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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, DC 20549
 FORM 10-Q
 QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended September 30, 2005
 Commission File Number 0-13071
 INTERPHASE CORPORATION
 (Exact Name of Registrant as Specified in Its Charter)
 Texas
    
    75-1549797(State or other Jurisdiction of
    
    (IRS Employer Identification No.)Incorporation or Organization)
 Parkway Centre I
2901 North Dallas Parkway, Suite 200
Plano, Texas 75093  (Address of Principal Executive Offices)
 (214)-654-5000  (Registrants Telephone Number Including Area Code)
 
 þ o
 
 o þ
 
 o þ
 
  Class
    
    Outstanding at November 7, 2005Common Stock, $.10 par value
    
    5,889,828




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INTERPHASE CORPORATION
 Index to Form 10-Q
Quarterly Period Ended September 30, 2005
 Part I -Financial InformationItem 1. Condensed Consolidated Financial Statements (unaudited)Condensed Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004
    
    
    3Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2005 and 2004
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    18Item 4. Controls and Procedures
    
    
    18Part II  Other InformationItem 1. Legal Proceedings
    
    
    19Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    19Item 3. Defaults Upon Senior Securities
    
    
    19Item 4. Submission of Matters to a Vote of Security Holders
    
    
    19Item 5. Other Information
    
    
    19Item 6. Exhibits
    
    
    19Rule 13a-14(a)/15d-14(a) CertificationRule 13a-14(a)/15d-14(a) CertificationSection 1350 CertificationSection 1350 Certification
  2




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PART I
FINANCIAL INFORMATION
 
 Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 INTERPHASE CORPORATION
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 September 30,
    
    December 31,2005
    
    2004ASSETSCash and cash equivalents
    
    $
    6,089
    
    
    $
    4,928Marketable securities
    
    
    14,779
    
    
    
    15,585Trade accounts receivable, less allowances
of $256 and $141, respectively
    
    
    3,855
    
    
    
    4,976Inventories
    
    
    3,214
    
    
    
    3,509Prepaid expenses and other current assets
    
    
    1,547
    
    
    
    956Income taxes receivable
    
    
    
    
    
    
    246Total current assets
    
    
    29,484
    
    
    
    30,200Machinery and equipment
    
    
    6,444
    
    
    
    6,170Leasehold improvements
    
    
    410
    
    
    
    377Furniture and fixtures
    
    
    560
    
    
    
    5727,414
    
    
    
    7,119Less-accumulated depreciation and amortization
    
    
    (6,097
    )
    
    
    (5,729
    )Total property and equipment, net
    
    
    1,317
    
    
    
    1,390Capitalized software, net
    
    
    248
    
    
    
    310Other assets
    
    
    182
    
    
    
    198Total assets
    
    $
    31,231
    
    
    $
    32,098LIABILITIES AND SHAREHOLDERS EQUITYLiabilitiesAccounts payable
    
    $
    558
    
    
    $
    529Deferred revenue
    
    
    244
    
    
    
    244Accrued liabilities
    
    
    2,198
    
    
    
    1,423Accrued compensation
    
    
    1,136
    
    
    
    1,554Total current liabilities
    
    
    4,136
    
    
    
    3,750Deferred lease obligations
    
    
    80
    
    
    
    60Long-term debt
    
    
    3,500
    
    
    
    3,500Total liabilities
    
    
    7,716
    
    
    
    7,310Commitments and ContingenciesShareholders EquityCommon stock, $0.10 par value; 100,000,000
shares authorized; 5,889,078 and
5,750,824 shares issued and outstanding,
respectively
    
    
    589
    
    
    
    575Additional paid in capital
    
    
    39,393
    
    
    
    38,633Unamortized restricted stock
    
    
    (641
    )
    
    
    Retained deficit
    
    
    (15,074
    )
    
    
    (13,846
    )Cumulative other comprehensive loss
    
    
    (752
    )
    
    
    (574
    )Total shareholders equity
    
    
    23,515
    
    
    
    24,788Total liabilities and shareholders equity
    
    $
    31,231
    
    
    $
    32,098
 The accompanying notes are an integral part of these condensed consolidated financial statements.
 3




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INTERPHASE CORPORATION
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Revenues
    
    $
    6,924
    
    
    $
    8,294
    
    
    $
    23,296
    
    
    $
    27,621Cost of sales
    
    
    3,433
    
    
    
    3,628
    
    
    
    11,003
    
    
    
    12,439Gross margin
    
    
    3,491
    
    
    
    4,666
    
    
    
    12,293
    
    
    
    15,182Research and development
    
    
    1,898
    
    
    
    1,938
    
    
    
    6,091
    
    
    
    5,944Sales and marketing
    
    
    1,680
    
    
    
    1,497
    
    
    
    4,756
    
    
    
