10-Q

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

Form 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended June 30, 2003

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the transition period from ______ to ______

Commission File No. 0-26844

RADISYS CORPORATION
(Exact name of registrant as specified in its charter)

Oregon	93-0945232
(State of Incorporation)	(I.R.S. Employer Identification No.)

5445 NE Dawson Creek Drive, Hillsboro, Oregon 97124
(Address of principal executive offices, including zip code)

(503) 615-1100
(Registrant's telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)
Yes þ No o

Number of shares of Common Stock outstanding as of August 7, 2003: 17,864,116

RADISYS CORPORATION

PART I. FINANCIAL INFORMATION

		Page No.
Item 1.	Consolidated Financial Statements (Unaudited)
	Consolidated Statements of Operations - Three and six months ended June 30, 2003 and 2002	3
	Consolidated Balance Sheets - June 30, 2003 and December 31, 2002	4
	Consolidated Statement of Changes in Shareholders' Equity - December 31, 2002 through June 30, 2003	5
	Consolidated Statements of Cash Flows - Six months ended June 30, 2003 and 2002	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	32
Item 4.	Controls and Procedures	33

PART II. OTHER INFORMATION

Item 4.	Submission of Matters to a Vote of Security Holders	34
Item 6.	Exhibits and Reports on Form 8-K	36
Signatures		37

2

Table of Contents

Item 1.	Consolidated Financial Statements (Unaudited)
	Consolidated Statements of Operations - Three and six months ended June 30, 2003 and 2002
	Consolidated Balance Sheets - June 30, 2003 and December 31, 2002
	Consolidated Statement of Changes in Shareholders' Equity - December 31, 2002 through June 30, 2003
	Consolidated Statements of Cash Flows - Six months ended June 30, 2003 and 2002
	Notes to Consolidated Financial Statements
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures about Market Risk
Item 4.	Controls and Procedures

Item 4.	Submission of Matters to a Vote of Security Holders
Item 6.	Exhibits and Reports on Form 8-K
Signatures
EX-10.1	RadiSys Corporation 1996 Employee Stock Purchase Plan, as amended.
EX-31.1	Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
EX-31.2	Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
EX-32.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
EX-32.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (Unaudited)

RadiSys Corporation
Consolidated Statements of Operations
(In thousands, except per share amounts, unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
Revenues	$	48,898		$	52,152		$	97,302		$	104,851
Cost of sales		32,945			37,022			66,152			75,008
Gross margin		15,953			15,130			31,150			29,843
Research and development		5,733			7,715			11,273			15,101
Selling, general, and administrative		6,783			8,962			13,331			16,872
Intangible assets amortization		765			765			1,530			1,543
Restructuring charges		--			4,281			1,829			4,281
Income (loss) from operations		2,672			(6,593	)		3,187			(7,954	)
Gain on repurchase of convertible
subordinated notes		--			1,504			825			2,859
Interest expense, net		(595	)		(642	)		(1,001	)		(1,450	)
Other expense, net		(297	)		(188	)		(789	)		(410	)
Income (loss) from continuing operations before
income tax benefit		1,780			(5,919	)		2,222			(6,955	)
Income tax benefit		(9	)		(3,247	)		--			(4,022	)
Income (loss) from continuing operations		1,789			(2,672	)		2,222			(2,933	)
Discontinued operations related to Savvi business:
Loss from discontinued operations		--			(889	)		(4,679	)		(1,759	)
Income tax benefit		--			(489	)		--			(967	)
Net income (loss)	$	1,789		$	(3,072	)	$	(2,457	)	$	(3,725	)
Income (loss) per share from continuing operations:
Basic	$	0.10		$	(0.15	)	$	0.13		$	(0.17	)
Diluted	$	0.10		$	(0.15	)	$	0.12		$	(0.17	)
Net income (loss) per share:
Basic	$	0.10		$	(0.18	)	$	(0.14	)	$	(0.21	)
Diluted	$	0.10		$	(0.18	)	$	(0.14	)	$	(0.21	)
Weighted average shares outstanding:
Basic		17,785			17,492			17,728			17,450
Diluted		18,098			17,492			17,967			17,450

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

3

RadiSys Corporation
Consolidated Balance Sheets
(In thousands)

	June 30, 2003			December 31, 2002
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	30,700		$	33,138
Short term investments, net (Note 2)		54,398			72,661
Accounts receivable, net (Note 3)		29,464			27,473
Inventories, net (Note 4)		26,962			24,864
Other current assets		2,520			4,361
Deferred tax assets		7,454			7,521
Total current assets		151,498			170,018
Property and equipment, net		23,355			25,882
Goodwill (Notes 5 and 11)		27,521			29,969
Intangible assets, net (Notes 6 and 11)		7,963			11,159
Long-term investments, net (Note 2)		28,875			13,128
Long-term deferred tax assets		21,212			21,437
Other assets		1,713			2,706
Total assets	$	262,137		$	274,299
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	17,530		$	18,933
Accrued wages and bonuses		4,278			4,879
Accrued interest payable		1,421			1,643
Accrued restructuring (Note 7)		3,873			5,178
Other accrued liabilities		8,674			6,911
Total current liabilities		35,776			37,544
Long-term liabilities (Note 9)
Convertible subordinated notes, net		67,443			77,366
Mortgage payable		6,544			6,588
Total long-term liabilities		73,987			83,954
Total liabilities		109,763			121,498
Shareholders' equity (Note 10):
Common stock - 100,000 shares authorized; 17,839 and
17,605 shares issued and outstanding at June 30, 2003 and		162,819			161,485
December 31, 2002
Accumulated deficit		(12,482	)		(10,025	)
Accumulated other comprehensive income:
Cumulative translation adjustments		1,960			1,230
Unrealized gain equity on securities		77			111
Total shareholders' equity		152,374			152,801
Total liabilities and shareholders' equity	$	262,137		$	274,299

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

4

RadiSys Corporation
Consolidated Statement of Changes in Shareholders’ Equity
(In thousands, unaudited)

						Cumulative translation adjustments		Unrealized gain on equity securities			Accumulated deficit			Total			Accumulated other comprehensive income (loss)
	Common Stock
	Shares		Amount
Balances, December 31, 2002		17,605	$	161,485		$	1,230	$	111		$	(10,025	)	$	152,801			–
Shares issued pursuant to
benefit plans		124		684			–		–			–			684			–
Tax benefit of options exercised		–		17			–		–			–			17			–
Translation adjustments		–		–			72		–			–			72			72
Unrealized gain on equity
securities available for sale		–		–			–		43			–			43			43
Net loss for the period		–		–			–		–			(4,246	)		(4,246	)		(4,246	)
Balances, March 31, 2003		17,729		162,186			1,302		154			(14,271	)		149,371
Comprehensive loss, three months
ended March 31, 2003																		(4,131	)
Shares issued pursuant to
benefit plans		110		650			–		–			–			650			–
Reversal of tax benefit of
options exercised		–		(17	)		–		–			–			(17	)		–
Translation adjustments		–		–			658		–			–			658			658
Unrealized loss on equity
securities available for sale		–		–			–		(77	)		–			(77	)		(77	)
Net income for the period		–		–			–		–			1,789			1,789			1,789
Balances, June 30, 2003		17,839	$	162,819		$	1,960	$	77		$	(12,482	)	$	152,374
Comprehensive income, three
months ended June 30, 2003																	$	2,370
Comprehensive loss, six months
ended June 30, 2003																	$	(1,761	)

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

5

RadiSys Corporation
Consolidated Statements of Cash Flows
(In thousands, unaudited)

	Six Months Ended June 30,
	2003			2002
Cash flows from operating activities:
Net loss	$	(2,457	)	$	(3,725	)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Loss on sale of Savvi business		4,286			–
Depreciation and amortization		5,167			6,058
Gain on repurchase of convertible subordinated notes		(825	)		(2,859	)
Non-cash interest expense, net		1,334			1,075
Provision for inventory reserves		2,757			3,688
Deferred income taxes		265			4,377
Impairment of fixed assets		492			540
Tax benefit of options exercised		–			185
Provision for allowance for doubtful accounts		–			238
Other		199			195
Decrease (increase) in assets:
Accounts receivable		(1,991	)		7,746
Inventories		(5,182	)		2,665
Other current assets		1,841			(200	)
Increase (decrease) in liabilities:
Accounts payable		(1,403	)		(4,975	)
Accrued wages and bonuses		(601	)		(1,033	)
Interest payable		(223	)		(400	)
Accrued restructuring		(1,305	)		1,874
Other accrued liabilities		1,762			(2,820	)
Net cash provided by operating activities		4,116			12,629
Cash flows from investing activities:
Purchases of investments		(52,479	)		(47,448	)
Proceeds from maturities of investments		53,867			50,000
Capital expenditures		(1,084	)		(1,642	)
Proceeds from the sale of Savvi business		360			–
Purchases of long-term assets		–			(200	)
Net cash provided by investing activities		664			710
Cash flows from financing activities:
Repurchase of convertible subordinated notes		(9,238	)		(16,522	)
Proceeds from issuance of common stock		1,334			2,231
Principal payment on mortgage payable		(44	)		(30	)
Net cash used in financing activities		(7,948	)		(14,321	)
Effect of exchange rate changes		730			1,596
Net (decrease) increase in cash and cash equivalents		(2,438	)		614
Cash and cash equivalents, beginning of period	$	33,138		$	29,036
Cash and cash equivalents, end of period	$	30,700		$	29,650

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

6

RadiSys Corporation
Notes to Consolidated Financial Statements
(Unaudited)

Note 1 – Significant Accounting Policies

     RadiSys Corporation (the “Company”) has adhered to the accounting policies set forth in its Annual Report on Form 10-K for the year ended December 31, 2002 in preparing the accompanying interim condensed Consolidated Financial Statements. The preparation of these statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Actual results could differ from those estimates.

     The financial information included herein reflects all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for interim periods.

     For the six months ended June 30, 2003, there have been no changes to these accounting policies except as noted below.

Reclassifications

     Certain reclassifications have been made to amounts in prior years to conform to current year presentation. These changes had no effect on previously reported results of operations or shareholders’ equity.

Accrued Restructuring

     In July 2002, the Financial Accounting Standard Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 146 “Accounting for Costs Associated with Exit or Disposal Activities,” (“SFAS 146”). SFAS 146 requires that liabilities for costs associated with exit or disposal activities be recognized and measured initially at fair value in the period in which the liabilities are incurred. For the six months ended June 30, 2003, the Company recorded restructuring charges in accordance with the provisions of SFAS 146. See “Note 14 — Recent Accounting Pronouncements” below.

     Prior to the six months ended June 30, 2003, the Company recorded restructuring charges including employee termination and related costs, costs related to leased facilities, losses on impairment of fixed assets and capitalized software and other accounting and legal fees. Employee termination and related costs were previously recorded in accordance with the provisions of Emerging Issues Task Force No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” For leased facilities that were vacated and subleased, an amount equal to the total future lease obligations from the date of vacating the premises through the expiration of the lease, net of any future sublease income, was recorded as a part of restructuring charges. For property and equipment and capitalized software written off, the impairment losses were previously recorded in accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

Stock-based Compensation

      In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure, An Amendment of SFAS No. 123,” (“SFAS 148”). SFAS 148 amends certain provisions of SFAS 123 and provides alternative methods of transition in voluntary adoption of SFAS 123. The Company accounts for its stock-based compensation in accordance with the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” The Company adopted the disclosure requirements of SFAS 148 during the fourth quarter of 2002.

7

     Had the Company accounted for stock-based compensation plans in accordance with SFAS 123, the Company’s net income (loss) and pro forma net loss per share would have been reported as follows (in thousands, except per share amounts):

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
Income (loss) from continuing operations	$	1,789		$	(2,672	)	$	2,222		$	(2,933	)
Add: Stock-based employee compensation
expense included in reported net income
(loss), net of related tax effects		–			–			–			–
Deduct: Stock-based employee compensation
expense determined under fair value method
for all awards, net of related tax effects		3,143			1,753			5,650			3,985
Pro forma net loss from continuing operations		(1,354	)		(4,425	)		(3,428	)		(6,918	)
Loss from discontinued operations		–			(889	)		(4,679	)		(1,759	)
Income tax benefit		–			(489	)		–			(967	)
Pro forma net loss	$	(1,354	)	$	(4,825	)	$	(8,107	)	$	(7,710	)
Income (loss) per share from continuing operations:
Basic	$	0.10		$	(0.15	)	$	0.13		$	(0.17	)
Diluted	$	0.10		$	(0.15	)	$	0.12		$	(0.17	)
Pro forma basic	$	(0.08	)	$	(0.25	)	$	(0.19	)	$	(0.40	)
Pro forma diluted	$	(0.08	)	$	(0.25	)	$	(0.19	)	$	(0.40	)
Net loss per share:
Basic	$	0.10		$	(0.18	)	$	(0.14	)	$	(0.21	)
Diluted	$	0.10		$	(0.18	)	$	(0.14	)	$	(0.21	)
Pro forma basic	$	(0.08	)	$	(0.28	)	$	(0.46	)	$	(0.44	)
Pro forma diluted	$	(0.08	)	$	(0.28	)	$	(0.46	)	$	(0.44	)

Warranty Reserves

     The following is a summary of the change in the Company’s warranty accrual reserve for the three months ended June 30, 2003 and March 31, 2003 (in thousands):

	Three Months Ended
	June 30, 2003			March 31, 2003
Beginning balances	$	1,919		$	1,553
Provision for product warranty		1,026			1,147
Product warranty payments		(685	)		(781	)
Ending balances	$	2,260		$	1,919

     Warranty reserves are included in other accrued liabilities in the accompanying Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002.

8

Note 2 – Held-to-Maturity Investments

     Held-to-maturity investments as of June 30, 2003 and December 31, 2002 consisted of the following (in thousands):

	June 30, 2003		December 31, 2002
Short-term held-to-maturity investments,
net of unamortized premium of $1,007 and $864, respectively	$	54,398	$	72,661
Long-term held-to-maturity investments,
net of unamortized premium of $1,267 and $600, respectively	$	28,875	$	13,128

     As of June 30, 2003, the Company’s long-term held-to-maturity investments had maturities ranging from 12.5 months to 35.9 months. The Company’s investment policy requires that the total investment portfolio not exceed a maximum weighted average maturity of 18 months. In addition, the policy mandates that an individual investment must have a maturity of less than 36 months, with no more than 20% of the total investment portfolio exceeding 24 months.

