##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
 OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended June 30, 2005
    
    Commission File Number 0-13071
 INTERPHASE CORPORATION
 (Exact Name of Registrant as Specified in Its Charter)
 Texas(State or other Jurisdiction of
Incorporation or Organization)
    
    75-1549797(IRS Employer Identification No.)
 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)
 
 ü
 
 ___ ü
 
  Class
    
    Outstanding at August 5, 2005Common Stock, $.10 par value
    
    5,896,778




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##### Table of Contents



INTERPHASE CORPORATION
 Index to Form 10-Q
Quarterly Period Ended June 30, 2005
  
 Part I  Financial InformationItem 1.
    
    Condensed Consolidated Financial Statements (unaudited)Condensed Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004
    
    
    3Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 2005 and 2004
    
    
    4Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2004
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    17Item 4.
    
    Controls and Procedures
    
    
    18Part II  Other InformationItem 1.
    
    Legal Proceedings
    
    
    19Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    19Item 3.
    
    Defaults Upon Senior Securities
    
    
    19Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    19Item 5.
    
    Other Information
    
    
    19Item 6.
    
    Exhibits
    
    
    19Rule 13a-14(a)/15d-14(a) CertificationRule 13a-14(a)/15d-14(a) CertificationSection 1350 CertificationSection 1350 Certification
 2




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##### Table of Contents



PART I
FINANCIAL INFORMATION
 
 Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 INTERPHASE CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
   June
30,
    
    
    December 31,2005
    
    
    2004ASSETSCash and cash equivalents
    
    $
    4,628
    
    
    $
    4,928Marketable securities
    
    
    15,950
    
    
    
    15,585Trade accounts receivable, less allowances
of $256 and $141, respectively
    
    
    3,896
    
    
    
    4,976Inventories
    
    
    3,510
    
    
    
    3,509Prepaid expenses and other current assets
    
    
    1,871
    
    
    
    956Income taxes receivable
    
    
    
    
    
    
    246Total current assets
    
    
    29,855
    
    
    
    30,200Machinery and equipment
    
    
    6,335
    
    
    
    6,170Leasehold improvements
    
    
    383
    
    
    
    377Furniture and fixtures
    
    
    560
    
    
    
    5727,278
    
    
    
    7,119Lessaccumulated depreciation and amortization
    
    
    (5,948
    )
    
    
    (5,729
    )Total property and equipment, net
    
    
    1,330
    
    
    
    1,390Capitalized software, net
    
    
    264
    
    
    
    310Other assets
    
    
    182
    
    
    
    198Total assets
    
    $
    31,631
    
    
    $
    32,098LIABILITIES AND SHAREHOLDERS EQUITYLiabilitiesAccounts payable
    
    $
    403
    
    
    $
    529Deferred revenue
    
    
    160
    
    
    
    244Accrued liabilities
    
    
    1,864
    
    
    
    1,423Accrued compensation
    
    
    1,269
    
    
    
    1,554Total current liabilities
    
    
    3,696
    
    
    
    3,750Deferred lease obligations
    
    
    71
    
    
    
    60Long-term debt
    
    
    3,500
    
    
    
    3,500Total liabilities
    
    
    7,267
    
    
    
    7,310Commitments and ContingenciesShareholders EquityCommon stock, $0.10 par value; 100,000,000 shares
authorized; 5,894,610 and
5,750,824 shares issued and outstanding,
respectively
    
    
    589
    
    
    
    575Additional paid in capital
    
    
    39,424
    
    
    
    38,633Unamortized restricted stock
    
    
    (746
    )
    
    
    Retained deficit
    
    
    (14,162
    )
    
    
    (13,846
    )Cumulative other comprehensive loss
    
    
    (741
    )
    
    
    (574
    )Total shareholders equity
    
    
    24,364
    
    
    
    24,788Total liabilities and shareholders equity
    
    $
    31,631
    
    
    $
    32,098
 The accompanying notes are an integral part of these condensed consolidated financial statements.
 3




