10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

(Mark One)

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2008

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 0-13071

INTERPHASE CORPORATION

(Exact name of registrant as specified in its charter)

Texas
(State or other jurisdiction of incorporation or organization) 75-1549797
(I.R.S. Employer Identification No.)

2901 North Dallas Parkway, Suite 200, Plano, Texas 75093
(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:

	Name of each exchange
Title of each class	on which registered
Common Stock, $.10 par value	NASDAQ Global Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o       No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o      No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed 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. Yes þ     No 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. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o 
Non-accelerated filer o
(Do not check if a smaller reporting company) Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes o      No þ

The aggregate market value of common stock held by non-affiliates of the registrant on June 30, 2008, was approximately $21,200,000. As of March 13, 2009, shares of common stock outstanding totaled 6,905,994.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III of this Report, to the extent not set forth herein, is incorporated herein by reference from the registrant’s definitive proxy statement relating to the Annual Meeting of Shareholders to be held in 2009, which definitive proxy statement shall be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Report relates.

TABLE OF CONTENTS

PART I
	Item 1. Business.
	Item 1A. Risk Factors.
	Item 1B. Unresolved Staff Comments.
	Item 2. Properties.
	Item 3. Legal Proceedings.
	Item 4. Submission of Matters to a Vote of Security Holders.
PART II
	Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
	Item 6. Selected Consolidated Financial Data.
	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
	ITEM 7A. Quantitative and Qualitative Disclosure about Market 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.
	Item 9B. Other Information.
PART III
	Item 10. Directors, Executive Officers and Corporate Governance.
	Item 11. Executive Compensation.
	Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
	Item 13. Certain Relationships and Related Transactions, and Director Independence.
	Item 14. Principal Accountant Fees and Services.
PART IV
	Item 15. Exhibits and Financial Statement Schedules.
SIGNATURES
INDEX TO EXHIBITS
EX-10.(B)
EX-23.(A)
EX-31.(A)
EX-31.(B)
EX-32.(A)
EX-32.(B)

PART I

Item 1. Business.

Introduction

Interphase Corporation and subsidiaries (“Interphase” or the “Company”) is a leading provider of robust building blocks, highly integrated subsystems and innovative gateway appliances in the areas of network connectivity, content management, and packet processing solutions in the converged communications network. This converged network is expected to expand from the proprietary telecommunications networks of today to the converged open, but highly secure IP based networks for communications of the future. Incorporated in 1977 and building on a more than 30 year history of providing advanced I/O solutions for telecom and enterprise applications, and addressing the need for high speed connectivity, Interphase (NASDAQ: INPH) has established a key leadership role in delivering next generation AdvancedTCA^® (ATCA) and AdvancedMC™ (AMC), PCI-x, PCI-e and custom solutions to the marketplace. This leadership role continues as Interphase expands its product focus into the Long Term Evolution (LTE) architecture, providing the next generation of solutions for TCP/IP based solutions in the converged next generation network. Headquartered in Plano, Texas with sales offices across the globe, Interphase clients include Alcatel-Lucent, Emerson Network Power, Fujitsu Ltd., Hewlett Packard, Nokia- Siemens Networks, Sun Microsystems and Samsung.

The Company maintains a Web site on the Internet with the address of www.interphase.com. Copies of this Annual Report on Form 10-K and copies of the Company’s Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, 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 Web site. The public may read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The general public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet Web site 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; as such, 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.

3G — Third-generation mobile telephone technology. The services associated with 3G provide the ability to transfer both voice data (a telephone call) and non-voice data (such as downloading information, exchanging email, and instant messaging).

3GPP — 3rd Generation Partnership Project; a collaboration agreement that was established in December 1998. 3GPP is a co-operation among the following standards organizations: ETSI (Europe), ARIB/TTC (Japan), CCSA (China), ATIS (North America) and TTA (South Korea). The scope of 3GPP is to make a globally applicable 3G mobile phone system specification within the scope of the ITU’s IMT-2000 project. 3GPP specifications are based on evolved GSM specifications, now generally known as the UMTS system.

1

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 platform architecture beyond CompactPCI defined by the PICMG standards body as the PICMG 3.0 series of specifications. This architecture affords greater bandwidth, processing and board density, cooling abilities, and memory, while enabling delivery of highly reliable, scalable and manageable telecommunications products to meet the growing needs of next-generation applications for converged communications networks. AdvancedTCA is a registered trademark of PICMG.

AdvancedMC™ or AMC (Advanced Mezzanine Card) — AdvancedMC specifications define the mezzanine card form factor for use with ATCA platforms. AdvancedMC enhances ATCA flexibility by extending its high-bandwidth, multi-protocol interface to individual hot-swappable modules, which are optimized for packet-based telecom applications. Together, ATCA blades equipped with AdvancedMC modules give telecom equipment manufacturers (or TEMs) a versatile platform for quickly building modular telecom systems that could be designed, manufactured, scaled, upgraded and serviced at a much lower cost. AdvancedMC is a trademark of PICMG.

ASN Gateway or ASN-GW — The ASN Gateway is a logical entity in the WiMAX network architecture that represents an aggregation of control plane functional entities that are either paired with a corresponding function in the WiMAX Access Service Network (ASN) or a resident function in the WiMAX Core Service Network. The ASN-GW may also perform bearer plane routing or bridging function.

Asynchronous Transfer Mode (ATM) — A network technology used in Wide Area Networks 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 scalable and supports transmission speeds of 1.5, 25, 100, 155, 622 and 2488 Mbps.

Backplane — The interconnect mechanism that links all printed circuit boards within a system so 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.

Base Station Controller (BSC) — A robust network element that handles allocation of radio channels, receives measurements from mobile phones, and controls handovers from base station to base station, etc. Many BSCs act as a full switching center while also providing data for network management and measurement.

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 on a carrier card.

2

Broadband — A transmission facility (communications link) that has bandwidth (capacity) greater than a traditional voice grade line.

Building Blocks — The basic board-level products used in a system; these products are combined with other hardware and software building blocks to build a network element, system and/or application.

Code Division Multiple Access (CDMA) — A form of multiplexing and a method of multiple access that does not divide up the channel by time or frequency, but instead encodes data with a certain code associated with a channel and uses the constructive interference properties of the signal medium to perform the multiplexing. CDMA is used in digital cellular telephony systems for delivery of very high bandwidth mobile access.

Communications Controller — Communications controller modules (similar to a network interface card) 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^® (cPCI) — An industrial-grade variation of the PCI bus standard that utilizes the VME form factor. CompactPCI was 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 9s” (99.999%) reliability. Often referred to as 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 serves as the foundation for the new AdvancedTCA standard architecture from PICMG.

DSL or xDSL — DSL or xDSL is a family of technologies that provides digital data transmission over the wires of a local telephone network.

Digital Signal Processing — is the study of signals in a digital representation and the processing methods of these signals. A Digital Signal Processer (DSP) is a processer used for Digital Signal Processing.

Ethernet — A family of frame-based computer networking technologies for local area networks (LANs). Ethernet operates over twisted wire, coaxial cable and fiber optic cables at speeds starting at 10 Mbps. The original 10 Mbps specification was extended to a speed of 100 Mbps transmission bandwidth with Fast Ethernet and to 1 Gbps with gigabit Ethernet. Gigabit Ethernet is now the most popular variant being deployed. Ethernet itself has evolved to the next 10 Gbps transmission bandwidth capability. As network bandwidth usage continues to rapidly expand world-wide, 10 Gbps is expected to become a commonplace offering in enterprise and service provider networks.

European Telecommunications Standards Institute (ETSI) — An independent, non-profit organization, whose mission is to produce telecommunications standards for today and for the future for global networks. ETSI has been successful in standardizing the GSM mobile phone system.

3

Femtocell — Originally known as an Access Point Base Station, a femtocell is a small cellular base station, typically designed for use in residential or small business environments. It connects to the service provider’s network via broadband (such as DSL or cable); current designs typically support 2 to 4 active mobile phones in a residential setting. A femtocell allows service providers to extend service indoors, especially where access would otherwise be limited or unavailable. The femtocell incorporates the functionality of a typical base station but extends it to allow a simpler, self contained deployment.

Gateway Appliances — Network elements that provide translation functions between multiple protocols used for transfer of data and to control information across networks.

Gigabits per second (Gbps) — One thousand million bits per second.

Global System for Mobile Communications (GSM) — The most popular standard for mobile phones in the world. GSM differs significantly from its predecessors in that both signaling and speech channels are digital, which means that it is considered a second generation (2G) mobile phone system. This fact has also meant that data communication was built into the system from very early on. GSM is an open standard which is currently developed by the 3GPP. GSM service is used by over 1.5 billion people across more than 210 countries and territories. The ubiquity of the GSM standard makes international roaming very common between mobile phone operators, enabling subscribers to use their phones in many parts of the world.

General Packet Radio Service (GPRS) — A packet oriented mobile data service available to users of the 2G cellular communication systems GSM standard, as well as in the 3G systems. In the 2G systems, GPRS provides data rates of 56-114 kbps.

Input/output (I/O) — 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.

International Mobile Telecommunications-2000 (IMT-2000) — The global standard for third generation (3G) wireless communications as defined by the International Telecommunication Union.

International Telecommunication Union (ITU) — An international organization established to standardize and regulate international radio and telecommunications. It was founded as the International Telegraph Union in Paris on May 17, 1865. Its main tasks include standardization, allocation of the radio spectrum, and organizing interconnection arrangements between different countries to allow international phone calls.

Internet Engineering Task Force (IETF) — Formed in 1986, the IETF sets technical standards that run the Internet such as routing, transport and security.

Internet Protocol (IP) — The standard method or protocol by which data is sent from one computer to another on the Internet.

Inverse Multiplexing over ATM (IMA) — A specification defined by the ATM forum that provides a way to combine an ATM cell stream over two or more circuits.

4

IP Multimedia Subsystem (IMS) — A standardized Next Generation Networking (NGN) IP architecture designed to enable (both wireless and wireline) carriers to create and deliver a full portfolio of new telecom services quickly and cost-effectively, and promises to be the cornerstone for fixed/mobile convergence within the telecom world. This network architecture based on the IETF SIP protocol was initially developed for delivering multi-media services in the 3G network by 3GPP but has been widely adopted and extended to enable fixed and mobile network convergence.

IP-PBX — A private branch exchange (telephone switching system within an enterprise) that switches calls between VoIP users on local lines while allowing all users to share a certain number of external phone lines.

IP Security (IPSec) — A security protocol from the Internet Engineering Task Force (IETF) that provides authentication and encryption over the Internet.

I-TDM — A PICMG standard optimized to transport and switch 64 Kbps low-latency communications traffic over gigabit Ethernet based packet backplanes.

Kilobits per second (Kbps) — One thousand bits per second.

Local Area Network (LAN) — 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.

Long Term Evolution (LTE or 3GPP LTE) — LTE is the name given to a project within the 3GPP to improve the UMTS mobile phone standard to cope with future technology evolutions. Goals include improving spectral efficiency, lowering costs, improving services, making use of new spectrum and reframed spectrum opportunities, and better integration with other open standards. A characteristic of so-called “4G” networks such as LTE is that they are fundamentally based upon TCP/IP, the core protocol of the Internet, with higher level services such as voice, video, and messaging, built on top of this.

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 a softswitch.

Megabits per second (Mbps) — One million bits per second, when used as a measurement for the speed of telecommunications, networking or local area networking.

MicroTCA — A set of standards that defines the ability to use AdvancedMC modules directly, without the need for an ATCA or custom carrier, enabling TEMs to achieve substantial reductions in size, cost and power requirements. MicroTCA is complementary to ATCA for small form-factor central office and outside plant applications like wireless base stations, WiMax radio boxes, next-generation digital loop carriers and optical network units.

Multilink PPP (MLPPP) — A bandwidth-on-demand protocol that can connect multiple links between two systems as needed to provide bandwidth on demand.

5

Network Elements — Equipment in the telecommunications network that provides various network functions.

OC-3/STM-1 — The American and European standards (respectively) for optical connections at 155.52 Mbps. This line speed is very common in telecommunications access networks.

OC-12/STM-4 — The American and European standards (respectively) for optical connections at 672 Mbps.

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, 2000 and Vista and VxWorks^®, Solaris^™ and Linux.

Original Equipment Manufacturer (OEM) — Manufacturers who resell other companies’ products under their own name.

Packet Processing — Real time wire-speed analysis and processing of packets in the IP network.

PCI Industrial Computer Manufacturers Group (PICMG) — 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 systems, thereby providing alternatives to market monopolies created by proprietary system architectures.

PCI Mezzanine Card (PMC) — 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.

Peripheral Components Interconnect (PCI) — 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, which is CompactPCI.

Peripheral Components Interconnect—Express (PCI-e) — An I/O interconnect bus standard that expands on and doubles the data transfer rates of original PCI. PCI-e is a two-way, serial connection that carries data in packets along two pairs of point-to-point data lanes, compared to the single parallel data bus of traditional PCI that routes data at a set rate.

Peripheral Components Interconnect—Extended (PCI-x) — An extension of the original PCI design, PCI-x increases the internal bus speed from 66 MHz to 133 MHz. PCI-x supports a maximum rate of data exchange of 1.06 Gbps. This level of bandwidth is critical for servers running gigabit Ethernet, Fibre Channel and other high-speed networking applications.

6

Point-to-Point Protocol (PPP) — A protocol defined for direct communication links between two nodes in a network.

Public Switched Telephone Network (PSTN) — The concentration of the world’s public circuit-switched telephone networks, in much the same way that the Internet is the concentration of the world’s public IP-based packet-switched networks. Originally a network of fixed-line analog telephone systems, the PSTN is now almost entirely digital, and now includes mobile as well as fixed telephones.

Protocol — A specific set of rules, procedures or conventions relating to format and timing of data transmission between two devices in a telecommunication connection.

Radio Network Controller (RNC) — The governing element in a 3G wireless radio access network responsible for control of base stations which are connected to the controller. The RNC carries out radio resource management, some of the mobility management functions and is the point where encryption is done before user data is sent to and from the mobile device.

Router — A highly intelligent device that acts as a junction between two networks to transfer data packets among them.

Real-time Transport Protocol (RTP) — A protocol that provides end-to-end network transport functions suitable for applications transmitting real-time data, such as audio, video or simulation data, over multicast or unicast network services.

Session Initiation Protocol (SIP) — A text-based protocol developed by the IETF for initiating, modifying, and terminating an interactive session between users that involves multimedia elements such as video, voice, instant messaging, online games, and virtual reality in an IP-based packet network. In November 2000, SIP was accepted as a 3GPP signaling protocol and permanent element of the IMS architecture. SIP is one of the leading signaling protocols for VoIP.

Signaling Gateway — A gateway appliance component solely responsible for translating signaling messages (i.e., information about call establishment and teardown) between one medium (usually IP) and another (PSTN). A signaling gateway is often part of a softswitch in modern VoIP deployments.

Signaling System 7 (SS7) — The protocols used in the PSTN 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.

Signaling Transport (SIGTRAN) — A standard defined by IETF as “an architecture framework for transport of message-based signaling protocols over IP networks.”

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).

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

7

encoding can handle many more voice channels. T1 lines are also used to connect networks across remote distances.

T3/E3/J3 — 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.

TCP/IP — Also known as the Internet Protocol Suite, TCP/IP is the set of communications protocols used for the Internet and other similar networks. It is named from two of the most important protocols in it; the Transmission Control Protocol (TCP) and the Internet Protocol (IP), which were the first two networking protocols defined in this standard.

Time-division multiplexing (TDM) — A type of digital or analog multiplexing in which two or more signals or bit streams are transferred apparently simultaneously as sub-channels in one communication channel, but physically are taking turns on the channel.

Telecommunications Equipment Manufacturer (TEM) — A company that manufacturers telecom equipment for sale to telecommunications carriers.

Triple Play — The delivery of voice, video and data over a single broadband connection.

User Plane — An ATM term referring to the functions which address flow control and error control. The User Plane cuts through all 4 layers of the ATM Protocol Reference Model.

VersModule-Eurocard (VME) — A mechanical and electrical bus standard developed in the late 1970s, with a backplane that runs at 80 Mbps and is most commonly used in commercial, military and industrial applications.

Voice over Internet Protocol (VoIP) — A phone call transmitted over a data network. The “Internet Protocol” is a catch-all for the protocols and technology of encoding a voice call that allow the voice call to be slotted in between data calls on a data network.

Virtual Private Network (VPN) — A highly secure network service offering used for accessing a corporate local area network, server or corporate intranet using the resources of the public Internet. VPNs are highly effective for telecommuters, traveling employees, and/or to link branches or regions, vendors, partners, affiliates, etc. to a corporate office/network.

Wide Area Network (WAN) — 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 connectivity.

Worldwide Interoperability of Microwave Access (WiMAX) — A standard formed in June 2001 to promote conformance and interoperability of the IEEE 802.16 standard. The WiMAX Forum describes WiMAX as “a standards-based technology enabling the delivery of last mile wireless broadband access as an alternative to cable and DSL.”

8

Mission

The Company’s mission is to provide innovative, high-performance network connectivity and content management and processing solutions to the converging voice, data, and video communication segments of telecommunications, enterprise, and military/aerospace markets. Interphase will do this through innovative robust building blocks, highly integrated subsystems and innovative gateway appliances, along with engineering design and manufacturing services.

The Company’s ongoing strategy is to be a “Trusted Partner” and vendor of choice for commercial off-the-shelf (COTS) product solutions as the standards-based COTS market emerges, giving Interphase a powerful foothold within the major tier I TEMs while expanding into tier II and tier III customer sets. During 2008, Interphase continued to expand its relationship with many of the key system integration partners that supply all segments and geographic areas of the market and provide fully integrated platform solutions to customers looking for rapid time to market offerings, thus further refining the Company’s position as a key solutions provider to the top integrators in the industry.

In achieving these objectives, Interphase has reinforced its brand image as a provider of hardware, software, and service offerings in network connectivity and content management and processing. Our Company is focused on bringing to market solution offerings that take our customers from TDM network connectivity all the way to full IP-based network elements of the future. We have placed our company in the content management and processing space by laying the foundation with product solutions focused upon packet acceleration hardware and software offerings. These building block elements become the blueprint that will drive the base of differentiated content applications for the future. Interphase will move vertically along this architectural blueprint providing hardware, software and services that deliver secure differentiated content across multiple industries.

Recent Developments

In 2008, the Company delivered a mixture of custom and standard products adhering to the schedules committed to our customers based on the requests for proposal (RFP) and design win activity in previous years. This effort included the delivery of multiple AdvancedMC products for field deployment. During the year, we successfully delivered a new PCI-e low profile standards based product for intelligent T1/E1 and media processing applications. The Company also added additional configurations of our media converter gateway product which resulted in increased production deliveries of the product. We also continued to enhance our presence in the user plane segment of the market. With a comprehensive portfolio of AdvancedMC, PCI-x/PCI-e and gateway appliance products, the Company was able to obtain additional design wins in the user plane segment of the network during the year.

As the telecommunications network transitions from a circuit switched-based network to a packet, or IP switched network, securing the transmission of information transported across the IP network has become very critical. Interphase has continued to build upon its successful security product portfolio in the PMC and PCI form-factors and added multi-core technology to its group of solutions for content management and packet processing. Rounding out this new group of announcements was our first 16 core New Equipment Building System (NEBS) compliant PCI-x Cavium based packet processing card. With special attention paid to thermal design, the Company was able to fit two 16 core packet processing cards into an Intel based server built for wireless solutions of the next generation. These cards will be used for

9

routing, traffic management, deep packet inspection, lawful intercept and many other applications in the new IP based network as well as enterprise based solutions.

General

With a high performance and high quality product portfolio, ease of integration, highly capable development, post-development support and professional services for customization and integration, Interphase has established itself as a “trusted partner” to its global TEM customer base by delivering cost-effective and expedient time-to-market solutions that enable its customers to deliver advanced communications infrastructure solutions. The following are key components of our product and service offerings which have allowed us to become the “trusted partner” to our customer base.

Professional Services

The Interphase professional services group provides us with the ability to customize and tailor the Company’s standards-based product offerings to the specific and unique needs of its customers. During 2008, the services group was engaged in providing significant software enhancements and capabilities to our building block products, expanding their utility in a broad range of applications. In addition, the services group has played a key role in the interoperability testing of Interphase products together with complementary single board computer carriers, DSP blades and AdvancedTCA and MicroTCA platforms from other industry suppliers.

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

As the enterprise server market has advanced to deliver high performance computing solutions, high throughput networking adaptor and security products have become essential to deliver end application performance needs.

Advances in the PCI interconnect technology to higher speeds (PCI-x) and serial connectivity (PCI-e) has enabled server solutions to meet ever-increasing connectivity and bandwidth requirements. During 2008, Interphase completed successful delivery of four and two port low-profile gigabit Ethernet cards. These cards can fit in the smaller slots on servers allowing more space for higher density solutions for our customers. Rounding out this exciting group of announcements was our first multi-core PCI-x Cavium based packet processing cards. These offerings enhance the Company’s overall portfolio of products aimed at the new IP based networks and enterprise solutions.

Delivering a comprehensive environment-friendly product portfolio

Interphase continued its push to deliver environment-friendly products to the marketplace. During 2008, all new products delivered were compatible with Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (RoHS), the European directive, and we have enabled our customers across our broad portfolio to deliver environment-friendly products.