Note 3 – Accounts Receivable

     Accounts receivable balances as of June 30, 2003 and December 31, 2002 were as follows (in thousands):

	June 30, 2003			December 31, 2002
Accounts receivable, gross	$	31,097		$	29,601
Less: allowance for doubtful accounts		(1,633	)		(2,128	)
Accounts receivable, net	$	29,464		$	27,473

     The Company recorded no provisions for the allowance for doubtful accounts during the six months ended June 30, 2003. During the three and six months ended June 30, 2002, the Company recorded provisions for allowance for doubtful accounts of $79 thousand and $226 thousand, respectively.

Note 4 – Inventories

     Inventories as of June 30, 2003 and December 31, 2002 consisted of the following (in thousands):

	June 30, 2003			December 31, 2002
Raw materials	$	29,055		$	28,058
Work-in-process		2,116			1,991
Finished goods		6,332			4,773
		37,503			34,822
Less: inventory reserves		(10,541	)		(9,958	)
Inventories, net	$	26,962		$	24,864

     During the three months ended June 30, 2003 and 2002, the Company recorded provisions for excess and obsolete inventory of $1.5 million and $2.2 million, respectively. During the six months ended June 30, 2003 and 2002, the Company recorded provisions for excess and obsolete inventory of $2.8 million and $3.7 million, respectively.

9

     The following is a summary of the change in the Company’s excess and obsolete inventory reserve for the six months ended June 30, 2003 and 2002 (in thousands):

	Inventory Reserve Balance
Inventory reserve balance, December 31, 2002	$	9,958
Usage:
Inventory scrapped		(967	)
Inventory utilized		(1,207	)
Subtotal		(2,174	)
Reserve provision		2,757
Remaining reserve balance as of June 30, 2003	$	10,541
Inventory reserve balance, December 31, 2001	$	19,119
Usage:
Inventory scrapped		(4,257	)
Sale of inventory		(1,189	)
Inventory utilized		(1,793	)
Subtotal		(7,239	)
Reserve provision		3,688
Remaining reserve balance as of June 30, 2002	$	15,568

     The excess and obsolete inventory reserve provision is included in cost of sales in the accompanying financial statements.

Note 5 – Goodwill

     During the six months ended June 30, 2003, the Company recorded goodwill write-offs of $2.4 million associated with the sale of its Savvi business line. See Note 12, “Discontinued Operations,” for further information.

     The Company ceased the amortization of goodwill effective January 1, 2002 in order to comply with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” (“SFAS 142”). SFAS 142 further requires goodwill to be tested for impairment annually and under certain circumstances written down when impaired, rather than being amortized as previous standards required. To comply with this provision of SFAS 142, the Company completed a comprehensive goodwill impairment analysis during the six months ended June 30, 2002. Based upon the analysis, the Company concluded that as of January 1 and June 30, 2002, there was no goodwill impairment. In addition, the Company updated its goodwill impairment analysis through September 30, 2002 and concluded that as of September 30, 2002, there was no goodwill impairment. As of June 30, 2003, management concluded there was no indication of material changes that would require an updated goodwill impairment analysis. The Company may be required, under certain circumstances, to update its impairment analysis, which may result in losses on its acquired goodwill and intangible assets.

10

Note 6 – Intangible Assets

     The following tables present details of the Company’s total purchased intangible assets (in thousands):

	Gross		Accumulated Amortization			Net
June 30, 2003
Technology	$	2,415	$	(990	)	$	1,425
Technology licenses		6,790		(2,829	)		3,961
Patents		6,643		(4,670	)		1,973
Trade names		736		(132	)		604
Other		237		(237	)		–
Total	$	16,821	$	(8,858	)	$	7,963
	Gross		Accumulated Amortization			Net
December 31, 2002
Technology	$	4,096	$	(835	)	$	3,261
Technology licenses		6,790		(2,075	)		4,715
Patents		6,647		(4,104	)		2,543
Trade names		736		(96	)		640
Other		237		(237	)		–
Total	$	18,506	$	(7,347	)	$	11,159

     The Company’s purchased intangible assets have lives ranging from four to 15 years. In accordance with SFAS 144, the Company reviews for impairment of all its purchased intangible assets when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. No impairment charges have been recognized under SFAS 144.

     The estimated future amortization expense of purchased intangible assets as of June 30, 2003 is as follows (in thousands):

Years Ending December 31,	Estimated Intangibles Amortization Amount
2003 (remaining six months)	$	1,530
2004		2,225
2005		2,051
2006		726
2007		525
Thereafter		906
Total	$	7,963

     During the six months ended June 30, 2003, the Company recorded intangible asset write-offs of $1.7 million associated with the sale of its Savvi business line. See Note 12, “Discontinued Operations,” for further information.

11

Note 7– Accrued Restructuring

     Accrued restructuring as of June 30, 2003 and December 31, 2002 consisted of the following (in thousands):

	June 30, 2003		December 31, 2002
First quarter 2003 restructuring charge	$	136	$	–
Second quarter 2002 restructuring charge		913		1,760
Fourth quarter 2001 restructuring charge		1,274		1,591
Liabilities assumed in Microware acquisition		155		190
First quarter 2001 restructuring charge		1,395		1,637
Total	$	3,873	$	5,178

     The Company evaluates the adequacy of the accrued restructuring charges on a quarterly basis. As a result, the Company records certain reclassifications and reversals to the accrued restructuring charges based on the results of the evaluation. The total accrued restructuring charges for each restructuring event are not affected by reclassifications. Reversals are recorded in the period in which the Company determines that expected restructuring obligations are less than the amounts accrued.

First Quarter 2003 Restructuring Charge

     The following table summarizes the write-offs and expenditures related to the first quarter 2003 restructuring charge (in thousands):

	Employee termination and related costs			Other charges			Total
Restructuring costs	$	1,764		$	65		$	1,829
Expenditures		(1,403	)		(18	)		(1,421	)
Balance accrued as of
March 31, 2003		361			47			408
Expenditures		(264	)		(8	)		(272	)
Balance accrued as of
June 30, 2003	$	97		$	39		$	136

     The amount remaining in the first quarter 2003 restructuring charge accrual at June 30, 2003 represents the Company’s residual obligation for severance, audit and legal fees. The remaining obligations are expected to be paid over the next six months.

12

Second Quarter 2002 Restructuring Charge

     The following table summarizes the write-offs and expenditures related to the second quarter 2002 restructuring charge (in thousands):

	Employee termination and related costs			Facilities			Property and equipment			Other charges			Total
Restructuring costs	$	2,606		$	750		$	530		$	465		$	4,351
Expenditures		(1,782	)		(40	)		–			(46	)		(1,868	)
Write-offs		–			–			(219	)		–			(219	)
Reclassifications		(35	)		19			10			6			–
Reversals		(192	)		(165	)		(147	)		–			(504	)
Balance accrued as of
December 31, 2002		597			564			174			425			1,760
Expenditures		(229	)		(199	)		–			(22	)		(450	)
Reclassifications		(368	)		368			–			–			–
Balance accrued as of
March 31, 2003		–			733			174			403			1,310
Expenditures		–			(74	)		–			(28	)		(102	)
Write-offs		–			–			(174	)		(121	)		(295	)
Reclassifications		–			24			–			(24	)		–
Balance accrued as of
June 30, 2003	$	–		$	683		$	–		$	230		$	913

     The accrual amount remaining as of June 30, 2003 includes lease obligations relating to the facility in Houston, Texas and other small office spaces and office related expenses expected to be paid monthly for the next 24 months.

Fourth Quarter 2001 Restructuring Charge

     The following table summarizes the write-offs and expenditures relating to the fourth quarter 2001 restructuring charge (in thousands):

	Employee termination and related costs			Facilities			Property and equipment			Other charges			Total
Restructuring costs	$	914		$	2,417		$	463		$	132		$	3,926
Expenditures		(452	)		–			–			–			(452	)
Write-offs		–			–			(463	)		–			(463	)
Balance accrued as of
December 31, 2001		462			2,417			–			132			3,011
Expenditures		(395	)		(931	)		–			(27	)		(1,353	)
Reversals		(67	)		–			–			–			(67	)
Balance accrued as of
December 31, 2002		–			1,486			–			105			1,591
Expenditures		–			(164	)		–			(6	)		(170	)
Reversals		–			(1	)		–			(1	)		(2	)
Balance accrued as of
March 31, 2003		–			1,321			–			98			1,419
Expenditures		–			(145	)		–			–			(145	)
Balance accrued as of
June 30, 2003	$	–		$	1,176		$	–		$	98		$	1,274

     The accrual amount remaining as of June 30, 2003 represents mainly lease obligations relating to the facilities in Houston, Texas and Boca Raton, Florida expected to be paid monthly for the next 24 to 30 months.

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Liabilities Assumed In Microware Acquisition

     In August 2001, the Company assumed Microware’s restructuring liability amounting to $1.1 million as a result of the Microware acquisition. As of June 30, 2003, the Company has paid $603 thousand of employee termination and related costs, $117 thousand in legal fees and other costs and reversed $256 thousand. The remaining balance of $155 thousand represents other service fees. The remaining obligations are expected to be paid in the next six months.

First Quarter 2001 Restructuring Charge

     The following table summarizes the write-offs and expenditures related to the first quarter 2001 restructuring charge (in thousands):

	Employee termination and related costs			Leasehold improvements and facilities			Property and equipment			Capitalized software			Other charges			Total
Restructuring costs	$	2,777		$	3,434		$	2,460		$	1,067		$	105		$	9,843
Expenditures		(2,545	)		(378	)		–			–			(46	)		(2,969	)
Write-offs		–			(113	)		(2,460	)		(1,067	)		–			(3,640	)
Balance accrued as of
December 31, 2001		232			2,943			–			–			59			3,234
Expenditures		(232	)		(679	)		–			–			(10	)		(921	)
Write-offs		–			(627	)		–			–			–			(627	)
Reversals		–			–			–			–			(49	)		(49	)
Balance accrued as of
December 31, 2002		–			1,637			–			–			–			1,637
Expenditures		–			(125	)		–			–			–			(125	)
Balance accrued as of
March 31, 2003		–			1,512			–			–			–			1,512
Expenditures		–			(117	)		–			–			–			(117	)
Balance accrued as of
June 30, 2003	$	–		$	1,395		$	–		$	–		$	–		$	1,395

     The accrual amount remaining as of June 30, 2003 represents mainly lease obligations relating to the facilities in Houston, Texas and Boca Raton, Florida expected to be paid monthly for the next 24 months.

Note 8 – Short-Term Borrowings

     During the quarter ended March 31, 2003, the Company renewed its line of credit facility, which expires on March 31, 2004, for $20.0 million at an interest rate based upon the lower of the London Inter-Bank Offered Rate (“LIBOR”) plus 1.0% or the bank’s prime rate. The line of credit is collateralized by the Company’s non-equity investments. The market value of these investments must exceed 125.0% of the borrowed facility amount, and the investments must meet specified investment grade ratings.

     As of June 30, 2003 and December 31, 2002, there was no outstanding balance on the line of credit and the Company was in compliance with all debt covenants.

Note 9 – Long-Term Liabilities

Convertible Subordinated Notes

     Convertible subordinated notes are unsecured obligations convertible into the Company’s Common Stock and are subordinated to all present and future senior indebtedness of the Company. Interest on the subordinated notes accrues at 5.5% per year and is payable semi-annually on February 15 and August 15. The convertible subordinated notes are payable in full in August 2007. The notes are convertible, at the option of the holder, at any time on or before maturity, unless previously redeemed or repurchased, into shares of the Company’s Common Stock at a conversion price of $67.80 per share, which is equal to a conversion rate of 14.7484 shares per $1,000 principal

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amount of notes. The Company may redeem all or a portion of the notes at its option on or after August 20, 2003, provided that the notes will only be subject to mandatory redemption if the closing price of the Company’s Common Stock equals or exceeds 140% of the conversion price then in effect for at least 20 trading days within a period of 30 consecutive trading days ending on the trading day before the date of the notice of the provisional redemption. The accretion of the discount on the notes is calculated using the effective interest method.

     In February 2003, the Company repurchased $10.3 million of convertible subordinated notes with a related discount of $308 thousand. The Company repurchased the notes in the open market for $9.2 million and, as a result, recorded a gain of $825 thousand.

     As of June 30, 2003 and December 31, 2002, the Company had $67.4 million and $77.4 million of convertible subordinated notes outstanding, net of unamortized discount of $1.3 million and $1.7 million, respectively. Amortization of discounts on the convertible subordinated notes was $69 thousand and $80 thousand for the three months ended June 30, 2003 and 2002, respectively, and $141 thousand and $171 thousand for the six months ended June 30, 2003 and 2002, respectively. The estimated fair value of the convertible subordinated notes was $63.4 million and $66.5 million at June 30, 2003 and December 31, 2002, respectively.

Mortgage Payable

     During the six months ended June 30, 2003, the Company paid $44 thousand of principal on its mortgage payable related to a building owned in Des Moines, Iowa, along with interest at 7.46%. During the six months ended June 30, 2003, the Company reinvested $825 thousand of restricted cash in a restricted short-term investment account as a part of collateral for its mortgage. The current portion of the mortgage payable of $85 thousand and $84 thousand is included in Other accrued liabilities in the Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002, respectively.

     In July 2003, the Company entered into an agreement to sell the building and associated land in Des Moines, Iowa. If the sale closes, the Company expects the close to occur before December 31, 2003. Subject to closing, the Company will be paying the mortgage payable in full. In addition, the Company expects to incur a loss on the sale..

