10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2010

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.)

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

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

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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

Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller Reporting Company þ

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

As of October 29, 2010, shares of common stock outstanding totaled 6,827,262.

INTERPHASE CORPORATION

Index to Form 10-Q
Quarterly Period Ended September 30, 2010

Part I — Financial Information
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009	2
Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2010 and 2009	3
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009	4
Notes to Condensed Consolidated Financial Statements	5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3. Quantitative and Qualitative Disclosures About Market Risk	16
Item 4. Controls and Procedures	17
Part II — Other Information
Item 1. Legal Proceedings	18
Item 1A. Risk Factors	18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	18
Item 3. Defaults Upon Senior Securities	18
Item 4. (Removed and Reserved)	18
Item 5. Other Information	18
Item 6. Exhibits	18
Exhibit 31(a)
Exhibit 31(b)
Exhibit 32(a)
Exhibit 32(b)

1

PART I
FINANCIAL INFORMATION

Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

	September 30,			December 31,
	2010			2009
ASSETS
Cash and cash equivalents	$	5,800		$	8,115
Marketable securities		7,564			9,724
Trade accounts receivable, less allowances of $50 and $76, respectively		4,253			5,106
Inventories		2,015			1,699
Prepaid expenses and other current assets		608			2,202
Total current assets		20,240			26,846
Machinery and equipment		6,954			6,993
Leasehold improvements		425			430
Furniture and fixtures		582			587
		7,961			8,010
Less-accumulated depreciation and amortization		(7,459	)		(7,318	)
Total property and equipment, net		502			692
Capitalized software, net		583			912
Other assets		723			197
Total assets	$	22,048		$	28,647
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Accounts payable	$	1,431		$	1,257
Deferred revenue		141			161
Accrued liabilities		4,901			2,667
Accrued compensation		1,361			1,504
Total current liabilities		7,834			5,589
Deferred lease obligations		257			296
Long-term debt		3,500			3,500
Total liabilities		11,591			9,385
Commitments and Contingencies
Shareholders’ Equity
Common stock, $0.10 par value; 100,000,000 shares authorized; 6,830,262 and 6,911,494 shares issued and outstanding, respectively		683			691
Additional paid in capital		43,292			43,022
Retained deficit		(32,650	)		(23,784	)
Cumulative other comprehensive loss		(868	)		(667	)
Total shareholders’ equity		10,457			19,262
Total liabilities and shareholders’ equity	$	22,048		$	28,647

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

2

INTERPHASE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Revenues	$	4,770		$	4,368		$	12,387		$	20,909
Cost of sales		2,439			3,269			6,416			10,337
Gross margin		2,331			1,099			5,971			10,572
Research and development		1,605			1,797			5,516			5,752
Sales and marketing		1,103			1,230			3,634			4,329
General and administrative		950			860			2,908			3,145
Restructuring charge		3,339			—			3,339			—
Total operating expenses		6,997			3,887			15,397			13,226
Loss from operations		(4,666	)		(2,788	)		(9,426	)		(2,654	)
Interest income, net		—			65			87			243
Other loss, net		—			(3	)		(79	)		(9	)
Loss before income tax		(4,666	)		(2,726	)		(9,418	)		(2,420	)
Income tax benefit		(374	)		(345	)		(552	)		(820	)
Net loss	$	(4,292	)	$	(2,381	)	$	(8,866	)	$	(1,600	)
Net loss per share:
Basic EPS	$	(0.63	)	$	(0.34	)	$	(1.30	)	$	(0.23	)
Diluted EPS	$	(0.63	)	$	(0.34	)	$	(1.30	)	$	(0.23	)
Weighted average common shares		6,830			6,910			6,844			6,894
Weighted average common and dilutive shares		6,830			6,910			6,844			6,894

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

3

INTERPHASE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

	Nine Months Ended
	September 30,
	2010			2009
Cash flows from operating activities:
Net loss	$	(8,866	)	$	(1,600	)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for uncollectible accounts and returns		(12	)		38
Provision for excess and obsolete inventories		100			300
Depreciation and amortization		567			636
Amortization of stock-based compensation		262			307
Change in assets and liabilities:
Trade accounts receivable		865			532
Inventories		(416	)		(63	)
Prepaid expenses and other current assets		1,466			856
Other assets		(516	)		10
Accounts payable, deferred revenue and accrued liabilities		2,426			24
Accrued compensation		(68	)		427
Deferred lease obligations		(39	)		207
Net cash (used in) provided by operating activities		(4,231	)		1,674
Cash flows from investing activities:
Purchase of property and equipment		(38	)		(122	)
Purchase of capitalized software		(30	)		(131	)
Proceeds from the sale of marketable securities		5,094			7,071
Purchase of marketable securities		(2,950	)		(4,138	)
Net cash provided by investing activities		2,076			2,680
Cash flows from financing activities:
Borrowings under credit facility		5,500			10,500
Payments on credit facility		(5,500	)		(10,500	)
Proceeds from the exercise of stock options		—			4
Net cash provided by financing activities		—			4
Effect of exchange rate changes on cash and cash equivalents		(160	)		65
Net (decrease) increase in cash and cash equivalents		(2,315	)		4,423
Cash and cash equivalents at beginning of period		8,115			7,383
Cash and cash equivalents at end of period	$	5,800		$	11,806

