##### 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 September 30, 2009
 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
 Yes o No o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller Reporting Company þ
 o þ




---



##### 



INTERPHASE CORPORATION
 Index to Form 10-Q
Quarterly Period Ended September 30, 2009
 Part I  Financial InformationItem 1. Condensed Consolidated Financial Statements (unaudited)Condensed Consolidated Balance Sheets as of September 30, 2009
and December 31, 2008
    
    
    2Condensed Consolidated Statements of Operations for the three
months and nine months ended September 30, 2009 and 2008
    
    
    3Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2009 and 2008
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    11Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    15Item 4. Controls and Procedures
    
    
    16Part II  Other InformationItem 1. Legal Proceedings
    
    
    17Item 1A. Risk Factors
    
    
    17Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    17Item 3. Defaults Upon Senior Securities
    
    
    17Item 4. Submission of Matters to a Vote of Security Holders
    
    
    17Item 5. Other Information
    
    
    17Item 6. Exhibits
    
    
    17Exhibit 31(a)Exhibit 31(b)Exhibit 32(a)Exhibit 32(b)
   1




---



##### Table of Contents



PART I
FINANCIAL INFORMATION
 
 Item 1.
    
    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 INTERPHASE CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 September 30,
    
    
    December 31,2009
    
    
    2008ASSETSCash and cash equivalents
    
    $
    11,806
    
    
    $
    7,383Marketable securities
    
    
    8,723
    
    
    
    11,563Trade accounts receivable, less allowances
of $65 and $159, respectively
    
    
    4,188
    
    
    
    4,758Inventories
    
    
    2,092
    
    
    
    2,329Prepaid expenses and other current assets
    
    
    1,906
    
    
    
    2,729Total current assets
    
    
    28,715
    
    
    
    28,762Machinery and equipment
    
    
    7,067
    
    
    
    6,929Leasehold improvements
    
    
    432
    
    
    
    422Furniture and fixtures
    
    
    587
    
    
    
    5808,086
    
    
    
    7,931Less-accumulated depreciation and amortization
    
    
    (7,340
    )
    
    
    (7,056
    )Total property and equipment, net
    
    
    746
    
    
    
    875Capitalized software, net
    
    
    1,195
    
    
    
    1,408Other assets
    
    
    200
    
    
    
    203Total assets
    
    $
    30,856
    
    
    $
    31,248LIABILITIES AND SHAREHOLDERS EQUITYLiabilitiesAccounts payable
    
    $
    772
    
    
    $
    1,328Deferred revenue
    
    
    148
    
    
    
    28Accrued liabilities
    
    
    1,451
    
    
    
    942Accrued compensation
    
    
    1,636
    
    
    
    1,163Total current liabilities
    
    
    4,007
    
    
    
    3,461Deferred lease obligations
    
    
    208
    
    
    
    1Long-term debt
    
    
    3,500
    
    
    
    3,500Total liabilities
    
    
    7,715
    
    
    
    6,962Commitments and ContingenciesShareholders EquityCommon stock, $0.10 par value; 100,000,000 shares
authorized; 6,911,494 and 6,573,294 shares issued and
outstanding, respectively
    
    
    691
    
    
    
    657Additional paid in capital
    
    
    42,929
    
    
    
    42,652Retained deficit
    
    
    (19,830
    )
    
    
    (18,230
    )Cumulative other comprehensive loss
    
    
    (649
    )
    
    
    (793
    )Total shareholders equity
    
    
    23,141
    
    
    
    24,286Total liabilities and shareholders equity
    
    $
    30,856
    
    
    $
    31,248
 The accompanying notes are an integral part of these condensed consolidated financial statements.
  2




---



##### Table of Contents



INTERPHASE CORPORATION
 
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenues
    
    $
    4,368
    
    
    $
    6,888
    
    
    $
    20,909
    
    
    $
    21,009Cost of sales
    
    
    3,269
    
    
    
    2,904
    
    
    
    10,337
    
    
    
    9,585Gross margin
    
    
    1,099
    
    
    
    3,984
    
    
    
    10,572
    
    
    
    11,424Research and development
    
    
    1,797
    
    
    
    1,963
    
    
    
    5,752
    
    
    
    7,347Sales and marketing
    
    
    1,230
    
    
    
    1,244
    
    
    
    4,329
    
    
    
    3,989General and administrative
    
    
    860
    
    
    
    990
    
    
    
    3,145
    
    
    
    2,976Restructuring charge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    403Total operating expenses
    
    
    3,887
    
    
    
    4,197
    
    
    
    13,226
    
    
    
    14,715Loss from operations
    
    
    (2,788
    )
    
    
    (213
    )
    
    
    (2,654
    )
    
