10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2012

OR

¨ 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: 1-35267

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  x    No  ¨

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  x   No  ¨

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¨      Accelerated filer  ¨      Non-accelerated filer  ¨ Smaller reporting company  x

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

As of October 31, 2012, shares of common stock outstanding totaled 7,000,010.

INTERPHASE CORPORATION

Index to Form 10-Q

Quarterly Period Ended September 30, 2012

Part I - Financial Information
Item 1.	Condensed Consolidated Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011	2
	Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2012 and 2011	3
	Condensed Consolidated Statements of Comprehensive Income for the three months and nine months ended September 30, 2012 and 2011	4
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	18
Item 4.	Controls and Procedures	18
Part II - Other Information
Item 1.	Legal Proceedings	19
Item 1A.	Risk Factors	20
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20
Item 3.	Defaults Upon Senior Securities	20
Item 4.	Mine Safety Disclosures	20
Item 5.	Other Information	20
Item 6.	Exhibits	20

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, 2012			December 31, 2011
ASSETS
Cash and cash equivalents	$	4,655		$	7,470
Marketable securities		4,601			4,355
Trade accounts receivable, less allowances of $35 and $43, respectively		2,507			2,998
Inventories		2,443			1,556
Prepaid expenses and other current assets		424			414
Total current assets		14,630			16,793
Machinery and equipment		6,033			6,233
Leasehold improvements		332			327
Furniture and fixtures		400			400
		6,765			6,960
Less-accumulated depreciation and amortization		(6,397	)		(6,591	)
Total property and equipment, net		368			369
Capitalized software, net		181			225
Other assets		498			431
Total assets	$	15,677		$	17,818
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Accounts payable	$	633		$	1,008
Deferred revenue		141			164
Accrued liabilities		1,108			1,231
Accrued compensation		95			393
Total current liabilities		1,977			2,796
Deferred lease obligations		123			180
Long-term debt		3,500			3,500
Total liabilities		5,600			6,476
Commitments and Contingencies
Shareholders’ Equity
Common stock, $0.10 par value; 100,000,000 shares authorized; 7,000,010 and 6,895,085 shares issued and outstanding, respectively		700			690
Additional paid in capital		45,547			44,232
Retained deficit		(35,300	)		(32,708	)
Cumulative other comprehensive loss		(870	)		(872	)
Total shareholders' equity		10,077			11,342
Total liabilities and shareholders' equity	$	15,677		$	17,818

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 September 30,					Nine Months Ended September 30,
	2012			2011		2012			2011
Revenues:
Product	$	2,120		$	4,690	$	8,115		$	16,671
Service		1,047			831		2,536			1,715
Total revenues		3,167			5,521		10,651			18,386
Cost of sales:
Product		1,037			2,483		4,013			8,284
Service		666			443		1,748			1,008
Total cost of sales		1,703			2,926		5,761			9,292
Gross margin		1,464			2,595		4,890			9,094
Research and development		690			923		2,476			2,971
Sales and marketing		658			834		2,700			2,710
General and administrative		648			753		2,319			2,767
Total operating expenses		1,996			2,510		7,495			8,448
(Loss) income from operations		(532	)		85		(2,605	)		646
Other income, net		-			5		13			15
(Loss) income before income tax		(532	)		90		(2,592	)		661
Income tax expense		9			31		-			54
Net (loss) income	$	(541	)	$	59	$	(2,592	)	$	607
Net (loss) income per share:
Basic	$	(0.08	)	$	0.01	$	(0.37	)	$	0.09
Diluted	$	(0.08	)	$	0.01	$	(0.37	)	$	0.09

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

3

INTERPHASE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Net (loss) income	$	(541	)	$	59		$	(2,592	)	$	607
Other comprehensive (loss) income:
Foreign currency translation adjustment		(12	)		6			(1	)		(37	)
Unrealized holding gain (loss) arising during period, net of tax		2			(5	)		3			(21	)
Other comprehensive (loss) income		(10	)		1			2			(58	)
Comprehensive (loss) income	$	(551	)	$	60		$	(2,590	)	$	549

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

4

INTERPHASE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine Months Ended September 30,
	2012			2011
Cash flows from operating activities:
Net (loss) income	$	(2,592	)	$	607
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Recovery of uncollectible trade accounts receivable and product returns		(8	)		(12	)
Provision for excess and obsolete inventories		65			-
Depreciation and amortization		311			416
Stock-based compensation expense		501			272
Change in assets and liabilities:
Trade accounts receivable		499			(226	)
Inventories		(952	)		110
Prepaid expenses and other current assets		(11	)		282
Other assets		(70	)		139
Accounts payable, deferred revenue and accrued liabilities		(516	)		(1,031	)
Accrued compensation		(298	)		(257	)
Deferred lease obligations		(57	)		(47	)
Net cash (used in) provided by operating activities		(3,128	)		253
Cash flows from investing activities:
Purchase of property and equipment		(162	)		(169	)
Purchase of capitalized software		(104	)		(69	)
Proceeds from the sale of marketable securities		7,213			5,503
Purchases of marketable securities		(7,456	)		(2,800	)
Net cash (used in) provided by investing activities		(509	)		2,465
Cash flows from financing activities:
Borrowings under credit facility		10,500			7,000
Payments on credit facility		(10,500	)		(7,000	)
Proceeds from the exercise of stock options		824			527
Net cash provided by financing activities		824			527
Effect of exchange rate changes on cash and cash equivalents		(2	)		96
Net (decrease) increase in cash and cash equivalents		(2,815	)		3,341
Cash and cash equivalents at beginning of period		7,470			4,772
Cash and cash equivalents at end of period	$	4,655		$	8,113

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

5

INTERPHASE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 1.  -  BASIS OF PRESENTATION

Interphase Corporation and its subsidiaries (“Interphase” or the “Company”) is a diversified information and communications technology company, committed to innovation through the process of identifying, developing and introducing new products and services.  The Company is known in the industry as a premier provider of solutions for connectivity, interworking, packet processing, electronic manufacturing services, and electronic engineering design services.  Clients of the Company’s communications networking products include Alcatel-Lucent, Emerson Network Power, Fujitsu Ltd., Genband, Hewlett Packard, Nokia Siemens Networks, Oracle, and Samsung.  Interphase recently expanded its business to include penveu®, a handheld device that enhances the functionality of installed projectors and large screen displays; making any flat surface, from pull down screens to HDTVs, an interactive display system. penveu is an affordable and portable solution that targets the education and enterprise markets.  The Company, founded in 1974, is headquartered in Plano, Texas, with manufacturing facilities in Carrollton, Texas, and sales offices throughout the Americas and Europe.  See Note 10 for information regarding the Company’s revenues related to North America and foreign regions.

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.  All such adjustments are of a normal, recurring nature.  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 and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.  These financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2011.

NOTE 2.  - STOCK-BASED COMPENSATION

Stock Options

During the nine months ended September 30, 2012, the Company issued 138,500 stock options that vest over a one to four year period and expire ten years from date of grant.  The weighted average exercise price of these stock options is $5.25.  During the nine months ended September 30, 2011, the Company issued 215,000 stock options that vest over a three to four year period and expire ten years from the date of grant. The weighted average exercise price of these stock options is $2.00.  Compensation expense related to these stock options was $108,000 and $44,000 for the three months ended September 30, 2012 and 2011, respectively.  Compensation expense related to these stock options was $285,000 and $114,000 for the nine months ended September 30, 2012 and 2011, respectively.

During the nine months ended September 30, 2012, the Company also issued 448,000 stock options with performance-based vesting conditions for the years ending December 31, 2012, 2013, 2014, and 2015, the achievement of which would result in pro rata vesting per year in February 2013, 2014, 2015, and 2016, respectively. The weighted average exercise price of these stock options is $4.76.  During the nine months ended September 30, 2011, the Company issued 20,000 stock options with performance-based vesting conditions related to non-financial objectives for November 2011 and January 2012 and revenue objectives for the years ending December 31, 2012, 2013 and 2014, the achievement of which would result in vesting in February 2013, 2014 and 2015.  All stock options with performance-based conditions expire ten years from date of grant.  Of the stock options outstanding at September 30, 2012, 638,975 are subject to the achievement of certain performance conditions.  The performance conditions related to approximately 37,000 of these stock options were deemed probable as of September 30, 2012.  Compensation expense related to performance-based stock options, for which vesting was deemed probable, was $28,000 for the three months ended September 30, 2012.  During the three months ended September 30, 2011, it was determined that performance targets related to certain performance-based stock options were no longer probable of being achieved, and, as a result, the Company recognized a benefit of $7,000 related to performance-based stock options during the third quarter of 2011.  Compensation expense related to performance-based stock options, for which vesting was deemed probable, was $113,000 and $8,000 for the nine months ended September 30, 2012 and 2011, respectively.  The performance conditions related to the remaining options were not deemed probable at September 30, 2012; therefore no compensation expense related to these options has been recorded.

6

INTERPHASE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The weighted-average remaining contractual life of stock options outstanding and exercisable at September 30, 2012 and 2011 was 3.42 years and 2.07 years, respectively.

The following table summarizes the combined stock option activity under all of the plans:

	Number of Options			Weighted Average Option Price
Balance, December 31, 2011		1,332,473		$	4.21
Granted		586,500			4.88
Exercised		(168,915	)		4.83
Cancelled		(189,025	)		3.85
Balance, September 30, 2012		1,561,033		$	4.44

Option Valuation

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with weighted-average assumptions based on the grant date.