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INTERPHASE CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues
    
    $
    7,592
    
    
    $
    10,129
    
    
    $
    16,372
    
    
    $
    19,327Cost of sales
    
    
    3,542
    
    
    
    4,516
    
    
    
    7,570
    
    
    
    8,811Gross margin
    
    
    4,050
    
    
    
    5,613
    
    
    
    8,802
    
    
    
    10,516Research and development
    
    
    2,024
    
    
    
    1,909
    
    
    
    4,193
    
    
    
    4,006Sales and marketing
    
    
    1,558
    
    
    
    1,595
    
    
    
    3,076
    
    
    
    3,187General and administrative
    
    
    897
    
    
    
    1,041
    
    
    
    1,843
    
    
    
    2,068Total operating expenses
    
    
    4,479
    
    
    
    4,545
    
    
    
    9,112
    
    
    
    9,261(Loss) income from operations
    
    
    (429
    )
    
    
    1,068
    
    
    
    (310
    )
    
    
    1,255Interest income, net
    
    
    89
    
    
    
    61
    
    
    
    165
    
    
    
    89Other (expense) income, net
    
    
    (50
    )
    
    
    5
    
    
    
    (54
    )
    
    
    8(Loss) income before income tax
    
    
    (390
    )
    
    
    1,134
    
    
    
    (199
    )
    
    
    1,352Income tax provision (benefit)
    
    
    81
    
    
    
    39
    
    
    
    117
    
    
    
    (18
    )Net (loss) income
    
    $
    (471
    )
    
    $
    1,095
    
    
    $
    (316
    )
    
    $
    1,370Net (loss) income per share:Basic EPS
    
    $
    (0.08
    )
    
    $
    0.19
    
    
    $
    (0.05
    )
    
    $
    0.24Diluted EPS
    
    $
    (0.08
    )
    
    $
    0.18
    
    
    $
    (0.05
    )
    
    $
    0.21Weighted average common shares
    
    
    5,755
    
    
    
    5,706
    
    
    
    5,753
    
    
    
    5,698Weighted average common and
dilutive shares
    
    
    5,755
    
    
    
    6,234
    
    
    
    5,753
    
    
    
    6,413
 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
   Six Months EndedJune 30,2005
    
    
    2004Cash flows from operating activities:Net (loss) income
    
    $
    (316
    )
    
    $
    1,370Adjustments to reconcile net income to net cash provided by
operating activities:Provision for uncollectible accounts and returns
    
    
    57
    
    
    
    14Provision for excess and obsolete inventories
    
    
    400
    
    
    
    200Depreciation and amortization
    
    
    400
    
    
    
    402Amortization of restricted stock
    
    
    19
    
    
    
    Change in assets and liabilities:Trade accounts receivable
    
    
    1,023
    
    
    
    562Inventories
    
    
    (401
    )
    
    
    (170
    )Prepaid expenses and other current assets
    
    
    (926
    )
    
    
    (226
    )Income taxes receivable
    
    
    235
    
    
    
    (102
    )Other assets
    
    
    
    
    
    
    46Accounts payable, deferred revenue and accrued liabilities
    
    
    247
    
    
    
    124Accrued compensation
    
    
    (188
    )
    
    
    507Deferred lease obligations
    
    
    11
    
    
    
    (22
    )Net cash provided by operating activities
    
    
    561
    
    
    
    2,705Cash flows from investing activities:Purchase of property and equipment
    
    
    (326
    )
    
    
    (253
    )Purchase of capitalized software
    
    
    (13
    )
    
    
    (79
    )Proceeds from the sale of marketable securities
    
    
    5,928
    
    
    
    700Purchase of marketable securities, net of unrealized holding period gain or loss
    
    
    (6,309
    )
    
    
    (10,597
    )Net cash used in investing activities
    
    
    (720
    )
    
