##### 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 September 30, 2003 |  | 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 November 7, 2003
|                             |  |                                
|                             |  |                                 |           | 
|Common Stock, $.10 par value |  |                                 | 5,588,053 | 



---

---





---

TABLE OF CONTENTS



|                                                   |                                                                                               |                                                      |  |  |  |  |  | 
|-------------------------------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I FINANCIAL INFORMATION                      
|                                                   | Item 1. FINANCIAL STATEMENTS                                                                 
|                                                   |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                                                   |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                                                   |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                                                   |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                                                   | Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                                   | Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                                                   | Item 4. CONTROLS AND PROCEDURES                                                              
|PART II OTHER INFORMATION                         
|                                                   | Item 1. LEGAL PROCEEDINGS                                                                    
|                                                   | Item 2. CHANGES IN 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 AND REPORTS ON FORM 8-K                                                     
|SIGNATURE                                         
|INDEX TO EXHIBITS                                 
|EX-31.(a) Certification Pursuant to Rule 13a-14(a)
|EX-31.(b) Certification Pursuant to Rule 13a-14(a)
|EX-32.(a) Certification Pursuant to Section 1350  
|EX-32.(b) Certification Pursuant to Section 1350  



---



##### Table of Contents



INTERPHASE CORPORATION

Index to Form 10-Q
Quarter Ended September 30, 2003

|                              |  |                                                                                       |  |                                                                                                                             |    |  |   | 
|----------------------------- |  | ------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------- | -- |  | - | 
|Part I -Financial Information
|Item 1.                       |  | Financial Statements                                                                  |  |                                                                                                                             |    | 
|                              |  |                                                                                       |  | Condensed Consolidated Balance Sheets as of September 30, 2003 (unaudited)
and December 31, 2002                            |    |  | 3 | 
|                              |  |                                                                                       |  | Condensed Consolidated Statements of Operations for the three and nine
months ended September 30, 2003 and 2002 (unaudited) |    |  | 4 | 
|                              |  |                                                                                       |  | Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2003 and 2002 (unaudited)           |    |  | 5 | 
|                              |  |                                                                                       |  | Notes to Condensed Consolidated Financial Statements                                                                        |    |  | 6 | 
|Item 2.                       |  | Managements Discussion and Analysis of
Financial Condition and Results of Operations |  |                                                                                                                             | 11 | 
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                            |  |                                                                                                                             | 16 | 
|Item 4.                       |  | Controls and Procedures                                                               |  |                                                                                                                             | 16 | 
|Part II - Other Information  
|Item 1.                       |  | Legal Proceedings                                                                     |  |                                                                                                                             | 17 | 
|Item 2.                       |  | Changes in Securities and Use of Proceeds                                             |  |                                                                                                                             | 17 | 
|Item 3.                       |  | Defaults Upon Senior Securities                                                       |  |                                                                                                                             | 17 | 
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                   |  |                                                                                                                             | 17 | 
|Item 5.                       |  | Other Information                                                                     |  |                                                                                                                             | 17 | 
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                      |  |                                                                                                                             | 17 | 

2



---



##### Table of Contents






PART I
FINANCIAL INFORMATION




Item 1. FINANCIAL STATEMENTS




INTERPHASE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

|                                                                                                                                                              |                                            |   |               |        |              |   |         |        | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | - | ------------- | ------ | ------------ | - | ------- | ------ | 
|                                                                                                                                                              |                                            |   | September 30, |        | December 31,
|                                                                                                                                                              |                                            |   | 2003          |        | 2002        
|                                                                                                                                                              |                                            |   |               |        |             
|                                                                                                                                                              |                                            |   | (unaudited)   |        |              |   |        
|ASSETS                                                                                                                                                        |                                            |   |               |        |              |   |         |       
|Current Assets:                                                                                                                                               |                                            |   |               |        |              |   |         |       
|Cash and cash equivalents                                                                                                                                     |                                            | $ | 11,423        |        |              | $ | 9,857   |       
|Marketable securities                                                                                                                                         |                                            |   | 5,525         |        |              |   | 5,518   |       
|Restricted cash                                                                                                                                               |                                            |   |              |        |              |   | 3,500   |       
|Trade accounts receivable, less allowances for uncollectible
accounts and returns of $239 and $230, respectively                                              |                                            |   | 6,852         |        |              |   | 5,683   |       
|Inventories                                                                                                                                                   |                                            |   | 2,919         |        |              |   | 3,121   |       
|Prepaid expenses and other current assets                                                                                                                     |                                            |   | 565           |        |              |   | 674     |       
|Income taxes receivable                                                                                                                                       |                                            |   | 553           |        |              |   | 247     |       
|                                                                                                                                                              |                                            |   |               |        |              |   |         |       
|                                                                                                                                                              | Total current assets                       |   |               | 27,837 |              |   |         | 28,600 | 
|Machinery and equipment                                                                                                                                       |                                            |   | 6,117         |        |              |   | 5,731   |       
|Leasehold improvements                                                                                                                                        |                                            |   | 387           |        |              |   | 380     |       
|Furniture and fixtures                                                                                                                                        |                                            |   | 564           |        |              |   | 549     |       
|                                                                                                                                                              |                                            |   |               |        |              |   |         |       
|                                                                                                                                                              |                                            |   | 7,068         |        |              |   | 6,660   |       
|Less-accumulated depreciation and amortization                                                                                                                |                                            |   | (5,542        | )      |              |   | (4,921  | )     
|                                                                                                                                                              |                                            |   |               |        |              |   |         |       
|                                                                                                                                                              | Total property and equipment, net          |   |               | 1,526  |              |   |         | 1,739  | 
|Capitalized software, net                                                                                                                                     |                                            |   | 391           |        |              |   | 199     |       
|Other assets                                                                                                                                                  |                                            |   | 227           |        |              |   | 211     |       
|                                                                                                                                                              |                                            |   |               |        |              |   |         |       
|                                                                                                                                                              | Total assets                               |   | $             | 29,981 |              |   | $       | 30,749 | 
|                                                                                                                                                              |                                            |   |               |        |              |   |         |       
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                          |                                            |   |               |        |              |   |         |       
|Current Liabilities:                                                                                                                                          |                                            |   |               |        |              |   |         |       
|Accounts payable                                                                                                                                              |                                            | $ | 1,561         |        |              | $ | 1,437   |       
|Deferred revenue                                                                                                                                              |                                            |   | 294           |        |              |   | 595     |       
|Accrued liabilities                                                                                                                                           |                                            |   | 1,598         |        |              |   | 1,291   |       
|Accrued compensation                                                                                                                                          |                                            |   | 1,105         |        |              |   | 1,023   |       
|                                                                                                                                                              |                                            |   |               |        |              |   |         |       
|                                                                                                                                                              | Total current liabilities                  |   |               | 4,558  |              |   |         | 4,346  | 
|Deferred lease obligations                                                                                                                                    |                                            |   | 99            |        |              |   | 85      |       
|Long-term debt                                                                                                                                                |                                            |   | 3,500         |        |              |   | 3,500   |       
|                                                                                                                                                              |                                            |   |               |        |              |   |         |       
|                                                                                                                                                              | Total liabilities                          |   |               | 8,157  |              |   |         | 7,931  | 
|Shareholders Equity:                                                                                                                                         |                                            |   |               |        |              |   |         |       
|Common stock, $0.10 par value; 100,000,000 shares
authorized; 5,530,613 and 5,514,276 shares issued at
September 30, 2003 and December 31, 2002, respectively |                                            |   | 553           |        |              |   | 551     |       
|Additional paid in capital                                                                                                                                    |                                            |   | 37,372        |        |              |   | 37,304  |       
|Accumulated deficit                                                                                                                                           |                                            |   | (15,776       | )      |              |   | (14,795 | )     
|Cumulative other comprehensive loss                                                                                                                           |                                            |   | (325          | )      |              |   | (242    | )     
|                                                                                                                                                              |                                            |   |               |        |              |   |         |       
|                                                                                                                                                              | Total shareholders equity                 |   |               | 21,824 |              |   |         | 22,818 | 
|                                                                                                                                                              |                                            |   |               |        |              |   |         |       
|                                                                                                                                                              | Total liabilities and shareholders equity |   | $             | 29,981 |              |   | $       | 30,749 | 
|                                                                                                                                                              |                                            |   |               |        |              |   |         |       

