<PAGE>
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-K

                        FOR ANNUAL AND TRANSITION REPORTS
                     PURSUANT TO SECTIONS 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

(Mark One)

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

FOR THE FISCAL YEAR ENDED OCTOBER 31, 2002

                                       OR

|_|  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. 0-8419


                                    SBE, INC.
             (Exact name of Registrant as specified in its charter)

          Delaware                                           94-1517641
(State or other jurisdiction of                    (IRS Employer Identification
 incorporation or organization)                               Number)

            2305 Camino Ramon, Suite 200, San Ramon, California 94583
              (Address of principal executive offices and Zip Code)

                                 (925) 355-2000
              (Registrant's Telephone Number, including Area Code)

           Securities registered pursuant to Section 12(b) of the Act:

                                      None

           Securities registered pursuant to Section 12(g) of the Act:

                                  Common Stock
                                (Title of Class)

     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 such shorter  period that the registrant
was  required  to file such  reports),  and (2) has been  subject to such filing
requirements for the past 90 days. Yes |X| No |_|

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained,  to the
best  of  the  registrant's   knowledge,  in  definitive  proxy  or  information

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statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. |X|

     Indicate by check mark whether the registrant is an  accelerated  filer (as
defined in Exchange Act Rule 12b-2). Yes |_| No |X|

     The  approximate  aggregate  market  value  of  the  Common  Stock  of  the
registrant held by non-affiliates of the registrant,  based on the closing price
for the registrant's Common Stock on December 31, 2002 as reported on the Nasdaq
SmallCap Market,  was $2,306,399.  Shares of Common Stock held by each executive
officer, director and stockholder whose ownership exceeds five percent of Common
Stock  outstanding  have been excluded  because such persons may be deemed to be
affiliates  of the  registrant.  This  determination  of  affiliate  status  for
purposes  of  the  foregoing   calculation  is  not   necessarily  a  conclusive
determination of affiliate status for other purposes.

         The number of shares of the Registrant's Common Stock outstanding as of
December 31, 2002 was 4,142,692.

                       Documents incorporated by reference

     Portions  of  the   registrant's   definitive   proxy   statement  for  the
registrant's Annual Meeting of Stockholders,  scheduled for March 18, 2003, have
been incorporated by reference into Part III of this Annual Report on Form 10-K.


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                                    SBE, INC.

                                    FORM 10-K

                                TABLE OF CONTENTS


PART I

       Item 1         Business                                               4
       Item 2         Properties                                            15
       Item 3         Legal Proceedings                                     15
       Item 4         Submission of Matters to a Vote of Security Holders   15



PART II

       Item 5         Market for Registrant's Common Equity
                           and Related Stockholder Matters                  16
       Item 6         Selected Financial Data                               17
       Item 7         Management's Discussion and Analysis of
                           Financial Condition and Results of Operations    17
       Item 7A        Quantitative and Qualitative Disclosures about Market
                      Risk                                                  26
       Item 8         Financial Statements and Supplementary Data           26
       Item 9         Changes in and Disagreements with Accountants
                           on Accounting and Financial Disclosure           26

PART III

       Item 10        Directors and Executive Officers of the Registrant    27
       Item 11        Executive Compensation                                28
       Item 12        Security Ownership of Certain Beneficial Owners
                           and Management                                   28
       Item 13        Certain Relationships and Related Transactions        28
       Item 14        Controls and Procedures                               28

       Item 15        Exhibits, Financial Statement Schedules
                      and Reports on Form 8-K                               29
SIGNATURES                                                                  32

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                   SPECIAL NOTE ON FORWARD LOOKING STATEMENTS

     CERTAIN STATEMENTS SET FORTH IN OR INCORPORATED BY REFERENCE IN THIS ANNUAL
REPORT ON FORM 10-K CONSTITUTE  "FORWARD-LOOKING  STATEMENTS" WITHIN THE MEANING
OF SECTION 27A OF THE  SECURITIES  ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE  ACT  OF  1934.  THESE  STATEMENTS  INCLUDE,  WITHOUT  LIMITATION,  OUR
EXPECTATIONS  REGARDING  OUR SALES TO THE  HEWLETT-PACKARD  COMPANY  (PREVIOUSLY
COMPAQ  COMPUTER),  THE BELIEF  THAT THE MARKET  FOR  CLIENT  SERVER  NETWORKING
PRODUCTS  IS  GROWING,  THE  ADEQUACY OF  ANTICIPATED  SOURCES OF CASH,  PLANNED
CAPITAL  EXPENDITURES,  THE EFFECT OF  INTEREST  RATE  INCREASES,  AND TRENDS OR
EXPECTATIONS  REGARDING OUR OPERATIONS.  IN ADDITION,  WORDS SUCH AS "BELIEVES,"
"ANTICIPATES,"  "EXPECTS,"  "INTENDS,"  "ESTIMATES" AND SIMILAR  EXPRESSIONS ARE
INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS, BUT ARE NOT THE EXCLUSIVE MEANS
OF IDENTIFYING SUCH STATEMENTS. SUCH STATEMENTS ARE BASED ON CURRENTLY AVAILABLE
OPERATING,  FINANCIAL  AND  COMPETITIVE  INFORMATION  AND ARE SUBJECT TO VARIOUS
RISKS  AND  UNCERTAINTIES.   READERS  ARE  CAUTIONED  THAT  THE  FORWARD-LOOKING
STATEMENTS  REFLECT  MANAGEMENT'S  ESTIMATES ONLY AS OF THE DATE HEREOF,  AND WE
ASSUME NO OBLIGATION TO UPDATE THESE STATEMENTS.  ACTUAL FUTURE RESULTS,  EVENTS
AND TRENDS  MAY DIFFER  MATERIALLY  FROM THOSE  EXPRESSED  IN OR IMPLIED BY SUCH
STATEMENTS  DEPENDING  ON A VARIETY OF  FACTORS,  INCLUDING,  BUT NOT LIMITED TO
THOSE  SET  FORTH  UNDER  "ITEM  1 -  BUSINESS  -- RISK  FACTORS"  ON PAGE 6 AND
ELSEWHERE IN THIS FORM 10-K.