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

4

INTERPHASE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1. — BASIS OF PRESENTATION

Interphase Corporation (NASDAQ: INPH) delivers solutions for LTE and WiMAX, interworking gateways, packet processing, network connectivity, and security for key applications for the communications, aerospace-defense, and enterprise markets. Founded in 1974, Interphase provides expert engineering design and contract manufacturing services, in addition to its COTS portfolio, and plays a leadership role in next generation AdvancedTCA^® (ATCA), AdvancedMC™ (AMC), PCI-X, and PCIe standards and solutions. Interphase is headquartered in Plano, Texas, with sales offices across the globe. Clients include Alcatel-Lucent, Emerson Network Power, Fujitsu Ltd., Hewlett Packard, Samsung, and Sun Microsystems. See Note 11 for information regarding the Company’s revenues related to North America and foreign countries.

The accompanying condensed consolidated financial statements include the accounts of Interphase Corporation and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated. While the accompanying condensed consolidated financial statements are unaudited, they have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of the Company, all material adjustments and disclosures necessary to fairly present the results of such periods have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Operating results for the three months and nine months ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2009.

NOTE 2. — STOCK-BASED COMPENSATION

The Company recorded stock-based compensation expense related to stock options of approximately $17,000 and $21,000 included in operating expense during the three and nine months ended September 30, 2010, respectively. These stock options vest over a three to four year period and expire ten years from the date of grant. In addition to the options generating compensation expense, the Company has 250,000 unvested options related to grants made with performance-based vesting criteria. Based on the performance conditions not being deemed probable at September 30, 2010, no compensation expense related to these options has been recorded. There were no unvested stock options during the three and nine months ended September 30, 2009, and as a result the Company recorded no stock-based compensation expense related to stock options during the three and nine months ended September 30, 2009. The weighted-average remaining contractual life of stock options outstanding and exercisable was 1.71 years at September 30, 2010 and 2.59 years at December 31, 2009.

The Company uses the Black-Scholes option-pricing model to estimate the fair value of stock options awarded on the date of grant. There were no options granted during the three or nine months ended September 30, 2009. The weighted average fair value of stock options on the date of grant and the assumptions used to estimate the fair value of the stock options using the Black-Scholes option-pricing model granted during the three and nine months ended September 30, 2010 were as follows:

	Three months ended					Nine months ended
	September 30,					September 30,
	2010			2009		2010			2009
Weighted average risk free interest rates		2.75	%		N/A		2.83	%		N/A
Weighted average life (in years)		10			N/A		10			N/A
Expected volatility		63.51	%		N/A		63.69	%		N/A
Expected dividend yield		—			N/A		—			N/A
Weighted average grant-date fair value per share of options granted	$	1.22			N/A	$	1.27			N/A

5

INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following table summarizes stock option activity under the Company’s stock option plans:

	Number of			Weighted Average
	Options			Option Price
Balance, December 31, 2009		1,449,771		$	8.16
Granted		348,200			1.75
Exercised		—			—
Cancelled		(292,899	)		14.07
Balance, September 30, 2010		1,505,072		$	5.52

The Interphase Corporation 2004 Long-Term Stock Incentive Plan provides for grants of bonus stock awards (“restricted stock”) to the Company’s directors and certain employees at no cost to the recipient. Holders of restricted stock are entitled to cash dividends, if any, and to vote their respective shares. Restrictions limit the sale or transfer of these shares during a predefined vesting period, currently ranging from three to five years, and in some cases vesting is subject to the achievement of certain performance conditions. Upon issuance of restricted stock under the plan, unearned compensation equivalent to the market value at the date of grant is recorded as a reduction to shareholders’ equity and subsequently amortized to expense over the respective restriction periods. Compensation expense related to restricted stock was approximately $61,000 and $81,000 for the three months ended September 30, 2010 and 2009, respectively. Compensation expense related to restricted stock was approximately $241,000 and $307,000 for the nine months ended September 30, 2010 and 2009, respectively. As of September 30, 2010, there is approximately $652,000 of total unamortized compensation expense related to unvested restricted stock remaining to be recognized, which is expected to be recognized over a weighted-average period of 3.1 years. At December 31, 2009, there was approximately $1.1 million of total unamortized compensation expense related to unvested restricted stock remaining to be recognized which was expected to be recognized over a weighted-average period of 3.5 years. The following summarizes the restricted stock activity for the nine months ended September 30, 2010:

	Restricted			Weighted Average
	Stock Shares			Grant Date Value
Nonvested restricted stock at December 31, 2009		484,258		$	2.84
Granted		—			—
Vested		(60,234	)		4.91
Cancelled/Forefeited		(81,232	)		2.02
Nonvested restricted stock at September 30, 2010		342,792		$	2.67

NOTE 3. — MARKETABLE SECURITIES

Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures,” defines the levels used to measure fair value into the following hierarchy:

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

6

INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The Company’s marketable securities are classified as “available-for-sale” and are presented at estimated fair value based on quoted prices for similar assets in active markets with any unrealized gains or losses included in other comprehensive loss. Realized gains and losses are computed based on the specific identification method and were not material for the periods presented. Marketable securities are used to secure the Company’s credit facility.

