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, 2008

OR

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

For the transition period from                      to                     

Commission File Number 0-13071

INTERPHASE CORPORATION

(Exact name of registrant as specified in its charter)

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

Large accelerated filer o Accelerated filer o Non-accelerated filer o 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 November 5, 2008, shares of common stock outstanding totaled 6,550,994.

INTERPHASE CORPORATION

Index to Form 10-Q
Quarterly Period Ended September 30, 2008

Part I — Financial Information
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007	2
Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2008 and 2007	3
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007	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. Submission of Matters to a Vote of Security Holders	18
Item 5. Other Information	18
Item 6. Exhibits	18
Exhibit 10(l)
Exhibit 31(a)
Exhibit 31(b)
Exhibit 32(a)
Exhibit 32(b)

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,
	2008			2007
ASSETS
Cash and cash equivalents	$	4,517		$	6,384
Marketable securities		13,261			14,185
Trade accounts receivable, less allowances of $136 and $173, respectively		7,559			7,550
Inventories		2,644			2,886
Prepaid expenses and other current assets		576			1,391
Total current assets		28,557			32,396
Machinery and equipment		7,030			6,962
Leasehold improvements		425			427
Furniture and fixtures		576			574
		8,031			7,963
Less-accumulated depreciation and amortization		(7,060	)		(6,879	)
Total property and equipment, net		971			1,084
Capitalized software, net		1,482			1,817
Other assets		1,981			883
Total assets	$	32,991		$	36,180
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Accounts payable	$	1,482		$	2,304
Deferred revenue		77			30
Accrued liabilities		711			1,387
Accrued compensation		1,713			1,645
Total current liabilities		3,983			5,366
Deferred lease obligations		13			52
Long-term debt		3,500			3,500
Total liabilities		7,496			8,918
Commitments and Contingencies
Shareholders’ Equity
Common stock, $0.10 par value; 100,000,000 shares authorized; 6,550,994 and 6,500,294 shares issued and outstanding, respectively		655			650
Additional paid in capital		42,536			42,267
Retained deficit		(16,948	)		(15,204	)
Cumulative other comprehensive loss		(748	)		(451	)
Total shareholders’ equity		25,495			27,262
Total liabilities and shareholders’ equity	$	32,991		$	36,180

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,
	2008			2007			2008			2007
Revenues	$	6,888		$	8,429		$	21,009		$	21,774
Cost of sales		2,904			3,249			9,585			8,970
Gross margin		3,984			5,180			11,424			12,804
Research and development		1,963			2,413			7,347			7,320
Sales and marketing		1,244			1,417			3,989			4,208
General and administrative		990			1,180			2,976			3,267
Restructuring charge		—			—			403			—
Total operating expenses		4,197			5,010			14,715			14,795
(Loss) income from operations		(213	)		170			(3,291	)		(1,991	)
Interest income, net		133			185			419			578
Other (loss) income, net		(175	)		192			150			349
(Loss) income before income tax		(255	)		547			(2,722	)		(1,064	)
Income tax benefit		(200	)		(151	)		(978	)		(300	)
Net (loss) income	$	(55	)	$	698		$	(1,744	)	$	(764	)
Net (loss) income per share:
Basic EPS	$	(0.01	)	$	0.11		$	(0.28	)	$	(0.13	)
Diluted EPS	$	(0.01	)	$	0.10		$	(0.28	)	$	(0.13	)
Weighted average common shares		6,334			6,152			6,315			6,112
Weighted average common and dilutive shares		6,334			6,781			6,315			6,112

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,
	2008			2007
Cash flows from operating activities:
Net loss	$	(1,744	)	$	(764	)
Adjustments to reconcile net loss to net cash used in operating activities:
Provision for uncollectible accounts and returns		(37	)		49
Provision for excess and obsolete inventories		—			300
Depreciation and amortization		670			665
Amortization of restricted stock		271			261
Write-off of impaired capitalized software		185			—
Change in assets and liabilities:
Trade accounts receivable		28			(1,414	)
Inventories		242			(831	)
Prepaid expenses and other current assets		859			(356	)
Other assets		(1,226	)		(3	)
Accounts payable, deferred revenue and accrued liabilities		(1,443	)		367
Accrued compensation		128			(441	)
Deferred lease obligations		(39	)		(25	)
Net cash used in operating activities		(2,106	)		(2,192	)
Cash flows from investing activities:
Purchase of property and equipment		(227	)		(310	)
Purchase of capitalized software		(201	)		(866	)
Proceeds from the sale of marketable securities		6,853			11,522
Purchase of marketable securities		(6,049	)		(12,430	)
Net cash provided by (used in) investing activities		376			(2,084	)
Cash flows from financing activities:
Proceeds from the exercise of stock options		2			735
Net cash provided by financing activities		2			735
Effect of exchange rate changes on cash and cash equivalents		(139	)		(74	)
Net decrease in cash and cash equivalents		(1,867	)		(3,615	)
Cash and cash equivalents at beginning of period		6,384			9,061
Cash and cash equivalents at end of period	$	4,517		$	5,446

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

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NOTE 1. — BASIS OF PRESENTATION

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 a 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 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, 2008, are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2007.