Delivering superior customer service

Throughout the Company’s more than 30-year history, Interphase has established strong relationships with top-tier global suppliers of enterprise computer and telecommunications equipment. With a vertically

10

integrated account perspective, Interphase provides flexibility, timely response and other customized account service features. Further, the Company’s technical support is staffed by subject-matter experts for both telecom and enterprise products, allowing Interphase to deliver superior pre- and post-sales support and services.

Establishing key strategic alliances and partnerships

Interphase products are utilized by customers in conjunction with other companies’ products to enable the delivery of leading-edge network solutions. By delivering standards-compliant, interoperable products, Interphase helps to ease the integration efforts for our customers. A key to ensuring interoperability is the pre-testing of Interphase products with complementary products from other vendors in the supply chain.

In addition, with the emergence of standards-based platforms and products, such as AdvancedTCA, there have been significant changes in the telecommunications industry value chain. This has resulted in a rise in importance of systems integrators who have taken on a number of tasks which were previously performed in-house by the TEMs.

Interphase has recognized this trend and focused its sales and marketing efforts to establish strategic relationships with many of the component and systems integration vendors in the industry supply chain. The benefits of these alliances include exposure to new customer opportunities, additional higher value-add opportunities at existing customers and the increased ability to win competitive bids by emerging as the “network connectivity supplier of choice” to all bidding parties. These relationships also provide Interphase the opportunity to leverage joint marketing efforts to increase market exposure in areas such as industry trade events, seminars, whitepapers, and subject matter expert articles. However one of the key strategic advantages of these alliances is the ability to expand into markets both horizontally and vertically. With many of our partners focused on military/aerospace, VoIP, and media markets, they provide the bundling of our products into their overall solutions that are sold not only to tier I customers but packaged to reach the tier II and III markets that require platforms or appliances.

During 2008, the Company solidified several new system integrator strategic relationships to help us expand an additional channel for delivery of our products, thus extending our market reach and opportunity. In addition to our traditional I/O products we have also been very active in promoting our packet accelerator product portfolio as a key complementary product offering that enhances the overall solution offering across a broad range of IP packet services applications.

Enhancing operational efficiencies

One of the key motivations for an industry to move to standards-based products is the ability to reduce overall system costs and re-use these products across multiple applications to maximize flexibility. The move to AdvancedTCA standards in the telecommunications industry is driven by the same needs for cost reduction and supply chain optimization. The emergence of low-cost Asian product manufacturers has increased the competitive landscape and the need for highly cost-effective solutions in the marketplace. For Interphase, these trends are expected to result in downward pressure on our product profit margins and will, in turn, dictate the need for the Company to increase product delivery and manufacturing efficiencies.

11

Products

Interphase offers a large portfolio of products bundled with optimized software packages to address applications in the telecommunications, enterprise, and military networking markets within its one reporting business segment (Converged Communication Network). These products span multiple form factors including PCI, PCI-x, PCI-e, PMC, cPCI, cPSB, AdvancedTCA and AdvancedMC. Within the Converged Communication Network business segment Interphase offers two product groups: Broadband Telecom products and Enterprise products. Broadband Telecom products revenue accounted for 89%, 85% and 79% of total revenue in 2008, 2007 and 2006, respectively.

Broadband Telecom Products

Integrated Communications Controllers

The integrated communications controller product family is designed to enable different types of physical connections within the telecommunications network. These products fall into the subcategories of T1/E1/J1 controllers and high-density interface controllers.

T1/E1/J1 Controllers

This 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 in Asia and Australia) and the J1 format (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:

iSPAN 4538 — a PMC with two T1/E1/J1 interfaces on the front faceplate and a 10/100 Ethernet port

iSPAN 4539/4539F — a PMC with four T1/E1/J1 interfaces via front or rear access, and a 10/100 Ethernet interface on the front

iSPAN 5539F — a PCI card with four T1/E1/J1 interfaces for use in server systems

iSPAN 5539 — a native PCI card with four T1/E1/J1 interfaces for use in server systems

iSPAN 3639 — an AdvancedMC with four or eight T1/E1/J1 interfaces via front and rear access with support for both signaling and media termination

iSPAN 5639 — a PCI-e four or eight port T1/E1/J1 interface card for use in server systems with PCI-e host connectivity

iSPAN 5639E — a PCI-e four or eight port T1/E1/J1 interface card for use in server systems with PCI-e host connectivity providing the addition of echo cancellation to the card

12

iSPAN 5639L — a PCI-e four port T1/E1/J1 interface card for use in server systems with PCI-e host connectivity but requiring installation in a low profile slot

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 Controllers

These 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 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

iSPAN 4533P — a single port OC-12/STM-4 passive interface PCM with support for a variety of fiber optic connection types

iSPAN 3650 — an AdvancedMC with four port OC-3/STM-1 or single port OC-12 along with interworking capability and 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)

13

ATM Network Interface Cards

ATM network interface cards are used in many broadband networking elements for processing information transported on ATM networks. Key products include:

iSPAN 4575/4576 — a single or dual-port OC-3/STM-1 PMC for ATM processing

iSPAN 5575/5576 PCI ATM Communications Interface Card — a single or dual-port OC-3/STM-1 PCI card for ATM processing

iSPAN 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

Gateway Appliance Solutions

Interphase gateway appliances provide targeted high performance and easy-to-manage solutions to address the needs of interworking in the emerging transition from PSTN and ATM-based legacy networks to all-IP based networks. These appliances integrate Interphase building block products and software into more robust and complete solution offerings. Key products include:

iNAV^® 9200 Broadband Access Gateway — an advanced, price/performance-maximized solution for applications requiring the translation of IP to/from ATM

iNAV^® 921x Media Converter — provides seamless media conversion from legacy TDM streams over T1/E1s to RTP streams for delivery over the IP network, with support for up to 16 T1/E1 ports and two gigabit Ethernet ports for IP connectivity

Security Acceleration Cards — Telecom

The Interphase security product portfolio provides encryption and decryption capabilities enabling customers to securely operate enterprise or telecommunications networks. The key telecom related product:

45NS — a PMC 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

14

Content Management and Packet Acceleration Cards

Interphase offers a broad portfolio of multi-port gigabit Ethernet Cavium based multi-core packet processor based solutions that provide enhanced traffic management, security, routing, deep packet inspection and many other capabilities for a variety of telecommunications and enterprise networking solutions. Key products include:

iSPAN^® 55CA PCI-x™ — Quad SFP Gigabit Ethernet Packet Processor based on the Cavium Octeon Plus high-performance multi-core processor architecture

iSPAN^® 55MC8 PCI-x™ — Quad SFP Gigabit Ethernet Packet Processor based on the Cavium Octeon Plus high-performance multi-core processor architecture and support for a variety of fiber optic connection types

iSPAN^® 36CA — AdvancedMC with 4 port Gigabit Ethernet Packet Processor based on the Cavium Octeon Plus high-performance multi-core processor architecture

iSPAN^® 36MC1 — AdvancedMC with 4 port Gigabit Ethernet Packet Processor based on the Cavium 56XX multi-core processor architecture (in development)

iSPAN^® 36MC2 — AdvancedMC Packet Processor with Dual 10 Gigabit Ethernet ports based on the Cavium 56XX multi-core processor architecture (in development)

In 2008, to enhance this line of products and help reduce the development time of customers providing new IP based network applications, Interphase entered into a strategic software relationship with 6WIND to jointly develop three extensions to the 6WINDGate™ software suites: SIP, SIP to RTP, and GTP-U. These software offerings from Interphase provide customers migrating to IP based networks with off the shelf application solution modules incorporated into the 6WINDGate™ software that enhance the processing level of multi-core based hardware platforms and provide the protocols needed for today’s IP based networks.

Key network elements and applications enabled include:

• Radio Network Controller (RNC)

• Packet Access Gateway in 4G wireless networks

• ASN Gateway and BSCs in WiMax networks

• GGSN in Wideband CDMA networks

• Wireless LAN Access Concentrators

• Content Processing Appliances

• Security Appliances

15

Enterprise Products

Gigabit Ethernet Network Interface Cards

Interphase offers a broad portfolio of multi-port gigabit Ethernet solutions that provide enhanced Ethernet connectivity for a variety of telecommunications and enterprise networking solutions. Key products include:

454G SlotOptimizer™ — a quad-port PMC Ethernet card for high-density Ethernet connectivity

364G SlotOptimizer™ — a quad-port AdvancedMC Ethernet card for high-density Ethernet connectivity

554GB SlotOptimizer — a quad-port PCI Ethernet card with PCI-x for high-density Ethernet connectivity

564GB SlotOptimizer — a quad-port PCI-e Ethernet card for high-density Ethernet connections

564GL SlotOptimizer — a quad-port Low Profile PCI-e Ethernet card for high-density Ethernet connections

562GL SlotOptimizer — a dual-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

Security Acceleration Cards — Enterprise

The Interphase security product portfolio provides encryption and decryption capabilities enabling customers to securely operate enterprise or telecommunications networks. Key enterprise products include:

5585 — PCI card based on the Hifn 8155 security processor designed to accelerate multiple security protocols, including IPSec, for use in encryption and decryption of information

5556 — low-end PCI card based on the Hifn 7956 security co-processor designed to accelerate multiple security protocols, including IPSec, for use in encryption and decryption of information

566GS — PCI card based on the Hifn 8155 security processor with support for six gigabit Ethernet ports on the front panel designed for VPN and security appliances

16

Key network elements and applications enabled include:

• Firewall and VPN solutions

• On Line Transaction Processing (OLTP)

• Network Management solutions

New Product Development

There are a number of major market trends in the telecom market that will affect Interphase solution offerings. Interphase must rapidly respond to these market trends with expansions in its product portfolio and offerings.

Of the major market trends, perhaps the most prominent is the move from circuit switched-based networks to IP/Ethernet packet-based networks. This move has a profound impact on the telecom markets served by Interphase. The industry’s embrace of IP/Ethernet-based networks is primarily fueled by the following factors:

• Ethernet-based IP networks offer an inexpensive, ubiquitous broadband packet-based delivery approach for carriers. The simplicity of IP-based networks are expected to shorten the period of new service deployment and time to revenue.

• The second promise of this network architecture is greatly reduced cost of purchasing, provisioning and maintaining their networks.

• Another significant trend in the COTS market is the move to AdvancedTCA platforms. Sponsored primarily by Intel, a number of AdvancedTCA suppliers have emerged to address the ever-growing needs of TEMs. TEMs have been reducing their internal development infrastructure over the past several years and are now more dependent on outsourced solutions to meet their product development needs.

• With the transition to the packet infrastructure modules that provide multi-gigabit Ethernet and 10 gigabit Ethernet line rate switching, processing and classification of packet data are becoming very important for a wide range of applications including secure data transport, micro-billing and high speed multi-media content delivery.

Interphase is focused on developing high performance, highly reliable products and solutions allowing rapid time to market for network based solutions in LTE, Femtocell, WiFi, WiMAX, and many other network expanding and enhancing architectures. We support multiple platform architectures based on AdvancedTCA, AdvancedMC, MicroTCA, PCI-x and PCI-e standards, along with custom appliances, that enable our customers to deliver cost-effective and expedient time-to-market solutions that address the above market trends.

Telecom Segment Initiatives

In the telecommunications market, Interphase continues to expand its product portfolio with the inclusion of new user plane and packet processing targeted products. These products are designed to address the

17

needs of high bandwidth applications for 3G wireless networks, VoIP networks, broadband access networks and the advanced services capabilities promised by the emerging IMS network architecture.

Packet Accelerator Products

Interphase has identified a key emerging opportunity for packet processing solutions that enable multi-gigabit and 10 gigabit line rate termination, inspection, classification, processing and switching of Ethernet and IP packet data. These packet processing modules and blades are emerging as essential building blocks for a wide range of applications including security processing, deep packet inspection and classification of user traffic and data, billing applications, etc. These packet data modules are also finding use in the aggregation of multiple user data at the access into the core network infrastructure, as well as the delivery of multi-media content to multiple users from the core of the network.

During 2008, we began delivering products that would position us as an IP “packet processing” leader. In order to further propel our position in the market and increase our revenue opportunities, we have expanded our product portfolio to address native IP network application requirements of high performance line rate deep packet inspection and packet processing. The Interphase product portfolio of AdvancedMC and PCI adaptor products are well suited for use in AdvancedTCA, MicroTCA, rack-mount server and blade server platform products that are being used to deliver IP based broadband services. These products are based on the industry leading Cavium Octeon Plus^® processor family that delivers high performance packet processing within the constraints of the module form-factors. The Octeon processors include co-processor and accelerator technology for many of the packet processing functions required in a network element. These functions include line rate encryption and decryption and compression and decompression of packets, high speed pattern matching on packet header content to help process application level protocols and deep packet inspection to deliver quality of service prioritization of packets, anti-virus and intrusion detection services. Interphase is also engaged in the delivery of a broad portfolio of software modules to enable acceleration of product development and time to market for our customers.

This new line of products enable line rate secure packet processing, packet inspection, classification, and Quality of Service (QoS) support. Interphase plans to deliver a comprehensive suite of software modules integrated together with the hardware offering to meet the high performance packet processing requirements in next generation networks.

AdvancedTCA,MicroTCA and AdvancedMC

AdvancedTCA standards define a highly reliable, manageable, high-performance and flexible platform architecture that enables the delivery of high throughput network solutions. Hence, TEMs have embraced AdvancedTCA as a common platform framework to deliver systems solutions to meet the needs of 3G wireless, IMS and VoIP network deployments.

The field-replaceable AdvancedMC module standards introduce additional flexibility for the delivery of application-specific functions to enhance a common platform vision and architecture.

MicroTCA standards define a smaller platform that uses the same AdvancedMC building blocks as AdvancedTCA. MicroTCA can be used to deliver complete network elements such as base stations, NodeB and, DSL access multiplexers, WiMAX base stations and IP-PBXs.

18

During 2008, Interphase completed successful general market availability delivery of multiple products in its AdvancedMC portfolio. These products have already been delivered to key customers for lab use and system integration activity and are now rolling out in volume. The Interphase AdvancedTCA and AdvancedMC product portfolio includes:

iSPAN 3639 — an AdvancedMC with four or eight T1/E1/J1 interfaces via front and rear access with support for both signaling and media termination

364G — an AdvancedMC with four Gigabit Ethernet interfaces

3602 — an AdvancedMC with two Gigabit Ethernet interfaces

iSPAN 3650 — an AdvancedMC with four OC-3/STM-1 unchannelized interfaces via front and rear access for termination of ATM packets and interworking to IP

iSPAN 36CA — an AdvancedMC with four 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 four mid-size or full size AdvancedMCs with 10 Gigabit fabric interface support for the integration and delivery of high-capacity and high performance subsystem solutions

iNAV 74PF — a quad processor dual-core Freescale 8641D based processor blade for high performance embedded packet and control processing

All of the AdvancedMC solutions are also usable in both AdvancedTCA applications as well as MicroTCA based platform architectures being adopted for network edge and access solutions. Interphase continues to see significant adoption of the MicroTCA platform architecture for a wide variety of telecommunications applications as well as in adjacent embedded markets such as the military segment for defense related networking applications.

Beyond AdvancedTCA and MicroTCA, AdvancedMC solutions are also attracting the attention of TEM customers as a valuable building block of the latest technology in their proprietary platforms. Some of the TEMs are looking at adding AdvancedMC carrier blades to their proprietary systems enabling them to reuse the AdvancedMC technology available in the market and refresh/upgrade the functionality of these proprietary systems. Interphase, with its broad AdvancedMC product portfolio, is well positioned to take advantage of these opportunities. In addition, blade server vendors are also introducing AdvancedMC carriers in their telecommunications blade server platforms to take advantage of the diverse I/O processing capabilities offered by the AdvancedMC form-factor. Interphase is working closely with these blade server manufacturers to ensure interoperability and integration of its AdvancedMCs to offer customers additional choices as they decide on the specific platform form-factor for the end network applications.

Cost Reduction Services

Another major trend in the worldwide communications infrastructure market is the increased business in the emerging markets for the delivery of basic communications and wireless services. These markets tend to be very cost sensitive and very competitive. Many of the TEMs are re-purposing their existing legacy

19

platform infrastructure to address these markets with cost reduction initiatives that help reduce their overall solution cost while extending the lifespan of the products. During 2007 and 2008, Interphase successfully completed important cost reduction developments for some of it’s key customers; delivering a high quality product in a very short time span and began volume rollout. The Company continued to increase the amount of cost reduction services and expanded this into engineering and manufacturing services offerings adding several new contracts to its client list. Interphase will seek to leverage its broad technology experience and expertise to support its customers in similar cost-reduction and services projects going forward.

PCI Rack Mounted Server Solutions

Telecommunications grade rack mount server and blade server solutions from server manufacturers such as IBM, Sun and HP continue to be an important platform of choice for delivery of operation, administration, management and provisioning applications as well as for network elements needing large databases and storage. The Company is therefore also engaged in delivering PCI/PCI-e based modules that take advantage of the equivalent AdvancedMC module designs to meet the I/O needs of these platforms. Key products were made available in the first two quarters of 2008 and included the iSPAN 5639 4/8 port T1/E1/J1 communications controller module as well as the iSPAN 5639E 4/8 port T1/E1/J1 media interface module and the iSPAN 55CA Quad gigabit Ethernet Packet Accelerator Module. These products along with the addition of the 5639L, a new low profile version of our four port T1E1J1 controller, created a robust portfolio of solutions for rack mounted and standalone servers.

Appliance Solutions

Interphase continues to expand and innovate with its appliance solutions, by delivering easy to use and easy to manage devices that address key transition requirements in the network infrastructure. The iNAV 9200 broadband access gateway solution was deployed successfully during 2006 for the delivery of ATM to IP interworking in a number of broadband access applications.

During 2008, Interphase also completed the delivery of its iNAV 921x Media Converter appliance based on the iNAV 9200 platform for media interworking between TDM and IP media streams and began shipping this product in volume. The 921x Media Converter appliance provides up to 16 T1/E1 ports and two Gigabit Ethernet ports for TDM media stream termination and processing for conversion and transmission to an IP network. In addition, Interphase is exploring additional opportunities that enable us to deliver subsystem solutions for target interworking and networking applications, with the broad portfolio of AdvancedMCs integrated on the Interphase AdvancedTCA carrier blade.

Enterprise Networking Initiatives

In the enterprise networking market, Interphase has focused on delivery of specialized SlotOptimizer solutions for servers used in high performance computing, scientific lab environments and advanced enterprise applications. During 2007 and 2008, the Company completed successful integration of its security line of PCI products into a key tier I VPN and firewall appliance and added an additional SlotOptimizer card supporting up to six gigabit Ethernet ports together with an onboard security co-processor solution. The Company expects to begin shipping this product in 2009.

20

Industry Standards Participation

Throughout its history, Interphase has been active in the formulation of industry standards by participating in groups such as PICMG and in the AdvancedTCA subcommittee, to actively work with other key industry participants to help drive the standardization of telecom solutions. In addition, Interphase has been an active participant in interoperability events to ensure that the Company’s products are standards-compliant as well as fully interoperable with the ATCA carrier board solutions from other vendors to ensure ease of integration for its customers.

During the year, Interphase was an active participant in the SCOPE alliance and Communications Platform Trade Association (CP-TA) standards activities. SCOPE is an industry alliance committed to accelerating the deployment of carrier grade base platforms for service provider applications. Its mission is to help, enable and promote the availability of open carrier grade base platforms based on COTS hardware/software and free open source software (FOSS) building blocks, and to promote interoperability to better serve service providers and consumers. All the major TEMs are sponsor members of the SCOPE alliance organization. The CP-TA is an association of communications platform and building block providers dedicated to accelerate the adoption of PICMG governed, open specification based communications platforms through interoperability certification. With industry collaboration, the CP-TA plans to drive a mainstream market for open industry standards based communications platforms by certifying interoperable building blocks.

Investment in New Product Development

The Company invests significant resources in the research and development of new products within the Converged Communication Network product area. Total research and development expense for the years ended 2008, 2007 and 2006 was $9.2 million, $10.2 million and $8.2 million, respectively.

Marketing and Customers

The Company’s broadband telecommunications products are sold to TEMs for inclusion into telecommunications and networking infrastructure solutions designed for use in both wireline and wireless carrier networks. The enterprise products are delivered to server manufacturers for integration into server platforms for delivery of high performance application platforms for enterprise networking.

During 2008, the Company solidified its customer base with products delivered or under design-win consideration at each of the major tier I TEMs. In addition, with its strategic alliances with the system integrators, Interphase has been able to expand its customer footprint across the globe enabling us to diversify our revenue and customer base beyond what was accomplished in 2007.

During 2008, sales to Nokia-Siemens Networks, Alcatel-Lucent and Emerson were $6.0 million or 23%, $5.6 million or 21% and $3.1 million or 12% of the Company’s consolidated revenues, respectively. During 2007, sales to Alcatel-Lucent and Emerson (formerly Motorola ECC) accounted for $9.5 million or 31% and $5.1 million or 17%, of the Company’s consolidated revenues, respectively. During 2006, sales to Alcatel-Lucent, Emerson (formerly Motorola ECC) and Hewlett Packard accounted for $11.3 million or 34%, $7.5 million or 22% and $3.4 million or 10% 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.

