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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



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FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

|                                            |  |                               
|------------------------------------------- |  | ------------------------------
|For the Fiscal Year Ended December 31, 2002 |  | Commission File Number 0-13071

INTERPHASE CORPORATION

(Exact name of registrant as specified in its charter)


|                                                                    |  |                                               
|------------------------------------------------------------------- |  | ----------------------------------------------
|Texas(State or other jurisdiction of
incorporation or organization) |  | 75-1549797(I.R.S. Employer
Identification No.)

2901 North Dallas Parkway, Suite 200
Plano, Texas 75093
(Address of principal executive offices and zip code)
Registrants telephone number, including area code: (214) 654-5000
Securities registered pursuant to Section 12(b) of the Act:None
Securities registered pursuant to Section 12(g) of the Act:Title of Class
Common Stock, $.10 par value

Indicate by check mark whether the registrant (1) has filed all reports
required 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 x No o
| | ----------

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this 10-K. [  ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).

| | Yes o No x
| | ----------

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 30, 2002 was approximately $18,464,079.

As of March 18, 2003, registrant had 5,514,276 shares of Common Stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Parts of the following documents are incorporated by reference into this annual
report on Form 10-K: Portions of the Definitive Proxy Statement for Annual
Meeting of Shareholders to be held on May 7, 2003 (Part III).



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TABLE OF CONTENTS



|                                                   |                                                                                               |                                                 |  |  |  |  |  | 
|-------------------------------------------------- | --------------------------------------------------------------------------------------------- | ----------------------------------------------- |  |  |  |  |  | 
|PART I                                            
|                                                   | ITEM 1. BUSINESS                                                                             
|                                                   | ITEM 2. PROPERTIES                                                                           
|                                                   | ITEM 3. LEGAL PROCEEDINGS                                                                    
|                                                   | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|PART II                                           
|                                                   | ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED SHAREHOLDER MATTERS                
|                                                   | ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA                                                 
|                                                   | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                                   | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK                           
|                                                   | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|                                                   | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|PART III                                          
|                                                   | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                  
|                                                   | ITEM 11. EXECUTIVE COMPENSATION                                                              
|                                                   | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|                                                   | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|                                                   | ITEM 14. CONTROLS AND PROCEDURES                                                             
|                                                   | ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                    
|SIGNATURES                                        
|CERTIFICATION PURSUANT TO RULE 13a-14(b)          
|REPORT OF INDEPENDENT ACCOUNTANTS                 
|                                                   |                                                                                               | CONSOLIDATED BALANCE SHEETS                    
|                                                   |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS          
|                                                   |                                                                                               | CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
|                                                   |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     
|INDEX TO EXHIBITS                                 
|EX-21.(a) Subsidiaries of the Registrant          
|EX-23.(a) Consent - Independent Public Accountants
|EX-99.(a) Certification Pursuant to Section 906   
|EX-99.(b) Certification Pursuant to Section 906   



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PART I




ITEM 1. BUSINESS

Introduction

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.

The Company maintains a website on the internet with the address of
www.iphase.com. Copies of this Annual Report on Form 10-K for the year ended
December 31, 2002 and copies of the Companys Quarterly Reports on Form 10-Q
for 2002 and 2003 and any current Reports on Form 8-K for 2002 and 2003, and
any amendments thereto, are or will be available free of charge as soon as
reasonably practical after they are filed with Securities and Exchange
Commission (SEC) at such website. The general public may also read and copy
any materials the Company files with the SEC at 1-800-SEC-0330. The Company is
an electronic filer, and the SEC maintains an internet website at www.sec.gov
that contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC.

Key Terms and Definitions

Interphase is a technology company and many terms used by the Company may be
unfamiliar to those outside the industry. Following are some key terms that
may be useful in helping the reader understand the products, technologies and
markets relevant for the Company.

Adapter Also called a host bus adapter (HBA) or network interface card (NIC).
An adapter is a device that connects a computer server to one or more
peripheral devices (such as switches, hubs, storage devices, etc.) or other
computers. An adapter card typically plugs into the expansion bus on the
motherboard of the computer and communicates with the operating system
controlling the system via the use of specific device drivers.

ATM (Asynchronous Transfer Mode) A network technology for both LANs and WANs
that supports real time voice, real time video and data. The topology uses
switches that establish a logical circuit from end to end, which guarantees a
quality of service (QoS) for that transmission. However, unlike telephone
switches that dedicate circuits end to end, unused bandwidth in ATM circuits
can be appropriated whenever available. For example, idle bandwidth in a
videoconference circuit can be used to transfer data. ATM is also highly
scalable and supports transmission speeds of 1.5, 25, 100, 155, 622 and 2488
Mbps.

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Broadband A transmission facility (communications link) that has bandwidth
(capacity) greater than a voice grade line.

CDMA (Code-Division Multiple Access) Protocols used in wireless
communications that allow numerous signals to occupy a single transmission
channel, optimizing the use of available bandwidth. The technology is used in
ultra-high-frequency (UHF) cellular telephone systems.

CDMA2000 (Code-Division Multiple Access  2000) A third-generation (3G)
mobile wireless technology also known as IMT-2000, and based on the standard
CDMA technology.

Communications Controller Communications module (similar to a network
interface card) designed specifically for carrier-grade computer systems that
often support signaling, switching and routing networks. Communication
controllers must conform to specifications that maintain overall system
compliance to the rigorous performance and reliability standards that apply to
telecom service provider equipment into which they are integrated.

CompactPCI An industrial grade variation of the PCI bus standard that
utilizes the Eurocard (VME) form factor. CompactPCI has been widely adopted by
telecom equipment suppliers because of its high-density connectors, support for
front or rear I/O access and hot-swap capabilities important for Five 9s
(99.999%) reliability.

Converged Next Generation Networks (Formerly referred to as Advanced
Intelligent Networks)The primary architecture of the public switched telephone
system (PSTN) in the 1990s, which provides enhanced voice, video and data
services and dynamic routing capabilities. It uses digital switches known as
Signal Switching Points (SSPs) that query databases in computer systems known
as Service Control Points (SCPs). The newest generation of applications
include: soft switches and media gateways which enable convergence of the PSTN
with other communications mediums such as cell phones, Internet, email, etc.

Device Drivers A program routine that links an adapter card (or other device)
to the operating system. It is written by software engineers who understand
the detailed knowledge of the adapters command language and characteristics
and contains the precise machine language necessary to perform the functions
requested by the application. When a new adapter is added to the computer, its
driver must be installed in order to run it. The operating system calls the
driver, and the driver drives the adapter. Routines that perform internal
functions, such as memory managers and disk caches, are also called drivers.

DSL A relatively new broadband technology that carries data signals up to 20
times faster than 56K dial-up modems on the high-frequency portions of phone
lines that also transmit voice. Unlike with dial-up services, DSL users dont
dial a phone number to log on to the Internet. Like cable-modem service, a DSL
line is continuously open. DSL requires two modems, one at the customer end and
one at the phone company end (called a DSLAN), which communicate constantly
with each other. DSL providers dont usually sell their services directly to
consumers  they typically resell them through Internet service providers such
as America Online and Earthlink.

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Fast Ethernet A variation of the Ethernet standard (10Base-T) that provides
100 Mbps transmission bandwidth, and up to 200 Mbps total I/O throughput with
full duplex operation.

Fibre Channel A high-speed transmission technology that can be used as a
front-end communications network, a back-end storage network, or both at the
same time. With Fibre Channel, servers can not only talk to the storage system
via SCSI (storage protocol, see below), but the hosts can talk to each other
via IP (Internet Protocol) over the same network. Fibre Channel supports
existing peripheral interfaces and communications protocols. Its name is
somewhat misleading, as Fibre Channel supports coaxial cable and twisted pair
copper wiring as well as single mode and multimode fiber connections.

Frame Relay A high-speed packet switching protocol used in wide area networks
(WANs). Providing a granular service of up to DS3 speed (45 Mbps), it has
become very popular for LAN-to-LAN connections across remote distances. All the
major telecommunications carriers offer frame relay services. Frame relay is
much faster than X.25 networks, the first packet-switching WAN standard,
because frame relay was designed for todays reliable circuits and performs
less rigorous error detection.

Gigabit Ethernet An Ethernet technology that raises transmission speed to one
Gbps and is used primarily for backbone networks and high-speed
server-to-server connectivity.

ISDN A system of digital connections that has been available for over a
decade and has gained increased use in the last few years for high-speed data
and video transmission.

LAN (Local Area Network) A short distanced data communications network that
is contained within a building or complex. Its primary use is to link
computers and peripheral devices (such as printers) and to provide individuals
with access to databases and applications running on servers attached to the
network. Anyone connected to the LAN can send messages to and work jointly
with others on the network.

Media Gateway A networking device that converts data from the format required
for one type of network to the format required for another. The media gateway
is controlled by the media gateway controller. Both are a component of
softswitch.

NAS (Network Attached Storage) A network topology that provides a common pool
of storage that can be shared by multiple servers and clients, regardless of
their file system or operating system. NAS servers are self-contained,
intelligent devices that attach directly to an existing LAN. A file system is
located and managed on the NAS server and data is transferred to network
clients over industry standard network protocols such as IP (Ethernet).

NGN (Next Generation Network) Sometimes referred to as the converged voice
and data network, NGN technology refers to post public switched telephone
network (PSTN) telecommunications networks. Elements of an NGN include, among
other items, soft switches media gateways.

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Node B A component of a 3G wireless base station containing radio
transmitters and receivers.

OC-3/STM-1 The American and European standards (respectfully) for ATM optical
interconnect 3 traffic, which is a digital transmission link with capacity of
155 Mbps.

Operating System The master control program that runs the computer. It is the
first program loaded when the computer is turned on, and its main part, called
the kernel, resides in memory at all times. It may be developed by the vendor
of the computer its running in or by a third party. It is an important
component of the computer system because it sets the operational guidelines for
all application programs that run on the system. All programs must talk to
the operating system. Popular network operating systems today include Windows
NT and 2000, HP-UX, AIX and Linux.

PCI A bus standard (Peripheral Components Interconnect) that is currently the
main general-purpose bus in virtually every desktop computer and a majority of
servers throughout the world.

PCI-X A high-performance extension to the PCI Local Bus that is designed to
meet the increased I/O demands of technologies such as Fibre Channel, Gigabit
Ethernet and Ultra3 SCSI.

PMC (PCI Mezzanine Card) a low profile mezzanine card that is electronically
equivalent to the Peripheral Component Interconnect (PCI) specification. PMC
cards are used as a quick and cost-effective method to add modular I/O to other
card formats such as VME and CompactPCI.

PTMC (PCI Telecom Mezzanine Card) A mezzanine card with connectors specific
to telecom applications, based on the industry standard PICMG 2.15.

RAID (Redundant Array of Inexpensive Disks) A set of physical disk drives
viewed by the user as a single logical device. Data is written to a number of
disk drives in a RAID so that if one fails, the data can be retrieved from one
of the remaining drives.

Remote Access Server A remote access server is a computer that provides
access to remote users (such as telecommuters, road warriors and branch office
locations) via analog or digital modems and ISDN connections.

RNC (Radio Network Controller) A component of a 3G wireless base station that
controls radio transmitters and receivers and performs other radio access and
link maintenance functions.

SAN (Storage Area Network) A flexible any-to-any networking infrastructure
linking multiple servers to multiple storage devices. Based on Fibre Channel
technology, SANs have recently emerged as the highest performance data
communications environment available today to interconnect servers and storage.
Running at Gigabit speeds, SANs offer better scalability, fault recovery and
general manageability than current client-server LAN-based approaches for
real-time and data intensive applications. Storage Area Networks are being
widely deployed for video editing, prepress and data mining applications
throughout the general IT marketplace.

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SCSI (Small Computer System Interface) Pronounced skuzzy, SCSI is a widely
used communications technology for connecting computer servers to storage
devices. The technology is especially popular in applications where network
servers are attached to numerous SCSI drives and configured as fault-tolerant
RAID clusters. In the event one drive fails, the system is still operational.
SCSI-based RAID is widely used in file servers, database servers and other
network servers. Interphase products utilize Ultra2 SCSI, which provides up to
80 Mbps data throughput and Ultra3 SCSI, which doubles the throughput to 160
Mbps.

Server A computer in a network shared by multiple users. These are
typically more powerful than computers used by individuals (often referred to
as desktops) and require advanced I/O connectivity. In enterprise network
environments, some computers may be dedicated to a single task. For instance,
an Internet server is a computer that provides World Wide Web services on the
Internet. If the Web server is used internally and not by the public, it may
be known as an intranet server.

Softswitch (Software Switch) A generic term for an open application program
interface software used to bridge a public switched telephone network and Voice
over Internet Protocol by separating the call control functions of a phone call
from the media gateway (transport layer).

SS7 (Signaling System 7) The protocols used in the U.S. telephone system for
setting up calls and providing modern transaction services such as caller ID,
automatic recall and call forwarding. When you dial 1 in front of a number,
SS7 routes the call to your long distance carrier. It also routes local calls
based on the first three digits of the phone number.

T1 A digital transmission link with a capacity of 1.544 Mbps (1,544,000 bits
per second). T1 links normally handle 24 voice conversations, but with digital
encoding can handle many more voice channels. T1 lines are also used to
connect networks across remote distances. E1 is the European equivalent and J1
is the Japanese equivalent to T1.

T3 A digital transmission link equivalent to 28 T1 lines. Providing a
capacity of 45 Mbps, a T3 link is capable of handling 672 voice conversations.
E3 is the European equivalent and J3 is the Japanese equivalent to T3.

UMTS (Universal Mobile Telecommunications System) The technology envisioned
for the next generation of Global System for Mobile Communications (GSM), and
the European member of the 3G wireless standards. UMTS is designed to support
constant connectivity to the Internet for mobile voice and data users
regardless of their location.

WAN (Wide Area Network) A communications network that covers a wide
geographic area, such as state or country. A WAN typically extends a LAN
(Local Area Network, see above) outside the building, over telephone common
carrier lines to link to other LANs in remote locations, such as branch offices
or at-home workers and telecommuters. WANs typically run over leased phone
lines, but are increasingly also employing the Internet for VPN (virtual
private network) connectivity.

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W-CDMA (Wideband Code-Division Multiple Access) A third-generation (3G)
mobile wireless technology offering much higher data speeds to mobile and
portable wireless devices than commonly offered in todays market.

1xRTT A subset of CDMA2000, a 3G wireless technology.

6U A standard size and design of printed circuit boards and the chassis that
holds them.

Strategy

The Companys strategy is to provide innovative, high-performance connectivity
solutions for the telecommunications and enterprise server markets. To achieve
this strategy, Interphase pursues several key initiatives that include:

Providing an advanced line of communication controllers for next-generation
telecom servers.

To capitalize on the trend towards the acquisition of I/O connectivity from
third party vendors by telecommunication server providers, Interphase offers a
comprehensive line of carrier-class communications controllers for:



| |  | 2.5 and 3G Wireless- controllers that provide enhanced mobile services
and integration with other networks                                                                                                                                                                                     
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Broadband/Network Telephony Access- controllers that enable
high-speed network connectivity, i.e. Internet access.                                                                                                                                                                             
| 
| |  | Next Generation Networks and the Advanced Intelligent Networks (AIN)-
controllers that help service providers migrate their AIN facilities
to more scalable and cost-effective architectures and provide new
platforms for Soft switch and Media Gateway convergence of voice and
data networks

To further assist telecommunication server providers, Interphase launched its
professional services organization in 2001 responsible for customizing software
and third party applications to customer specific designs. With
high-performance communication controllers, software development tools,
protocol support, experience with third party protocols and complementary
professional services, Interphase helps decrease costs and improve
time-to-market for service providers building next-generation telecom networks.

Offering a comprehensive server I/O adapter product portfolio.

In order to provide Interphase customers with effective storage networking
solutions, Interphase offers a comprehensive line of storage networking
adapters specifically designed for use in demanding, enterprise class
applications such as:



| |  | Enterprise Networking mission critical backbone and Internet servers             
|- |  | ----------------------------------------------------------------------------------
| 
| |  | Server-attached Storage high-throughput direct-attached storage servers          
| 
| |  | Storage Area Networks servers providing connectivity for SAN and NAS applications

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Delivering superior customer service.

Over the past 25 years, Interphase has established strong relationships with
key Fortune 500 suppliers of enterprise computer and telecommunication servers.
Much of this success has been due to the superior pre- and post-sale service
the Company delivers to customers. With a vertically integrated account
perspective, Interphase provides flexibility, timely response and other
customized account service features. Further, the Companys technical support
is divided into functional groups supporting either server I/O or
telecommunication product offerings, allowing Interphase to specifically focus
its support efforts for the different needs and requirements of its customers
in these differing market segments.

Developing strategic partnerships.

Interphase is an acknowledged leader in designing products for multi-vendor
interoperability. The Company leverages this leadership position into
strategic partnerships with its Diamond Developer Partners Program. Through
this program, Interphase builds synergistic marketing and technical
relationships with other key suppliers in its respective markets. Rigorous
product testing and early access to new partner product releases allows tighter
product integration and helps assure compatibility for the Companys end-user
customers. Also, Interphases joint software development, particularly with
third party protocol vendors, decreases the integration time for customers by
offering a pre-integrated solution.

Products

Interphase offers an advanced line of telecom communication controllers, a
comprehensive portfolio of Fibre Channel SAN adapters and adapters for remote
access and WAN communications.

Telecom Communication Controllers

Interphase products designed for use in next-generation Broadband
telecommunication servers include:



| |  |  | iNAV 4000 CompactPCI Blade- a protocol interworking, network
protocol processing board with on-board intelligence suited to
Broadband convergence applications such as wireless gateways and media
gateways.                                                                                                                                
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | iNAV 3000 CompactPCI Blade- a telecom carrier card designed to
enable PMC cards to function in a CompactPCI environment aimed at
narrowed applications.                                                                                                                                                                                   
|
| |  |  | 1635 CompactPCI Packet Switched Backplane T1/E1/J1 Communications
Controller- a 6U CompactPCI communications controller, based on the
PICMG 2.16 Ethernet backplane standard, with an advanced architecture
featuring the Motorola MPC8260 RISC CPU that offers superior
performance over T1/E1/J1 communication links. The 1635 also offers

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| |   |  | dual Ethernet interfaces to 2.16 backplanes, and can convert both SS7 and
ATM to IP for access to the Ethernet backplane.                                                                                                                                                                                                                                                                                                                                                                                                       
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 4531 PMC ATM over T3/E3 Communications Controller- a PCI Mezzanine
Card that provides reliable, high performance ATM communications over
T3/E3 connections for applications such as aggregating Internet traffic
for transport over the public ATM backbone network.                                                                                                                                                                                                                                                            
|
| |  |  | 4531S PMC ATM over T3/E3 Communications Controller- an
intelligent, high-performance, PCI Mezzanine Card that provides
software selectable T3/E3 network access, and can support multiple
protocols on-board, increasing overall system performance.                                                                                                                                                                                                                                                                            
|
| |  |  | 4532 PMC Single-port OC-3/STM-1 Communications Controller an
intelligent, high-performance, PCI Mezzanine Card that provides direct
access to SONET networks and software selectable access to OC-3/STM-1
ATM network, as well as a 10/100 Ethernet interface. The 4532 is the
only product in its class, and is ideally suited for 3G networks that
define ATM as the interconnect between RNCs and Node Bs, for example.
It also targets broadband access networks and gateways that require
on-board ATM to IP interworking.
|
| |  |  | 4534 PMC Quad-port Serial Communications Controller- a PCI
Mezzanine Card that provides reliable, high performance serial
communications for multiple telecommunication protocols including ATM,
ISDN, Frame Relay, X.25 and PPP.                                                                                                                                                                                                                                                                                               
|
| |  |  | 4535 PMC Multiprotocol Communications Controller- a PCI Mezzanine
Card that provides four high-speed serial communication links to
provide connection to the Public Switch Telephone Network to support
advanced SS7 or AIN applications.                                                                                                                                                                                                                                                                                       
|
| |  |  | 4537 PMC Multiprotocol Communications Controller- a PCI Mezzanine
Card targeted specifically for telecommunication applications that
require multiple T1/E1 interfaces. The 4537 supports multiple
frame-based protocols, such as ATM and SS7, provides options for front
or rear I/O access, and includes an integrated Channel Service Unit.                                                                                                                                                                                  
|
| |  |  | 4538 PMC Communications Controller- a PCI Mezzanine Card with 2
software selectable T1/E1/J1 interfaces front access plus a 10/100
Ethernet port, it is targeted for signaling and control plane
applications in wireless and NGN telecom networks. With its on-board
SS7 protocol processing and excellent SS7 performance, and its Ethernet
access, it is a modular solution for signaling platforms and signaling
gateway applications.                                                                                      
|
| |  |  | 4539 PMC Communications Controller- a PCI Mezzanine Card targeted
for signaling/control plane and broadband/user plane telecom networks.
The 4539 offers four software selectable T1/E1/J1 interfaces via rear
access, and a 10/100 Ethernet interface on the front. The 4539
supports multiple protocols on board, including ATM, and it can serve
both narrowband and broadband networks in one solution.                                                                                                                     

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| |  |  | 4575 PMC ATM Communications Interface Card- a PCI Mezzanine Card
that provides reliable, high performance ATM SONET OC-3 155 Mbps
connectivity.                                                                                        
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 4576 PMC ATM Communications Interface Card- the next generation of
the 4575 product.                                                                                                                                                   
|
| |  |  | 5575 PCI ATM Communications Interface Card- a PCI adapter card
that provides full duplex ATM connectivity for systems running Windows
NT, Novell NetWare, UnixWare, Solaris and AIX.                                                   
|
| |  |  | 5576 PCI ATM Communications Interface Card- the next generation of
the 4575 product.                                                                                                                                                   
|
| |  |  | 6535 CompactPCI T1/E1/J1 Communications Controller- a 6U
CompactPCI communications controller with an advanced architecture
featuring the Motorola MPC8260 RISC CPU that offers superior
performance over T1/E1/J1 communication links.
|
| |  |  | 6575 CompactPCI ATM Communications Controller- a 3U or 6U
CompactPCI adapter that provides full duplex ATM connectivity at OC-3
data rates for industrial and telecommunication server computers.                                      

Server I/O Products

Interphase server I/O products targeted for use in enterprise applications
include the following:



| |  |  | 4526T PowerSAN PCI Fibre Channel Adapter- a 33Mhz PMC adapter
which provides single port 1-Gbps Fibre Channel connectivity.                                                                                                                                 
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 5540 PowerSAN PCI Fibre Channel Adapter- a 66Mhz PCI bus adapter
which provides price-effective 1-Gbps storage connectivity for basic
Fibre Channel SAN connectivity.                                                                                       
|
| |  |  | 5541 PowerSAN PCI Fibre Channel Adapter a low profile version of
the 5540 that is only half of the height of normal PCI cards, allowing
use in the new smaller profile (1U) servers being increasingly used in
Internet server and e-commerce applications.
|
| |  |  | 5550 PowerSAN PCI Fibre Channel Adapter- a 66Mhz PCI bus adapter
which provides two independent 1-Gbps Fibre Channel connections for
high-reliability SAN applications.                                                                                     
|
| |  |  | 5560 PowerSAN PCI Fibre Channel Adapter- a 66Mhz PCI bus adapter
which provides 2-Gbps Fibre Channel connectivity for applications
requiring maximized data throughput.                                                                                     
|
| |  |  | FibreView Enterprise- a JAVA-based management utility which allows
enterprise IT managers to control Fibre Channel server connections from
anywhere within the network via the Internet.                                                                    

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| |  |  | 5570 SlotOptimizer (Combo) PCI Storage Networking Adapter a
64-bit PCI multifunction adapter card providing full duplex Gigabit
Fibre Channel and high-performance Gigabit Ethernet connectivity.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 552C SlotOptimizer (Combo) PCI Storage Networking Adapter a
64-bit PCI multifunction adapter card combining dual channel Ultra2
SCSI connectivity with two 10/100 Ethernet ports.                
|
| |  |  | 553C SlotOptimizer (Combo) PCI Storage Networking Adapter a
64-bit PCI multifunction adapter card combining dual channel Ultra3
SCSI connectivity with two 10/100 Ethernet ports.                
|
| |  |  | 551E SlotOptimizer (Combo) Single-port Fast Ethernet Adapter a
64-bit PCI adapter card.                                                                                                          
|
| |  |  | 554E SlotOptimizer (Combo) Quad-port Fast Ethernet Adapter a
64-bit PCI adapter card that provides four independent full-duplex Fast
Ethernet ports.                                             

New Product Development

The primary target markets for the Companys products are characterized by
those areas of a telecom network that can reduce cost for carriers, decrease
their time to market for deployment of new and existing services and finally,
preserve carriers network equipment investment. The economic downturn in the
telecom business sector has forced telecom service providers and network
equipment providers, or NEPs, to reexamine their areas of competitive value add
and streamline their business operations. In particular, service and NEPs have
been consolidating their product development and manufacturing groups, which
actions generally lead to an increase in the use of off-the-shelf products,
such as the products sold by Interphase. Consequently, the Companys new
product development is driven by the profitable growth areas in the market
where NEPs use off the shelf designs and emerging standards that improve the
performance and reliability of standard designs and the race to market.