NOTE 2. — STOCK-BASED COMPENSATION

The Company accounts for stock-based compensation in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payments.” The Company had no unvested stock options nor were any stock options granted during the nine months ended September 30, 2008 or 2007, and as a result the Company recorded no stock-based compensation expense related to stock options during the nine months ended September 30, 2008 or 2007. The weighted-average remaining contractual life of stock options outstanding and exercisable at September 30, 2008 is 2.87 years and 3.61 years at December 31, 2007.

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

	Number of			Weighted Average
	Options			Option Price
Balance, December 31, 2007		1,698,801		$	9.67
Granted		—			—
Exercised		(500	)		4.12
Cancelled		(59,030	)		10.56
Balance, September 30, 2008		1,639,271		$	9.64

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 four years, and in some cases is subject to the achievement of certain performance conditions. During the nine months ended September 30, 2008, there were 116,037 shares granted at a weighted average market price of $7.49. 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 $113,000 and $88,000 for the three

5

months ended September 30, 2008 and 2007, respectively. Compensation expense related to restricted stock was approximately $271,000 and $261,000 for the nine months ended September 30, 2008 and 2007, respectively. As of September 30, 2008, there is approximately $1.3 million 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 2.9 years. At December 31, 2007, there was approximately $1.3 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 2.7 years. The following summarizes the restricted stock activity for the nine months ended September 30, 2008:

	Restricted			Weighted Average
	Stock Shares			Grant Date Value
Nonvested restricted stock at December 31, 2007		207,560		$	8.53
Granted		116,037			7.49
Vested		(42,811	)		7.37
Cancelled/Forefeited		(65,837	)		9.92
Nonvested restricted stock at September 30, 2008		214,949		$	7.77

NOTE 3. — MARKETABLE SECURITIES

SFAS No. 157, “Fair Value Measurements” defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 classifies the levels used to measure fair value into the following hierarchy:

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

The Company’s marketable securities are classified as “available-for-sale” and are presented at estimated fair value based on quoted prices for similar assets in active markets with any unrealized gains or losses included in other comprehensive income (loss). Realized gains and losses are computed based on the specific identification method and were not material for the periods presented. Financial assets, measured at fair value, by level within the fair value hierarchy as of September 30, 2008 (in thousands).

	Quoted Prices in		Significant
	Active Markets		Other		Significant
	for Identical		Observable		Unobservable
	Assets		Inputs		Inputs
	Level 1		Level 2		Level 3		Total
Available-for-sale	$	—	$	13,261	$	—	$	13,261
Securities
Total	$	—	$	13,261	$	—	$	13,261

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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,
	2008		2007
Raw materials	$	1,783	$	2,038
Work-in-process		445		594
Finished goods		416		254
Total	$	2,644	$	2,886

Valuing inventory at the lower of cost or market involves an inherent level of risk and uncertainty due to technology trends in the industry and customer demand for the Company’s products. Future events may cause significant fluctuations in the Company’s operating results. Inventories are written down when needed to ensure the Company carries inventory at the lower of cost or market. Writedowns for the three months and nine months ended September 30, 2007 were $100,000 and $300,000, respectively. There were no such writedowns during the three months and nine months ended September 30, 2008.

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 as hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and therefore any change in the market value of these contracts resulting in a gain or loss is recognized as other (loss) income, net in the period of the change. For the three months and nine months ended September 30, 2008, the Company recognized a loss of approximately $162,000 and a gain of approximately $184,000 respectively related to these foreign exchange contracts. For the three months and nine months ended September 30, 2007, the Company recognized a gain of approximately $187,000 and $306,000 respectively related to these foreign exchange contracts. At September 30, 2008, the Company had one foreign exchange contract outstanding to acquire 1.1 million Euros on a specified date during the next month. At September 30, 2008, the Company recorded approximately $145,000 in accrued liabilities, related to the fair value of its outstanding foreign exchange contract. There was one such contract outstanding at December 31, 2007, the Company recorded approximately $167,000 in prepaid expenses and other current assets for this contract.

NOTE 6. — INCOME TAXES

SFAS No. 109, “Accounting for Income Taxes,” requires that a valuation allowance be established when it is “more likely than not” that all or a portion of a deferred tax asset will not be realized. A review of all available positive and negative evidence needs to be considered, including a company’s current and past performance, the market environment in which the company operates, the utilization of past tax credits, length of carry back and carry forward periods, existing contracts or sales backlog that will result in future profits, as well as other factors.

Forming a conclusion on a valuation allowance 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. 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, 2008 and September 30, 2007. During the three and nine months ended September 30, 2008 and September 30, 2007, the Company recorded a tax benefit related to its operations in France. This benefit was primarily the result of a 10% research and development tax credit for 2007, which increased to a 30% research and development tax credit for 2008.

7

The Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), on January 1, 2007. At September 30, 2008 and December 31, 2007, the Company had an uncertain U.S. tax position of approximately $80,000 related to foreign operations. Due to the net operating loss position in the U.S., the Company would not incur tax, interest or penalty currently or in the near future. As such, no expense was recorded on the income statement and there is no impact on the Company’s effective tax rate. The Company does not anticipate any event in the next twelve months that would cause a change to this position. The Company will recognize any penalties and interest when necessary as tax expense. The U.S. federal tax returns for the years ended December 31, 2004 and after are open for IRS examination. The year ended December 31, 2002 generated a loss and the 2002 net operating loss (NOL) is still being used by the Company. The IRS may audit up to the NOL amount generated from the year ended December 31, 2002 until the statute of limitations expiration on open tax years.