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

		September 30, 2010						December 31, 2009
						Estimated						Estimated
	Fair Value			Unrealized		Fair				Unrealized		Fair
	Hierarchy	Cost		Gain		Value		Cost		Gain		Value
Agencies	Level 2	$	304	$	2	$	306	$	3,350	$	29	$	3,379
Asset Backed	Level 2		1,845		13		1,858		2,065		17		2,082
Corporate Bonds	Level 2		1,732		7		1,739		976		1		977
Municipal Bonds and US Treasuries	Level 2		3,646		15		3,661		3,276		10		3,286
Total		$	7,527	$	37	$	7,564	$	9,667	$	57	$	9,724

NOTE 4. — INVENTORIES

Inventories are valued at the lower of cost or market and include material, labor and manufacturing overhead. Cost is determined on a first-in, first-out basis (in thousands):

	September 30,		December 31,
	2010		2009
Raw materials	$	1,608	$	1,399
Work-in-process		348		218
Finished goods		59		82
Total	$	2,015	$	1,699

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. There were no writedowns during the three months ended September 30, 2010. Writedowns were $100,000 for the nine months ended September 30, 2010. Writedowns for the three and nine months ended September 30, 2009 were $200,000 and $300,000, respectively.

NOTE 5. — DERIVATIVE FINANCIAL INSTRUMENTS

The Company is exposed to adverse movements in foreign currency exchange rates because it conducts business on a global basis and in some cases in foreign currencies. The Company’s operations in France are transacted in the local currency and converted into U.S. Dollars based on published exchange rates for the periods reported and are therefore subject to risk of exchange rate fluctuations.

In an attempt to mitigate the risk described above, the Company may enter into, from time to time, foreign exchange contracts to purchase a fixed amount of Euros on a fixed date in the future at a fixed rate determined at the contract date. These derivative financial instruments do not meet the criteria to qualify for hedge accounting treatment and therefore any change in the market value of these contracts resulting in a gain or loss is recognized as other loss, net in the period of the change. There were no foreign exchange contracts held by the Company during the three months ended September 30, 2010, and thus there was no related gain or loss during the period. For the nine months ended September 30, 2010, the Company recognized a loss of approximately $62,000 related to a foreign exchange contract. There were no foreign exchange contracts held by the Company at any point during the nine months ended September 30, 2009, and thus there was no related gain or loss. There were no foreign exchange contracts outstanding at September 30, 2010 or December 31, 2009.

7

INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 6. — INCOME TAXES

The Company records a valuation allowance when it is “more likely than not” that all or a portion of a deferred tax asset will not be realized. Management reviews all available positive and negative evidence, including the 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. The Company continues to maintain a valuation allowance on all of the net deferred tax assets for the periods presented. Until an appropriate level of profitability is sustained, the Company expects to continue to record a full valuation allowance on future tax benefits except for those that may be generated in foreign jurisdictions.

The effective tax rate differed from the U.S. statutory rate as the Company continued to provide a full valuation allowance for its net deferred tax assets at September 30, 2010 and December 31, 2009. During the three and nine months ended September 30, 2010, the Company recorded a tax benefit related to its operations in France. This benefit was primarily the result of a 30% research and development tax credit, net of taxable income in France.

NOTE 7. — RESTRUCTURING CHARGE

On September 30, 2010, the Company initiated a restructuring plan (the “2010 restructuring plan”) intended to result in savings of approximately $5.5 million in annualized operating costs. The goal of the 2010 restructuring plan was to mitigate gross margin erosion by reducing manufacturing and procurements costs, streamline research and development expense, focus remaining research and development resources on key strategic growth areas, and reduce selling and administrative expenses through product rationalization and consolidation of support functions. The Company plans to reduce its worldwide work force by 20% to 30%, including the closure of its European engineering and support center located in Chaville, France. As a result of the 2010 restructuring plan, the Company recorded a restructuring charge of $3.3 million, classified as an operating expense, in the third quarter of 2010 related to future cash expenditures to cover employee severance and benefits and other related costs. The Company expects to complete the actions associated with the 2010 restructuring plan, including payments of the related cash expenditures, by the second quarter of 2011.

The following table summarizes the timing of payments under the 2010 restructuring plan (in thousands):

			Cash payments		Remaining
			during quarter		liability as of
	Restructuring		ended September 30,		September 30,
Description	charge		2010		2010
Severance & Fringe Benefits	$	3,181	$	—	$	3,181
Other Related Costs		158		—		158
Total	$	3,339	$	—	$	3,339

On December 11, 2009, the Company adopted a plan (the “2009 restructuring plan”) to restructure its worldwide operations. The primary goal of the 2009 restructuring plan was to align the Company’s current spending with recent revenue trends and to enable additional investments in strategic growth areas for the Company. Under the 2009 restructuring plan, the Company reduced its workforce by 12 positions. As a result of the 2009 restructuring plan, the Company recorded a restructuring charge of $1.2 million, classified as an operating expense, in the fourth quarter of 2009 of which approximately $1.1 million has resulted in cash expenditures to cover employee severance and benefits. The remaining $173,000 included in the restructuring charge related to certain non-cash software impairment charges.

