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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549


FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

|                                             |  |                               
|-------------------------------------------- |  | ------------------------------
|For the Quarterly Period Ended June 30, 2003 |  | Commission File Number 0-13071

INTERPHASE CORPORATION

(Exact Name of Registrant as Specified in Its Charter)


|                         |  |                                  
|------------------------ |  | ---------------------------------
|Texas                    |  | 75-1549797                       
|(State of Incorporation) |  | (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)



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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


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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


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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 August 6, 2003
|                             |  |                              
|Common Stock, $.10 par value |  | 5,528,978                    



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TABLE OF CONTENTS



|                                                   |                                                                                               |                                                    |  |  |  |  |  | 
|-------------------------------------------------- | --------------------------------------------------------------------------------------------- | -------------------------------------------------- |  |  |  |  |  | 
|Part I -Financial Information                     
|                                                   | Item 1. Consolidated Interim Financial Statements                                            
|                                                   |                                                                                               | CONSOLIDATED BALANCE SHEETS                       
|                                                   |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS             
|                                                   |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS             
|                                                   |                                                                                               | NOTES TO CONSOLIDATED INTERIM 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                                           
|                                                   | 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-10.(a) Master Revolving Note & Credit Agreement
|EX-31.(A) Certification Pursuant to Rule 13a-15(e)
|EX-31.(b) Certification Pursuant to Rule 13a-15(e)
|Ex-32.(A) Certifications Pursuant to Section 1350 
|EX-32.(b) Certifications Pursuant to Section 1350 



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INTERPHASE CORPORATION

INDEX

|                              |  |         |  |                                                                                                                    |  |      
|----------------------------- |  | ------- |  | ------------------------------------------------------------------------------------------------------------------ |  | -----
|Part I -Financial Information |  |        
|                              |  | Item 1. |  | Consolidated Interim Financial Statements                                                                          |  |      
|                              |  |         |  | Consolidated Balance Sheets as of June 30, 2003 (unaudited)
and December 31, 2002                                  |  | 3    
|                              |  |         |  | Consolidated Statements of Operations for the three months
and six months ended June 30, 2003 and 2002 (unaudited) |  | 4    
|                              |  |         |  | Consolidated Statements of Cash Flows for the six months
ended June 30, 2003 and 2002 (unaudited)                  |  | 5    
|                              |  |         |  | Notes to Consolidated Interim Financial Statements                                                                 |  | 6-11 
|                              |  | Item 2. |  | Managements Discussion and Analysis of
Financial Condition and Results of Operations                              |  | 11-17
|                              |  | Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                                                         |  | 17   
|                              |  | Item 4. |  | Controls and Procedures                                                                                            |  | 18   
|Part II  Other Information   |  |        
|                              |  | Item 1. |  | Legal Proceedings                                                                                                  |  | 18   
|                              |  | Item 2. |  | Changes in Securities and Use of Proceeds                                                                          |  | 18   
|                              |  | Item 3. |  | Defaults Upon Senior Securities                                                                                    |  | 18   
|                              |  | Item 4. |  | Submission of Matters to a Vote of Security Holders                                                                |  | 19   
|                              |  | Item 5. |  | Other Information                                                                                                  |  | 19   
|                              |  | Item 6. |  | Exhibits and Reports on Form 8-K                                                                                   |  | 19   
|                              |  |         |  | Signature                                                                                                          |  | 20   

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

|                                                                                                                                 |                                            |      |             |        |          |   |         |        | 
|-------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ---- | ----------- | ------ | -------- | - | ------- | ------ | 
|                                                                                                                                 |                                            |      | (unaudited) |        |          |   |        
|                                                                                                                                 |                                            |      | Jun. 30,    |        | Dec. 31,
|ASSETS                                                                                                                           |                                            | 2003 |             | 2002  
|                                                                                                                                 |                                            |      |             |       
|Cash and cash equivalents                                                                                                        |                                            | $    | 8,552       |        |          | $ | 9,857   |       
|Marketable securities                                                                                                            |                                            |      | 5,602       |        |          |   | 5,518   |       
|Restricted cash                                                                                                                  |                                            |      | 3,500       |        |          |   | 3,500   |       
|Trade accounts receivable, less allowances for uncollectible
accounts and returns of $239 and $230, respectively                 |                                            |      | 5,230       |        |          |   | 5,683   |       
|Inventories                                                                                                                      |                                            |      | 3,059       |        |          |   | 3,121   |       
|Prepaid expenses and other current assets                                                                                        |                                            |      | 594         |        |          |   | 674     |       
|Income taxes receivable                                                                                                          |                                            |      | 302         |        |          |   | 247     |       
|                                                                                                                                 |                                            |      |             |        |          |   |         |       
|                                                                                                                                 | Total current assets                       |      |             | 26,839 |          |   |         | 28,600 | 
|Machinery and equipment                                                                                                          |                                            |      | 6,040       |        |          |   | 5,731   |       
|Leasehold improvements                                                                                                           |                                            |      | 386         |        |          |   | 380     |       
|Furniture and fixtures                                                                                                           |                                            |      | 562         |        |          |   | 549     |       
|                                                                                                                                 |                                            |      |             |        |          |   |         |       
|                                                                                                                                 |                                            |      | 6,988       |        |          |   | 6,660   |       
|Less-accumulated depreciation and amortization                                                                                   |                                            |      | (5,354      | )      |          |   | (4,921  | )     
|                                                                                                                                 |                                            |      |             |        |          |   |         |       
|                                                                                                                                 | Total property and equipment, net          |      |             | 1,634  |          |   |         | 1,739  | 
|Capitalized software, net                                                                                                        |                                            |      | 425         |        |          |   | 199     |       
|Other assets                                                                                                                     |                                            |      | 224         |        |          |   | 211     |       
|                                                                                                                                 |                                            |      |             |        |          |   |         |       
|                                                                                                                                 | Total assets                               |      | $           | 29,122 |          |   | $       | 30,749 | 
|                                                                                                                                 |                                            |      |             |        |          |   |         |       
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                             |                                            |      |             |        |          |   |         |       
|                                                                                                                                 | Liabilities                                |      |             |        |          |   |         |        | 
|Accounts payable                                                                                                                 |                                            | $    | 1,424       |        |          | $ | 1,437   |       
|Deferred revenues                                                                                                                |                                            |      | 354         |        |          |   | 595     |       
|Accrued liabilities                                                                                                              |                                            |      | 1,190       |        |          |   | 1,291   |       
|Accrued compensation                                                                                                             |                                            |      | 1,113       |        |          |   | 1,023   |       
|                                                                                                                                 |                                            |      |             |        |          |   |         |       
|                                                                                                                                 | Total current liabilities                  |      |             | 4,081  |          |   |         | 4,346  | 
|Deferred lease obligations                                                                                                       |                                            |      | 110         |        |          |   | 85      |       
|Long term debt                                                                                                                   |                                            |      | 3,500       |        |          |   | 3,500   |       
|                                                                                                                                 |                                            |      |             |        |          |   |         |       
|                                                                                                                                 | Total liabilities                          |      |             | 7,691  |          |   |         | 7,931  | 
|                                                                                                                                 | Shareholders Equity                       |      |             |        |          |   |         |        | 
|Common stock, $.10 par value; 100,000,000 shares authorized;
5,516,276 and 5,514,276 shares issued and outstanding, respectively |                                            |      | 552         |        |          |   | 551     |       
|Additional paid in capital                                                                                                       |                                            |      | 37,311      |        |          |   | 37,304  |       
|Accumulated deficit                                                                                                              |                                            |      | (16,142     | )      |          |   | (14,795 | )     
|Cumulative other comprehensive loss                                                                                              |                                            |      | (290        | )      |          |   | (242    | )     
|                                                                                                                                 |                                            |      |             |        |          |   |         |       
|                                                                                                                                 | Total shareholders equity                 |      |             | 21,431 |          |   |         | 22,818 | 
|                                                                                                                                 |                                            |      |             |        |          |   |         |       
|                                                                                                                                 | Total liabilities and shareholders equity |      | $           | 29,122 |          |   | $       | 30,749 | 
|                                                                                                                                 |                                            |      |             |        |          |   |         |       