     The aggregate maturities of long-term liabilities for each of the five years ending December 31, 2007 and thereafter at June 30, 2003 are as follows (in thousands):

Years Ending December 31,	Convertible Subordinated Notes			Mortgage Payable
2003 (remaining six months)	$	–		$	42
2004		–			88
2005		–			97
2006		–			104
2007		68,748			113
Thereafter		–			6,185
		68,748			6,629
Less: unamortized discount		(1,305	)		–
Less: current portion		–			(85	)
Long-term liabilities, net	$	67,443		$	6,544

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Note 10 – Basic and Diluted Income (Loss) Per Share

     A reconciliation of the numerator and the denominator used to calculate basic and diluted income (loss) per share is as follows (in thousands, except per share amounts):

	Three Months Ended June 30,					Six Months Ended June 30,
	2003		2002			2003			2002
Numerator - Basic
Income (loss) from continuing operations, basic	$	1,789	$	(2,672	)	$	2,222		$	(2,933	)
Discontinued operations related to Savvi business:
Loss from discontinued operations		–		(889	)		(4,679	)		(1,759	)
Income tax benefit		–		(489	)		–			(967	)
Net income (loss), basic	$	1,789	$	(3,072	)	$	(2,457	)	$	(3,725	)
Numerator - Diluted
Income (loss) from continuing operations, basic		1,789		(2,672	)		2,222			(2,933	)
Interest on convertible notes (1)		–		–			–			–
Income (loss) from continuing operations, diluted	$	1,789	$	(2,672	)	$	2,222		$	(2,933	)
Net income (loss), basic		1,789		(3,072	)		(2,457	)		(3,725	)
Interest on convertible notes (1)		–		–			–			–
Net income (loss), diluted	$	1,789	$	(3,072	)	$	(2,457	)	$	(3,725	)
Denominator - Basic
Weighted average shares used to calculate income
(loss) per share from continuing operations, basic		17,785		17,492			17,728			17,450
Weighted average shares used to calculate net income
(loss) per share, basic		17,785		17,492			17,728			17,450
Denominator - Diluted
Weighted average shares used to calculate income
(loss) per share from continuing operations, basic		17,785		17,492			17,728			17,450
Effect of dilutive stock options (2)		313		–			239			–
Weighted average shares used to calculate income
(loss) from continuing operations, diluted		18,098		17,492			17,967			17,450
Weighted average shares used to calculate net income
(loss) per share, basic		17,785		17,492			17,728			17,450
Effect of dilutive stock options (3)		313		–			–			–
Weighted average shares used to calculate income
(loss) from continuing operations, diluted		18,098		17,492			17,728			17,450
Income (loss) per share from continuing operations:
Basic	$	0.10	$	(0.15	)	$	0.13		$	(0.17	)
Diluted	$	0.10	$	(0.15	)	$	0.12		$	(0.17	)
Net income (loss) per share:
Basic	$	0.10	$	(0.18	)	$	(0.14	)	$	(0.21	)
Diluted	$	0.10	$	(0.18	)	$	(0.14	)	$	(0.21	)

(1) Interest on convertible notes and related as-if converted shares were excluded from the calculation as the effect would be anti-dilutive. At June 30, 2003 and 2002, the total number of as-if converted shares excluded from the calculation was 1.1 million and 1.4 million, respectively.

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(2) For the three and six months ended June 30, 2003, 3.3 million options were excluded from the calculation as the exercise prices were higher than the average market price of the common shares; therefore, the effect would be anti-dilutive. For the three and six months ended June 30, 2002, 3.1 million options were excluded from the calculation as the Company reported a loss from continuing operations; therefore, the effect would be anti-dilutive.

(3) For the three months ended June 30, 2003, 3.3 million options were excluded from the calculation as the exercise prices were higher than the average market price of the common shares; therefore, the effect would be anti-dilutive. For the six months ended June 30, 2003 and for the three and six months ended June 30, 2002, 3.5 million, 3.1 million, and 3.1 million options, respectively, were excluded from the calculation as the Company reported a net loss; therefore, the effect would be anti-dilutive.

Note 11 – Segment Information

     The Company has adopted SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information,” (“SFAS 131”). SFAS 131 establishes standards for the reporting by public business enterprises of information about operating segments, products and services, geographic areas and major customers. The method for determining what information to report is based on the way that management organizes the segments within the Company for making operating decisions and assessing financial performance.

     The Company has aggregated divisional results of operations into a single reportable segment as allowed under SFAS 131 because divisional results of operations reflect similar long-term economic characteristics including average gross margins. Additionally, the divisional operations are similar with respect to the nature of products sold, types of customers, production processes employed, and distribution methods used. Accordingly, the Company describes its reportable segment as designing and manufacturing embedded computing solutions. All of the Company’s revenues result from sales within this segment.

     Information about the Company’s revenues and long-lived asset information by geographic area is as follows (in thousands):

Geographic Revenues:

	Three Months Ended June 30,				Six Months Ended June 30,
	2003		2002		2003		2002
Revenue
North America	$	29,296	$	29,795	$	55,695	$	59,566
Europe		16,835		21,689		37,470		43,615
Asia Pacific		2,767		668		4,137		1,670
Total	$	48,898	$	52,152	$	97,302	$	104,851

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Long-Lived Assets by Geographic Area

	June 30, 2003		December 31, 2002
Property and equipment, net
United States	$	23,012	$	25,538
Europe		299		298
Asia Pacific		44		46
Total property and equipment, net	$	23,355	$	25,882
Goodwill, net
United States	$	27,521	$	29,969
Europe		–		–
Asia Pacific		–		–
Total goodwill, net	$	27,521	$	29,969
Intangible assets, net
United States	$	7,963	$	11,159
Europe		–		–
Asia Pacific		–		–
Total intangible assets, net	$	7,963	$	11,159

     For the three and six months ended June 30, 2003, two customers accounted for more than 10.0% of total revenues. For the three months ended June 30, 2003, Nortel Networks Limited accounted for $8.7 million or 17.7% of total revenues and Nokia Corporation accounted for $7.3 million or 14.9% of total revenues. For the six months ended June 30, 2003, Nortel Networks Limited accounted for $18.6 million or 19.1% of total revenues and Nokia Corporation accounted for $15.6 million or 16.0% of total revenues.

     For the three and six months ended June 30, 2002, two customers accounted for more than 10.0% of total revenues. For the three months ended June 30, 2002, Nortel Networks Limited accounted for $10.3 million or 19.8% of total revenues and Nokia Corporation accounted for $6.1 million or 11.7% of total revenues. For the six months ended June 30, 2002, Nortel Networks Limited accounted for $19.5 million or 18.6% of total revenues and Nokia Corporation accounted for $14.3 million or 13.6% of total revenues.

Note 12 – Discontinued Operations

     On March 14, 2003, the Company completed the sale of its Savvi business resulting in a loss of $4.3 million. As a result of this transaction, the Company recorded $4.1 million in write-offs of goodwill and intangible assets. The total $4.7 million loss from discontinued operations recorded in the three months ended March 31, 2003 includes the $4.3 million loss on the sale of the Savvi business as well as $393 thousand of net losses incurred by the business unit during the quarter, before the business unit was sold. No loss from discontinued operations was recorded for the three months ended June 30, 2003. For the three and six months ended June 30, 2002, a total of $889 thousand and $1.8 million, respectively, were reclassified from continuing operations to losses from discontinued operations as a result of the sale of the Savvi business in the first quarter of 2003.

Note 13 – Legal Proceedings

     In the normal course of business, the Company is subject to legal proceedings, claims and litigation. As of June 30, 2003, the Company had no pending litigation that would have a material effect on the Company’s financial position, results of operations or cash flows.

Note 14 – Recent Accounting Pronouncements

     In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” (“SFAS 146”). SFAS 146 requires that liabilities for costs associated with exit or disposal activities be recognized and measured initially at fair value in the period in which the liabilities are incurred. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. In the three months ended March 31, 2003, the Company recorded restructuring charges in accordance

18

with the provisions of SFAS 146. In the three months ended June 30, 2003, the Company did not incur any charges associated with exit or disposal activities that would be required to be recorded in accordance with the provisions of SFAS 146.

     Prior to the quarter ended March 31, 2003, the Company had recorded restructuring charges in light of economic downturns and reduced customer demand. These restructuring charges included employee termination and related costs, costs related to leased facilities that will be vacated and potentially subleased, losses on impairment of fixed assets and capitalized software and other accounting and legal fees. Employee termination and related costs have been recorded in accordance with the provisions of Emerging Issues Task Force No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” For leased facilities that will be vacated and potentially subleased, the amount equal to the total future lease obligations from the date of vacating the premises through the expiration of the lease, net of any future sublease income, is recorded as a part of restructuring charges. For property and equipment and capitalized software to be written off, the impairment losses are recorded in accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

     In November 2002, the FASB issued FASB Interpretation No. 45 (“FIN 45”), which elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002; while the provisions of the disclosure requirements are effective for the financial statements of interim or annual reports ending after December 15, 2002. The Company adopted the disclosure requirements of FIN 45 during the fourth quarter of 2002. The adoption of the disclosure requirements of FIN 45 did not have a material effect on the Company’s financial position or results of operations.

Note 15 – Subsequent Events

     In July 2003, the Company entered into an agreement to sell the building and associated land in Des Moines, Iowa. If the sale closes, the Company expects the close to occur before December 31, 2003. Subject to closing, the Company will be paying the mortgage payable in full. In addition, the Company expects to incur a loss on the sale.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

     The Company provides embedded systems for compute, data processing, and network-intensive applications to Original Equipment Manufacturers (“OEM”s) within the commercial systems, enterprise systems and service provider systems markets. The Company focuses on industry-leading architecture while working in a close “virtual division” relationship with its customers. The Company’s value proposition to its customers is providing leading technology solutions, while improving their time-to-market advantage and reducing total life-cycle costs.

     Total revenue was $48.9 million for the three months ended June 30, 2003, compared to $52.2 million for the three months ended June 30, 2002 and $97.3 million for the six months ended June 30, 2003, compared to $104.9 million for the six months ended June 30, 2002. Net income was $1.8 million for the three months ended June 30, 2003, compared to a net loss of $3.1 million for the three months ended June 30, 2002. Net loss was $2.5 million for the six months ended June 30, 2003, compared to a net loss of $3.7 million for the six months ended June 30, 2002. Net income per share was $0.10, basic and diluted, for the three months ended June 30, 2003, compared to net loss per share of $0.18, basic and diluted, for the three months ended June 30, 2002. Net loss per share was $0.14, basic and diluted, for the six months ended June 30, 2003, compared to net loss per share of $0.21, basic and diluted for the six months ended June 30, 2002.

     Certain statements made in this section of the report may be deemed to be forward-looking statements. Please see the information contained in the section entitled “FORWARD-LOOKING STATEMENTS.”

Markets

     The Company provides embedded technology solutions to three distinct markets:

• Commercial Systems – The commercial systems market is comprised of the following sub-markets: medical equipment, transaction terminals, test and measurement equipment, semiconductor capital equipment, and automated industrial equipment. Examples of products into which the Company’s embedded solutions are incorporated into include: 4D ultrasound systems, blood analyzers, CT scanners, ATM terminals, point of sale terminals, high-end test equipment, and electronics assembly equipment.
• Enterprise Systems – The enterprise systems market is defined as embedded compute, processing and networking systems used in private enterprise IT infrastructure. Examples of products that the Company’s embedded solutions are used in include blade-based servers, unified messaging systems, IP-enabled PBX systems, storage systems, and local area network I/O cards.
  
  
• Service Provider Systems – The service provider systems market includes embedded communication systems that are used in voice, video, and data systems within public network systems. Examples of these products include 2, 2.5 and 3G wireless infrastructure, wireline infrastructure, packet-based switches, and unified messaging.
  
  

     The Company provides system architecture, design, sourcing, configuration, delivery and full product life-cycle management to systems providers. The growth drivers for embedded systems include:

• Increasing levels of intelligence and networking content in all systems, including systems monitoring and control, real-time information processing, and high-bandwidth network connectivity.
  
  
• Increasing focus by system makers on their core competencies and application specific intellectual property, with increased desire for merchant-supplied embedded processing and networking systems.
  
  
• Increasing demand for standards-based solutions so system makers are not required to develop their own proprietary architectures.
  
  
• The emergence of new technologies such as switch fabrics, network I/O cards, packet processing, network processing, and voice processing, following the embedded systems model.
  
  

     The Company believes system makers will progressively look to outside sources for supply of integrated hardware/software building blocks to achieve better technical solutions, faster time-to-market, and reduced life-cycle costs.

Strategy

     The Company’s strategy is to provide its customers with a “virtual division” where embedded systems, or functional building blocks, are conceived, developed, supplied, and managed. This allows the Company’s customers to focus their resources and development on application-specific competencies giving them higher value systems and a time-to-market advantage with a lower total cost of ownership. Historically, system makers had been largely vertically integrated, developing most, if not all, of the functional building blocks of their systems. System makers are now more focused on their core competencies and are looking for partners to provide them with building blocks for a growing number of processing and networking functions.

