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, 2005

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

2901 North Dallas Parkway, Suite 200, Plano, Texas 75093
(Address of Principal Executive Offices and Zip Code)

Registrant’s telephone number, including area code: (214) 654-5000

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

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.10 par value
(Title of Class)

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. o

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

Large accelerated filer o       Accelerated filer o       Non-accelerated filer 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, 2005, was approximately $34,400,000. As of March 15, 2006, shares of common stock outstanding totaled 6,023,562.

DOCUMENTS TO BE 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 2006, 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 and Executive Officers of the Registrant
	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
	Item 14 Principal Accountant Fees and Services
PART IV
	Item 15 Exhibits and Financial Statement Schedules
SIGNATURES
INDEX TO EXHIBITS
Employment Agreement - Gregory B. Kalush
Employment Agreement for Chief Technology Officer - Felix V. Diaz
Employment, Confidentiality, and Non-Competition Agreement - Thomas N. Tipton, Jr.
Employment, Confidentiality, and Non-Competition Agreement - Randall E. McComas
Employment Agreement - Deborah A. Shute
Employment, Confidentiality, and Non-Competition Agreement - James W. Gragg
Employment, Confidentiality, and Non-Competition Agreement - Prasad Kallur
Employment Agreement - Steven P. Kovac
Consent of Independent Registered Public Accounting Firm
Consent of Independent Registered Public Accounting Firm
Rule 13a-14(a)/15d-14(a) Certification
Rule 13a-14(a)/15d-14(a) Certification
Section 1350 Certification
Section 1350 Certification

PART I

Item 1. Business.

Introduction

Interphase Corporation and subsidiaries (“Interphase” or the “Company”) provide robust building blocks, highly integrated subsystems and innovative gateway appliances for the converged communications network. Building on an almost 30-year history of providing advanced Input/Output (I/O) solutions for telecommunications and enterprise applications, and addressing the need for high speed connectivity, Interphase has established a key role in delivering next generation AdvancedTCA^® (Advanced Telecommunications Computing Architecture or ATCA), MicroTCA and AdvancedMC™ (Advanced Mezzanine Card or AMC) solutions to the marketplace. The Company’s products enable telecommunications equipment manufacturers to deploy robust and highly scalable network infrastructure equipment into Third Generation Wireless (3G), IP Multimedia Subsystem (IMS), Voice over IP (VoIP) and Broadband Access Networks worldwide, enabling the delivery of advanced IPTV and Triple Play services. The Company is headquartered in Plano, Texas with sales offices across the globe, and its clients include Alcatel, Ericsson, Fujitsu Ltd., Hewlett Packard, Lucent Technologies, Motorola Inc., Nortel Networks Ltd., 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 for the year ended December 31, 2005 and copies of the Company’s Quarterly Reports on Form 10-Q for 2004 and 2005 and any Current Reports on Form 8-K for 2004 and 2005, 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 general public may obtain any materials the Company files with the SEC at 1-800-SEC-0330, or since the Company is an electronic filer, the SEC maintains an Internet 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.

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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.

ATM (Asynchronous Transfer Mode) – 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 Megabits per second (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, 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.

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

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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.

CDMA (Code Division Multiple Access) – 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 Eurocard (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 served as the foundation for the new AdvancedTCA standard architecture from PICMG.

Ethernet – A Local Area Network standard used for connecting computers, printers, workstations, and servers. Ethernet operates over twisted wire, coaxial cable and fibre optic cables at speeds starting at 10 Mega Bits per second (10Mbps). The original 10Mbps specification was extended to a speed of 100Mbps transmission bandwidth with Fast Ethernet and to 1000Mbps – 1 Gigabit per second (1Gbps) with Gigabit Ethernet. Gigabit Ethernet is now the most popular variant being deployed. Ethernet itself has evolved to the next 10Gbps transmission bandwidth capability. As network bandwidth usage continues to rapidly expand world-wide, 10Gbps is expected to become a commonplace offering in enterprise and service provider networks.

ETSI (European Telecommunications Standards Institute) – An independent, non-profit standards organization of the telecommunications industry (equipment makers and network operators) in Europe, with worldwide projection. ETSI has been successful in standardizing the GSM cell phone system.

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

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

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GSM (Global System for Mobile Communications) – 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.

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

IMS (IP Multimedia Subsystem) – A standardized Next Generation Networking (NGN) 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. It uses a Voice over IP (VoIP) implementation based on a 3GPP implementation of SIP, and runs over the standard Internet Protocol (IP). Existing phone systems (both packet-switched and circuit-switched) are supported.

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

Internet Protocol Television (IPTV ) – A system where digital television is delivered over the internet.

I/O (Input/output) – The transfer of data or voice traffic into and out of a computing device. The main function of an adapter, communications controller, or network interface card is to regulate or control communications I/O.

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

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

ITU (International Telecommunication Union) – 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.

LAN (Local Area Network) – A short-distanced data communications network that is contained within a building or complex. Its primary use is to link computers and peripheral devices (such as printers) and to provide individuals with access to databases and applications running on servers attached to the network. Anyone connected to the LAN can send messages to and work jointly with others on the network.

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Media Gateway – A networking device that converts data from the format required for one type of network to the format required for another. The media gateway is controlled by the media gateway controller. Both are a component of softswitch.

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

MicroTCA – A set of standards that define 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, Wi-Fi/WiMax radio boxes, next-generation digital loop carriers, optical Add/Drop Multiplexers and Fiber-to-the-Curb optical network units. The initial standards are expected to be completed by mid-2006.

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

OEM (Original Equipment Manufacturer) – Manufacturers who resell other companies products under its own name.

PCI (Peripheral Components Interconnect) – A printed circuit board bus standard that is currently the main general-purpose bus in many desktop computers and a majority of enterprise servers throughout the world. Telecom servers generally use the newer generation of the PCI architecture which is CompactPCI.

PCI-x (Peripheral Components Interconnect–Extended) – 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.

PCI-e (Peripheral Components Interconnect–Express) – 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.

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PICMG (PCI Industrial Computer Manufacturers Group) – The technical standards governing body responsible for specifying technical requirements of specific systems architectures, including PCI, CompactPCI, CPSB, and AdvancedTCA. Standardized architectures are intended to provide a common set of rules and parameters for creating a system. The resulting benefit of such specifications is interoperability among multiple vendors for complementary system, thereby providing alternatives to market monopolies created by proprietary system architectures.

PMC (PCI Mezzanine Card) – A low profile mezzanine card that is electronically equivalent to the Peripheral Component Interconnect (PCI) specification. PMC cards are used as a quick and cost-effective method to add modular I/O to other card formats such as VME and CompactPCI, thus expanding the processing or I/O density of a single system slot.

PSTN (Public Switched Telephone Network) – 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 UMTS 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.

SIP (Session Initiation Protocol) – 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 a 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.

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).

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.

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

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SS7 (Signaling System 7) – 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.

T1/E1 – A digital transmission link with a capacity of 1.544 Mbps (1,544,000 bits per second) or 2.048 Mbps for the European E1 standard. T1 links normally handle 24 voice conversations, but with digital encoding can handle many more voice channels. T1 lines are also used to connect networks across remote distances.

T3/E3/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.

TEM (Telecommunications Equipment Manufacturer) – 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.

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

VoIP (Voice over Internet Protocol) – 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.

WAN (Wide Area Network) – A communications network that covers a wide geographic area, such as a state or country. A WAN typically extends a LAN outside the building, over telephone common carrier lines to link to other LANs in remote locations, such as branch offices or at-home workers and telecommuters. WANs typically run over leased phone lines, but are increasingly also employing the Internet for VPN (virtual private network) connectivity.

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Mission

The Company’s mission is to provide innovative, high-performance connectivity solutions for the telecommunications and enterprise embedded system markets and to become the leader in providing robust building blocks, highly integrated subsystems and innovative gateway appliances for the converged communications network.

The Company’s ongoing strategy is to become the vendor of choice and a commercial off-the-shelf (COTS) market leader as the standards-based COTS market has begun to mature, giving Interphase a powerful foothold within the major TEM accounts. The Company has made substantial progress toward this objective in 2005, expanding its reach into many of the industry’s largest telecom equipment manufacturers, diversifying its customer base and extending its global reach.

To achieve these objectives, Interphase is pursuing several key initiatives that include:

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

The Company’s diverse product portfolio includes versatile communications boards, integrated hardware and software subsystems and gateway appliances delivered to the TEMs for integration into a wide variety of wireline and wireless applications that enable ubiquitous end-to-end multimedia connectivity.

The Company has established a premier presence in this marketplace with a product portfolio based on various form factor technologies: PMC, cPCI/cPSB and PCI. The Company has differentiated its product offering by providing hardware products with integrated software to deliver solutions that enable ease-of-integration and help address the critical time-to-market constraints that the Company’s customers face in the highly competitive global markets. The Company’s offerings have been further enhanced by offering gateway appliances that deliver robust and complete solutions targeting specific interworking needs in the telecom infrastructure; these appliances integrate Interphase building block products and software into more robust and complete solution offerings.

In 2005, the Company enhanced this strategy by focusing on the ongoing transformation of the platform architecture for telecommunications systems to AdvancedTCA and MicroTCA. Interphase has successfully completed the design and development activity of the initial products in the emerging AdvancedTCA and AdvancedMC product portfolio.

By conducting a comprehensive analysis of the market, Interphase determined that in order to grow revenues, it must participate in supplying solutions to the user plane (or “bearer plane”) segment of the market, which management believes represents a much larger opportunity than the Company’s initial target market segment based primarily on signaling. This strategy is translated into the delivery of new AdvancedTCA and AdvancedMC products that address diverse applications such as Radio Network Controllers, Media Gateways and Base Station Controllers in the emerging broadband access infrastructure.

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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 Internet has become very critical. In 2005, Interphase introduced a comprehensive portfolio of security products in PMC and PCI form factors to address the emerging requirements for encryption and data security within emerging IP network platforms.

The Interphase professional services group continues to provide the ability to customize and tailor the Company’s standards-based product offerings to the specific and unique needs of its customers’ application solutions.

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 delivering cost-effective and expedient time-to-market solutions that enable its customers to deliver advanced communications infrastructure solutions.

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) have enabled server solutions to meet ever-increasing connectivity and bandwidth requirements. Interphase continued to evolve its innovative slot-optimization product portfolio with the design and delivery of its 4 port Gigabit Ethernet network adaptor products which support PCI-x and PCI-e.

The Company also enhanced its network security product portfolio with the delivery of advanced security adaptor products for integration into diverse applications such as firewalls and VPN security platforms.

Delivering a comprehensive environment-friendly product portfolio

The Directive of the European Parliament and of the Council on the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (RoHS) prohibits new electrical and electronic equipment from being placed on the European market after July 1, 2006, if they contain higher than specified levels of environmentally harmful elements such as lead. Although initiated by the European Union, similar directives are also being adopted in various other countries, primarily in the Asia/Pacific region.

Interphase established early leadership in this area by shipping its first RoHS-compliant product in April 2005. The Company’s aggressive timetable has enabled Interphase to work very closely with its customers to deliver products that are either fully compliant or have a customized compliance based on telecommunications exemptions. The Company has successfully met RoHS compliance standards across its product portfolio for multiple customers well before the July 2006 deadline, thus enabling customers to deliver products that are in compliance with the stringent environmental standards ahead of the deadline.

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Delivering superior customer service

Throughout the Company’s almost 30-year history, Interphase has established strong relationships with top-tier global suppliers of enterprise computer and telecommunications equipment. With a vertically integrated account perspective, Interphase provides flexibility, timely response and other customized account service features. Further, the Company’s technical support is staffed by 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 end 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 “I/O vendor of choice” where Interphase is the strategic supplier 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, joint whitepapers, articles, etc.

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 a compressing of product profit margins and will, in turn, dictate the need for the Company to increase product delivery and manufacturing efficiencies.

To respond effectively to these business trends the Company has reduced the workforce in all non-critical areas to align spending with expected 2006 revenues and is also regularly examining spending and productivity against global benchmarks, putting in place metrics designed to enable global competitiveness.

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Products

Interphase offers a comprehensive portfolio of products bundled with optimized software packages to address applications in the telecommunications and enterprise networking markets. These products span multiple form factors including PCI, PCI-x, PCI-e, PMC, cPCI, cPSB, AdvancedTCA and AdvancedMC.

Building Block Component Products

The building block products constitute the fundamental solutions offered by Interphase to meet the modularity, flexibility, high-performance and reliability requirements for delivery of advanced telecommunications and enterprise services. The modular design of these products enables their use across a wide variety of applications, creating cost-effective and high re-use value to customers. Building block products manufactured by Interphase include: integrated communications controllers, ATM network interface cards, security accelerator cards and Gigabit Ethernet network interface cards.

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 Asia and Australia) and the J1 (and derived formats) used in Japan. All of these products are offered together with the field-proven Interphase iWare^® Software Development Suite. Key products include:

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 1635 – a cPSB card with eight T1/E1/J1 interfaces via front or rear access

Some of the key network elements enabled by this product family 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

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• Service Control Point

• Media Servers

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 4531/4531P – a PMC that provides reliable, high performance ATM communications over DS3 connections

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 4532P/Q – 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

Some of the key network elements enabled by this product family include:

• Radio Network Controller (RNC)

• Mobile Switching Center (MSC)

• DSL Access Multiplexers

• Cable Modem Termination System (CMTS)

ATM Network Interface Cards

The 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

Some of the key network elements enabled by this product family 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

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Security Acceleration Cards

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

45NS – a PMC designed to accelerate multiple security protocols, including IPSec, for use in encryption and decryption of information

55NS/5585 – PCI cards designed to accelerate multiple security protocols, including IPSec, for use in encryption and decryption of information

Key applications enabled include:

• Firewall and VPN solutions

• On Line Transaction Processing (OLTP)

• Network Management solutions

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

554GB SlotOptimizer – a quad-port PCI Ethernet card with PCI-X for high density Ethernet connectivity

Key network elements and applications include:

• High performance computing servers for engineering applications

• Serving GPRS Service Node (SGSN)

• Softswitches

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 9400 Signaling Gateway – provides seamless translation of SS7 to/from SIGTRAN for use in the transition of PSTN to IP networks.

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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 Ethernet networks will shorten the period of new service deployment and time to revenue.

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

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

• The IP Multimedia Subsystem (IMS) standard architecture is enabled by a high bandwidth IP/Ethernet backbone, and promises to offer multimedia service delivery to end user devices (wireless or wireline.)

Interphase is focused on developing high performance, highly reliable COTS products based on current and emerging standards such as AdvancedTCA, which enable its customers to deliver cost-effective and expedient time-to-market solutions that address the above market trends.

Telecom Segment Initiatives

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

AdvancedTCA and MicroTCA

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.

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

Furthermore, the MicroTCA standards define a smaller platform that uses AdvancedMCs. MicroTCA can be used to deliver complete network elements such as Base Stations, NodeBs, DSL access multiplexers, WiMAX base stations, IP-PBXs, etc.

Interphase seeks to preserve and expand its existing business from key customers by extending our product line to natural follow-on products based on AdvancedTCA and AdvancedMC. These standards avail us to participate in both AdvancedTCA and MicroTCA opportunities as these common platform requirements emerge. Secondly, and perhaps more importantly, Interphase intends to expand its product focus to include key user plane-oriented products capable of providing cost-effective functionality in an AdvancedMC form factor.

Interphase has completed the design of its initial two AdvancedMC products in preparation for delivery to customers for system integration purposes. The Company has also initiated the development and design of additional AdvancedTCA, MicroTCA and AdvancedMC products based on multiple customer requests and interactions throughout the year. Interphase plans to have these next-generation products available in 2006 and 2007.

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. During 2005, Interphase delivered its Signaling Gateway appliance solution for trials and integration to key customers. The Company has also continued to expand the robust feature set and functionality of its Broadband Access Gateway appliance solution to address the needs of broadband access networks to enable advanced applications like triple play and IPTV.

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 2005, the Company completed the design, delivery and qualification of its high throughput four-port PCI-x Gigabit Ethernet Controller product. In addition, the design and development of the next generation PCI-e four-port Gigabit Ethernet Controller has been completed for initial customer qualification purposes.

Industry Standards Participation

Throughout its history, Interphase has been active in the formulation of industry standards sanctioned by groups such as PICMG and the AdvancedTCA subcommittee in particular. During 2005, the Company has actively participated in the ATCA and AdvancedMC subcommittees and has worked with other key industry participants to help drive the standardization. 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.

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Marketing and Customers

The Company’s products are sold to network equipment OEMs for inclusion in embedded systems designed for use in carrier networks and enterprise data networks. During 2005, the Company focused on global expansion of its customer portfolio within top tier TEMs. This penetration has occurred both through direct engagement with TEM development teams as well as by working closely with other industry leaders to deliver pre-tested and pre-integrated solutions to the marketplace

During 2005, sales to Lucent Technologies, Hewlett Packard and Motorola accounted for $7.9 million or 26%, $6 million or 19% and $4.2 million or 14% of the Company’s consolidated revenues, respectively. During 2004, sales to Lucent Technologies and Hewlett Packard accounted for $12.6 million or 36% and $9.6 million or 27% of the Company’s consolidated revenues, respectively. During 2003, sales to Lucent Technologies and Hewlett Packard accounted for $13.5 million or 42% and $9.7 million or 30% of the Company’s consolidated revenues, respectively. No other customers accounted for more than 10% of the Company’s consolidated revenues in the periods presented.

The Company markets its products through its direct sales force, manufacturers’ representatives and value-added distribution partners. In addition to the Company’s headquarters in Plano, Texas; the Company has sales offices located in or near Los Angeles, California; Minneapolis, Minnesota; Newark, New Jersey; Munich, Germany; Helsinki, Finland; Sydney, Australia; and Paris, France. The Company’s direct sales force markets products directly to key customers and supports manufacturer’s representatives and the distribution channel. In addition, the Company has entered into distribution agreements with key international distribution partners 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), some of which are sole-sourced, on some of its products, as well as standard off-the shelf items presently available from two or more suppliers. Historically, the Company has not experienced any significant problems in maintaining an adequate supply of these parts sufficient to satisfy customer demand. The Company believes that it has good relations with its vendors.

The Company generally does not manufacture products to stock finished goods inventory, as substantially all of the Company’s production is dedicated to specific customer purchase orders. As a result, the Company has limited requirements to maintain significant finished goods inventories.

Intellectual Property and Patents

While the Company believes that its success is ultimately dependent upon the innovative skills of its personnel and its ability to anticipate technological changes, its ability to compete successfully will depend, in part, upon its ability to protect proprietary technology contained in its products. The Company

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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 noninfringing technology or acquiring licenses to the technology, which is the subject of asserted infringement.

The Company has entered into several nonexclusive software licensing agreements that allow the Company to incorporate third-party software into its product line thereby increasing its functionality, performance and interoperability.

Employees

At December 31, 2005, the Company had 126 full-time employees, of which 36 were engaged in manufacturing and quality assurance, 43 in research and development, 24 in sales, sales support, customer service and marketing and 23 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 enterprise I/O and telecommunication product markets. Most of the Company’s major OEM customers have chosen to outsource the design, manufacture and software integration of certain communications controllers and protocol processing, and the recent market conditions and reduction in resources have forced some network equipment providers to utilize off the shelf products for their product design. Increased competition and commoditization of network interface technologies could result in price reductions, reduced margins and loss of market share.

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Item 1A. Risk Factors.

The marketing and sale of our products involve lengthy sales cycles. This and other factors make business forecasting extremely difficult and can lead to significant fluctuations in period-to-period results.

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. The 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.

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 start-up companies both public and private. Our

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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 the number of customers, cost reductions or otherwise. We expect that competition will increase as a result of industry consolidations and alliances, as well as the emergence of new competitors. There can be no assurance that 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, 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 and problems, then we 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

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provisions that are included in our license agreements. A successful product liability claim 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 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 are currently in negotiations to establish alternative manufacturing capabilities through a third party in the event of a disaster in the current facility. If we are 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 minimize the effect of the 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 there could be a material impact on the net realizable value of inventory which could adversely affect our results.

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We may be unable to effectively protect our proprietary technology, which would negatively affect our ability to compete.

Our success depends partly upon certain proprietary technologies developed within our software. 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 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 its personnel and on its 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.

We derive approximately 45% 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 results of operations, cash flows and financial condition. 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 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).

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

We believe our current financial resources will be sufficient to meet the 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 2006;

• expand product and service offerings beyond what is contemplated in 2006 if unforeseen opportunities arise;

• 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 $2.3 million for the year ended December 31, 2005. Although we posted net income of approximately $1.7 million for the year ended December 31, 2004, we incurred net losses of approximately $769,000 for the year ended December 31, 2003, $8.4 million for the year ended December 31, 2002, and $9.6 million for the year ended December 31, 2001. In order to achieve profitability again, 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 fluctations 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 computer and communications industries and other events or factors. In addition, stock markets have experienced extreme price and trading volume volatility in recent years. This volatility has had a substantial effect on the market price of the securities of many high technology companies for reasons frequently unrelated to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common stock. Our common stock has historically had relatively small trading volumes. As a result,

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small transactions in common stock can have a disproportionately large impact on the quoted price of the common stock.

2007 will be the first year that our internal controls over financial reporting will be audited by our independent registered public accounting firm in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 unless we become an accelerated filer in 2006.

The year ending December 31, 2007 will be the first year that our internal controls over financial reporting will be audited by our independent registered public accounting firm in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”). However, if we become an accelerated filer in 2006 then the year ending December 31, 2006 will be the first year that our internal controls over financial reporting will be audited in accordance with Section 404. As a result of the ongoing interpretation of new guidance issued by the standards-setting community and the audit testing yet to be completed, our internal controls over financial reporting may include an unidentified material weakness which would result in receiving an adverse opinion on internal controls over financial reporting from our independent registered public accounting firm. This could result in significant additional expenditures responding to the Section 404 internal control audit, heightened regulatory scrutiny and potentially an adverse effect to the price of the 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 the end of 2008 and the manufacturing and operations center lease extends through the end of 2009. The Company also leases a 3,000-square foot facility in Lisle, Illinois that supports an engineering laboratory. The Lisle, Illinois lease extends through October 2006. In addition, the Company leases a 9,000-square foot facility in Chaville, France (near Paris) that primarily supports an engineering team. The Chaville, France lease extends through June 2008. 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.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Since January 1984, shares of the Company’s common stock have been traded on the Nasdaq National Market, or its predecessors, under the symbol INPH. The following table summarizes its high and low closing price for each quarter during 2004 and 2005 as reported by Nasdaq.

2004	High		Low
First Quarter		19.17		11.30
Second Quarter		12.67		8.36
Third Quarter		12.65		9.21
Fourth Quarter		10.22		6.70

2005	High		Low
First Quarter		8.55		6.34
Second Quarter		7.36		5.41
Third Quarter		7.10		4.47
Fourth Quarter		4.89		4.06

The Company had approximately 2,400 beneficial owners of its common stock, of which 96 were of record as of March 9, 2006.

The Company has not paid dividends on its common stock since its inception. The Board of Directors does not anticipate payment of any dividends in the foreseeable future and intends to continue its present policy of retaining earnings for reinvestment in the operations of the Company.

The Board of Directors has adopted a Shareholder Rights Plan whereby each holder of record as of December 29, 2000 received a right to purchase from the Company one share of common stock of the Company at a price of $93 per share for each share held. These rights can only be exercised after certain events occur, such as if a person or entity acquires, or makes a tender or exchange offer to acquire 15% or more of the Company’s common stock and the rights expire ten years from the record date. Upon acquisition of 15% or more of the Company’s common stock, each right not owned by the acquiring person or group will be adjusted to allow the purchase for $93 of a number of shares having a then market value of $186. These rights are intended to provide the Company certain anti-takeover protections. The Board of Directors may terminate the Rights Plan, or redeem the rights for $0.01 per right, at any time until the tenth business day following a public announcement of a 15% or more stock acquisition. The Company has reserved 7,000,000 shares of common stock for this plan. The rights were distributed to shareholders as of the record date as a nontaxable dividend. The rights are attached to and trade with Interphase common stock until the occurrence of one of the triggering events, at which time the rights would become detached from the common stock.

In November 2001, the Board of Directors authorized the repurchase of up to $5 million of the Company’s common stock. Purchases were authorized to be made from time to time during a twenty-four

24

month period, ending in November 2003, in the open market or in privately negotiated transactions depending on market conditions. The Company canceled all shares that it repurchased.

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

Item 6. Selected Consolidated Financial Data.

The selected consolidated financial data presented below under the captions “Statement of Operations Data” and “Balance Sheet Data” have been derived from the consolidated balance sheets and the related statements of operations for the years ended December 31, 2005, 2004, 2003, 2002, and 2001, 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, 2005, 2004, and 2003.

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

	Year ended December 31
	2005			2004			2003			2002			2001
Revenues	$	30,852		$	35,015		$	32,490		$	25,123		$	28,732
Gross margin		16,097			19,171			16,909			9,792			9,004
Research and development		7,974			8,033			7,719			7,005			7,757
Sales and marketing		6,310			6,107			6,929			5,991			6,812
General and administrative		3,531			3,675			3,547			3,285			3,759
Restructuring charge and other special charges		600			—			—			—			2,091
Goodwill impairment charge		—			—			—			—			2,350
(Loss) income from operations		(2,318	)		1,356			(1,286	)		(6,489	)		(13,765	)
Other, net		237			240			305			611			(20	)
(Loss) income from operations before income tax		(2,081	)		1,596			(981	)		(5,878	)		(13,785	)
Income tax provision (benefit)		218			(122	)		(212	)		2,523			(4,213	)
Net (loss) income	$	(2,299	)	$	1,718		$	(769	)	$	(8,401	)	$	(9,572	)
Net (loss) income per share
Basic EPS	$	(0.40	)	$	0.30		$	(0.14	)	$	(1.51	)	$	(1.68	)
Diluted EPS	$	(0.40	)	$	0.27		$	(0.14	)	$	(1.51	)	$	(1.68	)
Weighted average common shares		5,758			5,719			5,544			5,551			5,705
Weighted average common and dilutive shares		5,758			6,312			5,544			5,551			5,705

Balance Sheet Data:
(In thousands)

	December 31,
	2005		2004		2003		2002		2001
Working capital	$	24,554	$	26,450	$	24,255	$	24,254	$	31,601
Total assets		29,194		32,098		30,743		30,749		39,243
Total liabilities		6,696		7,310		7,930		7,931		7,323
Redeemable common stock		—		—		—		—		762
Shareholders’ equity	$	22,498	$	24,788	$	22,813	$	22,818	$	31,158

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This report contains forward-looking statements about the business, financial condition and prospects of the Company. These statements are made under the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. The actual results of the Company could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties, including without limitation, our reliance on a limited number of customers, failure to see spending improvements in the telecommunications and computer networking industries, significant changes in product demand, the availability of products, changes in competition, various inventory risks due to changes in market conditions and other risks and uncertainties indicated in the Company’s filings and reports with the Securities and Exchange Commission. All the foregoing risks and uncertainties are beyond the ability of the Company to control, and in many cases, the Company cannot predict the risks and uncertainties that could cause its actual results to differ materially from those indicated by the forward-looking statements. When used in this report, the words “believes,” “plans,” “expects,” “intends,” and “anticipates” and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

The Company’s consolidated financial statements are based on the selection and application of significant accounting policies, which require management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management believes the following are some of the more critical judgment areas in the application of the Company’s accounting policies that affect the Company’s financial condition and results of operations. Management has discussed the application of these critical accounting policies with the Board of Directors and Audit Committee.

Revenue Recognition: Revenues consist of product and service revenues and are recognized in accordance with SEC Staff Accounting Bulletin (“SAB”) 104, “Revenue Recognition.” Product revenues are recognized upon shipment, provided fees are fixed and determinable, a customer purchase order is obtained (when applicable), and collection is probable. Revenues from reseller 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. Service revenue is recognized as the services are performed. Deferred revenue consists primarily of revenue from reseller arrangements and service revenue.

Revenue derived from the development and installation of highly customized software packages under a professional services contract is recognized on a percentage of completion basis measured by the relationship of hours worked to total estimated contract hours and the costs incurred as of the date of measurement. The Company follows this method since reasonably dependable estimates of the revenue and contract hours applicable to various elements of a contract can be made. Since the financial reporting of these contracts depends upon estimates, which are assessed continually during the term of these contracts, recognized revenue and profit are subject to revisions as the contract progresses to completion. Revisions in profit estimates are reflected in the period in which the facts that give rise to the revisions become known. Accordingly, favorable changes in estimates result in additional revenue recognition and net income, and unfavorable changes in estimates result in a reduction of recognized revenue and net

27

income. If estimates were to indicate that a loss would be incurred on a contract upon completion, a provision for the expected loss would be recorded in the period in which the loss became evident.

Warranty Reserve: The Company offers to its customers a limited warranty that its products will be free from defect in the materials and workmanship for a specified period. The Company has established a warranty reserve, as a component of accrued liabilities, for any potential claims. The Company estimates its warranty reserve based upon an analysis of all identified or expected claims and an estimate of the cost to resolve those claims. Changes in claim rates and differences between actual and expected warranty costs could impact the warranty reserve estimates.

Allowance for Doubtful Accounts: Management is required to estimate the collectibility of the Company’s trade receivables. A considerable amount of judgment is required in assessing the realization of these receivables, including the current creditworthiness of each customer and related aging of the past due balances. Management evaluates all accounts periodically and a reserve is established based on the best facts available to management and reevaluated and adjusted as additional information is received. The reserves also are determined by using percentages applied to certain aged receivable categories based on historical results.

Allowance for Returns: The Company estimates its allowance for returns based upon expected return rates. The estimates of expected return rates are generally a factor of historical returns. Changes in return rates could impact allowance for return estimates.

Inventories: Inventories are valued at the lower of cost or market and include material, labor and manufacturing overhead. Cost is determined on a first-in, first-out basis. Valuing inventories at the lower of cost or market involves an inherent level of risk and uncertainty due to technology trends in the industry and customer demand for our products. In assessing the ultimate realization of inventories, management is required to make judgments as to future demand requirements and compare that with the current or committed inventory levels. Reserve requirements generally increase as projected demand requirements decrease due to market conditions, technological and product life cycle changes as well as longer than previously expected usage periods. The Company has experienced significant changes in required reserves in the past due to changes in strategic direction, such as discontinuances of product lines as well as declining market conditions. It is possible that significant changes in this estimate may continue to occur in the future as market conditions change.

Long-Lived Assets: Property and Equipment and other long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Such determination is made in accordance with the applicable Generally Accepted Accounting Principles (“GAAP”) requirements associated with the long-lived asset, and is based upon, among other things, estimates of the amount of future net cash flows to be generated by the long-lived asset and estimates of the current fair value of the asset. Adverse changes in such estimates could result in an inability to recover the carrying value of the long-lived asset, thereby possibly requiring an impairment charge to be recognized in the future. All impairments are recognized in operating results when a permanent reduction in value occurs.

Derivative Financial Instruments and Hedging: All derivative instruments are recorded as assets or liabilities 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

28

designated as hedging instruments is included in current income in the period that changes in fair value occur.

Stock-Based Compensation: The Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB 25”) and related interpretations in accounting for its employee stock options. Under APB 25, compensation expense is recorded when the exercise price of employee stock options is less than the fair value of the underlying stock on the date of grant. The Company has implemented the disclosure-only provisions of Statement of Financial Accounting Standards Board No. (“SFAS”) 123, “Accounting for Stock-Based Compensation,” and SFAS 148, “Accounting for Stock-Based Compensation Transition and Disclosure.” Beginning January 1, 2006 the Company will implement SFAS No. 123(R) “Share Based Payments.” Since the Company had no unvested options as of December 31, 2005, the adoption of SFAS No. 123(R) will not have a material impact on the consolidated financial statements.

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

Deferred Taxes: The Company records a valuation allowance to reduce its deferred income tax assets to the amount that is believed to be realizable under the guidance of Statement of Financial Accounting Standards No. 109 “Accounting for Income Taxes.” The Company considers recent historical losses, future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. Management is required to make a continuous assessment as to the realizability of the deferred tax assets.

CONSOLIDATED STATEMENT OF OPERATIONS AS A PERCENTAGE OF REVENUE

	Year ended December 31,
	2005			2004			2003
Revenues		100.0	%		100.0	%		100.0	%
Cost of sales		47.8	%		45.2	%		48.0	%
Gross margin		52.2	%		54.8	%		52.0	%
Research and development		25.8	%		22.9	%		23.8	%
Sales and marketing		20.5	%		17.5	%		21.3	%
General and administrative		11.5	%		10.5	%		10.9	%
Restructuring charge		1.9	%		—			—
(Loss) income from operations		(7.5	)%		3.9	%		(4.0	)%
Interest income, net		1.2	%		0.7	%		0.7	%
Other (expense) income, net		(0.4	)%		0.0	%		0.3	%
(Loss) income before income tax		(6.7	)%		4.6	%		(3.0	)%
Income tax provision (benefit)		0.8	%		(0.3	)%		(0.6	)%
Net (loss) income		(7.5	)%		4.9	%		(2.4	)%

29

OVERVIEW

2005 was a year of repositioning and refocusing for Interphase as we focused on leading the Company into higher growth market opportunities while entrenching ourselves within our key customer accounts. During 2005, we focused our efforts on building the foundation for long term success which included initiatives to expand our customer base across all geographic segments, expand our product portfolio beyond the signaling segments of the market where we have largely been participating to date. Additionally, we focused our development strategy on AdvancedMC products for the delivery of AdvancedTCA platforms and restructured our cost basis to bring it more in line with revenue and profit expectations in the short term as well as to enhance our competiveness over the long term.

