##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number: 0-13071
 INTERPHASE CORPORATION
  Texas
(State or other jurisdiction of incorporation or organization)
    
    75-1549797
(I.R.S. Employer Identification No.)
 Parkway Centre I
2901 North Dallas Parkway, Suite 200
Plano, Texas 75093
 (214) 654-5000
 þ o
  o o þ
 o þ




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INTERPHASE CORPORATION
 Index to Form 10-Q
Quarterly Period Ended March 31, 2007
 Part I  Financial InformationItem 1.
    
    Condensed Consolidated Financial Statements (unaudited)Condensed Consolidated Balance Sheets as of March 31, 2007
and December 31, 2006
    
    
    2Condensed Consolidated Statements of Operations for the three
months ended March 31, 2007 and 2006
    
    
    3Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2007 and 2006
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2.
    
    Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    10Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    13Item 4.
    
    Controls and Procedures
    
    
    14Part II  Other InformationItem 1.
    
    Legal Proceedings
    
    
    15Item 1A.
    
    Risk Factors
    
    
    15Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    15Item 3.
    
    Defaults Upon Senior Securities
    
    
    15Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    15Item 5.
    
    Other Information
    
    
    15Item 6.
    
    Exhibits
    
    
    15Rule 13a-14(a)/15d-14(a) CertificationRule 13a-14(a)/15d-14(a) CertificationSection 1350 CertificationSection 1350 Certification




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PART I
FINANCIAL INFORMATION
 
 Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
 INTERPHASE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
 March 31,
    
    December 31,2007
    
    2006ASSETSCash and cash equivalents
    
    $
    5,874
    
    
    $
    9,061Marketable securities
    
    
    15,631
    
    
    
    13,469Trade accounts receivable, less allowances
of $110 and $118, respectively
    
    
    3,982
    
    
    
    5,824Inventories
    
    
    1,874
    
    
    
    1,921Prepaid expenses and other current assets
    
    
    1,355
    
    
    
    1,298Total current assets
    
    
    28,716
    
    
    
    31,573Machinery and equipment
    
    
    6,398
    
    
    
    6,308Leasehold improvements
    
    
    423
    
    
    
    422Furniture and fixtures
    
    
    556
    
    
    
    5547,377
    
    
    
    7,284Less-accumulated depreciation and amortization
    
    
    (6,473
    )
    
    
    (6,308
    )Total property and equipment, net
    
    
    904
    
    
    
    976Capitalized software, net
    
    
    1,398
    
    
    
    1,322Other assets
    
    
    193
    
    
    
    191Total assets
    
    $
    31,211
    
    
    $
    34,062LIABILITIES AND SHAREHOLDERS EQUITYLiabilitiesAccounts payable
    
    $
    900
    
    
    $
    1,372Deferred revenue
    
    
    73
    
    
    
    98Accrued liabilities
    
    
    1,167
    
    
    
    1,140Accrued compensation
    
    
    1,289
    
    
    
    2,067Total current liabilities
    
    
    3,429
    
    
    
    4,677Deferred lease obligations
    
    
    77
    
    
    
    85Long-term debt
    
    
    3,500
    
    
    
    3,500Total liabilities
    
    
    7,006
    
    
    
    8,262Commitments and ContingenciesShareholders EquityCommon stock, $0.10 par value; 100,000,000
shares authorized; 6,169,240 and
6,152,141 shares issued and outstanding,
respectively
    
    
    617
    
    
    
    615Additional paid in capital
    
    
    40,063
    
    
    
    39,884Retained deficit
    
    
    (15,862
    )
    
    
    (14,059
    )Cumulative other comprehensive loss
    
    
    (613
    )
    
    
    (640
    )Total shareholders equity
    
    
    24,205
    
    
    
    25,800Total liabilities and shareholders equity
    
    $
    31,211
    
    
    $
    34,062
 The accompanying notes are an integral part of these condensed consolidated financial statements.
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INTERPHASE CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share data)(unaudited) Three Months EndedMarch 31,2007
    
    2006Revenues
    
    $
    5,104
    
    
    $
    8,151Cost of sales
    
    
    2,405
    
    
    
    4,030Gross margin
    
    
    2,699
    
    
    