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Critical Accounting Policies and Estimates

     The Company reaffirms its critical accounting policies and use of estimates as reported in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

Results of Operations

     The following table sets forth certain operating data as a percentage of revenues for the three and six months ended June 30, 2003 and 2002:

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
Revenues		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		67.4			71.0			68.0			71.5
Gross margin		32.6			29.0			32.0			28.5
Research and development		11.7			14.8			11.6			14.4
Selling, general, and administrative		13.8			17.1			13.6			16.1
Intangible assets amortization		1.6			1.5			1.6			1.5
Restructuring charges		–			8.2			1.9			4.1
Income (loss) from operations		5.5			(12.6	)		3.3			(7.6	)
Gain on repurchase of convertible
subordinated notes		–			2.9			0.8			2.7
Interest expense, net		(1.2	)		(1.2	)		(1.0	)		(1.4	)
Other expense, net		(0.6	)		(0.4	)		(0.8	)		(0.3	)
Income (loss) from continuing operations before
income tax benefit		3.7			(11.3	)		2.3			(6.6	)
Income tax benefit		–			(6.2	)		–			(3.8	)
Income (loss) from continuing operations		3.7			(5.1	)		2.3			(2.8	)
Discontinued operations related to Savvi business:
Loss from discontinued operations		–			(1.7	)		(4.8	)		(1.7	)
Income tax benefit		–			(0.9	)		–			(0.9	)
Net income (loss)		3.7	%		(5.9	)%		(2.5	)%		(3.6	)%

Comparison of three and six months ended June 30, 2003 to three and six months ended June 30, 2002

     Revenues. Revenues decreased $3.3 million, or 6.2%, from $52.2 million for the three months ended June 30, 2002 to $48.9 million for the three months ended June 30, 2003. Revenues decreased $7.5 million, or 7.2%, from $104.9 million for the six months ended June 30, 2002 to $97.3 million for the six months ended June 30, 2003. The decrease in revenues for the three months ended June 30, 2003, compared to the same period in 2002, is due to a decrease in revenues in the service provider systems market of $5.1 million offset by an increase in revenues in the commercial systems market of $1.8 million. Revenues in the service provider systems market decreased in the three months ended June 30, 2003, compared to the same period in 2002, as the Company experienced lower unit volume sales on existing customer contracts due to the unfavorable economic climate. Revenues in the commercial systems

21

market increased due to a strengthening in the medical equipment and transaction terminal markets. The decrease in revenues for the six months ended June 30, 2003, compared to the same period in 2002, is due to decreases in revenues in the service provider systems and commercial systems markets of $6.4 million and $2.1 million, respectively, offset by an increase in revenues in the enterprise systems market of $1.0 million. Revenues in the service provider systems market and the commercial systems market decreased in the six months ended June 30, 2003, compared to the same period in 2002, as the Company experienced lower unit volume sales on existing customer contracts as a result of unfavorable economic conditions. The increase in commercial systems market revenues for the three months ended June 30, 2003, described previously, did not offset the overall decrease in revenues for the six months ended June 30, 2003.

     Additionally, for the three and six months ended June 30, 2003, compared to the same periods in 2002, the overall decrease in revenues due to the unfavorable economic conditions affected primarily the Company’s European geographies. The decrease in revenues attributable to the European geographies amounted to $4.9 million and $6.1 million for the three and six months ended June 30, 2003, compared to the same periods in 2002.

     Gross Margin. Gross margin for the three months ended June 30, 2003 was 32.6%, compared to 29.0% for the three months ended June 30, 2002. Gross margin for the six months ended June 30, 2003 was 32.0%, compared to 28.5% for the six months ended June 30, 2002. The increase in gross margin as a percentage of revenues for the three and six months ended June 30, 2003, compared to the same periods in 2002, was due to improvements in the Company’s manufacturing cost structure as a result of the restructuring events in the first quarter of 2003 and the second quarter of 2002. In addition, early in 2002, the Company began an aggressive strategic plan to reduce material costs, which began to materialize in the latter half of 2002. As such, these cost reductions resulted in an increase in gross margin for the three and six months ended June 30, 2003, compared to the same periods in 2002. The Company’s long-term gross margin target range continues to be 32% to 35%.

     Research and Development. Research and development expenses consist primarily of salary, bonuses, and benefits for product development staff, and cost of design and development supplies and equipment, net of reimbursements for non-recurring engineering services. Research and development expenses decreased $2.0 million, or 25.7%, from $7.7 million for the three months ended June 30, 2002 to $5.7 million for the three months ended June 30, 2003. Research and development expenses decreased $3.8 million, or 25.3%, from $15.1 million for the six months ended June 30, 2002 to $11.3 million for the six months ended June 30, 2003. The decrease in research and development expenses is due mainly to a reduction in payroll-related expenses of $1.8 million and $3.5 million in the three and six months ended June 30, 2003, respectively, compared to the same periods in 2002. The reduction in payroll expenses is a result of decreases in headcount, primarily associated with the restructuring events in the first quarter of 2003 and the second quarter of 2002. In addition, the overall decrease in research and development expenses is a result of cost cutting measures undertaken in 2002 and 2003, including office closures and tighter controls on discretionary spending. The Company’s long-term target for research and development funding continues to be 10 to 12% of revenues.

     Selling, General, and Administrative. Selling, general and administrative expenses consist primarily of salary, commissions, bonuses and benefits for sales, marketing, executive, and administrative personnel, as well as the costs of professional services and costs of other general corporate activities. Selling, general and administrative expenses decreased $2.2 million, or 24.3%, from $9.0 million for the three months ended June 30, 2002 to $6.8 million for the three months ended June 30, 2003. Selling, general and administrative expenses decreased $3.5 million, or 21.0%, from $16.9 million for the six months ended June 30, 2002 to $13.3 million for the six months ended June 30, 2003. The decrease in selling, general and administrative expenses for the three and six months ended June 30, 2003, compared to the same periods in 2002, was primarily due to unusual severance and relocation charges incurred in the prior year and a reduction in payroll expenses. Specifically, in June 2002, the Company incurred $1.2 million of severance-related expenses paid to a former executive. The reduction in payroll expenses is a result of decreases in headcount, primarily associated with the restructuring events in the first quarter of 2003 and the second quarter of 2002. In addition, the overall decrease in sales, general and administrative expenses is a result of cost cutting measures undertaken in 2002 and 2003, including office closures and tighter controls on discretionary spending. The Company’s long-term goal for selling, general, and administrative expenses is 10 to 12% of revenues.

     Intangibles Amortization. Intangibles amortization expense was flat at $765 thousand and $1.5 million for the three and six months ended June 30, 2003 and 2002, respectively. Intangible assets consist of purchased technology, patents and other identifiable intangible assets.

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     Restructuring Charges. The Company evaluates the adequacy of the accrued restructuring charges on a quarterly basis. As a result, the Company records certain reclassifications and reversals to the accrued restructuring charges based on the results of the evaluation. The total accrued restructuring charges for each restructuring event are not affected by reclassifications. Reversals are recorded in the period in which the Company determines that expected restructuring obligations are less than the amounts accrued. Tables containing the activity in the accrued liability for each restructuring event are contained in Footnote 7 of the Notes to the Consolidated Financial Statements. During the three and six months ended June 30, 2003 and 2002, the Company recorded restructuring charges and reversals as described below.

First Quarter 2003 Restructuring Charge

     In March 2003, the Company recorded a restructuring charge of $1.8 million as a result of its continued efforts to improve its profitability and market diversification. The restructuring charge includes a net workforce reduction of 103 employee positions. The 103 employee positions eliminated included 53 from manufacturing operations, 42 from shifts in portfolio investments, and eight in support functions.

Second Quarter 2002 Restructuring Charge

     In June 2002, the Company recorded a restructuring charge of $4.4 million as a result of its continued efforts to improve cost structure and consolidate redundant functions and facilities. The restructuring charge includes a net workforce reduction of 80 employee positions, the closure of the Houston, Texas Design Center, and the consolidation of certain domestic and international sales and service offices. The 80 employee positions eliminated included 46 engineering positions, 19 sales positions, and 15 administrative positions.

Reversals

     The Company recorded reversals amounting to $70 thousand and $2 thousand during the three and six months ended June 30, 2002 and June 30, 2003, respectively, related to various over-accruals for restructuring charges recorded in 2001. The Company recorded no reversals during the three and six months ended June 30, 2003.

     Gain on Repurchase of Convertible Subordinated Notes. In February 2003, the Company repurchased $10.3 million of convertible subordinated notes with a related discount of $308 thousand. The Company repurchased the notes in the open market for $9.2 million and recorded a gain of $825 thousand.

     In April 2002, the Company repurchased $11.9 million of convertible subordinated notes with a related discount of $356 thousand. The Company repurchased the notes in the open market for $10.1 million and recorded a gain of $1.5 million.

     In January and February 2002, the Company repurchased $8.0 million of convertible subordinated notes with a related discount of $240 thousand. The Company repurchased the notes in the open market for $6.4 million and recorded a gain of $1.3 million.

     Interest Expense, net. Interest expense, net, primarily includes interest expense incurred on convertible subordinated notes and net income earned on investments. Net interest expense decreased $47 thousand, or 7.3%, from $642 thousand for the three months ended June 30, 2002 to $595 thousand for the three months ended June 30, 2003. Net interest expense decreased $449 thousand or 31.0%, from $1.5 million for the six months ended June 30, 2002 to $1.0 million for the six months ended June 30, 2003.

     Interest expense decreased $235 thousand, or 17.0%, from $1.4 million for the three months ended June 30, 2002 to $1.2 million for the three months ended June 30, 2003. Interest expense decreased $631 thousand, or 21.1% from $3.0 million for the six months ended June 30, 2002 to $2.4 million for the six months ended June 30, 2003. The primary reason for the decrease in interest expense was the decrease in the balance of outstanding convertible subordinated notes. This decrease is due to the repurchases of the convertible subordinated notes on various dates in 2003 and 2002.

     Interest income decreased $188 thousand, or 25.3%, from $744 thousand for the three months ended June 30, 2002 to $556 thousand for the three months ended June 30, 2003. Interest income decreased $181 thousand, or 11.8%, from $1.5 million for the six months ended June 30, 2002 to $1.4 million for the six months ended June 30, 2003. Interest income decreased as a result of lower yields earned on investments.

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     Other Expense, net. Other expense, net, primarily includes foreign currency exchange gains and losses and non-recurring items. Other expense, net, increased $109 thousand, or 58.0%, from $188 thousand for the three months ended June 30, 2002 to $297 thousand for the three months ended June 30, 2003. Other expense, net, increased $379 thousand, or 92.4%, from $410 thousand for the six months ended June 30, 2002 to $789 thousand for the six months ended June 30, 2003.

     Foreign currency exchange rate fluctuations resulted in expenses of $84 thousand for the three months ended June 30, 2003 compared to $280 thousand for the three months ended June 30, 2002. Foreign currency exchange rate fluctuations resulted in expenses of $647 thousand for the six months ended June 30, 2002 compared to $179 thousand for the six months ended June 30, 2003.

     Net of the change in expenses related to foreign currency exchange rate fluctuations, the increase in other expense, net, for the three and six months ended June 30, 2003, compared to the same periods in 2002, is primarily attributable to several non-recurring items. Specifically, in March 2003, the Company performed a fixed asset physical inventory count resulting in write-offs of $240 thousand. In June 2002, the Company recorded a gain on the sale of an investment in the amount of $69 thousand. Additionally, in March 2002, the Company recorded other income in the amount of $189 thousand related to an insurance reimbursement.

     Income Tax Benefit. The Company recorded a tax benefit from continuing operations of $9 thousand for the three months ended June 30, 2003 compared to $3.2 million for the three months ended June 30, 2002. The Company recorded no income tax benefit from continuing operations in the six months ended June 30, 2003. The Company recorded a tax benefit from continuing operations of $4.0 million for the six months ended June 30, 2002. The Company’s effective tax rate was (0.5%) for the three months ended June 30, 2003, compared to (54.9%) for the three months ended June 30, 2002. The Company’s effective tax rate was (0.0%) for the six months ended June 30, 2003, compared to (57.8%) for the six months ended June 30, 2002. The decrease in income tax benefit for the three months ended June 30, 2003 compared to the same period in 2002, is due to pre-tax net income for the three months ended June 30, 2003 versus pre-tax net loss for the three months ended June 30, 2002. The decrease in income tax benefit for the six months ended June 30, 2003 compared to the same period in 2002, is due to a decrease in pre-tax losses, including the loss from discontinued operations from Savvi. The Company has elected to record a zero tax rate for the six months ended June 30, 2003, based on projected results for 2003 and the estimate of permanent book versus tax differences.

     At June 30, 2003, the balance of net deferred tax assets was $28.7 million after providing a valuation allowance of $16.2 million due to the uncertainty of realization of certain net operating loss and tax credit carryforwards.

     Discontinued Operations. On March 14, 2003, the Company completed the sale of its Savvi business resulting in a loss of $4.3 million. As a result of this transaction, the Company recorded $4.1 million in write-offs of goodwill and intangible assets. The total $4.7 million loss from discontinued operations recorded for the three months ended March 31, 2003 includes the $4.3 million loss on the sale of the Savvi business as well as $393 thousand of net losses incurred by the business unit during the quarter, before the business unit was sold. For the three and six months ended June 30, 2002, a total of $889 thousand and $1.8 million, respectively, were reclassified from continuing operations to losses from discontinued operations as a result of the sale of the Savvi business in the first quarter of 2003.

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LIQUIDITY AND CAPITAL RESOURCES

     The following table presents selected financial information for each of the quarters ended on the dates indicated (in thousands, other than days sales outstanding, days to pay and inventory turns):

	June 30, 2003		December 31, 2002		June 30, 2002
Working capital	$	115,722	$	132,474	$	133,027
Cash and cash equivalents	$	30,700	$	33,138	$	29,650
Short-term investments	$	54,398	$	72,661	$	68,678
Accounts receivable, net	$	29,464	$	27,473	$	33,710
Inventory, net	$	26,962	$	24,864	$	26,108
Long-term investments	$	28,875	$	13,128	$	12,091
Accounts payable	$	17,530	$	18,933	$	19,537
Convertible subordinated notes	$	67,433	$	77,366	$	78,312
Days sales outstanding (A)		55		53		59
Days to pay (B)		49		52		48
Inventory turns (C)		4.9		5.3		5.7

(A)	Based on (ending net trade receivables divided by quarterly revenue each period) times (365 divided by 4).
(B)	Based on (ending accounts payable divided by quarterly cost of sales) times (365 divided by 4).
(C)	Based on (quarterly cost of sales divided by ending inventory) times 4.