To better address the emerging market opportunities in UMTS/W-CDMA and
CDMA-2000/1xRTT wireless servers (3G Wireless) and media gateways and
signaling elements, Interphase is expanding its product line to incorporate
more ATM to IP interworking functions, increased access to Ethernet networks
and backplanes, and overall higher-performance on-board protocol processing
performance. This is achieved through enhancements to existing products and
the launch of new product lines and services in the telecom products portfolio.

Interphase also targets enterprise data centers facing the ongoing pressure to
scale their infrastructure to satisfy the storage I/O demand for new
data-intensive applications. Interphase continues to expand its
SlotOptimizerTM combination I/O adapter product line designed to overcome the
I/O slot constraints of todays smaller servers. These products are designed
to combine high-performance LAN and storage interface technologies (such as
various speeds of Ethernet, SCSI and Fibre Channel) into a single adapter,
providing multiple networking connections that make more efficient use of
precious PCI slots.

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The Company has been engaged in the development of new products and the
refinement of its existing products since its inception. The Company has
invested $7 million in 2002, $7.8 million in 2001 and $10.4 million in 2000 in
its research and development activities. Interphase has been active in the
formulation of industry standards sanctioned by groups such as the PCI
Industrial Manufacturers Group (PICMG), IEEE, ANSI, VME International Trade
Association (VITA), Fast Ethernet Alliance, SCSI Committee, the LADDIS Group,
ONC/NFS Consortium, and Storage Networking Interoperability Association (SNIA),
and FC-Open (Fibre Channel) Consortium.

Marketing and Customers

The Companys standard products are sold to OEMs for inclusion in scientific,
industrial, medical, engineering workstations, printing, mini-supercomputer,
graphics and other computer applications. These purchasers incorporate the
Companys products in proprietary systems for resale to distributors, system
integrators and VARs (which may add specially designed software) prior to
resale to end-users. Also, the Company sells products directly to
sophisticated end-users such as the military. During 2002, sales to Hewlett
Packard and Lucent accounted for $8.7 million or 35% and $7.2 million or 29% of
the Companys consolidated revenues, respectively. During 2001, sales to
Hewlett Packard and SCI Systems accounted for $8.5 million or 30% and $4.2
million or 15% of the Companys consolidated revenues, respectively. During
2000, sales to Hewlett Packard and Terayon Communication Systems accounted for
$10 million or 18% and $5.9 million or 11% of the Companys consolidated
revenues, respectively. No other customers accounted for more than 10% of the
Companys consolidated revenues in the periods presented.

The Company markets its products through its direct sales force and value-added
distribution partners. In addition to the Companys headquarters in Plano,
Texas; the Company has sales offices located in or near Boca Raton, Florida;
Santa Clara, California; Boston, Massachusetts; Minneapolis, Minnesota; Ottawa,
Canada; Munich, Germany; Beijing, China; Helsinki, Finland; Paris, France; and
Bangkok, Thailand. The Companys sales personnel market products directly to
key customers and support the distribution channel. In addition, the Company
has entered into distribution agreements with key national and international
distribution partners, including Arrow North American Computer Products (North
America), Crellon Microsystems (UK), ACAL (The Netherlands), Future Systems
(Korea), Macnica (Japan), Adlink, Limited (China), Alloy Computer (Australia),
Powerbridge (Germany) and many others. See Note 17 of the accompanying notes
to the consolidated financial statements for information regarding the
Companys revenues related to North America and other foreign countries.

Interphase emphasizes its extensive product support, training and field support
to its customers. The Companys products are generally sold with a one-year
warranty covering components and labor, however, certain contracts with major
OEM customers allow for longer warranty periods. The Company also offers
extended warranties and support, however at December 31, 2002, a limited number
of agreements were in place.

The Company and its major customers generally enter into written contracts
specifying, among other items standard in commercial agreements, product
specifications, failure rates, shipping requirements, shipment rescheduling
terms, price/volume schedules and manufacturer warranties.

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These agreements generally do not contain determinable purchase commitments of
the customers, providing instead that actual purchase and shipments of products
be made by specific purchase order. Accordingly, any shipment dates stated in
such contracts are subject to rescheduling and/or cancellation and, therefore,
are not indicative of the future purchase orders to be submitted by such
customer. In addition, the actual terms of the contracts tend to be modified
in the ordinary course of business by means of subsequent purchase order terms
and by course of dealing.

The Company does not believe that the level of backlog of orders is either
material or indicative of future results, since its contracts are subject to
revision through subsequent purchase orders and its customers are generally
permitted to cancel purchase orders, within certain parameters, prior to
shipment without penalty.

The majority of the Companys sales are to OEMs with payment terms typically
being net 30-90 days from the date of invoice.

Manufacturing and Supplies

Manufacturing operations are currently conducted at the Companys manufacturing
facility located in Carrollton, Texas. The Companys products consist
primarily of various integrated circuits, other electronic components and
firmware assembled onto an internally designed printed circuit board.

The Company uses internally designed applications specific integrated circuits
(ASIC), some of which are sole-sourced, on some of its products, as well as
standard off-the shelf items presently available from two or more suppliers.
Historically, the Company has not experienced any significant problems in
maintaining an adequate supply of these parts sufficient to satisfy customer
demand. The Company believes that it has good relations with its vendors.

The Company generally does not manufacture products to stock in finished goods
inventory, as substantially all of the Companys production is dedicated to
specific customer purchase orders. As a result, the Company does not have any
material requirements to maintain significant finished goods inventories.

Intellectual Property and Patents

While the Company believes that its success is ultimately dependent upon the
innovative skills of its personnel and its ability to anticipate technological
changes, its ability to compete successfully will depend, in part, upon its
ability to protect proprietary technology contained in its products. The
Company does not currently hold any patents relative to its current product
lines. Instead, the Company relies upon a combination of trade secret,
copyright and trademark laws and contractual restrictions to establish and
protect proprietary rights in its products. The development of alternative,
proprietary and other technologies by third parties could adversely affect the
competitiveness of the Companys products. Further, the laws of some countries
do not provide the same degree of protection of the Companys proprietary
information, as do the laws of the United States. Finally, the Companys
adherence to industry-wide technical standards and specifications

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may limit the Companys opportunities to provide proprietary product features
capable of protection.

The Company is also subject to the risk of litigation alleging infringement of
third party intellectual property rights. Infringement claims could require
the Company to expend significant time and money in litigation, pay damages,
develop noninfringing technology or acquire licenses to the technology, which
is the subject of asserted infringement.

The Company has entered into several nonexclusive software licensing agreements
that allow the Company to incorporate third-party software into its product
line thereby increasing its functionality, performance and interoperability.

Employees

At December 31, 2002, the Company had 155 full-time employees, of which 40 were
engaged in manufacturing and quality assurance, 56 in research and development,
35 in sales, sales support, customer service and marketing and 24 in general
management and administration.

The Companys success to date has been significantly dependent on the
contributions of a number of its key technical and management employees. The
loss of the services of one or more of these key employees could have a
material adverse effect on the Company. In addition, the Company believes that
its future success will depend in a large part upon its ability to attract and
retain highly skilled and motivated technical, managerial, sales and marketing
personnel. Competition for such personnel is intense.

None of the Companys employees are covered by a collective bargaining
agreement and there have been no work stoppages. The Company considers its
relationship with its employees to be good.

Competition

The Companys competition includes vendors specifically dedicated to the
storage I/O and telecommunication product markets. Most of the Companys major
OEM customers have chosen to outsource the design, manufacture and software
integration of communications controllers and protocol processing, and the
recent market conditions and reduction in resources have forced some network
equipment providers to utilize off the shelf products for their product design.
Increased competition and commoditization of network interface technologies
could result in price reductions, reduced margins and loss of market share.

Risk Factors

Potential Fluctuations in Period-to-Period Results

Interphase has experienced fluctuations in its period-to-period revenue and
operating results in the past and may experience fluctuations in the future.
The Companys sales on both an annual and a quarterly basis can fluctuate as a
result of a variety of factors, many of which are beyond its control.

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The Company may have difficulty predicting the volume and timing of orders for
products, and delays in closing orders can cause the Companys operating
results to fall short of anticipated levels for any period. Delays by
Interphases OEM customers in producing products that incorporate the Companys
products could also cause operating results to fall short of anticipated
levels. Other factors that may particularly contribute to fluctuations in the
Companys revenue and operating results include success in achieving design
wins, the market acceptance of the OEM products that incorporate the Companys
products, the rate of adoption of new products, competition from new
technologies and other companies, and the variability of the life cycles of
Interphases customers products.

Because fluctuations can happen, Interphase believes that comparisons of the
results of its operations for preceding quarters are not necessarily meaningful
and that investors should not rely on the results for any one quarter as an
indication of how Interphase will perform in the future. Investors should also
understand that, if the Companys revenue or operating results for any quarter
are less than the level expected by securities analysts or the market in
general, the market price for the Companys common stock could immediately and
significantly decline.

Continued Computer and Communications Market Slowdown

During 2002 and 2001, the global computer and communications market has
significantly deteriorated reflecting a significant reduction in capital
spending in these markets. The Companys sales and results of operations have
been adversely affected by this market deterioration.

If capital investment levels in these markets continue to decline, or if the
computer and communications market does not improve or improves at a slower
pace than anticipated, the Companys revenues and profitability will continue
to be adversely affected. In addition, if the Companys sales volume and
product mix do not improve, our gross margin percentage may not improve,
resulting in lower than expected results of operations.

The significant slowdown in capital spending in the Companys target markets
has created uncertainty as to the level of demand in those markets. In
addition, the level of demand can change quickly and can vary over short
periods of time. As a result of the uncertainty and variations in these
markets, accurately forecasting revenues, results and cash flow is increasingly
difficult.

Technological Change and New Product Introductions

The market for the Companys products is characterized by rapid technological
change and frequent introduction of products based on new technologies. As
these products are introduced, the industry standards change. Additionally, the
overall telecommunications and networking industry is volatile as the effects
of new technologies, new standards, new products and short life cycles
contribute to changes in the industry and the performance of industry
participants. The Companys future revenue will depend upon the Companys
ability to anticipate technological change and to develop and introduce
enhanced products of its own on a timely basis that comply with new industry
standards. New product introductions, or the delays thereof, could contribute
to quarterly fluctuations in operating results as orders for new products
commence and orders for existing products decline.

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Moreover, significant delays can occur between a product introduction and
commencement of volume production. The inability to develop and manufacture
new products in a timely manner, the existence of reliability, quality or
availability problems in its products or their component parts, or the failure
to achieve market acceptance for its products could have a material adverse
effect on the Companys revenue and operating results.

Competition

The telecommunications, signaling and networking business is extremely
competitive, and the Company faces competition from a number of established and
emerging start-up companies. Many of the Companys principal competitors have
established brand name recognition and market positions and have substantially
greater financial resources to deploy on promotion, advertising and research
and product development than the Company. In addition, as the Company broadens
its product offerings, it may face competition from new competitors. Companies
in related markets could offer products with functionality similar or superior
to that offered by the Companys products. Increased competition could result
in price reductions, reduced margins and loss of market share, all of which
could materially and adversely affect the Companys revenue and operating
results. The Company expects that competition will increase substantially as a
result of industry consolidations and alliances, as well as the emergence of
new competitors. There can be no assurance that the Company will be able to
compete successfully with its existing or new competitors or that competitive
pressures faced by the Company will not have a material adverse effect on the
Companys revenue and operating results.

Dependence on Key Customers

While the Company enjoys a very good relationship with its customers, there can
be no assurance that the Companys principal customers will continue to
purchase products from the Company at current levels. Customers typically do
not enter into long-term volume purchase contracts with the Company, and
customers have certain rights to extend or delay the shipment of their orders.
The loss of one or more of the Companys major customers, or the reduction,
delay or cancellation of orders or a delay in shipment of the Companys
products to such customers could have a material adverse effect on the
Companys revenue and operating results.

Design Wins

A design win is when a customer or prospective customer notifies the Company
that its product has been selected to be integrated with their product.
Ordinarily, there are a number of steps between the design win and when
customers initiate production shipments. Design wins reach production volumes
at varying rates, typically beginning approximately 12 to 24 months after the
design win occurs. A variety of risks such as schedule delays, cancellations
of programs and changes in customer markets can delay or prevent the design win
from reaching the production phase. The customers failure to bring their
product to the production phase could have an adverse effect on the Companys
revenue and operating results.

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Product Liability

If the Company delivers products with errors, defects or problems, its
credibility and the market acceptance and sales of its products could be
harmed. Further, if Interphases products contain errors, defects and
problems, then the Company may be required to expend significant capital and
resources to alleviate such problems. Defects could also lead to product
liability as a result of product liability lawsuits against Interphase or
against its customers. Interphase has agreed to indemnify its customers in some
circumstances against liability from defects in its products. While no such
litigation currently exists, product liability litigation arising from errors,
defects or problems, even if it resulted in an outcome favorable to Interphase,
would be time consuming and costly to defend. Existing or future laws or
unfavorable judicial decisions could negate any limitation of liability
provisions that are included in the Companys license agreements. A successful
product liability claim could seriously harm the Companys business, financial
condition and results of operations.

Interphase maintains insurance coverage for product liability claims. Although
management believes this coverage is adequate, it is not assured that coverage
under insurance policies will be adequate to cover product liability claims
against the Company. In addition, product liability insurance could become
more expensive and difficult to maintain and may not be available in the future
on commercially reasonable terms or at all. The amount and scope of any
insurance coverage may be inadequate if a product liability claim is
successfully asserted against the Company.

Dependence on Third-Party Suppliers

Certain components used in the Companys products are currently available to
the Company from one or a limited number of sources. There can be no assurance
that future supplies will be adequate for the Companys needs or will be
available on prices and terms acceptable to the Company. The Companys
inability in the future to obtain sufficient limited-source components, or to
develop alternative sources, could result in delays in product introduction or
shipments, and increased component prices could negatively affect the Companys
gross margins, either of which could have a material adverse effect on the
Companys revenue and operating results.

Dependence on Internal Manufacturing

The Company manufactures its products at its Carrollton, Texas facility, and
does not currently have alternative manufacturing capabilities, either
internally or through third parties, to perform those manufacturing functions.
If the Company were able to identify alternative third-party contract
manufacturers, there can be no assurance that the Company would be able to
retain their services at the same costs that the Company currently enjoys. In
the event of an interruption in production, the Company may not be able to
deliver products on a timely basis, which could have a material adverse effect
on the Companys revenue and operating results. Although the Company currently
has business interruption insurance, no assurances can be given that such
insurance will adequately cover the Companys lost business as a result of such
an interruption.

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Dependence on Proprietary Technology

The Companys success depends upon its proprietary technologies. To date, the
Company has relied principally upon trademark, copyright and trade secret laws
to protect its proprietary technologies. The Company generally enters into
confidentiality or license agreements with its customers, distributors and
potential customers and limits access to and distribution of the source code to
its software and other proprietary information. The Companys employees are
subject to the Companys employment policy regarding confidentiality. There can
be no assurance that the steps taken by the Company in this regard will be
adequate to prevent misappropriation of its technologies or to provide an
effective remedy in the event of a misappropriation by others.

Although management believes that the Companys products do not infringe on the
proprietary rights of third parties, there can be no assurance that
infringement claims will not be asserted, possibly resulting in costly
litigation in which the Company may not ultimately prevail. Adverse
determinations in such litigation could result in the loss of the Companys
proprietary rights, subject the Company to significant liabilities, require the
Company to seek licenses from third parties or prevent the Company from
manufacturing or selling its products, any of which could have a material
adverse effect on the Companys revenue and operating results.

It may be necessary for the Company to enter into technology licenses from
others due to the large number of patents in the computer networking industry
and the rapid rate of issuance of new patents and new standards or to obtain
important new technology. There can be no assurance that these third party
technology licenses will be available to the Company on commercially reasonable
terms. The loss of or inability to obtain any of these technology licenses
could result in delays or reductions in product shipments. Such delays or
reductions in product shipments could have a material adverse effect on the
Companys revenue and operating results.

Dependence on Employees

The Companys success depends on the continued contributions of its personnel
and on its ability to attract and retain skilled employees. Although the
Companys employees are subject to the Companys employment policy regarding
confidentiality and ownership of inventions, employees are generally not
subject to employment agreements or non-competition covenants. Changes in
personnel could adversely affect the Companys operating results.

The Company has Incurred Significant Losses in the Past

The Company has incurred net losses of approximately $8.4 million for the year
ended December 31, 2002 and $9.6 million for the year ended December 31, 2001.
As part of a broader strategic refocusing, the Company developed a strategy to
end-of-life many of its legacy products in an effort to focus its resources on
its new product lines. This strategy resulted in increased sales of legacy
products in 2000, however legacy product revenues have consistently declined in
2001 and 2002. Management does not expect significant revenues from its legacy
product lines in future periods. However, management does expect to return to
revenue growth in 2003 driven by the design wins of the Companys high
performance controllers in previous years. In order to achieve sustainable
profitability, the Company will need to generate significantly higher revenues
while containing costs and operating expenses. Management cannot be certain
that the Companys revenues will

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grow or that the Company will ever achieve sufficient revenues to become
profitable on a long-term, sustained basis.

The Company May Need More Working Capital to Fund Operations and Expand the
Business

Management believes the Companys current financial resources will be
sufficient to meet the present working capital and capital expenditure
requirements for the next twelve months. However, the Company may need to
raise additional capital before this period ends to further:



| |  |  | fund research and development of new products beyond what is
expected in 2003;                                           
| | - |  | -------------------------------------------------------------------------------------------------------------------------
|
| |  |  | expand the Companys product and service offerings beyond what is
contemplated in 2003 if unforeseen opportunities arise;
|
| |  |  | respond to unforeseen competitive pressures.                                                                             

The Companys future liquidity and capital requirements will depend upon
numerous factors, including the success of the existing and new product and
service offerings and potentially competing technological and market
developments. However, any projections of future cash flows are subject to
substantial uncertainty. If current cash, marketable securities, lines of
credit and cash generated from operations are insufficient to satisfy the
liquidity requirements, the Company may seek to sell additional equity
securities, issue debt securities or increase the Companys working capital
line of credit. The sale of additional equity securities could result in
additional dilution to the Companys shareholders. From time to time,
management expects to evaluate the acquisition of or investment in businesses
and technologies that complement the Company. Acquisitions or investments
might impact the Companys liquidity requirements or cause the Company to sell
additional equity securities or issue debt securities. There can be no
assurance that financing will be available in amounts or on terms acceptable to
the Company, if at all. If adequate funds were not available on acceptable
terms, the Companys ability to develop or enhance products and services, take
advantage of future opportunities or respond to competitive pressures would be
limited. This limitation could negatively impact the results of operations and
financial condition of the Company.




ITEM 2. PROPERTIES

The Companys executive offices are located in a 22,000-square foot leased
facility located in Plano, Texas. The executive offices serve as the primary
location for the Companys administrative, engineering and marketing functions.
The Companys manufacturing and operations center is located in a
24,000-square foot leased facility in Carrollton, Texas. The executive offices
and the manufacturing and operations center leases extend through the end of
2005. In addition, the Company leases a 9,000-square foot facility in
Chaville, France (near Paris) that supports the European markets. The
Chaville, France lease extends through June 2005. The Company believes that
its facilities and equipment are in good operating condition and are adequate
for its operations. The Company owns most of the equipment used in its
operations. Such equipment consists primarily of engineering equipment,
manufacturing and test equipment and fixtures.

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ITEM 3. LEGAL PROCEEDINGS

None




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

Not applicable




PART II




ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

Since January 1984, shares of the Companys common stock have been traded on
the Nasdaq National Market, or its predecessors, under the symbol INPH. The
following table summarizes its high and low price for each quarter during 2002
and 2001 as reported by Nasdaq.

|               |  |      |       |     |  |  |       | 
|-------------- |  | ---- | ----- | --- |  |  | ----- | 
|2002           |  | High |       | Low
|               |  |      |       |    
|First Quarter  |  |      | 5.970 |     |  |  | 4.020 | 
|Second Quarter |  |      | 4.870 |     |  |  | 3.500 | 
|Third Quarter  |  |      | 4.640 |     |  |  | 3.000 | 
|Fourth Quarter |  |      | 4.180 |     |  |  | 3.060 | 

|               |  |      |        |     |  |  |       | 
|-------------- |  | ---- | ------ | --- |  |  | ----- | 
|2001           |  | High |        | Low
|               |  |      |        |    
|First Quarter  |  |      | 13.875 |     |  |  | 6.750 | 
|Second Quarter |  |      | 7.560  |     |  |  | 5.150 | 
|Third Quarter  |  |      | 5.100  |     |  |  | 3.210 | 
|Fourth Quarter |  |      | 5.860  |     |  |  | 3.170 | 

The Company had approximately 3,300 beneficial owners of its common stock, of
which 55 were of record as of March 18, 2003.

The Company has not paid dividends on its common stock since its inception.
The Board of Directors does not anticipate payment of any dividends in the
foreseeable future and intends to continue its present policy of retaining
earnings for reinvestment in the operations of the Company.