    
    (3,291
    )Interest income, net
    
    
    65
    
    
    
    133
    
    
    
    243
    
    
    
    419Other (loss) income, net
    
    
    (3
    )
    
    
    (175
    )
    
    
    (9
    )
    
    
    150Loss before income tax
    
    
    (2,726
    )
    
    
    (255
    )
    
    
    (2,420
    )
    
    
    (2,722
    )Income tax benefit
    
    
    (345
    )
    
    
    (200
    )
    
    
    (820
    )
    
    
    (978
    )Net loss
    
    $
    (2,381
    )
    
    $
    (55
    )
    
    $
    (1,600
    )
    
    $
    (1,744
    )Net loss per share:Basic EPS
    
    $
    (0.34
    )
    
    $
    (0.01
    )
    
    $
    (0.23
    )
    
    $
    (0.27
    )Diluted EPS
    
    $
    (0.34
    )
    
    $
    (0.01
    )
    
    $
    (0.23
    )
    
    $
    (0.27
    )Weighted average common shares
    
    
    6,910
    
    
    
    6,553
    
    
    
    6,894
    
    
    
    6,529Weighted average common
and dilutive shares
    
    
    6,910
    
    
    
    6,553
    
    
    
    6,894
    
    
    
    6,529
 The accompanying notes are an integral part of these condensed consolidated financial statements.
  3




---



##### Table of Contents



INTERPHASE CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Nine Months EndedSeptember 30,2009
    
    
    2008Cash flows from operating activities:Net loss
    
    $
    (1,600
    )
    
    $
    (1,744
    )Adjustments
to reconcile net loss to net cash provided by (used in) operating activities:Provision for uncollectible accounts and returns
    
    
    38
    
    
    
    (37
    )Provision for excess and obsolete inventories
    
    
    300
    
    
    
    Depreciation and amortization
    
    
    636
    
    
    
    670Amortization of restricted stock
    
    
    307
    
    
    
    271Write-off of impaired capitalized software
    
    
    
    
    
    
    185Change in assets and liabilities:Trade accounts receivable
    
    
    532
    
    
    
    28Inventories
    
    
    (63
    )
    
    
    242Prepaid expenses and other current assets
    
    
    856
    
    
    
    859Other assets
    
    
    10
    
    
    
    (1,226
    )Accounts payable, deferred revenue and accrued liabilities
    
    
    24
    
    
    
    (1,443
    )Accrued compensation
    
    
    427
    
    
    
    128Deferred lease obligations
    
    
    207
    
    
    
    (39
    )Net cash provided by (used in) operating activities
    
    
    1,674
    
    
    
    (2,106
    )Cash flows from investing activities:Purchase of property and equipment
    
    
    (122
    )
    
    
    (227
    )Purchase of capitalized software
    
    
    (131
    )
    
    
    (201
    )Proceeds from the sale of marketable securities
    
    
    7,071
    
    
    
    6,853Purchase of marketable securities
    
    
    (4,138
    )
    
    
    (6,049
    )Net cash provided by investing activities
    
    
    2,680
    
    
    
    376Cash flows from financing activities:Borrowings under credit facility
    
    
    10,500
    
    
    
    Payments on debt
    
    
    (10,500
    )
    
    
    Proceeds from the exercise of stock options
    
    
    4
    
    
    
    2Net cash provided by financing activities
    
    
    4
    
    
    
    2Effect of exchange rate changes on cash and cash equivalents
    
    
    65
    
    
    
    (139
    )Net increase (decrease) in cash and cash equivalents
    
    
    4,423
    
    
    
    (1,867
    )Cash and cash equivalents at beginning of period
    
    
    7,383
    
    
    
    6,384Cash and cash equivalents at end of period
    
    $
    11,806
    
    
    $
    4,517
 The accompanying notes are an integral part of these condensed consolidated financial statements.
  4




---



##### Table of Contents



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, 2008
    
    
    1,634,271
    
    
    $
    9.65Granted
    
    
    
    
    
    
    Exercised
    
    
    (1,000
    )
    
    
    4.12Cancelled
    
    
    (132,500
    )
    
    
    7.47Balance, September 30, 2009
    
    
    1,500,771
    
    
    $
    9.85
  5




---



##### Table of Contents



INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
  Restricted
    
    
    Weighted AverageStock Shares
    
    
    Grant Date ValueNonvested restricted stock at December 31, 2008
    
    
    232,249
    
    
    $
    7.24Granted
    
    
    390,500
    
    
    
    1.87Vested
    
    
    (72,616
    )
    
    
    6.61Cancelled/Forefeited
    
    
    (53,300
    )
    
    
    8.99Nonvested restricted stock at September 30, 2009
    
    
    496,833
    
    
    $
    2.92
 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 Securities
    
    $
    
    
    