8

INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following table summarizes the timing of payments under the 2009 restructuring plan (in thousands):

			Cash		Cash		Cash		Cash payments,
			payments and		payments, net		payments, net		net of currency
			non-cash		of currency		of currency		translation
			charges		translation		translation		adjustments,
			during		adjustments,		adjustments,		during quarter		Remaining
			quarter ended		during quarter		during quarter		ended		liability as of
	Restructuring		December 31,		ended March 31,		ended June 30,		September 30,		September 30,
Description	charge		2009		2010		2010		2010		2010
Severance & Fringe Benefits	$	1,063	$	84	$	530	$	132	$	317	$	—
Non-Utilized Fixed Assets		173		173		—		—		—		—
Total	$	1,236	$	257	$	530	$	132	$	317	$	—

NOTE 8. — CREDIT FACILITY

The Company maintains a $5.0 million revolving bank credit facility maturing December 19, 2013 with an applicable interest rate on any outstanding balances under the credit facility based on LIBOR plus an applicable margin rate of 1.0% to 1.5%, based on certain factors included in our credit agreement. At September 30, 2010 and December 31, 2009, the Company’s interest rate on the $3.5 million borrowings under the revolving credit facility was 1.8% and 1.3%, respectively. The unused portion of the credit facility is subject to an unused facility fee ranging from .25% to .75% depending on total deposits with the creditor. All borrowings under this facility are secured by marketable securities. The borrowings of $3.5 million are classified as long-term debt on the Company’s balance sheets. Subsequent to September 30, 2010, $2.0 million of the outstanding balance on the credit facility was repaid.

NOTE 9. — COMPREHENSIVE LOSS

The following table shows the Company’s comprehensive loss (in thousands):

	Three months ended						Nine months ended
	September 30,						September 30,
	2010			2009			2010			2009
Net loss	$	(4,292	)	$	(2,381	)	$	(8,866	)	$	(1,600	)
Other comprehensive loss:
Unrealized holding gain arising during period, net of tax		9			3			—			97
Foreign currency translation adjustment		25			39			(58	)		47
Comprehensive loss	$	(4,258	)	$	(2,339	)	$	(8,924	)	$	(1,456	)

9

INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 10. — 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 the potential issuance of dilutive common shares. Earnings per share are calculated as follows (in thousands, except per share data):

	Three months ended						Nine months ended
	September 30,						September 30,
	2010			2009			2010			2009
Basic net loss per share:
Net loss	$	(4,292	)	$	(2,381	)	$	(8,866	)	$	(1,600	)
Weighted average common shares outstanding		6,830			6,910			6,844			6,894
Basic net loss per share	$	(0.63	)	$	(0.34	)	$	(1.30	)	$	(0.23	)
Diluted net loss per share:
Net loss	$	(4,292	)	$	(2,381	)	$	(8,866	)	$	(1,600	)
Weighted average common shares outstanding		6,830			6,910			6,844			6,894
Dilutive stock options		—			—			—			—
Weighted average common shares outstanding — assuming dilution		6,830			6,910			6,844			6,894
Diluted net loss per share	$	(0.63	)	$	(0.34	)	$	(1.30	)	$	(0.23	)
Outstanding stock options that were not included in the diluted calculation because their effect would be anti-dilutive		1,379			1,332			1,481			1,527

NOTE 11. — SEGMENT INFORMATION

The Company is principally engaged in providing solutions for LTE and WiMAX, interworking gateways, packet processing, network connectivity and security for key applications for the communications, aerospace-defense, and enterprise markets. 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 revenues related to North America and foreign regions are as follows (in thousands):

	Three months ended				Nine months ended
	September 30,				September 30,
	2010		2009		2010		2009
Revenues:
Pacific Rim	$	1,923	$	2,109	$	4,451	$	8,955
North America		1,607		1,463		3,951		6,146
Europe		1,240		796		3,985		5,808
Total	$	4,770	$	4,368	$	12,387	$	20,909

10

INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

	Three months ended				Nine months ended
	September 30,				September 30,
	2010		2009		2010		2009
Product Revenues:
Broadband telecom	$	3,738	$	3,594	$	10,152	$	18,813
Enterprise		438		211		1,001		645
Professional services		369		368		646		874
Other		225		195		588		577
Total	$	4,770	$	4,368	$	12,387	$	20,909

NOTE 12. — RECENTLY ISSUED ACCOUNTING PROUNOUCEMENTS

In October 2009, the FASB issued ASU 2009-13, “Multiple-Deliverable Revenue Arrangements — a consensus of the FASB Emerging Issues Task Force,” to amend certain guidance in FASB ASC 605-25, “Revenue Recognition — Multiple-Element Arrangements.” The amended guidance in ASC 605-25 modifies the separation criteria by eliminating the criterion that requires objective and reliable evidence of fair value for the undelivered items and eliminates the use of the residual method of allocation. Instead, the amended guidance requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables based on their relative selling price. The amended guidance in ASC 605-25 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early application and retrospective application permitted. The Company prospectively applied the amended guidance in ASC 605-25 beginning January 1, 2010. The Company’s adoption of this statement did not have an impact on its Condensed Consolidated Financial Statements.

11

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

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, 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”, “anticipates” and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements.

RESULTS OF OPERATIONS

Revenue

Total revenue increased to $4.8 million for the three months ended September 30, 2010, compared to $4.4 million for the same period in the prior year. The increase was primarily attributable to our enterprise product revenue, which increased to $438,000 for the three months ended September 30, 2010 compared to $211,000 in the comparable period in the prior year. Our broadband telecom revenue increased to $3.7 million for the three months ended September 30, 2010, compared to $3.6 million in the comparable period in the prior year. Our professional services revenue remained consistent at approximately $370,000 for the three months ended September 30, 2010, and 2009. All other revenues increased to $225,000 for the three months ended September 30, 2010, compared to $195,000 for the same period in the prior year.

