral Components InterconnectExtended (PCI-x
 Point-to-Point Protocol (PPP) 
 Public Switched Telephone Network (PSTN)
 Protocol
 Radio Network Controller (RNC
 Router
 6




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RTP 
 Session Initiation Protocol (SIP)
 Signaling Gateway
 Signaling System 7 (SS7
 Signaling Transport (SIGTRAN
 Softswitch (Software Switch)
 T1/E1
 T3/E3/J3
 Time-division multiplexing (TDM)
 Telecommunications Equipment Manufacturer (TEM)
 Triple Play
 User Plane
 7




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VersModule-Eurocard (VME)
 Voice over Internet Protocol (VoIP)
 Virtual Private Network (VPN)
 Wide Area Network (WAN)
 Worldwide Interoperability of Microwave Access (WiMAX)
 8




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Mission
    Building innovative and high quality building blocks and gateway appliances for the delivery of
high performance communications infrastructure products
      9




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Delivering advanced slot-optimization and security products for enterprise class applications
   10




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Delivering a comprehensive environment-friendly product portfolio
   Delivering superior customer service
  Establishing key strategic alliances and partnerships
     11




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Enhancing operational efficiencies
   Products
  Building Block Component Products
  Integrated Communications Controllers
  T1/E1/J1 ControllersThis flagship product line consists of multiple solutions designed to support prevalent
physical connections in the network. These products typically support the T1 North American
format, the E1 European format (adopted by many other countries worldwide, including Asia
and Australia) and the J1 (and derived formats) used in Japan. All of these products are
offered together with the field-proven Interphase iWare® Software Development
Suite. Key products include:
 12




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iSPAN 4538 a PMC with two T1/E1/J1 interfaces on the front faceplate and a 10/100
Ethernet portiSPAN 4539/4539F a PMC with four T1/E1/J1 interfaces via front or rear access, and
a 10/100 Ethernet interface on the frontiSPAN 5539F a PCI card with four T1/E1/J1 interfaces for use in server systemsiSPAN 1635 a cPSB card with eight T1/E1/J1 interfaces via front or rear accessiSPAN 3639 an AdvancedMC with 4 or 8 T1/E1/J1 interfaces via front and rear access
with support for both signaling and media terminationiSPAN 5639 a PCI-e 4 or 8 port T1/E1/J1 interface card for use in server systems
with PCI-e host connectivity
 Key network elements and applications enabled include:
 
    
    Radio Network Controller (RNC)
    
    Mobile Switching Center (MSC)
    
    Short Message Service Center (SMSC)
    
    Home Location Register/Home Subscriber Subsystem (HLR/HSS)
    
    Signaling Gateway
    
    Softswitch
    
    Media Gateway
    
    Service Control Point
    
    Media Servers
    
    IP-PBX
 High Density Interface ControllersThese products enable high bandwidth connections used in many different telecommunications
network applications. These products support the North American DS-3, OC-3 and OC-12
connection formats and STM-1 and STM-4 European connection formats, both of which are used
globally. Key products include:
 iSPAN 4531/4531P a PMC that provides reliable, high performance ATM communications
over DS3 connectionsiSPAN 4532 an intelligent, high-performance single-port OC-3/STM-1 ATM PMC with a
10/100 Ethernet interface. This product is offered with the field-proven Interphase
iWare® Software Development Suite.iSPAN 4532Q four-port OC-3/STM-1 passive PMCs with support for a variety of fiber
optic connection types
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iSPAN 4533P a single-port OC-12/STM-4 passive interface PCM with support for a
variety of fiber optic connection types
 Key network elements and applications enabled include:
 
    
    Radio Network Controller (RNC)
    
    Mobile Switching Center (MSC)
    
    DSL Access Multiplexers
    
    Cable Modem Termination System (CMTS)
 ATM Network Interface Cards
  iSPAN 4575/4576 a single or dual-port OC-3/STM-1 PMC for ATM processingiSPAN 5575/5576 PCI ATM Communications Interface Card a single or dual-port OC-3/STM-1 PCI
card for ATM processingiSPAN 3676 AdvancedMC ATM communications Interface Card  an OC-3/STM-1 single or dual-port
card for ATM processing
 Key network elements and applications enabled include:
 
    
    Serving GPRS Service Node (SGSN)
    
    Gateway GPRS Service Node (GGSN)
    
    Operations, Administration and Management devices used for back-end services in
the telecommunications infrastructure
 Security Acceleration Cards
  45NS a PMC designed to accelerate multiple security protocols, including IPSec, for use in
encryption and decryption of information5585 PCI card based on the HiFn 8155 security processor designed to accelerate multiple
security protocols, including IPSec, for use in encryption and decryption of information5556  low-end PCI cards based on the HiFn 7956 security co-processor designed to accelerate
multiple security protocols, including IPSec, for use in encryption and decryption of
information
 Key network elements and applications enabled include:
 
    
    Firewall and VPN solutions
    
    On Line Transaction Processing (OLTP)
    
    Network Management solutions
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Gigabit Ethernet Network Interface Cards
  454G SlotOptimizer  a quad-port PMC Ethernet card for high-density Ethernet connectivity364G SlotOptimizer  a quad-port AdvancedMC Ethernet card for high-density Ethernet
connectivity554GB SlotOptimizer a quad-port PCI Ethernet card with PCI-x for high-density Ethernet
connectivity564GB SlotOptimizer a quad-port PCI-e Ethernet card for high-density Ethernet connections
 Key network elements and applications enabled include:
 
    
    High performance computing servers for engineering applications
    
    Serving GPRS Service Node (SGSN)
    
    Softswitches
 Gateway Appliance Solutions
  iNAV®9200 Broadband Access Gateway an advanced, price/performance-maximized solution for
applications requiring the translation of IP to/from ATM and is in the process of being
enhanced to support TDM to RTP inter-workingiNAV 9400 Signaling Gateway provides seamless translation of SS7 to/from SIGTRAN for use
in the transition of PSTN to IP networks.
 New Product Development
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
    
    Ethernet-based IP networks offer an inexpensive, ubiquitous broadband packet-based
delivery approach for carriers. The simplicity of IP-based Ethernet networks are
expected to shorten the period of new service deployment and time to revenue.
    
    The second promise of this network architecture is greatly reduced cost of purchasing
(CAPEX), provisioning and maintaining their networks (OPEX).
    
    Another significant trend in the COTS market is the move to AdvancedTCA platforms.
Sponsored primarily by Intel, a number of AdvancedTCA suppliers have emerged to address
the ever-growing needs of TEMs. TEMs have been reducing their internal development
infrastructure over the past several years and are now more dependent on outsourced
solutions to meet their product development needs.
    