    
    (10,229
    )Cash flows from financing activities:Proceeds from the exercise of stock options
    
    
    40
    
    
    
    216Net cash provided by financing activities
    
    
    40
    
    
    
    216Effect of exchange rate changes on cash and cash equivalents
    
    
    (181
    )
    
    
    15Net decrease in cash and cash equivalents
    
    
    (300
    )
    
    
    (7,293
    )Cash and cash equivalents at beginning of period
    
    
    4,928
    
    
    
    14,204Cash and cash equivalents at end of period
    
    $
    4,628
    
    
    $
    6,911
 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
    6




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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Stock-Based Compensation
  Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net (loss) income as reported
    
    $
    (471
    )
    
    $
    1,095
    
    
    $
    (316
    )
    
    $
    1,370Add: APB 25 expense, net of
related tax effects
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Less: Total stock-based
employee compensation expense
determined under fair value
methods for option awards, net
of related tax effects
    
    
    (221
    )
    
    
    (537
    )
    
    
    (581
    )
    
    
    (979
    )Pro forma net (loss) income
    
    $
    (692
    )
    
    $
    558
    
    
    $
    (897
    )
    
    $
    391Earnings (loss) per common share:As reported  basic
    
    $
    (0.08
    )
    
    $
    0.19
    
    
    $
    (0.05
    )
    
    $
    0.24Pro forma  basic
    
    $
    (0.12
    )
    
    $
    0.10
    
    
    $
    (0.16
    )
    
    $
    0.07As reported  diluted
    
    $
    (0.08
    )
    
    $
    0.18
    
    
    $
    (0.05
    )
    
    $
    0.21Pro forma  diluted
    
    $
    (0.12
    )
    
    $
    0.09
    
    
    $
    (0.16
    )
    
    $
    0.06
 NOTE 2.    INVENTORIES
  June 30, 2005
    
    
    December 31, 2004Raw materials
    
    $
    2,255
    
    
    $
    1,818Work-in-process
    
    
    553
    
    
    
    747Finished goods
    
    
    702
    
    
    
    944Total
    
    $
    3,510
    
    
    $
    3,509
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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 3.    DERIVATIVE FINANCIAL INSTRUMENTS
  NOTE 4.    DEFERRED TAXES
    NOTE 5.  LOSS CONTINGENCY
   8




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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 6.    CREDIT FACILITY
  NOTE 7.    COMMON STOCK
  NOTE 8.    COMPREHENSIVE INCOME
  Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net (loss) income
    
    $
    (471
    )
    
    $
    1,095
    
    
    $
    (316
    )
    
    $
    1,370Other comprehensive income (loss):Unrealized holding gain (loss)
arising during
period, net of tax
    
    
    19
    
    
    
    (134
    )
    
    
    (15
    )
    
    
    (143
    )Foreign currency translation adjustment
    
    
    (154
    )
    
    
    6
    
    
    
    (152
    )
    
    
    32Comprehensive (loss) income
    
    $
    (606
    )
    
    $
    967
    
    
    $
    (483
    )
    
    $
    1,259
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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 9.    EARNINGS PER SHARE
  Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Basic earnings per share:Net (loss) income
    
    $
    (471
    )
    
    $
    1,095
    
    
    $
    (316
    )
    
    $
    1,370Weighted average common shares outstanding
    
    
    5,755
    
    
    
    5,706
    
    
    
    5,753
    
    
    
    5,698Basic (loss) earnings per share
    
    $
    (0.08
    )
    
    $
    0.19
    
    
    $
    (0.05
    )
    
    $
    0.24Diluted earnings per share:Net (loss) income
    
    $
    (471
    )
    
    $
    1,095
    
    
    $
    (316
    )
    
    $
    1,370Weighted average common shares outstanding
    
    
    5,755
    
    
    
    5,706
    
    
    
    5,753
    
    
    
    5,698Dilutive stock options
    
    
    
    
    
    
    528
    
    
    