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

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

|                            |       |      |  |                           |        |      |  |                                             |  |   |        |   |  |   |        |  
|--------------------------- | ----- | ---- |  | ------------------------- | ------ | ---- |  | ------------------------------------------- |  | - | ------ | - |  | - | ------ | -
|Three Months Ended Jun. 30, |       |      |  | Six Months Ended Jun. 30,
|                            |       |      |  |                          
|2003                        |       | 2002 |  |                           |        | 2003 |  | 2002                                       
|                            |       |      |  |                           |        |      |  |                                            
|$                           | 7,357 |      |  | $                         | 6,016  |      |  | Revenues                                    |  | $ | 14,870 |   |  | $ | 12,316 |  
|                            | 3,661 |      |  |                           | 4,454  |      |  | Cost of sales                               |  |   | 7,383  |   |  |   | 8,262  |  
|                            |       |      |  |                           |        |      |  |                                             |  |   |        |   |  |   |        |  
|                            | 3,696 |      |  |                           | 1,562  |      |  | Gross margin                                |  |   | 7,487  |   |  |   | 4,054  |  
|                            | 1,954 |      |  |                           | 1,713  |      |  | Research and development                    |  |   | 3,913  |   |  |   | 3,362  |  
|                            | 1,561 |      |  |                           | 1,610  |      |  | Sales and marketing                         |  |   | 3,361  |   |  |   | 2,981  |  
|                            | 835   |      |  |                           | 815    |      |  | General and administrative                  |  |   | 1,723  |   |  |   | 1,569  |  
|                            |       |      |  |                           |        |      |  |                                             |  |   |        |   |  |   |        |  
|                            | 4,350 |      |  |                           | 4,138  |      |  | Total operating expenses                    |  |   | 8,997  |   |  |   | 7,912  |  
|                            |       |      |  |                           |        |      |  |                                             |  |   |        |   |  |   |        |  
|                            | (654  | )    |  |                           | (2,576 | )    |  | Operating loss                              |  |   | (1,510 | ) |  |   | (3,858 | )
|                            |       |      |  |                           |        |      |  |                                             |  |   |        |   |  |   |        |  
|                            | 57    |      |  |                           | 134    |      |  | Interest income, net                        |  |   | 127    |   |  |   | 327    |  
|                            | 19    |      |  |                           | (55    | )    |  | Other income (expense), net                 |  |   | 36     |   |  |   | 1      |  
|                            |       |      |  |                           |        |      |  |                                             |  |   |        |   |  |   |        |  
|                            | (578  | )    |  |                           | (2,497 | )    |  | Loss before income taxes                    |  |   | (1,347 | ) |  |   | (3,530 | )
|                            | (57   | )    |  |                           | (1,004 | )    |  | Income tax benefit                          |  |   |       |   |  |   | (1,471 | )
|                            |       |      |  |                           |        |      |  |                                             |  |   |        |   |  |   |        |  
|$                           | (521  | )    |  | $                         | (1,493 | )    |  | Net loss                                    |  | $ | (1,347 | ) |  | $ | (2,059 | )
|                            |       |      |  |                           |        |      |  |                                             |  |   |        |   |  |   |        |  
|                            |       |      |  |                           |        |      |  | Loss per share                              |  |   |        |   |  | $ |        |  
|$                           | (0.09 | )    |  | $                         | (0.27  | )    |  | Basic EPS                                   |  | $ | (0.24  | ) |  |   | (0.37  | )
|                            |       |      |  |                           |        |      |  |                                             |  |   |        |   |  |   |        |  
|                            |       |      |  |                           |        |      |  |                                             |  |   |        |   |  | $ |        |  
|$                           | (0.09 | )    |  | $                         | (0.27  | )    |  | Diluted EPS                                 |  | $ | (0.24  | ) |  |   | (0.37  | )
|                            |       |      |  |                           |        |      |  |                                             |  |   |        |   |  |   |        |  
|                            | 5,514 |      |  |                           | 5,565  |      |  | Weighted average common shares              |  |   | 5,514  |   |  |   | 5,586  |  
|                            |       |      |  |                           |        |      |  |                                             |  |   |        |   |  |   |        |  
|                            | 5,514 |      |  |                           | 5,565  |      |  | Weighted average common and dilutive shares |  |   | 5,514  |   |  |   | 5,586  |  
|                            |       |      |  |                           |        |      |  |                                             |  |   |        |   |  |   |        |  