    The IP Multimedia Subsystem (IMS) standard architecture is enabled by a high bandwidth
IP/Ethernet backbone, and promises to offer multimedia service delivery to end user
devices (wireless or wireline).
    
    With the transition to the packet infrastructure modules that provide multi-gigabit
Ethernet and 10 gigabit Ethernet line rate switching, processing and classification of
packet data are becoming very important for a wide range of applications including secure
data transport, microbilling and high speed multi-media content delivery.
  Telecom Segment Initiatives
  AdvancedTCA and MicroTCA
   16




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
    
    iSPAN 3639 an AdvancedMC with 4 or 8 T1/E1/J1 interfaces via
front and rear access with support for both signaling and media
termination
    
    364G an AdvancedMC with 4 Gigabit Ethernet interfaces
    
    iSPAN 3632 an AdvancedMC with 4 OC-3/STM-1 channelized
interfaces via front and rear access for high density media
termination and conversion of media steams into I-TDM flows with
support for sub-rate media channel processing
    
    iSPAN 3650 an AdvancedMC with 4 OC-3/STM-1 unchannelized
interfaces via front and rear access for termination of ATM
packets and interworking to IP
    
    iSPAN 3651 an AdvancedMC with 4 OC-3/STM-1 channelized
interfaces via front and rear access with support for channelized
operation to support IMA and MLPPP applications
    
    iSPAN 36WP an AdvancedMC with 4 Gigabit Ethernet ports via front
access for high speed packet processing and switching
    
    iSPAN 36CA an AdvancedMC with 4 gigabit Ethernet interfaces via
front access for high performance line rate packet processing and
packet switching solutions
    
    iNAV 31K an AdvancedTCA carrier with support for up to 4
mid-size or full size AdvancedMCs with 10 Gigabit fabric
interface support for the integration and delivery of
high-capacity and high performance subsystem solutions
    
    iNAV 74K a quad processor dual-core Freescale 8641D based
processor blade for high performance embedded packet and control
processing
    17




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PCI Rack Mounted Server Solutions
  Appliance Solutions
   TM
 Enterprise Networking Initiatives
  Industry Standards Participation
  18




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Marketing and Customers
    Manufacturing and Supplies
  19




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Intellectual Property and Patents
    Employees
   20




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Competition
  
 Item 1A. Risk Factors.
 The marketing and sale of our products involve lengthy sales cycles. This and other factors make
business forecasting extremely difficult and can lead to significant fluctuations in
period-to-period results.
   The telecommunications signaling and networking business is characterized by rapid technological
change and frequent introduction of new products.
  21




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We operate in an intensely competitive marketplace and many of our competitors have greater
resources than we do.
  The loss of one or more key customers or reduced spending by customers could significantly impact
our operating results, financial condition and cash flows.
  Schedule delays, cancellations of programs and changes in customer markets can delay or prevent a
design win from reaching the production phase, which could negatively impact our operating results,
financial condition and cash flows.
  22




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Design defects, errors or problems in our products could harm our reputation, revenue and
profitability.
   If our third party suppliers fail to produce quality products or parts in a timely manner, we may
not be able to meet our customers demands.
  We are dependent on one manufacturing facility and if there is an interruption in production we may
not be able to deliver products on a timely basis.
  23




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If we fail to accurately forecast demand for our products, we would be exposed to risk associated
with inventory.
  We may be unable to effectively protect our proprietary technology, which would negatively affect
our ability to compete.
    We depend on key personnel to manage our business effectively.
  We have substantial international activities, which expose us to additional business risks
including political, economic and currency risks.
  24




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We may require additional working capital to fund operations and expand our business.
  
    
    fund research and development of new products beyond what is expected in 2007;
    
    expand product and service offerings beyond what is contemplated in 2007 if unforeseen
opportunities arise; or
    
    respond to unforeseen competitive pressures.
  We have incurred significant losses.
  We may experience significant period-to-period quarterly and annual fluctuations in our revenue and
operating results, which may result in volatility in our stock price.
  25




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2008 will be the first year that our internal controls over financial reporting will be audited by
our independent registered public accounting firm in accordance with Section 404 of the
Sarbanes-Oxley Act of 2002 unless we become an accelerated filer in 2007.
  
 Item 1B. Unresolved Staff Comments.
  
 Item 2. Properties.
  
 Item 3. Legal Proceedings.
  26




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Item 4. Submission of Matters to a Vote of Security Holders.
  
 PART II
 
 Item 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
  2005
    
    High
    
    LowFirst Quarter
    
    
    8.55
    
    
    
    6.34Second Quarter
    
    
    7.36
    
    
    
    5.41Third Quarter
    
    
    7.10
    
    
    
    4.47Fourth Quarter
    
    
    4.89
    
    
    
    4.06
 2006
    
    High
    
    LowFirst Quarter
    
    
    6.25
    
    
    
    4.40Second Quarter
    
    
    6.55
    
    
    
    5.25Third Quarter
    
    
    12.60
    
    
    
    5.58Fourth Quarter
    
    
    15.37
    
    
    
    7.85
  27




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Number of securities inthousands remainingNumber of securities in
    
    
    
    
    
    available for futurethousands to be issued
    
    Weighted-average
    
    issuance under equityupon exercise of
    
    exercise price of
    
    compensation planoutstanding options,
    
    outstanding options,
    
    (excluding securitiesPlan Category
    
    warrants and rights
    
    warrants and rights
    
    reflected in column (a))(a)
    
    (b)
    
    (c)Equity Compensation
plans approved by
security holders
    
    
    2,122
    
    
    $
    9.52
    
    
    
    1,247Equity Compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    2,122
    
    
    $
    9.52
    
    
    
    1,247
   Stock Performance Graph
  28




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Cumulative Return12/01
    
    
    12/02
    
    
    12/03
    
    
    12/04
    
    
    12/05
    
    
    12/06Interphase Corporation
    
    
    
    100
    
    
    
    
    65
    
    
    
    
    238
    
    
    
    
    154
    
    
    
    
    81
    
    
    
    
    152NASDAQ Composite
    
    
    
    100
    
    
    
    
    72
    
    
    
    
    107
    
    
    
    
    117
    
    
    
    
    121
    
    
    
    
    137DJ
Wilshire Telecommunications Equipment Index
    
    
    
    100
    
    
    
    
    57
    
    
    
    
    105
    
    
    
    
    109
    
    
    
    
    110
    
    
    
    
    127Peer Group (SIC 3577)
    
    
    
    100
    
    
    
    
    70
    
    
    
    
    129
    
    
    
    
    110
    
    
    
    
    95
    
    
    
    
    137
 COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
 
 
 *
    
    $ 100 invested on 12/31/01 in stock or index-including reinvestment of dividends.Fiscal year ending December 31. 29




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Item 6. Selected Consolidated Financial Data.
   