	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
Weighted average risk free interest rates		1.53	%		2.28	%		1.93	%		3.54	%
Weighted average life (in years)		10			10			10			10
Volatility		66.00	%		66.16	%		65.90	%		63.89	%
Expected dividend yield		-			-			-			-
Weighted average grant-date fair value per share of options granted	$	3.18		$	3.39		$	3.55		$	1.70

Restricted Stock

The Interphase Corporation 2004 Long-Term Stock Incentive Plan provides for grants of bonus stock awards (“restricted stock”) to its directors and certain employees at no cost to the recipient.  Holders of restricted stock are entitled to cash dividends, if declared, 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 six years, and in some cases vesting is subject to the achievement of certain performance conditions. During the nine months ended September 30, 2012, the Company issued 9,000 shares of restricted stock.  During the nine months ended September 30, 2011, the Company issued 72,000 shares of restricted stock.  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 $34,000 and $44,000 for the three months ended September 30, 2012 and 2011, respectively.  Compensation expense related to restricted stock was $103,000 and $149,000 for the nine months ended September 30, 2012 and 2011, respectively.  As of September 30, 2012, there was $294,000 of total unamortized compensation cost related to unvested restricted stock remaining to be recognized. The expense is expected to be recognized over a weighted-average period of 2.3 years.  As of December 31, 2011, there was $479,000 of total unamortized compensation cost related to unvested restricted stock which was expected to be recognized over a weighted-average period of 3.0 years.  The following table summarizes the restricted stock activity for the nine months ended September 30, 2012:

7

INTERPHASE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

	Restricted Stock Shares			Weighted Average Grant Date Value
Nonvested restricted stock at December 31, 2011		225,941		$	2.67
Granted		9,000			5.72
Vested		(44,236	)		3.47
Cancelled/Forfeited		(72,990	)		1.82
Nonvested restricted stock at September 30, 2012		117,715		$	3.13

NOTE 3.  -  MARKETABLE SECURITIES

Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements.  The Company follows ASC 820 in its valuation of its marketable securities.  ASC 820 defines fair value as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 classifies the levels used to measure fair value into the following hierarchy:

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.

Level 2 – Valuations 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.

Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

The Company’s investments in marketable securities primarily consist of investments in debt securities, which are classified as available for sale and presented as current assets on the accompanying condensed consolidated balance sheets. Earnings from debt securities are calculated on a yield to maturity basis and recorded in the results of operations. Unrealized gains or losses for the periods presented were included in other comprehensive (loss) income. 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.  The fair values of marketable securities were estimated using the market approach.

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

		September 30, 2012						December 31, 2011
	Fair Value Hierarchy	Cost		Unrealized Gain		Estimated Fair Value		Cost		Unrealized Gain		Estimated Fair Value
Asset Backed	Level 2	$	1,281	$	4	$	1,285	$	2,136	$	2	$	2,138
Corporate Bonds	Level 2		615		1		616		616		1		617
US Treasuries	Level 2		2,700		-		2,700		1,600		-		1,600
Total		$	4,596	$	5	$	4,601	$	4,352	$	3	$	4,355

8

INTERPHASE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 4.  -  INVENTORIES

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

	September 30, 2012		December 31, 2011
Raw Materials	$	1,878	$	1,231
Work-in-Process		491		214
Finished Goods		74		111
Total	$	2,443	$	1,556

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.  The Company increased reserve requirements by $45,000 during the three months ended September 30, 2012.  There were no writedowns during the three months ended September 30, 2011.  The Company increased reserve requirements by $65,000 during the nine months ended September 30, 2012.  There were no writedowns during the nine months ended September 30, 2011.

NOTE 5.  -  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 income tax rates for the periods presented differ from the U.S. statutory rate as the Company continues to provide a full valuation allowance for the net deferred tax assets at September 30, 2012 and 2011.

NOTE 6.  -  RESTRUCTURING CHARGE

On September 30, 2010, the Company initiated a restructuring plan to mitigate gross margin erosion by reducing manufacturing and procurement 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.  Under the 2010 restructuring plan, the Company reduced its worldwide work force by 39 employees, 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 approximately $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.  Cash payments, net of currency translation adjustments, during the three and nine months ended September 30, 2011 were approximately $10,000 and $1.2 million, respectively.  The remaining liability as of September 30, 2011 was $19,000.  These amounts were paid out under the restructuring plan by the end of 2011.

NOTE 7.  -  CREDIT FACILITY

The Company maintains a $5.0 million revolving bank credit facility maturing December 19, 2013.  The Company intends to extend or replace this credit facility during the fourth quarter of 2012.  The applicable interest rate on outstanding balances is LIBOR plus 1.0% to 1.5% based on certain factors included in the credit agreement.  At September 30, 2012 and December 31, 2011, the Company’s interest rate on the $3.5 million outstanding balance was 1.9% and 1.8%, 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 outstanding balance of $3.5 million as of September 30, 2012 and December 31, 2011 is classified as long-term debt on the Company’s condensed consolidated balance sheets.  Subsequent to September 30, 2012 and prior to the Company’s filing of the condensed consolidated financial statements, the outstanding balance on the credit facility was repaid.

9

INTERPHASE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 8.  -  EARNINGS PER SHARE

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

	Three months ended September 30,					Nine months ended September 30,
	2012			2011		2012			2011
Basic net (loss) income per share:
Net (loss) income	$	(541	)	$	59	$	(2,592	)	$	607
Weighted average common shares outstanding		7,000			6,895		6,965			6,845
Basic net (loss) income per share	$	(0.08	)	$	0.01	$	(0.37	)	$	0.09
Diluted net (loss) income per share:
Net (loss) income	$	(541	)	$	59	$	(2,592	)	$	607
Weighted average common shares outstanding		7,000			6,895		6,965			6,845
Dilutive stock options		-			287		-			280
Weighted average common shares outstanding – assuming dilution		7,000			7,182		6,965			7,125
Diluted net (loss) income per share	$	(0.08	)	$	0.01	$	(0.37	)	$	0.09
Outstanding stock options that were not included in the diluted calculation because their effect would be anti-dilutive		717			609		713			708

NOTE 9.  -  SHAREHOLDERS’ EQUITY

The Board of Directors adopted a Shareholder Rights Plan (the “Plan”) and, under the Plan, declared a non-taxable dividend, paid at the close of business on August 9, 2011 (the “Record Date”), of one common share purchase right (a “Right”) for each outstanding share of Common Stock.  From the Record Date until the Rights become exercisable, the Rights will be attached to all outstanding shares of Common Stock and, therefore, will be represented by the certificates evidencing the shares of Common Stock and transferrable only with the shares of Common Stock.  A Right will be exercisable, upon certain conditions, to purchase one share of Common Stock from the Company at a price of $39, subject to adjustment.  The Rights will become exercisable, and separate from the shares of Common Stock, upon the earlier of:

(1) ten business days following the date of the first public announcement (the “Stock Acquisition Date”) that a person or a group of affiliated or associated persons has acquired, or obtained the right to acquire, beneficial ownership of 15% or more of the outstanding shares of Common Stock (an “Acquiring Person”), or

(2) ten business days (or such later date as the Board of Directors may determine) following the commencement of a tender or exchange offer that, if consummated, would result in a person or group of persons becoming an Acquiring Person.

10

INTERPHASE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Upon a Stock Acquisition Date, each holder of a Right (other than an Acquiring Person) will be entitled to receive, upon exercise of the Right, shares of Common Stock at a 50% discount.  Also, if, at any time following a Stock Acquisition Date, the Company is acquired in a merger or business combination and its Common Stock is exchanged or converted, or if 50% or more of the Company’s assets, cash flow or earning power is sold or transferred, then each holder of a Right (other than an Acquiring Person) will be entitled to receive, upon exercise of the Right, shares of the acquirer’s common stock at a 50% discount.  Further, at any time after a person or group of persons becomes an Acquiring Person, but before any person or group of persons becomes the beneficial owner of 50% or more of the outstanding shares of Common Stock, the Company may cause each exercisable Right to be exchanged for one share of Common Stock.  The Rights will expire at the close of business on July 29, 2021, or such other date as the Board of Directors may determine under certain circumstances.  The Board of Directors may terminate the Plan or cause the Company to redeem the Rights, at a price of $0.001 per Right, at any time before the earlier of a Stock Acquisition Date or the expiration of the Rights.  The Company has reserved 90,315,210 shares of Common Stock for possible issuance upon exercise of Rights under the Plan.

NOTE 10.  -  SEGMENT INFORMATION

The Company is principally engaged in delivering embedded communications networking and computing solutions, interworking gateways, packet processing, network connectivity, and security for key applications for the communications and enterprise markets.  Except for revenues, which are 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 have only a single reporting segment.

Geographic revenue related to North America and foreign regions is as follows (in thousands):

	Three months ended September 30,				Nine months ended September 30,
	2012		2011		2012		2011
Revenues:
North America	$	2,092	$	2,274	$	5,989	$	6,127
Pacific Rim		623		1,872		2,869		6,755
Europe		452		1,375		1,793		5,504
Total	$	3,167	$	5,521	$	10,651	$	18,386

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

	Three months ended September 30,				Nine months ended September 30,
	2012		2011		2012		2011
Product Revenues:
Telecommunications	$	1,925	$	4,439	$	7,681	$	15,154
Services		1,047		831		2,536		1,715
Enterprise		158		192		346		1,393
Other		37		59		88		124
Total	$	3,167	$	5,521	$	10,651	$	18,386

NOTE 11.  -  RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-12, Comprehensive Income (Topic 220), Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.  This ASU deferred the ASU 2011-05 requirement that companies present reclassification adjustments for each component of accumulated other comprehensive income (“AOCI”) in both net income and other comprehensive income on the face of the financial statements.  Companies are still required to present reclassifications out of AOCI on the face of the financial statements or disclose those amounts in the notes to the financial statements.  This ASU also defers the requirement to report reclassification adjustments in interim periods.  This ASU is effective for interim and annual periods beginning after December 15, 2011 and is to be applied retrospectively.  The Company’s adoption of this update did not have a material impact on the consolidated financial statements.