During the third quarter of 2010, sales to three customers individually accounted for approximately 21%, 18% and 12%, respectively, of our total revenues. During the third quarter of 2009, sales to four customers individually accounted for approximately 23%, 17%, 13% and 11%, respectively, of our total revenues. No other customer accounted for more than 10% of our total revenue in the periods presented.

Total revenue decreased to $12.4 million for the nine months ended September 30, 2010, compared to $20.9 million in the comparable period for the prior year. The decrease in revenue is primarily attributable to a significant decrease in our broadband telecom revenues, which decreased to $10.2 million for the nine months ended September 30, 2010, compared to $18.8 million for the same period in the prior year. This decrease is mainly a result of market share trends in the thriving Asian markets as purchasers shifted away from foreign tier 1 telecom equipment manufacturers, which compose a significant portion of our customer base, toward local or regional manufacturers. Our professional services revenues decreased to $646,000 for the nine months ended September 30, 2010, compared to $874,000 in the comparable period in the prior year. Partially offsetting the decreases in our revenue, our enterprise product revenues increased to $1.0 million for the nine months ended September 30, 2010, compared to $645,000 for the same period in the prior year. All other revenues remained relatively consistent at $588,000 for the nine months ended September 30, 2010 compared to $577,000 for the nine months ended September 30, 2009.

Gross Margin

For the three months ended September 30, 2010, gross margin as a percentage of sales was 49% compared to 25% for the same period in the prior year. The increase in our gross margin percentage in the third quarter of 2010 was primarily due to three factors. Most significantly, we experienced a favorable shift in our product mix toward higher margin products during the third quarter of 2010 compared to the same period last year. Also, increased utilization of our manufacturing facility as a result of increased production volume impacted our margins favorably in the third quarter of 2010. Finally, a reduction in excess and obsolete inventory charges of $200,000 in the third quarter of 2010, compared to the third quarter of 2009, favorably impacted our gross margin percentage.

12

Gross margin as a percentage of sales was 48% and 51% for the nine months ended September 30, 2010 and 2009, respectively. The decrease in gross margin percentage is primarily due to two factors. During the nine months ended September 30, 2010, there was a decrease in factory utilization compared to the same period in the prior year which negatively impacted our gross margin percentage. Also, contributing to the decrease, we experienced an unfavorable shift in our product mix toward lower margin products during the first nine months of 2010, when compared to the same period in the prior year. Partially offsetting these two factors was a reduction in excess and obsolete charges of $200,000 during the nine months ended September 30, 2010 compared to the same period in the prior year. We believe that pricing pressures in the industry may dampen our gross margin in future periods and it may continue to be challenging to offset these pressures with incremental supplier cost reductions and factory productivity improvements.

Research and Development

Our investment in the development of new products through research and development was $1.6 million and $1.8 million for the three months ended September 30, 2010 and 2009, respectively. The decrease in research and development expense was primarily the result of the restructuring plans we have recently undertaken. As a result of the 2009 restructuring plan, our research and development expense decreased by approximately $250,000 for the three months ended September 30, 2010, compared to the same period in the prior year. Additionally, the 2010 restructuring plan reduced our research and development expense by approximately $125,000 for the three months ended September 30, 2010 compared to the same period last year. See Note 7 in the Notes to the Condensed Consolidated Financial Statements for additional information regarding the restructuring plans. Partially offsetting the reductions as a result of the restructuring plans was an increase in project related expenses of approximately $170,000 during the third quarter of 2010 compared to the third quarter of 2009. As a percentage of total revenue, research and development expense was approximately 34% in the third quarter of 2010 as compared to approximately 41% for the same period for the prior year. The decrease in research and development expense as a percentage of total revenue is due to research and development expense decreasing while revenue increased.

Our investment in research and development was $5.5 million and $5.8 million for the nine months ended September 30, 2010 and 2009, respectively. The decrease in research and development expense is primarily the result of three factors. First, research and development expense decreased by approximately $750,000 as a result of the 2009 restructuring plan. In addition, the 2010 restructuring plan resulted in a reduction in research and development expense of approximately $125,000. See Note 7 in the Notes to the Condensed Consolidated Financial Statements for additional information regarding the restructuring plans. Finally, a stronger Dollar against the Euro in 2010 resulted in a decrease in research and development expense of approximately $118,000 for the nine months ended September 30, 2010, compared to the same period last year. Partially offsetting the decreases to research and development expense, we experienced an increase in project related expense of approximately $690,000 for the nine months ended September 30, 2010, compared to the same period in the prior year. As a percentage of total revenue, research and development expense was approximately 45% for the nine months ended September 30, 2010 and 28% for the nine months ended September 30, 2009. The increase in research and development expense as a percentage of total revenue is due to revenue decreasing at a higher rate than research and development expense. We will continue to monitor the level of our investments in research and development concurrently with actual revenue and profit results.

