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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 September 30, 2008
 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
    
    75-1549797(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 Parkway Centre I
2901 North Dallas Parkway, Suite 200
Plano, Texas 75093
 (214) 654-5000
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller Reporting Company þ
 o þ




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##### 



INTERPHASE CORPORATION
 Index to Form 10-Q
Quarterly Period Ended September 30, 2008
 Part I  Financial InformationItem 1. Condensed Consolidated Financial Statements (unaudited)Condensed Consolidated Balance Sheets as of September 30, 2008
and December 31, 2007
    
    
    2Condensed Consolidated Statements of Operations for the three
months and nine months ended September 30, 2008 and 2007
    
    
    3Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2008 and 2007
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    16Item 4. Controls and Procedures
    
    
    17Part II  Other InformationItem 1. Legal Proceedings
    
    
    18Item 1A. Risk Factors
    
    
    18Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    18Item 3. Defaults Upon Senior Securities
    
    
    18Item 4. Submission of Matters to a Vote of Security Holders
    
    
    18Item 5. Other Information
    
    
    18Item 6. Exhibits
    
    
    18Exhibit 10(l)Exhibit 31(a)Exhibit 31(b)Exhibit 32(a)Exhibit 32(b)




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PART I
FINANCIAL INFORMATION
 
 Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 INTERPHASE CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 September 30,
    
    
    December 31,2008
    
    
    2007ASSETSCash and cash equivalents
    
    $
    4,517
    
    
    $
    6,384Marketable securities
    
    
    13,261
    
    
    
    14,185Trade accounts receivable, less allowances
of $136 and $173, respectively
    
    
    7,559
    
    
    
    7,550Inventories
    
    
    2,644
    
    
    
    2,886Prepaid expenses and other current assets
    
    
    576
    
    
    
    1,391Total current assets
    
    
    28,557
    
    
    
    32,396Machinery and equipment
    
    
    7,030
    
    
    
    6,962Leasehold improvements
    
    
    425
    
    
    
    427Furniture and fixtures
    
    
    576
    
    
    
    5748,031
    
    
    
    7,963Less-accumulated depreciation and amortization
    
    
    (7,060
    )
    
    
    (6,879
    )Total property and equipment, net
    
    
    971
    
    
    
    1,084Capitalized software, net
    
    
    1,482
    
    
    
    1,817Other assets
    
    
    1,981
    
    
    
    883Total assets
    
    $
    32,991
    
    
    $
    36,180LIABILITIES AND SHAREHOLDERS EQUITYLiabilitiesAccounts payable
    
    $
    1,482
    
    
    $
    2,304Deferred revenue
    
    
    77
    
    
    
    30Accrued liabilities
    
    
    711
    
    
    
    1,387Accrued compensation
    
    
    1,713
    
    
    
    1,645Total current liabilities
    
    
    3,983
    
    
    
    5,366Deferred lease obligations
    
    
    13
    
    
    
    52Long-term debt
    
    
    3,500
    
    
    
    3,500Total liabilities
    
    
    7,496
    
    
    
    8,918Commitments and ContingenciesShareholders EquityCommon stock, $0.10 par value; 100,000,000
shares authorized; 6,550,994 and
6,500,294 shares issued and outstanding,
respectively
    
    
    655
    
    
    
    650Additional paid in capital
    
    
    42,536
    
    
    
    42,267Retained deficit
    
    
    (16,948
    )
    
    
    (15,204
    )Cumulative other comprehensive loss
    
    
    (748
    )
    
    
    (451
    )Total shareholders equity
    
    
    25,495
    
    
    
    27,262Total liabilities and shareholders equity
    
    $
    32,991
    
    
    $
    36,180
 The accompanying notes are an integral part of these condensed consolidated financial statements.
  2




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INTERPHASE CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues
    
    $
    6,888
    
    
    $
    8,429
    
    
    $
    21,009
    
    
    $
    21,774Cost of sales
    
    
    2,904
    
    
    
    3,249
    
    
    
    9,585
    
    
    
    8,970Gross margin
    
    
    3,984
    
    
    
    5,180
    
    
    
    11,424
    
    
    
    12,804Research and development
    
    
    1,963
    
    
    
    2,413
    
    
    
    7,347
    
    
    
    7,320Sales and marketing
    
    
    1,244
    
    
    
    1,417
    
    
    
    3,989
    
    
    
    4,208General and administrative
    
    
    990
    
    
    
    1,180
    
    
    
    2,976
    
    
    
    3,267Restructuring charge
    
    
    
    
    
    
    
    
    
    
    403
    
    
    
    Total operating expenses
    
    
    4,197
    
    
    
    5,010
    
    
    
    14,715
    
    
    
    14,795(Loss) income from operations
    
    
    (213
    )
    
    
    170
    
    
    
    (3,291
    )
    