The Board of Directors has adopted a Shareholder Rights Plan whereby each
holder of record as of December 29, 2000 received a right to purchase from the
Company one share of common stock of the Company at a price of $93 per share
for each share held. These rights can only be exercised after certain events
occur, such as if a person or entity acquires, or makes a tender or exchange
offer to acquire 15% or more of the Companys common stock and the rights
expire ten years from the record date. Upon acquisition of 15% or more of the
Companys common stock, each right not owned by the acquiring person or group
will be adjusted to allow the purchase for $93 of a number of shares having a
then market value of $186. These rights are intended to provide the Company

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certain anti-takeover protections. The Board of Directors may terminate the
Rights Plan, or redeem the rights for $0.01 per right, at any time until the
tenth business day following a public announcement of a 15% or more stock
acquisition. The Company has reserved 7,000,000 shares of common stock for
this plan. The rights were distributed to shareholders as of the record date
as a nontaxable dividend. The rights are attached to and trade with Interphase
common stock until the occurrence of one of the triggering events, at which
time the rights would become detached from the common stock.

In November 2001, the Board of Directors authorized the repurchase of up to $5
million of the Companys 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 Companys Board of Directors
believes the repurchase program is an appropriate means of increasing
shareholder value. The repurchase plan does not obligate the Company to
repurchase any specific number of shares and may be suspended at any time.

See Note 11 of the accompanying notes to the consolidated financial statements
for information regarding the Companys shareholder approved stock option
plans.




ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data presented below under the captions
Statement of Operations Data and Balance Sheet Data have been derived from
the consolidated balance sheets and the related statements of operations for
the years ended December 31, 2002, 2001, 2000, 1999 and 1998, and the notes
thereto appearing elsewhere herein, as applicable.

It is important that you also read Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations and the financial
statements, including the notes, for the years ended December 31, 2002, 2001
and 2000.

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Statement of Operations Data:
(In thousands, except per share data)

|                                                             |             |   |                         |       |      |   |         |       |      |   |        |      |  |   |        |      |  |   |        |      | 
|------------------------------------------------------------ | ----------- | - | ----------------------- | ----- | ---- | - | ------- | ----- | ---- | - | ------ | ---- |  | - | ------ | ---- |  | - | ------ | ---- | 
|                                                             |             |   | Year ended December 31,
|                                                             |             |   |                        
|                                                             |             |   | 2002                    |       | 2001 |   | 2000    |       | 1999 |   | 1998  
|                                                             |             |   |                         |       |      |   |         |       |      |   |       
|Revenues                                                     |             | $ | 25,123                  |       |      | $ | 28,732  |       |      | $ | 55,697 |      |  | $ | 73,502 |      |  | $ | 68,690 |     
|                                                             |             |   |                         |       |      |   |         |       |      |   |        |      |  |   |        |      |  |   |        |     
|Gross margin                                                 |             |   | 9,792                   |       |      |   | 9,004   |       |      |   | 29,688 |      |  |   | 34,702 |      |  |   | 33,598 |     
|                                                             |             |   |                         |       |      |   |         |       |      |   |        |      |  |   |        |      |  |   |        |     
|Research and development                                     |             |   | 7,005                   |       |      |   | 7,757   |       |      |   | 10,359 |      |  |   | 10,590 |      |  |   | 10,766 |     
|Sales and marketing                                          |             |   | 5,991                   |       |      |   | 6,812   |       |      |   | 10,731 |      |  |   | 11,036 |      |  |   | 10,060 |     
|General and administrative                                   |             |   | 3,285                   |       |      |   | 3,759   |       |      |   | 4,824  |      |  |   | 5,366  |      |  |   | 5,417  |     
|Restructuring costs and other
special charges                |             |   |                        |       |      |   | 2,091   |       |      |   |       |      |  |   |       |      |  |   |       |     
|Goodwill impairment charge                                   |             |   |                        |       |      |   | 2,350   |       |      |   |       |      |  |   |       |      |  |   |       |     
|                                                             |             |   |                         |       |      |   |         |       |      |   |        |      |  |   |        |      |  |   |        |     
|Operating (loss) income                                      |             |   | (6,489                  | )     |      |   | (13,765 | )     |      |   | 3,774  |      |  |   | 7,710  |      |  |   | 7,355  |     
|Other, net                                                   |             |   | 611                     |       |      |   | (20     | )     |      |   | 333    |      |  |   | (1,030 | )    |  |   | (1,583 | )   
|                                                             |             |   |                         |       |      |   |         |       |      |   |        |      |  |   |        |      |  |   |        |     
|(Loss) income from continuing
operations before income
taxes |             |   | (5,878                  | )     |      |   | (13,785 | )     |      |   | 4,107  |      |  |   | 6,680  |      |  |   | 5,772  |     
|(Loss) income from continuing
operations                     |             |   | (8,401                  | )     |      |   | (9,572  | )     |      |   | 2,400  |      |  |   | 4,291  |      |  |   | 3,542  |     
|Discontinued operations, net                                 |             |   |                        |       |      |   |        |       |      |   | 571    |      |  |   | (867   | )    |  |   | (829   | )   
|                                                             |             |   |                         |       |      |   |         |       |      |   |        |      |  |   |        |      |  |   |        |     
|Net (loss) income                                            |             | $ | (8,401                  | )     |      | $ | (9,572  | )     |      | $ | 2,971  |      |  | $ | 3,424  |      |  | $ | 2,713  |     
|                                                             |             |   |                         |       |      |   |         |       |      |   |        |      |  |   |        |      |  |   |        |     
|(Loss) income from continuing
operations per share
Basic EPS |             | $ | (1.51                   | )     |      | $ | (1.68   | )     |      | $ | 0.41   |      |  | $ | 0.77   |      |  | $ | 0.64   |     
|                                                             | Diluted EPS |   | $                       | (1.51 | )    |   | $       | (1.68 | )    |   | $      | 0.38 |  |   | $      | 0.70 |  |   | $      | 0.63 | 
|Net (loss) income per share                                  |             |   |                         |       |      |   |         |       |      |   |        |      |  |   |        |      |  |   |        |     
|                                                             | Basic EPS   | $ | (1.51                   | )     |      | $ | (1.68   | )     |      | $ | 0.51   |      |  | $ | 0.61   |      |  | $ | 0.49   |     
|                                                             | Diluted EPS |   | $                       | (1.51 | )    |   | $       | (1.68 | )    |   | $      | 0.48 |  |   | $      | 0.56 |  |   | $      | 0.48 | 
|Weighted average common shares                               |             |   | 5,551                   |       |      |   | 5,705   |       |      |   | 5,805  |      |  |   | 5,593  |      |  |   | 5,508  |     
|Weighted average common and
dilutive shares                  |             |   | 5,551                   |       |      |   | 5,705   |       |      |   | 6,237  |      |  |   | 6,113  |      |  |   | 5,628  |     

Balance Sheet Data:
(In Thousands)

|                        |  |              |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|----------------------- |  | ------------ | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                        |  | December 31,
|                        |  |             
|                        |  | 2002         |        | 2001 |  | 2000 |        | 1999 |  | 1998
|                        |  |              |        |      |  |      |        |      |  |     
|Working capital         |  | $            | 24,254 |      |  | $    | 31,601 |      |  | $    | 37,502 |  |  | $ | 35,314 |  |  | $ | 26,314 | 
|Total assets            |  |              | 30,749 |      |  |      | 39,243 |      |  |      | 54,473 |  |  |   | 54,671 |  |  |   | 50,288 | 
|Total liabilities       |  |              | 7,931  |      |  |      | 7,323  |      |  |      | 12,534 |  |  |   | 14,536 |  |  |   | 18,463 | 
|Redeemable common stock |  |              |       |      |  |      | 762    |      |  |      | 1,780  |  |  |   | 2,796  |  |  |   | 3,813  | 
|Shareholders equity    |  |              | 22,818 |      |  |      | 31,158 |      |  |      | 40,159 |  |  |   | 37,339 |  |  |   | 28,012 | 

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ITEM 7. 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, our 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.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

The Companys consolidated financial statements are based on the selection and
application of significant accounting policies, which require management to
make significant 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. Management believes the following are some of the more critical
judgment areas in the application of the Companys accounting policies that
affect the Companys financial condition and results of operations. Management
has discussed the application of these critical accounting policies with the
Board of Directors and Audit Committee.

Revenue Recognition:Revenues consist of product and service revenues and are
recognized in accordance with Generally Accepted Accounting Principals (GAAP)
and related SEC Staff Accounting Bulletin (SAB) 101, Revenue Recognition.
Product revenues are recognized upon shipment, provided fees are fixed and
determinable, a customer purchase order is obtained (when applicable), and
collection is probable. Revenues from reseller agreements are recognized when
the product is sold through to the end customer unless an established return
history supports recognizing revenue upon shipment, less a provision for
estimated sales returns. Deferred revenue consists of revenue from reseller
arrangements and certain arrangements with extended payment terms. Revenue
from extended payment terms is recognized in the period the payment becomes due
if all other revenue recognition criteria have been met. Service revenue is
recognized as the services are performed.

Revenue derived from the development and installation of highly customized
software packages under a professional services contract is recognized on a
percentage of completion basis measured by the relationship of hours worked to
total estimated contract hours and the costs incurred as of the

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date of measurement. The Company follows this method since reasonably
dependable estimates of the revenue and contract hours applicable to various
elements of a contract can be made. Since the financial reporting of these
contracts depends upon estimates, which are assessed continually during the
term of these contracts, recognized revenue and profit are subject to revisions
as the contract progresses to completion. Revisions in profit estimates are
reflected in the period in which the facts that give rise to the revisions
become known. Accordingly, favorable changes in estimates result in additional
revenue recognition and net income, and unfavorable changes in estimates result
in a reduction of recognized revenue and net income. If estimates were to
indicate that a loss would be incurred on a contract upon completion, a
provision for the expected loss would be recorded in the period in which the
loss became evident.

Warranty Reserve:The Company offers to its customers a limited warranty that
its products will be free from defect in the materials and workmanship for a
specified period. The Company has established a warranty reserve, as a
component of accrued liabilities, for any potential claims. The Company
estimates its warranty reserve based upon an analysis of all identified or
expected claims and an estimate of the cost to resolve those claims. Changes
in claim rates and differences between actual and expected warranty costs could
impact the warranty reserve estimates.

Allowance for Doubtful Accounts:Management is required to estimate the
collectibility of the Companys trade receivables. A considerable amount of
judgment is required in assessing the realization of these receivables,
including the current creditworthiness of each customer and related aging of
the past due balances. Management evaluates all accounts periodically and a
reserve is established based on the best facts available to management and
reevaluated and adjusted as additional information is received. The reserves
also are determined by using percentages applied to certain aged receivable
categories based on historical results.

Allowance for Returns:The Company estimates its allowance for returns based
upon expected return rates. The estimates of expected return rates are
generally a factor of historical returns. Changes in return rates could impact
allowance for return estimates.

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. 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 our products. In assessing the ultimate realization of
inventories, management is required to make judgments as to future demand
requirements and compare that with the current or committed inventory levels.
Reserve requirements generally increase as projected demand requirements
decrease due to market conditions, technological and product life cycle changes
as well as longer than previously expected usage periods. The Company has
experienced significant changes in required reserves in recent periods due to
changes in strategic direction, such as discontinuances of product lines as
well as declining market conditions. It is possible that significant changes
in required inventory reserves may continue to occur in the future if there is
a further decline in market conditions.

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Long-Lived Assets:Property and Equipment and other long-lived assets are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. Such determination is made in
accordance with the applicable Generally Accepted Accounting Principals
requirements associated with the long-lived asset, and is based upon, among
other things, estimates of the amount of future net cash flows to be generated
by the long-lived asset and estimates of the current fair value of the asset.
Adverse changes in such estimates could result in an inability to recover the
carrying value of the long-lived asset, thereby possibly requiring an
impairment charge to be recognized in the future. All impairments are
recognized in operating results when a permanent reduction in value occurs.

Tax Assessments:The Company is periodically engaged in various tax audits by
federal and state governmental authorities incidental to its business
activities. The Company records reserves for its estimated probable losses of
these proceedings if applicable.

Deferred Taxes:The Company records a valuation allowance to reduce its
deferred income tax assets to the amount that is believed to be realizable
under the guidance of Statement of Financial Accounting Standards No. 109
Accounting for Income Taxes. The Company considers recent historical losses,
future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for a valuation allowance. Management is required to
make a continuous assessment as to the realizability of the deferred tax
assets.

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CONSOLIDATED STATEMENT OF OPERATIONS AS A PERCENTAGE OF REVENUE

|                                                             |  |                         |       |      |  |      |       |    |  |  |       |   
|------------------------------------------------------------ |  | ----------------------- | ----- | ---- |  | ---- | ----- | -- |  |  | ----- | --
|                                                             |  | Year ended December 31,
|                                                             |  |                        
|                                                             |  | 2002                    |       | 2001 |  | 2000
|                                                             |  |                         |       |      |  |     
|Revenues                                                     |  |                         | 100.0 | %    |  |      | 100.0 | %  |  |  | 100.0 | % 
|Cost of sales                                                |  |                         | 61.0  | %    |  |      | 68.7  | %  |  |  | 46.7  | % 
|                                                             |  |                         |       |      |  |      |       |    |  |  |       |   
|Gross margin                                                 |  |                         | 39.0  | %    |  |      | 31.3  | %  |  |  | 53.3  | % 
|Research and development                                     |  |                         | 27.9  | %    |  |      | 27.0  | %  |  |  | 18.6  | % 
|Sales and marketing                                          |  |                         | 23.8  | %    |  |      | 23.7  | %  |  |  | 19.3  | % 
|General and administrative                                   |  |                         | 13.1  | %    |  |      | 13.0  | %  |  |  | 8.6   | % 
|Restructuring costs and other special charges                |  |                         |      |      |  |      | 7.3   | %  |  |  |      |   
|Goodwill impairment charge                                   |  |                         |      |      |  |      | 8.2   | %  |  |  |      |   
|                                                             |  |                         |       |      |  |      |       |    |  |  |       |   
|Operating (loss) income                                      |  |                         | (25.8 | )%   |  |      | (47.9 | )% |  |  | 6.8   | % 
|                                                             |  |                         |       |      |  |      |       |    |  |  |       |   
|Interest, net                                                |  |                         | 2.0   | %    |  |      | 1.9   | %  |  |  | 1.1   | % 
|Other, net                                                   |  |                         | .4    | %    |  |      | (2.0  | )% |  |  | (0.5  | )%
|                                                             |  |                         |       |      |  |      |       |    |  |  |       |   
|(Loss) income from continuing operations
before income taxes |  |                         | (23.4 | )%   |  |      | (48.0 | )% |  |  | 7.4   | % 
|(Benefit) provision for income taxes                         |  |                         | 10.0  | %    |  |      | (14.7 | )% |  |  | 3.1   | % 
|                                                             |  |                         |       |      |  |      |       |    |  |  |       |   
|(Loss) income from continuing operations                     |  |                         | (33.4 | )%   |  |      | (33.3 | )% |  |  | 4.3   | % 
|Discontinued operations, net                                 |  |                         |      |      |  |      |      |    |  |  | 1.0   | % 
|                                                             |  |                         |       |      |  |      |       |    |  |  |       |   
|Net (loss) income                                            |  |                         | (33.4 | )%   |  |      | (33.3 | )% |  |  | 5.3   | % 
|                                                             |  |                         |       |      |  |      |       |    |  |  |       |   

OVERVIEW

In the midst of the Companys efforts to provide the telecommunications
industry with the same high-performance and reliability that Interphase had
traditionally delivered in enterprise network environments, the global
telecommunications and computer networking industries, as a whole,
significantly deteriorated in fiscal year 2001 and continued to decline in
2002. The Companys revenue and profitability were adversely impacted due to
these market conditions as its target customers delayed or canceled projects
while reducing resource levels through downsizing and layoffs. While in the
longer term, we believe that these actions will enhance our ability to sell
these customers our solutions; it has caused uncertainty in the shorter term
about the level of demand for our products and the status of current programs
we are involved in, and impaired our ability to predict trends and demand.

Over the past two years, we have worked closely with our customers to consider
their needs and position our current and future product and services offerings.
We have also significantly reduced our overall cost structure and quarterly
breakeven revenue level. However, if telecom and enterprise communication OEM
spending levels continue to decline or if the communications

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controller markets that we serve do not improve or improve at a slow rate, our
revenues as well as profitability will be negatively impacted. We expect to
see revenue growth in 2003 from prior years design wins. Our final results are
expected to improve by realizing higher gross margin rates resulting from lower
excess and obsolete inventory charges, improved product mix, and reductions in
manufacturing overhead cost although we anticipate an overall increase in
operating expenses due to continued investments in research and development and
sales and marketing efforts to position the Company for long term success.

RESULTS OF OPERATIONS

In September 1999, the Company completed the sale of its Voice Over Internet
Protocol (VOIP) business. Accordingly, the Companys consolidated financial
statements and notes included herein, for all periods presented reflect the
VOIP business as a discontinued operation in accordance with Accounting
Principles Board Opinion No. 30.

Revenues:Total revenues for the years ended December 31, 2002, 2001 and 2000
were $25.1 million, $28.7 million and $55.7 million, respectively.

Revenues decreased 13% in 2002 compared to 2001. Among other factors such as
the expected decline of revenues from legacy and storage products as the
Company concentrated its sales efforts on its next-generation solutions, the
reduction in revenues was primarily due to the continued telecommunications and
computer networking market downturn. This downturn has resulted in reduced
equipment purchasing and delayed or cancelled programs in various existing
customers and targeted accounts. Legacy technology revenues decreased from $8.8
million for the year ended December 31, 2001 to $2.2 million for the year ended
December 31, 2002. In addition to the decrease in legacy technologies,
revenues from Fibre Channel products decreased from $5.9 million for the year
ended December 31, 2001 to $1.5 million for the year ended December 31, 2002.
The decrease in legacy and Fibre Channel revenues was partially offset by
revenue growth in combo and telecom technologies. Combo product revenues
increased to $8.6 million for the year ended December 31, 2002 from $6.8
million for the year ended December 31, 2001. Telecom technology revenues
increased to $11.8 million for the year ended December 31, 2002 from $6.4
million for the year ended December 31, 2001. In 2003, we expect to see
revenue growth over current levels from previous years design wins of our high
performance telecom controllers and a continued decline in legacy and Fibre
Channel revenues.

Revenues decreased 48% in 2001 compared to 2000. The reduction in revenues was
generally due to the overall market slowdown experienced in 2001, which
significantly reduced computer and communications equipment purchasing by key
customers in both the enterprise and telecommunications industries, as well as
the discontinuance of several lines of legacy technologies. Legacy technology
revenues decreased from $24.5 million for the year ended December 31, 2000 to
$8.8 million for the year ended December 31, 2001. The decrease in legacy
technologies revenues was partially offset by revenue growth in combo
technologies. Combo technologies revenue grew to $6.8 million for the year
ended December 31, 2001 from $2.7 million for the year ended December 31, 2000.

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Gross Margin:Gross margin as a percentage of sales for the years ended
December 31, 2002, 2001 and 2000 was 39%, 31% and 53%, respectively. For the
five-year period prior to 2001 and 2002, the Companys annual gross margin
rates were between 47% and 53%. A large part of the recent deterioration in
margin is due to significant excess and obsolete inventory charges incurred as
a result of an accelerated decline of legacy and storage revenues. It is
difficult to predict our future margins based on the current economic and
political environment and the condition of the telecommunications and computer
industries, however, over the past year we have focused on design cost
improvements, manufacturing costs and purchasing practices that we expect will
enable us to remain price competitive and return margin rates to previously
seen levels if current forecasts are realized.

The increase in the gross margin percentage in 2002 compared to 2001 primarily
relates to an excess and obsolete inventory charge of $4.4 million incurred
during the second quarter 2001 compared to an excess and obsolete inventory
charge of $1.1 million incurred during the second quarter 2002. Gross margin
as a percentage of revenues, before considering these excess and obsolete
inventory charges, was 43% and 47% for the years ended December 31, 2002 and
2001, respectively.

The gross margin rate declined in 2001 compared to 2000 by approximately 16
points due to an excess and obsolete inventory charge of $4.4 million incurred
in the second quarter 2001, as described in the restructuring costs and other
special charges section below. The remaining portion of the decline was due to
the shift in product mix away from higher margin legacy products and
underutilization of the Companys manufacturing facility.

Research and Development:The Companys investment in the development of new
products through research and development was $7.0 million, $7.8 million and
$10.4 million in 2002, 2001 and 2000, respectively. As a percentage of
revenue, research and development expenses were 28%, 27% and 19% for 2002, 2001
and 2000, respectively. We anticipate that spending on research and
development will increase in the future as we continue to invest in development
of our current and future products, however, the Company will monitor the level
of its investments concurrently with actual revenue results.

Research and development expenses decreased $752,000 in 2002 compared to 2001.
Approximately 69% of the decrease in research and development expenses was due
to a reduction in headcount associated with the Companys restructuring program
and other cost reduction initiatives implemented at the end of the second
quarter 2001. The remaining portion of the decrease primarily related to the
decreased spending on legacy sustaining engineering, partially offset by an
increase in telecommunications development spending. Research and development
expenses as a percentage of sales increased slightly during the period due to
the decrease in revenues.

Research and development costs decreased $2.6 million in 2001 compared to 2000.
Approximately 41% of the decrease was due to the Companys restructuring
program and other cost reduction initiatives implemented at the end of the
second quarter 2001, as described in the restructuring costs and other special
charges section below. The remaining portion of the decrease primarily related
to

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decreased spending on legacy sustaining engineering, partially offset by an
increase in telecommunications development spending. Research and development
costs as a percentage of sales increased during this period due to the decrease
in revenues.

Sales and Marketing:Sales and marketing expenses were $6 million, $6.8
million and $10.7 million in 2002, 2001 and 2000, respectively. As a
percentage of revenue, sales and marketing expenses were 24%, 24% and 19% for
2002, 2001 and 2000, respectively.

Sales and marketing expense decreased $821,000 in 2002 compared to 2001.
Approximately 89% of the decrease was related to reductions in marketing
headcount and activities associated with the Companys restructuring program
and other cost reduction initiatives implemented at the end of the second
quarter 2001. The remaining portion of the decrease is primarily related to
other cost reduction initiatives within the sales organization.

Sales and marketing expenses decreased $3.9 million in 2001 compared to 2000.
Approximately 34% of the decrease was due to decreased revenues, which resulted
in reduced sales commissions and bonuses. The remaining portion of the
decrease primarily relates to the Companys restructuring program and other
cost reduction initiatives implemented at the end of the second quarter 2001,
as described in the restructuring costs and other special charges section
below. Sales and marketing expenses as a percentage of sales increased due to
the decrease in revenues.

General and Administrative:General and administrative expenses were $3.3
million, $3.8 million and $4.8 million in 2002, 2001 and 2000, respectively.
As a percentage of revenue, general and administrative expenses were 13%, 13%
and 9% for 2002, 2001 and 2000, respectively.

General and administrative expenses decreased $474,000 in 2002 compared to
2001. Approximately 63% of the reduction is due to decreases in legal and
accounting expenditures. The remaining portion of the decrease is primarily the
result of the Companys restructuring program and other cost reduction
initiatives implemented at the end of the second quarter 2001.

General and administrative expenses decreased $1.1 million in 2001 compared to
2000, primarily as a result of the Companys restructuring program and cost
reduction initiatives implemented at the end of the second quarter 2001, as
described in the restructuring costs and other special charges section below.
General and administrative expenses as a percentage of sales increased due to
the decrease in revenues.