The Company is also subject to income tax in France. At September 30, 2008, the Company had an uncertain tax position of approximately $523,000 of which $504,000 is related to a potential tax liability, $14,000 is related to possible interest, and $5,000 is related to a potential penalty. The uncertain tax position in France is expected to have a favorable impact on the effective tax rate in the amount of $504,000. At December 31, 2007, the Company had an uncertain tax position of approximately $266,000, of which $249,000 is related to a potential tax liability, $13,000 is related to potential interest, and $4,000 is related to a potential penalty. The Company does not anticipate any event in the next twelve months that would cause a change to this position. The French income tax returns for the years ended December 31, 2005 and subsequent remain open for examination.

NOTE 7. — RESTRUCTURING CHARGE

On March 27, 2008, the Company adopted a plan to restructure its United States based business operations to balance its current spending with recent revenue trends. The primary goal of the restructuring program was to improve the ability of the Company to invest in future business opportunities that are designed to provide the Company with increased growth potential and greater revenue diversification in the coming years and better align the Company’s skills with its future direction. Under the restructuring plan, the Company reduced its workforce by 14 employees. As a result of the restructuring program, the Company recorded a restructuring charge of $365,000, classified as an operating expense in the first quarter of 2008. There was an additional charge of $38,000 associated with a facility closure during the second quarter of 2008 related to lease termination costs. These amounts will be paid out under the restructuring plan and will be complete by the end of the fourth quarter 2008. At September 30, 2008, approximately $35,000 relating to future cash payments under this plan was included in accrued liabilities. The following table summarizes the timing of payments under the restructuring plan (in thousands):

			Cash payments		Cash payments		Cash payments		Remaining
			during quarter		during quarter		during quarter		liability as of
	Restructuring		ended March 31,		ended June 30,		ended September 30,		September 30,
Description	charge		2008		2008		2008		2008
Severance & Fringe Benefits	$	365	$	7	$	267	$	60	$	31
Lease Obligation		38		—		17		17		4
Total	$	403	$	7	$	284	$	77	$	35

NOTE 8. — CREDIT FACILITY

The Company maintains a $5.0 million revolving bank credit facility with a maturity date of July 31, 2010 and interest rate of LIBOR plus 1.5% (3.5% at September 30, 2008). At December 31, 2007, this credit facility had an interest rate of LIBOR plus 1.0% (6.25% at December 31, 2007). In an attempt to mitigate interest rate fluctuations, the Company from time to time may enter into agreements with our lender to fix the interest rate; our interest rate agreement at September 30, 2008 expired on October 2, 2008. 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.

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NOTE 9. — COMPREHENSIVE (LOSS) INCOME

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

	Three months ended						Nine months ended
	September 30,						September 30,
	2008			2007			2008			2007
Net (loss) income	$	(55	)	$	698		$	(1,744	)	$	(764	)
Other comprehensive (loss) income:
Unrealized holding (loss) gain arising during period, net of tax		(126	)		57			(119	)		53
Foreign currency translation adjustment		(193	)		(1	)		(178	)		23
Comprehensive (loss) income	$	(374	)	$	754		$	(2,041	)	$	(688	)

NOTE 10. — EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share are computed by dividing reported earnings (loss) available to common shareholders by weighted average common shares outstanding. Diluted earnings (loss) per share give effect to dilutive potential common shares. Earnings (loss) per share are calculated as follows (in thousands, except per share data):

	Three months ended					Nine months ended
	September 30,					September 30,
	2008			2007		2008			2007
Basic earnings per share:
Net (loss) income	$	(55	)	$	698	$	(1,744	)	$	(764	)
Weighted average common shares outstanding		6,334			6,152		6,315			6,112
Basic (loss) earnings per share	$	(0.01	)	$	0.11	$	(0.28	)	$	(0.13	)
Diluted earnings per share:
Net (loss) income	$	(55	)	$	698	$	(1,744	)	$	(764	)
Weighted average common shares outstanding		6,334			6,152		6,315			6,112
Dilutive stock options and restricted stock		—			629		—			—
Weighted average common shares outstanding — assuming dilution		6,334			6,781		6,315			6,112
Diluted (loss) earnings per share	$	(0.01	)	$	0.10	$	(0.28	)	$	(0.13	)
Outstanding stock options and unvested restricted stock that were not included in the diluted calculation because their effect would be anti-dilutive
		1,675			755		1,534			1,458

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NOTE 11. — SEGMENT INFORMATION

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 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 revenues related to North America and foreign countries is as follows (in thousands):

	Three months ended				Nine months ended
	September 30,				September 30,
	2008		2007		2008		2007
Revenues:
Pacific Rim	$	3,353	$	3,243	$	9,834	$	9,949
North America		1,940		3,672		5,990		9,572
Europe		1,595		1,514		5,185		2,253
Total	$	6,888	$	8,429	$	21,009	$	21,774

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

	Three months ended				Nine months ended
	September 30,				September 30,
	2008		2007		2008		2007
Product Revenues:
Broadband telecom	$	6,482	$	7,170	$	18,457	$	18,420
Professional services		209		124		347		382
Enterprise		106		980		735		2,402
Other		91		155		1,470		570
Total	$	6,888	$	8,429	$	21,009	$	21,774

NOTE 12. — RECENTLY ISSUED ACCOUNTING PROUNOUCEMENTS

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements. The Company was subject to the provisions of SFAS 157 beginning January 1, 2008. The Company’s adoption of SFAS 157 did not have a material impact on its Condensed Consolidated Financial Statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. SFAS 159 allows entities the option to measure eligible financial instruments at fair value as of specified dates. Such election, which may be applied on an instrument by instrument basis, is typically irrevocable once elected. SFAS 159 was effective for fiscal years beginning after November 15, 2007. The Company’s adoption of SFAS 159 did not have a material impact on its Condensed Consolidated Financial Statements as it did not elect the fair value option for any financial assets or liabilities.