     Cash and cash equivalents decreased by $2.4 million from $33.1 million at December 31, 2002, to $30.7 million at June 30, 2003. Activities impacting cash and cash equivalents are as follows (in thousands):

	Six Months Ended June 30,
	2003			2002
Cash provided by operating activities	$	4,116		$	12,629
Cash provided by investing activities		664			710
Cash used in financing activities		(7,948	)		(14,321	)
Effect of exchange rate changes		730			1,596
Net (decrease) increase in cash and cash equivalents	$	(2,438	)	$	614

     The decrease in cash provided by operating activities for the six months ended June 30, 2003, compared to the same period in 2002, was primarily due to a decrease in net accounts receivable collections of $9.7 million and an increase in net inventory-related purchases of $7.8 million, partially offset by a decrease in accounts payable of $3.6 million. Cash collections on accounts receivable have decreased from 2002 to 2003 as a result of decreasing accounts receivable balances due to lower sales volumes. The increase in inventory-related purchases from 2002 to 2003, was primarily attributable to the purchase of customer committed inventory for last-time buys of components during the quarter for which the Company’s customers are ultimately committed to consume or purchase. The Company continues to manage inventory levels in order to meet future customer demands while attempting to mitigate inventory obsolescence.

     Net cash provided by investing activities was $664 thousand and $710 thousand for the six months ended June 30, 2003 and 2002, respectively. Net cash resulting from the purchases and maturities of investments decreased by $1.2 million as a result of a shift in the Company’s investments to longer-term investments. Capital expenditures decreased by $558 thousand due to cost-cutting measures undertaken in 2002 and 2003. During the six months ended June 30, 2003, capital expenditures primarily consisted of purchases for manufacturing test equipment and computers. During the six months ended June 30, 2002, capital

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expenditures primarily consisted of purchases of network upgrades, manufacturing test equipment, and computers. Cash proceeds from the sale of the Savvi business in March 2003 were $360 thousand.

     Net cash used in financing activities was $7.9 million and $14.3 million for the six months ended June 30, 2003 and 2002, respectively. The decrease in the cash used in financing activities was primarily attributable to a decrease in the amounts of convertible subordinated notes repurchased in each period. During the six months ended June 30, 2003 and 2002, the Company repurchased convertible subordinated notes in the open market for $9.2 million and $16.5 million, respectively.

Line of Credit

     During the quarter ended March 31, 2003, the Company renewed its line of credit facility, which expires on March 31, 2004, for $20.0 million at an interest rate based upon the lower of London Inter-Bank Offered Rate (“LIBOR”) plus 1.0% or the bank’s prime rate. The line of credit is collateralized by the Company’s non-equity investments. The market value of these investments must exceed 125.0% of the borrowed facility amount, and the investments must meet specified investment grade ratings.

     As of June 30, 2003 and December 31, 2002, there was no outstanding balance on the line of credit and the Company was in compliance with all debt covenants.

Convertible Subordinated Notes

     In January 2003, the Company’s Board of Directors authorized the repurchase, in the open market or through privately negotiated transactions, of up to $20.0 million of the Company’s 5.5% convertible subordinated notes. In February 2003, the Company repurchased $10.3 million of convertible subordinated notes with a related discount of $308 thousand. The Company repurchased the notes in the open market for $9.2 million and, as a result, recorded a gain of $825 thousand.

Mortgage Payable

     During the six months ended June 30, 2003, the Company paid $44 thousand of principal on its mortgage payable related to a building owned in Des Moines, Iowa, along with interest at 7.46%. During the six months ended June 30, 2003, the Company reinvested $825 thousand of restricted cash in a restricted short-term investment account as a part of collateral for its mortgage. The current portion of the mortgage payable of $85 thousand and $84 thousand is included in Other accrued liabilities in the Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002, respectively.

     In July 2003, the Company entered into an agreement to sell the building and associated land in Des Moines, Iowa. If the sale closes, the Company expects the close to occur before December 31, 2003. Subject to closing, the Company will be paying the mortgage payable in full. In addition, the Company expects to incur a loss on the sale.

     The following summarizes the Company’s contractual obligations at June 30, 2003 and the effect of such on its liquidity and cash flows in future periods (in thousands):

Years Ending December 31,	Convertible Subordinated Notes		Mortgage Payable			Future Minimum Lease Payments			Total
2003 - remaining six months	$	–	$	42		$	2,238		$	2,280
2004		–		88			4,336			4,424
2005		–		97			3,920			4,017
2006		–		104			1,817			1,921
2007		68,748		113			1,779			70,640
Thereafter		–		6,185			7,211			13,396
		68,748		6,629			21,301			96,678
Less: current portion		–		(85	)		(4,409	)		(4,494	)
Long-term obligations	$	68,748	$	6,544		$	16,892		$	92,184

     The Company does not engage in any activity involving special purpose entities or off-balance sheet financing.

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Liquidity Outlook

     The Company believes that its current cash and cash equivalents, investments and cash generated from operations will satisfy its short and long-term expected working capital needs, capital expenditures, investment requirements, stock repurchases, and other liquidity requirements associated with its existing operations. Capital expenditures are expected to be minimal, ranging from $500 thousand to $1.0 million per quarter. Because capital requirements cannot be predicted with certainty, it is possible that the Company could be compelled to obtain additional financing in the future, and that financing may not be available.

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FORWARD-LOOKING STATEMENTS

     This Quarterly Report on Form 10-Q may contain forward-looking statements. The Company’s statements concerning expectations and goals for revenues, gross margin, research and development expenses, selling, general, and administrative expenses, the impact of the Company’s restructuring events on future revenues, the anticipated cost savings effects of the Company’s restructuring activities, and the Company’s projected liquidity are some of the forward-looking statements contained in this Quarterly Report on Form 10-Q. All statements that relate to future events or to the Company’s future performance are forward-looking statements. In some cases, forward-looking statements can be identified by terms such as “may,” “will,” “should,” “expect,” “plans,” “seeks,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” “seek to continue,” “intends,” or other comparable terminology. These forward-looking statements are made pursuant to safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the Company’s or its industries’ actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by these forward-looking statements.

     Forward-looking statements in this Quarterly Report on Form 10-Q include discussions of the Company’s goals, including those discussions set forth in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The Company cannot provide assurance that these goals will be achieved.

     Although forward-looking statements help provide complete information about the Company, investors should keep in mind that forward-looking statements are only predictions, at a point in time, and are inherently less reliable than historical information. In evaluating these statements, you should specifically consider the risks outlined above and those listed under “Risk Factors.” These risk factors may cause the Company’s actual results to differ materially from any forward-looking statement.

     The Company does not guarantee future results, levels of activity, performance or achievements and does not assume responsibility for the accuracy and completeness of these statements. The forward-looking statements contained in this Quarterly Report on Form 10-Q are based on information as of the date of this report. The Company assumes no obligation to update any of these statements based on information after the date of this report.

RISK FACTORS

The Company depends on the commercial systems, service provider systems and enterprise systems market in which demand can be cyclical and any inability to sell products to these markets could have a material adverse effect on its revenues.

     The Company derives its revenues from a number of diverse end markets, some of which are subject to significant cyclical changes in demand. In 2002, the Company derived 37%, 27% and 36% of its revenues from the service provider systems market, the enterprise systems market, and the commercial systems market, respectively. For the six months ended June 30, 2003, the Company derived 37%, 28% and 35% of its revenues from the service provider systems market, the enterprise systems market, and the commercial systems market, respectively. The Company believes that its revenues for the remainder of 2003 will be similarly comprised. Some of these markets are characterized by intense competition, rapid technological change, economic uncertainty and structural financial problems. A slowing economy in the United States, and a global slowdown in the service provider market, has created additional uncertainties for the Company’s customers and therefore, the Company’s business. The Company’s exposure to economic cyclicality and any related fluctuation in customer demand could have a material adverse effect on the Company’s revenues and financial condition.

Because of the Company’s dependence on certain customers, the loss of a top customer could have a material adverse effect on the Company’s revenues and profitability.

     During 2002, the Company derived 48% of its revenues from five customers. These five customers were Nortel, Nokia, Comverse, IBM and Diebold. For the six months ended June 30, 2003, the Company derived 55% of its revenues from the same five customers. During 2002, revenues attributable to Nortel and Nokia were 17% and 13%, respectively. For the six months ended June 30, 2003, revenues attributable to Nortel and Nokia were 19% and 16%, respectively. The Company believes that sales to these customers will continue to be a substantial percentage of its revenues in 2003. A financial hardship experienced by, or a substantial decrease in sales to, any one of the Company’s top customers could materially affect revenues and profitability.

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The Company derives a majority of its revenue from design wins; not all design wins actually ramp into production and if ramped into production the volumes derived from such design wins may not be as significant as the Company had originally estimated which could have a substantial negative impact on the Company’s revenues and profitability.

     The Company derives a majority of its revenues from design wins for OEM products. The Company announced 46 design wins during 2002. In the first quarter of 2003, the Company completed the sale of its Savvi business. Three of the 2002 design wins were attributable to the Savvi business. None of the 2002 Savvi business design wins ramped into production. In the first quarter of 2003, the Company changed the acceptance criteria for declaring a design win to require that programs progress further through the sales cycle before being classified as a design win. This change, effective January 1, 2003, prospectively impacted the count and timing of reported wins in the first six months of 2003. During the first six months ended June 30, 2003, the Company announced 19 design wins. A design win is a project estimated at the time of the design win to produce more than $500 thousand in revenue per year assuming full production. Design wins that ramp into production do so at varying rates. If a design win actually ramps into production, the average ramp into production begins about 12 months after the win, although some more complex wins can take up to 24 months or longer. After that, there is an additional time lag from the start of production ramp to peak revenue. Not all design wins ramp into production and even if a win is ramped into production, the volumes derived from such design win may not be as significant as the Company had originally estimated. The determination of a design win is highly subjective and is based on information available to the Company at the time of the project estimate. Design wins are sometimes canceled or delayed, or can perform below original expectations, which can adversely impact revenues and profitability.

Because of the Company’s dependence on a few suppliers or, in some cases, one supplier for some of the components it uses in the manufacture of its products, a loss of a supplier or a shortage of any of these components could have a material adverse effect on the Company’s business or its financial performance.

     The Company depends on a few suppliers or, in some cases, one supplier for some of the components the Company uses in the manufacture of its products. For example, the Company primarily uses Intel microprocessors for its products and any disruption in supply could adversely impact the Company’s financial performance. In addition, the Company depends on two primary contract manufacturing partners, Manufacturers’ Services Limited and Sanmina-SCI, and failed execution on their behalf could temporarily effect revenue and profitability. The Company currently manufactures the majority of its products and relies on its contract manufacturing partners to manufacture the remaining amount, with a planned migration toward increasing reliance on contract manufacturing in the future.

Competition in the market for embedded systems is intense, and if the Company loses its competitive position, its revenues and profitability could decline.

     Some of the Company’s competitors and potential competitors have a number of significant advantages over the Company, including:

• a longer operating history;
• greater name recognition and marketing power;
• preferred vendor status with the Company's existing and potential customers; and
• significantly greater financial, technical, marketing, and other resources, which allow them to respond more quickly to new or changing opportunities, technologies, and customer requirements.

     Furthermore, existing or potential competitors may establish cooperative relationships with each other or with third parties, or adopt aggressive pricing policies to gain market share.

     As a result of increased competition, the Company could encounter significant pricing pressures. These pricing pressures could result in significantly lower average selling prices for the Company’s products. The Company may not be able to offset the effects of any price reductions with an increase in the number of customers, cost reductions or otherwise. In addition, many of the industries the Company serves, such as the communications industry, are encountering market consolidation, or are likely to encounter consolidation in the near future, which could result in increased pricing pressure and other competition.

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The Company competes with a number of companies providing embedded systems including Advantech Co. LTD., Force Computers, a division of Solectron, Inc., divisions within Intel Corporation, Kontron AG, Mercury Computer Systems, Motorola Computer Group, a unit of Motorola Inc., Performance Technologies, and SBS Technologies.

The Company’s international operations expose the Company to additional political, economic, and regulatory risks not faced by businesses that operate only in the United States.

     The Company derived 38% of its 2002 revenues from Europe and Israel and 3% from Asia. For the six months ended June 30, 2003, the Company derived 39% of its revenues from Europe and Israel and 4% from Asia. In addition, the Company has a design center located in Birmingham, United Kingdom. As a result, the Company is subject to worldwide economic and market conditions risks generally associated with global trade, such as fluctuating exchange rates, tariff and trade policies, domestic and foreign tax policies, foreign governmental regulations, political unrest, wars and other acts of terrorism, and changes in other economic conditions. These risks, among others, could adversely affect the Company’s results of operations or financial position.

If the Company is unable to generate sufficient income in the future, it may not be able to fully utilize its net deferred tax assets or support its current levels of goodwill and intangibles on its balance sheet.

     The Company cannot provide absolute assurance that sufficient taxable income will be generated for full utilization of the net deferred tax assets of $28.7 million as of June 30, 2003. Accordingly, the Company may be required to record an additional valuation allowance against the deferred tax assets if its future expectations of taxable income are not achieved. On the other hand, if the Company generates taxable income in excess of its future expectations, then, the valuation allowance may be reduced accordingly. The Company also cannot provide absolute assurance that future income will support the carrying amount of goodwill and intangibles of $35.5 million on the Consolidated Balance Sheet as of June 30, 2003, and therefore, the Company may incur an impairment charge in the future.

Because the Company has material levels of customer specific inventory, a financial hardship experienced by the Company’s customers could have a material adverse impact on the Company’s profitability.

     The Company provides long-life support to its customers and therefore has material levels of customer specific inventory. A financial hardship experienced by the Company’s customers could materially effect the viability of the dedicated inventory, and ultimately adversely impact profitability.

The Company’s products for embedded computing applications are based on industry standards, which are continually evolving, and any failure to conform to these standards could have a substantial negative impact on the Company’s revenues and profitability.

     Products for embedded computing applications are often based on industry standards, which are continually evolving. The Company’s future success will depend, in part, upon its ability to successfully develop and introduce new products based on emerging industry standards. The Company’s failure to conform to these standards could render its products unmarketable or obsolete. As the Company’s addressable markets develop new standards, the Company may be unable to successfully design and manufacture new products that address the needs of the Company’s customers or achieve substantial market acceptance.

If the Company is unable to protect its intellectual property, the Company may lose a valuable competitive advantage or be forced to incur costly litigation to protect its rights.