    4,121Research and development
    
    
    2,538
    
    
    
    1,880Sales and marketing
    
    
    1,412
    
    
    
    1,344General and administrative
    
    
    957
    
    
    
    954Total operating expenses
    
    
    4,907
    
    
    
    4,178Loss from operations
    
    
    (2,208
    )
    
    
    (57
    )Interest income, net
    
    
    201
    
    
    
    115Other income, net
    
    
    95
    
    
    
    137(Loss) income before income tax
    
    
    (1,912
    )
    
    
    195Income tax benefit
    
    
    (60
    )
    
    
    (115
    )Net (loss) income
    
    $
    (1,852
    )
    
    $
    310Net (loss) income per share:Basic EPS
    
    $
    (0.30
    )
    
    $
    0.05Diluted EPS
    
    $
    (0.30
    )
    
    $
    0.05Weighted average common shares
    
    
    6,076
    
    
    
    5,822Weighted average common and
dilutive shares
    
    
    6,076
    
    
    
    5,918
 The accompanying notes are an integral part of these condensed consolidated financial statements.
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INTERPHASE CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)(unaudited) Three Months EndedMarch 31,2007
    
    2006Cash flows from operating activities:Net (loss) income
    
    $
    (1,852
    )
    
    $
    310Adjustments to reconcile net income to net cash (used in) provided by
operating activities:Provision for uncollectible accounts and returns
    
    
    (8
    )
    
    
    10Provision for excess and obsolete inventories
    
    
    100
    
    
    
    200Depreciation and amortization
    
    
    185
    
    
    
    170Amortization of restricted stock
    
    
    77
    
    
    
    64Change in assets and liabilities:Trade accounts receivable
    
    
    1,850
    
    
    
    (412
    )Inventories
    
    
    (53
    )
    
    
    477Prepaid expenses and other current assets
    
    
    2
    
    
    
    83Other assets
    
    
    
    
    
    
    3Accounts payable, deferred revenue and accrued liabilities
    
    
    (474
    )
    
    
    353Accrued compensation
    
    
    (789
    )
    
    
    263Other non-current liabilities
    
    
    
    
    
    
    (34
    )Deferred lease obligations
    
    
    (8
    )
    
    
    (36
    )Net cash (used in) provided by operating activities
    
    
    (970
    )
    
    
    1,451Cash flows from investing activities:Purchase of property and equipment
    
    
    (75
    )
    
    
    (53
    )Purchase of capitalized software
    
    
    (84
    )
    
    
    (348
    )Proceeds from the sale of marketable securities
    
    
    2,445
    
    
    
    3,318Purchase of marketable securities
    
    
    (4,595
    )
    
    
    (1,959
    )Net cash (used in) provided by investing activities
    
    
    (2,309
    )
    
    
    958Cash flows from financing activities:Proceeds from the exercise of stock options
    
    
    104
    
    
    
    316Net cash provided by financing activities
    
    
    104
    
    
    
    316Effect of exchange rate changes on cash and cash equivalents
    
    
    (12
    )
    
    
    (5
    )Net (decrease) increase in cash and cash equivalents
    
    
    (3,187
    )
    
    
    2,720Cash and cash equivalents at beginning of period
    
    
    9,061
    
    
    
    3,180Cash and cash equivalents at end of period
    
    $
    5,874
    
    
    $
    5,900
 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
 ®
  NOTE 2.    STOCK-BASED COMPENSATION
   Number of
    
    Weighted AverageOptions
    

Option PriceBalance, December 31, 2006
    
    
    2,122
    
    
    
    9.52Granted
    
    
    
    
    
    
    Exercised
    
    
    (17
    )
    
    
    6.07Canceled
    
    
    
    
    
    
    Balance, March 31, 2007
    
    
    2,105
    
    
    
    9.55
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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  WeightedRestricted Stock
    
    Average GrantShares
    
    Date ValueNonvested restricted stock at December 31, 2006
    
    
    221,425
    
    
    
    5.96Granted
    
    
    60,000
    
    
    
    11.57Vested
    
    
    (10,230
    )
    
    
    5.42Cancelled/Forefeited
    
    
    (60,000
    )
    
