10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 

WASHINGTON, DC 20549 

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2014

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.)

4240 International Parkway, Suite 105

Carrollton, Texas 75007

(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  ☒    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  ☒   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  ☒

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

As of April 30, 2014, shares of common stock outstanding totaled 7,011,146.

INTERPHASE CORPORATION

Index to Form 10-Q

Quarterly Period Ended March 31, 2014

Part I - Financial Information
	Item 1.	Condensed Consolidated Financial Statements (Unaudited)
		Condensed Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013	2
		Condensed Consolidated Statements of Operations for the three months ended March 31, 2014 and 2013	3
		Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2014 and 2013	4
		Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013	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	17
	Item 4.	Controls and Procedures	18
Part II - Other Information
	Item 1.	Legal Proceedings	18
	Item 1A.	Risk Factors	19
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19
	Item 3.	Defaults Upon Senior Securities	19
	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)

	March 31, 2014			December 31, 2013
ASSETS
Cash and cash equivalents	$	565		$	1,478
Marketable securities		4,617			5,121
Trade accounts receivable, less allowances of $60 and $45, respectively		2,372			2,679
Inventories		3,569			3,332
Prepaid expenses and other current assets		1,637			1,041
Total current assets		12,760			13,651
Machinery and equipment		6,085			6,064
Leasehold improvements		616			380
Furniture and fixtures		152			425
		6,853			6,869
Less-accumulated depreciation and amortization		(5,940	)		(6,552	)
Total property and equipment, net		913			317
Capitalized software, net		75			96
Other assets		399			345
Total assets	$	14,147		$	14,409
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Accounts payable	$	1,409		$	1,475
Deferred revenue		638			652
Accrued liabilities		1,715			1,513
Accrued compensation		173			231
Total current liabilities		3,935			3,871
Deferred lease obligations		584			16
Long-term debt		3,500			3,500
Total liabilities		8,019			7,387
Commitments and Contingencies
Shareholders’ Equity
Common stock, $0.10 par value; 100,000,000 shares authorized; 7,011,146 and 7,011,146 shares issued and outstanding, respectively		701			701
Additional paid in capital		46,565			46,442
Accumulated deficit		(40,212	)		(39,196	)
Cumulative other comprehensive loss		(926	)		(925	)
Total shareholders' equity		6,128			7,022
Total liabilities and shareholders' equity	$	14,147		$	14,409

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 March 31,
	2014			2013
Revenues:
Product	$	1,786		$	2,558
Service		1,647			722
Total revenues		3,433			3,280
Cost of sales:
Product		907			1,520
Service		1,452			490
Total cost of sales		2,359			2,010
Gross margin		1,074			1,270
Research and development		606			830
Sales and marketing		625			676
General and administrative		850			888
Restructuring benefit		-			(67	)
Total operating expenses		2,081			2,327
Loss from operations		(1,007	)		(1,057	)
Other loss, net		(1	)		(341	)
Loss before income tax		(1,008	)		(1,398	)
Income tax provision		8			12
Net loss	$	(1,016	)	$	(1,410	)
Net loss per share:
Basic	$	(0.14	)	$	(0.20	)
Diluted	$	(0.14	)	$	(0.20	)

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

3

INTERPHASE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)

	Three Months Ended March 31,
	2014			2013
Net loss	$	(1,016	)	$	(1,410	)
Other comprehensive (loss) income:
Foreign currency translation adjustment		(1	)		19
Unrealized holding loss arising during period, net of tax		-			(2	)
Other comprehensive (loss) income		(1	)		17
Comprehensive loss	$	(1,017	)	$	(1,393	)

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)

	Three Months Ended March 31,
	2014			2013
Cash flows from operating activities:
Net loss	$	(1,016	)	$	(1,410	)
Adjustments to reconcile net loss to net cash used in operating activities:
Allowance for/(recovery of) doubtful accounts and returns		14			(1	)
Writedowns of excess and obsolete inventories		14			16
Depreciation and amortization		58			57
Amortization of stock-based compensation		123			205
Loss on retirement of machinery and equipment		14			-
Change in assets and liabilities:
Trade accounts receivable		293			173
Inventories		(251	)		131
Prepaid expenses and other current assets		(597	)		(204	)
Other assets		(54	)		(3	)
Accounts payable, deferred revenue and accrued liabilities		123			665
Accrued compensation		(58	)		(67	)
Deferred lease obligations		568			(21	)
Net cash used in operating activities		(769	)		(459	)
Cash flows from investing activities:
Purchases of property and equipment		(646	)		(15	)
Purchases of capitalized software		(1	)		-
Proceeds from the sale of marketable securities		4,514			3,830
Purchases of marketable securities		(4,010	)		(3,507	)
Net cash (used in) provided by investing activities		(143	)		308
Cash flows from financing activities:
Borrowings under credit facility		3,500			3,500
Payments on credit facility		(3,500	)		(3,500	)
Net cash provided by (used in) financing activities		-			-
Effect of exchange rate changes on cash and cash equivalents		(1	)		(7	)
Net decrease in cash and cash equivalents		(913	)		(158	)
Cash and cash equivalents at beginning of period		1,478			3,949
Cash and cash equivalents at end of period	$	565		$	3,791

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 offers products and services from embedded computing solutions, engineering design services, and contract manufacturing services to a new line of embedded computer vision products.

Embedded solutions include communications networking products for connectivity, interworking and packet processing. Clients for this product line include Alcatel-Lucent, Fujitsu Ltd., GENBAND, Hewlett Packard, and Samsung.

The engineering design and manufacturing services serve a wide variety of industries within the electronics market, from machine-to-machine (“M2M”) and Internet of Things (“IoT”) designs utilizing Cellular, GPS and Wi-Fi tracking solutions to cost-saving redesigns for manufacturability. Interphase Productization services provide customers with the full suite of rapid design and manufacturing services required to quickly take a project from design concept to full production in the marketplace.

The penveu® product line, from the embedded computer vision line of business, addresses both the education and enterprise markets. penveu® is a handheld device that adds interactivity to projectors and large screen displays, turning flat surfaces into an interactive display.

Founded in 1974, the Company is located in Carrollton, Texas, with sales offices in the United States 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 months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.  These financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2013.

NOTE 2. - STOCK-BASED COMPENSATION

Stock Options

During the three months ended March 31, 2014, the Company issued no stock options without performance-based vesting conditions. During the three months ended March 31, 2013, the Company issued 9,000 stock options that vest over a four year period and expire ten years from the date of grant. The weighted average exercise price of these stock options is $2.48. Compensation expense related to stock options without performance-based vesting conditions was $55,000 and $118,000 for the three months ended March 31, 2014 and 2013, respectively.

During the three months ended March 31, 2014 and 2013, the Company issued no stock options with performance-based vesting conditions. Of the unvested stock options outstanding at March 31, 2014, 1,069,200 are subject to the achievement of certain performance conditions. The performance conditions related to approximately 18,000 of these stock options were deemed probable as of March 31, 2014. Compensation expense related to performance-based stock options, for which vesting was deemed probable, was $53,000 and $56,000 for the three months ended March 31, 2014 and 2013, respectively. The performance conditions related to the remaining options were not deemed probable at March 31, 2014; 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 March 31, 2014 and 2013 was 6.84 years and 4.31 years, respectively.