RESULTS OF OPERATIONS

Revenue: Total revenue for the years ended December 31, 2005, 2004 and 2003 were $30.9 million, $35.0 million and $32.5 million, respectively. Revenue decreased 12% in 2005 compared to 2004. This decrease was primarily attributable to Enterprise SlotOptimizer revenue. Enterprise SlotOptimizer revenue decreased approximately 29% to $7.6 million for the year ended December 31, 2005 compared to $10.7 million for the year ended December 31, 2004. We expect that revenue from the current SlotOptimizer product line will continue to decline in 2006 as the product line is near the end of its life cycle. However, we expect that revenues from our new Gigabit Ethernet SlotOptimizer products will help to offset a portion of this revenue decline. Broadband telecom revenue increased slightly to $20.3 million for the year ended December 31, 2005 compared to $20.2 for the year ended December 31, 2004. All other revenue composed primarily of security legacy networking, professional services and storage product lines decreased approximately 27% to $3.0 million for the year ended December 31, 2005 compared to $4.1 million for the year ended December 31, 2004.

Revenue increased 8% in 2004 compared to 2003. This increase was primarily attributable to broadband telecom product revenue. Broadband telecom product revenue increased approximately 13% to $20.2 million for the year ended December 31, 2004 compared to $17.8 million for the year ended December 31, 2003. This increase was partially offset by Enterprise SlotOptimizer revenue which declined approximately 6% to $10.7 million for the year ended December 31, 2004 compared to $11.4 million for the year ended December 31, 2003. All other revenue, composed primarily of security, professional services and legacy networking and storage product lines, increased approximately 26% for the year ended December 31, 2004 to $4.1 million compared to $3.3 million for the year ended December 31, 2003.

Gross Margin: Gross margin as a percentage of sales for the years ended December 31, 2005, 2004 and 2003 was 52%, 55% and 52%, respectively. The decrease in gross margin percentage in 2005 compared to 2004 is primarily driven by excess and obsolete inventory charges. The Company recorded approximately $1.0 million in excess and obsolete inventory charges for the year ended December 31, 2005 compared to approximately $300,000 for the year ended December 31, 2004. The increase in excess and obsolete inventory charges primarily relates to product end of life activities that proceeded more rapidly than anticipated. The Company believes that pricing pressures in the industry may dampen gross margins in future periods.

The increase in the gross margin percentage in 2004 compared to 2003 was partially due to a shift toward more complex, and thus, higher margin products. In addition, the Company’s excess and obsolete

30

inventory charges decreased to $300,000 for the year ended December 31, 2004, compared to $700,000 for the year ended December 31, 2003. The Company also improved manufacturing efficiencies and achieved reductions in material costs for certain product lines due to increased production volumes.

Research and Development: The Company’s investment in the development of new products through research and development was $8.0 million, $8.0 million and $7.7 million in 2005, 2004 and 2003, respectively. As a percentage of revenue, research and development expenses were 26%, 23% and 24% for 2005, 2004 and 2003, respectively. Research and development expenses were flat in 2005 compared to 2004. The increase in research and development costs as a percentage of total revenue is due to revenue decreasing while research and development costs remained unchanged. The Company anticipates that spending on research and development will decrease in 2006, as a result of the impact of its restructuring plan adopted during the fourth quarter of 2005. Fluctuations in currency exchange rates affect the Company’s development expenses, which are associated with its engineering lab in France (see Item 7A – Foreign Currency Risk), The Company will continue to monitor the level of its investments concurrently with actual revenue results.

Research and development expenses increased $314,000 in 2004 compared to 2003. The increase in research and development expense primarily was due to foreign currency changes as the U.S. Dollar dropped significantly in value relative to the Euro (see Item 7A – Foreign Currency Risk) partially offset by reduced general overhead spending as the Company continues to work toward keeping break even levels as low as possible. The decrease in research and development costs as a percentage of total revenue is due to revenue increasing at a higher rate than research and development costs for the year.

Sales and Marketing: Sales and marketing expenses were $6.3 million, $6.1 million and $6.9 million in 2005, 2004 and 2003, respectively. As a percentage of revenue, sales and marketing expenses were 20%, 18% and 21% for 2005, 2004 and 2003, respectively. Sales and marketing expenses increased approximately $200,000 in 2005 compared to 2004. Approximately 70% of the increase relates to fees associated with outside consulting services obtained as part of the Company’s strategic marketing efforts. The remaining portion of the increase relates to compensation related expenditures as the Company expanded its marketing operations. These expenses were offset by a reduction in travel and related costs. 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.

Sales and marketing expense decreased $822,000 in 2004 compared to 2003. Approximately 82% of the decrease in sales and marketing expenses for the twelve months ended December 31, 2004 compared to the twelve months ended December 31, 2003 related to a reduction in sales and marketing headcount related expenses, including contract labor and sales commissions. The remaining portion of the decrease primarily relates to reductions in advertising and promotional activities. The decrease in sales and marketing expense as a percentage of total revenue is due to revenue increasing while sales and marketing expenses decreased.

General and Administrative: General and administrative expenses were $3.5 million, $3.7 million and $3.5 million in 2005, 2004 and 2003, respectively. As a percentage of revenue, general and administrative expenses were 11% for each of the years ending December 31, 2005, 2004 and 2003, respectively.

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General and administrative expenses decreased approximately $144,000 in 2005 compared to 2004. The decrease in general and administrative expenses primarily relates to a decrease in compensation related expenditures.

General and administrative expenses increased approximately $128,000 in 2004 compared to 2003. The increase in general and administrative expenses primarily relates to increased employee compensation including bonuses tied to increased revenues and profits.

Restructuring Charge: On November 10, 2005, the Company adopted a plan to restructure its worldwide operations. The primary goal of the restructuring program was to improve the Company’s ability to continue to strategically fund research and development efforts, to balance the Company’s skills to align with the future directions of the marketplace, and to streamline the Company in its continued goal of being the most cost-effective company in the embedded systems marketplace. Under the restructuring plan, Interphase reduced its workforce by approximately 19%. The global workforce reduction impacted all functions within the Company. As a result of the restructuring program, the Company recorded a restructuring charge of approximately $600,000, classified as operating expenses. See Note 8 of the accompanying notes to the consolidated financial statements for more information. There were no such activities in 2004 or 2003.

Interest, Net: Interest income, net of interest expense, was $370,000, $232,000 and $226,000 in 2005, 2004 and 2003, respectively. The increase in interest income, net of interest expense is primarily due to an increase in the investment rates of return in 2005 compared to 2004.

Other (Expense) Income, Net: Other expense, net was $133,000 in 2005. Other income, net, was $8,000 and $79,000 in 2004 and 2003, respectively.

Other expense for 2005 is primarily related to the loss of approximately $125,000 related to foreign exchange contracts. See Note 4 of the accompanying notes to the consolidated financial statements for information regarding the Company’s derivative financial instruments. There were no such contracts for the years ended December 31, 2004 and 2003.

Income Taxes: Although the Company was in a net loss position for 2005, the Company recorded a $218,000 tax provision due to taxes on foreign income. The Company’s effective income tax rates were (8%) in 2004 and (22%) in 2003. The effective tax provision rate for the periods presented differed from the U.S. statutory rate as the Company continued to provide a full valuation allowance for its net deferred tax assets at December 31, 2005, 2004 and 2003. The Company also incurred taxes on foreign income during the periods presented.

During the first quarter of 2004, after conducting a thorough review of the Company’s Internal Revenue Service (“IRS”) transcripts, the Company discovered that the IRS had not paid allowable interest on the refund from the IRS audit described below. As a result, the Company recognized a tax benefit of approximately $100,000 in 2004.

During the third quarter 2003, the IRS concluded a federal income tax audit of the Company related to the tax years 1996 through 2001. In addition, the French tax administration also concluded a tax audit of the Company’s French subsidiary covering the same periods resulting in a finding of no tax due. Due to the

32

finalization of both tax audits, the Company recognized a benefit of approximately $245,000 during the year ended December 31, 2003. This benefit was partially offset by taxes on foreign income.

Net (Loss) Income: The Company reported a net loss of $2.3 million for the twelve months ended December 31, 2005. The Company reported net income of $1.7 million for the twelve months ended December 31, 2004. The Company reported a net loss of $769,000 for the twelve months ended December 31, 2003.

LIQUIDITY AND CAPITAL RESOURCES

Consolidated Cash Flows

Cash and cash equivalents decreased $1.7 million for the year ended December 31, 2005. During 2004 the Company purchased approximately $14.0 million in marketable securities, which decreased cash and cash equivalents by $9.3 million for the year ended December 31, 2004. Cash and cash equivalents increased $4.3 million for the year ended December 31, 2003. Cash flows are impacted by operating, investing and financing activities.

Operating Activities: Trends in cash flows from operating activities for 2005, 2004 and 2003, are generally similar to the trends in the Company’s earnings except for provision for uncollectible accounts and returns, provision for excess and obsolete inventories, depreciation and amortization, and amortization of restricted stock. Cash used in operating activities totaled $1.2 million for the year ended December 31, 2005, compared to a net loss of $2.3 million. Cash provided by operating activities totaled $1.5 million and $385,000 for the years ended December 31, 2004 and 2003, respectively, compared to net income of $1.7 million and a net loss of $769,000 2004 and 2003, respectively. Provisions for uncollectible accounts and returns decreased during all three years due to an increased focus on credit evaluation and improved returns experience. Provision for excess and obsolete inventories increased $700,000 for 2005 compared to 2004 primarily due to product end of life activities that proceeded more rapidly than anticipated. Provision for excess and obsolete inventories decreased $400,000 in 2004 compared to 2003. Depreciation and amortization was relatively flat in 2005 compared to 2004. Depreciation and amortization decreased slightly in 2004. Amortization of restricted stock increased for 2005 compared to 2004 as the Company issued restricted stock to employees and directors in 2005. See Note 10 in Notes to Condensed Consolidated Financial Statements for more information on restricted stock.

Changes in assets and liabilities result primarily from the timing of production, sales and purchases. Such changes in assets and liabilities generally tend to even out over time and result in trends in cash flows from operating activities generally reflecting earnings trends.

Investing Activities: The Company’s investing activities resulted in a net cash use of $374,000, $11.3 million and $484,000 in 2005, 2004 and 2003, respectively. Cash used in investing activities in each of the three years related principally to additions to property and equipment, capitalized software purchases and the Company’s investments in marketable securities. Additions to property and equipment and capitalized software during 2005 primarily related to equipment purchases for the engineering, manufacturing and information technology functions of the Company. The expenditures in 2004 were focused on software and equipment purchases for the sales, engineering and information technology functions of the Company. The expenditures in 2003 related primarily to manufacturing equipment and capitalized software used in the engineering and sales functions. Purchases of marketable securities

33

decreased approximately $2.3 million for 2005 compared to 2004. Purchases of marketable securities significantly increased to $14.0 million in 2004 compared to $1.7 million in 2003 as the Company adjusted its investment strategy in 2004. Proceeds from the sale of marketable securities increased significantly to $12 million compared to $ 3.3 million in 2004. Proceeds from the sale of marketable securities increased to $3.3 million in 2004 compared to $2.1 million in 2003.

Financing Activities: Net cash provided by financing activities totaled $62,000, $422,000 and $4.4 million for the years ended December 31, 2005, 2004 and 2003, respectively. Cash provided by financing activities for 2005 and 2004 is comprised of proceeds from the exercise of stock options of $62,000 and $422,000, respectively. Cash provided by financing activities in 2003 includes the removal of $3.5 million of restrictions on cash in 2003 and $931,000 in proceeds from the exercise of stock options due to the increase in stock option exercises as a result of the Company’s increased stock price during the second half of 2003.

Commitments

At December 31, 2005, the Company had no material commitments to purchase capital assets, however, planned capital expenditures for 2006 are estimated at approximately $850,000, the majority of which relate to the Company’s engineering tools and general office equipment. The Company’s significant long-term obligations are its operating leases on its facilities and future debt payments. The Company has not paid any dividends since its inception and does not anticipate paying any dividends in 2006.

The following table summarizes the Company’s future contractual obligations and payment commitments as of December 31, 2005 (in thousands):

Contractual Obligation	2006		2007		2008		2009		Total
Operating leases (1)	$	736	$	736	$	656	$	152	$	2,280
Long-term debt (2,3)	$	188	$	3,610	$	—	$	—	$	3,798
Total	$	924	$	4,346	$	656	$	152	$	6,078

(1)	The Company leases its facilities under non-cancelable operating leases with the longest terms extending to December 2009.
(2)	At December 31, 2005, the Company had borrowings of $3.5 million under a $5 million revolving credit facility with a bank. The revolving credit facility matures on July 31, 2007 and is secured throughout the term of the credit facility by marketable securities.
(3)	The Company incurs interest expense on the borrowings from the revolving credit facility at a rate of LIBOR + 1% (5.375% at December 31, 2005). The Company used the 5.375% rate to estimate interest expense for 2006 through July 2007. The interest expense estimate is $188,000 and $110,000 for years 2006 and 2007, respectively.

Off-Balance Sheet Arrangements

At December 31, 2005, the Company had five foreign exchange contracts outstanding to acquire approximately 1.1 million Euros for each contract on specified dates during the next 13 months. The Company carried a $70,000 liability on the balance sheet at December 31, 2005, representing the fair value of these contracts. There were no such contracts at December 31, 2004.

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Other

Management believes that cash generated from operations and borrowing availability under the revolving credit facility, together with cash on hand, will be sufficient to meet the Company’s liquidity needs for working capital, capital expenditures and debt services. To the extent that the Company’s actual operating results or other developments differ from the Company’s expectations, Interphase’s liquidity could be adversely affected.

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

Recently Issued Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123(R), “Share Based Payments”, which replaces SFAS No. 123, “Accounting for Stock-Based Compensation”, and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” and amends SFAS No. 95, “Statement of Cash Flows”. SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. As such, pro forma disclosure in lieu of expensing is no longer an alternative. The new standard was effective for annual reporting periods beginning after June 15, 2005. The Company adopted the provisions of SFAS 123(R) as of January 1, 2006. Since the Company had no unvested options as of December 31, 2005, the adoption of SFAS 123(R) will not have a material impact to the consolidated financial statements.

In December 2004, the FASB issued SFAS No. 151 “Inventory Costs, an Amendment of ARB No. 43, Chapter 4”. SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material and requires that these items be recognized as current period charges. SFAS No. 151 applies only to inventory costs incurred during periods beginning after the effective date and also requires that the allocation of fixed production overhead to conversion costs be based on the normal capacity of the production facilities. SFAS No. 151 is effective for the Company’s fiscal year beginning January 1, 2006 and is not expected to have a material impact on our consolidated financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Foreign Currency Risk

The Company is exposed to adverse movements in foreign currency exchange rates because it conducts business on a global basis and in some cases in foreign currencies. The Company’s operations in France are measured in the local currency and converted into U.S. Dollars based on

35

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 $1.1 million, $1.1 million and $595,000 for the years ended December 31, 2005, 2004 and 2003, respectively.

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 changes in the market value of these contracts are recognized as a gain or loss in the period of the change. For the year ended December 31, 2005, the Company recognized a loss of approximately $125,000 related to these foreign exchange contracts. At December 31, 2005 the Company had five foreign exchange contracts outstanding to acquire approximately 1.1 million Euros for each contract on specified dates during the next 13 months. There were no such contracts at December 31, 2004.

Market Price Risk

The Company has no equity hedge contracts outstanding as of December 31, 2005, 2004 or 2003.

Interest Rate Risk

The Company’s investments are subject to interest rate risk. Interest rate risk is the risk that the Company’s financial condition and results of operations could be adversely affected due to movements in interest rates. The Company invests its cash in a variety of interest-earning financial instruments, including bank time deposits, money market funds, and variable rate and fixed rate obligations of corporations and national governmental entities and agencies. Due to the demand nature of the Company’s money market funds and the short-term nature of the Company’s time deposits and debt securities portfolio, these assets are particularly sensitive to changes in interest rates. The Company manages this risk through investments with shorter-term maturities and varying maturity dates.

A hypothetical 50 basis point increase in interest rates would result in an approximate decrease of less than 1% in the fair value of our available-for-sale securities at December 31, 2005. This potential change is based on sensitivity analyses performed on our marketable securities at December 31, 2005. 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, 2004.

The Company’s credit facility, bears interest at a variable rate tied to the London Interbank Offered Rate (LIBOR). In an effort to mitigate interest rate fluctuations the Company has, from time to time, locked in the rate with one year agreements. The Company is examining interest rate trends to determine if it would be beneficial to enter into an agreement to lock in the LIBOR rate for a period longer than its current 30 day period. As of December 31, 2005, the LIBOR Rate was 5.375% (LIBOR + 1%). A hypothetical 100 basis point increase in LIBOR would increase annual interest expense on this credit facility by approximately $35,000.

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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.

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 quarterly 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 are designed to provide reasonable assurance that its books and records accurately reflect, in all material respects, the transactions of the Company and that its established policies and procedures are adhered to. There were no changes to the Company’s internal controls or in other factors that could significantly affect the Company’s internal controls subsequent to the date of the evaluation by the Company’s CEO and CFO, including any corrective actions with regard to significant deficiencies and material weaknesses.

Item 9B. Other Information.

None.

PART III

Item 10. Directors and Executive Officers of the Registrant.

Directors

See information regarding the directors and nominees for director under the heading “Election of Directors” in the Proxy Statement for the Annual Meeting of Shareholders to be held May 3, 2006, which is incorporated herein by reference.

37

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 3, 2006, 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 Stock Market, by filing a Current Report on Form 8-K with the Securities and Exchange Commission disclosing such information.

Item 11. Executive Compensation.

See information regarding executive compensation under the heading “Executive Compensation” in the Proxy Statement for the Annual Meeting of Shareholders to be held May 3, 2006, which is incorporated herein by reference.

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 3, 2006, which is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions.

See information regarding certain relationships and related transactions under the headings “Principal Shareholders” and “Certain Related Transactions” in the Proxy Statement for the Annual Meeting of Shareholders to be held May 3, 2006, 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 3, 2006, which is incorporated herein by reference.

38

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 hereto.

     (3) Exhibits.

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

39

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 21, 2006	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 21, 2006.

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/ Randall D. Ledford	Director
Randall D. Ledford
/s/ Michael J. Myers	Director
Michael J. Myers
/s/ Kenneth V. Spenser	Director
Kenneth V. Spenser
/s/ S. Thomas Thawley	Vice Chairman, Director and Secretary
S. Thomas Thawley

40

INDEX TO FINANCIAL STATEMENTS

Report of Grant Thornton LLP	F-2
Report of PricewaterhouseCoopers LLP	F-3
Consolidated Balance Sheets — As of December 31, 2005 and 2004	F-4
Consolidated Statements of Operations — Years Ended December 31, 2005, 2004 and 2003	F-5
Consolidated Statements of Shareholders’ Equity — Years Ended December 31, 2005, 2004 and 2003	F-6
Consolidated Statements of Cash Flows — Years Ended December 31, 2005, 2004 and 2003	F-7
Notes to Consolidated Financial Statements	F-8 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

The Board of Directors
Interphase Corporation

We have audited the accompanying consolidated balance sheets of Interphase Corporation and subsidiaries (the Company) as of December 31, 2005 and 2004 and the related consolidated statements of operations, shareholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Interphase Corporation and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ Grant Thornton LLP

Dallas, Texas
March 3, 2006

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Interphase Corporation:

In our opinion, the accompanying consolidated balance sheet as of December 31, 2003 and the related consolidated statement of operations, of shareholders’ equity, and of cash flows present fairly, in all material respects, the financial position of Interphase Corporation and its subsidiaries (the Company) at December 31, 2003, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Dallas, Texas
March 5, 2004

F-3

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

	December 31,
	2005			2004
ASSETS
Cash and cash equivalents	$	3,180		$	4,928
Marketable securities		15,388			15,585
Trade accounts receivable, less allowances of $126 and $141, respectively		5,195			4,976
Inventories		3,109			3,509
Prepaid expenses and other current assets		754			956
Income taxes receivable		—			246
Total current assets		27,626			30,200
Machinery and equipment		5,899			6,170
Leasehold improvements		411			377
Furniture and fixtures		545			572
		6,855			7,119
Less-accumulated depreciation and amortization		(5,697	)		(5,729	)
Total property and equipment, net		1,158			1,390
Capitalized software, net		229			310
Other assets		181			198
Total assets	$	29,194		$	32,098
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Accounts payable	$	255		$	529
Deferred revenue		118			244
Accrued liabilities		1,757			1,423
Accrued compensation		942			1,554
Total current liabilities		3,072			3,750
Other non-current liabilities		34			—
Deferred lease obligations		90			60
Long term debt		3,500			3,500
Total liabilities		6,696			7,310
Commitments and contingencies
Shareholders’ Equity
Common stock, $.10 par value; 100,000,000 shares authorized; 5,901,895 and 5,750,824 shares issued and outstanding, respectively		590			575
Additional paid in capital		39,445			38,633
Unamortized restricted stock		(628	)		—
Retained deficit		(16,145	)		(13,846	)
Cumulative other comprehensive loss		(764	)		(574	)
Total shareholders’ equity		22,498			24,788
Total liabilities and shareholders’ equity	$	29,194		$	32,098

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

F-4

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

	2005			2004			2003
Revenues	$	30,852		$	35,015		$	32,490
Cost of sales		14,755			15,844			15,581
Gross margin		16,097			19,171			16,909
Research and development		7,974			8,033			7,719
Sales and marketing		6,310			6,107			6,929
General and administrative		3,531			3,675			3,547
Restructuring charge		600			—			—
Total operating expenses		18,415			17,815			18,195
(Loss) income from operations		(2,318	)		1,356			(1,286	)
Interest income, net		370			232			226
Other (expense) income, net		(133	)		8			79
(Loss) income before income tax		(2,081	)		1,596			(981	)
Income tax provision (benefit)		218			(122	)		(212	)
Net (loss) income	$	(2,299	)	$	1,718		$	(769	)
Net (loss) income per share:
Basic EPS	$	(0.40	)	$	0.30		$	(0.14	)
Diluted EPS	$	(0.40	)	$	0.27		$	(0.14	)
Weighted average common shares		5,758			5,719			5,544
Weighted average common and dilutive shares		5,758			6,312			5,544

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

F-5

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

					Additional		Unamortized						Other
	Common Stock				Paid in		Restricted			Retained			Comprehensive
	Shares		Amount		Capital		Stock			Deficit			Loss			Total
Balance at December 31, 2002		5,514	$	551	$	37,304				$	(14,795	)	$	(242	)	$	22,818
Option exercises		166		17		914					—			—			931
Comprehensive loss:
Foreign currency translation		—		—		—		—			—			(46	)		(46	)
Unrealized holding period loss		—		—		—		—			—			(121	)		(121	)
Net loss		—		—		—		—			(769	)		—			(769	)
Total comprehensive loss		—		—		—		—			—			—			—
Balance at December 31, 2003		5,680	$	568	$	38,218	$	—		$	(15,564	)	$	(409	)	$	22,813
Option exercises		71		7		415					—			—			422
Comprehensive income:
Foreign currency translation		—		—		—		—			—			21			21
Unrealized holding period loss		—		—		—		—			—			(186	)		(186	)
Net income		—		—		—		—			1,718						1,718
Total comprehensive income		—		—		—		—			—			—			—
Balance at December 31, 2004		5,751	$	575	$	38,633	$	—		$	(13,846	)	$	(574	)	$	24,788
Option exercises		15		1		63		—			—			—			64
Stock issued under restricted stock plan		136		14		749		(763	)		—						—
Amortization of restricted stock plan compensation		—		—		—		135			—						135
Comprehensive loss:
Foreign currency translation		—		—		—		—			—			(157	)		(157	)
Unrealized holding period loss		—		—		—		—			—			(33	)		(33	)
Net loss		—		—		—		—			(2,299	)					(2,299	)
Total comprehensive loss		—		—		—		—			—			—			—
Balance at December 31, 2005		5,902	$	590	$	39,445	$	(628	)	$	(16,145	)	$	(764	)	$	22,498

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

F-6

INTERPHASE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

	Years ended December 31,
	2005			2004			2003
Cash flows from operating activities:
Net (loss) income	$	(2,299	)	$	1,718		$	(769	)
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Provision for uncollectible accounts and returns		(10	)		(3	)		(42	)
Provision for excess and obsolete inventories		1,000			300			700
Depreciation and amortization		801			788			902
Amortization of restricted stock		135			—			—
Change in assets and liabilities:
Trade accounts receivable		(209	)		661			91
Inventories		(600	)		(848	)		(540	)
Prepaid expenses and other current assets		192			(187	)		(62	)
Income taxes receivable		233			(246	)		247
Other assets		(1	)		44			1
Accounts payable, deferred revenue and accrued liabilities		(42	)		(976	)		(183	)
Accrued compensation		(501	)		309			37
Other current liabilities		34			—			—
Deferred lease obligations		30			(28	)		3
Net adjustments		1,062			(186	)		1,154
Net cash (used in) provided by operating activities		(1,237	)		1,532			385
Cash flows from investing activities:
Purchase of property and equipment		(506	)		(454	)		(504	)
Purchase of software		(32	)		(86	)		(329	)
Proceeds from the sale of marketable securities		11,948			3,322			2,068
Purchases of marketable securities, net of unrealized holding period gain or loss		(11,784	)		(14,047	)		(1,719	)
Net cash used in investing activities		(374	)		(11,265	)		(484	)
Cash flows from financing activities:
Decrease in restricted cash		—			—			3,500
Proceeds from the exercise of stock options		62			422			931
Repayment of long-term debt		—			—			(3,500	)
Borrowings under new revolving credit facility		—			—			3,500
Net cash provided by financing activities		62			422			4,431
Effect of exchange rate changes on cash and cash equivalents		(199	)		35			15
Net (decrease) increase in cash and cash equivalents		(1,748	)		(9,276	)		4,347
Cash and cash equivalents at beginning of year		4,928			14,204			9,857
Cash and cash equivalents at end of year	$	3,180		$	4,928		$	14,204
Supplemental Disclosure of Cash Flow Information:
Income taxes paid	$	—		$	—		$	—
Interest paid	$	124		$	111		$	72

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

F-7

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”) provide robust building blocks, highly integrated subsystems and innovative gateway appliances for the converged communications network. Building on an almost 30-year history of providing advanced Input/Output (I/O) solutions for telecommunications and enterprise applications, and addressing the need for high speed connectivity, Interphase has established a key role in delivering next generation AdvancedTCA^® (Advanced Telecommunications Computing Architecture or ATCA), MicroTCA and AdvancedMC™ (Advanced Mezzanine Card or AMC) solutions to the marketplace. The Company’s products enable telecommunications equipment manufacturers to deploy robust and highly scalable network infrastructure equipment into Third Generation Wireless (3G), IP Multimedia Subsystem (IMS), Voice over IP (VoIP) and Broadband Access Networks worldwide, enabling the delivery of advanced IPTV and Triple Play services. 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. The Company has no involvement with any variable interest entity covered by the scope of FASB Interpretation (“FIN”) No. 46R, Consolidation of Variable Interest Entities.

Fair Value of Financial Instruments: The carrying value of the Company’s cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities estimate fair value due to their relative short-term nature. The carrying value of the Company’s marketable securities approximates fair value as they are marked to market at the balance sheet date. The Company’s debt approximates fair value due to the nature of the floating interest rates being charged.

Cash and Cash Equivalents: The Company considers cash and temporary investments with original maturities of less than three months, as well as interest bearing money market accounts, to be cash equivalents.

Marketable Securities: Investments in debt and equity securities are classified as available for sale with unrealized holding gains and losses reported in other comprehensive income. Gains and losses from securities are calculated using the specific identification method. Management determines the appropriate classification of securities at the time of purchase. Earnings from debt securities are calculated on a yield to maturity basis and recorded in the results of operation.

F-8

Allowance for Doubtful Accounts: Management is required to estimate the collectibility of the Company’s trade receivables. A considerable amount of judgment is required in assessing the realization of these receivables, including the current creditworthiness of each customer and related aging of the past due balances. Management evaluates all accounts periodically and a reserve is established based on the best facts available to management and reevaluated and adjusted as additional information is received. The reserves also are determined by using percentages applied to certain aged receivable categories based on historical results. The activity in this account was as follows (in thousands):

	Balance at				(Write-offs,)			Balance
	Beginning		Charged to		Net of			at End
Year Ended December 31:	of Period		Expense		Recoveries			of Period
2005	$	36	$	5	$	(5	)	$	36
2004		89		9		(62	)		36
2003		30		53		6			89

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, 2005, 2004 and 2003, the allowance for returns was $90,000, $105,000, and $105,000 respectively maintained as a reduction to accounts receivable.

Inventories: Inventories are valued at the lower 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,
	2005		2004
Raw Materials	$	2,393	$	1,818
Work-in-Process		549		747
Finished Goods		167		944
Total	$	3,109	$	3,509

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 2005 and 2004 were $1.0M and $300,000, 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
2005	$	690
2004	$	656
2003	$	721

F-9

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 network and mass storage products as well as the general operations of the Company. Capitalized software is amortized over three to five years utilizing the straight-line method. Related amortization expense and accumulated amortization were as follows (in thousands):

			Accumulated
Year ended December 31:	Amortization expense		Amortization
2005	$	111	$	1,501
2004	$	132	$	2,429
2003	$	181	$	2,268

Long-Lived Assets: Property and equipment and other long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. All impairments are recognized in operating results when a permanent reduction in value occurs.

Revenue Recognition: Revenues consist of product and service revenues and are recognized in accordance with SEC Staff Accounting Bulletin (“SAB”) 104, “Revenue Recognition.” Product revenues are recognized upon shipment, provided fees are fixed and determinable, a customer purchase order is obtained (when applicable), and collection is probable. Revenues from reseller 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. Service revenue is recognized as the services are performed. Deferred revenue consists primarily of revenue from reseller arrangements and service revenue.

Revenue derived from the development and installation of highly customized software packages under a professional services contract is recognized on a percentage of completion basis measured by the relationship of hours worked to total estimated contract hours and the costs incurred as of the date of measurement. The Company follows this method since reasonably dependable estimates of the revenue and contract hours applicable to various elements of a contract can be made. Since the financial reporting of these contracts depends upon estimates, which are assessed continually during the term of these contracts, recognized revenue and profit are subject to revisions as the contract progresses to completion. Revisions in profit estimates are reflected in the period in which the facts that give rise to the revisions become known. Accordingly, favorable changes in estimates result in additional revenue recognition and net income, and unfavorable changes in estimates result in a reduction of recognized revenue and net income. If estimates were to indicate that a loss would be incurred on a contract upon completion, a provision for the expected loss would be recorded in the period in which the loss became evident.

Warranty Reserve: The Company offers to its customers a limited warranty that its products will be free from defect in the materials and workmanship for a specified period. The Company has

F-10

established a warranty reserve, as a component of accrued liabilities, for any potential claims. The Company estimates its warranty reserve based upon an analysis of all identified or expected claims and an estimate of the cost to resolve those claims.

Concentration of Credit Risks: Financial instruments which potentially expose the Company to concentrations of credit risk consist primarily of trade accounts receivable. The majority of the Company’s sales have been to original equipment manufacturers who produce computer systems or telecommunication networks. The Company conducts credit evaluations of its customers’ financial condition and limits the amount of trade credit extended when necessary.

Research and Development: Research and development costs are charged to expense as incurred.

Advertising Expense: Advertising costs are charged to expense as incurred. Advertising expense was approximately $23,000, $14,000 and $156,000 during the years ended December 31, 2005, 2004 and 2003, respectively.

Foreign Currency Translation: Assets and liabilities of the Company’s French subsidiary, whose functional currency is other than the U.S. Dollar, are translated at year-end rates of exchange, and revenues and expenses are translated at average exchange rates prevailing during the year. Foreign currency transaction gains and losses are recognized in income as incurred.

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

Income Taxes: The Company determines its deferred taxes using the liability method. Deferred tax assets and liabilities are based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of enacted tax law. The Company’s consolidated financial statements include deferred income taxes arising from the recognition of revenues and expenses in different periods for income tax and financial reporting purposes.

The Company records a valuation allowance to reduce its deferred income tax assets to the amount that is believed to be realizable under the guidance of 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.

Other Comprehensive (Loss) Income: Other comprehensive (loss) income is recorded directly to a separate section of shareholders’ equity in cumulative other comprehensive loss and includes unrealized gains and losses excluded from the consolidated Statements of Operations. These unrealized gains and losses consist of holding period gains and losses related to marketable securities, net of income taxes, and foreign currency translation, which are not adjusted for income taxes since they relate to indefinite investments in a non-U.S. subsidiary.

Stock-Based Compensation: The Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB 25”) and related interpretations in accounting for its employee stock options. Under APB 25, compensation expense is recorded when

F-11

the exercise price of employee stock options is less than the fair value of the underlying stock on the date of grant. The Company has implemented the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” and SFAS 148, “Accounting for Stock-Based Compensation Transition and Disclosure.” Had the Company elected to adopt the expense recognition provisions of SFAS 123, the pro forma impact on net (loss) income and (loss) income per common share would have been as follows (in thousands, except per share data):

	Years ended December 31,
	2005			2004			2003
Net (loss) income as reported	$	(2,299	)	$	1,718		$	(769	)
Add: APB 25 expense		135			—			—
Less: Total stock based employee compensation expense determined under fair value methods for all awards		(1,150	)		(1,863	)		(2,084	)
Pro forma net loss		(3,314	)		(145	)		(2,853	)
(Loss) income per common share:
As reported — basic	$	(0.40	)	$	0.30		$	(0.14	)
Pro forma — basic	$	(0.58	)	$	(0.03	)	$	(0.53	)
As reported — diluted	$	(0.40	)	$	0.27		$	(0.14	)
Pro forma — diluted	$	(0.58	)	$	(0.03	)	$	(0.53	)

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 and inventory impairment charges and income tax accounts.

