UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

[ü] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

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

Commission file number 0-26844

RADISYS CORPORATION

5445 N.E. Dawson Creek Drive
Hillsboro, OR 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 the filing requirements for the past 90 days. Yes [ü] No [ ]

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

Number of shares of Common Stock outstanding as of August 2, 2004: 18,943,364

RADISYS CORPORATION
FORM 10-Q

TABLE OF CONTENTS

1

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

RADISYS CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts, unaudited)

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

2

RADISYS CORPORATION

CONSOLIDATED BALANCE SHEETS
(In thousands, unaudited)

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

3

RADISYS CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands, unaudited)

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

4

RADISYS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)

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

5

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, 2003 in preparing the accompanying interim 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 three and six month periods ended June 30, 2004, there have been no changes to these accounting policies.

   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 No. 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 year ended December 31, 2003, the Company recorded restructuring charges in accordance with the provisions of SFAS No. 146.

     Prior to the year ended December 31, 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.

   Warranty

     The Company provides for the estimated cost of product warranties at the time it recognizes revenue. Products are generally sold with warranty coverage for a period of 24 months after shipment. Parts and labor are covered under the terms of the warranty agreement. The warranty provision is based on historical experience by product family. The Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its components suppliers; however, ongoing failure rates, material usage and service delivery costs incurred in correcting product failure, as well as specific product class failures out of the Company’s baseline experience affect the estimated warranty obligation. If actual product failure rates, material usage or service delivery costs differ from estimates, revisions to the estimated warranty liability would be required.

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     The following is a summary of the change in the Company’s warranty liability for the six months ended June 30, 2004 and 2003 (in thousands):

     The warranty liability balance is included in other accrued liabilities in the accompanying Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003. The Company offers fixed price support or maintenance contracts to its customers. Revenues from fixed price support or maintenance contracts were not significant to the Company’s operations for the periods reported.

   Stock-based Compensation

     The Company accounts for its stock-based compensation plans using the intrinsic value method and provides pro forma disclosures of net income (loss) and net income (loss) per common share as if the fair value method had been applied in measuring compensation expense. Equity instruments are granted to employees, directors, and consultants in certain instances, as defined in the respective plan agreements.

     Had RadiSys accounted for these plans under the fair value method, the Company’s net income (loss) and pro forma net income (loss) per share would have been reported as follows (in thousands, except per share amounts):

     During the three and six month periods ended June 30, 2004, the Company incurred $356 thousand and $533 thousand of stock-based compensation expense, respectively. The stock-based compensation expense was associated with shares issued and to be issued pursuant to the Company’s 1996 Employee Stock Purchase Plan (“ESPP”). The Company incurred stock-based compensation expense because the original number of ESPP shares approved by the shareholders will be insufficient to meet employee demand for an ESPP offering which was consummated in February 2003 and ends in August 2004. The Company subsequently received shareholder approval for additional ESPP shares in May 2003. The shares issued and to be issued in the February 2003 ESPP offering in excess of the original number of ESPP shares approved at the beginning of the offering (the “shortfall”) triggers recognition of stock-based compensation expense under the intrinsic value method. The shortfall amounted to 138 thousand shares in May 2004 and the Company currently estimates the shortfall to amount to 152 thousand shares to be issued in August 2004.

7

     The expense per share is calculated as the difference between 85% of the closing price of RadiSys shares as quoted on NASDAQ on the date that additional ESPP shares were approved (May 2003) and the February 2003 ESPP offering purchase price. Accordingly, the expense per share is calculated as the difference between $8.42 and $5.48. The shortfall of shares is dependent on the amount of contributions from participants enrolled in the February 2003 ESPP offering.

     The Company recognized stock-based compensation expense as follows (in thousands):

     For the three months ended September 30, 2004 and the three months ended December 31, 2004, the Company estimates stock-based compensation expense recognized under the intrinsic value method to amount to approximately $275 thousand and $50 thousand, respectively. Approximately $114 thousand, $90 thousand, and $71 thousand of the stock-based compensation expense currently expected to be incurred in the third quarter of 2004 is associated with cost of sales, research and development, and selling, general and administrative expenses, respectively. Approximately $50 thousand of stock-based compensation currently expected to be incurred in the fourth quarter of 2004 is associated with cost of sales. After the fourth quarter of 2004, the Company currently does not anticipate incurring stock-based compensation expense associated with the Company’s ESPP.

     Recent Accounting Pronouncements

     In March 2004, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue 03-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments.” EITF No. 03-01 requires disclosures on investments in an unrealized loss position. The disclosures are designed to help financial statement users analyze a company’s unrealized losses on its investments and to enable them to better understand the basis for any management conclusion that the impairment is temporary. Quantitative and qualitative disclosures for investments accounted for under FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” are effective for the first annual reporting period ending after December 15, 2003. All new disclosures related to cost method investments are effective for the annual reporting periods ending after June 15, 2004. Comparative information for the periods prior to the period of initial application is not required. The Company does not believe that EITF 03-1 will have a material impact on its financial position, results of operations or cash flows.

8

     In June 2004, the EITF issued a draft of EITF No. 04-08, “Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effect on Diluted Earnings per Share.” EITF No 04-08 proposes that companies should not exclude shares underlying a convertible bond through the use of a contingent conversion or “CoCo” feature. If ratified by Financial Accounting Standards Board (“FASB”), the proposal would be applied retroactively, which would require companies to restate diluted earnings per share by applying the “If-Converted” method of accounting from the issuance date of the convertible bond. The following table depicts the effect of the EITF as currently drafted, if the EITF is ratified by the FASB (in thousands, except per share amounts).

Note 2 — Held-to-maturity Investments

     Held-to-maturity investments consisted of the following (in thousands):

     The Company invests excess cash in debt instruments of the U.S. Government and its agencies and those of high-quality corporate issuers. As of June 30, 2004, the Company’s long-term held-to-maturity investments had maturities ranging from 15.7 months to 35.6 months. The Company’s investment policy requires that the total investment portfolio, including cash and investments, 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 portfolio exceeding 24 months. As of June 30, 2004, the Company was in compliance with its investment policy.

Note 3 — Accounts Receivable and Other Receivables

     Accounts receivable consists of