Restructuring Costs and Other Special Charges:In the second quarter 2001, the
Company announced a restructuring program designed to allow the Company to
continue aggressive funding of its development organizations, while preserving
cash levels and securing new design-ins. As a result of the restructuring
program, continued decline in predicted revenue and customers cautious
expectations regarding market recovery, the Company recorded restructuring
costs and other special charges of $2.1 million, classified as operating
expenses, and an additional excess and obsolete inventory charge of $4.4
million, classified as cost of sales.

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The restructuring program resulted in the reduction of approximately 22% of the
Companys workforce, impacting all business functions in North America. As a
result, the Company recorded a workforce reduction charge of $483,000 relating
to severance and fringe benefits. In addition, the Company wrote off $123,000
of nonutilized fixed assets.

Due to the decline in business conditions, decline in legacy product revenues
and the diminished expected future benefits from the purchased intangibles
related to the acquisition of Synaptel, S.A. in 1996, the Company recorded a
charge of $1.5 million related to the impairment of developed technology and
assembled workforce during the second quarter 2001. These intangible assets,
purchased in the acquisition of Synaptel, S.A., relate to the Companys legacy
product lines. In the second quarter 2000, the Company developed a strategy to
end-of-life many of its legacy products in an effort to focus its resources on
its new product lines. This strategy resulted in increased sales of legacy
products in 2000, as many customers placed last time buy orders; however,
legacy product revenues declined in the first quarter of 2001, and continued to
decline through the second quarter of 2001. Management does not expect
significant revenues from its legacy product lines in future periods.

Goodwill Impairment Charge:All of the Companys goodwill is associated with
the entire Company rather than any specific identifiable asset or product line.
Each quarter the Company evaluates whether an impairment of this enterprise
goodwill may exist by comparing the book value of its common stock to the
product of (i) the number of shares of common stock issued and outstanding at
the end of the quarter and (ii) the market price of the common stock at the end
of the quarter. If the product of shares and market price exceeds the book
value, impairment does not exist. If the product of shares and market price is
less than book value, the Company evaluates whether the condition is other than
temporary based (i) primarily on whether fluctuations in the Companys stock
price subsequent to the quarter-end result in a product of shares and market
price that exceeds book value and (ii) on all other available evidence. If the
product of shares and market price is continuously less than book value based
on daily closing market prices for the prior six months, the Company evaluates
whether the condition is other than temporary considering all other available
evidence. If the Company determines the condition is other than temporary,
additional amortization is recorded for the impairment, equal to the excess
book value at the end of the quarter.

The Company recorded an impairment charge, at the end of the fourth quarter
2001 by writing-off the remaining $2.4 million of goodwill. At December 31,
2001, the Company had 5.5 million common shares issued and outstanding with a
book value of $33.5 million. The common stock price at December 31, 2001 was
$5.44, resulting in a market capitalization of $30 million. The Companys
market capitalization had consistently been less than book value since June 30,
2001, and continued to remain below book value after year-end 2001. As a
result of the Companys market capitalization continuously remaining below book
value for a period of greater than six months and the uncertainty related to
the timing of a technology sector market recovery, the Company, following its
stated policy, recorded the impairment charge of $2.4 million at the end of the
fourth quarter 2001.

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Interest, Net:Interest income, net of interest expense, was $517,000,
$554,000 and $599,000 in 2002, 2001 and 2000, respectively. The decrease in
interest income, net of interest expense in 2002 compared to 2001 primarily
relates to lower investment rates of return.

The decrease in interest income, net, of interest expense in 2001 compared to
2000 relates to the reduction in the investment rate of return on the funds
available for investment. This reduction was partially offset by higher daily
cash levels available for investment, as well as lower debt levels.

Other Income (Expense), Net:Other income (expense), net, was $94,000,
($574,000) and ($266,000) in 2002, 2001 and 2000, respectively.

Other income, net was $94,000 in 2002 compared to other (expense), net of
($574,000) in 2001. Other (expense), net in 2001 included charges for the
amortization of goodwill of $240,000 and purchased intangibles of $330,000. As
the carrying value of the Companys goodwill and purchased intangibles exceeded
its fair value, the Company wrote off the carrying amount of its goodwill in
the fourth quarter of 2001 and its purchased intangibles in the second quarter
of 2001. In addition to the elimination of amortization expense related to
goodwill and purchased intangibles during the third quarter 2001, the Company
recorded a charge of $334,000 due to the other than temporary impairment of
certain marketable securities received in the sale of the Companys VOIP
business. These expenses were partially offset by proceeds received in the
first quarter of 2001 related to the settlement of a lawsuit for approximately
$130,000.

The increase in other expense, net, in 2001 compared to 2000 primarily relates
to a charge of $334,000 due to the other than temporary impairment of certain
marketable securities received in the sale of the Companys VOIP business.
This charge was partially offset by the elimination of the purchased
intangibles amortization expense. As described in Note 2 to the financial
statements, the Company wrote off the impaired purchased intangibles during the
second quarter of 2001. These purchased intangibles were amortized at a rate
of $165,000 per quarter. Additionally, other expense, net in 2000 includes a
gain of approximately $689,000 related to hedging transactions on certain
marketable securities received in the sale of the Companys VOIP business.

Income Taxes:The Companys effective income tax rates were 43% in 2002 (31%)
in 2001 and 42% in 2000.

The effective tax provision rate for the current year was significantly more
than the U.S. statutory rate due to a non-cash charge of approximately $4.9
million to provide a full valuation allowance for the net deferred tax assets
at December 31, 2002. The effective tax benefit rate excluding this charge
would have been (40%), which differed from the U.S. statutory rate primarily
due to the benefit of a foreign tax loss carry forward. The foreign tax loss
carry forward expired at December 31, 2002.

At December 31, 2001 and continuing through September 30, 2002, the future tax
benefits related to the domestic deferred tax assets were not reserved as it
had been more likely than not that they would be realized due to their
relatively long carry forward periods. A valuation allowance is required when
it is more likely than not that all or a portion of a deferred tax asset will
not be

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realized. 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. During the
fiscal 2002 fourth quarter-end review, several significant developments were
considered in determining the need for a full valuation allowance, including
the continuing market decline, uncertainty and lack of visibility in the
telecommunications market as a whole and continued losses from operations. As
a result of managements assessment, the Company established a full valuation
allowance for the deferred tax assets at December 31, 2002. Until the Company
reaches an appropriate level of profitability management does not expect to
recognize any significant tax benefits in future results of operations. The
Companys provision for income taxes for the year ended December 31, 2002
includes a charge of approximately $4.9 million related to the establishment of
a full valuation allowance for the deferred tax assets.

The decline in the Companys effective income tax rate from 2000 to 2001 is
primarily due to the impairment of goodwill and other identifiable intangibles
resulting in significant nondeductible charges in 2001.

Discontinued Operations:In 1999, the Company sold its VOIP business for $2.4
million. However, due to the uncertainty of payment on the proceeds that
remained unpaid as of December 31, 1999, the Company recognized income upon
payment. In 2000, the remaining $830,000 due for the technology license fee
was collected and recorded as a gain on disposal of discontinued operations.
Additionally, in 2000, the Company sold its 20% interest in Quescom for
$400,000, resulting in a gain of $91,000. The total gain in 2000 was $571,000
net of $350,000 tax. There were no operating activities during 2000 related to
the VOIP business.

Net (Loss) Income:The Company reported a net loss of $8.4 million in 2002, a
net loss of $9.6 million in 2001, and net income of $3 million in 2000.

LIQUIDITY AND CAPITAL RESOURCES

Consolidated Cash Flows

Operating Activities:Trends in cash flows from operating activities for 2002,
2001 and 2000, are generally similar to the trends in the Companys earnings
except for noncash realized holding period loss on marketable securities,
provision for uncollectible accounts and returns, provision for excess and
obsolete inventory, depreciation and amortization, deferred income taxes, tax
benefit from stock option exercises, noncash restructuring costs and other
special charges and goodwill impairment charge. Cash provided by operating
activities totaled $1.8 million, $4.8 million and $4.8 million for the years
ended December 31, 2002, 2001 and 2000, respectively, compared to net loss of
$8.4 million and $9.6 million in 2002 and 2001, respectively and net income of
$3 million in 2000. The Company incurred a significant noncash realized
holding period loss on marketable securities in 2001 related to the other than
temporary impairment of certain marketable securities received in the sale of
the Companys VOIP business (Note 5). Provisions for uncollectible accounts
and returns decreased in 2001 and 2002 due to the reduction in accounts
receivable and an increased focus on credit evaluation. Provision for excess
and obsolete inventory has remained high as the Company continues to migrate
from legacy product lines. Management expects lower

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provision requirements in 2003. Depreciation and amortization decreased in
2002 and 2001 due to the write-offs of the Companys goodwill and other
intangible assets in 2001 (Notes 2 and 3). Deferred income taxes decreased in
2002, due to the establishment of a full valuation allowance for the Companys
deferred tax assets (Note 9). Deferred income taxes increased in 2001, due
primarily to the establishment of a net operating loss carry forward generated
by 2001 losses. The Companys tax benefit from stock option exercises has
decreased in 2002 and 2001 due to the reduction in stock option exercises as a
result of the Companys stock price. The Company incurred significant noncash
restructuring costs and other special charges and a goodwill impairment charge
in 2001 (Notes 2 and 3).

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 $1.7 million in 2002, a net cash increase of $1 million in 2001 and
a net cash use of $2 million in 2000. Cash flows from investing activities in
each of the three years 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 three years
focused on the manufacturing and engineering functions of the Company. The
expenditures in 2002 relate primarily to leasehold improvements made to the
Companys new corporate offices and manufacturing facility and to the purchase
of new manufacturing equipment which utilizes new technologies and increases
automation of the manufacturing process to provide increased productivity and
efficiency. Expenditures in 2001 and 2000 relate primarily to general
equipment upgrades and modernization. Cash used by investing activities in
2000, included approximately $1.2 million in cash received in the sale of the
Companys VOIP business (Note 8).

Financing Activities:Net cash used by financing activities totaled $783,000,
$5.9 million and $3.2 million for the three years ended December 31, 2002, 2001
and 2000, respectively. Cash used by financing activities includes $3.5
million related to an increase in restricted cash in 2001 (Note 7). Cash used
by financing activities includes payments on debt of approximately $1.7 million
and $2.2 million in 2001 and 2000, respectively. There were no debt payments
necessary in 2002. Cash used by financing activities includes approximately
$328,000 and $539,000 related to proceeds from the exercise of stock options in
2001 and 2000, respectively. Stock option exercises have declined since 2000
due to the decline in the Companys stock price. Cash used from financing
activities in each of the three years includes the purchase of redeemable
common stock of approximately $762,000, $1 million and $1 million in 2002, 2001
and 2000, respectively (Note 13).

Commitments and Contingencies

At December 31, 2002, the Company had no material commitments to purchase
capital assets, however capital expenditures for 2003 are estimated at
approximately $1 million, the majority of which relate to the Companys
engineering tools and general office equipment. The Companys significant
long-term obligations are its operating leases on its facilities and future
debt payments.

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The Company has not paid any dividends since its inception and does not
anticipate paying any dividends in 2003.

The following table summarizes the Companys future contractual obligations and
payment commitments as of December 31, 2002:

|                    |                   |       |     |      |     |      |     |            |       |       |     |   |     |   |   |   |   |   |       |       |       | 
|------------------- | ----------------- | ----- | --- | ---- | --- | ---- | --- | ---------- | ----- | ----- | --- | - | --- | - | - | - | - | - | ----- | ----- | ----- | 
|Contractual         |                   |       |     |      |     |      |     |            |       |       |     |   |     |   |   |   |   |   |       |      
|Obligations         |                   | 2003  |     | 2004 |     | 2005 |     | Thereafter |       | Total
|                    |                   |       |     |      |     |      |     |            |       |      
|Operating leases(1) |                   | $     | 788 |      |     | $    | 835 |            |       | $     | 652 |   |     | $ |  |   |   | $ | 2,275 |      
|                    | Long-term debt(2) |       |     |     |     |      |     | 3,500      |       |       |     |  |     |   |   |  |   |   |       | 3,500 |      
|                    |                   | Total |     | $    | 788 |      |     | $          | 4,335 |       |     | $ | 652 |   |   | $ |  |   |       | $     | 5,775 | 



---

|(1) |  | The Company leases its facilities under noncancelable
operating leases with the longest terms extending to the end of
2005.                                                                                                                                                                                                                                                               
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | At December 31, 2002, the Company had borrowings of
$3.5 million under a $5 million revolving credit facility with a
bank. The revolving 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.

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
Companys Board of Directors believes the repurchase program is an appropriate
means of increasing shareholder value. The repurchase plan does not obligate
the Company to repurchase any specific number of shares and may be suspended at
any time.

Effective October 1998, the Company approved a stock repurchase agreement with
Motorola, Inc. to purchase ratably from October 1998 to July 2002, all of the
shares owned by Motorola for $4.1 million at $6.25 per share. Under the terms
of the agreement, Motorola retained the right as an equity owner and had
assigned its voting rights to the Company. The Company canceled the stock upon
each repurchase. Prior to the repurchase agreement, Motorola owned
approximately 12% of the Companys outstanding common stock. In July 2002, the
Company made its final repurchase of stock from Motorola and therefore has no
further obligation under the agreement.

Other

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

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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

In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. The
most significant changes made by SFAS No. 141 are: 1) requiring that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001; and 2) establishing specific criteria for the recognition
of intangible assets separately from goodwill. SFAS No. 142 primarily
addresses the accounting for acquired goodwill and intangible assets. The most
significant changes made by SFAS No. 142 are: 1) goodwill and indefinite-lived
intangible assets are no longer amortized; 2) goodwill will be tested annually
and whenever events or circumstances occur indicating that goodwill might be
impaired; and 3) the amortization period of intangible assets with finite lives
will no longer be limited to forty years. In the current year, accordance with
the adoption of these standards, the Company would have been required to
transfer the balance of the intangible defined as Workforce into Goodwill under
the terms of the pronouncement and no longer amortize goodwill. The Company
adopted SFAS No. 141 effective July 1, 2001, and SFAS No. 142 effective January
1, 2002, however, as the Companys goodwill and workforce were determined to be
impaired and were written off in the fourth quarter of 2001, the adoption of
these standards did not have a material effect on the Companys financial
position or results of operations for the periods ended December 31, 2002.

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires the fair value of a liability for an asset
retirement obligation to be recognized in the period that it is incurred if a
reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset.
SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The
adoption of SFAS No. 143 is not expected to have a material impact on the
Companys results of operations, financial position or cash flows.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 addresses financial accounting
and reporting for the impairment of long-lived assets and for long-lived assets
to be disposed of. This statement supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of; however, this statement retains the
fundamental provisions of SFAS No. 121 for (a) recognition and measurement of
the impairment of long-lived assets to be

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held and used, and (b) measurement of
long-lived assets to be disposed of by sale. This statement also supersedes
the accounting and reporting provisions of APB Opinion No. 30, Reporting the
Results of Operations  Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions for segments of a business to be disposed of. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. The Company
adopted this standard effective January 1, 2002. The adoption of this standard
did not have a material effect on the Companys financial position or results
of operations for the year ended December 31, 2002.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections as
of April 2002, which rescinded or amended various existing standards. One
change addressed by this standard pertains to treatment of extinguishments of
debt as an extraordinary item. SFAS No. 145 rescinds SFAS No. 4, Reporting
Gains and Losses from Extinguishment of Debt and states that an extinguishment
of debt cannot be classified as an extraordinary item unless it meets the
unusual or infrequent criteria outlined in Accounting Principles Board Opinion
No. 30 Reporting the Unusual and Infrequently Occurring Events and
Transactions. The provisions of this statement are effective for fiscal years
beginning after May 15, 2002 and extinguishments of debt that were previously
classified as an extraordinary item in prior periods that do not meet the
criteria in Opinion 30 for classification as an extraordinary item shall be
reclassified. The adoption of SFAS No. 145 did not have a material impact on
the Companys results of operations, financial position or cash flows for the
year ended December 31, 2002.

In June 2002, the FASB issued SFAS No. 146 Accounting for Costs Associated
with Exit or Disposal Activities, which requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. The provisions of
this statement are effective for exit or disposal activities initiated after
December 31, 2002 and are not expected to have a material impact on the
Companys results of operations, financial position or cash flows.

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 are effective for financial statements of both interim
and annual periods that end after December 15, 2002.

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In December 2002, the FASB issued SFAS No. 148 Accounting for Stock-Based
Compensation  Transition and Disclosure, an Amendment of FASB Statement No.
123. SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation prescribed by SFAS No. 123. SFAS No. 148 also amends the
disclosure requirements of SFAS No. 123 to require disclosure in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
As the Company continues to account for stock-based employee compensation using
the intrinsic value method under APB No. 25, the Company, as required, has only
adopted the revised disclosure requirements of SFAS No. 148 as of December 31,
2002 (Note 11).

EITF Issue 00-21, Accounting for Revenue Arrangements with Multiple
Deliverables, addresses the accounting treatment for an arrangement to provide
the delivery or performance of multiple products and/or services where the
delivery of a product or system or performance of services may occur at
different points in time or over different periods of time. The arrangements
are often accompanied by initial installation, initiation, or activation
services and involve either a fixed fee or a fixed fee coupled with a
continuing payment stream, which may be fixed or variable. The EITF reached
conclusions regarding, among other issues, the applicability of the provisions
regarding separation of contract elements in EITF Issue 00-21 to contracts
where one or more elements fall within the scope of other authoritative
literature, such as SOP 81-1. The proposed 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Foreign Currency Risk

Due to the fact that the Company conducts business on a global basis in various
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. Foreign currency translation and transaction gains and
losses were not significant during the years ended December 31, 2002, 2001 and
2000.

Market Price Risk

The Company maintained a minority equity investment in a publicly traded
company and recorded a net after tax loss on this investment of $20,000 and
$334,000 during 2002 and 2001, respectively.

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The Company has no equity hedge
contracts outstanding as of December 31, 2002 or December 31, 2001.

Interest Rate Risk

The Companys investments are subject to interest rate risk. Interest rate
risk is the risk that the Companys financial condition and results of
operations could be adversely affected due to movements in interest rates. The
Company invests its cash in a variety of interest-earning financial
instruments, including bank time deposits, money market funds, and variable
rate and fixed rate obligations of corporations and national governmental
entities and agencies. Due to the demand nature of the Companys money market
funds and the short-term nature of the Companys time deposits and debt
securities portfolio, these assets are particularly sensitive to changes in
interest rates. The Company manages this risk through investments with
shorter-term maturities and varying maturity dates. If the Companys
short-term assets are reinvested in a declining interest rate environment, the
Company would experience an immediate negative impact on other income. The
opposite holds true in a rising interest rate environment.




ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Item 15 (a) below.




ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

On June 13, 2002, the Audit Committee of the Board of Directors of Interphase
Corporation (Interphase) authorized (1) the engagement of
PricewaterhouseCoopers LLP as the independent auditors for Interphase for the
calendar year 2002 and (2) the dismissal of Interphases existing independent
auditors, Arthur Andersen LLP (Andersen).

During the two fiscal years ended December 31, 2001, and the subsequent interim
period through June 13, 2002, the date of the dismissal of Andersen, (1) there
were no disagreements with Andersen on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedures,
which disagreements, if not resolved to the satisfaction of Andersen, would
have caused Andersen to make reference in connection with its report to the
subject matter of the disagreement and (2) Andersen has not advised Interphase
of any reportable events as defined in paragraphs (A) through (D) of Regulation
S-K Item 304 (a)(1)(v).

The accountants report of Andersen on the consolidated financial statements of
Interphase and its subsidiaries as of and for the years ended December 31, 2001
and 2000 did not contain any adverse opinion or disclaimer of opinion and was
not qualified or modified as to uncertainty, audit scope, or accounting
principles.

During the two fiscal years ended December 31, 2001, and the subsequent interim
period through June 13, 2002, PricewaterhouseCoopers LLP has not been consulted
by Interphase, or by anyone on Interphases behalf, regarding either the
application of accounting principles to a specified

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transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
the financial statements of Interphase.




PART III




ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors

See information regarding the directors and nominees for director under the
heading Election of Directors of the Proxy Statement for the Annual Meeting
of Shareholders to be held May 7, 2003, which is incorporated herein by
reference.

Executive Officers

See information regarding the executive officers under the heading Executive
Officers of the Proxy Statement for the Annual Meeting of Shareholders to be
held May 7, 2003, which is incorporated herein by reference.




ITEM 11. EXECUTIVE COMPENSATION

See information regarding executive compensation under the heading Executive
Compensation of the Proxy Statement for the Annual Meeting of Shareholders to
be held May 7, 2003, which is incorporated herein by reference.




ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

See information regarding security ownership of certain beneficial owners and
management under the headings Principal Shareholders and Executive
Compensation of the Proxy Statement for the Annual Meeting of Shareholders to
be held May 7, 2003, which is incorporated herein by reference.




ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

See information regarding certain relationships and related transactions under
the headings Principal Shareholders and Certain Related Transactions of the
Proxy Statement for the Annual Meeting of Shareholders to be held May 7, 2003,
which is incorporated herein by reference.




ITEM 14. CONTROLS AND PROCEDURES

The Companys management, under the supervision of the Companys 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 defined in Rule 13a-14(c) and 15d-14(c)
under the Securities and Exchange act of 1934) as of a date within 90 days

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before the filing date of this annual 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.




ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

|    |  |                                                  |  | 
|--- |  | ------------------------------------------------ |  | 
|(a) |  | (i) and (ii) Financial Statements and Schedules.

Reference is made to the listing on page F-1 of all financial statements and
schedules filed as a part of this report.

| |  |                 |  | 
| |  | --------------- |  | 
| |  | (iii) Exhibits.

Reference is made to the Index to Exhibits on page E-1 for a list of all
exhibits filed during the period covered by this report.

|    |  |                     
|--- |  | --------------------
|(b) |  | Reports on Form 8-K.

