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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, 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
    
    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
  o o þ
 o þ




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##### 



INTERPHASE CORPORATION
 Index to Form 10-Q
Quarterly Period Ended September 30, 2007
 Part I  Financial InformationItem 1.
    
    Condensed Consolidated Financial Statements (unaudited)Condensed Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006
    
    
    2Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2007 and 2006
    
    
    3Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 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
    
    
    14Item 4.
    
    Controls and Procedures
    
    
    15Part 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
    
    
    16Item 5.
    
    Other Information
    
    
    16Item 6.
    
    Exhibits
    
    
    16Rule 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
 September 30,
    
    December 31,ASSETS
    
    2007
    
    2006Cash and cash equivalents
    
    $
    5,446
    
    
    $
    9,061Marketable securities
    
    
    14,430
    
    
    
    13,469Trade accounts receivable, less allowances
of $167 and $118, respectively
    
    
    7,189
    
    
    
    5,824Inventories
    
    
    2,452
    
    
    
    1,921Prepaid expenses and other current assets
    
    
    1,776
    
    
    
    1,298Total current assets
    
    
    31,293
    
    
    
    31,573Machinery and equipment
    
    
    6,577
    
    
    
    6,308Leasehold improvements
    
    
    424
    
    
    
    422Furniture and fixtures
    
    
    568
    
    
    
    5547,569
    
    
    
    7,284Less-accumulated depreciation and amortization
    
    
    (6,713
    )
    
    
    (6,308
    )Total property and equipment, net
    
    
    856
    
    
    
    976Capitalized software, net
    
    
    2,062
    
    
    
    1,322Other assets
    
    
    204
    
    
    
    191Total assets
    
    $
    34,415
    
    
    $
    34,062LIABILITIES AND SHAREHOLDERS EQUITYLiabilitiesAccounts payable
    
    $
    1,686
    
    
    $
    1,372Deferred revenue
    
    
    44
    
    
    
    98Accrued liabilities
    
    
    1,261
    
    
    
    1,140Accrued compensation
    
    
    1,707
    
    
    
    2,067Total current liabilities
    
    
    4,698
    
    
    
    4,677Deferred lease obligations
    
    
    60
    
    
    
    85Long-term debt
    
    
    3,500
    
    
    
    3,500Total liabilities
    
    
    8,258
    
    
    
    8,262Commitments and ContingenciesShareholders EquityCommon stock, $0.10 par value; 100,000,000
shares authorized; 6,281,373 and
6,152,141 shares issued and outstanding,
respectively
    
    
    628
    
    
    
    615Additional paid in capital
    
    
    40,867
    
    
    
    39,884Retained deficit
    
    
    (14,774
    )
    
    
    (14,059
    )Cumulative other comprehensive loss
    
    
    (564
    )
    
    
    (640
    )Total shareholders equity
    
    
    26,157
    
    
    
    25,800Total liabilities and shareholders equity
    
    $
    34,415
    
    
    $
    34,062
 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 30,2007
    
    2006
    
    2007
    
    2006Revenues
    
    $
    8,429
    
    
    $
    7,758
    
    
    $
    21,774
    
    
    $
    25,280Cost of sales
    
    
    3,249
    
    
    
    3,691
    
    
    
    8,970
    
    
    
    11,692Gross margin
    
    
    5,180
    
    
    
    4,067
    
    
    
    12,804
    
    
    
    13,588Research and development
    
    
    2,413
    
    
    
    2,019
    
    
    
    7,320
    
    
    
    5,865Sales and marketing
    
    
    1,417
    
    
    
    1,222
    
    
    
    4,208
    
    
    
    4,040General and administrative
    
    
    1,180
    
    
    
    851
    
    
    
    3,267
    
    
    
    3,047Total operating expenses
    
    
    5,010
    
    
    
    4,092
    
    
    
    14,795
    
    
    
    12,952Income (loss) from operations
    
    
    170
    
    
    
    (25
    )
    
    
    (1,991
    )
    
    
    636Interest income, net
    
    
    185
    
    
    
    189
    
    
    
    578
    
    
    
    429Other income (loss), net
    
    
    192
    
    
    
    (46
    )
    
    
    349
    
    
    
    314Income (loss) before income tax
    
    
    547
    
    
    
    118
    
    
    
    (1,064
    )
    
    
    1,379Income tax benefit
    
    
    (151
    )
    
    
    (57
    )
    
    
    (300
    )
    
    
    (249
    )Net income (loss)
    
    $
    698
    
    
    $
    175
    
    
    $
    (764
    )
    
    $
    1,628Net income (loss) per share:Basic EPS
    
    $
    0.11
    
    
    $
    0.03
    
    
    $
    (0.13
    )
    
    $
    0.28Diluted EPS
    
    $
    0.10
    
    
    $
    0.03
    
    
    $
    (0.13
    )
    