                                     PART I

ITEM 1.       BUSINESS

OVERVIEW

SBE, Inc. designs, markets, sells and supports network communications controller
solutions  for  original  equipment   manufacturers  in  the  global  networking
marketplace.  Our solutions enable both datacom and telecom companies to rapidly
deliver  advanced   networking   products  and  services  in  order  to  compete
effectively in today's  fast-evolving public switched telephone network ("PSTN")
and  Internet  environment.  Our products are  distributed  worldwide  through a
direct sales force, distributors, independent manufacturers' representatives and
value-added resellers. We were incorporated in 1961 as Linear Systems, Inc.

We  currently  market,  sell and  support  four lines of  high-speed  networking
products:  HighWire(TM)  , WAN Adapters,  LAN Adapters and VMEbus.  All of these
products are sold primarily to original equipment manufacturers ("OEMs").  These
products are often customized for a specific  customer's  application,  and they
support  applications in a broad spectrum of industrial and commercial  markets.
Markets  and  application  areas  that our  products  serve  include  enterprise
servers,  data storage,  process control,  medical imaging,  CAE/automated  test
equipment, government/military defense systems and telecommunications networks.

The  HighWire  and  VME  products  are   "intelligent,"   containing  their  own
microprocessors   and  memory.   This  architecture  allows  our  communications
controllers to offload many of the lower-level  communications  tasks that would
typically  be  performed  by  the  host  platform,   improving   overall  system
performance.  The Adapters are open standards  interface model layer one adapter
cards  that do not have a  microprocessor  onboard  ("state  machine  products")
designed to be low cost and high performance  connectivity products that provide
developers  of data  communications  equipment an easy,  cost  effective  way to
integrate wide area networks ("WAN") and local area networks ("LAN")  interfaces
for their  systems.  All four  product  lines are  supported  by  communications
software developed by us and a variety of third party partners.

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In the  telecommunications  market, our HighWire products provide high bandwidth
intelligent  connectivity  to servers  designed to act as gateways and signaling
points  within   communication   networks  and  network  devices.  The  HighWire
co-processing  controllers enable operators of wireline and wireless networks to
deliver  Intelligent  Network ("IN") and Advanced  Intelligent  Network  ("AIN")
services such as Caller ID, voice  messaging,  personal number calling,  Service
Provider Local Number Portability and customized routing and billing, as well as
digital wireless  services such as Personal  Communications  Systems ("PCS") and
Global System for Mobile  Telecommunications  ("GSM"). The HighWire products are
designed  for  integration  with  standard  server  platforms  that will  enable
traditional  carriers  and new  telecom  entrants  to  pursue  cost-reduced  and
performance-enhanced  network  architectures  based on Internet Protocol ("IP"),
broadband or other "packet" technologies.

With the addition of the  embedded  Linux  operating  system  software,  several
HighWire  products  can now be used in  combination  with either our WAN and LAN
peripheral  control  interface  ("PCI") mezzanine card ("PMC") products or other
third party PMC form factor products to provide core computing and  connectivity
solutions to the  communications,  military/government,  medical and  industrial
control  markets.  Our  HighWire  product  has been  uniquely  positioned  as an
intelligent  real time  controller  in a ground  based  mobile  unit used by the
military.  Utilizing our HighWire  products in conjunction  with other available
PMC modules such as A-to-D  converters or video capture PMC modules gives us new
opportunities to market our products into the  factory/process  control or video
surveillance applications markets.

Our WAN  Adapter  products  are focused on the need for WAN  interfaces  in data
communications products residing between the middle and the edge of the internet
used in routers,  firewalls,  virtual  private network ("VPN") servers and Voice
over  Internet  Protocol  ("VoIP")  gateways.  Due to  increasing  IT  demand in
conjunction  with network  security used for  enterprise  networks an enterprise
network is the network  covering the entire  entity's  private  branch  exchange
("PBX'),  LAN, WAN and  internetworking  bridges),  this is our fastest  growing
product  family.  We offer a broad  range of  interfaces  including  synchronous
serial, T1/E1, HSSI and T3 in both PCI and PMC industry standard form factors.

Our newly released LAN Adapter  products are focused on LAN  connectivity  using
high speed Ethernet  technology.  We have one, two and four port LAN adapter PMC
modules  that  feature  connectivity  to 10  Mb/second,  100  Mb/second  or 1000
Mb/second.  Ethernet  LAN  connectivity  is required by  virtually  every market
segment in the OEM spectrum.  We expect to sell our LAN Adapter  products to our
existing WAN Adapter  prospects and customers,  as well as to new customers that
have not historically required WAN connectivity.

Our VMEbus products are designed for high  reliability  industrial  applications
and are used in many  wireline,  wireless  and  satellite  based  communications
networks.  Our VME products are intelligent  communications  controller products
used to  provide  connectivity  between  a  system  such as a  mini-computer  or
bridge/router  and a  local  or  wide  area  network.  Communication  controller
products enable computers to exchange data in much the same way as the telephone
system allows people to converse with one another. As computers have become more
pervasive  in all  areas  of  society,  computer  users  are  demanding  greater
productivity,  efficiency and lower costs in their computer  systems,  which has
led to the sharing of databases,  software  applications and computer peripheral
equipment.  Communications  controllers  have  become  a  central  component  to

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connecting networks and computers to deliver information more efficiently.

Our VMEbus communications products target all four major protocol communications
technologies for each of the bus architectures: Fiber Distributed Data Interface
("FDDI"), Token Ring, Ethernet and high-speed serial communications.  The latter
is a growing wide-area  networking  technology that enables computers to talk to
one another using telephone lines.  FDDI, Token Ring and Ethernet are local area
networking  technologies  that  offer a wide  range  of  speed  and  reliability
options.

RISK FACTORS

     In addition to the other  information  in this Annual  Report on Form 10-K,
stockholders or prospective  investors should  carefully  consider the following
risk factors:

                          RISKS RELATED TO OUR BUSINESS

     WE HAVE INCURRED OPERATING LOSSES AND MAY NOT BE PROFITABLE IN THE FUTURE.