The Registrant has filed no Reports on Form 8-K during the quarter ended
December 31, 2002.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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
|                     |  |                        |  |                                      
|Date: March 24, 2003 |  | By:                    |  | /s/ Gregory B. Kalush                
|                     |  |                        |  |                                      
|                     |  |                        |  | Gregory B. Kalush                    
|                     |  |                        |  | Chairman of the Board,               
|                     |  |                        |  | Chief Executive Officer and President

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 24, 2003.

|                                         |  |                                                                                               
|---------------------------------------- |  | ----------------------------------------------------------------------------------------------
|Name                                     |  | Title                                                                                         
|                                         |  |                                                                                               
|/s/ Gregory B. Kalush

Gregory B. Kalush |  | Chairman of the Board,
Chief Executive Officer and President
(Principal executive officer)    
|                                         |  |                                                                                               
|/s/ Steven P. Kovac

Steven P. Kovac     |  | Chief Financial Officer, Treasurer and
Vice President of Finance
(Principal financial officer)
|                                         |  |                                                                                               
|/s/ Paul N. Hug                          |  | Director                                                                                      
|                                         |  |                                                                                               
|Paul N. Hug                              |  |                                                                                               
|                                         |  |                                                                                               
|/s/ Randall D. Ledford                   |  | Director                                                                                      
|                                         |  |                                                                                               
|Randall D. Ledford                       |  |                                                                                               
|                                         |  |                                                                                               
|/s/ Michael J. Myers                     |  | Director                                                                                      
|                                         |  |                                                                                               
|Michael J. Myers                         |  |                                                                                               
|                                         |  |                                                                                               
|/s/ David H. Segrest                     |  | Director                                                                                      
|                                         |  |                                                                                               
|David H. Segrest                         |  |                                                                                               
|                                         |  |                                                                                               
|/s/ Kenneth V. Spenser                   |  | Director                                                                                      
|                                         |  |                                                                                               
|Kenneth V. Spenser                       |  |                                                                                               
|                                         |  |                                                                                               
|/s/ S. Thomas Thawley

S. Thomas Thawley |  | Vice Chairman, Director
and Secretary                                                         
|                                         |  |                                                                                               
|/s/ William R. Voss                      |  | Director                                                                                      
|                                         |  |                                                                                               
|William R. Voss                          |  |                                                                                               

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CERTIFICATION PURSUANT TO RULE 13a-14(b)

I, Gregory B. Kalush, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Interphase
Corporation (the Company);                                                                                                                                                                                                                                
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Company as of, and for, the periods presented in this annual report;                      
|  
|4. |  | The Companys other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14) for the Company and we have:                                                                                                                 



| | (a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | evaluated the effectiveness of the Companys disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the Evaluation Date); and                                                                                                    
|
| | (c) |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                     



|5. |  | The Companys other certifying officer and I have disclosed, based on
our most recent evaluation, to the Companys auditors and the Audit
Committee of the Companys Board of Directors:
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (a) |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the Companys ability to record,
process, summarize and report financial data and have identified for the
Companys auditors any material weaknesses in internal controls; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | any fraud, whether or not material, that involves management or other
employees who have a significant role in the Companys internal controls; and                                                                                                                                     



|6. |  | The Companys other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                     |  |            |  |                        
|-------------------- |  | ---------- |  | -----------------------
|Date: March 24, 2003 |  | Signature: |  | /s/ Gregory B. Kalush  
|                     |  |            |  |                        
|                     |  |            |  | Chief Executive Officer

41



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##### Table of Contents



CERTIFICATION PURSUANT TO RULE 13a-14(b)

I, Steven P. Kovac, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Interphase
Corporation (the Company);                                                                                                                                                                                                                                
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Company as of, and for, the periods presented in this annual report;                      
|  
|4. |  | The Companys other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14) for the Company and we have:                                                                                                                 



| | (a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | evaluated the effectiveness of the Companys disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the Evaluation Date); and                                                                                                    
|
| | (c) |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                     



|5. |  | The Companys other certifying officer and I have disclosed, based on
our most recent evaluation, to the Companys auditors and the Audit
Committee of the Companys Board of Directors:
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (a) |  | all significant deficiencies in the design or operation of internal
controls which could adversely affect the Companys ability to record,
process, summarize and report financial data and have identified for the
Companys auditors any material weaknesses in internal controls; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | any fraud, whether or not material, that involves management or other
employees who have a significant role in the Companys internal controls; and                                                                                                                                     



|6. |  | The Companys other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                     |  |            |  |                        
|-------------------- |  | ---------- |  | -----------------------
|Date: March 24, 2002 |  | Signature: |  | /s/ Steven P. Kovac    
|                     |  |            |  |                        
|                     |  |            |  | Chief Financial Officer

42



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##### Table of Contents



INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES

|                                                                                               |  |             |     |  | 
|---------------------------------------------------------------------------------------------- |  | ----------- | --- |  | 
|Report of Independent Accountants 
PricewaterhouseCoopers LLP                                 |  |             | F-2 | 
|Report of Independent Public Accountants 
Arthur Andersen LLP                                 |  |             | F-3 | 
|Consolidated Balance Sheets  As of December 31, 2002 and 2001                                 |  |             | F-4 | 
|Consolidated Statements of Operations  Years Ended
December 31, 2002, 2001 and 2000           |  |             | F-5 | 
|Consolidated Statements of Shareholders Equity  Years Ended
December 31, 2002, 2001 and 2000 |  |             | F-6 | 
|Consolidated Statements of Cash Flows  Years Ended December 31, 2002, 2001 and 2000           |  |             | F-7 | 
|Notes to Consolidated Financial Statements                                                     |  | F-8 to F-27

*     All schedules are omitted because they are not applicable or the required
information is presented in the consolidated financial statements or notes
thereto.

F-1



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##### Table of Contents






REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of Interphase Corporation:

In our opinion, the accompanying consolidated balance sheet as of December 31,
2002 and the related consolidated statements of operations, of shareholders
equity, and of cash flows present fairly, in all material respects, the
financial position of Interphase Corporation and its subsidiaries (the Company)
at December 31, 2002, and the results of their operations and their cash flows
for the year then ended in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Companys management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion. The Companys consolidated financial statements as of December 31,
2001, and for each of the two years in the period ended December 31, 2001,
prior to the revisions described in Note 16 to the consolidated financial
statements, were audited by other independent accountants who have ceased
operations. Those independent accountants expressed an unqualified opinion on
those financial statements in their report dated February 6, 2002.

As discussed above, the Companys consolidated financial statements as of
December 31, 2001, and for each of the two years in the period ended December
31, 2001, were audited by other independent accountants who have ceased
operations. As described in Note 16, those financial statements have been
revised to include the transitional disclosures required by Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets,
which was adopted by the Company as of January 1, 2002. We audited the
transitional disclosures for 2001 and 2000 included in Note 16. In our opinion,
the transitional disclosures for 2001 and 2000 in Note 16 are appropriate.
However, we were not engaged to audit, review, or apply any procedures to the
2001 or 2000 financial statements of the Company other than with respect to
such disclosures and, accordingly, we do not express an opinion or any other
form of assurance on the 2001 or 2000 financial statements taken as a whole.

| |  |                               
| |  | ------------------------------
| |  | /s/ PricewaterhouseCoopers LLP
| |  |                               
| |  | Dallas, Texas
February 5, 2003

F-2



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##### Table of Contents



REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

The following report is a copy of a report previously issued by Arthur Andersen
LLP and has not been reissued by Arthur Andersen LLP. As discussed in Note 16,
the Company has presented the transitional disclosures for 2001 and 2000
required by in the Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets (SFAS No.142). The Arthur Andersen LLP
report does not extend to these changes to the 2001 and 2000 consolidated
financial statements. The adjustments to the 2001 and 2000 consolidated
financial statements were reported on by PricewaterhouseCoopers LLP as stated
in their report appearing herein.

To the Shareholders and Board of Directors of Interphase Corporation:

We have audited the accompanying consolidated balance sheets of Interphase
Corporation, a Texas corporation, and subsidiaries as of December 31, 2001 and
2000*, and the related consolidated statements of operations, shareholders
equity, and cash flows for each of the three years in the period ended December
31, 2001*. These consolidated financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Interphase
Corporation and subsidiaries as of December 31, 2001 and 2000*, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2001*, in conformity with accounting principles
generally accepted in the United States.

| |  |                               
| |  | ------------------------------
| |  | /s/ ARTHUR ANDERSEN LLP       
| |  |                               
| |  | Arthur Andersen LLP           
| |  |                               
| |  | Dallas, Texas
February 6, 2002

*     The 2000 consolidated balance sheet and the 1999 consolidated statement of
operations and cash flows are not presented in the 2002 annual report.

F-3



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##### Table of Contents






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

|                                                                                                                                 |                                            |   |              |        |      |   |        |        | 
|-------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | - | ------------ | ------ | ---- | - | ------ | ------ | 
|                                                                                                                                 |                                            |   | December 31,
|                                                                                                                                 |                                            |   |             
|                                                                                                                                 |                                            |   | 2002         |        | 2001
|                                                                                                                                 |                                            |   |              |        |     
|ASSETS                                                                                                                           |                                            |   |              |        |      |   |        |       
|Cash and cash equivalents                                                                                                        |                                            | $ | 9,857        |        |      | $ | 10,415 |       
|Marketable securities                                                                                                            |                                            |   | 5,518        |        |      |   | 5,216  |       
|Restricted cash                                                                                                                  |                                            |   | 3,500        |        |      |   | 3,500  |       
|Trade accounts receivable, less allowances for uncollectible
accounts and returns of $230 and $370, respectively                 |                                            |   | 5,683        |        |      |   | 5,046  |       
|Inventories                                                                                                                      |                                            |   | 3,121        |        |      |   | 6,655  |       
|Prepaid expenses and other current assets                                                                                        |                                            |   | 674          |        |      |   | 480    |       
|Income taxes receivable                                                                                                          |                                            |   | 247          |        |      |   | 2,476  |       
|Deferred income taxes, net                                                                                                       |                                            |   |             |        |      |   | 1,636  |       
|                                                                                                                                 |                                            |   |              |        |      |   |        |       
|                                                                                                                                 | Total current assets                       |   |              | 28,600 |      |   |        | 35,424 | 
|                                                                                                                                 |                                            |   |              |        |      |   |        |       
|Machinery and equipment                                                                                                          |                                            |   | 5,731        |        |      |   | 6,117  |       
|Leasehold improvements                                                                                                           |                                            |   | 380          |        |      |   | 2,936  |       
|Furniture and fixtures                                                                                                           |                                            |   | 549          |        |      |   | 543    |       
|                                                                                                                                 |                                            |   |              |        |      |   |        |       
|                                                                                                                                 |                                            |   | 6,660        |        |      |   | 9,596  |       
|Less-accumulated depreciation and amortization                                                                                   |                                            |   | (4,921       | )      |      |   | (8,653 | )     
|                                                                                                                                 |                                            |   |              |        |      |   |        |       
|                                                                                                                                 | Total property and equipment, net          |   |              | 1,739  |      |   |        | 943    | 
|                                                                                                                                 |                                            |   |              |        |      |   |        |       
|Capitalized software, net                                                                                                        |                                            |   | 199          |        |      |   | 335    |       
|Deferred income taxes, net                                                                                                       |                                            |   |             |        |      |   | 2,373  |       
|Other assets                                                                                                                     |                                            |   | 211          |        |      |   | 168    |       
|                                                                                                                                 |                                            |   |              |        |      |   |        |       
|                                                                                                                                 | Total assets                               |   | $            | 30,749 |      |   | $      | 39,243 | 
|                                                                                                                                 |                                            |   |              |        |      |   |        |       
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                             |                                            |   |              |        |      |   |        |       
|                                                                                                                                 | Liabilities                                |   |              |        |      |   |        |        | 
|Accounts payable                                                                                                                 |                                            | $ | 1,437        |        |      | $ | 921    |       
|Deferred revenue                                                                                                                 |                                            |   | 595          |        |      |   | 110    |       
|Accrued liabilities                                                                                                              |                                            |   | 1,291        |        |      |   | 1,615  |       
|Accrued compensation                                                                                                             |                                            |   | 1,023        |        |      |   | 1,177  |       
|                                                                                                                                 |                                            |   |              |        |      |   |        |       
|                                                                                                                                 | Total current liabilities                  |   |              | 4,346  |      |   |        | 3,823  | 
|Deferred lease obligations                                                                                                       |                                            |   | 85           |        |      |   |       |       
|Long-term debt                                                                                                                   |                                            |   | 3,500        |        |      |   | 3,500  |       
|                                                                                                                                 |                                            |   |              |        |      |   |        |       
|                                                                                                                                 | Total liabilities                          |   |              | 7,931  |      |   |        | 7,323  | 
|                                                                                                                                 | Commitments and contingencies              |   |              |        |      |   |        |        | 
|Common stock redeemable; zero and 121,996 shares, respectively                                                                   |                                            |   |             |        |      |   | 762    |       
|                                                                                                                                 | Shareholders Equity                       |   |              |        |      |   |        |        | 
|Common stock, $.10 par value; 100,000,000 shares authorized;
5,514,276 and 5,518,476 shares issued and outstanding, respectively |                                            |   | 551          |        |      |   | 552    |       
|Additional paid in capital                                                                                                       |                                            |   | 37,304       |        |      |   | 37,324 |       
|Retained deficit                                                                                                                 |                                            |   | (14,795      | )      |      |   | (6,394 | )     
|Cumulative other comprehensive loss                                                                                              |                                            |   | (242         | )      |      |   | (324   | )     
|                                                                                                                                 |                                            |   |              |        |      |   |        |       
|                                                                                                                                 | Total shareholders equity                 |   |              | 22,818 |      |   |        | 31,158 | 
|                                                                                                                                 |                                            |   |              |        |      |   |        |       
|                                                                                                                                 | Total liabilities and shareholders equity |   | $            | 30,749 |      |   | $      | 39,243 | 
|                                                                                                                                 |                                            |   |              |        |      |   |        |       

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

F-4



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##### Table of Contents






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

|                                                                               |             |                          |        |                          |        |      |         |       |        |   |        |      |        | 
|------------------------------------------------------------------------------ | ----------- | ------------------------ | ------ | ------------------------ | ------ | ---- | ------- | ----- | ------ | - | ------ | ---- | ------ | 
|                                                                               |             |                          |        | Years ended December 31,
|                                                                               |             |                          |        |                         
|                                                                               |             |                          |        | 2002                     |        | 2001 |         | 2000 
|                                                                               |             |                          |        |                          |        |      |         |      
|Revenues                                                                       |             | $                        | 25,123 |                          |        | $    | 28,732  |       |        | $ | 55,697 |     
|Cost of sales                                                                  |             |                          | 15,331 |                          |        |      | 19,728  |       |        |   | 26,009 |     
|                                                                               |             |                          |        |                          |        |      |         |       |        |   |        |     
|Gross margin                                                                   |             |                          | 9,792  |                          |        |      | 9,004   |       |        |   | 29,688 |     
|                                                                               |             |                          |        |                          |        |      |         |       |        |   |        |     
|Research and development                                                       |             |                          | 7,005  |                          |        |      | 7,757   |       |        |   | 10,359 |     
|Sales and marketing                                                            |             |                          | 5,991  |                          |        |      | 6,812   |       |        |   | 10,731 |     
|General and administrative                                                     |             |                          | 3,285  |                          |        |      | 3,759   |       |        |   | 4,824  |     
|Restructuring costs and other special charges                                  |             |                          |       |                          |        |      | 2,091   |       |        |   |       |     
|Goodwill impairment charge                                                     |             |                          |       |                          |        |      | 2,350   |       |        |   |       |     
|                                                                               |             |                          |        |                          |        |      |         |       |        |   |        |     
|                                                                               |             | Total operating expenses |        |                          | 16,281 |      |         |       | 22,769 |   |        |      | 25,914 | 
|                                                                               |             |                          |        |                          |        |      |         |       |        |   |        |     
|Operating (loss) income                                                        |             |                          | (6,489 | )                        |        |      | (13,765 | )     |        |   | 3,774  |     
|Interest, net                                                                  |             |                          | 517    |                          |        |      | 554     |       |        |   | 599    |     
|Other, net                                                                     |             |                          | 94     |                          |        |      | (574    | )     |        |   | (266   | )   
|                                                                               |             |                          |        |                          |        |      |         |       |        |   |        |     
|(Loss) income from continuing operations
before income taxes                   |             |                          | (5,878 | )                        |        |      | (13,785 | )     |        |   | 4,107  |     
|Provision (benefit) for income taxes                                           |             |                          | 2,523  |                          |        |      | (4,213  | )     |        |   | 1,707  |     
|                                                                               |             |                          |        |                          |        |      |         |       |        |   |        |     
|(Loss) income from continuing operations                                       |             |                          | (8,401 | )                        |        |      | (9,572  | )     |        |   | 2,400  |     
|Discontinued operations (Note 8)
Gain on disposal of VOIP business, net of tax |             |                          |       |                          |        |      |        |       |        |   | 571    |     
|                                                                               |             |                          |        |                          |        |      |         |       |        |   |        |     
|Net (loss) income                                                              |             | $                        | (8,401 | )                        |        | $    | (9,572  | )     |        | $ | 2,971  |     
|                                                                               |             |                          |        |                          |        |      |         |       |        |   |        |     
|(Loss) income from continuing operations per share                             |             | $                        | (1.51  | )                        |        | $    | (1.68   | )     |        | $ | 0.41   |     
|                                                                               | Basic EPS   |                          | $      | (1.51                    | )      |      | $       | (1.68 | )      |   | $      | 0.41 |       
|                                                                               |             |                          |        |                          |        |      |         |       |        |   |        |     
|                                                                               | Diluted EPS |                          | $      | (1.51                    | )      |      | $       | (1.68 | )      |   | $      | 0.38 |       
|                                                                               |             |                          |        |                          |        |      |         |       |        |   |        |     
|Net (loss) income per share                                                    |             |                          |        |                          |        |      |         |       |        |   |        |     
|                                                                               | Basic EPS   |                          | $      | (1.51                    | )      |      | $       | (1.68 | )      |   | $      | 0.51 |       
|                                                                               |             |                          |        |                          |        |      |         |       |        |   |        |     
|                                                                               | Diluted EPS |                          | $      | (1.51                    | )      |      | $       | (1.68 | )      |   | $      | 0.48 |       
|                                                                               |             |                          |        |                          |        |      |         |       |        |   |        |     
|Weighted average common shares                                                 |             |                          | 5,551  |                          |        |      | 5,705   |       |        |   | 5,805  |     
|                                                                               |             |                          |        |                          |        |      |         |       |        |   |        |     
|Weighted average common and dilutive shares                                    |             |                          | 5,551  |                          |        |      | 5,705   |       |        |   | 6,237  |     
|                                                                               |             |                          |        |                          |        |      |         |       |        |   |        |     

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

F-5



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##### Table of Contents






INTERPHASE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(in thousands)

|                                                |                                            |  |              |   |            |   |          |   |               |   |               |   |       |   |               |   |  |   |            |      |   |   |        |      |   |   |        |      |  
|----------------------------------------------- | ------------------------------------------ |  | ------------ | - | ---------- | - | -------- | - | ------------- | - | ------------- | - | ----- | - | ------------- | - |  | - | ---------- | ---- | - | - | ------ | ---- | - | - | ------ | ---- | -
|                                                |                                            |  |              |   |            |   |          |   |               |   |               |   |       |   |               |   |  |   | Cumulative |      |   |   |        |      |   |   |       
|                                                |                                            |  | Common Stock |   | Additional |   | Retained |   | Other         |   |               |   |       |   |               |   | 
|                                                |                                            |  |              |   | Paid in    |   | Earnings |   | Comprehensive |   |               |   |       |   | Comprehensive
|                                                |                                            |  | Shares       |   | Amount     |   | Capital  |   | (Deficit)     |   | Income (Loss) |   | Total |   | Income (Loss)
|                                                |                                            |  |              |   |            |   |          |   |               |   |               |   |       |   |              
|Balance at December 31, 1999                    |                                            |  | 5,391        |   |            | $ | 539      |   |               | $ | 35,998        |   |       | $ | 207           |   |  | $ | 595        |      |   | $ | 37,339 |      |   |   |        |     
|                                                |                                            |  |              |   |            |   |          |   |               |   |               |   |       |   |               |   |  |   |            |      |   |   |        |      |   |   |        |     
|Option exercises, including related tax benefit |                                            |  | 90           |   |            |   | 9        |   |               |   | 807           |   |       |   |              |   |  |   |           |      |   |   | 816    |      |   | $ |       |     
|Comprehensive income:                           |                                            |  |              |   |            |   |          |   |               |   |               |   |       |   |               |   |  |   |            |      |   |   |        |      |   |   |        |     
|                                                | Foreign currency translation               |  |              |  |            |   |          |  |               |   |               |  |       |   |               |  |  |   |            | (80  | ) |   |        | (80  | ) |   |        | (80  | )
|                                                | Unrealized holding period loss, net of tax |  |              |  |            |   |          |  |               |   |               |  |       |   |               |  |  |   |            | (887 | ) |   |        | (887 | ) |   |        | (887 | )
|Net income                                      |                                            |  |             |   |            |   |         |   |               |   |              |   |       |   | 2,971         |   |  |   |           |      |   |   | 2,971  |      |   |   | 2,971  |     
|                                                |                                            |  |              |   |            |   |          |   |               |   |               |   |       |   |               |   |  |   |            |      |   |   |        |      |   |   |        |     
|Total comprehensive income                      |                                            |  |             |   |            |   |         |   |               |   |              |   |       |   |              |   |  |   |           |      |   |   |       |      |   | $ | 2,004  |     
|                                                |                                            |  |              |   |            |   |          |   |               |   |               |   |       |   |               |   |  |   |            |      |   |   |        |      |   |   |        |     
|Balance at December 31, 2000                    |                                            |  | 5,481        |   |            | $ | 548      |   |               | $ | 36,805        |   |       | $ | 3,178         |   |  | $ | (372       | )    |   | $ | 40,159 |      |   |   |        |     
|                                                |                                            |  |              |   |            |   |          |   |               |   |               |   |       |   |               |   |  |   |            |      |   |   |        |      |   |   |        |     
|Option exercises, including related tax benefit |                                            |  | 38           |   |            |   | 4        |   |               |   | 523           |   |       |   |              |   |  |   |           |      |   |   | 527    |      |   | $ |       |     
|Stock repurchase                                |                                            |  | (1           | ) |            |   |         |   |               |   | (4            | ) |       |   |              |   |  |   |           |      |   |   | (4     | )    |   |   |        |     
|Comprehensive loss:                             |                                            |  |              |   |            |   |          |   |               |   |               |   |       |   |               |   |  |   |            |      |   |   |        |      |   |   |        |     
|                                                | Foreign currency translation               |  |              |  |            |   |          |  |               |   |               |  |       |   |               |  |  |   |            | (120 | ) |   |        | (120 | ) |   |        | (120 | )
|                                                | Unrealized holding period gain, net of tax |  |              |  |            |   |          |  |               |   |               |  |       |   |               |  |  |   |            | 168  |   |   |        | 168  |   |   |        | 168  |  
|Net loss                                        |                                            |  |             |   |            |   |         |   |               |   |              |   |       |   | (9,572        | ) |  |   |           |      |   |   | (9,572 | )    |   |   | (9,572 | )   
|                                                |                                            |  |              |   |            |   |          |   |               |   |               |   |       |   |               |   |  |   |            |      |   |   |        |      |   |   |        |     
|Total comprehensive loss                        |                                            |  |             |   |            |   |         |   |               |   |              |   |       |   |              |   |  |   |           |      |   |   |       |      |   | $ | (9,524 | )   
|                                                |                                            |  |              |   |            |   |          |   |               |   |               |   |       |   |               |   |  |   |            |      |   |   |        |      |   |   |        |     
|Balance at December 31, 2001                    |                                            |  | 5,518        |   |            | $ | 552      |   |               | $ | 37,324        |   |       | $ | (6,394        | ) |  | $ | (324       | )    |   | $ | 31,158 |      |   |   |        |     
|                                                |                                            |  |              |   |            |   |          |   |               |   |               |   |       |   |               |   |  |   |            |      |   |   |        |      |   |   |        |     
|Stock repurchase                                |                                            |  | (4           | ) |            |   | (1       | ) |               |   | (20           | ) |       |   |              |   |  |   |           |      |   |   | (21    | )    |   | $ |       |     
|Comprehensive loss:                             |                                            |  |              |   |            |   |          |   |               |   |               |   |       |   |               |   |  |   |            |      |   |   |        |      |   |   |        |     
|                                                | Foreign currency translation               |  |              |  |            |   |          |  |               |   |               |  |       |   |               |  |  |   |            | 32   |   |   |        | 32   |   |   |        | 32   |  
|                                                | Unrealized holding period gain, net of tax |  |              |  |            |   |          |  |               |   |               |  |       |   |               |  |  |   |            | 50   |   |   |        | 50   |   |   |        | 50   |  
|Net loss                                        |                                            |  |             |   |            |   |         |   |               |   |              |   |       |   | (8,401        | ) |  |   |           |      |   |   | (8,401 | )    |   |   | (8,401 | )   
|                                                |                                            |  |              |   |            |   |          |   |               |   |               |   |       |   |               |   |  |   |            |      |   |   |        |      |   |   |        |     
|Total comprehensive loss                        |                                            |  |             |   |            |   |         |   |               |   |              |   |       |   |              |   |  |   |           |      |   |   |       |      |   | $ | (8,319 | )   
|                                                |                                            |  |              |   |            |   |          |   |               |   |               |   |       |   |               |   |  |   |            |      |   |   |        |      |   |   |        |     
|Balance at December 31, 2002                    |                                            |  | 5,514        |   |            | $ | 551      |   |               | $ | 37,304        |   |       | $ | (14,795       | ) |  | $ | (242       | )    |   | $ | 22,818 |      |   |   |        |     
|                                                |                                            |  |              |   |            |   |          |   |               |   |               |   |       |   |               |   |  |   |            |      |   |   |        |      |   |   |        |     