11

 INTERPHASE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income.  This update requires that all nonowner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements.  This ASU is effective for interim and annual periods beginning after December 15, 2011 and is to be applied retrospectively.  The Company’s adoption of this update did not have a material impact on the consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.  The amendments in this ASU generally represent clarification of Topic 820, but also include instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed.  This update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) and International Financial Reporting Standards (“IFRS”).  The amendments are effective for interim and annual periods beginning after December 15, 2011 and are to be applied prospectively.  Early application is not permitted.  The Company’s adoption of this update did not have a material impact on the consolidated financial statements.

NOTE 12. - SUBSEQUENT EVENT

On October 19, 2012, the Company committed to a restructuring plan intended to result in savings of approximately $1.0 million to $1.6 million in annualized operating costs.  These actions aim to improve the balance between the Company’s telecommunications product expense and the reduced revenue levels of this product line.  As part of this plan, the Company expects to reduce the number of its employees by approximately 12% to 16%.  The Company expects to incur charges for one-time termination benefits in the range of $200,000 to $700,000, most of which will be cash expenditures.  The Company expects to substantially complete the actions associated with this plan during the fourth quarter of 2012.

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

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, 2011.

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) effects of the ongoing issues in global credit and financial markets, our reliance on a limited number of customers, the lack of spending improvements in the telecommunications and computer networking industries, significant changes in product demand, the development and introduction of new products and services, 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 of the foregoing risks and uncertainties are beyond the ability of the Company to control, and in many cases, the Company cannot predict the risks and uncertainties that could cause its actual results to differ materially from those indicated by the forward-looking statements.  When used in this report, the words “believes”, “plans”, “expects”, “will”, “intends,” and “anticipates” and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements.

RESULTS OF OPERATIONS

Revenue

Total revenue decreased 43% to $3.2 million for the three months ended September 30, 2012, compared to $5.5 million for the same period in the prior year.  Our telecommunications product revenue decreased to $1.9 million for the three months ended September 30, 2012, compared to $4.4 million in the comparable period in the prior year.  This decrease was primarily driven by two factors.  First, we experienced significantly reduced sales of an interworking product where the primary customer has delayed, until November 2012, the launch of its product.  This customer purchased inventory during the three months ended September 30, 2011 in anticipation of an earlier launch.  Second, the slowdown in telecommunications equipment spending worldwide has had a negative impact on our major customers and has impacted their purchase volume from us.  Our services revenues increased to $1.0 million for the three months ended September 30, 2012, compared to $831,000 for the same period in the previous year, because of increases in electronic manufacturing services and, to a lesser degree, increases in electronic engineering design services.  Our enterprise product revenue decreased to $158,000 for the three months ended September 30, 2012 compared to $192,000 for the same period in the previous year.  All other revenues decreased to $37,000, compared to $59,000 in the comparable period last year.

Total revenue decreased 42% to $10.7 million for the nine months ended September 30, 2012, compared to $18.4 million for the same period in the prior year.  Our telecommunications product revenue decreased to $7.7 million for the nine months ended September 30, 2012, compared to $15.2 million in the comparable period in the prior year.  This decrease was primarily driven by two factors.  First, the slowdown in telecommunications equipment spending worldwide has had a negative impact on our major customers and has impacted their purchase volume from us.  Second, we experienced significantly reduced sales of an interworking product where the primary customer has delayed, until November 2012, the launch of its product.  This customer purchased inventory during the nine months ended September 30, 2011 in anticipation of an earlier launch.  Our services revenues increased to $2.5 million for the nine months ended September 30, 2012, compared to $1.7 million for the same period in the previous year, because of increases in electronic manufacturing services and, to a lesser degree, increases in electronic engineering design services.  As expected, our enterprise product revenue decreased to $346,000 for the nine months ended September 30, 2012 compared to $1.4 million for the same period in the previous year because the major customer roll-out driving this product line has been completed.  All other revenues decreased to $88,000, compared to $124,000 in the comparable period last year.

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On October 19, 2012, we committed to a plan intended to improve the balance between our telecommunications product expense and the reduced revenue levels of this product line.  See Note 12 in the notes to condensed consolidated financial statements for more information on the plan.

During the third quarter of 2012, sales to one customer individually accounted for approximately 27% of total revenues.  During the third quarter of 2011, sales to two customers individually accounted for approximately 38% and 17% of total revenues, respectively.  No other customers individually accounted for more than 10% of our consolidated revenues in the periods presented.

Included in accounts receivable at September 30, 2012 was $693,000 and $322,000 due from Alcatel-Lucent and Genband, respectively.  Included in accounts receivable at December 31, 2011 was $786,000 and $734,000, due from Alcatel-Lucent and Nokia Siemens Networks, respectively.  No other customers individually accounted for more than 10% of our accounts receivable in the periods presented.

Gross Margin

Gross margin as a percentage of revenue was 46% and 47% for the three months ended September 30, 2012 and 2011, respectively.  The decrease in gross margin percentage in the third quarter of 2012 compared to the same period in the prior year was primarily due to decreased utilization of our manufacturing facility, partially offset by a shift in product mix toward higher margin products.

Gross margin as a percentage of revenue was 46% and 49% for the nine months ended September 30, 2012 and 2011, respectively.  The decrease in gross margin was primarily due to decreased utilization of our manufacturing facility, partially offset by a shift in product mix toward higher margin products.

We believe that pricing pressures in the industry and our anticipated future product mix may further reduce our gross margin percentage in future periods.

Research and Development

Our investment in research and development was $690,000 and $923,000 for the three months ended September 30, 2012 and 2011, respectively.  The decrease in research and development expense was primarily due to a decrease in variable project-related expenses.  As a percentage of revenue, research and development expenses were approximately 22% in the third quarter of 2012 compared to approximately 17% for the same period in the prior year.  The increase in research and development expenses as a percentage of total revenue was due to revenue decreasing at a higher rate than research and development expenses.

Our investment in research and development was $2.5 million and $3.0 million for the nine months ended September 30, 2012 and 2011, respectively.  During the first nine months of 2012, there was an increase in professional services activities, which resulted in an increase in services revenues.  Engineering costs associated with these activities generate revenue; therefore, the related expenses are recorded as cost of sales rather than research and development operating expenses, resulting in a decrease of $255,000 in research and development expenses during the period.  In addition, there was a decrease in other variable project-related expenses of $177,000 during the period.  As a percentage of revenue, research and development expenses were approximately 23% for the nine months ended September 30, 2012 compared to approximately 16% for the same period in the prior year.  The increase in research and development expenses as a percentage of total revenue was due to revenue decreasing at a higher rate than research and development expenses.

On October 19, 2012, we committed to a plan intended to improve the balance between our telecommunications product expense and the reduced revenue levels of this product line.  See Note 12 in the notes to condensed consolidated financial statements for more information on the plan.

Sales and Marketing

Sales and marketing expenses were $658,000 and $834,000 for the three months ended September 30, 2012 and 2011, respectively. The decrease in sales and marketing expense was primarily due to a decrease in professional sales and marketing services expense of $86,000 and a decrease in personnel-related expense of $79,000.  As a percentage of revenue, sales and marketing expenses were approximately 21% for the third quarter of 2012, compared to approximately 15% for the same period in the prior year.  The increase in sales and marketing expenses as a percentage of total revenue was due to revenue decreasing at a higher rate than sales and marketing expenses.

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Sales and marketing expenses were $2.7 million for each of the nine months ended September 30, 2012 and 2011. In the nine months ended September 30, 2012, the increase in marketing, public relations and tradeshow activities related to the introduction of our new product, penveu®, was offset by a decrease in personnel-related expense.  As a percentage of revenue, sales and marketing expenses were approximately 25% for the nine months ended September 30, 2012, compared to approximately 15% for the same period in the prior year.  The increase in sales and marketing expenses as a percentage of total revenue was due to revenue decreasing while sales and marketing expenses were flat.

On October 19, 2012, we committed to a plan intended to improve the balance between our telecommunications product expense and the reduced revenue levels of this product line.  See Note 12 in the notes to condensed consolidated financial statements for more information on the plan.

General and Administrative

General and administrative expenses were $648,000 and $753,000 for the three months ended September 30, 2012 and 2011, respectively.  The decrease in general and administrative expenses was primarily due to a decrease in legal services expense of $57,000 and a decrease in depreciation and amortization expense of $45,000.  As a percentage of revenue, general and administrative expenses were approximately 20% for the third quarter of 2012 and 14% for the same period in the prior year.  The increase in general and administrative expenses as a percentage of total revenue was due to revenue decreasing at a higher rate than general and administrative expenses.

General and administrative expenses were $2.3 million and $2.8 million for the nine months ended September 30, 2012 and 2011, respectively.  The decrease in general and administrative expenses was primarily due to a decrease in personnel-related expense of $195,000, a decrease in legal services expense of $129,000, and a decrease in depreciation of $45,000.  As a percentage of revenue, general and administrative expenses were approximately 22% for the nine months ended September 30, 2012 and 15% for the same period in the prior year.  The increase in general and administrative expenses as a percentage of total revenue was due to revenue decreasing at a higher rate than general and administrative expenses.  We will continue to monitor the level of general and administrative costs concurrently with actual revenue results.

Income Taxes

Our tax rate was 0% for the nine months ended September 30, 2012, compared to a tax expense rate of 8% for the nine months ended September 30, 2011.  The effective income tax rates for the periods presented differ from the U.S. statutory rate as we continue to provide a full valuation allowance for our net deferred tax assets at September 30, 2012 and September 30, 2011.  The tax expense for the nine months ended September 30, 2011 primarily relates to tax in a foreign jurisdiction.