As of March 31, 2014, there were 1,215,450 unvested options expected to vest over a weighted-average period of 8.8 years. As of December 31, 2013, there were 1,586,076 unvested options expected to vest over a weighted-average period of 8.9 years.

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

	Number of Options			Weighted Average Option Price
Balance, December 31, 2013		2,187,019		$	4.11
Granted		-			-
Exercised		-			-
Cancelled		(332,016	)		6.12
Balance, March 31, 2014		1,855,003		$	3.75

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 March 31,
	2014		2013
Risk free interest rate range		-		1.99 - 2.04	%
Weighted average life (in years)		10		10
Weighted average volatility		-		66.26	%
Volatility range		-		66.16 - 66.28	%
Expected dividend yield		-		-
Weighted average grant-date fair value per share of options granted		-	$	1.80

7

INTERPHASE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Restricted Stock

The Interphase Corporation 2004 Long-Term Stock Incentive Plan provided 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 of approximately one year and in some cases vesting is subject to the achievement of certain performance conditions. There were no shares of restricted stock issued during the three months ended March 31, 2014 or 2013. 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 previously granted restricted stock was $15,000 and $31,000 for the three months ended March 31, 2014 and 2013, respectively. As of March 31, 2014, there was $109,000 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 1.0 year. As of December 31, 2013, there was $124,000 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 1.2 years. The following table summarizes the restricted stock activity for the three months ended March 31, 2014:

	Restricted Stock Shares			Weighted Average Grant Value
Nonvested restricted stock at December 31, 2013		61,656		$	3.21
Granted		-			-
Vested		(15,836	)		1.82
Cancelled/Forfeited		-			-
Nonvested restricted stock at March 31, 2014		45,820		$	3.69

NOTE 3. - MARKETABLE SECURITIES

Fair value is 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. The Company 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 observable inputs other than Level 1, such as: quoted prices for similar assets or liabilities in active markets; quoted prices in markets that are not active; or inputs that are derived principally from or corroborated by observable market data by correlation or other means. Valuations in the category are inherently less reliable than Level 1 due to the degree of subjectivity involved in determining appropriate methodologies and the applicable observable market underlying assumptions.

Level 3 – Valuations based on inputs that are unobservable, supported by little or no market activity, 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 using prices and other relevant information generated by market transactions involving identical or comparable assets. The Company uses quoted market prices in active markets or quoted market prices in markets that are not active to measure fair value. When developing fair value estimates, the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs.

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

		March 31, 2014						December 31, 2013
	Fair Value Hierarchy	Cost		Unrealized Gain		Fair Value		Cost		Unrealized Gain		Fair Value
Asset Backed	Level 2	$	442	$	1	$	443	$	455	$	1	$	456
Corporate Bonds	Level 2		164		-		164		164		1		165
US Treasuries	Level 2		4,010		-		4,010		4,500		-		4,500
Total		$	4,616	$	1	$	4,617	$	5,119	$	2	$	5,121

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):

	March 31, 2014		December 31, 2013
Raw Materials	$	2,371	$	2,108
Work-in-Process		922		903
Finished Goods		276		321
Total	$	3,569	$	3,332

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’s reserve requirements increased by $14,000 and $16,000 during the three months ended March 31, 2014 and 2013, respectively.     

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 March 31, 2014 and 2013.

NOTE 6. - RESTRUCTURING CHARGE

On October 19, 2012, the Company committed to a plan intended to improve the balance between the Company’s communications networking product expenses with the reduced revenue levels of this product line. Under the 2012 restructuring plan, the Company reduced its workforce by 10 regular full-time positions. As a result of the 2012 restructuring plan, the Company recorded a restructuring charge of $253,000, classified as an operating expense, in the fourth quarter of 2012 related to future cash expenditures to cover employee severance and benefits. During the three months ended March 31, 2013, the Company reduced its restructuring charge by $67,000 related to reduced future cash expenditures related to severance and benefits for a former employee. The former employee’s accepting other employment in April 2013 reduced the amount of severance and benefit payouts by the Company. These amounts were paid out under the restructuring plan by June 30, 2013.

NOTE 7. - CREDIT FACILITY

The Company maintains a $5.0 million revolving bank credit facility maturing December 19, 2015. 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 both March 31, 2014 and December 31, 2013, the Company’s interest rate on the $3.5 million outstanding balance was 1.7%. 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 March 31, 2014 and December 31, 2013 was classified as long-term debt on the Company’s condensed consolidated balance sheets. Subsequent to March 31, 2014 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 March 31,
	2014			2013
Basic net loss per share:
Net loss	$	(1,016	)	$	(1,410	)
Weighted average common shares outstanding		7,011			7,006
Basic net loss per share	$	(0.14	)	$	(0.20	)
Diluted net loss per share:
Net loss	$	(1,016	)	$	(1,410	)
Weighted average common shares outstanding		7,011			7,006
Dilutive stock options		-			-
Weighted average common shares outstanding – assuming dilution		7,011			7,006
Diluted net loss per share	$	(0.14	)	$	(0.20	)
Outstanding stock options that were not included in the diluted calculation because their effect would be anti-dilutive		392			897

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

Interphase 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 offers products and services from embedded computing solutions, engineering design services, and contract manufacturing services to a new line of embedded computer vision products.

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 March 31,
	2014		2013
Revenues:
North America	$	2,468	$	1,702
Pacific Rim		586		564
Europe		379		1,014
Total	$	3,433	$	3,280

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

	Three months ended March 31,
	2014		2013
Product Revenues:
Communications networking	$	1,735	$	2,544
Services		1,647		722
Other		51		14
Total	$	3,433	$	3,280

11

INTERPHASE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE 11. - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This ASU addresses the diversity in practice regarding financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance requires an unrecognized tax benefit, or a portion of it, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. To the extent the deferred tax asset is not available at the reporting date to settle any additional income taxes that would result from the disallowance of a tax position, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with the deferred tax asset. The amendments to this standard are effective for reporting periods beginning after December 15, 2013, with early adoption permitted. The adoption of this update did not have a material impact on the consolidated financial statements, as it is consistent with the Company’s present practice.

12

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, 2013.

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 and adverse global economic conditions, our reliance on a limited number of customers, the lack of spending improvements in the communications 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 Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 and in the Company’s other 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 increased 5% to $3.4 million for the three months ended March 31, 2014, compared to $3.3 million for the same period in the prior year. Our communications networking product revenue decreased to $1.7 million for the three months ended March 31, 2014, compared to $2.5 million in the comparable period in the prior year. This decrease was primarily due to decreased demand for two communications networking products, which led to reduced revenue from these products in the first three months of 2014. Approximately 39% of the decrease was due to a communications networking customer consolidating manufacturing locations (and inventory supply), causing lower demand for one of our products. We expect this customer to resume purchasing once its excess inventory is consumed. Another 16% of the decrease was due to the same product; one of our customers has cancelled their project that was using that product. Additionally, 39% of the decrease was due to one of our customers moving toward a higher throughput product, which decreased the total number of units sold, and other general buying patterns. Our services revenues increased 128% to $1.6 million for the three months ended March 31, 2014, compared to $722,000 for the same period in the previous year. This increase was primarily related to increased electronic contract manufacturing services revenue and, to a lesser extent, increased electronic engineering design services revenue. All other revenues increased to $51,000, compared to $14,000 in the comparable period last year.

