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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 June 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 June 30, 2007
 Part I  Financial InformationItem 1. Condensed Consolidated Financial Statements (unaudited)Condensed Consolidated Balance Sheets as of June 30, 2007
and December 31, 2006
    
    
    2Condensed Consolidated Statements of Operations for the three
months and six months ended June 30, 2007 and 2006
    
    
    3Condensed Consolidated Statements of Cash Flows for the six months
ended June 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
    
    
    15Item 5. Other Information
    
    
    15Item 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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##### Table of Contents



PART I
FINANCIAL INFORMATION
 
 Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 INTERPHASE CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
   June 30,
    
    
    December 31,2007
    
    
    2006ASSETSCash and cash equivalents
    
    $
    4,130
    
    
    $
    9,061Marketable securities
    
    
    15,615
    
    
    
    13,469Trade accounts receivable, less allowances
of $139 and $118, respectively
    
    
    6,808
    
    
    
    5,824Inventories
    
    
    1,973
    
    
    
    1,921Prepaid expenses and other current assets
    
    
    1,521
    
    
    
    1,298Total current assets
    
    
    30,047
    
    
    
    31,573Machinery and equipment
    
    
    6,600
    
    
    
    6,308Leasehold improvements
    
    
    424
    
    
    
    422Furniture and fixtures
    
    
    558
    
    
    
    5547,582
    
    
    
    7,284Less-accumulated depreciation and amortization
    
    
    (6,634
    )
    
    
    (6,308
    )Total property and equipment, net
    
    
    948
    
    
    
    976Capitalized software, net
    
    
    1,911
    
    
    
    1,322Other assets
    
    
    194
    
    
    
    191Total assets
    
    $
    33,100
    
    
    $
    34,062LIABILITIES AND SHAREHOLDERS EQUITYLiabilitiesAccounts payable
    
    $
    1,821
    
    
    $
    1,372Deferred revenue
    
    
    83
    
    
    
    98Accrued liabilities
    
    
    1,386
    
    
    
    1,140Accrued compensation
    
    
    1,544
    
    
    
    2,067Total current liabilities
    
    
    4,834
    
    
    
    4,677Deferred lease obligations
    
    
    68
    
    
    
    85Long-term debt
    
    
    3,500
    
    
    
    3,500Total liabilities
    
    
    8,402
    
    
    
    8,262Commitments and ContingenciesShareholders EquityCommon stock, $0.10 par value; 100,000,000
shares authorized; 6,202,723 and
6,152,141 shares issued and outstanding,
respectively
    
    
    620
    
    
    
    615Additional paid in capital
    
    
    40,170
    
    
    
    39,884Retained deficit
    
    
    (15,472
    )
    
    
    (14,059
    )Cumulative other comprehensive loss
    
    
    (620
    )
    
    
    (640
    )Total shareholders equity
    
    
    24,698
    
    
    
    25,800Total liabilities and shareholders equity
    
    $
    33,100
    
    
    $
    34,062
 The accompanying notes are an integral part of these condensed consolidated financial statements.
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INTERPHASE CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues
    
    $
    8,241
    
    
    $
    9,371
    
    
    $
    13,345
    
    
    $
    17,522Cost of sales
    
    
    3,316
    
    
    
    3,971
    
    
    
    5,721
    
    
    
    8,001Gross margin
    
    
    4,925
    
    
    
    5,400
    
    
    
    7,624
    
    
    
    9,521Research and development
    
    
    2,369
    
    
    
    1,966
    
    
    
    4,907
    
    
    
    3,846Sales and marketing
    
    
    1,379
    
    
    
    1,474
    
    
    
    2,791
    
    
    
    2,818General and administrative
    
    
    1,130
    
    
    
    1,242
    
    
    
    2,087
    
    
    
    2,196Total operating expenses
    
    
    4,878
    
    
    
    4,682
    
    
    
    9,785
    
    
    
    8,860Income (loss) from operations
    
    
    47
    
    
    
    718
    
    
    
    (2,161
    )
    
    
    661Interest income, net
    
    
    192
    
    
    
    125
    
    
    
    393
    
    
    
    240Other income, net
    
    
    62
    
    
    
    223
    
    
    
    157
    
    
    
    360Income (loss) before income tax
    
    
    301
    
    
    
    1,066
    
    
    