Net (Loss) Income

We reported a net loss of $541,000 for the three months ended September 30, 2012 and a net income of $59,000 for the three months ended September 30, 2011.  Basic loss per share for the three months ended September 30, 2012 was ($0.08).  Basic and diluted earnings per share for the three months ended September 30, 2011 was $0.01.  We reported a net loss of $2.6 million for the nine months ended September 30, 2012 and a net income of $607,000 for the nine months ended September 30, 2011.  Basic loss per share for the nine months ended September 30, 2012 was ($0.37).  Basic and diluted earnings per share for the nine months ended September 30, 2011 was $0.09.

Recently Announced Product

On April 18, 2012 we announced the debut of penveu®.  penveu is a handheld device that enhances the functionality of installed projectors and large screen displays; making any flat surface, from pull down screens to HDTVs, an interactive display system.  Using embedded computer vision technology, penveu works with any device with a VGA connection and requires no software or driver installation, no particular operating system, and no periodic calibration.  penveu is targeted at the education and enterprise markets.  An independent source estimates the interactive whiteboard market to grow to approximately $1.85 billion in revenue in 2017.  However, penveu also has the unique ability to turn the estimated over 51 million projectors and 7 million large screen displays that are currently installed worldwide into interactive display devices.  The retail price of penveu will be less than 25% of the average price of a typical installed interactive whiteboard and, unlike an interactive whiteboard, penveu will not require the time and expense of installation.  penveu will be offered and sold through our website, other online retailers and catalogs.  We continue to make significant investments in development, marketing and infrastructure associated with penveu to position this important product for a successful launch.

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LIQUIDITY AND CAPITAL RESOURCES

Consolidated Cash Flows

Cash and cash equivalents decreased $2.8 million from December 31, 2011 to September 30, 2012 and increased $3.3 million from December 31, 2010 to September 30, 2011.  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, 2012 and 2011 are generally similar to the trends in our earnings except for the recovery of uncollectible accounts and returns, provision for excess and obsolete inventories, depreciation and amortization and amortization of stock-based compensation.  Cash used in operating activities totaled $3.1 million for the nine months ended September 30, 2012, compared to net loss of $2.6 million.  Recovery of uncollectible accounts and returns decreased $4,000 for the nine months ended September 30, 2012 compared to the same period in 2011.  Provision for excess and obsolete inventories increased $65,000 for the nine months ended September 30, 2012 compared to the same period in 2011.  Depreciation and amortization decreased $105,000 for the nine months ended September 30, 2012 compared to the same period in 2011.  Amortization of stock-based compensation increased $229,000 for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 primarily due to stock options issued during the first half of 2012. See Note 2 in the 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 except for the increase in inventory during the nine months ended September 30, 2012, which was primarily due to the purchase of parts for penveu and parts associated with an interworking product where the primary customer has delayed the launch of its product.  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 used in investing activities totaled $509,000 and cash provided by investing activities totaled $2.5 million for the nine months ended September 30, 2012 and 2011, respectively. Cash used in or provided by investing activities in each of the periods related principally to our investments in marketable securities, additions to property and equipment and capitalized software purchases.  Additions to property and equipment and capitalized software were $266,000 for the nine months ended September 30, 2012, compared to $238,000 for the nine months ended September 30, 2011.  The additions for the nine months ended September 30, 2012 primarily related to software and equipment purchases for our newly announced product, penveu®, and for our manufacturing function.  The additions for the nine months ended September 30, 2011 primarily related to software and equipment purchases for our engineering, manufacturing, and administrative functions.  Purchases of marketable securities were $7.5 million and $2.8 million for the nine months ended September 30, 2012 and 2011, respectively.  Proceeds from the sale of marketable securities increased to $7.2 million for the nine months ended September 30, 2012, compared to $5.5 million for the nine months ended September 30, 2011.

Financing Activities

Net cash provided by financing activities totaled $824,000 for the nine months ended September 30, 2012, consisting solely of proceeds from the exercise of stock options.  Net cash provided by financing activities totaled $527,000 for the nine months ended September 30, 2011, also consisting solely of proceeds from the exercise of stock options.

16

Restructuring Charge

On September 30, 2010, the Company initiated a restructuring plan to mitigate gross margin erosion by reducing manufacturing and procurement 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.  Under the 2010 restructuring plan, the Company reduced its worldwide work force by 39 employees, 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 approximately $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.  Cash payments, net of currency translation adjustments, during the three and nine months ended September 30, 2011 were approximately $10,000 and $1.2 million, respectively.  The remaining liability as of September 30, 2011 was $19,000.  These amounts were paid out under the restructuring plan by the end of 2011.

Commitments

At September 30, 2012, we had no material commitments to purchase capital assets; however, planned capital expenditures for the remainder of 2012 are estimated at approximately $30,000, which primarily relates to software for penveu.  At September 30, 2012, we had $124,000 of non-cancelable purchase commitments for inventory and product tooling as part of the normal course of business.  Our significant long-term obligations are operating leases on facilities and our phone system and future debt payments.  We have not paid any dividends since our inception and do not anticipate paying any dividends in 2012.

Other

Management believes that 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 the indebtedness of the Company or its subsidiaries.

Critical Accounting Policies

There have been no significant changes to our critical accounting policies from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011.

Recently Issued Accounting Pronouncements

See Note 11 in the notes to the condensed consolidated financial statements for more information regarding recently issued accounting pronouncements, including the dates of adoption and estimated effects on our condensed consolidated financial statements.

Subsequent Event

On October 19, 2012, we committed to a plan intended to improve the balance between our telecommunications product expense and the reduced revenue levels of this product line.  See Note 12 in the notes to condensed consolidated financial statements for more information on the plan.

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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.  The Company’s operations in France were transacted in the local currency and converted into U.S. Dollars based on published exchange rates for the periods reported and were therefore subject to risk of exchange rate fluctuations.  The Euro to U.S. Dollar translation accounted for charges of $2,000 and $7,000 for the three months ended September 30, 2012 and 2011, respectively.  The Euro to U.S. Dollar translation accounted for charges of $14,000 and $25,000 for the nine months ended September 30, 2012 and 2011, respectively.  This risk was significantly reduced due to the closure of our French operations at the end of 2010.

Market Price Risk

We had no equity hedge contracts outstanding as of September30, 2012 or December 31, 2011.

Interest Rate Risk

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

A hypothetical 50 basis point increase in interest rates would result in an approximate decrease of less than 1% in the fair value of our available-for-sale securities at September 30, 2012.  This potential change is based on sensitivity analyses performed on our marketable securities at September 30, 2012.  Actual results may differ materially.  The same hypothetical 50 basis point increase in interest rates would have resulted in an approximate decrease of less than 1% in the fair value of our available-for-sale securities at December 31, 2011.

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 London Interbank Offered Rate (“LIBOR”) plus 1.0% to 1.5% applicable margin rate based on certain factors included in our credit agreement.  The interest rate on the borrowings under the revolving credit facility was 1.9% and 1.8% at September 30, 2012 and December 31, 2011, 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.  A hypothetical 50 basis point increase in LIBOR would increase annual interest expense on this credit facility by $17,500.  All borrowings under this facility are secured by marketable securities.  Subsequent to September 30, 2012 and prior to the Company’s filing of the condensed consolidated financial statements, the outstanding balance on the credit facility was repaid.  The Company intends to extend or replace this credit facility during the fourth quarter of 2012.

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 Securities Exchange Act of 1934 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 Securities and Exchange Commission.

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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.  From time to time the Company may experience changes to its internal controls due, for example, to employee turnover, re-balancing of workloads, extended absences and promotions of employees.  However, there were no changes in our internal controls over financial reporting during the quarter ended September 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II

OTHER INFORMATION

Item 1.               LEGAL PROCEEDINGS

French Restructuring Litigation

Twenty-five former employees (“Plaintiffs”) of Interphase SAS, a subsidiary of Interphase Corporation, brought suit in France against Interphase SAS alleging various causes of action and rights to damages relating to claims of wrongful dismissal of employment, specific French employment indemnities, general economic losses, and contractual claims relating specifically to their employment relationship and contracts entered into between the individual and Interphase SAS.  The lawsuits were filed between November 2010 and April 2011 and are pending in the Labor Court of Boulogne-Billancourt, France and the Administrative Court of Cergy-Pontoise, France.  The various claims and assertions arise from, and relate to, the Plaintiffs’ release from employment as part of the restructuring actions taken during the third quarter of 2010.  See Note 6 in the notes to the condensed consolidated financial statements for more information regarding the restructuring plan.  The updated statement of claim is for an aggregate payment of approximately €3.1 million, which translated to approximately $4.0 million at September 30, 2012, related to these claims.  The Company believes that the Plaintiffs’ claims are without merit and plans to continue to vigorously defend itself in this lawsuit.

On March 22, 2012, a hearing was conducted with the Labor Court of Boulogne-Billancourt, France related to the claims of twenty-three of the twenty-five former employees.  On May 31, 2012, the Court reported that the four judges’ votes were split; therefore, another hearing of the Court will be scheduled.  The same four judges will hear the case again, along with a professional judge from another court to ensure that a majority decision will be reached.  A date has not yet been scheduled for the new hearing.  The new hearing is not likely to take place before mid-2013.

On May 22, 2012, a hearing was conducted with the Labor Court of Boulogne-Billancourt, France related to the claims of one of the twenty-five former employees.  On July 31, 2012, the Court reported that the four judges’ votes were split; therefore, another hearing of the Court will be scheduled.  The same four judges will hear the case again, along with a professional judge from another court to ensure that a majority decision will be reached.  A date has not yet been scheduled for the new hearing.  The new hearing is not likely to take place before mid-2013.

On June 12, 2012, a hearing was conducted with the Labor Court of Boulogne-Billancourt, France related to the claims of one of the twenty-five former employees.  The Labor Court postponed the hearing on this case until May 28, 2013 or until the Administrative Court rules on this case.