During the first quarter of 2014, sales to two customers individually accounted for approximately 31% and 20% of total revenues, respectively. During the first quarter of 2013, sales to three customers individually accounted for approximately 25%, 19% and 16% 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 March 31, 2014 was $758,000, $357,000, $304,000 and $237,000 due individually from four customers, respectively. Included in accounts receivable at December 31, 2013 was $809,000, $491,000, and $404,000, due individually from three customers, respectively. No other customers individually accounted for more than 10% of our accounts receivable in the periods presented.

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Gross Margin

Gross margin as a percentage of revenue was 31% and 39% for the three months ended March 31, 2014 and 2013, respectively. The decrease in gross margin percentage in the first quarter of 2014 compared to the same period in the prior year was primarily due to a revenue mix shift toward lower margin services, partially offset by increased utilization of our manufacturing facility. We expect this trend to stabilize in future periods.

Research and Development

Our investment in research and development was $606,000 and $830,000 for the three months ended March 31, 2014 and 2013, respectively. Approximately 63% of the decrease in research and development expenses was due to 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 in research and development expenses in the first quarter of 2014 compared to the same period in the prior year. In addition, there was a decrease in personnel and related expenses of approximately 33%. As a percentage of revenue, research and development expenses were approximately 18% in the first quarter of 2014 compared to approximately 25% for the same period in the prior year. The decrease in research and development expenses as a percentage of total revenue was due to revenue increasing while research and development expense decreased as described above. We will continue to monitor the level of our investments in research and development concurrently with actual revenue results.

Sales and Marketing

Sales and marketing expenses were $625,000 and $676,000 for the three months ended March 31, 2014 and 2013, respectively. As a percentage of revenue, sales and marketing expenses were approximately 18% for the first quarter of 2014, compared to approximately 21% for the same period in the prior year. The decrease in sales and marketing expenses as a percentage of total revenue was due to revenue increasing while sales and marketing expenses decreased. We will continue to monitor the level of sales and marketing costs concurrently with actual revenue results.

General and Administrative

General and administrative expenses were $850,000 and $888,000 for the three months ended March 31, 2014 and 2013, respectively. As a percentage of revenue, general and administrative expenses were approximately 25% for the first quarter of 2014 and 27% for the same period in the prior year. The decrease in general and administrative expenses as a percentage of total revenue was due to revenue increasing while general and administrative expenses decreased. We will continue to monitor the level of general and administrative costs concurrently with actual revenue results.

Restructuring Charge

On October 19, 2012, we committed to a plan intended to improve the balance between our communications networking product expenses with the reduced revenue levels of this product line. Under the 2012 restructuring plan, we reduced our workforce by 10 regular full-time positions. As a result of the 2012 restructuring plan, we recorded a restructuring charge of $253,000, classified as an operating expense, in the fourth quarter of 2012 related to future cash expenditures to cover employee severance and benefits. This plan is expected to result in savings of approximately $1.0 million to $1.6 million in annualized operating costs. During the three months ended March 31, 2013, we reduced our restructuring charge by $67,000 related to reduced future cash expenditures related to severance and benefits for a former employee. The former employee’s accepting other employment in April 2013 reduced the amount of severance and benefit payouts by us. These amounts were paid out under the restructuring plan by June 30, 2013. See Note 6 in the notes to the consolidated financial statements for more information regarding the 2012 restructuring plan.

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Other Loss, Net

Other loss, net was $1,000 and $341,000 for the three months ended March 31, 2014 and 2013, respectively. The loss for the three months ended March 31, 2013 was primarily related to the decision of the Labor Court of Boulogne-Billancourt, France on March 22, 2013 related to specific French employment indemnity claims of four former employees. See Part II, Item 1. “Legal Proceedings” below for more information.

Income Taxes

Our effective income tax rate was 0.8% for the three months ended March 31, 2014, compared to an effective income tax rate of 0.9% for the three months ended March 31, 2013. 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 March 31, 2014 and March 31, 2013. The tax expense in the periods primarily relate to tax in a foreign jurisdiction.

Net Loss

We reported a net loss of $1.0 million and $1.4 million for the three months ended March 31, 2014 and 2013, respectively. Basic loss per share was ($0.14) and ($0.20) for the three months ended March 31, 2014 and 2013, respectively.

New Product 

On April 18, 2012 we announced the debut of penveu, a handheld device that adds interactivity to the installed base of 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 market, and it can be used effectively in the corporate training market as well as the enterprise market. An independent source estimates the new interactive whiteboard installations market to grow to approximately $1.85 billion in revenue by 2017. However, penveu also has the unique ability to turn the estimated over 50 million projectors and 7 million large screen displays that are currently installed worldwide into interactive display devices. The retail price of penveu is less than 25% of the average price of a typical installed interactive whiteboard, and unlike an interactive whiteboard, penveu does not require the time and expense of installation. penveu will be offered and sold through our website, other online distributors, resellers, retailers and catalogs. Although we were excited for penveu to enter the beta phase of testing during 2013, we experienced some unexpected challenges related to the positioning system and certain areas of the user experience. However, we believe these technical issues have been resolved, and we expect to begin shipping penveu in May 2014.

LIQUIDITY AND CAPITAL RESOURCES

Consolidated Cash Flows

Cash and cash equivalents decreased $913,000 from December 31, 2013 to March 31, 2014 and decreased $158,000 from December 31, 2012 to March 31, 2013. Cash flows are impacted by operating, investing and financing activities.

Operating Activities

Trends in cash flows from operating activities for the three months ended March 31, 2014 and 2013 are generally similar to the trends in our earnings except for the allowance for/(recovery of) uncollectible accounts and returns, provision for excess and obsolete inventories, depreciation and amortization, amortization of stock-based compensation and the loss on retirement of machinery and equipment. Cash used in operating activities totaled $769,000 for the three months ended March 31, 2014, compared to net loss of $1.0 million for that period. The allowance for/(recovery of) doubtful accounts and returns increased $15,000 for the three months ended March 31, 2014 compared to the same period in 2013. Writedowns of excess and obsolete inventories decreased $2,000 for the three months ended March 31, 2014 compared to the same period in 2013. Depreciation and amortization increased $1,000 for the three months ended March 31, 2014 compared to the same period in 2013. Amortization of stock-based compensation decreased $82,000 for the three months ended March 31, 2014 compared to the same period in 2013. The loss on retirement of machinery and equipment increased $14,000 for the three months ended March 31, 2014 compared to the same period in 2013.

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

Investing Activities

Cash used in investing activities totaled $143,000 and cash provided by investing activities totaled $308,000 for the three months ended March 31, 2014 and 2013, 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 $647,000 for the three months ended March 31, 2014, compared to $15,000 for the three months ended March 31, 2013. The additions for the three months ended March 31, 2014 primarily related to leasehold improvements to our new facility which, in accordance with our lease, will be reimbursed by our landlord during the second quarter of 2014. The additions for the three months ended March 31, 2013 primarily related to equipment purchases for our manufacturing function. Purchases of marketable securities were $4.0 million and $3.5 million for the three months ended March 31, 2014 and 2013, respectively. Proceeds from the sale of marketable securities increased to $4.5 million for the three months ended March 31, 2014, compared to $3.8 million for the three months ended March 31, 2013.

