##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 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 þ
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



INTERPHASE CORPORATION
 Index to Form 10-Q
Quarterly Period Ended June 30, 2008
  
 Part I  Financial InformationItem 1. Condensed Consolidated Financial Statements (unaudited)Condensed Consolidated Balance Sheets as of June 30, 2008
and December 31, 2007
    
    
    2Condensed Consolidated Statements of Operations for the three
months and six months ended June 30, 2008 and 2007
    
    
    3Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2008 and 2007
    
    
    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
    
    
    17Rule 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 31,2008
    
    2007ASSETSCash and cash equivalents
    
    $
    5,253
    
    
    $
    6,384Marketable securities
    
    
    14,198
    
    
    
    14,185Trade accounts receivable, less allowances
of $134 and $173, respectively
    
    
    6,022
    
    
    
    7,550Inventories
    
    
    2,516
    
    
    
    2,886Prepaid expenses and other current assets
    
    
    944
    
    
    
    1,391Total current assets
    
    
    28,933
    
    
    
    32,396Machinery and equipment
    
    
    7,140
    
    
    
    6,962Leasehold improvements
    
    
    435
    
    
    
    427Furniture and fixtures
    
    
    588
    
    
    
    5748,163
    
    
    
    7,963Less-accumulated depreciation and amortization
    
    
    (7,160
    )
    
    
    (6,879
    )Total property and equipment, net
    
    
    1,003
    
    
    
    1,084Capitalized software, net
    
    
    1,561
    
    
    
    1,817Other assets
    
    
    1,713
    
    
    
    883Total assets
    
    $
    33,210
    
    
    $
    36,180LIABILITIES AND SHAREHOLDERS EQUITYLiabilitiesAccounts payable
    
    $
    1,574
    
    
    $
    2,304Deferred revenue
    
    
    58
    
    
    
    30Accrued liabilities
    
    
    822
    
    
    
    1,387Accrued compensation
    
    
    1,474
    
    
    
    1,645Total current liabilities
    
    
    3,928
    
    
    
    5,366Deferred lease obligations
    
    
    26
    
    
    
    52Long-term debt
    
    
    3,500
    
    
    
    3,500Total liabilities
    
    
    7,454
    
    
    
    8,918Commitments and ContingenciesShareholders EquityCommon stock, $0.10 par value; 100,000,000
shares authorized; 6,554,651 and
6,500,294 shares issued and outstanding,
respectively
    
    
    655
    
    
    
    650Additional paid in capital
    
    
    42,423
    
    
    
    42,267Retained deficit
    
    
    (16,893
    )
    
    
    (15,204
    )Cumulative other comprehensive loss
    
    
    (429
    )
    
    
    (451
    )Total shareholders equity
    
    
    25,756
    
    
    
    27,262Total liabilities and shareholders equity
    
    $
    33,210
    
    
    $
    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
    
    Six Months EndedJune 30,
    
    June 30,2008
    
    2007
    
    2008
    
    2007Revenues
    
    $
    6,650
    
    
    $
    8,241
    
    
    $
    14,121
    
    
    $
    13,345Cost of sales
    
    
    3,547
    
    
    
    3,316
    
    
    
    6,681
    
    
    
    5,721Gross margin
    
    
    3,103
    
    
    
    4,925
    
    
    
    7,440
    
    
    
    7,624Research and development
    
    
    2,514
    
    
    
    2,369
    
    
    
    5,384
    
    
    
    4,907Sales and marketing
    
    
    1,246
    
    
    
    1,379
    
    
    
    2,745
    
    
    
    2,791General and administrative
    
    
    1,078
    
    
    
    1,130
    
    
    
    1,986
    
    
    
    2,087Restructuring charge
    
    
    38
    
    
    
    
    
    
    
    403
    
    
    
    Total operating expenses
    
    
    4,876
    
    
    
    4,878
    
    
    
    10,518
    
    
    
    9,785(Loss) income from operations
    
    
    (1,773
    )
    
    
    47
    
    
    
    (3,078
    )
    
    
    (2,161
    )Interest income, net
    
    
    123
    
    
    
    192
    
    
    
    286
    
    
    
    393Other income, net
    
    
    22
    
    
    
    62
    
    
    
    325
    
    
    
    157(Loss) income before income tax
    
    
    (1,628
    )
    
    
    301
    
    
    
    (2,467
    )
    
    
    (1,611
    )Income tax benefit
    
    
    (467
    )
    
    
    (89
    )
    
    
    (778
    )
    
    
    (149
    )Net (loss) income
    
    $
    (1,161
    )
    
    $
    390
    
    
    $
    (1,689
    )
    
    $
    (1,462
    )Net (loss) income per share:Basic EPS
    
    $
    (0.18
    )
    
    $
    0.06
    
    
    $
    (0.27
    )
    
    $
    (0.24
    )Diluted EPS
    
    $
    (0.18
    )
    
    $
    0.06
    
    
    $
    (0.27
    )
    