The accompanying notes are an integral part of these consolidated financial statements.

3



---



##### Table of Contents






INTERPHASE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

|                                            |  |                               |       |                    |       |                   |        |      |        |      |        |   |        |   |        |   |        |  
|------------------------------------------- |  | ----------------------------- | ----- | ------------------ | ----- | ----------------- | ------ | ---- | ------ | ---- | ------ | - | ------ | - | ------ | - | ------ | -
|                                            |  |                               |       | Three Months Ended |       | Nine Months Ended
|                                            |  |                               |       | September 30,      |       | September 30,    
|                                            |  |                               |       |                    |       |                  
|                                            |  |                               |       | 2003               |       | 2002              |        | 2003 |        | 2002
|                                            |  |                               |       |                    |       |                   |        |      |        |     
|Revenue                                     |  | $                             | 8,571 |                    |       | $                 | 6,022  |      |        | $    | 23,441 |   |        | $ | 18,338 |  
|Cost of sales                               |  |                               | 4,092 |                    |       |                   | 3,414  |      |        |      | 11,475 |   |        |   | 11,676 |  
|                                            |  |                               |       |                    |       |                   |        |      |        |      |        |   |        |   |        |  
|                                            |  | Gross margin                  |       |                    | 4,479 |                   |        |      | 2,608  |      |        |   | 11,966 |   |        |   | 6,662  |  
|                                            |  |                               |       |                    |       |                   |        |      |        |      |        |   |        |   |        |  
|Research and development                    |  |                               | 1,797 |                    |       |                   | 1,836  |      |        |      | 5,710  |   |        |   | 5,198  |  
|Sales and marketing                         |  |                               | 1,782 |                    |       |                   | 1,433  |      |        |      | 5,143  |   |        |   | 4,414  |  
|General and administrative                  |  |                               | 807   |                    |       |                   | 846    |      |        |      | 2,530  |   |        |   | 2,415  |  
|                                            |  |                               |       |                    |       |                   |        |      |        |      |        |   |        |   |        |  
|                                            |  | Total operating expenses      |       |                    | 4,386 |                   |        |      | 4,115  |      |        |   | 13,383 |   |        |   | 12,027 |  
|                                            |  |                               |       |                    |       |                   |        |      |        |      |        |   |        |   |        |  
|                                            |  | Income (loss) from operations |       |                    | 93    |                   |        |      | (1,507 | )    |        |   | (1,417 | ) |        |   | (5,365 | )
|Interest income, net                        |  |                               | 42    |                    |       |                   | 100    |      |        |      | 169    |   |        |   | 427    |  
|Other income, net                           |  |                               | 11    |                    |       |                   | 23     |      |        |      | 47     |   |        |   | 24     |  
|                                            |  |                               |       |                    |       |                   |        |      |        |      |        |   |        |   |        |  
|Income (loss) before income tax
benefit     |  |                               | 146   |                    |       |                   | (1,384 | )    |        |      | (1,201 | ) |        |   | (4,914 | )
|Income tax benefit                          |  |                               | (220  | )                  |       |                   | (663   | )    |        |      | (220   | ) |        |   | (2,134 | )
|                                            |  |                               |       |                    |       |                   |        |      |        |      |        |   |        |   |        |  
|Net income (loss)                           |  | $                             | 366   |                    |       | $                 | (721   | )    |        | $    | (981   | ) |        | $ | (2,780 | )
|                                            |  |                               |       |                    |       |                   |        |      |        |      |        |   |        |   |        |  
|Earnings (loss) per share - basic           |  | $                             | 0.07  |                    |       | $                 | (0.13  | )    |        | $    | (0.18  | ) |        | $ | (0.50  | )
|                                            |  |                               |       |                    |       |                   |        |      |        |      |        |   |        |   |        |  
|Earnings (loss) per share - diluted         |  | $                             | 0.06  |                    |       | $                 | (0.13  | )    |        | $    | (0.18  | ) |        | $ | (0.50  | )
|                                            |  |                               |       |                    |       |                   |        |      |        |      |        |   |        |   |        |  
|Weighted average common shares              |  |                               | 5,527 |                    |       |                   | 5,521  |      |        |      | 5,519  |   |        |   | 5,564  |  
|                                            |  |                               |       |                    |       |                   |        |      |        |      |        |   |        |   |        |  
|Weighted average common and
dilutive shares |  |                               | 5,920 |                    |       |                   | 5,521  |      |        |      | 5,519  |   |        |   | 5,564  |  
|                                            |  |                               |       |                    |       |                   |        |      |        |      |        |   |        |   |        |  

The accompanying notes are an integral part of these consolidated financial statements.