    $
    0.27Weighted average common shares
    
    
    6,152
    
    
    
    5,857
    
    
    
    6,112
    
    
    
    5,832Weighted average common and
dilutive shares
    
    
    6,781
    
    
    
    6,330
    
    
    
    6,112
    
    
    
    6,105
 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 30,2007
    
    2006Cash flows from operating activities:Net (loss) income
    
    $
    (764
    )
    
    $
    1,628Adjustments to reconcile net (loss) income to net cash (used in) provided by
operating activities:Provision for uncollectible accounts and returns
    
    
    49
    
    
    
    23Provision for excess and obsolete inventories
    
    
    300
    
    
    
    400Depreciation and amortization
    
    
    665
    
    
    
    491Amortization of restricted stock
    
    
    261
    
    
    
    211Change in assets and liabilities:Trade accounts receivable
    
    
    (1,414
    )
    
    
    (365
    )Inventories
    
    
    (831
    )
    
    
    352Prepaid expenses and other current assets
    
    
    (356
    )
    
    
    (81
    )Other assets
    
    
    (3
    )
    
    
    1Accounts payable, deferred revenue and accrued liabilities
    
    
    367
    
    
    
    (148
    )Accrued compensation
    
    
    (441
    )
    
    
    902Other non-current liabilities
    
    
    
    
    
    
    (34
    )Deferred lease obligations
    
    
    (25
    )
    
    
    (4
    )Net cash (used in) provided by operating activities
    
    
    (2,192
    )
    
    
    3,376Cash flows from investing activities:Purchase of property and equipment
    
    
    (310
    )
    
    
    (129
    )Purchase of capitalized software
    
    
    (866
    )
    
    
    (505
    )Proceeds from the sale of marketable securities
    
    
    11,522
    
    
    
    11,681Purchase of marketable securities
    
    
    (12,430
    )
    
    
    (10,278
    )Net cash (used in) provided by investing activities
    
    
    (2,084
    )
    
    
    769Cash flows from financing activities:Proceeds from the exercise of stock options
    
    
    735
    
    
    
    392Net cash provided by financing activities
    
    
    735
    
    
    
    392Effect of exchange rate changes on cash and cash equivalents
    
    
    (74
    )
    
    
    71Net (decrease) increase in cash and cash equivalents
    
    
    (3,615
    )
    
    
    4,608Cash and cash equivalents at beginning of period
    
    
    9,061
    
    
    
    3,180Cash and cash equivalents at end of period
    
    $
    5,446
    
    
    $
    7,788
 The accompanying notes are an integral part of these condensed consolidated financial statements.
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INTERPAHSE CORPORATION
 
 NOTES 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
    
    
    (99
    )
    
    
    7.39Cancelled
    
    
    (3
    )
    
    
    20.38Balance, September 30, 2007
    
    
    2,020
    
    
    
    9.61
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INTERPAHSE CORPORATION
NOTES CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
  Restricted Stock
    
    Weighted AverageShares
    
    Grant Date ValueNonvested restricted stock at December 31, 2006
    
    
    221,425
    
    
    
    5.96Granted
    
    
    106,000
    
    
    
    10.94Vested
    
    
    (38,455
    )
    
    
    5.76Cancelled/Forefeited
    
    
    (76,250
    )
    
    
    6.01Nonvested restricted stock at September 30, 2007
    
    
    212,720
    
    
    
    8.52
 NOTE 3.    INVENTORIES
  September 30, 2007
    
    December 31, 2006Raw materials
    
    $
    1,854
    
    
    $
    1,449Work-in-process
    
    
    470
    
    
    
    344Finished goods
    
    
    128
    
    
    
    128Total
    
    $
    2,452
    
    
    $
    1,921
  NOTE 4.    DERIVATIVE FINANCIAL INSTRUMENTS
   6




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INTERPAHSE CORPORATION
NOTES CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
  NOTE 5.    INCOME TAXES
      NOTE 6.    CREDIT FACILITY
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INTERPAHSE CORPORATION
NOTES CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 7.    COMPREHENSIVE INCOME (LOSS)
  Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Net income (loss)
    
    $
    698
    
    
    $
    175
    
    
    $
    (764
    )
    
    $
    1,628Other comprehensive income (loss):Unrealized holding gain arising during period, net of tax
    
    
    57
    
    
    
    43
    
    
    
    53
    
    
    
    49Foreign currency translation adjustment
    
    
    (1
    )
    
    
    (18
    )
    
    
    23
    
    
    
    36Comprehensive income (loss)
    
    $
    754
    
    
    $
    200
    
    
    $
    (688
    )
    
    $
    1,713
 NOTE 8.    EARNINGS PER SHARE
  Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Basic earnings per share:Net income (loss)
    