21

The Company markets its products through its direct sales force, manufacturers’ representatives and value-added distributors. In addition to the Company’s headquarters in Plano, Texas, the Company has sales offices located in or near Los Angeles, California; Newark, New Jersey; Amsterdam, Holland; Helsinki, Finland; Sydney, Australia; and Paris, France. The Company’s direct sales force markets products directly to key customers and supports manufacturers’ representatives and the distribution channel. In addition, the Company has entered into distribution agreements with key international distributors located in countries in North America, Asia and Europe. See Note 15 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 products utilizing application specific integrated circuits (ASIC), on some of its products, as well as standard off-the-shelf items, some of which are sole-sourced. 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, paying damages, developing non-infringing technology or acquiring licenses to the technology which is the subject of asserted infringement.

22

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, 2008, the Company had 124 full-time employees, of which 39 were engaged in manufacturing and quality assurance, 41 in research and development, 22 in sales, sales support, customer service and marketing and 22 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 large part, upon its ability to attract and retain highly skilled and motivated technical, managerial, sales and marketing personnel. Competition for such personnel is significant.

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.

Competition

The Company’s competition includes vendors specifically dedicated to the telecommunication and enterprise I/O product markets. In the case of specific product offerings, Interphase may also face competition from the in-house design teams at the TEMs. Increased competition and commoditization of network interface technologies could result in price reductions, reduced margins and loss of market share. Our products and services compete on the basis of the following key characteristics: performance, functionality, reliability, pricing, quality, customer support skills, ease of integration, time-to-market delivery capabilities and compliance with industry standards. Most of the Company’s major TEM 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 additional off-the-shelf products for their product design.

Item 1A. Risk Factors.

The current crisis in global credit and financial markets could materially and adversely affect our business and results of operations.

The global credit and financial markets have been experiencing extreme disruptions in recent months, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, and uncertainty about economic stability. There can be no assurance that there will not be further deterioration in credit and financial markets and confidence in economic conditions. These economic uncertainties affect businesses such as ours in a number of ways, making it difficult to accurately forecast and plan our future business activities. The current tightening of credit in financial markets may lead consumers and businesses to postpone spending, which may cause our customers to

23

decrease or delay their existing and future orders with us. In addition, financial difficulties experienced by our suppliers, distributors, or customers could result in product delays, increased accounts receivable defaults and inventory challenges. We are unable to predict the likely duration and severity of the current and potential future disruptions in the credit and financial markets and adverse global economic conditions. There can be no assurance that if the current uncertain economic conditions continue that it will not have a material adverse effect on our operating results, financial condition and cash flows.

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.

We have experienced fluctuations in our period-to-period revenue and operating results in the past and may experience fluctuations in the future. Our sales on both an annual and a quarterly basis can fluctuate as a result of a variety of factors, many of which are beyond our control. We may have difficulty predicting the volume and timing of orders for products, and delays in closing orders can cause our operating results to fall short of anticipated levels for any period. Delays by our OEM customers in producing products that incorporate our products could also cause operating results to fall short of anticipated levels. Other factors that may particularly contribute to fluctuations in our revenue and operating results include success in achieving design wins, the market acceptance of the OEM products that incorporate our products, the rate of adoption of new products, competition from new technologies and other companies, and the variability of the life cycles of our customers’ products.

Because fluctuations can happen, we believe that comparisons of the results of our 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 revenue or operating results for any quarter are less than the level expected by securities analysts or the market in general, the market price of our common stock could immediately and significantly decline.

The telecommunications signaling and networking business is characterized by rapid technological change and frequent introduction of new products.

The market for our 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. Future revenue will depend upon our ability to anticipate technological change and to develop and introduce enhanced products of our 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 18 to 30 months. This timing has varied significantly during times of mergers, economic instability, and technology changes affecting platform architectures. Our inability to develop and manufacture new products in a timely manner, the existence of reliability, quality or availability problems in our products or their component parts, or the failure to achieve market acceptance for our products could have a material adverse effect on our operating results, financial condition and cash flows.

24

We operate in an intensely competitive marketplace and many of our competitors have greater resources than we do.

The telecommunications, signaling and networking business is extremely competitive, and we face competition from a number of established and emerging companies, both public and private. Our 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. In addition, as we broaden our product offerings, we may face competition from new competitors. Companies in related markets could offer products with functionality similar or superior to our product offerings. Increased competition could result in significant pricing pressures. These pricing pressures could result in significantly lower average selling prices for our products. We may not be able to offset the effects of any price reductions with an increase in sales volumes, cost reductions or otherwise. We expect that competition will increase as a result of industry consolidations and alliances, as well as the potential emergence of new competitors. There can be no assurance that we will be able to compete successfully with existing or new competitors or that competitive pressures will not have a material adverse effect on our operating results, financial condition and cash flows.

The loss of one or more key customers or reduced spending by customers could significantly impact our operating results, financial condition and cash flows.

While we enjoy very good relationships with our customers, there can be no assurance that our principal customers will continue to purchase products from us at the 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 us, and customers have certain rights to extend or delay the shipment of their orders. The loss of one or more of our major customers, or the reduction, delay or cancellation of orders or a delay in shipment of products to such customers could have a material adverse effect on 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.

A design win occurs when a customer or prospective customer notifies us that our 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 18 to 30 months after the design win occurs. A variety of risks such as schedule delays, customer consolidations, 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 our operating results, financial condition and cash flows.

Design defects, errors or problems in our products could harm our reputation, revenue and profitability.

If we deliver products with errors, defects or problems, our credibility and the market acceptance and sales of our products could be harmed. Further, if our products contain errors, defects or problems, then we

25

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 us or our customers. We have agreed to indemnify our customers in some circumstances against liability from defects in our 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 us, 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 our license agreements. A product liability claim, whether or not successful, could seriously harm our business, financial condition and results of operations.

We maintain insurance coverage for product liability claims. Although we believe this coverage is adequate, we are not assured that coverage under insurance policies will be adequate to cover specific product liability claims made against us. 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 us.

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.

Certain components used in our products, such as application specific integrated circuits (ASIC), are currently available from one or a limited number of sources. There can be no assurance that future supplies will be adequate for our needs or will be available with acceptable prices and terms. 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 gross margins, either of which could have a material adverse effect on operating results, financial condition and cash flows.

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.

We manufacture our products at our Carrollton, Texas facility, and have established alternative manufacturing capabilities through a third party in the event of a disaster in the current facility. Even though we have been successful in establishing an alternative third-party contract manufacturer, there can be no assurance that we would be able to retain their services at the same costs that we currently enjoy. In the event of an interruption in production, we may not be able to deliver products on a timely basis, which could have a material adverse effect on our revenue and operating results. Although we currently have business interruption insurance and a disaster recovery plan to mitigate the effect of an interruption, no assurances can be given that such insurance or recovery plan will adequately cover lost business as a result of such an interruption.

If we fail to accurately forecast demand for our products, we would be exposed to risk associated with inventory.

We must identify the right product mix and maintain sufficient inventory on hand to meet customer orders. Failure to do so could adversely affect our sales and earnings. However, if circumstances change

26

there could be a material impact on the net realizable value of inventory which could adversely affect our results.

We may be unable to effectively protect our proprietary technology, which would negatively affect our ability to compete. Also, if our products are alleged to violate the proprietary rights of others, our ability to compete would be negatively impacted.

Our success depends partly upon certain proprietary technologies developed within our products. To date, we have relied principally upon trademark, copyright and trade secret laws to protect our proprietary technologies. We generally enter into confidentiality or license agreements with our customers, distributors and potential customers, which limit access to and distribution of the source code to our software and other proprietary information. Our employees are subject to our employment policy regarding confidentiality. There can be no assurance that the steps taken by us in this regard will be adequate to prevent misappropriation of our technologies or to provide an effective remedy in the event of a misappropriation by others.

Although we believe that our 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 we may not ultimately prevail. Adverse determinations in such litigation could result in the loss of proprietary rights, subject us to significant liabilities, require that we seek licenses from third parties or prevent us from manufacturing or selling our products, any of which could have a material adverse effect on our operating results, financial condition and cash flows.

It may be necessary to obtain technology licenses from others due to the large number of patents in the telecommunications and 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 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 our operating results, financial condition and cash flows.

We depend on key personnel to manage our business effectively.

Our success depends on the continued contributions of our personnel and on our ability to attract and retain skilled employees. Changes in personnel could adversely affect our operating results, financial condition and cash flows.

We have substantial international activities, which expose us to additional business risks including political, economic and currency risks.

In 2008, we derived approximately 67% of our revenues from sales outside of North America. Economic and political conditions in some of these markets as well as different legal, tax, accounting and other regulatory requirements may adversely affect our operating results, financial condition and cash flows. We are exposed to adverse movements in foreign currency exchange rates because we conduct business on a global basis and in some cases in foreign currencies. Our operations in France are measured in the

27

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).

We may require additional working capital to fund operations and expand our business.

We believe our current financial resources will be sufficient to meet our present working capital and capital expenditure requirements for the next twelve months. However, we may need to raise additional capital before this period ends to further:

• fund research and development of new products beyond what is expected in 2009;

• expand product and service offerings beyond what is contemplated in 2009 if unforeseen opportunities arise;

• take advantage of potential acquisition opportunities in the current economic environment;

• invest in businesses and technologies that complement our current operations; or

• respond to unforeseen competitive pressures.

Our 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. From time to time, we expect to evaluate the acquisition of, or investment in businesses and technologies that complement our current operations. If current cash, marketable securities, lines of credit and cash generated from operations are insufficient to satisfy the liquidity requirements, we may seek to sell additional equity securities, issue debt securities or increase our working capital line of credit. The sale of additional equity securities could result in additional dilution to shareholders. There can be no assurance that financing will be available in amounts or on terms acceptable, if at all. If adequate funds are not available on acceptable terms, our 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 our results of operations, financial condition and cash flows.

We have incurred significant losses.

We posted a net loss of approximately $3.0 million and $1.2 million, for the years ended December 31, 2008 and 2007 respectively. In order to achieve profitability consistently, we will need to generate higher revenues while containing costs and operating expenses. We cannot be certain that our revenues will grow or that we will generate sufficient revenues to achieve and maintain profitability on a long-term, sustained basis. If we fail to achieve and maintain profitability, then the market price of our common stock will likely be negatively impacted.

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.

The trading price of our common stock is subject to wide fluctuations in response to quarter-to-quarter fluctuations in operating results, general conditions in the telecommunications and networking industry 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

28

specific companies. These broad market fluctuations may adversely affect the market price of our common stock. Our common stock has historically had relatively small trading volumes. As a result, small transactions in common stock can have a disproportionately large impact on the price of the common stock.

2009 is expected to be the first year that our internal controls over financial reporting will be audited by our independent registered public accounting firm in accordance with Section 404 of the Sarbanes-Oxley Act of 2002.

For the years ending December 31, 2008 and 2007, management completed its assessments of our internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”). The year ending December 31, 2009, is expected to be the first year that our internal controls over financial reporting will be audited by our independent registered public accounting firm in accordance with Section 404. As a result of the ongoing interpretation of new guidance issued by the standards-setting community and the audit testing yet to be completed, our internal controls over financial reporting may include one or more unidentified material weaknesses, which would result in us receiving an adverse opinion on internal controls over financial reporting from our independent registered public accounting firm. This could result in significant additional expenditures internal and external responding to the Section 404 internal control audit, heightened regulatory scrutiny and potentially an adverse effect to the price of the common stock.

Item 1B. Unresolved Staff Comments.

None.

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 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 February 2014 and the manufacturing and operations center lease extends through March 2014. The Company also leases a 9,000-square foot facility in Chaville, France (near Paris) that primarily supports an engineering team. The Chaville, France lease extends through June 2011. 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, computer equipment and fixtures.

Item 3. Legal Proceedings.

None.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

29

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 Global Market, or its predecessors, under the symbol INPH. The following table summarizes its high and low closing price for each quarter during 2007 and 2008 as reported by the NASDAQ Global Market.

2007	High		Low
First Quarter		11.85		8.20
Second Quarter		13.66		8.91
Third Quarter		12.52		8.99
Fourth Quarter		12.43		9.27

2008	High		Low
First Quarter		9.93		4.52
Second Quarter		4.90		3.20
Third Quarter		3.45		2.80
Fourth Quarter		2.99		1.59

The Company had approximately 1,900 beneficial owners of its common stock, of which 99 were of record as of March 13, 2009.

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.

					Number of securities in
					thousands remaining
					available for future
	Number of securities in				issuance under equity
	thousands to be issued		Weighted-average		compensation plan
	upon exercise of		exercise price of		(excluding securities
	outstanding options,		outstanding options,		reflected in column
Plan Category	warrants and rights		warrants and rights		(a))
	(a)		(b)		(c)
Equity Compensation plans approved by security holders		1,634	$	9.65		1,314
Equity Compensation plans not approved by security holders		—		—		—
Total		1,634	$	9.65		1,314

30

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.

See Note 10 of the accompanying notes to the consolidated financial statements for information regarding the Company’s shareholder approved stock incentive plans.

31

Stock Performance Graph

The following chart compares the cumulative total shareholder return of Interphase common stock during the years ended December 31, 2008, 2007, 2006, 2005 and 2004 with the cumulative total return of the NASDAQ composite index and the DJ Wilshire Telecommunications Equipment Index. The Company relied upon information provided by another firm with respect to the stock performance graph. The Company did not attempt to validate the information supplied to it other than review it for reasonableness. The comparison assumes $100 was invested on December 31, 2003 in the Common Stock of the Company and in each of the foregoing indices and assumes reinvestment of dividends.

Cumulative Return

	12/03		12/04		12/05		12/06		12/07		12/08
Interphase Corporation		100		65		34		64		80		13
NASDAQ Composite		100		110		113		127		138		80
DJ Wilshire Telecommunications Equipment Index		100		104		105		121		125		73

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Interphase Corporation, The NASDAQ Composite Index
And The DJ Wilshire Telecommunications Equipment Index

* $100 invested on 12/31/03 in stock & index-including reinvestment of dividends.
Fiscal year ending December 31.

Copyright © 2009 Dow Jones & Co. All rights reserved.

32

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 at or for the years ended December 31, 2008, 2007, 2006, 2005, and 2004, 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, 2008, 2007, and 2006.

Statement of Operations Data:
(In thousands, except per share data)

	Year ended December 31,
	2008			2007			2006			2005			2004
Revenues	$	26,231		$	30,780		$	33,403		$	30,852		$	35,015
Gross margin		14,031			17,591			18,126			16,097			19,171
Research and development		9,198			10,216			8,226			7,974			8,033
Sales and marketing		5,237			5,614			5,405			6,310			6,107
General and administrative		4,100			4,692			3,926			3,531			3,675
Restructuring charge		403			—			—			600			—
(Loss) income from operations		(4,907	)		(2,931	)		569			(2,318	)		1,356
Other income, net		618			1,128			1,112			237			240
(Loss) income before income tax		(4,289	)		(1,803	)		1,681			(2,081	)		1,596
Income tax (benefit) provision		(1,263	)		(609	)		(405	)		218			(122	)
Net (loss) income	$	(3,026	)	$	(1,194	)	$	2,086		$	(2,299	)	$	1,718
Net (loss) income per share
Basic EPS	$	(0.48	)	$	(0.19	)	$	0.36		$	(0.40	)	$	0.30
Diluted EPS	$	(0.48	)	$	(0.19	)	$	0.33		$	(0.40	)	$	0.27
Weighted average common shares		6,320			6,161			5,854			5,758			5,719
Weighted average common and dilutive shares		6,320			6,161			6,254			5,758			6,312

Balance Sheet Data:
(In thousands)

	December 31,
	2008		2007		2006		2005		2004
Working capital	$	25,301	$	27,030	$	26,604	$	24,554	$	26,450
Total assets		31,248		36,180		34,062		29,194		32,098
Total liabilities		6,962		8,918		8,262		6,696		7,310
Shareholders’ equity	$	24,286	$	27,262	$	25,800	$	22,498	$	24,788

33

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, effects of the ongoing crisis in global credit and financial markets, 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,” “will,” “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 arrangements 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. Sales tax collected from customers and remitted to the applicable taxing authorities is accounted for on a net basis, with no impact to revenues. Service revenue is recognized as the services are performed. Deferred revenue consists primarily of service revenue not yet performed.

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.

Accounts Receivable and Allowance for Doubtful Accounts: The Company records accounts receivable at their net realizable value and management is required to estimate the collectability of the

34

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. This reserve is also partially determined by using percentages applied to certain aged receivable categories based on historical results and is reevaluated and adjusted as additional information is received. After all attempts to collect a receivable have failed, the receivable is written off against the allowance for doubtful accounts.

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 decreases 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 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 in the United States (“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.

Fair Value of Financial Instruments: Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” which defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. SFAS No. 157 defines fair value as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Stock-Based Compensation: The Company accounts for stock-based compensation under the provisions of SFAS No. 123(R), “Share-Based Payments.” SFAS No. 123(R) superseded Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and revises guidance in SFAS No. 123, “Accounting for Stock-Based Compensation.”

35

Tax Assessments: The Company is periodically engaged in various tax audits by federal, state and foreign governmental authorities incidental to its business activities. The Company records reserves for its estimated probable losses of these proceedings, if applicable.

Income 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 SFAS 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. The Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes within financial statements. Under FIN 48, the impact of an uncertain tax position taken or expected to be taken on an income tax return must be recognized in the financial statements at the amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized in the financial statements unless it is more likely than not of being sustained.

CONSOLIDATED STATEMENT OF OPERATIONS AS A PERCENTAGE OF REVENUE

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

36

OVERVIEW

2008 was a year of considerable challenge for Interphase. A slowdown in all of the major economies throughout the world has stagnated deployments of telecommunications equipment and services, and this has led to a commensurate slowdown in our business activity in supplying the large tier I TEMs. The product demand picture in 2008 was very difficult to predict and the telecommunications industry as a whole has struggled. We have worked very hard to manage our resources and working capital in an effort to maintain a strong balance sheet for these uncertain times. We reduced spending early in the year in an effort to conserve cash as the market picture grew dimmer, and reallocated resources toward high value opportunities throughout the year. As we look to 2009, we have a number of new revenue generating design wins which we believe will bolster our revenues in the relatively near term.

RESULTS OF OPERATIONS

Revenues: Total revenues for the years ended December 31, 2008, 2007 and 2006 were $26.2 million, $30.8 million and $33.4 million, respectively. Revenues decreased by 15% in 2008 compared to 2007. This decrease was primarily attributable to our broadband telecom revenues which decreased by 11% to $23.2 million in 2008 from $26.1 million in 2007. The global economic slowdown had an impact on our customers and resulted in a significant telecommunications market slowdown. In addition, as expected our enterprise product line revenues decreased by 74% to $867,000 for 2008 compared to $3.4 million in 2007. All other revenues, composed primarily of professional services, cancellation charges and storage products increased 60% to $2.1 million in 2008 compared to $1.3 million in 2007. We had a one-time cancellation fee of $973,000 included in other revenue during 2008 for unique customer requirements for product development work that was discontinued. There were no similar fees earned in 2007.

Revenues decreased by 8% in 2007 compared to 2006. This decrease was primarily attributable to our enterprise product revenues. As expected, enterprise product revenues decreased approximately 29% to $3.4 million in 2007 from $4.7 million in 2006. In addition to our enterprise product revenue decrease, broadband telecom revenues decreased by approximately 2% to $26.1 million in 2007 from $26.5 million in 2006 primarily as a result of the significant reduction in revenues experienced in the first quarter of 2007 due to the general telecommunications market slowdown, which included the impact of the merger activity experienced in the businesses of our top tier I customers. All other revenues, composed primarily of storage products, professional services, project cancellation charges and raw material sales, decreased by approximately 38% to $1.3 million for the year ended December 31, 2007 compared to $2.2 million for the year ended December 31, 2006. Included in all other revenues for the year ended December 31, 2006 was approximately $400,000 of raw material parts sold at cost, which reduced our exposure to potential excess and obsolete inventory charges and approximately $600,000 of project cancellation charges, neither of which occurred in 2007.

Gross Margin: Gross margin as a percentage of revenue for the years ended December 31, 2008, 2007 and 2006 was 53%, 57% and 54%, respectively. The decrease in gross margin percentage in 2008 compared to 2007 is primarily driven by product mix as we saw an increase in purchases of our lower margin products within our broadband telecom product portfolio. Also, contributing to the decrease in our gross margin percentage was a decrease in factory utilization in 2008 compared to 2007. The negative factors to our gross margin were partially offset by a reduction in excess and obsolete inventory charges, as we recorded $200,000 in excess and obsolete inventory charges for the year ended December 31, 2008 compared to $300,000 for the year ended December 31, 2007. Approximately 75% of the 2008 excess

37

and obsolete inventory charges was the result of stranded inventory related to a future project, cancelled by Nortel Networks in connection with their reorganization under Chapter 11 in late January 2009. We believe that pricing pressures in the industry may continue to dampen our gross margin percentage 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 gross margin percentage in 2007 compared to 2006 is primarily driven by product mix as our higher margin broadband telecom products accounted for approximately 85% of our revenue compared to 79% in the preceding year. We recorded $300,000 in excess and obsolete inventory charges for the year ended December 31, 2007 compared to $500,000 for the year ended December 31, 2006. The $200,000 reduction in excess and obsolete inventory charges was partially offset by reduced plant utilization.