10

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

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

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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”, and “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 decreased to $6.9 million for the three months ended September 30, 2008, compared to $8.4 million for the same period in the prior year. Our broadband telecom revenue decreased approximately 10% to $6.5 million for the three months ended September 30, 2008, compared to $7.2 million in the comparable period in the prior year. Our enterprise product revenue decreased 89% to $106,000 for the three months ended September 30, 2008, compared to $980,000 for the same period in the prior year. All other revenues increased 8% to $300,000 for the three months ended September 30, 2008, compared to $279,000 for the same period in the prior year.

During the third quarter of 2008, sales to four customers individually accounted for approximately 24%, 17%, 13% and 13% of total revenues, respectively. During the third quarter of 2007, sales to two customers individually accounted for approximately 28% and 26% of total revenues, respectively. No other customer accounted for more than 10% of our consolidated revenue in the periods presented.

Total revenue decreased to $21.0 million for the nine months ended September 30, 2008, compared to $21.8 million in the comparable period for the prior year. The decrease in revenue is primarily attributable to our enterprise product revenues, which decreased approximately 69% to $735,000 for the nine months ended September 30, 2008, compared to $2.4 million for the same period in the prior year. Our other revenue increased approximately 91% to $1.8 million for the nine months ended September 30, 2008 from $952,000 for the nine months ended September 30, 2007, which partially offset the decrease in enterprise product revenue. We had a one-time cancellation fee of $973,000 included in other revenue during the first quarter of 2008 for unique customer requirements for product development work that was discontinued. Our broadband telecom revenue remained relatively consistent at $18.4 million for the nine months ended September 30, 2008 compared to $18.5 million for the same period in the prior year.

Gross Margin

For the three months ended September 30, 2008, gross margin, as a percentage of sales, was 58% compared to 61% for the same period in the prior year. The decrease in our gross margin percentage in the third quarter of 2008 was primarily due to a revenue mix shift toward lower margin products. In addition, gross margin was negatively impacted by reduced utilization of our manufacturing facility. These two factors were partially offset by a decrease of $100,000 in obsolete inventory charges during the three months ended September 30, 2008, compared to the same period in the prior year.

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Gross margin as a percentage of sales was 54% and 59% for the nine months ended September 30, 2008 and 2007, respectively. The decrease in gross margin percentage was primarily a result of a shift in revenue mix toward lower margin products. In addition, we experienced reduced utilization of our manufacturing facility. These factors were partially offset by the effect of the $973,000 cancellation charge in the first quarter of 2008 described earlier, which had no cost associated with it. Furthermore, for the nine months ended September 30, 2008, we recorded $300,000 less in obsolete inventory charges compared to the nine months ended September 30, 2007, favorably impacting gross margin. We believe that gross margins will continue to fluctuate based on product mix.

Research and Development

Our investment in the development of new products through research and development was $2.0 million and $2.4 million for the three months ended September 30, 2008 and 2007, respectively. The decrease in research and development expense is primarily due to the restructuring plan we undertook in the first quarter of 2008 (See Note 6 in the Notes to Condensed Consolidated Financial Statements for more information). The reduced headcount and associated facility expense resulted in a decrease in research and development expense of approximately $305,000. Additionally, there was a reduction in project related research and development expenses of approximately $230,000 during the third quarter 2008 compared to the third quarter 2007 as we were preparing for several new product introductions and conducting field trials during the third quarter 2007. These two factors were partially offset by the impact that the Euro to Dollar exchange rate had on research and development expense. Much of our research and development resources are located in France and as such those costs are subject to exchange rate fluctuations with the Euro and the Dollar. The Euro was stronger against the Dollar in the third quarter of 2008 compared to the third quarter of 2007. This exchange rate fluctuation resulted in an increase to research and development expense of approximately $95,000, compared to the same period last year. As a percentage of total revenue, research and development expense was approximately 28% in the third quarter of 2008 as compared to approximately 29% 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 at a higher rate than revenue. We anticipate that spending on research and development will begin to level in the near future as a result of the restructuring plan undertaken in the first quarter of 2008, subject to fluctuations in currency exchange rates because much of our development expense is associated with our engineering lab in France. We will continue to take steps, when appropriate, to attempt to mitigate the impact of currency exposure by strategically acquiring foreign exchange contracts to purchase a fixed amount of Euros on a specific date in the future at a predetermined rate established by contract (see Item 3 — Foreign Currency Risk). In addition to our foreign exchange contracts, our total cost of performing research and development activities in France is reduced by the effect of a 30% research and development tax credit offered by the French tax administration. See Note 6 in the Notes to Condensed Consolidated Financial Statements for more information.