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

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

|                                                             |                                                                                 |                                             |                                                             |        |                           |      |        |        |        |       |  
|------------------------------------------------------------ | ------------------------------------------------------------------------------- | ------------------------------------------- | ----------------------------------------------------------- | ------ | ------------------------- | ---- | ------ | ------ | ------ | ----- | -
|                                                             |                                                                                 |                                             |                                                             |        | Six Months Ended Jun. 30,
|                                                             |                                                                                 |                                             |                                                             |        |                          
|                                                             |                                                                                 |                                             |                                                             |        | 2003                      |      | 2002  
|                                                             |                                                                                 |                                             |                                                             |        |                           |      |       
|Cash flow from operating activities:                         |                                                                                 |                                             |                                                             |        |                           |      |        |       
|                                                             | Net loss                                                                        |                                             | $                                                           | (1,347 | )                         |      | $      | (2,059 | )     
|                                                             | Adjustments to reconcile net loss to net cash provided by operating activities: |                                             |                                                             |        |                           |      |        |        |       
|                                                             | Provision for uncollectible accounts and returns                                |                                             |                                                             |       |                           |      |        | (100   | )     
|                                                             | Provision for excess and obsolete inventory                                     |                                             |                                                             | 400    |                           |      |        | 1,350  |       
|                                                             | Depreciation and amortization                                                   |                                             |                                                             | 462    |                           |      |        | 433    |       
|                                                             | Deferred income taxes                                                           |                                             |                                                             |       |                           |      |        | (264   | )     
|                                                             | Tax benefit from stock option exercises                                         |                                             |                                                             | 1      |                           |      |        |       |       
|                                                             |                                                                                 | Change in assets and liabilities:           |                                                             |        |                           |      |        |        |        |      
|                                                             |                                                                                 |                                             | Trade accounts receivable                                   |        |                           | 453  |        |        |        | 529   |  
|                                                             |                                                                                 |                                             | Inventories                                                 |        |                           | (338 | )      |        |        | 1,514 |  
|                                                             |                                                                                 |                                             | Prepaid expenses and other current assets                   |        |                           | 90   |        |        |        | 17    |  
|                                                             |                                                                                 |                                             | Income taxes receivable                                     |        |                           | (55  | )      |        |        | 2,476 |  
|                                                             |                                                                                 |                                             | Other assets                                                |        |                           | (3   | )      |        |        | (21   | )
|                                                             |                                                                                 |                                             | Accounts payable, deferred revenues and accrued liabilities |        |                           | (363 | )      |        |        | 88    |  
|                                                             |                                                                                 |                                             | Accrued compensation                                        |        |                           | 35   |        |        |        | 12    |  
|                                                             |                                                                                 |                                             | Deferred lease obligations                                  |        |                           | 25   |        |        |        |      |  
|                                                             |                                                                                 |                                             |                                                             |        |                           |      |        |       
|                                                             |                                                                                 | Net adjustments                             |                                                             |        | 707                       |      |        |        | 6,034  |      
|                                                             |                                                                                 |                                             |                                                             |        |                           |      |        |       
|                                                             |                                                                                 |                                             | Net cash (used) provided by operating activities            |        |                           | (640 | )      |        |        | 3,975 |  
|Cash flows from investing activities:                        |                                                                                 |                                             |                                                             |        |                           |      |        |       
|                                                             |                                                                                 | Additions to property and equipment         |                                                             |        | (249                      | )    |        |        | (92    | )    
|                                                             |                                                                                 | Additions to capitalized software           |                                                             |        | (313                      | )    |        |        | (29    | )    
|                                                             |                                                                                 | Proceeds from sale of marketable securities |                                                             |        | 1,485                     |      |        |        | 864    |      
|                                                             |                                                                                 | Purchases of marketable securities          |                                                             |        | (1,606                    | )    |        |        | (1,010 | )    
|                                                             |                                                                                 |                                             |                                                             |        |                           |      |        |       
|                                                             |                                                                                 |                                             | Net cash used by investing activities                       |        |                           | (683 | )      |        |        | (267  | )
|Cash flows from financing activities:                        |                                                                                 |                                             |                                                             |        |                           |      |        |       
|                                                             |                                                                                 | Purchase of redeemable common stock         |                                                             |        |                          |      |        |        | (508   | )    
|                                                             |                                                                                 | Purchase of common stock                    |                                                             |        |                          |      |        |        | (14    | )    
|                                                             |                                                                                 | Proceeds from the exercise of stock options |                                                             |        | 7                         |      |        |        |       |      
|                                                             |                                                                                 |                                             |                                                             |        |                           |      |        |       
|                                                             |                                                                                 |                                             | Net cash provided (used) by financing activities            |        |                           | 7    |        |        |        | (522  | )
|                                                             |                                                                                 |                                             |                                                             |        |                           |      |        |       
|Effect of exchange rate changes on cash and cash equivalents |                                                                                 |                                             | 11                                                          |        |                           |      | 135    |       
|                                                             |                                                                                 |                                             |                                                             |        |                           |      |        |       
|Net (decrease) increase in cash and cash equivalents         |                                                                                 |                                             | (1,305                                                      | )      |                           |      | 3,321  |       
|Cash and cash equivalents at beginning of period             |                                                                                 |                                             | 9,857                                                       |        |                           |      | 10,415 |       
|                                                             |                                                                                 |                                             |                                                             |        |                           |      |        |       
|Cash and cash equivalents at end of period                   |                                                                                 | $                                           | 8,552                                                       |        |                           | $    | 13,736 |       
|                                                             |                                                                                 |                                             |                                                             |        |                           |      |        |       

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

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NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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 revenues
related to North America and foreign countries.

The accompanying consolidated interim financial statements include the accounts
of Interphase Corporation and its wholly owned subsidiaries. Significant
intercompany accounts and transactions have been eliminated.

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
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. These financial statements should be read in
conjunction with the consolidated financial statements and notes thereto for
the year ended December 31, 2002.

Certain prior period amounts within the Statements of Cash Flows have been
reclassified to conform with the current year presentation.