Research and Development: Our investment in the development of new products through research and development was $9.2 million, $10.2 million and $8.2 million in 2008, 2007 and 2006, respectively. As a percentage of revenue, research and development expenses were 35%, 33% and 25% for 2008, 2007 and 2006, respectively. Research and development expenses decreased in 2008 compared to 2007 by approximately $1.0 million. The decrease in research and development expense is primarily due to the restructuring plan we undertook in the first quarter of 2008 (See Note 8 in the Notes to the Consolidated Financial Statements for more information). The reduced headcount and facility expense resulted in a decrease in research and development expense of approximately $769,000. In addition, we reduced our project related headcount expense by approximately $535,000 in 2008 compared to 2007. These two factors were partially offset by the impact that the Euro to Dollar exchange rate had on research and development expense. Much of our research and development resources are located in France and as such those costs are subject to exchange rate fluctuations with the Euro and the Dollar. The Euro was stronger against the Dollar in 2008 compared to 2007. This exchange rate fluctuation resulted in an increase to research and development expense of approximately $345,000. We anticipate that spending on research and development will begin to level in the near future as a result of the restructuring plan we undertook in the first quarter of 2008, subject to fluctuations in currency exchange rates. We will continue to take steps, when appropriate to attempt to mitigate the impact of currency exposure by strategically acquiring foreign exchange contracts to purchase a fixed amount of Euros on a specific date in the future at a predetermined rate established by contract (see Item 7A — Foreign Currency Risk). In addition to our foreign exchange contracts, our total cost of performing research and development activities in France is reduced by the effect of a 30% research and development tax credit offered by the French tax administration. See Note 7 in the Notes to the Consolidated Financial Statements for more information. The increase in research and development expense as a percentage of total revenue is due to revenue decreasing at a higher rate than research and development expense. We will continue to monitor the level of our investments in research and development concurrently with actual revenue results.

Research and development expenses increased in 2007 compared to 2006 by approximately $2.0 million. Approximately 52% of this increase was due to our strategic reinvestment in the area of project related research and development activities on a variable basis. The weaker dollar relative to the Euro in 2007 contributed approximately 26% to our increase in research and development expense. Additionally, there was an expense of approximately $220,000 or 11% related to the write-off of a previously capitalized software license related to a product that was subsequently discontinued. The increase in research and development expense as a percentage of total revenue is due to revenue decreasing while research and development costs increased.

38

Sales and Marketing: Sales and marketing expenses were $5.2 million, $5.6 million and $5.4 million in 2008, 2007 and 2006, respectively. As a percentage of revenue, sales and marketing expenses were 20%, 18% and 16% for 2008, 2007 and 2006, respectively. Sales and marketing expenses decreased approximately $400,000 in 2008 compared to 2007. The decrease in sales and marketing expense is primarily due to the restructuring plan we undertook in the first quarter of 2008 (See Note 8 in the Notes to the Consolidated Financial Statements for more information). The reduced headcount expense resulted in a decrease in sales and marketing expense of approximately $385,000. Additionally, we saw a decrease in variable sales compensation of approximately $95,000 due to the decrease in revenue in 2008 compared to 2007. The reductions were partially offset by approximately $125,000 as a result of the stronger Euro against the Dollar in 2008 compared to 2007. The increase in sales and marketing expenses as a percentage of total revenue is due to revenue decreasing at a higher rate than sales and marketing expenses.

Sales and marketing expenses were relatively flat in 2007 compared to 2006. The increase in sales and marketing expenses as a percentage of total revenue is due to revenue decreasing while sales and marketing costs increased slightly.

General and Administrative: General and administrative expenses were $4.1 million, $4.7 million and $3.9 million in 2008, 2007 and 2006, respectively. As a percentage of revenue, general and administrative expenses were 16%, 15% and 12% in the years ended December 31, 2008, 2007 and 2006, respectively. General and administrative expenses decreased approximately $600,000 in 2008 compared to 2007. The decrease in general and administrative expenses is primarily due to the reduction in utilization of outside consulting, legal and accounting services of approximately $330,000. In addition, the organizational changes related to our French subsidiary, which were completed in 2007, resulted in reduced expenses of approximately $250,000 in 2008. The increase in general and administrative expenses as a percentage of total revenues is due to revenue decreasing at a higher rate than general and administrative expenses.

General and administrative expenses increased approximately $770,000 in 2007 compared to 2006. The increase in general and administrative expenses related to a number of factors including some organizational changes related to our French subsidiary which accounted for approximately 58% of the increase. An additional 17% of the increase related to our use of outside services as part of our first year management assessment for Sarbanes-Oxley Section 404 compliance. Finally, we began incurring additional support costs and amortization expense in 2007 related to our new Enterprise Performance Management system installed in the second quarter of 2007 which was approximately 12% of the increase. The increase in general and administrative expenses as a percentage of total revenue is due to revenue decreasing while general and administrative costs increased.

Restructuring Charge: On March 27, 2008, we adopted a plan to restructure our United States based business operations to balance our current spending with recent revenue trends. The primary goal of the restructuring program was to improve our ability to invest in future business opportunities that are designed to provide us with increased growth potential and greater revenue diversification in the coming years and better align our skills with our future direction. Under the restructuring plan, we reduced our workforce by 14 employees. As a result of the restructuring program, we recorded a restructuring charge of $403,000, classified as an operating expense in 2008 (See Note 8 of the accompanying Notes to the Consolidated Financial Statements for more information). There were no such activities in 2007 or 2006.

39

Interest Income, Net: Interest income, net of interest expense, was $526,000, $764,000 and $637,000 in 2008, 2007 and 2006, respectively. The decrease in interest income, net of interest expense in 2008 compared to 2007 is primarily due to a lower average investment balance in 2008 when compared to 2007. In addition, we experienced lower investment rates of return in 2008 compared to 2007. The increase in interest income, net of interest expense in 2007 compared to 2006 is primarily due to an increase in the investment rates of return in 2007 compared to 2006.

Other Income, Net: Other income, net was $92,000, $364,000 and $475,000 in 2008, 2007 and 2006, respectively. Other income, net in 2008, 2007 and in 2006 is primarily due to the change in market value of our foreign exchange derivative financial instruments which resulted in a gain of approximately $130,000, $346,000 and $442,000 for the years ended December 31, 2008, 2007 and 2006, respectively. See Note 5 of the accompanying Notes to the Consolidated Financial Statements for more information regarding our derivative financial instruments.

Income Taxes: The effective income tax rates for the periods presented differ from the U.S. statutory rate as we continue to provide a full valuation allowance for our net deferred tax assets at December 31, 2008, 2007, and 2006. The effective income tax benefit rate for 2008 was 29%. This income tax benefit was primarily due to a research and development tax credit earned by our operations in France that increased for 2008 to 30% from the previous rate of 10% used for 2007. During 2008, the benefit from the research and development tax credit was partially offset by tax expense related to income generated in France due to the impact of foreign currency fluctuations.

The effective income tax benefit rate for 2007 was 34%. Approximately 78% of this income tax benefit was due to a 10% research and development tax credit earned by our operations in France. The remainder of the tax benefit was the result of a previously unrecognized benefit in the U.S. which had been pending the expiration of the statute of limitations on the 2003 tax return related to a transfer pricing arrangement with our foreign subsidiary.

The effective income tax benefit rate for 2006 was 24%. This income tax benefit was primarily due to a 10% research and development tax credit earned by our operations in France.

Net (Loss) Income: We reported a net loss of approximately $3.0 million and $1.2 million for the twelve months ended December 31, 2008 and 2007, respectively. We reported net income of approximately $2.1 million for the twelve months ended December 31, 2006.

LIQUIDITY AND CAPITAL RESOURCES

Consolidated Cash Flows

Cash and cash equivalents increased by $999,000 for the year ended December 31, 2008. Cash and cash equivalents decreased $2.7 million for the year ended December 31, 2007. Cash and cash equivalents increased $5.9 million for the year ended December 31, 2006.

Operating Activities: Trends in cash flows from operating activities for 2008, 2007 and 2006, are generally similar to the trends in our earnings except for provision for uncollectible accounts and returns, provision for excess and obsolete inventories, depreciation and amortization, amortization of restricted stock and write-off of impaired capitalized software. Cash used in operating activities totaled $805,000

40

for the year ended December 31, 2008, compared to a net loss of $3.0 million. Cash used in operating activities totaled $2.5 million for the year ended December 31, 2007, compared to a net loss of $1.2 million. Cash provided by operating activities totaled $4.6 million for the year ended December 31, 2006, compared to net income of $2.1 million. Provisions for uncollectible accounts and returns decreased during 2008 as we experienced strong collection efforts throughout the year and improved returns experience. Provisions for uncollectible accounts and returns increased during 2007 due to a shift in our customer base requiring longer payment terms, which resulted in additional requirements for a reserve against potential uncollectible accounts. Provision for excess and obsolete inventories decreased by $100,000 for 2008 compared to 2007. Provision for excess and obsolete inventories decreased by $200,000 for 2007 compared to 2006. Depreciation and amortization decreased by approximately $48,000 in 2008, primarily related to portions of our manufacturing line equipment becoming fully depreciated during the year. Depreciation and amortization increased by approximately $220,000 in 2007 primarily due to the increased depreciation related to a new Enterprise Performance Management system. Amortization of restricted stock remained relatively consistent in 2008 compared to 2007. Amortization of restricted stock increased approximately $80,000 for 2007 compared to 2006 due to the cumulative effect of restricted stock issuances and additional restricted stock grants in 2007. See Note 10 in Notes to the Consolidated Financial Statements for more information on restricted stock. During 2008 and 2007, there were write-offs of software licenses of approximately $185,000 and $220,000 that were procured for products that were subsequently discontinued. There were no such write-offs in 2006.

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: Net cash provided by investing activities totaled $2.0 million in 2008. Net cash used in investing activities totaled $2.3 million in 2007. Net cash provided by investing activities totaled $446,000 in 2006. Cash provided by or used in investing activities in each of the three years related principally to additions to property and equipment, capitalized software purchases and our investments in marketable securities. Additions to property and equipment during 2008 primarily related to additional functionality and enhancements to our Enterprise Performance Management system and purchases for the engineering and manufacturing functions. Additions to property and equipment during 2007 primarily related to the purchase and implementation of a new Enterprise Performance Management system. Purchases of marketable securities decreased by approximately $9.5 million for 2008 compared to 2007. Purchases of marketable securities increased by approximately $2.7 million for 2007 compared to 2006. Proceeds from the sale of marketable securities decreased by approximately $6.4 million for 2008 compared to 2007. Proceeds from the sale of marketable securities increased by approximately $100,000 for 2007 compared to 2006.

Financing Activities: Net cash provided by financing activities totaled $2,000, $2.0 million and $797,000 for the years ended December 31, 2008, 2007 and 2006, respectively. Cash provided by financing activities for 2008, 2007 and 2006 is comprised of proceeds from the exercise of stock options for all three years. The decrease in stock options exercised in 2008 reflects the decrease in our stock price compared to 2007. The increase in stock options exercised in 2007 reflects a number of options which were set to expire during 2007.

41

Commitments

At December 31, 2008, we had no material commitments to purchase capital assets; however planned capital expenditures for 2009 are estimated at $460,000, a significant portion of which relates to engineering equipment and tools. The remaining planned purchases relate to enhancements to our manufacturing and general office equipment. Our significant long-term obligations are operating leases on facilities and future debt payments. We have not paid any dividends since our inception and do not anticipate paying any dividends in 2009.

The following table summarizes our future contractual obligations and payment commitments as of December 31, 2008 (in thousands):

Contractual Obligation	Payments due by period
	Total		<1 year		1 -3 years		3- 5 years		> 5 years
Long-term debt obligation (1,2)	$	3,885	$	77	$	154	$	3,654	$	—
Operating lease obligations (3,4)	$	3,511	$	562	$	1,626	$	1,208	$	115
Total	$	7,396	$	639	$	1,780	$	4,862	$	115

(1)	At December 31, 2008, we had borrowings of $3.5 million under a $5.0 million revolving credit facility with a bank. The revolving credit facility matures on December 19, 2013 and is secured throughout the term of the credit facility by marketable securities.
(2)	We incur interest expense on the borrowings from the revolving credit facility at a rate of LIBOR plus 1%, if LIBOR is greater than 2.5%, otherwise the applicable margin is 1.5%. At December 31, 2008, our interest rate on the borrowings from the revolving credit facility was 2.2%. We used the 2.2% rate to estimate interest expense for 2009 through December 2013. The interest expense estimate is $77,000 annually for the years 2009 through December 2013.
(3)	We lease our facilities under non-cancelable operating leases with the longest terms extending to March 2014.
(4)	Our operating lease at our headquarters location includes a $350,000 letter of credit issued to our landlord which can only be used in the case of non-payment of such lease. The letter of credit, if accessed, would be funded by our existing revolving credit facility.

Off-Balance Sheet Arrangements

In an attempt to mitigate foreign currency risk, we may enter into, from time to time, foreign exchange contracts to purchase a fixed amount of Euros on a fixed date in the future at a fixed rate determined at the contract date. At December 31, 2008, we had no foreign exchange contracts. At December 31, 2007, we had one foreign exchange contract outstanding to acquire 1.1 million Euros on a specified date in January 2008. We recorded approximately $167,000 in prepaid expenses and other current assets for this contract at December 31, 2007.

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 our liquidity needs for working

42

capital, capital expenditures and debt services. To the extent that our actual operating results or other developments differ from our expectations, our liquidity could be adversely affected.

We periodically evaluate our liquidity requirements, alternative uses of capital, capital needs and available resources in view of, among other things, our capital expenditure requirements and estimated future operating cash flows. As a result of this process, we have in the past and may in the future seek to raise additional capital, refinance or restructure indebtedness, issue additional securities, repurchase shares of our common stock or take a combination of such steps to manage our liquidity and capital resources. In the normal course of business, we may review opportunities for acquisitions, joint ventures or other business combinations. In the event of any such transaction, we may consider using available cash, issuing additional equity securities or increasing the indebtedness of the Company or its subsidiaries.

Recently Issued Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141, “Business Combinations” (Revised 2007). SFAS No. 141R will change the accounting for business combinations. Under SFAS No. 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition date fair value with limited exceptions. SFAS No. 141R will change the accounting treatment and disclosure for certain specific items in a business combination. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. SFAS No. 141R will have an impact on accounting for business combinations once adopted but the effect is dependent upon acquisitions after that time.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — An amendment of ARB No.51”. SFAS No. 160 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No.160 will be effective for fiscal years beginning on or after December 15, 2008. Our adoption of this statement will not have a material impact on our Consolidated Financial Statements.

ITEM 7A. Quantitative and Qualitative Disclosure about Market Risk

Foreign Currency Risk

We are exposed to adverse movements in foreign currency exchange rates because we conduct business on a global basis and, in some cases, in foreign currencies. The Company’s operations in France are transacted 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 charges of approximately $2.4 million, $2.0 million and $1.2 million for the years ended December 31, 2008, 2007 and 2006, respectively.

In an attempt to mitigate the risk described above, we may enter into, from time to time, foreign exchange contracts to purchase a fixed amount of Euros on a fixed date in the future at a fixed rate determined at the contract date.  These derivative financial instruments do not meet the criteria to qualify as hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and therefore any change in the market value of these contracts resulting in a gain or loss is recognized as other income (loss), net in the period of the change.  For the year ended December 31, 2008, 2007 and 2006, we recognized a gain of

43

$130,000, $346,000 and $442,000, respectively related to these foreign exchange contracts. At December 31, 2008, there were no foreign exchange contracts outstanding. At December 31, 2007, we had one foreign exchange contract outstanding to acquire 1.1 million Euros on a specified date in January 2008. We recorded approximately $167,000 in prepaid expenses and other current assets for this contract at December 31, 2007.

Market Price Risk

We had no equity hedge contracts outstanding as of December 31, 2008, 2007 or 2006.

Interest Rate Risk

Our investments are subject to interest rate risk. Interest rate risk is the risk that our financial condition and results of operations could be adversely affected due to movements in interest rates. We invest our 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 our money market funds and the short-term nature of our time deposits and debt securities portfolio, these assets are particularly sensitive to changes in interest rates. We manage 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, 2008. This potential change is based on sensitivity analyses performed on our marketable securities at December 31, 2008. 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, 2007.

On December 19, 2008, we entered into a new $5.0 million revolving bank credit facility maturing December 19, 2013 with an applicable interest rate on any outstanding balances under the credit facility based on London Interbank Offered Rate (LIBOR) plus 1.0%, if LIBOR is greater than 2.5%, otherwise the applicable margin rate is 1.5%. The interest rate on the borrowings under the revolving credit facility was 2.2% at December 31, 2008. The unused portion of the credit facility is subject to an unused facility fee ranging from .25% to .75% depending on total deposits with the creditor. A hypothetical 100 basis point increase in LIBOR would increase annual interest expense on this credit facility by approximately $35,000. All borrowings under this facility are secured by marketable securities. At December 31, 2007, through our previous $5.0 million revolving bank credit facility, we maintained borrowings of $3.5 million, with an interest rate of LIBOR plus 1%. At December 31, 2007, our interest rate on the borrowings from the revolving credit facility was 6.25%. The borrowings of $3.5 million are classified as long-term debt on the accompanying balance sheet.

Item 8. Financial Statements and Supplementary Data.

See Item 15 (a) below.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

44

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 designed, and are effective, to give reasonable assurance that the information required to be disclosed by the Company in reports that it files under the Exchange Act is accumulated and communicated to management, including the CEO and CFO, to allow timely decisions regarding disclosure and that information is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.

Changes in Internal Controls

The Company maintains a system of internal controls that is 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 in our internal controls over financial reporting during the fourth quarter of the year ended December 31, 2008 that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other associates, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

(1)	Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
(2)	Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
(3)	Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

45

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, known as COSO, in “Internal Control — Integrated Framework.” Based on the results of its evaluation, the Company’s management has concluded that the internal control over financial reporting was effective as of December 31, 2008. This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

Item 9B. Other Information.

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

Directors

See information regarding the directors and nominees for director under the heading “Election of Directors” in the Proxy Statement for the Annual Meeting of Shareholders to be held May 6, 2009, which is incorporated herein by reference.

Executive Officers

See information regarding the executive officers under the heading “Executive Officers” in the Proxy Statement for the Annual Meeting of Shareholders to be held May 6, 2009, which is incorporated herein by reference.

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 Corporate 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 Global 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” in the Proxy Statement for the Annual Meeting of Shareholders to be held May 6, 2009, which is incorporated herein by reference.

46

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

See information regarding security ownership of certain beneficial owners and management under the headings “Principal Shareholders” and “Executive Compensation” in the Proxy Statement for the Annual Meeting of Shareholders to be held May 6, 2009, which is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence.

See information regarding certain relationships, related transactions and director independence under the headings “Principal Shareholders” and “Certain Related Transactions” in the Proxy Statement for the Annual Meeting of Shareholders to be held May 6, 2009, which is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services.

See information regarding principal accountant fees and services under the heading “Relationship with Independent Public Auditors” in the Proxy Statement for the Annual Meeting of Shareholders to be held May 6, 2009, which is incorporated herein by reference.

PART IV

Item 15. Exhibits and Financial Statement Schedules.

(a) (1) Financial Statements.

Reference is made to the listing on page F-1 of all financial statements filed as a part of this report.

(2) Financial Statement Schedules

All schedules are omitted because they are not applicable or the required information is presented in the consolidated financial statements or notes thereto.

(3) Exhibits.

Reference is made to the Index to Exhibits on page E-1 for a list of all exhibits filed with this report.

47

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 CORPORATION
Date: March 20, 2009	By:	/s/ Gregory B. Kalush
		Gregory B. Kalush
		Chairman 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 20, 2009.

Name	Title
/s/ Gregory B. Kalush	Chairman of the Board,
Gregory B. Kalush	Chief Executive Officer and President (Principal executive officer)
/s/ Thomas N. Tipton, Jr.	Chief Financial Officer,
Thomas N. Tipton, Jr.	Vice President of Finance and Treasurer (Principal financial and accounting officer)
/s/ Paul N. Hug	Director
Paul N. Hug
/s/ Michael J. Myers	Director
Michael J. Myers
/s/ Kenneth V. Spenser	Director
Kenneth V. Spenser
/s/ Christopher B. Strunk	Director
Christopher B. Strunk
/s/ S. Thomas Thawley	Vice Chairman, Director
S. Thomas Thawley	and Secretary

48

INDEX TO FINANCIAL STATEMENTS

Report of Grant Thornton LLP	F-2
Consolidated Balance Sheets — As of December 31, 2008 and 2007	F-3
Consolidated Statements of Operations — Years Ended December 31, 2008, 2007 and 2006	F-4
Consolidated Statements of Shareholders’ Equity — Years Ended December 31, 2008, 2007 and 2006	F-5
Consolidated Statements of Cash Flows — Years Ended December 31, 2008, 2007 and 2006	F-6
Notes to Consolidated Financial Statements	F-7 to F-24

* All schedules are omitted because they are not applicable or the required information is presented in the consolidated financial statements or notes thereto.

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders
Interphase Corporation

We have audited the accompanying consolidated balance sheets of Interphase Corporation (a Texas corporation) and subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2008. 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 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 audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Interphase Corporation and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated financial statements, Interphase Corporation and its subsidiaries changed their method of accounting for unrecognized tax benefits as of January 1, 2007, in connection with the adoption of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes: as interpretation of FASB Statement No. 109.”