The  consolidated financial statements contemplate the realization of assets and
the  satisfaction  of  liabilities in the normal course of business. We incurred
net losses of $1.7 million and $9.9 million for the years ended October 31, 2002
and  2001,  respectively,  and  generated negative cash flows from operations of
$2.7  million and $1.5 million in these years. These factors raise a substantial
doubt  about  our ability to continue as a going concern. Our plans with respect
to  this  matter  included  the  restructuring executed in the fourth quarter of
fiscal  2002,  which reduced headcount from 47 employees to 24 employees and has
reduced  our  cost structure entering fiscal 2003. We believe the cost reduction
and  a  projected  increase in sales during fiscal 2003 will generate sufficient
cash  flows  to  fund  our  operations  through October 31, 2003. However, these
projected  sales  are  to a limited number of new and existing OEM customers and
are based on internal and customer provided estimates of future demand, not firm
customer  orders.  If  the  projected  sales do not materialize, we will need to
reduce  expenses  further  and  raise  additional  capital  through  customer
prepayments  or  the  issuance of debt or equity securities. If additional funds
are  raised  through  the  issuance of preferred stock or debt, these securities
could  have  rights,  privileges or preferences senior to those of Common Stock,
and  debt  covenants  could  impose  restrictions on our operations. The sale of
equity  or debt could result in additional dilution to current stockholders, and
such  financing  may  not be available to us on acceptable terms, if at all. The
consolidated financial statements do not include any adjustments relating to the
recoverability  and  classification  of  recorded  assets  or  the  amount  or
classification  of  liabilities or any other adjustments that might be necessary
should  we  be  unable  to  continue  as  a  going  concern.

     WE  DEPEND  UPON A SMALL  NUMBER OF OEM  CUSTOMERS,  AND THE LOSS OF ANY OF
THEM,  OR THEIR  FAILURE  TO SELL THEIR  PRODUCTS,  WOULD  LIMIT OUR  ABILITY TO
GENERATE REVENUES.

In fiscal  2002,  most of our sales were  derived  from a limited  number of OEM
customers.  In  fiscal  2002,  2001  and  2000,  sales  of VME  products  to The
Hewlett-Packard  Company  (previously Compaq Computer) ("HP") accounted for 30%,
34% and 66%, respectively, of our net sales. A substantial portion of such sales
were  attributable  to sales of VME  products  pursuant  to a  long-term  supply
agreement  with HP. On October 31, 2002, HP placed an end of life purchase order

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for shipment of these VME  products  over the first two quarters of fiscal 2003;
however,  we still expect sales to HP will  constitute a substantial  portion of
our net sales in fiscal  2003,  both as a result of the end of life VME  product
orders and projected sales of WAN Adapter products to HP. We do not expect sales
of VME products to HP to be a substantial  portion of our revenues  after fiscal
2003.

Orders  by our OEM  customers  are  affected  by  factors  such  as new  product
introductions,  product life cycles,  inventory levels,  manufacturing strategy,
contract awards,  competitive  conditions and general economic  conditions.  Our
sales to any single OEM  customer are also  subject to  significant  variability
from quarter to quarter. Such fluctuations may have a material adverse effect on
our operating  results.  A  significant  reduction in orders from any of our OEM
customers,  particularly HP, Nortel and Lockheed  Martin,  would have a material
adverse effect on our operating results,  financial condition and cash flows. In
addition,  we anticipate a significant portion of future sales will be dependent
on a few new OEM customers,  and there can be no assurance that we will become a
qualified  supplier  with new OEM  customers  or that we will remain a qualified
supplier with existing OEM customers.

IF WE FAIL TO DEVELOP AND PRODUCE NEW HIGHWIRE AND ADAPTER PRODUCTS, WE MAY LOSE
SALES AND OUR REPUTATION MAY BE HARMED.

Since late 1998,  we have  focused a  significant  portion of our  research  and
development,  marketing and sales efforts on HighWire and Adapter products.  The
success of these  products is dependent  on several  factors,  including  timely
completion  of new product  designs,  achievement  of  acceptable  manufacturing
quality and yields,  introduction of competitive products by other companies and
market acceptance of our products. If the HighWire and Adapter products or other
new  products  developed  by us do not gain  market  acceptance,  our  business,
operating  results,  financial  condition  and cash  flows  would be  materially
adversely affected.

     THE  COMMUNICATIONS  PRODUCTS  MARKET  IS  INTENSELY  COMPETITIVE,  AND OUR
FAILURE TO COMPETE EFFECTIVELY COULD REDUCE OUR REVENUES AND MARGINS.

We compete directly with traditional vendors of terminal servers, modems, remote
control  software,   terminal   emulation   software  and   application-specific
communications  solutions.  We also  compete with  suppliers  of routers,  hubs,
network interface cards and other data communications  products.  In the future,
we expect  competition from companies  offering  client/server  access solutions
based on emerging  technologies such as switched digital telephone services.  In
addition,  we may encounter  increased  competition  from  operating  system and
network  operating  system  vendors  to the extent  such  vendors  include  full
communications  capabilities  in their  products.  We may also encounter  future
competition from telephony  service providers (such as AT&T or the regional Bell
operating  companies)  that may  offer  communications  services  through  their
telephone networks.

Increased  competition with respect to any of our products could result in price
reductions and loss of market share,  which would adversely affect our business,
operating results,  financial  condition and cash flows. Many of our current and
potential  competitors have greater  financial,  marketing,  technical and other
resources  than we do. There can be no assurance that we will be able to compete
successfully  with  our  existing   competitors  or  will  be  able  to  compete
successfully with new competitors.

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OUR OPERATING  RESULTS IN FUTURE  PERIODS ARE LIKELY TO FLUCTUATE  SIGNIFICANTLY
AND MAY FAIL TO MEET THE  EXPECTATIONS  OF  SECURITIES  ANALYSTS  OR  INVESTORS,
CAUSING OUR STOCK PRICE TO FALL.

Our quarterly  operating  results have fluctuated  significantly in the past and
are likely to fluctuate significantly in the future due to several factors, some
of which are outside our control,  including  timing of significant  orders from
OEM  customers,  fluctuating  market  demand  for,  and  declines in the average
selling prices of, our products, delays in the introduction of our new products,
competitive  product  introductions,  the mix of products  sold,  changes in our
distribution  network,  the  failure to  anticipate  changing  customer  product
requirements,  the cost and  availability  of  components  and general  economic
conditions.  We generally do not operate with a significant order backlog, and a
substantial  portion of our revenue in any quarter is derived from orders booked
in that quarter.  Accordingly,  our sales expectations are based almost entirely
on our internal estimates of future demand and not on firm customer orders.

Due to the adverse economic conditions in the  telecommunications  industry, our
OEM  telecommunications  customers may hold excess inventory of our products.  A
result of the economic  downturn is that certain of our customers have cancelled
or delayed  many of their new desiIgn  projects  and new product  rollouts  that
included our products.  Due to the current economic  uncertainty,  our customers
now typically  require a  "just-in-time"  ordering and delivery cycle where they
will  place a  purchase  order  with us after  they  receive an order from their
customer. This "just-in-time" inventory purchase cycle by our customers has made
forecasting of our future sales volumes very difficult.