4



---



##### Table of Contents






INTERPHASE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

|                                                             |                                                                                           |                                                |                                                  |                                                             |        |                   |        |        |        |       |       |  
|------------------------------------------------------------ | ----------------------------------------------------------------------------------------- | ---------------------------------------------- | ------------------------------------------------ | ----------------------------------------------------------- | ------ | ----------------- | ------ | ------ | ------ | ----- | ----- | -
|                                                             |                                                                                           |                                                |                                                  |                                                             |        | Nine Months Ended
|                                                             |                                                                                           |                                                |                                                  |                                                             |        | September 30,    
|                                                             |                                                                                           |                                                |                                                  |                                                             |        |                  
|                                                             |                                                                                           |                                                |                                                  |                                                             |        | 2003              |        | 2002  
|                                                             |                                                                                           |                                                |                                                  |                                                             |        |                   |        |       
|Cash flows from operating activities:                        |                                                                                           |                                                |                                                  |                                                             |        |                   |        |       
|                                                             | Net loss                                                                                  |                                                | $                                                | (981                                                        | )      |                   | $      | (2,780 | )     
|                                                             | Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |                                                |                                                  |                                                             |        |                   |        |        |       
|                                                             |                                                                                           |                                                | Provision for uncollectible accounts and returns |                                                             |        |                  |        |        |        | (76   | )    
|                                                             |                                                                                           |                                                | Provision for excess and obsolete inventory      |                                                             |        | 600               |        |        |        | 1,649 |      
|                                                             |                                                                                           |                                                | Depreciation and amortization                    |                                                             |        | 682               |        |        |        | 628   |      
|                                                             |                                                                                           |                                                | Deferred income taxes                            |                                                             |        |                  |        |        |        | (891  | )    
|                                                             |                                                                                           |                                                | Tax benefit from stock option exercises          |                                                             |        | 26                |        |        |        |      |      
|                                                             |                                                                                           |                                                | Change in assets and liabilities:                |                                                             |        |                   |        |        |        |       |      
|                                                             |                                                                                           |                                                |                                                  | Trade accounts receivable                                   |        |                   | (1,169 | )      |        |       | 701   |  
|                                                             |                                                                                           |                                                |                                                  | Inventories                                                 |        |                   | (398   | )      |        |       | 910   |  
|                                                             |                                                                                           |                                                |                                                  | Prepaid expenses and other current assets                   |        |                   | 121    |        |        |       | (2    | )
|                                                             |                                                                                           |                                                |                                                  | Income taxes receivable                                     |        |                   | (306   | )      |        |       | 2,476 |  
|                                                             |                                                                                           |                                                |                                                  | Other assets                                                |        |                   | (4     | )      |        |       | (90   | )
|                                                             |                                                                                           |                                                |                                                  | Accounts payable, deferred revenues and accrued liabilities |        |                   | 119    |        |        |       | 596   |  
|                                                             |                                                                                           |                                                |                                                  | Accrued compensation                                        |        |                   | 20     |        |        |       | (102  | )
|                                                             |                                                                                           |                                                |                                                  | Deferred lease obligations                                  |        |                   | 14     |        |        |       |      |  
|                                                             |                                                                                           |                                                |                                                  |                                                             |        |                   |        |        |       
|                                                             |                                                                                           |                                                |                                                  | Net cash (used in) provided by operating activities         |        |                   | (1,276 | )      |        |       | 3,019 |  
|                                                             |                                                                                           |                                                |                                                  |                                                             |        |                   |        |        |       
|Cash flows from investing activities:                        |                                                                                           |                                                |                                                  |                                                             |        |                   |        |       
|                                                             |                                                                                           | Purchase of property and equipment             |                                                  |                                                             | (316   | )                 |        |        | (202   | )    
|                                                             |                                                                                           | Purchase of capitalized software               |                                                  |                                                             | (323   | )                 |        |        | (31    | )    
|                                                             |                                                                                           | Proceeds from sale of marketable securities    |                                                  |                                                             | 1,668  |                   |        |        | 1,014  |      
|                                                             |                                                                                           | Purchase of marketable securities              |                                                  |                                                             | (1,755 | )                 |        |        | (1,187 | )    
|                                                             |                                                                                           |                                                |                                                  |                                                             |        |                   |        |        |       
|                                                             |                                                                                           |                                                |                                                  | Net cash used in investing activities                       |        |                   | (726   | )      |        |       | (406  | )
|                                                             |                                                                                           |                                                |                                                  |                                                             |        |                   |        |        |       
|Cash flows from financing activities:                        |                                                                                           |                                                |                                                  |                                                             |        |                   |        |       
|                                                             |                                                                                           | Decrease in restricted cash                    |                                                  |                                                             | 3,500  |                   |        |        |       |      
|                                                             |                                                                                           | Purchase of redeemable common stock            |                                                  |                                                             |       |                   |        |        | (762   | )    
|                                                             |                                                                                           | Purchase of common stock                       |                                                  |                                                             |       |                   |        |        | (21    | )    
|                                                             |                                                                                           | Proceeds from the exercise of stock options    |                                                  |                                                             | 44     |                   |        |        |       |      
|                                                             |                                                                                           | Repayment of long-term debt                    |                                                  |                                                             | (3,500 | )                 |        |        |       |      
|                                                             |                                                                                           | Borrowings under new revolving credit facility |                                                  |                                                             | 3,500  |                   |        |        |       |      
|                                                             |                                                                                           |                                                |                                                  |                                                             |        |                   |        |        |       
|                                                             |                                                                                           |                                                |                                                  | Net cash provided by (used in) financing activities         |        |                   | 3,544  |        |        |       | (783  | )
|                                                             |                                                                                           |                                                |                                                  |                                                             |        |                   |        |        |       
|Effect of exchange rate changes on cash and cash equivalents |                                                                                           |                                                | 24                                               |                                                             |        |                   | 110    |       
|Net increase in cash and cash equivalents                    |                                                                                           |                                                | 1,566                                            |                                                             |        |                   | 1,940  |       
|Cash and cash equivalents at beginning of period             |                                                                                           |                                                | 9,857                                            |                                                             |        |                   | 10,415 |       
|                                                             |                                                                                           |                                                |                                                  |                                                             |        |                   |        |        |       
|Cash and cash equivalents at end of period                   |                                                                                           | $                                              | 11,423                                           |                                                             |        | $                 | 12,355 |       
|                                                             |                                                                                           |                                                |                                                  |                                                             |        |                   |        |        |       

The accompanying notes are an integral part of these consolidated financial statements.