/s/ GRANT THORNTON LLP 

Dallas, Texas
March 20, 2009

F-2

INTERPHASE CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

	December 31,
	2008			2007
ASSETS
Cash and cash equivalents	$	7,383		$	6,384
Marketable securities		11,563			14,185
Trade accounts receivable, less allowances of $159 and $173, respectively		4,758			7,550
Inventories		2,329			2,886
Prepaid expenses and other current assets		2,729			1,391
Total current assets		28,762			32,396
Machinery and equipment		6,929			6,962
Leasehold improvements		422			427
Furniture and fixtures		580			574
		7,931			7,963
Less-accumulated depreciation and amortization		(7,056	)		(6,879	)
Total property and equipment, net		875			1,084
Capitalized software, net		1,408			1,817
Other assets		203			883
Total assets	$	31,248		$	36,180
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Accounts payable	$	1,328		$	2,304
Deferred revenue		28			30
Accrued liabilities		942			1,387
Accrued compensation		1,163			1,645
Total current liabilities		3,461			5,366
Deferred lease obligations		1			52
Long term debt		3,500			3,500
Total liabilities		6,962			8,918
Commitments and contingencies
Shareholders’ Equity
Common stock, $.10 par value; 100,000,000 shares authorized; 6,573,294 and 6,500,294 shares issued and outstanding, respectively		657			650
Additional paid in capital		42,652			42,267
Retained deficit		(18,230	)		(15,204	)
Cumulative other comprehensive loss		(793	)		(451	)
Total shareholders’ equity		24,286			27,262
Total liabilities and shareholders’ equity	$	31,248		$	36,180

The accompanying notes are an integral part of these consolidated financial statements.

F-3

INTERPHASE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)

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

The accompanying notes are an integral part of these consolidated financial statements.

F-4

INTERPHASE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)

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

The accompanying notes are an integral part of these consolidated financial statements.

F-5

INTERPHASE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

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

The accompanying notes are an integral part of these consolidated financial statements.

F-6

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”) is a leading provider of robust building blocks, highly integrated subsystems and innovative gateway appliances in the areas of network connectivity, content management, and packet processing solutions in the converged communications network. This converged network expands from the proprietary telecommunications networks of today to the converged open, but highly secure IP based networks for communications in the Enterprise, Military, Government, and Communications industry of the future. Building on a more than 30 year history of providing advanced I/O solutions for telecom and enterprise applications, and addressing the need for high speed connectivity, Interphase (NASDAQ: INPH) has established a key leadership role in delivering next generation AdvancedTCA^® (ATCA) and AdvancedMC™ (AMC), PCI-x, PCI-e and custom solutions to the marketplace. This leadership role continues as Interphase expands into the Long Term Evolution (LTE) architecture, providing the next generation of solutions for TCP/IP based solutions in the converged next generation network. See Note 15 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. All intercompany accounts and transactions have been eliminated.

Fair Value of Financial Instruments: Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” which defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements. The Company follows SFAS No. 157 in its valuation of its marketable securities. SFAS No. 157 defines fair value as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 classifies the levels used to measure fair value into the following hierarchy:

1.	Level 1 — Valuations based on quoted prices in active markets for identical assets and liabilities that the reporting entity has the ability to obtain at the measurement date. This level provides the most reliable evidence of fair value.
2.	Level 2 — Valuation based on one or more quoted prices in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs that are observable other than quoted prices for the asset or the liability; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
3.	Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

Cash and Cash Equivalents: 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. The Company maintains cash balances at various financial institutions. Accounts at each institution are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. From time to time, the Company has had cash in financial institutions in excess of federally insured limits.

F-7

As of December 31, 2008, the Company had cash and cash equivalents in excess of FDIC limits of approximately $6.9 million.

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 operations. Marketable securities are used to secure our credit facility. See Note 6 for information regarding the Company’s credit facility.

Accounts Receivable and Allowance for Doubtful Accounts: The Company records accounts receivable at their net realizable value and 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. This reserve is also partially determined by using percentages applied to certain aged receivable categories based on historical results and is reevaluated and adjusted as additional information is received. After all attempts to collect a receivable have failed, the receivable is written off against the allowance for doubtful accounts. The activity in this account was as follows (in thousands):

	Balance at					(Write-offs,)			Balance
	Beginning		Charged to			Net of			at End
Year Ended December 31:	of Period		Expense			Recoveries			of Period
2008	$	77	$	45		$	(9	)	$	113
2007		33		47			(3	)		77
2006		36		(3	)		—			33

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, 2008, 2007 and 2006, the allowance for returns was $46,000, $96,000, and $85,000, respectively, and maintained as a reduction to accounts receivable.

Derivative Financial Instruments and Hedging: All derivative instruments are recorded as assets or liabilities, as applicable, on the balance sheet at fair value. Changes in the fair value of derivatives are either recorded in income or other comprehensive income, as appropriate. The gain or loss on derivatives that have not been designated as hedging instruments is included in current income in the period that changes in fair value occur.

F-8

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,
	2008		2007
Raw Materials	$	1,885	$	2,038
Work-in-Process		378		594
Finished Goods		66		254
Total	$	2,329	$	2,886

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. Inventories are written down when needed to ensure the Company carries inventory at the lower of cost or market. Writedowns in 2008, 2007 and 2006 were $200,000, $300,000 and $500,000, respectively.

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 Expense
2008	$	427
2007	$	588
2006	$	567

The depreciable lives of property and equipment are as follows:

Machinery and equipment	3-5 years
Leasehold improvements	Term of the respective leases
Furniture and fixtures	3-10 years

Capitalized Software: Capitalized software represents various software licenses purchased by the Company and utilized in connection with the Company’s 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 Amortization
2008	$	441	$	2,382
2007	$	328	$	1,964
2006	$	128	$	1,670

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. There was determined to be impairment with certain software licenses which resulted in writedowns of $185,000 and $218,000 during 2008 and 2007, respectively, of capitalized software.

F-9

These writedowns were recorded as an operating expense in research and development. No impairments were recorded in 2006.

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 arrangements 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. Sales tax collected from customers and remitted to the applicable taxing authorities is accounted for on a net basis, with no impact to revenues. Service revenue is recognized as the services are performed. Deferred revenue consists primarily of service revenue not yet performed.

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 of $95,000 and $155,000 at December 31, 2008 and 2007, respectively, 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 who produce computer systems or telecommunication networks, see Note 13 for additional information. 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.

Interest Income, net: Interest income from investment in securities and cash balances was approximately $714,000, $988,000, and $853,000 for the years ended December 31, 2008, 2007, and 2006, respectively. Interest expense related to the Company’s credit facility was approximately $188,000, $224,000 and $216,000 for the years ended December 31, 2008, 2007 and 2006, respectively.

Advertising Expense: Advertising costs are charged to expense as incurred. Advertising expense was approximately $17,000, $38,000 and $37,000 for the years ended December 31, 2008, 2007 and 2006, 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 the Consolidated Statements of Operations as incurred.

The Company accounts for unrealized gains or losses on its foreign currency translation adjustments in accordance with SFAS No. 130, “Reporting Comprehensive Income,” which requires the adjustments be accumulated in shareholders’ equity as part of other comprehensive income.

F-10

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 basis 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 SFAS 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.

The Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes within financial statements. Under FIN 48, the impact of an uncertain tax position taken or expected to be taken on an income tax return must be recognized in the financial statements at the amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized in the financial statements unless it is more likely than not of being sustained.

Other Comprehensive Income (loss): Other comprehensive income (loss) is recorded directly to a separate section of shareholders’ equity in cumulative other comprehensive income (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.

Stock-Based Compensation: The Company accounts for stock-based compensation under the provisions of SFAS No. 123(R), “Share-Based Payments.” SFAS No. 123(R) superseded Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and revises guidance in SFAS No. 123, “Accounting for Stock-Based Compensation.”

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, warranties, inventory impairment charges and income tax accounts.

2. MARKETABLE SECURITIES

Marketable securities primarily consist of investments in debt securities, which are classified as current assets on the balance sheet as the investments are available-for-sale. As of December 31, 2008, the fair market value of marketable securities was $11.6 million, of which $4.9 million matures in one year or less, and $6.7 million matures in 5 years or less. As of December 31, 2007, the fair market value of marketable securities was $14.2 million, of which $6.6 million matures in one year or less, and $7.6 million matures in 5 years or less. Gains and losses on marketable securities sold are recognized on a

F-11

specific identification basis. The Company recorded an unrealized loss with respect to certain available-for-sale securities in 2008 of $86,000. The Company recorded an unrealized gain with respect to certain available for sale securities of $91,000 in 2007.

The Company’s marketable securities are classified as “available-for-sale” and are presented at estimated fair value based on quoted prices for similar assets in active markets with any unrealized gains or losses included in other comprehensive income (loss). Realized gains and losses are computed based on the specific identification method and were not material for the periods presented. Financial assets, measured at fair value, by level within the fair value hierarchy as of December 31, 2008 were as follows (in thousands):

	Quoted Prices		Significant
	in Active		Other		Significant
	Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	Level 1		Level 2		Level 3		Total
Available-for-sale	$	—	$	11,563	$	—	$	11,563
Securities
Total	$	—	$	11,563	$	—	$	11,563

Financial assets, measured at fair value, by level within the fair value hierarchy as of December 31, 2007 were as follows (in thousands):

	Quoted Prices		Significant
	in Active		Other		Significant
	Markets for		Observable		Unobservable
	Identical Assets		Inputs		Inputs
	Level 1		Level 2		Level 3		Total
Available-for-sale	$	—	$	14,185	$	—	$	14,185
Securities
Total	$	—	$	14,185	$	—	$	14,185

3. PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consisted of the following (in thousands):

	Years ended December 31,
	2008		2007
Research and development tax credit in France	$	2,388	$	435
Prepaid other		341		956
Total Prepaid Expenses and Other Current Assets	$	2,729	$	1,391

F-12

4. ACCRUED LIABILITIES

Accrued liabilities consisted of the following (in thousands):

	Years ended December 31,
	2008		2007
French corporate tax		423		—
Inventory receipts		149		364
Consulting fees		36		298
Accrued other		334		725
Total Accrued Liabilities	$	942	$	1,387

5. DERIVATIVE FINANCIAL INSTRUMENTS

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 transacted 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.

In an attempt to mitigate the risk described above, the Company may enter into, from time to time, foreign exchange contracts to purchase a fixed amount of Euros on a fixed date in the future at a fixed rate determined at the contract date. These derivative financial instruments do not meet the criteria to qualify as hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and therefore any change in the market value of these contracts resulting in a gain or loss is recognized as other income (loss), net in the period of the change. For the year ended December 31, 2008, 2007 and 2006, the Company recognized a gain of $130,000, $346,000 and $442,000, respectively related to these foreign exchange contracts. At December 31, 2008, there were no foreign exchange contracts outstanding. At December 31, 2007, the Company had one foreign exchange contract outstanding to acquire 1.1 million Euros on a specified date in January 2008. The Company recorded approximately $167,000 in prepaid expenses and other current assets for this contract at December 31, 2007.

6. CREDIT FACILITY

On December 19, 2008, the Company entered into a new $5.0 million revolving bank credit facility maturing December 19, 2013 with an applicable interest rate on any outstanding balances under the credit facility based on LIBOR plus 1.0%, if LIBOR is greater than 2.5%, otherwise the applicable margin rate is 1.5%. At December 31, 2008, the Company’s interest rate on the $3.5 million borrowings under the revolving credit facility was 2.2%. The unused portion of the credit facility is subject to an unused facility fee ranging from .25% to .75% depending on total deposits with the creditor. All borrowings under this facility are secured by marketable securities. At December 31, 2007, through its previous $5.0 million revolving bank credit facility, the Company maintained borrowings of $3.5 million, with an interest rate of LIBOR plus 1%. At December 31, 2007, the Company’s interest rate on the borrowings from the revolving credit facility was 6.25%. The borrowings of $3.5 million are classified as long-term debt on the Company’s balance sheet.

F-13

7. INCOME TAXES

The provision for income taxes applicable to continuing operations for each period presented was as follows (in thousands):

	Year ended December 31,
	2008			2007			2006
United States tax benefit	$	(2	)	$	(133	)	$	(55	)
Foreign tax benefit		(1,261	)		(476	)		(350	)
Income tax benefit	$	(1,263	)	$	(609	)	$	(405	)

The tax effect of temporary differences that give rise to significant components of the deferred tax assets as of December 31, 2008 and 2007, are presented as follows (in thousands):

	Year ended December 31,
	2008			2007
Current deferred tax assets:
Inventories	$	735		$	659
Accounts receivable		43			29
Deferred revenue		57			11
Other accruals		256			214
Total current deferred tax assets	$	1,091		$	913
Noncurrent deferred tax assets:
Depreciation	$	(74	)	$	(40	)
Amortization		153			216
Other		27			25
Net operating loss carryforwards		8,988			7,244
Total noncurrent deferred tax assets	$	9,094		$	7,445
Valuation allowance for deferred tax assets		(10,185	)		(8,358	)
Deferred tax assets, net of valuation allowance	$	—		$	—

SFAS No. 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. 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 record a full valuation allowance on future tax benefits except for those that may be generated in foreign jurisdictions.

F-14

At December 31, 2008, the Company has recorded a valuation allowance against its net deferred tax assets because management believes that, after considering all the available objective evidence, the realization of the assets is not reasonably assured.

The differences between the actual income tax (benefit) provision and the amount computed by applying the statutory federal tax rate to the (loss) income before income tax shown in the Consolidated Statements of Operations are as follows (in thousands):

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

At December 31, 2008, the Company had approximately $26.0 million of federal net operating loss carryforwards, the earliest of which does not expire until 2022. The federal net operating loss includes $3.6 million related to non-qualified stock option deductions. The Company also had state net operating losses of $4.1 million. The valuation allowance recorded on the portion of net operating losses related to stock options will reverse as a credit to shareholders’ equity once management believes that these losses are more likely than not to be realized. At December 31, 2008, the Company’s French subsidiary has a research and development tax credit of approximately $2.4 million, net of $503,000 uncertain tax position reserve. At December 31, 2007, the Company’s French subsidiary had a research and development tax credit of approximately $800,000, net of $266,000 uncertain tax position reserve. At December 31, 2008, the entire research tax credit was classified on the balance sheet as an other current asset. Prior to 2008, generated research and development tax credits were refundable in cash if not used within three years after the year generated. However, during the fourth quarter of 2008, the tax credit regulations were revised to allow for the refund in cash in 2009 of all unused research and development tax credits. The Company’s unused research and development tax credit balance was generated in the years 2006, 2007 and 2008. At December 31, 2007, approximately $440,000 of the research and development tax credit was classified on the balance sheet as an other current asset.

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.

The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), on January 1, 2007. As a result of the adoption of FIN 48, the Company

F-15

made an adjustment to equity of $49,000. At December 31, 2008, the Company had an uncertain U.S. tax position of approximately $80,000 related to foreign operations. Due to the net operating loss position in the U.S., the Company would not incur tax, interest or penalty currently or in the near future. As such, no expense was recorded on the income statement and there is no impact on the Company’s effective tax rate. The Company does not anticipate any event in the next twelve months that would cause a change to this position. The Company will recognize any penalties and interest when necessary as tax expense. The U.S. federal returns for the years ending December 31, 2005 and after are open for IRS examination. During 2007, the Company recognized a $139,000 benefit, which was previously unrecognized pending the expiration of the statute of limitations on the 2003 tax return related to a transfer pricing arrangement with our foreign subsidiary. The Company’s operations during the year ended December 31, 2002 generated a loss, and the 2002 net operating loss (NOL) is still being used by the Company. The IRS may audit up to the NOL amount generated during the year ended December 31, 2002 until the statute of limitations expiration on open tax years.

The Company is also subject to income tax in France. At December 31, 2008, the Company had an uncertain tax position of approximately $503,000 of which $493,000 is related to a potential tax liability, $8,000 is related to possible interest, and $2,000 is related to a potential penalty. The uncertain tax position in France is expected to have a favorable impact in the amount of $493,000, resulting in a favorable impact on the effective tax rate. At December 31, 2007, the Company had an uncertain tax position of approximately $266,000, of which $249,000 was related to a potential tax liability, $13,000 was related to potential interest, and $4,000 was related to a potential penalty. The Company does not anticipate any event in the next twelve months that would cause a change to this position. The French income tax returns for the years ended December 31, 2005 and subsequent remain open for examination.

A reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows (in thousands):

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

F-16

8. RESTRUCTURING CHARGE

On March 27, 2008, the Company adopted a plan to restructure its United States based business operations to balance its current spending with recent revenue trends. The primary goal of the restructuring program was to improve the ability of the Company to invest in future business opportunities that are designed to provide the Company with increased growth potential and greater revenue diversification in the coming years and better align the Company’s skills with its future direction. Under the restructuring plan, the Company reduced its workforce by 14 employees. As a result of the restructuring program, we recorded a restructuring charge of $403,000, classified as an operating expense in 2008. Approximately $365,000 of the charges related to severance and fringe benefits, approximately $38,000 of the charges related to lease obligations. These amounts were paid out under the restructuring plan by the end of 2008.

9. 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,
	2008			2007			2006
Basic (loss) income per share:
Net (loss) income	$	(3,026	)	$	(1,194	)	$	2,086
Weighted average common shares outstanding		6,320			6,161			5,854
Basic (loss) income per share	$	(0.48	)	$	(0.19	)	$	0.36
Diluted (loss) income per share:
Net (loss) income	$	(3,026	)	$	(1,194	)	$	2,086
Weighted average common shares outstanding		6,320			6,161			5,854
Dilutive stock options and restricted stock		—			—			400
Weighted average common shares outstanding — assuming dilution		6,320			6,161			6,254
Diluted (loss) income per share	$	(0.48	)	$	(0.19	)	$	0.33
Outstanding stock options and restricted stock that were not included in the diluted calculation because their effect would be anti-dilutive		1,676			1,440			1,251

10. COMMON STOCK

2004 Long-Term Stock Incentive Plan: 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 of the amended and restated plan 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 Compensation Committee which is

F-17

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 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, in most cases, 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-18

The following table summarizes the combined stock option activity under all of the plans (in thousands, except option prices):

	Number of			Weighted Average		Aggregate
	Options			Option Price		Intrinsic Value
Balance, December 31, 2005		2,586		$	9.38	$	73
Granted		—			N/A
Exercised		(144	)		5.54
Canceled		(320	)		10.13
Balance, December 31, 2006		2,122			9.52		2,886
Granted		—			N/A
Exercised		(320	)		6.37
Canceled		(103	)		16.90
Balance, December 31, 2007		1,699			9.67		4,366
Granted		—			N/A
Exercised		(1	)		4.12
Canceled		(64	)		10.17
Balance, December 31, 2008		1,634			9.65		—
Exercisable at December 31, 2008		1,634		$	9.65	$	—

The total intrinsic value of stock options exercised during 2008, 2007 and 2006 were approximately $4,000, $1.2 million and $496,000, respectively.

The following table summarizes information about options granted under the plans that were outstanding at December 31, 2008 (in thousands, except option prices):

	Options Outstanding				Options Exercisable
			Weighted-
			Average
	Number Outstanding		Remaining		Weighted		Number Exercisable
Range of	at		Contractual Life		Average Exercise		at		Weighted Average
Exercise Prices	12/31/08		(years)		Price		12/31/08		Exercise Price
$3.09-$4.60		187		2.97	$	4.31		187	$	4.31
$4.83-$6.45		440		3.85		5.49		440		5.49
$7.20-$10.63		457		1.84		8.27		457		8.27
$11.25-$13.88		314		3.00		12.78		314		12.78
$17.25-$24.06		226		1.00		19.67		226		19.67
$31.00		10		0.90		31.00		10		31.00
Total		1,634		2.61	$	9.65		1,634	$	9.65

Restricted Stock: The Interphase Corporation 2004 Long-Term Stock Incentive Plan provides for grants of bonus stock awards (“restricted stock”) to its directors and certain employees at no cost to the recipient. Holders of restricted stock are entitled to cash dividends, if any, and to vote their respective shares. Restrictions limit the sale or transfer of these shares during a predefined vesting period,

F-19

currently ranging from one to four years, and in some cases vesting is subject to the achievement of certain performance conditions. During 2008, the Company issued 138,337 restricted stock shares granted at market prices ranging from $2.31 to $8.98. During 2007, the Company issued 106,000 restricted stock shares granted at market prices ranging from $8.95 to $11.80. Upon issuance of restricted stock under the plan, unearned compensation equivalent to the market value at the date of grant is recorded as a reduction to shareholders’ equity and subsequently amortized to expense over the respective restriction periods. Compensation expense related to restricted stock was approximately $389,000, $376,000 and $295,000 for the years ended December 31, 2008, 2007 and 2006, respectively. As of December 31, 2008, there is approximately $1.2 million of total unamortized compensation cost related to unvested restricted stock remaining to be recognized. The expense is expected to be recognized over a weighted-average period of 2.5 years. As of December 31, 2007, there was $1.3 million of total unamortized compensation cost. The following summarizes the restricted stock activity for 2008 and 2007:

	Restricted Stock			Weighted Average
	Shares			Grant Date Value
Nonvested restricted stock at December 31, 2006		221,425		$	5.96
Granted		106,000			10.94
Vested		(41,455	)		6.09
Cancelled/Forefeited		(78,410	)		6.07
Nonvested restricted stock at December 31, 2007		207,560		$	8.53
Granted		138,337		$	6.65
Vested		(47,811	)		7.50
Cancelled/Forefeited		(65,837	)		9.92
Nonvested restricted stock at December 31, 2008		232,249		$	7.24

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 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 the Company’s 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.

Option Valuation: 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

F-20

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 weighted-average assumptions based on the grant date. There were no options granted in 2006, 2007 or 2008.

11. RELATED PARTY TRANSACTIONS

During the years ended December 31, 2008, 2007 and 2006, the Company had no related party transactions.