Financing Activities

There was no net cash provided by or used in financing activities for the three months ended March 31, 2014 and 2013.

Restructuring Charge

On October 19, 2012, we committed to a plan intended to improve the balance between our telecommunications product expenses with the reduced revenue levels of this product line. Under the 2012 restructuring plan, we reduced our workforce by 10 regular full-time positions. As a result of the 2012 restructuring plan, we recorded a restructuring charge of $253,000, classified as an operating expense, in the fourth quarter of 2012 related to future cash expenditures to cover employee severance and benefits. During the three months ended March 31, 2013, we reduced our restructuring charge by $67,000 related to reduced future cash expenditures related to severance and benefits for a former employee. The former employee’s accepting other employment in April 2013 reduced the amount of severance and benefit payouts by us. These amounts were paid out under the restructuring plan by June 30, 2013.

Commitments

At March 31, 2014, we had no material commitments to purchase capital assets; however, planned capital expenditures for the remainder of 2014 are estimated at approximately $1 million, approximately 75% of which relates to enhancements to our manufacturing equipment through a capital lease. At March 31, 2014, we had $200,000 of non-cancelable purchase commitments for inventory as part of the normal course of business. Our significant long-term obligations are future debt payments, operating leases on our facility and our phone system and a capital lease on our manufacturing equipment. We have not paid any dividends since our inception and do not anticipate paying any dividends in 2014.

Other

Management believes that cash generated from operations and borrowing availability under the revolving credit facility, together with cash on hand, will be sufficient to meet our standard business liquidity needs for working capital, capital expenditures and debt service for the next twelve months. However, Management is currently evaluating scenarios whereby we may seek to raise additional funds that would be used in large part to expedite and or expand marketing and product launch activities associated with the introduction of penveu. To the extent our actual operating results or other developments, including the anticipated financial impact of the second quarter of 2014 commercial release of penveu, differ from our expectations, our liquidity could be adversely affected.

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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 sought, 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, 2013.

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.

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 $6,000 and $3,000 for the three months ended March 31, 2014 and 2013, respectively.    

Market Price Risk

We had no equity hedge contracts outstanding as of March 31, 2014 or December 31, 2013.

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 March 31, 2014. This potential change is based on sensitivity analyses performed on our marketable securities at March 31, 2014. 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, 2013.

We maintain a $5.0 million revolving bank credit facility maturing December 19, 2015 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 1.7% at both March 31, 2014 and December 31, 2013. 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 March 31, 2014 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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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 using the “Internal Control – Integrated Framework (1992)” created by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) framework. 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.

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 March 31, 2014 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

Twenty-five former employees (“Plaintiffs”) of Interphase SAS, a France domiciled 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 in the Labor Court of Boulogne-Billancourt, France and the Administrative Court of Cergy-Pontoise, France. The various claims and assertions arose from, and related to, the Plaintiffs’ release from employment as part of the restructuring actions taken during the third quarter of 2010. The updated statement of claim is for an aggregate payment of approximately €2.1 million, which translated to approximately $2.9 million at March 31, 2014. The Company believes that the Plaintiffs’ claims were without merit and has vigorously defended itself in these lawsuits.

On March 22, 2012, a hearing was conducted before 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 before the Labor Court took place on January 25, 2013. The same four judges heard the case again, along with a professional judge from another court to ensure that a majority decision would be reached.

The decision of the Labor Court regarding the claims of twenty-two former employees was rendered on March 22, 2013. All of those claims were rejected, because the Labor Court ruled that the redundancy procedure was regular and that redundancies were based on valid reasons, except claims from four Plaintiffs based on non-competition indemnity (amounting in total to approximately €265,000, which translated to approximately $340,000 at March 31, 2013). During the three months ended March 31, 2013 and the three months ended December 31, 2013, the Company recorded a charge of approximately $340,000 and $115,000 (to reflect payroll taxes corresponding to the allowed claims), respectively, classified as other loss on its condensed consolidated statements of operations and as a current liability on its condensed consolidated balance sheets in connection with the non-competition indemnity. Regarding the claims of the four Plaintiffs based on non-competition indemnity, one of these Plaintiffs has filed an appeal of the Labor Court’s decision (the part of the judgment dismissing his claims based on the redundancy procedures; the economic and financial justification for the redundancy); therefore, related to this Plaintiff, the Company is currently evaluating its appeal options. No payment to this Plaintiff is to be made until the appeal process is resolved. The Company is not filing an appeal related to the other three Plaintiffs’ claims based on non-competition indemnity. For these three Plaintiffs, the Company must pay approximately €238,000, which translated to approximately $305,000 at March 31, 2013. Approximately $275,000 was paid during the three months ended December 31, 2013. Fourteen other former employees also filed an appeal. The date of the hearing before the Court of Appeals of Versailles is on October 8, 2014. The Company intends to vigorously defend itself against these appeals.

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On May 22, 2012, a hearing was conducted before the Labor Court of Boulogne-Billancourt, France related to the claims of one of the twenty-five former employees with non-executive status. On July 31, 2012, the Court reported that the four judges’ votes were split; therefore, the Labor Court decided to join this case to the cases of the other twenty-three former employees described above in order to be heard again at the same hearing. Therefore, this case was heard again at the hearing on January 25, 2013 before the Labor Court. On March 22, 2013, the Labor Court rejected this former employee's claims. This former employee is one of the fourteen other former employees that filed an appeal, as described in the preceding paragraph.

Among the twenty-five cases described above, two former employees were made redundant related to a decision of the Labor Inspector to authorize their redundancy. Because of their protected status as employee representatives, their redundancy required the prior authorization of the French administration. Each of those former employees also filed a claim before the Administrative Tribunal in order to challenge the decision of the Labor Inspector which authorized their redundancy. Although each such claim or action is directed against the State, Interphase is also a party to these proceedings. The decision of the Administrative Tribunal regarding these two cases was rendered on February 3, 2014. The Administrative Tribunal dismissed these two former employees’ claims challenging the administrative decision authorizing their redundancy. Each of the former employees filed an appeal on April 3, 2014 of the Administrative Tribunal’s decision, and therefore each case will be scheduled and heard anew by the Versailles Administrative Court of Appeal.

For one of the twenty-five former employees, who was an employee representative, the Labor Court granted the Company’s motion at the January 25, 2013 hearing; the Labor Court rejected the Plaintiff’s claim to hear the case on the merits, regarding the alleged irregularity of the information and consultation procedure, and postponed this case in deference to the pending case before the Administrative Tribunal as described above. This case was heard again on September 27, 2013, and the Labor Court rendered the same decision (to postpone the case to a hearing on September 5, 2014). On September 5, 2014, the case will not be heard on the merits if the Plaintiff files an appeal against the Administrative Tribunal’s judgment before the Administrative Court of Appeal.

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, who was also an employee representative. The Labor Court granted the Company’s motion and rejected the Plaintiff’s claim to hear the case on the merits, regarding the alleged irregularity of the information and consultation procedure, and decided to postpone this case in deference to the pending case before the Administrative Tribunal as described above. This case was heard again on May 28, 2013. The Labor Court rendered the same decision and again postponed the hearing until the Administrative Tribunal makes its decision; therefore, this case will be heard again on June 17, 2014. On June 17, 2014, the case will not be heard on the merits if the Plaintiff files an appeal against the Administrative Tribunal’s judgment before the Administrative Court of Appeal.