2. MARKETABLE SECURITIES

Marketable securities primarily consist of investments in debt securities. As of December 31, 2005 the fair market value of marketable securities was $15.4 million, of which $11.6 million matures in one year or less, $3.8 million matures in five years or less. As of December 31, 2004 the fair market value of marketable securities was $15.6 million, of which $9.3 million matures in one year or less, $6.3 million matures in five years or less. Gains and losses on marketable securities sold are recognized on a specific identification basis. The Company recorded an unrealized loss with respect to certain available-for-sale securities of $33,000, $186,000 and $121,000 in 2005, 2004 and 2003 respectively.

F-12

3. ACCRUED LIABILITIES

Accrued liabilities consisted of the following (in thousands):

	Years ended December 31,
	2005		2004
Accrued audit fees	$	127	$	170
Restructuring accrual		288		—
Loss contingency		—		225
Accrued outside commissions		81		15
Accrued property tax		27		56
Inventory receipts		500		117
Accrued other		734		840
	$	1,757	$	1,423

4. 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 changes in the market value of these contracts are recognized as a gain or loss in the period of the change. For the year ended December 31, 2005, the Company recognized a loss of approximately $125,000 related to these foreign exchange contracts. At December 31, 2005 the Company had five foreign exchange contracts outstanding to acquire approximately 1.1 million Euros for each contract on specified dates during the next 13 months. There were no such contracts at December 31, 2004. At December 31, 2005, the Company carried a $70,000 liability on the balance sheet, classified as accrued liabilities, related to the fair value of its outstanding foreign exchange contracts.

5. CREDIT FACILITY

The Company maintains a $5.0 million revolving bank credit facility with a maturity date of July 31, 2007 and interest rate of LIBOR plus 1.0% (5.375% at December 31, 2005). All borrowings under this facility are secured by marketable securities. The borrowings of $3.5 million are classified as long-term debt on the accompanying balance sheet.

F-13

6. INCOME TAXES

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

	Year ended December 31,
	2005			2004			2003
United States tax (benefit) provision	$	(10	)	$	(89	)	$	(245	)
Foreign provision (benefit)		228			(33	)		33
Income tax provision (benefit)	$	218		$	(122	)	$	(212	)

Tax effect of temporary differences that give rise to significant components of the deferred tax assets as of December 31, 2005 and 2004, are presented as follows (in thousands):

	Year ended December 31,
	2005			2004
Current deferred tax assets:
Inventories	$	1,313		$	1,249
Accounts receivable		14			14
Deferred revenue		45			34
Other accruals		177			610
Total current deferred tax assets	$	1,549		$	1,907
Noncurrent deferred tax assets:
Assets:
Depreciation	$	45		$	4
Amortization		369			433
Net operating loss		6,412			4,169
Total noncurrent deferred tax assets	$	6,826		$	4,606
Valuation allowance for deferred tax assets		(8,375	)		(6,513	)
Deferred tax assets, net of valuation allowance	$	—		$	—

SFAS 109, “Accounting for Income Taxes,” requires that a valuation allowance be established when it is “more likely than not” that all or a portion of a deferred tax asset will not be realized. A review of all available positive and negative evidence needs to be considered, including a company’s current and past performance, the market environment in which the company operates, the utilization of past tax credits, length of carry back and carry forward periods, existing contracts or sales backlog that will result in future profits, as well as other factors.

Forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years. Cumulative losses weigh heavily in the overall assessment. As a result of a review undertaken at December 31, 2002, the Company concluded that it was appropriate to establish a full valuation allowance for its net deferred tax assets. The Company

F-14

continues to maintain a valuation allowance on all of the net deferred tax assets. Until an appropriate level of profitability is sustained, the Company expects to continue to maintain a valuation allowance on substantially all of the future tax benefits and does not expect to recognize any significant tax benefits in future results of operations. At December 31, 2005, the amount of valuation allowance is approximately $8.4 million. Approximately $500,000 of this total, if reversed, would be allocated directly to additional paid-in capital as it relates to non-qualified stock option deductions.

During the first quarter of 2004, after conducting a thorough review of the Company’s IRS transcripts, the Company discovered that the IRS had not paid allowable interest on the refund from the IRS audit described below. As a result, the Company recognized a tax benefit of approximately $100,000 in 2004.

During the third quarter of 2003, the IRS concluded a federal income tax audit of the Company related to the tax years 1996 through 2001. In addition, the French tax administration also concluded a tax audit of the Company’s French subsidiary covering the same periods resulting in a finding of no tax due. Due to the finalization of both tax audits, the Company recognized a tax benefit of approximately $245,000. This benefit was partially offset by taxes on foreign income.

The differences between the provision for income taxes computed on income before income taxes at the U.S. federal statutory income tax rate (34%) and the amount shown in the Consolidated Statements of Operations are presented below (in thousands):

	Year ended December 31,
	2005			2004			2003
Income taxes at statutory rate	$	(708	)	$	543		$	(334	)
Benefit for French research and development tax credit		(239	)		(144	)		—
State (benefit) provision		(119	)		22			62
Benefit recorded for favorable outcome of tax audits		—			(102	)		(245	)
French permanent items		244			(133	)		(292	)
Extraterritorial income exclusion benefit		(75	)		(389	)		(386	)
Adjustment to deferred tax assets		(747	)		—			—
Other		—			(33	)		—
Change in valuation allowance		1,862			114			983
Provision (benefit) for income taxes	$	218		$	(122	)	$	(212	)

At December 31, 2005, the Company had net operating loss carryforwards for federal income tax purposes of approximately $17.5 million, $1.5 million of which are related to non-qualified stock option deductions. The Company also has state net operating losses of $11.3 million. These net operating loss carryforwards will begin to expire in 2022. A valuation allowance against the entire net operating loss carryforward has been established as the realizability of this asset is uncertain.

The earnings of the Company’s foreign subsidiary are considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state income taxes have been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to foreign tax credits) and withholding taxes payable to foreign countries. Foreign and state tax amounts for 2004 and 2003 have been separately shown for comparison purposes to 2005 amounts.

F-15

7. EXIT ACTIVITIES

During the second quarter of 2003, the Company committed to an exit plan regarding one of its leased facilities, which was scheduled to expire during the first quarter of 2005. The Company had previously held this facility open for storage, overflow use, and anticipated growth. However, it was determined that the facility would not be needed for such uses and the Company began pursuing subleasing opportunities. As a result of this exit plan, the Company recorded a charge of approximately $109,000 during the second quarter of 2003, classified as operating expenses, related to net termination costs associated with the lease of the facility. In May 2004, the Company entered into a sublease termination agreement with the landlord of the leased facility resulting in an additional charge of approximately $42,000. All cash payments related to this exit plan had been made prior to December 31, 2004 and therefore there was no liability, related to these exit activities, on the balance sheet at December 31, 2005 or 2004.

8. RESTRUCTURING CHARGE

On November 10, 2005, Interphase adopted a plan to restructure its worldwide operations. The primary goal of the restructuring program was to improve the Company’s ability to continue to strategically fund research and development efforts, to balance the Company’s skills to align with the future directions of the marketplace, and to streamline the Company in its continued goal of being the most cost-effective company in the embedded systems marketplace. Under the restructuring plan, Interphase reduced its workforce by approximately 19%. The global workforce reduction impacted all functions within the Company. As a result of the restructuring program, the Company recorded a restructuring charge of approximately $600,000, classified as operating expense.

These amounts will be paid out under the restructuring plan and will be complete by the end of the second quarter of 2006. Approximately $586,000 of the charges related to severance and fringe benefits, approximately $8,000 of the charges related to future lease obligations and approximately $6,000 related to non-utilized fixed assets. As of December 31, 2005, approximately $306,000 cash payments had been made related to the restructuring program with $288,000 remaining as a liability on the Company’s balance sheet relating to future cash payments.

F-16

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,
	2005			2004		2003
Basic (loss) income per share:
Net (loss) income	$	(2,299	)	$	1,718	$	(769	)
Weighted average common shares outstanding		5,758			5,719		5,544
Basic (loss) income per share	$	(0.40	)	$	0.30	$	(0.14	)
Diluted (loss) income per share:
Net (loss) income	$	(2,299	)	$	1,718	$	(769	)
Weighted average common shares outstanding		5,758			5,719		5,544
Dilutive stock options		—			593		—
Weighted average common shares outstanding – assuming dilution		5,758			6,312		5,544
Diluted (loss) income per share	$	(0.40	)	$	0.27	$	(0.14	)
Outstanding stock options that were not included in the diluted calculation because their effect would be anti-dilutive		2,084			808		1,199

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 shall be subject to the terms and conditions of the separate plans in effect with respect to such options prior to the effective date and awards granted after the effective date shall be subject to the terms and conditions of the 2004 Long-Term Stock Incentive Plan. Awards granted under this plan may be (a) incentive stock options, (b) non-qualified stock options, (c) bonus stock awards, (d) stock appreciation rights, (e) performance share awards and performance unit awards, (f) phantom stock awards, and (g) any other type of award established by the committee which is consistent with the Plan’s purposes, as designated at the time of grant. The total amount of Common Stock with respect to which awards may be granted under the Plan is 5,250,000 shares.

Amended and Restated Stock Option Plan: The exercise price of the incentive stock options must be at least equal to the fair market value of the Company’s common stock on the date of the grant, while the exercise price of nonqualified stock options may be less than fair market value on the date of grant, as determined by the Board of Directors. The Board of Directors may provide for the exercise of options in installments and upon such terms, conditions and restrictions as it may determine. Options granted prior to January 1, 1999 generally vest ratably over a five-year period from the date of grant. Options granted since January 1, 1999 generally vest ratably over a three-year period from the date of grant. The term of option grants may be up to ten years. Options are canceled upon the lapse of three months, in most cases, following termination of employment except in the event of death or disability, as defined.

F-17

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.

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

	Number of			Weighted Average
	Options			Option Price
Balance, December 31, 2002		2,415			9.49
Granted		413			6.25
Exercised		(166	)		5.61
Canceled		(84	)		10.66
Balance, December 31, 2003		2,578			9.18
Granted		226			10.84
Exercised		(71	)		5.97
Canceled		(79	)		10.92
Balance, December 31, 2004		2,654			9.35
Granted		—			N/A
Exercised		(15	)		4.24
Canceled		(53	)		9.78
Balance, December 31, 2005		2,586			9.38
Exercisable at December 31, 2005		2,586		$	9.38

F-18

The following table summarizes information about options granted under the plans that were outstanding at December 31, 2005 (in thousands, except option prices):

	Options Outstanding				Options Exercisable
			Weighted-
			Average
	Number		Remaining		Weighted		Number		Weighted
Range of	Outstanding at		Contractual Life		Average Exercise		Exercisable at		Average Exercise
Exercise Prices	12/31/05		(years)		Price		12/31/05		Price
$3.09-$4.60		304		5.90	$	4.22		304	$	4.22
$4.65-$6.50		701		6.14		5.58		701		5.58
$7.20-$10.63		783		4.42		8.19		783		8.19
$11.25-$15.75		473		5.88		12.90		473		12.90
$17.25-$24.06		315		3.96		19.76		315		19.76
$31.00		10		3.90		31.00		10		31.00
Total		2,586		5.27	$	9.38		2,586	$	9.38

Stock Option Acceleration: On December 19, 2005, the Board of Directors approved the acceleration of the vesting of all unvested options to purchase shares of common stock of the Company that were held by employees and executive officers as of December 19, 2005. Less than one percent of these unvested options consisted of “in-the-money” options. The number of shares and exercise prices of the options subject to the acceleration were unchanged. The Company elected to take this action to eliminate approximately $350,000 of future compensation expense that would have been recorded over a two year period. The Company’s board and executive management believes this action is in the best interest of the Company and its shareholders. The following table summarizes the outstanding options subject to accelerated vesting:

	Aggregate Number of		Weighted Average
	Shares Issuable Under		Exercise Price Per
	Accelerated Stock Options		Share
Total Non-Employee Directors		—		N/A
Total Executive Officers		167,830	$	9.47
Total All Other Employees		38,092	$	7.61
Total		205,922	$	9.13

F-19

Restricted Stock: During 2005 the Company issued 145,652 shares of bonus stock awards (“restricted stock”) under the Interphase Corporation 2004 Long-Term Stock Incentive Plan to its directors and certain employees at no cost to the recipient. Of the 145,652 shares of restricted stock issued during 2005, 9,600 shares were forfeited and canceled, leaving 136,052 shares outstanding at December 31, 2005. 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 vesting period of one year for directors subject to the achievement of certain performance conditions and over a vesting period of four years for employees. Upon issuance of restricted stock under the plan, unearned compensation equivalent to the market value at the date of grant was recorded as a reduction to shareholder’s equity and subsequently amortized to expense over the respective restriction periods. Compensation expense related to restricted stock was approximately $135,000 for the year ended December 31, 2005. The following summarizes the restricted stock activity for 2005:

	Restricted Stock Shares
Shares at December 31, 2004		—
Grant (average fair value of $5.60)		145,652
Vested		—
Cancelled/Forefeited		9,600
Shares at December 31, 2005		136,052

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 Interphase common stock until the occurrence of one of the triggering events, at which time the rights would become detached from the Company’s common stock.

Pro Forma Net Loss: The Black-Scholes model was not developed for use in valuing employee stock options, but was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, it requires the use of subjective assumptions including expectations of future dividends and stock price volatility. Such assumptions are only used for making the required fair value estimate and should not be considered as indicators of future dividend policy or stock price appreciation. Because changes in the subjective assumptions can materially affect the fair value estimate, and because employee stock options have characteristics significantly different from those of traded options, the use of the Black-Scholes option-pricing model may not provide a reliable estimate of the fair value of employee stock options.

F-20

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for options granted in 2004, and 2003 as there were no options granted in 2005:

	2005		2004			2003
Weighted average risk free interest rates		N/A		2.39	%		2.36	%
Weighted average life (in years)		N/A		4.10			3.87
Volatility		N/A		88	%		130	%
Expected dividend yield		N/A		—			—
Weighted average grant-date fair value per share of options granted		N/A	$	6.99		$	5.02

11. RELATED PARTY TRANSACTIONS

During the year ended December 31, 2005, the Company had no related party transactions. The Company paid approximately $104,000 and $68,000 for the years ended December 31, 2004 and 2003, respectively to certain former outside directors of the Company or their firms for professional services. The Company believes the terms were equivalent to those of unrelated parties.

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% of the first 6% of the employee’s contributions up to a maximum of $6,300 per employee for the year ended December 31, 2005. The total expense under this plan was $313,000, $295,000 and $270,000 for the years ended December 31, 2005, 2004 and 2003, respectively. The Company offers no post-retirement or post-employment benefits.

13. OTHER FINANCIAL INFORMATION

Major Customers: During 2005, sales to Lucent Technologies, Hewlett Packard and Motorola accounted for $7.9 million or 26%, $6.0 million or 19% and $4.2 million or 14% of the Company’s consolidated revenues, respectively. During 2004, sales to Lucent Technologies and Hewlett Packard accounted for $12.6 million or 36% and $9.6 million or 27% of the Company’s consolidated revenues, respectively. During 2003, sales to Lucent Technologies and Hewlett Packard accounted for $13.5 million or 42% and $9.7 million or 30% of the Company’s consolidated revenues, respectively. During 2002, sales to Hewlett Packard and Lucent Technologies accounted for $8.7 million or 35% and $7.2 million or 29% of the Company’s consolidated revenues, respectively. No other customers accounted for more than 10% of the Company’s consolidated revenues in the periods presented.

Included in accounts receivable at December 31, 2005, was approximately $1.6 million due from Hewlett Packard, approximately $950,000 due from Lucent Technologies and approximately $610,000 due from Macnica Networks Corporation. Included in accounts receivable at December 31, 2004, was approximately $1.4 million due from Hewlett Packard, approximately $710,000 due from Lucent Technologies and approximately $660,000 due from Macnica Networks Corporation. 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 December 2009. Rent expense related to these leases is recorded on a straight-line basis. As of December 31, 2005, operating lease commitments having noncancelable terms of more than one year are as follows (in thousands):

Year ending December 31:
2006	$	736
2007	$	736
2008	$	656
2009	$	152

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

Year ending December 31:
2005	$	757
2004	$	791
2003	$	932

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 2004, the FASB issued SFAS No. 123(R), “Share Based Payments”, which replaces SFAS No. 123, “Accounting for Stock-Based Compensation”, and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” and amends SFAS No. 95, “Statement of Cash Flows”. SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. As such, pro forma disclosure in lieu of expensing is no longer an alternative. After the Securities and Exchange Commission’s new rule amending the compliance date, the new standard is effective for annual reporting periods beginning after June 15, 2005. The Company adopted the provisions of SFAS 123(R) as of January 1, 2006. Since the Company had no unvested options as of December 31, 2005, the adoption of SFAS 123(R) will not have a material impact to the consolidated financial statements.

In December 2004, the FASB issued SFAS No. 151 “Inventory Costs, an Amendment of ARB No. 43, Chapter 4”. SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material and requires that these items be recognized as current period charges. SFAS No. 151 applies only to inventory costs incurred during periods beginning after the effective date and also requires that the allocation of fixed production overhead to conversion costs be based on the normal capacity of the production facilities. SFAS No. 151 is effective for the Company’s fiscal year beginning January 1, 2006 and is not expected to have a material impact on our consolidated financial statements.

F-22

15. SEGMENT DATA

The Company is principally engaged in the design, development, and manufacturing of high-performance connectivity products utilizing advanced technologies being used in next generation telecommunication networks and enterprise data/storage networks. Except for revenue performance, which is monitored by product line, the chief operating decision-makers review financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance. Accordingly, the Company considers itself to be in a single industry segment.

Geographic long lived assets and revenue related to North America and foreign countries as of December 31, 2005 and 2004 and for the years ended December 31, 2005, 2004 and 2003 is as follows (in thousands):

Long Lived Assets	2005		2004
North America	$	1,078	$	1,321
Europe		309		379
Total	$	1,387	$	1,700

Revenues	2005		2004		2003
North America	$	16,912	$	21,049	$	23,037
Europe		8,804		8,528		4,312
Pacific Rim		5,136		5,438		5,141
Total	$	30,852	$	35,015	$	32,490

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

Product Revenue	2005		2004		2003
Broadband telecom	$	20,293	$	20,151	$	17,773
Enterprise SlotOptimizer		7,577		10,713		11,422
LAN		485		1,088		1,368
Storage		714		814		522
WAN		40		188		152
Other		1,743		2,061		1,253
Total	$	30,852	$	35,015	$	32,490

F-23

16. QUARTERLY FINANCIAL DATA (Unaudited)

Quarterly results of operations for 2005 (unaudited)
(In thousands, except per share amounts)

	Quarter Ended
	March 31		June 30			September 30			December 31
Revenues	$	8,780	$	7,592		$	6,924		$	7,556
Gross margin		4,752		4,050			3,491			3,804
Income (loss) before income taxes		191		(390	)		(876	)		(1,006	)
Net income (loss)		155		(471	)		(912	)		(1,071	)
Earnings (loss) per share:
Basic EPS	$	0.03	$	(0.08	)	$	(0.15	)	$	(0.19	)
Diluted EPS	$	0.03	$	(0.08	)	$	(0.15	)	$	(0.19	)

Quarterly results of operations for 2004 (unaudited)
(In thousands, except per share amounts)

	Quarter Ended
	March 31		June 30		September 30		December 31
Revenues	$	9,198	$	10,129	$	8,294	$	7,394
Gross margin		4,903		5,613		4,666		3,989
Income (loss) before income taxes		218		1,134		525		(281	)
Net income (loss)		275		1,095		500		(152	)
Earnings (loss) per share:
Basic EPS	$	0.05	$	0.19	$	0.09	$	(0.03	)
Diluted EPS	$	0.04	$	0.18	$	0.08	$	(0.03	)

Due to changes in the weighted average common shares outstanding per quarter, the sum of basic and diluted earnings per common share per quarter may not equal the basic and diluted earnings (loss) per common share for the applicable year.

F-24

INDEX TO EXHIBITS

Exhibits

2    (a)	Stock Purchase Agreement, dated as of June 29, 1996, among Interphase Corporation, Synaptel and Philippe Oros, Xavier Sutter, Francois Lecerf, Schroder Ventures French Enterprise Fund LPI (USA), Schroder ventures French Enterprise Fund UKLP (UK) and Schroder Ventures Holding Limited (UK). (3)
3    (a)	Certificate of Incorporation of the registrant. (1)
3    (b)	Amendment to Articles of Incorporation of the registrant. (5)
3    (c)	Amended and Restated Bylaws of the registrant adopted on December 5, 1995 and amended on January 19, 1999. (7)
4    (a)	Rights Agreement dated as of December 7, 2000 by and between the Company and Computershare Investor Services, LLC as Rights Agent. (6)
10    (a)	Registrant’s Amended and Restated Stock Option Plan and Amendment No. 1 and 2 thereto.*(4)
10    (b)	Registrant’s Amended and Restated Stock Option Plan Amendment No. 4. *(5)
10    (c)	Directors Stock Option Plan and Amendment No. 1 thereto. *(2)
10    (d)	Directors Stock Option Plan Amendment No. 2. *(5)
10    (e)	Registrant’s France Incentive Stock Option Sub-Plan. *(7)
10     (f)	Lease on Facility at Parkway Center, Phase I, Plano, Texas. (8)
10    (g)	Lease on Facility at 2105 Luna Road, Carrolton, Texas. (8)
10    (h)	Note and Credit Agreement between Interphase Corporation and Comerica Bank, including Amendment dated November 5, 2004. (11)
10     (i)	Employment Agreement with Gregory B. Kalush, dated March 12, 1999. *(13)
10     (j)	Employment Agreement for Chief Technology Officer with Felix V. Diaz, dated May 22, 1996. *(13)
10    (k)	Employment, Confidentiality, and Non-Competition Agreement with Thomas N. Tipton, Jr., dated December 19, 2005. *(13)
10     (l)	Employment, Confidentiality, and Non-Competition Agreement with Randall E. McComas, dated February 15, 2002. *(13)
10   (m)	Employment Agreement with Deborah A. Shute, dated November 24, 1999. *(13)
10    (n)	Employment, Confidentiality, and Non-Competition Agreement with James W. Gragg, dated November 1, 2004. *(13)
10    (o)	Employment, Confidentiality, and Non-Competition Agreement with Prasad Kallur, dated May 23, 2005. *(13)
10    (p)	Employment Agreement with Steven P. Kovac, dated May 11, 1999. *(13)
10    (q)	Interphase Corporation 2004 Long-Term Stock Incentive Plan *(12)
16    (a)	Letter regarding change in certifying accountant. (10)
21    (a)	Subsidiaries of the Registrant. (9)
23    (a)	Consent of Independent Registered Public Accounting Firm. (13)
23    (b)	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)

E-1

(1)	Filed as an exhibit to Registration Statement No. 2-86523 on Form S-1 and incorporated herein by reference.
(2)	Filed as an exhibit to Report on Form 10-K for the year ended October 31, 1995, and incorporated herein by reference.
(3)	Filed as an exhibit to Report on Form 8-K on August 6, 1996, and incorporated herein by reference.
(4)	Filed as an exhibit to Report on Form 10-K for the year ended December 31, 1996, and incorporated herein by reference.
(5)	Filed as an exhibit to Report on Form 10-K for the year ended December 31, 1999, and incorporated herein by reference.
(6)	Filed as an exhibit to Form 8-K on January 9, 2001, and incorporated herein by reference.
(7)	Filed as an exhibit to Report on Form 10-K for the year ended December 31, 2001, and incorporated herein by reference.
(8)	Filed as an exhibit to Report on Form 10-Q for the quarter ended September 30, 2002, and incorporated herein by reference.
(9)	Filed as an exhibit to Report on Form 10-K for the year ended December 31, 2002, and incorporated herein by reference.
(10)	Filed as an exhibit to Form 8-K on September 13, 2004, and incorporated herein by reference.
(11)	Filed as an exhibit to Report on Form 10-K for the year ended December 31, 2004, and incorporated herein by reference.
(12)	Filed as an exhibit to Schedule 14a on March 31, 2005 and incorporated herein by reference.
(13)	Filed herewith.
*	Management contract or compensatory plan or arrangement.

E-2

EX-10.(I)

Exhibit 10(i)

[THIS AGREEMENT IS SUBJECT TO ARBITRATION]

EMPLOYMENT AGREEMENT

     THIS EMPLOYMENT AGREEMENT (the “Agreement”) is made and entered into effective as of the 12th day of March, 2000 (the “Effective Date”), by and between Interphase Corporation (the “Corporation”) and Gregory B. Kalush (the “Executive”).

     WHEREAS, the Corporation desires to continue its employment relationship with the Executive on certain terms and conditions as set forth herein; and

     WHEREAS, the Executive is willing to accept such employment;

     WHEREAS, the Corporation and the Executive previously entered into a written employment agreement dated March 12, 1999 (the “1919 Agreement”) and now desire to supersede and replace the 1999 Agreement with this Agreement.

     NOW, THEREFORE, the parties hereto, in consideration of the mutual covenants and promises hereinafter contained, do hereby agree as follows:

     1. Employment. The Corporation hereby employs the Executive in the capacity of President and Chief Executive Officer, and the Executive hereby accepts the employment, on the terms and conditions hereinafter set forth.

     2. Duties. The Executive’s general duties and responsibilities as President and Chief Executive Officer shall be overseeing the general operations of the Corporation. Executive will also serve as Chairman of the Board, or any such other position to which he is appointed by the Board of Directors of the Corporation.

     3. Term. The Executive’s employment with the Corporation will be for a term of three (3) years from the Effective Date, subject to the termination provisions in Section 10. After the expiration of the three-year term, this Agreement, and Executive’s employment hereunder, will

continue for successive two (2) year terms, unless, as provided in Section 10(a), more than thirty (30) days prior to the expiration of the then current term (i.e., initial or renewal) of this Agreement, either the Executive or the Corporation gives notice to the other party that this Agreement will not be renewed.

     4. Salary and Other Compensation. As compensation for the services to be rendered by the Executive to the Corporation pursuant to this Agreement, the Executive shall be paid the following compensation and other benefits:

a.	Base Salary: A Base Salary at an annual rate of $250,000.00, payable in semi-monthly installments will be paid to the Executive. The Base Salary may not be decreased at any time during the term of the Executive’s employment hereunder and shall be reviewed annually throughout the term of this Agreement by the Board of Directors or Compensation Committee of the Board of Directors.
b.	Bonus: The Executive shall be eligible for an annual Executive Bonus based upon the guidelines contained in the Corporation’s Executive Bonus Plan. The Executive’s “annual bonus target” for the period January 1, 2000 through December 31, 2000 shall be $200,000 and thereafter shall be established by the Board of Directors or the Compensation Committee of the Board of Directors of the Corporation (if such authority is delegated to the Compensation Committee).
c.	Stock Options:

     i) Options: As provided in the 1999 Agreement, the Corporation, in accordance with the Corporation’s Amended and Restated

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Stock Option Plan, granted to the Executive stock options to purchase 100,000 shares of common stock of the Corporation (the “Option”). Since the date of the grant of the Option, the vesting schedule for the shares covered thereby has been accelerated. Accordingly, and in accordance with prior action of the Board of Directors, the Option will vest as follows:

A)	33,334 of the total options will vest on March 12, 2000;
B)	An additional 33,333 of the total options will vest on March 12, 2001;
C)	The remaining 33,333 options will vest on March 12, 2002.

The exercise price, term and other relevant provisions of the Option (including, but not limited to, which options will be incentive stock options and which will be nonqualified options) will be contained in Option Agreement # 1083 and 1085 executed by the Executive. In the event of any conflict between the terms of this Section 4c. and the Option Agreement, the Option Agreement shall control.

d.	Expense Reimbursements: The Corporation agrees to reimburse the Executive, in accordance with the Corporation’s policies regarding reimbursement of business expenses, for the reasonable and necessary business expenses incurred by the Executive in the performance of his duties.
e.	Office Furnishings: The Corporation agrees to provide a personal computer and office space and furnishings to the Executive commensurate with the Corporation’s decor and culture.

3

f. Executive Benefit Plans: The Executive shall be allowed to participate, to the extent he may be eligible, in any profit sharing, retirement, insurance or other Executive Benefit Plan maintained by the Corporation.

     5. Indemnification. The Corporation agrees to provide the Executive with coverage under its Director’s and Officer’s liability insurance policy. The Corporation also agrees to indemnify and defend the Executive in accordance with the Corporation’s Articles of Incorporation and Bylaws.

     6. Health Insurance. The Corporation also agrees to provide coverage to the Executive under the Interphase Executive Health Insurance Plan. The Corporation, in its discretion, may apply for and procure in its own name and for its own benefit, life insurance on the life of the Executive in any amount or amounts considered advisable by the Corporation, and the Executive shall submit to any medical or other examination and execute and deliver any application or other instrument in writing, reasonably necessary to effectuate such insurance.

     7. Vacations and Leave. The Executive shall be entitled to four (4) weeks of vacation per year and ten (10) sick days per year and any other paid leave benefits provided for in the Corporation’s Employee Handbook.

     8. Non-Disclosure of Confidential Information. The Executive acknowledges that in and as a result of his employment by the Corporation, he will be making use of, acquiring, and/or adding to confidential information of a special and unique nature and value relating to such matters as the patents, copyrights, proprietary information, trade secrets, systems, product developments, procedures, manuals, confidential reports, lists of customers (which are deemed for all purposes confidential and proprietary) of the Corporation and its Affiliates (an “Affiliate” of the Corporation being defined as any person controlling, controlled by, or under common control with the Corporation), as well as the nature and type of services rendered by the Corporation and its

4

Affiliates, the equipment and methods used and preferred by the customers of the Corporation and its Affiliates, and the fees paid by them. The Corporation and its Affiliates are sometimes hereinafter referred to as the “Interphase Group.” The Executive further agrees that if a third party (e.g., vendors, customers and manufacturers) contracts with the Interphase Group or any member thereof the information obtained or received from a third party including, but not limited to its patents, copyrights, proprietary information, trade secrets, systems, product development, procedures, manuals, and confidential reports will be treated in the same manner and be subject to the same protection as other Confidential Trade Secret Information (as hereinafter defined) of the Interphase Group.

     As a material inducement to the Corporation to enter into this Agreement and to pay the Executive the compensation and benefits stated herein and as a condition of employment and continued employment, the Executive shall keep confidential all such confidential and proprietary information which the Executive learns or acquires as a result of his employment with the Corporation (collectively, “Confidential Trade Secret Information”). By way of example, “Confidential Trade Secret Information” may consist of any idea, process, design, concept, formula, pattern, device, development, customer information or compilation of information which is used in the business of the Interphase Group, which gives the Interphase Group an advantage over a competitor who does not know or use it.

     The Executive agrees (i) that the remedy at law for any breach or threatened breach of this Section 8 is inadequate and (ii) that, in the event of breach or threatened breach of this Section 8, the Corporation (or any other member of the Interphase Group) shall be entitled to injunctive relief and specific performance to enforce this Section 8. Injunctive relief and/or specific performance will be in addition to whatever other remedy is available to the Corporation (or other member of the

5

Interphase Group) at law, under this Agreement or otherwise. The Executive agrees that damages for use of any identified Confidential Trade Secret Information in violation of this Section 8 shall be 100% of the gross amount of revenue derived or resulting from unauthorized use of such information.

     9. Covenants Not to Compete. The Executive acknowledges that the services he is to render to the Corporation are of a special and unusual character with a unique value to the Interphase Group, the loss of which cannot adequately be compensated by damages in an action at law. Accordingly, the Executive agrees that during the term of his employment with the Corporation and for a period of two (2) years immediately following the date of termination, for whatever reason, of his employment with the Corporation:

a.

The Executive shall not, directly or indirectly, without the express written consent of the Corporation, (i) solicit or induce, or attempt to solicit or induce, any current or future employee of the Interphase Group, or any member thereof, to leave or cease his relationship with the Interphase Group, for any reason whatsoever, and/or (ii) hire any current or future employee of the Interphase Group or any member thereof on Executive’s behalf or on behalf of any subsequent employer of Executive.

b.

The Executive shall not, directly or indirectly, within the Restricted Territory (as hereinafter defined), without the express written consent of the Corporation: (i) engage, as an owner, employer, consultant or otherwise, in any business or activity that is competitive with the business of the Interphase Group; and/or (ii) be employed by, or provide competitive services or assistance to, a Competing Business (as hereinafter defined) which would

6

potentially involve, directly or indirectly, the use and/or disclosure of Confidential Trade Secret Information, as defined in Section 8. For purposes of this Section 9 the “Restricted Territory” shall mean North America, Europe, Japan, Korea, Australia, Thailand, China, Singapore and India. For purposes of this Section 9, a “Competing Business” means any person or firm that offers services or products that are directly competitive with those marketed, offered for sale and/or under any stage of development by the Interphase Group, or any member thereof, as of the date of the Executive’s separation from employment with the Corporation. If the Executive desires to work for a Competing Business in an area that is not competitive with the business of the Interphase Group, the Executive must give written notice to the Board of Directors of the Corporation and obtain its approval that the employment will not violate the terms and conditions of this section before beginning employment with the Competing Business.

c. The Executive shall not, directly or indirectly, solicit or attempt to solicit the existing or prospective customers of the Interphase Group to purchase services or products that are competitive with those marketed, offered for sale and/or under any stage of development by the Interphase Group as of the date of the Executive’s separation from employment with the Corporation. For purposes of this Agreement, existing customers shall mean those persons or firms to whom the Interphase Group, or any member thereof, has made a sale in the preceding twelve (12) months prior to the Executive’s separation from employment; prospective customers shall mean those persons or firms that

7

the Interphase Group, or any member thereof, has solicited to purchase, and/or with whom the Interphase Group, or any member thereof, has negotiated to sell, the products or services of the Interphase Group within the preceding twelve (12) months prior to the Executive’s separation from employment.

d.