    
    
    
    
    715Weighted average common shares
outstanding  assuming dilution
    
    
    5,755
    
    
    
    6,234
    
    
    
    5,753
    
    
    
    6,413Diluted (loss) earnings per share
    
    $
    (0.08
    )
    
    $
    0.18
    
    
    $
    (0.05
    )
    
    $
    0.21Outstanding stock options that were not
included in the diluted calculation
because their effect would be
anti-dilutive1,812
    
    
    
    926
    
    
    
    1,807
    
    
    
    656Restricted
stock shares
    
    
    134
    
    
    
    
    
    
    
    134
    
    
    
    
 NOTE 10.    SEGMENT INFORMATION
   Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues:North America
    
    $
    3,702
    
    
    $
    7,222
    
    
    $
    8,418
    
    
    $
    13,929Europe
    
    
    2,841
    
    
    
    1,801
    
    
    
    5,646
    
    
    
    2,883Pacific Rim
    
    
    1,049
    
    
    
    1,106
    
    
    
    2,308
    
    
    
    2,515Total
    
    $
    7,592
    
    
    $
    10,129
    
    
    $
    16,372
    
    
    $
    19,327
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Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Product Revenues:Broadband telecom
    
    $
    5,155
    
    
    $
    6,670
    
    
    $
    10,870
    
    
    $
    12,449Enterprise SlotOptimizer
    
    
    1,694
    
    
    
    2,570
    
    
    
    3,747
    
    
    
    5,004LAN/WAN
    
    
    185
    
    
    
    213
    
    
    
    334
    
    
    
    600Storage
    
    
    173
    
    
    
    35
    
    
    
    297
    
    
    
    224Professional Services
    
    
    123
    
    
    
    174
    
    
    
    336
    
    
    
    269Other
    
    
    262
    
    
    
    467
    
    
    
    788
    
    
    
    781Total
    
    $
    7,592
    
    
    $
    10,129
    
    
    $
    16,372
    
    
    $
    19,327
 NOTE 11.  RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
      11




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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
    12




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Gross Margin
   Research and Development
   Sales and Marketing
   13




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General and Administrative
   Interest Income, Net
  Other (Expense) Income, Net
  Income Taxes
    Net (Loss) Income
  14




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LIQUIDITY AND CAPITAL RESOURCES
 Consolidated Cash Flows
  Operating Activities
   Investing Activities
  Financing Activities
  15




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Commitments and Contingencies
 Commitments
  Contingencies
   Other
    Recently Issued Accounting Pronouncements
  16




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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Foreign Currency Risk
  17




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Market Price Risk
  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.(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.
 18




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PART II
OTHER INFORMATION
 
 Item 1. LEGAL PROCEEDINGS
  
 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
  Nominee
    
    Votes Cast for
    
    Votes WithheldPaul N. Hug
    
    
    4,214,957
    
    
    
    42,218Gregory B. Kalush
    
    
    4,226,547
    
    
    
    30,628Randall D. Ledford
    
    
    4,228,957
    
    
    
    28,218Michael J. Myers
    
    
    4,228,157
    
    
    
    29,018Kenneth V. Spenser
    
    
    4,229,107
    
    
    
    28,068S. Thomas Thawley
    
    
    4,169,984
    
    
    
    87,191
 
 Item 5. OTHER INFORMATION
  
 Item 6. EXHIBITS
 Exhibits
 2 (a)
    
    Stock Purchase Agreement, dated as of June 29, 1996, between 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). (7)3 (a)
    
    Certificate of Incorporation of the registrant. (1)3 (b)
    
    Amendment to Articles of Incorporation of the registrant. (10)3 (c)
    
    Amended and Restated Bylaws of the registrant adopted on December 5, 1995 and
amended on January 19, 1999. (12)4 (a)
    
    Rights Agreement dated as of December 7, 2000 by and between the Company and
Computershare Investor Services, LLC as Rights Agent. (11)10 (a)
    