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, 2013.

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

None.

Item 3. DEFAULTS UPON SENIOR SECURITIES

None.

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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”.

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: May 6, 2014	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)

20

EX-31

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:    May 6, 2014	Signature:    /s/ Gregory B. Kalush
	Chief Executive Officer

EX-31

 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 disjclosure 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:    May 6, 2014	Signature: /s/ Thomas N. Tipton Jr.
	Chief Financial Officer

EX-32

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 March 31, 2014, 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

May 6, 2014

EX-32

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 March 31, 2014, 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

May 6, 2014

XML

Note 9 - Shareholders' Equity (Details) (USD $)	3 Months Ended
	Mar. 31, 2014	Aug. 09, 2011
Note 9 - Shareholders' Equity (Details) [Line Items]
Shareholder Rights, Exercisable Conditions, Beneficial Ownership Percentage	15.00%
Shareholder Rights, Percentage of Assets, Cash Flow or Earning Power that Must Be Sold or Transferred to Trigger Discount	50.00%
Shareholder Rights, Beneficial Owner Threshold Percentage for Exchange of Exercisable Rights for Common Stock	50.00%
Shareholder Rights Plan [Member]
Note 9 - Shareholders' Equity (Details) [Line Items]
Class of Warrant or Right, Exercise Price of Warrants or Rights (in Dollars per Share)		$ 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 2 - Stock-Based Compensation (Details) - Share-based Payment Award, Stock Options, Valuation Assumptions (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Note 2 - Stock-Based Compensation (Details) - Share-based Payment Award, Stock Options, Valuation Assumptions [Line Items]
Weighted average life (in years)	10 years	10 years
Weighted average volatility		66.26%
Expected dividend yield	0.00%	0.00%
Weighted average grant-date fair value per share of options granted (in Dollars per share)		$ 1.80
Minimum [Member]
Note 2 - Stock-Based Compensation (Details) - Share-based Payment Award, Stock Options, Valuation Assumptions [Line Items]
Risk free interest rate range		1.99%
Volatility range		66.16%
Expected dividend yield		0.00%
Maximum [Member]
Note 2 - Stock-Based Compensation (Details) - Share-based Payment Award, Stock Options, Valuation Assumptions [Line Items]
Risk free interest rate range		2.04%
Volatility range		66.28%
Expected dividend yield		0.00%

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Note 3 - Marketable Securities

3 Months Ended

Mar. 31, 2014

Fair Value Disclosures [Abstract]

Fair Value Disclosures [Text Block]

NOTE 3. - MARKETABLE SECURITIES

Fair value is 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. The Company 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 observable inputs other than Level 1, such as: quoted prices for similar assets or liabilities in active markets; quoted prices in markets that are not active; or inputs that are derived principally from or corroborated by observable market data by correlation or other means. Valuations in the category are inherently less reliable than Level 1 due to the degree of subjectivity involved in determining appropriate methodologies and the applicable observable market underlying assumptions.

Level 3 – Valuations based on inputs that are unobservable, supported by little or no market activity, 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 using prices and other relevant information generated by market transactions involving identical or comparable assets. The Company uses quoted market prices in active markets or quoted market prices in markets that are not active to measure fair value. When developing fair value estimates, the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs.

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

		March 31, 2014						December 31, 2013
	Fair Value Hierarchy	Cost		Unrealized Gain		Fair Value		Cost		Unrealized Gain		Fair Value
Asset Backed	Level 2	$	442	$	1	$	443	$	455	$	1	$	456
Corporate Bonds	Level 2		164		-		164		164		1		165
US Treasuries	Level 2		4,010		-		4,010		4,500		-		4,500
Total		$	4,616	$	1	$	4,617	$	5,119	$	2	$	5,121

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Note 4 - Inventories (Details) - Inventory (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Inventory [Abstract]
Raw Materials	$ 2,371	$ 2,108
Work-in-Process	922	903
Finished Goods	276	321
Total	$ 3,569	$ 3,332

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Note 4 - Inventories (Details) (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Inventory Disclosure [Abstract]
Inventory Write-down	$ 14,000	$ 16,000

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Note 6 - Restructuring Charge (Details) (USD $)	3 Months Ended
	Mar. 31, 2013	Dec. 31, 2012
Restructuring and Related Activities [Abstract]
Restructuring and Related Cost, Number of Positions Eliminated		10
Restructuring Charges	$ (67,000)	$ 253,000
Restructuring Reserve, Accrual Adjustment	$ 67,000

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Note 7 - Credit Facility (Details) (USD $) In Millions, unless otherwise specified			3 Months Ended
	Mar. 31, 2014	Dec. 31, 2013	Mar. 31, 2014 Minimum [Member] London Interbank Offered Rate (LIBOR) [Member] Line of Credit [Member]	Mar. 31, 2014 Minimum [Member]	Mar. 31, 2014 Maximum [Member] London Interbank Offered Rate (LIBOR) [Member] Line of Credit [Member]	Mar. 31, 2014 Maximum [Member]
Note 7 - Credit Facility (Details) [Line Items]
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	1.70%	1.70%
Line of Credit Facility, Commitment Fee Percentage				0.25%		0.75%

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Note 2 - Stock-Based Compensation

3 Months Ended

Mar. 31, 2014

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

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

NOTE 2. - STOCK-BASED COMPENSATION

Stock Options

During the three months ended March 31, 2014, the Company issued no stock options without performance-based vesting conditions. During the three months ended March 31, 2013, the Company issued 9,000 stock options that vest over a four year period and expire ten years from the date of grant. The weighted average exercise price of these stock options is $2.48. Compensation expense related to stock options without performance-based vesting conditions was $55,000 and $118,000 for the three months ended March 31, 2014 and 2013, respectively.

During the three months ended March 31, 2014 and 2013, the Company issued no stock options with performance-based vesting conditions. Of the unvested stock options outstanding at March 31, 2014, 1,069,200 are subject to the achievement of certain performance conditions. The performance conditions related to approximately 18,000 of these stock options were deemed probable as of March 31, 2014. Compensation expense related to performance-based stock options, for which vesting was deemed probable, was $53,000 and $56,000 for the three months ended March 31, 2014 and 2013, respectively. The performance conditions related to the remaining options were not deemed probable at March 31, 2014; therefore no compensation expense related to these options has been recorded.

The weighted-average remaining contractual life of stock options outstanding and exercisable at March 31, 2014 and 2013 was 6.84 years and 4.31 years, respectively.

As of March 31, 2014, there were 1,215,450 unvested options expected to vest over a weighted-average period of 8.8 years. As of December 31, 2013, there were 1,586,076 unvested options expected to vest over a weighted-average period of 8.9 years.