Based on the foregoing,  we believe that quarterly  operating results are likely
to vary significantly in the future and that period-to-period comparisons of our
results of operations  are not  necessarily  meaningful and should not be relied
upon as indications of future  performance.  Further,  it is likely that in some
future quarter our revenue or operating  results will be below the  expectations
of public market analysts and investors.  In such event, the price of our common
stock is likely to fall.

IF WE  ARE  UNABLE  TO  KEEP  UP  WITH  THE  RAPID  TECHNOLOGICAL  CHANGES  THAT
CHARACTERIZE OUR INDUSTRY, OUR BUSINESS WOULD SUFFER.

The markets for our products are characterized by rapidly changing technologies,
evolving industry standards and frequent new product  introductions.  Our future
success  will  depend on our  ability to enhance our  existing  products  and to
introduce  new  products  and  features to meet and adapt to  changing  customer
requirements  and  emerging  technologies  such as Frame  Relay,  DSL  ("Digital
Subscriber Line"), ATM ("Asynchronous Transfer Mode"),VoIP ("Voice over Internet
Protocol") and 3G Wireless ("Third Generation Wireless Services").  There can be
no  assurance   that  we  will  be   successful  in   identifying,   developing,
manufacturing and marketing new products or enhancing our existing products.  In
addition,  there can be no assurance  that  services,  products or  technologies
developed by others will not render our products noncompetitive or obsolete.

WE DEPEND ON OUR KEY PERSONNEL. IF WE ARE UNABLE TO RETAIN OUR CURRENT PERSONNEL
AND HIRE ADDITIONAL QUALIFIED PERSONNEL AS NEEDED, OUR BUSINESS WOULD BE HARMED.

We are highly dependent on the technical, management, marketing and sales skills
of a limited number of key employees. We do not have employment agreements with,
or life  insurance  on the lives of, any of our key  employees.  The loss of the


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services of any key employees could adversely  affect our business and operating
results.  Our future  success  will depend on our ability to continue to attract
and  retain  highly  talented  personnel  to  the  extent  our  business  grows.
Competition for qualified personnel in the networking  industry,  and in the San
Francisco  Bay  Area,  is  intense.  There can be no  assurance  that we will be
successful  in  retaining  our key  employees  or that we can  attract or retain
additional skilled personnel as required.

BECAUSE OF OUR  DEPENDENCE ON SINGLE  SUPPLIERS FOR SOME  COMPONENTS,  WE MAY BE
UNABLE TO OBTAIN AN ADEQUATE SUPPLY OF SUCH COMPONENTS, OR WE MAY BE REQUIRED TO
PAY HIGHER PRICES OR TO PURCHASE COMPONENTS OF LESSER QUALITY.

The  chipsets  used in most of our products are  currently  available  only from
Motorola.  In addition,  certain other  components are currently  available only
from single  suppliers.  The inability to obtain  sufficient  key  components as
required,  or to develop  alternative  sources if and as required in the future,
could result in delays or  reductions  in product  shipments or margins that, in
turn, would have a material adverse effect on our business,  operating  results,
financial condition and cash flows.

OUR FUTURE CAPITAL NEEDS MAY EXCEED OUR ABILITY TO RAISE CAPITAL.

The  development  and marketing of our products is  capital-intensive.  While we
believe  that our existing  cash  balances  and our  anticipated  cash flow from
operations will satisfy our working capital needs for the next twelve months, we
cannot  assure  that this will be the case.  Further  declines in our sales or a
failure  to keep  expenses  in  line  with  revenues  could  require  us to seek
additional  financing  in fiscal  2003.  In  addition,  should we  experience  a
significant  growth in customer  orders,  we may be required to seek  additional
capital  to meet our  working  capital  needs.  There can be no  assurance  that
additional financing,  if required,  will be available on reasonable terms or at
all.  To the  extent  that  additional  capital  is raised  through  the sale of
additional  equity  or  convertible  debt  securities,   the  issuance  of  such
securities could result in additional dilution to our stockholders.

WE MAY BE UNABLE TO PROTECT OUR  INTELLECTUAL  PROPERTY,  WHICH COULD REDUCE ANY
COMPETITIVE ADVANTAGE WE HAVE.

Although we believe that our future success will depend  primarily on continuing
innovation,  sales,  marketing and technical  expertise,  the quality of product
support and customer relations,  we must also protect the proprietary technology
contained in our products.  We do not  currently  hold any patents and rely on a
combination  of  copyright,   trademark,   trade  secret  laws  and  contractual
provisions to establish and protect  proprietary  rights in our products.  There
can be no  assurance  that steps  taken by us in this regard will be adequate to
deter misappropriation or independent third-party development of our technology.
Although we believe  that our  products  and  technology  do not infringe on the
proprietary rights of others,  there can be no assurance that third parties will
not assert infringement claims against us.



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               RISKS ASSOCIATED WITH OWNERSHIP OF OUR COMMON STOCK

     OUR COMMON STOCK IS AT RISK FOR DELISTING FROM THE NASDAQ SMALLCAP  MARKET.
IF IT IS DELISTED, OUR STOCK PRICE AND YOUR LIQUIDITY MAY BE IMPACTED.

Our common stock is currently listed on the Nasdaq SmallCap  Market.  Nasdaq has
requirements  that a company  must meet in order to remain  listed on the Nasdaq
SmallCap Market.  These requirements  include  maintaining a minimum closing bid
price of $1.00 and minimum stockholders' equity of $2.5 million. The closing bid
price for our common stock has been below $1.00 for short periods of time during
fiscal  2002.  If the closing bid price of our common stock is below $1.00 for a
period of 30  consecutive  trading  days,  our common  stock could be subject to
delisting  from the  Nasdaq  SmallCap  Market.  Our  stockholders'  equity as of
October  31,  2002  was  $3.7  million.  Our  common  stock  is also at risk for
delisting for failure to meet the stockholders' equity requirement.

If we fail to  maintain  the  standards  necessary  to be quoted  on the  Nasdaq
SmallCap  Market and our common stock is  delisted,  trading in our common stock
would be  conducted  on the OTC  Bulletin  Board as long as we  continue to file
reports  required by the  Securities and Exchange  Commission.  The OTC Bulletin
Board is  generally  considered  to be a less  efficient  market than the Nasdaq
SmallCap  Market,  and our stock price,  as well as the  liquidity of our Common
Stock, may be adversely impacted as a result.