    
    (1,991
    )Interest income, net
    
    
    133
    
    
    
    185
    
    
    
    419
    
    
    
    578Other (loss) income, net
    
    
    (175
    )
    
    
    192
    
    
    
    150
    
    
    
    349(Loss) income before income tax
    
    
    (255
    )
    
    
    547
    
    
    
    (2,722
    )
    
    
    (1,064
    )Income tax benefit
    
    
    (200
    )
    
    
    (151
    )
    
    
    (978
    )
    
    
    (300
    )Net (loss) income
    
    $
    (55
    )
    
    $
    698
    
    
    $
    (1,744
    )
    
    $
    (764
    )Net (loss) income per share:Basic EPS
    
    $
    (0.01
    )
    
    $
    0.11
    
    
    $
    (0.28
    )
    
    $
    (0.13
    )Diluted EPS
    
    $
    (0.01
    )
    
    $
    0.10
    
    
    $
    (0.28
    )
    
    $
    (0.13
    )Weighted average common shares
    
    
    6,334
    
    
    
    6,152
    
    
    
    6,315
    
    
    
    6,112Weighted average common and dilutive shares
    
    
    6,334
    
    
    
    6,781
    
    
    
    6,315
    
    
    
    6,112
 The accompanying notes are an integral part of these condensed consolidated financial statements.
  3




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INTERPHASE CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Nine Months EndedSeptember 30,2008
    
    
    2007Cash flows from operating activities:Net loss
    
    $
    (1,744
    )
    
    $
    (764
    )Adjustments to reconcile net loss to net cash used in
operating activities:Provision for uncollectible accounts and returns
    
    
    (37
    )
    
    
    49Provision for excess and obsolete inventories
    
    
    
    
    
    
    300Depreciation and amortization
    
    
    670
    
    
    
    665Amortization of restricted stock
    
    
    271
    
    
    
    261Write-off of impaired capitalized software
    
    
    185
    
    
    
    Change in assets and liabilities:Trade accounts receivable
    
    
    28
    
    
    
    (1,414
    )Inventories
    
    
    242
    
    
    
    (831
    )Prepaid expenses and other current assets
    
    
    859
    
    
    
    (356
    )Other assets
    
    
    (1,226
    )
    
    
    (3
    )Accounts payable, deferred revenue and accrued liabilities
    
    
    (1,443
    )
    
    
    367Accrued compensation
    
    
    128
    
    
    
    (441
    )Deferred lease obligations
    
    
    (39
    )
    
    
    (25
    )Net cash used in operating activities
    
    
    (2,106
    )
    
    
    (2,192
    )Cash flows from investing activities:Purchase of property and equipment
    
    
    (227
    )
    
    
    (310
    )Purchase of capitalized software
    
    
    (201
    )
    
    
    (866
    )Proceeds from the sale of marketable securities
    
    
    6,853
    
    
    
    11,522Purchase of marketable securities
    
    
    (6,049
    )
    
    
    (12,430
    )Net cash provided by (used in) investing activities
    
    
    376
    
    
    
    (2,084
    )Cash flows from financing activities:Proceeds from the exercise of stock options
    
    
    2
    
    
    
    735Net cash provided by financing activities
    
    
    2
    
    
    
    735Effect of exchange rate changes on cash and cash equivalents
    
    
    (139
    )
    
    
    (74
    )Net decrease in cash and cash equivalents
    
    
    (1,867
    )
    
    
    (3,615
    )Cash and cash equivalents at beginning of period
    
    
    6,384
    
    
    
    9,061Cash and cash equivalents at end of period
    
    $
    4,517
    
    
    $
    5,446
 The accompanying notes are an integral part of these condensed consolidated financial statements.
  4




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NOTE 1.    BASIS OF PRESENTATION
 ®
  NOTE 2.    STOCK-BASED COMPENSATION
   Number of
    
    
    Weighted AverageOptions
    
    
    Option PriceBalance, December 31, 2007
    
    
    1,698,801
    
    
    $
    9.67Granted
    
    
    
    
    
    
    Exercised
    
    
    (500
    )
    
    
    4.12Cancelled
    
    
    (59,030
    )
    
    
    10.56Balance, September 30, 2008
    
    
    1,639,271
    
    
    $
    9.64
   5




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Restricted
    
    
    Weighted AverageStock Shares
    
    
    Grant Date ValueNonvested restricted stock at December 31, 2007
    
    
    207,560
    
    
    $
    8.53Granted
    
    
    116,037
    
    
    
    7.49Vested
    
    
    (42,811
    )
    
    
    7.37Cancelled/Forefeited
    
    
    (65,837
    )
    
    
    9.92Nonvested restricted stock at September 30, 2008
    
    
    214,949
    
    
    $
    7.77
 NOTE 3.    MARKETABLE SECURITIES
  1.
    