5



---



##### Table of Contents






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 and data
communications markets through custom and off-the-shelf communications
equipment, embedded software development suites, and systems integration and
consulting services for telecom and enterprise networks. The Companys
products connect computer and telecommunication servers 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 Integrated Services Digital Network (ISDN)
technologies. See Note 8 for information regarding the Companys revenue
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.

While the accompanying 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 and
nine months ended September 30, 2003, are not necessarily indicative of the
results that may be expected for the year ending December 31, 2003. These
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto for the year ended December 31, 2002.

Reclassifications

Certain reclassifications have been made to the condensed consolidated
financial statements for the periods ended September 30, 2002, to correspond
with the presentation used at September 30, 2003, and for the periods then
ended.

6



---



##### Table of Contents



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 Board 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 ended |       | Nine months ended
|                                  |                                                                                                                                      |   | September 30,      |       | September 30,    
|                                  |                                                                                                                                      |   |                    |       |                  
|                                  |                                                                                                                                      |   | 2003               |       | 2002              |   | 2003   |       | 2002
|                                  |                                                                                                                                      |   |                    |       |                   |   |        |       |     
|Net income (loss) as reported     |                                                                                                                                      | $ | 366                |       |                   | $ | (721   | )     |      | $ | (981   | )      |   | $ | (2,780 | )     
|                                  | Less: Total stock-based
employee compensation expense
determined under fair value
methods for all awards, net of
related tax effects |   |                    | (517  | )                 |   |        | (557  | )    |   |        | (1,630 | ) |   |        | (2,128 | )
|                                  |                                                                                                                                      |   |                    |       |                   |   |        |       |      |   |        |        |   |   |        |       
|Pro forma net loss                |                                                                                                                                      | $ | (151               | )     |                   | $ | (1,278 | )     |      | $ | (2,611 | )      |   | $ | (4,908 | )     
|                                  |                                                                                                                                      |   |                    |       |                   |   |        |       |      |   |        |        |   |   |        |       
|Earnings (loss) per common share: |                                                                                                                                      |   |                    |       |                   |   |        |       |      |   |        |        |   |   |        |       
|                                  | As reported  basic                                                                                                                  |   | $                  | 0.07  |                   |   | $      | (0.13 | )    |   | $      | (0.18  | ) |   | $      | (0.50  | )
|                                  |                                                                                                                                      |   |                    |       |                   |   |        |       |      |   |        |        |   |   |        |       
|                                  | Pro forma  basic                                                                                                                    |   | $                  | (0.03 | )                 |   | $      | (0.25 | )    |   | $      | (0.50  | ) |   | $      | (0.94  | )
|                                  |                                                                                                                                      |   |                    |       |                   |   |        |       |      |   |        |        |   |   |        |       
|                                  | As reported  diluted                                                                                                                |   | $                  | 0.06  |                   |   | $      | (0.13 | )    |   | $      | (0.18  | ) |   | $      | (0.50  | )
|                                  |                                                                                                                                      |   |                    |       |                   |   |        |       |      |   |        |        |   |   |        |       
|                                  | Pro forma  diluted                                                                                                                  |   | $                  | (0.03 | )                 |   | $      | (0.25 | )    |   | $      | (0.50  | ) |   | $      | (0.94  | )
|                                  |                                                                                                                                      |   |                    |       |                   |   |        |       |      |   |        |        |   |   |        |       

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):

|                |       |   |               |       |              |   |       |       | 
|--------------- | ----- | - | ------------- | ----- | ------------ | - | ----- | ----- | 
|                |       |   | September 30, |       | December 31,
|                |       |   | 2003          |       | 2002        
|                |       |   |               |       |             
|Raw materials   |       | $ | 1,689         |       |              | $ | 2,325 |      
|Work-in-process |       |   | 929           |       |              |   | 670   |      
|Finished goods  |       |   | 301           |       |              |   | 126   |      
|                |       |   |               |       |              |   |       |      
|                | Total |   | $             | 2,919 |              |   | $     | 3,121 | 
|                |       |   |               |       |              |   |       |      

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



---



##### Table of Contents



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. In addition,
the French tax administration also concluded a tax audit of the
Company's French
subsidiary covering the same periods resulting in a finding of no tax due. Due
to the finalization of both tax audits, the Company recognized a tax benefit of
approximately $245,000 during the third quarter of 2003. This benefit was
partially offset by taxes on foreign income.

NOTE 4.  -  CREDIT FACILITY

On July 25, 2003, the Company entered into a new $5 million revolving bank
credit facility designed to replace an older credit facility maturing on June
30, 2004. In September of 2003, the Company borrowed $3.5 million under the
new credit facility and used the proceeds to repay the amounts outstanding
under the old credit facility. The new credit facility bears interest at the
rate of LIBOR plus 2.0%, 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 this year,
classified as operating expenses, related to net termination costs associated
with the lease of the facility. As of September 30, 2003, 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 June 30, 2003      |                        | $ | 109 |    
|                                | Rent payments          |   |     | (39 | )
|                                | Cost of not subleasing |   |     | 23  |  
|                                |                        |   |     |    
|Liability at September 30, 2003 |                        | $ | 93  |    
|                                |                        |   |     |    
|Total costs to date             |                        | $ | 132 |    
|                                |                        |   |     |    

