UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

INTERPHASE CORPORATION

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

INTERPHASE CORPORATION

Index to Form 10-Q
Quarterly Period Ended September 30, 2004

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PART I
FINANCIAL INFORMATION

Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

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

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

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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1. — BASIS OF PRESENTATION

Interphase Corporation and subsidiaries (“Interphase” or the “Company”) enables rapid platform design and integration for the global voice, video, and data communications markets through custom and off-the-shelf communications equipment, embedded software development suites, and systems integration and consulting services for carrier and private networks. The Company’s products provide communications computing and connectivity of telecommunications and computer systems to Wide Area Networks (WANs), Local Area Networks (LANs), and Storage Area Networks (SANs) using Asynchronous Transfer Mode (ATM), Ethernet, Signaling System 7 (SS7), IP, Fibre Channel, HDLC, Frame Relay and multi-protocol networking technologies. See Note 9 for information regarding the Company’s revenues related to North America and foreign countries.

The accompanying condensed consolidated financial statements include the accounts of Interphase Corporation and its wholly owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.

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 standard adjustments and disclosures necessary to fairly present the results of such periods have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Operating results for the three months and nine months ended September 30, 2004, are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. These financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2003.

Reclassifications

Certain reclassifications have been made to the condensed consolidated financial statements for the periods ended September 30, 2003, to correspond with the presentation used at September 30, 2004, and for the periods then ended.

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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Stock-Based Compensation

The Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB 25”) and related interpretations in accounting for its employee stock options. Under APB 25, compensation expense is recorded when the exercise price of employee stock options is less than the fair value of the underlying stock on the date of grant. The Company has implemented the disclosure-only provisions of Statement of Financial Accounting Standards No. (“SFAS”) 123, “Accounting for Stock-Based Compensation,” and SFAS 148, “Accounting for Stock-Based Compensation Transition and Disclosure.” Had the Company elected to adopt the expense recognition provisions of SFAS 123, the pro forma impact on net income and earnings per share would have been as follows (in thousands, except per share data):

NOTE 2. — INVENTORIES

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

     Valuing inventories at the lower of cost or market involves an inherent level of risk and uncertainty due to technology trends in the industry and customer demand for the Company’s products. Future events may cause significant fluctuations in the Company’s operating results.

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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 3. — DEFERRED TAXES

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

Forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years. Cumulative losses weigh heavily in the overall assessment. As a result of a review undertaken at December 31, 2002, the Company concluded that it was appropriate to establish a full valuation allowance for its net deferred tax assets. The Company continues to maintain a full valuation allowance on the tax benefits. Until an appropriate level of profitability is sustained, the Company expects to continue to record a full valuation allowance on future tax benefits and does not expect to recognize any significant tax benefits in future results of operations.

During the third quarter of 2003, the Internal Revenue Service concluded a federal income tax audit of the Company related to the tax years 1996 through 2001, resulting in a refund due the Company. During the first quarter of 2004, after conducting a thorough review of the Company’s IRS transcripts, the Company discovered that the IRS had not paid allowable interest on this refund. As a result, the Company recognized a tax benefit of approximately $100,000 during the first quarter of 2004. This tax benefit is partially offset by taxes on foreign income and alternative minimum tax on domestic income.

NOTE 4. — LOSS CONTINGENCY

The Company has agreed to perform a minor repair, at no cost to a customer, of approximately 1,800 units that were shipped between December 2003 and April 2004. The actual cost to repair the units is insignificant. However, the Company has estimated that other costs including shipping related charges and installation related charges could be more significant. The Company has estimated that the range of the potential liability is between approximately $225,000 and $650,000 but cannot determine an amount within that range which is more likely than another. Therefore, in accordance with Financial Accounting Standards Board Interpretation No. 14 “Reasonable Estimation of the Amount of a Loss — an Interpretation of FASB Statement No. 5”, the Company has recorded, in accrued liabilities, the minimum liability amount of approximately $225,000 at September 30, 2004.

NOTE 5. — CREDIT FACILITY

The Company maintains a $5 million revolving bank credit facility. During the quarter ended September 30, 2004, the credit facility provided for interest at the rate of LIBOR plus 2.0% (3.375% at September 30, 2004). Effective November 5, 2004, the Company extended the maturity date of the credit facility to July 31, 2007 and obtained a reduction in the interest rate to LIBOR plus 1.0%. All borrowings under this facility are secured by marketable securities. The borrowings of $3.5 million are classified as long-term debt on the accompanying balance sheet.