Our investment in research and development was consistent at $7.3 million for the nine months ended September 30, 2008 and 2007, respectively. The stronger Euro against the Dollar in 2008 resulted in an increase to research and development expense of approximately $460,000 for the nine months ended September 30, 2008, compared to the same period last year. Additionally, there were charges of approximately $185,000 during 2008 related to software purchased for specific products that is no longer required. These two factors were offset by the actions taken as part of the restructuring plan initiated in the first quarter of 2008. As a percentage of total revenue, research and development expense was approximately 35% for the nine months ended September 30, 2008 and 34% for the nine months ended September 30, 2007. The increase in research and development expense as a percentage of total revenue is due to revenue decreasing while research and development expense increased slightly.

Sales and Marketing

Sales and marketing expenses were $1.2 million and $1.4 million for the three months ended September 30, 2008 and 2007, respectively. The decrease in sales and marketing expense is primarily due to the restructuring plan we undertook in the first quarter of 2008 (See Note 7 in the Notes to Condensed Consolidated Financial Statements for more information). The reduced headcount resulted in a decrease in sales and marketing expense of approximately $140,000. Additionally, lower variable compensation and travel related expense of approximately $55,000 in the three months ended September 30, 2008 compared to 2007 also contributed to the decrease in total sales and marketing expense. As a percentage of total revenue, sales and marketing expense was approximately 18% for the third quarter of 2008 and 17% for the third quarter of 2007. The increase in sales and marketing expenses as a percentage of total revenue is due to revenue decreasing at a higher rate than sales and marketing expenses. We will continue to monitor the level of sales and marketing costs concurrently with actual revenue and profit results.

Sales and marketing expenses were $4.0 million and $4.2 million for the nine months ended September 30, 2008 and 2007, respectively. The decrease in sales and marketing expenses is primarily attributable to the impact of the restructuring plan we undertook in the first quarter of 2008. As a percentage of total revenue, sales and marketing expense was approximately 19% for the nine months ended September 30, 2008 and 2007.

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General and Administrative

General and administrative expenses were $1.0 million and $1.2 million for the three months ended September 30, 2008 and 2007, respectively. The decrease in general and administrative expenses is primarily due to a reduction in utilization of outside consulting, legal and accounting services compared to the same period in the prior year. As a percentage of total revenue, general and administrative expenses were approximately 14% in the third quarter of 2008 and 2007. We will continue to monitor the level of general and administrative costs concurrently with actual revenue and profit results.

General and administrative expenses were $3.0 million and $3.3 million for the nine months ended September 30, 2008 and 2007, respectively. General and administrative expenses decreased in the nine months ended September 30, 2008 primarily due to a reduction in utilization of outside consulting, legal and accounting services of approximately $155,000 compared to the same period in the prior year. In addition, bad debt expense during the nine months ended September 30, 2008 was approximately $45,000 less than the same period in the prior year. As a percentage of total revenue, general and administrative expense was approximately 14% for the nine months ended September 30, 2008 and 15% for the nine months ended September 30, 2007. The decrease as a percentage of revenue is due to general and administrative expenses decreasing at a higher rate than revenue.

Restructuring Charge

On March 27, 2008, we adopted a plan to restructure our United States based business operations to balance our current spending with recent revenue trends. The primary goal of the restructuring program was to improve our ability to invest in future business opportunities that are designed to provide us with increased growth potential and greater revenue diversification in the coming years and better align our skills with our future direction. Under the restructuring plan, we reduced our workforce by 14 employees. As a result of the restructuring program, the Company recorded a restructuring charge of $365,000 in the first quarter of 2008, classified as operating expense. There was an additional charge of $38,000 associated with a facility closure during the second quarter of 2008 related to lease termination costs. We currently estimate that activities related to the restructuring plan will remove over $1.5 million of annualized operating costs. See Note 7 in Notes to Condensed Consolidated Financial Statements for more information. There were no such restructuring activities during 2007.

Interest Income, Net

Interest income, net of interest expense, decreased to $133,000 for the three months ended September 30, 2008 from $185,000 in the comparable period in the prior year. Interest income, net of interest expense, was $419,000 for the nine months ended September 30, 2008 and $578,000 for the nine months ended September 30, 2007. The decrease in interest income, net for each period primarily relates to lower cash and investment balances as well as lower rates of return on our investments during the three and nine months ended September 30, 2008 compared to the same periods in 2007, resulting in decreased interest income during the periods. A decrease in interest expense due to improved interest rates during the periods presented partially offset the decrease in interest income.

Other (Loss) Income, Net

Other loss, net, was $175,000 for the three months ended September 30, 2008, compared to other income, net of $192,000 for the same period in the prior year. The change in other loss, net, primarily relates to the change in market value of our one foreign exchange derivative financial instrument outstanding at September 30, 2008 and resulted in loss of approximately $162,000 for the three months ended September 30, 2008. For the three months ended September 30, 2007, the change in market value of the two financial instruments outstanding at September 30, 2007 was a gain of approximately $187,000. Other income, net, was $150,000 and $349,000 for the nine months ended September 30, 2008 and 2007, respectively. For the nine months ended September 30, 2008 and 2007 our foreign exchange derivative financial instruments resulted in income of approximately $184,000 and $306,000, respectively. See Note 5 in the Notes to Condensed Consolidated Financial Statements for more information.

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Income Taxes

Our tax benefit rate for the nine months ended September 30, 2008 was 36%, compared to a tax benefit rate of 28% for the nine months ended September 30, 2007.

