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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

INTERPHASE CORPORATION

Parkway Centre I
2901 North Dallas Parkway, Suite 200
Plano, Texas 75093
(Address of Principal Executive Offices)

(214)-654-5000
(Registrant’s telephone number, including area code)

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INTERPHASE CORPORATION

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

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PART I
FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

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

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

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

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

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

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

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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1. - BASIS OF PRESENTATION

Interphase Corporation and subsidiaries (“Interphase” or the “Company”) enables rapid platform design and integration for the global voice and data communications markets through custom and off-the-shelf communications equipment, embedded software development suites, and systems integration and consulting services for telecom and enterprise networks. The Company’s products connect computer and telecommunication servers to Wide Area Networks (WANs), Local Area Networks (LANs) and Storage Area Networks (SANs) using Asynchronous Transfer Mode (ATM), Ethernet, Signaling System 7 (SS7), IP, Fibre Channel, HDLC, Frame Relay and Integrated Services Digital Network (ISDN) technologies. See Note 8 for information regarding the Company’s revenue related to North America and foreign countries.

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

While the accompanying interim financial statements are unaudited, they have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of the Company, all material standard adjustments and disclosures necessary to fairly present the results of such periods have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Operating results for the three months and nine months ended September 30, 2003, are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2002.

Reclassifications

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

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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Stock-Based Compensation

The Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB 25”) and related interpretations in accounting for its employee stock options. Under APB 25, compensation expense is recorded when the exercise price of employee stock options is less than the fair value of the underlying stock on the date of grant. The Company has implemented the disclosure-only provisions of Statement of Financial Accounting Standards Board No. (“SFAS”) 123, “Accounting for Stock-Based Compensation,” and SFAS 148, “Accounting for Stock-Based Compensation Transition and Disclosure.” Had the Company elected to adopt the expense recognition provisions of SFAS 123, the pro forma impact on net income and earnings per share would have been as follows (in thousands, except per share data):

NOTE 2. - INVENTORIES

Inventories are valued at the lower of cost or market and include material, labor and manufacturing overhead. Cost is determined on a first-in, first-out basis (in thousands):

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.

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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 3. - DEFERRED TAXES

SFAS 109, “Accounting for Income Taxes,” requires that a valuation allowance be established when it is “more likely than not” that all or a portion of a deferred tax asset will not be realized. A review of all available positive and negative evidence needs to be considered, including a company’s current and past performance, the market environment in which the company operates, the utilization of past tax credits, length of carry back and carry forward periods, existing contracts or sales backlog that will result in future profits, as well as other factors.

Forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years. Cumulative losses weigh heavily in the overall assessment. As a result of a review undertaken at December 31, 2002, the Company concluded that it was appropriate to establish a full valuation allowance for its net deferred tax assets. The Company continues to maintain a full valuation allowance on the tax benefits. Until an appropriate level of profitability is sustained, the Company expects to continue to record a full valuation allowance on future tax benefits and does not expect to recognize any significant tax benefits in future results of operations.

During the third quarter of 2003, the Internal Revenue Service concluded a federal income tax audit of the Company related to the tax years 1996 through 2001. In addition, the French tax administration also concluded a tax audit of the Company's French subsidiary covering the same periods resulting in a finding of no tax due. Due to the finalization of both tax audits, the Company recognized a tax benefit of approximately $245,000 during the third quarter of 2003. This benefit was partially offset by taxes on foreign income.

NOTE 4. - CREDIT FACILITY

On July 25, 2003, the Company entered into a new $5 million revolving bank credit facility designed to replace an older credit facility maturing on June 30, 2004. In September of 2003, the Company borrowed $3.5 million under the new credit facility and used the proceeds to repay the amounts outstanding under the old credit facility. The new credit facility bears interest at the rate of LIBOR plus 2.0%, matures on July 30, 2005 and all borrowings are secured by marketable securities. The borrowings of $3.5 million are classified as long-term debt on the accompanying balance sheet.