    $
    8,723
    
    
    $
    
    
    
    $
    8,723Total
    
    $
    
    
    
    $
    8,723
    
    
    $
    
    
    
    $
    8,723
  6




---



##### Table of Contents



INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
  Quoted Prices in
    
    
    SignificantActive Markets
    
    
    Other
    
    
    Significantfor Identical
    
    
    Observable
    
    
    UnobservableAssets
    
    
    Inputs
    
    
    InputsLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalAvailable-for-sale Securities
    
    $
    
    
    
    $
    11,563
    
    
    $
    
    
    
    $
    11,563Total
    
    $
    
    
    
    $
    11,563
    
    
    $
    
    
    
    $
    11,563
 NOTE 4.    INVENTORIES
  September 30, 2009
    
    
    December 31, 2008Raw materials
    
    $
    1,578
    
    
    $
    1,885Work-in-process
    
    
    453
    
    
    
    378Finished goods
    
    
    61
    
    
    
    66Total
    
    $
    2,092
    
    
    $
    2,329
  NOTE 5.    DERIVATIVE FINANCIAL INSTRUMENTS
    7




---



##### Table of Contents



INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 6.    INCOME TAXES
   NOTE 7.    RESTRUCTURING CHARGE
  NOTE 8.    CREDIT FACILITY
  NOTE 9.    COMPREHENSIVE LOSS
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net loss
    
    $
    (2,381
    )
    
    $
    (55
    )
    
    $
    (1,600
    )
    
    $
    (1,744
    )Other comprehensive loss:Unrealized holding gain (loss) arising
during period, net of tax
    
    
    3
    
    
    
    (126
    )
    
    
    97
    
    
    
    (119
    )Foreign currency translation adjustment
    
    
    39
    
    
    
    (193
    )
    
    
    47
    
    
    
    (178
    )Comprehensive loss
    
    $
    (2,339
    )
    
    $
    (374
    )
    
    $
    (1,456
    )
    
    $
    (2,041
    )
 NOTE 10.    EARNINGS PER SHARE
   8




---



##### Table of Contents



INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Basic net loss per share:Net loss
    
    $
    (2,381
    )
    
    $
    (55
    )
    
    $
    (1,600
    )
    
    $
    (1,744
    )Weighted average common shares outstanding
    
    
    6,910
    
    
    
    6,553
    
    
    
    6,894
    
    
    
    6,529Basic net loss per share
    
    $
    (0.34
    )
    
    $
    (0.01
    )
    
    $
    (0.23
    )
    
    $
    (0.27
    )Diluted net loss per share:Net loss
    
    $
    (2,381
    )
    
    $
    (55
    )
    
    $
    (1,600
    )
    
    $
    (1,744
    )Weighted average common shares outstanding
    
    
    6,910
    
    
    
    6,553
    
    
    
    6,894
    
    
    
    6,529Dilutive stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average common shares outstanding -
assuming dilution
    
    
    6,910
    
    
    
    6,553
    
    
    
    6,894
    
    
    
    6,529Diluted net loss per share
    
    $
    (0.34
    )
    
    $
    (0.01
    )
    
    $
    (0.23
    )
    
    $
    (0.27
    )Outstanding stock options that were not
included in the diluted calculation because
their effect would be anti-dilutive1,332
    
    
    
    1,652
    
    
    
    1,527
    
    
    
    1,501
 NOTE 11.    SEGMENT INFORMATION
   Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenues:Pacific Rim
    
    $
    2,109
    
    
    $
    3,353
    
    
    $
    8,955
    
    
    $
    9,834North America
    
    
    1,463
    
    
    
    1,940
    
    
    
    6,146
    
    
    
    5,990Europe
    
    
    796
    
    
    
    1,595
    
    
    
    5,808
    
    
    
    5,185Total
    
    $
    4,368
    
    
    $
    6,888
    
    
    $
    20,909
    
    
    $
    21,009
  9




---



##### Table of Contents



INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Product Revenues:Broadband telecom
    
    $
    3,594
    
    
    $
    6,482
    
    
    $
    18,813
    
    
    $
    18,457Professional services
    
    
    368
    
    
    
    209
    
    
    
    874
    
    
    
    347Enterprise
    
    
    211
    
    
    
    106
    
    
    
    645
    
    
    
    735Other
    
    
    195
    
    
    
    91
    
    
    
    577
    
    
    
    1,470Total
    
    $
    4,368
    
    
    $
    6,888
    
    
    $
    20,909
    
    
    $
    21,009
 NOTE 12.    RECENTLY ISSUED ACCOUNTING PROUNOUCEMENTS
     10




---



##### Table of Contents



Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 FORWARD-LOOKING STATEMENTS
  RESULTS OF OPERATIONS
 Revenue
     11