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)

|                                                             |                                                                                                                 |                                                                                   |                                                            |        |                          |        |        |        |        |        |        |       |        |        |  
|------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------- | ---------------------------------------------------------- | ------ | ------------------------ | ------ | ------ | ------ | ------ | ------ | ------ | ----- | ------ | ------ | -
|                                                             |                                                                                                                 |                                                                                   |                                                            |        | Years ended December 31,
|                                                             |                                                                                                                 |                                                                                   |                                                            |        |                         
|                                                             |                                                                                                                 |                                                                                   |                                                            |        | 2002                     |        | 2001   |        | 2000  
|                                                             |                                                                                                                 |                                                                                   |                                                            |        |                          |        |        |        |       
|Cash flows from operating activities:                        |                                                                                                                 |                                                                                   |                                                            |        |                          |        |        |        |        |        |        |      
|                                                             | (Loss) income from continuing operations                                                                        |                                                                                   | $                                                          | (8,401 | )                        |        | $      | (9,572 | )      |        | $      | 2,400 |       
|                                                             | Gain on disposal of discontinued operations                                                                     |                                                                                   |                                                            |       |                          |        |        |       |        |        |        | 571   |       
|                                                             | Adjustments to reconcile (loss) income from continuing operations
to net cash provided by operating activities: |                                                                                   |                                                            |        |                          |        |        |        |        |        |        |       |       
|                                                             | Noncash realized holding period loss on marketable securities                                                   |                                                                                   |                                                            | 20     |                          |        |        | 334    |        |        |        |      |       
|                                                             | Provision for uncollectible accounts and returns                                                                |                                                                                   |                                                            | (77    | )                        |        |        | (60    | )      |        |        | 358   |       
|                                                             | Provision for excess and obsolete inventory                                                                     |                                                                                   |                                                            | 1,849  |                          |        |        | 700    |        |        |        | 1,837 |       
|                                                             | Depreciation and amortization                                                                                   |                                                                                   |                                                            | 845    |                          |        |        | 1,846  |        |        |        | 2,554 |       
|                                                             | Deferred income taxes                                                                                           |                                                                                   |                                                            | 4,009  |                          |        |        | (2,019 | )      |        |        | 242   |       
|                                                             | Tax benefit from stock option exercises                                                                         |                                                                                   |                                                            |       |                          |        |        | 199    |        |        |        | 278   |       
|                                                             | Noncash restructuring costs and other special charges                                                           |                                                                                   |                                                            |       |                          |        |        | 6,002  |        |        |        |      |       
|                                                             | Goodwill impairment charge                                                                                      |                                                                                   |                                                            |       |                          |        |        | 2,350  |        |        |        |      |       
|                                                             |                                                                                                                 | Change in assets and liabilities:                                                 |                                                            |        |                          |        |        |        |        |        |        |       |        |       
|                                                             |                                                                                                                 |                                                                                   | Trade accounts receivable                                  |        |                          | (558   | )      |        |        | 9,097  |        |       |        | (494   | )
|                                                             |                                                                                                                 |                                                                                   | Inventories                                                |        |                          | 1,685  |        |        |        | 1,444  |        |       |        | (3,354 | )
|                                                             |                                                                                                                 |                                                                                   | Prepaid expenses and other current assets                  |        |                          | (185   | )      |        |        | 454    |        |       |        | (398   | )
|                                                             |                                                                                                                 |                                                                                   | Income taxes receivable                                    |        |                          | 2,229  |        |        |        | (2,476 | )      |       |        |       |  
|                                                             |                                                                                                                 |                                                                                   | Accounts payable, deferred revenue and accrued liabilities |        |                          | 638    |        |        |        | (2,644 | )      |       |        | 1,637  |  
|                                                             |                                                                                                                 |                                                                                   | Accrued compensation                                       |        |                          | (252   | )      |        |        | (740   | )      |       |        | (144   | )
|                                                             |                                                                                                                 |                                                                                   | Income taxes payable                                       |        |                          |       |        |        |        | (78    | )      |       |        | (676   | )
|                                                             |                                                                                                                 |                                                                                   |                                                            |        |                          |        |        |        |        |        |        |      
|                                                             |                                                                                                                 | Net adjustments                                                                   |                                                            |        | 10,203                   |        |        |        | 14,409 |        |        |       | 2,411  |       
|                                                             |                                                                                                                 |                                                                                   |                                                            |        |                          |        |        |        |        |        |        |      
|                                                             |                                                                                                                 |                                                                                   | Net cash provided by operating activities                  |        |                          | 1,802  |        |        |        | 4,837  |        |       |        | 4,811  |  
|                                                             |                                                                                                                 |                                                                                   |                                                            |        |                          |        |        |        |        |        |        |      
|Cash flows from investing activities:                        |                                                                                                                 |                                                                                   |                                                            |        |                          |        |        |        |        |        |        |      
|                                                             |                                                                                                                 | Additions to property, equipment, capitalized software and leasehold improvements |                                                            |        | (1,482                   | )      |        |        | (477   | )      |        |       | (1,074 | )     
|                                                             |                                                                                                                 | Decrease in other assets                                                          |                                                            |        | (25                      | )      |        |        |       |        |        |       | 353    |       
|                                                             |                                                                                                                 | Cash received in sale of VOIP business                                            |                                                            |        |                         |        |        |        |       |        |        |       | 1,230  |       
|                                                             |                                                                                                                 | Proceeds from the sale of marketable securities                                   |                                                            |        | 2,219                    |        |        |        | 6,667  |        |        |       | 852    |       
|                                                             |                                                                                                                 | Purchases of marketable securities, net of unrealized holding period gain or loss |                                                            |        | (2,491                   | )      |        |        | (5,163 | )      |        |       | (3,337 | )     
|                                                             |                                                                                                                 | Increase in deferred lease obligations                                            |                                                            |        | 85                       |        |        |        |       |        |        |       |       |       
|                                                             |                                                                                                                 |                                                                                   |                                                            |        |                          |        |        |        |        |        |        |      
|                                                             |                                                                                                                 |                                                                                   | Net cash (used) provided by investing activities           |        |                          | (1,694 | )      |        |        | 1,027  |        |       |        | (1,976 | )
|                                                             |                                                                                                                 |                                                                                   |                                                            |        |                          |        |        |        |        |        |        |      
|Cash flows from financing activities:                        |                                                                                                                 |                                                                                   |                                                            |        |                          |        |        |        |        |        |        |      
|                                                             |                                                                                                                 | Increase in restricted cash                                                       |                                                            |        |                         |        |        |        | (3,500 | )      |        |       |       |       
|                                                             |                                                                                                                 | Decrease in other long-term liabilities                                           |                                                            |        |                         |        |        |        |       |        |        |       | (525   | )     
|                                                             |                                                                                                                 | Payments on debt                                                                  |                                                            |        |                         |        |        |        | (1,683 | )      |        |       | (2,182 | )     
|                                                             |                                                                                                                 | Purchase of redeemable common stock                                               |                                                            |        | (762                     | )      |        |        | (1,018 | )      |        |       | (1,016 | )     
|                                                             |                                                                                                                 | Purchase of common stock                                                          |                                                            |        | (21                      | )      |        |        | (4     | )      |        |       |       |       
|                                                             |                                                                                                                 | Proceeds from the exercise of stock options                                       |                                                            |        |                         |        |        |        | 328    |        |        |       | 539    |       
|                                                             |                                                                                                                 |                                                                                   |                                                            |        |                          |        |        |        |        |        |        |      
|                                                             |                                                                                                                 |                                                                                   | Net cash used by financing activities                      |        |                          | (783   | )      |        |        | (5,877 | )      |       |        | (3,184 | )
|                                                             |                                                                                                                 |                                                                                   |                                                            |        |                          |        |        |        |        |        |        |      
|Effect of exchange rate changes on cash and cash equivalents |                                                                                                                 |                                                                                   | 117                                                        |        |                          |        | (159   | )      |        |        | (52    | )    
|Net decrease in cash and cash equivalents                    |                                                                                                                 |                                                                                   | (558                                                       | )      |                          |        | (172   | )      |        |        | (401   | )    
|Cash and cash equivalents at beginning of year               |                                                                                                                 |                                                                                   | 10,415                                                     |        |                          |        | 10,587 |        |        |        | 10,988 |      
|                                                             |                                                                                                                 |                                                                                   |                                                            |        |                          |        |        |        |        |        |        |      
|Cash and cash equivalents at end of year                     |                                                                                                                 | $                                                                                 | 9,857                                                      |        |                          | $      | 10,415 |        |        | $      | 10,587 |      
|                                                             |                                                                                                                 |                                                                                   |                                                            |        |                          |        |        |        |        |        |        |      
|Supplemental Disclosure of Cash Flow Information:            |                                                                                                                 |                                                                                   |                                                            |        |                          |        |        |        |        |        |        |      
|Income taxes paid                                            |                                                                                                                 | $                                                                                 | 22                                                         |        |                          | $      | 229    |        |        | $      | 1,729  |      
|Interest paid                                                |                                                                                                                 | $                                                                                 | 88                                                         |        |                          | $      | 311    |        |        | $      | 608    |      

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

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INTERPHASE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of the Business: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 17 for information
regarding the Companys revenues related to North America and foreign
countries.

Principles of Consolidation and Basis of Presentation:The accompanying
consolidated financial statements include the accounts of Interphase
Corporation and its wholly owned subsidiaries. Significant intercompany
accounts and transactions have been eliminated.

In September 1999, the Company completed the sale of its Voice Over Internet
Protocol (VOIP) businesses. Accordingly, the Companys consolidated
financial statements and notes included herein, for all periods presented
reflect the VOIP business as a discontinued operation in accordance with
Accounting Principles Board Opinion No. 30. See further discussion of the sale
in Note 8.

Cash and Cash Equivalents:The Company considers cash and temporary
investments with original maturities of less than three months, as well as
interest bearing money market accounts, to be cash equivalents.

Investments:Investments in debt and equity securities are classified as
available for sale with unrealized holding gains and losses reported in other
comprehensive income. Gains and losses from securities sold are calculated
using the specific identification method. Management determines the
appropriate classification of securities at the time of purchase. Earnings
from debt securities are calculated on a yield to maturity basis and recorded
in the results of operations.

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Allowance for Doubtful Accounts:The Company provides an allowance for
doubtful accounts for known and potential losses arising from sales to
customers based on a periodic review of these accounts. As of December 31,
2002, 2001 and 2000, the allowance for doubtful accounts was $30,000, $170,000
and $273,000. The activity in this account was as follows (in thousands):

|                  |  |            |     |                  |  |            |     |             |  |         |      |   |  |   |     | 
|----------------- |  | ---------- | --- | ---------------- |  | ---------- | --- | ----------- |  | ------- | ---- | - |  | - | --- | 
|                  |  | Balance at |     |                  |  |            |     | Write-offs, |  | Balance
|                  |  | Beginning  |     | Charged to       |  | Net of     |     | at End     
|Year Ended:       |  | of Period  |     | (Income) Expense |  | Recoveries |     | of Period  
|                  |  |            |     |                  |  |            |     |            
|December 31, 2002 |  | $          | 170 |                  |  | $          | (77 | )           |  | $       | (63  | ) |  | $ | 30  | 
|December 31, 2001 |  |            | 273 |                  |  |            | (60 | )           |  |         | (43  | ) |  |   | 170 | 
|December 31, 2000 |  |            | 260 |                  |  |            | 358 |             |  |         | (345 | ) |  |   | 273 | 

Allowance for Returns:The Company maintains an allowance for returns based on
historical returns experience. As of December 31, 2002, 2001 and 2000, the
allowance for returns was $200,000, maintained as a reduction to accounts
receivable.

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):

|                |  |                          |       |      |  |   |       | 
|--------------- |  | ------------------------ | ----- | ---- |  | - | ----- | 
|                |  | Years ended December 31,
|                |  |                         
|                |  | 2002                     |       | 2001
|                |  |                          |       |     
|Raw Materials   |  | $                        | 2,325 |      |  | $ | 4,740 | 
|Work-in-Process |  |                          | 670   |      |  |   | 1,397 | 
|Finished Goods  |  |                          | 126   |      |  |   | 518   | 
|                |  |                          |       |      |  |   |       | 
|Total           |  | $                        | 3,121 |      |  | $ | 6,655 | 
|                |  |                          |       |      |  |   |       | 

Valuing inventory at the lower of cost or market involves an inherent level of
risk and uncertainty due to technology trends in the industry and customer
demand for the Companys products. Future events may cause significant
fluctuations in the Companys operating results.

Property and Equipment:Property and equipment are recorded at cost.
Depreciation is provided over the estimated useful lives of depreciable assets
using the straight-line method. When property and equipment are sold or
otherwise retired, the cost and accumulated depreciation applicable to such
assets are eliminated from the accounts, and any resulting gain or loss is
reflected in current operations. Related depreciation expense was as follows
(in thousands):

|                        |  |                      |       | 
|----------------------- |  | -------------------- | ----- | 
|Year ended December 31: |  | Depreciation Expense
|                        |  |                     
|2002                    |  | $                    | 671   | 
|2001                    |  | $                    | 1,039 | 
|2000                    |  | $                    | 1,370 | 

The depreciable lives of property and equipment are as follows:

|                        |  |             |  | 
|----------------------- |  | ----------- |  | 
|Machinery and equipment |  | 3-5   years
|Leasehold improvements  |  | 3-10 years 
|Furniture and fixtures  |  | 3-7   years

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Capitalized Software:Capitalized software represents various software
licenses purchased by the Company and utilized in connection with the Companys
network and mass storage products as well as the general operations of the
Company. Capitalized software is amortized over three to five years utilizing
the straight-line method. Related amortization expense and accumulated
amortization were as follows (in thousands):

|                        |  |                      |     |                          |  |   |       | 
|----------------------- |  | -------------------- | --- | ------------------------ |  | - | ----- | 
|Year ended December 31: |  | Amortization Expense |     | Accumulated Amortization
|                        |  |                      |     |                         
|2002                    |  | $                    | 174 |                          |  | $ | 2,190 | 
|2001                    |  | $                    | 237 |                          |  | $ | 2,040 | 
|2000                    |  | $                    | 345 |                          |  | $ | 2,139 | 

Long-Lived Assets:Property and equipment and other long-lived assets are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. All impairments are
recognized in operating results when a permanent reduction in value occurs.

Revenue Recognition:Revenues consist of product and service revenues and are
recognized in accordance with Generally Accepted Accounting Principals and
related SEC Staff Accounting Bulletin (SAB) 101, Revenue Recognition.
Product revenues are recognized upon shipment, provided fees are fixed and
determinable, a customer purchase order is obtained, and collection is
probable. Revenues from reseller agreements are recognized when the product is
sold through to the end customer unless an established return history supports
recognizing revenue upon shipment, less a provision for estimated sales
returns. Deferred revenue consists of revenue from reseller arrangements and
certain arrangements with extended payment terms. Revenue from extended
payment terms is recognized in the period the payment becomes due if all other
revenue recognition criteria have been met. Service revenue is recognized as
the services are performed. Revenue derived from the development and
installation of customized software packages under a fixed price contract is
recognized on a percentage of completion basis measured primarily by the
relationship of hours worked to total contract hours.

As of December 31, 2002, the Company had recognized revenue of approximately
$247,000 and had deferred revenue of $272,000 related to a fixed price contract
to provide services at a price of approximately $996,000. In January, 2003,
the Company received notice as to the cancellation of the contract, effective
in February 2003. Under the terms of the contract, the Company will complete
another deliverable related to this contract in the first quarter 2003, and
recognize all revenue related to the completed deliverables at that time.

Warranty Reserve:The Company offers to its customers a limited warranty that
its products will be free from defect in the materials and workmanship for a
specified period. The Company has established a warranty reserve, as a
component of accrued liabilities, for any potential claims. The Company
estimates its warranty reserve based upon an analysis of all identified or
expected claims and an estimate of the cost to resolve those claims.

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Concentration of Credit Risk:Financial instruments which potentially expose
the Company to concentrations of credit risk consist primarily of trade
accounts receivable. The majority of the Companys sales have been to original
equipment manufacturers of computer systems or telecommunication networks. The
Company conducts credit evaluations of its customers financial condition and
limits the amount of trade credit extended when necessary.

Research and Development:Research and development costs are charged to
expense as incurred.

Advertising Expense:Advertising costs are charged to expense as incurred.

Foreign Currency Translation:Assets and liabilities of the Companys French
subsidiary, whose functional currency is other than the U.S. Dollar, are
translated at year-end rates of exchange, and revenues and expenses are
translated at average exchange rates prevailing during the year. Foreign
currency transaction gains and losses are recognized in income as incurred.

The Company accounts for unrealized gains or losses on its foreign currency
translation adjustments in accordance with Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income, which requires the
adjustments be accumulated in shareholders equity as part of other
comprehensive income.

Income Taxes:The Company determines its deferred taxes using the liability
method. Deferred tax assets and liabilities are based on the estimated future
tax effects of differences between the financial statement and tax basis of
assets and liabilities given the provisions of enacted tax law. The Companys
consolidated financial statements include deferred income taxes arising from
the recognition of revenues and expenses in different periods for income tax
and financial reporting purposes.

Comprehensive Loss:The Company has no material components of other
comprehensive income or loss and accordingly, the Companys comprehensive loss
is approximately the same as its net loss.

Stock Options:The Company accounts for stock-based employee compensation in
accordance with Accounting Principles Board Opinion (APBO) No. 25,
Accounting for Stock Issued to Employees, and its various interpretations
(Note 11). Under APBO No. 25, no compensation cost is generally recognized for
fixed stock options in which the exercise price is greater than or equal to the
market price on the grant date. In accordance with APBO No. 25, the Company
has not recognized compensation cost related to stock options during the years
ended December 31, 2002, 2001 and 2000. If the Company had elected to account
for its stock-based employee compensation related to stock options in
accordance with the fair value-based recognition provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, for all awards granted subsequent to
January 1, 1995, the Companys pro forma net loss for 2002, 2001 and 2000 would
have been $12.6 million, $12.7 million and $2.2 million respectively, resulting
in loss per share of $2.88, $2.48 and $0.36, respectively.

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Certain Reclassifications:Certain reclassifications have been made for
consistent presentation among periods presented.

Use of Estimates: 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.

2. RESTRUCTURING COSTS AND OTHER SPECIAL CHARGES

In the second quarter 2001, the Company announced a restructuring program
designed to allow the Company to continue aggressive funding of its development
organizations, while preserving cash levels and securing new design-ins. As a
result of the restructuring program, continued decline in predicted revenue and
customers cautious expectations regarding market recovery, the Company
recorded restructuring costs and other special charges of $2.1 million,
classified as operating expenses, and an additional excess and obsolete
inventory charge of $4.4 million, classified as cost of sales.

The restructuring program resulted in the reduction of approximately 22% of the
Companys workforce, impacting all business functions in North America. As a
result, the Company recorded a workforce reduction charge of $483,000 relating
to severance and fringe benefits. In addition, the Company wrote off $123,000
of nonutilized fixed assets.

Due to the decline in business conditions and legacy product revenues and the
diminished expected future benefits from the purchased intangibles related to
the acquisition of Synaptel, S.A. in 1996, the Company recorded a charge of
$1.5 million related to the impairment of developed technology and assembled
workforce during the second quarter 2001. These intangible assets, purchased
in the acquisition of Synaptel, S.A., relate to the Companys legacy product
lines. In the second quarter 2000, the Company developed a strategy to
end-of-life many of its legacy products in an effort to focus its resources on
its new product lines. This strategy resulted in increased sales of legacy
products in 2000; however, legacy product revenues declined in the first
quarter of 2001, and continued to decline through the second quarter of 2001.
Management did not expect significant revenues from its legacy product lines in
future periods.

The Company wrote off $5.9 million of excess and obsolete inventory during the
second quarter of 2001, resulting in an additional charge to cost of sales of
$4.4 million. Approximately 74% of the write-off relates to the Companys
legacy product lines. The remaining $1.5 million of excess and obsolete
inventory written off was charged against the already established reserve.
This additional excess and obsolete inventory charge was due to a sudden and
significant decrease in predicted revenue and was calculated in accordance with
the Companys established policy. Only the severance and fringe benefit

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payments relating to the workforce reduction impacted cash flow. A summary of
the restructuring costs and other special charges is outlined as follows (in
thousands):

|                                     |  |        |       |         |  |          |       |          |  |               |     |         |  |   |    |  |  |   |   | 
|------------------------------------ |  | ------ | ----- | ------- |  | -------- | ----- | -------- |  | ------------- | --- | ------- |  | - | -- |  |  | - | - | 
|                                     |  |        |       |         |  | Second   |       |          |  |               |     |         |  |   |    |  |  |  
|                                     |  |        |       |         |  | Quarter  |       |          |  |               |     |         |  |   |    |  |  |  
|                                     |  |        |       |         |  | Cash     |       |          |  |               |     |         |  |   |    |  |  |  
|                                     |  |        |       |         |  | Payments |       | Third    |  | Fourth        |     |         |  |  
|                                     |  |        |       |         |  | and      |       | Quarter  |  | Quarter       |     | Accrual
|                                     |  | Total  |       | Noncash |  | Cash     |       | Cash     |  | Balance at   
|                                     |  | Charge |       | Charges |  | Payments |       | Payments |  | Dec. 31, 2001
|                                     |  |        |       |         |  |          |       |          |  |              
|Workforce reduction                  |  | $      | 483   |         |  | $        | 17    |          |  | $             | 384 |         |  | $ | 82 |  |  | $ |  | 
|Fixed asset write-off                |  |        | 123   |         |  |          | 123   |          |  |               |    |         |  |   |   |  |  |   |  | 
|Impairment of
purchased
intangibles  |  |        | 1,485 |         |  |          | 1,485 |          |  |               |    |         |  |   |   |  |  |   |  | 
|Excess and obsolete inventory charge |  |        | 4,394 |         |  |          | 4,394 |          |  |               |    |         |  |   |   |  |  |   |  | 
|                                     |  |        |       |         |  |          |       |          |  |               |     |         |  |   |    |  |  |   |   | 
|                                     |  | $      | 6,485 |         |  | $        | 6,019 |          |  | $             | 384 |         |  | $ | 82 |  |  | $ |  | 
|                                     |  |        |       |         |  |          |       |          |  |               |     |         |  |   |    |  |  |   |   | 

3. GOODWILL IMPAIRMENT CHARGE

All of the Companys goodwill is associated with the entire company rather than
any specific identifiable asset or product line. Each quarter the Company
evaluates whether an impairment of this enterprise goodwill may exist by
comparing the book value of its common stock to the product of (i) the number
of shares of common stock issued and outstanding at the end of the quarter and
(ii) the market price of the common stock at the end of the quarter. If the
product of shares and market price exceeds the book value, impairment does not
exist. If the product of shares and market price is less than book value, the
Company evaluates whether the condition is other than temporary based (i)
primarily on whether fluctuations in the Companys stock price subsequent to
the quarter-end result in a product of shares and market price that exceeds
book value and (ii) on all other available evidence. If the product of shares
and market price is continuously less than book value based on daily closing
market prices for the prior six months, the Company evaluates whether the
condition is other than temporary considering all other available evidence. If
the Company determines the condition is other than temporary, additional
amortization is recorded for the impairment, equal to the excess book value at
the end of the quarter.

