##### 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 March 31, 2006
 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
(State or other jurisdiction of incorporation or organization)
    
    75-1549797
(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
 o þ




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##### 



INTERPHASE CORPORATION
 Index to Form 10-Q
Quarterly Period Ended March 31, 2006
 Part
I  Financial InformationItem 1. Condensed Consolidated Financial Statements (unaudited)Condensed Consolidated Balance Sheets as of March 31, 2006
and December 31, 2005
    
    
    2Condensed Consolidated Statements of Operations for the three
months ended March 31, 2006 and 2005
    
    
    3Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2006 and 2005
    
    
    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
    
    
    13Item 4. Controls and Procedures
    
    
    14Part 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
    
    
    15Certification Pursuant to Rule 13a-14(a)/15d-14(a)Certification Pursuant to Rule 13a-14(a)/15d-14(a)Certification Pursuant to Section 1350Certification Pursuant to Section 1350




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PART I
 
 FINANCIAL INFORMATION
 
 Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 INTERPHASE CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 March 31,
    
    December 31,2006
    
    2005ASSETSCash and cash equivalents
    
    $
    5,900
    
    
    $
    3,180Marketable securities
    
    
    14,035
    
    
    
    15,388Trade accounts receivable, less allowances
of $136 and $126, respectively
    
    
    5,597
    
    
    
    5,195Inventories
    
    
    2,431
    
    
    
    3,109Prepaid expenses and other current assets
    
    
    673
    
    
    
    754Total current assets
    
    
    28,636
    
    
    
    27,626Machinery and equipment
    
    
    5,914
    
    
    
    5,899Leasehold improvements
    
    
    413
    
    
    
    411Furniture and fixtures
    
    
    541
    
    
    
    5456,868
    
    
    
    6,855Less-accumulated depreciation and amortization
    
    
    (5,798
    )
    
    
    (5,697
    )Total property and equipment, net
    
    
    1,070
    
    
    
    1,158Capitalized software, net
    
    
    554
    
    
    
    229Other assets
    
    
    180
    
    
    
    181Total assets
    
    $
    30,440
    
    
    $
    29,194LIABILITIES AND SHAREHOLDERS EQUITYLiabilitiesAccounts payable
    
    $
    1,146
    
    
    $
    255Deferred revenue
    
    
    98
    
    
    
    118Accrued liabilities
    
    
    1,207
    
    
    
    1,757Accrued compensation
    
    
    1,220
    
    
    
    942Total current liabilities
    
    
    3,671
    
    
    
    3,072Other non-current liabilities
    
    
    
    
    
    
    34Deferred lease obligations
    
    
    88
    
    
    
    90Long-term debt
    
    
    3,500
    
    
    
    3,500Total liabilities
    
    
    7,259
    
    
    
    6,696Commitments and ContingenciesShareholders EquityCommon stock, $0.10 par value; 100,000,000
shares authorized; 6,041,360 and
5,901,895 shares issued and outstanding,
respectively
    
    
    604
    
    
    
    590Additional paid in capital
    
    
    39,183
    
    
    
    38,817Retained deficit
    
    
    (15,835
    )
    
    
    (16,145
    )Cumulative other comprehensive loss
    
    
    (771
    )
    
    
    (764
    )Total shareholders equity
    
    
    23,181
    
    
    
    22,498Total liabilities and shareholders equity
    
    $
    30,440
    
    
    $
    29,194
 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 EndedMarch 31,2006
    
    2005Revenues
    
    $
    8,151
    
    
    $
    8,780Cost of sales
    
    
    4,030
    
    
    
    4,028Gross margin
    
    
    4,121
    
    
    
    4,752Research and development
    
    
    1,880
    
    
    
    2,169Sales and marketing
    
    
    1,344
    
    
    
    1,518General and administrative
    
    
    954
    
    
    
    946Total operating expenses
    
    
    4,178
    
    
    
    4,633(Loss) income from operations
    
    
    (57
    )
    
    
    119Interest income, net
    
    
    115
    
    
    