In the event that, notwithstanding the foregoing, any of the provisions of this Section 9 shall be held to be invalid or unenforceable, the remaining provisions thereof shall nevertheless continue to be valid and enforceable as though the invalid or unenforceable provisions had not been included therein. In the event that any provision of this Section relating to the time period and/or the areas of restriction and/or related aspects shall be declared by a court of competent jurisdiction to exceed the maximum restrictiveness such court deems reasonable and enforceable, the time period and/or areas of restriction and/or related aspects deemed reasonable and enforceable by the court shall become and thereafter be the maximum restriction in such regard, and the restriction shall remain enforceable to the fullest extent deemed reasonable by such court.

e.

The Executive agrees; (i) that the remedy at law for any breach or threatened breach of this Section 9 is inadequate and (ii) that, in the event of breach or threatened breach of this Section 9, the Corporation shall be entitled to injunctive relief and specific performance to enforce this Section 9. Injunctive relief and/or specific performance will be in addition to whatever other remedy is available to the Corporation at law, under this Agreement or

8

otherwise. The Executive agrees that the damages for breach of this Section 9 shall be 100% of the gross amount of revenue derived or resulting from the breach of the covenant in this Section 9.

     10. Termination. This Agreement, and the Executive’s employment hereunder, will terminate as follows:

a.	Non-renewal of Employment Agreement. The Executive is notified by the Corporation, or the Executive gives notice to the Corporation, more than 30 days prior to the expiration of the then current (i.e., initial or renewal) term that this Agreement will not be renewed. Notice of non-renewal of this Agreement shall be communicated by dated, written “Notice of Non-Renewal” sent by Registered Mail, signed receipt requested.
b.	Death. The Executive’s employment hereunder shall automatically terminate upon his death.
c.	Disability. The Corporation may terminate the Executive’s employment thereunder in the event of the Executive’s Disability (as hereinafter defined). For purposes of this Agreement, “Disability” shall mean that, as a result of the Executive’s incapacity due to illness or injury, the Executive shall have been absent from his duties under this Agreement on a substantially full-time basis for a period of three or more consecutive months, and thereafter, within 30 days after the Corporation notifies the Executive in writing that it intends to replace him, the Executive shall not have returned to the performance of such duties on a full-time basis. Should the Executive be diagnosed as permanently disabled by his treating physician, the Corporation can terminate

9

his employment for “Disability” without waiting for the expiration of the three-month period. Without limiting the foregoing, until the Corporation terminates the Executive’s employment hereunder on account of Disability, the Executive shall receive his full compensation as provided in Section 4 of this Agreement.

d.	By the Executive. The Executive may resign at any time upon thirty days written notice to the Board of Directors of the Corporation.
e.	By the Corporation.

     i) The Corporation may terminate the Executive immediately for “Overt Misconduct” For purposes of this Agreement, “Overt Misconduct” means (a) any act or course of conduct by the Executive constituting a criminal act or (b) an act by the Executive that is not authorized by the Board of Directors of the Corporation, or a committee thereof, and which results in gain to or personal enrichment of the Executive at the expense of the Corporation, or (c) the commission by the Executive of an act or course of conduct involving moral turpitude, or (d) a breach by Executive of either or both of Sections 8 or 9 of this Agreement, or (e) the Executive’s intentional violation of reasonable written instructions or policies established by the Corporation’s Board of Directors with respect to the operation of the Corporation’s business and affairs, or the Executive’s failure to carry out reasonable written instructions or policies of the Board of Directors, or a material breach (other than a breach of Sections 8 or 9) by the Executive of this Agreement, provided that before a termination of the Executive pursuant

10

to this subsection 10(e)(i)(e) shall be considered for “Overt Misconduct,” the Corporation’s Board of Directors must give the Executive written notice and fifteen (15) days to cure such violation or failure.

     ii) In the event the Corporation asserts that the Executive has committed an act of Overt Misconduct, the termination notice must specify in detail the misconduct alleged, and the witnesses or other basis for such allegation.

f. Notice of Termination. Notice of termination shall be communicated by dated, written “Notice of Termination” sent by Registered Mail, signed receipt requested.

     11. Payments Upon Termination. Payments to the Executive upon termination of employment (“Termination Payments”) shall be as follows:

a. Upon Resignation by the Executive. In the event of a resignation by the Executive, the Executive shall be entitled to his earned, but unpaid, base salary through his last date of employment and to exercise vested stock options in accordance with the terms of the Executive’s stock option grant agreements. Executive will also be entitled to any unpaid expense reimbursements for expenses incurred prior to his resignation. Executive will also be entitled to compensation for any accrued, but unused vacation as of the date of his resignation. Executive’s election not to renew this Agreement as described in Section 10(a) shall be deemed for purposes of this Section 11 to be a “resignation” by Executive.

11

b. Upon Non-Renewal of Executive’s Employment Agreement by the Corporation or Termination Without Cause. In the event that the Corporation elects not to renew this Agreement, or terminates the Executive without cause then the Executive shall be entitled to the following severance plan (which severance plan shall be in lieu of any damages sustained by the Executive in the event of termination without cause and the Executive waives such damages):

     i) The Executive shall receive severance payments in the amount of three years’ base salary, payable in semi-monthly installments at the current effective base salary rate at the time of non-renewal of this agreement. Such severance payments will be reduced by any compensation (e.g., base salary, bonus, commission or similar payments) that the Executive receives from other employment (including, but not limited to, self employment by the Executive) during the three (3) year severance pay period. The Executive agrees to keep the Corporation fully informed of such compensation received from other employment;

     ii) Executive will also be entitled to any unpaid expense reimbursements for expenses incurred prior to his resignation.

     iii) Executive will also be entitled to compensation for any accrued, but unused vacation as of the date of termination (or non-renewal).

     iv) The exercise period of the Executive’s Nonqualified Stock Options (as defined herein) that are vested on the date this Agreement expires

12

will be extended for three years, beginning on the date this Agreement expires; and

     v) If any of the Executive’s Incentive Stock Options (as defined herein), which are vested on the date this Agreement expires are not exercised prior to their termination, then the Corporation shall grant a fully-vested nonqualified stock option to the Executive for the same number of vested shares not exercised and at the same exercise price, with a three-year exercise period beginning on the date this Agreement expires.

c. Upon Disability of the Executive. In the event of termination of the Executive’s employment by reason of Disability, the Executive shall be entitled:

     i) To his earned, but unpaid, base salary through his last date of employment;

     ii) To severance payments in the amount of two year’s base salary, payable in semi-monthly installments at the current base salary rate as of the Executive’s disability;

     iii) To payment of two years of the Executive’s annual bonus under the Corporation’ Executive Bonus Plan. For this purpose, the annual bonus amount will be the greater of the prior fiscal year’s Executive Bonus payment or 100% of the Executive’s Bonus Plan target for the year in which his employment terminates;

     iv) To payment of any unpaid expense reimbursements for expenses incurred prior to his termination for disability.

13

     v) To payment for any accrued, but unused vacation as of the date of termination for disability.

     vi) To exercise vested stock options in accordance with the terms of the Executive’s stock option grant agreements, except as provided in the next two sentences. Upon termination of employment by reason of the Executive’s Disability, the exercise period of all nonqualified stock options (the “Executive’s Nonqualified Stock Options”) which have been or may be granted to the Executive pursuant to the Corporation’s Incentive Stock Option Plan, as amended from time to time (the “Plan”), or otherwise, but specifically excluding the Executive’s Incentive Stock Options and stock options which have been or may be granted to the Executive pursuant to the Corporation’s Directors Stock Option Plan, and which are vested on the date of the Executive’s Disability, will be extended three (3) years, beginning on the date of the Executive’s Disability. After the Executive’s Disability, and termination of employment by reason thereof, if any of the incentive stock options (the “Executive’s Incentive Stock Options”) which have been or may be granted to the Executive pursuant to the Plan, or otherwise (but specifically excluding the Executive’s Nonqualified Stock Options and stock options which have been or may be granted to the Executive pursuant to the Corporation’s Directors Stock Option Plan), which are vested are not exercised prior to their termination, then the Corporation shall grant a fully-vested nonqualified stock option to the Executive for the same number of

14

vested shares not exercised and at the same exercise price, with a three-year exercise period beginning on the date of the Executive’s Disability.

d. Upon Death. In the event the Executive’s employment is terminated by reason of his death, the Executive’s estate shall be entitled:

     i) To the Executive’s earned, but unpaid base salary through his last date of employment;

     ii) To payments in the amount of two year’s base salary of the Executive, payable in semi-monthly installments at the base salary rate at the time of his termination by reason of death;

     iii) To a payment equal to two years of the Executive’s annual bonus under the Corporation’s Executive Bonus Plan. For this purpose, the annual bonus amount will be the greater of the prior fiscal year’s Executive Bonus payment or 100% of the Executive’s Bonus Plan target for the year in which his employment terminates due to death.

     iv) To payment of any unpaid expense reimbursements for expenses incurred prior to his termination for death.

     v) To payment for any accrued, but unused vacation as of the date of termination for death.

     vi) The exercise period of the Executive’s Nonqualified Stock Options that are vested on the date of the Executive’s death will be extended for three years, beginning on the date of the Executive’s death. If any of the Executive’s Incentive Stock Options which are vested on the date of the Executive’s death are not exercised prior to their termination, then the

15

Corporation shall grant a fully-vested nonqualified stock option to the Executive for the same number of vested shares not exercised and at the same exercise price, with a three-year exercise period beginning on the date of the Executive’s death.

e. Upon Termination for Overt Misconduct. The Executive shall be entitled to his earned, but unpaid, base salary through his last date of employment, to any unpaid expense reimbursements incurred while performing his executive duties and to any earned by unused vacation as of the date of termination and to exercise vested stock options in accordance with the terms of the Executive’s stock option grant agreements.

     12. Acquisition of Shares by One Investor. Notwithstanding any provision herein to the contrary, if at any time during the term of this Agreement one investor (including all affiliates, as defined in Rule 405 promulgated pursuant to the Securities Act of 1933, as amended, of such investor) accumulates 20% or more of the outstanding common stock of the Corporation (such event being hereinafter referred to as the “Acquisition”), then in lieu of any other severance program provided for in this Agreement (e.g., the provisions of Section 1l(a)-(d) of this Agreement shall thereafter be inapplicable in the event of termination of the Executive’s employment for whatever reason), (i) the Executive shall, immediately following the Acquisition, receive a payment in the amount of two (2) years’ base salary at the current base salary amount, (ii) the Executive shall also receive an immediate payment equal to two years of the Executive’s annual bonus (determined as provided below) under the Corporation’s Executive Bonus Plan, and (iii) all of the stock options (the “Executive Stock Options”) which have been granted pursuant to the Plan, or otherwise, shall be accelerated on the date of the Acquisition. The annual bonus amount will be the greater of the prior

16

fiscal year’s Executive Bonus payment or 100% of the Executive’s Bonus Plan target for the fiscal year in which the Acquisition occurs. The Executive Stock Options as so accelerated are hereinafter referred to as the “Advanced Options.” Further, upon the date of the Acquisition, the exercise period of the Executive’s Nonqualified Stock Options that are vested on such date, including the Advanced Options that fall within the definition of the Executive’s Nonqualified Stock Options, will be extended for three (3) years, beginning on the date of the Executive’s termination. If any of the Executive’s Incentive Stock Options, including the Advanced Options that fall within the definition of the Executive’s Incentive Stock Options, which are vested are not exercised prior to their termination, then the Corporation shall grant a fully-vested nonqualified stock option to the Executive for the same number of vested shares not exercised and at the same exercise price, with a three-year exercise period beginning on the date of the Acquisition.

     13. Tender or Exchange Offer. In the event any person or entity makes a tender offer or exchange offer for the common stock of the Corporation whereby such person or entity would own more than 20% of the outstanding common stock of the Corporation (the “Tender Offer”), then immediately upon the making of the Tender Offer, all of the Executive’s Stock Options that are not yet exercisable shall be accelerated and the Executive shall have the right, in accordance with the terms of this Section 13, to immediately exercise any then unexercised portion of all of the Executive’s Stock Options. The unexercisable portion of the Executive’s Stock Options that are accelerated in accordance with this Section 13, other than the Executive’s Stock Options that are scheduled to vest on or after the date the Tender Offer is made and on or before the date the Tender Offer is completed or the date it is determined the Tender Offer will not be completed, shall be referred to herein as the “Accelerated Options.” For the purpose of participating in the Tender Offer, the Executive hereby agrees not to exercise those Accelerated Options for which the exercise price

17

per share of such options is greater than the fair market value per share of the Tender Offer. Any common stock of the Corporation issued to the Executive in connection with his exercise of the Accelerated Options (the “Accelerated Common Stock”) and the Accelerated Options shall be subject to the following restrictions (the “Restrictions”): (i) the Accelerated Common Stock shall be tendered to the tender offeror pursuant to the Tender Offer; (ii) if the Tender Offer is not completed, then the Executive will transfer the Accelerated Common Stock back to the Corporation, the Corporation will return to the Executive the exercise price for the Accelerated Common Stock, the acceleration of the Accelerated Options will be rescinded, and the Executive will be placed in the same position with respect to the Accelerated Options as he would have been had the Tender Offer never been made and the acceleration had never occurred; and (iii) any assignee or transferee of the Accelerated Common Stock by will or by the laws of descent and distribution or otherwise shall be subject to the restrictions described in clauses (i) and (ii) of this Section 13. The purpose of rescinding the acceleration of the Accelerated Options if the Tender Offer is not completed is to continue to promote and encourage the Executive’s loyalty to the Corporation. Notification of the Restrictions shall be given to the Corporation’s stock transfer agent upon issuance of any Accelerated Common Stock and shall be placed upon the certificate or certificates, if any, representing any Accelerated Common Stock.

     14. Gross Up Payment.

a. Excess Parachute Payment. If Executive incurs the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”) on “excess parachute payments” within the meaning of Section 28OG(b)(1) of the Code as the result of the receipt of any payments under this Agreement, the Corporation shall pay to Executive a gross up payment (the “Gross Up

18

Payment”) such that the net amount retained by Executive, after deduction of (1) any such excise tax upon any payments under this Agreement (other than payments provided by Section 11 and this Section 14) and (2) any federal, state and local income and employment taxes (together with penalties and interest) and excise tax upon the payments provided by this Section 14 shall be equal to the amount of the payments that Executive is entitled to receive under this Agreement (other than payments provided by this Section 14).

b.

Applicable Rates. For purposes of determining the Gross Up Payment amount, Executive shall be deemed:

     i) to pay federal income taxes at the highest marginal rate of federal income taxation applicable to individual taxpayers in the calendar year in which the Gross Up Payment is made (which rate shall be adjusted as necessary to take into account the effect of any reduction in deductions, exemptions or credits otherwise available to Executive had the Gross Up Payment not been received);

     ii) to pay additional employment taxes as a result of the receipt of the Gross Up Payment in an amount equal to the highest marginal rate of employment taxes applicable to wages; provided that if any employment tax is applied only up to a specified maximum amount of wages, such limit shall be taken into account for purposes of such calculation; and

     iii) to pay state and local income taxes at the highest marginal rates of taxation in the state and locality of Executive’s residence on the date

19

of the termination, net of the maximum reduction in federal income taxes that could be obtained from deduction of such state and local taxes.

c. Determination of Gross Up Payment Amount. The determination of the Gross Up Payment amount shall be made by Arthur Andersen or another nationally recognized public accounting firm selected by Executive and reasonably acceptable to the Corporation. If the Excise Tax amount payable by Executive, is different from the Excise Tax amount computed by the Accountants for purposes of determining the Gross Up Payment amount, then appropriate adjustments to the Gross Up Payment amount shall be made. For purposes of determining the Gross Up Payment amount prior to such determination of the Excise Tax amount, the following assumptions shall be utilized:

     i) that portion of the Termination Payment that is attributable to the items described in Section 12, and the Gross Up Payment, shall be treated as “parachute payments” pursuant to Code Section 280G without regard to whether a change in control satisfies the requirements of Section 28OG(b)(2)(A)(i) of the Code;

     ii) no portion of any payment made pursuant to Section 11, shall be treated as a parachute payment;

     iii) the amount payable to Executive pursuant to Section 12 shall be:

20

A)	deemed to be equal to 150% of the highest annual base compensation at any time during the Executive’s employment with the Corporation;
B)	deemed to have been paid immediately following the change in control;
C)	deemed to include the additional amount payable under Section 14, if any, for additional taxes payable by Executive as a result of the receipt of the payment described in Section 12; and
D)	treated 100% as a parachute payment;

     iv) the “ascertainable fair market value” (as set forth in Prop. Treas. Reg. §1.28OG-1, Q&A 13) of the Options, the vesting of which was accelerated by the change in control as provided in the Plan, shall be equal to the product of A) and B) as set forth below:

A)	the number of shares covered by such Options; and
B)	the difference between:

(a)	the fair market value per share as of the date of the change in control; and
(b)	the exercise price per share of stock subject to such Options; and

     v) for purposes of applying the rules set forth in Prop. Treas. Reg. §1.28OG-1, Q&A 24(c) to a payment described in Prop. Treas. Reg. §1.28OG-1, Q&A 24(b), the amount reflecting the lapse of the obligation to

21

continue performing services shall be equal to the minimum amount allowed for such payment as set forth in Prop. Treas. Reg. §1.28OG-1, Q&A 24(c)(2) (or if Prop. Treas. Reg. § 1.28OG-1 has been superseded by temporary or final regulations, the minimum amount provided for in any temporary or final regulations that supersede Prop. Treas. Reg. §1.28OG-1 and that are applicable to the Termination Payment, Gross Up Payment, or both).

d. Time For Payment. The Corporation shall pay the estimated Gross Up Payment amount in cash to Executive concurrent with or as soon as reasonably practicable after the payment by the Corporation of the amounts to which the excise tax relates. The Corporation and Executive agree to reasonably cooperate in the determination of the actual Gross Up Payment amount. Further, the Corporation and Executive agree to make such adjustments to the estimated Gross Up Payment amount as may be necessary to equal the actual Gross Up Payment amount, which in the case of Executive shall refer to refunds of prior overpayments and in the case of Corporation shall refer to makeup of prior underpayments.

     15. Outplacement Services. If Executive is terminated by the Corporation for any reason other than Overt Misconduct, the Corporation agrees to reimburse Executive for any outplacement consulting fees and expenses incurred by Executive during the two year period following such termination; provided that the aggregate amount reimbursed by the Corporation shall not exceed 15% of Executive’s Base Salary in effect immediately prior such termination. In addition and as to each reimbursement payment, to the extent that any reimbursement under this Section 15 is not deductible by Executive for federal, state and local income tax purposes, Corporation shall pay

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Executive an additional amount such that the net amount retained by Executive, after deduction of any federal, state and local income tax on the reimbursement and such additional amount, shall be equal to the reimbursement payment. All amounts under this Section 15 shall be paid by Corporation within 15 days after Executive’s presentation to Corporation of any statements of such amounts and thereafter shall bear interest at the lesser of eighteen percent (18.0%) per annum or the maximum rate allowed by law until paid by Corporation.

     16. Withholding. All payments required to be made to Executive by Corporation shall be subject to the withholding of such amounts, if any, relating to Federal, state and local taxes as may be required by law.

     17. Arbitration. Any dispute, controversy or claim arising out of or relating to this Agreement, or breach thereof, except for requests for injunctive relief, specific performance and declaratory relief shall be settled by the following arbitration procedure: The parties hereto shall expeditiously seek to resolve between themselves such dispute, controversy or claim. If they shall fail to reach such a resolution, within 20 days of such failure, each party shall appoint one arbitrator. Within 20 days after both arbitrators have been appointed, the arbitrators shall jointly appoint a third arbitrator. Within 30 days after the appointment of the third arbitrator, the three-person arbitration panel shall consider all relevant evidence concerning such dispute, controversy or claim and reach its award or decision concerning such dispute, controversy or claim. Any arbitration must take place in Dallas, Texas. In reaching their award or decision, the arbitrators shall have no authority to change or modify any provision of this Agreement. The prevailing party shall be entitled to reimbursement for all legal fees and expenses incurred in conjunction with the arbitration, and the non-prevailing party will be responsible to pay the fees and costs of the arbitrators. Judgment upon any award rendered by the arbitrators may be entered in any United States District Court.

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     18. Resignation Upon Termination. In the event of termination of the Executive’s employment with the Corporation, for whatever reason, the Executive hereby agrees to resign from all positions held in the Corporation, and in any member of the Interphase Group, including, without limitations, any position as a director, officer, agent, trustee or consultant of the Corporation.

     19. Right to Obtain Insurance. The Corporation may, at its option, fund all or any portion of its severance obligations through life, disability or other appropriate insurance on the Executive. In regard to the foregoing, the Executive agrees to fully cooperate with the Corporation in connection with the Corporation’s efforts to obtain any such insurance. Such cooperation shall include, but shall not be limited to, submission to any medical or other examination and execution of applications or other instruments reasonably necessary to effectuate such insurance. The Executive acknowledges the Corporation is not obligated to acquire insurance pursuant to this Section 19, such decision being solely at the Corporation’s discretion.

     20. Waiver. A party’s failure to insist on compliance or enforcement of any provision of this Agreement shall not affect the validity or enforceability or constitute a waiver of future enforcement of that provision or of any other provision of this Agreement by that party or any other party.

     21. Governing Law. This Agreement shall in all respects be subject to, and governed by, the laws of the State of Texas.

     22. Severability. The invalidity or unenforceability of any provision in the Agreement shall not in any way affect the validity or enforceability of any other provision and this Agreement shall be construed in all respects as if such invalid or unenforceable provision had never been in this Agreement.

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     23. Notice. Any and all notices required or permitted herein shall be deemed delivered if delivered personally or if mailed by registered or certified mail to the Corporation at its principal place of business and to the Executive at the address hereinafter set forth following the Executive’s signature, or at such other address or addresses as either party may hereafter designate in writing to the other.

     24. Assignment. This Agreement, together with any amendments hereto, shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors, assigns, heirs and personal representatives, except that the rights and benefits of either of the parties under this Agreement may not be assigned without he prior written consent of the other party.

     25. Amendments. This Agreement may be amended at any time by mutual consent of the parties hereto. Any such amendment to be valid must be in writing and signed by the Corporation and the Executive.

     26. Survival. The provisions of Sections 8, 9, 17 and any other provisions of this Agreement which by its terms is intended to so survive, will survive termination or expiration of this Agreement.

     27. Entire Agreement. This Agreement contains the entire agreement and under standing by and between the Executive and the Corporation with respect to the employment of the Executive, and no representations, promises, agreements, or understandings, written or oral, relating to the employment of the Executive by the Corporation not contained herein shall be of any force or effect. This Agreement supersedes and replaces, in all respects, the 1999 Agreement. Notwithstanding the above, any stock option agreements existing between the Corporation and the Executive as of the date of this Agreement shall not be superseded by this Agreement.

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     28. Burden and Benefit. This Agreement shall be binding upon, and shall inure to the benefit of, the Corporation and the Executive, and their respective heirs, personal and legal representatives, successors, and assigns.

     29. References to Gender and Number Terms. In construing this Agreement, feminine or neuter pronouns shall be substituted for those masculine in form and vice versa, and plural terms shall be substituted for singular and singular for plural in any place which the context so requires.

     30. Headings. The various headings in this Agreement are inserted for convenience only and are not part of this Agreement.

     IN WITNESS WHEREOF, the Corporation and the Executive have duly executed this Agreement effective as of the Effective Date.

INTERPHASE CORPORATION:
By:	/s/ James F. Halpin		/s/ Gregory B. Kalush
	James F. Halpin		GREGORY B. KALUSH
	Chairman, Compensation Committee		CEO, President and
			Chairman of the Board
Address for Notice Purposes:		Address for Notice Purposes:
Board of Directors
Interphase Corporation
13800 Senlac
Dallas, Texas 75234

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EX-10.(J)

EXHIBIT 10(j)

[THIS AGREEMENT IS SUBJECT TO ARBITRATION]

EMPLOYMENT AGREEMENT FOR CHIEF TECHNOLOGY OFFICER

     THIS AGREEMENT is made and entered into as of the 22 day of May, 1996, by and between Interphase Corporation (the “Corporation”), and Felix Diaz (“Executive”).

     WHEREAS, the Corporation desires to enter into an employment relationship with Executive on certain terms and conditions as set forth herein; and

     WHEREAS, Executive is willing to accept such employment;

     NOW, THEREFORE, the parties hereto, in consideration of the mutual covenants and promises hereinafter contained, do hereby agree as follows:

     1. Employment. The Corporation hereby employs Executive and Executive hereby accepts the employment, on the terms and conditions hereinafter set forth. Executive’s general duties and responsibilities as chief Technology Officer. Executive agrees to review and comply with all policies and procedures in the Corporation’s Employee Handbook.

     2. Term. Executive’s employment with the Corporation will be at-will, and thus, either party may terminate the relationship at any time for any reason, subject to the termination provisions in paragraphs 6 and 7. Executive understands and agrees that no employee or agent of the Corporation, other than the Corporation’s Chief Executive Officer, has any authority to enter into any agreement for employment for any specified period of time or to make any agreement contrary to the at-will

EMPLOYMENT AGREEMENT FOR CHIEF TECHNOLOGY OFFICER— Page 1

relationship and that any such modifications or agreements must be in writing and signed by the Chief Executive Officer of the Corporation.

     3. Salary and Other Compensation. As compensation for the services to be rendered by Executive to the Corporation pursuant to this Agreement, Executive shall be paid the following compensation and other benefits:

     a. Salary: $10,000.00 per month, less deductions as may be required by law, payable in semi-monthly installments. The Corporation reserves the right to: (i) make periodic increases or decreases in Executive’s salary, in the sole discretion of the Corporation; (ii) make deductions from Executive’s pay to satisfy any outstanding obligations; and/or (iii) make deductions from Executive’s pay to satisfy any losses resulting from unlawful activities.

     b. Signing Bonus: Executive shall be paid a ten thousand dollar ($10,000.00) signing bonus as consideration for his agreement to abide by the covenant not to compete provisions and nondisclosure requirements contained in paragraphs 4 and 5 of this Agreement.

     c. Stock Options: The Corporation shall, in accordance with the Corporation’s Amended and Restated Stock Option Plan, grant to Executive a qualified stock option to purchase 10,000 shares of common stock of the Corporation as consideration for his agreement to abide by the covenant not to compete provisions and nondisclosure requirements contained in paragraphs 4 and 5 of this Agreement.

EMPLOYMENT AGREEMENT FOR CHIEF TECHNOLOGY OFFICER—Page 2

     d. Bonus: Executive shall be eligible for an annual bonus of up to thirty thousand dollars ($30,000.00) based upon the guidelines contained in the Corporation’s Executive Bonus Plan; less deductions as may be required by law. The Corporation reserves the right to: (i) make periodic increases or decreases in Executive’s bonus, in the sole discretion of the Corporation; (ii) make deductions from Executive’s bonus to satisfy any outstanding obligations and/or (iii) make deductions from Executive’s bonus to satisfy any losses resulting from unlawful activities.

     e. Office Furnishings: The Corporation agrees to provide office space and furnishings to Executive commensurate with the Corporation’s decor and culture.

     f. Executive Benefit Plans: Executive shall be allowed to participate, to the extent he may be eligible, in any profit sharing, stock options, retirement, insurance or other Executive benefit plan maintained by the Corporation. Executive must comply with all requirements regarding purchasing the Corporation’s Common Stock and exercising stock options, including, without limitation, requirements promulgated by the Corporation and the Security and Exchange Commission. In this regard, Executive must report to the Corporation any activity such as selling, purchasing or exercising the Corporation’s Common Stock and/or stock options. Any questions regarding reporting requirements should be directed to the Corporation’s Chief Financial Officer.

     EMPLOYMENT AGREEMENT FOR CHIEF TECHNOLOGY OFFICER — Page 3

     g. Vacations and Leave: Executive shall be entitled to three (3) weeks of vacation per year and six (6) sick days per year, and any other paid leave benefits provided for in the Corporation’s Employee Handbook.

     4. Non-Disclosure of Confidential Information. Executive acknowledges that in and as a result of his employment by the Corporation, he will be making use of, acquiring, and/or adding to confidential information of a special and unique nature and value relating to such matters as the Corporation’s patents, copyrights, proprietary information, trade secrets, systems, product developments, procedures, manuals, confidential reports, lists of customers (which are deemed for all purposes confidential and proprietary), as well as the nature and type of services rendered by the Corporation, the equipment and methods used and preferred by the Corporation’s customers, and the fees paid by them. Executive further agrees that if a third party (e.g., vendors, customers and manufacturers) contracts with the Corporation the information obtained or received from a third party including, but not limited to its patents, copyrights, proprietary information, trade secrets, systems, product development, procedures, manuals, and confidential reports will be treated in the same manner and subject to the same protection as other Confidential Trade Secret Information (as hereinafter defined) of the Corporation.

As a material inducement to the Corporation to enter into this Agreement and to pay Executive the compensation and benefits stated herein and as a condition of employment and continued employment, Executive shall keep confidential all such

EMPLOYMENT AGREEMENT FOR CHIEF TECHNOLOGY OFFICER— Page 4

confidential and proprietary information which Executive learns or acquires as a result of his employment with the Corporation. By way of example, “Confidential Trade Secret Information” may consist of any idea, process, design, concept, formula, pattern, device, development, customer information or compilation of information which is used in the Corporation’s business, which gives the Corporation an advantage over a competitor who does not know or use it.

     Executive agrees that the appropriate remedy for any breach of this paragraph 4 is a suit for injunctive relief and specific performance in any court of competent jurisdiction. Executive agrees that damages for use of any identified Confidential Trade Secret Information in violation of this paragraph 4 shall be 100% of the gross amount of revenue derived from unauthorized use of such information.

     5. Covenants Not to Compete. Executive acknowledges that the service he/she is to render to the Corporation are of a special and unusual character with a unique value to the Corporation, the loss of which cannot adequately be compensated by damages in action at law. Accordingly, Executive agrees that during the term of his/her employment and for a period of one (1) year from the date this Agreement is terminated, for whatever reason:

     a. Executive shall not, directly or indirectly, without the express written consent of the Corporation, solicit or induce, or attempt to solicit or induce, any employee of the Corporation, current or future, to leave or cease their relationship with the Corporation, for any reason whatsoever, or hire any current or future employee of the Corporation.

EMPLOYMENT AGREEMENT FOR CHIEF TECHNOLOGY OFFICER — Page 5

     b. Executive shall not, directly or indirectly, without the express written content of the Corporation: (i) engage in any business or activity that is competitive with the business of the Corporation; and/or (ii) be employed by, or provide competitive services or assistance to, a “Competing Business” (hereinafter defined) which would potentially involve, directly or indirectly, the use and/or disclosure of the Corporation’s Confidential Trade Secret Information, as defined in paragraph 4. For purposes of this Agreement, a Competing Business means any person or firm that offers services or products that are directly competitive with those marketed, offered for sale and/or under any stage of development by the Corporation as of the date of Executive’s separation from employment. If Executive desires to work for a Competing Business in an area that is not competitive with the business of the Corporation, Executive must give written notice to the Chief Executive Officer and obtain his approval that the employment will not violate the terms and conditions of this paragraph 5 before beginning employment with the Competing Business.

     c. Executive will not solicit or attempt to solicit the Corporation’s existing or prospective customers to purchase services or products that are competitive with those marketed, offered for sale and/or under any stage of development by the Corporation as of the date of Executive’s separation from the Corporation. For purposes of the

EMPLOYMENT AGREEMENT FOR CHIEF TECHNOLOGY OFFICER — Page 6

Agreement, existing customers shall mean those persons or firms that the Corporation has made a sale to in the twelve (12) months preceding Executive’s separation from employment; prospective customers shall mean those persons or firms that the Corporation has solicited and/or negotiated to sell the Corporation’s products or services to within the twelve (12) months preceding Executive’s separation from the Corporation.

     d. In the event that, notwithstanding the foregoing, any of the provisions of this paragraph 5 shall be held to be invalid or unenforceable, the remaining provisions thereof shall nevertheless continue to be valid and enforceable as though the invalid or unenforceable parts had not been included therein. In the event that any provision of this paragraph 5 relating to the time period and/or the areas of restriction and/or related aspects shall be declared by a court of competent jurisdiction to exceed the maximum restrictiveness such court deems reasonable and enforceable, the time period and/or areas of restriction and/or related aspects deemed reasonable and enforceable by the court shall become and thereafter be the maximum restriction in such regard, and the restriction shall remain enforceable to the fullest extent deemed reasonable by such court.

     e. Executive agrees that the appropriate remedy for any breach of this paragraph 5 is a suit for injunctive relief and specific performance

EMPLOYMENT AGREEMENT FOR CHIEF TECHNOLOGY OFFICER — Page 7

in any court of competent jurisdiction. Executive agrees that the Corporation also has the right to seek damages for any breach of this paragraph 5, and that the damages for breach of this paragraph shall be 100% of the gross amount of revenue derived from the breach of the covenant in this paragraph 5. The Corporation has sole discretion regarding whether to seek a remedy for breach of this paragraph in a Court of competent jurisdiction and/or through arbitration procedures outlined in paragraph 8.

1. Termination. This Agreement will terminate as follows:

     a. Death. Executive’s employment hereunder shall automatically terminate upon his death.

     b. Disability. The Corporation may terminate the Executive’s employment hereunder in the event of the Executive’s Disability (as hereinafter defined). For purposes of this Agreement, “Disability” shall mean that, as a result of the Executive’s incapacity due to illness or injury, Executive shall have been absent from his duties under this Agreement on a substantially full-time basis for a period of three (3) or more consecutive months, and thereafter, within thirty (30) days after the Corporation notifies Executive in writing that it intends to replace him, Executive shall not have returned to the performance of such duties on a full-time basis. Should Executive be diagnosed as permanently disabled by his treating physician, the Corporation can terminate his employment without waiting for the expiration of the three-month period.

