##### Table of Contents



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 March 31, 2004
    
    Commission File Number 0-13071
 INTERPHASE CORPORATION (Exact Name of Registrant as Specified in Its Charter)
 Texas(State of Incorporation)
    
    75-1549797(IRS Employer Identification No.)
 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) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes þ  No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes o  No þ Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date. Class
    
    Outstanding at May 7, 2004Common Stock, $.10 par value
    
    5,698,599




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INTERPHASE CORPORATION Index to Form 10-Q
Quarterly Period Ended March 31, 2004 Part I - Financial InformationItem 1. Financial StatementsCondensed Consolidated Balance Sheets as of March 31, 2004 (unaudited)
and December 31, 2003
    
    
    3Condensed Consolidated Statements of Operations for the three
months ended March 31, 2004 and 2003 (unaudited)
    
    
    4Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2004 and 2003 (unaudited)
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 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
    
    
    14Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
    
    
    14Item 3. Defaults Upon Senior Securities
    
    
    14Item 4. Submission of Matters to a Vote of Security Holders
    
    
    14Item 5. Other Information
    
    
    14Item 6. Exhibits and Report on Form 8-K
    
    
    15Rule 13a-14(a)/15d-14(a) CertificationRule 13a-14(a)/15d-14(a) CertificationSection 1350 CertificationSection 1350 Certification
  2




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##### Table of Contents



PART I
FINANCIAL INFORMATION 
 Item 1. FINANCIAL STATEMENTS INTERPHASE CORPORATION 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 March 31,
    
    December 31,2004
    
    2003(unaudited)ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    16,309
    
    
    $
    14,204Marketable securities
    
    
    4,752
    
    
    
    5,047Trade accounts receivable, less allowances for
uncollectible
accounts and returns of $194
    
    
    4,246
    
    
    
    5,634Inventories
    
    
    2,734
    
    
    
    2,961Prepaid expenses and other current assets
    
    
    1,052
    
    
    
    751Income taxes receivable
    
    
    102
    
    
    
    Total current assets
    
    
    29,195
    
    
    
    28,597Machinery and equipment
    
    
    5,758
    
    
    
    5,626Leasehold improvements
    
    
    390
    
    
    
    392Furniture and fixtures
    
    
    553
    
    
    
    5606,701
    
    
    
    6,578Less-accumulated depreciation and amortization
    
    
    (5,155
    )
    
    
    (5,018
    )Total property and equipment, net
    
    
    1,546
    
    
    
    1,560Capitalized software, net
    
    
    377
    
    
    
    355Other assets
    
    
    226
    
    
    
    231Total assets
    
    $
    31,344
    
    
    $
    30,743LIABILITIES AND SHAREHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    1,352
    
    
    $
    1,106Deferred revenue
    
    
    377
    
    
    
    373Accrued liabilities
    
    
    1,593
    
    
    
    1,684Accrued compensation
    
    
    1,229
    
    
    
    1,179Total current liabilities
    
    
    4,551
    
    
    
    4,342Deferred lease obligations
    
    
    77
    
    
    
    88Long-term debt
    
    
    3,500
    
    
    
    3,500Total liabilities
    
    
    8,128
    
    
    
    7,930Shareholders Equity:Common stock, $0.10 par value; 100,000,000
shares authorized; 5,698,349 and
5,680,179 shares issued and outstanding,
respectively
    
    
    570
    
    
    
    568Additional paid in capital
    
    
    38,327
    
    
    
    38,218Accumulated deficit
    
    
    (15,289
    )
    
    
    (15,564
    )Cumulative other comprehensive loss
    
    
    (392
    )
    
    
    (409
    )Total shareholders equity
    
    
    23,216
    
    
    
    22,813Total liabilities and shareholders equity
    
    $
    31,344
    
    
    $
    30,743
 The accompanying notes are an integral part of these consolidated financial statements. 3




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INTERPHASE CORPORATION 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months EndedMarch 31,2004
    