    76Other income (expense), net
    
    
    137
    
    
    
    (4
    )Income before income tax
    
    
    195
    
    
    
    191Income tax (benefit) provision
    
    
    (115
    )
    
    
    36Net income
    
    $
    310
    
    
    $
    155Net income per share:Basic EPS
    
    $
    0.05
    
    
    $
    0.03Diluted EPS
    
    $
    0.05
    
    
    $
    0.03Weighted average common shares
    
    
    5,822
    
    
    
    5,751Weighted average common and
dilutive shares
    
    
    5,918
    
    
    
    5,992
 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
 Three Months EndedMarch 31,2006
    
    2005Cash flows from operating activities:Net income
    
    $
    310
    
    
    $
    155Adjustments to reconcile net income to net cash provided by
operating activities:Provision for uncollectible accounts and returns
    
    
    10
    
    
    
    17Provision for excess and obsolete inventories
    
    
    200
    
    
    
    100Depreciation and amortization
    
    
    170
    
    
    
    197Amortization of restricted stock
    
    
    64
    
    
    
    Change in assets and liabilities:Trade accounts receivable
    
    
    (412
    )
    
    
    654Inventories
    
    
    477
    
    
    
    (842
    )Prepaid expenses and other current assets
    
    
    83
    
    
    
    326Other assets
    
    
    3
    
    
    
    1Accounts payable, deferred revenue and accrued liabilities
    
    
    353
    
    
    
    (511
    )Accrued compensation
    
    
    263
    
    
    
    (349
    )Other non-current liabilities
    
    
    (34
    )
    
    
    Deferred lease obligations
    
    
    (36
    )
    
    
    4Net cash provided by operating activities
    
    
    1,451
    
    
    
    (248
    )Cash flows from investing activities:Purchase of property and equipment
    
    
    (53
    )
    
    
    (7
    )Purchase of capitalized software
    
    
    (348
    )
    
    
    (14
    )Proceeds from the sale of marketable securities
    
    
    3,318
    
    
    
    2,349Purchase of marketable securities
    
    
    (1,959
    )
    
    
    (1,971
    )Net cash provided by investing activities
    
    
    958
    
    
    
    357Cash flows from financing activities:Proceeds from the exercise of stock options
    
    
    316
    
    
    
    Net cash provided by financing activities
    
    
    316
    
    
    
    Effect of exchange rate changes on cash and cash equivalents
    
    
    (5
    )
    
    
    (11
    )Net increase in cash and cash equivalents
    
    
    2,720
    
    
    
    98Cash and cash equivalents at beginning of period
    
    
    3,180
    
    
    
    4,928Cash and cash equivalents at end of period
    
    $
    5,900
    
    
    $
    5,026
 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
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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
  Restricted StockSharesShares at January 1, 2006
    
    
    136,052Grant (average fair value of $5.43)
    
    
    72,300Vested
    
    
    Cancelled/Forefeited
    
    
    Shares at March 31, 2006
    
    
    208,352
  Three monthsendedMarch 31, 2005Net income as reported
    
    $
    155Add: APB 25 expense
    
    
    Less: Total stock-based employee compensation expense
determined under fair value methods for all awards
    
    
    (360
    )Pro forma net loss
    
    $
    (205
    )Income (loss) per common share:As reported  basic
    
    $
    0.03Pro forma  basic
    
    $
    (0.04
    )As reported  diluted
    
    $
    0.03Pro forma  diluted
    
    $
    (0.04
    )
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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 3.    INVENTORIES
  March 31, 2006
    
    December 31, 2005Raw materials
    
    $
    1,791
    
    
    $
    2,393Work-in-process
    
    
    388
    
    
    
    549Finished goods
    
    
    252
    
    
    
    167Total
    
    $
    2,431
    
    
    $
    3,109
  NOTE 4.    DERIVATIVE FINANCIAL INSTRUMENTS
   NOTE 5.    INCOME TAXES
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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
  NOTE 6.  RESTRUCTURING CHARGE
   Cash payments andnon-cash charges
    