    
    5.40Nonvested restricted stock at March 31, 2007
    
    
    211,195
    
    
    
    6.81
 NOTE 3.    INVENTORIES
  March 31, 2007
    
    December 31, 2006Raw materials
    
    $
    1,441
    
    
    $
    1,449Work-in-process
    
    
    289
    
    
    
    344Finished goods
    
    
    144
    
    
    
    128Total
    
    $
    1,874
    
    
    $
    1,921
  NOTE 4.    DERIVATIVE FINANCIAL INSTRUMENTS
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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 NOTE 5.    INCOME TAXES
      NOTE 6.    CREDIT FACILITY
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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 NOTE 7.    COMPREHENSIVE INCOME
  Three months endedMarch 31,2007
    
    2006Net (loss) income
    
    $
    (1,852
    )
    
    $
    310Other comprehensive income:Unrealized holding gain arising
during period, net of tax
    
    
    12
    
    
    
    7Foreign currency translation adjustment
    
    
    15
    
    
    
    (14
    )Comprehensive (loss) income
    
    $
    (1,825
    )
    
    $
    303
 NOTE 8.    EARNINGS PER SHARE
  Three months endedMarch 31,2007
    
    2006Basic (loss) earnings per share:Net (loss) income
    
    $
    (1,852
    )
    
    $
    310Weighted average common shares outstanding
    
    
    6,076
    
    
    
    5,822Basic (loss) earnings per share
    
    $
    (0.30
    )
    
    $
    0.05Diluted (loss) earnings per share:Net (loss) income
    
    $
    (1,852
    )
    
    $
    310Weighted average common shares outstanding
    
    
    6,076
    
    
    
    5,822Dilutive stock options and restricted stock
    
    
    
    
    
    
    96Weighted average common shares outstanding 
assuming dilution
    
    
    6,076
    
    
    
    5,918Diluted (loss) earnings per share
    
    $
    (0.30
    )
    
    $
    0.05Outstanding stock options and unvested restricted
stock that were not included in the diluted
calculation because their effect would be
anti-dilutive
    
    
    1,467
    
    
    
    1,986
 NOTE 9.    SEGMENT INFORMATION
  8




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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
  Three months endedMarch 31,2007
    
    2006Revenues:North America
    
    $
    2,471
    
    
    $
    2,900Europe
    
    
    2,053
    
    
    
    3,633Pacific Rim
    
    
    580
    
    
    
    1,618Total
    
    $
    5,104
    
    
    $
    8,151
  Three months endedMarch 31,2007
    
    2006Product Revenues:Broadband telecom
    
    $
    4,245
    
    
    $
    5,935Enterprise SlotOptimizer
    
    
    377
    
    
    
    927Security
    
    
    169
    
    
    
    274Storage
    
    
    136
    
    
    
    231Professional services
    
    
    41
    
    
    
    118Other
    
    
    136
    
    
    
    666Total
    
    $
    5,104
    
    
    $
    8,151
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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 FORWARD-LOOKING STATEMENTS
  RESULTS OF OPERATIONS
 Revenue
   Gross Margin
  Research and Development
  10




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Sales and Marketing
  General and Administrative
  Interest Income, Net
  Other Income, Net
  Income Taxes
   Net (Loss) Income
 11
    Table of Contents   LIQUIDITY AND CAPITAL RESOURCES
 Consolidated Cash Flows
  Operating Activities
   Investing Activities
  Financing Activities
  Commitments
 Commitments
 12
    Table of Contents   Off-Balance Sheet Arrangements
  Other
    
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Foreign Currency Risk
   Market Price Risk
 13
    Table of Contents   Interest Rate Risk
    
 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, to give reasonable assurance that the
information required to be disclosed by the Company in reports that it files under the
Exchange Act is accumulated and communicated to management, including the CEO and CFO, to
allow timely decisions regarding disclosure and that information is recorded, processed,
summarized and reported within the time periods specified in the rules and forms of the
SEC.(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 changes to the Companys
internal controls or in other factors that could significantly affect the Companys
internal controls subsequent to the date of the evaluation by the Companys CEO and CFO,
including any corrective actions with regard to significant deficiencies and material
weaknesses.
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PART II
OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
  