    2003Revenue
    
    $
    9,198
    
    
    $
    7,513Cost of sales
    
    
    4,295
    
    
    
    3,722Gross margin
    
    
    4,903
    
    
    
    3,791Research and development
    
    
    2,097
    
    
    
    1,959Sales and marketing
    
    
    1,592
    
    
    
    1,800General and administrative
    
    
    1,027
    
    
    
    888Total operating expenses
    
    
    4,716
    
    
    
    4,647Income (loss) from operations
    
    
    187
    
    
    
    (856
    )Interest income, net
    
    
    28
    
    
    
    70Other income, net
    
    
    3
    
    
    
    17Income (loss) before income taxes
    
    
    218
    
    
    
    (769
    )Income tax (benefit) provision
    
    
    (57
    )
    
    
    57Net income (loss)
    
    $
    275
    
    
    $
    (826
    )Earnings (loss) per share  basic
    
    $
    0.05
    
    
    $
    (0.15
    )Earnings (loss) per share  diluted
    
    $
    0.04
    
    
    $
    (0.15
    )Weighted average common shares
    
    
    5,695
    
    
    
    5,514Weighted average common and dilutive shares
    
    
    6,556
    
    
    
    5,514
 The accompanying notes are an integral part of these consolidated financial statements. 4




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INTERPHASE CORPORATION 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three Months EndedMarch 31,2004
    
    2003Cash flows from operating activities:Net income (loss)
    
    $
    275
    
    
    $

    (826
    )Adjustments to reconcile net income (loss) to net cash (used in)
provided
by operating activities:Provision for excess and obsolete inventory
    
    
    100
    
    
    
    200Depreciation and amortization
    
    
    202
    
    
    
    244Change in assets and liabilities:Trade accounts receivable
    
    
    1,388
    
    
    
    (68
    )Inventories
    
    
    127
    
    
    
    (305
    )Prepaid expenses and other current assets
    
    
    (304
    )
    
    
    (161
    )Income taxes receivable
    
    
    (102
    )
    
    
    (12
    )Other assets
    
    
    1
    
    
    
    (3
    )Accounts payable, deferred revenues and accrued liabilities
    
    
    164
    
    
    
    (243
    )Accrued compensation
    
    
    72
    
    
    
    (114
    )Deferred lease obligations
    
    
    (11
    )
    
    
    36Net cash provided by (used in) operating activities
    
    
    1,912
    
    
    
    (1,252
    )Cash flows from investing activities:Purchase of property and equipment
    
    
    (155
    )
    
    
    (139
    )Purchase of capitalized software
    
    
    (58
    )
    
    
    (293
    )Proceeds from sale of marketable securities
    
    
    286
    
    
    
    526Purchase of marketable securities
    
    
    
    
    
    
    (556
    )Net cash provided by (used in) investing activities
    
    
    73
    
    
    
    (462
    )Cash flows from financing activities:Proceeds from the exercise of stock options
    
    
    111
    
    
    
    Net cash provided by financing activities
    
    
    111
    
    
    
    Effect of exchange rate changes on cash and cash equivalents
    
    
    9
    
    
    
    9Net increase (decrease) in cash and cash equivalents
    
    
    2,105
    
    
    
    (1,705
    )Cash and cash equivalents at beginning of period
    
    
    14,204
    
    
    
    9,857Cash and cash equivalents at end of period
    
    $
    16,309
    
    
    $
    8,152
 The accompanying notes are an integral part of these consolidated financial statements. 5