8



---



##### Table of Contents



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 ended |     | Nine months ended
|                                   |                                                                  |   | September 30,      |     | September 30,    
|                                   |                                                                  |   |                    |     |                  
|                                   |                                                                  |   | 2003               |     | 2002              |   | 2003 |     | 2002
|                                   |                                                                  |   |                    |     |                   |   |      |     |     
|Net income (loss)                  |                                                                  | $ | 366                |     |                   | $ | (721 | )   |      | $ | (981   | )   |   | $ | (2,780 | ) 
|Other comprehensive income (loss): |                                                                  |   |                    |     |                   |   |      |     |      |   |        |     |   |   |        |   
|                                   | Unrealized holding (loss) gain arising
during period, net of tax |   |                    | (43 | )                 |   |      | 66  |      |   |        | (79 | ) |   |        | 51 | 
|                                   | Foreign currency translation adjustment                          |   |                    | 8   |                   |   |      | (17 | )    |   |        | (4  | ) |   |        | 53 | 
|                                   |                                                                  |   |                    |     |                   |   |      |     |      |   |        |     |   |   |        |   
|Comprehensive income (loss)        |                                                                  | $ | 331                |     |                   | $ | (672 | )   |      | $ | (1,064 | )   |   | $ | (2,676 | ) 
|                                   |                                                                  |   |                    |     |                   |   |      |     |      |   |        |     |   |   |        |   

NOTE 7.  -  EARNINGS PER SHARE

Basic earnings per share are computed by dividing reported earnings available
to common stockholders 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 ended |       | Nine months ended
|                                                                                                                        |                                                                |  | September 30,      |       | September 30,    
|                                                                                                                        |                                                                |  |                    |       |                  
|                                                                                                                        |                                                                |  | 2003               |       | 2002              |  | 2003  |       | 2002
|                                                                                                                        |                                                                |  |                    |       |                   |  |       |       |     
|Basic earnings per share:                                                                                               |                                                                |  |                    |       |                   |  |       |       |      |  |       |       |   |  |       |       
|                                                                                                                        | Net income (loss)                                              |  | $                  | 366   |                   |  | $     | (721  | )    |  | $     | (981  | ) |  | $     | (2,780 | )
|                                                                                                                        | Weighted average commons shares outstanding                    |  |                    | 5,527 |                   |  |       | 5,521 |      |  |       | 5,519 |   |  |       | 5,564  |  
|                                                                                                                        | Basic earnings per share                                       |  | $                  | 0.07  |                   |  | $     | (0.13 | )    |  | $     | (0.18 | ) |  | $     | (0.50  | )
|                                                                                                                        |                                                                |  |                    |       |                   |  |       |       |      |  |       |       |   |  |       |       
|Diluted earnings per share:                                                                                             |                                                                |  |                    |       |                   |  |       |       |      |  |       |       |   |  |       |       
|                                                                                                                        | Net income (loss)                                              |  | $                  | 366   |                   |  | $     | (721  | )    |  | $     | (981  | ) |  | $     | (2,780 | )
|                                                                                                                        | Weighted average common shares outstanding                     |  |                    | 5,527 |                   |  |       | 5,521 |      |  |       | 5,519 |   |  |       | 5,564  |  
|                                                                                                                        | Dilutive stock options                                         |  |                    | 393   |                   |  |       |      |      |  |       |      |   |  |       |       |  
|                                                                                                                        |                                                                |  |                    |       |                   |  |       |       |      |  |       |       |   |  |       |        |  
|                                                                                                                        | Weighted average common shares outstanding
 assuming dilution |  |                    | 5,920 |                   |  |       | 5,521 |      |  |       | 5,519 |   |  |       | 5,564  |  
|                                                                                                                        | Diluted earnings per share                                     |  | $                  | 0.06  |                   |  | $     | (0.13 | )    |  | $     | (0.18 | ) |  | $     | (0.50  | )
|                                                                                                                        |                                                                |  |                    |       |                   |  |       |       |      |  |       |       |   |  |       |       
|Outstanding stock options that were not
included in the diluted calculation because
their effect would be anti-dilutive |                                                                |  | 882                |       |                   |  | 2,386 |       |      |  | 1,805 |       |   |  | 2,083 |       
|                                                                                                                        |                                                                |  |                    |       |                   |  |       |       |      |  |       |       |   |  |       |        |  

9



---



##### Table of Contents



INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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.

Geographic revenue related to North America and foreign countries for the three
and nine months ended September 30, 2003 and 2002 is as follows (in thousands):

|         |               |   |                    |       |                   |   |       |       |      |   |        |        |  |   |        |        | 
|-------- | ------------- | - | ------------------ | ----- | ----------------- | - | ----- | ----- | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|         |               |   | Three months ended |       | Nine months ended
|         |               |   | September 30,      |       | September 30,    
|         |               |   |                    |       |                  
|         |               |   | 2003               |       | 2002              |   | 2003  |       | 2002
|         |               |   |                    |       |                   |   |       |       |     
|Revenue: |               |   |                    |       |                   |   |       |       |      |   |        |        |  |   |        |       
|         | North America |   | $                  | 6,765 |                   |   | $     | 4,842 |      |   | $      | 16,925 |  |   | $      | 13,501 | 
|         | Europe        |   |                    | 863   |                   |   |       | 582   |      |   |        | 2,786  |  |   |        | 3,122  | 
|         | Pacific Rim   |   |                    | 943   |                   |   |       | 598   |      |   |        | 3,730  |  |   |        | 1,715  | 
|         |               |   |                    |       |                   |   |       |       |      |   |        |        |  |   |        |       
|Total    |               | $ | 8,571              |       |                   | $ | 6,022 |       |      | $ | 23,441 |        |  | $ | 18,338 |       
|         |               |   |                    |       |                   |   |       |       |      |   |        |        |  |   |        |       