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

	Number of Options			Weighted Average Option Price
Balance, December 31, 2013		2,187,019		$	4.11
Granted		-			-
Exercised		-			-
Cancelled		(332,016	)		6.12
Balance, March 31, 2014		1,855,003		$	3.75

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 March 31,
	2014		2013
Risk free interest rate range		-		1.99	-	2.04	%
Weighted average life (in years)		10			10
Weighted average volatility		-			66.26		%
Volatility range		-		66.16	-	66.28	%
Expected dividend yield		-			-
Weighted average grant-date fair value per share of options granted		-	$		1.80

Restricted Stock

The Interphase Corporation 2004 Long-Term Stock Incentive Plan provided 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 of approximately one year and in some cases vesting is subject to the achievement of certain performance conditions. There were no shares of restricted stock issued during the three months ended March 31, 2014 or 2013. 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 previously granted restricted stock was $15,000 and $31,000 for the three months ended March 31, 2014 and 2013, respectively. As of March 31, 2014, there was $109,000 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 1.0 year. As of December 31, 2013, there was $124,000 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 1.2 years. The following table summarizes the restricted stock activity for the three months ended March 31, 2014:

	Restricted Stock Shares			Weighted Average Grant Value
Nonvested restricted stock at December 31, 2013		61,656		$	3.21
Granted		-			-
Vested		(15,836	)		1.82
Cancelled/Forfeited		-			-
Nonvested restricted stock at March 31, 2014		45,820		$	3.69

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Note 8 - Earning Per Share (Details) - Earning Per Share (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Basic net loss per share:
Net (loss) income (in Dollars)	$ (1,016)	$ (1,410)
Weighted average common shares outstanding	7,011	7,006
Weighted average common shares outstanding – assuming dilution	7,011	7,006
Diluted net loss per share (in Dollars per share)	$ (0.14)	$ (0.20)
Basic net loss per share (in Dollars per share)	$ (0.14)	$ (0.20)
Stock Compensation Plan [Member]
Basic net loss per share:
Outstanding stock options that were not included in the diluted calculation because their effect would be anti-dilutive	392	897
Employee Stock Option [Member]
Basic net loss per share:
Dilutive stock options		0

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Condensed Consolidated Balance Sheets (unaudited) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
ASSETS
Cash and cash equivalents	$ 565	$ 1,478
Marketable securities	4,617	5,121
Trade accounts receivable, less allowances of $60 and $45, respectively	2,372	2,679
Inventories	3,569	3,332
Prepaid expenses and other current assets	1,637	1,041
Total current assets	12,760	13,651
Machinery and equipment	6,085	6,064
Leasehold improvements	616	380
Furniture and fixtures	152	425
	6,853	6,869
Less-accumulated depreciation and amortization	(5,940)	(6,552)
Total property and equipment, net	913	317
Capitalized software, net	75	96
Other assets	399	345
Total assets	14,147	14,409
LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable	1,409	1,475
Deferred revenue	638	652
Accrued liabilities	1,715	1,513
Accrued compensation	173	231
Total current liabilities	3,935	3,871
Deferred lease obligations	584	16
Long-term debt	3,500	3,500
Total liabilities	8,019	7,387
Commitments and Contingencies
Shareholders’ Equity
Common stock, $0.10 par value; 100,000,000 shares authorized; 7,011,146 and 7,011,146 shares issued and outstanding, respectively	701	701
Additional paid in capital	46,565	46,442
Accumulated deficit	(40,212)	(39,196)
Cumulative other comprehensive loss	(926)	(925)
Total shareholders' equity	6,128	7,022
Total liabilities and shareholders' equity	$ 14,147	$ 14,409

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Condensed Consolidated Statements of Cash Flows (unaudited) (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Cash flows from operating activities:
Net loss	$ (1,016,000)	$ (1,410,000)
Allowance for/(recovery of) doubtful accounts and returns	14,000	(1,000)
Writedowns of excess and obsolete inventories	14,000	16,000
Depreciation and amortization	58,000	57,000
Amortization of stock-based compensation	123,000	205,000
Loss on retirement of machinery and equipment	14,000
Change in assets and liabilities:
Trade accounts receivable	293,000	173,000
Inventories	(251,000)	131,000
Prepaid expenses and other current assets	(597,000)	(204,000)
Other assets	(54,000)	(3,000)
Accounts payable, deferred revenue and accrued liabilities	123,000	665,000
Accrued compensation	(58,000)	(67,000)
Deferred lease obligations	568,000	(21,000)
Net cash used in operating activities	(769,000)	(459,000)
Cash flows from investing activities:
Purchases of property and equipment	(646,000)	(15,000)
Purchases of capitalized software	(1,000)
Proceeds from the sale of marketable securities	4,514,000	3,830,000
Purchases of marketable securities	(4,010,000)	(3,507,000)
Net cash (used in) provided by investing activities	(143,000)	308,000
Cash flows from financing activities:
Borrowings under credit facility	3,500,000	3,500,000
Payments on credit facility	(3,500,000)	(3,500,000)
Net cash provided by (used in) financing activities	0	0
Effect of exchange rate changes on cash and cash equivalents	(1,000)	(7,000)
Net decrease in cash and cash equivalents	(913,000)	(158,000)
Cash and cash equivalents at beginning of period	1,478,000	3,949,000
Cash and cash equivalents at end of period	$ 565,000	$ 3,791,000

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Note 10 - Segment Information (Details) - Additional Information Regarding Revenue by Product Line (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Product Revenues:
Revenues	$ 3,433	$ 3,280
Telecommunications and Enterprise [Member]
Product Revenues:
Revenues	1,735	2,544
Services [Member]
Product Revenues:
Revenues	1,647	722
Other Segments [Member]
Product Revenues:
Revenues	$ 51	$ 14

XML

Note 10 - Segment Information (Tables)

3 Months Ended

Mar. 31, 2014

Segment Reporting [Abstract]

Revenue from External Customers by Geographic Areas [Table Text Block]

	Three months ended March 31,
	2014		2013
Revenues:
North America	$	2,468	$	1,702
Pacific Rim		586		564
Europe		379		1,014
Total	$	3,433	$	3,280

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

	Three months ended March 31,
	2014		2013
Product Revenues:
Communications networking	$	1,735	$	2,544
Services		1,647		722
Other		51		14
Total	$	3,433	$	3,280

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Note 2 - Stock-Based Compensation (Details) - Summary of Combined Stock Option Activity (USD $)	3 Months Ended
	Mar. 31, 2014
Summary of Combined Stock Option Activity [Abstract]
Balance, December 31, 2013	2,187,019
Balance, December 31, 2013	$ 4.11
Balance, March 31, 2014	1,855,003
Balance, March 31, 2014	$ 3.75
Granted	0
Granted	$ 0
Exercised	0
Exercised	$ 0
Cancelled	(332,016)
Cancelled	$ 6.12

XML

Note 1 - Basis of Presentation

3 Months Ended

Mar. 31, 2014

Disclosure Text Block [Abstract]

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 offers products and services from embedded computing solutions, engineering design services, and contract manufacturing services to a new line of embedded computer vision products.

Embedded solutions include communications networking products for connectivity, interworking and packet processing. Clients for this product line include Alcatel-Lucent, Fujitsu Ltd., GENBAND, Hewlett Packard, and Samsung.

The engineering design and manufacturing services serve a wide variety of industries within the electronics market, from machine-to-machine (“M2M”) and Internet of Things (“IoT”) designs utilizing Cellular, GPS and Wi-Fi tracking solutions to cost-saving redesigns for manufacturability. Interphase Productization services provide customers with the full suite of rapid design and manufacturing services required to quickly take a project from design concept to full production in the marketplace.