The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States of America, requires Company
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates. Areas involving estimates are the allowance for doubtful
accounts and returns, warranty and inventory reserves and deferred taxes.

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-

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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:

|                                                                                                                                     |  |                             |        |                           |  |      |        |      |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------- | ------ | ------------------------- |  | ---- | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                                                                     |  | Three months ended Jun. 30, |        | Six months ended Jun. 30,
|                                                                                                                                     |  |                             |        |                          
|                                                                                                                                     |  | 2003                        |        | 2002                      |  | 2003 |        | 2002
|                                                                                                                                     |  |                             |        |                           |  |      |        |     
|Net loss as reported                                                                                                                 |  | $                           | (521   | )                         |  | $    | (1,493 | )    |  | $ | (1,347 | ) |  | $ | (2,059 | )
|Less: Total
stock-based employee
compensation
expense determined
under fair value
methods for all
awards, net of
related tax effects |  |                             | (500   | )                         |  |      | (702   | )    |  |   | (1,113 | ) |  |   | (1,571 | )
|Pro forma net loss                                                                                                                   |  | $                           | (1,021 | )                         |  | $    | (2,195 | )    |  | $ | (2,460 | ) |  | $ | (3,630 | )
|                                                                                                                                     |  |                             |        |                           |  |      |        |      |  |   |        |   |  |   |        |  
|Loss per common share                                                                                                                |  |                             |        |                           |  |      |        |      |  |   |        |   |  |   |        |  
|As reported                                                                                                                          |  | $                           | (0.09  | )                         |  | $    | (0.27  | )    |  | $ | (0.24  | ) |  | $ | (0.37  | )
|Pro forma                                                                                                                            |  | $                           | (0.20  | )                         |  | $    | (0.44  | )    |  | $ | (0.49  | ) |  | $ | (0.71  | )

The Company utilizes the Black-Scholes option-pricing model to calculate its
pro forma stock-based compensation expense, and the assumptions used for each
period are as follows:

|                                                                    |  |                             |      |                           |  |            |      |            |  |   |      |   |  |   |      |  
|------------------------------------------------------------------- |  | --------------------------- | ---- | ------------------------- |  | ---------- | ---- | ---------- |  | - | ---- | - |  | - | ---- | -
|                                                                    |  | Three months ended Jun. 30, |      | Six months ended Jun. 30,
|                                                                    |  |                             |      |                          
|                                                                    |  | 2003                        |      | 2002                      |  | 2003       |      | 2002      
|                                                                    |  |                             |      |                           |  |            |      |           
|Weighted average risk
free interest rate                            |  |                             | 2.32 | %                         |  |            | 3.51 | %          |  |   | 2.33 | % |  |   | 3.51 | %
|Volatility                                                          |  |                             | 130  | %                         |  |            | 160  | %          |  |   | 130  | % |  |   | 160  | %
|Expected dividend yield                                             |  |                             | 0.00 | %                         |  |            | 0.00 | %          |  |   | 0.00 | % |  |   | 0.00 | %
|Weighted average
grant-date fair value
per share of options
granted |  | $                           | 4.66 |                           |  | $          | 4.40 |            |  | $ | 4.65 |   |  | $ | 4.66 |  
|Expected term                                                       |  | 3.84 years                  |      | 6.11 years                |  | 3.84 years |      | 6.78 years

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):

|                |  |               |       |               |  |   |       | 
|--------------- |  | ------------- | ----- | ------------- |  | - | ----- | 
|                |  | Jun. 30, 2003 |       | Dec. 31, 2002
|                |  |               |       |              
|Raw materials   |  | $             | 1,966 |               |  | $ | 2,325 | 
|Work-in-process |  |               | 698   |               |  |   | 670   | 
|Finished goods  |  |               | 395   |               |  |   | 126   | 
|                |  |               |       |               |  |   |       | 
|Total           |  | $             | 3,059 |               |  | $ | 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

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Companys products. Future events may cause significant fluctuations in the
Companys operating results.

3. DEFERRED TAXES

SFAS No.109, Accounting for Income Taxes (SFAS 109) 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.

The Company has received preliminary tax assessments for the years 1996 to 2001
from the French tax authorities proposing tax deficiencies, including related
interest, of approximately $225,000. The Company has filed protests to the
assessments with respect to such years and believes that a significant portion
of the assessments is without merit. No assurance can be given that the
Companys tax matters will be favorably resolved due to the inherent
uncertainties involved in tax proceedings. The Company believes that it has
provided adequate accruals for additional taxes and related interest expense
which may ultimately result for all such examinations and believes that the
ultimate disposition of such examinations should not have a material adverse
effect on the Companys consolidated financial position, results of operations
or liquidity.

4. CREDIT FACILITY

At June 30, 2003, the Company had a $5 million revolving bank credit facility
(current credit facility). The current credit facility matures on June 30,
2004 and is secured throughout the term of the credit facility by a ninety-day
certificate of deposit issued by the bank in the principal amount equal to the
stated principal amount of the promissory note. The certificate
of deposit is reflected as restricted cash on the accompanying balance sheet.
The current credit facility bears interest at the rate of approximately 1% per
annum above the certificate of deposit rate, which was 0.90% at June 30, 2003,
and includes certain restrictive covenants including, among others, a tangible
net worth restriction. As of June 30, 2003, the Company was in compliance with
all restrictive covenants included in the current credit facility. At June 30,
2003, the Company had borrowings of $3.5 million

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classified as long-term debt on the balance sheet and the remaining
availability under the current credit facility was $1.5 million.

On July 25, 2003, the Company entered into a new $ 5 million revolving bank
credit facility (new credit facility) designed to replace the current credit
facility described above. The new credit facility matures on
July 30, 2005 therefore; the borrowings of $3.5 million, under the current
credit facility, are classified as long-term debt on the balance sheet at June 30, 2003.
All borrowings under the new credit facility will be secured by marketable
securities. The new credit facility bears
interest at the rate of LIBOR plus 2.00%. The Company intends to borrow $3.5 million under the new
credit facility during the third quarter and repay the current credit facility
with the proceeds.