NOTE 5. - EXIT ACTIVITIES

During the second quarter of 2003, the Company committed to an exit plan regarding one of its leased facilities which expires during the first quarter of 2005. The Company had previously held this facility open for storage, overflow use, and anticipated growth. However, it has been determined that the facility will not be needed for overflow space and the Company is pursuing subleasing opportunities. As a result of this exit plan, the Company recorded a charge of approximately $109,000 during the second quarter of this year, classified as operating expenses, related to net termination costs associated with the lease of the facility. As of September 30, 2003, the facility had not been subleased. Additional costs may continue to be incurred in future periods if the Company is not successful in subleasing the facility. A reconciliation showing the changes to the liability account during the quarter is as follows (in thousands):

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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 6. - COMPREHENSIVE INCOME (LOSS)

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

NOTE 7. - EARNINGS PER SHARE

Basic earnings per share are computed by dividing reported earnings available to common stockholders by weighted average common shares outstanding. Diluted earnings per share give effect to dilutive potential common shares. Earnings per share are calculated as follows (in thousands, except per share data):

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INTERPHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 8. - SEGMENT INFORMATION

The Company is principally engaged in the design, development, and manufacturing of high-performance connectivity products utilizing advanced technologies being used in next generation telecommunication networks and enterprise data/storage networks. Except for revenue performance, which is monitored by product line, the chief operating decision-makers review financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance. Accordingly, the Company considers itself to be in a single industry segment.

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

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

NOTE 9. - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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

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

FORWARD LOOKING STATEMENTS

This report contains forward-looking statements about the business, financial condition and prospects of the Company. These statements are made under the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. The actual results of the Company could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties, including without limitation, the Company’s reliance on a limited number of customers, failure to see spending improvements in the telecommunications and computer networking industries, significant changes in product demand, the availability of products, changes in competition, various inventory risks due to changes in market conditions and other risks and uncertainties indicated in the Company’s filings and reports with the Securities and Exchange Commission. All the foregoing risks and uncertainties are beyond the ability of the Company to control, and in many cases, the Company cannot predict the risks and uncertainties that could cause its actual results to differ materially from those indicated by the forward-looking statements. When used in this report, the words “believes,” “plans,” “expects,” “intends,” and “anticipates” and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements.

RESULTS OF OPERATIONS

Revenue

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

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

During the third quarter of 2003, sales to two customers accounted for approximately 60% and 23% of total revenue, compared to approximately 43% and 30% of total revenue for the comparable period. No other customer accounted for more than 10% of the Company’s consolidated revenue for the periods then ended.

Gross Margin

For the three months ended September 30, 2003, gross margin, as a percentage of sales, was 52% compared to 43% for the same period in the prior year. The increase in the gross margin percentage primarily relates to the continued shift in product mix towards higher margin products. In addition, the Company improved

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

For the nine months ended September 30, 2003, gross margin, as a percentage of sales, was 51% compared to 36% for the same period in the prior year. The increase in the gross margin percentage primarily relates to an excess and obsolete inventory charge of $1.6 million incurred during the nine months ended September 30, 2002 compared to $600,000 incurred for the same period in the current year. Additionally, there has been a continued shift in product mix towards higher margin products. In addition, the Company improved manufacturing efficiencies and achieved reductions in material costs for certain product lines due to increased production volumes and lower overall overhead costs.

Research and Development

The Company’s investment in the development of new products through research and development was $1.8 million for both the three months ended September 30, 2003 and 2002. As a percentage of total revenue, research and development expense was approximately 21% in the third quarter of 2003 as compared to approximately 31% for the same period for the prior year. The decrease in research and development costs as a percentage of total revenue is due to increased revenue.