    (1,611
    )
    
    
    1,261Income tax benefit
    
    
    (89
    )
    
    
    (77
    )
    
    
    (149
    )
    
    
    (192
    )Net income (loss)
    
    $
    390
    
    
    $
    1,143
    
    
    $
    (1,462
    )
    
    $
    1,453Net income (loss) per share:Basic EPS
    
    $
    0.06
    
    
    $
    0.20
    
    
    $
    (0.24
    )
    
    $
    0.25Diluted EPS
    
    $
    0.06
    
    
    $
    0.19
    
    
    $
    (0.24
    )
    
    $
    0.24Weighted average common shares
    
    
    6,109
    
    
    
    5,843
    
    
    
    6,092
    
    
    
    5,819Weighted average common and
dilutive shares
    
    
    6,714
    
    
    
    6,002
    
    
    
    6,092
    
    
    
    5,940
 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 30,2007
    
    
    2006Cash flows from operating activities:Net (loss) income
    
    $
    (1,462
    )
    
    $
    1,453Adjustments to reconcile net (loss) income to net cash (used in) provided by
operating activities:Provision for uncollectible accounts and returns
    
    
    21
    
    
    
    20Provision for excess and obsolete inventories
    
    
    200
    
    
    
    300Depreciation and amortization
    
    
    413
    
    
    
    328Amortization of restricted stock
    
    
    173
    
    
    
    179Change in assets and liabilities:Trade accounts receivable
    
    
    (1,005
    )
    
    
    (1,651
    )Inventories
    
    
    (252
    )
    
    
    409Prepaid expenses and other current assets
    
    
    (158
    )
    
    
    (162
    )Other assets
    
    
    
    
    
    
    5Accounts payable, deferred revenue and accrued liabilities
    
    
    675
    
    
    
    176Accrued compensation
    
    
    (545
    )
    
    
    750Other non-current liabilities
    
    
    
    
    
    
    (34
    )Deferred lease obligations
    
    
    (17
    )
    
    
    (3
    )Net cash (used in) provided by operating activities
    
    
    (1,957
    )
    
    
    1,770Cash flows from investing activities:Purchase of property and equipment
    
    
    (157
    )
    
    
    (83
    )Purchase of capitalized software
    
    
    (612
    )
    
    
    (359
    )Proceeds from the sale of marketable securities
    
    
    7,222
    
    
    
    8,767Purchase of marketable securities
    
    
    (9,372
    )
    
    
    (6,562
    )Net cash (used in) provided by investing activities
    
    
    (2,919
    )
    
    
    1,763Cash flows from financing activities:Proceeds from the exercise of stock options
    
    
    118
    
    
    
    316Net cash provided by financing activities
    
    
    118
    
    
    
    316Effect of exchange rate changes on cash and cash equivalents
    
    
    (173
    )
    
    
    78Net (decrease) increase in cash and cash equivalents
    
    
    (4,931
    )
    
    
    3,927Cash and cash equivalents at beginning of period
    
    
    9,061
    
    
    
    3,180Cash and cash equivalents at end of period
    
    $
    4,130
    
    
    $
    7,107
 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
    
    
    (19
    )
    
    
    6.04Cancelled
    
    
    (3
    )
    
    
    21.00Balance, June 30, 2007
    
    
    2,100
    
    
    
    9.54
  5




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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
  Restricted Stock
    
    
    Weighted AverageShares
    
    
    Grant Date ValueNonvested restricted stock at December 31, 2006
    
    
    221,425
    
    
    
    5.96Granted
    
    
    91,000
    
    
    
    11.05Vested
    
    
    (38,055
    )
    
    
    5.77Cancelled/Forefeited
    
    
    (60,000
    )
    
    
    5.40Nonvested restricted stock at June 30, 2007
    
    
    214,370
    
    
    
    8.37
 NOTE 3.    INVENTORIES
  June 30, 2007
    
    
    December 31, 2006Raw materials
    
    $
    1,526
    
    
    $
    1,449Work-in-process
    
    
    348
    
    
    
    344Finished goods
    
    
    99
    
    
    
    128Total
    
    $
    1,973
    
    
    $
    1,921
  NOTE 4.    DERIVATIVE FINANCIAL INSTRUMENTS
   6




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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
  NOTE 5.    INCOME TAXES
      NOTE 6.    CREDIT FACILITY
  7