5. EXIT ACTIVITIES

During the second quarter 2003, the Company committed to an exit plan regarding
one of its leased facilities. The Company had previously held this facility
open for storage, overflow use, and anticipated growth. During the quarter,
the Company determined that the facility would not be needed for overflow space
and other arrangements could be made for storage. The lease for this facility
will expire in the first quarter 2005, however the Company is pursuing
subleasing opportunities. As a result of this exit plan, the Company recorded
a charge of approximately $109,000, classified as operating expenses, related
to net termination costs associated with the lease of the facility. Additional
costs may be incurred in future periods if the Company is not successful in
subleasing the facility.

6. COMPREHENSIVE LOSS

The following table shows the Companys comprehensive loss (in thousands):

|                                                                 |  |                             |      |                           |  |      |        |      |  |   |        |   |  |   |        |  
|---------------------------------------------------------------- |  | --------------------------- | ---- | ------------------------- |  | ---- | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                 |  | Three months ended Jun. 30, |      | Six months ended Jun. 30,
|                                                                 |  |                             |      |                          
|                                                                 |  | 2003                        |      | 2002                      |  | 2003 |        | 2002
|                                                                 |  |                             |      |                           |  |      |        |     
|Net loss                                                         |  | $                           | (521 | )                         |  | $    | (1,493 | )    |  | $ | (1,347 | ) |  | $ | (2,059 | )
|Other comprehensive
income (loss):                               |  |                             |      |                           |  |      |        |      |  |   |        |   |  |   |        |  
|Unrealized holding
loss (gain) arising
during period, net
of tax |  |                             | 18   |                           |  |      | (51    | )    |  |   | 36     |   |  |   | 14     |  
|Foreign currency
translation
adjustment                          |  |                             | (46  | )                         |  |      | 222    |      |  |   | (84    | ) |  |   | 41     |  
|                                                                 |  |                             |      |                           |  |      |        |      |  |   |        |   |  |   |        |  
|Comprehensive loss                                               |  | $                           | (549 | )                         |  | $    | (1,322 | )    |  | $ | (1,395 | ) |  | $ | (2,004 | )
|                                                                 |  |                             |      |                           |  |      |        |      |  |   |        |   |  |   |        |  

7. NET INCOME PER COMMON AND COMMON DILUTIVE SHARE

Diluted earnings per share consist only of the dilutive impact of stock
options, using the treasury stock method. Due to the Companys net losses for
the periods presented, the effect of dilutive securities would have been
antidilutive. Options that would have otherwise been included in the
calculation of diluted earnings per common share were 103,018 and 12,869 stock
options for the three-month periods ended June 30, 2003 and 2002, respectively
and 31,750 and 31,778 stock options for the six-month periods ended June 30,
2003 and 2002, respectively.

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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 revenues related to North America and foreign countries for the
three-months and six-months ended June 30, 2003 and 2002 are as follows (in
thousands):

|              |  |                             |       |                           |  |      |       |      |  |   |        |  |  |   |        | 
|------------- |  | --------------------------- | ----- | ------------------------- |  | ---- | ----- | ---- |  | - | ------ |  |  | - | ------ | 
|              |  | Three months ended Jun. 30, |       | Six months ended Jun. 30,
|              |  |                             |       |                          
|Revenues      |  | 2003                        |       | 2002                      |  | 2003 |       | 2002
|              |  |                             |       |                           |  |      |       |     
|North America |  | $                           | 5,084 |                           |  | $    | 4,610 |      |  | $ | 10,160 |  |  | $ | 8,659  | 
|Europe        |  |                             | 935   |                           |  |      | 1,100 |      |  |   | 1,923  |  |  |   | 2,540  | 
|Pacific Rim   |  |                             | 1,338 |                           |  |      | 306   |      |  |   | 2,787  |  |  |   | 1,117  | 
|              |  |                             |       |                           |  |      |       |      |  |   |        |  |  |   |        | 
|Total         |  | $                           | 7,357 |                           |  | $    | 6,016 |      |  | $ | 14,870 |  |  | $ | 12,316 | 
|              |  |                             |       |                           |  |      |       |      |  |   |        |  |  |   |        | 

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

|                  |  |                             |       |                           |  |      |       |      |  |   |        |  |  |   |        | 
|----------------- |  | --------------------------- | ----- | ------------------------- |  | ---- | ----- | ---- |  | - | ------ |  |  | - | ------ | 
|                  |  | Three months ended Jun. 30, |       | Six months ended Jun. 30,
|                  |  |                             |       |                          
|Product Revenues  |  | 2003                        |       | 2002                      |  | 2003 |       | 2002
|                  |  |                             |       |                           |  |      |       |     
|Broadband telecom |  | $                           | 3,825 |                           |  | $    | 2,827 |      |  | $ | 7,244  |  |  | $ | 4,986  | 
|Combo             |  |                             | 2,782 |                           |  |      | 2,111 |      |  |   | 5,618  |  |  |   | 4,739  | 
|LAN               |  |                             | 561   |                           |  |      | 486   |      |  |   | 793    |  |  |   | 1,282  | 
|Storage           |  |                             | 34    |                           |  |      | 313   |      |  |   | 394    |  |  |   | 751    | 
|WAN               |  |                             | 53    |                           |  |      | 24    |      |  |   | 97     |  |  |   | 112    | 
|Other             |  |                             | 102   |                           |  |      | 255   |      |  |   | 724    |  |  |   | 446    | 
|                  |  |                             |       |                           |  |      |       |      |  |   |        |  |  |   |        | 
|Total             |  | $                           | 7,357 |                           |  | $    | 6,016 |      |  | $ | 14,870 |  |  | $ | 12,316 | 
|                  |  |                             |       |                           |  |      |       |      |  |   |        |  |  |   |        | 

9. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

On November 25, 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34.
FIN 45 clarifies the requirements of FASB Statement No. 5, Accounting for
Contingencies relating to the guarantors accounting for, and disclosure of,
the issuance of certain types of guarantees. For guarantees that fall within
the scope of FIN 45, the Interpretation requires that guarantors recognize a
liability equal to the fair value of the guarantee upon its issuance. The
Interpretations provisions for initial recognition and measurement should be
applied on a prospective basis to guarantees issued or modified after December
31, 2002, irrespective of the guarantors fiscal year-end. The guarantors
previous accounting for guarantees that were issued before the date of FIN 45s
initial application may not be revised or restated to reflect the effect of the
recognition and measurement provisions of the Interpretation. The disclosure
requirements were effective for financial statements of both interim and annual
periods that end after December 15, 2002.