Additional information regarding revenue by product-line is as follows (in
thousands):

|                 |                   |   |                    |       |                   |   |       |       |      |   |        |        |  |   |        |       | 
|---------------- | ----------------- | - | ------------------ | ----- | ----------------- | - | ----- | ----- | ---- | - | ------ | ------ |  | - | ------ | ----- | 
|                 |                   |   | Three months ended |       | Nine months ended
|                 |                   |   | September 30,      |       | September 30,    
|                 |                   |   |                    |       |                  
|                 |                   |   | 2003               |       | 2002              |   | 2003  |       | 2002
|                 |                   |   |                    |       |                   |   |       |       |     
|Product Revenue: |                   |   |                    |       |                   |   |       |       |      |   |        |        |  |   |        |      
|                 | Broadband telecom |   | $                  | 5,899 |                   |   | $     | 3,442 |      |   | $      | 13,140 |  |   | $      | 8,430 | 
|                 | SlotOptimizer     |   |                    | 2,235 |                   |   |       | 1,856 |      |   |        | 7,855  |  |   |        | 6,593 | 
|                 | LAN               |   |                    | 294   |                   |   |       | 208   |      |   |        | 1,086  |  |   |        | 1,490 | 
|                 | Storage           |   |                    | 28    |                   |   |       | 262   |      |   |        | 423    |  |   |        | 1,013 | 
|                 | WAN               |   |                    | 14    |                   |   |       | 34    |      |   |        | 111    |  |   |        | 147   | 
|                 | Other             |   |                    | 101   |                   |   |       | 220   |      |   |        | 826    |  |   |        | 665   | 
|                 |                   |   |                    |       |                   |   |       |       |      |   |        |        |  |   |        |      
|Total            |                   | $ | 8,571              |       |                   | $ | 6,022 |       |      | $ | 23,441 |        |  | $ | 18,338 |      
|                 |                   |   |                    |       |                   |   |       |       |      |   |        |        |  |   |        |      

NOTE 9.  -  RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Emerging Issues Task Force (EITF) Issue 00-21, Accounting for Revenue
Arrangements with Multiple Deliverables, addresses the accounting treatment
for an arrangement to provide the delivery or performance of multiple products
and/or services where the delivery of a product or system or performance of
services may occur at different points in time or over different periods of
time. The arrangements are often accompanied by initial installation,
initiation, or activation services and involve either a fixed fee or a fixed
fee coupled with a continuing payment stream, which may be fixed or variable.
The EITF reached conclusions regarding, among other issues, the applicability
of the provisions regarding separation of contract elements in EITF Issue 00-21
to contracts where one or more elements fall within the scope of other
authoritative literature, such as the AICPAs Statement of Position (SOP)
81-1. EITF Issue 00-21 does not impact the use of SOP 81-1 for contracts that
fall within the scope of SOP 81-1, such as for implementation or building of an
information technology system or product to client specifications for a client
under a long-term contract. Where an implementation or development project is
contracted with a client, and the vendor will also provide services or operate
the system over a period of time, EITF Issue 00-21 provides the methodology for
separating the contract elements and earnings processes. The provisions of
EITF Issue 00-21 are applicable on a prospective basis to transactions entered
into in fiscal years beginning after June 15, 2003. The Company does not
believe that EITF Issue 00-21 will have a material impact on its consolidated
financial statements.

10



---



##### Table of Contents






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 42% to $8.6 million for the three months
ended September 30, 2003, compared to $6.0 million for the same period in the
prior year. The increase was primarily attributable to Broadband telecom
product revenue, which increased approximately 71% to $5.9 million for the
three months ended September 30, 2003, compared to $3.4 million in the
comparable period. The increase in revenue was partially offset by the
continued decrease in revenue related to legacy networking and storage product
lines, which decreased approximately 66% to $88,000 during the third quarter of
2003, compared to $257,000 for the comparable period in the prior year. The
Company believes that if the telecommunication industry stabilizes, it will
continue to experience growth in revenue as design wins begin to move into
production volumes. However, this growth will continue to be impacted by
decreased sales related to legacy networking and storage product lines.

For the nine months ended September 30, 2003, total revenues increased
approximately 28% to $23.4 million, compared to $18.3 million for the same
period in the prior year. The increase was primarily attributable to Broadband
telecom and SlotOptimizer product revenue. Broadband telecom revenue increased
approximately 56% to $13.1 million for the nine months ended September 30,
2003, compared to $8.4 million in the comparable period. In addition,
SlotOptimizer revenue increased approximately 19% to $7.9 million for the nine
months ended September 30, 2003, compared to $6.6 million for the comparable
period. The increase in revenue related to these product lines was partially
offset by the continued decrease in revenue related to legacy networking and
storage product lines, which decreased approximately 74% to $419,000 for the
nine months ended September 30, 2003, compared to $1.7 million for the
comparable period in the prior year. The Company believes that if the
telecommunication industry stabilizes, it will continue to experience growth in
revenue as design wins begin to move into production volumes. However, this
growth will continue to be impacted by decreased sales related to legacy
networking and storage product lines.

During the third quarter of 2003, sales to two customers accounted for
approximately 60% and 23% of total revenue, compared to approximately 43% and
30% of total revenue for the comparable period. 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 September 30, 2003, gross margin, as a percentage of
sales, was 52% compared to 43% 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 higher margin products. In addition, the Company
improved

11



---



##### Table of Contents



manufacturing efficiencies and achieved reductions in material costs for
certain product lines due to increased production volumes and lower overall
overhead costs.

For the nine months ended September 30, 2003, gross margin, as a percentage of
sales, was 51% compared to 36% for the same period in the prior year. The
increase in the gross margin percentage primarily relates to an excess and
obsolete inventory charge of $1.6 million incurred during the nine months ended
September 30, 2002 compared to $600,000 incurred for the same period in the
current year. Additionally, there has been a continued shift in product mix
towards 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.

Research and Development

The Companys investment in the development of new products through research
and development was $1.8 million for both the three months ended September 30,
2003 and 2002. As a percentage of total revenue, research and development
expense was approximately 21% in the third quarter of 2003 as compared to
approximately 31% 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s investment in the development of new products through research
and development was $5.7 million and $5.2 million for the nine months ended
September 30, 2003 and 2002, respectively. Approximately 81% of the increase
in research and development expenses period over period is due to foreign
currency changes as the dollar dropped significantly (see Item 3  Foreign
Currency Risk) in value relative to the Euro. The remaining portion of the
increase is primarily due to an increase in the development of new telecom
products. As a percentage of total revenue, research and development expense
was approximately 24% for the nine months ended September 30, 2003 compared to
approximately 28% for the same period in the prior year. The decrease in
research and development costs as a percentage of total revenue is due to
revenue increasing at a higher rate than research and development costs for the
period.

Sales and Marketing

Sales and marketing expenses were $1.8 million and $1.4 million for the three
months ended September 30, 2003 and 2002, respectively. The increase in sales
and marketing expense quarter over quarter is primarily due to higher sales
commissions and bonuses as a result of the increase in revenue during the
quarter. As a percentage of total revenue, sales and marketing expense was
approximately 21% for the third quarter of 2003 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 at a higher rate than
sales and marketing expense for the quarter.