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INTERPHASE CORPORATION 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 1.    BASIS OF PRESENTATION Interphase Corporation and subsidiaries (Interphase or the Company) enables
rapid platform design and integration for the global voice, video, and data
communications markets through custom and off-the-shelf communications
equipment, embedded software development suites, and systems integration and
consulting services for carrier and private networks. The Companys products
provide communications computing and connectivity of telecommunications and
computer systems to Wide Area Networks (WANs), Local Area Networks (LANs), and
Storage Area Networks (SANs) using Asynchronous Transfer Mode (ATM), Ethernet,
Signaling System 7 (SS7), IP, Fibre Channel, HDLC, Frame Relay and
multi-protocol interworking technologies. See Note 8 for information regarding
the Companys revenues related to North America and foreign countries. The accompanying condensed consolidated interim financial statements include
the accounts of Interphase Corporation and its wholly owned subsidiaries.
Significant intercompany accounts and transactions have been eliminated in
consolidation. The Company has no involvement with any variable interest
entity covered by the scope of FASB Interpretation (FIN) No. 46R,
Consolidation of Variable Interest Entities. While the accompanying condensed consolidated interim financial statements are
unaudited, they have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of the
Company, all material standard adjustments and disclosures necessary to fairly
present the results of such periods have been made. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
of America have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. Operating results for the three
months ended March 31, 2004, are not necessarily indicative of the results that
may be expected for the year ending December 31, 2004. These financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto for the year ended December 31, 2003. Reclassifications Certain reclassifications have been made to the condensed consolidated
financial statements for the period ended March 31, 2003, to correspond with
the presentation used at March 31, 2004, and for the periods then ended. 6




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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Stock-Based Compensation The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, (APB 25) and related
interpretations in accounting for its employee stock options. Under APB 25,
compensation expense is recorded when the exercise price of employee stock
options is less than the fair value of the underlying stock on the date of
grant. The Company has implemented the disclosure-only provisions of Statement
of Financial Accounting Standards No. (SFAS) 123, Accounting for Stock-Based
Compensation, and SFAS 148, Accounting for Stock-Based Compensation
Transition and Disclosure. Had the Company elected to adopt the expense
recognition provisions of SFAS 123, the pro forma impact on net income and
earnings per share would have been as follows (in thousands, except per share
data): Three months endedMarch 31,2004
    
    2003Net income (loss) as reported
    
    $
    275
    
    
    $
    (826
    )Add: APB 25 expense, net of related tax effects
    
    
    
    
    
    
    Less: Total stock-based employee compensation
expense determined under fair value methods for
all awards, net of related tax effects
    
    
    (442
    )
    
    
    (614
    )Pro forma net loss
    
    $
    (167
    )
    
    $
    (1,440
    )Earnings (loss) per common share:As reported  basic
    
    $
    0.05
    
    
    $
    (0.15
    )Pro forma  basic
    
    $
    (0.03
    )
    
    $
    (0.27
    )As reported  diluted
    
    $
    0.04
    
    
    $
    (0.15
    )Pro forma  diluted
    
    $
    (0.03
    )
    
    $
    (0.27
    )
 NOTE 2.    INVENTORIES Inventories are valued at the lower of cost or market and include material,
labor and manufacturing overhead. Cost is determined on a first-in, first-out
basis (in thousands): March 31, 2004
    
    December 31, 2003Raw materials
    
    $
    1,710
    
    
    $
    1,907Work-in-process
    
    
    714
    
    
    
    745Finished goods
    
    
    310
    
    
    
    309Total
    
    $
    2,734
    
    
    $
    2,961
 Valuing inventory at the lower of cost or market involves an inherent level of
risk and uncertainty due to technology trends in the industry and customer
demand for the Companys products. Future events may cause significant
fluctuations in the Companys operating results. 7