12. 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% up to 6% of the employee’s contributions up to a maximum of $6,300 per employee for the year ended December 31, 2008. The total expense under this plan was $408,000, $306,000 and $214,000 for the years ended December 31, 2008, 2007 and 2006, respectively. The Company offers no post-retirement or post-employment benefits.

13. OTHER FINANCIAL INFORMATION

Major Customers: During 2008, sales to Nokia-Siemens Networks, Alcatel-Lucent and Emerson were $6.0 million or 23%, $5.6 million or 21% and $3.1 million or 12% of the Company’s consolidated revenues, respectively. During 2007, sales to Alcatel-Lucent and Emerson (formerly Motorola ECC) were $9.5 million or 31% and $5.1 million or 17% of the Company’s consolidated revenues, respectively. During 2006, sales to Alcatel-Lucent, Emerson (formerly Motorola ECC) and Hewlett Packard accounted for $11.3 million or 34%, $7.5 million or 22% and $3.4 million or 10%, 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, 2008, was approximately $2.0 million due from Alcatel-Lucent and approximately $1.0 million due from Nokia-Siemens Networks. Included in accounts receivable at December 31, 2007, was approximately $2.2 million due from Nokia-Siemens Networks, approximately $1.5 million due from Alcatel-Lucent and approximately $1.2 million due from Emerson (formerly Motorola ECC). No other customers accounted for more than 10% of the Company’s accounts receivable at the balance sheet dates presented.

F-21

Commitments: The Company leases its facilities under noncancelable operating leases with the longest terms extending to March 2014. Rent expense related to these leases is recorded on a straight-line basis. As of December 31, 2008, operating lease commitments having noncancelable terms of more than one year are as follows (in thousands):

Year ending December 31:
2009	$	562
2010	$	883
2011	$	743
2012	$	599
2013	$	609
Thereafter	$	115

Total rent expense for operating leases was as follows (in thousands):

Year ending December 31:
2008	$	840
2007	$	837
2006	$	738

Contingencies: 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.

14. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In December 2007, the FASB issued SFAS No. 141, “Business Combinations” (Revised 2007). SFAS 141R will change the accounting for business combinations. Under SFAS 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition date fair value with limited exceptions. SFAS 141R will change the accounting treatment and disclosure for certain specific items in a business combination. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. SFAS 141R will have an impact on accounting for business combinations once adopted but the effect is dependent upon acquisitions after that time.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — An amendment of ARB No.51”. SFAS 160 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 will be effective for fiscal years beginning on or after December 15, 2008. The Company’s adoption of this statement will not have a material impact on its Condensed Consolidated Financial Statements.

15. SEGMENT DATA

The Company is principally engaged in providing robust building blocks, highly integrated subsystems and innovative gateway appliances in the areas of network connectivity, content management, and

F-22

packet processing solutions in the converged communications network. 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, determined by physical location, and revenue, determined by location of the customer, related to North America and foreign countries as of December 31, 2008 and 2007 and for the years ended December 31, 2008, 2007 and 2006 is as follows (in thousands):

Long Lived Assets	2008		2007
North America	$	1,910	$	2,657
Europe		373		244
Total	$	2,283	$	2,901

Revenues	2008		2007		2006
Pacific Rim	$	11,204	$	11,994	$	6,962
North America		8,598		12,475		11,226
Europe		6,429		6,311		15,215
Total	$	26,231	$	30,780	$	33,403

Additional information regarding revenue by product-line is as follows (in thousands):

Product Revenue	2008		2007		2006
Broadband telecom	$	23,218	$	26,071	$	26,507
Enterprise		867		3,369		4,730
Professional services		501		603		128
Other		1,645		737		2,038
Total	$	26,231	$	30,780	$	33,403

F-23

16. QUARTERLY FINANCIAL DATA (Unaudited)

Quarterly results of operations for 2008 (unaudited)
(In thousands, except per share amounts)

	Quarter Ended
	March 31			June 30			September 30			December 31
Revenues	$	7,471		$	6,650		$	6,888		$	5,222
Gross margin		4,337			3,103			3,984			2,607
Loss before income tax		(839	)		(1,628	)		(255	)		(1,567	)
Net loss		(528	)		(1,161	)		(55	)		(1,282	)
Net loss per share:
Basic EPS	$	(0.08	)	$	(0.18	)	$	(0.01	)	$	(0.20	)
Diluted EPS	$	(0.08	)	$	(0.18	)	$	(0.01	)	$	(0.20	)

Quarterly results of operations for 2007 (unaudited)
(In thousands, except per share amounts)

	Quarter Ended
	March 31			June 30		September 30		December 31
Revenues	$	5,104		$	8,241	$	8,429	$	9,006
Gross margin		2,699			4,925		5,180		4,787
(Loss) income before income tax		(1,912	)		301		547		(739	)
Net (loss) income		(1,852	)		390		698		(430	)
Net (loss) earnings per share:
Basic EPS	$	(0.30	)	$	0.06	$	0.11	$	(0.07	)
Diluted EPS	$	(0.30	)	$	0.06	$	0.10	$	(0.07	)

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-24

INDEX TO EXHIBITS

Exhibits

3	(a)	Certificate of Incorporation of the registrant. (1)
3	(b)	Amendment to Articles of Incorporation of the registrant. (2)
3	(c)	Amended and Restated Bylaws of the registrant adopted on July 27, 2007. (4)
4	(a)	Rights Agreement dated as of December 7, 2000 by and between the Company and Computershare Investor Services, LLC as Rights Agent. (3)
10	(a)	Lease on Facility at Parkway Center, Phase I, Plano, Texas. (5)
10	(b)	Second Amendment to lease on Facility at Parkway Center, Phase I, Plano, Texas. (13)
10	(c)	Lease on Facility at 2105 Luna Road, Carrollton, Texas. (6)
10	(d)	Note and Credit Agreement between Interphase Corporation and Texas Capital Bank. (9)
10	(e)	Amended and Restated Employment, Confidentiality, and Non-Competition Agreement with Gregory B. Kalush, dated December 30, 2008. *(10)
10	(f)	Amended and Restated Employment, Confidentiality, and Non-Competition Agreement with Thomas N. Tipton, Jr. dated December 30, 2008. *(10)
10	(g)	Amended and Restated Employment, Confidentiality, and Non-Competition Agreement with Randall E. McComas, dated December 30, 2008. *(10)
10	(h)	Amended and Restated Employment, Confidentiality, and Non-Competition Agreement with Deborah A. Shute, dated December 30, 2008. *(10)
10	(i)	Amended and Restated Employment, Confidentiality, and Non-Competition Agreement with James W. Gragg, dated December 30, 2008. *(10)
10	(j)	Amended and Restated Employment, Confidentiality, and Non-Competition Agreement with Marc E. DeVinney, dated December 30, 2008. *(10)
10	(k)	Amended and Restated Employment, Confidentiality, and Non-Competition Agreement with Yoram Solomon, dated December 30, 2008. *(10)
10	(l)	Employment, Confidentiality, and Non-Competition Agreement with Marc E. DeVinney, dated August 31, 2007* (11)
10	(m)	Employment, Confidentiality, and Non-Competition Agreement with Yoram Solomon, dated November 17, 2008* (12)
10	(n)	Interphase Corporation 2004 Long-Term Stock Incentive Plan *(8)
21	(a)	Subsidiaries of the Registrant. (7)
23	(a)	Consent of Independent Registered Public Accounting Firm. (13)
31	(a)	Rule 13a-14(a)/15d-14(a) Certification. (13)
31	(b)	Rule 13a-14(a)/15d-14(a) Certification. (13)
32	(a)	Section 1350 Certification. (13)
32	(b)	Section 1350 Certification. (13)

(1)	Filed as an exhibit to Registration Statement No. 2-86523 on Form S-1 and incorporated herein by reference.
(2)	Filed as an exhibit to Report on Form 10-K for the year ended December 31, 1999, and incorporated herein by reference.
(3)	Filed as an exhibit to Form 8-K on January 9, 2001, and incorporated herein by reference.
(4)	Filed as an exhibit to Report on Form 8-K on July 31, 2007, and incorporated herein by reference.
(5)	Filed as an exhibit to Report on Form 10-Q for the quarter ended September 30, 2002, and incorporated herein by reference.

E-1

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

E-2

EX-10.(B)

EXHIBIT 10 (b)

Re: Parkway Centre I
2901 Dallas Parkway
Plano, Texas

SECOND AMENDMENT TO LEASE

THE STATE OF TEXAS	§
	§	KNOW ALL MEN BY THESE PRESENTS:
CITY OF PLANO	§

     THIS SECOND AMENDMENT TO LEASE (this “Amendment”) has been executed as of (but not necessarily on) the 31^st day of December, 2008, by SUN LIFE ASSURANCE COMPANY OF CANADA, a  Canadian corporation (“Landlord”), and INTERPHASE CORPORATION, a Texas corporation (“Tenant”).

R E C I T A L S:

     A. Wedgewood Drive Partners, Ltd., a Texas limited partnership (“Original Landlord”) and Tenant have heretofore executed that certain Office Lease Agreement (the “Original Lease”) commencing as of October 1, 2002, as amended by Amendment to Office Lease Agreement dated October 28, 2004 (the Original Lease, as so amended, is hereinafter referred to as the “Lease”), pursuant to which Tenant leases approximately 22,228 rentable square feet in Suite 200 (the “Premises”) of the above-referenced building, as more particularly described in the Lease (the “Building”). Unless otherwise provided herein, capitalized words and phrases shall have the meanings specified in the Lease.

     B. Landlord has acquired title to, among other property, the Building and all of Original Landlord’s interest under the Lease.

     C. Landlord and Tenant desire to execute this Amendment in order to evidence their agreement to (i) extend the Lease Term; and (ii) make certain other amendments to the Lease, all as more particularly set forth in this Amendment.

     NOW THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant agree as follows:

SECOND AMENDMENT TO LEASE — Page 1 of 27

Article I

CERTAIN AMENDMENTS

     SECTION 1.01. Lease Term. The Lease Term is hereby extended through and including February 28, 2014 (the “Expiration Date”), subject to adjustment and earlier termination as provided in the Lease. Except as set forth on Exhibit C of this Amendment, Tenant shall have no further renewal or extension rights or options and all of such rights or options, if any, are hereby deleted.

     SECTION 1.02. Base Rental. As of January 1, 2009 (the “Extension Effective Date”), the Base Rental due and payable by Tenant to Landlord under the Lease shall be as follows:

	Annual
	Base Rental		Monthly
Period:	Per R.S.F.		Base Rental:
1/1/09 – 2/28/10	$	18.50 + E	$	34,268.17 + E
3/1/10 – 2/28/11	$	18.90 + E	$	35,009.10 + E
3/1/11 – 2/29/12	$	19.30 + E	$	35,750.03 + E
3/1/12 – 2/28/13	$	19.70 + E	$	36,490.97 + E
3/1/13 – 2/28/14	$	20.10 + E	$	37,231.90 + E

Landlord hereby abates 1/2 of the first 8 full monthly installment(s) of Base Rental described above (i.e., January – August, 2009). Tenant shall pay all other monetary obligations accruing during such month(s). If an event of default occurs under the Lease beyond any applicable period of notice and cure, any remaining Base Rent abatement shall cease from the date of such event of default. The Base Rental under the Lease shall be due and payable in equal monthly installments, each such monthly installment due and payable on the first day of each calendar month, in advance, without demand and without setoff or deduction whatsoever.

     SECTION 1.03. Base Year. As of the Extension Effective Date, the Base Year shall be the calendar year 2009.

     SECTION 1.04. Operating Expenses. The following is added after “at Landlord’s sole cost and expense” in Section 10 of the Original Lease: “(but subject to inclusion in Operating Expenses)”.

     SECTION 1.05. AS IS; Refurbishment Work. Except for maintenance and repair obligations under Section 10 of the Original Lease and the Landlord’s Work (as hereinafter defined), Landlord is leasing the Premises to Tenant “as is” “where is” without representation or warranty, either express or implied, without any obligation to alter, remodel, improve, repair or decorate any part of the Premises; provided, however, as of the date of this Amendment Landlord shall provide Tenant with a refurbishment allowance (the “Refurbishment Allowance”) in an amount equal to $10.00 per rentable square foot in the Premises (i.e., $222,280.00), to

SECOND AMENDMENT TO LEASE — Page 2 of 27

improve and refurbish the Premises with Building standard improvements (the “Refurbishment Work”) pursuant to plans and specifications approved by Landlord and Tenant in writing (such approval not to be unreasonably withheld or delayed). Within ten (10) days prior to Landlord’s physical commencement of the Refurbishment Work, Tenant shall pay Landlord all costs of the Refurbishment Work in excess of the Refurbishment Allowance. The Refurbishment Allowance shall be made available for Tenant’s use within thirty (30) days of the execution of this Amendment. The Refurbishment Work shall be performed only by contractors engaged by Landlord and reasonably approved by Tenant. Tenant acknowledges that Landlord’s contractors may construct the Refurbishment Work while Tenant occupies the Premises, that the construction of the Refurbishment Work may prevent Tenant from using all or part of the Premises from time to time and that the construction of the Refurbishment Work may create noise dust and debris that will interfere with Tenant’s use of the Premises.  Tenant acknowledges and agrees that it shall have no right to any abatement of rent or to recover any other damages from Landlord due to its inability to use the all or portions of the Premises while the Refurbishment Work are being completed or due to interference with its business operations caused by such construction.  Tenant shall cooperate with Landlord’s contractors in completing the Refurbishment Work and Landlord’s contractors are hereby granted authority to enter the Premises to complete the Refurbishment Work.  Landlord and Tenant shall coordinate the completion of the Refurbishment Work in order to minimize disruptions to Tenant’s business activities, but Landlord shall have no obligation to incur additional costs in order to minimize such disruptions.  Tenant shall be responsible for moving its personal property (e.g., computers, telephone equipment, cabling, photocopy machines) from time to time, at Tenant’s sole expense, unless provided for in the Refurbishment Allowance, to facilitate the completion of the Refurbishment Work, and Landlord and its contractors shall have no obligation to move any of Tenant’s personal property. However, Landlord shall also bid the Refurbishment Work with contractors moving the furniture, fixtures, and other equipment as necessary and Landlord, in conjunction with Tenant, shall determine which bid to utilize. Landlord or its agent shall supervise the Refurbishment Work, make disbursements required to be made to the contractor, and act as a liaison between the contractor and Tenant and coordinate the relationship between the Refurbishment Work, the Building, and the Building’s systems. In consideration for Landlord’s construction supervision services, Tenant shall pay to Landlord a construction supervision fee equal to 3% of the total costs (including “hard” and “soft” costs as such terms are commonly understood in the area of the Building in connection with tenant improvement construction) related to the Refurbishment Work, which Landlord may deduct from the Refurbishment Allowance. Notwithstanding the foregoing, upon written notice from Tenant to Landlord after the Refurbishment Work has been substantially completed (and all costs related to the Refurbishment Work have been paid and disbursed in full) but before December 31, 2009 (the “Refurbishment Allowance Deadline”), Tenant may elect to use up to $6.00 per rentable square foot in the Premises of any unspent Refurbishment Allowance (a) toward the cost of wiring, cabling, furniture, fixtures and equipment, provided Tenant submits to Landlord paid invoices therefor prior to the Refurbishment Allowance Deadline, and (b) as a credit against Tenant’s Rent obligations under the Lease next coming due provided Tenant gives Landlord written notice thereof prior to the Refurbishment Allowance Deadline; provided, however, if an event of default extending beyond any applicable notice or cure period occurs Tenant shall have no right to use any portion of the Refurbishment Allowance for such expenses or as a credit against Rent and any credit against Rent previously given shall, at Landlord’s election, either be

SECOND AMENDMENT TO LEASE — Page 3 of 27

reversed or immediately paid to Landlord by Tenant. Any portion of the Refurbishment Allowance which remains unspent as of the Refurbishment Allowance Deadline shall be retained by Landlord without credit or reimbursement to Tenant.

     SECTION 1.06. Landlord’s Work. In addition to providing the Refurbishment Allowance, Landlord shall perform the following improvements (the “Landlord’s Work”) using Building standard materials and colors with input from Tenant: (a) replace 2^nd floor common corridor carpet, (b) resurface the existing travertine wall around elevator doors on the 2^nd floor with a new hard surface (the new surface will correspond with Tenant’s choice of finishes for the remodel of their entryway), (c) replace cracked sink in the women’s restroom, and (d) repair continuing water incursion and leaks in and into the Premises. Landlord’s Work shall be completed within the calendar year 2009.

     SECTION 1.07. Brokers. Landlord and Tenant represent to the other that it has not dealt with any broker or agent in connection with the negotiation or execution of this Amendment except Holt Lunsford Commercial representing Landlord and Daniel Rudd of CB Richard Ellis, Inc. representing Tenant (collectively, “Brokers”). Landlord will be responsible to pay the commission, if any, owed to Brokers pursuant to the terms of a separate written agreement. Landlord and Tenant hereby indemnify each other from any claims, losses, damages (including attorneys’ fees) resulting from a breach of the above representation.

     SECTION 1.08. Parking. Between the Extension Effective Date and the Expiration Date, the parking charge for the 10 designated covered parking spaces shall be at the rate of $35.00 plus tax per space per month; provided, however, such parking charges shall be abated between the Extension Effective Date and December 31, 2009. Following the Expiration Date, the parking charges shall be at the then current market rate from time to time.

     SECTION 1.09. Holdover. The reference to “twice” in Section 35 of the Original Lease is amended to be “150% of”. The following sentence is added to the end of Section 35 of the Original Lease: “Notwithstanding the foregoing, during the first month of any holding over by Tenant, Tenant shall pay rent equal to 125% the Base Rental and additional rent which would have been applicable had the term of this Lease continues through the period of such holding over by Tenant.”

     SECTION 1.10. Right of First Refusal. As of the date of this Amendment, Section 4 of the First Amendment and the 4^th and 5^th paragraphs of Exhibit C of the Original Lease are deleted and Tenant shall be provided a Right of First Refusal in accordance with Exhibit A of this Amendment.

     SECTION 1.11. Termination Option. Tenant shall have a termination option in accordance with Exhibit B of this Amendment.

     SECTION 1.12. Extension Option. Tenant shall have an extension option in accordance with Exhibit C of this Amendment.

SECOND AMENDMENT TO LEASE — Page 4 of 27

     SECTION 1.13. Additional Consideration (Letter of Credit). Simultaneously with the execution of this Amendment, Tenant shall deposit with Landlord a letter of credit in accordance with Exhibit D of this Amendment.

     SECTION 1.14. Further Amendments. The Lease shall be and hereby is further amended wherever necessary, even though not specifically referred to herein, in order to give effect to the terms of this Amendment. The reference to “$1,000,000” in Section 21 of the Original Lease is deleted and replaced with “$5,000,000.” The following is added after “or in the event of any material uninsured loss to the Building” in Section 24 of the Original Lease: “or in the event Landlord makes a good faith determination that restoring the Premises would be uneconomical”. Exhibit F (Renewal Option) of the Original Lease is deleted.

Article II

MISCELLANEOUS

     SECTION 2.01. Ratification.  The Lease, as amended hereby, is hereby ratified, confirmed and deemed in full force and effect in accordance with its terms. Each party represents to the other that such party (a) is currently unaware of any default by the other party under the Lease; and (b) has full power and authority to execute and deliver this Amendment and this Amendment represents a valid and binding obligation of such party enforceable in accordance with its terms. Tenant represents to Landlord that except as set forth in this Amendment (a) Landlord has completed all improvements to the Premises in compliance with all requirements in the Lease; and (b) all tenant finish costs or allowances payable by Landlord have been paid and no such costs or allowances are payable hereafter under the Lease.

     SECTION 2.02. No Offer. The submission of this Amendment to Tenant shall not be construed as an offer, nor shall Tenant have any rights under this Amendment unless Landlord executes a copy of this Amendment and delivers it to Tenant.

     SECTION 2.03. Counterparts. This Amendment may be executed in multiple counterparts each of which is deemed an original but together constitute one and the same instrument. This Amendment may be executed by facsimile or “pdf” and each party has the right to rely upon a facsimile or “pdf” counterpart of this Amendment signed by the other party to the same extent as if such party had received an original counterpart.

     SECTION 2.04. Governing Document. In the event the terms of the Lease conflict or are inconsistent with those of this Amendment, the terms of this Amendment shall govern.

     SECTION 2.05. Waiver of Right to Protest. Tenant hereby waives any and all rights under Section 41.413 and 42.015 of the Texas Tax Code granting to tenant the right to contest appraised values, or to receive notice of reappraised values, on all or any portion of the Building irrespective of whether Landlord has elected to contest same. To the extent such waiver is prohibited by applicable law, Tenant hereby appoints Landlord as Tenant’s attorney in fact, coupled with an interest, to appear and take all actions on behalf of Tenant which Tenant may have under said Section of the Code with respect to the Building, but not with

SECOND AMENDMENT TO LEASE — Page 5 of 27

respect to Tenant’s personal property located within the Premises. Landlord shall use commercially reasonable efforts to reduce and/or mitigate property taxes, but shall have no liability for any failure to reduce property taxes.

     SECTION 2.06. Waiver of Consumer Rights. Tenant hereby waives all its rights under the Texas Deceptive Trade Practices — Consumer Protection Act, Section 17.41 et. seq. of the Texas Business and Commerce Code, a law that gives consumers special rights and protections. After consultation with an attorney of Tenant’s own selection, Tenant voluntarily consents to this waiver.