 Year ended December 312006
    
    2005
    
    2004
    
    2003
    
    2002Revenues
    
    $
    33,403
    
    
    $
    30,852
    
    
    $
    35,015
    
    
    $
    32,490
    
    
    $
    25,123Gross margin
    
    
    18,126
    
    
    
    16,097
    
    
    
    19,171
    
    
    
    16,909
    
    
    
    9,792Research and development
    
    
    8,226
    
    
    
    7,974
    
    
    
    8,033
    
    
    
    7,719
    
    
    
    7,005Sales and marketing
    
    
    5,405
    
    
    
    6,310
    
    
    
    6,107
    
    
    
    6,929
    
    
    
    5,991General and administrative
    
    
    3,926
    
    
    
    3,531
    
    
    
    3,675
    
    
    
    3,547
    
    
    
    3,285Restructuring charge
    
    
    
    
    
    
    600
    
    
    
    
    
    
    
    
    
    
    
    Income (loss) from operations
    
    
    569
    
    
    
    (2,318
    )
    
    
    1,356
    
    
    
    (1,286
    )
    
    
    (6,489
    )Other, net
    
    
    1,112
    
    
    
    237
    
    
    
    240
    
    
    
    305
    
    
    
    611Income (loss) from operations before income tax
    
    
    1,681
    
    
    
    (2,081
    )
    
    
    1,596
    
    
    
    (981
    )
    
    
    (5,878
    )Income tax (benefit) provision
    
    
    (405
    )
    
    
    218
    
    
    
    (122
    )
    
    
    (212
    )
    
    
    2,523Net income (loss)
    
    $
    2,086
    
    
    $
    (2,299
    )
    
    $
    1,718
    
    
    $
    (769
    )
    
    $
    (8,401
    )Net income (loss) per shareBasic EPS
    
    $
    0.36
    
    
    $
    (0.40
    )
    
    $
    0.30
    
    
    $
    (0.14
    )
    
    $
    (1.51
    )Diluted EPS
    
    $
    0.33
    
    
    $
    (0.40
    )
    
    $
    0.27
    
    
    $
    (0.14
    )
    
    $
    (1.51
    )Weighted average common shares
    
    
    5,854
    
    
    
    5,758
    
    
    
    5,719
    
    
    
    5,544
    
    
    
    5,551Weighted average common and dilutive shares
    
    
    6,254
    
    
    
    5,758
    
    
    
    6,312
    
    
    
    5,544
    
    
    
    5,551
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December 31,2006
    
    2005
    
    2004
    
    2003
    
    2002Working capital
    
    $
    26,896
    
    
    $
    24,554
    
    
    $
    26,450
    
    
    $
    24,255
    
    
    $
    24,254Total assets
    
    
    34,062
    
    
    
    29,194
    
    
    
    32,098
    
    
    
    30,743
    
    
    
    30,749Total liabilities
    
    
    8,262
    
    
    
    6,696
    
    
    
    7,310
    
    
    
    7,930
    
    
    
    7,931Shareholders equity
    
    $
    25,800
    
    
    $
    22,498
    
    
    $
    24,788
    
    
    $
    22,813
    
    
    $
    22,818
 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
  APPLICATION OF CRITICAL ACCOUNTING POLICIES
  Revenue Recognition:
 31




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Warranty Reserve:
 Accounts Receivable and Allowance for Doubtful Accounts:
 Allowance for Returns:
 Inventories:
 Long-Lived Assets:
 32




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Derivative Financial Instruments and Hedging:
 Stock-Based Compensation:
 Tax Assessments:
 Deferred Taxes:
 33




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CONSOLIDATED STATEMENT OF OPERATIONS AS A PERCENTAGE OF REVENUE
 Year ended December 31,2006
    
    2005
    
    2004Revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    45.7
    %
    
    
    47.8
    %
    
    
    45.2
    %Gross margin
    
    
    54.3
    %
    
    
    52.2
    %
    
    
    54.8
    %Research and development
    
    
    24.6
    %
    
    
    25.8
    %
    
    
    22.9
    %Sales and marketing
    
    
    16.2
    %
    
    
    20.5
    %
    
    
    17.5
    %General and administrative
    
    
    11.8
    %
    
    
    11.5
    %
    
    
    10.5
    %Restructuring charge
    
    
    
    
    
    
    1.9
    %
    
    
    Income (loss) from operations
    
    
    1.7
    %
    
    
    (7.5
    )%
    
    
    3.9
    %Interest income, net
    
    
    1.9
    %
    
    
    1.2
    %
    
    
    0.7
    %Other income (expense), net
    
    
    1.4
    %
    
    
    (0.4
    )%
    
    
    0.0
    %Income (loss) before income tax
    
    
    5.0
    %
    
    
    (6.7
    )%
    
    
    4.6
    %Income tax (benefit) provision
    
    
    (1.2
    )%
    
    
    0.8
    %
    
    
    (0.3
    )%Net income (loss)
    
    
    6.2
    %
    
    
    (7.5
    )%
    
    
    4.9
    %
 OVERVIEW
 ® ® TM
 RESULTS OF OPERATIONS
 Revenue:
 34




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Gross Margin:
  Research and Development:
  35




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Sales and Marketing:
  General and Administrative:
  Restructuring Charge:
 Interest Income, Net:
 36




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Other Income (Expense), Net:
  Income Taxes:
   Net Income (Loss):
 LIQUIDITY AND CAPITAL RESOURCES
 Consolidated Cash Flows
  Operating Activities:
 37




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Investing Activities:
 Financing Activities:
 Commitments
  38




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Contractual Obligation
    
    
    
    
    
    Payments due by periodTotal
    
    
    <1 year
    
    
    1 -3 years
    
    
    3- 5 years
    
    
    > 5 yearsLong-term debt obligation (1,2)
    
    $
    3,853
    
    
    $
    223
    
    
    $
    3,630
    
    
    $
    
    
    
    $
    Operating lease obligations (3)
    
    
    1,472
    
    
    
    773
    
    
    
    699
    
    
    
    
    
    
    
    Total
    
    $
    5,325
    
    
    $
    996
    
    
    $
    4,329
    
    
    $
    
    
    
    $
    
 
 (1)
    
    At December 31, 2006, 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, 2008 and is secured throughout the term of the credit facility by
marketable securities.(2)
    
    The Company incurs interest expense on the borrowings from the revolving credit
facility at a rate of LIBOR + 1% (6.375% at December 31, 2006). The Company used the
6.375% rate to
estimate interest expense for 2007 through July 2008. The interest expense estimate is
$223,000 and $130,000 for years 2007 and 2008, respectively.(3)
    
    The Company leases its facilities under non-cancelable operating leases with
the longest terms extending to January 2009. Off-Balance Sheet Arrangements
  Other
   39




---



##### Table of Contents



Recently Issued Accounting Pronouncements
   
 ITEM 7A.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 Foreign Currency Risk
   40




---



##### Table of Contents



Market Price Risk
  Interest Rate Risk
    
 Item 8. Financial Statements and Supplementary Data.
  