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, 2008 and September 30, 2007. During each of the nine months ended September 30, 2008 and September 30, 2007, we recorded a tax benefit related to our operations in France. This benefit was primarily the result of a research and development tax credit that increased for 2008 to 30% from the previous rate of 10% used during 2007. During 2008 the benefit from the research and development tax credit was partially offset by tax expense related to income generated in France as the result of foreign currency fluctuations.

Net (Loss) Income

We reported a net loss of $55,000 for the three months ended September 30, 2008 and net income of $698,000 for the three months ended September 30, 2007. Basic loss per share for the three months ended September 30, 2008 was ($0.01). Basic and diluted earnings per share for the three months ended September 30, 2007 was $0.11 and $0.10, respectively. The Company reported a net loss of $1.7 million and $764,000 for the nine months ended September 30, 2008 and September 30, 2007, respectively. Basic loss per share for the nine months ended September 30, 2008 and September 30, 2007 was ($0.28) and ($0.13), respectively.

LIQUIDITY AND CAPITAL RESOURCES

Consolidated Cash Flows

Cash and cash equivalents decreased $1.9 million and $3.6 million for the nine months ended September 30, 2008 and September 30, 2007, respectively. 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, 2008 and 2007 are generally similar to the trends in our earnings except for provision for uncollectible accounts and returns, provision for excess and obsolete inventories, depreciation and amortization, amortization of restricted stock and write-off of impaired capitalized software. Cash used in operating activities totaled $2.1 million for the nine months ended September 30, 2008, compared to a net loss of $1.7 million. Provision for uncollectible accounts and returns decreased $86,000 for the nine months ended September 30, 2008 compared to the same period in 2007. Provision for excess and obsolete inventories decreased $300,000 for the nine months ended September 30, 2008 compared to the same period in 2007. Depreciation and amortization increased slightly for the nine months ended September 30, 2008 compared to the same period in 2007. Amortization of restricted stock increased slightly for the nine months ended September 30, 2008, compared to the nine months ended September 30, 2007. See Note 2 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, 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 $376,000 for the nine months ended September 30, 2008 compared to cash used in investing activities of $2.1 million for the nine months ended September 30, 2007. Additions to property and equipment and capitalized software were $428,000 for the nine months ended September 30, 2008 compared to $1.2 million for the nine months ended September 30, 2007. The additions for the nine months ended September 30, 2008 primarily related to software and equipment purchases for our engineering and manufacturing functions. The additions for the nine months ended September 30, 2007 primarily related to our new enterprise performance management system and equipment purchases for our engineering function. Purchases of marketable securities were $6.0 million and $12.4 million for the nine months ended September 30, 2008 and 2007, respectively. Proceeds from the sale of marketable securities decreased to $6.9 million for the nine months ended September 30, 2008 compared to $11.5 million for the same period in 2007.

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Financing Activities

Net cash provided by financing activities totaled $2,000 for the nine months ended September 30, 2008 compared to $735,000 for the nine months ended September 30, 2007. Net cash provided by financing activities for both periods presented related to proceeds from employees exercising stock options.

Commitments

Commitments

At September 30, 2008, we had no material commitments to purchase capital assets. However, planned capital expenditures for the remainder of 2008 are estimated at approximately $60,000, relating to engineering, manufacturing and general office equipment. Our significant long-term obligations as of September 30, 2008, 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 2008.

Off-Balance Sheet Arrangements

At September 30, 2008 we had one foreign exchange contract outstanding to acquire 1.1 million Euros on a specified date during the next month. At September 30, 2008, we recorded approximately $145,000 in accrued liabilities related to the fair value of this outstanding foreign exchange contract. There was one such contract outstanding at December 31, 2007, we recorded approximately $167,000 in prepaid expenses and other current assets for this contract.

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 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, 2007.

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 $572,000 and $436,000 for the three months ended September 30, 2008, and 2007, respectively. The Euro to U.S. Dollar translation accounted for charges of approximately $2.0 million and $1.3 million for the nine months ended September 30, 2008 and 2007, 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.

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These derivative financial instruments do not meet the criteria to qualify as hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and therefore, any change in the market value of these contracts are recognized as a gain or loss as other income in the period of the change. For the three months and nine months ended September 30, 2008, we recognized a loss of approximately $162,000 and a gain of approximately $184,000 respectively related to these foreign exchange contracts. For the three months and nine months ended September 30, 2007, we recognized a gain of approximately $184,000 and $306,000 respectively related to these foreign exchange contracts. At September 30, 2008, we had one foreign exchange contract outstanding to acquire 1.1 million Euros at a specified date during the next month. At September 30, 2008, we recorded approximately $145,000 in accrued liabilities, related to the fair value of our outstanding foreign exchange contract. There was one such contract outstanding at December 31, 2007, we recorded $167,000 in prepaid expenses and other current assets for this contract.

Market Price Risk

We had no equity hedge contracts outstanding as of September 30, 2008 or December 31, 2007.

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, 2008. This potential change is based on sensitivity analyses performed on our marketable securities at September 30, 2008. 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, 2007.