Sales and Marketing

Sales and marketing expenses were $1.1 million and $1.2 million for the three months ended September 30, 2010 and 2009, respectively. The decrease in sales and marketing expense was primarily the result of the 2009 restructuring plan. See Note 7 in the Notes to Condensed Consolidated Financial Statements for more information on the 2009 restructuring plan. As a percentage of total revenue, sales and marketing expense was approximately 23% for the third quarter of 2010 and 28% for the third quarter of 2009. The decrease in sales and marketing expense as a percentage of total revenue is due to revenue increasing while sales and marketing expense decreased.

Sales and marketing expenses were $3.6 million and $4.3 million for the nine months ended September 30, 2010 and 2009, respectively. The decrease in sales and marketing expense is primarily the result of a decrease in commission and variable compensation of approximately $420,000 compared to the same period in the prior year. Additionally, sales and marketing expense decreased by approximately $255,000 during the nine months ended September 30, 2010 compared to the same period in the prior year as the result of the 2009 restructuring plan. See Note 7 in the Notes to Condensed Consolidated Financial Statements for more information on the 2009 restructuring plan. As a percentage of total revenue, sales and marketing expense was approximately 29% for the nine months ended September 30, 2010 and 21% for the nine months ended September 30, 2009. The increase in sales and marketing expense as a percentage of total revenue is due to revenue decreasing at a higher rate than sales and marketing expense for the period. We will continue to monitor the level of our investments in sales and marketing concurrently with actual revenue and profit results.

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General and Administrative

General and administrative expenses were $950,000 and $860,000 for the three months ended September 30, 2010 and 2009, respectively. As a percentage of total revenue, general and administrative expenses were approximately 20% in the third quarter of 2010 and 2009.

General and administrative expenses were $2.9 million and $3.1 million for the nine months ended September 30, 2010 and 2009, respectively. The decrease in general and administrative expense is primarily driven by a decreased cost of outside providers of accounting, consulting and legal services of approximately $170,000. As a percentage of total revenue, general and administrative expense was approximately 23% for the nine months ended September 30, 2010 and 15% for the nine months ended September 30, 2009. The increase as a percentage of revenue is due to revenues decreasing at a higher rate than general and administrative expenses for the period. We will continue to monitor the level of general and administrative costs concurrently with actual revenue and profit results.

Restructuring Charge

On September 30, 2010, we initiated a restructuring plan intended to result in savings of approximately $5.5 million in annualized operating costs. The goal of the 2010 restructuring plan was to mitigate gross margin erosion by reducing manufacturing and procurements costs, streamline research and development expense and focus remaining resources on key strategic growth areas, and reduce selling and administrative expenses through product rationalization and consolidation of support functions. We plan to reduce our worldwide work force by 20% to 30%, including the closure of our European engineering and support center located in Chaville, France. As a result of the 2010 restructuring plan, we recorded a restructuring charge of $3.3 million, classified as an operating expense, in the third quarter of 2010 related to future cash expenditures to cover employee severance and benefits and other related costs. See Note 7 in the Notes to Condensed Consolidated Financial Statements for more information on the 2010 restructuring plan.

Interest Income, Net

Interest income, net of interest expense, decreased to zero for the three months ended September 30, 2010 from $65,000 in the comparable period in the prior year. Interest income, net of interest expense, was $87,000 for the nine months ended September 30, 2010 and $243,000 for the nine months ended September 30, 2009. The decrease in interest income, net for each period primarily relates to lower investment balances and lower rates of return on our investments during the three and nine months ended September 30, 2010 compared to the same periods in 2009.

Other Loss, Net

Other loss, net, was zero and $3,000 for the three months ended September 30, 2010 and 2009, respectively. Other loss, net, was $79,000 and $9,000 for the nine months ended September 30, 2010 and 2009, respectively. The other loss, net during the periods presented for 2010, primarily relates to the change in market value of a foreign exchange derivative financial instrument. The financial instrument resulted in a net loss of $62,000 for the nine months ended September 30, 2010. During, the three and nine months ended September 30, 2009, we had no such foreign exchange derivative financial instruments. See Note 5 in the Notes to Condensed Consolidated Financial Statements for more information.

Income Taxes

Our tax benefit rate for the nine months ended September 30, 2010 was 6%, compared to a tax benefit rate of 34% for the nine months ended September 30, 2009.

The effective tax rate differed from the U.S. statutory rate as we continued to provide a full valuation allowance for our net deferred tax assets at September 30, 2010 and September 30, 2009. During each of the nine months ended September 30, 2010 and September 30, 2009, we recorded a tax benefit related to our operations in France. This benefit was primarily the result of a 30% research and development tax credit, net of taxable income in France.

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Net Loss

We reported a net loss of $4.3 million and $2.4 million for the three months ended September 30, 2010 and 2009, respectively. Basic loss per share for the three months ended September 30, 2010 and 2009 was ($0.63) and ($0.34), respectively. The Company reported a net loss of $8.9 million and $1.6 million for the nine months ended September 30, 2010 and 2009, respectively. Basic loss per share for the nine months ended September 30, 2010 and 2009 was ($1.30) and ($0.23), respectively.

LIQUIDITY AND CAPITAL RESOURCES

Consolidated Cash Flows

Cash and cash equivalents decreased $2.3 million from December 31, 2009 to September 30, 2010 and increased $4.4 million from December 31, 2008 to September 30, 2009. Cash flows are impacted by operating, investing and financing activities.