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
  
 Item 9A. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
  41




---



##### Table of Contents



Changes in Internal Controls
  
 Item 9B. Other Information.
  
 PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance.
 Directors
  Executive Officers
  Code of Ethics
 www.interphase.com
 42




---



##### Table of Contents



Item 11. Executive Compensation.
  
 Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
  
 Item 13. Certain Relationships and Related Transactions, and Director Independence.
  
 Item 14. Principal Accounting Fees and Services.
  
 PART IV
 
 Item 15. Exhibits and Financial Statement Schedules.
       43




---



##### Table of Contents



SIGNATURES
  INTERPHASE CORPORATIONDate: March 23, 2007
    
    By:
    
    /s/ Gregory B. KalushGregory B. KalushChairman of the Board,Chief Executive Officer and
President
  Name
    


    Title/s/ Gregory B. Kalush
    
    Chairman of the Board,Gregory B. Kalush
    
    Chief Executive Officer and President

(Principal executive officer)/s/ Thomas N. Tipton, Jr.

Thomas N. Tipton, Jr.
    
    Chief Financial Officer,

 Vice President of Finance and Treasurer(Principal financial and accounting officer)/s/ Paul N. Hug

Paul N. Hug
    
    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
 44




---



##### Table of Contents



INDEX TO FINANCIAL STATEMENTS
 Report of Grant Thornton LLP
    
    
    F-2Consolidated Balance Sheets  As of December 31, 2006 and 2005
    
    
    F-3Consolidated Statements of Operations  Years Ended
December 31, 2006, 2005 and 2004
    
    
    F-4Consolidated Statements of Shareholders Equity  Years Ended
December 31, 2006, 2005 and 2004
    
    
    F-5Consolidated Statements of Cash Flows  Years Ended
    
    
    F-6December 31, 2006, 2005 and 2004Notes to Consolidated Financial Statements
    
    F-7 to F-22
 
 *
    
    All schedules are omitted because they are not applicable or the required information is
presented in the consolidated financial statements or notes thereto. F-1




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
      
 F-2




---



##### Table of Contents



December 31,2006
    
    
    2005ASSETSCash and cash equivalents
    
    $
    9,061
    
    
    $
    3,180Marketable securities
    
    
    13,469
    
    
    
    15,388Trade accounts receivable, less allowances
of $118 and $126, respectively
    
    
    5,824
    
    
    
    5,195Inventories
    
    
    1,921
    
    
    
    3,109Prepaid expenses and other current assets
    
    
    1,298
    
    
    
    754Total current assets
    
    
    31,573
    
    
    
    27,626Machinery and equipment
    
    
    6,308
    
    
    
    5,899Leasehold improvements
    
    
    422
    
    
    
    411Furniture and fixtures
    
    
    554
    
    
    
    5457,284
    
    
    
    6,855Less-accumulated depreciation and amortization
    
    
    (6,308
    )
    
    
    (5,697
    )Total property and equipment, net
    
    
    976
    
    
    
    1,158Capitalized software, net
    
    
    1,322
    
    
    
    229Other assets
    
    
    191
    
    
    
    181Total assets
    
    $
    34,062
    
    
    $
    29,194LIABILITIES AND SHAREHOLDERS EQUITYLiabilitiesAccounts payable
    
    $
    1,372
    
    
    $
    255Deferred revenue
    
    
    98
    
    
    
    118Accrued liabilities
    
    
    1,140
    
    
    
    1,757Accrued compensation
    
    
    2,067
    
    
    
    942Total current liabilities
    
    
    4,677
    
    
    
    3,072Other non-current liabilities
    
    
    
    
    
    
    34Deferred lease obligations
    
    
    85
    
    
    
    90Long term debt
    
    
    3,500
    
    
    
    3,500Total liabilities
    
    
    8,262
    
    
    
    6,696Commitments and contingenciesShareholders EquityCommon stock, $.10 par value; 100,000,000 shares
authorized; 6,152,141 and 5,901,895 shares issued
and outstanding, respectively
    
    
    615
    
    
    
    590Additional paid in capital
    
    
    39,884
    
    
    
    38,817Retained deficit
    
    
    (14,059
    )
    
    
    (16,145
    )Cumulative other comprehensive loss
    
    
    (640
    )
    
    
    (764
    )Total shareholders equity
    
    
    25,800
    
    
    
    22,498Total liabilities and shareholders equity
    
    $
    34,062
    
    
    $
    29,194
 The accompanying notes are an integral part of these consolidated financial statements.
 F-3




---



##### Table of Contents



2006
    
    
    2005
    
    
    2004Revenues
    
    $
    33,403
    
    
    $
    30,852
    
    
    $
    35,015Cost of sales
    
    
    15,277
    
    
    
    14,755
    
    
    
    15,844Gross margin
    
    
    18,126
    
    
    
    16,097
    
    
    
    19,171Research and development
    
    
    8,226
    
    
    
    7,974
    
    
    
    8,033Sales and marketing
    
    
    5,405
    
    
    
    6,310
    
    
    
    6,107General and administrative
    
    
    3,926
    
    
    
    3,531
    
    
    
    3,675Restructuring charge
    
    
    
    
    
    
    600
    
    
    
    Total operating expenses
    
    
    17,557
    
    
    
    18,415
    
    
    
    17,815Income (loss) from operations
    
    
    569
    
    
    
    (2,318
    )
    
    
    1,356Interest income, net
    
    
    637
    
    
    
    370
    
    
    
    232Other income (expense), net
    
    
    475
    
    
    
    (133
    )
    
    
    8Income (loss) before income tax
    
    
    1,681
    
    
    
    (2,081
    )
    