EMPLOYMENT AGREEMENT FOR CHIEF TECHNOLOGY OFFICER — Page 8

Without limiting the foregoing, until the Corporation terminates Executive’s employment hereunder on account of Disability, the Executive shall receive his full compensation as provided in Paragraph 3 of this Agreement.

     c. By Executive. Executive may resign at any time upon thirty (30) days notice to the Chief Executive Officer of the Corporation.

     d. By the Corporation.

     (1) The Corporation may terminate Executive for any reason or no reason upon thirty (30) days written notice to Executive.

     (2) The Corporation may terminate Executive immediately for overt misconduct. For purposes of this Agreement, “Overt Misconduct” means willful violation of any rule or regulation that may be established from time to time for the conduct of the Corporation’s business, for neglect of the interests of the Corporation, breach of fiduciary duty involving personal profit, willful violation of any law, rule, regulation (other than traffic violations or similar minor offenses), or material breach of any provision of this Agreement.

2. Payments Upon Termination. Payments to Executive upon termination shall be as follows:

EMPLOYMENT AGREEMENT FOR CHIEF TECHNOLOGY OFFICER — Page 9

     a. Upon Death. Executive’s estate shall be entitled to his earned, but unpaid base salary, pro rata bonus, and to exercise vested stock options as of the date of death.

     b. Upon Disability. Executive shall be entitled to his earned, but unpaid base salary, pro rata bonus, and to exercise vested stock options through the effective date of termination.

     c. Upon Resignation by Executive. In the event of any resignation by Executive, Executive shall be entitled to his earned, but unpaid salary and to exercise vested stock options through the effective date of the resignation.

     d. Upon Termination for Overt Misconduct. Executive shall be entitled to his earned but unpaid base salary and to exercise vested stock options through the effective date of termination for Overt Misconduct.

     e. Upon Termination by the Corporation for Other than Overt Misconduct. If the Corporation terminates Executive’s employment for any reason other than Overt Misconduct, Executive will be eligible for three (3) months’ severance pay at his base annual rate. Eighty percent of this severance payment will be allocated to Executive’s agreement to abide by the convenant not to compete provisions and nondisclosure requirements contained in paragraphs 4 and 5 of this Agreement. Executive will be entitled to the severance payment only if he executes a general release of all claims against the Corporation.

EMPLOYMENT AGREEMENT FOR CHIEF TECHNOLOGY OFFICER — Page 10

     3. Arbitration. Subject to the provisions of paragraphs 4 and 5, Executive and Corporation agree that all Disputes, as defined in Article I of the Alternative Dispute Resolution Procedure (the “ADR Procedure”), regarding the termination of employment or other covered Dispute shall be resolved exclusively in accordance with the Corporation’s ADR Procedure. The parties, however, agree that the ADR Procedure does not apply to claims for unemployment compensation benefits or claims by the Corporation for injunctive relief, specific performance, and/or damages as provided for in paragraphs 4 and 5 of this Agreement. Executive represents, warrants and agrees that (a) Executive has received, read and understands the Corporations ADR Procedure; (b) Executive must file a claim, if any, under the ADR Procedure within one-hundred and eighty(180) days of being notified of the termination or other adverse employment decision; (c) arbitration may be compelled and enforced under the Federal Arbitration Act; (d) any arbitration award is final and binding upon both Executive and the Corporation; (e) the ADR Procedure shall survive the employer-employee relationship and applies to any Dispute whether it is asserted during or after Executive’s separation of employment; and (f) the ADR Procedure does not alter the parties’ “at-will” employment relationship.

     4. Resignation Upon Termination. In the event of separation of Executive’s employment with the Corporation, Executive hereby agrees to resign from all positions held in the Corporation, including, without limitation, any position of director, officer, agent, trustee, or consultant of the Corporation.

EMPLOYMENT AGREEMENT FOR CHIEF TECHNOLOGY OFFICER — Page 11

     5. Waiver. A party’s failure to insist on compliance or enforcement of any provision of this Agreement, shall not affect the validity or enforceability or constitute a waiver of future enforcement of that provision or of any other provision of this Agreement by that party or any other party.

     6. Governing Law. This Agreement shall in all respects be subject to, and governed by, the laws of the State of Texas.

     7. Sererability. The invalidity or unenforceability of any provision in the Agreement shall not in any way affect the validity or enforceability of any other provision and this Agreement shall be construed in all respects as if such invalid or unenforceable provision had never been in the Agreement.

     8. Notice. Any and all notices required or permitted herein shall be deemed delivered if delivered personally or if mailed by registered or certified mail to the Corporation at its principal place of business and to Executive at the address hereinafter set forth following Executive’s signature, or at such other address or addresses as either party may hereafter designate in writing to the other.

     9. Assignment. This Agreement, together with any amendments hereto, shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors, assigns, heirs and personal representatives, except that the rights and benefits of either of the parties under this Agreement may not be assigned without the prior written consent of the other party.

EMPLOYMENT AGREEMENT FOR CHIEF TECHNOLOGY OFFICER — Page 12

     10. Amendments. This Agreement may be amended at any time by mutual consent of the parties hereto, with any such amendment to be invalid unless in writing, signed by the Corporation and Executive.

     11. Entire Agreement. This Agreement contains the entire agreement and understanding by and between Executive and the Corporation with respect to the employment of Executive, and no representations, promises, agreements, or understandings, written or oral, relating to the employment of Executive by the Corporation not contained herein shall be of any force or effect.

     12. Burden and Benefit. This Agreement shall be binding upon, and shall inure to the benefit of, the Corporation and Executive, and their respective heirs, personal and legal representatives, successors, and assigns.

     13. References to Gender and Number Terms. In construing this Agreement, feminine or number pronouns shall be substituted for those masculine in form and vice versa, and plural terms shall be substituted for singular and singular for plural in any place which the context so requires.

     14. Headings. The various headings in this Agreement are inserted for convenience only and are not part of the Agreement.

EMPLOYMENT AGREEMENT FOR CHIEF TECHNOLOGY OFFICER — Page 13

     IN WITNESS WHEREOF, the Corporation and Executive have duly executed this Agreement as of the day and year first above written.

INTERPHASE CORPORATION:		EXECUTIVE’S NAME
By:	/s/ R. Stephen Polley	/s/ Felix V. Diaz
	R. Stephen Polley	Felix Diaz
Its:	Chairman, C.E.O. & President
Address for Notice Purposes:		Address for Notice Purposes:
Interphase Corporation
13800 Senlac Road
Dallas, Texas 75234

EMPLOYMENT AGREEMENT FOR CHIEF TECHNOLOGY OFFICER — Page 14

EX-10.(K)

Exhibit 10(k)

[THIS AGREEMENT IS SUBJECT TO ARBITRATION]

EMPLOYMENT, CONFIDENTIALITY, AND NON-COMPETITION AGREEMENT

     This “Agreement” is between the “Company,” Interphase Corporation, and Thomas N. Tipton, Jr., “Executive.” The Company is organized under the laws of the State of Texas. Its principal place of business is located at 2901 North Dallas Parkway, Suite 200, Plano, TX 75093.

Background Statement

     The Company enables rapid platform design and integration for the global voice and data communications markets through custom and off-the-shelf communications equipment, embedded software development suites, and systems integration and consulting services for telecom and enterprise networks. Executive desires to be employed or continue to be employed by the Company. The Company desires to employ Executive, provided that as an express, prior condition of such employment, Executive enters into this Agreement with the Company.

     This Agreement sets forth the terms of Executive’s employment. The parties agree that this Agreement is supported by valuable consideration, that mutual promises and obligations have been undertaken by the parties to it, and that the agreement is entered into voluntarily by the parties.

Statement of Agreement

1.

Duties. Executive shall devote Executive’s best efforts to the business of the Company. Executive shall perform such duties and responsibilities customary to the position of Chief Financial Officer and Vice President of Finance, including those described on Exhibit A to this Agreement. Executive shall also perform those duties assigned by the Company from time to time.

2.

Terms. The “initial term” of employment under this Agreement shall terminate six (6) months after the date of this Agreement. The initial term of this Agreement shall automatically renew for successive six (6) month periods, referred to as “successor terms,” unless either party gives thirty (30) days written notice of its intention not to renew prior to the expiration of the initial or any successor term or Executive is terminated for cause.

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3. Terminable Only For Cause. This Agreement may be terminated by the Company prior to the expiration of the initial term or any successor term as follows:

(a)	Due to the death of Executive;
(b)	Due to a physical or mental disability which prevents Executive from performing the essential functions of his full duties for a period of ninety (90) consecutive days during the term of this Agreement, as determined in good faith by a physician reasonably acceptable to the Company; or,
(c)	For Cause, which is (i) fraud, misappropriation, embezzlement, dishonesty, or other act of material misconduct against the Company or any affiliate of the Company; (ii) failure to perform specific and lawful directives of Executive’s superiors; (iii) violation of any rules or regulations of any governmental or regulatory body, which is materially injurious to the financial condition of the Company; (iv) conviction of or plea of guilty or nolo contendere to a felony; (v) violation of the provisions of 8, 9, 10, 11, 13, or 16; or, (vi) substantial failure to perform the duties and responsibilities of Executive under this Agreement.

In the event of termination under this paragraph, Executive shall be entitled only to Executive’s base salary earned through the date of termination. No accrued but unpaid bonuses or commissions shall be due to Executive.

4. Termination Without Cause or Nonrenewal. In the event the Company gives Executive thirty days written notice of its intention not renew a term of this Agreement, or if Executive is terminated without cause after the expiration of the initial term, the Executive shall receive an amount equal to six-months severance pay based on the Executive’s base salary at the time of termination, payable in bi-monthly or bi-weekly installments as dictated by the regular pay dates of the Company. No accrued but unpaid bonuses or commissions shall be due to Executive under this Paragraph. No other severance payment or benefits shall be due Executive other than those provided for under this Agreement. Notwithstanding anything stated herein to the contrary, in the event Executive becomes employed during the period in which the Executive is eligible to receive post-employment payments under this Paragraph, any amounts received by Executive in the form of compensation, salary, or other payments shall be offset or shall reduce any amounts or liability owed by the Company to the Executive under this Paragraph.

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5.	Compensation. Employer shall pay and provide benefits to Executive according to the provisions of Executive’s compensation plan described in the attached Exhibit B. Executive’s compensation plan shall be reviewed on a periodic basis. The Company reserves the right, and Executive hereby authorizes Company, to make deductions from Executive’s pay or bonuses to satisfy any outstanding obligations of Executive to the Company. The Company may offset against the final payment of wages or bonuses owed to Executive any amounts due the Company from Executive.
6.	Changes in Position, Location, or Compensation. If the Company transfers, promotes, or reassigns Executive to another position or geographic area, or both parties agree to a change in compensation or benefits during a term of this Agreement or upon the renewal of a term of this Agreement, an updated employment agreement may be substituted by agreement of the parties but is not required. Mutually-agreeable changes in compensation or benefits shall be effected by amendment to and incorporation of a modified Exhibit B, initialed by the parties or their authorized representative. All provisions, promises, terms or conditions not modified by an amendment of Exhibits A—C shall remain in effect and shall not be deemed revoked or modified beyond the changes set forth in one or more amended Exhibits.
7.	Executive Representation/Warranty. Executive represents that Executive is not a party to any agreement with a third party, or limited by a court order, containing a non-competition provision or other restriction which would preclude Executive’s employment with Company or any of the services which Executive will provide on the Company’s behalf.
8.	Duty of Loyalty. Executive acknowledges the common law duties of reasonable care, loyalty, and honesty which arise out of the principal/agent relationship of the parties. While employed and thereafter for whatever term the law may impose, Executive shall not engage in any activity to the detriment of the Company. By way of illustration and not as a limitation, Executive shall not discuss with any customer or potential customer of the Company any plans by Executive or any other Executives of the Company to leave the employment of the Company and compete with the Company.
9.	Company Documents. Executive agrees and acknowledges that Executive holds as the Company’s property all memoranda, books, papers, letters, and other data, including duplicates, relating to the Company’s business and affairs (“Company Documents”). This includes Company Documents created or used by Executive or otherwise coming into Executive’s possession in connection with the performance of Executive’s job duties. All Company Documents in the possession, custody, or control of Executive shall be returned to the Company at the time of termination of employment.

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Confidential Information and Non-Competition

10. In exchange for the mutual promises and obligations contained in this Agreement, and contemporaneous with its execution or soon thereafter, Employer promises to deliver to Executive or permit Executive to acquire, be exposed to, and/or have access to material, data, and information of the Company and/or its customers or clients that is confidential, proprietary and/or a trade secret (“Confidential Information”). At all times, both during and after the termination of employment, the Executive shall keep and retain in confidence and shall not disclose, except as required in the course of the Executive’s employment with the Company, to any person, firm or corporation, or use for the Executive’s own purposes, any Confidential Information. For the purposes of this paragraph, such information shall include, but is not limited to:

1.	The Company’s standard operating procedures, processes, formulae, know-how, scientific, technical, or product information, whether patentable or not, which is of value to the Company and not generally known by the Company’s competitors;
2.	All confidential information obtained from third parties and customers concerning their products, business, or equipment specifications;
3.	Confidential business information of the Company, including, but not limited to, marketing and business plans, strategies, projections, business opportunities, client identities or lists, sales and cost information, internal financial statements or reports, profit, loss, or margin information, customer price information; and,
4.	Other information designated by the Company or deemed by law to be confidential information.

11. Non-Competition. In consideration of the mutual promises contained in this Agreement, the sufficiency of which is acknowledged by the parties, Executive agrees that during the term of his employment and for a period of twelve (12) calendar months after termination of employment from the Company (whether voluntary or involuntary), Executive shall not, directly or indirectly, either as principal, agent, manager, employee, partner, shareholder, director, officer, consultant or otherwise:

1. Become associated or affiliated with, employed by, or financially interested in any business operation which competes in the business currently engaged in by Company. (The phrase “business currently engaged in by the Company” includes, but is not limited to, the type of activities in which the Company was engaged during Executive’s tenure, such as designs and delivers high performance connectivity adapters for computer and telecommunication networks.)

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2.	Solicit or attempt to solicit the business or patronage of any person, firm, corporation, partnership, association, department of government or other entity with whom the Company has had any contact during a period of twelve (12) calendar months preceding the date of this Agreement (“Customers”), or otherwise induce such Customers to reduce, terminate, restrict or otherwise alter business relationships with the Company in any fashion; or,
3.	In any way solicit or attempt to solicit the business or patronage of any Customers.
4.	The parties intend the above restrictions on competition to be completely severable and independent, and any invalidity or unenforceability of any one or more such restrictions shall not render invalid or unenforceable any one or more restrictions.

12. Limitations on Scope. In recognition of the broad geographic scope of the Company’s business and the ease of competing with the Company in any part of the United States, the restrictions on competition set forth herein are intended to cover the following geographic areas:

1.	The geographic territory identified on the attached Exhibit C;
2.	The cities containing a facility or operation owned or managed by the Company; and,
3.	A fifty (50) mile radius outside the boundary limits of each such city.

The parties intend the above geographical areas to be completely severable and independent, and any invalidity or unenforceability of this Agreement with respect to any one area shall not render this Agreement unenforceable as applied to any one or more of the other areas.

13. Non-Solicitation of Employees. During employment and for a period of twelve (12) months after termination, Executive agrees not to hire, employ, solicit, divert, recruit, or attempt to induce, directly or indirectly, any existing or future employee of the Company to leave their position with the Company or to become associated with a competing business.

Remedies for Breach

14. Company’s Right to Obtain an Injunction. Executive acknowledges that the Company will have no adequate means of protecting its rights under Paragraphs 10, 11, 12, or 13 of this Agreement other than be securing an injunction (a court order prohibiting the Executive from violating the Agreement). Accordingly, the Executive agrees that the Company is entitled to enforce this Agreement by obtaining a temporary, preliminary, and permanent injunction and any other appropriate equitable relief. Executive acknowledges that the Company’s recovery of damages will not be an adequate means to redress a breach of this Agreement. Nothing

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contained in this paragraph, however, shall prohibit the Company from pursuing any remedies in addition to injunctive relief, including recovery of damages. Executive expressly acknowledges that the Company has sole discretion regarding whether to seek a remedy for breaches of Paragraphs 10, 11, 12, or 13 in a court of competent jurisdiction or by arbitration procedures outlined in paragraph 15.

15.

Arbitration. Executive and the Company agree that any unresolved dispute or controversy involving a claim for monetary damages and/or declaratory or injunctive relief arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a single arbitrator in Dallas, Texas, according to the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator’s award in any court having jurisdiction. The direct expense of any arbitration proceeding shall be borne by the Company. Notwithstanding the foregoing, nothing in this Paragraph is intended to subject a claim by either party arising under Paragraphs 10, 11, 12, or 13 to mandatory arbitration. Any claim arising under Paragraphs 10, 11, 12, or 13 shall be litigated in the courts of the relevant jurisdiction and venue.

Inventions and Discoveries

16. Discoveries, Inventions, & Copyrights. Executive shall disclose promptly to the Company any and all conceptions and ideas for inventions, improvements, and valuable discoveries, whether patentable or not, which are conceived or made by the Executive, solely or jointly, during Executive’s term of employment and which pertain to the business activities of the Company. Executive hereby assigns and agrees to assign all his interest therein to the Company or to its nominee. Whenever requested to do so by the Company, Executive shall execute any and all applications, assignments, or other instruments which the Company shall deem necessary to apply for and obtain Letters of Patent of the United States or any foreign country or to otherwise protect the Company’s interest therein.

General Provisions

17.

Condition to Seeking Subsequent Employment. Executive agrees to show a copy of this Agreement to any Competitor with whom Executive interviews during the Executive’s employment with the Company or with whom the Executive interviews within twelve (12) months following the effective date of the termination of the Executive’s employment with the Company.

18.

Attorneys’ Fees. If any party shall obtain a final judgment of a court of competent jurisdiction, subject to no further appeal, pursuant to which any other party shall be determined to have breached its obligations hereunder or made any misrepresentations, such prevailing party shall be entitled to recover, in addition to any award of damages, reasonable attorneys’ fees, costs, and expenses incurred by such party in obtaining such judgment.

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19.	Non-Disparagement and Confidentiality. Except as may be required by law or as consented to in writing by an authorized officer or agent of the Company, Executive agrees not to make any statements whatsoever, directly or indirectly, written or oral, which could reasonably become public, which could be interpreted as embarrassing, disparaging, prejudicial, or in any way detrimental or inimical to the interests of the Company. Furthermore, Executive agrees to hold confidential and not to disclose, make public, or to communicate orally or in writing to any person or entity (other than Executive’s significant other and immediate family), directly or indirectly, the terms of this Agreement or any matters set forth herein, except only: (a) as may be compelled by court orders; (b) as may be necessary to enforce the terms of this Agreement; (c) to legal, accounting, and financial advisors; (d) as may be necessary in connection with the application for or obtaining loans or credit; (e) as may be necessary to comply with applicable laws and government regulations; or, (f) as may be necessary or desirable in obtaining future employment.
20.	Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the Company, its subsidiaries, affiliates, successors, and assigns.
21.	Nonwaiver. Any waiver by the Company of a breach of any provision of this Agreement must be in writing and signed by the Company to be effective. Any waiver by the Company of a breach of any provision of this Agreement shall not operate or be construed as a waiver by the Company of any different or subsequent breach of this Agreement by Executive.
22.	Applicable Law. This Agreement shall be construed in accordance with and governed by the laws of the State of Texas, without giving effect to the conflict of laws provisions thereof.
23.	Forum Selection Clause. Any and all causes of action for equitable relief relating to the enforcement of this Agreement and not otherwise subject to the mandatory arbitration provisions of Paragraph 15 may, in the Employer’s sole discretion, be brought in the United States District Court for the Northern District of Texas or the Dallas County District of the Texas State Courts. The parties agree that the provisions of this paragraph benefit both Employer and Executive. Any and all causes of action by and between Employer and Executive can be quickly and efficiently resolved in the agreed-upon forum, which will not unduly burden either Employer or Executive, and which will substantially aid Employer and Executive in providing the opportunity for uniform treatment with respect to any issues relating to the covenants contained in this Agreement.
24.	Entire Agreement. This Agreement represents the entire agreement between the Company and the Executive with respect to the subject matter hereof, supersedes all prior agreements dealing with the same subject matter, and may not be changed except in a writing signed by the party against whom enforcement of the Agreement, as so changed, is sought.
25.	Severability. The invalidity of any term or provision of this Agreement, including any term or provision of paragraphs 10, 11, 12, or 13 shall not invalidate or otherwise affect any other

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	term or provision of this Agreement.
26.	This agreement shall be effective December 19, 2005.

Interphase Corporation
By:	/s/ Gregory B. Kalush
	Gregory B. Kalush
Its: President and Chief Executive Officer
Executive
/s/ Thomas N. Tipton, Jr.
Thomas N. Tipton, Jr.

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Exhibit A

Job Description

Job Title: CFO & VP of Finance	Department: Executive
Reports To: CEO	FLSA Status: Exempt
Prepared By: G. Kalush & D. Shute	Approved By: G. Kalush & D. Shute
Prepared Date: December 12, 2005	Approved Date: December 12, 2005

SUMMARY

Overall responsibility for all aspects of Finance, Treasury, Accounting, and IT for Interphase on a worldwide basis. This position holds the responsibility for the creating, gaining approval of and implementing the financial strategy (and architecture) for the company, including the management of the company’s controls, establishing effective measurements and review processes, participating in the architecture of significant transactions (whether with key OEM customers, potential M&A activities, or key strategic partnerships). This position is a key member of the executive team and is an officer of the company, and as such will prepare for and be a key representative of management at all Board meetings.

ESSENTIAL DUTIES AND RESPONSIBILITIES include the following. Other duties may be assigned. Management reserves the right to change these duties at any time.

The CFO and VP of Finance position is responsible for establishing the financial architecture for Interphase, a publicly traded company. This includes the establishment and implementation of all of the company’s financial controls, preparation and interpretation of financial reports in accordance with GAAP, all SEC reporting, safeguarding of the company’s assets, sound financial guidance in all significant transactions (whether with key OEM customers, potential M&A activities, or key strategic partnerships), treasury functions, and assisting the CEO with company strategy and support as necessary. This position in a “right-hand” to the CEO, and as such must act in harmony with the direction that the CEO sets for the company.

Responsible for coordinating and ensuring the efficient and effective creation (working with other senior executives) of the company’s annual operating and strategic plans. This includes the development of the all financial and accounting plans and policies of the company. Prepares financial and economic analysis for operating plans of the organization, and helps coach peer executives to a balanced, financially sound plan.

Maintains healthy, positive and honest relationships with the banking community, public audit partners, Wall Street analysts and shareholders.

Directs Finance and Accounting, Treasury, MIS, and Investor Relations, establishing benchmarked goals and creative plans to achieve those goals for each responsibility.

Coordinates and directs all financial operations including: budgeting, tax, audit, SEC compliance, legal counsel, cash management, care and custody of funds and other financial assets, and business risk management (and insurance) programs.

Participates in any merger and acquisition decisions, and maps all due diligence processes. This includes potentially related activities such as business divestitures, partnerships, joint ventures, etc. This role is a key advisor-ship role to the CEO on behalf of the company.

Responsible for reviewing and approving all company contractual obligations including OEM agreements, NDA agreements, etc.

Responsible for the creation and leadership of the company’s investor relations program, ensure that the company is properly and honestly promoted in the market, this will include the joint creation of the company’s “story” and the road shows and street relationships to deliver it.

Responsible for producing and publishing the company’s annual report.

In conjunction with CEO, creates the Delegation of Authority Matrix.

SUPERVISORY RESPONSIBILITIES

The CFO directs and leads subordinate managers including: the Corporate Controller, Financial Planning & Analysis Manager, European Finance & HR Manager, Contracts Manager, and the IT Manager. Responsible for the overall direction, coordination, and evaluation of these units. Carries out supervisory responsibilities in accordance with the organization’s policies and applicable laws and governmental regulations. Responsibilities include interviewing, hiring, and training employees; planning, assigning, and directing work; appraising performance; rewarding and disciplining employees; addressing complaints and resolving problems, and motivating team.

QUALIFICATIONS To perform this job successfully, the individual must be able to perform each essential duty satisfactorily. The requirements listed below are representative of the knowledge, skill, and/or ability required. Reasonable accommodations may be made to enable individuals with disabilities to perform the essential functions.

EDUCATION and/or EXPERIENCE

Bachelor’s degree (B. A.) or equivalent; plus ten or more years related experience and/or training; or equivalent combination of education and experience. Must have strong leadership skills and the ability to inspire and motivate teams to perform well and meet company objectives. Must have a current CPA license in good standing.

LANGUAGE SKILLS

Ability to read, analyze, and interpret financial statements and reports, complex contracts and legal documents. Ability to write speeches and articles for publication that conform to prescribed style and format. Ability to effectively present information to customers, the Sr. Leadership Team, the Board of Directors, our employees, public groups, and/or the media.

OTHER SKILLS AND ABILITIES

Must have excellent communication skills (reading, writing, speaking, and presentation), understanding of business and finance-related concepts, analytical skills, creative thinking skills, skills in tactfully addressing various tasks, and the ability to occasionally work under pressure or in a deadline-oriented environment. Able to communicate and partner effectively with employees at all levels, as well as with customers, analysts, investors, the Board of Directors and the business community. Must be able to handle multiple tasks concurrently, prioritizing as necessary. Must be very computer literate. Proficient with the Microsoft Suite of products to create PowerPoint presentations, Word documents, Excel spreadsheets, and do email. Strong knowledge of database and accounting computer application systems which supply the most accurate financial information. Excellent analytical, mathematical, and organizational skills.

REASONING ABILITY

Ability to define problems, collect data, establish facts, draw valid conclusions. Ability to interpret an extensive variety of technical instructions in mathematical or diagram form and deal with several abstract and concrete variables.

PHYSICAL DEMANDS

The physical demands described here are representative of those that must be met by an employee to successfully perform the essential functions of this job. Reasonable accommodations may be made to enable individuals with disabilities to perform the essential functions.

While performing the duties of this job, the employee is regularly required to use hands to finger, handle, or feel and talk or hear. The employee frequently is required to walk, sit, and reach with hands and arms. The employee is occasionally required to stand. The employee must occasionally lift and/or move up to 10 pounds. Specific vision abilities required by this job include close vision and color vision.

WORK ENVIRONMENT

The work environment characteristics described here are representative of those an employee encounters while performing the essential functions of this job. Reasonable accommodations may be made to enable individuals with disabilities to perform the essential functions.

Normal Office Environment, though some travel may be required. A valid passport will be necessary.

Initials /s/ GBK
/s/ TNT

Exhibit A

Exhibit B

Compensation

Base Salary. $5,769.23 per pay period ($150,000/year on an annual basis), of which there are 26 in each calendar year, less deductions as may be required by law or authorized by Executive.

Key Talent Bonus. Executive shall be eligible for an annual bonus for FY2006 of $30,000 based upon the Corporation’s existing Executive Bonus Plan. This bonus will be tied to Executive Incentive Targets (MBOs) for 2006. The bonus will be awarded based on achievement of specific corporate objectives, as determined by the Company, and is subject to change annually by the Board of Directors.

Equity. The Corporation shall, according to the Company’s Long-Term Stock Incentive Plan and with the approval of the CEO and Board of Directors, grant to Executive 10,000 shares of restricted stock of the Company. Executive’s right, title, and interest to any stock conferred under the Employment Agreement shall be controlled and governed by terms and conditions of the Company’s Long-Term Stock Incentive Plan. The per share price will be determined as of the close of NASDAQ trading on Executive’s first day of employment in the new role.

Executive Benefit Plans. Based on the plans in force at the time, and subject to change at any time, the Executive will be provided with a comprehensive and competitive benefits package including medical, dental, life, AD&D, and STD, all effective on promotion date. Executive will be 401k eligible after 60 days of employment. The Executive shall be eligible to participate in any benefit plan maintained by the Company, according to the terms and conditions of those plans. The Executive will pay the same as all other Executive and non-Executive employees for health premiums.

Severance Pay. 6 months package, subject to terms and conditions. Please refer to section 4, “Termination Without Cause or Nonrenewal”, on page 2 of the Employment Agreement.

Executive Disability Plan. The Executive is eligible to apply through Interphase for a voluntary, individual Executive Disability Plan. If approved by the carrier for coverage, the premiums will be paid for by the Executive.

Vacation and Leave. Executive shall be entitled to three (3) weeks of vacation per year, accrued monthly, and six (6) sick days per year, and any other paid leave benefits provided for in the Company’s Policy Guide.

Cell Phone & Computer. Executive will be furnished with a laptop and cell phone/PDA for business purposes.

Office Furnishings. The Company agrees to provide office space and furnishings to Executive commensurate with the Company’s decor and culture.

Initials:/s/ GBK
/s/ TNT

Exhibit B

Exhibit C

Designated Cities — Per Paragraph 11a of Employment, Confidentiality,
and Non-Compete Agreement.

The Continental United States

Initials:/s/ GBK
/s/ TNT

Exhibit C

EX-10.(L)

Exhibit 10(l)

[THIS AGREEMENT IS SUBJECT TO ARBITRATION]

EMPLOYMENT, CONFIDENTIALITY, AND NON-COMPETITION AGREEMENT

     This “Agreement” is between the “Company,” Interphase Corporation, and Randall E. McComas, “Executive.” The Company is organized under the laws of the State of Texas. Its principal place of business is located at 13800 Senlac Road, Dallas, Texas, 75234.

Background Statement

     The Company is engaged in the computer and telecommunications server markets, including local area networking, wide area networking, and storage area networking. Executive desires to be employed or continue to be employed by the Company. The Company desires to employ Executive, provided that as an express, prior condition of such employment, Executive enters into this Agreement with the Company.

     This Agreement sets forth the terms of Executive’s employment. The parties agree that this Agreement is supported by valuable consideration, that mutual promises and obligations have been undertaken by the parties to it, and that the agreement is entered into voluntarily by the parties.

Statement of Agreement

1.

Duties. Executive shall devote Executive’s best efforts to the business of the Company. Executive shall perform such duties and responsibilities customary to the position of Vice President of Global Sales & Marketing, including those described on Exhibit A to this Agreement. Executive shall also perform those duties assigned by the Company from time to time.

2.

Terms. The “initial term” of employment under this Agreement shall terminate twelve (12) months after the date of this Agreement. The initial term of this Agreement shall automatically renew for successive twelve (12) month periods, referred to as “successor terms,” unless either party gives thirty (30) days written notice of its intention not to renew prior to the expiration of the initial or any successor term or Executive is terminated for cause.

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3. Terminable Only For Cause. This Agreement may be terminated by the Company prior to the expiration of the initial term or any successor term as follows:

(a)	Due to the death of Executive;
(b)	Due to a physical or mental disability which prevents Executive from performing the essential functions of his full duties for a period of ninety (90) consecutive days during the term of this Agreement, as determined in good faith by a physician reasonably acceptable to the Company; or,
(c)	For Cause, which is (i) fraud, misappropriation, embezzlement, dishonesty, or other act of material misconduct against the Company or any affiliate of the Company; (ii) failure to perform specific and lawful directives of Executive’s superiors; (iii) violation of any rules or regulations of any governmental or regulatory body, which is materially injurious to the financial condition of the Company; (iv) conviction of or plea of guilty or nolo contendere to a felony; (v) violation of the provisions of 8, 10, 11, 13, or 16; or, (vi) substantial failure to perform the duties and responsibilities of Executive under this Agreement.

In the event of termination under this paragraph, Executive shall be entitled only to Executive’s base salary earned through the date of termination. No accrued but unpaid bonuses or commissions shall be due to Executive.

4.

Termination Without Cause or Nonrenewal. In the event the Company gives Executive thirty days written notice of its intention not renew a term of this Agreement, or if Executive is terminated without cause, the Executive shall receive: (i) the balance of base-salary due under this Agreement for the balance of its term on the regular pay dates of the Company; and thereafter, (ii) as severance pay for a minimum period of three (3) months, Executive’s base salary payable on the regular pay dates of the Company; provided, however, that in no event shall the amount of base-salary payments paid or owing under this paragraph, whether owed under the balance of any remaining term or as severance pay, be less than six (6) months base-salary compensation, or greater than nine (9) months base-salary compensation. No accrued but unpaid bonuses or commissions shall be due to Executive under this Paragraph. No other severance payment or benefits shall be due Executive other than those provided for under this Agreement. Notwithstanding anything stated herein to the contrary, in the event Executive becomes employed during the period in which the Executive is eligible to receive post-employment payments under this paragraph, any amounts received by Executive in the form of compensation, salary, or other payments shall be offset or shall reduce any amounts or liability owed by the Company to the Executive under this paragraph.

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5.	Compensation. Employer shall pay and provide benefits to Executive according to the provisions of Executive’s compensation plan described in the attached Exhibit B. Executive’s compensation plan shall be reviewed on a periodic basis. The Company reserves the right, and Executive hereby authorizes Company, to make deductions from Executive’s pay or bonuses to satisfy any outstanding obligations of Executive to the Company. The Company may offset against the final payment of wages or bonuses owed to Executive any amounts due the Company from Executive.
6.	Changes in Position, Location, or Compensation. If the Company transfers, promotes, or reassigns Executive to another position or geographic area, or both parties agree to a change in compensation or benefits during a term of this Agreement or upon the renewal of a term of this Agreement, an updated employment agreement may be substituted by agreement of the parties but is not required. Mutually-agreeable changes in compensation or benefits shall be effected by amendment to and incorporation of a modified Exhibit B, initialed by the parties or their authorized representative. All provisions, promises, terms or conditions not modified by an amendment of Exhibits A—C shall remain in effect and shall not be deemed revoked or modified beyond the changes set forth in one or more amended Exhibits.
7.	Executive Representation/Warranty. Executive represents that Executive is not a party to any agreement with a third party, or limited by a court order, containing a non-competition provision or other restriction which would preclude Executive’s employment with Company or any of the services which Executive will provide on the Company’s behalf.
8.	Duty of Loyalty. Executive acknowledges the common law duties of reasonable care, loyalty, and honesty which arise out of the principal/agent relationship of the parties. While employed and thereafter for whatever term the law may impose, Executive shall not engage in any activity to the detriment of the Company. By way of illustration and not as a limitation, Executive shall not discuss with any customer or potential customer of the Company any plans by Executive or any other Executives of the Company to leave the employment of the Company and compete with the Company.
9.	Company Documents. Executive agrees and acknowledges that Executive holds as the Company’s property all memoranda, books, papers, letters, and other data, including duplicates, relating to the Company’s business and affairs (“Company Documents”). This includes Company Documents created or used by Executive or otherwise coming into Executive’s possession in connection with the performance of Executive’s job duties. All Company Documents in the possession, custody, or control of Executive shall be returned to the Company at the time of termination of employment.