Patent Infringement Litigation

On April 7, 2011, Interphase was named as one of the defendants in a lawsuit filed by Mosaid Technologies (“Mosaid”) pending in the United States District Court for the Eastern District of Texas.  The complaint includes allegations that Interphase has infringed and is still infringing upon a certain registered U.S. patent to which Mosaid has enforcement rights.  The sole infringement allegation directed at Interphase appears to concern communications controller chips that Interphase purchases (indirectly) from Freescale Semiconductor, Inc. (“Freescale”), another defendant in the infringement allegation, which are used in several of Interphase’s products.

19

The complaint requests a judgment that Mosaid’s patents have been and are being infringed upon and, accordingly, an award of an unspecified amount of damages, plus interest and costs, as well as injunctive relief and any other remedies available under law.  Because the complaint claims the alleged infringing conduct is willful, it also requests treble damages and attorneys’ fees under the applicable U.S. patent statute.

Interphase does not know if there is any merit to Mosaid’s allegations.  Nevertheless, Interphase intends, and understands that Freescale intends, to vigorously defend the allegations; and to the extent that the infringement claim relates to the Freescale chips used in Interphase’s products, Freescale will also defend Interphase and indemnify Interphase against damages in the lawsuit.

In late-August 2012, after a hearing, the court denied Mosaid’s motion to limit the defendants' invalidity contentions regarding Mosaid’s patent claims and granted the defendants' motion to limit the number of asserted claims in this lawsuit.

In late-September 2012, after a hearing, the court denied the defendants' motion to sever Interphase from this lawsuit and transfer the remainder of the lawsuit to California.

In mid-October 2012, the parties to this lawsuit began the court-ordered mediation process.

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, 2011.

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

None.

Item 3.               DEFAULTS UPON SENIOR SECURITIES

None.

Item 4.               MINE SAFETY DISCLOSURES

None.

Item 5.               OTHER INFORMATION

None.

Item 6.               EXHIBITS

Exhibits

31  (a) Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.

31  (b) Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.

32  (a) Section 1350 Certification of Chief Executive Officer.

32  (b) Section 1350 Certification of Chief Financial Officer.

101.INS XBRL Instance Document. *

101.SCH XBRL Taxonomy Extension Schema Document. *

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. *

101.LAB XBRL Taxonomy Extension Label Linkbase Document. *

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document. *

101.DEF XBRL Taxonomy Extension Definition Linkbase Document. *

* Furnished electronically herewith, but (in accordance with Rule 406T of Regulation S-T) not deemed “filed”.

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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 8, 2012                                                                                       By:/s/ Thomas N. Tipton Jr.

Thomas N. Tipton Jr.

Chief Financial Officer, Secretary,

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 8, 2012                                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 8, 2012 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, 2012, 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 8, 2012

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, 2012, 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 8, 2012

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Note 8 - Earning Per Share (Detail) - Earning Per Share (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Basic net (loss) income per share:
Net (loss) income (in Dollars)	$ (541)	$ 59	$ (2,592)	$ 607
Weighted average common shares outstanding	7,000	6,895	6,965	6,845
Weighted average common shares outstanding – assuming dilution	7,000	7,182	6,965	7,125
Diluted net (loss) income per share (in Dollars per share)	$ (0.08)	$ 0.01	$ (0.37)	$ 0.09
Basic net (loss) income per share (in Dollars per share)	$ (0.08)	$ 0.01	$ (0.37)	$ 0.09
Stock Options [Member]
Basic net (loss) income per share:
Dilutive stock options		287		280
Outstanding Stock Awards [Member]
Basic net (loss) income per share:
Outstanding stock options that were not included in the diluted calculation because their effect would be anti-dilutive	717	609	713	708

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Note 2 - Stock-Based Compensation (Detail) - Summary of Combined Stock Option Activity (USD $)	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
Balance, December 31, 2011	1,332,473
Balance, December 31, 2011 (in Dollars per share)	$ 4.21	$ 2.00
Balance, September 30, 2012	1,561,033
Balance, September 30, 2012 (in Dollars per share)	$ 4.44	$ 2.00
Granted	586,500
Granted (in Dollars per share)	$ 4.88
Exercised	(168,915)
Exercised (in Dollars per share)	$ 4.83
Cancelled	(189,025)
Cancelled (in Dollars per share)	$ 3.85

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Note 12 - Subsequent Event (Detail) (USD $)	3 Months Ended
	Dec. 31, 2012
Minimum [Member]
Effect on Future Earnings, Amount	$ 1,000,000
Restructuring and Related Cost, Number of Positions Eliminated, Period Percent	12.00%
Severance Costs	200,000
Maximum [Member]
Effect on Future Earnings, Amount	1,600,000
Restructuring and Related Cost, Number of Positions Eliminated, Period Percent	16.00%
Severance Costs	$ 700,000

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Note 3 - Marketable Securities

9 Months Ended

Sep. 30, 2012

Fair Value Disclosures [Text Block]

NOTE 3.  -  MARKETABLE SECURITIES

Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements.  The Company follows ASC 820 in its valuation of its marketable securities.  ASC 820 defines fair value as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 classifies the levels used to measure fair value into the following hierarchy:

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.

Level 2 – Valuations 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.

Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

The Company’s investments in marketable securities primarily consist of investments in debt securities, which are classified as available for sale and presented as current assets on the accompanying condensed consolidated balance sheets. Earnings from debt securities are calculated on a yield to maturity basis and recorded in the results of operations. Unrealized gains or losses for the periods presented were included in other comprehensive (loss) income. 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.  The fair values of marketable securities were estimated using the market approach.

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

		September 30, 2012						December 31, 2011
	Fair Value Hierarchy	Cost		Unrealized Gain		Estimated Fair Value		Cost		Unrealized Gain		Estimated Fair Value
Asset Backed	Level 2	$	1,281	$	4	$	1,285	$	2,136	$	2	$	2,138
Corporate Bonds	Level 2		615		1		616		616		1		617
US Treasuries	Level 2		2,700		-		2,700		1,600		-		1,600
Total		$	4,596	$	5	$	4,601	$	4,352	$	3	$	4,355

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Note 4 - Inventories (Detail) (USD $)	3 Months Ended		9 Months Ended	21 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2012
Inventory Write-down	$ 45,000	$ 0	$ 65,000	$ 9

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Note 3 - Marketable Securities (Detail) - Fair Value, Financial Assets Measured by Level within The Fair Value Hierarchy (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Cost	$ 4,596	$ 4,352
Unrealized Gain	5	3
Estimated Fair Value	4,601	4,355
Asset-backed Securities [Member] | Fair Value, Inputs, Level 2 [Member]
Cost	1,281	2,136
Unrealized Gain	4	2
Estimated Fair Value	1,285	2,138
Corporate Debt Securities [Member] | Fair Value, Inputs, Level 2 [Member]
Cost	615	616
Unrealized Gain	1	1
Estimated Fair Value	616	617
US Treasury Securities [Member] | Fair Value, Inputs, Level 2 [Member]
Cost	2,700	1,600
Unrealized Gain	0	0
Estimated Fair Value	$ 2,700	$ 1,600

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Note 4 - Inventories (Detail) - Inventory (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Raw Materials	$ 1,878	$ 1,231
Work-in-Process	491	214
Finished Goods	74	111
Total	$ 2,443	$ 1,556

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Note 6 - Restructuring Charge (Detail) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010	Sep. 30, 2011
Restructuring Charges		$ 3,300,000
Restructuring Reserve, Settled with Cash	10,000		1,200,000
Effect on Future Cash Flows, Amount	$ 19,000

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Note 2 - Stock-Based Compensation

9 Months Ended

Sep. 30, 2012

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

NOTE 2.  - STOCK-BASED COMPENSATION

Stock Options

During the nine months ended September 30, 2012, the Company issued 138,500 stock options that vest over a one to four year period and expire ten years from date of grant.  The weighted average exercise price of these stock options is $5.25.  During the nine months ended September 30, 2011, the Company issued 215,000 stock options that vest over a three to four year period and expire ten years from the date of grant. The weighted average exercise price of these stock options is $2.00.  Compensation expense related to these stock options was $108,000 and $44,000 for the three months ended September 30, 2012 and 2011, respectively.  Compensation expense related to these stock options was $285,000 and $114,000 for the nine months ended September 30, 2012 and 2011, respectively.

During the nine months ended September 30, 2012, the Company also issued 448,000 stock options with performance-based vesting conditions for the years ending December 31, 2012, 2013, 2014, and 2015, the achievement of which would result in pro rata vesting per year in February 2013, 2014, 2015, and 2016, respectively. The weighted average exercise price of these stock options is $4.76.  During the nine months ended September 30, 2011, the Company issued 20,000 stock options with performance-based vesting conditions related to non-financial objectives for November 2011 and January 2012 and revenue objectives for the years ending December 31, 2012, 2013 and 2014, the achievement of which would result in vesting in February 2013, 2014 and 2015.  All stock options with performance-based conditions expire ten years from date of grant.  Of the stock options outstanding at September 30, 2012, 638,975 are subject to the achievement of certain performance conditions.  The performance conditions related to approximately 37,000 of these stock options were deemed probable as of September 30, 2012.  Compensation expense related to performance-based stock options, for which vesting was deemed probable, was $28,000 for the three months ended September 30, 2012.  During the three months ended September 30, 2011, it was determined that performance targets related to certain performance-based stock options were no longer probable of being achieved, and, as a result, the Company recognized a benefit of $7,000 related to performance-based stock options during the third quarter of 2011.  Compensation expense related to performance-based stock options, for which vesting was deemed probable, was $113,000 and $8,000 for the nine months ended September 30, 2012 and 2011, respectively.  The performance conditions related to the remaining options were not deemed probable at September 30, 2012; therefore no compensation expense related to these options has been recorded.

The weighted-average remaining contractual life of stock options outstanding and exercisable at September 30, 2012 and 2011 was 3.42 years and 2.07 years, respectively.