The penveu® product line, from the embedded computer vision line of business, addresses both the education and enterprise markets. penveu® is a handheld device that adds interactivity to projectors and large screen displays, turning flat surfaces into an interactive display.

Founded in 1974, the Company is located in Carrollton, Texas, with sales offices in the United States 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 months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.  These financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2013.

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Condensed Consolidated Balance Sheets (unaudited) (Parentheticals) (USD $) In Thousands, except Share data, unless otherwise specified	Mar. 31, 2014	Dec. 31, 2013
Trade accounts receivable, allowances (in Dollars)	$ 60	$ 45
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	7,011,146	7,011,146
Common stock, shares outstanding	7,011,146	7,011,146

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Note 11 - Recently Issued Accounting Pronouncements

3 Months Ended

Mar. 31, 2014

Accounting Changes and Error Corrections [Abstract]

Accounting Changes and Error Corrections [Text Block]

NOTE 11. - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This ASU addresses the diversity in practice regarding financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance requires an unrecognized tax benefit, or a portion of it, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. To the extent the deferred tax asset is not available at the reporting date to settle any additional income taxes that would result from the disallowance of a tax position, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with the deferred tax asset. The amendments to this standard are effective for reporting periods beginning after December 15, 2013, with early adoption permitted. The adoption of this update did not have a material impact on the consolidated financial statements, as it is consistent with the Company’s present practice.

XML

Document And Entity Information	3 Months Ended
	Mar. 31, 2014	Apr. 30, 2014
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		7,011,146
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	Mar. 31, 2014
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q1

XML

Note 2 - Stock-Based Compensation (Tables)

3 Months Ended

Mar. 31, 2014

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

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

	Number of Options			Weighted Average Option Price
Balance, December 31, 2013		2,187,019		$	4.11
Granted		-			-
Exercised		-			-
Cancelled		(332,016	)		6.12
Balance, March 31, 2014		1,855,003		$	3.75

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

	Three months ended March 31,
	2014		2013
Risk free interest rate range		-		1.99	-	2.04	%
Weighted average life (in years)		10			10
Weighted average volatility		-			66.26		%
Volatility range		-		66.16	-	66.28	%
Expected dividend yield		-			-
Weighted average grant-date fair value per share of options granted		-	$		1.80

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

	Restricted Stock Shares			Weighted Average Grant Value
Nonvested restricted stock at December 31, 2013		61,656		$	3.21
Granted		-			-
Vested		(15,836	)		1.82
Cancelled/Forfeited		-			-
Nonvested restricted stock at March 31, 2014		45,820		$	3.69

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Condensed Consolidated Statements of Operations (unaudited) (USD $)	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Revenues:
Product	$ 1,786,000	$ 2,558,000
Service	1,647,000	722,000
Total revenues	3,433,000	3,280,000
Cost of sales:
Product	907,000	1,520,000
Service	1,452,000	490,000
Total cost of sales	2,359,000	2,010,000
Gross margin	1,074,000	1,270,000
Research and development	606,000	830,000
Sales and marketing	625,000	676,000
General and administrative	850,000	888,000
Restructuring benefit		(67,000)
Total operating expenses	2,081,000	2,327,000
Loss from operations	(1,007,000)	(1,057,000)
Other loss, net	(1,000)	(341,000)
Loss before income tax	(1,008,000)	(1,398,000)
Income tax provision	8,000	12,000
Net loss	$ (1,016,000)	$ (1,410,000)
Basic (in Dollars per share)	$ (0.14)	$ (0.20)
Diluted (in Dollars per share)	$ (0.14)	$ (0.20)

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Note 6 - Restructuring Charge

3 Months Ended

Mar. 31, 2014

Restructuring and Related Activities [Abstract]

Restructuring and Related Activities Disclosure [Text Block]

NOTE 6. - RESTRUCTURING CHARGE

On October 19, 2012, the Company committed to a plan intended to improve the balance between the Company’s communications networking product expenses with the reduced revenue levels of this product line. Under the 2012 restructuring plan, the Company reduced its workforce by 10 regular full-time positions. As a result of the 2012 restructuring plan, the Company recorded a restructuring charge of $253,000, classified as an operating expense, in the fourth quarter of 2012 related to future cash expenditures to cover employee severance and benefits. During the three months ended March 31, 2013, the Company reduced its restructuring charge by $67,000 related to reduced future cash expenditures related to severance and benefits for a former employee. The former employee’s accepting other employment in April 2013 reduced the amount of severance and benefit payouts by the Company. These amounts were paid out under the restructuring plan by June 30, 2013.

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Note 5 - Income Taxes

3 Months Ended

Mar. 31, 2014

Income Tax Disclosure [Abstract]

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 March 31, 2014 and 2013.

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Note 2 - Stock-Based Compensation (Details) (USD $)	3 Months Ended		12 Months Ended
	Mar. 31, 2014	Mar. 31, 2013	Dec. 31, 2013
Note 2 - Stock-Based Compensation (Details) [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Shares Issued in Period		9,000
Share-based Compensation Arrangements by Share-based Payment Award, Options, Grants in Period, Weighted Average Exercise Price (in Dollars per share)	$ 0
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number	1,855,003		2,187,019
Share-based Compensation Arrangement by Share-based Payment Award, Options, Nonvested, Number of Shares	1,215,450		1,586,076
Stock Options without Performance-Based Vesting Condition [Member]
Note 2 - Stock-Based Compensation (Details) [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Shares Issued in Period	0
Employee Stock Option [Member]
Note 2 - Stock-Based Compensation (Details) [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period		4 years
Share-based Compensation Arrangement by Share-based Payment Award, Terms of Award		ten
Share-based Compensation Arrangements by Share-based Payment Award, Options, Grants in Period, Weighted Average Exercise Price (in Dollars per share)		$ 2.48
Share-based Compensation (in Dollars)	$ 55,000	$ 118,000
Performance Shares [Member]
Note 2 - Stock-Based Compensation (Details) [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Shares Issued in Period	0	0
Share-based Compensation (in Dollars)	53,000	56,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number	1,069,200
Share-based Compensation Arrangement by Share-based Payment Award, Options, Vested and Expected to Vest, Outstanding, Number	18,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Weighted Average Remaining Contractual Term	6 years 306 days	4 years 113 days
Restricted Stock [Member]
Note 2 - Stock-Based Compensation (Details) [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Shares Issued in Period	0	0
Share-based Compensation (in Dollars)	15,000	31,000
Employee Service Share-based Compensation, Nonvested Awards, Compensation Not yet Recognized, Stock Options (in Dollars)			124,000
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Period for Recognition	1 year		1 year 73 days
Restricted Stock [Member] | Minimum [Member]
Note 2 - Stock-Based Compensation (Details) [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period	1 year
Restricted Stock Units (RSUs) [Member]
Note 2 - Stock-Based Compensation (Details) [Line Items]
Employee Service Share-based Compensation, Nonvested Awards, Compensation Not yet Recognized, Stock Options (in Dollars)	$ 109,000
Expected to Vest Only [Member]
Note 2 - Stock-Based Compensation (Details) [Line Items]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Vested and Expected to Vest, Outstanding, Weighted Average Remaining Contractual Term	8 years 292 days		8 years 328 days

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Note 3 - Marketable Securities (Tables)