     The Company is a technology dependent company and its success depends on developing and protecting its intellectual property. The Company relies on patents, copyrights, trademarks and trade secret laws to protect its intellectual property. At the same time, the Company’s products are complex, and are often not patentable in their entirety. The Company also licenses intellectual property from third parties and relies on those parties to maintain and protect their technology. The Company cannot be certain that its actions will protect proprietary rights. If the Company is unable to adequately protect its technology, or if the Company is unable to continue to obtain or maintain licenses for protected techology from third parties, it could have a material adverse affect on the Company’s results of operations.

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The Company’s period-to-period revenues and operating results fluctuate significantly, which may result in volatility in the price of its common stock.

     The price of the Company’s common stock may be subject to wide, rapid fluctuations. The Company’s period-to-period revenues and operating results have varied in the past and may continue to vary in the future, and any such fluctuations may cause the Company’s stock price to fluctuate. Fluctuations in the stock price may also be due to other factors such as changes in analysts’ estimates regarding earnings, or may be due to factors relating to the service provider systems, enterprise systems and commercial systems markets in general. Shareholders should be willing to incur the risk of such fluctuations.

Other Risk Factors

     Other risk factors include, but are not limited to, changes in the mix of products sold, regulatory and tax legislation, changes in effective tax rates, inventory risks due to changes in market demand or the Company’s business strategies, potential litigation and claims arising in the normal course of business, credit risk of customers and other risk factors. Proposed changes to accounting rules, including proposals to account for employee stock options as a compensation expense, could, if mandated, materially increase the expense the Company reports under generally accepted accounting principles and adversely affect operating results.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

     The Company is exposed to market risk from changes in interest rates, foreign currency exchange rates, and equity trading prices, which could impact results of its operations and financial condition.

     Interest Rate Risk. The Company invests its excess cash in debt instruments of the U.S. Government and its agencies, and in high-quality corporate issuers. The Company attempts to protect and preserve its invested funds by limiting default, market, and reinvestment risk. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due to the short duration of most of the investment portfolio, an immediate 10% change in interest rates would not have a material effect on the fair value of the portfolio. Therefore, the Company would not expect the operating results or cash flows to be affected to any significant degree by a sudden change in market interest rates on its securities portfolio.

     Foreign Currency Risk. The Company pays the expenses of its international operations in local currencies, namely, the Japanese Yen, British Pound, and Euro. The international operations are subject to risks typical of an international business, including, but not limited to: differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. Accordingly, future results could be materially and adversely affected by changes in these or other factors. The Company is also exposed to foreign exchange rate fluctuations as they relate to revenues and operating expenses as the financial results of foreign subsidiaries are translated into U.S. dollars in consolidation. Because exchange rates vary, these results, when translated, may vary from expectations and adversely impact overall expected profitability. In 2002, the Company entered into several 30-day forward contracts to hedge its receivables in Yen. Foreign exchange rate transaction losses, net of gains, related to forward contracts for the quarter ended June 30, 2002, were approximately $600 thousand. No forward contracts were outstanding at June 30, 2003 or December 31, 2002. As such, there were no forward contract related foreign exchange rate transaction gains or losses for the quarter ended June 30, 2003.

     Equity Price Risk. The Company is exposed to equity price risk due to one available-for-sale equity investment it holds in GA eXpress, Inc. stock. As of June 30, 2003, the estimated fair value of this investment is $179 thousand.

     Convertible Subordinated Notes. The aggregate face value of the convertible subordinated notes as of June 30, 2003 was $68.7 million. The notes are unsecured obligations convertible into the Company’s Common Stock and are subordinated to all present and future senior indebtedness of the Company. Interest on the subordinated notes accrues at 5.5% per year and is payable semi-annually on February 15 and August 15. The convertible subordinated notes are payable in full in August 2007. The notes are convertible, at the option of the holder, at any time on or before maturity, unless previously redeemed or repurchased, into shares of the Company’s Common Stock at a conversion price of $67.80 per share, which is equal to a conversion rate of 14.7484 shares per $1,000 principal amount of notes. The Company may redeem all or a portion of the notes at its option on or after August 20, 2003, provided that the notes will only be subject to mandatory redemption if the closing price of the Company’s Common Stock equals or exceeds 140% of the conversion price then in effect for at least 20 trading days within a period of 30 consecutive trading days ending on the trading day before the date of the notice of the provisional redemption. As of August 7, 2003, the closing price of the Company’s Common Stock as reported on the Nasdaq National Market was $14.74 per share. The accretion of the discount on the notes is calculated using the effective interest method.

     The fair value of the convertible subordinated notes is sensitive to interest rate changes. Interest rate changes would result in increases or decreases in the fair value of the convertible subordinated notes, due to differences between market interest rates and rates in effect at the inception of the obligation. Unless the Company elects to repurchase its convertible subordinated notes in the open market, changes in the fair value of convertible subordinated notes have no impact on our cash flows or consolidated financial statements. The estimated fair value of the convertible subordinated notes was $63.4 million and $66.5 million at June 30, 2003 and December 31, 2002, respectively.

     The Company has cumulatively repurchased convertible subordinated notes in the amount of $51.3 million, face value, for $41.3 million. These repurchases were financed from the Company’s investment portfolio. If and when appropriate opportunities present themselves, the Company may use a portion of its cash and cash equivalents and investment balances to buy back additional amounts of the convertible subordinated notes. As of June 30, 2003, the Company’s aggregate cash and cash equivalents and investments were $114.0 million.

32

Item 4. Controls and Procedures

     Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

     During the Company’s fiscal quarter ended June 30, 2003, no change occurred in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

33

PART II. OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders

At the Company’s Annual Meeting on May 13, 2003, the holders of the Company’s outstanding Common Stock took the actions described below. As of the record date for the Annual Meeting, 17,729,296 shares of Common Stock were issued and outstanding and entitled to vote.

1. The shareholders elected each of C. Scott Gibson, Scott C. Grout, James F. Dalton, Richard J. Faubert, Dr. William W. Lattin, Carl W. Neun, Jean-Pierre D. Patkay and Jean-Claude Peterschmitt to the Company's Board of Directors, by the votes indicated below, to serve for the ensuing year.

C. Scott Gibson
15,105,155	Shares in favor
1,022,211	Shares against or withheld
0	Abstentions
0	Broker nonvotes
Scott C. Grout
15,447,993	Shares in favor
679,373	Shares against or withheld
0	Abstentions
0	Broker nonvotes
James F. Dalton
15,110,215	Shares in favor
1,017,151	Shares against or withheld
0	Abstentions
0	Broker nonvotes
Richard J. Faubert
14,743,558	Shares in favor
1,383,808	Shares against or withheld
0	Abstentions
0	Broker nonvotes
Dr. William W. Lattin
15,469,748	Shares in favor
657,618	Shares against or withheld
0	Abstentions
0	Broker nonvotes

34

Carl W. Neun
15,147,101	Shares in favor
980,265	Shares against or withheld
0	Abstentions
0	Broker nonvotes
Jean-Pierre D. Patkay
14,743,882	Shares in favor
1,383,484	Shares against or withheld
0	Abstentions
0	Broker nonvotes
Jean-Claude Perterschmitt
14,879,783	Shares in favor
1,247,583	Shares against or withheld
0	Abstentions
0	Broker nonvotes

2. Approval to amend the Company’s 1996 Employee Stock Purchase Plan to add an additional 1,000,000 shares that may be issued under this plan.

11,819,620	Shares in favor
1,303,661	Shares against or withheld
142,684	Abstentions
2,861,401	Broker nonvotes

3. Approval of a Stock Option Exchange Program which allows holders of certain Company stock options, other than directors, vice presidents and executive officers, to cancel stock options in exchange for the right to receive additional stock options in the future.

9,894,244	Shares in favor
3,203,722	Shares against or withheld
167,999	Abstentions
2,861,401	Broker nonvotes

35

Item 6. Exhibits and Reports on Form 8-K

(a)	Exhibits
	10.1	RadiSys Corporation 1996 Employee Stock Purchase Plan, as amended.
	10.2	RadiSys Corporation 1995 Employee Stock Incentive Plan, as amended. Incorporated by reference from Exhibit (d)(1) to the Tender Offer Statement filed by the Company on Schedule TO-I, dated July 31, 2003, SEC file No. 005-49160.
	10.3	RadiSys Corporation 2001 Nonqualified Stock Option Plan, as amended. Incorporated by reference from Exhibit (d)(2) to the Tender Offer Statement filed by the Company on Schedule TO-I, dated July 31, 2003, SEC file No. 005-49160.
	31.1	Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2	Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b)	Reports on Form 8-K
	On April 18, 2003, the Company filed a current report on Form 8-K under Item 9. Regulation FD Disclosure (pursuant to Item 12. Results of Operations and Financial Condition) announcing that on April 16, 2003, the Company issued a press release with its fiscal 2003 first quarter results.

36

SIGNATURES

     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.

	RADISYS CORPORATION
Date: August 13, 2003	By:	/s/ SCOTT C. GROUT
		Scott C. Grout President, Chief Executive Officer and Director (Principal Executive Officer)
Date: August 13, 2003	By:	/s/ JULIA A. HARPER
		Julia A. Harper Vice President of Finance and Administration and Chief Financial Officer (Principal Financial and Accounting Officer)

37

EXHIBIT INDEX

Exhibit No.	Description
10.1	RadiSys Corporation 1996 Employee Stock Purchase Plan, as amended.
10.2	RadiSys Corporation 1995 Employee Stock Incentive Plan, as amended. Incorporated by reference from Exhibit (d)(1) to the Tender Offer Statement filed by the Company on Schedule TO-I, dated July 31, 2003, SEC file No. 005-49160.
10.3	RadiSys Corporation 2001 Nonqualified Stock Option Plan, as amended. Incorporated by reference from Exhibit (d)(2) to the Tender Offer Statement filed by the Company on Schedule TO-I, dated July 31, 2003, SEC file No. 005-49160.
31.1	Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

38

EX-10.1

                                                                    Exhibit 10.1

                               RADISYS CORPORATION
                        1996 EMPLOYEE STOCK PURCHASE PLAN
                        (AS AMENDED THROUGH MAY 13, 2003)

I. PURPOSE OF PLAN

      As a means by which Employees may share in the Company's growth and
success, RadiSys Corporation (the "Company") believes that ownership of shares
of its Common Stock by its Employees is desirable. To this end, and as an
incentive to better performance and improved profits, the Company has
established the RadiSys Corporation 1996 Employee Stock Purchase Plan (the
"Plan").

      The Company intends that the Plan will constitute an "employee stock
purchase plan" within the meaning of Section 423 of the Code.

II. DEFINITIONS

      Terms that are capitalized within this document shall have the meanings as
set forth in Exhibit A, unless otherwise specified within the text.

III. EMPLOYEE PARTICIPATION

      PARTICIPATION

      Subject to the provisions of this Section III, an Employee may elect to
participate in the Plan effective as of any Enrollment Date by completing and
filing a Payroll Deduction Authorization Form as provided in Section IV. As of
each Enrollment Date, the Company hereby grants a right to purchase Shares under
the terms of the Plan to each eligible Employee who has elected to participate
in the Offering commencing on that Enrollment Date.

      REQUIREMENTS FOR PARTICIPATION

      A person shall become eligible to participate in the Plan on the first
Enrollment Date on which that person meets the following requirements:

      a) The person is an Employee, and

      b) The person's customary period of Employment is more than twenty (20)
hours per week.

      Any eligible Employee may enroll in the Plan as of the Enrollment Date of
any Offering by filing timely written notice of such participation, subject to
the following provisions:

      (i) In order to enroll in the Plan initially, an eligible Employee must
complete, sign and submit to the Company the following forms:

            (A) Payroll Deduction Authorization Form Must be received by the
      Company prior to 4:00 p.m., Pacific Time on the Enrollment Date of an
      Offering to be effective for that Offering.

            (B) ESPP New Account Form This form must accompany the Payroll
      Deduction Authorization Form submitted for enrollment in the Plan. An ESPP
      New Account Form must be received by the Company prior to 4:00 p.m.,
      Pacific Time on the Enrollment Date of an Offering to be effective for
      that Offering.

      (ii) A Participant in an ongoing Offering may elect as of any Enrollment
Date to enroll in the new Offering commencing on that Enrollment Date by filing
a Payroll Deduction Authorization Form making such election prior to 4:00 p.m.
Pacific Time on the Enrollment Date. An election by a current Participant to
enroll in a new Offering shall constitute a withdrawal, effective as of such
Enrollment Date, from the ongoing Offering and simultaneous reenrollment in the
new Offering. A reenrollment shall not affect the purchase of Shares under the
ongoing Offering occurring on the Purchase Date immediately preceding the
Enrollment Date. A Participant may make an ongoing election to reenroll on any
Enrollment Date as of which the fair market value of the Shares for purposes of
Section VI is less than it was as of the Enrollment Date for the Offering in
which the Participant is currently participating. Unless otherwise specified by
the Participant, any such ongoing reenrollment election shall be subject to
revocation; provided, however, that to be effective to prevent reenrollment on
any Enrollment Date, such revocation must be received by the Company prior to
4:00 p.m. Pacific Time on the Enrollment Date.


                                       43


      (iii) Absent withdrawal from the Plan pursuant to Section VII, a
Participant will automatically be re-enrolled in the Offering commencing on the
Enrollment Date immediately following the expiration of the Offering of which
that person is then a Participant.

      A Participant shall become ineligible to participate in the Plan and shall
cease to be a Participant when the Participant ceases to meet the eligibility
requirements as defined above.

      LIMITATIONS ON PARTICIPATION

      No Employee may obtain a right to purchase Shares under the Plan if,
immediately after the right is granted, the Employee owns or is deemed to own
Shares possessing five percent (5%) or more of the combined voting power or
value of all classes of stock of the Company or any parent or subsidiary of the
Company. For purposes of determining share ownership, the rules of Section
424(d) of the Code shall apply and Shares that the Employee may purchase under
any options or rights to purchase, whether or not Vested, shall be treated as
Shares owned by the Employee.