Emerging Issues Task Force (EITF) Issue 00-21, Accounting for Revenue
Arrangements with Multiple Deliverables, addresses the accounting treatment
for an

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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. The EITF
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.




Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Revenues:Total revenues for the three months ended June 30, 2003 were $7.4
million. Revenues for the same period in 2002 (comparative period) were $6
million. Telecom product revenues increased to $3.8 million for the three
months ended June 30, 2003, from $2.8 million in the comparative period.
Telecom product revenues continue to grow steadily as some of the Companys
design wins move into production levels. We expect to see this growth trend
continue throughout the year, however, the telecommunications equipment market
continues to struggle through a prolonged contraction and customer forecasts
have continued to be unpredictable and therefore unreliable or inconsistent.

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Combo product revenues also increased to $2.8 million for the three months
ended June 30, 2003 compared to $2.1 million in the comparative period. These
combined increases were partially offset by the continued and anticipated
decline in revenues from the Companys legacy and storage product lines.
Legacy and storage product revenues decreased from $0.8 million in the
comparative period to $0.6 million for the three months ended June 30, 2003.

Three customers individually accounted for 42%, 31% and 12% of the Companys
second quarter 2003 revenues. In the comparative period, two customers
individually accounted for 35% and 33% of the Companys revenues.

Total revenues for the six months ended June 30, 2003 were $14.9 million.
Revenues for the six months ended June 30, 2002 were $12.3 million. Telecom
product revenues increased to $7.2 million for the six months ended June 30,
2003, from $5 million for the six months ended June 30, 2002. Combo product
revenues increased to $5.6 million for the six months ended June 30, 2003 from
$4.7 million for the six months ended June 30, 2002. These combined increases
were partially offset by the continued and anticipated decline in revenues from
the Companys legacy and storage product lines. Legacy and storage product
revenues decreased from $2.1 million for the six months ended June 30, 2002 to
$1.3 million for the six months ended June 30, 2003.

Gross Margin:Gross margin as a percentage of sales was 50% for the second
quarter 2003 and 26% for the comparative period. The increase in the gross
margin percentage primarily relates to an excess and obsolete inventory charge
of $1.1 million incurred during the second quarter 2002 compared to an excess
and obsolete inventory charge of $200,000 incurred during the second quarter
2003. Along with the reduction in excess and obsolete inventory charges, the
Companys product mix contributed to the increase in gross margin as a
percentage of sales due to increased sales of high margin telecommunication
controllers. In addition, the Company improved manufacturing efficiencies and
achieved reductions in material costs of certain product lines due to increased
production volumes and lower overall overhead costs.

Gross margin for the six months ended June 30, 2003 and 2002 was 50% and 33%,
respectively. The increase in the gross margin percentage primarily relates to
an excess and obsolete inventory charge of $1.4 million incurred during the six
months ended June 30, 2002 compared to an excess and obsolete inventory charge
of $400,000 incurred during the six months ended June 30, 2003. Along with the
reduction in excess and obsolete inventory charges, the Companys product mix
contributed to the increase in gross margin as a percentage of sales due to
increased sales of high margin telecommunication controllers and services
revenues. In addition, the Company improved manufacturing efficiencies and
achieved reductions in material costs of 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 $2 million and $1.7 million for
the three months ended June 30, 2003 and 2002, respectively. As a percentage
of revenues, research and development expenses were 27% in the second quarter
2003 and 28% in the comparative period. Approximately 67% of the increase in
research and development expenses for the three months ended June 30, 2003,
related to foreign currency changes as

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the dollar dropped significantly (see Item 3  Foreign Currency Risk) in value
relative to the Euro. The remainder of the difference was primarily due to
investment in a future telecommunications product.

The Companys investment in the development of new products through research
and development was $3.9 million and $3.4 million for the six months ended June
30, 2003 and 2002, respectively. As a percentage of revenues, research and
development expenses were 26% for the six months ended June 30, 2003 and 27%
for the six months ended June 30, 2002. Approximately 57% of the increase in
research and development expenses for the six months ended June 30, 2003,
related to foreign currency changes as the dollar dropped significantly (see
Item 3  Foreign Currency Risk) in value relative to the Euro. The remainder
of the difference was primarily due to investment in a future
telecommunications product.

Sales and Marketing:Sales and marketing expenses were $1.6 million in both the
second quarter of 2003 and in the comparative period. As a percentage of
revenues, sales and marketing expenses were 21% in the second quarter 2003 and
27% in the comparative period.

Sales and marketing expenses were $3.4 million and $3 million for the six
months ended June 30, 2003 and 2002, respectively. As a percentage of
revenues, sales and marketing expenses were 23% for the six months ended June
30, 2003 and 24% for the six months ended June 30, 2002. Approximately 31% of
the increase in sales and marketing expenses for the six months ended June 30,
2003, related to foreign currency changes as the dollar dropped significantly
(see Item 3  Foreign Currency Risk) in value relative to the Euro. The
remainder of the increase is due to increased spending, primarily in the first
quarter of 2003, on headcount, travel-related and marketing communication
activities aimed at increasing our brand awareness, messaging and ability to
generate and close on sales leads.

General and Administrative:General and administrative expenses were $835,000
in the second quarter 2003 and $815,000 in the comparative period. As a
percentage of revenues, general and administrative expenses were 11% in the
second quarter 2003 and 14% in the comparative period.

General and administrative expenses were $1.7 million and $1.6 million for the
six months ended June 30, 2003 and 2002, respectively. As a percentage of
revenues, general and administrative expenses were 12% for the six months ended
June 30, 2003 and 13% for the six months ended June 30, 2002. The increase in
general and administrative expenses primarily resulted from uncontrollable
increases in business insurance premiums and other accounting related expenses.
However, general and administrative expenses decreased as a percentage of
revenues.

Interest Income, Net:Interest income, net of interest expense, was $57,000 in
the second quarter 2003 and $134,000 in the comparative period. Interest
income, net of interest expense, was $127,000 for the six months ended June 30,
2003 and $327,000 for the six months ended June 30, 2002. The decrease, during
both the three months and the six months ended June 30, 2003, primarily relates
to lower daily cash and investments levels and lower investment rates of
return.