Operating Activities

Trends in cash flows from operating activities for the nine months ended September 30, 2010 and 2009 are generally similar to the trends in our earnings except for provision for uncollectible accounts and returns, provision for excess and obsolete inventories, depreciation and amortization and amortization of stock-based compensation. Cash used by operating activities totaled $4.2 million for the nine months ended September 30, 2010, compared to a net loss of $8.9 million. Provision for uncollectible accounts and returns decreased $50,000 for the nine months ended September 30, 2010 compared to the same period in 2009. Provision for excess and obsolete inventories decreased by $200,000 for the nine months ended September 30, 2010, compared to the same period in 2009. Depreciation and amortization decreased by $69,000 for the nine months ended September 30, 2010 compared to the same period in 2009. Amortization of stock-based compensation decreased $45,000 for the nine months ended September 30, 2010, compared to the nine months ended September 30, 2009. See Note 2 in Notes to Condensed Consolidated Financial Statements for more information on stock based compensation.

Changes in assets and liabilities result primarily from the timing of production, sales, purchases and payments. 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

Cash provided by investing activities totaled $2.1 million and $2.7 million for the nine months ended September 30, 2010 and 2009, respectively. Cash provided by investing activities in each of the periods presented related principally to proceeds from the sale of marketable securities, disbursements for additions to property and equipment, capitalized software and our investments in marketable securities. Additions to property and equipment and capitalized software were $68,000 for the nine months ended September 30, 2010 compared to $253,000 for the nine months ended September 30, 2009. The additions for the nine months ended September 30, 2010 primarily related to software and equipment purchases for our engineering and manufacturing functions. The additions for the nine months ended September 30, 2009 primarily related to enhancements to our enterprise performance management system and software purchases for our engineering function. Purchases of marketable securities were $3.0 million and $4.1 million for the nine months ended September 30, 2010 and 2009, respectively. Proceeds from the sale of marketable securities decreased to $5.1 million for the nine months ended September 30, 2010 compared to $7.1 million for the same period in 2009.

Financing Activities

There was no net cash provided by or used in financing activities for the nine months ended September 30, 2010. During the nine months ended September 30, 2009, cash provided by financing activities totaled $4,000 related to proceeds from employee exercise of stock options.

15

Commitments

Commitments

At September 30, 2010, we were committed to purchase $200,000 of software development services during the next three months. There were no material commitments to purchase capital assets. However, planned capital expenditures for the remainder of 2010 are estimated at approximately $50,000, a significant portion of which relates to enhancements to our internal technology infrastructure, manufacturing equipment and engineering tools. Our significant long-term obligations as of September 30, 2010, are our operating leases on facilities and future debt payments related to our credit facility. To date, we have not paid any dividends and do not anticipate paying any dividends in 2010.

Off-Balance Sheet Arrangements

At September 30, 2010 and December 31, 2009, we did not have any off-balance sheet arrangements including foreign exchange contracts.

Other

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

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Quarterly Report on Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and other material included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Risk

We are exposed to adverse movements in foreign currency exchange rates because we conduct business on a global basis and in some cases in foreign currencies. 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. The Euro to U.S. Dollar translation accounted for charges of approximately $238,000 and $476,000 for the three months ended September 30, 2010, and 2009, respectively. The Euro to U.S. Dollar translation accounted for charges of approximately $947,000 and $1.4 million for the nine months ended September 30, 2010 and 2009, respectively.

In an attempt to mitigate the risk described above, we may enter into, from time to time, foreign exchange contracts to purchase a fixed amount of Euros on a fixed date in the future at a fixed rate determined at the contract date. These derivative financial instruments do not meet the criteria to qualify as hedges and therefore any change in the market value of these contracts resulting in a gain or loss is recognized as other loss, net in the period of the change. There were no foreign exchange contracts held by us during the three months ended September 30, 2010, and thus there was no related gain or loss during the period. For the nine months ended September 30, 2010, we recognized a loss of approximately $62,000 related to a foreign exchange contract. There were no foreign exchange contracts held by us at any point during the nine months ended September 30, 2009, and thus there was no related gain or loss. There were no foreign exchange contracts outstanding at September 30, 2010 or December 31, 2009.

16

Market Price Risk

We had no equity hedge contracts outstanding as of September 30, 2010 or December 31, 2009.

Interest Rate Risk

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

A hypothetical 50 basis point increase in interest rates would be expected to result in an approximate decrease of less than 1% in the fair value of our available-for-sale securities at September 30, 2010. This potential change is based on sensitivity analyses performed on our marketable securities at September 30, 2010. Actual results may differ materially. We estimate that 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, 2009.

We maintain a $5.0 million revolving bank credit facility maturing December 19, 2013 with an applicable interest rate on any outstanding balances under the credit facility based on LIBOR plus an applicable margin rate of 1.0% to 1.5%, based on certain factors included in our credit agreement. At September 30, 2010 and December 31, 2009, our interest rate on the $3.5 million borrowings under the revolving credit facility was 1.8% and 1.3%, respectively. The unused portion of the credit facility is subject to an unused facility fee ranging from .25% to .75% depending on total deposits with the creditor. All borrowings under this facility are secured by marketable securities. The borrowings of $3.5 million are classified as long-term debt on the accompanying balance sheets.

Item 4. 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 is designed to provide reasonable assurance that its books and records accurately reflect, in all material respects, the transactions of the Company and that its established policies and procedures are adhered to. There were no changes to the Company’s internal controls over financial reporting during the quarter ended September 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

17

PART II
OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

None.