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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) NOTE 3.    DEFERRED TAXES SFAS 109, Accounting for Income Taxes, requires that a valuation allowance be
established when it is more likely than not that all or a portion of a
deferred tax asset will not be realized. A review of all available positive
and negative evidence needs to be considered, including a companys current and
past performance, the market environment in which the company operates, the
utilization of past tax credits, length of carry back and carry forward
periods, existing contracts or sales backlog that will result in future
profits, as well as other factors. Forming a conclusion that a valuation allowance is not needed is difficult when
there is negative evidence such as cumulative losses in recent years.
Cumulative losses weigh heavily in the overall assessment. As a result of a
review undertaken at December 31, 2002, the Company concluded that it was
appropriate to establish a full valuation allowance for its net deferred tax
assets. The Company continues to maintain a full valuation allowance on the
tax benefits. Until an appropriate level of profitability is sustained, the
Company expects to continue to record a full valuation allowance on future tax
benefits and does not expect to recognize any significant tax benefits in
future results of operations. During the third quarter of 2003, the Internal Revenue Service concluded a
federal income tax audit of the Company related to the tax years 1996 through
2001, resulting in a refund due the Company. During the first quarter of 2004,
after conducting a thorough review of the Companys IRS transcripts, the
Company discovered that the IRS had not paid allowable interest on this refund.
As a result, the Company recognized a tax benefit of approximately $100,000
during the first quarter of 2004. This tax benefit is partially offset by
taxes on foreign income. NOTE 4.    CREDIT FACILITY The Company maintains a $5 million revolving bank credit facility. The credit
facility bears interest at the rate of LIBOR plus 2.0% (3.375% at March 31,
2004), matures on July 30, 2005 and all borrowings are secured by marketable
securities. The borrowings of $3.5 million are classified as long-term debt on
the accompanying balance sheet. NOTE 5.    EXIT ACTIVITIES During the second quarter of 2003, the Company committed to an exit plan
regarding one of its leased facilities which expires during the first quarter
of 2005. The Company had previously held this facility open for storage,
overflow use, and anticipated growth. However, it has been determined that the
facility will not be needed for overflow space and the Company is pursuing
subleasing opportunities. As a result of this exit plan, the Company recorded
a charge of approximately $109,000 during the second quarter of 2003,
classified as operating expenses, related to net termination costs associated
with the lease of the facility. As of March 31, 2004, the facility had not
been subleased. Additional costs may continue to be incurred in future periods
if the Company is not successful in subleasing the facility. A reconciliation
showing the changes to the liability account during the quarter is as follows
(in thousands): Liability at December 31, 2003
    
    $
    76Rent payments
    
    
    (39
    )Cost of not subleasing
    
    
    23Liability at March 31, 2004
    
    $
    60Total costs to date
    
    $
    177
 8




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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) NOTE 6.    COMPREHENSIVE INCOME (LOSS) The following table shows the Companys comprehensive income (loss) (in
thousands): Three months endedMarch 31,2004
    
    2003Net income (loss)
    
    $
    275
    
    
    $
    (826
    )Other comprehensive income (loss):Unrealized holding (loss) gain arising
during period, net of tax
    
    
    (9
    )
    
    
    18Foreign currency translation adjustment
    
    
    26
    
    
    
    (38
    )Comprehensive income (loss)
    
    $
    292
    
    
    $
    (846
    )
 NOTE 7.    EARNINGS PER SHARE Basic earnings per share are computed by dividing reported earnings available
to common shareholders by weighted average common shares outstanding. Diluted
earnings per share give effect to dilutive potential common shares. Earnings
per share are calculated as follows (in thousands, except per share data): Three months endedMarch 31,2004
    
    
    
    
    
    2003Basic earnings per share:Net income (loss)
    
    $
    275
    
    
    
    
    
    
    $
    (826
    )Weighted average commons shares outstanding
    
    
    5,695
    
    
    
    
    
    
    
    5,514Basic earnings (loss) per share
    
    $
    0.05
    
    
    
    
    
    
    $
    (0.15
    )Diluted earnings per share:Net income (loss)
    
    $
    275
    
    
    
    
    
    
    $
    (826
    )Weighted average common shares outstanding
    
    
    5,695
    
    
    
    
    
    
    
    5,514Dilutive stock options
    
    
    861
    
    
    
    
    
    
    
    Weighted average common shares outstanding 
assuming dilution
    
    
    6,556
    
    
    
    
    