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Other Income (Expense), Net:Other income, net, was $19,000 in the second
quarter 2003. Other expense, net was $55,000 in the comparative period. Other
income, net was $36,000 for the six months ended June 30, 2003 and $1,000 for
the six months ended June 30, 2002. The increase in other income, net during
both the three months and the six months ended June 30, 2003 was primarily due
to an increase in the amount of net gains on the sale of marketable securities
and the sale of miscellaneous obsolete parts.

Income Taxes:The Companys effective tax benefit rate was zero for the six
months ended June 30, 2003 compared to a benefit rate of 42% for the six months
ended June 30, 2002.

The Company continues to provide a full valuation allowance for its net
deferred tax assets at June 30, 2003. The effective tax benefit rate for the
comparative period differed from the statutory rate due to foreign income,
which was offset by foreign loss carry forwards. The foreign loss carry
forwards expired at December 31, 2002.

Net Loss:The Company reported a net loss of $521,000 in the second quarter
2003 and a net loss of $1.5 million in the comparative period. The Company
reported a net loss of $1.3 million for the six months ended June 30, 2003 and
a net loss of $2.1 million for the six months ended June 30, 2002.

During the second quarter 2003, the Company committed to an exit plan regarding
one of its leased facilities. The Company had previously held this facility
open for storage, overflow use, and anticipated growth. During the quarter,
the Company determined that the facility would not be needed for overflow space
and other arrangements could be made for storage. The lease for this facility
will expire in the first quarter 2005, however the Company is pursuing
subleasing opportunities. As a result of this exit plan, the Company recorded
a charge of approximately $109,000, classified as operating expenses, related
to net termination costs associated with the lease of the facility. Additional
costs may be incurred in future periods if the Company is not successful in
subleasing the facility.

LIQUIDITY AND CAPITAL RESOURCES

Consolidated Cash Flows

Operating Activities:Trends in cash flows from operating activities for the
three months ended June 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 $640,000 for the six months ended June 30, 2003, compared to a net loss
of $1.3 million. Cash provided by operating activities was $4 million for the
six months ended June 30, 2002, compared to a net loss of $2.1 million.
Provision for uncollectible accounts and returns decreased for the six months
ended June 30, 2003 compared to the six months ended June 30, 2002 due to
improved aging statistics. Provision for excess and obsolete inventory has
decreased as the Company is in the final stages of its migration from legacy
product lines. Depreciation and amortization increased slightly for the six
months ended June 30, 2003

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compared to the six months ended June 30, 2002. Deferred income taxes
decreased for the six months ended June 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 $683,000 and $267,000 for the six months ended June 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 six months ended June 30, 2003 related primarily to capitalized software
used in the engineering and sales functions. Expenditures made during the six
months ended June 30, 2002 related primarily to general equipment upgrades.

Financing Activities:Net cash provided by financing activities totaled $7,000
for the six months ended June 30, 2003 and related to proceeds from the
exercise of stock options. Cash used from financing activities totaled
$522,000 for the six months ended June 30, 2002 and includes the purchase of
redeemable common stock of $508,000 and the purchase of common stock of
$14,000.

Commitments and Contingencies

At June 30, 2003, the Company had no material commitments to purchase capital
assets. The Companys significant long-term obligations are its operating
leases on its facilities and future debt payments. The Company has not paid
any dividends since its inception and does not anticipate paying any dividends
in 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-four month period
in the open market or in privately negotiated transactions depending on market
conditions. The Company will 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.

At June 30, 2003, the Company had a $5 million revolving bank credit facility
(current credit facility). The current credit facility matures on June 30,
2004 and is secured throughout the term of the credit facility by a ninety-day
certificate of deposit issued by the bank in the principal amount equal to the
stated principal amount of the promissory note. The certificate
of deposit is reflected as restricted cash on the accompanying balance sheet.
The current credit facility bears interest at the rate of approximately 1% per
annum above

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the certificate of deposit rate, which was 0.90% at June 30, 2003, and includes
certain restrictive covenants including, among others, a tangible net worth
restriction. As of June 30, 2003, the Company was in compliance with all
restrictive covenants included in the current credit facility. At June 30,
2003, the Company had borrowings of $3.5 million classified as long-term debt
on the balance sheet and the remaining availability under the current credit
facility was $1.5 million.

On July 25, 2003, the Company entered into a new $5 million revolving bank
credit facility (new credit facility) designed to replace the current credit
facility described above. The new credit facility matures on July 30, 2005 therefore; the borrowings of $3.5 million, under the current
credit facility, are classified as long-term debt on the balance sheet at June 30, 2003.
All borrowings under the new credit facility will be secured by marketable
securities. The new credit facility bears
interest at the rate of LIBOR plus 2.00%. The Company intends to borrow $3.5 million under the new
credit facility during the third quarter and repay the current credit facility
with the proceeds.

Other

Based on current operating levels, management believes that cash generated from
operations and borrowing availability under the revolving credit facility,
together with cash on hand, will be sufficient to meet the Companys liquidity
needs for working capital, capital expenditures and debt service during the
next twelve months. To the extent that the Companys actual operating results
or other developments differ from the Companys expectations, Interphases
liquidity could be adversely affected.

The Company periodically evaluates its liquidity requirements, alternative uses
of capital, capital needs and available resources in view of, among other
things, its capital expenditure requirements, and estimated future operating
cash flows. As a result of this process, the Company has in the past and may
in the future seek to raise additional capital, refinance or restructure
indebtedness, issue additional securities, repurchase shares of its common
stock or take a combination of such steps to manage its liquidity and capital
resources. In the normal course of business, the Company may review
opportunities for acquisitions, joint ventures or other business combinations
in the component products industry. In the event of any such transaction, the
Company may consider using available cash, issuing additional equity securities
or increasing the indebtedness of the Company or its subsidiaries.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

On November 25, 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34.
FIN 45 clarifies the requirements of FASB Statement No. 5, Accounting for
Contingencies relating to the guarantors accounting for, and disclosure of,
the issuance of certain types of guarantees. For guarantees that fall within
the scope of FIN 45, the Interpretation requires that guarantors recognize a
liability equal to the fair value of the guarantee upon its issuance. The
Interpretations provisions for initial recognition and measurement should be
applied on a prospective basis to guarantees issued or modified after December
31, 2002, irrespective of the guarantors fiscal year-end. The guarantors
previous accounting for

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guarantees that were issued before the date of FIN 45s initial application may
not be revised or restated to reflect the effect of the recognition and
measurement provisions of the Interpretation. The disclosure requirements were
effective for financial statements of both interim and annual periods that end
after December 15, 2002.