The following table summarizes the combined stock option activity under all of the plans:

	Number of Options			Weighted Average Option Price
Balance, December 31, 2011		1,332,473		$	4.21
Granted		586,500			4.88
Exercised		(168,915	)		4.83
Cancelled		(189,025	)		3.85
Balance, September 30, 2012		1,561,033		$	4.44

Option Valuation

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with weighted-average assumptions based on the grant date.

	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
Weighted average risk free interest rates		1.53	%		2.28	%		1.93	%		3.54	%
Weighted average life (in years)		10			10			10			10
Volatility		66.00	%		66.16	%		65.90	%		63.89	%
Expected dividend yield		-			-			-			-
Weighted average grant-date fair value per share of options granted	$	3.18		$	3.39		$	3.55		$	1.70

Restricted Stock

The Interphase Corporation 2004 Long-Term Stock Incentive Plan provides for grants of bonus stock awards (“restricted stock”) to its directors and certain employees at no cost to the recipient.  Holders of restricted stock are entitled to cash dividends, if declared, 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 six years, and in some cases vesting is subject to the achievement of certain performance conditions. During the nine months ended September 30, 2012, the Company issued 9,000 shares of restricted stock.  During the nine months ended September 30, 2011, the Company issued 72,000 shares of restricted stock.  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 $34,000 and $44,000 for the three months ended September 30, 2012 and 2011, respectively.  Compensation expense related to restricted stock was $103,000 and $149,000 for the nine months ended September 30, 2012 and 2011, respectively.  As of September 30, 2012, there was $294,000 of total unamortized compensation cost related to unvested restricted stock remaining to be recognized. The expense is expected to be recognized over a weighted-average period of 2.3 years.  As of December 31, 2011, there was $479,000 of total unamortized compensation cost related to unvested restricted stock which was expected to be recognized over a weighted-average period of 3.0 years.  The following table summarizes the restricted stock activity for the nine months ended September 30, 2012:

	Restricted Stock Shares			Weighted Average Grant Date Value
Nonvested restricted stock at December 31, 2011		225,941		$	2.67
Granted		9,000			5.72
Vested		(44,236	)		3.47
Cancelled/Forfeited		(72,990	)		1.82
Nonvested restricted stock at September 30, 2012		117,715		$	3.13

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Note 7 - Credit Facility (Detail) (USD $) In Millions, unless otherwise specified				3 Months Ended		3 Months Ended
	Sep. 30, 2012	Dec. 31, 2011	Sep. 30, 2012 Minimum [Member] Line of Credit [Member]	Sep. 30, 2012 Minimum [Member]	Sep. 30, 2012 Maximum [Member] Line of Credit [Member]	Sep. 30, 2012 Maximum [Member]
Line of Credit Facility, Maximum Borrowing Capacity (in Dollars)	$ 5.0
Debt Instrument, Basis Spread on Variable Rate			1.00%		1.50%
Line of Credit Facility, Amount Outstanding (in Dollars)	$ 3.5	$ 3.5
Line of Credit Facility, Interest Rate at Period End	1.90%	1.80%
Line of Credit Facility, Unused Capacity, Commitment Fee Percentage				0.25%		0.75%

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Condensed Consolidated Balance Sheets (unaudited) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
ASSETS
Cash and cash equivalents	$ 4,655	$ 7,470
Marketable securities	4,601	4,355
Trade accounts receivable, less allowances of $35 and $43, respectively	2,507	2,998
Inventories	2,443	1,556
Prepaid expenses and other current assets	424	414
Total current assets	14,630	16,793
Machinery and equipment	6,033	6,233
Leasehold improvements	332	327
Furniture and fixtures	400	400
	6,765	6,960
Less-accumulated depreciation and amortization	(6,397)	(6,591)
Total property and equipment, net	368	369
Capitalized software, net	181	225
Other assets	498	431
Total assets	15,677	17,818
LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable	633	1,008
Deferred revenue	141	164
Accrued liabilities	1,108	1,231
Accrued compensation	95	393
Total current liabilities	1,977	2,796
Deferred lease obligations	123	180
Long-term debt	3,500	3,500
Total liabilities	5,600	6,476
Commitments and Contingencies
Common stock, $0.10 par value; 100,000,000 shares authorized; 7,000,010 and 6,895,085 shares issued and outstanding, respectively	700	690
Additional paid in capital	45,547	44,232
Retained deficit	(35,300)	(32,708)
Cumulative other comprehensive loss	(870)	(872)
Total shareholders' equity	10,077	11,342
Total liabilities and shareholders' equity	$ 15,677	$ 17,818

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Condensed Consolidated Statements of Cash Flows (unaudited) (USD $)	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
Cash flows from operating activities:
Net (loss) income	$ (2,592,000)	$ 607,000
Recovery of uncollectible trade accounts receivable and product returns	(8,000)	(12,000)
Provision for excess and obsolete inventories	65,000
Depreciation and amortization	311,000	416,000
Stock-based compensation expense	501,000	272,000
Change in assets and liabilities:
Trade accounts receivable	499,000	(226,000)
Inventories	(952,000)	110,000
Prepaid expenses and other current assets	(11,000)	282,000
Other assets	(70,000)	139,000
Accounts payable, deferred revenue and accrued liabilities	(516,000)	(1,031,000)
Accrued compensation	(298,000)	(257,000)
Deferred lease obligations	(57,000)	(47,000)
Net cash (used in) provided by operating activities	(3,128,000)	253,000
Cash flows from investing activities:
Purchase of property and equipment	(162,000)	(169,000)
Purchase of capitalized software	(104,000)	(69,000)
Proceeds from the sale of marketable securities	7,213,000	5,503,000
Purchases of marketable securities	(7,456,000)	(2,800,000)
Net cash (used in) provided by investing activities	(509,000)	2,465,000
Cash flows from financing activities:
Borrowings under credit facility	10,500,000	7,000,000
Payments on credit facility	(10,500,000)	(7,000,000)
Proceeds from the exercise of stock options	824,000	527,000
Net cash provided by financing activities	824,000	527,000
Effect of exchange rate changes on cash and cash equivalents	(2,000)	96,000
Net (decrease) increase in cash and cash equivalents	(2,815,000)	3,341,000
Cash and cash equivalents at beginning of period	7,470,000	4,772,000
Cash and cash equivalents at end of period	$ 4,655,000	$ 8,113,000

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Note 10 - Segment Information (Detail) - Geographic Revenue Related to North America and Foreign Regions (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Revenues:
Revenues	$ 3,167	$ 5,521	$ 10,651	$ 18,386
North America [Member]
Revenues:
Revenues	2,092	2,274	5,989	6,127
Pacific Rim [Member]
Revenues:
Revenues	623	1,872	2,869	6,755
Europe [Member]
Revenues:
Revenues	$ 452	$ 1,375	$ 1,793	$ 5,504

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Note 8 - Earning Per Share (Tables)

9 Months Ended

Sep. 30, 2012

Schedule of Earnings Per Share, Basic and Diluted [Table Text Block]

	Three months ended September 30,					Nine months ended September 30,
	2012			2011		2012			2011
Basic net (loss) income per share:
Net (loss) income	$	(541	)	$	59	$	(2,592	)	$	607
Weighted average common shares outstanding		7,000			6,895		6,965			6,845
Basic net (loss) income per share	$	(0.08	)	$	0.01	$	(0.37	)	$	0.09
Diluted net (loss) income per share:
Net (loss) income	$	(541	)	$	59	$	(2,592	)	$	607
Weighted average common shares outstanding		7,000			6,895		6,965			6,845
Dilutive stock options		-			287		-			280
Weighted average common shares outstanding – assuming dilution		7,000			7,182		6,965			7,125
Diluted net (loss) income per share	$	(0.08	)	$	0.01	$	(0.37	)	$	0.09
Outstanding stock options that were not included in the diluted calculation because their effect would be anti-dilutive		717			609		713			708

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Note 10 - Segment Information (Detail) - Additional Information Regarding Revenue by Product Line (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Product Revenues:
Revenues	$ 3,167	$ 5,521	$ 10,651	$ 18,386
Telecomunications [Member]
Product Revenues:
Revenues	1,925	4,439	7,681	15,154
Services [Member]
Product Revenues:
Revenues	1,047	831	2,536	1,715
Enterprise [Member]
Product Revenues:
Revenues	158	192	346	1,393
All Other Segments [Member]
Product Revenues:
Revenues	$ 37	$ 59	$ 88	$ 124

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Note 2 - Stock-Based Compensation (Detail) (USD $)	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011	Dec. 31, 2011
Share-based Compensation Arrangement by Share-based Payment Award, Shares Issued in Period (in Shares)			138,500
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Exercise Price (in Dollars per share)	$ 4.44	$ 2.00	$ 4.44	$ 2.00	$ 4.21
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number (in Shares)	1,561,033		1,561,033		1,332,473
Stock Issued During Period, Shares, Restricted Stock Award, Net of Forfeitures (in Shares)			9,000	72,000
Stock Options [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Shares Issued in Period (in Shares)				215,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Exercise Price (in Dollars per share)	$ 5.25		$ 5.25
Share-based Compensation	$ 108,000	$ 44,000	$ 285,000	$ 114,000
Performance Shares [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Shares Issued in Period (in Shares)			448,000	20,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Exercise Price (in Dollars per share)	$ 4.76		$ 4.76
Share-based Compensation	28,000	(7,000)	113,000	8,000
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Rights			During the nine months ended September 30, 2012, the Company also issued 448,000 stock options with performance-based vesting conditions for the years ending December 31, 2012, 2013, 2014, and 2015, the achievement of which would result in pro rata vesting per year in February 2013, 2014, 2015, and 2016, respectively.	During the nine months ended September 30, 2011, the Company issued 20,000 stock options with performance-based vesting conditions related to non-financial objectives for November 2011 and January 2012 and revenue objectives for the years ending December 31, 2012, 2013 and 2014, the achievement of which would result in vesting in February 2013, 2014 and 2015.
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number (in Shares)	638,975		638,975
Share-based Compensation Arrangement by Share-based Payment Award, Options, Vested and Expected to Vest, Outstanding, Number (in Shares)	37,000		37,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Remaining Contractual Term	3 years 153 days	2 years 25 days
Restricted Stock [Member] | Minimum [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period	3 years
Restricted Stock [Member] | Maximum [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period			6 years
Restricted Stock [Member]
Share-based Compensation	34,000	44,000	103,000	149,000
Employee Service Share-based Compensation, Nonvested Awards, Total Compensation Cost Not yet Recognized, Stock Options					479,000
Employee Service Share-based Compensation, Nonvested Awards, Total Compensation Cost Not yet Recognized, Period for Recognition	2 years 109 days				3 years
Restricted Stock Units (RSUs) [Member]
Employee Service Share-based Compensation, Nonvested Awards, Total Compensation Cost Not yet Recognized, Stock Options	$ 294,000		$ 294,000
Minimum [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period			1 year	3 years
Maximum [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period			4 years	4 years