      No Employee may obtain a right to purchase Shares under the Plan that
permits the Employee's rights to purchase Shares under the Plan and any other
employee stock purchase plan within the meaning of Section 423 of the Code of
the Company or any parent or subsidiary of the Company to accrue at a rate which
exceeds $25,000 in fair market value of Shares (determined as of the Enrollment
Date) for each calendar year of the Offering. This section shall be interpreted
to permit an Employee to purchase the maximum number of Shares permitted under
Section 423(b)(8) of the Code and regulations and interpretations adopted
thereunder.

      The maximum number of Shares that an Employee may purchase in an Offering
shall not exceed 10,000 shares, no more than one-third of which may be purchased
on any Purchase Date on or prior to August 15, 2000, and no more than one-sixth
of which may be purchased on any Purchase Date after August 15, 2000.

      VOLUNTARY PARTICIPATION

      Participation in the Plan shall be strictly voluntary.

IV. PAYROLL DEDUCTIONS

      PAYROLL DEDUCTION AUTHORIZATION

      An Employee may contribute to the Plan only by means of payroll
deductions. A Payroll Deduction Authorization Form must be filed with the
Company's stock administrator prior to 4:00 p.m. Pacific Time on the Enrollment
Date as of which the payroll deductions are to take effect.

      AMOUNT OF DEDUCTIONS

      A Participant may specify that the person desires to make contributions to
the Plan at a rate not less than 1% and not more than 15% of the Compensation
paid to the Participant during each pay period in the Offering, or other such
minimum or maximum percentages as the Plan Administrator shall establish from
time to time; provided, however, that a Participant in any Offering that
commenced prior to August 15, 2000 may not specify during that Offering
contributions to the Plan of more than 10% of Compensation. Such specification
shall apply during any period of continuous participation in the Plan, unless
otherwise modified or terminated as provided in this Section IV or as otherwise
provided in the Plan. If a payroll deduction cannot be made in whole or in part
because the Participant's pay for the period in question is insufficient to fund
the deduction after having first withheld all other amounts deductible from that
person's pay, the amount that was not withheld cannot be made up by the
Participant nor will it be withheld from subsequent pay checks.


                                       44


      COMMENCEMENT OF DEDUCTIONS

      Payroll deductions for a Participant shall commence on the Enrollment Date
of the Offering for which that person's Payroll Deduction Authorization Form is
effective and shall continue indefinitely, unless modified or terminated as
provided in this Section IV or as otherwise provided in the Plan.

      ACCOUNTS

      All payroll deductions made for a Participant shall be credited to his or
her Account under the Plan. Following each Purchase Date, the Plan Administrator
shall promptly deliver a report to each Participant setting forth the aggregate
payroll deductions credited to such Participant's Account since the last
Purchase Date and the number of Shares purchased and delivered to the Custodian
for deposit into the Participant's Custodial Account.

      MODIFICATION OF AUTHORIZED DEDUCTIONS

      A Participant may at any time increase or decrease the amount of that
person's payroll deduction effective for all applicable payroll periods, by
completing an amended Payroll Deduction Authorization Form and filing it with
the Company's stock administrator in accordance with this Section IV; provided,
however, that a Participant in any Offering that commenced prior to August 15,
2000 may not change the amount of that person's payroll deduction more than
three times during that Offering.

      A Participant may at any time discontinue the Participant's payroll
deductions, without withdrawing from the Plan, by completing an amended Payroll
Deduction Authorization Form and filing it with the Company's stock
administrator. Previous payroll deductions will then be retained in the
Participant's Account for application to purchase Shares on the next Purchase
Date, after which the Participant's participation in the Offering and in the
Plan will terminate unless the participant has timely filed another Payroll
Deduction Authorization Form to resume payroll deductions.

      For purposes of the above, an amended Payroll Deduction Authorization form
shall be effective for a specific pay period when filed 7 days prior to the last
day of such payroll period; provided, however, that for a Participant in any
Offering that commenced prior to August 15, 2000 an amended Payroll Deduction
Authorization form shall be effective for a specific pay period during that
Offering when filed 15 days prior to the last day of such payroll period.

V. CUSTODY OF SHARES

      DELIVERY AND CUSTODY OF SHARES

      Shares purchased pursuant to the Plan shall be delivered to and held by
the Custodian.

      CUSTODIAL ACCOUNT

      As soon as practicable after each Purchase Date, the Company shall deliver
to the Custodian the full Shares purchased for each Participant's Account. The
Shares will be held in a Custodial Account specifically established for this
purpose. An Employee must open a Custodial Account with the Custodian in order
to be eligible to purchase Shares under the Plan. In order to open a Custodial
Account, the Participant must complete an ESPP New Account Form and file it with
the stock administrator prior to 4:00 p.m. Pacific Time on the Enrollment Date
of the Offering as of which the enrollment is to take effect; provided, however,
that an ESPP New Account Form that effects a change in the status of the
Custodial Account may be filed at any time during participation in the Plan.

      TRANSFER OF SHARES

      Upon receipt of appropriate instructions from a Participant on forms
provided for that purpose, the Custodian will transfer into the Participant's
own name all or part of the Shares held in the Participant's Custodial Account
and deliver such Shares to the Participant.

      STATEMENTS

      The Custodian will deliver to each Participant a semi-annual statement
showing the activity of the Participant's Custodial Account and the balance as
to both Shares and cash. Participants will be furnished such other reports and
statements, and at such intervals, as the Custodian and Plan Administrator shall
determine from time to time.


                                       45


VI. PURCHASE OF SHARES

      PURCHASE OF SHARES

      Subject to the limitations of Section VII, on each Purchase Date in an
Offering, the Company shall apply the amount credited to each Participant's
Account to the purchase of as many full Shares that may be purchased with such
amount at the price set forth in this Section VI, and shall promptly deliver
such Shares to the Custodian for deposit into the Participant's Custodial
Account. Payment for Shares purchased under the Plan will be made only through
payroll withholding deductions in accordance with Section IV.

      PRICE

      The price of Shares to be purchased on any Purchase Date shall be the
lower of:

      (a)   Eighty-five percent (85%) of the fair market value of the Shares on
            the Enrollment Date of the Offering; or

      (b)   Eighty-five percent (85%) of the fair market value of the Shares on
            the Purchase Date.

      FAIR MARKET VALUE

      The fair market value of the Shares on any date shall be equal to the
closing trade price of such shares on the Valuation Date, as reported on the
NASDAQ National Market System or such other quotation system that supersedes it.

      UNUSED CONTRIBUTIONS

      Any amount credited to a Participant's Account and remaining therein
immediately after a Purchase Date because it was less than the amount required
to purchase a full Share shall be carried forward in such Participant's Account
for application on the next succeeding Purchase Date.

VII. TERMINATION AND WITHDRAWAL

      TERMINATION OF EMPLOYMENT

      Upon termination of a Participant's Employment for any reason other than
death, the payroll deductions credited to such Participant's Account shall be
returned to the Participant. A Participant shall have no right to accrue Shares
upon termination of the person's Employment.

      TERMINATION UPON DEATH

      Upon termination of the Participant's Employment because of that person's
death, the payroll deductions credited to that person's Account shall be used to
purchase Shares as provided in Section VI on the next Purchase Date. Any Shares
purchased and any remaining balance shall be transferred to the deceased
Participant's Beneficiary, or if none, to that person's estate.

      DESIGNATION OF BENEFICIARY

      Each Participant may designate, revoke, and redesignate Beneficiaries. All
changes to designation of Beneficiary shall be in writing and will be effective
upon delivery to the Plan Administrator.

      WITHDRAWAL

      A Participant may withdraw the entire amount credited to that individual's
Account under the Plan and thereby terminate participation in the current
Offering at any time by giving written notice to the Company, but in no case may
a Participant withdraw accounts within the 15 days immediately preceding a
Purchase Date for the Offering. Any amount withdrawn shall be paid to the
Participant promptly after receipt of proper notice of withdrawal and no further
payroll deductions shall be made from the person's Compensation unless a Payroll
Deduction Authorization Form directing further deductions is or has been
submitted.


                                       46


      STATUS OF CUSTODIAL ACCOUNT

      Upon termination of a Participant's Employment for any reason other than
death, the Participant may,

      (a) Elect to retain with the Custodian the Shares held in the
Participant's Custodial Account. The Participant will bear the cost of any
annual fees resulting from maintaining such an account.

      (b) Request issuance of the Shares held in the Participant's Custodial
Account by submitting to the Custodian the appropriate forms provided for that
purpose.

      Upon termination of a Participant's Employment as a result of death, any
Shares held by the Custodian for the Participant's Account shall be transferred
to the person(s) entitled thereto under the laws of the state of domicile of the
Participant upon a proper showing of authority.

VIII. SHARES PURCHASED UNDER THE PLAN

      SOURCE AND LIMITATION OF SHARES

      The Company has reserved for sale under the Plan 2,750,000 shares of
common stock, subject to adjustment upon changes in capitalization of the
Company as provided in Section X. Shares sold under the Plan may be newly issued
Shares or Shares reacquired in private transactions or open market purchases,
but all Shares sold under the Plan regardless of source shall be counted against
the 2,750,000 Share limitation.

      If there is an insufficient number of Shares to permit the full exercise
of all existing rights to purchase Shares, or if the legal obligations of the
Company prohibit the issuance of all Shares purchasable upon the full exercise
of such rights, the Plan Administrator shall make a pro rata allocation of the
Shares remaining available in as nearly a uniform and equitable manner as
possible, based pro rata on the aggregate amounts then credited to each
Participant's Account. In such event, payroll deductions to be made shall be
reduced accordingly and the Plan Administrator shall give written notice of such
reduction to each Participant affected thereby. Any amount remaining in a
Participant's Account immediately after all available Shares have been purchased
will be promptly remitted to such Participant. Determination by the Plan
Administrator in this regard shall be final, binding and conclusive on all
persons. No deductions shall be permitted under the Plan at any time when no
Shares are available.

      DELIVERY OF SHARES

      As promptly as practicable after each Purchase Date, the Company shall
deliver to the Custodian the full Shares purchased for each Participant's
Account.

      INTEREST IN SHARES

      The rights to purchase Shares granted pursuant to this Plan will in all
respects be subject to the terms and conditions of the Plan, as interpreted by
the Plan Administrator from time to time. The Participant shall have no interest
in Shares purchasable under the Plan until payment for the Shares has been
completed at the close of business on the relevant Purchase Date. The Plan
provides only an unfunded, unsecured promise by the Company to pay money or
property in the future. Except with respect to the Shares purchased on a
Purchase Date, an Employee choosing to participate in the Plan shall have no
greater rights than an unsecured creditor of the Company. After the purchase of
Shares, the Participant shall be entitled to all rights of a stockholder of the
Company.

IX. ADMINISTRATION

      PLAN ADMINISTRATOR

      At the discretion of the Board of Directors, the Plan shall be
administered by the Board of Directors or by a Committee appointed by the Board
of Directors. Each member of the Committee shall be either a director, an
officer or an Employee of the Company. Each member shall serve for a term
commencing on a date specified by the Board of Directors and continuing until
that person dies, resigns or is removed by the Board of Directors.


                                       47


      POWERS

      The Plan Administrator shall be vested with full authority to make,
administer and interpret the rules and regulations as it deems necessary to
administer the Plan. Any determination, decision or act of the Plan
Administrator with respect to any action in connection with the construction,
interpretation, administration or application of the Plan shall be final,
binding and conclusive upon all Participants and any and all other persons
claiming under or through any Participant. The provisions of the Plan shall be
construed in a manner consistent with the requirements of Section 423 of the
Code.

X. CHANGES IN CAPITALIZATION, MERGER, ETC.

      RIGHTS OF THE COMPANY

      The grant of a right to purchase Shares pursuant to this Plan shall not
affect in any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or other changes in its capital or business
structure or to merge, consolidate or dissolve, liquidate or transfer all or any
part of its divisions, subsidiaries, business or assets.

      RECAPITALIZATION

      Subject to any required action by stockholders, the number of Shares
covered by the Plan as provided in Section VIII and the price per Share shall be
proportionately adjusted for any increase or decrease in the number of issued
Shares of the Company resulting from a subdivision or consolidation of Shares or
the payment of a stock dividend or any other increase or decrease in the number
of such Shares effected without receipt or payment of consideration by the
Company.

      CONSOLIDATION OR MERGER

      In the event of the consolidation or merger of the Company with or into
any other business entity, or sale by the Company of substantially all of its
assets, the successor may at its discretion continue the Plan by adopting the
same by resolution of its Board of Directors or agreement of its partners or
proprietors. If, within 90 days after the effective date of a consolidation,
merger, or sale of assets, the successor corporation, partnership or
proprietorship does not adopt the Plan, the Plan shall be terminated in
accordance with Section XIII.

XI. TERMINATION OF EMPLOYMENT

      LEAVE

      A person's Employment shall not terminate on account of an authorized
leave of absence or sick leave, or on account of a military leave described in
this Section XI, or a direct transfer between Employers, provided such leave
does not exceed 90 days or, if longer, so long as the person's right to
reemployment is guaranteed by statute or by contract. Failure to return to work
upon expiration of any leave of absence or sick leave shall be considered a
resignation effective as of the expiration of such leave of absence or sick
leave.

      MILITARY LEAVE

      Any Employee who leaves the Employer directly to perform services in the
Armed Forces of the United States or in the United States Public Health Service
under conditions entitling the Employee to reemployment rights provided by the
laws of the United States, shall be on military leave. An Employee's military
leave shall expire if the Employee voluntarily resigns from the Employer during
the leave or if that person fails to make an application for reemployment within
a period specified by such law for preservation of employment rights. In such
event, the individual's Employment shall terminate by resignation on the day the
military leave expires.


                                       48


XII. STOCKHOLDER APPROVAL AND RULINGS

      The Plan is expressly made subject to (a) the approval of the Plan within
twelve (12) months after the Plan is adopted by the stockholders of the Company
and (b) at the Company's election, to the receipt by the Company from the
Internal Revenue Service of a ruling in scope and content satisfactory to
counsel to the Company, affirming qualification of the Plan within the meaning
of Section 423 of the Code. If the Plan is not so approved by the stockholders
within 12 months after the date the Plan is adopted and if, at the election of
the Company a ruling from the Internal Revenue Service is sought but not
received on or before one year after this Plan's adoption by the Board of
Directors, this Plan shall not come into effect. In that case, the Account of
each Participant shall forthwith be paid to the Participant.