THE MARKET PRICE OF OUR COMMON  STOCK IS LIKELY TO CONTINUE TO BE VOLATILE.  YOU
MAY NOT BE ABLE TO  RESELL  YOUR  SHARES  AT OR ABOVE  THE  PRICE  AT WHICH  YOU
PURCHASED SUCH SHARES.

The  trading  price of our  common  stock is  subject  to wide  fluctuations  in
response to quarter-to-quarter fluctuations in operating results, the failure to
meet  analyst  estimates,  announcements  of  technological  innovations  or new
products  by us or our  competitors,  general  conditions  in the  computer  and
communications  industries  and other  events or  factors.  In  addition,  stock
markets have experienced  extreme price and trading volume  volatility in recent
years.  This  volatility  has had a  substantial  effect on the market prices of
securities of many high technology companies for reasons frequently unrelated to
the  operating  performance  of  the  specific  companies.  These  broad  market
fluctuations may adversely affect the market price of our common stock.

OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND THE DELAWARE GENERAL CORPORATION
LAW CONTAIN PROVISIONS THAT COULD DELAY OR PREVENT A CHANGE IN CONTROL.

Our board of directors  has the  authority  to issue up to  2,000,000  shares of
preferred stock and to determine the price,  rights,  preferences and privileges
of those  shares  without any further  vote or action by the  stockholders.  The
rights of the holders of common stock will be subject to, and may be  materially
adversely affected by, the rights of the holders of any preferred stock that may
be issued in the future.  The issuance of preferred  stock could have the effect
of making it more  difficult  for a third  party to  acquire a  majority  of our
outstanding  voting  stock.   Furthermore,   certain  other  provisions  of  our
certificate  of  incorporation  and bylaws may have the  effect of  delaying  or
preventing  changes in control or management,  which could adversely  affect the
market price of our common stock. In addition,  we are subject to the provisions
of Section 203 of the Delaware General Corporation Law, an anti-takeover law.



                                       10
<PAGE>

PRODUCTS

We design,  market,  sell and support innovative  communications  controller and
adapter products for the global communications, military/government, medical and
industrial  control  marketplace.  We offer four  principal  lines of  products:
HighWire, WAN Adapter, LAN Adapter, and VMEbus.

HIGHWIRE  PRODUCTS.  Our  HighWire  products  have  been  focused  on  providing
communications  solutions  to the  telecommunications  market.  With the  recent
addition of embedded Linux operating  system software we are now able to broaden
the reach of our HighWire products to include  military/government,  medical and
industrial control markets.

The  switched  telecommunications  market  is  characterized  as an  Intelligent
Network.  The  Intelligent  Network  ("IN")  utilizes  out of band  signaling to
provide the basis for  virtually  all new  telecommunications  services.  The IN
architecture  uses two separate but parallel  paths;  one to handle the voice or
data traffic and a second to carry the signaling information for call set up and
routing.  The  signaling  channel  utilizes a protocol  referred to as Signaling
System Seven or "SS7." Network operators utilize the IN architecture to increase
the  efficiency of their networks by offloading  signaling  traffic onto the SS7
network,  thus  freeing up trunk line  capacity  needed for  revenue  generating
traffic.

A second generation  Intelligent Network called the Advanced Intelligent Network
("AIN") is used by  carriers  and  service  providers  seeking to  differentiate
themselves by offering advanced voice and data communications  services. The AIN
is a network  architecture  and a set of  standards  designed  to allow  network
operators to create,  deploy and modify these services quickly and economically.
AIN  services  represent  the merging of  telephony  with  database  information
through  SS7  signaling.  Such  services  include  Caller ID,  voice  messaging,
personal  number  calling,   Service  Provider  Local  Number   Portability  and
customized routing and billing, as well as digital wireless services such as PCS
and GSM.

In fiscal 2002, we added the embedded Linux operating system software to several
HighWire  products  expanding  the product  focus beyond the  telecommunications
applications market into the military/government, medical and industrial control
applications  markets. The HighWire products can now be used in combination with
our WAN and LAN PMC  products  or with other  third party PMC product to provide
computing and  connectivity  solutions to the  military/government,  medical and
industrial controller markets.

WAN ADAPTER  PRODUCTS.  Our WAN Adapter products are focused on the need for WAN
interfaces in data  communications  products residing between the middle and the
edge of the internet used in routers, firewalls, virtual private network ("VPN")
servers and Voice over Internet Protocol ("VoIP") gateways. Due to increasing IT
demand in  conjunction  with network  security used for  enterprise  networks an
enterprise network is the network covering the entire entity's PBX, LAN, WAN and
internetworking bridges), this is our fastest growing product family. We offer a
broad range of interfaces  including  synchronous serial,  T1/E1, HSSI and T3 in
both PCI and PMC industry standard form factors.

LAN ADAPTER PRODUCTS. Our newly released LAN Adapter products are focused on LAN
connectivity  using high speed  Ethernet  technology.  We have one, two and four
port LAN adapter PMC modules  that feature  connectivity  to 10  Mb/second,  100




                                       11
<PAGE>

Mb/second or 1000 Mb/second.  Ethernet LAN connectivity is required by virtually
every  market  segment in the OEM  spectrum.  We expect to sell our LAN  Adapter
products to our existing WAN Adapter  prospects  and customers as well as to new
customer opportunities which have not historically required WAN connectivity.

VMEBUS   INTELLIGENT    COMMUNICATIONS    CONTROLLER    PRODUCTS.    Intelligent
communications  controller products are used to provide  connectivity  between a
system  such  as a  mini-computer  or  bridge/router  and a local  or wide  area
network. Communications controller products enable computers to exchange data in
much the same way as the  telephone  system  allows  people to converse with one
another.  As  computers  have  become  more  pervasive  in all areas of society,
computer users are demanding greater productivity, efficiency and lower costs in
their  computer  systems,  which has led to the sharing of  databases,  software
applications and computer peripheral equipment.  Communications controllers have
become a central  component  to  connecting  networks  and  computers to deliver
information more efficiently.

Our VMEbus communications products target all four major protocol communications
technologies for each of the bus architectures: Fiber Distributed Data Interface
("FDDI"), Token Ring, Ethernet and high-speed serial communications.  The latter
is a growing wide-area  networking  technology that enables computers to talk to
one another using telephone lines.  FDDI, Token Ring and Ethernet are local area
networking  technologies  that  offer a wide  range  of  speed  and  reliability
options.