3 Months Ended

Mar. 31, 2014

Fair Value Disclosures [Abstract]

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

		March 31, 2014						December 31, 2013
	Fair Value Hierarchy	Cost		Unrealized Gain		Fair Value		Cost		Unrealized Gain		Fair Value
Asset Backed	Level 2	$	442	$	1	$	443	$	455	$	1	$	456
Corporate Bonds	Level 2		164		-		164		164		1		165
US Treasuries	Level 2		4,010		-		4,010		4,500		-		4,500
Total		$	4,616	$	1	$	4,617	$	5,119	$	2	$	5,121

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Note 9 - Shareholders' Equity

3 Months Ended

Mar. 31, 2014

Stockholders' Equity Note [Abstract]

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

3 Months Ended

Mar. 31, 2014

Debt Disclosure [Abstract]

Debt Disclosure [Text Block]

NOTE 7. - CREDIT FACILITY

The Company maintains a $5.0 million revolving bank credit facility maturing December 19, 2015. 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 both March 31, 2014 and December 31, 2013, the Company’s interest rate on the $3.5 million outstanding balance was 1.7%. 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 March 31, 2014 and December 31, 2013 was classified as long-term debt on the Company’s condensed consolidated balance sheets. Subsequent to March 31, 2014 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

3 Months Ended

Mar. 31, 2014

Earnings Per Share [Abstract]

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 March 31,
	2014			2013
Basic net loss per share:
Net loss	$	(1,016	)	$	(1,410	)
Weighted average common shares outstanding		7,011			7,006
Basic net loss per share	$	(0.14	)	$	(0.20	)
Diluted net loss per share:
Net loss	$	(1,016	)	$	(1,410	)
Weighted average common shares outstanding		7,011			7,006
Dilutive stock options		-			-
Weighted average common shares outstanding – assuming dilution		7,011			7,006
Diluted net loss per share	$	(0.14	)	$	(0.20	)
Outstanding stock options that were not included in the diluted calculation because their effect would be anti-dilutive		392			897

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Note 10 - Segment Information

3 Months Ended

Mar. 31, 2014

Segment Reporting [Abstract]

Segment Reporting Disclosure [Text Block]

NOTE 10. - SEGMENT INFORMATION

Interphase 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 offers products and services from embedded computing solutions, engineering design services, and contract manufacturing services to a new line of embedded computer vision products.

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 March 31,
	2014		2013
Revenues:
North America	$	2,468	$	1,702
Pacific Rim		586		564
Europe		379		1,014
Total	$	3,433	$	3,280

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

	Three months ended March 31,
	2014		2013
Product Revenues:
Communications networking	$	1,735	$	2,544
Services		1,647		722
Other		51		14
Total	$	3,433	$	3,280

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Note 10 - Segment Information (Details) - Geographic Revenue Related to North America and Foreign Regions (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Revenues:
Revenues	$ 3,433	$ 3,280
North America [Member]
Revenues:
Revenues	2,468	1,702
Pacific Rim [Member]
Revenues:
Revenues	586	564
Europe [Member]
Revenues:
Revenues	$ 379	$ 1,014

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Note 8 - Earning Per Share (Tables)

3 Months Ended

Mar. 31, 2014

Earnings Per Share [Abstract]

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

	Three months ended March 31,
	2014			2013
Basic net loss per share:
Net loss	$	(1,016	)	$	(1,410	)
Weighted average common shares outstanding		7,011			7,006
Basic net loss per share	$	(0.14	)	$	(0.20	)
Diluted net loss per share:
Net loss	$	(1,016	)	$	(1,410	)
Weighted average common shares outstanding		7,011			7,006
Dilutive stock options		-			-
Weighted average common shares outstanding – assuming dilution		7,011			7,006
Diluted net loss per share	$	(0.14	)	$	(0.20	)
Outstanding stock options that were not included in the diluted calculation because their effect would be anti-dilutive		392			897

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Note 2 - Stock-Based Compensation (Details) - Nonvested Restricted Stock Units Activity (Restricted Stock [Member], USD $)	3 Months Ended
	Mar. 31, 2014
Restricted Stock [Member]
Note 2 - Stock-Based Compensation (Details) - Nonvested Restricted Stock Units Activity [Line Items]
Nonvested restricted stock at December 31, 2013	61,656
Nonvested restricted stock at December 31, 2013	$ 3.21
Granted	0
Granted	$ 0
Vested	(15,836)
Vested	$ 1.82
Cancelled/Forfeited	0
Cancelled/Forfeited	$ 0
Nonvested restricted stock at March 31, 2014	45,820
Nonvested restricted stock at March 31, 2014	$ 3.69

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Condensed Consolidated Statements of Comprehensive Income (unaudited) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2014	Mar. 31, 2013
Net loss	$ (1,016)	$ (1,410)
Other comprehensive (loss) income:
Foreign currency translation adjustment	(1)	19
Unrealized holding loss arising during period, net of tax		(2)
Other comprehensive (loss) income	(1)	17
Comprehensive loss	$ (1,017)	$ (1,393)

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Note 4 - Inventories

3 Months Ended

Mar. 31, 2014

Inventory Disclosure [Abstract]

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):

	March 31, 2014		December 31, 2013
Raw Materials	$	2,371	$	2,108
Work-in-Process		922		903
Finished Goods		276		321
Total	$	3,569	$	3,332

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’s reserve requirements increased by $14,000 and $16,000 during the three months ended March 31, 2014 and 2013, respectively.     

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Note 3 - Marketable Securities (Details) - Fair Value, Financial Assets Measured by Level within The Fair Value Hierarchy (USD $) In Thousands, unless otherwise specified	3 Months Ended	12 Months Ended
	Mar. 31, 2014	Dec. 31, 2013
Note 3 - Marketable Securities (Details) - Fair Value, Financial Assets Measured by Level within The Fair Value Hierarchy [Line Items]
Cost	$ 4,616	$ 5,119
Unrealized Gain	1	2
Estimated Fair Value	4,617	5,121
Asset-backed Securities [Member] | Fair Value, Inputs, Level 2 [Member]
Note 3 - Marketable Securities (Details) - Fair Value, Financial Assets Measured by Level within The Fair Value Hierarchy [Line Items]
Cost	442	455
Unrealized Gain	1	1
Estimated Fair Value	443	456
Corporate Debt Securities [Member] | Fair Value, Inputs, Level 2 [Member]
Note 3 - Marketable Securities (Details) - Fair Value, Financial Assets Measured by Level within The Fair Value Hierarchy [Line Items]
Cost	164	164
Unrealized Gain	0	1
Estimated Fair Value	164	165
US Treasury Securities [Member] | Fair Value, Inputs, Level 2 [Member]
Note 3 - Marketable Securities (Details) - Fair Value, Financial Assets Measured by Level within The Fair Value Hierarchy [Line Items]
Cost	4,010	4,500
Unrealized Gain	0	0
Estimated Fair Value	$ 4,010	$ 4,500

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Note 4 - Inventories (Tables)

3 Months Ended

Mar. 31, 2014

Inventory Disclosure [Abstract]

Schedule of Inventory, Current [Table Text Block]

	March 31, 2014		December 31, 2013
Raw Materials	$	2,371	$	2,108
Work-in-Process		922		903
Finished Goods		276		321
Total	$	3,569	$	3,332