XIII. MISCELLANEOUS PROVISIONS

      AMENDMENT AND TERMINATION OF THE PLAN

      The Board of Directors of the Company may at any time amend the Plan.
Except as otherwise provided herein, no amendment may adversely affect or change
any right to purchase Shares without prior approval of the stockholders of the
Company if the amendment would:

      (i)   Permit the sale of more Shares than are authorized under Section
            VIII;

      (ii)  Permit the sale of Shares to employees of entities which are not
            Employers;

      (iii) Materially increase the benefits accruing to Participants under the
            Plan; or

      (iv)  Materially modify the requirements as to eligibility for
            participation in the Plan.

      The Plan is intended to be a permanent program, but the Company reserves
the right to declare the Plan terminated at any time. Upon such termination,
amounts credited to the Accounts of the Participants with respect to whom the
Plan has been terminated shall be returned to such Participants.

      NON-TRANSFERABILITY

      Neither payroll deductions credited to a Participant's Account nor any
rights with regard to the purchase of Shares under the Plan may be assigned,
transferred, pledged or otherwise disposed of in any way by the Participant
except as provided in Section VII, and any attempted assignment, transfer,
pledge, or other disposition shall be null and void. The Company may treat any
such act as an election to withdraw funds in accordance with Section VII. A
Participant's rights to purchase Shares under the Plan are exercisable during
the Participant's lifetime only by the Participant.

      USE OF FUNDS

      All payroll deductions received or held by the Company under the Plan may
be used by the Company for any corporate purposes and the Company shall not be
obligated to segregate the payroll deductions.

      EXPENSES

      All expenses of administering the Plan shall be borne by the Company. The
Company will not pay expenses, commissions or taxes incurred in connection with
sales of Shares by the Custodian at the request of a Participant. Expenses to be
paid by a Participant will be deducted from the proceeds of sale prior to
remittance.

      TAX WITHHOLDING

      Each Participant who has purchased Shares under the Plan shall immediately
upon notification of the amount due, if any, pay to the Employer in cash amounts
necessary to satisfy any applicable federal, state and local tax withholding
determined by the Employer to be required. If the Employer determines that
additional withholding is required beyond any amounts deposited at the time of
purchase, the Participant shall pay such amount to the Employer on demand. If
the Participant fails to pay the amount demanded, the Employer may withhold that
amount from other amounts payable by the Employer to the Participant, including
salary, subject to applicable law.


                                       49


      NO INTEREST

      No Participant shall be entitled, at any time, to any payment or credit
for interest with respect to or on the payroll deductions contemplated herein,
or on any other assets held hereunder for the Participant's Account.

      REGISTRATION AND QUALIFICATION OF SHARES

      The offering of Shares hereunder shall be subject to the effecting by the
Company of any registration or qualification of the Shares under any federal or
state law or the obtaining of the consent or approval of any governmental
regulatory body which the Company shall determine, in its sole discretion, is
necessary or desirable as a condition to, or in connection with, the offering or
the issue or purchase of the Shares covered thereby. The Company shall make
every reasonable effort to effect such registration or qualification or to
obtain such consent or approval.

      RESPONSIBILITY AND INDEMNITY

      Neither the Company, its Board of Directors, the Custodian, nor any
member, officer, agent or employee of any of them, shall be liable to any
Participant under the Plan for any mistake of judgment or for any omission or
wrongful act unless resulting from gross negligence, willful misconduct or
intentional misfeasance. The Company will indemnify and save harmless its Board
of Directors, the Custodian and any such member, officer, agent or employee
against any claim, loss, liability or expense arising out of the Plan, except
such as may result from the gross negligence, willful misconduct or intentional
misfeasance of such entity or person.

      PLAN NOT A CONTRACT OF EMPLOYMENT

      The Plan is strictly a voluntary undertaking on the part of the Employer
and shall not constitute a contract between the Employer and any Employee, or
consideration for or an inducement or a condition of employment of an Employee.
Except as otherwise required by law, or any applicable collective bargaining
agreement, nothing contained in the Plan shall give any Employee the right to be
retained in the service of the Employer or to interfere with or restrict the
right of the Employer, which is hereby expressly reserved, to discharge or
retire any Employee at any time, with or without cause and with or without
notice. Except as otherwise required by law, inclusion under the Plan will not
give any Employee any right or claim to any benefit hereunder except to the
extent such right has specifically become fixed under the terms of the Plan. The
doctrine of substantial performance shall have no application to any Employee,
Participant, or Beneficiary. Each condition and provision, including numerical
items, has been carefully considered and constitutes the minimum limit on
performance which will give rise to the applicable right.

      SERVICE OF PROCESS

      The Secretary of the Company is hereby designated agent for service or
legal process on the Plan.

      NOTICE

      All notices or other communications by a Participant to the Company under
or in connection with the Plan shall be deemed to have been duly given when
received by the Plan Administrator. Any notice required by the Plan to be
received by the Company prior to an Enrollment Date, payroll period or other
specified date, and received by the Plan Administrator subsequent to such date
shall be effective on the next occurring Enrollment Date, payroll period or
other specified date to which such notice applies.

      GOVERNING LAW

      The Plan shall be interpreted, administered and enforced in accordance
with the Code, and the rights of Participants, former Participants,
Beneficiaries and all other persons shall be determined in accordance with it.
To the extent state law is applicable, the laws of the State of Oregon shall
apply.

      REFERENCES

      Unless the context clearly indicates to the contrary, reference to a Plan
provision, statute, regulation or document shall be construed as referring to
any subsequently enacted, adopted or executed counterpart.


                                       50


                                    EXHIBIT A
                                   DEFINITIONS

ACCOUNT                     shall mean each separate account maintained for a
                            Participant under the Plan collectively or singly as
                            the context requires. Each Account shall be credited
                            with a Participant's contributions, and shall be
                            charged for the purchase of Shares. A Participant
                            shall be fully vested in the cash contributions to
                            that person's Account at all times. The Plan
                            Administrator may create special types of Accounts
                            for administrative reasons, even though the Accounts
                            are not expressly authorized by the Plan.

BENEFICIARY                 shall mean a person or entity entitled under Section
                            VII of the Plan to receive Shares purchased by, and
                            any remaining balance in, a Participant's Account on
                            the Participant's death.

BOARD OF DIRECTORS          shall mean the Board of Directors of the Company.

CODE                        shall mean the Internal Revenue Code of 1986, as
                            amended, or the corresponding provisions of any
                            future tax code.

COMMITTEE                   shall mean the Committee appointed by the Board of
                            Directors in accordance with Section IX of the Plan.

COMPENSATION                shall mean the total cash compensation (except as
                            otherwise set forth below), before tax withholding,
                            paid to an Employee in the period in question for
                            services rendered to the Employer by the Employee.
                            Compensation shall include the earnings waived by an
                            Employee pursuant to a salary reduction arrangement
                            under any cash or deferred or cafeteria plan that is
                            maintained by the Employer and that is intended to
                            be qualified under Section 401(k) or 125 of the
                            Code. An Employee's Compensation shall not include
                            severance pay, hiring or relocation bonuses, or pay
                            in lieu of vacations or sick leave.

COMMON STOCK                shall mean the common stock of the Company.

COMPANY                     shall mean RadiSys Corporation, an Oregon
                            Corporation.

CUSTODIAN                   shall mean the investment or financial firm
                            appointed by the Plan Administrator to hold all
                            Shares pursuant to the Plan.

CUSTODIAL ACCOUNT           shall mean the account maintained by the Custodian
                            for a Participant under the Plan.

DISABILITY                  shall refer to a mental or physical impairment which
                            is expected to result in death or which has lasted
                            or is expected to last for a continuous period of
                            twelve (12) months or more and which causes the
                            Employee to be unable, in the opinion of the Company
                            and two independent physicians, to perform his or
                            her duties as an Employee of the Company. Disability
                            shall be deemed to have occurred on the first day
                            after the Company and two independent physicians
                            have furnished their opinion of Disability to the
                            Plan Administrator.

EMPLOYEE                    shall mean an individual who renders services to the
                            Employer pursuant to an employment relationship with
                            such Employer. A person rendering services to an
                            Employer purportedly as an independent consultant or
                            contractor shall not be an Employee for purposes of
                            the Plan.

EMPLOYER                    shall mean, collectively, the Company and its
                            Subsidiaries or any successor entity that continues
                            the Plan. All Employees of entities which constitute
                            the Employer shall be treated as employed by a
                            single company for all purposes of the Plan.


                                       51


EMPLOYMENT                  shall mean the period during which an individual is
                            an Employee. Employment shall commence on the day
                            the individual first performs services for the
                            Employer as an Employee and shall terminate on the
                            day such services cease, except as determined under
                            Section XI.

ENROLLMENT DATE             shall mean the first day of each Offering.

ESPP NEW ACCOUNT FORM       shall mean the form provided by the Company on which
                            a Participant shall elect to open an Account with
                            the Custodian and authorize delivery to the
                            Custodian of all Shares issued for the Participant's
                            Account.

OFFERING                    until August 15, 2000 shall mean any one of the
                            separate overlapping eighteen (18) month periods
                            commencing on February 15 and August 15 of each
                            calendar year under the Plan other than calendar
                            year 1999; in calendar year 1999, the first Offering
                            shall be a period commencing on June 12, 1999 and
                            ending on August 15, 2000, and the second Offering
                            shall be the eighteen (18) month period commencing
                            on August 15, 1999. Beginning with the Offering that
                            commences on August 15, 2000, Offering shall mean
                            any one of the separate overlapping eighteen (18)
                            month periods commencing on February 15, May 15,
                            August 15 and November 15 of each calendar year
                            under the Plan.

PARTICIPANT                 shall mean any Employee who is participating in any
                            Offering under the Plan pursuant to Section III.

PAYROLL DEDUCTION           shall mean the form  provided  by the Company on
AUTHORIZATION FORM          which a Participant shall elect to participate in
                            the Plan and the Offering under the Plan and
                            designate the percentage of that individual's
                            Compensation to be contributed to that individual's
                            Account through payroll deductions.

PLAN                        shall mean this document.

PLAN ADMINISTRATOR          shall mean the Board of Directors or the Committee,
                            whichever shall be administering the Plan from time
                            to time in the discretion of the Board of Directors,
                            as described in Section IX.

PURCHASE DATE               until August 15, 2000 shall mean the last day of the
                            sixth, twelfth and eighteenth one-month periods of
                            the Offering, except for the Offering beginning on
                            June 12, 1999, in which Offering the Purchase Dates
                            shall be August 14, 1999, February 14, 2000 and
                            August 14, 2000. Beginning on August 15, 2000, for
                            all then pending Offerings and any Offerings
                            commenced on or after that date, Purchase Date shall
                            mean the last day of the third, sixth, ninth,
                            twelfth, fifteenth and eighteenth one-month periods
                            of each Offering. Accordingly, since after August
                            15, 2000 the Enrollment Dates occur on February 15,
                            May 15, August 15 and November 15 of each year,
                            Purchase Dates shall occur on February 14, May 14,
                            August 14 and November 14 of each year beginning
                            with November 14, 2000.

RETIREMENT                  shall mean a Participant's termination of Employment
                            on or after attaining the age of 65 or after the
                            Plan Administrator has determined that the
                            individual has suffered a Disability.

SHARE                       shall mean one share of Common Stock.

SUBSIDIARIES                shall mean any corporation in which at least eighty
                            percent (80%) or more of the total combined voting
                            power of all classes of stock are owned directly or
                            indirectly by RadiSys Corporation.


                                       52


VALUATION DATE              shall mean the date upon which the fair market value
                            of Shares is to be determined for purposes of
                            setting the price of Shares under Section VI (that
                            is, the Enrollment Date or the applicable Purchase
                            Date). If the Enrollment Date or the Purchase Date
                            is not a date on which the fair market value may be
                            determined in accordance with Section VI, the
                            Valuation Date shall be the first day prior to the
                            Enrollment Date or the Purchase Date, as applicable,
                            for which such fair market value may be determined.

VESTED                      shall mean non-forfeitable.

Initial Adoption:           December 5, 1995
Last Amended:               May 13, 2003 (shareholders approved increase in
                            shares in Article VIII to 2,750,000)

                            May 15, 2001 (shareholders approved increase in
                            shares in Article VIII to 1,750,000)

                            June 6, 2000 (board approved revisions to Articles
                            III, IV, and V and to the definitions of Employee,
                            Offering and Purchase Date in Exhibit A)

                            May 16, 2000 (shareholders approved increase in
                            shares in Article VIII to 1,250,000)


                                       53

EX-31.1

                                                                    Exhibit 31.1

                                 CERTIFICATIONS

I, Scott C. Grout, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of RadiSys Corporation;

2. Based on my knowledge, this 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 report;

3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

      a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;

      b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and

      c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):

      a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and

      b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.

Date: August 12, 2003


/s/ SCOTT C. GROUT

Scott C. Grout
Chief Executive Officer and President


                                       39

EX-31.2

                                                                    Exhibit 31.2

                                 CERTIFICATIONS

I, Julia A. Harper, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of RadiSys Corporation;

2. Based on my knowledge, this 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 report;

3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

      a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;

      b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and

      c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):

      a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and

      b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.

Date: August 12, 2003


/s/ JULIA A. HARPER

Julia A. Harper
Chief Financial Officer


                                       40

EX-32.1

                                                                    Exhibit 32.1


                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of RadiSys Corporation (the "Company")
on Form 10-Q for the fiscal quarter ended June 30, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Scott
C. Grout, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C.
ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002,
that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.


/s/ SCOTT C. GROUT

Scott C. Grout
Chief Executive Officer
August 12, 2003


                                       41

EX-32.2

                                                                    Exhibit 32.2

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of RadiSys Corporation (the "Company")
on Form 10-Q for the fiscal quarter ended June 30, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Julia
A. Harper, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.


/s/ JULIA A. HARPER

Julia A. Harper
Chief Financial Officer
August 12, 2003


                                       42