    4,684General and administrative
    
    
    885
    
    
    
    767
    
    
    
    2,728
    
    
    
    2,835Total operating expenses
    
    
    4,463
    
    
    
    4,202
    
    
    
    13,575
    
    
    
    13,463(Loss) income from operations
    
    
    (972
    )
    
    
    464
    
    
    
    (1,282
    )
    
    
    1,719Interest income, net
    
    
    104
    
    
    
    69
    
    
    
    269
    
    
    
    158Other expense, net
    
    
    (8
    )
    
    
    (8
    )
    
    
    (62
    )
    
    
    (Loss) income before income tax
    
    
    (876
    )
    
    
    525
    
    
    
    (1,075
    )
    
    
    1,877Income tax provision
    
    
    36
    
    
    
    25
    
    
    
    153
    
    
    
    7Net (loss) income
    
    $
    (912
    )
    
    $
    500
    
    
    $
    (1,228
    )
    
    $
    1,870Net (loss) income per share:Basic EPS
    
    $
    (0.15
    )
    
    $
    0.09
    
    
    $
    (0.21
    )
    
    $
    0.33Diluted EPS
    
    $
    (0.15
    )
    
    $
    0.08
    
    
    $
    (0.21
    )
    
    $
    0.29Weighted average common shares
    
    
    5,895
    
    
    
    5,732
    
    
    
    5,823
    
    
    
    5,709Weighted average common and
dilutive shares
    
    
    5,895
    
    
    
    6,298
    
    
    
    5,823
    
    
    
    6,375
 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
 Nine Months EndedSeptember 30,2005
    
    2004Cash flows from operating activities:Net (loss) income
    
    $
    (1,228
    )
    
    $
    1,870Adjustments to reconcile net income to net cash provided by
operating activities:Provision for uncollectible accounts and returns
    
    
    57
    
    
    
    14Provision for excess and obsolete inventories
    
    
    600
    
    
    
    200Depreciation and amortization
    
    
    612
    
    
    
    591Amortization of restricted stock
    
    
    83
    
    
    
    Change in assets and liabilities:Trade accounts receivable
    
    
    1,064
    
    
    
    1,532Inventories
    
    
    (305
    )
    
    
    (833
    )Prepaid expenses and other current assets
    
    
    (601
    )
    
    
    (196
    )Income taxes receivable
    
    
    235
    
    
    
    (102
    )Other assets
    
    
    
    
    
    
    45Accounts payable, deferred revenue and accrued liabilities
    
    
    821
    
    
    
    (859
    )Accrued compensation
    
    
    (322
    )
    
    
    397Deferred lease obligations
    
    
    20
    
    
    
    (33
    )Net cash provided by operating activities
    
    
    1,036
    
    
    
    2,626Cash flows from investing activities:Purchase of property and equipment
    
    
    (496
    )
    
    
    (358
    )Purchase of capitalized software
    
    
    (24
    )
    
    
    (85
    )Proceeds from the sale of marketable securities
    
    
    9,378
    
    
    
    1,750Purchase of marketable securities, net of unrealized
holding period gain or loss
    
    
    (8,612
    )
    
    
    (12,389
    )Net cash provided by (used in) investing activities
    
    
    246
    
    
    
    (11,082
    )Cash flows from financing activities:Proceeds from the exercise of stock options
    
    
    50
    
    
    
    401Net cash provided by financing activities
    
    
    50
    
    
    
    401Effect of exchange rate changes on cash and cash equivalents
    
    
    (171
    )
    
    
    10Net increase (decrease) in cash and cash equivalents
    
    
    1,161
    
    
    
    (8,045
    )Cash and cash equivalents at beginning of period
    
    
    4,928
    
    
    
    14,204Cash and cash equivalents at end of period
    
    $
    6,089
    
    
    $
    6,159
 The accompanying notes are an integral part of these condensed consolidated financial statements.
 5




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INTERPHASE CORPORATION
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 1.    BASIS OF PRESENTATION
    6




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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Stock-Based Compensation
  Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Net (loss) income as reported
    
    $
    (912
    )
    
    $
    500
    
    
    $
    (1,228
    )
    
    $
    1,870Add: APB 25 expense, net of
related tax effects
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Less: Total stock-based
employee compensation
expense determined under
fair value methods for
option awards, net of
related tax effects
    
    
    (76
    )
    
    
    (449
    )
    
    
    (657
    )
    
    
    (1,428
    )Pro forma net (loss) income
    
    $
    (988
    )
    
    $
    51
    
    
    $
    (1,885
    )
    
    $
    442Net (loss) income per share:As reported
 basic
    
    $
    (0.15
    )
    
    $
    0.09
    
    
    $
    (0.21
    )
    
    $
    0.33Pro forma
 basic
    
    $
    (0.17
    )
    