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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 6. — EXIT ACTIVITIES

During the second quarter of 2003, the Company committed to an exit plan regarding one of its leased facilities, the lease for which was scheduled to expire during the first quarter of 2005. The Company had previously held this facility open for storage, overflow use, and anticipated growth. However, it was determined that the facility would not be needed for such uses and the Company began pursuing subleasing opportunities. As a result of this exit plan, the Company recorded a charge of approximately $109,000 during the second quarter of 2003, classified as operating expenses, related to net termination costs associated with the lease of the facility. In May 2004, the Company entered into a sublease termination agreement with the landlord of the leased facility resulting in an additional charge of approximately $42,000. A reconciliation showing the changes to the liability account during the nine month period is as follows (in thousands):

NOTE 7. — COMPREHENSIVE INCOME (LOSS)

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

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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 8. — EARNINGS (LOSS) PER SHARE

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

NOTE 9. — SEGMENT INFORMATION

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

Geographic revenue related to North America and foreign countries for the three months and nine months ended September 30, 2004 and 2003 is as follows (in thousands):

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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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

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

FORWARD LOOKING STATEMENTS

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

RESULTS OF OPERATIONS

Revenues: Total revenue decreased slightly to $8.3 million for the three months ended September 30, 2004, compared to $8.6 million for the same period in the prior year. The decline in revenue was primarily attributable to lower levels of broadband telecom product revenue, which decreased approximately 21% to $4.7 million for the three months ended September 30, 2004, compared to $5.9 million in the comparable period. Broadband telecom product revenue was down due to a more sudden than expected shift by a large customer to a board developed by the Company to significantly reduce the cost for the customer. Based on discussions with the customer, the Company believed that additional volume would offset the impact of this shift, and that the cutover would be phased in over a longer period of time. The customer implemented the board change quicker than expected and the anticipated offsetting volumes did not occur. Further adding to this issue, this customer moved its assembly location during the quarter which may also have contributed to the lack of offsetting volumes. The decrease in broadband telecom product revenue was partially offset by an increase of approximately 19% in SlotOptimizer product revenue to $2.7 million for the three months ended September 30, 2004 from $2.2 million for the same period in the prior year. During the third quarter of 2004, the Company recognized $181,000 in professional services revenue. There was no revenue from professional services during the third quarter of 2003. The professional services revenue recognized during the three months ended September 30, 2004 relates to a single software customization contract. The Company expects to receive similar revenue levels from this contract for the remainder of 2004. All other revenues increased to $787,000 for the three months ended September 30, 2004 from $437,000 for the three months ended September 30, 2003. The Company believes that it will experience revenue growth again if

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the telecommunications equipment market continues to improve. However, customer forecasts continue to be unreliable and therefore, unpredictable.

The Company’s customer base is beginning to diversify as two customers individually accounted for 39% and 25% of the Company’s third quarter 2004 revenues. For the same period in 2003, two customers individually accounted for 60% and 23% of the Company’s revenues.

Total revenue increased approximately 18% to $27.6 million for the nine months ended September 30, 2004, compared to $23.4 million in the comparable period of the prior year. The increase in revenue was primarily attributable to Broadband telecom product revenue, which increased approximately 30% to $17.1 million for the nine months ended September 30, 2004, from $13.1 million for the same period in the prior year. In addition, during the nine months ended September 30, 2004, the Company recognized $440,000 of revenue related to contract manufacturing while there was no such revenue during the same period in the prior year. The Company does not expect to receive revenue from contract manufacturing in the future. The increases to revenue were partially offset by a slight decrease in SlotOptimizer product revenue to $7.7 million for the nine months ended September 30, 2004 from $7.9 million for the nine months ended September 30, 2003. All other revenues including professional services, legacy and storage product revenues were flat at approximately $2.4 million for both the nine months ended September 30, 2004 and 2003.

Gross Margin: Gross margin as a percentage of sales was 56% for the third quarter 2004 and 52% for the same period in 2003. The increase in the gross margin percentage primarily relates to the continued shift towards more complex, and thus, higher margin products. In addition, the Company improved manufacturing efficiencies and achieved reductions in material costs of certain product lines due to increased production volumes. The Company believes that pricing pressures in the industry may dampen gross margins in future quarters and it may become increasingly challenging to offset these pressures with incremental factory productivity improvements.

Gross margin for the nine months ended September 30, 2004 and 2003 was 55% and 51%, respectively. The increase in the gross margin percentage primarily relates to the continued shift towards more complex, and thus, higher margin products. In addition, the Company improved manufacturing efficiencies and achieved reductions in material costs of certain product lines due to increased production volumes.