    
    1,596Income tax (benefit) provision
    
    
    (405
    )
    
    
    218
    
    
    
    (122
    )Net income (loss)
    
    $
    2,086
    
    
    $
    (2,299
    )
    
    $
    1,718Net income (loss) per share:Basic EPS
    
    $
    0.36
    
    
    $
    (0.40
    )
    
    $
    0.30Diluted EPS
    
    $
    0.33
    
    
    $
    (0.40
    )
    
    $
    0.27Weighted average common shares
    
    
    5,854
    
    
    
    5,758
    
    
    
    5,719Weighted average common and dilutive
shares
    
    
    6,254
    
    
    
    5,758
    
    
    
    6,312
 The accompanying notes are an integral part of these consolidated financial statements.
 F-4




---



##### Table of Contents



CumulativeAdditional
    
    
    
    
    
    
    OtherCommon Stock
    
    
    Paid in
    
    
    Retained
    
    
    Comprehensive
    
    
    
    
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Loss
    
    
    Total
    
    
    Income (Loss)Balance at December 31, 2003
    
    
    5,680
    
    
    $
    568
    
    
    $
    38,218
    
    
    $
    (15,564
    )
    
    $
    (409
    )
    
    $
    22,813Option exercises
    
    
    71
    
    
    
    7
    
    
    
    415
    
    
    
    
    
    
    
    
    
    
    
    422Comprehensive income: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
    )
    
    $
    24,788Option exercises
    
    
    15
    
    
    
    1
    
    
    
    63
    
    
    
    
    
    
    
    
    
    
    
    64Stock issued under restricted stock plan
    
    
    136
    
    
    
    14
    
    
    
    (14
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of restricted stock
plan compensation
    
    
    
    
    
    
    
    
    
    
    135
    
    
    
    
    
    
    
    
    
    
    
    135Comprehensive loss:Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (157
    )
    
    
    (157
    )
    
    
    (157
    )Unrealized holding period loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (33
    )
    
    
    (33
    )
    
    
    (33
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,299
    )
    
    
    
    
    
    
    (2,299
    )
    
    
    (2,299
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (2,489
    )Balance at December 31, 2005
    
    
    5,902
    
    
    $
    590
    
    
    $
    38,817
    
    
    $
    (16,145
    )
    
    $
    (764
    )
    
    $
    22,498Option exercises
    
    
    144
    
    
    
    15
    
    
    
    782
    
    
    
    
    
    
    
    
    
    
    
    797Stock issued under restricted stock
plan, net forfeitures
    
    
    106
    
    
    
    10
    
    
    
    (10
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of restricted stock plan compensation
    
    
    
    
    
    
    
    
    
    
    295
    
    
    
    
    
    
    
    
    
    
    
    295Comprehensive income:Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61
    
    
    
    61
    
    
    
    61Unrealized holding period gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63
    
    
    
    63
    
    
    
    63Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,086
    
    
    
    
    
    
    
    2,086
    
    
    
    2,086Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,210Balance at December 31, 2006
    
    
    6,152
    
    
    $
    615
    
    
    $
    39,884
    
    
    $
    (14,059
    )
    
    $
    (640
    )
    
    $
    25,800
 The accompanying notes are an integral part of these consolidated financial statements.
 F-5




---



##### Table of Contents



Years ended December 31,2006
    
    
    2005
    
    
    2004Cash flows from operating activities:Net income (loss)
    
    $
    2,086
    
    
    $
    (2,299
    )
    
    $
    1,718Adjustments to reconcile net income (loss) to net cash provided by operating activities:Provision for uncollectible accounts and returns
    
    
    (8
    )
    
    
    (10
    )
    
    
    (3
    )Provision for excess and obsolete inventories
    
    
    500
    
    
    
    1,000
    
    
    
    300Depreciation and amortization
    
    
    695
    
    
    
    801
    
    
    
    788Amortization of restricted stock
    
    
    295
    
    
    
    135
    
    
    
    Change in assets and liabilities:Trade accounts receivable
    
    
    (621
    )
    
    
    (209
    )
    
    
    661Inventories
    
    
    688
    
    
    
    (600
    )
    
    
    (848
    )Prepaid expenses and other current assets
    
    
    (513
    )
    
    
    192
    
    
    
    (187
    )Income taxes receivable
    
    
    
    
    
    
    233
    
    
    
    (246
    )Other assets
    
    
    3
    
    
    
    (1
    )
    
    
    44Accounts payable, deferred revenue and accrued liabilities
    
    
    455
    
    
    
    (42
    )
    
    
    (976
    )Accrued compensation
    
    
    1,030
    
    
    
    (501
    )
    
    
    309Other non-current liabilities
    
    
    (34
    )
    
    
    34
    
    
    
    Deferred lease obligations
    
    
    (5
    )
    
    
    30
    
    
    
    (28
    )Net adjustments
    
    
    2,485
    
    
    
    1,062
    
    
    
    (186
    )Net cash provided by (used in) operating activities
    
    
    4,571
    
    
    
    (1,237
    )
    
    
    1,532Cash flows from investing activities:Purchase of property and equipment
    
    
    (358
    )
    
    
    (506
    )
    
    
    (454
    )Purchase of capitalized software
    
    
    (1,178
    )
    
    
    (32
    )
    
    
    (86
    )Proceeds from the sale of marketable securities
    
    
    14,860
    
    
    
    11,948
    
    
    
    3,322Purchases of marketable securities
    
    
    (12,878
    )
    
    
    (11,784
    )
    
    
    (14,047
    )Net cash provided by (used in) investing activities
    
    
    446
    
    
    
    (374
    )
    
    
    (11,265
    )Cash flows from financing activities:Proceeds
from the exercise of stock options
    
    
    797
    
    
    
    62
    
    
    
    422Net cash provided by financing activities
    
    
    797
    
    
    
    62
    
    
    
    422Effect of exchange rate changes on cash and cash equivalents
    
    
    67
    
    
    
    (199
    )
    
    
    35Net increase (decrease) in cash and cash equivalents
    
    
    5,881
    
    
    
    (1,748
    )
    
    
    (9,276
    )Cash and cash equivalents at beginning of year
    
    
    3,180
    
    
    
    4,928
    
    
    
    14,204Cash and cash equivalents at end of year
    
    $
    9,061
    
    
    $
    3,180
    
    
    $
    4,928Supplemental Disclosure of Cash Flow Information:Income taxes paid
    
    $
    359
    
    
    $
    92
    
    
    $
    Interest paid
    
    $
    160
    
    
    $
    124
    
    
    $
    111
 The accompanying notes are an integral part of these consolidated financial statements.
 F-6