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Note 1 - Basis of Presentation

9 Months Ended

Sep. 30, 2012

Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block]

NOTE 1.  -  BASIS OF PRESENTATION

Interphase Corporation and its subsidiaries (“Interphase” or the “Company”) is a diversified information and communications technology company, committed to innovation through the process of identifying, developing and introducing new products and services.  The Company is known in the industry as a premier provider of solutions for connectivity, interworking, packet processing, electronic manufacturing services, and electronic engineering design services.  Clients of the Company’s communications networking products include Alcatel-Lucent, Emerson Network Power, Fujitsu Ltd., Genband, Hewlett Packard, Nokia Siemens Networks, Oracle, and Samsung.  Interphase recently expanded its business to include penveu®, a handheld device that enhances the functionality of installed projectors and large screen displays; making any flat surface, from pull down screens to HDTVs, an interactive display system. penveu is an affordable and portable solution that targets the education and enterprise markets.  The Company, founded in 1974, is headquartered in Plano, Texas, with manufacturing facilities in Carrollton, Texas, and sales offices throughout the Americas and Europe.  See Note 10 for information regarding the Company’s revenues related to North America and foreign regions.

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.  All such adjustments are of a normal, recurring nature.  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 and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.  These financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2011.

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Condensed Consolidated Balance Sheets (unaudited) (Parentheticals) (USD $) In Thousands, except Share data, unless otherwise specified	Sep. 30, 2012	Dec. 31, 2011
Trade accounts receivable, allowances (in Dollars)	$ 35	$ 43
Common stock par value (in Dollars per share)	$ 0.10	$ 0.10
Common stock, shares authorized	100,000,000	100,000,000
Common stock, shares issued	7,000,010	6,895,085
Common stock, shares outstanding	7,000,010	6,895,085

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Note 11 - Recently Issued Accounting Pronouncements

9 Months Ended

Sep. 30, 2012

Accounting Changes and Error Corrections [Text Block]

NOTE 11.  -  RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-12, Comprehensive Income (Topic 220), Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.  This ASU deferred the ASU 2011-05 requirement that companies present reclassification adjustments for each component of accumulated other comprehensive income (“AOCI”) in both net income and other comprehensive income on the face of the financial statements.  Companies are still required to present reclassifications out of AOCI on the face of the financial statements or disclose those amounts in the notes to the financial statements.  This ASU also defers the requirement to report reclassification adjustments in interim periods.  This ASU is effective for interim and annual periods beginning after December 15, 2011 and is to be applied retrospectively.  The Company’s adoption of this update did not have a material impact on the consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income.  This update requires that all nonowner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements.  This ASU is effective for interim and annual periods beginning after December 15, 2011 and is to be applied retrospectively.  The Company’s adoption of this update did not have a material impact on the consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.  The amendments in this ASU generally represent clarification of Topic 820, but also include instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed.  This update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) and International Financial Reporting Standards (“IFRS”).  The amendments are effective for interim and annual periods beginning after December 15, 2011 and are to be applied prospectively.  Early application is not permitted.  The Company’s adoption of this update did not have a material impact on the consolidated financial statements.

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Document And Entity Information	9 Months Ended
	Sep. 30, 2012	Oct. 31, 2012
Document and Entity Information [Abstract]
Entity Registrant Name	INTERPHASE CORP
Document Type	10-Q
Current Fiscal Year End Date	--12-31
Entity Common Stock, Shares Outstanding		7,000,010
Amendment Flag	false
Entity Central Index Key	0000728249
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Filer Category	Smaller Reporting Company
Entity Well-known Seasoned Issuer	No
Document Period End Date	Sep. 30, 2012
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q3

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Note 12 - Subsequent Event

9 Months Ended

Sep. 30, 2012

Subsequent Events [Text Block]

NOTE 12. - SUBSEQUENT EVENT

On October 19, 2012, the Company committed to a restructuring plan intended to result in savings of approximately $1.0 million to $1.6 million in annualized operating costs.  These actions aim to improve the balance between the Company’s telecommunications product expense and the reduced revenue levels of this product line.  As part of this plan, the Company expects to reduce the number of its employees by approximately 12% to 16%.  The Company expects to incur charges for one-time termination benefits in the range of $200,000 to $700,000, most of which will be cash expenditures.  The Company expects to substantially complete the actions associated with this plan during the fourth quarter of 2012.

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Condensed Consolidated Statements of Operations (unaudited) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Revenues:
Product	$ 2,120	$ 4,690	$ 8,115	$ 16,671
Service	1,047	831	2,536	1,715
Total revenues	3,167	5,521	10,651	18,386
Cost of sales:
Product	1,037	2,483	4,013	8,284
Service	666	443	1,748	1,008
Total cost of sales	1,703	2,926	5,761	9,292
Gross margin	1,464	2,595	4,890	9,094
Research and development	690	923	2,476	2,971
Sales and marketing	658	834	2,700	2,710
General and administrative	648	753	2,319	2,767
Total operating expenses	1,996	2,510	7,495	8,448
(Loss) income from operations	(532)	85	(2,605)	646
Other income, net		5	13	15
(Loss) income before income tax	(532)	90	(2,592)	661
Income tax expense	9	31		54
Net (loss) income	$ (541)	$ 59	$ (2,592)	$ 607
Basic (in Dollars per share)	$ (0.08)	$ 0.01	$ (0.37)	$ 0.09
Diluted (in Dollars per share)	$ (0.08)	$ 0.01	$ (0.37)	$ 0.09

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Note 6 - Restructuring Charge

9 Months Ended

Sep. 30, 2012

Restructuring and Related Activities Disclosure [Text Block]

NOTE 6.  -  RESTRUCTURING CHARGE

On September 30, 2010, the Company initiated a restructuring plan to mitigate gross margin erosion by reducing manufacturing and procurement 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.  Under the 2010 restructuring plan, the Company reduced its worldwide work force by 39 employees, 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 approximately $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.  Cash payments, net of currency translation adjustments, during the three and nine months ended September 30, 2011 were approximately $10,000 and $1.2 million, respectively.  The remaining liability as of September 30, 2011 was $19,000.  These amounts were paid out under the restructuring plan by the end of 2011.

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Note 5 - Income Taxes

9 Months Ended

Sep. 30, 2012

Income Tax Disclosure [Text Block]

NOTE 5.  -  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 income tax rates for the periods presented differ from the U.S. statutory rate as the Company continues to provide a full valuation allowance for the net deferred tax assets at September 30, 2012 and 2011.

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Note 10 - Segment Information (Tables)

9 Months Ended

Sep. 30, 2012

Schedule of Revenue from External Customers Attributed to Foreign Countries by Geographic Area [Table Text Block]

	Three months ended September 30,				Nine months ended September 30,
	2012		2011		2012		2011
Revenues:
North America	$	2,092	$	2,274	$	5,989	$	6,127
Pacific Rim		623		1,872		2,869		6,755
Europe		452		1,375		1,793		5,504
Total	$	3,167	$	5,521	$	10,651	$	18,386

Revenue from External Customers by Products and Services [Table Text Block]

	Three months ended September 30,				Nine months ended September 30,
	2012		2011		2012		2011
Product Revenues:
Telecommunications	$	1,925	$	4,439	$	7,681	$	15,154
Services		1,047		831		2,536		1,715
Enterprise		158		192		346		1,393
Other		37		59		88		124
Total	$	3,167	$	5,521	$	10,651	$	18,386

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Note 2 - Stock-Based Compensation (Tables)

9 Months Ended

Sep. 30, 2012

Schedule of Share-based Compensation, Stock Options, Activity [Table Text Block]

	Number of Options			Weighted Average Option Price
Balance, December 31, 2011		1,332,473		$	4.21
Granted		586,500			4.88
Exercised		(168,915	)		4.83
Cancelled		(189,025	)		3.85
Balance, September 30, 2012		1,561,033		$	4.44

Schedule of Share-based Payment Award, Stock Options, Valuation Assumptions [Table Text Block]

	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
Weighted average risk free interest rates		1.53	%		2.28	%		1.93	%		3.54	%
Weighted average life (in years)		10			10			10			10
Volatility		66.00	%		66.16	%		65.90	%		63.89	%
Expected dividend yield		-			-			-			-
Weighted average grant-date fair value per share of options granted	$	3.18		$	3.39		$	3.55		$	1.70

Schedule of Nonvested Restricted Stock Units Activity [Table Text Block]