    Cash payments
    
    Remainingduring quarter
    
    during quarter
    
    liability as ofRestructuring
    
    ended December 31,
    
    ended March 31,
    
    March 31,Description
    
    charge
    
    2005
    
    2006
    
    2006Severance & Fringe Benefits
    
    $
    586
    
    
    $
    307
    
    
    $
    253
    
    
    $
    26Lease Obligation
    
    
    8
    
    
    
    
    
    
    
    4
    
    
    
    4Non-Utlized Fixed Assets
    
    
    6
    
    
    
    6
    
    
    
    
    
    
    
    Total
    
    $
    600
    
    
    $
    313
    
    
    $
    257
    
    
    $
    30
 NOTE 7.    CREDIT FACILITY
  NOTE 8.    COMPREHENSIVE INCOME
  Three months endedMarch 31,2006
    
    2005Net income
    
    $
    310
    
    
    $
    155Other comprehensive income:Unrealized holding gain (loss) arising
during period, net of tax
    
    
    7
    
    
    
    (34
    )Foreign currency translation adjustment
    
    
    (14
    )
    
    
    2Comprehensive income
    
    $
    303
    
    
    $
    123
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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 9.    EARNINGS PER SHARE
  Three months endedMarch 31,2006
    
    2005Basic earnings per share:Net income
    
    $
    310
    
    
    $
    155Weighted average common shares outstanding
    
    
    5,822
    
    
    
    5,751Basic earnings per share
    
    $
    0.05
    
    
    $
    0.03Diluted earnings per share:Net income
    
    $
    310
    
    
    $
    155Weighted average common shares outstanding
    
    
    5,822
    
    
    
    5,751Dilutive stock options and restricted stock
    
    
    96
    
    
    
    241Weighted average common shares outstanding 
assuming dilution
    
    
    5,918
    
    
    
    5,992Diluted earnings per share
    
    $
    0.05
    
    
    $
    0.03Outstanding stock options that were not
included in the diluted calculation because
their effect would be anti-dilutive
    
    
    1,986
    
    
    
    1,601
 NOTE 10.    SEGMENT INFORMATION
   Three months endedMarch 31,2006
    
    2005Revenues:North America
    
    $
    2,900
    
    
    $
    4,715Europe
    
    
    3,633
    
    
    
    2,806Pacific Rim
    
    
    1,618
    
    
    
    1,259Total
    
    $
    8,151
    
    
    $
    8,780
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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
  Three months endedMarch 31,2006
    
    
    2005Product Revenues:Broadband telecom
    
    $
    5,935
    
    
    $
    5,715Enterprise SlotOptimizer
    
    
    927
    
    
    
    2,053LAN/WAN
    
    
    81
    
    
    
    149Storage
    
    
    231
    
    
    
    124Professional services
    
    
    118
    
    
    
    213Other
    
    
    859
    
    
    
    526Total
    
    $
    8,151
    
    
    $
    8,780
 
 Item 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 FORWARD-LOOKING STATEMENTS
  RESULTS OF OPERATIONS
 Revenue
  10




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Gross
Margin
  Research and Development
  Sales and Marketing
  General and Administrative
  Interest Income, Net
  Other Income (Expense), Net
  11




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Income Taxes
   Net Income
  LIQUIDITY AND CAPITAL RESOURCES
 Consolidated Cash Flows
  Operating Activities
   Investing Activities
  12




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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
   13




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Market Price Risk
  Interest Rate Risk
    
 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.
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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
 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). (3)3 (a)
    
    Certificate of Incorporation of the registrant. (1)3 (b)
    
    Amendment to Articles of Incorporation of the registrant. (5)3 (c)
    
    Amended and Restated Bylaws of the registrant adopted on December 5, 1995 and
amended on January 19, 1999. (7)4 (a)
    
    Rights Agreement dated as of December 7, 2000 by and between the Company and
Computershare Investor Services, LLC as Rights Agent. (6)10 (a)
    