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Confidential Information and Non-Competition

10. In exchange for the mutual promises and obligations contained in this Agreement, and contemporaneous with its execution or soon thereafter, Employer promises to deliver to Executive or permit Executive to acquire, be exposed to, and/or have access to material, data, and information of the Company and/or its customers or clients that is confidential, proprietary and/or a trade secret (“Confidential Information”). At all times, both during and after the termination of employment, the Executive shall keep and retain in confidence and shall not disclose, except as required in the course of the Executive’s employment with the Company, to any person, firm or corporation, or use for the Executive’s own purposes, any Confidential Information. For the purposes of this paragraph, such information shall include, but is not limited to:

1.	The Company’s standard operating procedures, processes, formulae, know-how, scientific, technical, or product information, whether patentable or not, which is of value to the Company and not generally known by the Company’s competitors;
2.	All confidential information obtained from third parties and customers concerning their products, business, or equipment specifications;
3.	Confidential business information of the Company, including, but not limited to, marketing and business plans, strategies, projections, business opportunities, client identities or lists, sales and cost information, internal financial statements or reports, profit, loss, or margin information, customer price information; and,
4.	Other information designated by the Company or deemed by law to be confidential information.

11. Non-Competition. In consideration of the mutual promises contained in this Agreement, the sufficiency of which is acknowledged by the parties, Executive agrees that during the term of his employment and for a period of twelve (12) calendar months after termination of employment from the Company (whether voluntary or involuntary), Executive shall not, directly or indirectly, either as principal, agent, manager, employee, partner, shareholder, director, officer, consultant or otherwise:

  1. Become associated or affiliated with, employed by, or financially interested in any business operation which competes in the business currently engaged in by Company. (The phrase “business currently engaged in by the Company” includes, but is not limited to, the type of activities in which the Company was engaged during Executive’s tenure, such as designs and delivers high performance connectivity adapters for computer and telecommunication networks.)

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2.	Solicit or attempt to solicit the business or patronage of any person, firm, corporation, partnership, association, department of government or other entity with whom the Company has had any contact during a period of twelve (12) calendar months preceding the date of this Agreement (“Customers”), or otherwise induce such Customers to reduce, terminate, restrict or otherwise alter business relationships with the Company in any fashion; or,
3.	In any way solicit or attempt to solicit the business or patronage of any Customers.
4.	The parties intend the above restrictions on competition to be completely severable and independent, and any invalidity or unenforceability of any one or more such restrictions shall not render invalid or unenforceable any one or more restrictions.

12. Limitations on Scope. In recognition of the broad geographic scope of the Company’s business and the ease of competing with the Company in any part of the United States, the restrictions on competition set forth herein are intended to cover the following geographic areas:

1.	The geographic territory identified on the attached Exhibit C;
2.	The cities containing a facility or operation owned or managed by the Company; and,
3.	A fifty (50) mile radius outside the boundary limits of each such city.
	The parties intend the above geographical areas to be completely severable and independent, and any invalidity or unenforceability of this Agreement with respect to any one area shall not render this Agreement unenforceable as applied to any one or more of the other areas.

13. Non-Solicitation of Employees. During employment and for a period of twelve (12) months after termination, Executive agrees not to hire, employ, solicit, divert, recruit, or attempt to induce, directly or indirectly, any existing or future employee of the Company to leave their position with the Company or to become associated with a competing business.

Remedies for Breach

14. Company’s Right to Obtain an Injunction. Executive acknowledges that the Company will have no adequate means of protecting its rights under Paragraphs 10, 11, 12, or 13 of this Agreement other than be securing an injunction (a court order prohibiting the Executive from violating the Agreement). Accordingly, the Executive agrees that the Company is entitled to enforce this Agreement by obtaining a temporary, preliminary, and permanent injunction and any other appropriate equitable relief. Executive acknowledges that the Company’s recovery of damages will not be an adequate means to redress a breach of this Agreement. Nothing

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contained in this paragraph, however, shall prohibit the Company from pursuing any remedies in addition to injunctive relief, including recovery of damages. Executive expressly acknowledges that the Company has sole discretion regarding whether to seek a remedy for breaches of Paragraphs 10, 11, 12, or 13 in a court of competent jurisdiction or by arbitration procedures outlined in paragraph 15.

15.

Arbitration. Except for the provisions of paragraphs 10, 11, 12, or 13, Executive and the Company agree that all Disputes, as defined in Article 1 of the Alternative Dispute Resolution Procedure (the “ADR Procedure”), regarding the termination of employment or other covered Disputes, shall be resolved exclusively in accordance with the Company’s ADR Procedure. Executive warrants and represents that Executive has received, read, and understands the Company’s ADR Procedure.

Inventions and Discoveries

16. Discoveries, Inventions, & Copyrights. Executive shall disclose promptly to the Company any and all conceptions and ideas for inventions, improvements, and valuable discoveries, whether patentable or not, which are conceived or made by the Executive, solely or jointly, during Executive’s term of employment and which pertain to the business activities of the Company. Executive hereby assigns and agrees to assign all his interest therein to the Company or to its nominee. Whenever requested to do so by the Company, Executive shall execute any and all applications, assignments, or other instruments which the Company shall deem necessary to apply for and obtain Letters of Patent of the United States or any foreign country or to otherwise protect the Company’s interest therein.

General Provisions

17. Condition to Seeking Subsequent Employment. Executive agrees to show a copy of this Agreement to any Competitor with whom Executive interviews during the Executive’s employment with the Company or with whom the Executive interviews within twelve (12) months following the effective date of the termination of the Executive’s employment with the Company.

18. Attorneys’ Fees. If any party shall obtain a final judgment of a court of competent jurisdiction, subject to no further appeal, pursuant to which any other party shall be determined to have breached its obligations hereunder or made any misrepresentations, such prevailing party shall be entitled to recover, in addition to any award of damages, reasonable attorneys’ fees, costs, and expenses incurred by such party in obtaining such judgment.

19. Non-Disparagement and Confidentiality. Except as may be required by law or as consented to in writing by an authorized officer or agent of the Company, Executive agrees not to make any statements whatsoever, directly or indirectly, written or oral, which could reasonably become public, which could be interpreted as embarrassing, disparaging, prejudicial, or in

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	any way detrimental or inimical to the interests of the Company. Furthermore, Executive agrees to hold confidential and not to disclose, make public, or to communicate orally or in writing to any person or entity (other than Executive’s significant other and immediate family), directly or indirectly, the terms of this Agreement or any matters set forth herein, except only: (a) as may be compelled by court orders; (b) as may be necessary to enforce the terms of this Agreement; (c) to legal, accounting, and financial advisors; (d) as may be necessary in connection with the application for or obtaining loans or credit; (e) as may be necessary to comply with applicable laws and government regulations; or, (f) as may be necessary or desirable in obtaining future employment.
20.	Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the Company, its subsidiaries, affiliates, successors, and assigns.
21.	Nonwaiver. Any waiver by the Company of a breach of any provision of this Agreement must be in writing and signed by the Company to be effective. Any waiver by the Company of a breach of any provision of this Agreement shall not operate or be construed as a waiver by the Company of any different or subsequent breach of this Agreement by Executive.
22.	Applicable Law. This Agreement shall be construed in accordance with and governed by the laws of the State of Texas, without giving effect to the conflict of laws provisions thereof.
23.	Forum Selection Clause. Any and all causes of action for equitable relief relating to the enforcement of this Agreement and not otherwise subject to the mandatory arbitration provisions of Paragraph 15 may, in the Employer’s sole discretion, be brought in the United States District Court for the Northern District of Texas or the Dallas County District of the Texas State Courts. The parties agree that the provisions of this paragraph benefit both Employer and Executive. Any and all causes of action by and between Employer and Executive can be quickly and efficiently resolved in the agreed-upon forum, which will not unduly burden either Employer and Executive, and which will substantially aid Employer and Executive in providing the opportunity for uniform treatment with respect to any issues relating to the covenants contained in this Agreement.
24.	Entire Agreement. This Agreement represents the entire agreement between the Company and the Executive with respect to the subject matter hereof, supersedes all prior agreements dealing with the same subject matter, and may not be changed except in a writing signed by the party against whom enforcement of the Agreement, as so changed, is sought.
25.	Severability. The invalidity of any term or provision of this Agreement, including any term or provision of paragraphs 10, 11, 12, or 13 shall not invalidate or otherwise affect any other term or provision of this Agreement.
26.	This agreement shall be effective February 15, 2002.

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Interphase Corporation
By:	/s/ Gregory B. Kalush
	Gregory B. Kalush
Its:	President and Chief Executive Officer
Executive
/s/ Randall E. McComas
Randall E. McComas

Page 8

Exhibit A

Job Description

Job Title: Vice President, Global Sales & Mktg.	Department: Sales & Marketing
Reports To: President and CEO	FLSA Status: Exempt
Prepared By: Human Resources	Approved By: G. Kalush
Prepared Date: November 6, 2001	Approved Date: 1/22/02

SUMMARY

Responsible for the sales and marketing processes, policies, programs and objectives of the company on a worldwide basis. Responsible for setting the long-term sales & marketing vision for the company and developing sales and marketing strategies to achieve the company’s long-term goals.

ESSENTIAL DUTIES AND RESPONSIBILITIES include the following. Other duties may be assigned. Management reserves the right to change these duties at any time.

Evaluates marketing strategy to meet competitive conditions.

Plans and directs sales and marketing teams toward the accomplishment of corporate objectives.

Strives to maintain and improve the organization’s competitive position and ensures maximum sales volume while achieving profit goals.

Establishes and implements sales forecasts, and meets or exceeds expectations.

Directs and coordinates activities of Strategic Account Managers, Regional Sales Managers, and Channel Sales through national and international distribution networks to attain goals and objectives.

Reviews analyses of activities, costs, operations, and forecast data to determine department progress toward stated goals and objectives.

Confers with chief executive officer to review achievements and discuss required changes in goals or objectives resulting from current status and conditions.

Develops pricing strategies in conjunction with Finance.

Establishes and implements promotional and advertising programs.

SUPERVISORY RESPONSIBILITIES

Manages several subordinate managers including the Director of European Sales, Strategic Account Managers, Regional Sales Managers and Channel Sales Manager. Will also have a dotted line reporting relationship to the business unit marketing management staff and responsibility for all Corporate Marketing staff. Is responsible for the overall direction, coordination, and evaluation of these units. Carries out supervisory responsibilities in accordance with the organization’s policies and applicable laws. Responsibilities include interviewing, hiring, and training employees; planning, assigning, and directing work; appraising performance; rewarding and disciplining employees; addressing complaints and resolving problems.

QUALIFICATIONS To perform this job successfully, an individual must be able to perform each essential duty satisfactorily. The requirements listed below are representative of the knowledge, skill, and/or ability required. Reasonable accommodations may be made to enable individuals with disabilities to perform the essential functions.

EDUCATION and/or EXPERIENCE

Bachelor’s degree (B. A.) or equivalent; plus eight to ten years related experience and/or training; or equivalent combination of education and experience. Must have extensive sales and marketing experience in North America, Europe and the Asia/Pacific Rim regions. This position requires a proven track record of driving sales through OEM account managers and distribution networks as well as managing the marketing efforts through subordinate managers. Must have developed a working knowledge of Telecommunications and Computer Networking product markets. Must also possess an effective tactical execution style.

LANGUAGE SKILLS

Ability to read, analyze, and interpret common scientific and technical journals, financial reports, and legal documents. Ability to respond to common inquiries or complaints from customers, regulatory agencies, members of the business community, or employees. Ability to write speeches and articles for publication that conform to prescribed style and format. Ability to effectively present information to customers, the Sr. Leadership Team, the Board of Directors, our employees, public groups, and/or the media.

MATHEMATICAL SKILLS

Ability to work with mathematical concepts such as probability and statistical inference, and fundamentals of plane and solid geometry and trigonometry. Ability to apply concepts such as fractions, percentages, ratios, and proportions to practical situations.

REASONING ABILITY

Ability to define problems, collect data, establish facts, and draw valid conclusions. Ability to interpret an extensive variety of technical instructions in mathematical or diagram form and deal with several abstract and concrete variables.

PHYSICAL DEMANDS The physical demands described here are representative of those that must be met by an employee to successfully perform the essential functions of this job. Reasonable accommodations may be made to enable individuals with disabilities to perform the essential functions.

While performing the duties of this job, the employee is regularly required to use hands to finger, handle, or feel and talk or hear. The employee frequently is required to walk, sit, and reach with hands and arms. The employee is occasionally required to stand. The employee must occasionally lift and/or move up to 10 pounds. Specific vision abilities required by this job include close vision and color vision.

WORK ENVIRONMENT The work environment characteristics described here are representative of those an employee encounters while performing the essential functions of this job. Reasonable accommodations may be made to enable individuals with disabilities to perform the essential functions.

Normal office environment.

Initials /s/ GBK
/s/ REM

Exhibit A

Exhibit B

Compensation

Base Salary. $9,375 per pay period ($225,000/year on an annual basis), of which there are 26 in each calendar year, less deductions as may be required by law or authorized by Executive.

Auto Allowance. $600.00 per month.

Performance Bonus. Executive shall be eligible for an annual bonus for FY2002 of $100,000 based upon the Corporation’s existing Executive Bonus Plan. The first $30,000 of this bonus will be considered a guaranteed sign on bonus, payable at the end of 60 days of employment. The remaining $70,000 will be tied to Executive Incentive Targets (MBOs) for 2002. The bonus will be awarded based on achievement of specific corporate objectives, as determined by the Company.

Stock Options. The Corporation shall, according to the Company’s Amended and Restated Stock Option Plan, grant to Executive options to purchase 100,000 shares of common stock of the Company. Executive’s right, title, and interest to any stock options conferred under the Employment Agreement shall be controlled and governed by terms and conditions of the Company’s Amended and Restated Stock Option Plan. The per share option price will be determined as of the close of NASDAQ trading on Executive’s first day of employment.

Vacation and Leave. Executive shall be entitled to three (3) weeks of vacation per year, accrued monthly, and six (6) sick days per year, and any other paid leave benefits provided for in the Company’s Employee Handbook.

Office Furnishings. The Company agrees to provide office space and furnishings to Executive commensurate with the Company’s decor and culture.

Executive Benefit Plans. Executive shall be eligible to participate in any profit sharing, retirement, medical benefit, or disability benefit plan maintained by the Company, if any, according to the terms and conditions of those plans.

Initials:/s/ GBK
/s/ REM

Exhibit B

Exhibit C

Designated Cities — Per Paragraph 11a of Employment, Confidentiality,
and Non-Compete Agreement.

The Continental United States

Initials:/s/ GBK
/s/ REM

Exhibit C

EX-10.(M)

Exhibit 10(m)

[THIS AGREEMENT IS SUBJECT TO ARBITRATION]

EMPLOYMENT AGREEMENT

     THIS EMPLOYMENT AGREEMENT (“Agreement”) is made and entered into as of the 24th day of November, 1999, (“Effective Date”) by and between Interphase Corporation and its subsidiaries (the “Corporation”), and Deborah A. Shute (“Executive”).

     WHEREAS, the Corporation desires to enter into an employment agreement with Executive on certain terms and conditions as set forth herein; and

     WHEREAS, Executive is willing to accept such employment on such terms; and

     NOW, THEREFORE, the parties hereto, in consideration of the mutual covenants and promises hereinafter contained, do hereby agree as follows:

1.	Employment. The Corporation hereby employs Executive and Executive hereby accepts employment on the following terms and conditions. Executive will be employed by the Corporation as the Vice President of Human Resources. In that capacity, Executive will report directly to the Chief Executive Officer of the Corporation. Executive agrees to review and comply with all policies and procedures in the Corporation’s Employee Handbook.
2.	Term. Executive’s employment with the Corporation will be “At Will”, and thus, either party may terminate the relationship at any time for any reason, subject to the termination provisions in paragraphs 6 and 7. Executive further understands that any reference to dates and/or periods of time in this Agreement, including any reference to rights Executive may have at certain specified dates after her execution of this Agreement, are expressly conditional upon Executive remaining in the employment of the Corporation at the specified time or date and are in no way intended to alter the “At Will” nature of Executive’s employment.
3.	Salary and Other Compensation. As compensation for the services to be rendered by Executive to the Corporation pursuant to this Agreement, Executive shall be paid the following compensation and other benefits:

a)

Salary: $5,000.00 per pay period, of which there are 26 in each calendar year, less deductions as may be required by law. The Corporation reserves the right to: (i) make deductions from Executive’s pay to satisfy any outstanding obligations; and/or (ii) make deductions from Executive’s pay to satisfy any losses resulting from unlawful activities. In each case, deductions to be made only after final adjudication by a court of competent jurisdiction.

b)

Bonus: Executive shall be eligible for an annual bonus based upon the Corporation’s existing Executive Bonus Plan. The maximum annual bonus potential shall be $30,000 if the Corporation and Executive satisfy the criteria for

achieving said bonus as outlined in the Executive Bonus Plan. The Corporation reserves the right to: (i) make deductions from Executive’s bonus to satisfy any outstanding obligations; and/or (ii) make deductions from Executive’s bonus to satisfy any losses resulting from unlawful activities.

c)	Office Furnishings: The Corporation agrees to provide office space and furnishings to Executive commensurate with the Corporation’s décor and culture.
d)	Executive Benefit Plans: Executive shall be allowed to participate, to the extent they may be eligible, in any profit sharing, retirement, insurance or other Executive benefit plan maintained by the Corporation. In the event Executive elects to participate in the Corporation’s medical, dental, vision, and life insurance plans, the Corporation will pay the entire cost of such coverage for Executive and her immediate family.
e)	Vacations and Leave: Executive shall be entitled to three (3) weeks of vacation per year, accrued monthly, and six (6) sick days per year, and any other paid leave benefits provided for in the Corporation’s Employee Handbook.

4.	Non-Disclosure of Confidential Information. Executive acknowledges that beginning on Effective Date, the Corporation has and shall continue to provide to Executive, and she will otherwise be making use of, acquiring, and/or adding to special training and confidential information of a special and unique nature and value relating to such matters as the Corporation’s copyrights, proprietary information, trade secrets, systems, product developments, procedures, manuals, confidential reports, lists of customers (which are deemed for all purposes confidential and proprietary), as well as the nature and type of services rendered by the Corporation, the equipment and methods used and preferred by the Corporation’s customers, and the fees paid by them. Executive further agrees that if a third party (e.g., vendors, customers and manufacturers) contracts with the Corporation, the information obtained or received from a third party including, but not limited to, its patents, copyrights, proprietary information, trade secrets, systems, product development, procedures, manuals, and confidential reports, will be treated in the same manner and subject to the same protection as other Confidential Trade Secret Information (as hereinafter defined) of the Corporation.
	As a material inducement to the Corporation to enter into this Agreement and to pay Executive the compensation and benefits stated herein and as a condition of employment and continued employment, Executive shall keep confidential all such confidential and proprietary information which Executive has learned or learns or acquires as a result of her employment with the Corporation. By way of example, “Confidential Trade Secret Information” may consist of any idea, process, design, concept, formula, pattern, device, development, customer information or compilation of information which is used in the Corporation’s business, which gives the Corporation an advantage over a competitor who does not know or use it.
	Executive agrees that the appropriate remedy for any breach of this paragraph 4 is a suit for injunctive relief and specific performance in any court of competent jurisdiction. Executive agrees that damages for use of any identified Confidential Trade Secret Information in violation

of this paragraph 4 shall be 100% of the gross amount of revenue derived from unauthorized use of such information.

5. Covenants Not to Compete. Executive acknowledges that the confidential information which the Corporation shall provide to her under the terms of paragraph 4 of this Agreement is special and unique, and that the receipt of it by Executive is of benefit and value to her. Executive acknowledges delivery and receipt of such confidential information and specialized training contemporaneously and/or in conjunction with the execution of this Agreement, such confidential information and training being given and delivered to Executive expressly in consideration for her agreement to be bound by the provisions of this Paragraph. Executive also acknowledges that Corporation does not normally disclose such confidential information and takes steps to protect it. Executive further acknowledges that the services he/she is to render to the Corporation are of a special and unusual character with a unique value to the Corporation, the loss of which cannot adequately be compensated by damages in action at law. Accordingly, and expressly in consideration for the Corporation’s agreement in paragraph 4 of this Agreement to provide confidential information to her, Executive agrees that during the term of her employment and for a period of twelve (12) months from the date this Agreement is terminated, for whatever reason:

a)	Executive shall not, directly or indirectly, without the express written consent of the Corporation, solicit or induce, or attempt to solicit or induce, any employee of the Corporation, current or future, to leave or cease their relationship with the Corporation, for any reason whatsoever, or hire any current or future employee of the Corporation.
b)	Executive shall not, directly or indirectly, without the express written consent of the Corporation: (i) engage in any business or activity that is competitive with the business of the Corporation; and/or (ii) be employed by, or provide competitive services or assistance to, a “Competing Business” (hereinafter defined) which would potentially involve, directly or indirectly, the use and/or disclosure of the Corporation’s Confidential Trade Secret Information. For purposes of this Agreement, a Competing Business means any person or firm that offers services or products that are directly competitive with those marketed, offered for sale and/or under any stage of development by the Corporation as of the date of Executive’s separation from employment. If Executive desires to work for a Competing Business in an area that is not competitive with the business of the Corporation, Executive must give written notice to the Chief Executive Officer of the Corporation and obtain her approval that the employment will not violate the terms and conditions of this paragraph 5 before beginning employment with the Competing Business.
c)	Executive will not solicit or attempt to solicit the Corporation’s existing or prospective customers to purchase services or products that are competitive with those marketed, offered for sale and/or under any stage of development by the Corporation as of the date of Executive’s separation from the Corporation. For purposes of this Agreement, existing customers shall mean those persons or firms

that the Corporation has made a sale to in the twelve (12) months preceding Executive’s separation from employment; prospective customers shall mean those persons or firms that the Corporation has solicited and/or negotiated to sell the Corporation’s products or services to within the twelve (12) months preceding Executive’s separation from the Corporation.

d)

In the event that any of the provisions of this paragraph 5 shall be held to be invalid or unenforceable, the remaining provisions thereof shall nevertheless continue to be valid and enforceable as though the invalid or unenforceable parts had not been included therein. In the event that any provision of this paragraph 5 relating to the time period and/or the areas of restriction and/or related aspects shall be declared by a court of competent jurisdiction to exceed the maximum restrictiveness such court deems reasonable and enforceable, the time period and/or areas of restriction and/or related aspects deemed reasonable and enforceable by the court shall become and thereafter be the maximum restriction in such regard, and the restriction shall remain enforceable to the fullest extent deemed reasonable by such court.

e)

Executive agrees that the appropriate remedy for any breach of this paragraph 5 is a suit for injunctive relief and/or specific performance in any court of competent jurisdiction. Executive agrees that the Corporation also has the right to seek damages for any breach of this paragraph 5. The Corporation has sole discretion regarding whether to seek a remedy for breach of this paragraph in a Court of competent jurisdiction and/or through arbitration procedures outlined in paragraph 9.

6. Termination. This Agreement will terminate as follows:

a)

Death. Executive’s employment hereunder shall automatically terminate upon her death.

b)

Disability. The Corporation may terminate the Executive’s employment hereunder in the event of the Executive’s Disability (as hereinafter defined). For purposes of this Agreement, “Disability” shall mean that, as a result of the Executive’s incapacity due to illness or injury, Executive shall have been absent from her duties under this Agreement on a substantially full-time basis for a period of three (3) or more consecutive months, and thereafter, within thirty (30) days after the Corporation notifies Executive in writing that it intends to replace her, Executive shall not have returned to the performance of such duties on a full-time basis. Should Executive be diagnosed as permanently disabled by her treating physician, the Corporation can terminate her employment without waiting for the expiration of the three-month period. Without limiting the foregoing, until the Corporation terminates Executive’s employment hereunder on account of Disability, the Executive shall receive her full compensation as provided in Paragraph 3 of this Agreement.

c)	By Executive. Executive may resign at any time upon thirty (30) days notice to the Chief Executive Officer of the Corporation.
d)	By the Corporation.

(1)

The Corporation may terminate Executive for any reason or no reason upon thirty (30) days written notice to Executive.

(2)

The Corporation may terminate Executive immediately for Willful Neglect of her duties and responsibilities. For purposes of this Agreement, “Willful Neglect” means (a) any act or course of conduct by the Executive constituting a criminal act or (b) an act by the Executive that is not authorized by the Board of Directors of the Corporation, or a committee thereof, and which results in gain to or personal enrichment of the Executive at the expense of the Corporation, or (c) the commission by the Executive of an act or course of conduct involving moral turpitude, or (d) a breach by Executive of either or both of Paragraphs 4 and 5 of this Agreement, or (e) the Executive’s intentional violation of reasonable written instructions or policies established by the Corporation’s Board of Directors with respect to the operation of the Corporation’s business and affairs, or the Executive’s failure to carry out reasonable written instructions or policies of the Board of Directors, or a material breach (other than a breach of Paragraphs 4 or 5) by the Executive of this Agreement, provided that before a termination of the Executive pursuant to this subsection 10(d)(i)(e) shall be considered for “Willful Neglect”, the Corporation’s Board of Directors must give the Executive written notice and (30) days to cure such violation or failure.

7. Payment Upon Termination. Notwithstanding any other provision of this Agreement, payments and/or benefits to Executive upon termination shall be as follows, and only as follows:

a)	Upon Death or Disability: Executive shall be entitled to earned, but unpaid salary, pro-rata bonus as determined by the Corporation and vested options.
b)	Upon Resignation by Executive and Upon Termination for Willful Neglect: Executive shall be entitled to her earned, but unpaid salary and vested options.
c)	Upon Termination for Other than Willful Neglect: If the Corporation terminates Executive’s employment for any reason other than Willful Neglect, Executive will be eligible for 6 months of severance pay at her base salary rate, payable in 13 bi-weekly payments consistent with the Corporation’s normal payroll cycle, if and only if she executes a general release of all claims against the Corporation upon separation of her employment with the Corporation. The severance payment, pro-rated bonus as determined by the Corporation, vested options, and

accrued vacation will be the only entitlements made to Executive upon separation of her employment with the Corporation. Executive will receive no other monetary payment from the Corporation. Eighty percent of this severance payment will be allocated to Executive’s agreement to abide by the covenant not to compete provisions and nondisclosure requirements contained in paragraphs 4 and 5 of this Agreement. Executive’s obligations under paragraphs 4 and 5 of this Agreement will continue regardless of whether Executive receives a severance payment from the Corporation. To the extent possible, the Executive shall be required to mitigate the amount of any severance payment provided for in this Agreement by seeking other employment or otherwise.

d)

Any amounts of money owed by Executive to the Corporation at the time of termination shall be offset against any wages owed by Corporation to Executive.

8.	Non-Disparagement. Executive agrees that she will not disparage the Corporation, in any manner, upon separation of her employment from the Corporation. Likewise, Corporation agrees that it will not disparage the Employee, in any manner, upon separation of her employment from the Corporation.
9.	Arbitration. Except for the provisions of paragraphs 4 and 5, Executive and Corporation agree that all Disputes, as defined in Article I of the Alternative Dispute Resolution Procedure (the “ADR Procedure”), regarding the termination of employment or other covered Dispute shall be resolved exclusively in accordance with the Corporation’s ADR Procedure. The parties, however, agree that the ADR Procedure does not apply to claims for unemployment compensation benefits or claims by the Corporation for injunctive relief, specific performance, and/or damages as provided for in paragraphs 4 and 5 of this Agreement. Executive represents, warrants and agrees that (a) Executive has received, read and understands the Corporation’s ADR Procedure; (b) Executive must file a claim under the ADR Procedure within one-hundred and eighty (180) days of being notified of the termination or other adverse employment decision; (c) arbitration may be compelled and enforced under the Federal Arbitration Act; (d) any arbitration award is final and binding upon both Executive and the Corporation; (e) the ADR Procedure shall survive the employer-Executive relationship and applies to any Dispute whether it is asserted during or after Executive’s separation of employment; and (f) the ADR Procedure does not alter the parties’ ““At Will”” employment relationship.
10.	Indemnification. If applicable, the Corporation agrees to provide the Executive with coverage under its Director’s and Officer’s liability insurance policy. The Corporation also agrees to indemnify and defend Executive in accordance with the Corporation’s Bylaws.
11.	Resignation Upon Termination. In the event of separation of Executive’s employment with the Corporation, Executive hereby agrees to resign from all positions held in the Corporation, including, without limitation, any position of director, officer, agent, trustee, or consultant of the Corporation.
12.	Waiver. A party’s failure to insist on compliance or enforcement of any provision of this Agreement, shall not affect the validity or enforceability or constitute a waiver of future

enforcement of that provision or of any other provision of this Agreement by that party or any other party.

13.	Governing Law. This Agreement shall in all respects be subject to, and governed by, the laws of the State of Texas.
14.	Severability. The invalidity or unenforceability of any provision in the Agreement shall not in any way affect the validity or enforceability of any other provision and this Agreement shall be construed in all respects as if such invalid or unenforceable provision had never been in the Agreement.
15.	Notice. Any and all notices required or permitted herein shall be deemed delivered if delivered personally or if mailed by registered or certified mail to the Corporation at its principal place of business and to Executive at the address hereinafter set forth following Executive’s signature, or at such other address or addresses as either party may hereafter designate in writing to the other.
16.	Assignment. This Agreement, together with any amendments hereto, shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors, assigns, heirs and personal representatives, except that the rights and benefits of either of the parties under this Agreement may not be assigned without the prior written consent of the other party.
17.	Amendments. This Agreement may be amended in writing at any time by mutual consent of the parties hereto. Any purported amendment that is not in writing and signed by the Corporation and Executive is invalid.
18.	Entire Agreement. This Agreement contains the entire agreement and understanding by and between Executive and the Corporation with respect to the employment of Executive, and no representations, promises, agreements, or understandings, written or oral, relating to the employment of Executive by the Corporation not contained herein shall be of any force or effect.
19.	Burden and Benefit. This Agreement shall be binding upon, and shall inure to the benefit of, the Corporation and Executive, and their respective heirs, personal and legal representatives, successors, and assigns.
20.	References to Gender and Number Terms. In construing this Agreement, feminine or number pronouns shall be substituted for those masculine in form and vice versa, and plural terms shall be substituted for singular and singular for plural in any place which the context so requires.
21.	Headings. The various headings in this Agreement are inserted for convenience only and are not part of the Agreement.

IN WITNESS WHEREOF, the Corporation and Executive have duly executed this Agreement as of the Effective Date.

INTERPHASE CORPORATION	EXECUTIVE
By: /s/ Gregory B. Kalush	By: /s/ Deborah A. Shute
GREGORY B. KALUSH	DEBORAH A. SHUTE
President &	Vice President, Human Resources
Chief Executive Officer
Address for Notice Purposes:	Address for Notice Purposes:

Chief Executive Officer
Interphase Corporation
13800 Senlac Road
Dallas, Texas 75234

ATTACHMENT A

List of Confidential Information

• Overall corporate strategy

• Annual Business Plan, Revenue, Expense and Earnings Projections

• Annual Budgets, Margin Analyses

• Product Strategy including Marketing Plans and Product Roadmaps

• Customer and Supplier Lists

• Pricing Strategy

• Bills of Materials

• Telephone Listing of Current Employees

EX-10.(N)

Exhibit 10(n)

[THIS AGREEMENT IS SUBJECT TO ARBITRATION]

EMPLOYMENT, CONFIDENTIALITY, AND NON-COMPETITION AGREEMENT

          This “Agreement” is between the “Company,” Interphase Corporation, and James W. Gragg, “Executive.” The Company is organized under the laws of the State of Texas. Its principal place of business is located at 2901 North Dallas Parkway, Suite 200, Plano, TX 75093.

Background Statement

          The Company enables rapid platform design and integration for the global voice and data communications markets through custom and off-the-shelf communications equipment, embedded software development suites, and systems integration and consulting services for telecom and enterprise networks. Executive desires to be employed or continue to be employed by the Company. The Company desires to employ Executive, provided that as an express, prior condition of such employment, Executive enters into this Agreement with the Company.

          This Agreement sets forth the terms of Executive’s employment. The parties agree that this Agreement is supported by valuable consideration, that mutual promises and obligations have been undertaken by the parties to it, and that the agreement is entered into voluntarily by the parties.

Statement of Agreement

1. Duties. Executive shall devote Executive’s best efforts to the business of the Company. Executive shall perform such duties and responsibilities customary to the position of Vice President of Operations & Fulfillment, including those described on Exhibit A to this Agreement. Executive shall also perform those duties assigned by the Company from time to time.

2. Terms. The “initial term” of employment under this Agreement shall terminate six (6) months after the date of this Agreement. The initial term of this Agreement shall automatically renew for successive six (6) month periods, referred to as “successor terms,” unless either party gives thirty (30) days written notice of its intention not to renew prior to the expiration of the initial or any successor term or Executive is terminated for cause.