     SECTION 2.07. Determination of Charges. Landlord and Tenant are knowledgeable and experienced in commercial transactions and agree that the provisions set forth in the Lease for determining rent and other charges and amounts payable by Tenant are commercially reasonable and valid even though such methods may not state a precise mathematical formula for determining such charges. Accordingly, Tenant hereby voluntarily and knowingly waives all rights and benefits of Tenant under Section 93.012 of the Texas Property Code, as such section now exists or as may be hereafter amended or succeeded.

     SECTION 2.08. Intentionally Deleted.

     SECTION 2.09. OFAC. Neither Tenant nor any of its affiliates, nor any of their respective partners, members, shareholders or other equity owners, and none of their respective employees, officers, directors, managers, representatives or agents, is a person or entity with whom U.S. persons or entities are restricted from doing business under regulations of the Office of Foreign Asset Control (“OFAC”) of the Department of the Treasury (including those named on OFAC’s Specially Designated and Blocked Persons List) or under any statute, executive order (including the September 24, 2001, Executive Order Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit, or Support Terrorism), or other governmental action.

     SECTION 2.10. Margin & Substitution Taxes. Notwithstanding anything in the Lease to the contrary, the definition of “real property taxes” shall include the following regardless of whether the following are expressly excluded by language elsewhere in the Lease (a) all taxes allocated by Landlord to the Project attributable to taxable margin levied pursuant to Chapter 171 of the Texas Tax Code or any amendment, adjustment or replacement thereof, and (b) any taxes, assessments, levies, impositions, tolls, excises, tariffs, charges or fees imposed, levied or assessed in lieu of or in substitution, addition or supplementation of other real property taxes.

[SIGNATURES ON FOLLOWING PAGE]

SECOND AMENDMENT TO LEASE — Page 6 of 27

     IN WITNESS WHEREOF, this Amendment has been executed as of (but not necessarily on) the date and year first above written.

LANDLORD:
SUN LIFE ASSURANCE COMPANY OF CANADA,
a Canadian corporation
By: Name:	/s/ Deborah Tirone Deborah K. Tirone
Title:	Managing Director
Date:	December 31, 2008
By:	/s/ Thomas V. Pedulla
Name:	Thomas V. Pedulla
Title:	Senior Managing Director
Date:	December 31, 2008
TENANT:
INTERPHASE CORPORATION,
a Texas corporation
By:	/s/ Thomas N. Tipton Jr.
Name:	Thomas N. Tipton Jr.
Title:	Chief Financial Officer
Date:	December 31, 2008

SECOND AMENDMENT TO LEASE — Page 7 of 27

EXHIBIT A

RIGHT OF FIRST REFUSAL

     Tenant shall have the right of first refusal (the “Right of First Refusal”) to lease space as described and/or shown on Exhibit A-1 (the “First Refusal Space”), in accordance with and subject to each of the following terms and conditions:

     1. Procedure for Offer. Between the date of this Amendment and February 28, 2014, should Landlord receive an offer (an “Offer”) with respect to all or any portion of the First Refusal Space from a bona fide third party prospect (the “Prospect”) which Landlord is willing to accept, Landlord shall notify Tenant (a “First Refusal Notice”) provided that no Superior Right Holder (hereinafter defined) wishes to lease such space. Pursuant to such First Refusal Notice, Landlord shall offer to lease to Tenant the applicable First Refusal Space based on the terms and conditions of the Offer; provided, however, if Landlord delivers a First Refusal Notice within 12 months following the date of this Amendment, Landlord shall also offer to lease to Tenant the applicable First Refusal Space based on the terms and conditions of this Amendment except (a) there shall be no Base Rental abatement, (b) the Lease Term for the First Refusal Space shall commence no later than 90 days following Landlord’s receipt of the First Refusal Acceptance Notice, (c) all allowances, concessions and similar terms for the First Refusal Space shall be proportionally adjusted based on the amount of Lease Term remaining; in addition, Tenant shall post additional consideration in the form of a letter of credit in a proportional amount requested by Landlord on the terms and conditions set forth in Exhibit D attached to this Amendment, and (d) if the applicable First Refusal Space is “spec” space that has been built out by Landlord, Tenant shall not be entitled to any “Refurbishment Allowance” or tenant improvement allowance with respect to such “spec” space. The rentable square footage of the space so offered to Tenant shall be determined by Landlord in accordance with Landlord’s standard method for measuring space in the Building.

     2. Procedure for Acceptance. If Tenant wishes to exercise Tenant’s Right of First Refusal with respect to the space described in a First Refusal Notice, then within 5 business days of delivery of such First Refusal Notice to Tenant, Tenant shall deliver notice to Landlord (a “First Refusal Acceptance Notice”) of Tenant’s exercise of the Right of First Refusal with respect to the entire space described in such First Refusal Notice on the terms contained therein. If Tenant does not deliver a First Refusal Acceptance Notice within the 5 business day period, then Landlord shall be free to lease the space described in such First Refusal Notice to anyone to whom Landlord desires on any terms Landlord desires; provided, however, if the transaction does not consummate within 6 months from the date of Landlord’s First Refusal Notice, or if there is a reduction in base rent of more than 10%, an increase in the allowance by more than 10% or an extension or reduction of the term for more than one (1) year, Landlord shall be obliged to present the revised Offer from that Prospect, or the next Offer from a new Prospect, to Tenant in a First Refusal Notice, as the case may be. Notwithstanding anything to the contrary contained herein, (a) Tenant must elect to exercise the Right of First Refusal, if at all, with respect to all of the space offered by Landlord to Tenant at any particular time, and Tenant may not elect to lease only a portion thereof, and (b) if the First Refusal Notice includes space in excess of the First Refusal Space, Tenant must exercise its right hereunder, if at all, as to all of

SECOND AMENDMENT TO LEASE — Page 8 of 27

the space contained in the First Refusal Notice, and Tenant may not elect to lease only the First Refusal Space. If Tenant does not exercise the Right of First Refusal with respect to the space described in a First Refusal Notice or if Tenant fails to respond to a First Refusal Notice within 5 business days of delivery thereof, then Tenant’s Right of First Refusal as set forth in this exhibit shall terminate as to the portion of the First Refusal Space so offered, except as provided above.

     3. Construction in First Refusal Space. Tenant shall accept the First Refusal Space in its then existing “as is” condition, and except as set forth in a First Refusal Notice, Landlord shall not be required to perform any improvements or provide any allowance for improvements. The construction of any improvements in the First Refusal Space shall comply with the terms of the Lease.

     4. Landlord’s Right to Make Term Coterminous. If the Term with respect to the First Refusal Space will expire after the Term with respect to the Premises, at Landlord’s and Tenant’s mutual election, the Term with respect to the Premises will be extended to be coterminous with the Term with respect to the First Refusal Space, and the Base Rental rate with respect to the Premises during such extended period will be the Market Rate, determined in accordance with Exhibit C.

     5. Superior Right Holders. Notwithstanding the foregoing, the Right of First Refusal and Landlord’s obligation to deliver a First Refusal Notice shall commence only following the expiration or earlier termination of the existing leases (including renewals, regardless of whether or not such renewals are pursuant to renewal options) of the First Refusal Space, and such Right of First Refusal shall be subordinate to all tenants (and the rights of all tenants under leases of the First Refusal Space) existing as of the date hereof, and all rights of other tenants of the Building, which rights relate to the First Refusal Space and which rights are set forth in leases of space in the Building existing as of the date hereof, each including any renewal, extension, expansion, first offer, first negotiation and other similar rights, regardless of whether such rights are executed strictly in accordance with their respective terms or pursuant to lease amendments or new leases (all such tenants under existing leases of the First Refusal Space and other tenants of the Building, collectively, the “Superior Right Holders”).

     6. Occupancy of Premises. The Right of First Refusal may only be exercised while Tenant is occupying the entire Premises, and at Landlord’s election any delivery of a First Refusal Acceptance Notice during any period of time in which Tenant is not occupying the entire Premises shall be null and void and of no effect.

     7. Tenant’s Default. Notwithstanding the foregoing, (a) Tenant shall have no right to exercise the Right of First Refusal at any time in which an event of default exists beyond any applicable notice or cure period and any exercise during such period of time shall be null and void and of no effect, (b) if an event of default occurs beyond any applicable notice or cure period under the Lease prior to Tenant’s exercise of the Right of First Refusal (in accordance with Section 2 hereof), the Right of First Refusal shall automatically become null and void, and (c) if after Tenant’s exercise of the Right of First Refusal (in accordance with Section 2 hereof) but before the commencement of the term with respect to the First Refusal Space an event of default exists beyond any applicable notice or cure period, then Landlord may elect, but is not obligated, by written notice given to Tenant to cancel and declare null and void Tenant’s

SECOND AMENDMENT TO LEASE — Page 9 of 27

exercise of the Right of First Refusal. If Landlord does not cancel Tenant’s exercise of the Right of First Refusal, Tenant shall cure the default within the period of time specified in the Lease.

     8. No Right of First Refusal After Transfer. The Right of First Refusal is personal to the originally named Tenant in the Lease or Lease amendment to which this exhibit is attached and its Related Entities. If an assignment, sublease or other transfer occurs, other than to a Related Entity, the Right of First Refusal shall be deemed null and void and neither Tenant nor any transferee (other than a Related Entity) shall have the right to exercise the Right of First Refusal. This condition may be waived by Landlord at its sole discretion and may not be used by Tenant as a means to negate the effectiveness of Tenant’s exercise of the Right of First Refusal. As used herein, “Related Entity” shall mean an entity which (i) directly or indirectly controls the subject party, (ii) is under the direct or indirect control of the subject party, (iii) is under common direct or indirect control with the subject party, (iv) with which the subject party is merged or consolidated, or (v) which acquires all or substantially all of the subject party’s assets or stock. Control shall mean ownership of fifty-one percent (51%) or more of the voting securities or rights of the controlled entity.

     9. No Right of First Refusal After Exercise of Certain Options. Notwithstanding anything in the Lease to the contrary, (a) if Tenant exercises any option contained in the Lease, if any, to terminate the Lease or reduce the size of the Premises, the Right of First Refusal shall automatically become null and void upon such exercise, and (b) if Tenant exercises the Right of First Refusal, the Termination Option shall not apply to the Right of First Refusal Space or any additional space leased or occupied by Tenant in the Building.

     10. Intentionally Deleted.

     11. Other Terms of Lease Apply. Except for the specific terms applicable to the First Refusal Space, all other terms and conditions of the Lease shall apply to the First Refusal Space.

     12. Amendment to Lease. Promptly after Tenant’s exercise of the Right of First Refusal, Landlord shall deliver to Tenant an amendment to the Lease to reflect the addition of the applicable First Refusal Space. Within 10 business days thereafter, Tenant shall execute and return the amendment if acceptable or return a redlined amendment, but in any case the Amendment must be fully executed by Tenant within 30 days following the date of Tenant’s acceptance. If Tenant fails to return the amendment within the periods required in this Section 12, at Landlord’s written election, Tenant’s rights under this Exhibit shall be deemed terminated and Tenant shall have no further right to the First Refusal Space.

     13. Tenant’s Financial Condition. Notwithstanding the foregoing, (a) Tenant shall have no right to exercise the Right of First Refusal and Landlord shall no obligation to give Tenant a First Refusal Notice if Tenant’s Net Worth is not equal to or better than the condition existing on the date of this Amendment on the date of and/or after Tenant’s exercise of the Right of First Refusal (in accordance with Section 2 hereof). In such event, Landlord may elect, but is not obligated, by written notice given to Tenant to cancel and declare null and void Tenant’s exercise of the Right of First Refusal. As used herein, “Net Worth” of Tenant as described in this Amendment shall mean the unencumbered assets (e.g., not encumbered by any pledge, claim, lien,

SECOND AMENDMENT TO LEASE — Page 10 of 27

judgment, mortgage or other encumbrance and excluding good will) of said entity less all liabilities of said entity

SECOND AMENDMENT TO LEASE — Page 11 of 27

EXHIBIT A-1

FIRST REFUSAL SPACE

     All rentable square footage in the Building, excluding common areas.

SECOND AMENDMENT TO LEASE — Page 12 of 27

EXHIBIT B

TERMINATION OPTION

     Notwithstanding anything to the contrary contained herein, Tenant shall have a one-time option to terminate the Lease (the “Termination Option”) in accordance with and subject to each of the following terms and conditions:

     1. Termination Notice. In the event a Tenant Acquisition Event (as hereinafter defined) occurs, subject to the terms and conditions set forth in this Exhibit B, and if Tenant desires to exercise the Termination Option following (but not before) such Tenant Acquisition Event, Tenant may give Landlord irrevocable written notice (the “Termination Notice”) of Tenant’s exercise of the Termination Option, which shall be delivered by U.S. certified mail, return receipt requested. The Termination Date shall be no earlier than the fortieth (40th) full calendar month following the Extension Effective Date. Time is of the essence with the respect to Landlord’s receipt of the Termination Notice and all other deadlines in this exhibit. As used herein, a “Tenant Acquisition Event” is a transaction in which Tenant sells all or substantially all of its assets or merges with a third party resulting in a 51% change of control.

     2. Termination Date. Notwithstanding anything contained in this Exhibit B to the contrary, if Landlord timely receives the Termination Notice and Tenant complies with all the provisions in this exhibit, the Lease shall terminate at 11:59 p.m. on (the “Termination Date”) the last day of the 9th full calendar month following the date Landlord receives the Termination Notice, but not earlier than after the 40th full calendar month following the Extension Effective Date.

     3. Termination Fee Must Accompany Termination Notice. In order for the Termination Notice to be effective, it must be accompanied by the entire termination fee (the “Termination Fee”) in cash or certified funds in the amount of the total aggregate amount of the brokerage commission payable in connection with the Lease or the Amendment to which this Exhibit is attached, the amount of the Refurbishment Allowance which would be unamortized as of the Termination Date, assuming that such total aggregate amount were to be fully amortized over the period between the Extension Effective Date and the Expiration Date using an interest rate of 7% per annum.

     4. Tenant’s Obligations Survive Termination. Tenant’s obligations to pay Rent and any other costs or charges under the Lease, and to perform all other Lease obligations for the period up to and including the Termination Date, shall survive the termination of the Lease.

     5. Tenant’s Default. Notwithstanding the foregoing, (a) Tenant shall have no right to exercise the Termination Option or deliver a Termination Notice at any time in which an event exists which, with notice or lapse of time or both, would constitute an event of default beyond any applicable notice or cure period under the Lease, and any delivery of a Termination Notice during such period of time shall be null and void and of no effect, (b) if an event of default beyond any applicable notice or cure period occurs under the Lease prior to Tenant’s exercise of the Termination Option (in accordance with Section 1 hereof), upon Landlord’s written election

SECOND AMENDMENT TO LEASE — Page 13 of 27

given to Tenant within 30 days of the event of default beyond any applicable notice or cure period, the Termination Option shall become null and void, and (c) if an uncured event of default occurs under the Lease after Tenant’s exercise of the Termination Option (in accordance with Section 1 hereof), then Landlord may elect, but is not obligated, by written notice given to Tenant to cancel and declare null and void Tenant’s exercise of the Termination Option, and the Lease shall continue in full force and effect for the full Term hereof unaffected by Tenant’s exercise of the Termination Option and Landlord shall either (i) apply the Termination Fee to existing or future Rent obligations under the Lease, and/or (ii) refund the Termination Fee to Tenant. If Landlord does not cancel Tenant’s exercise of the Termination Option after an event of default, Tenant shall cure the default within the period of time specified in the Lease and this obligation shall survive the Termination Date.

     6. Tenant Shall Surrender Space by Termination Date. If Tenant exercises the Termination Option, Tenant covenants to surrender full and complete possession of the Premises to Landlord on or before the Termination Date vacant, broom-clean, devoid of Tenant’s or any third party’s personal property, and in good order and condition, in accordance with the provisions of the Lease, and thereafter the Premises shall be free and clear of all leases, tenancies, and rights of occupancy of any entity claiming by or through Tenant.

     7. Failure to Surrender Constitutes a Holdover. If Tenant shall fail to deliver possession of the Premises on or before the Termination Date in accordance with the terms hereof, Tenant shall be deemed to be a holdover tenant from and after the Termination Date.

     8. Lease Ceases After Termination. If Tenant properly and timely exercises the Termination Option and Landlord has not negated the effectiveness of Tenant’s exercise of the Termination Option as allowed under this Exhibit, the Lease shall cease and expire on the Termination Date with the same force and effect as if the Termination Date were the date originally provided in the Lease as the expiration date of the Term hereof.

     9. Intentionally Deleted.

     10. No Termination Option After Transfer. The Termination Option is personal to the named Tenant and its Related Entities. This condition may be waived by Landlord at its sole discretion and may not be used by Tenant as a means to negate the effectiveness of Tenant’s exercise of the Termination Option. As used herein, “Related Entity” shall mean an entity which (i) directly or indirectly controls the subject party, (ii) is under the direct or indirect control of the subject party, (iii) is under common direct or indirect control with the subject party, (iv) with which the subject party is merged or consolidated, or (v) which acquires all or substantially all of the subject party’s assets or stock. Control shall mean ownership of fifty-one percent (51%) or more of the voting securities or rights of the controlled entity.

     11. No Termination Option After Exercise of Certain Options. Notwithstanding anything in the Lease to the contrary, if Tenant exercises any extension option contained in the Lease or extends the Term past February 28, 2014, the Termination Option shall automatically become null and void.

SECOND AMENDMENT TO LEASE — Page 14 of 27

     12. Termination Option Only Applies to Original Premises. Notwithstanding anything in this Exhibit to the contrary, the Termination Option applies only to the original Premises (the “Original Premises”) described in this Amendment (i.e., 22,228 rentable square feet) and not to any additional premises (“Additional Premises”) previously or hereafter leased by Tenant, including, without limitation, any Additional Premises leased pursuant to any option to increase the size of the Premises (e.g., a right of first offer). Notwithstanding anything in the Lease to the contrary the Termination Option shall not apply to any Additional Premises.

SECOND AMENDMENT TO LEASE — Page 15 of 27

EXHIBIT C

EXTENSION OPTION

     Notwithstanding anything to the contrary contained herein, Landlord hereby grants to Tenant the option to extend the Lease Term (“Extension Option”) for 1 period of 5 years (“Extension Term”) commencing when the Lease Term expires in accordance with and subject to each of the following terms and conditions:

     1. Extension Notice. If Tenant desires to exercise an Extension Option, Tenant shall give Landlord written notice (the “Extension Notice”) of Tenant’s exercise of an Extension Option, which shall be delivered by U.S. certified mail, return receipt requested. The Extension Notice must be received by Landlord no later than the date that is 9 full months prior to the date that the Extension Term would start and no earlier than the date that is 15 full months prior to the date that the Extension Term would start. Time is of the essence with respect to Landlord’s receipt of the Extension Notice and all other deadlines in this exhibit.

     2. Terms of Extension Term. During any Extension Term, all of the terms and conditions of the Lease (excluding any terms, conditions and options specifically applicable to only the initial or any prior Term) except where specifically modified by this exhibit shall apply. Tenant shall have no additional extension option.

     3. Rent for Extension Term. The Rent payable during an Extension Term shall be the Market Rate on the date the Extension Term commences.

     4. Definition of Market Rate. The term “Market Rate” shall mean the amount that a willing, comparable renewal tenant would pay and a willing, comparable landlord of a similar building in the same submarket would accept at arm’s length for similar space, giving appropriate consideration to all relevant factors, including, without limitation, the following matters: (i) annual rental rates per rentable square foot; (ii) the type of escalation clauses (including, but without limitation, operating expenses, base year, real estate taxes, electrical costs and CPI) and the extent of liability under the escalation clauses (i.e., whether determined on a “net lease” basis or by increases over a particular base year or base dollar amount); (iii) rent abatement provisions reflecting free rent and/or no rent during the lease term; (iv) length of lease term; (v) quality, size, utility and location of premises being leased; (vi) whether other renewal tenants are receiving tenant improvements or refurbishment allowances; (vii) size and credit standing of Tenant; (viii) the cost of the Reduction Premises Work described under Section 13 below, (ix) other generally applicable terms and conditions of tenancy for similar space. In no event shall Landlord be obligated to provide Tenant with a tenant improvement or refurbishment allowance, unless Landlord at the time is offering an allowance to renewing tenants (as opposed to new tenants). The Market Rate may also designate periodic rental increases and similar economic adjustments. The Market Rate shall be the Market Rate in effect as of the beginning of the Extension Term, even though the determination may be made in advance of that date, and the parties may use recent trends in rental rates in determining the proper Market Rate as of the beginning of the Extension Term. The Market Rate will be an effective rate, not specifically including, but accounting for, the appropriate economic considerations described above.

SECOND AMENDMENT TO LEASE — Page 16 of 27

     5. Determination of Market Rate. If Tenant exercises an Extension Option (in accordance with Section 1 hereof), Landlord shall determine the Market Rate by using its good faith judgment. Landlord shall provide Tenant with written notice (“Landlord’s Notice”) of such amount within 20 days after Tenant exercises such Extension Option. Tenant shall have 20 days following delivery of Landlord’s Notice to notify Landlord in writing (“Tenant’s Renewal Notice”) of (i) Tenant’s exercise of its right to renew the Lease at the Market Rate proposed by Landlord, or (ii) Tenant’s counter offer to Landlord, or (iii) Tenant’s election not to exercise its right to renew the Lease. Tenant’s failure to timely deliver Tenant’s Renewal Notice shall be deemed rejection by Tenant of the Market Rate proposed by Landlord and the Lease shall expire on the scheduled expiration date of February 28, 2014. If Tenant delivers a counter offer to Landlord, then Tenant and Landlord shall have 45 days from delivery of Tenant’s Renewal Notice to agree on terms for such Extension Option and if the parties fail to agree on the terms for any reason or no reason within such 45 day period, this Extension Option shall be null and void and the Lease shall terminate February 28, 2014.