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##### Table of Contents



INTERPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Description of the Business: ®
 Principles of Consolidation and Basis of Presentation:
 Fair Value of Financial Instruments:
 Cash and Cash Equivalents:
 Marketable Securities:
 F-7




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##### Table of Contents



Accounts Receivable and Allowance for Doubtful Accounts:
 Balance at
    
    
    
    
    
    (Write-offs,)
    
    BalanceBeginning
    
    Charged to
    
    Net of
    
    at EndYear Ended December 31:
    
    of Period
    
    Expense
    
    Recoveries
    
    of Period2006
    
    $
    36
    
    
    $
    (3
    )
    
    $
    
    
    
    $
    332005
    
    
    36
    
    
    
    5
    
    
    
    (5
    )
    
    
    362004
    
    
    89
    
    
    
    9
    
    
    
    (62
    )
    
    
    36
 Allowance for Returns:
 Inventories:
 Years ended December 31,2006
    
    
    2005Raw Materials
    
    $
    1,449
    
    
    $
    2,393Work-in-Process
    
    
    344
    
    
    
    549Finished Goods
    
    
    128
    
    
    
    167Total
    
    $
    1,921
    
    
    $
    3,109
  F-8




---



##### Table of Contents



Property and Equipment:
 Year ended December 31:
    
    Depreciation Expense2006
    
    $
    5672005
    
    $
    6902004
    
    $
    656
  Machinery and equipment
    
    3-5yearsLeasehold improvements
    
    Term of the respective leasesFurniture and fixtures
    
    3-10years
 Capitalized Software:
 AccumulatedYear ended December 31:
    
    Amortization Expense
    
    Amortization2006
    
    $
    128
    
    
    $
    1,6702005
    
    $
    111
    
    
    $
    1,5012004
    
    $
    132
    
    
    $
    2,429
 Long-Lived Assets:
 Revenue Recognition:
 Warranty Reserve:
 F-9




---



##### Table of Contents



Concentration of Credit Risks:
 Research and Development:
 Interest Income, net:
 Advertising Expense:
 Foreign Currency Translation:
  Income Taxes:
  Other Comprehensive Income (loss):
 F-10




---



##### Table of Contents



Stock-Based Compensation:
 Years ended December 31,2005
    
    
    2004Net (loss) income as reported
    
    $
    (2,299
    )
    
    $
    1,718Add: APB 25 expense
    
    
    135
    
    
    
    Less: Total stock based employee compensation expense
determined under fair value methods for all awards
    
    
    (1,150
    )
    
    
    (1,863
    )Pro forma net loss
    
    
    (3,314
    )
    
    
    (145
    )(Loss) income per common share:As reported  basic
    
    $
    (0.40
    )
    
    $
    0.30Pro forma  basic
    
    $
    (0.58
    )
    
    $
    (0.03
    )As reported  diluted
    
    $
    (0.40
    )
    
    $
    0.27Pro forma  diluted
    
    $
    (0.58
    )
    
    $
    (0.03
    )
 Use of Estimates:
 2. MARKETABLE SECURITIES
  F-11




---



##### Table of Contents





3. ACCRUED LIABILITIES




Years ended December 31,2006
    
    
    2005Inventory receipts
    
    
    381
    
    
    
    500Restructuring accrual
    
    
    
    
    
    
    288Accrued other
    
    
    759
    
    
    
    969$
    1,140
    
    
    $
    1,757


4. DERIVATIVE FINANCIAL INSTRUMENTS






5. CREDIT FACILITY


F-12




---



##### Table of Contents



6. INCOME TAXES
  Year ended December 31,2006
    
    
    2005
    
    
    2004United States tax benefit
    
    $
    (55
    )
    
    $
    (10
    )
    
    $
    (89
    )Foreignt (benefit) provision
    
    
    (350
    )
    
    
    228
    
    
    
    (33
    )Income tax (benefit) provision
    
    $
    (405
    )
    
    $
    218
    
    
    $
    (122
    )
  Year ended December 31,2006
    
    
    2005Current deferred tax assets:Inventories
    
    $
    1,198
    
    
    $
    1,313Accounts receivable
    
    
    13
    
    
    
    14Deferred revenue
    
    
    37
    
    
    
    45Other accruals
    
    
    265
    
    
    
    177Total current deferred tax assets
    
    $
    1,513
    
    
    $
    1,549Noncurrent deferred tax assets:Depreciation
    
    $
    77
    
    
    $
    45Amortization
    
    
    280
    
    
    
    369Other
    
    
    26
    
    
    
    Net operating loss carryforwards
    
    
    5,564
    
    
    
    6,412Total noncurrent deferred tax assets
    
    $
    5,947
    
    
    $
    6,826Valuation allowance for deferred tax assets
    
    
    (7,460
    )
    
    
    (8,375
    )Deferred tax assets, net of valuation allowance
    
    $
    
    
    
    $
    
   F-13




---



##### Table of Contents



Year ended December 31,2006
    
    
    2005
    
    
    2004Income taxes at statutory rate
    
    $
    576
    
    
    $
    (708
    )
    
    $
    543Benefit for French research and development tax credit
    
    
    (394
    )
    
    
    (239
    )
    
    
    (144
    )State provision (benefit)
    
    
    16
    
    
    
    (119
    )
    
    
    22Benefit recorded for favorable outcome of tax audits
    
    
    
    
    
    
    
    
    
    
    (102
    )French permanent items
    
    
    (218
    )
    
    
    244
    
    
    
    (133
    )Extraterritorial income exclusion benefit
    
    
    (56
    )
    
    
    (75
    )
    
    
    (389
    )Adjustment to deferred tax assets
    
    
    717
    
    
    
    (747
    )
    
    
    Other
    
    
    (130
    )
    
    
    
    
    
    
    (33
    )Change in valuation allowance
    
    
    (916
    )
    
    
    1,862
    
    
    
    114(Benefit) provision for income taxes
    
    $
    (405
    )
    
    $
    218
    
    
    $
    (122
    )
   F-14
    Table of Contents   7. RESTRUCTURING CHARGE
   8. EARNINGS PER SHARE
  Years ended December 31,2006
    
    2005
    
    2004Basic income (loss) per share:Net income (loss)
    
    $
    2,086
    
    
    $
    (2,299
    )
    
    $
    1,718Weighted average common shares outstanding
    
    
    5,854
    
    
    
    5,758
    
    
    
    5,719Basic income (loss) per share
    
    $
    0.36
    
    
    $
    (0.40
    )
    