    
    
    5,514Diluted earnings (loss) per share
    
    $
    0.04
    
    
    
    
    
    
    $
    (0.15
    )Outstanding stock options that were not included
in the diluted calculation because their effect
would be anti-dilutive
    
    
    343
    
    
    
    
    
    
    
    2,394
 NOTE 8.    SEGMENT INFORMATION The Company is principally engaged in the design, development, and
manufacturing of high-performance connectivity products utilizing advanced
technologies being used in next generation telecommunication networks and
enterprise data/storage networks. Except for revenue performance, which is
monitored by product line, the chief operating decision-makers review financial
information presented on a consolidated basis for purposes of making operating
decisions and assessing financial performance. Accordingly, the Company
considers itself to be in a single industry segment. 9




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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) Geographic revenue related to North America and foreign countries for the three
months ended March 31, 2004 and 2003 is as follows (in thousands): Three months endedMarch 31,2004
    
    2003Revenue:North America
    
    $
    6,706
    
    
    $
    5,076Europe
    
    
    1,082
    
    
    
    988Pacific Rim
    
    
    1,410
    
    
    
    1,449Total
    
    $
    9,198
    
    
    $
    7,513
 Additional information regarding revenue by product-line is as follows (in
thousands): Three months endedMarch 31,2004
    
    2003Product Revenue:Broadband telecom
    
    $
    5,779
    
    
    $
    3,419SlotOptimizer
    
    
    2,434
    
    
    
    2,836LAN
    
    
    263
    
    
    
    232Storage
    
    
    189
    
    
    
    360WAN
    
    
    124
    
    
    
    44Other
    
    
    409
    
    
    
    622Total
    
    $
    9,198
    
    
    $
    7,513
 
 Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS This report contains forward-looking statements about the business, financial
condition and prospects of the Company. These statements are made under the
safe harbor provisions of the Private Securities Litigation Reform Act of
1995. The actual results of the Company could differ materially from those
indicated by the forward-looking statements because of various risks and
uncertainties, including without limitation, the Companys reliance on a
limited number of customers, failure to see spending improvements in the
telecommunications and computer networking industries, significant changes in
product demand, the availability of products, changes in competition, various
inventory risks due to changes in market conditions and other risks and
uncertainties indicated in the Companys filings and reports with the
Securities and Exchange Commission. All the foregoing risks and uncertainties
are beyond the ability of the Company to control, and in many cases, the
Company cannot predict the risks and uncertainties that could cause its actual
results to differ materially from those indicated by the forward-looking
statements. When used in this report, the words believes, plans,
expects, intends, and anticipates and similar expressions as they relate
to the Company or its management are intended to identify forward-looking
statements. RESULTS OF OPERATIONS Revenue Total revenue increased approximately 22% to $9.2 million for the three months
ended March 31, 2004, compared to $7.5 million for the same period in the prior
year. The increase was primarily attributable to Broadband telecom product
revenue, which increased approximately 69% to $5.8 million for the three months
ended March 31, 2004, compared to $3.4 million in the comparable period. In
addition, during the first quarter of 2004, the Company recognized $173,000 of
revenue related to contract manufacturing while 10