Sales and marketing expenses increased approximately 17% to $5.1 million for
the nine months ended September 30, 2003, compared to $4.4 million for the same
period in the prior year. Approximately 45% of the increase in sales and
marketing expense period over period is due to higher sales commissions and
bonuses due to higher revenue levels. Additionally, approximately 32% of the
increase in sales and marketing expense is due to increased travel and
headcount related expenses related to the sales organization. The remaining
portion of the increase primarily relates to higher marketing expenditures,
including headcount. As a percentage of total revenue, sales and marketing
expense decreased to approximately 22% for the nine months ended September 30,
2003 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 at a higher rate than sales and marketing expense for the nine
months ended September 30, 2003.

General and Administrative

General and administrative expenses were $807,000 and $846,000 for the three
months ended September 30, 2003 and 2002, respectively. As a percentage of
total revenue, general and administrative expenses decreased to approximately
9% for the third quarter of 2003 compared to approximately 14% for the same
period in the prior year. The decrease as a percentage of total revenue is due
to increased revenue.

12



---



##### Table of Contents



General and administrative expenses were $2.5 million and $2.4 million for the
nine months ended September 30, 2003 and 2002, respectively. The increase in
general and administrative expenses period over period is primarily related to
an increase in insurance premiums and other accounting related expenses. As a
percentage of total revenue, general and administrative expenses decreased to
approximately 11% for the nine months ended September 30, 2003 from
approximately 13% for the same period in the prior year. The decrease as a
percentage of total revenue is due to revenue for the period increasing at a
higher rate than general and administrative expenses.

Interest Income, Net

Interest income, net of interest expense, decreased to $42,000 for the three
months ended September 30, 2003 from $100,000 in the comparable period. For
the nine months ended September 30, 2003, interest income, net of interest
expense, decreased to $169,000 from $427,000 for the same period in the prior
year. The decrease, during both the three and nine months ended September 30,
2003 as compared to the same period in the prior year, is primarily due to
lower cash levels during 2003 as well as lower investment rates of return.

Other Income, Net

Other income, net of other expense, decreased to $11,000 for the three months
ended September 30, 2003 from $23,000 in the comparable period. For the nine
months ended September 30, 2003, other income, net of other expense, increased
to $47,000 compared to $24,000 for the same period in the prior year. The
increase is primarily due to net losses incurred in the prior period from the
sale of marketable securities, as compared to net gains for the nine months
ended September 30, 2003, partially offset by a decrease in the amount of
proceeds received from the sale of obsolete inventory parts during the current
period.

Income Taxes

The Companys effective tax benefit rate was 18% for the nine months ended
September 30, 2003 compared to 43% for the same period in the prior year.

The Company continues to provide a full valuation allowance for its net
deferred tax assets at September 30, 2003. However, during the third quarter
2003, the Internal Revenue Service concluded a federal income tax audit of the
Company related to the tax years 1996 through 2001. In addition, the French
tax administration also concluded a tax audit of the Companys French
subsidiary covering the same periods resulting in a finding of no tax due. Due
to the finalization of both tax audits, the Company recognized a tax benefit of
approximately $245,000 during the third quarter of 2003. This benefit was
partially offset by taxes on foreign income.

The effective tax benefit rate for the comparable period differed from the
statutory rate due to foreign income, which was offset by foreign loss carry
forwards. As of December 31, 2002, all remaining foreign loss carry forwards
expired.

Net Income ( Loss)

The Company reported net income of $366,000 for the three months ended
September 30, 2003, as compared to a net loss of $721,000 for the same period
in the prior year. Basic and diluted earnings per share for the three months
ended September 30, 2003 were $0.07 and $0.06, respectively, compared to
$(0.13) for the comparable period. For the nine months ended September 30,
2003, the Company reported a net loss of $981,000, compared to a net loss of
$2.8 million for the comparable period. Basic and diluted earnings per share
were $(0.18) and $(0.50) for the nine months ended September 30, 2003 and 2002,
respectively.

13



---



##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES

Consolidated Cash Flows

Cash and cash equivalents increased $1.6 million in the nine months ended
September 30, 2003 and increased $1.9 million in the nine months ended
September 30, 2002. Cash flows are impacted by operating, investing and
financing activities.

Operating Activities

Trends in cash flows from operating activities for the nine months ended
September 30, 2003 and 2002, are generally similar to the trends in the
Companys earnings except for provision for uncollectible accounts and returns,
provision for excess and obsolete inventory, depreciation and amortization and
deferred income taxes. Cash used by operating activities totaled $1.3 million
for the nine months ended September 30, 2003, compared to a net loss of
$981,000. Cash provided by operating activities was $3.0 million for the nine
months ended September 30, 2002, compared to a net loss of $2.8 million.
Provision for uncollectible accounts resulted in a benefit of $76,000 during
the nine months ended September 30, 2002 due to recoveries and improved aging
statistics. No provision for uncollectible accounts was required during the
nine months ended September 30, 2003 as the aging statistics and estimates do
not warrant an increase to the provision at this time. Provision for excess
and obsolete inventory has decreased in 2003 as the Companys inventory turns
continue to improve. Depreciation and amortization increased slightly for the
nine months ended September 30, 2003 compared to the nine months ended
September 30, 2002. Deferred income taxes decreased for the nine months ended
September 30, 2003, due to a full valuation allowance for the Companys
deferred tax assets. See Note 3 for further information regarding the
Companys deferred tax assets.

Changes in assets and liabilities result primarily from the timing of
production, sales and purchases. 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.

Investing Activities

The Companys investing activities resulted in a net cash use of $726,000 and
$406,000 for the nine months ended September 30, 2003 and 2002, respectively.
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 manufacturing, sales and engineering functions of
the Company. The expenditures made during the nine months ended September 30,
2003 related primarily to capitalized software used in the engineering and
sales functions. Expenditures made during the nine months ended September 30,
2002 related primarily to general equipment and furniture upgrades.

Financing Activities

Net cash provided by financing activities totaled $3.5 million for the nine
months ended September 30, 2003 and related primarily to the removal of the
restrictions on cash associated with the old credit facility. Cash used from
financing activities totaled $783,000 for the nine months ended September 30,
2002 and includes the purchase of redeemable common stock of $762,000 and the
purchase of common stock of $21,000.