    $
    0.30Diluted income (loss) per share:Net income (loss)
    
    $
    2,086
    
    
    $
    (2,299
    )
    
    $
    1,718Weighted average common shares outstanding
    
    
    5,854
    
    
    
    5,758
    
    
    
    5,719Dilutive stock options and restricted stock
    
    
    400
    
    
    
    
    
    
    
    593Weighted average common shares outstanding  assuming dilution
    
    
    6,254
    
    
    
    5,758
    
    
    
    6,312Diluted income (loss) per share
    
    $
    0.33
    
    
    $
    (0.40
    )
    
    $
    0.27Outstanding stock options that were not included in the diluted
calculation because their effect would be anti-dilutive
    
    
    1,251
    
    
    
    2,084
    
    
    
    808
 9. COMMON STOCK
 2004 Long-Term Stock Incentive Plan:
 F-15    Table of Contents  Amended and Restated Stock Option Plan:
 France Stock Option Sub-Plan:
 Amended and Restated Director Stock Option Plan:
 F-16
    Table of Contents  Number of
    
    Weighted AverageOptions
    
    Option PriceBalance, December 31, 2003
    
    
    2,578
    
    
    $
    9.18Granted
    
    
    226
    
    
    
    10.84Exercised
    
    
    (71
    )
    
    
    5.97Canceled
    
    
    (79
    )
    
    
    10.92Balance, December 31, 2004
    
    
    2,654
    
    
    
    9.35Granted
    
    
    
    
    
    
    N/AExercised
    
    
    (15
    )
    
    
    4.24Canceled
    
    
    (53
    )
    
    
    9.78Balance, December 31, 2005
    
    
    2,586
    
    
    
    9.38Granted
    
    
    
    
    
    
    N/AExercised
    
    
    (144
    )
    
    
    5.54Canceled
    
    
    (320
    )
    
    
    10.13Balance, December 31, 2006
    
    
    2,122
    
    
    
    9.52Exercisable at
December 31, 2006
    
    
    2,122
    
    
    $
    9.52
   Options Outstanding
    
    Options ExercisableWeighted-AverageNumber
    
    Remaining
    
    Weighted
    
    Number
    
    WeightedRange of
    
    Outstanding at
    
    Contractual Life
    
    Average Exercise
    
    Exercisable at
    
    Average ExerciseExercise Prices
    
    12/31/06
    
    (years)
    
    Price
    
    12/31/06
    
    Price$3.09-$4.60
    
    
    255
    
    
    
    4.91
    
    
    $
    4.24
    
    
    
    255
    
    
    $
    4.24$4.83-$6.50
    
    
    590
    
    
    
    5.23
    
    
    
    5.60
    
    
    
    590
    
    
    
    5.60$7.20-$10.63
    
    
    594
    
    
    
    3.45
    
    
    
    8.18
    
    
    
    594
    
    
    
    8.18$11.25-$13.88
    
    
    389
    
    
    
    5.09
    
    
    
    12.77
    
    
    
    389
    
    
    
    12.77$17.25-$24.06
    
    
    284
    
    
    
    2.97
    
    
    
    20.02
    
    
    
    284
    
    
    
    20.02$31.00
    
    
    10
    
    
    
    2.90
    
    
    
    31.00
    
    
    
    10
    
    
    
    31.00Total
    
    
    2,122
    
    
    
    4.35
    
    
    $
    9.52
    
    
    
    2,122
    
    
    $
    9.52
 Stock Option Acceleration:
 F-17
    Table of Contents  Aggregate Number of
    
    Weighted AverageShares Issuable Under
    
    Exercise Price PerAccelerated Stock Options
    
    ShareTotal Non-Employee Directors
    
    
    
    
    
    
    N/ATotal Executive Officers
    
    
    167,830
    
    
    $
    9.47Total All Other Employees
    
    
    38,092
    
    
    $
    7.61Total
    
    
    205,922
    
    
    $
    9.13
 Restricted Stock:
 Weighted AverageRestricted Stock Shares
    
    
    Grant Date ValueNonvested Restricted stock at December 31, 2004
    
    
    
    
    
    $
    Granted
    
    
    145,652
    
    
    
    5.60Vested
    
    
    
    
    
    
    Cancelled/Forefeited
    
    
    (9,600
    )
    
    
    5.47Nonvested Restricted stock at December 31, 2005
    
    
    136,052
    
    
    $
    5.59Granted
    
    
    112,300
    
    
    $
    6.46Vested
    
    
    (21,127
    )
    
    
    5.68Cancelled/Forefeited
    
    
    (5,800
    )
    
    
    6.11Nonvested Restricted stock at December 31, 2006
    
    
    221,425
    
    
    $
    5.96
 Rights Agreement:
 F-18
    Table of Contents  Pro Forma Net Loss:
  2006
    
    2005
    
    2004Weighted average risk free interest rates
    
    
    N/A
    
    
    
    N/A
    
    
    
    2.39
    %Weighted average life (in years)
    
    
    N/A
    
    
    
    N/A
    
    
    
    4.10Volatility
    
    
    N/A
    
    
    
    N/A
    
    
    
    88
    %Expected dividend yield
    
    
    N/A
    
    
    
    N/A
    
    
    
    Weighted average grant-date fair value per share
of options granted
    
    
    N/A
    
    
    
    N/A
    
    
    $
    6.99
 10. RELATED PARTY TRANSACTIONS
  11. EMPLOYEE BENEFIT PLAN
  F-19
    Table of Contents  12. OTHER FINANCIAL INFORMATION
 Major Customers
  Commitments:
 Year ending December 31:2007
    
    $
    7732008
    
    $
    6862009
    
    $
    13
  Year ending December 31:2006
    
    $
    7382005
    
    $
    7572004
    
    $
    791
  13. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
  F-20
    Table of Contents  14. SEGMENT DATA
   Long Lived Assets
    
    2006
    
    
    2005North America
    
    $
    2,064
    
    
    $
    1,078Europe
    
    
    234
    
    
    
    309Total
    
    $
    2,298
    
    
    $
    1,387
 Revenues
    
    2006
    
    
    2005
    
    
    2004Europe
    
    $
    15,215
    
    
    $
    8,804
    
    
    $
    8,528North America
    
    
    11,226
    
    
    
    16,912
    
    
    
    21,049Pacific Rim
    
    
    6,962
    
    
    
    5,136
    
    
    