Research and Development: The Company’s investment in the development of new products through research and development was $1.9 million and $1.8 million for the three months ended September 30, 2004 and 2003, respectively. As a percentage of revenues, research and development expenses were 23% in the third quarter 2004 and 21% for the same period in the prior year. The increase in research and development costs as a percentage of total revenue is due to revenue decreasing slightly while research and development expenses increased. The Company anticipates that spending on research and development will remain steady in the near future, except for fluctuations in currency exchange rates as much of the Company’s development costs reside in France (see Item 3 — Foreign Currency Risk), as the Company continues to invest in development of our current and future products, however, the Company will continue to monitor the level of its investments concurrently with actual revenue results.

The Company’s investment in the development of new products through research and development was $5.9 million and $5.7 million for the nine months ended September 30, 2004 and 2003, respectively. As a percentage of revenues, research and development expenses were 22% for the nine months ended September 30, 2004 and 24% for the nine months ended September 30, 2003. The decrease in research and development costs as a percentage of total revenue is due to revenue increasing at a higher rate than research and development expenses.

Sales and Marketing: Sales and marketing expenses were $1.5 million in the third quarter of 2004 compared to $1.8 million in the third quarter of 2003. Approximately 78% of the decrease related to a reduction in sales and marketing headcount related expenses, including sales commissions and contract labor. The remaining portion of the decrease primarily relates to reductions in variable marketing communication activities and general overhead spending. As a percentage of revenues, sales and marketing expenses were 18% in the third quarter 2004 and 21% for the same period in the prior year. The decrease in sales and marketing expense as a percentage of total revenue is due to revenue decreasing at a slower rate than sales and marketing expenses.

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Sales and marketing expenses were $4.7 million and $5.1 million for the nine months ended September 30, 2004 and 2003, respectively. As a percentage of revenues, sales and marketing expenses were 17% for the nine months ended September 30, 2004 and 22% for the nine months ended September 30, 2003. Approximately 69% of the decrease in sales and marketing expenses for the nine months ended September 30, 2004 related to a reduction in sales and marketing headcount related expenses, including sales commissions and contract labor. The remaining portion of the decrease primarily relates to reductions in variable marketing communication activities and general overhead spending. The decrease in sales and marketing expense as a percentage of total revenue is due to revenue increasing while sales and marketing expenses decreased.

General and Administrative: General and administrative expenses were flat at $767,000 for the third quarter 2004 compared to $807,000 for the same period in the prior year. As a percentage of revenues, general and administrative expenses were 9% in both the third quarter 2004 and 2003.

General and administrative expenses were $2.8 million and $2.5 million for the nine months ended September 30, 2004 and 2003, respectively. As a percentage of revenues, general and administrative expenses were 10% for the nine months ended September 30, 2004 and 11% for the nine months ended September 30, 2003. The increase in general and administrative expenses primarily relates to increased employee compensation and variable expenses tied to increased revenues. The decrease as a percentage of total revenue is due to revenue increasing at a higher rate than general and administrative expenses.

Interest Income, Net: Interest income, net of interest expense, was $69,000 in the third quarter 2004 and $42,000 for the same period in the prior year. The increase in interest income for the three months ended September 30, 2004 is due to the Company converting a large portion of its cash to marketable securities during the second quarter of 2004 thus improving the overall investment rate of return. Interest income, net of interest expense, was $158,000 for the nine months ended September 30, 2004 and $169,000 for the nine months ended September 30, 2003.

Other (Expense) Income, Net: Other (expense) income, net, was an expense of $8,000 in the third quarter 2004, compared to income of $11,000 for the same period in the prior year. Other (expense) income, net was zero for the nine months ended September 30, 2004 and income of $47,000 for the nine months ended September 30, 2003. The decrease in other (expense) income, net for the nine months ended September 30, 2004 is primarily due to a decline in realized gains on the sale of marketable securities.

Income Taxes: The Company’s effective tax rate was 0.4% for the nine months ended September 30, 2004 compared to a benefit rate of 18% for the nine months ended September 30, 2003.

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

During the first quarter of 2004, after conducting a thorough review of the Company’s IRS transcripts, the Company discovered that the IRS had not paid allowable interest on the refund from the IRS audit described above. As a result, the Company recognized a tax benefit of approximately $100,000 during the first quarter of 2004. This tax benefit is offset by taxes on foreign income and domestic alternative minimum tax.

The effective tax rates for the periods presented differ from the U.S. statutory rate as the Company continues to provide a full valuation allowance for its net deferred tax assets at September 30, 2004 and September 30, 2003.

Net Income (Loss): The Company reported net income of $500,000 in the third quarter 2004 compared to $366,000 for the same period in the prior year. The Company reported net income of $1.9 million for the nine months ended September 30, 2004 and a net loss of $981,000 for the nine months ended September 30, 2003.