    Registrants Amended and Restated Stock Option Plan and Amendment No. 1 and 2 thereto. (9)10 (b)
    
    Registrants Amended and Restated Stock Option Plan Amendment No. 4. (10)10 (c)
    
    Registrants United Kingdom Incentive Stock Option Sub-Plan. (3)10 (d)
    
    Stock Purchase Warrant issued to Motorola, Inc. (4)10 (e)
    
    Lease on Dallas facility. (5)10 (f)
    
    Directors Stock Option Plan and Amendment No. 1 thereto. (6)10 (g)
    
    Directors Stock Option Plan Amendment No. 2. (10)10 (h)
    
    Loan Agreement between Interphase Corporation and BankOne Texas, N.A. (8)10 (i)
    
    Purchase Agreement between Interphase Corporation and Cisco Systems Inc. (9)10 (j)
    
    Motorola Stock Repurchase Agreement. (2)10 (k)
    
    Registrants France Incentive Stock Option Sub-Plan. (12)10 (l)
    
    Sublease on Plano facility. (12)
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10 (m)
    
    Credit Agreement between Interphase Corporation and Bank One, NA. (12)10 (n)
    
    Lease on Facility at Parkway Center, Phase I, Plano, Texas. (13)10 (o)
    
    Lease on Facility at 2105 Luna Road, Carrolton, Texas. (13)10 (p)
    
    Note and Credit Agreement between Interphase Corporation and Comerica Bank, including
Amendment dated November 5, 2004. (15)10 (q)
    
    Interphase Corporation 2004 Long-Term Stock Incentive Plan (14)31 (a)
    
    Rule 13a-14(a)/15d-14(a) Certification. (16)31 (b)
    
    Rule 13a-14(a)/15d-14(a) Certification. (16)32 (a)
    
    Section 1350 Certification. (16)32 (b)
    
    Section 1350 Certification. (16)
 
 (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 October 15, 1998, and incorporated
herein by reference.(3)
    
    Filed as an exhibit to Report on Form 10-K for the year ended October 31, 1988, and
incorporated herein by reference.(4)
    
    Filed as an exhibit to Report on Form 10-Q for the quarter ended April 30, 1989, and
incorporated herein by reference.(5)
    
    Filed as an exhibit to Report on Form 10-K for the year ended October 31, 1994, and
incorporated herein by reference.(6)
    
    Filed as an exhibit to Report on Form 10-K for the year ended October 31, 1995, and
incorporated herein by reference.(7)
    
    Filed as an exhibit to Report on Form 8-K on August 6, 1996, and incorporated herein by
reference.(8)
    
    Filed as an exhibit to Report on Form 8-K on October 4, 1996, and incorporated herein by
reference.(9)
    
    Filed as an exhibit to Report on Form 10-K for the year ended December 31, 1996, and
incorporated herein by reference.(10)
    
    Filed as an exhibit to Report on Form 10-K for the year ended December 31, 1999, and
incorporated herein by reference.(11)
    
    Filed as an exhibit to Form 8-K on January 9, 2001, and incorporated herein by reference.(12)
    
    Filed as an exhibit to Report on Form 10-K for the year ended December 31, 2001, and
incorporated herein by reference.(13)
    
    Filed as an exhibit to Report on Form 10-Q for the quarter ended September 30, 2002, and
incorporated herein by reference.(14)
    
    Filed as an exhibit to Def 14A on March 31, 2004, and incorporated herein by reference.(15)
    
    Filed as an exhibit to Report on Form 10-K for the year ended December 31, 2004, and
incorporated herein by reference.(16)
    
    Filed herein. 20




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##### Table of Contents



SIGNATURE
  INTERPHASE CORPORATION
(Registrant)By:
    /s/ Steven P. KovacSteven P. KovacChief Financial Officer,
Vice President of Finance and Treasurer
(Principal Financial and Accounting Officer) 
 21