    5,438Total
    
    $
    33,403
    
    
    $
    30,852
    
    
    $
    35,015
 F-21
    Table of Contents  Product Revenue
    
    2006
    
    
    2005
    
    
    2004Broadband telecom
    
    $
    26,199
    
    
    $
    20,293
    
    
    $
    20,151Enterprise SlotOptimizer
    
    
    3,898
    
    
    
    7,577
    
    
    
    10,713Storage
    
    
    585
    
    
    
    714
    
    
    
    814Professional/Support Services
    
    
    251
    
    
    
    487
    
    
    
    744LAN/WAN
    
    
    144
    
    
    
    525
    
    
    
    1,276Other
    
    
    2,326
    
    
    
    1,256
    
    
    
    1,317Total
    
    $
    33,403
    
    
    $
    30,852
    
    
    $
    35,015
 15. QUARTERLY FINANCIAL DATA (Unaudited)
 
 Quarter EndedMarch 31
    
    June 30
    
    September 30
    
    December 31Revenues
    
    $
    8,151
    
    
    $
    9,371
    
    
    $
    7,758
    
    
    $
    8,123Gross margin
    
    
    4,121
    
    
    
    5,400
    
    
    
    4,067
    
    
    
    4,538Income before
income taxes
    
    
    195
    
    
    
    1,066
    
    
    
    118
    
    
    
    302Net income
    
    
    310
    
    
    
    1,143
    
    
    
    175
    
    
    
    458Earnings per share:Basic EPS
    
    $
    0.05
    
    
    $
    0.20
    
    
    $
    0.03
    
    
    $
    0.08Diluted EPS
    
    $
    0.05
    
    
    $
    0.19
    
    
    $
    0.03
    
    
    $
    0.07
 
 Quarter EndedMarch 31
    
    June 30
    
    September 30
    
    December 31Revenues
    
    $
    8,780
    
    
    $
    7,592
    
    
    $
    6,924
    
    
    $
    7,556Gross margin
    
    
    4,752
    
    
    
    4,050
    
    
    
    3,491
    
    
    
    3,804Income (loss) before
income taxes
    
    
    191
    
    
    
    (390
    )
    
    
    (876
    )
    
    
    (1,006
    )Net income (loss)
    
    
    155
    
    
    
    (471
    )
    
    
    (912
    )
    
    
    (1,071
    )Earnings (loss) per share:Basic EPS
    
    $
    0.03
    
    
    $
    (0.08
    )
    
    $
    (0.15
    )
    
    $
    (0.19
    )Diluted EPS
    
    $
    0.03
    
    
    $
    (0.08
    )
    
    $
    (0.15
    )
    
    $
    (0.19
    )
  F-22
    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). (3)3 (a)
    
    Certificate of Incorporation of the registrant. (1)3 (b)
    
    Amendment to Articles of Incorporation of the registrant. (4)3 (c)
    
    Amended and Restated Bylaws of the registrant adopted on December 5, 1995 and
amended on January 19, 1999. (6)4 (a)
    
    Rights Agreement dated as of December 7, 2000 by and between the Company and
Computershare Investor Services, LLC as Rights Agent. (5)10 (a)
    
    Lease on Facility at Parkway Center, Phase I, Plano, Texas. (7)10 (b)
    
    Lease on Facility at 2105 Luna Road, Carrolton, Texas. (7)10 (c)
    
    Note and Credit Agreement between Interphase Corporation and Comerica Bank, including
Amendment dated November 5, 2004. (10)10 (d)
    
    Employment Agreement with Gregory B. Kalush, dated March 12, 1999. *(12)10 (e)
    
    Employment Agreement for Chief Technology Officer with Felix V. Diaz,
dated May 22, 1996. *(12)10 (f)
    
    Employment, Confidentiality, and Non-Competition Agreement with Thomas N. Tipton, Jr.,
dated December 19, 2005. *(12)10 (g)
    
    Employment, Confidentiality, and Non-Competition Agreement with Randall E. McComas,
dated February 15, 2002. *(12)10 (h)
    
    Employment Agreement with Deborah A. Shute, dated November 24, 1999. *(12)10 (i)
    
    Employment, Confidentiality, and Non-Competition Agreement with James W. Gragg,
dated November 1, 2004. *(12)10 (j)
    
    Employment, Confidentiality, and Non-Competition Agreement with Prasad Kallur,
dated May 23, 2005. *(12)10 (k)
    
    Employment Agreement with Steven P. Kovac, dated May 11, 1999. *(12)10 (l)
    
    Interphase Corporation 2004 Long-Term Stock Incentive Plan *(11)16 (a)
    
    Letter regarding change in certifying accountant. (9)21 (a)
    
    Subsidiaries of the Registrant. (8)23 (a)
    
    Consent of Independent Registered Public Accounting Firm. (13)31 (a)
    
    Rule 13a-14(a)/15d-14(a) Certification. (13)31 (b)
    
    Rule 13a-14(a)/15d-14(a) Certification. (13)32 (a)
    
    Section 1350 Certification. (13)32 (b)
    
    Section 1350 Certification. (13)
 
 (1)
    
    Filed as an exhibit to Registration Statement No. 2-86523 on Form S-1 and incorporated
herein by
reference.(2)
    
    Filed as an exhibit to Report on Form 10-K for the year ended October 31, 1995, and
incorporated herein by reference.(3)
    
    Filed as an exhibit to Report on Form 8-K on August 6, 1996, and incorporated herein by
reference. E-1
    Table of Contents  (4)
    
    Filed as an exhibit to Report on Form 10-K for the year ended December 31, 1999, and
incorporated herein by reference.(5)
    
    Filed as an exhibit to Form 8-K on January 9, 2001, and incorporated herein by
reference.(6)
    
    Filed as an exhibit to Report on Form 10-K for the year ended December 31, 2001, and
incorporated herein by reference.(7)
    
    Filed as an exhibit to Report on Form 10-Q for the quarter ended September 30, 2002, and
incorporated herein by reference.(8)
    
    Filed as an exhibit to Report on Form 10-K for the year ended December 31, 2002, and
incorporated herein by reference.(9)
    
    Filed as an exhibit to Form 8-K on September 13, 2004, and incorporated herein by
reference.(10)
    
    Filed as an exhibit to Report on Form 10-K for the year ended December 31, 2004, and
incorporated herein by reference.(11)
    
    Filed as an exhibit to Schedule 14a on March 31, 2005 and incorporated herein by reference.(12)
    
    Filed as an exhibit to Report on Form 10-K for the year ended December 31, 2005, and
incorporated herein by reference.(13)
    
    Filed herewith 
 *
    
    Management contract or compensatory plan or arrangement. E-2