Item 1A. RISK FACTORS

There have been no material changes from the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

Item 3. DEFAULTS UPON SENIOR SECURITIES

None.

Item 4. (REMOVED AND RESERVED)

Item 5. OTHER INFORMATION

None.

Item 6. EXHIBITS

Exhibits
	3	(a)	Certificate of Incorporation of the registrant. (1)
	3	(b)	Amendment to Articles of Incorporation of the registrant. (2)
	3	(c)	Amended and Restated Bylaws of the registrant adopted on July 27, 2007. (3)
	4	(a)	Rights Agreement dated as of December 7, 2000 by and between the Company and Computershare Investor Services, LLC as Rights Agent. (4)
	10	(a)	Lease on Facility at Parkway Center, Phase I, Plano, Texas. (5)
	10	(b)	Second Amendment to lease on Facility at Parkway Center, Phase 1, Plano, Texas (6)
	10	(c)	Lease on Facility at 2105 Luna Road, Carrollton, Texas. (7)
	10	(d)	Note and Credit Agreement between Interphase Corporation and Texas Capital Bank. (8)
	10	(e)	First Amendment to Loan Agreement between Interphase Corporation and Texas Capital Bank. (9)
	10	(f)	Amended and Restated Employment, Confidentiality, and Non-Competition Agreement with Gregory B. Kalush, dated December 30, 2008. *(10)
	10	(g)	Amended and Restated Employment, Confidentiality, and Non-Competition Agreement with Thomas N. Tipton, Jr. dated December 30, 2008. *(10)
	10	(h)	Amended and Restated Employment, Confidentiality, and Non-Competition Agreement with Randall E. McComas, dated December 30, 2008. *(10)
	10	(i)	Amended and Restated Employment, Confidentiality, and Non-Competition Agreement with Deborah A. Shute, dated December 30, 2008. *(10)
	10	(j)	Amended and Restated Employment, Confidentiality, and Non-Competition Agreement with James W. Gragg, dated December 30, 2008. *(10)
	10	(k)	Amended and Restated Employment, Confidentiality, and Non-Competition Agreement with Marc E. DeVinney, dated December 30, 2008. *(10)
	10	(l)	Amended and Restated Employment, Confidentiality, and Non-Competition Agreement with Yoram Solomon, dated December 30, 2008. *(10)

18

Exhibits
	10	(m)	Employment, Confidentiality, and Non-Competition Agreement with Yoram Solomon, dated November 17, 2008* (11)
	10	(n)	Employment, Confidentiality, and Non-Competition Agreement with H. Keith Seawright, dated April 6, 2010* (12)
	10	(o)	Interphase Corporation 2004 Long-Term Stock Incentive Plan *(13)
	31	(a)	Rule 13a-14(a)/15d-14(a) Certification. (14)
	31	(b)	Rule 13a-14(a)/15d-14(a) Certification. (14)
	32	(a)	Section 1350 Certification. (14)
	32	(b)	Section 1350 Certification. (14)

(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 Annual Report on Form 10-K for the year ended December 31, 1999, and incorporated herein by reference.
(3)	Filed as an exhibit to Current Report on Form 8-K on July 31, 2007, and incorporated herein by reference.
(4)	Filed as an exhibit to Current Report on Form 8-K on January 9, 2001, and incorporated herein by reference.
(5)	Filed as an exhibit to Quarterly Report on Form 10-Q for the quarter ended September 30, 2002, and incorporated herein by reference.
(6)	Filed as an exhibit to Annual Report on Form 10-K for the year ended December 31, 2008, and incorporated herein by reference.
(7)	Filed as an exhibit to Current Report on Form 8-K on December 10, 2008, and incorporated herein by reference.
(8)	Filed as an exhibit to Current Report on Form 8-K on December 24, 2008, and incorporated herein by reference.
(9)	Filed as an exhibit to Quarterly Report on Form 10-Q for the quarter ended March 31, 2009, and incorporated herein by reference
(10)	Filed as an exhibit to Current Report on Form 8-K on December 31, 2008, and incorporated herein by reference.
(11)	Filed as an exhibit to Current Report on Form 8-K on November 17, 2008, and incorporated herein by reference.
(12)	Filed as an exhibit to Current Report on Form 8-K on April 7, 2010, and incorporated herein by reference.
(13)	Filed as an exhibit to Schedule 14a on March 31, 2004 and incorporated herein by reference.
(14)	Filed herewith
*	Management contract or compensatory plan or arrangement.

SIGNATURE

Pursuant to the requirements 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 (Registrant)
Date: November 3, 2010	By:	/s/ Thomas N. Tipton Jr.
		Thomas N. Tipton Jr.
		Chief Financial Officer, Vice President of Finance and Treasurer (Principal Financial and Accounting Officer)

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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-Q of Interphase Corporation (the “Company”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-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 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: November 3, 2010	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-Q of Interphase Corporation (the “Company”);

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

4. The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-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 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: November 3, 2010	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 Quarterly Report of Interphase Corporation (the “Company”) on Form 10-Q for the quarter ended September 30, 2010, 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
November 3, 2010 

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 Quarterly Report of Interphase Corporation (the “Company”) on Form 10-Q for the quarter ended September 30, 2010, 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
November 3, 2010