---



##### Table of Contents



Gross Margin
   Research and Development
   Sales and Marketing
   12




---



##### Table of Contents



General and Administrative
   Restructuring Charge
  Interest Income, Net
  Other (Loss) Income, Net
   13




---



##### Table of Contents



Income Taxes
   Net Loss
  LIQUIDITY AND CAPITAL RESOURCES
 Consolidated Cash Flows
  Operating Activities
   Investing Activities
   14




---



##### Table of Contents



Financing Activities
  Commitments
 Commitments
  Off-Balance Sheet Arrangements
  Other
    
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Foreign Currency Risk
    15




---



##### Table of Contents



Market Price Risk
  Interest Rate Risk
    
 Item 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
   16




---



##### Table of Contents



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 27, 2007. (3)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. (5)10
    (b)

    Second Amendment to lease on Facility at Parkway Center, Phase 1, Plano, Texas (6)10
    (c)

    Lease on Facility at 2105 Luna Road, Carrollton, Texas. (7)10
    (d)

    Note and Credit Agreement between Interphase Corporation and Texas Capital Bank. (8)10
    (e)

    First Amendment to Loan Agreement between Interphase Corporation and Texas Capital Bank. (9)10
    (f)

    Amended and Restated Employment, Confidentiality, and Non-Competition Agreement with
Gregory B. Kalush, dated December 30, 2008. *(10)10
    (g)

    Amended and Restated Employment, Confidentiality, and Non-Competition Agreement with
Thomas N. Tipton, Jr. dated December 30, 2008. *(10)10
    (h)

    Amended and Restated Employment, Confidentiality, and Non-Competition Agreement with
Randall E. McComas, dated December 30, 2008. *(10)10
    (i)

    Amended and Restated Employment, Confidentiality, and Non-Competition Agreement with
Deborah A. Shute, dated December 30, 2008. *(10)10
    (j)

    Amended and Restated Employment, Confidentiality, and Non-Competition Agreement with
James W. Gragg, dated December 30, 2008. *(10)10
    (k)

    Amended and Restated Employment, Confidentiality, and Non-Competition Agreement with
Marc E. DeVinney, dated December 30, 2008. *(10)10
    (l)

    Amended and Restated Employment, Confidentiality, and Non-Competition Agreement with
Yoram Solomon, dated December 30, 2008. *(10)10
    (m)

    Employment, Confidentiality, and Non-Competition Agreement with Yoram Solomon, dated
November 17, 2008* (11)10
    (n)

    Interphase Corporation 2004 Long-Term Stock Incentive Plan *(12)31
    (a)

    Rule 13a-14(a)/15d-14(a) Certification. (13)31
    (b)

    Rule 13a-14(a)/15d-14(a) Certification. (13)32
    (a)

    Section 1350 Certification. (13)32
    (b)

    Section 1350 Certification. (13)
  17




---



##### Table of Contents



(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 Annual Report on Form 10-K for the year ended December 31, 1999, and
incorporated herein by reference.(3)
    
    Filed as an exhibit to Current Report on Form 8-K on July 31, 2007, and incorporated herein by
reference.(4)
    
    Filed as an exhibit to Current Report on Form 8-K on January 9, 2001, and incorporated herein
by reference.(5)
    
    Filed as an exhibit to Quarterly Report on Form 10-Q for the quarter ended September 30, 2002,
and incorporated herein by reference.(6)
    
    Filed as an exhibit to Annual Report on Form 10-K for the year ended December 31, 2008, and
incorporated herein by reference.(7)
    
    Filed as an exhibit to Current Report on Form 8-K on December 10, 2008, and incorporated herein
by reference.(8)
    
    Filed as an exhibit to Current Report on Form 8-K on December 24, 2008, and incorporated
herein by reference.(9)
    
    Filed as an exhibit to Quarterly Report on Form 10-Q for the quarter ended March 31, 2009,
and incorporated herein by reference.(10)
    
    Filed as an exhibit to Current Report on Form 8-K on December 31, 2008, and incorporated
herein by reference.(11)
    
    Filed as an exhibit to Current Report on Form 8-K on November 17, 2008, and incorporated
herein by reference.(12)
    
    Filed as an exhibit to Schedule 14a on March 31, 2004 and incorporated herein by reference.(13)
    
    Filed herewith.*
    
    Management contract or
compensatory plan or arrangement. SIGNATURE
  INTERPHASE CORPORATION
(Registrant)Date: November 6, 2009
    By:
    /s/ Thomas N. Tipton Jr.Thomas N. Tipton Jr.Chief Financial Officer,
Vice President of Finance and Treasurer
(Principal Financial and Accounting Officer)  18