     6. Tenant’s Default. Notwithstanding the foregoing, (a) Tenant shall have no right to exercise an Extension Option or deliver an Extension Notice at any time in which an event exists which, with notice or lapse of time or both, would constitute an event of default beyond any applicable notice or cure period under the Lease, and any delivery of an Extension Notice during such period of time shall be null and void and of no effect, (b) if an event of default occurs beyond any applicable notice or cure period under the Lease prior to Tenant’s exercise of an Extension Option (in accordance with Section 1 hereof), the Extension Option shall automatically become null and void, and (c) if after Tenant’s exercise of an Extension Option (in accordance with Section 1 hereof) but before the commencement of an Extension Term an event exists which, with notice or lapse of time or both, would constitute an uncured Event of Default under the Lease, then Landlord may elect, but is not obligated, by written notice given to Tenant to cancel and declare null and void Tenant’s exercise of the Extension Option, and the Lease shall continue in full force and effect for the full Term hereof unaffected by Tenant’s exercise of the Extension Option. If Landlord does not cancel Tenant’s exercise of the Extension Option, Tenant shall cure the default within the period of time specified in the Lease.

     7. No Extension Option After Transfer. The Extension Option is personal to the originally named Tenant in the Lease or Lease amendment and its Related Entity. If an assignment, sublease (of more than 25% of the Premises) or other transfer occurs to a party other than a Related Entity, the Extension Option shall be deemed null and void and neither Tenant nor any assignee, subtenant or other transferee (other than a Related Entity) shall have the right to exercise such option. This condition may be waived in writing by Landlord at its sole and absolute discretion and may not be used by Tenant as a means to negate the effectiveness of Tenant’s exercise of an Extension Option.

     8. Occupancy of Premises. The Extension Option may only be exercised while Tenant is occupying seventy-five percent (75%) of the entire Premises (subject to Section 13 below), and at Landlord’s election any delivery of an Extension Notice during any period of time in which Tenant is not occupying 75% of the entire Premises (subject to Section 13 below) shall be null and void and of no effect.

SECOND AMENDMENT TO LEASE — Page 17 of 27

     9. No Extension Option After Exercise of Certain Options. Notwithstanding anything in the Lease to the contrary, (a) if Tenant exercises any option contained in the Lease, if any, to terminate the Lease or reduce the size of the Premises (except as permitted in Section 13 below), the Extension Option shall automatically become null and void upon such exercise, and (b) if Tenant exercises an Extension Option or extends the Term past February 28, 2014, any rights of Tenant under the Lease to terminate the Lease or reduce the size of the Premises, if any, shall automatically become null and void upon such exercise.

     10. Intentionally Deleted.

     11. Amendment to Lease. Promptly after the determination of the Market Rate, Landlord shall deliver to Tenant an amendment to the Lease to reflect the Extension Term. Within 10 business days thereafter, Tenant shall execute and return the amendment. If Tenant fails to return the amendment within such 10 business day period, at Landlord’s written election, Tenant’s rights under this Exhibit shall be deemed terminated.

     12. Tenant’s Financial Condition. Notwithstanding the foregoing, (a) Tenant shall have no right to exercise the Extension Option and Landlord shall have no obligation to give Tenant a Landlord’s Notice if Tenant’s Net Worth is not equal to or better than the condition existing on the date of this Amendment, on the date of and/or after Tenant’s exercise of the Extension Option (in accordance with Section 2 hereof). In such event, Landlord may elect, but is not obligated, by written notice given to Tenant to cancel and declare null and void Tenant’s exercise of the Extension Option. As used herein, “Net Worth” of Tenant as described in this Amendment shall mean the unencumbered assets (e.g., not encumbered by any pledge, claim, lien, judgment, mortgage or other encumbrance and excluding good will) of said entity less all liabilities of said entity.

     13. Option to Extend as to Less Than All the Premises. Notwithstanding anything in this Exhibit to the contrary, Tenant may elect (the “Reduction Election”), by giving Landlord written notice in the Extension Notice, to exercise an Extension Option as to less than 100% (but at least 75%) of the rentable square footage of the Premises, provided the Extension Notice specifies the approximate amount of the rentable square footage Tenant desires to give back to Landlord (the “Reduction Premises”) and the Reduction Premises is a space Landlord deems leasable, in Landlord’s reasonable discretion. If Tenant timely makes a Reduction Election, Landlord shall specify the location of the Reduction Premises in Landlord’s Notice, which shall be in a location acceptable to Landlord, in Landlord’s reasonable discretion. The cost of the Reduction Premises Work shall be taken into consideration in determining the market rate. The “Reduction Premises Work” shall consist of (i) all improvements specified by Landlord that are needed in order to demise the Reduction Premises from the balance of the Premises, including, without limitation, the separation of all utilities and services, such that both the Reduction Premises and the balance of the Premises are separately demised spaces that each have their own independently functioning utilities and services required for normal office usage, and (b) if required by Landlord, the cost of all improvements specified by Landlord that are needed in order to create a Building standard multi-tenant corridor, plus a reasonable construction

SECOND AMENDMENT TO LEASE — Page 18 of 27

management fee. The Reduction Premises Work shall be performed by a contractor(s) engaged by Landlord.

SECOND AMENDMENT TO LEASE — Page 19 of 27

EXHIBIT D

ADDITIONAL CONSIDERATION (LETTER OF CREDIT)

     1. General. As additional consideration for Landlord’s agreement to enter into this Amendment, concurrently with Tenant’s execution and delivery of this Amendment, and as a condition to Landlord’s obligations under the Lease, Tenant covenants and agrees to deliver to Landlord, as additional consideration, an irrevocable letter of credit (the “L/C”) in the form of, and upon all of the terms and conditions contained in, Exhibit D-1 attached hereto and incorporated herein by reference. The L/C shall be issued by an institutional lender of good financial standing (which lender shall, in any event, have assets equal to or exceeding $4 billion dollars as of the date of issuance of the L/C), having a place of business where the L/C can be presented for payment in Dallas, Texas. The lender shall be subject to Landlord’s prior written approval, which approval shall not be unreasonably withheld or delayed. The L/C shall provide for 1 or more draws by Landlord or its transferee up to the aggregate amount of US $350,000.00 (the “L/C Amount”) on the terms and conditions of Exhibit D-1. Landlord and Tenant (1) acknowledge and agree that in no event or circumstance shall the L/C or any renewal thereof or substitute therefor or any proceeds thereof be deemed to be or treated as a “security deposit” under any Law applicable to security deposits in the commercial context (“Security Deposit Laws”), and (2) acknowledge and agree that the L/C (including any renewal thereof or substitute therefor or any proceeds thereof) is independent consideration separate and apart from the Security Deposit and is not intended to serve as a security deposit, and the Security Deposit Laws shall have no applicability or relevancy thereto.

     2. Renewal of L/C. Tenant shall maintain the L/C in effect from the date of Tenant’s execution of this Amendment until the date which is 30 days after Tenant shall have performed all of its obligations under the Lease (said period is hereinafter referred to as the “L/C Term”). If the expiration date of the L/C (or any renewal or replacement L/C provided pursuant to this section) occurs prior to the end of the L/C Term, then Tenant shall deliver to Landlord a renewal of the L/C or a replacement L/C meeting all of the terms and conditions of this section, not later than 60 days prior to the then-applicable expiration date. Each L/C provided pursuant to this section shall have an expiration date which is at least one (1) year from such L/C’s date of issue except where the then-applicable expiration date of the L/C is less than one (1) year from the end of the L/C Term, in which case the renewal or replacement L/C shall be for such lesser period. The issuing bank’s agreement to place an automatic renewal provision in the L/C, as required pursuant to said Exhibit D-1, shall not relieve or release Tenant from its obligation to provide a renewal or replacement L/C on the terms hereinabove stated, it being understood that any such automatic renewal is an independent obligation of the issuing bank which is intended for Landlord’s sole benefit. If Tenant fails to provide the renewal or replacement L/C not later than 30 days prior to the then-applicable, stated expiration date (excluding automatic renewal provisions), such failure shall be a default by Tenant, and Landlord shall have the right, without notice or demand, on one or more occasions, to draw upon all or any part of the remaining proceeds of the L/C.

     3. Draw on L/C. Landlord may elect from time to time, in Landlord’s sole discretion, with notice to Tenant (for informational purposes only), to draw upon all or any part of the

SECOND AMENDMENT TO LEASE — Page 20 of 27

remaining proceeds of the L/C upon the occurrence of one or more of the following events: (i) Tenant fails to pay Base Rental, and such failure constitutes an event of default beyond any applicable notice or cure period by Tenant as defined in the Lease, or Tenant fails to perform any of its monetary obligations under this section or (ii) Tenant makes any assignment for the benefit of creditors, Tenant declares bankruptcy or is the subject of an involuntary bankruptcy proceeding, a trustee or receiver is appointed to take possession of some or all of Tenant’s assets or Tenant declares it is insolvent. In addition, Landlord may elect from time to time, in Landlord’s sole discretion, with five (5) days prior written notice to Tenant to draw upon all or any part of the remaining proceeds of the L/C upon the occurrence of the following event: Tenant fails to perform any of its other monetary obligations under the Lease (e.g., operating expenses, electricity, parking, etc.), and such failure constitutes an event of default beyond any applicable notice or cure period by Tenant as defined in the Lease.

     4. Application of L/C Proceeds. Landlord may elect, from time to time, upon written notice to Tenant (for informational purposes only), in Landlord’s sole discretion, to apply the proceeds it receives from a draw on the L/C in one or more of the following manners without prejudice to any other remedies: (i) as payment for some or all of the rent or other amounts owed by Tenant under the Lease but unpaid on the date of such draw, (ii) as payment for some or all of the future amounts of rent or other amounts that Landlord estimates will be due and payable under the Lease after the date of the draw, (iii) as payment for some or all of the damage Landlord may suffer as a result of Tenant’s failure to perform its obligations under the Lease, and/or (iv) in any other manner permitted by the Lease or applicable law, provided such application directly mitigates the monetary liabilities owed to Landlord arising under the Lease. Landlord may make one or more partial draws under the L/C and shall have the right, upon written notice to Tenant, to treat each draw or a portion thereof in one or more of the ways described in the previous sentence. Tenant hereby waives any other law or regulation that may be inconsistent with the terms and conditions of this section.

     5. Enforcement. Tenant’s obligation to furnish the L/C shall not be released, modified or affected by any failure or delay on the part of Landlord to enforce or assert any of its rights or remedies under the Lease or this section, whether pursuant to the terms thereof or at law or in equity. Landlord’s right to draw upon the L/C shall be without prejudice or limitation to Landlord’s right to draw upon any security deposit provided by Tenant to Landlord or to avail itself of any other rights or remedies available to Landlord under the Lease or at law or equity.

     6. Event of Default. Tenant’s failure to perform its obligations under this section (time being of the essence) shall constitute an event of default under the Lease, and shall entitle Landlord to immediately exercise all of its rights and remedies under the Lease (including, but not limited to rights and remedies under this section) or at law or in equity without notice or demand to Tenant.

     7. Conflict. If there is any conflict between the terms and conditions of this section and the terms and conditions of the Lease, the terms of this Exhibit shall control

     8. Reduction in Amount of L/C. So long as (a) an event of default beyond any applicable notice or cure period has not occurred and Tenant is obligated for the initial Premises,

SECOND AMENDMENT TO LEASE — Page 21 of 27

consisting of 22,228 rentable square feet, and (b) Landlord has not drawn upon the Letter of Credit, on the 1^st, 2^nd, 3^rd and 4^th anniversaries of the Extension Effective Date, Tenant shall have the right to reduce the L/C Amount by $70,000. For example, if the Extension Effective Date occurs on January 1, 2009, then on January 1, 2010 Tenant would have the right to reduce the L/C Amount to $280,000.00, on January 1, 2011 Tenant would have the right to reduce the L/C Amount to $210,000.00, on January 1, 2012 Tenant would have the right to reduce the L/C Amount to $140,000.00, and on January 1, 2013 Tenant would have the right to reduce the L/C Amount to $70,000.00. In no event shall the L/C Amount be decreased below $70,000.00. The documents evidencing the reduction of the L/C Amount shall be satisfactory to Landlord, in Landlord’s reasonable discretion.

SECOND AMENDMENT TO LEASE — Page 22 of 27

EXHIBIT D-1

LETTER OF CREDIT

[DATE]

Sun Life Assurance Company of Canada
c/o Sun Life Financial SC 1307
One Sun Life Executive Park, SC-1307
Wellesley Hills, Massachusetts 02481
Attn: Deborah Tirone

Ladies and Gentlemen:

     At the request and on the instructions of our customer,                      (the “Applicant”), we hereby establish this Irrevocable Letter of Credit No.                      (the “Letter of Credit”) in the amount of $                     in your favor. This Letter of Credit is effective immediately and shall have a minimum term of one (1) year from the date hereof (the “Initial Term”). This Letter of Credit shall automatically renew for successive one-year periods (each, a “Successive Term”) unless we notify you in writing at least sixty (60) days prior to the expiration of the applicable Successive Term that the Letter of Credit will not be renewed by us.

     This Letter of Credit is issued with respect to that certain lease, by and between you, as Landlord, and the Applicant, as Tenant. Said lease, and any amendments or modifications thereof, is hereinafter referred to as the “Lease.” Our obligations under this Letter of Credit are solely as set forth herein and are completely independent of the obligations of the Applicant under the Lease. We do not undertake any obligation under the Lease, nor do we undertake any responsibility to ascertain any facts, or to take any other action, with respect to the Lease, and we acknowledge that our obligations under this Letter of Credit shall not be affected by any circumstance, claim or defense of any party as to the enforceability of the Lease. The references to the Lease in this Letter of Credit are solely to state our agreement that this Letter of Credit is an independent obligation and shall not be affected by the Lease.

     Funds under this Letter of Credit will be made available to you against receipt by us of a Sight Draft in the form of Annex A attached hereto, in each case appropriately completed and purportedly signed by one of your authorized officers.

     Presentation of any such Sight Draft shall be made at our office located at [PRESENTATION OFFICE ADDRESS), Attention:                      , telecopy number (                    )                      , during our banking hours of                      a.m., Central Time,

SECOND AMENDMENT TO LEASE — Page 23 of 27

to                      p.m., Central Time. Presentation hereunder may also be made in the form of facsimile transmission of the appropriate Sight Draft to the preceding address and telecopy number.

     If a sight draft is presented hereunder by sight or by facsimile transmission as permitted hereunder, by 10:00 a.m., Central Time, and provided that such sight draft conforms to the terms and conditions of this Letter of Credit, payment shall be made to you, or to your designee, of the amount specified, in immediately available funds, not later than 2:00 p.m., Central Time, on the same day. If a sight draft is presented by you hereunder after the time specified above, and provided that such sight draft conforms to the terms and conditions of this Letter of Credit, payment shall be made to you, or to your designee, of the amount specified, in immediately available funds, not later than 2:00 p.m., Central Time, on the next business day. If a demand for payment made by you hereunder does not, in any instance, conform to the terms and conditions of this Letter of Credit, we shall give you notice within one business day that the demand for payment was not effected in accordance with the terms and conditions of this Letter of Credit, stating the reasons therefor and that we will upon your instructions hold any documents at your disposal or return the same to you. Upon being notified that the demand for payment was not effected in conformity with this Letter of Credit, you may attempt to correct any such non-conforming demand for payment to the extent that you are entitled to do so and within the validity of this Letter of Credit.

     Partial drawings are allowed under this Letter of Credit. Any drawing under this Letter of Credit will be paid from our general funds and not directly or indirectly from funds or collateral deposited with or for our account by the Applicant, or pledged with or for our account by the Applicant.

     This Letter of Credit is transferable and notwithstanding Article 48 of the Uniform Customs (as defined below), this Letter of Credit may be successively transferred. Transfer of this Letter of Credit to a transferee shall be effected only upon the presentation to us of the original of this Letter of Credit accompanied by a certificate in the form of Annex B. Upon such presentation we shall transfer the same to your transferee or, if so requested by your transferee, issue a letter of credit to your transferee with provisions consistent with, and substantially the same as, this Letter of Credit.

     This Letter of Credit shall be subject to the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500 (the “Uniform Customs”), which is incorporated into the text of this Letter of Credit by this reference. This Letter of Credit shall be deemed to be issued under the laws of the State of Texas and shall be governed by and construed in accordance with the law of the State of Texas with respect to matters not governed by the Uniform Customs and matters on which the Uniform Customs and the laws of the State of Texas are inconsistent.

SECOND AMENDMENT TO LEASE — Page 24 of 27

Very truly yours,

[ISSUING BANK]

By:

Name:

Title:

SECOND AMENDMENT TO LEASE — Page 25 of 27

ANNEX A

DATE:

TO:		RE:	LETTER OF CREDIT NO.
			ISSUED BY
	ATTN:

GENTLEMEN:

THE UNDERSIGNED BENEFICIARY HEREBY DEMANDS PAYMENT OF $                     TO BE PAID IN IMMEDIATELY AVAILABLE FUNDS IN ACCORDANCE WITH THE ABOVE-REFERENCED LETTER OF CREDIT.

SINCERELY,

BENEFICIARY’S NAME

AUTHORIZED SIGNATURE OF BENEFICIARY

NAME AND TITLE OF AUTHORIZED SIGNATORY

SECOND AMENDMENT TO LEASE — Page 26 of 27

ANNEX B

DATE:

TO:		RE:	LETTER OF CREDIT NO.
			ISSUED BY
	ATTN:

GENTLEMEN:

FOR VALUE RECEIVED, THE UNDERSIGNED BENEFICIARY HEREBY IRREVOCABLY TRANSFERS TO:

(NAME OF TRANSFEREE)
(ADDRESS)

ALL RIGHTS OF THE UNDERSIGNED BENEFICIARY TO DRAW UNDER THE ABOVE LETTER OF CREDIT ARE TRANSFERRED TO THE TRANSFEREE. TRANSFEREE SHALL HAVE THE SOLE RIGHTS AS BENEFICIARY THEREOF, INCLUDING SOLE RIGHTS RELATING TO ANY AMENDMENTS, WHETHER INCREASES OR EXTENSIONS OR OTHER AMENDMENTS, AND WHETHER NOW EXISTING OR HEREAFTER MADE. ALL AMENDMENTS ARE TO BE ADVISED DIRECT TO THE TRANSFEREE WITHOUT NECESSITY OF ANY CONSENT OF OR NOTICE TO THE UNDERSIGNED BENEFICIARY.

THE ORIGINAL OF SUCH LETTER OF CREDIT IS RETURNED HEREWITH, AND WE ASK YOU TO ENDORSE THE TRANSFER ON THE REVERSE THEREOF, AND FORWARD IT DIRECTLY TO THE TRANSFEREE WITH YOUR CUSTOMARY NOTICE OF TRANSFER.

SINCERELY,

(BENEFICIARY’S NAME)

SIGNATURE OF BENEFICIARY

SIGNATURE AUTHENTICATED

(NAME OF BANK)

AUTHORIZED SIGNATURE

SECOND AMENDMENT TO LEASE — Page 27 of 27

EX-23.(A)

Exhibit 23(a)

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have issued our report dated March 20, 2009, with respect to the consolidated financial statements in the Annual Report of Interphase Corporation on Form 10-K for the year ended December 31, 2008. We hereby consent to the incorporation by reference of said report in the Registration Statements of Interphase Corporation on Forms S-8 (File No. 333-91029, effective November 16, 1999, and File No. 333-97971, effective August 12, 2002).

/s/ GRANT THORNTON LLP
Dallas, Texas
March 20, 2009

EX-31.(A)

Exhibit 31(a)

CERTIFICATION PURSUANT TO RULE 13a-14(a) and 15d-14(a)

I, Gregory B. Kalush, certify that:

1.	I have reviewed this report on Form 10-K of Interphase Corporation (the “Company”);
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;
4.	The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules13a-15(f) and 15d-15(f)) for the Company and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors:

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Date: March 20, 2009	Signature:	/s/ Gregory B. Kalush
		Chief Executive Officer

EX-31.(B)

Exhibit 31(b)

CERTIFICATION PURSUANT TO RULE 13a-14(a) and 15d-14(a)

I, Thomas N. Tipton Jr., certify that:

1.	I have reviewed this report on Form 10-K of Interphase Corporation (the “Company”);
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;
4.	The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules13a-15(f) and 15d-15(f)) for the Company and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter (the Company’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

5. The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors:

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

Date: March 20, 2009	Signature:	/s/ Thomas N. Tipton Jr.
		Chief Financial Officer

EX-32.(A)

Exhibit 32(a)

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Interphase Corporation (the “Company”) on Form 10-K for the year ended December 31, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Gregory B. Kalush, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

     (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Gregory B. Kalush  

Gregory B. Kalush 

Chief Executive Officer
March 20, 2009 

EX-32.(B)

Exhibit 32(b)

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Interphase Corporation (the “Company”) on Form 10-K for the year ended December 31, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Thomas N. Tipton Jr., Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

     (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

     (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Thomas N. Tipton Jr.  

Thomas N. Tipton Jr. 

Chief Financial Officer
March 20, 2009