We maintain a $5.0 million revolving bank credit facility with a maturity date of July 31, 2010 and interest rate of LIBOR plus 1.5% (3.5% at September 30, 2008). At December 31, 2007, this credit facility had an interest rate of LIBOR plus 1.0% (6.25% at December 31, 2007). In an attempt to mitigate interest rate fluctuations, we from time to time may enter into agreements with our lender to fix the interest rate; our interest rate agreement at September 30, 2008 expired on October 2, 2008. A hypothetical 100 basis point increase in LIBOR would increase annual interest expense on this credit facility by approximately $35,000. All borrowings under this facility are secured by marketable securities. The borrowings of $3.5 million are classified as long-term debt on the balance sheet.

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 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.

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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, 2007.

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

None.

Item 3. DEFAULTS UPON SENIOR SECURITIES

None.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

Item 5. OTHER INFORMATION

On September 30, 2008, Interphase Corporation amended its Note and Credit Agreement with Comerica Bank to extend its outstanding credit facility from a maturity date of July 31, 2009 to a maturity date of July 31, 2010. The applicable interest rate on all outstanding balances under the credit facility continues to be based on LIBOR; however the applicable margin rate has changed from 1.0% to 1.5%. A complete copy of this amendment is attached as an exhibit to this 10-Q.

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 25, 2007. (4)
4 (a)	Rights Agreement dated as of December 7, 2000 by and between the Company and Computershare Investor Services, LLC as Rights Agent. (3)
10 (a)	Lease on Facility at Parkway Center, Phase I, Plano, Texas. (5)
10 (b)	Lease on Facility at 2105 Luna Road, Carrollton, Texas. (5)
10 (c)	Note and Credit Agreement between Interphase Corporation and Comerica Bank, including Amendment dated November 5, 2004. (6)
10 (d)	Employment Agreement with Gregory B. Kalush, dated March 12, 1999. *(8)
10 (e)	Employment, Confidentiality, and Non-Competition Agreement with Thomas N. Tipton, Jr., dated December 19, 2005. *(8)
10 (f)	Employment, Confidentiality, and Non-Competition Agreement with Randall E. McComas, dated February 15, 2002. *(8)
10 (g)	Employment Agreement with Deborah A. Shute, dated November 24, 1999. *(8)
10 (h)	Employment, Confidentiality, and Non-Competition Agreement with James W. Gragg, dated November 1, 2004. *(8)
10 (i)	Employment, Confidentiality, and Non-Competition Agreement with Prasad Kallur, dated May 23, 2005. *(8)

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Exhibits
10 (j)	Interphase Corporation 2004 Long-Term Stock Incentive Plan *(7)
10 (k)	Employment, Confidentiality, and Non-Competition Agreement with Marc E. DeVinney, dated August 31, 2007. *(9)
10 (l)	Amendment to Note and Credit agreement between Interphase Corporation and Comerica Bank dated September 30, 2008 (10)
31 (a)	Rule 13a-14(a)/15d-14(a) Certification. (10)
31 (b)	Rule 13a-14(a)/15d-14(a) Certification. (10)
32 (a)	Section 1350 Certification. (10)
32 (b)	Section 1350 Certification. (10)

(1)	Filed as an exhibit to Registration Statement No. 2-86523 on Form S-1 and incorporated herein by reference.
(2)	Filed as an exhibit to Report on Form 10-K for the year ended December 31, 1999, and incorporated herein by reference.
(3)	Filed as an exhibit to Form 8-K on January 9, 2001, and incorporated herein by reference.
(4)	Filed as an exhibit to Report on Form 8-K on July 31, 2007, and incorporated herein by reference.
(5)	Filed as an exhibit to Report on Form 10-Q for the quarter ended September 30, 2002, and incorporated herein by reference.
(6)	Filed as an exhibit to Report on Form 10-K for the year ended December 31, 2004, and incorporated herein by reference.
(7)	Filed as an exhibit to Schedule 14a on March 31, 2005 and incorporated herein by reference.
(8)	Filed as an exhibit to Report on Form 10-K for the year ended December 31, 2005 and incorporated herein by reference.
(9)	Filed as an exhibit to Report on Form 8-K on August 31, 2007, and incorporated herein by reference.
(10)	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 6, 2008	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-10.L

Exhibit 10(l)

 FOURTH AMENDMENT TO NOTE AND CREDIT AGREEMENT

This Fourth Amendment to Note and Credit Agreement (this “Fourth Amendment”), is made, delivered and effective as of September 30, 2008, by and between INTERPHASE CORPORATION, a Texas corporation (“Borrower”), and COMERICA BANK, successor by merger with Comerica Bank — Texas (“Bank”).

WHEREAS, Bank has made a revolving loan to Borrower evidenced by that certain Master Revolving Note (as amended, the “Note”) dated July 25, 2003, executed by Borrower and payable to the order of Bank, in the original principal amount of $5,000,000.00, which Note was extended pursuant to the terms and conditions under (i) that certain Amendment to Note and Credit Agreement (the “First Amendment”) dated as of November 1, 2004, executed by and between Borrower and Bank; (ii) that certain Second Amendment to Note and Credit Agreement (the “Second Amendment”) dated as of April 17, 2006, executed by and between Borrower and Bank; and (iii) that certain Third Amendment to Note and Credit Agreement (the “Third Amendment”) dated as of September 21, 2007, executed by and between Borrower and Bank;

WHEREAS, the indebtedness evidenced by the Note is subject to the terms and conditions of that certain Credit Agreement (as amended, the “Credit Agreement”) dated as of July 25, 2003, by and between Borrower and Bank, which was amended by the First Amendment, the Second Amendment and the Third Amendment; and

WHEREAS, Bank and Borrower desire to further amend the Note and Credit Agreement as set forth below.