    $
    698
    
    
    $
    175
    
    
    $
    (764
    )
    
    $
    1,628Weighted average common shares outstanding
    
    
    6,152
    
    
    
    5,857
    
    
    
    6,112
    
    
    
    5,832Basic earnings (loss) per share
    
    $
    0.11
    
    
    $
    0.03
    
    
    $
    (0.13
    )
    
    $
    0.28Diluted earnings per share:Net income (loss)
    
    $
    698
    
    
    $
    175
    
    
    $
    (764
    )
    
    $
    1,628Weighted average common shares outstanding
    
    
    6,152
    
    
    
    5,857
    
    
    
    6,112
    
    
    
    5,832Dilutive stock options and restricted stock
    
    
    629
    
    
    
    473
    
    
    
    
    
    
    
    273Weighted average common shares outstanding 
assuming dilution
    
    
    6,781
    
    
    
    6,330
    
    
    
    6,112
    
    
    
    6,105Diluted earnings (loss) per share
    
    $
    0.10
    
    
    $
    0.03
    
    
    $
    (0.13
    )
    
    $
    0.27Outstanding stock options and unvested
restricted stock that were not included in
the diluted calculation because their effect
would be anti-dilutive
    
    
    755
    
    
    
    813
    
    
    
    1,458
    
    
    
    1,389
 NOTE 9.    SEGMENT INFORMATION
  8




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INTERPAHSE CORPORATION
NOTES CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
   Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Revenues:North America
    
    $
    3,672
    
    
    $
    2,495
    
    
    $
    9,572
    
    
    $
    9,007Europe
    
    
    1,514
    
    
    
    3,857
    
    
    
    2,253
    
    
    
    10,795Pacific Rim
    
    
    3,243
    
    
    
    1,406
    
    
    
    9,949
    
    
    
    5,478Total
    
    $
    8,429
    
    
    $
    7,758
    
    
    $
    21,774
    
    
    $
    25,280
  Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Product Revenues:Broadband telecom
    
    $
    7,170
    
    
    $
    6,300
    
    
    $
    18,420
    
    
    $
    20,155Enterprise
    
    
    980
    
    
    
    1,302
    
    
    
    2,402
    
    
    
    3,845Professional services
    
    
    124
    
    
    
    
    
    
    
    382
    
    
    
    123Other
    
    
    155
    
    
    
    156
    
    
    
    570
    
    
    
    1,157Total
    
    $
    8,429
    
    
    $
    7,758
    
    
    $
    21,774
    
    
    $
    25,280
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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
   10




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Research and Development
   Sales and Marketing
   General and Administrative
  11




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Interest Income, Net
  Other Income (Expense), Net
  Income Taxes
   Net Income (Loss)
  LIQUIDITY AND CAPITAL RESOURCES
 Consolidated Cash Flows
  12




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Operating Activities
   Investing Activities
  Financing Activities
  Commitments
 Commitments
  Off-Balance Sheet Arrangements
  13




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Other
    
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Foreign Currency Risk
   Market Price Risk
  Interest Rate Risk
  14




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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, 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.
 
 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
  15




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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 Item 5. OTHER INFORMATION
  
 Item 6. EXHIBITS
 Exhibits
 2 (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 July 25, 2007. (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, Confidentiality, and Non-Competition Agreement with Thomas N. Tipton, Jr.,
dated December 19, 2005. *(9)10 (f)
    
    Employment, Confidentiality, and Non-Competition Agreement with Randall E. McComas,
dated February 15, 2002. *(9)10 (g)
    
    Employment Agreement with Deborah A. Shute, dated November 24, 1999. *(9)10 (h)
    
    Employment, Confidentiality, and Non-Competition Agreement with James W. Gragg,
dated November 1, 2004. *(9)10 (i)
    
    Employment, Confidentiality, and Non-Competition Agreement with Prasad Kallur,
dated May 23, 2005. *(9)10 (j)
    
    Interphase Corporation 2004 Long-Term Stock Incentive Plan *(8)10 (k)
    
    Employment, Confidentiality, and Non-Competition Agreement with Marc E. DeVinney,
dated August 31, 2007. *(10)31 (a)
    
    Rule 13a-14(a)/15d-14(a) Certification. (11)31 (b)
    
    Rule 13a-14(a)/15d-14(a) Certification. (11)32 (a)
    
    Section 1350 Certification. (11)32 (b)
    
    Section 1350 Certification. (11)
 
 (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 8-K on July 31, 2007, 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 as an exhibit to Report on Form 8-K on August 31, 2007, and
incorporated herein by reference.(11)
    
    Filed herewith 16




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*
    
    Management contract or compensatory plan or arrangement SIGNATURE
  INTERPHASE CORPORATION
(Registrant)Date: November 9, 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