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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 7.    COMPREHENSIVE INCOME (LOSS)
  Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income (loss)
    
    $
    390
    
    
    $
    1,143
    
    
    $
    (1,462
    )
    
    $
    1,453Other comprehensive (loss) income:Unrealized holding (loss) gain arising
during period,
net of tax
    
    
    (16
    )
    
    
    (1
    )
    
    
    (4
    )
    
    
    6Foreign currency translation adjustment
    
    
    9
    
    
    
    68
    
    
    
    24
    
    
    
    54Comprehensive income (loss)
    
    $
    383
    
    
    $
    1,210
    
    
    $
    (1,442
    )
    
    $
    1,513
 NOTE 8.    EARNINGS PER SHARE
  Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Basic earnings per share:Net income (loss)
    
    $
    390
    
    
    $
    1,143
    
    
    $
    (1,462
    )
    
    $
    1,453Weighted average common shares outstanding
    
    
    6,109
    
    
    
    5,843
    
    
    
    6,092
    
    
    
    5,819Basic earnings (loss) per share
    
    $
    0.06
    
    
    $
    0.20
    
    
    $
    (0.24
    )
    
    $
    0.25Diluted earnings per share:Net income (loss)
    
    $
    390
    
    
    $
    1,143
    
    
    $
    (1,462
    )
    
    $
    1,453Weighted average common shares outstanding
    
    
    6,109
    
    
    
    5,843
    
    
    
    6,092
    
    
    
    5,819Dilutive stock options and restricted stock
    
    
    605
    
    
    
    159
    
    
    
    
    
    
    
    121Weighted average common shares outstanding 
assuming dilution
    
    
    6,714
    
    
    
    6,002
    
    
    
    6,092
    
    
    
    5,940Diluted earnings (loss) per share
    
    $
    0.06
    
    
    $
    0.19
    
    
    $
    (0.24
    )
    
    $
    0.24Outstanding stock options and unvested
restricted stock that were not included in
the diluted calculation because their effect
would be anti-dilutive
    
    
    758
    
    
    
    1,407
    
    
    
    1,456
    
    
    
    1,789
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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 9.    SEGMENT INFORMATION
   Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues:North America
    
    $
    2,902
    
    
    $
    3,564
    
    
    $
    5,900
    
    
    $
    6,512Europe
    
    
    497
    
    
    
    3,353
    
    
    
    739
    
    
    
    6,938Pacific Rim
    
    
    4,842
    
    
    
    2,454
    
    
    
    6,706
    
    
    
    4,072Total
    
    $
    8,241
    
    
    $
    9,371
    
    
    $
    13,345
    
    
    $
    17,522
  Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Product Revenues:Broadband telecom
    
    $
    7,208
    
    
    $
    7,756
    
    
    $
    11,250
    
    
    $
    13,855Enterprise
    
    
    695
    
    
    
    1,298
    
    
    
    1,422
    
    
    
    2,543Professional services
    
    
    217
    
    
    
    25
    
    
    
    258
    
    
    
    143Other
    
    
    121
    
    
    
    292
    
    
    
    415
    
    
    
    981Total
    
    $
    8,241
    
    
    $
    9,371
    
    
    $
    13,345
    
    
    $
    17,522
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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, Net
  Income Taxes
   Net Income (Loss)
  LIQUIDITY AND CAPITAL RESOURCES
 Consolidated Cash Flows
  Operating Activities
  12




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




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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
  
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  Nominee
    
    Votes cast for
    
    
    Votes withheldPaul N. Hug
    
    
    5,462,082
    
    
    
    98,367Gregory B. Kalush
    
    
    5,456,216
    
    
    
    104,233Michael J. Myers
    
    
    5,464,689
    
    
    
    95,760Kenneth V. Spenser
    
    
    5,464,339
    
    
    
    96,110Christopher B. Strunk
    
    
    5,464,339
    
    
    
    96,110S. Thomas Thawley
    
    
    5,074,173
    
    
    
    486,276
 
 Item 5. OTHER INFORMATION
  15




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Item 6. EXHIBITS
 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 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 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 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 herewith*
    
    Management contract or compensatory plan or arrangement 16




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SIGNATURE
  INTERPHASE CORPORATION
(Registrant)Date: August 10, 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