NOW, THEREFORE, in consideration of the premises and the mutual promises contained in this Fourth Amendment, Borrower and Bank agree as follows:

1.

Borrower and Bank hereby agree that the Maturity Date of the Note is hereby extended until July 31, 2010, at which time all outstanding principal, together with all accrued interest which has not been paid, shall be due and payable in full. All references in the Note or the other Loan Documents to the “Maturity Date” shall hereafter be modified to reflect July 31, 2010, as the “Maturity Date”, unless the indebtedness evidenced by the Note is otherwise accelerated following a Default or the occurrence of an Event of Default. The Liens (as defined below) are hereby extended until the Note as extended hereby, and all other obligations and indebtedness secured by the Loan Documents are fully paid and satisfied.

2.

Borrower and Bank hereby acknowledge and agree that, from and after the date hereof, the definition of the term “Revolving Credit Maturity Date”, as set forth in Section 1.1 of the Credit Agreement entitled “Defined Terms”, is hereby modified and replaced in its entirety with the following:

“Revolving Credit Maturity Date” shall now mean July 31, 2010, or such earlier date on which the entire unpaid principal amount of all Revolving Loans becomes due and payable whether by the lapse of time, demand for payment, acceleration or otherwise; provided, however, if any such date is not a business day, then the Revolving Credit Maturity Date shall be the next succeeding business day.”

3. Borrower and Bank hereby acknowledge and agree that, from and after the date hereof, the definition of the term “Applicable Margin”, as set forth in the Note, is hereby modified and replaced in its entirety with the following:

“Applicable Margin”, as used herein, shall mean 0% for the Prime Rate Balance, and one and one-half percent (1.50%) for each Libor Balance.”

4.	Borrower is responsible for all costs incurred by Bank, including without limit reasonable attorneys’ fees (whether inside or outside counsel is used), with regard to the preparation and execution of this Fourth Amendment.
5.	The execution of this Fourth Amendment shall not be deemed to be a waiver of any Default or the occurrence of an Event of Default.
6.	All the terms used in this Fourth Amendment which are defined in the Note and/or Credit Agreement shall have the same meaning as used in the Note and/or Credit Agreement, unless otherwise defined in this Fourth Amendment.
7.	Borrower waives, discharges, and forever releases Bank, Bank’s employees, officers, directors, attorneys, stockholders, and their successors and assigns, from and of any and all claims, causes of action, allegations or assertions that Borrower has or may have had at any time up through and including the date of this Fourth Amendment, against any or all of the foregoing, regardless of whether any such claims, causes of action, allegations or assertions are known to Borrower or whether any such claims, causes of action, allegations or assertions arose as a result of Bank’s actions or omissions in connection with the Note or Credit Agreement, or any amendments, extensions or modifications thereof, or Bank’s administration of the Indebtedness or otherwise, INCLUDING ANY CLAIMS, CAUSES OF ACTION, ALLEGATIONS OR ASSERTIONS RESULTING FROM BANK’S OWN NEGLIGENCE, except and to the extent (but only to the extent) caused by Bank’s gross negligence or willful misconduct.
8.	All Liens which secure or purport to secure the Indebtedness, including the indebtedness evidenced by the Note, are hereby ratified, confirmed, brought forward, renewed, extended and rearranged as security for the Indebtedness. The term “Lien” shall mean any valid and enforceable interest in any property, whether real, personal or mixed, securing an indebtedness, obligation or liability owed to or claimed by any person other than the owner of such property, whether such indebtedness is based on the common law or any statute or contract and including, but not limited to, a security interest, pledge, mortgage, assignment, conditional sale, trust receipt, lease, consignment or bailment for security purposes.
9.	This Fourth Amendment is not an agreement to any further or other amendment of the Note or Credit Agreement.
10.	Borrower expressly acknowledges and agrees that except as expressly amended in this Fourth Amendment, the Note and Credit Agreement, as amended, remain in full force and effect and are ratified, confirmed and restated. This Fourth Amendment shall neither extinguish nor constitute a novation of the Note or indebtedness evidenced thereby.
11.	THIS FOURTH AMENDMENT AND THE OTHER “LOAN AGREEMENTS” (AS DEFINED IN SECTION 26.02(A)(2) OF THE TEXAS BUSINESS & COMMERCE CODE, AS AMENDED) REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES, AND THIS AGREEMENT AND THE OTHER WRITTEN LOAN AGREEMENTS MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THE PARTIES. THERE ARE NO UNWRITTEN AGREEMENTS BETWEEN THE PARTIES.

IN WITNESS WHEREOF, the parties have executed and delivered this Fourth Amendment on the date set forth above.

BORROWER:		BANK:
INTERPHASE CORPORATION, COMERICA BANK a Texas corporation
By:	/s/ Tom Tipton Tom Tipton Chief Financial Officer	By:	/s/ Ruth Ann Firestone Ruth Ann Firestone, Vice President — Texas Division

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 6, 2008 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 6, 2008 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, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Gregory B. Kalush, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

/s/ Gregory B. Kalush

Gregory B. Kalush

Chief Executive Officer

November 6, 2008

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, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Thomas N. Tipton Jr., Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

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

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

/s/ Thomas N. Tipton Jr.

Thomas N. Tipton Jr.

Chief Financial Officer

November 6, 2008