    $
    (0.24
    )Weighted average common shares
    
    
    6,315
    
    
    
    6,109
    
    
    
    6,305
    
    
    
    6,092Weighted average common and
dilutive shares
    
    
    6,315
    
    
    
    6,714
    
    
    
    6,305
    
    
    
    6,092
 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
 Six Months EndedJune 30,2008
    
    2007Cash flows from operating activities:Net loss
    
    $
    (1,689
    )
    
    $
    (1,462
    )Adjustments to reconcile net loss to net cash used in
operating activities:Provision for uncollectible accounts and returns
    
    
    (39
    )
    
    
    21Provision for excess and obsolete inventories
    
    
    
    
    
    
    200Depreciation and amortization
    
    
    445
    
    
    
    413Amortization of restricted stock
    
    
    158
    
    
    
    173Write-off of impaired capitalized software
    
    
    185
    
    
    
    Change in assets and liabilities:Trade accounts receivable
    
    
    1,567
    
    
    
    (1,005
    )Inventories
    
    
    370
    
    
    
    (252
    )Prepaid expenses and other current assets
    
    
    536
    
    
    
    (158
    )Other assets
    
    
    (747
    )
    
    
    Accounts payable, deferred revenue and accrued liabilities
    
    
    (1,280
    )
    
    
    675Accrued compensation
    
    
    (263
    )
    
    
    (545
    )Other non-current liabilities
    
    
    
    
    
    
    Deferred lease obligations
    
    
    (26
    )
    
    
    (17
    )Net cash used in operating activities
    
    
    (783
    )
    
    
    (1,957
    )Cash flows from investing activities:Purchase of property and equipment
    
    
    (109
    )
    
    
    (157
    )Purchase of capitalized software
    
    
    (144
    )
    
    
    (612
    )Proceeds from the sale of marketable securities
    
    
    4,764
    
    
    
    7,222Purchase of marketable securities
    
    
    (4,771
    )
    
    
    (9,372
    )Net cash used in investing activities
    
    
    (260
    )
    
    
    (2,919
    )Cash flows from financing activities:Proceeds from the exercise of stock options
    
    
    2
    
    
    
    118Net cash provided by financing activities
    
    
    2
    
    
    
    118Effect of exchange rate changes on cash and cash equivalents
    
    
    (90
    )
    
    
    (173
    )Net decrease in cash and cash equivalents
    
    
    (1,131
    )
    
    
    (4,931
    )Cash and cash equivalents at beginning of period
    
    
    6,384
    
    
    
    9,061Cash and cash equivalents at end of period
    
    $
    5,253
    
    
    $
    4,130
 The accompanying notes are an integral part of these condensed consolidated financial statements.
 4




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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, 2007
    
    
    1,698,801
    
    
    $
    9.67Granted
    
    
    
    
    
    
    Exercised
    
    
    (500
    )
    
    
    4.12Cancelled
    
    
    (23,865
    )
    
    
    13.19Balance,
June 30, 2008
    
    
    1,674,436
    
    
    $
    9.62
  5




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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
  Restricted
    
    
    Weighted AverageStock Shares
    
    
    Grant Date ValueNonvested restricted stock at December 31, 2007
    
    
    207,560
    
    
    $
    8.53Granted
    
    
    116,037
    
    
    
    7.49Vested
    
    
    (38,044
    )
    
    
    7.08Cancelled/Forefeited
    
    
    (62,180
    )
    
    
    9.99Nonvested restricted stock at June 30, 2008
    
    
    223,373
    
    
    $
    7.83
 NOTE 3.    INVENTORIES
  June 30, 2008
    
    December 31, 2007Raw materials
    
    $
    1,837
    
    
    $
    2,038Work-in-process
    
    
    392
    
    
    
    594Finished goods
    
    
    287
    
    
    
    254Total
    
    $
    2,516
    
    
    $
    2,886
  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.    RESTRUCTURING CHARGE
  7




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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
  Cash payments
    
    Cash payments
    
    Remainingduring quarter
    
    during quarter
    
    liability as ofRestructuring
    
    ended March 31,
    
    ended June 30,
    
    June 30,Description
    
    charge
    
    2008
    
    2008
    
    2008Severance & Fringe
Benefits
    
    $
    365
    
    
    $
    7
    
    
    $
    267
    
    
    $
    91Lease Obligation
    
    
    38
    
    
    
    
    
    
    
    17
    
    
    
    21Total
    
    $
    403
    
    
    $
    7
    
    
    $
    284
    
    
    $
    112
 NOTE 7.    CREDIT FACILITY
  NOTE 8.    COMPREHENSIVE (LOSS) INCOME
  Three months ended
    
    Six months endedJune 30,
    
    June 30,2008
    
    2007
    
    2008
    
    2007Net (loss) income
    
    $
    (1,161
    )
    
    $
    390
    
    
    $
    (1,689
    )
    
    $
    (1,462
    )Other comprehensive (loss) income:Unrealized holding (loss) gain arising
during period,
net of tax
    