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there was no such revenue
during the first quarter of 2003. The increase in revenue was partially offset
by a decrease in revenue related to SlotOptimizer product sales, which decreased
approximately 14% to $2.4 million during the first quarter of 2004, compared to
$2.8 million for the comparable period in the prior year. In addition, the
Companys revenues related to professional services decreased to $95,000 for
the three months ended March 31, 2004, compared to $497,000 for the same period
in the prior year. The professional services revenue recognized in 2003
related to a single software customization contract. The Company expects to
see professional services revenue from time to time but not on a consistent
basis. Revenue related to storage and legacy networking product lines
continued their decline and were $362,000 for the first quarter 2004 compared
to $585,000 for the same period in the prior year. The Company believes that
if the telecommunication industry continues to stabilize, it will continue to
experience growth in revenue. During the first quarter of 2004, sales to two customers accounted for
approximately 52% and 21% of total revenue. During the first quarter of 2003,
sales to three customers accounted for approximately 35%, 29% and 13% of total
revenue. No other customer accounted for more than 10% of the Companys
consolidated revenue for the periods then ended. Gross Margin For the three months ended March 31, 2004, gross margin, as a percentage of
sales, was 53% compared to 50% for the same period in the prior year. The
increase in the gross margin percentage primarily relates to the continued
shift in product mix towards more complex, and thus, higher margin products.
In addition, the Company improved manufacturing efficiencies and achieved
reductions in material costs for certain product lines due to increased
production volumes and lower overall overhead costs. The Company believes that
its gross margin, as a percentage of sales, will be near 50% for the near
future. Research and Development The Companys investment in the development of new products through research
and development was $2.1 million for the three months ended March 31, 2004 and
$2.0 million for the same period in the prior year. The increase in research
and development expenses is primarily due to foreign currency changes as the
dollar dropped significantly in value relative to the Euro (see Item 3 
Foreign Currency Risk). As a percentage of total revenue, research and
development expense was approximately 23% in the first quarter of 2004 as
compared to approximately 26% for the same period for the prior year. The
decrease in research and development costs as a percentage of total revenue is
due to increased revenue. The Company anticipates that spending on research
and development will remain steady in the near future as the Company continues
to invest in development of our current and future products, however, the
Company will continue to monitor the level of its investments concurrently with
actual revenue results. Sales and Marketing Sales and marketing expenses were $1.6 million and $1.8 million for the three
months ended March 31, 2004 and 2003, respectively. Approximately 75% of the
decrease in sales and marketing expense quarter over quarter is due to reduced
headcount and travel related costs with the remaining portion of the decrease
primarily related to a reduction in expenditures on marketing activities. As a
percentage of total revenue, sales and marketing expense was approximately 17%
for the first quarter of 2004 down from approximately 24% for the comparable
period. The decrease in sales and marketing expense as a percentage of total
revenue is due to revenue increasing while sales and marketing expenses
decreased. General and Administrative General and administrative expenses were $1.0 million and $888,000 for the
three months ended March 31, 2004 and 2003, respectively. The increase in
general and administrative expense period over period is primarily related to
an increase in salaries and related expenses. As a percentage of total
revenue, general and administrative expenses decreased to approximately 11% for
the first quarter of 2004 compared to approximately 12% for the same period in
the prior year. The decrease as a percentage of total revenue is due to
revenue increasing at a higher rate than general and administrative expenses. 11