	Restricted Stock Shares			Weighted Average Grant Date Value
Nonvested restricted stock at December 31, 2011		225,941		$	2.67
Granted		9,000			5.72
Vested		(44,236	)		3.47
Cancelled/Forfeited		(72,990	)		1.82
Nonvested restricted stock at September 30, 2012		117,715		$	3.13

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Note 9 - Shareholders' Equity

9 Months Ended

Sep. 30, 2012

Stockholders' Equity Note Disclosure [Text Block]

NOTE 9.  -  SHAREHOLDERS’ EQUITY

The Board of Directors adopted a Shareholder Rights Plan (the “Plan”) and, under the Plan, declared a non-taxable dividend, paid at the close of business on August 9, 2011 (the “Record Date”), of one common share purchase right (a “Right”) for each outstanding share of Common Stock.  From the Record Date until the Rights become exercisable, the Rights will be attached to all outstanding shares of Common Stock and, therefore, will be represented by the certificates evidencing the shares of Common Stock and transferrable only with the shares of Common Stock.  A Right will be exercisable, upon certain conditions, to purchase one share of Common Stock from the Company at a price of $39, subject to adjustment.  The Rights will become exercisable, and separate from the shares of Common Stock, upon the earlier of:

(1) ten business days following the date of the first public announcement (the “Stock Acquisition Date”) that a person or a group of affiliated or associated persons has acquired, or obtained the right to acquire, beneficial ownership of 15% or more of the outstanding shares of Common Stock (an “Acquiring Person”), or

(2) ten business days (or such later date as the Board of Directors may determine) following the commencement of a tender or exchange offer that, if consummated, would result in a person or group of persons becoming an Acquiring Person.

Upon a Stock Acquisition Date, each holder of a Right (other than an Acquiring Person) will be entitled to receive, upon exercise of the Right, shares of Common Stock at a 50% discount.  Also, if, at any time following a Stock Acquisition Date, the Company is acquired in a merger or business combination and its Common Stock is exchanged or converted, or if 50% or more of the Company’s assets, cash flow or earning power is sold or transferred, then each holder of a Right (other than an Acquiring Person) will be entitled to receive, upon exercise of the Right, shares of the acquirer’s common stock at a 50% discount.  Further, at any time after a person or group of persons becomes an Acquiring Person, but before any person or group of persons becomes the beneficial owner of 50% or more of the outstanding shares of Common Stock, the Company may cause each exercisable Right to be exchanged for one share of Common Stock.  The Rights will expire at the close of business on July 29, 2021, or such other date as the Board of Directors may determine under certain circumstances.  The Board of Directors may terminate the Plan or cause the Company to redeem the Rights, at a price of $0.001 per Right, at any time before the earlier of a Stock Acquisition Date or the expiration of the Rights.  The Company has reserved 90,315,210 shares of Common Stock for possible issuance upon exercise of Rights under the Plan.

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Note 7 - Credit Facility

9 Months Ended

Sep. 30, 2012

Debt Disclosure [Text Block]

NOTE 7.  -  CREDIT FACILITY

The Company maintains a $5.0 million revolving bank credit facility maturing December 19, 2013.  The Company intends to extend or replace this credit facility during the fourth quarter of 2012.  The applicable interest rate on outstanding balances is LIBOR plus 1.0% to 1.5% based on certain factors included in the credit agreement.  At September 30, 2012 and December 31, 2011, the Company’s interest rate on the $3.5 million outstanding balance was 1.9% and 1.8%, 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 outstanding balance of $3.5 million as of September 30, 2012 and December 31, 2011 is classified as long-term debt on the Company’s condensed consolidated balance sheets.  Subsequent to September 30, 2012 and prior to the Company’s filing of the condensed consolidated financial statements, the outstanding balance on the credit facility was repaid.

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Note 8 - Earning Per Share

9 Months Ended

Sep. 30, 2012

Earnings Per Share [Text Block]

NOTE 8.  -  EARNINGS PER SHARE

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

	Three months ended September 30,					Nine months ended September 30,
	2012			2011		2012			2011
Basic net (loss) income per share:
Net (loss) income	$	(541	)	$	59	$	(2,592	)	$	607
Weighted average common shares outstanding		7,000			6,895		6,965			6,845
Basic net (loss) income per share	$	(0.08	)	$	0.01	$	(0.37	)	$	0.09
Diluted net (loss) income per share:
Net (loss) income	$	(541	)	$	59	$	(2,592	)	$	607
Weighted average common shares outstanding		7,000			6,895		6,965			6,845
Dilutive stock options		-			287		-			280
Weighted average common shares outstanding – assuming dilution		7,000			7,182		6,965			7,125
Diluted net (loss) income per share	$	(0.08	)	$	0.01	$	(0.37	)	$	0.09
Outstanding stock options that were not included in the diluted calculation because their effect would be anti-dilutive		717			609		713			708

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Note 10 - Segment Information

9 Months Ended

Sep. 30, 2012

Segment Reporting Disclosure [Text Block]

NOTE 10.  -  SEGMENT INFORMATION

The Company is principally engaged in delivering embedded communications networking and computing solutions, interworking gateways, packet processing, network connectivity, and security for key applications for the communications and enterprise markets.  Except for revenues, which are 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 have only a single reporting segment.

Geographic revenue related to North America and foreign regions is as follows (in thousands):

	Three months ended September 30,				Nine months ended September 30,
	2012		2011		2012		2011
Revenues:
North America	$	2,092	$	2,274	$	5,989	$	6,127
Pacific Rim		623		1,872		2,869		6,755
Europe		452		1,375		1,793		5,504
Total	$	3,167	$	5,521	$	10,651	$	18,386

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

	Three months ended September 30,				Nine months ended September 30,
	2012		2011		2012		2011
Product Revenues:
Telecommunications	$	1,925	$	4,439	$	7,681	$	15,154
Services		1,047		831		2,536		1,715
Enterprise		158		192		346		1,393
Other		37		59		88		124
Total	$	3,167	$	5,521	$	10,651	$	18,386

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Note 9 - Shareholders' Equity (Detail) (Shareholder Rights Plan [Member], USD $)	3 Months Ended
	Sep. 30, 2012	Aug. 09, 2011
Shareholder Rights Plan [Member]
Class of Warrant or Right, Exercise Price of Warrants or Rights (in Dollars per Item)		39
Common Stock Redemption Discount	50.00%
Class of Warrant or Right, Redemption Price (in Dollars per share)	$ 0.001
Common Stock, Capital Shares Reserved for Future Issuance (in Shares)	90,315,210

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Note 4 - Inventories (Tables)

9 Months Ended

Sep. 30, 2012

Schedule of Inventory, Current [Table Text Block]

	September 30, 2012		December 31, 2011
Raw Materials	$	1,878	$	1,231
Work-in-Process		491		214
Finished Goods		74		111
Total	$	2,443	$	1,556

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Note 2 - Stock-Based Compensation (Detail) - Share-based Payment Award, Stock Options, Valuation Assumptions (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Weighted average risk free interest rates	1.53%	2.28%	1.93%	3.54%
Weighted average life (in years)	10 years	10 years	10 years	10 years
Volatility	66.00%	66.16%	65.90%	63.89%
Expected dividend yield	0.00%	0.00%	0.00%	0.00%
Weighted average grant-date fair value per share of options granted (in Dollars per share)	$ 3.18	$ 3.39	$ 3.55	$ 1.70

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Condensed Consolidated Statements of Comprehensive Income (unaudited) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Net (loss) income	$ (541)	$ 59	$ (2,592)	$ 607
Other comprehensive (loss) income:
Foreign currency translation adjustment	(12)	6	(1)	(37)
Unrealized holding gain (loss) arising during period, net of tax	2	(5)	3	(21)
Other comprehensive (loss) income	(10)	1	2	(58)
Comprehensive (loss) income	$ (551)	$ 60	$ (2,590)	$ 549

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Note 4 - Inventories

9 Months Ended

Sep. 30, 2012

Inventory Disclosure [Text Block]

NOTE 4.  -  INVENTORIES

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

	September 30, 2012		December 31, 2011
Raw Materials	$	1,878	$	1,231
Work-in-Process		491		214
Finished Goods		74		111
Total	$	2,443	$	1,556

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.  The Company increased reserve requirements by $45,000 during the three months ended September 30, 2012.  There were no writedowns during the three months ended September 30, 2011.  The Company increased reserve requirements by $65,000 during the nine months ended September 30, 2012.  There were no writedowns during the nine months ended September 30, 2011.

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Note 2 - Stock-Based Compensation (Detail) - Nonvested Restricted Stock Units Activity (Restricted Stock [Member], USD $)	9 Months Ended
	Sep. 30, 2012
Restricted Stock [Member]
Nonvested restricted stock at December 31, 2011	225,941
Nonvested restricted stock at December 31, 2011 (in Dollars per share)	$ 2.67
Nonvested restricted stock at September 30, 2012	117,715
Nonvested restricted stock at September 30, 2012 (in Dollars per share)	$ 3.13
Granted	9,000
Granted (in Dollars per share)	$ 5.72
Vested	(44,236)
Vested (in Dollars per share)	$ 3.47
Cancelled/Forfeited	(72,990)
Cancelled/Forfeited (in Dollars per share)	$ 1.82

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Note 3 - Marketable Securities (Tables)

9 Months Ended

Sep. 30, 2012

Fair Value, Assets Measured on Recurring and Nonrecurring Basis [Table Text Block]

		September 30, 2012						December 31, 2011
	Fair Value Hierarchy	Cost		Unrealized Gain		Estimated Fair Value		Cost		Unrealized Gain		Estimated Fair Value
Asset Backed	Level 2	$	1,281	$	4	$	1,285	$	2,136	$	2	$	2,138
Corporate Bonds	Level 2		615		1		616		616		1		617
US Treasuries	Level 2		2,700		-		2,700		1,600		-		1,600
Total		$	4,596	$	5	$	4,601	$	4,352	$	3	$	4,355