    
    (81
    )
    
    
    (16
    )
    
    
    7
    
    
    
    (4
    )Foreign currency translation adjustment
    
    
    (4
    )
    
    
    9
    
    
    
    15
    
    
    
    24Comprehensive (loss) income
    
    $
    (1,246
    )
    
    $
    383
    
    
    $
    (1,667
    )
    
    $
    (1,442
    )
 8




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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 30,2008
    
    2007
    
    2008
    
    2007Basic earnings per share:Net (loss) income
    
    $
    (1,161
    )
    
    $
    390
    
    
    $
    (1,689
    )
    
    $
    (1,462
    )Weighted average common shares outstanding
    
    
    6,315
    
    
    
    6,109
    
    
    
    6,305
    
    
    
    6,092Basic (loss) earnings per share
    
    $
    (0.18
    )
    
    $
    0.06
    
    
    $
    (0.27
    )
    
    $
    (0.24
    )Diluted earnings per share:Net (loss) income
    
    $
    (1,161
    )
    
    $
    390
    
    
    $
    (1,689
    )
    
    $
    (1,462
    )Weighted average common shares outstanding
    
    
    6,315
    
    
    
    6,109
    
    
    
    6,305
    
    
    
    6,092Dilutive stock options and restricted stock
    
    
    
    
    
    
    605
    
    
    
    
    
    
    
    Weighted average common shares outstanding -
assuming dilution
    
    
    6,315
    
    
    
    6,714
    
    
    
    6,305
    
    
    
    6,092Diluted (loss) earnings per share
    
    $
    (0.18
    )
    
    $
    0.06
    
    
    $
    (0.27
    )
    
    $
    (0.24
    )Outstanding stock options and unvested
restricted stock that were not included in
the diluted calculation because their effect
would be anti-dilutive
    
    
    1,707
    
    
    
    758
    
    
    
    1,401
    
    
    
    1,456
 NOTE 10.    SEGMENT INFORMATION
   Three months ended
    
    Six months endedJune 30,
    
    June 30,2008
    
    2007
    
    2008
    
    2007Revenues:North America
    
    $
    1,543
    
    
    $
    2,902
    
    
    $
    4,050
    
    
    $
    5,900Europe
    
    
    1,691
    
    
    
    497
    
    
    
    3,590
    
    
    
    739Pacific Rim
    
    
    3,416
    
    
    
    4,842
    
    
    
    6,481
    
    
    
    6,706Total
    
    $
    6,650
    
    
    $
    8,241
    
    
    $
    14,121
    
    
    $
    13,345
 9




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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
  Three months ended
    
    Six months endedJune 30,
     
    June 30,2008
    
    2007
    
    2008
    
    2007Product Revenues:Broadband telecom
    
    $
    6,196
    
    
    $
    7,208
    
    
    $
    11,975
    
    
    $
    11,250Enterprise
    
    
    196
    
    
    
    695
    
    
    
    629
    
    
    
    1,422Professional services
    
    
    21
    
    
    
    217
    
    
    
    138
    
    
    
    258Other
    
    
    237
    
    
    
    121
    
    
    
    1,379
    
    
    
    415Total
    
    $
    6,650
    
    
    $
    8,241
    
    
    $
    14,121
    
    
    $
    13,345
 NOTE 11.    RECENTLY ISSUED ACCOUNTING PROUNOUCEMENTS
     10




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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
   11




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Research and Development
   Sales and Marketing
   12




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General and Administrative
   Restructuring Charge
  Interest Income, Net
  Other Income, Net
  Income Taxes
 June 30, 2007.
  13




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Net (Loss) Income
  LIQUIDITY AND CAPITAL RESOURCES
 Consolidated Cash Flows
  Operating Activities
   Investing Activities
  Financing Activities
  14




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




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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
  16




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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
  Nominee
    
    Votes cast for
    
    Votes withheldPaul N. Hug
    
    
    5,846,319
    
    
    
    226,849Gregory B. Kalush
    
    
    5,845,925
    
    
    
    227,243Michael J. Myers
    
    
    5,848,736
    
    
    
    224,432Kenneth V. Spenser
    
    
    5,848,536
    
    
    
    224,432Christopher B. Strunk
    
    
    5,848,536
    
    
    
    224,632S. Thomas Thawley
    
    
    5,305,243
    
    
    
    767,925
 
 Item 5. OTHER INFORMATION
  
 Item 6. EXHIBITS
 Exhibits
 3 (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)
 17




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##### Table of Contents



Exhibits
 10 (i)
    
    Employment, Confidentiality, and Non-Competition Agreement with Prasad Kallur,
dated May 23, 2005. *(8)10 (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)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: August 7, 2008
    By:
    /s/ Thomas N. Tipton Jr.Thomas N. Tipton Jr.Chief Financial Officer,
Vice President of Finance and
Treasurer
(Principal Financial andAccounting Officer) 18