 Item 1A. RISK FACTORS
  
 Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 Item 3. DEFAULTS UPON SENIOR SECURITIES
  
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 Item 5. OTHER INFORMATION
  
 Item 6. EXHIBITS
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Exhibits2(a)
    
    Stock Purchase Agreement, dated as of June 29, 1996, among Interphase Corporation,
Synaptel and Philippe Oros, Xavier Sutter, Francois Lecerf, Schroder Ventures French
Enterprise Fund LPI (USA), Schroder ventures French Enterprise Fund UKLP (UK) and Schroder
Ventures Holding Limited (UK). (2)3 (a)
    
    Certificate of Incorporation of the registrant. (1)3 (b)
    
    Amendment to Articles of Incorporation of the registrant. (3)3 (c)
    
    Amended and Restated Bylaws of the registrant adopted on December 5, 1995 and
amended on January 19, 1999. (5)4 (a)
    
    Rights Agreement dated as of December 7, 2000 by and between the Company and
Computershare Investor Services, LLC as Rights Agent. (4)10 (a)
    
    Lease on Facility at Parkway Center, Phase I, Plano, Texas. (6)10 (b)
    
    Lease on Facility at 2105 Luna Road, Carrollton, Texas. (6)10 (c)
    
    Note and Credit Agreement between Interphase Corporation and Comerica Bank, including
Amendment dated November 5, 2004. (7)10 (d)
    
    Employment Agreement with Gregory B. Kalush, dated March 12, 1999. *(9)10 (e)
    
    Employment Agreement for Chief Technology Officer with Felix V. Diaz,
dated May 22, 1996. *(9)10 (f)
    
    Employment, Confidentiality, and Non-Competition Agreement with Thomas N. Tipton, Jr.,
dated December 19, 2005. *(9)10 (g)
    
    Employment, Confidentiality, and Non-Competition Agreement with Randall E. McComas,
dated February 15, 2002. *(9)10 (h)
    
    Employment Agreement with Deborah A. Shute, dated November 24, 1999. *(9)10 (i)
    
    Employment, Confidentiality, and Non-Competition Agreement with James W. Gragg,
dated November 1, 2004. *(9)10 (j)
    
    Employment, Confidentiality, and Non-Competition Agreement with Prasad Kallur,
dated May 23, 2005. *(9)10 (l)
    
    Interphase Corporation 2004 Long-Term Stock Incentive Plan *(8)31 (a)
    
    Rule 13a-14(a)/15d-14(a) Certification. (10)31 (b)
    
    Rule 13a-14(a)/15d-14(a) Certification. (10)32 (a)
    
    Section 1350 Certification. (10)32 (b)
    
    Section 1350 Certification. (10)
 
 (1)
    
    Filed as an exhibit to Registration Statement No. 2-86523 on Form S-1 and incorporated herein
by reference.(2)
    
Filed as an exhibit to Report on Form 8-K on August 6, 1996,
and incorporated herein by reference.(3)
    
    Filed as an exhibit to Report on Form 10-K for the year ended December 31, 1999, and
incorporated herein by reference.(4)
    
Filed as an exhibit to Form 8-K on January 9, 2001, and incorporated herein by reference.(5)
    
    Filed as an exhibit to Report on Form 10-K for the year ended December 31, 2001, and
incorporated herein by reference.(6)
    
    Filed as an exhibit to Report on Form 10-Q for the quarter ended September 30, 2002, and
incorporated herein by reference.(7)
    
    Filed as an exhibit to Report on Form 10-K for the year ended December 31, 2004, and
incorporated herein by reference.(8)
    
    Filed as an exhibit to Schedule 14a on March 31, 2005 and incorporated herein by reference.(9)
    
    Filed as an exhibit to Report on Form 10-K for the year ended December 31, 2005 and
incorporated herein by reference.(10)
    
    Filed herewith*
    
    Management contract or compensatory plan or arrangement. 16




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SIGNATURE
  INTERPHASE CORPORATION
(Registrant)Date: May 14, 2007
    By:
    /s/ Thomas N. Tipton Jr.Thomas N. Tipton Jr.Chief Financial Officer,
Vice President of Finance and Treasurer
(Principal Financial and Accounting Officer) 17