During fiscal 2002,  we expanded our WAN Adapter  products and developed our LAN
Adapter  products and positioned  ourselves to be the single source  supplier to
our major  customers for all of their WAN and LAN  connectivity  needs.  We also
added embedded Linux to several HighWire products expanding the applicability of
these products beyond telecommunications.

The  following  table shows sales by major  product type as a percentage  of net
sales for fiscal 2002, 2001 and 2000:
<TABLE>
<CAPTION>

                                                                Year Ended October 31,
                                                          2002              2001               2000
                                                     ----------------------------------------------
<S>                                                  <C>                  <C>             <C>
                                                                  (percentage of net sales)

         VME Communication Controllers                      56%                64%              75%
         WAN Adapter                                        31                 31               21
         HighWire                                           13                  5                4
                                                     ------------------------------------------------
                                                           100%               100%             100%
                                                     ================================================
</TABLE>

Distribution, Sales and Marketing

We market our Adapter, HighWire and VMEbus communications controller products to
OEMs  and  systems  integrators.  We sell our  products  both  domestically  and
internationally,   using  a  direct   sales   force   as  well  as   independent
manufacturers'  representatives.  We believe that our direct sales force is well
suited to differentiate our products from those of our competitors.

                                       12
<PAGE>

We  market  our  products  through  multiple  indirect   distribution   channels
worldwide, including distributors,  manufacturers' representatives,  value-added
resellers and certain OEM  partners.  We actively  support our indirect  channel
marketing  partners  with our own sales and  marketing  organization.  Our sales
staff solicits prospective customers,  provides technical advice with respect to
our products  and works  closely  with  marketing  partners to train and educate
their staffs on how to sell, install and support our product lines.

We have  focused  our sales and  marketing  efforts  principally  in the  United
States, Canada and Europe. All of our international sales are negotiated in U.S.
dollars.

We conduct our sales and marketing  activities from our principal  office in San
Ramon,  California.  Our direct  sales force is based in three  locations in the
United States.

RESEARCH AND DEVELOPMENT

Our  product  development  efforts  are  focused  principally  on our  strategic
businesses,  providing high bandwidth connectivity and computing solutions using
WAN and  LAN  communications  applications,  client/server  internetworking  and
VMEbus intelligent communications controllers. Our experience in high-speed data
communications  creates opportunities to leverage our engineering investment and
develop   additional   integrated   products   for  simpler,   more   innovative
communications  solutions for customers.  The development of new internetworking
products, high-performance communications controllers and communications-related
software is critical to attracting new, and retaining existing, customers.

During the past three years, we have developed  communications products based on
Compact PCI, PCI, PMC, VMEbus and EISA architecture. We have also redesigned and
upgraded certain  communications  products to improve the products'  performance
and lower the products'  manufacturing  costs. In addition,  we have acquired or
licensed certain hardware products that have been integrated principally through
the addition of software into our product line.

During  fiscal  2002,  we focused  the  majority of our  development  efforts on
completing  the  HighWire  product  line,  developing  software  drivers for our
Adapter  products and  developing  a new LAN Adapter  product line based on high
speed Gigabit  Ethernet  technology.  We completed  hardware and software design
efforts and released to production  several WAN Adapter  products  which provide
enhanced functionality and are aimed primarily at the enterprise markets such as
VoIP,  VPN and  security  routers.  We also added the embedded  Linux  operating
system  software  to  several  HighWire   products  which  provides   additional
functionality  and  expands the  potential  market for these  products  from the
telecommunications  applications  market to encompass  the  military/government,
medical and industrial control markets.

During fiscal 2002,  2001 and 2000,  we incurred $3.0 million,  $5.7 million and
$5.6 million, respectively, in product research and development expenses.

                                       13
<PAGE>


MANUFACTURING

We do not engage in any manufacturing activities,  instead utilizing third-party
manufacturers  to build  our  products.  In  December  1996,  we sold all of our
manufacturing  assets and entered into a contract  manufacturing  agreement with
XeTel to supply  manufacturing  services.  In the second half of fiscal 2002, we
terminated  our  manufacturing  services  agreement  with XeTel and entered into
non-exclusive  contract manufacturing  agreements with ProWorks,  Inc. and Sonic
Manufacturing  Technology.  We believe  that  ProWorks and Sonic will be able to
provide lower prices and a more  efficient and timely  product  delivery than we
could produce with our previous manufacturing resources.

COMPETITION

The market for  telecommunications  and client/server  access products is highly
competitive.  Many of our competitors have greater  financial  resources and are
more established. Competition within the telecommunications market is fragmented
principally by application segment. Our HighWire products compete with offerings
from Radisys,  Performance  Technologies,  Interphase,  Artesyn, and Adax, along
with various other platform and controller  product  providers.  Our VMEbus, Wan
Adapter and LAN Adapter  communications  controller  products compete  primarily
with  products  from Digi  International,  Motorola,  Interphase  Corp.,  Themis
Computers,  SBS Technologies and various other companies on a product-by-product
basis.  To compete in this market,  we  emphasize  the  functionality,  support,
quality and price of our product in relation to its competitors,  as well as our
ability to  customize  the product or software  to exactly  meet the  customer's
needs.

Additionally,  we  compete  with  the  internal  engineering  resources  of  our
customers.  As our customers become successful with their products, they examine
methods to reduce costs and  integrate  functions.  To compete with the internal
engineering  resources of our customers,  we work jointly with their engineering
staffs to understand our customers'  system  requirements  and to anticipate new
product needs versus time-to-market decisions.

INTELLECTUAL PROPERTY

We believe that our future  success will depend  principally  on our  continuing
product innovation,  sales,  marketing and technical expertise,  product support
and customer relations.  We also believe that we need to protect the proprietary
technology  contained in our products.  We do not currently hold any patents and
rely on a combination of copyright, trademark, trade secret laws and contractual
provisions  to establish  and protect  proprietary  rights in our  products.  We
typically enter into  confidentiality  agreements with our employees,  strategic
partners, channel partners and suppliers and limit access to the distribution of
our proprietary information.

BACKLOG

On December 31, 2002, we had a backlog of product orders of  approximately  $1.5
million for shipment within the next twelve months. On December 31, 2001, we had
a backlog of product orders of  approximately  $337,000 for shipment  within the
next twelve  months.  Because  recorded  sales  orders are subject to changes in
customer delivery schedules,  cancellation,  or price changes, our backlog as of



                                       14
<PAGE>

any particular date may not be representative of actual sales for any succeeding
fiscal period and is not considered firm.