    $
    0.01
    
    
    $
    (0.33
    )
    
    $
    0.08As reported
 diluted
    
    $
    (0.15
    )
    
    $
    0.08
    
    
    $
    (0.21
    )
    
    $
    0.29Pro forma
 diluted
    
    $
    (0.17
    )
    
    $
    0.01
    
    
    $
    (0.33
    )
    
    $
    0.07
 NOTE 2.    INVENTORIES
  September 30, 2005
    
    December 31, 2004Raw materials
    
    $
    2,087
    
    
    $
    1,818Work-in-process
    
    
    640
    
    
    
    747Finished goods
    
    
    487
    
    
    
    944Total
    
    $
    3,214
    
    
    $
    3,509
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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 3.    DERIVATIVE FINANCIAL INSTRUMENTS
  NOTE 4.    DEFERRED TAXES
    NOTE
5.  LOSS CONTINGENCY
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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 6.    CREDIT FACILITY
  NOTE 7.    COMMON STOCK
  NOTE 8.    COMPREHENSIVE (LOSS) INCOME
  Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Net (loss) income
    
    $
    (912
    )
    
    $
    500
    
    
    $
    (1,228
    )
    
    $
    1,870Other comprehensive (loss) income:Unrealized holding (loss) gain
arising during
period, net of tax
    
    
    (24
    )
    
    
    11
    
    
    
    (39
    )
    
    
    (132
    )Foreign currency translation adjustment
    
    
    13
    
    
    
    (11
    )
    
    
    (139
    )
    
    
    21Comprehensive (loss) income
    
    $
    (923
    )
    
    $
    500
    
    
    $
    (1,406
    )
    
    $
    1,759
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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 9.    EARNINGS PER SHARE
  Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Basic earnings per share:Net (loss) income
    
    $
    (912
    )
    
    $
    500
    
    
    $
    (1,228
    )
    
    $
    1,870Weighted average common shares outstanding
    
    
    5,895
    
    
    
    5,732
    
    
    
    5,823
    
    
    
    5,709Basic (loss) earnings per share
    
    $
    (0.15
    )
    
    $
    0.09
    
    
    $
    (0.21
    )
    
    $
    0.33Diluted earnings per share:Net (loss) income
    
    $
    (912
    )
    
    $
    500
    
    
    $
    (1,228
    )
    
    $
    1,870Weighted average common shares outstanding
    
    
    5,895
    
    
    
    5,732
    
    
    
    5,823
    
    
    
    5,709Dilutive stock options
    
    
    
    
    
    
    566
    
    
    
    
    
    
    
    666Weighted average common shares
outstanding  assuming dilution
    
    
    5,895
    
    
    
    6,298
    
    
    
    5,823
    
    
    
    6,375Diluted (loss) earnings per share
    
    $
    (0.15
    )
    
    $
    0.08
    
    
    $
    (0.21
    )
    
    $
    0.29Outstanding stock options that were not
included in the diluted calculation
because their effect would be
anti-dilutive2,142
    
    
    
    920
    
    
    
    1,807
    
    
    
    652Restricted stock shares
    
    
    127
    
    
    
    
    
    
    
    127
    
    
    
    
 NOTE 10.    SEGMENT INFORMATION
   Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Revenues:North America
    
    $
    3,903
    
    
    $
    4,081
    
    
    $
    12,321
    
    
    $
    18,009Europe
    
    
    1,791
    
    
    
    2,987
    
    
    
    7,437
    
    
    
    5,870Pacific Rim
    
    
    1,230
    
    
    
    1,226
    
    
    
    3,538
    
    
    
    3,742Total
    
    $
    6,924
    
    
    $
    8,294
    
    
    $
    23,296
    
    
    $
    27,621
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Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Product Revenues:Broadband telecom
    
    $
    4,519
    
    
    $
    4,674
    
    
    $
    15,389
    
    
    $
    17,123Enterprise
SlotOptimizer
    
    
    1,877
    
    
    
    2,652
    
    
    
    5,624
    
    
    
    7,656LAN/WAN
    
    
    99
    
    
    
    342
    
    
    
    433
    
    
    
    942Storage
    
    
    160
    
    
    
    130
    
    
    
    457
    
    
    
    354Professional services
    
    
    15
    
    
    
    181
    
    
    
    351
    
    
    
    450Other
    
    
    254
    
    
    
    315
    
    
    
    1,042
    
    
    
    1,096Total
    
    $
    6,924
    
    
    $
    8,294
    
    
    $
    23,296
    
    
    $
    27,621
 NOTE
11.  SUBSEQUENT EVENT
  NOTE
12.  RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
     11




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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
  12




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Gross Margin
   Research and Development
   Sales and Marketing
  13




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General and Administrative
   Interest Income, Net
  Other Expense, Net
  Income Taxes
    14