    Registrants Amended and Restated Stock Option Plan and Amendment No. 1 and 2 thereto.*(4)10 (b)
    
    Registrants Amended and Restated Stock Option Plan Amendment No. 4. *(5)10 (c)
    
    Directors Stock Option Plan and Amendment No. 1 thereto. *(2)10 (d)
    
    Directors Stock Option Plan Amendment No. 2. *(5)10 (e)
    
    Registrants France Incentive Stock Option Sub-Plan. *(7)10 (f)
    
    Lease on Facility at Parkway Center, Phase I, Plano, Texas. (8)10 (g)
    
    Lease on Facility at 2105 Luna Road, Carrollton, Texas. (8)10 (h)
    
    Note and Credit Agreement between Interphase Corporation and Comerica Bank, including
Amendment dated November 5, 
2004. (11)10 (i)
    
    Employment Agreement with Gregory B. Kalush, dated March 12, 1999. *(13)10 (j)
    
    Employment Agreement for Chief Technology Officer with Felix V. Diaz,
dated May 22, 1996. *(13)10 (k)
    
    Employment, Confidentiality, and Non-Competition Agreement with Thomas N. Tipton, Jr.,
dated December 19, 2005. *(13)10 (l)
    
    Employment, Confidentiality, and Non-Competition Agreement with Randall E. McComas,
dated February 15, 2002. *(13)10 (m)
    
    Employment Agreement with Deborah A. Shute, dated November 24, 1999. *(13)
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10 (n)
    
    Employment, Confidentiality, and Non-Competition Agreement with James W. Gragg,
dated November 1, 2004. *(13)10 (o)
    
    Employment, Confidentiality, and Non-Competition Agreement with Prasad Kallur,
dated May 23, 2005. *(13)10 (p)
    
    Employment Agreement with Steven P. Kovac, dated May 11, 1999. *(13)10 (q)
    
    Interphase Corporation 2004 Long-Term Stock Incentive Plan *(12)31 (a)
    
    Rule 13a-14(a)/15d-14(a) Certification. (14)31 (b)
    
    Rule 13a-14(a)/15d-14(a) Certification. (14)32 (a)
    
    Section 1350 Certification. (14)32 (b)
    
    Section 1350 Certification. (14)
 
 (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 October 31, 1995, and
incorporated herein by reference.(3)
    
    Filed as an exhibit to Report on Form 8-K on August 6, 1996, and incorporated herein by
reference.(4)
    
    Filed as an exhibit to Report on Form 10-K for the year ended December 31, 1996, and
incorporated herein by reference.(5)
    
    Filed as an exhibit to Report on Form 10-K for the year ended December 31, 1999, and
incorporated herein by reference.(6)
    
    Filed as an exhibit to Form 8-K on January 9, 2001, and incorporated herein by
reference.(7)
    
    Filed as an exhibit to Report on Form 10-K for the year ended December 31, 2001, and
incorporated herein by reference.(8)
    
    Filed as an exhibit to Report on Form 10-Q for the quarter ended September 30, 2002, and
incorporated herein by reference.(9)
    
    Filed as an exhibit to Report on Form 10-K for the year ended December 31, 2002, and
incorporated herein by reference.(10)
    
    Filed as an exhibit to Form 8-K on September 13, 2004, and incorporated herein by
reference.(11)
    
    Filed as an exhibit to Report on Form 10-K for the year ended December 31, 2004, and
incorporated herein by reference.(12)
    
    Filed as an exhibit to Schedule 14a on March 31, 2005 and incorporated herein by
reference.(13)
    
    Filed as an exhibit to Report on Form 10-K for the year ended December 31, 2005 and
incorporated herein by reference.(14)
    
    Filed herewith*
    
    Management contract or compensatory plan or arrangement. 
 SIGNATURE
  INTERPHASE CORPORATION(Registrant)Date: May 12, 2006
    
    By:
    
    /s/ Thomas N. Tipton Jr.Thomas N. Tipton Jr.Chief Financial Officer,Vice President of Finance and Treasurer(Principal Financial and Accounting Officer)
 16