    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.2.
    
    Level 2  Valuation based on one or more quoted prices in markets that are not
active; quoted prices for similar assets or liabilities in active markets; inputs that
are observable other than quoted prices for the asset or the liability; or inputs that
are derived principally from or corroborated by observable market data by correlation
or other means.3.
    
    Level 3  Valuations based on inputs that are unobservable and significant to
the overall fair value measurement.
  Quoted Prices in
    
    
    SignificantActive Markets
    
    
    Other
    
    
    Significantfor Identical
    
    
    Observable
    
    
    UnobservableAssets
    
    
    Inputs
    
    
    InputsLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalAvailable-for-sale
    
    $
    
    
    
    $
    13,261
    
    
    $
    
    
    
    $
    13,261SecuritiesTotal
    
    $
    
    
    
    $
    13,261
    
    
    $
    
    
    
    $
    13,261
  6




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NOTE 4.    INVENTORIES
  September 30,
    
    
    December 31,2008
    
    
    2007Raw materials
    
    $
    1,783
    
    
    $
    2,038Work-in-process
    
    
    445
    
    
    
    594Finished goods
    
    
    416
    
    
    
    254Total
    
    $
    2,644
    
    
    $
    2,886
  NOTE 5.    DERIVATIVE FINANCIAL INSTRUMENTS
   NOTE 6.    INCOME TAXES
     7




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NOTE 7.    RESTRUCTURING CHARGE
  Cash payments
    
    
    Cash payments
    
    
    Cash payments
    
    
    Remainingduring quarter
    
    
    during quarter
    
    
    during quarter
    
    
    liability as ofRestructuring
    
    
    ended March 31,
    
    
    ended June 30,
    
    
    ended September 30,
    
    
    September 30,Description
    
    charge
    
    
    2008
    
    
    2008
    
    
    2008
    
    
    2008Severance & Fringe
Benefits
    
    $
    365
    
    
    $
    7
    
    
    $
    267
    
    
    $
    60
    
    
    $
    31Lease Obligation
    
    
    38
    
    
    
    
    
    
    
    17
    
    
    
    17
    
    
    
    4Total
    
    $
    403
    
    
    $
    7
    
    
    $
    284
    
    
    $
    77
    
    
    $
    35
 NOTE 8.    CREDIT FACILITY
   8




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NOTE 9.    COMPREHENSIVE (LOSS) INCOME
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net (loss) income
    
    $
    (55
    )
    
    $
    698
    
    
    $
    (1,744
    )
    
    $
    (764
    )Other comprehensive (loss) income:Unrealized holding (loss) gain arising
during period,
net of tax
    
    
    (126
    )
    
    
    57
    
    
    
    (119
    )
    
    
    53Foreign currency translation adjustment
    
    
    (193
    )
    
    
    (1
    )
    
    
    (178
    )
    
    
    23Comprehensive (loss) income
    
    $
    (374
    )
    
    $
    754
    
    
    $
    (2,041
    )
    
    $
    (688
    )
 NOTE 10.    EARNINGS (LOSS) PER SHARE
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Basic earnings per share:Net (loss) income
    
    $
    (55
    )
    
    $
    698
    
    
    $
    (1,744
    )
    
    $
    (764
    )Weighted average common shares outstanding
    
    
    6,334
    
    
    
    6,152
    
    
    
    6,315
    
    
    
    6,112Basic (loss) earnings per share
    
    $
    (0.01
    )
    
    $
    0.11
    
    
    $
    (0.28
    )
    
    $
    (0.13
    )Diluted earnings per share:Net (loss) income
    
    $
    (55
    )
    
    $
    698
    
    
    $
    (1,744
    )
    
    $
    (764
    )Weighted average common shares outstanding
    
    
    6,334
    
    
    
    6,152
    
    
    
    6,315
    
    
    
    6,112Dilutive stock options and restricted stock
    
    
    
    
    
    
    629
    
    
    
    
    
    
    
    Weighted average common shares outstanding 
assuming dilution
    
    
    6,334
    
    
    
    6,781
    
    
    
    6,315
    
    
    
    6,112Diluted (loss) earnings per share
    
    $
    (0.01
    )
    
    $
    0.10
    
    
    $
    (0.28
    )
    
    $
    (0.13
    )Outstanding stock options and unvested
restricted stock that were not included in
the diluted calculation because their effect
would be anti-dilutive1,675
    
    
    
    755
    
    
    
    1,534
    
    
    
    1,458
  9




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NOTE 11.    SEGMENT INFORMATION
   Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues:Pacific Rim
    
    $
    3,353
    
    
    $
    3,243
    
    
    $
    9,834
    
    
    $
    9,949North America
    
    
    1,940
    
    
    
    3,672
    
    
    
    5,990
    
    
    