Commitments and Contingencies

At September 30, 2003, 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 new credit facility. To date, the Company has not
paid any dividends and does not anticipate paying any for the remainder of
2003.

In October 2001, the Company announced that its Board of Directors had
authorized the repurchase of up to $5 million of its common stock. Purchases
are authorized to be made from time to time during a twenty-

14



---



##### Table of Contents



four month period in the open market or in privately negotiated transactions,
depending on market conditions. The Company plans to cancel all shares that it
repurchases. The repurchase plan does not obligate the Company to repurchase
any specific number of shares and may be suspended at any time.

On July 25, 2003, the Company entered into a new $5 million revolving bank
credit facility (new credit facility) designed to replace an older credit
facility (old credit facility) maturing on June 30, 2004. In September of
2003, the Company borrowed $3.5 million under the new credit facility and used
the proceeds to repay the amounts outstanding under the old credit facility.
The new credit facility bears interest at the rate of LIBOR plus 2%, matures on
July 30, 2005 and all borrowings will be secured by marketable securities. The
borrowings of $3.5 million are classified as long-term debt on the accompanying
balance sheet.

Other

Based on current operating levels, management believes that current cash on
hand and cash generated from operations will be sufficient to meet the
Companys liquidity needs for working capital, capital expenditures and debt
service during the next twelve months. To the extent that actual operating
results or other developments differ from managements expectations, the
Company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. Additionally, 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
transactions, the Company may consider using available cash, issuing additional
equity securities or increasing its indebtedness or that of 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, 2002.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Emerging Issues Task Force (EITF) Issue 00-21, Accounting for Revenue
Arrangements with Multiple Deliverables, addresses the accounting treatment
for an arrangement to provide the delivery or performance of multiple products
and/or services where the delivery of a product or system or performance of
services may occur at different points in time or over different periods of
time. The arrangements are often accompanied by initial installation,
initiation, or activation services and involve either a fixed fee or a fixed
fee coupled with a continuing payment stream, which may be fixed or variable.
The EITF reached conclusions regarding, among other issues, the applicability
of the provisions regarding separation of contract elements in EITF Issue 00-21
to contracts where one or more elements fall within the scope of other
authoritative literature, such as the AICPAs Statement of Position (SOP)
81-1. EITF Issue 00-21 does not impact the use of SOP 81-1 for contracts that
fall within the scope of SOP 81-1, such as for implementation or building of an
information technology system or product to client specifications for a client
under a long-term contract. Where an implementation or development project is
contracted with a client, and the vendor will also provide services or operate
the system over a period of time, EITF Issue 00-21 provides the methodology for
separating the contract elements and earnings processes. The provisions of
EITF Issue 00-21 are applicable on a prospective basis to transactions entered
into in fiscal years beginning after June 15, 2003. The Company does not
believe that EITF Issue 00-21 will have a material impact on its consolidated
financial statements.

15



---



##### Table of Contents






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 a charge of
approximately $366,000 for the nine months ended September 30, 2003, compared
to a benefit of $257,000 for the comparable period.

Market Price Risk

The Company had no equity hedge contracts outstanding as of September 30, 2003
or December 31, 2002.

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.

16



---



##### Table of Contents






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.




Item 6. EXHIBITS AND REPORTS 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) |  | Certification Pursuant to Rules 13a-14(a) and 15d-14(a) (7)                                                                                                                                                                                                                                      
|       |  |                                                                                                                                                                                                                                                                                                  
|31 (b) |  | Certification Pursuant to Rules 13a-14(a) and 15d-14(a) (7)                                                                                                                                                                                                                                      
|       |  |                                                                                                                                                                                                                                                                                                  
|32 (a) |  | Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (7)                                                                                                                                                                       
|       |  |                                                                                                                                                                                                                                                                                                  
|32 (b) |  | Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (7)                                                                                                                                                                       

Reports on Form 8-K

The Registrant filed a Current Report on Form 8-K dated October 16, 2003,
containing a press release dated October 15, 2003, announcing the Companys
release of financial results for the quarter and nine months ended September
30, 2003.

17



---



##### Table of Contents






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. Kovac                
| |  |     |  |                                    
| |  |     |  |                                    
| |  |     |  | Steven P. Kovac                    
| |  |     |  | Chief Financial Officer,           
| |  |     |  | Vice President of Finance          
| |  |     |  | and Treasurer                      
| |  |     |  | (Principal Financial and           
| |  |     |  | Accounting Officer)                

Plano, Texas
November 13, 2003

18



---



##### Table of Contents






INDEX TO EXHIBITS

|         |  |                                                                                                                                                                                                                                                                                                  
|-------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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)   |  | Certification Pursuant to Rules 13a-14(a) and 15d-14(a) (7)                                                                                                                                                                                                                                      
|         |  |                                                                                                                                                                                                                                                                                                  
|31 (b)   |  | Certification Pursuant to Rules 13a-14(a) and 15d-14(a) (7)                                                                                                                                                                                                                                      
|         |  |                                                                                                                                                                                                                                                                                                  
|32 (a)   |  | Certification Pursuant to 18 U.S.C. Section 1350, as adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (7)                                                                                                                                                                       
|         |  |                                                                                                                                                                                                                                                                                                  
|32 (b)   |  | Certification Pursuant to 18 U.S.C. Section 1350, as adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (7)                                                                                                                                                                       



---

|(1) |  | Incorporated by reference from the Companys Report on Form 8-K
filed on August 6, 1996.                     
|--- |  | -------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Incorporated by reference from the Companys Registration Statement
No. 2-86523 on Form S-1.                 
|   
|(3) |  | Incorporated by reference from the Companys Annual Report on Form
10-K for the year ended December 31, 1999.
|   
|(4) |  | Incorporated by reference from the Companys Annual Report on Form
10-K for the year ended December 31, 2001.
|   
|(5) |  | Incorporated by reference from the Companys Report on Form 8-K
filed on January 9, 2001.                    
|   
|(6) |  | Incorporated by reference from the Companys Quarterly Report on
Form 10-Q filed on August 14, 2003.         
|   
|(7) |  | Filed with this Quarterly Report on Form 10-Q.