The Company recorded an impairment charge, at the end of the fourth quarter
2001 by writing-off the remaining $2.4 million of goodwill. At December 31,
2001, the Company had 5.5 million common shares issued and outstanding with a
book value of $33.5 million. The common stock price at December 31, 2001 was
$5.44, resulting in a market capitalization of $30 million. The Companys
market capitalization had consistently been less than book value since June 30,
2001, and continued to remain below book value after year-end 2001. As a
result of the Companys market capitalization continuously remaining below book
value for a period of greater than six months and the uncertainty

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related to the timing of a technology sector market recovery, the Company,
following its stated policy, recorded the impairment charge of $2.4 million at
the end of the fourth quarter 2001.

4. INTANGIBLE ASSETS

As a result of the acquisition of Synaptel, S.A. (Synaptel) the Company
acquired intangible assets related to developed technologies, assembled
workforce and goodwill. Developed technology and assembled workforce were
amortized on a straight-line basis over a seven-year period. As described in
Note 2, at the end of the second quarter 2001, the Company recorded an
impairment charge for assembled workforce and developed technology. Goodwill
was amortized on a straight-line basis over a 15-year period. As described in
Note 3, at the end of the fourth quarter 2001, the Company recorded an
impairment charge for goodwill. The December 31, 2002 intangible balances at
historical cost and related amortization expense, impairment charge and
accumulated amortization were as follows (in thousands):

|                     |  |             |       |      |  |                      |   |             |  |              |     |        |  |         |     |  |  |   |       |  |  |   |       |  |  |   |   | 
|-------------------- |  | ----------- | ----- | ---- |  | -------------------- | - | ----------- |  | ------------ | --- | ------ |  | ------- | --- |  |  | - | ----- |  |  | - | ----- |  |  | - | - | 
|                     |  |             |       |      |  | Amortization Expense |   |             |  |              |     |       
|                     |  |             |       |      |  |                      |   | Accumulated |  | Impairment   |     | Ending
|                     |  | Intangibles |       | 2002 |  | 2001                 |   | 2000        |  | Amortization |     | Charge |  | Balance
|                     |  |             |       |      |  |                      |   |             |  |              |     |        |  |        
|Developed technology |  | $           | 4,230 |      |  | $                    |  |             |  | $            | 300 |        |  | $       | 600 |  |  | $ | 2,850 |  |  | $ | 1,380 |  |  | $ |  | 
|Assembled workforce  |  |             | 390   |      |  |                      |  |             |  |              | 30  |        |  |         | 60  |  |  |   | 285   |  |  |   | 105   |  |  |   |  | 
|Goodwill-Synaptel    |  |             | 3,596 |      |  |                      |  |             |  |              | 240 |        |  |         | 240 |  |  |   | 1,246 |  |  |   | 2,350 |  |  |   |  | 

5. MARKETABLE SECURITIES

Marketable securities consist of investments in equity and debt securities. As
of December 31, 2002 and 2001, the fair market value of marketable securities
was $5.5 million and $5.2 million, respectively. The Company recorded charges
due to the other than temporary impairment of certain marketable securities
received in the sale of the Companys VOIP business of $20,000 and $334,000 in
2002 and 2001, respectively. Gains and losses on marketable securities sold
are recognized on a specific identification basis. The Company recorded an
unrealized gain (net of taxes) with respect to certain available-for-sale
securities of $50,000 and $168,000 in 2002 and 2001, respectively.

6. ACCRUED LIABILITIES

Accrued liabilities consisted of the following (in thousands):

|                            |  |                          |       |      |  |   |       | 
|--------------------------- |  | ------------------------ | ----- | ---- |  | - | ----- | 
|                            |  | Years ended December 31,
|                            |  |                         
|                            |  | 2002                     |       | 2001
|                            |  |                          |       |     
|Accrued outside commissions |  | $                        | 187   |      |  | $ | 108   | 
|Accrued property tax        |  |                          | 121   |      |  |   | 324   | 
|Accrued other               |  |                          | 983   |      |  |   | 1,183 | 
|                            |  |                          |       |      |  |   |       | 
|                            |  | $                        | 1,291 |      |  | $ | 1,615 | 
|                            |  |                          |       |      |  |   |       | 

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7. CREDIT FACILITY

The Company has a $5 million revolving bank credit facility. The revolving
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 credit facility bears interest at the rate of
approximately 1% per annum above the certificate of deposit rate, which was
1.29% at December 31, 2002, and includes certain restrictive covenants
including, among others, a tangible net worth restriction. As of December 31,
2002, the Company was in compliance with all restrictive covenants included in
the revolving credit facility. At December 31, 2002, the Company had
borrowings of $3.5 million classified as long-term debt on the balance sheet
and the remaining availability under the revolving credit facility was $1.5
million.

8. DISPOSITION OF ASSETS

In June 1999, the Company sold an 80% interest in part of its VOIP business,
Quescom, for $1,130,000 to the former owner of Interphases French subsidiary.
The sales proceeds consisted of $300,000 due at closing with a $830,000
technology license fee. In January 2000, the remaining $830,000 due for the
technology license fee was collected and recorded as a gain on disposal of
discontinued operations. Additionally, in January 2000, the Company sold its
20% interest in Quescom for $400,000, resulting in a gain of $91,000. The
total gain in 2000 was $571,000 net of $350,000 tax.

9. INCOME TAXES

The provision for income taxes applicable to continuing operations for each
period presented was as follows (in thousands):

|                             |  |                         |        |      |  |      |        |   |  |   |       | 
|---------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ----- | 
|                             |  | Year ended December 31,
|                             |  |                        
|                             |  | 2002                    |        | 2001 |  | 2000
|                             |  |                         |        |      |  |     
|Current (benefit) provision  |  | $                       | (1,486 | )    |  | $    | (2,194 | ) |  | $ | 1,465 | 
|Deferred provision (benefit) |  |                         | 4,009  |      |  |      | (2,019 | ) |  |   | 242   | 
|                             |  |                         |        |      |  |      |        |   |  |   |       | 
|Income tax expense (benefit) |  | $                       | 2,523  |      |  | $    | (4,213 | ) |  | $ | 1,707 | 
|                             |  |                         |        |      |  |      |        |   |  |   |       | 

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Tax effect of temporary differences that give rise to significant components of
the deferred tax assets as of December 31, 2002 and 2001, are presented as
follows (in thousands):

|                                                   |  |                         |        |      |  |   |       |  
|-------------------------------------------------- |  | ----------------------- | ------ | ---- |  | - | ----- | -
|                                                   |  | Year ended December 31,
|                                                   |  |                        
|                                                   |  | 2002                    |        | 2001
|                                                   |  |                         |        |     
|Current deferred tax assets:                       |  |                         |        |      |  |   |       |  
|Inventory                                          |  | $                       | 1,029  |      |  | $ | 738   |  
|Accounts receivable                                |  |                         | 12     |      |  |   | 71    |  
|Deferred revenue                                   |  |                         | 15     |      |  |   | 17    |  
|Securities holding loss                            |  |                         | 21     |      |  |   | 127   |  
|Other accruals                                     |  |                         | 345    |      |  |   | 683   |  
|                                                   |  |                         |        |      |  |   |       |  
|Total current deferred tax assets                  |  | $                       | 1,422  |      |  | $ | 1,636 |  
|                                                   |  |                         |        |      |  |   |       |  
|Noncurrent deferred tax assets (liabilities), net: |  |                         |        |      |  |   |       |  
|Assets:                                            |  |                         |        |      |  |   |       |  
|Depreciation                                       |  | $                       | 959    |      |  | $ | 887   |  
|Amortization                                       |  |                         | 573    |      |  |   | 623   |  
|Other                                              |  |                         | 192    |      |  |   | (475  | )
|Net operating loss                                 |  |                         | 1,720  |      |  |   | 1,338 |  
|                                                   |  |                         |        |      |  |   |       |  
|Total noncurrent deferred tax assets, net          |  | $                       | 3,444  |      |  | $ | 2,373 |  
|                                                   |  |                         |        |      |  |   |       |  
|Valuation allowance for deferred tax assets        |  |                         | (4,866 | )    |  |   |      |  
|                                                   |  |                         |        |      |  |   |       |  
|Deferred tax assets, net of valuation allowance    |  | $                       |       |      |  | $ | 4,009 |  
|                                                   |  |                         |        |      |  |   |       |  

Statement of Financial Accounting Standards (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. During the fiscal
2002 fourth quarter-end review, several significant developments were
considered in determining the need for a full valuation allowance, including
the continuing market decline, uncertainty and lack of visibility in the
telecommunications market as a whole and continued losses from operations. As
a result of managements assessment, the Company established a full valuation
allowance for the net deferred tax assets at December 31, 2002. Until the
Company reaches an appropriate level of profitability management does not
expect to recognize any significant tax benefits in future results of
operations. The Companys provision for income taxes for the year ended
December 31, 2002 includes a charge of approximately $4.9 million related to
the establishment of a full valuation allowance for the deferred tax assets.
As of December 31, 2002, the Companys total valuation allowance on net
deferred tax assets was approximately $4.9 million.

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The differences between the provision for income taxes computed on income
before income taxes at the U.S. federal statutory income tax rate (34%) and the
amount shown in the Consolidated Statements of Operations are presented below
(in thousands):

|                                          |  |                         |        |      |  |      |        |   |  |   |       |  
|----------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ----- | -
|                                          |  | Year ended December 31,
|                                          |  |                        
|                                          |  | 2002                    |        | 2001 |  | 2000
|                                          |  |                         |        |      |  |     
|Income taxes at statutory rate            |  | $                       | (1,999 | )    |  | $    | (4,687 | ) |  | $ | 1,396 |  
|State income taxes                        |  |                         |       |      |  |      | (551   | ) |  |   | 189   |  
|Nondeductible goodwill amortization       |  |                         |       |      |  |      | 1,674  |   |  |   | 306   |  
|Benefit of foreign tax loss
carry-forward |  |                         | (383   | )    |  |      | (342   | ) |  |   | (209  | )
|Change in effective tax rate              |  |                         |       |      |  |      | (235   | ) |  |   |      |  
|Other                                     |  |                         | 39     |      |  |      | (72    | ) |  |   | 25    |  
|Change in valuation allowance             |  |                         | 4,866  |      |  |      |       |   |  |   |      |  
|                                          |  |                         |        |      |  |      |        |   |  |   |       |  
|Provision for income taxes                |  | $                       | 2,523  |      |  | $    | (4,213 | ) |  | $ | 1,707 |  
|                                          |  |                         |        |      |  |      |        |   |  |   |       |  

At December 31, 2002, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $7.2 million that will begin to
expire in 2022. A valuation allowance against the entire net operating loss
carryforward has been established as the relizability of this asset is
uncertain.

10. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE

The following table shows the calculation of the Companys weighted average
common and common equivalent shares outstanding (in thousands):

|                                                                       |  |                          |       |      |  |      |       |  |  |  |       | 
|---------------------------------------------------------------------- |  | ------------------------ | ----- | ---- |  | ---- | ----- |  |  |  | ----- | 
|                                                                       |  | Years ended December 31,
|                                                                       |  |                         
|                                                                       |  | 2002                     |       | 2001 |  | 2000
|                                                                       |  |                          |       |      |  |     
|Weighted average
shares outstanding                                    |  |                          | 5,551 |      |  |      | 5,705 |  |  |  | 5,805 | 
|Dilutive impact of stock options                                       |  |                          |      |      |  |      |      |  |  |  | 432   | 
|                                                                       |  |                          |       |      |  |      |       |  |  |  |       | 
|Total outstanding weighted
average common and common
equivalent shares |  |                          | 5,551 |      |  |      | 5,705 |  |  |  | 6,237 | 
|                                                                       |  |                          |       |      |  |      |       |  |  |  |       | 

Antidilutive options of 2.1 million, 1.9 million and 348,000 were excluded from
the dilutive calculation in 2002, 2001 and 2000, respectively.

11. COMMON STOCK

Amended and Restated Stock Option Plan:In 2002, the Company amended and
restated its Stock Option Plan which, as amended, authorizes the issuance to
employees of up to 4,500,000 shares of common stock in incentive stock options
(as defined in section 422 of the Internal Revenue Code of 1986, as amended)
and nonqualified stock options. The exercise price of the incentive stock
options must be at least equal to the fair market value of the Companys common
stock on the date of the grant, while the exercise price of nonqualified stock
options may be less than fair market value on the date of grant, as determined
by the Board of Directors. The Board of Directors may provide for the exercise
of options in installments and upon such terms, conditions and

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restrictions as it may determine. Options granted
prior to January 1, 1999 generally vest ratably over a five-year period from the date of grant. Options granted since
January 1, 1999 generally vest ratably over a three-year period from the date
of grant. The term of option grants may be up to ten years. Options are
canceled upon the lapse of three months following termination of employment
except in the event of death or disability, as defined.

United Kingdom Stock Option Sub-Plan:This plan was adopted in 1988 for the
benefit of the Companys employees located in the United Kingdom. This plan
authorizes the issuance of options to purchase common stock of the Company at
prices at least equal to the fair market value of the common stock on the date
of the grant. The Board may provide for the exercise of options in
installments and upon such terms, conditions and restrictions as it may
determine. Options granted prior to January 1, 1999 generally vest ratably
over a five-year period from the date of grant. Options granted since January
1, 1999 generally vest ratably over a three-year period from the date of grant.
The term of option grants may be up to ten years. The options are canceled
upon termination of employment, except in the event of death, retirement or
injury, as defined.

France Stock Option Sub-Plan:This plan was adopted in 2000 for the benefit of
the Companys employees located in France. This plan authorizes the issuance
of options to purchase common stock of the Company at prices at least equal to
the fair market value of the common stock on the date of the grant. Unless
otherwise decided at the sole discretion of the Board, the options vest (i) 75%
after the expiration of a two-year period from the date of grant and (ii) 25%
after the expiration of a three-year period from the date of grant. Except for
the events provided under the French tax code, the shares cannot be sold or
otherwise disposed of for a period of five years from the date of grant. The
term of option grants may be up to ten years. Options are canceled upon the
lapse of three months following termination of employment except in the event
of death or disability, as defined.

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The following table summarizes the transactions under the Stock Option Plan and
the Stock Option Sub-Plans (in thousands, except option prices):

|                                 |  |           |       |                  |  |   |       | 
|-------------------------------- |  | --------- | ----- | ---------------- |  | - | ----- | 
|                                 |  | Number of |       | Weighted Average
|                                 |  | Options   |       | Option Price    
|                                 |  |           |       |                 
|Balance, December 31, 1999       |  |           | 1,222 |                  |  | $ | 13.22 | 
|                                 |  |           |       |                  |  |   |       | 
|Granted                          |  |           | 746   |                  |  |   | 14.76 | 
|Exercised                        |  |           | (80   | )                |  |   | 6.90  | 
|Canceled                         |  |           | (287  | )                |  |   | 15.10 | 
|                                 |  |           |       |                  |  |   |       | 
|Balance, December 31, 2000       |  |           | 1,601 |                  |  |   | 13.85 | 
|                                 |  |           |       |                  |  |   |       | 
|Granted                          |  |           | 753   |                  |  |   | 6.65  | 
|Exercised                        |  |           | (38   | )                |  |   | 6.34  | 
|Canceled                         |  |           | (504  | )                |  |   | 15.45 | 
|                                 |  |           |       |                  |  |   |       | 
|Balance, December 31, 2001       |  |           | 1,812 |                  |  |   | 10.57 | 
|                                 |  |           |       |                  |  |   |       | 
|Granted                          |  |           | 302   |                  |  |   | 4.74  | 
|Exercised                        |  |           |      |                  |  |   |      | 
|Canceled                         |  |           | (47   | )                |  |   | 10.08 | 
|                                 |  |           |       |                  |  |   |       | 
|Balance, December 31, 2002       |  |           | 2,067 |                  |  |   | 9.73  | 
|                                 |  |           |       |                  |  |   |       | 
|Exercisable at December 31, 2002 |  |           | 1,179 |                  |  | $ | 11.80 | 
|                                 |  |           |       |                  |  |   |       | 

The following table summarizes information about options granted under the Plan
that were outstanding at December 31, 2002:

|                  |  |             |       |                     |  |                     |      |             |  |                |       |          |  |  |       |  |  |   |       |  |  | 
|----------------- |  | ----------- | ----- | ------------------- |  | ------------------- | ---- | ----------- |  | -------------- | ----- | -------- |  |  | ----- |  |  | - | ----- |  |  | 
|                  |  |             |       | Options Outstanding |  | Options Exercisable
|                  |  |             |       |                     |  |                    
|                  |  |             |       | Number              |  | Weighted-           |      |             |  |                |       | Number   |  |  |       | 
|                  |  |             |       | Outstanding         |  | Average             |      | Weighted    |  | Exercisable    |       | Weighted
|Range of Exercise |  | at 12/31/02 |       | Remaining           |  | Average             |      | at 12/31/02 |  | Average       
|Prices            |  | (000)       |       | Contractual Life    |  | Exercise Price      |      | (000)       |  | Exercise Price
|                  |  |             |       |                     |  |                     |      |             |  |               
|$3.09-$4.59       |  |             | 308   |                     |  |                     | 8.76 |             |  | $              | 4.06  |          |  |  | 65    |  |  | $ | 4.11  | 
|$4.65-$6.50       |  |             | 389   |                     |  |                     | 7.70 |             |  |                | 5.36  |          |  |  | 110   |  |  |   | 6.23  | 
|$7.04-$10.25      |  |             | 662   |                     |  |                     | 7.05 |             |  |                | 7.93  |          |  |  | 447   |  |  |   | 7.90  | 
|$10.63-$15.75     |  |             | 411   |                     |  |                     | 7.52 |             |  |                | 13.10 |          |  |  | 274   |  |  |   | 13.10 | 
|$16.44-$24.06     |  |             | 280   |                     |  |                     | 6.86 |             |  |                | 19.97 |          |  |  | 268   |  |  |   | 20.01 | 
|$25.00-$35.88     |  |             | 17    |                     |  |                     | 7.02 |             |  |                | 31.91 |          |  |  | 15    |  |  |   | 31.60 | 
|                  |  |             |       |                     |  |                     |      |             |  |                |       |          |  |  |       |  |  |   |       | 
|Total             |  |             | 2,067 |                     |  |                     | 7.49 |             |  | $              | 9.73  |          |  |  | 1,179 |  |  | $ | 11.80 | 

Amended and Restated Director Stock Option Plan:In 2000, the Company amended
and restated its Director Stock Option Plan, which, as amended, authorizes the
issuance to directors of up to 750,000 shares of common stock. Stock option
grants pursuant to the directors plan will vest in one year and have a term of
ten years. The exercise prices related to these options are equal to the
market value of the Companys stock on the date of grant.

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The following table summarizes the transactions under the Director Stock Option
Plan (in thousands, except option prices):

|                                 |  |           |     |                  |  |   |       | 
|-------------------------------- |  | --------- | --- | ---------------- |  | - | ----- | 
|                                 |  | Number of |     | Weighted Average
|                                 |  | Options   |     | Option Price    
|                                 |  |           |     |                 
|Balance, December 31, 1999       |  |           | 193 |                  |  | $ | 8.43  | 
|                                 |  |           |     |                  |  |   |       | 
|Granted                          |  |           | 60  |                  |  |   | 17.81 | 
|Exercised                        |  |           | (10 | )                |  |   | 11.19 | 
|Cancellations                    |  |           | (5  | )                |  |   | 10.25 | 
|                                 |  |           |     |                  |  |   |       | 
|Balance, December 31, 2000       |  |           | 238 |                  |  |   | 10.64 | 
|                                 |  |           |     |                  |  |   |       | 
|Granted                          |  |           | 80  |                  |  |   | 7.53  | 
|Exercised                        |  |           |    |                  |  |   |      | 
|Cancellations                    |  |           | (35 | )                |  |   | 15.45 | 
|                                 |  |           |     |                  |  |   |       | 
|Balance, December 31, 2001       |  |           | 283 |                  |  |   | 9.17  | 
|                                 |  |           |     |                  |  |   |       | 
|Granted                          |  |           | 100 |                  |  |   | 4.60  | 
|Exercised                        |  |           |    |                  |  |   |      | 
|Cancellations                    |  |           | (35 | )                |  |   | 7.02  | 
|                                 |  |           |     |                  |  |   |       | 
|Balance, December 31, 2002       |  |           | 348 |                  |  |   | 8.07  | 
|                                 |  |           |     |                  |  |   |       | 
|Exercisable at December 31, 2002 |  |           | 248 |                  |  | $ | 9.47  | 
|                                 |  |           |     |                  |  |   |       | 

The following table summarizes information about options granted under the Plan
that were outstanding at December 31, 2002:

|                  |       |             |                     |                  |                     |                |          |             |             |                |          |      |  |  |     |     |  |   |       |      | 
|----------------- | ----- | ----------- | ------------------- | ---------------- | ------------------- | -------------- | -------- | ----------- | ----------- | -------------- | -------- | ---- |  |  | --- | --- |  | - | ----- | ---- | 
|                  |       |             | Options Outstanding |                  | Options Exercisable
|                  |       |             |                     |                  |                    
|                  |       |             | Number              |                  | Weighted-           |                |          |             |             |                | Number   |      |  |  |    
|                  |       |             | Outstanding         |                  | Average             |                | Weighted |             | Exercisable |                | Weighted
|Range of Exercise |       | at 12/31/02 |                     | Remaining        |                     | Average        |          | at 12/31/02 |             | Average       
|Prices            |       | (000)       |                     | Contractual Life |                     | Exercise Price |          | (000)       |             | Exercise Price
|                  |       |             |                     |                  |                     |                |          |             |             |               
|$4.38-$4.60       |       |             | 148                 |                  |                     |                | 6.62     |             |             | $              | 4.53     |      |  |  | 48  |     |  | $ | 4.38  |     
|$7.50-$17.81      |       |             | 200                 |                  |                     |                | 5.79     |             |             |                | 10.70    |      |  |  | 200 |     |  |   | 10.70 |     
|                  |       |             |                     |                  |                     |                |          |             |             |                |          |      |  |  |     |     |  |   |       |     
|                  | Total |             |                     | 348              |                     |                |          | 6.14        |             |                | $        | 8.07 |  |  |     | 248 |  |   | $     | 9.47 | 

Rights Agreement:The Board of Directors has adopted a Shareholder Rights Plan
whereby each holder of record as of December 29, 2000 received a right to
purchase from the Company one share of common stock of the Company at a price
of $93 per share for each share held. These rights can only be exercised after
certain events occur, such as if a person or entity acquires, or makes a tender
or exchange offer to acquire, 15% or more of the Companys common stock and the
rights expire ten years from the record date. Upon acquisition of 15% or more
of the Companys common stock, each right not owned by the acquiring person or
group will be adjusted to allow the purchase for $93 of a number of shares
having a then market value of $186. These rights are intended to provide the
Company certain antitakeover protections. The Board of Directors may terminate
the Rights Plan, or redeem the rights for $0.01 per right, at any time until
the tenth business day following a public announcement of a 15% or more stock
acquisition. The Company had reserved 7,000,000 shares of common stock for
this plan.