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

Sales and Marketing

Sales and marketing expenses were $1.8 million and $1.4 million for the three months ended September 30, 2003 and 2002, respectively. The increase in sales and marketing expense quarter over quarter is primarily due to higher sales commissions and bonuses as a result of the increase in revenue during the quarter. As a percentage of total revenue, sales and marketing expense was approximately 21% for the third quarter of 2003 down from approximately 24% for the comparable period. The decrease in sales and marketing expense as a percentage of total revenue is due to revenue increasing at a higher rate than sales and marketing expense for the quarter.

Sales and marketing expenses increased approximately 17% to $5.1 million for the nine months ended September 30, 2003, compared to $4.4 million for the same period in the prior year. Approximately 45% of the increase in sales and marketing expense period over period is due to higher sales commissions and bonuses due to higher revenue levels. Additionally, approximately 32% of the increase in sales and marketing expense is due to increased travel and headcount related expenses related to the sales organization. The remaining portion of the increase primarily relates to higher marketing expenditures, including headcount. As a percentage of total revenue, sales and marketing expense decreased to approximately 22% for the nine months ended September 30, 2003 from approximately 24% for the comparable period. The decrease in sales and marketing expense as a percentage of total revenue is due to revenue increasing at a higher rate than sales and marketing expense for the nine months ended September 30, 2003.

General and Administrative

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

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

Interest Income, Net

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

Other Income, Net

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

Income Taxes

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

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

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

Net Income ( Loss)

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

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LIQUIDITY AND CAPITAL RESOURCES

Consolidated Cash Flows

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

Operating Activities

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

Changes in assets and liabilities result primarily from the timing of production, sales and purchases. Such changes in assets and liabilities generally tend to even out over time and result in trends in cash flows from operating activities generally reflecting earnings trends.

Investing Activities

The Company’s investing activities resulted in a net cash use of $726,000 and $406,000 for the nine months ended September 30, 2003 and 2002, respectively. Cash flows from investing activities in each of the periods related principally to additions to property, equipment, capitalized software and leasehold improvements and the Company’s investments in marketable securities. Additions to property, equipment, capitalized software and leasehold improvements in each of the periods focused on the manufacturing, sales and engineering functions of the Company. The expenditures made during the nine months ended September 30, 2003 related primarily to capitalized software used in the engineering and sales functions. Expenditures made during the nine months ended September 30, 2002 related primarily to general equipment and furniture upgrades.

Financing Activities

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

Commitments and Contingencies

At September 30, 2003, the Company had no material commitments to purchase capital assets. The Company’s significant long-term obligations for the period then ended are its operating leases on facilities and future debt payments related to the Company’s new credit facility. To date, the Company has not paid any dividends and does not anticipate paying any for the remainder of 2003.

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

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

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

Other

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

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and other material included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Risk

The Company is exposed to adverse movements in foreign currency exchange rates because it conducts business on a global basis and in some cases in foreign currencies. The Company’s operations in France are measured in the local currency and converted into U.S. Dollars based on published exchange rates for the periods reported and are therefore subject to risk of exchange rate fluctuations. The Euro to U.S. Dollar translation accounted for a charge of approximately $366,000 for the nine months ended September 30, 2003, compared to a benefit of $257,000 for the comparable period.

Market Price Risk

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

Interest Rate Risk

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

Item 4. CONTROLS AND PROCEDURES

	(a)		Evaluation of Disclosure Controls and Procedures. The Company’s management, under the supervision of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), performed an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures are effective.
	(b)		Changes in Internal Controls. The Company maintains a system of internal controls that are designed to provide reasonable assurance that its books and records accurately reflect, in all material respects, the transactions of the Company and that its established policies and procedures are adhered to. There were no significant changes to the Company’s internal controls or in other factors that could significantly affect the Company’s internal controls subsequent to the date of the evaluation by the Company’s CEO and CFO, including any corrective actions with regard to significant deficiencies and material weaknesses.

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PART II
OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

None.

Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None.

Item 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

Item 5. OTHER INFORMATION

None.

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

Exhibits

Reports on Form 8-K

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

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Plano, Texas
November 13, 2003

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INDEX TO EXHIBITS