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3. Terminable Only For Cause. This Agreement may be terminated by the Company prior to the expiration of the initial term or any successor term as follows:

(a)	Due to the death of Executive;
(b)	Due to a physical or mental disability which prevents Executive from performing the essential functions of his full duties for a period of ninety (90) consecutive days during the term of this Agreement, as determined in good faith by a physician reasonably acceptable to the Company; or,
(c)	For Cause, which is (i) fraud, misappropriation, embezzlement, dishonesty, or other act of material misconduct against the Company or any affiliate of the Company; (ii) failure to perform specific and lawful directives of Executive’s superiors; (iii) violation of any rules or regulations of any governmental or regulatory body, which is materially injurious to the financial condition of the Company; (iv) conviction of or plea of guilty or nolo contendere to a felony; (v) violation of the provisions of 8, 9, 10, 11, 13, or 16; or, (vi) substantial failure to perform the duties and responsibilities of Executive under this Agreement.

In the event of termination under this paragraph, Executive shall be entitled only to Executive’s base salary earned through the date of termination. No accrued but unpaid bonuses or commissions shall be due to Executive.

4. Termination Without Cause or Nonrenewal. In the event the Company gives Executive thirty days written notice of its intention not renew a term of this Agreement, or if Executive is terminated without cause after the expiration of the initial term, the Executive shall receive an amount equal to six-months severance pay based on the Executive’s base salary at the time of termination, payable in bi-monthly or bi-weekly installments as dictated by the regular pay dates of the Company. No accrued but unpaid bonuses or commissions shall be due to Executive under this Paragraph. No other severance payment or benefits shall be due Executive other than those provided for under this Agreement. Notwithstanding anything stated herein to the contrary, in the event Executive becomes employed during the period in which the Executive is eligible to receive post-employment payments under this Paragraph, any amounts received by Executive in the form of compensation, salary, or other payments shall be offset or shall reduce any amounts or liability owed by the Company to the Executive under this Paragraph.

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5. Compensation. Employer shall pay and provide benefits to Executive according to the provisions of Executive’s compensation plan described in the attached Exhibit B. Executive’s compensation plan shall be reviewed on a periodic basis. The Company reserves the right, and Executive hereby authorizes Company, to make deductions from Executive’s pay or bonuses to satisfy any outstanding obligations of Executive to the Company. The Company may offset against the final payment of wages or bonuses owed to Executive any amounts due the Company from Executive.

6. Changes in Position, Location, or Compensation. If the Company transfers, promotes, or reassigns Executive to another position or geographic area, or both parties agree to a change in compensation or benefits during a term of this Agreement or upon the renewal of a term of this Agreement, an updated employment agreement may be substituted by agreement of the parties but is not required. Mutually-agreeable changes in compensation or benefits shall be effected by amendment to and incorporation of a modified Exhibit B, initialed by the parties or their authorized representative. All provisions, promises, terms or conditions not modified by an amendment of Exhibits A — C shall remain in effect and shall not be deemed revoked or modified beyond the changes set forth in one or more amended Exhibits.

7. Executive Representation/Warranty. Executive represents that Executive is not a party to any agreement with a third party, or limited by a court order, containing a non-competition provision or other restriction which would preclude Executive’s employment with Company or any of the services which Executive will provide on the Company’s behalf.

8. Duty of Loyalty. Executive acknowledges the common law duties of reasonable care, loyalty, and honesty which arise out of the principal/agent relationship of the parties. While employed and thereafter for whatever term the law may impose, Executive shall not engage in any activity to the detriment of the Company. By way of illustration and not as a limitation, Executive shall not discuss with any customer or potential customer of the Company any plans by Executive or any other Executives of the Company to leave the employment of the Company and compete with the Company.

9. Company Documents. Executive agrees and acknowledges that Executive holds as the Company’s property all memoranda, books, papers, letters, and other data, including duplicates, relating to the Company’s business and affairs (“Company Documents”). This includes Company Documents created or used by Executive or otherwise coming into Executive’s possession in connection with the performance of Executive’s job duties. All Company Documents in the possession, custody, or control of Executive shall be returned to the Company at the time of termination of employment.

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Confidential Information and Non-Competition

10. In exchange for the mutual promises and obligations contained in this Agreement, and contemporaneous with its execution or soon thereafter, Employer promises to deliver to Executive or permit Executive to acquire, be exposed to, and/or have access to material, data, and information of the Company and/or its customers or clients that is confidential, proprietary and/or a trade secret (“Confidential Information”). At all times, both during and after the termination of employment, the Executive shall keep and retain in confidence and shall not disclose, except as required in the course of the Executive’s employment with the Company, to any person, firm or corporation, or use for the Executive’s own purposes, any Confidential Information. For the purposes of this paragraph, such information shall include, but is not limited to:

1.	The Company’s standard operating procedures, processes, formulae, know-how, scientific, technical, or product information, whether patentable or not, which is of value to the Company and not generally known by the Company’s competitors;
2.	All confidential information obtained from third parties and customers concerning their products, business, or equipment specifications;
3.	Confidential business information of the Company, including, but not limited to, marketing and business plans, strategies, projections, business opportunities, client identities or lists, sales and cost information, internal financial statements or reports, profit, loss, or margin information, customer price information; and,
4.	Other information designated by the Company or deemed by law to be confidential information.

11. Non-Competition. In consideration of the mutual promises contained in this Agreement, the sufficiency of which is acknowledged by the parties, Executive agrees that during the term of his employment and for a period of twelve (12) calendar months after termination of employment from the Company (whether voluntary or involuntary), Executive shall not, directly or indirectly, either as principal, agent, manager, employee, partner, shareholder, director, officer, consultant or otherwise:

1. Become associated or affiliated with, employed by, or financially interested in any business operation which competes in the business currently engaged in by Company. (The phrase “business currently engaged in by the Company” includes, but is not limited to, the type of activities in which the Company was engaged during Executive’s tenure, such as designs and delivers high performance connectivity adapters for computer and telecommunication networks.)

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2.	Solicit or attempt to solicit the business or patronage of any person, firm, corporation, partnership, association, department of government or other entity with whom the Company has had any contact during a period of twelve (12) calendar months preceding the date of this Agreement (“Customers”), or otherwise induce such Customers to reduce, terminate, restrict or otherwise alter business relationships with the Company in any fashion; or,
3.	In any way solicit or attempt to solicit the business or patronage of any Customers.
4.	The parties intend the above restrictions on competition to be completely severable and independent, and any invalidity or unenforceability of any one or more such restrictions shall not render invalid or unenforceable any one or more restrictions.

12. Limitations on Scope. In recognition of the broad geographic scope of the Company’s business and the ease of competing with the Company in any part of the United States, the restrictions on competition set forth herein are intended to cover the following geographic areas:

1.	The geographic territory identified on the attached Exhibit C;
2.	The cities containing a facility or operation owned or managed by the Company; and,
3.	A fifty (50) mile radius outside the boundary limits of each such city.

The parties intend the above geographical areas to be completely severable and independent, and any invalidity or unenforceability of this Agreement with respect to any one area shall not render this Agreement unenforceable as applied to any one or more of the other areas.

13. Non-Solicitation of Employees. During employment and for a period of twelve (12) months after termination, Executive agrees not to hire, employ, solicit, divert, recruit, or attempt to induce, directly or indirectly, any existing or future employee of the Company to leave their position with the Company or to become associated with a competing business.

Remedies for Breach

14. Company’s Right to Obtain an Injunction. Executive acknowledges that the Company will have no adequate means of protecting its rights under Paragraphs 10, 11, 12, or 13 of this Agreement other than be securing an injunction (a court order prohibiting the Executive from violating the Agreement). Accordingly, the Executive agrees that the Company is entitled to enforce this Agreement by obtaining a temporary, preliminary, and permanent injunction and any other appropriate equitable relief. Executive acknowledges that the Company’s recovery of damages will not be an adequate means to redress a breach of this Agreement. Nothing

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contained in this paragraph, however, shall prohibit the Company from pursuing any remedies in addition to injunctive relief, including recovery of damages. Executive expressly acknowledges that the Company has sole discretion regarding whether to seek a remedy for breaches of Paragraphs 10, 11, 12, or 13 in a court of competent jurisdiction or by arbitration procedures outlined in paragraph 15.

15. Arbitration. Executive and the Company agree that any unresolved dispute or controversy involving a claim for monetary damages and/or declaratory or injunctive relief arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a single arbitrator in Dallas, Texas, according to the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator’s award in any court having jurisdiction. The direct expense of any arbitration proceeding shall be borne by the Company. Notwithstanding the foregoing, nothing in this Paragraph is intended to subject a claim by either party arising under Paragraphs 10, 11, 12, or 13 to mandatory arbitration. Any claim arising under Paragraphs 10, 11, 12, or 13 shall be litigated in the courts of the relevant jurisdiction and venue.

Inventions and Discoveries

16. Discoveries, Inventions, & Copyrights. Executive shall disclose promptly to the Company any and all conceptions and ideas for inventions, improvements, and valuable discoveries, whether patentable or not, which are conceived or made by the Executive, solely or jointly, during Executive’s term of employment and which pertain to the business activities of the Company. Executive hereby assigns and agrees to assign all his interest therein to the Company or to its nominee. Whenever requested to do so by the Company, Executive shall execute any and all applications, assignments, or other instruments which the Company shall deem necessary to apply for and obtain Letters of Patent of the United States or any foreign country or to otherwise protect the Company’s interest therein.

General Provisions

17. Condition to Seeking Subsequent Employment. Executive agrees to show a copy of this Agreement to any Competitor with whom Executive interviews during the Executive’s employment with the Company or with whom the Executive interviews within twelve (12) months following the effective date of the termination of the Executive’s employment with the Company.

18. Attorneys’ Fees. If any party shall obtain a final judgment of a court of competent jurisdiction, subject to no further appeal, pursuant to which any other party shall be determined to have breached its obligations hereunder or made any misrepresentations, such prevailing party shall be entitled to recover, in addition to any award of damages, reasonable attorneys’ fees, costs, and expenses incurred by such party in obtaining such judgment.

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19. Non-Disparagement and Confidentiality. Except as may be required by law or as consented to in writing by an authorized officer or agent of the Company, Executive agrees not to make any statements whatsoever, directly or indirectly, written or oral, which could reasonably become public, which could be interpreted as embarrassing, disparaging, prejudicial, or in any way detrimental or inimical to the interests of the Company. Furthermore, Executive agrees to hold confidential and not to disclose, make public, or to communicate orally or in writing to any person or entity (other than Executive’s significant other and immediate family), directly or indirectly, the terms of this Agreement or any matters set forth herein, except only: (a) as may be compelled by court orders; (b) as may be necessary to enforce the terms of this Agreement; (c) to legal, accounting, and financial advisors; (d) as may be necessary in connection with the application for or obtaining loans or credit; (e) as may be necessary to comply with applicable laws and government regulations; or, (f) as may be necessary or desirable in obtaining future employment.

20. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the Company, its subsidiaries, affiliates, successors, and assigns.

21. Nonwaiver. Any waiver by the Company of a breach of any provision of this Agreement must be in writing and signed by the Company to be effective. Any waiver by the Company of a breach of any provision of this Agreement shall not operate or be construed as a waiver by the Company of any different or subsequent breach of this Agreement by Executive.

22. Applicable Law. This Agreement shall be construed in accordance with and governed by the laws of the State of Texas, without giving effect to the conflict of laws provisions thereof.

23. Forum Selection Clause. Any and all causes of action for equitable relief relating to the enforcement of this Agreement and not otherwise subject to the mandatory arbitration provisions of Paragraph 15 may, in the Employer’s sole discretion, be brought in the United States District Court for the Northern District of Texas or the Dallas County District of the Texas State Courts. The parties agree that the provisions of this paragraph benefit both Employer and Executive. Any and all causes of action by and between Employer and Executive can be quickly and efficiently resolved in the agreed-upon forum, which will not unduly burden either Employer or Executive, and which will substantially aid Employer and Executive in providing the opportunity for uniform treatment with respect to any issues relating to the covenants contained in this Agreement.

24. Entire Agreement. This Agreement represents the entire agreement between the Company and the Executive with respect to the subject matter hereof, supersedes all prior agreements dealing with the same subject matter, and may not be changed except in a writing signed by the party against whom enforcement of the Agreement, as so changed, is sought.

25. Severability. The invalidity of any term or provision of this Agreement, including any term or provision of paragraphs 10, 11, 12, or 13 shall not invalidate or otherwise affect any other

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term or provision of this Agreement.

26. This agreement shall be effective November 1, 2004.

Interphase Corporation
By: /s/ Gregory B. Kalush
	Gregory B. Kalush
	Its: President and Chief Executive Officer

Executive

/s/ James W. Gragg         

James W. Gragg

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Exhibit A

Job Description

Job Title: Vice President, Operations & Fulfillment	Department: Manufacturing
Reports To: CEO	FLSA Status: Exempt
Prepared By: D. Shute	Approved By: CEO & HR
Prepared Date: 10/29/04	Approved Date: 10/29/04

SUMMARY

Responsible for directing and controlling multiple manufacturing and operational functions, including, Material Planning, Quality Assurance, Incoming Inspection, Inventory Control, Surface Mount Board Assembly, Rework/touchup of assemblies, Mechanical Assembly, Production Test, Final Inspection, and Shipping and Receiving. Responsibility also includes the leadership of the Customer Fulfillment, Documentation Control, Return Material (RMA), and Manufacturing and Test Engineering Departments. Also chartered with ensuring the overall internal and external customer experience at Interphase is as close to best-in-class as possible in the areas for which this position is responsible.

ESSENTIAL DUTIES AND RESPONSIBILITIES include the following. Other duties may be assigned. Management reserves the right to change these duties at any time.
1.	Ensures Interphase manufactures an extremely high quality product to customer and/or company specifications, and that the product is delivered on time and in the manner in which the customer and/or company expects.
2.	Responsible for creating and maintaining a best-in-class manufacturing organization consisting of quality people, processes, programs, and products.
3.	Responsible for ensuring the company satisfactorily maintains its ISO:9000 and TL9000 quality certifications.
4.	Ensure effective communication, coordination, processes, and procedures between all cross-functional areas in Operations & Fulfillment, particularly between order management, contracts, configurations, production planning, and document control.
5.	Sets the long-term vision and mission of the organization, identifying short-term and long-term objectives, and developing strategies and tactics to link those objectives to corporate goals. Conveys initiatives, goals and values throughout the organization, and ensure management team does as well.
6.	Ensures key departmental metrics are established and performance to goals are tracked and reported on.
7.	Responsible for participating in the company’s annual planning process, including

	strategic decision making on future direction of company, developing functional operational plan, establishing budgets, etc.
8.	Personally manages the Engineering Departments associated with manufacturing including Manufacturing Engineering, Test Engineering and Component Engineering.
9.	Assists Production Planning with determination of manufacturing schedules, capacity analysis and inventory requirements. Involves detailed management of purchasing and inventory based on input from Executive Master Schedules, Sales Outlooks, OEM forecasts and historical material requirements.
10.	Ensures adequate training of managers and other manufacturing employees in related processes to accepted industry standards and applicable laws.
11.	Provides tactical initiatives and solutions to the manufacturing processes to ensure the ability to manufacture the advanced technology of LAN, SAN and WAN products.
12.	Maintains concise communications with the executive team to provide timely status and important issues for their review and recommendations.
13.	Participates in contract reviews, customer audits, as well as ISO audits, providing management responsibility representation and manufacturing process review.
14.	Leads the investigation and resolution efforts whenever product issues are determined to exist with a customer.

SUPERVISORY RESPONSIBILITIES

Manages several subordinate managers and staff including the Director of Customer Fulfillment, Sr. Manager of Manufacturing, Manager of Quality Assurance, and the Test Engineering team. Also, matrix manages the Manager of Purchasing. Is responsible for the overall direction, coordination, and evaluation of these units. Carries out supervisory responsibilities in accordance with the organization’s policies and applicable laws. Responsibilities include interviewing, hiring, and training employees; planning, assigning, and directing work; appraising performance; rewarding and disciplining employees; addressing complaints and resolving problems.

QUALIFICATIONS To perform this job successfully, an individual must be able to perform each essential duty satisfactorily. The requirements listed below are representative of the knowledge, skill, and/or ability required. Reasonable accommodations may be made to enable individuals with disabilities to perform the essential functions.  

EDUCATION and/or EXPERIENCE

Bachelor’s degree or higher in engineering or business, or equivalent, with 15 or more years experience in the electronic manufacturing industry, or equivalent combination of education and experience.

OTHER SKILLS AND ABILITIES

Knowledge of general business and accounting practices related to budgets, costing

and inventory management. Excellent interpersonal skills (written and verbal communication), ability to effectively lead teams of people toward common goals even under difficult circumstances, and the ability to motivate others. Strong negotiation and conflict resolution skills necessary. Ability to effectively conduct presentations to the rest of the company, our customers, and our Board of Directors. May be requested to participate in industry forums or associations on behalf of the company.

OTHER QUALIFICATIONS

Very computer literate. Proficient with the Microsoft Suite of products to create Excel spreadsheets and PowerPoint presentations, as well as do email and Word documents. Must be able to conduct effective cost-benefit analyses on capital expenditure requests, automation enhancements, department initiatives, etc.

REASONING ABILITY

Must demonstrate the ability to analyze and solve problems related to people and manufacturing processes.

PHYSICAL DEMANDS The physical demands described here are representative of those that must be met by an employee to successfully perform the essential functions of this job. Reasonable accommodations may be made to enable individuals with disabilities to perform the essential functions.

While performing the duties of this job, the employee is regularly required to talk or hear. The employee frequently is required to walk; sit; use hands to finger, handle, or feel; and reach with hands and arms. The employee is occasionally required to stand. The employee must occasionally lift and/or move up to 25 pounds. Specific vision abilities required by this job include color vision, close vision, and ability to adjust focus.

WORK ENVIRONMENT The work environment characteristics described here are representative of those an employee encounters while performing the essential functions of this job. Reasonable accommodations may be made to enable individuals with disabilities to perform the essential functions.

This position does require occasional travel, both national and international. Employee must possess, or be qualified to obtain, a valid passport.

The noise level in the work environment is usually moderate—manufacturing and normal office environment.

Initials /s/ GBK
/s/ JWG

Exhibit A

Exhibit B

Compensation

Base Salary. $5769.24 per pay period ($150,000/year on an annual basis), of which there are 26 in each calendar year, less deductions as may be required by law or authorized by Executive.

Performance Bonus. Executive shall be eligible for an annual bonus for FY2005 of $30,000 based upon the Corporation’s existing Executive Bonus Plan. This bonus will be tied to Executive Incentive Targets (MBOs) for 2005. The bonus will be awarded based on achievement of specific corporate objectives, as determined by the Company.

Stock Options. The Corporation shall, according to the Company’s Long-Term Stock Incentive Plan, grant to Executive options to purchase 10,000 shares of common stock of the Company. Executive’s right, title, and interest to any stock options conferred under the Employment Agreement shall be controlled and governed by terms and conditions of the Company’s Long-Term Stock Incentive Plan. The per share option price will be determined as of the close of NASDAQ trading on Executive’s first day of promotion to the Executive level.

Severance Pay. 6 months package, subject to terms and conditions. Please refer to section 4, “Termination Without Cause or Nonrenewal”, on page 2 of the Employment Agreement.

Vacation and Leave. Executive shall be entitled to four (4) weeks of vacation per year, accrued monthly, and six (6) sick days per year, and any other paid leave benefits provided for in the Company’s Policy Guide.

Office Furnishings. The Company agrees to provide, and has already provided, office space and furnishings to Executive commensurate with the Company’s decor and culture.

Executive Benefit Plans. Executive shall be eligible to participate in any profit sharing, retirement, medical benefit, or disability benefit plan maintained by the Company, if any, according to the terms and conditions of those plans.

Initials:/s/ GBK
/s/ JWG

Exhibit B

Exhibit C

Designated Cities — Per Paragraph 11a of Employment, Confidentiality,
and Non-Compete Agreement.

The Continental United States

Initials: /s/ GBK
/s/ JWG

Exhibit C

EX-10.(O)

Exhibit 10 (o)

(THIS AGREEMENT IS SUBJECT TO ARBITRATION)

EMPLOYMENT, CONFIDENTIALITY, AND NON-COMPETITION AGREEMENT

     This “Agreement” is between the “Company,” Interphase Corporation, and Prasad Kallur, “Executive.” The Company is organized under the laws of the State of Texas. Its principal place of business is located at 2901 North Dallas Parkway, Suite 200, Plano, TX 75093.

Background Statement

     The Company enables rapid platform design and integration for the global voice and data communications markets through custom and off-the-shelf communications equipment, embedded software development suites, and systems integration and consulting services for telecom and enterprise networks. Executive desires to be employed or continue to be employed by the Company. The Company desires to employ Executive, provided that as an express, prior condition of such employment, Executive enters into this Agreement with the Company.

     This Agreement sets forth the terms of Executive’s employment. The parties agree that this Agreement is supported by valuable consideration, that mutual promises and obligations have been undertaken by the parties to it, and that the agreement is entered into voluntarily by the parties.

Statement of Agreement

1. Duties. Executive shall devote Executive’s best efforts to the business of the Company. Executive shall perform such duties and responsibilities customary to the position of Vice President of Strategic Marketing, including those described on Exhibit A to this Agreement. Executive shall also perform those duties assigned by the Company from time to time.

2. Terms. The “initial term” of employment under this Agreement shall terminate six (6) months after the date of this Agreement. The initial term of this Agreement shall automatically renew for successive six (6) month periods, referred to as “successor terms,” unless either party gives thirty (30) days written notice of its intention not to renew prior to the expiration of the initial or any successor term or Executive is terminated for cause.

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3. Terminable Only For Cause. This Agreement may be terminated by the Company prior to the expiration of the initial term or any successor term as follows:

(a)	Due to the death of Executive;
(b)	Due to a physical or mental disability which prevents Executive from performing the essential functions of his full duties for a period of ninety (90) consecutive days during the term of this Agreement, as determined in good faith by a physician reasonably acceptable to the Company; or,
(c)	For Cause, which is (i) fraud, misappropriation, embezzlement, dishonesty, or other act of material misconduct against the Company or any affiliate of the Company; (ii) failure to perform specific and lawful directives of Executive’s superiors; (iii) violation of any rules or regulations of any governmental or regulatory body, which is materially injurious to the financial condition of the Company; (iv) conviction of or plea of guilty or nolo contendere to a felony; (v) violation of the provisions of 8, 9, 10, 11,13, or 16; or, (vi) substantial failure to perform the duties and responsibilities of Executive under this Agreement.
In the event of termination under this paragraph, Executive shall be entitled only to Executive’s base salary earned through the date of termination. No accrued but unpaid bonuses or commissions shall be due to Executive.

4. Termination Without Cause or Nonrenewal. In the event the Company gives Executive thirty days written notice of its intention not renew a term of this Agreement, or if Executive is terminated without cause after the expiration of the initial term, the Executive shall receive an amount equal to six-months severance pay based on the Executive’s base salary at the time of termination, payable in bi-monthly or bi-weekly installments as dictated by the regular pay dates of the Company. No accrued but unpaid bonuses or commissions shall be due to Executive under this Paragraph. No other severance payment or benefits shall be due Executive other than those provided for under this Agreement. Notwithstanding anything stated herein to the contrary, in the event Executive becomes employed during the period in which the Executive is eligible to receive post-employment payments under this Paragraph, any amounts received by Executive in the form of compensation, salary, or other payments shall be offset or shall reduce any amounts or liability owed by the Company to the Executive under this Paragraph.

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5.	Compensation. Employer shall pay and provide benefits to Executive according to the provisions of Executive’s compensation plan described in the attached Exhibit B. Executive’s compensation plan shall be reviewed on a periodic basis. The Company reserves the right, and Executive hereby authorizes Company. to make deductions front Executive’s pay or bonuses to satisfy any outstanding obligations of Executive to the Company. The Company may offset against the final payment of wages or bonuses owed to Executive any amounts due the Company from Executive.
6.	Changes in Position, Location, or Compensation. If the Company transfers, promotes, or reassigns Executive to another position, or geographic area, or both parties agree to a change in compensation or benefits during a term of this Agreement or upon the renewal of a term of this Agreement, an updated employment agreement may be substituted by agreement of the parties but is not required. Mutually-agreeable changes in compensation or benefits shall be effected by amendment to and incorporation of a modified Exhibit B, initialed by the parties or their authorized representative. All provisions, promises, terms or conditions not modified by an amendment of Exhibits A—C shall remain in effect and shall not be deemed revoked or modified beyond the changes set forth in one or more amended Exhibits.
7.	Executive Representation/Warranty. Executive represents that Executive is not a party to any agreement with a third party, or limited by a court order, containing a non-competition provision or other restriction which would preclude Executive’s employment with Company or any of the services which Executive will provide on the Company’s behalf.
8.	Duty of Loyalty. Executive acknowledges the common law duties of reasonable care, loyalty, and honesty which arise out of the principal/agent relationship of the parties. While employed and thereafter for whatever term the law may impose, Executive shall not engage in any activity to the detriment of the Company. By way of illustration and not as a limitation, Executive shall not discuss with any customer or potential customer of the Company any plans by Executive or any other Executives of the Company to leave the employment of the Company and compete with the Company.
9.	Company Documents. Executive agrees and acknowledges that Executive holds as the Company’s property all memoranda, books, papers, letters, and other data, including duplicates, relating to the Company’s business and affairs (“Company Documents”). This includes Company Documents created or used by Executive or otherwise coming into Executive’s possession in connection with the performance of Executive’s job duties. All Company Documents in the possession, custody, or control of Executive shall be returned to the Company at the time of termination of employment.

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Confidential Information and Non-Competition

10. In exchange for the mutual promises and obligations contained in this Agreement, and contemporaneous with its execution or soon thereafter, Employer promises to deliver to Executive or permit Executive to acquire, be exposed to, and/or have access to material, data, and information of the Company and/or its customers or clients that is confidential, proprietary and/or a trade secret (“Confidential Information”). At all times, both during and after the termination of employment, the Executive shall keep and retain in confidence and shall not disclose, except as required in the course of the Executive’s employment with the Company, to any person, firm or corporation, or use for the Executive’s own purposes, any Confidential Information. For the purposes of this paragraph, such information shall include, but is not limited to:

1.	The Company’s standard operating procedures, processes, formulae, know-how, scientific, technical, or product information, whether patentable or not, which is of value to the Company and not generally known by the Company’s competitors;
2.	All confidential information obtained from third parties and customers concerning their products, business, or equipment specifications;
3.	Confidential business information of the Company, including, but not limited to, marketing and business plans, strategies, projections, business opportunities, client identities or lists, sales and cost information, internal financial statements or reports, profit, loss, or margin information, customer price information; and,
4.	Other information designated by the Company or deemed by law to be confidential information.

11. Non-Competition. In consideration of the mutual promises contained in this Agreement, the sufficiency of which is acknowledged by the parties, Executive agrees that during the term of his employment and for a period of twelve (12) calendar months after termination of employment from the Company (whether voluntary or involuntary), Executive shall not, directly or indirectly, either as principal, agent, manager, employee, partner, shareholder, director, officer, consultant or otherwise:

1. Become associated or affiliated with, employed by, or financially interested in any business operation which competes in the business currently engaged in by Company. (The phrase “business currently engaged in by the Company” includes, but is not limited to, the type of activities in which the Company was engaged during Executive’s tenure, such as designs and delivers high performance connectivity adapters for computer and telecommunication networks.)

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2.	Solicit or attempt to solicit the business or patronage of any person, firm, corporation, partnership, association, department of government or other entity with whom the Company has had any contact during a period of twelve (12) calendar months preceding the date of this Agreement (“Customers”), or otherwise induce such Customers to reduce, terminate, restrict or otherwise alter business relationships with the Company in any fashion; or,
3.	In any way solicit or attempt to solicit the business or patronage of any Customers.
4.	The parties intend the above restrictions on competition to be completely severable and independent, and any invalidity or unenforceability of any one or more such restrictions shall not render invalid or unenforceable any one or more restrictions.

12. Limitations on Scope. In recognition of the broad geographic scope of the Company’s business and the ease of competing with the Company in any part of the United States, the restrictions on competition set forth herein are intended to cover the following geographic areas:

1.	The geographic territory identified on the attached Exhibit C;
2.	The cities containing a facility or operation owned or managed by the Company; and,
3.	A fifty (50) mile radius outside the boundary limits of each such city.
The parties intend the above geographical areas to be completely severable and independent, and any invalidity or unenforceability of this Agreement with respect to any one area shall not render this Agreement unenforceable as applied to any one or more of the other areas.

13. Non-Solicitation of Employees. During employment and for a period of twelve (12) months after termination, Executive agrees not to hire, employ, solicit, divert, recruit, or attempt to induce, directly or indirectly, any existing or future employee of the Company to leave their position with the Company or to become associated with a competing business.

Remedies for Breach

14. Company’s Right to Obtain an Injunction. Executive acknowledges that the Company will have no adequate means of protecting its rights under Paragraphs 10, 11, 12, or 13 of this Agreement other than be securing an injunction (a court order prohibiting the Executive from violating the Agreement). Accordingly, the Executive agrees that the Company is entitled to enforce this Agreement by obtaining a temporary, preliminary, and permanent injunction and any other appropriate equitable relief. Executive acknowledges that the Company’s recovery of damages will not be an adequate means to redress a breach of this Agreement. Nothing

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contained in this paragraph, however, shall prohibit the Company from pursuing any remedies in addition to injunctive relief, including recovery of damages. Executive expressly acknowledges that the Company has sole discretion regarding whether to seek a remedy for breaches of Paragraphs 10, 11, 12, or 13 in a court of competent jurisdiction or by arbitration procedures outlined in paragraph 15.

15.

Arbitration. Executive and the Company agree that any unresolved dispute or controversy involving a claim for monetary damages and/or declaratory or injunctive relief arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a single arbitrator in Dallas, Texas, according to the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator’s award in any court having jurisdiction. The direct expense of any arbitration proceeding shall be borne by the Company. Notwithstanding the foregoing, nothing in this Paragraph is intended to subject a claim by either party arising under Paragraphs 10, 11, 12, or 13 to mandatory arbitration. Any claim arising under Paragraphs 10, 11, 12, or 13 shall be litigated in the courts of the relevant jurisdiction and venue.

Inventions and Discoveries

16.	Discoveries, Inventions, & Copyrights. Executive shall disclose promptly to the Company any and all conceptions and ideas for inventions, improvements, and valuable discoveries, whether patentable or not, which are conceived or made by the Executive, solely or jointly, during Executive’s term of employment and which pertain to the business activities of the Company. Executive hereby assigns and agrees to assign all his interest therein to the Company or to its nominee. Whenever requested to do so by the Company, Executive shall execute any and all applications, assignments, or other instruments which the Company shall deem necessary to apply for and obtain Letters of Patent of the United States or any foreign country or to otherwise protect the Company’s interest therein.
	General Provisions
17.	Condition to Seeking Subsequent Employment. Executive agrees to show a copy of this Agreement to any Competitor with whom Executive interviews during the Executive’s employment with the Company or with whom the Executive interviews within twelve (12) months following the effective date of the termination of the Executive’s employment with the Company.
18.	Attorneys’ Fees. If any party shall obtain a final judgment of a court of competent jurisdiction, subject to no further appeal, pursuant to which any other party shall be determined to have breached its obligations hereunder or made any misrepresentations, such prevailing party shall be entitled to recover, in addition to any award of damages, reasonable attorneys’ fees, costs, and expenses incurred by such party in obtaining such judgment.

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19.	Non-Disparagement and Confidentiality. Except as may be required by law or as consented to in writing by an authorized officer or agent of the Company. Executive agrees not to make any statements whatsoever, directly or indirectly, written or oral, which could reasonably become public, which could be interpreted as embarrassing, disparaging, prejudicial, or in any way detrimental or inimical to the interests of the Company. Furthermore, Executive agrees to hold confidential and not to disclose, make public, or to communicate orally or in writing to any person or entity (other than Executive’s significant other and immediate family), directly or indirectly, the terms of this Agreement or any matters set forth herein, except only: (a) as may be compelled by court orders; (b) as may be necessary to enforce the terms of this Agreement; (c) to legal, accounting, and financial advisors; (d) as may be necessary in connection with the application for or obtaining loans or credit; (e) as may be necessary to comply with applicable laws and government regulations; or, (e) as may be necessary or desirable in obtaining future employment.
20.	Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the Company, its subsidiaries, affiliates, successors, and assigns.
21.	Nonwaiver. Any waiver by the Company of a breach of any provision of this Agreement must be in writing and signed by the Company to be effective. Any waiver by the Company of a breach of any provision of this Agreement shall not operate or be construed as a waiver by the Company of any different or subsequent breach of this Agreement by Executive.
22.	Applicable Law. This Agreement shall be construed in accordance with and governed by the laws of the State of Texas, without giving effect to the conflict of laws provisions thereof.
23.	Forum Selection Clause. Any and all causes of action for equitable relief relating to the enforcement of this Agreement and not otherwise subject to the mandatory arbitration provisions of Paragraph 15 may, in the Employer’s sole discretion, be brought in the United States District Court for the Northern District of Texas or the Dallas County District of the Texas State Courts. The parties agree that the provisions of this paragraph benefit both Employer and Executive. Any and all causes of action by and between Employer and Executive can be quickly and efficiently resolved in the agreed-upon forum, which will not unduly burden either Employer or Executive, and which will substantially aid Employer and Executive in providing the opportunity for uniform treatment with respect to any issues relating to the covenants contained in this Agreement.
24.	Entire Agreement. This Agreement represents the entire agreement between the Company and the Executive with respect to the subject matter hereof, supersedes all prior agreements dealing with the same subject matter, and may not be changed except in a writing signed by the party against whom enforcement of the Agreement, as so changed, is sought.
25.	Severability. The invalidity of any term or provision of this Agreement, including any term or provision of paragraphs 10, 11, 12, or 13 shall not invalidate or otherwise affect any other

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	term or provision of this Agreement.
26.	This agreement shall be effective May 23, 2005.