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Interest Income, Net Interest income, net of interest expense, decreased to $28,000 for the three
months ended March 31, 2004 from $70,000 in the comparable period. The
decrease in interest income, net period over period is primarily due to lower
investment rates of return. Other Income, Net Other income, net of other expense, decreased to $3,000 for the three months
ended March 31, 2004 from $17,000 in the comparable period. Income Taxes The Companys effective tax benefit rate was 26% for the three months ended
March 31, 2004 compared to a tax provision rate of 7% for the same period in
the prior year. During the third quarter of 2003, the Internal Revenue Service concluded a
federal income tax audit of the Company related to the tax years 1996 through
2001, resulting in a refund due the Company. During the first quarter of 2004,
after conducting a thorough review of the Companys IRS transcripts, the
Company discovered that the IRS had not paid allowable interest on this refund.
As a result, the Company recognized a tax benefit of approximately $100,000
during the first quarter of 2004. This tax benefit is partially offset by
taxes on foreign income. The effective tax provision rate for the comparable period differed from the
U.S. statutory rate as the Company continued to provide a full valuation
allowance for its net deferred tax assets at March 31, 2003. The Company also
incurred taxes on foreign income during the period. Net Income (Loss) The Company reported net income of $275,000 for the three months ended March
31, 2004, as compared to a net loss of $(826,000) for the same period in the
prior year. Basic and diluted earnings per share for the three months ended
March 31, 2004 were $0.05 and $0.04, respectively, compared to $(0.15) and
$(0.15), respectively for the comparable period. LIQUIDITY AND CAPITAL RESOURCES Consolidated Cash Flows Cash and cash equivalents increased $2.1 million in the three months ended
March 31, 2004 and decreased $1.7 million in the three months ended March 31,
2003. Cash flows are impacted by operating, investing and financing
activities. Operating Activities Trends in cash flows from operating activities for the three months ended March
31, 2004 and 2003 are generally similar to the trends in the Companys earnings
except for provision for excess and obsolete inventory, depreciation and
amortization. Cash provided by operating activities totaled $1.9 million for
the three months ended March 31, 2004, compared to a net income of $275,000.
Cash used by operating activities was $1.3 million for the three months ended
March 31, 2003, compared to a net loss of $826,000. Provision for excess and
obsolete inventory has decreased period over period as the Companys inventory
turns continue to improve. Depreciation and amortization decreased slightly
for the three months ended March 31, 2004 compared to the three months ended
March 31, 2003. Changes in assets and liabilities result primarily from the timing of
production, sales, purchases and payments. Such changes in assets and
liabilities generally tend to even out over time and result in trends in cash
flows from operating activities generally reflecting earnings trends. 12




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Investing Activities Cash provided by investing activities totaled $73,000 for the three months
ended March 31, 2004 compared to a net cash use of $462,000 for the three
months ended March 31, 2003. Cash flows from investing activities in each of
the periods related principally to additions to property, equipment,
capitalized software and leasehold improvements and the Companys investments
in marketable securities. Additions to property, equipment, capitalized
software and leasehold improvements in each of the periods focused on the sales
and engineering functions of the Company. Financing Activities Net cash provided by financing activities totaled $111,000 for the three months
ended March 31, 2004 and related to proceeds from the exercise of stock
options. There were no exercises of stock options for the three months ended
March 31, 2003. Commitments and Contingencies At March 31, 2004, the Company had no material commitments to purchase capital
assets. The Companys significant long-term obligations for the period then
ended are its operating leases on facilities and future debt payments related
to the Companys credit facility. To date, the Company has not paid any
dividends and does not anticipate paying any for the remainder of 2004. Other Management believes that cash generated from operations and borrowing
availability under the revolving credit facility, together with cash on hand,
will be sufficient to meet the Companys liquidity needs for working capital,
capital expenditures and debt service. To the extent that the Companys actual
operating results or other developments differ from the Companys expectations,
Interphases liquidity could be adversely affected. The Company periodically evaluates its liquidity requirements, alternative uses
of capital, capital needs and available resources in view of, among other
things, its capital expenditure requirements, and estimated future operating
cash flows. As a result of this process, the Company has in the past and may
in the future seek to raise additional capital, refinance or restructure
indebtedness, issue additional securities, repurchase shares of its common
stock or take a combination of such steps to manage its liquidity and capital
resources. In the normal course of business, the Company may review
opportunities for acquisitions, joint ventures or other business combinations
in the component products industry. In the event of any such transaction, the
Company may consider using available cash, issuing additional equity securities
or increasing the indebtedness of the Company or its subsidiaries. Managements Discussion and Analysis of Financial Condition and Results of
Operations in this Form 10-Q should be read in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of Operations and
other material included in the Companys Annual Report on Form 10-K for the
year ended December 31, 2003. 
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Foreign Currency Risk The Company is exposed to adverse movements in foreign currency exchange rates
because it conducts business on a global basis and in some cases in foreign
currencies. The Companys operations in France are measured in the local
currency and converted into U.S. Dollars based on published exchange rates for
the periods reported and are therefore subject to risk of exchange rate
fluctuations. The Euro to U.S. Dollar translation accounted for charges of
approximately $290,000 and $87,000 for the three months ended March 31, 2004
and 2003, respectively. Market Price Risk The Company had no equity hedge contracts outstanding as of March 31, 2004 or
December 31, 2003. 13