    9,572Europe
    
    
    1,595
    
    
    
    1,514
    
    
    
    5,185
    
    
    
    2,253Total
    
    $
    6,888
    
    
    $
    8,429
    
    
    $
    21,009
    
    
    $
    21,774
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Product Revenues:Broadband telecom
    
    $
    6,482
    
    
    $
    7,170
    
    
    $
    18,457
    
    
    $
    18,420Professional services
    
    
    209
    
    
    
    124
    
    
    
    347
    
    
    
    382Enterprise
    
    
    106
    
    
    
    980
    
    
    
    735
    
    
    
    2,402Other
    
    
    91
    
    
    
    155
    
    
    
    1,470
    
    
    
    570Total
    
    $
    6,888
    
    
    $
    8,429
    
    
    $
    21,009
    
    
    $
    21,774
 NOTE 12.    RECENTLY ISSUED ACCOUNTING PROUNOUCEMENTS
    10




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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
    Gross Margin
   12




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Research and Development
   Sales and Marketing
    13




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General and Administrative
   Restructuring Charge
  Interest Income, Net
  Other (Loss) Income, Net
   14




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Income Taxes
   Net (Loss) Income
  LIQUIDITY AND CAPITAL RESOURCES
 Consolidated Cash Flows
  Operating Activities
   Investing Activities
   15




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Financing Activities
  Commitments
 Commitments
  Off-Balance Sheet Arrangements
  Other
    
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Foreign Currency Risk
    16




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Market Price Risk
  Interest Rate Risk
    
 Item 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
   17




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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
 Exhibits3 (a)
    
    Certificate of Incorporation of the registrant. (1)3 (b)
    
    Amendment to Articles of Incorporation of the registrant. (2)3 (c)
    
    Amended and Restated Bylaws of the registrant adopted on July 25, 2007. (4)4 (a)
    
    Rights Agreement dated as of December 7, 2000 by and between the Company and
Computershare Investor Services, LLC as Rights Agent. (3)10 (a)
    
    Lease on Facility at Parkway Center, Phase I, Plano, Texas. (5)10 (b)
    
    Lease on Facility at 2105 Luna Road, Carrollton, Texas. (5)10 (c)
    
    Note and Credit Agreement between Interphase Corporation and Comerica Bank, including
Amendment dated November 5, 2004. (6)10 (d)
    
    Employment Agreement with Gregory B. Kalush, dated March 12, 1999. *(8)10 (e)
    
    Employment, Confidentiality, and Non-Competition Agreement with Thomas N. Tipton, Jr.,
dated December 19, 2005. *(8)10 (f)
    
    Employment, Confidentiality, and Non-Competition Agreement with Randall E. McComas,
dated February 15, 2002. *(8)10 (g)
    
    Employment Agreement with Deborah A. Shute, dated November 24, 1999. *(8)10 (h)
    
    Employment, Confidentiality, and Non-Competition Agreement with James W. Gragg,
dated November 1, 2004. *(8)10 (i)
    
    Employment, Confidentiality, and Non-Competition Agreement with Prasad Kallur,
dated May 23, 2005. *(8)
  18




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Exhibits10 (j)
    
    Interphase Corporation 2004 Long-Term Stock Incentive Plan *(7)10 (k)
    
    Employment, Confidentiality, and Non-Competition Agreement with Marc E. DeVinney,
dated August 31, 2007. *(9)10 (l)
    
    Amendment to Note and Credit agreement between Interphase Corporation and Comerica Bank
dated September 30, 2008 (10)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 10-K for the year ended December 31, 1999, and
incorporated herein by reference.(3)
    
    Filed as an exhibit to Form 8-K on January 9, 2001, and incorporated herein by reference.(4)
    
    Filed as an exhibit to Report on Form 8-K on July 31, 2007, and incorporated herein by reference.(5)
    
    Filed as an exhibit to Report on Form 10-Q for the quarter ended September 30, 2002, and
incorporated herein by reference.(6)
    
    Filed as an exhibit to Report on Form 10-K for the year ended December 31, 2004, and
incorporated herein by reference.(7)
    
    Filed as an exhibit to Schedule 14a on March 31, 2005 and incorporated herein by reference.(8)
    
    Filed as an exhibit to Report on Form 10-K for the year ended December 31, 2005 and
incorporated herein by reference.(9)
    
    Filed as an exhibit to Report on Form 8-K on August 31, 2007, and incorporated herein by
reference.(10)
    
    Filed herewith*
    
    Management contract or compensatory plan or arrangement 
 SIGNATURE
  INTERPHASE CORPORATION
(Registrant)Date: November 6, 2008
    By:
    /s/ Thomas N. Tipton Jr.Thomas N. Tipton Jr.Chief Financial Officer,

Vice President of Finance and Treasurer

(Principal Financial and Accounting Officer)  19