Emerging Issues Task Force (EITF) Issue 00-21, Accounting for Revenues
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. The EITF 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.




Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Risk

Due to the fact that the Company conducts business on a global basis and in
some cases in foreign currencies, it is exposed to adverse movements in foreign
currency exchange rates. The Companys operations in France are measured in
the local currency converted to the U.S. Dollar equivalent based on published
exchange rates for the periods reported and are therefore subject to risk of
exchange rate fluctuations. For the six months ended June 30, 2003 the Euro to
U.S. Dollar translation accounted for a charge of approximately $237,000
compared to a benefit of $238,000 for the six months ended June 30, 2002.

Market Price Risk

The Company had no equity hedge contracts outstanding as of June 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

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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

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. There have been no
significant changes in the Companys internal controls or in other factors that
could significantly affect disclosure controls subsequent to the date of this
evaluation.




PART II




Item 1. LEGAL PROCEEDINGS

None.




Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None.




Item 3. DEFAULTS UPON SENIOR SECURITIES

None.

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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On May 7, 2003, the annual meeting of shareholders of the Company was held.
The following matters were voted upon and approved at the meeting:

An election of directors of the Company to serve until the next annual meeting
for the Company was held. The following seven individuals were elected as
Directors of the Company:

|                   |  |                |           |                |  |  |        | 
|------------------ |  | -------------- | --------- | -------------- |  |  | ------ | 
|Nominee            |  | Votes Cast For |           | Votes Withheld
|                   |  |                |           |               
|Paul N. Hug        |  |                | 4,947,783 |                |  |  | 25,795 | 
|Gregory B. Kalush  |  |                | 4,947,783 |                |  |  | 25,795 | 
|Randall D. Ledford |  |                | 4,947,783 |                |  |  | 25,795 | 
|Michael J. Myers   |  |                | 4,947,783 |                |  |  | 25,795 | 
|David H. Segrest   |  |                | 4,947,783 |                |  |  | 25,795 | 
|Kenneth V. Spenser |  |                | 4,947,783 |                |  |  | 25,795 | 
|S. Thomas Thawley  |  |                | 4,947,783 |                |  |  | 25,795 | 




Item 5. OTHER INFORMATION

None.




Item 6. EXHIBITS AND REPORTS ON FORM 8-K

Exhibits

|       |  |                                                                                                                                                                                                                                                                                                       |  |  |  | 
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|2 (a)  |  | Stock Purchase Agreement, dated as of June 29, 1996, among
Interphase Corporation, Synaptel and Philippe Oros, Xavier
Sutter, Francois Lecerf, Schroder Ventures French Enterprise
Fund LPI (USA), Schroder ventures French
Enterprise Fund UKLP (UK) and Schroder Ventures
Holding Limited (UK). (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 as of 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 as of
July 25, 2003 (6)                                                                                                                                                                                                                             
|31 (a) |  | Certification Pursuant to Rules 13a-15(e) and
15d-15(e) (6)                                                                                                                                                                                                                                          
|31 (b) |  | Certification Pursuant to Rules 13a-15(e) and
15d-15(e) (6)                                                                                                                                                                                                                                          
|32 (a) |  | Certification Pursuant to 18 U.S.C Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(6)                                                                                                                                                                            
|32 (b) |  | Certification Pursuant to 18 U.S.C Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(6)                                                                                                                                                                            

Reports on Form 8-K

None

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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)                                
|                      |  |     |  |                                             
|Date: August 12, 2003 |  |     |  |                                             
|                      |  |     |  |                                             
|                      |  | By: |  | /s/ Steven P. Kovac                         
|                      |  |     |  |                                             
|                      |  |     |  | Steven P. Kovac                             
|                      |  |     |  | Chief Financial Officer,                    
|                      |  |     |  | Vice President of Finance
and Treasurer     
|                      |  |     |  | (Principal Financial and Accounting Officer)

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INDEX TO EXHIBITS

|         |  |                                                                                                                                                                                                                                                                                                      
|-------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibits |  |                                                                                                                                                                                                                                                                                                      
|         |  |                                                                                                                                                                                                                                                                                                      
|2 (a)    |  | Stock Purchase Agreement, dated as of June 29, 1996, among
Interphase Corporation, Synaptel and Philippe Oros, Xavier Sutter, Francois
Lecerf, Schroder Ventures French Enterprise Fund LPI (USA), Schroder Ventures
French Enterprise Fund UKLP (UK) and Schroder Ventures Holding Limited (UK).
(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 as of 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 as of July 25,
2003 (6)                                                                                                                                                                                                                            
|31 (a)   |  | Certification Pursuant to Rules 13a-15(e) and 15d-15(e) (6)                                                                                                                                                                                                                                          
|31 (b)   |  | Certification Pursuant to Rules 13a-15(e) and 15d-15(e) (6)                                                                                                                                                                                                                                          
|32 (a)   |  | Certification Pursuant to 18 U.S.C Section 1350, As Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
(6)                                                                                                                                                                            
|32 (b)   |  | Certification Pursuant to 18 U.S.C Section 1350, As Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
(6)                                                                                                                                                                            



---

|(1) |  | Filed as an exhibit to Report on Form 8-K on August 6, 1996, and
incorporated herein by reference.                    
|--- |  | ----------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Filed as an exhibit to Registration Statement No. 2-86523 on Form S-1 and
incorporated herein by reference.           
|   
|(3) |  | Filed as an exhibit to Report on Form 10-K for the year ended December
31, 1999,
and incorporated herein by reference.
|   
|(4) |  | Filed as an exhibit to Report on Form 10-K for the year ended December
31, 2001,
and incorporated herein by reference.
|   
|(5) |  | Filed as an exhibit to Form 8-K on January 9, 2001, and incorporated
herein by
reference.                             
|   
|(6) |  | Filed herein.