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The rights were distributed to shareholders as of the record date as a
nontaxable dividend. The rights are attached to and trade with Interphase
common stock until the occurrence of one of the triggering events, at which
time the rights would become detached from the Companys common stock.

Pro Forma Net Income (Loss):The Black-Scholes model was not developed for use
in valuing employee stock options, but was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, it requires the use of subjective assumptions
including expectations of future dividends and stock price volatility. Such
assumptions are only used for making the required fair value estimate and
should not be considered as indicators of future dividend policy or stock price
appreciation. Because changes in the subjective assumptions can materially
affect the fair value estimate, and because employee stock options have
characteristics significantly different from those of traded options, the use
of the Black-Scholes option-pricing model may not provide a reliable estimate
of the fair value of employee stock options.

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for options granted in 2002, 2001 and 2000: risk-free
interest rate of 3.51% in 2002, 4.39% in 2001 and 6% in 2000, expected dividend
yield of zero in each year, expected term of 6.81 years in 2002, 6.99 years in
2001 and 3.88 years in 2000, and expected volatility of 160% in 2002, 180% in
2001, and 140% in 2000. The weighted average fair valuation per share was
$4.54 in 2002, $6.62 in 2001 and $12.63 in 2000.

12. RELATED-PARTY TRANSACTIONS

The Company paid approximately $146,000, $161,000 and $253,000 for the years
ended December 31, 2002, 2001 and 2000, respectively, to certain outside
directors of the Company or their firms for professional services. The Company
believes the terms were equivalent to those of unrelated parties.

13. STOCK REPURCHASE

Effective October 1998, the Company approved a stock repurchase agreement with
Motorola, Inc. to purchase ratably from October 1998 to July 2002, all of the
shares owned by Motorola for $4.1 million at $6.25 per share. Under the terms
of the agreement, Motorola retained the right as an equity owner and had
assigned its voting rights to the Company. The Company canceled the stock upon
each repurchase. Prior to the repurchase agreement, Motorola owned
approximately 12% of the Companys outstanding common stock. In July 2002, the
Company made its final repurchase of stock from Motorola and therefore has no
further obligation under the agreement.

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14. EMPLOYEE BENEFIT PLAN

The Company maintains a defined contribution plan for those employees who meet
the plans length of service requirements. Under the defined contribution
plan, employees may make voluntary contributions to the plan, subject to
certain limitations, and the Company matches 50% up to 6% of the employees
contributions up to a maximum of $5,500 per employee for the year ended
December 31, 2002. The total expense under this plan was $261,000 $103,000 and
$256,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
The Company offers no post-retirement or postemployment benefits.

15. OTHER FINANCIAL INFORMATION

Major Customers: During 2002, sales to Hewlett Packard and Lucent Technologies
accounted for $8.7 million or 35% and $7.2 million or 29% of the Companys
consolidated revenues, respectively. During 2001, sales to Hewlett Packard and
SCI Systems accounted for $8.5 million or 30% and $4.2 million or 15% of the
Companys consolidated revenues, respectively. During 2000, sales to Hewlett
Packard and Terayon Communication Systems accounted for $10 million or 18% and
$5.9 million or 11% of the Companys consolidated revenues, respectively. No
other customers accounted for more than 10% of the Companys consolidated
revenues in the periods presented.

Included in accounts receivable at December 31, 2002, was approximately $2
million due from Lucent Technologies and approximately $1.5 million due from
Hewlett Packard. Included in accounts receivable at December 31, 2001, was
approximately $1.4 million due from SCI Systems, $1.4 million due from Glenayre
and approximately $810,000 due from Hewlett Packard. No other customers
accounted for more than 10% of the Companys accounts receivable at the balance
sheet dates presented.

Commitments:The Company leases its facilities under noncancelable operating
leases with the longest terms extending to the end of 2005. Rent expense
related to these leases is recorded on a straight-line basis. As of December
31, 2002, operating lease commitments having noncancelable terms of more than
one year are as follows (in thousands):

|                         |  |   |     | 
|------------------------ |  | - | --- | 
|Year ending December 31: |  |  
|                         |  |  
|2003                     |  | $ | 788 | 
|2004                     |  | $ | 835 | 
|2005                     |  | $ | 652 | 

Total rent expense for operating leases was approximately as follows (in
thousands):

|                         |  |                    |       | 
|------------------------ |  | ------------------ | ----- | 
|Year ending December 31: |  | Total Rent Expense
|                         |  |                   
|2002                     |  | $                  | 1,336 | 
|2001                     |  | $                  | 1,345 | 
|2000                     |  | $                  | 1,512 | 

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Contingencies:The Company is involved in various legal actions and claims
arising in the ordinary course of business. Management believes that such
litigation and claims will be resolved without material effect on the Companys
financial position or results of operations.

16. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets. The most significant
changes made by SFAS No. 141 are: 1) requiring that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001;
and 2) establishing specific criteria for the recognition of intangible assets
separately from goodwill. SFAS No. 142 primarily addresses the accounting for
acquired goodwill and intangible assets. The most significant changes made by
SFAS No. 142 are: 1) goodwill and indefinite-lived intangible assets are no
longer amortized; 2) goodwill will be tested annually and whenever events or
circumstances occur indicating that goodwill might be impaired; and 3) the
amortization period of intangible assets with finite lives will no longer be
limited to forty years. In the current year, accordance with the adoption of
these pronouncements, the Company would have been required to transfer the
balance of the intangible defined as Workforce into Goodwill. The Company
adopted SFAS No. 141 effective July 1, 2001, and SFAS No. 142 effective January
1, 2002, however, as the Companys goodwill and assembled workforce were
determined to be impaired and were written off in the fourth quarter of 2001,
the adoption of these standards did not have a material effect on the Companys
financial position or results of operations for the periods ended December 31,
2002.

The following tables present net income and earnings per share assuming
goodwill and assembled workforce would not have been amortized in accordance
with SFAS No. 142 as if adopted as of the beginning of the periods presented:
(in thousands)

|                                    |  |      |        |      |  |      |        |   |  |   |       | 
|----------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ----- | 
|                                    |  | 2002 |        | 2001 |  | 2000
|                                    |  |      |        |      |  |     
|Net (loss) income                   |  | $    | (8,401 | )    |  | $    | (9,572 | ) |  | $ | 2,971 | 
|Goodwill and workforce amortization |  |      |       |      |  |      | 270    |   |  |   | 300   | 
|                                    |  |      |        |      |  |      |        |   | 
|Adjusted net (loss) income          |  | $    | (8,401 | )    |  | $    | (9,302 | ) |  | $ | 3,271 | 
|                                    |  |      |        |      |  |      |        |   | 

|                                    |  |      |       |      |  |      |       |   |  |   |      | 
|----------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  | - | ---- | 
|                                    |  | 2002 |       | 2001 |  | 2000
|                                    |  |      |       |      |  |     
|Basic loss per share:               |  |      |       |      |  |      |       |   |  |   |      | 
|Net loss                            |  | $    | (1.51 | )    |  | $    | (1.68 | ) |  | $ | 0.51 | 
|Goodwill and workforce amortization |  |      |      |      |  |      | 0.05  |   |  |   | 0.05 | 
|                                    |  |      |       |      |  |      |       |   | 
|Adjusted basic net loss per share   |  | $    | (1.51 | )    |  | $    | (1.63 | ) |  | $ | 0.56 | 
|                                    |  |      |       |      |  |      |       |   | 

|                                    |  |      |       |      |  |      |       |   |  |   |      | 
|----------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  | - | ---- | 
|                                    |  | 2002 |       | 2001 |  | 2000
|                                    |  |      |       |      |  |     
|Diluted loss per share:             |  |      |       |      |  |      |       |   |  |   |      | 
|Net loss                            |  | $    | (1.51 | )    |  | $    | (1.68 | ) |  | $ | 0.48 | 
|Goodwill and workforce amortization |  |      |      |      |  |      | 0.05  |   |  |   | 0.05 | 
|                                    |  |      |       |      |  |      |       |   | 
|Adjusted diluted net loss per share |  | $    | (1.51 | )    |  | $    | (1.63 | ) |  | $ | 0.53 | 
|                                    |  |      |       |      |  |      |       |   | 

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In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires the fair value of a liability for an asset
retirement obligation to be recognized in the period that it is incurred if a
reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset.
SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The
adoption of SFAS No. 143 is not expected to have a material impact on the
Companys results of operations, financial position or cash flows.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 addresses financial accounting
and reporting for the impairment of long-lived assets and for long-lived assets
to be disposed of. This statement supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of;
however, this statement retains the fundamental provisions of SFAS No. 121 for
(a) recognition and measurement of the impairment of long-lived assets to be
held and used, and (b) measurement of long-lived assets to be disposed of by
sale. This statement also supersedes the accounting and reporting provisions
of APB Opinion No. 30, Reporting the Results of Operations  Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions for segments of a business to
be disposed of. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001. The Company adopted this standard effective January 1,
2002. The adoption of this standard did not have a material effect on the
Companys financial position or results of operations for the year ended
December 31, 2002.

In April 2002, the FASB issued SFAS No. 145, Recission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections as
of April 2002, which rescinded or amended various existing standards. One
change addressed by this standard pertains to treatment of extinguishments of
debt as an extraordinary item. SFAS No. 145 rescinds SFAS No. 4, Reporting
Gains and Losses from Extinguishment of Debt and states that an extinguishment
of debt cannot be classified as an extraordinary item unless it meets the
unusual or infrequent criteria outlined in Accounting Principles Board Opinion
No. 30 Reporting the Unusual and Infrequently Occurring Events and
Transactions. The provisions of this statement are effective for fiscal years
beginning after May 15, 2002 and extinguishments of debt that were previously
classified as an extraordinary item in prior periods that do not meet the
criteria in Opinion 30 for classification as an extraordinary item shall be
reclassified. The adoption of SFAS No. 145 is not expected to have a material
impact on the Companys results of operations, financial position or cash
flows.

In June 2002, the FASB issued SFAS No. 146 Accounting for Costs Associated
with Exit or Disposal Activities, which requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. The provisions of
this statement are effective for exit or disposal activities initiated after
December 31, 2002 and are not expected to have a material impact on the
Companys results of operations, financial position or cash flows.

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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 are effective for financial statements of both interim and annual
periods that end after December 15, 2002.

In December 2002, the FASB issued SFAS No. 148 Accounting for Stock-Based
Compensation  Transition and Disclosure, an Amendment of FASB Statement No.
123. SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation prescribed by SFAS No. 123. SFAS No. 148 also amends the
disclosure requirements of SFAS No. 123 to require disclosure in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
As the Company continues to account for stock-based employee compensation using
the intrinsic value method under APB No. 25, the Company, as required, has only
adopted the revised disclosure requirements of SFAS No. 148 as of December 31,
2002 (Note 11).

EITF Issue 00-21, Accounting for Revenue Arrangements with Multiple
Deliverables, addresses the accounting treatment for an arrangement to provide
the delivery or performance of multiple products and/or services where the
delivery of a product or system or performance of services may occur at
different points in time or over different periods of time. The arrangements
are often accompanied by initial installation, initiation, or activation
services and involve either a fixed fee or a fixed fee coupled with a
continuing payment stream, which may be fixed or variable. The EITF reached
conclusions regarding, among other issues, the applicability of the provisions
regarding separation of contract elements in EITF Issue 00-21 to contracts
where one or more elements fall within the scope of other authoritative
literature, such as SOP 81-1. The proposed 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

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that EITF Issue 00-21 will have a material impact on its consolidated financial
statements.

17. SEGMENT DATA

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 long lived assets and revenue related to North America and foreign
countries as of and for the years ended December 31, 2002, 2001 and 2000 are as
follows (in thousands):

Geographic long-lived assets exclude corporate assets. Corporate assets
include cash and cash equivalents, marketable securities and intangibles.

|                  |  |      |       |      |  |   |       | 
|----------------- |  | ---- | ----- | ---- |  | - | ----- | 
|Long lived assets |  | 2002 |       | 2001
|                  |  |      |       |     
|North America     |  | $    | 1,791 |      |  | $ | 1,116 | 
|Europe            |  |      | 145   |      |  |   | 160   | 
|Pacific Rim       |  |      | 2     |      |  |   | 2     | 
|                  |  |      |       |      |  |   |       | 
|Total             |  | $    | 1,938 |      |  | $ | 1,278 | 
|                  |  |      |       |      |  |   |       | 

|              |  |      |        |      |  |      |        |  |  |   |        | 
|------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|Revenues      |  | 2002 |        | 2001 |  | 2000
|              |  |      |        |      |  |     
|North America |  | $    | 18,525 |      |  | $    | 22,919 |  |  | $ | 47,116 | 
|Europe        |  |      | 4,011  |      |  |      | 5,173  |  |  |   | 6,209  | 
|Pacific Rim   |  |      | 2,587  |      |  |      | 640    |  |  |   | 2,372  | 
|              |  |      |        |      |  |      |        |  |  |   |        | 
|Total         |  | $    | 25,123 |      |  | $    | 28,732 |  |  | $ | 55,697 | 
|              |  |      |        |      |  |      |        |  |  |   |        | 

Additional information regarding revenue by product-line is as follows:

|                  |  |      |        |      |  |      |        |  |  |   |        | 
|----------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|Product Revenue   |  | 2002 |        | 2001 |  | 2000
|                  |  |      |        |      |  |     
|Broadband telecom |  | $    | 11,767 |      |  | $    | 6,417  |  |  | $ | 12,254 | 
|Combo             |  |      | 8,589  |      |  |      | 6,776  |  |  |   | 2,678  | 
|LAN               |  |      | 2,027  |      |  |      | 5,636  |  |  |   | 18,824 | 
|Storage           |  |      | 1,505  |      |  |      | 8,366  |  |  |   | 19,322 | 
|WAN               |  |      | 167    |      |  |      | 606    |  |  |   | 1,516  | 
|Other             |  |      | 1,068  |      |  |      | 931    |  |  |   | 1,103  | 
|                  |  |      |        |      |  |      |        |  |  |   |        | 
|Total             |  | $    | 25,123 |      |  | $    | 28,732 |  |  | $ | 55,697 | 
|                  |  |      |        |      |  |      |        |  |  |   |        | 

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18. QUARTERLY FINANCIAL DATA (Unaudited)

Quarterly results of operations for 2002 (unaudited)
(In thousands, except per share amounts)

|                                             |  |               |        |         |  |              |        |             |  |   |        |   |  |   |        |  
|-------------------------------------------- |  | ------------- | ------ | ------- |  | ------------ | ------ | ----------- |  | - | ------ | - |  | - | ------ | -
|                                             |  | Quarter Ended
|                                             |  |              
|                                             |  | March 31      |        | June 30 |  | September 30 |        | December 31
|                                             |  |               |        |         |  |              |        |            
|Revenues                                     |  | $             | 6,300  |         |  | $            | 6,016  |             |  | $ | 6,022  |   |  | $ | 6,785  |  
|Gross margin                                 |  |               | 2,492  |         |  |              | 1,562  |             |  |   | 2,608  |   |  |   | 3,130  |  
|Loss from
continuing
operations before
taxes |  |               | (1,033 | )       |  |              | (2,497 | )           |  |   | (1,384 | ) |  |   | (964   | )
|Loss from
continuing
operations              |  |               | (566   | )       |  |              | (1,493 | )           |  |   | (721   | ) |  |   | (5,621 | )
|Net loss                                     |  |               | (566   | )       |  |              | (1,493 | )           |  |   | (721   | ) |  |   | (5,621 | )
|Net loss per share                          
|Basic EPS                                    |  | $             | (0.10  | )       |  | $            | (0.27  | )           |  | $ | (0.13  | ) |  | $ | (1.02  | )
|Diluted EPS                                  |  | $             | (0.10  | )       |  | $            | (0.27  | )           |  | $ | (0.13  | ) |  | $ | (1.02  | )

Quarterly results of operations for 2001 (unaudited)
(In thousands, except per share amounts)

|                                               |  |               |       |         |  |              |        |             |  |   |        |   |  |   |        |  
|---------------------------------------------- |  | ------------- | ----- | ------- |  | ------------ | ------ | ----------- |  | - | ------ | - |  | - | ------ | -
|                                               |  | Quarter Ended
|                                               |  |              
|                                               |  | March 31      |       | June 30 |  | September 30 |        | December 31
|                                               |  |               |       |         |  |              |        |            
|Revenues                                       |  | $             | 9,951 |         |  | $            | 7,108  |             |  | $ | 4,603  |   |  | $ | 7,070  |  
|Gross margin                                   |  |               | 5,060 |         |  |              | (1,295 | )           |  |   | 1,770  |   |  |   | 3,469  |  
|Income from
continuing
operations before
taxes |  |               | (252  | )       |  |              | (8,757 | )           |  |   | (2,327 | ) |  |   | (2,449 | )
|Income from
continuing
operations              |  |               | (188  | )       |  |              | (6,006 | )           |  |   | (1,456 | ) |  |   | (1,922 | )
|Net Income                                     |  |               | (188  | )       |  |              | (6,006 | )           |  |   | (1,456 | ) |  |   | (1,922 | )
|Net income per share
Basic EPS                 |  | $             | (0.03 | )       |  | $            | (1.05  | )           |  | $ | (0.26  | ) |  | $ | (0.34  | )
|Diluted EPS                                    |  | $             | (0.03 | )       |  | $            | (1.05  | )           |  | $ | (0.26  | ) |  | $ | (0.34  | )

*     See earlier notes and Item 7 Managements Discussion and Analysis of
Financial Condition and Results of Operations for explanations regarding major
changes in amounts or trends.

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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).(7)
|3(a)     |  | Certificate of Incorporation of the registrant. (1)                                                                                                                                                                                                                                                 
|3(b)     |  | Amendment to Articles of Incorporation of the registrant. (10)                                                                                                                                                                                                                                      
|3(c)     |  | Amended and Restated Bylaws of the registrant adopted on December
5, 1995 and amended on January 19, 1999. (12)                                                                                                                                                                                     
|4(a)     |  | Rights Agreement dated as of December 7, 2000 by and between the
Company and Computershare Investor Services, LLC as Rights Agent.(11)                                                                                                                                                              
|10(a)    |  | Registrants Amended and Restated Stock Option Plan and Amendment No. 1
and 2 thereto.(9)                                                                                                                                                                                                           
|10(b)    |  | Registrants Amended and Restated Stock Option Plan Amendment No. 4.(10)                                                                                                                                                                                                                            
|10(c)    |  | Registrants United Kingdom Incentive Stock Option Sub-Plan.(3)                                                                                                                                                                                                                                     
|10(d)    |  | Stock Purchase Warrant issued to Motorola, Inc.(4)                                                                                                                                                                                                                                                  
|10(e)    |  | Lease on Dallas facility.(5)                                                                                                                                                                                                                                                                        
|10(f)    |  | Directors Stock Option Plan and Amendment No. 1 thereto.(6)                                                                                                                                                                                                                                         
|10(g)    |  | Directors Stock Option Plan Amendment No. 2.(10)                                                                                                                                                                                                                                                    
|10(h)    |  | Loan Agreement between Interphase Corporation and BankOne Texas, N.A.(8)                                                                                                                                                                                                                            
|10(i)    |  | Purchase Agreement between Interphase Corporation and Cisco Systems Inc.(9)                                                                                                                                                                                                                         
|10(j)    |  | Motorola Stock Repurchase Agreement.(2)                                                                                                                                                                                                                                                             
|10(k)    |  | Registrants France Incentive Stock Option Sub-Plan(12)                                                                                                                                                                                                                                             
|10(l)    |  | Sublease on Plano facility.(12)                                                                                                                                                                                                                                                                     
|10(m)    |  | Credit Agreement between Interphase Corporation and Bank One, NA.(12)                                                                                                                                                                                                                               
|10(n)    |  | Lease on Facility at Parkway Center, Phase I, Plano, Texas(13)                                                                                                                                                                                                                                      
|10(o)    |  | Lease on Facility at 2105 Luna Road, Carrollton, Texas(13)                                                                                                                                                                                                                                          
|21(a)    |  | Subsidiaries of the Registrant(14)                                                                                                                                                                                                                                                                  
|23(a)    |  | Consent of Independent Accountants.(14)                                                                                                                                                                                                                                                             
|99(a)    |  | Certification Pursuant to 18 U.S.C Section 1350, As Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002(14)                                                                                                                                                                           
|99(b)    |  | Certification Pursuant to 18 U.S.C Section 1350, As Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002(14)                                                                                                                                                                           



---

|(1) |  | Filed as an exhibit to Registration Statement No. 2-86523 on Form S-1 and
incorporated herein by reference.
|--- |  | -----------------------------------------------------------------------------------------------------------
|   
|(2) |  | Filed as an exhibit to Report on Form 8-K on October 15, 1998, and
incorporated herein by reference.       

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##### Table of Contents



|(3)  |  | Filed as an exhibit to Report on Form 10-K for the year ended
October 31, 1988, and incorporated herein by reference.     
|---- |  | --------------------------------------------------------------------------------------------------------------------------
|    
|(4)  |  | Filed as an exhibit to Report on Form 10-Q for the quarter ended
April 30, 1989, and incorporated herein by reference.    
|    
|(5)  |  | Filed as an exhibit to Report on Form 10-K for the year ended October 31,
1994, and incorporated herein by reference.     
|    
|(6)  |  | Filed as an exhibit to Report on Form 10-K for the year ended October 31,
1995, and incorporated herein by reference.     
|    
|(7)  |  | Filed as an exhibit to Report on Form 8-K on August 6, 1996, and
incorporated herein by reference.                        
|    
|(8)  |  | Filed as an exhibit to Report on Form 8-KA on October 4, 1996, and
incorporated herein by reference.                      
|    
|(9)  |  | Filed as an exhibit to Report on Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference.    
|    
|(10) |  | Filed as an exhibit to Report on Form 10-K for the year ended December
31, 1999, and incorporated herein by reference.    
|    
|(11) |  | Filed as an exhibit to Form 8-K on January 9, 2001, and incorporated
herein by reference.                                 
|    
|(12) |  | Filed as an exhibit to Report on Form 10-K for the year ended December
31, 2001, and incorporated herein by reference.    
|    
|(13) |  | Filed as an exhibit to Report on Form 10-Q for the quarter ended
September 30, 2002, and incorporated herein by reference.
|    
|(14) |  | Filed herein.                                                                                                             

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