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Net (Loss) Income
  LIQUIDITY AND CAPITAL RESOURCES
 Consolidated Cash Flows
  Operating Activities
   Investing Activities
  15




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Financing Activities
  Commitments and Contingencies
 Commitments
  Contingencies
   Other
    16




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Recently Issued Accounting Pronouncements
       17




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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Foreign Currency Risk
   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 designed, and 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
 18




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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 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, between 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). (7)3(a)
    
    Certificate of Incorporation of the registrant. (1)3(b)
    
    Amendment to Articles of Incorporation of the registrant. (10)3(c)
    
    Amended and Restated Bylaws of the registrant adopted on December 5, 1995 and
amended on January 19, 1999. (12)4(a)
    
    Rights Agreement dated as of December 7, 2000 by and between the Company and
Computershare Investor Services, LLC as Rights Agent. (11)10(a)
    
    Registrants Amended and Restated Stock Option Plan and Amendment No. 1 and 2 thereto. (9)10(b)
    
    Registrants Amended and Restated Stock Option Plan Amendment No. 4. (10)10(c)
    
    Registrants United Kingdom Incentive Stock Option Sub-Plan. (3)10(d)
    
    Stock Purchase Warrant issued to Motorola, Inc. (4)10(e)
    
    Lease on Dallas facility. (5)10(f)
    
    Directors Stock Option Plan and Amendment No. 1 thereto. (6)10(g)
    
    Directors Stock Option Plan Amendment No. 2. (10)10(h)
    
    Loan Agreement between Interphase Corporation and BankOne Texas, N.A. (8)10(i)
    
    Purchase Agreement between Interphase Corporation and Cisco Systems Inc. (9)10(j)
    
    Motorola Stock Repurchase Agreement. (2)10(k)
    
    Registrants France Incentive Stock Option Sub-Plan. (12)10(l)
    
    Sublease on Plano facility. (12)
 19




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10(m)
    
    Credit Agreement between Interphase Corporation and Bank One, NA. (12)10(n)
    
    Lease on Facility at Parkway Center, Phase I, Plano, Texas. (13)10(o)
    
    Lease on Facility at 2105 Luna Road, Carrolton, Texas. (13)10(p)
    
    Note and Credit Agreement between Interphase Corporation and Comerica Bank, including
Amendment dated November 5, 2004. (15)10(q)
    
    Interphase Corporation 2004 Long-Term Stock Incentive Plan (14)31(a)
    
    Rule 13a-14(a)/15d-14(a) Certification. (16)31(b)
    
    Rule 13a-14(a)/15d-14(a) Certification. (16)32(a)
    
    Section 1350 Certification. (16)32(b)
    
    Section 1350 Certification. (16)
 
 (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 October 15, 1998, and incorporated
herein by reference.(3)
    
    Filed as an exhibit to Report on Form 10-K for the year ended October 31, 1988, and
incorporated herein by reference.(4)
    
    Filed as an exhibit to Report on Form 10-Q for the quarter ended April 30, 1989, and
incorporated herein by reference.(5)
    
    Filed as an exhibit to Report on Form 10-K for the year ended October 31, 1994, and
incorporated herein by reference.(6)
    
    Filed as an exhibit to Report on Form 10-K for the year ended October 31, 1995, and
incorporated herein by reference.(7)
    
    Filed as an exhibit to Report on Form 8-K on August 6, 1996, and incorporated herein by
reference.(8)
    
    Filed as an exhibit to Report on Form 8-K on October 4, 1996, and incorporated herein by
reference.(9)
    
    Filed as an exhibit to Report on Form 10-K for the year ended December 31, 1996, and
incorporated herein by reference.(10)
    
    Filed as an exhibit to Report on Form 10-K for the year ended December 31, 1999, and
incorporated herein by reference.(11)
    
    Filed as an exhibit to Form 8-K on January 9, 2001, and incorporated herein by reference.(12)
    
    Filed as an exhibit to Report on Form 10-K for the year ended December 31, 2001, and
incorporated herein by reference.(13)
    
    Filed as an exhibit to Report on Form 10-Q for the quarter ended September 30, 2002, and
incorporated herein by reference.(14)
    
    Filed as an exhibit to Def 14A on March 31, 2004, and incorporated herein by reference.(15)
    
    Filed as an exhibit to Report on Form 10-K for the year ended December 31, 2004, and
incorporated herein by reference.(16)
    
    Filed herein. 20




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##### Table of Contents



SIGNATURE
  INTERPHASE CORPORATION(Registrant)By:
    
    /s/ Thomas N. Tipton Jr.Thomas N. Tipton Jr.Interim Chief Financial Officer,Vice President of Finance and Treasurer(Principal Financial and Accounting Officer)
 
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