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LIQUIDITY AND CAPITAL RESOURCES

Consolidated Cash Flows

Cash and cash equivalents decreased $8 million in the nine months ended September 30, 2004 primarily due to the purchase of approximately $12.4 million of marketable securities partially offset by cash provided by operating activities. Cash and cash equivalents increased $1.6 million in the nine months ended September 30, 2003. Cash flows are impacted by operating, investing and financing activities.

Operating Activities

Trends in cash flows from operating activities for the nine months ended September 30, 2004 and 2003 are generally similar to the trends in the Company’s earnings except for provision for uncollectible accounts and returns, provision for excess and obsolete inventory, depreciation and amortization. Cash provided by operating activities totaled $2.6 million for the nine months ended September 30, 2004, compared to a net income of $1.9 million. Cash used by operating activities was $1.3 million for the nine months ended September 30, 2003, compared to a net loss of $981,000. Provision for uncollectible accounts and returns increased slightly for the nine month period ended September 30, 2004 compared to the same period in 2003. Provision for excess and obsolete inventory has decreased period over period as the Company’s inventory turns continue to improve. Depreciation and amortization decreased slightly for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003.

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 $11.1 million for the nine months ended September 30, 2004 compared to $726,000 for the nine months ended September 30, 2003. Cash used in investing activities in each of the periods related principally to additions to property and equipment, capitalized software and the Company’s investments in marketable securities. Additions to property and equipment and capitalized software decreased to $443,000 for the nine months ended September 30, 2004 compared to $639,000 for the nine months ended September 30, 2003. The additions in each of the periods were focused on software and equipment purchases for the sales, engineering and information technology functions of the Company. Purchases of marketable securities significantly increased to $12.4 million for the nine months ended September 30, 2004 compared to $1.8 million for the same period in the prior year. Proceeds from the sale of marketable securities increased slightly and was $1.8 million for the nine month period ended September 30, 2004 compared to $1.7 million for the same period in 2003.

Financing Activities

Net cash provided by financing activities totaled $401,000 for the nine months ended September 30, 2004 and related to proceeds from the exercise of stock options. Net cash provided by financing activities totaled $3.6 million for the nine months ended September 30, 2003 and related primarily to the removal of restrictions on cash associated with the old credit facility.

Commitments and Contingencies

At September 30, 2004, the Company had no material commitments to purchase capital assets. The Company’s significant long-term obligations for the period then ended are its operating leases on facilities and future debt payments related to the Company’s credit facility. To date, the Company has not paid any dividends and does not anticipate paying any for the remainder of 2004.

Other

Management believes that cash generated from operations and borrowing availability under the revolving credit facility, together with cash and marketable securities on hand, will be sufficient to meet the Company’s liquidity needs for working capital, capital expenditures and debt service. To the extent that the

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Company’s actual operating results or other developments differ from the Company’s expectations, Interphase’s liquidity could be adversely affected.

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

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, 2003.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Risk

The Company is exposed to adverse movements in foreign currency exchange rates because it conducts business on a global basis and in some cases in foreign currencies. The Company’s operations in France are measured in the local currency and converted into U.S. Dollars based on published exchange rates for the periods reported and are therefore subject to risk of exchange rate fluctuations. The Euro to U.S. Dollar translation accounted for charges of approximately $230,000 and $129,000 for the three months ended September 30, 2004 and 2003, respectively. The Euro to U.S. Dollar translation accounted for a charge of approximately $737,000 and $366,000 for the nine months ended September 30, 2004 and 2003, respectively.

Market Price Risk

The Company had no equity hedge contracts outstanding as of September 30, 2004 or December 31, 2003.

Interest Rate Risk

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

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Item 4. CONTROLS AND PROCEDURES

	(a)		Evaluation of Disclosure Controls and Procedures. The Company’s management, under the supervision of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), performed an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures are effective.
	(b)		Changes in Internal Controls. The Company maintains a system of internal controls that are designed to provide reasonable assurance that its books and records accurately reflect, in all material respects, the transactions of the Company and that its established policies and procedures are adhered to. There were no significant changes to the Company’s internal controls or in other factors that could significantly affect the Company’s internal controls subsequent to the date of the evaluation by the Company’s CEO and CFO, including any corrective actions with regard to significant deficiencies and material weaknesses.

PART II
OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

None

Item 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

None.

Item 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

Item 5. OTHER INFORMATION

None.

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Item 6. EXHIBITS AND REPORT ON FORM 8-K

Exhibits

Report on Form 8-K

None.

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)
	By:	/s/ Steven P. Kovac
		Steven P. Kovac
		Chief Financial Officer, Vice President of Finance and Treasurer (Principal Financial and Accounting Officer)

Plano, Texas
November 12, 2004

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INDEX TO EXHIBITS