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Interest Rate Risk The Companys investments are subject to interest rate risk. Interest rate
risk is the risk that the Companys financial condition and results of
operations could be adversely affected due to movements in interest rates. The
Company invests its cash in a variety of interest-earning financial
instruments, including bank time deposits, money market funds, and variable
rate and fixed rate obligations of corporations and national governmental
entities and agencies. Due to the demand nature of the Companys money market
funds and the short-term nature of the Companys time deposits and debt
securities portfolio, these assets are particularly sensitive to changes in
interest rates. The Company manages this risk through investments with
shorter-term maturities and varying maturity dates. If the Companys
short-term assets were reinvested in a declining interest rate environment, the
Company would experience an immediate negative impact on interest income. The
opposite holds true in a rising interest rate environment. 
 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.(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 significant
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 None. 
 Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None. 
 Item 3. DEFAULTS UPON SENIOR SECURITIES None. 
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 
 Item 5. OTHER INFORMATION None. 14




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Item 6. EXHIBITS AND REPORT ON FORM 8-K Exhibits 2 (a)
    
    Stock Purchase Agreement, dated 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). (1)3 (a)
    
    Articles of Incorporation of the Registrant. (2)3 (b)
    
    Amendment to Articles of Incorporation of the Registrant. (3)3 (c)
    
    Amended and Restated Bylaws of the Registrant adopted on December 5,
1995 and amended on January 19, 1999. (4)4 (a)
    
    Rights Agreement dated December 7, 2000 by and between the Company
and Computershare Investor Services, LLC as Rights Agent. (5)10 (a)
    
    Master Revolving Note and Credit Agreement dated July 25, 2003 (6)31 (a)
    
    Rule 13a-14(a)/15d-14(a) Certification (7)31 (b)
    
    Rule 13a-14(a)/15d-14(a) Certification (7)32 (a)
    
    Section 1350 Certification (7)32 (b)
    
    Section 1350 Certification (7)
 Report on Form 8-K None. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. INTERPHASE CORPORATION
(Registrant)By:
    /s/ Steven P. KovacSteven P. KovacChief Financial Officer,
Vice President of Finance and Treasurer
(Principal Financial and Accounting Officer) Plano, Texas
May 13, 2003 15




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INDEX TO EXHIBITS 2 (a)
    
    Stock Purchase Agreement, dated 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). (1)3 (a)
    
    Articles of Incorporation of the Registrant. (2)3 (b)
    
    Amendment to Articles of Incorporation of the Registrant. (3)3 (c)
    
    Amended and Restated Bylaws of the Registrant adopted on December
5, 1995 and amended on January 19, 1999. (4)4 (a)
    
    Rights Agreement dated December 7, 2000 by and between the Company
and Computershare Investor Services, LLC as Rights Agent. (5)10 (a)
    
    Master Revolving Note and Credit Agreement dated July 25, 2003 (6)31 (a)
    
    Rule 13a-14(a)/15d-14(a) Certification (7)31 (b)
    
    Rule 13a-14(a)/15d-14(a) Certification (7)32 (a)
    
    Section 1350 Certification (7)32 (b)
    
    Section 1350 Certification (7)
  (1)
    
    Filed as an exhibit to Report on Form 8-K on August 6, 1996, and
incorporated herein by reference.(2)
    
    Filed as an exhibit to Registration Statement No. 2-86523 on Form
S-1 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 Report on Form 10-K for the year ended
December 31, 2001, and incorporated herein by reference.(5)
    
    Filed as an exhibit to Form 8-K on January 9, 2001, and
incorporated herein by reference.(6)
    
    Filed as an exhibit to Report on Form 10-Q for the quarter ended
June 30, 2003, and incorporated herein by reference.(7)
    
    Filed herein.