Interphase Corporation
By:	/s/ Gregory B. Kalush
	Gregory B. Kalush
Its:	President and Chief Executive Officer
Executive
/s/ Prasad Kallur
Prasad Kallur

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Exhibit A

Job Description

Job Title: Vice President, Strategic Marketing	Department: Marketing
Reports To: CEO & President	FLSA Status: Exempt
Prepared By: D. Shute	Approved By: CEO & HR
Prepared Date: 4/27/05	Approved Date:

SUMMARY

Responsible for leading the Strategic Marketing, Product Management, Technical Writing, and Marketing Communications functions by performing the following duties personally or through subordinate managers. Chartered with ensuring the overall internal and external customer experience at Interphase is as close to best-in-class as possible in the in the areas for which this position is responsible.

ESSENTIAL DUTIES AND RESPONSIBILITIES include the following. Other duties may be assigned. Management reserves the right to change these duties at any time.

1.	Leads Strategic Marketing.
•	Significantly contributes to setting the short-term and long-term vision and mission of the organization, identifying objectives and developing strategies and tactics to link those objectives to corporate goals.
•	Personally ensures Interphase Executive team is aware of current and leading-edge market & customer trends in a timely fashion, and participates in business development analysis and decision-making.
•	Triangulates customer trends and market trends for recommendations for corporate strategy.
•	Reviews and recommends alternative markets and segments.
•	Determines where the current products could compete
•	Understands what it takes to displace competition in the current and alternative markets.
2.	Product Line Management
•	Reviews Product Application in Existing Network Elements
•	As technology evolves what can Interphase do to extend the lifecycle?
•	Are there regulatory issues that may extend the lifecycle?
•	Are there marketing communications avenues with certain channels that will extend the life?

•	Manages Product Positioning for Current Product Lines.
•	Analyze market trends for current products, including the following: Where current customers are using the products, the pricing elasticity of the current products, the features required to extend the product lifecycle, the packaging required to create mid-life kickers of the product, the options to extend the product lifecycle, future technology trends and their impact, and competitive positioning.
•	Recommends Actions to Increase the Lifecycle or Revenue, including pricing, bundling, partners, channels, and marketing communications strategies.
3.	Manages Marketing Communications & Administration.
•	Responsible for all marketing activities associated with sales support and product/company promotion.
•	Focuses on existing product lines to determine the roadmap for the product line.
•	Determines how Interphase can extend the line as well as computing the lifecycle.
•	Provides measurement against competition and market share.
•	Oversees RFI/RFQ/RFP response and contract management for the product line.
4.	In conjunction with Sales and Finance, develops competitive pricing strategies.
5.	Responsible for ensuring the company satisfactorily maintains its ISO:9000 and TL9000 quality certifications. Reviews and analyses of activities, costs, operations, and forecast data to determine department progress toward stated goals and objectives.
6.	Confers with Chief Executive Officer to review achievements and discuss required changes in goals or objectives resulting from current status and conditions.
7.	Establishes and implements promotional and advertising programs.
8.	Responsible for creating and maintaining a best-in-class marketing organization consisting of quality people, processes, programs, and products.
9.	Ensures effective communication, coordination, processes, and procedures between all cross-functional areas in the company, particularly between Marketing, Sales, and Engineering.
10.	Conveys initiatives, goals and values throughout the organization, and ensure management team does as well.
11.	Ensures key departmental metrics are established and performance to goals are tracked and reported on.
12.	Responsible for participating in the company’s annual planning process, including strategic decision making on future direction of company, developing functional operational plan, establishing budgets, etc.

13.	Significantly assists with development and maintenance of the company’s Product Roadmap.
14.	Ensures adequate training of managers and other marketing employees in related processes to accepted industry standards and applicable laws.
15.	Provides tactical initiatives and solutions to the manufacturing processes to ensure the ability to manufacture the advanced technology of LAN, SAN and WAN products.
16.	Maintains concise communications with the executive team to provide timely status and important issues for their review and recommendations.
17.	Participates in contract reviews, customer audits, as well as ISO audits, providing management responsibility representation and manufacturing process review.

SUPERVISORY RESPONSIBILITIES

Manages several subordinate managers and staff including the director of Marketing Communications, Sr. Product Manager, Manager of Technical Writing, and Marketing Communications Associate. Is responsible for the overall leadership, direction, coordination, motivation, and evaluation of these units. Carries out supervisory responsibilities in accordance with the organization’s policies and applicable laws. Responsibilities include interviewing, hiring, and training employees; planning, assigning, and directing work; appraising performance; rewarding and disciplining employees; addressing complaints and managers and resolving problems.

QUALIFICATIONS To perform this job successfully, an individual must be able to perform each essential duty satisfactorily. The requirements listed below are representative of the knowledge, skill, and/or ability required. Reasonable accommodations may be made to enable individuals with disabilities to perform the essential functions.

EDUCATION and/or EXPERIENCE
Bachelor’s Degree required. Preferably an MBA with a major in Marketing or Economics; or a minimum of ten years related experience and/or training; or equivalent combination of education and experience.

LANGUAGE SKILLS

Ability to read, analyze, and interpret common scientific and technical journals, financial reports, and legal documents. Ability to write Marketing Requirements Specifications and Customer Requirements Specifications. Ability to respond to common inquiries or complaints from customers, regulatory agencies, or members of the business community. Ability to write speeches and whitepapers/articles for publication that conform to prescribed style and format. Ability to effectively present information to various internal and external audiences.

OTHER SKILLS AND ABILITIES

Knowledge of general business and accounting practices related to budgets, costing and inventory management. Excellent interpersonal skills (written and verbal communication), ability to effective lead teams of people toward common goals even under difficult circumstances, and the ability to motivate others. Strong negotiation and conflict resolution skills necessary. Ability to effectively conduct presentations to customers, technical industry groups, analysts, the media, the rest of the company, and our Board of Directors. May be requested to participate in industry forums or associations on behalf of the company.

MATHEMATICAL SKILLS

Ability to calculate key business measurements such as ROI and CAGR, and to conduct simple analysis using such tasks as frequency distribution, analysis of variance, correlation techniques, sampling theory, and factor analysis. Ability to present numerical data in a graphical format to enhance simple visual interpretation by a variety of audiences.

REASONING ABILITY

Ability to define problems, collect data, establish facts, draw valid conclusions. Ability to interpret an extensive variety of technical instructions in mathematical or diagram form and deal with several abstract and concrete variables.

OTHER QUALIFICATIONS

Must be able to handle multiple tasks concurrently, prioritizing as necessary. Must have good communication skills (reading, writing speaking, and presentation),understanding of business and marketing-related concepts,analytical skills, creative thinking skills, skills in tactfully addressing various tasks, and ability to occasionally work under pressure or in a deadline-oriented environment. Must be very computer literate. Proficient with the Microsoft Suite of products to create PowerPoint presentations, Word documents, Excel spreadsheets, and do email. Must be able to conduct effective cost-benefit analyses on capital expenditure requests, automation enhancements, department initiatives, etc.

PHYSICAL DEMANDS

The physical demands described here are representative of those that must be met by an employee to successfully perform the essential functions of this job. Reasonable accommodations may be made to enable individuals with disabilities to perform the essential functions.

While performing the duties of this job, the employee is regularly required to talk or hear. The employee frequently is required to walk; sit; use hands to finger, handle, or feel; and reach with hands and arms. The employee is occasionally required to stand. The employee must occasionally lift and/or move up to 25 pounds. Specific vision abilities required by this job include color vision, close vision, and ability to adjust focus.

WORK ENVIRONMENT

The work environment characteristics described here are representative of those an the employee encounters while performing the essential functions of this job. Reasonable accommodations may be made to enable individual with disabilities to perform the essential functions.

This position does require regular and significant travel, both national and international. Employee must possess, or be qualified to obtain, a valid passport.

Initials	/s/ PRK
	/s/ GBK

Exhibit A

Exhibit B

Compensation

Base salary. $6,730.77 per pay period ($175,000/year on an annual basis), of which there are 26 in each calendar year, less deductions as may be required by law or authorized by Executive.

Key Talent Bonus. Executive shall be eligible for an annual bonus for FY2005 of $40,000 based upon the Corporation’s existing Executive Bonus Plan. This bonus will be tied to Executive Incentive Targets (MEOs) for 2005. The bonus will be awarded based on achievement of specific corporate objectives, as determined by the Company, and is subject to change annually by the Bord of Directors.

Equity. The Corporation shall, according to the company’s Long-Term Stock Incentive Plan and with the approval of the CEO and Board of Directors, gant to Executive 18,000 shares of restricted stock of the Company. Executive’ right, title, and interest to any stock conferred under the Employment Agreement shall be controlled and governed by terms and conditions of the Company’s Long-Term Stock Incentive Plan. The per share price will be determined as of the close of NASDAQ trading on Executive’s first day of employment.

Relocation Bonus. $50,000 lump sum (grossed up for taxes), sign-on bonus to cover relocation expenses, payable 1^st pay period after start date. Executive is free to choose how these funds are spent, and no receipts are required. If Executive leaves within 1 year, bonus will be payable back to the company 100%. If Executive leaves after 1 year, but prior to 2 years, bonus will be payable back to the company on a monthly pro-rated basis. If company terminates Executive, repayment will not be required.

Temporary Living Expenses. Executive will be provided with a furnished, one-bedroom corporate apartment near the Plano office and a rental car, both paid for by the Company, up to a maximum of 90 days from commencement of employment. In addition, reimbursement for airfare between Dallas and San Diego to visit family, and for spouse’s visit to Dallas for house-hunting purposes during the 90 day relocation period will be paid for by the Company up to a maximum of $10,000 in compliance with the company’s standard Travel & Entertainment Policy.

Executive Benefit Plans. Based on the plans in force at the time, and subject to change at any time, the Executive will be provided with a comprehensive and competitive benefits package including medical, dental, vision, life, AD&D, STD, LTD, etc., all effective on hire date. Executive will be 401k eligible with matching contribution after 60 days of employment. The Executive shall be eligible to participate in any benefit plan maintained by the Company, according to the terms and conditions of those plans. For the 2005 Plan Year, 50% of the premiums charged to non-Executive employees will be paid by company for the Executive and their eligible dependents for medical, dental, vision, and life insurance.

Initials	/s/ PRK
	/s/ GBK

Executive and their eligible dependents for medical, dental, vision, and life insurance. Effective January 1, 2006, the Executive will pay same as all other Executive and non-Executive employees for health premiums

Severance Pay. 6 months package, subject to terms and conditions. Please refer to section 4, “Termination Without Cause or Nonrenewal”, on page 2 of the Employment Agreement.

Executive Disability Plan. The Executive is eligible to apply for the Company’s Executive Disability Plan. If approved by the carrier for coverage, the premiums will be paid for by the Company.

Vacation and Leave. Executive stall be entitled to three (3) weeks of vacation per year, accrued monthly, and six (6) sick days per year, and any other paid leave benefits provided for in the Company’s Policy Guide.

Cell Phone & Computer. Executive will be furnished with a laptop and cell phone/PDA for business purposes.

Office Furnishings. The Company agrees to provide office space and furnishings to Executive commensurate with the Company’s decor and culture.

Initials	/s/ PRK
	/s/ GBK

Exhibit B

Exhibit C

Designated Cities — Per Paragraph 11a of Employment, Confidentiality, and Non-Compete Agreement.

The Continental United States

Initials	/s/ PRK
	/s/ GBK

Exhibit C

EX-10.(P)

Exhibit 10(p)

[THIS AGREEMENT IS SUBJECT TO ARBITRATION]

EMPLOYMENT AGREEMENT

          THIS EMPLOYMENT AGREEMENT (“Agreement”) is made and entered into as of the 11^th of May, 1999, (“Effective Date”) by and between Interphase Corporation and its subsidiaries (the “Corporation”), and Steven P. Kovac (“Executive”).

          WHEREAS, the Corporation desires to enter into an employment relationship with Executive on certain terms and conditions as set forth herein; and

          WHEREAS, Executive is willing to accept such employment on such terms; and

          NOW, THEREFORE, the parties hereto, in consideration of the mutual covenants and promises hereinafter contained, do hereby agree as follows:

1)	Employment. The Corporation hereby employs Executive and Executive hereby accepts employment on the following terms and conditions. Executive will be employed by the Corporation as the Vice President of Finance and Chief Financial Officer of the Corporation. In that capacity, Executive will be an Officer of the Corporation and will report directly to the Chief Executive Officer of the Corporation. Executive agrees to review and comply with all policies and procedures in the Corporation’s Employee Handbook.
2)	Term. Executive’s employment with the Corporation will be “At Will”, and thus, either party may terminate the relationship at any time for any reason, subject to the termination provisions in paragraphs 6 and 7. Only the Chief Executive Officer of the Corporation has any authority to modify this Agreement or enter into any other agreement for employment for any specified time or to make any agreement contrary to the “At Will” relationship. Executive further understands that any reference to dates and/or periods of time in his Agreement, including any reference to rights Executive may have at certain specified dates after his execution of this Agreement, are expressly conditional upon Executive remaining in the employment of the Corporation at the specified time or date and are in no way intended to alter the “At Will” nature of Executive’s employment.
3)	Salary and Other Compensation. As compensation for the services to be rendered by Executive to the Corporation pursuant to this Agreement, Executive shall be paid the following compensation and other benefits:

a) Salary: $6,730.77 per pay period, of which there are 26 in each calendar year, less deductions as may be required by law. The Corporation reserves the right to: (i) make deductions from Executive’s pay to satisfy any outstanding obligations; and/or (ii) make deductions from Executive’s pay to satisfy any losses resulting from unlawful activities. In each case,

	deductions to be made only after final adjudication by a court of competent jurisdiction.
b)	Bonus: Executive shall be eligible for an annual bonus based upon the Corporation’s existing Executive Bonus Plan; the “annual bonus target”shall be $40,000 if the Corporation satisfies the criteria for achieving said bonus as outlined in the Executive Bonus Plan. Executive understands and agrees that for any calendar year 1999, he shall be eligible for a full year of his annual target bonus. The Corporation reserves the right to: (i) make deductions from Executive’s bonus to satisfy any outstanding obligations; and/or (ii) make deductions from Executive’s bonus to satisfy any losses resulting from unlawful activities.
c)	Stock Options:

1)	Option Grant: The Corporation shall, in accordance with the Corporation’s Amended and Restated Stock Option Plan, grant to Executive options to purchase 100,000 shares of common stock of the Corporation which options shall vest in accordance with sub-part 3) below. To the maximum extent permitted within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, a portion of the option grant will be incentive stock options with the balance being nonqualified stock options. Such option grant shall be in consideration of Executive’s agreement to abide by the covenant not to compete provisions and nondisclosure requirements contained in paragraphs 4 and 5 of this Agreement. Executive certifies that, as of the Effective Date, he has seen or been given access to the items listed on Attachment A, “List of Confidential Information”.
2)	Option Price: The price at which Executive may exercise the stock options will be the closing price of the Corporation’s common stock on Executive’s Effective Date. A separate stock option agreement will be prepared for Executive covering the incentive and nonqualified stock option grants.
3)	Vesting Schedule: Executive’s right to exercise the stock options granted to him herein will vest, provided that Executive remains employed by the Corporation, at the rate of 20% annually, beginning on the first date of his employment, provided that Executive will have no right to exercise any such options prior to the first anniversary of his employment with the Corporation (except as provided in sub-part below). Subject to the provisions of sub-part (4), below, Executive must exercise his options within 10 years of the Effective Date or Executive will lose and forever waive his rights to exercise such options.

4)	Rights Upon Termination of Employment: Notwithstanding the other provisions of this Agreement, in the event Executive’s employment with the Corporation terminates for any reason (i) Executive must exercise all vested options within 90 days of the date of termination, or Executive will lose and forever waive his rights to exercise such of options and (ii) any options in which Executive has not vested as of the date of termination will lapse and may not at any time be exercised by Executive.
5)	Regulation of Rights: Executive must comply with all requirements regarding purchasing the Corporation’s Common Stock and exercising stock options, including, without limitation, requirements promulgated by the Corporation and the Securities and Exchange Commission. In this regard, Executive must report to the Corporation any activity such as selling, purchasing or exercising the Corporation’s Common Stock and/or stock options. Any questions regarding reporting requirements should be directed to the Corporation’s Chief Executive Officer.
6)	Upon Acquisition of Shares by One Investor: Notwithstanding any provision herein to the contrary, if at any time during the term of this Agreement one investor (including all affiliates, as defined in Rule 405 promulgated pursuant to the Securities Act of 1933, as amended, of such investoi) accumulates 30% or more of the out standing common stock of the Corporation all of the stock options (the “Executive Stock Options”) which have been granted pursuant to the Plan, or otherwise, shall be accelerated and become immediately vested. The Executive Stock Options as so accelerated are hereinafter referred to as the “Advanced Options.” If any of the Executive’s Incentive Stock Options, including the Advanced Options that fall within the definition of the Executive’s Incentive Stock Options, which are vested are not exercised prior to their termination, then the Corporation shall grant a fully-vested nonqualified stock option to the Executive for the same number of vested shares not exercised and at the same exercise price.

d)

Office Furnishings: The Corporation agrees to provide office space and furnishings to Executive commensurate with the Corporation’s décor and culture.

e)

Executive Benefit Plans: Executive shall be allowed to participate, to the extent they may be eligible, in any profit sharing, retirement, insurance or other Executive benefit plan maintained by the Corporation. In the event Executive elects to participate in the Corporation’s medical, dental, vision, and life insurance plans, the Corporation will pay the entire cost of such coverage for Executive and his immediate family.

f) Vacations and Leave: Executive shall be entitled to three (3) weeks of vacation per year, accrued monthly, and six (6) sick days per year, and any other paid leave benefits provided for in the Corporation’s Employee Handbook.

4) Non-Disclosure of Confidential Information. Executive acknowledges that beginning on Effective Date, the Corporation shall provide to Executive, and he will otherwise be making use of, acquiring, and/or adding to special training and confidential information of a special and unique nature and value relating to such matters as the Corporation’s copyrights, proprietary information, trade secrets, systems, product developments, procedures, manuals, confidential reports, lists of customers (which are deemed for all purposes confidential and proprietary), as well as the nature and type of services rendered by the Corporation, the equipment and methods used and preferred by the Corporation’s customers, and the fees paid by them. Executive further agrees that if a third party (e.g., vendors, customers and manufacturers) contracts with the Corporation, the information obtained or received from a third party including, but not limited to, its patents, copyrights, proprietary information, trade secrets, systems, product development, procedures manuals, and confidential reports, will be treated in the same manner and subject to the same protection as other Confidential Trade Secret Information (as hereinafter defined) of the Corporation.

     As a material inducement to the Corporation to enter into this Agreement and to pay Executive the compensation and benefits stated herein and as a condition of employment and continued employment, Executive shall keep confidential all such confidential and proprietary information which Executive learns or acquires as a result of his employment with the Corporation. By way of example, “Confidential Trade Secret Information” may consist of any idea, process, design, concept, formula, pattern, device, development, customer information or compilation of information which is used in the Corporation’s business, which gives the Corporation an advantage over a competitor who does not know or use it.

     Executive agrees that the appropriate remedy for any breach of this paragraph 4 is a suit for injunctive relief and specific performance in any court of competent jurisdiction. Executive agrees that damages for use of any identified Confidential Trade Secret Information in violation of this paragraph 4 shall be 100% of the gross amount of revenue derived from unauthorized use of such information.

5) Covenants Not to Compete. Executive acknowledges that the confidential information which the Corporation may provide to him under the terms of paragraph 4 of this Agreement is special and unique, and that the receipt of it by Executive is of benefit and value to him. Executive acknowledges delivery and receipt of such confidential information and specialized training contemporaneously and/or in conjunction with the execution of this Agreement, such confidential information and training being given and delivered to Executive expressly in consideration for his agreement to be bound by the provisions of this Paragraph. Executive also acknowledges that Corporation does not normally disclose such confidential information and takes steps to protect it. Executive further acknowledges that the services he/she is to render to the

Corporation are of a special and unusual character with a unique value to the Corporation, the loss of which cannot adequately be compensated by damages in action at law. Accordingly, and expressly in consideration for the Corporation’s agreement in paragraph 4 of this agreement to provide confidential information to him, Executive agrees that during the term of his employment and for a period of twelve (12) months from the date this Agreement is terminated, for whatever reason:

a)	Executive shall not, directly or indirectly, without the express written consent of the Corporation, solicit or induce, or attempt to solicit or induce, any employee of the Corporation, current or future, to leave or cease their relationship with the Corporation, for any reason whatsoever, or hire any current or future employee of the Corporation.
b)	Executive shall not, directly or indirectly, without the express written consent of the Corporation (i) engage in any business or activity that is competitive with the business of the Corporation; and/or (ii) be employed by, or provide competitive services or assistance to, a “Competing Business” (hereinafter defined) which would potentially involve, directly or indirectly, the use and/or disclosure of the Corporation’s Confidential Trade Secret Information. For purposes of this Agreement, a Competing Business means any person or firm that offers services or products that are directly competitive with those marketed, offered for sale and/or under any stage of development by the Corporation as of the date of Executive’s separation from employment. If Executive desires to work for a Competing Business in an area that is not competitive with the business of the Corporation, Executive must give written notice to the Chief Executive Officer of the Corporation and obtain his approval that the employment will not violate the terms and conditions of this paragraph 5 before beginning employment with the Competing Business.
c)	Executive will not solicit or attempt to solicit the Corporation’s existing or prospective customers to purchase services or products that are competitive with those marketed, offered for sale and/or under any stage of development by the Corporation as of the date of Executive’s separation from the Corporation. For purposes of this Agreement,existing customers shall mean those persons or firms that the Corporation has made a sale to in the twelve (12) months preceding Executive’s separation from employment; prospective customers shall mean those persons or firms that the Corporation has solicited and/or negotiated to sell the Corporation’s products or services to within the twelve (12) months preceding Executive’s separation from the Corporation.
d)	In the event that any of the provisions of this paragraph 5 shall be held to be invalid or unenforceable, the remaining provisions thereof shall nevertheless continue to be valid and enforceable as though the invalid

or unenforceable parts had not been included therein. In the event that any provision of this paragraph 5 relating to the time period and/or the areas of restriction and/or related aspects shall be declared by a court of competent jurisdiction to exceed the maximum restrictiveness such court deems reasonable and enforceable, the time period and/or areas of restriction and/or related aspects deemed reasonable and enforceable by the court shall become and thereafter be the maximum restriction in such regard, and the restriction shall remain enforceable to the fullest extent deemed reasonable by such court.

e)

Executive agrees that the appropriate remedy for any breach of this paragraph 5 is a suit for injunctive relief and/or specific performance in any court of competent jurisdiction. Executive agrees that the Corporation also has the right to seek damages for any breach of this paragraph 5. The Corporation has sole discretion regarding whether to seek a remedy for breach of this paragraph in a Court of competent jurisdiction and/or through arbitration procedures outlined in paragraph 9.

6) Termination. This Agreement will terminate as follows:

a)	Death. Executive’s employment hereunder shall automatically terminate upon his death.
b)	Disability. The Corporation may terminate the Executive’s employment hereunder in the event of the Executive’s Disability (as hereinafter defined). For purposes of this Agreement, “Disability” shall mean that, as a result of the Executive’s Incapacity due to illness or injury, Executive shall have been absent from his duties under this Agreement on a substantially full-time basis or a period of three (3) or more consecutive months, and thereafter, within thirty (30) days after the Corporation notifies Executive in writing that it intends to replace him, Executive shall not have returned to the performance of such duties on a full-time basis. Should Executive be diagnosed as permanently disabled by his treating physician, the Corporation can terminate his employment without waiting for the expiration of the three-month period. Without limiting the foregoing, until the Corporation terminates Executive’s employment hereunder on account of Disability, the Executive shall receive his full compensation as provided in Paragraph 3 of this Agreement.
c)	By Executive. Executive may resign at any time upon thirty (30) days notice to the Chief Executive Officer of the Corporation.
d)	By the Corporation.

(1) The Corporation may terminate Executive for any reason or no reason upon thirty (30) days written notice to Executive.

(2) The Corporation may terminate Executive immediately for Willful Neglect of his duties and responsibilities. For purposes of this Agreement, “Willful Neglect” means (a) any act or course of conduct by the Executive constituting a criminal act or (b) an act by the Executive that is not authorized by the Board of Directors of the Corporation, or a committee thereof, and which results in gain to or personal enrichment of the Executive at the expense of the Corporation, or (c) the commission by the Executive of an act or course of conduct involving moral turpitude, or (d) a breach by Executive of either or both of Paragraphs 4 and 5 of this Agreement, or (e) the Executive’s intentional violation of reasonable written instructions or policies established by the Corporation’s Board of Directors with respect to the operation of the Corporation’s business and affairs, or the Executive’s failure to carry out reasonable written instructions or policies of the Board of Directors, or a material breach (other than a breach of Paragraphs 4 or 5) by the Executive of this Agreement, provided that before a termination of the Executive pursuant to this subsection 10(d)(i)(e) shall be considered for “Willful Neglect”, the Corporation’s Board of Directors must give the Executive written notice and (30) days to cure such violation or failure.

7) Payment Upon Termination. Notwithstanding any other provision of this Agreement, payments and/or benefits to Executive upon termination shall be as follows, and only as follows:

a)	Upon Death or Disability: Executive shall be entitled to earned, but unpaid salary, pro-rata bonus as determined by the Corporation and vested options.
b)	Upon Resignation by Executive and Upon Termination for Willful Neglect: Executive shall be entitled to his earned, but unpaid salary and vested options.
c)	Upon Termination for Other than Willful Neglect: If the Corporation terminates Executive’s employment for any reason other than Willful Neglect, Executive will be eligible for 9 months of severance pay at his base salary rate, payable in 18 bi-weekly payments consistent with the Corporation’s normal payroll cycle, if and only if he executes a general release of all claims against the Corporation upon separation of his employment with the Corporation. The severance payment, pro-rated bonus as determined by the Corporation, and vested options will be the only entitlements made to Executive upon separation of his employment with the Corporation. Executive will not receive accrued vacation or any

other monetary payment from the Corporation. Eighty percent of this severance payment will be allocated to Executive’s agreement to abide by the covenant not to compete provisions and nondisclosure requirements contained in paragraphs 4 and 5 of this Agreement. Executive’s obligations under paragraphs 4 and 5 of this Agreement will continue regardless of whether Executive receives a severance payment from the Corporation. The Executive shall not be required to mitigate the amount of any severance payment provided for in this Agreement by seeking other employment or otherwise.

8)	Non-Disparagement. Executive agrees that he will not disparage the Corporation, in any manner, upon separation of his employment from the Corporation. Likewise, Corporation agrees that it will not disparage the Employee, in any manner, upon separation of his employment from the Corporation.
9)	Arbitration. Subject to the provisions of paragraphs 4 and 5, Executive and Corporation agree that all Disputes, as defined in Article I of the Alternative Dispute Resolution Procedure (the “ADR Procedure”), regarding the termination of employment or other covered Dispute shall be resolved exclusively in accordance with the Corporation’s ADR Procedure. The parties, however, agree that the ADR Procedure does not apply to claims for unemployment compensation benefits or claims by the Corporation for injunctive relief, specific performance, and/or damages as provided for in paragraphs 4 and 5 of this Agreement. Executive represents, warrants and agrees that (a) Executive has received, read and understands the Corporation’s ADR Procedure; (b) Executive must file a claim under the ADR Procedure within one-hundred and eighty (180) days of being notified of the termination or other adverse employment decision; (c) arbitration may be compelled and enforced under the Federal Arbitration Act; (d) any arbitration award is final and binding upon both Executive and the Corporation; (e) the ADR Procedure shall survive the employer-Executive relationship and applies to any Dispute whether it is asserted during or after Executive’s separation of employment; and (f) the ADR Procedure does not alter the parties’ “At Will” employment relationship.
10)	Indemnification. The Corporation agrees to provide the Executive with coverage under its Director’s and Officer’s liability insurance policy. The Corporation also agrees to indemnify and defend Executive in accordance with the Corporation’s Bylaws.
11)	Resignation Upon Termination. In the event of separation of Executive’s employment with the Corporation, Executive hereby agrees to resign from all positions held in the Corporation, including, without limitation, any position of director, officer, agent, trustee, or consultant of the Corporation.
12)	Waiver. A party’s failure to insist on compliance or enforcement of any provision of this Agreement, shall not affect the validity or enforceability or constitute a waiver of

	future enforcement of that provision or of any other provision of this Agreement by that party or any other party.
13)	Governing Law. This Agreement shall in all respects be subject to, and governed by, the laws of the State of Texas.
14)	Severability. The invalidity or unenforceability of any provision in the Agreement shall not in any way affect the validity or enforceability of any other provision and this Agreement shall be construed in all respects as if such invalid or unenforceable provision had never been in the Agreement.
15)	Notice. Any and all notices required or permitted herein shall be deemed delivered if delivered personally or if mailed by registered or certified mail to the Corporation at its principal place of business and to Executive at the address hereinafter set forth following Executive’s signature, or at such other address or addresses as either party may hereafter designate in writing to the other.
16)	Assignment. This Agreement, together with any amendments hereto, shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors, assigns, heirs and personal representatives, except that the rights and benefits of either of the parties under this Agreement may not be assigned without the prior written consent of the other party.
17)	Amendments. This Agreement may be amended in writing at any time by mutual consent of the parties hereto. Any purported amendment that is not in writing and signed by the Corporation and Executive is invalid.
18)	Entire Agreement. This Agreement contains the entire agreement and understanding by and between Executive and the Corporation with respect to the employment of Executive, and no representations, promises, agreements, or understandings, written or oral, including the letter offer of employment dated May 5, 1999, relating to the employment of Executive by the Corporation not contained herein shall be of any force or effect.
19)	Burden and Benefit. This Agreement shall be binding upon, and shall inure to the benefit of, the Corporation and Executive, and their respective heirs, personal and legal representatives, successors, and assigns.
20)	References to Gender and Number Terms. In construing this Agreement, feminine or number pronouns shall be substituted for those masculine in form and vice versa, and plural terms shall be substituted for singular and singular for plural in any place which the context so requires.
21)	Headings. The various headings in this Agreement are inserted for convenience only and are not part of the Agreement.

IN WITNESS WHEREOF, the Corporation and Executive have duly executed this Agreement as of the Effective Date.

INTERPHASE CORPORATION		STEVEN P. KOVAC
By:	/s/ Gregory B. Kalush	By:	/s/ Steven P. Kovac
	GREGORY B. KALUSH
	President and Chief Executive Officer

Address for Notice Purposes: Address for Notice Purposes:

Chief Executive Officer
Interphase Corporation
13800 Senlac Road
Dallas, Texas 75234

ATTACHMENT A

List of Confidential Information

• Overall corporate strategy (including subsidiaries)

• FY 1999 Business Plan, Revenue, Expense and Earnings Projections

• FY 1999 Budgets, Margin Analyses

• Product Strategy including Marketing Plans and Product Roadmaps

• Customer and Supplier Lists

• Pricing Strategy

• Bills of Materials

• Telephone Listing of Current Employees

January 19, 2000

Mr. Steve P. Kovac
c/o Interphase Corporation
13800 Senlac Road
Dallas, Texas 75234

Re: Employment Agreement dated May 11, 1999 (the “Employment Agreement”) by and between Interphase Corporation and Its Subsidiaries (“Interphase”) and Steven P. Kovac

Dear Steve:

     Attached as Exhibit A is a copy of the Employment Agreement. This letter sets forth Interphase’s understanding of the agreement reached between us regarding amendment of the Employment Agreement, which understanding is as follows:

          (1) The Employment Agreement is amended by adding thereto a new provision which is in addition to, and not in lieu or substitution of, any other provision of the Employment Agreement. Such new provision which shall be added to the Employment Agreement as numbered paragraph 22 reads in its entirety as follows:

“22. Acceleration of Options Upon Acquisition of Shares by One Investor. If at any time during the term of this Agreement, one investor (including all affiliates, as defined in Rule 405 promulgated pursuant to the Securities Act of 1933, as amended, of such investor) accumulates 20% or more of the outstanding Common Stock of the Corporation then, effective as of the date of such accumulation, all of the Executive Stock Options shall be accelerated.”

          (2) Except as expressly amended by this letter agreement, the Employment Agreement, and each and every provision thereof, is expressly ratified, affirmed, adopted and approved.

  Steve, if this letter agreement correctly sets forth your understanding of the agreement reached with Interphase regarding amendment of the Employment Agreement, please so indicate by signing below, whereupon this shall become a binding agreement.

Sincerely,
Interphase Corporation
BY:	/s/ Gregory B. Kalus
Its:	CEO & PRESIDENT

Agreed to and Accepted By:

/s/ Steven P. Kovac

Steven P. Kovac

Dated: 1/20, 2000

EX-23.(A)

Exhibit 23(a)

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have issued our report dated March 3, 2006, accompanying the consolidated financial statements included in the Annual Report of Interphase Corporation on Form 10-K for the year ended December 31, 2005. We hereby consent to the incorporation by reference of said report in the Registration Statements of Interphase Corporation on Form S-8 (File No. 333-91029 and 333-97971).

/s/ GRANT THORNTON LLP

Dallas, Texas
March 3, 2006

EX-23.(B)

Exhibit 23(b)

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-91029 and 333-97971) of Interphase Corporation of our report dated March 5, 2004 relating to the financial statements which appears in this Form 10-K.

/s/ PricewaterhouseCoopers LLP

Dallas, Texas
March 17, 2006

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)) for the Company 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 an 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 21, 2006	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)) for the Company 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 an 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 21, 2006	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, 2005, 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 21, 2006

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, 2005, 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 21, 2006