EMPLOYEES

On December 31, 2002, we had 24 employees.  None of our employees is represented
by a labor union. We have experienced no work stoppages. We believe our employee
relations are good.

We believe  that our future  success  will  depend,  in part,  on our ability to
attract and retain qualified technical (particularly engineering), marketing and
management  personnel.  Such experienced  personnel are in great demand,  and we
must compete for their  services  with other  firms,  many of which have greater
financial resources.

ITEM 2. PROPERTIES

In December 2001, we relocated our engineering and  administrative  headquarters
to 15,000  square feet of leased  space  located in San Ramon,  California.  The
lease expires in 2004. We expect the facility to satisfy our  anticipated  needs
for the  foreseeable  future.  In  conjunction  with the  relocation  to the new
building,  we  assigned  the lease  related to our  former  63,000  square  foot
engineering and administrative headquarters facility to a third party. The third
party  has  guaranteed  payment  of the  remaining  lease  payments  though  the
termination of the original lease in 2006.

We leased 6,100 square feet of office  space in Madison,  Wisconsin  for various
product  development  activities.  At the end of fiscal 2002,  we abandoned  the
office in Madison, Wisconsin and negotiated a termination of the lease releasing
us from further financial obligations effective December 31, 2002.

Additionally,  through the acquisition of LAN Media Corp. in July 2000, we lease
approximately  3,650 square feet of office space in Sunnyvale,  California.  The
Sunnyvale  lease expires in May 2003. We subleased  this office space to a third
party for the remaining term of the lease.

ITEM 3. LEGAL PROCEEDINGS

We are not a party to any pending legal proceedings.

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

There  were no matters  submitted  to a vote of our  stockholders  in the fourth
quarter of fiscal 2002.



                                       15
<PAGE>

                                     PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
        RELATED STOCKHOLDER MATTERS

Our common stock is quoted on the Nasdaq  SmallCap Market under the symbol SBEI.
The following  table  presents  quarterly  information on the price range of our
common  stock,  indicating  the high and low bid prices  reported  by the Nasdaq
SmallCap  Market.  These  prices do not include  retail  markups,  markdowns  or
commissions.  As of December 31, 2002, there were  approximately  407 holders of
record of our Common  Stock.  There are no  restrictions  on our  ability to pay
dividends;  however,  it is currently the intention of the Board of Directors to
retain all  earnings,  if any, for use in our business and we do not  anticipate
paying cash dividends in the foreseeable future. Any future  determination as to
the payment of dividends will depend,  among other  factors,  upon our earnings,
capital requirements, operating results and financial condition.
<TABLE>
<CAPTION>

                                                    Fiscal quarter ended
                           ----------------------------------------------------------------------
     Fiscal 2002                  January 31          April 30           July 31       October 31
-------------------------------------------------------------------------------------------------
<S>                           <C>                   <C>               <C>           <C>

         High                         $1.43             $2.35            $2.18             $1.50
         Low                           0.49              1.15             1.21              0.80
     Fiscal 2001
         High                         $8.75             $5.50            $3.50             $1.70
         Low                           3.38              2.25             1.05              0.80
</TABLE>

The following table includes information regarding our equity incentive plans as
of the end of fiscal 2002.

                      Equity Compensation Plan Information
<TABLE>
<CAPTION>

                                                                                           Number of securities
                                                                                         remaining available for
                                Number of securities to     Weighted-average exercise     future issuance under
                                be issued upon exercise       price of outstanding      equity compensation plans
                                of outstanding options,         options, warrants         (excluding securities
Plan category                     warrants and rights              and rights            reflected in column (a))
-------------                     -------------------              ----------            ------------------------
                                          (a)                          (b)                         (c)
<S>                             <C>                           <C>                        <C>

Equity compensation plans
   approved by security
   holders                     1,209,341                               $3.32                     139,003
Equity compensation plans
   not approved by security

   holders                       682,472                               $3.11                      36,714
                               ---------                             -------                   ---------

   Total                       1,891,813                               $3.24                     175,717
                               ---------                             -------                   ---------


</TABLE>


                                       16
<PAGE>


ITEM 6.  SELECTED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations"  and the  Consolidated  Financial  Statements  and the Notes thereto
included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>

For years ended October 31,
  and at October 31                     2002            2001           2000           1999            1998
----------------------------------------------------------------------------------------------------------
(in thousands, except for per share amounts and number of employees)
<S>                                   <C>              <C>           <C>            <C>             <C>

Net sales                             $6,898        $ 7,726        $ 29,178        $19,854        $ 21,124

Net income (loss)                    $(1,731)       $(9,896)       $  3,970        $ (254)        $    184

Net income (loss) per share - basic   $(0.46)       $ (2.92)       $   1.24        $(0.08)        $   0.07

Net income (loss) per share - diluted $(0.46)       $ (2.92)       $   1.04        $(0.08)        $   0.06

Product research and development      $3,027        $  5,652       $  5,635        $ 5,167        $  3,864

Working capital                       $2,985        $  7,595       $ 11,793        $ 7,191        $  7,845

Total assets                          $5,321        $ 10,690       $ 17,427        $11,264        $ 11,783

Long-term liabilities                    $10        $  4,870       $    288        $   503        $    631

Stockholders' equity                  $3,696        $  4,119       $ 13,829        $ 8,636        $  8,846

Number of employees                       24              47             87             72              68
</TABLE>


ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF
        FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SBE, Inc.  designs,  manufactures and markets  high-speed,  intelligent  network
communications  controller  and software  products  that are embedded  within an
original  equipment  manufacturer's  ("OEM") products.  Our products enable both
traditional and emerging  datacom and  telecommunications  service  providers to
deliver  advanced  communications  products and services,  which we believe help
these providers compete more effectively in today's highly  competitive  datacom
and  telecommunications  service markets. Our products include wide area network
("WAN") and local area network ("LAN")  interface  Adapters and high performance
intelligent Linux embedded  communications  controllers for workstations,  media
gateways,  routers,  internet access devices,  home location  registers and data
messaging applications.

Our business is  characterized  by a concentration of sales to a small number of
OEMs who provide  products  and  services to the datacom and  telecommunications
service  markets.  Consequently,  the timing of  significant  orders  from major
customers and their product cycles cause  fluctuation in our operating  results.
HP is the largest of our customers and represented 30%, 34% and 66% of net sales
in fiscal  2002,  2001 and 2000,  respectively.  If any of our major  customers,
especially HP, Nortel and Lockheed Martin,  reduces orders for our products,  we
could lose revenues and suffer damage to our business reputation.  Orders by our
OEM customers are affected by factors such as new product introductions, product
life  cycles,  inventory  levels,   manufacturing  strategy,   contract  awards,


                                       17
<PAGE>

competitive conditions and general economic conditions.

We are attempting to diversify our sales with the  introduction  of new products
that are targeted at large growing  enterprise markets such as VPN, security and
other communications  devices. Our HighWire products have been focused primarily
on the telecommunications market and the significant increases in communications
activity  that  are  driven  by  the   convergence  of   traditional   telephony
applications  with  the  Internet.  With  the  introduction  of  embedded  Linux
operating  system on the  HighWire  products,  we can now  begin to  market  the
HighWire  products to the  military/government,  medical and industrial  control
application  markets.  With the  introduction  of our LAN  Adapter  products  in
January 2003 we are  attempting  to penetrate  the Gigabit  Ethernet LAN market.
While we believe the market for the HighWire and LAN Adapter product families is
large,  there can be no assurance that we will be able to succeed in penetrating
these markets and diversifying our sales.

One of our  strategies to increase  sales is to have our products  designed into
new OEM product  offerings.  We believe  these  design wins result in  long-term
revenue  from the OEM if the OEM  products are  ultimately  successful.  We were
awarded ten design wins in fiscal 2002  compared to three  during  fiscal  2001.
These  design  wins  are for OEM  product  applications  using  our WAN  Adapter
products in a diverse set of  applications  that include secure Virtual  Private
Network ("VPN") routers, wireless Internet access, SS7 network analyzers,  Voice
over Internet Protocol ("VoIP") gateways and storage area networks ("SANs").

During the year ended October 31, 2002,  we reduced our workforce  from 47 to 24
employees,  or 49% over the prior year.  We also vacated the leased office space
located in Madison,  Wisconsin  and retained a real estate agent to seek a third
party to sublease the space We were able to secure a third party  corporation to
take over our Madison  office lease and we negotiated a termination of our lease
for the office space ending any further financial obligations effective December
31, 2002.  As a result of the  reduction in our  workforce and reduction in real
estate  needs,  we expect to realize an annual  savings  of  approximately  $2.0
million as compared to fiscal 2002. We recorded $446,000 in restructuring  costs
related to the reduction in our  workforce and the abandoned  facility in fiscal
2002.

On April 30,  2002,  we  completed a private  placement  of shares of our common
stock and a warrant to purchase common stock resulting in gross cash proceeds of
approximately $1.0 million,  and on May 14, 2002, we secured a $1.0 million line
of credit from a bank.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The  preparation  of  consolidated   financial  statements  in  conformity  with
generally  accepted  accounting  principles  in the  United  States  of  America
requires  management to make estimates and assumptions  that affect the reported
amounts  of assets and  liabilities  and  disclosure  of  contingent  assets and
liabilities at the date of the financial  statements and the reported amounts of
revenues and expenses during the reporting period. Such estimates include levels
of reserves  for  doubtful  accounts,  obsolete  inventory,  warranty  costs and
deferred tax assets. Actual results could differ from those estimates.

Our critical accounting policies and estimates include the following:


                                       18
<PAGE>

REVENUE RECOGNITION

We record product sales at the time of product shipment.  Our sales transactions
are negotiated in U.S. dollars. Our agreements with OEMs, such as HP, Nortel and
Lockheed  Martin,   typically   incorporate  clauses  reflecting  the  following
understandings:

     -    all prices are fixed and determinable at the time of sale;

     -    title  and  risk  of  loss  pass  at  the  time  of  shipment;

     -    collectibility  of the sales prices is probable.  The OEM is obligated
          to pay and such  obligation is not  contingent on the ultimate sale of
          the OEM's integrated solution;

     -    the OEM's  obligation to us would not be changed in the event of theft
          or physical destruction or damage of the product;

     -    we do not have  significant  obligations  for  future  performance  to
          directly bring about resale of the product by the OEMs; and

     -    there is no  contractual  right of  return  other  than for  defective
          products;  we can  reasonably  estimate  such  returns  and  record  a
          warranty reserve at the point of shipment.

WARRANTY RESERVES

We accrue the estimated costs to be incurred in performing  warranty services at
the time of revenue  recognition  and shipment of the products to the OEMs.  Our
estimate of costs to service our  warranty  obligations  is based on  historical
experience  and  expectation of future  conditions.  To the extent we experience
increased  warranty claim activity or increased costs  associated with servicing
those claims,  the warranty accrual will increase,  resulting in decreased gross
margin.

INVENTORIES

Inventories  are  stated at the lower of cost,  using  the  first-in,  first-out
method, or market value. Our inventories include  high-technology parts that may
be  subject  to rapid  technological  obsolescence.  We  consider  technological
obsolescence  in  estimating  required  reserves to reduce  recorded  amounts to
market  values.  Such  estimates  could change in the future and have a material
adverse impact on our financial position and results of operations.

PROPERTY AND EQUIPMENT

We review  property and equipment for impairment  whenever  events or changes in
circumstances indicate the carrying value of an asset may not be recoverable. In
performing  the review for  recoverability,  we  estimate  the future cash flows
expected to result from the use of the asset and its eventual  disposition.  The
amount of the impairment  loss, if any, would be calculated  based on the excess
of the carrying amount of the asset over its fair value.

CAPITALIZED SOFTWARE COSTS

Capitalized  software  costs consist of costs to purchase  software and costs to
internally  develop  software.  Capitalization of software costs begins upon the
establishment of technological  feasibility.  All capitalized software costs are
amortized  as related  sales are  recorded  on a  per-unit  basis with a minimum
amortization  based on a straight-line  method over a two-year  estimated useful


                                       19
<PAGE>

life. We evaluate the estimated net  realizable  value of each software  product
and record  provisions to the asset value of each product for which the net book
value is in excess of the net realizable value.

DEFERRED TAXES

We record a valuation  allowance to reduce our deferred taxes to the amount that
is more  likely  than not to be  realized.  Based on the  uncertainty  of future
pre-tax income, we have fully reserved our deferred tax assets as of October 31,
2002.  In the event we were to  determine  that we would be able to realize  our
deferred tax assets in the future, an adjustment to the deferred tax asset would
increase income in the period such determination was made.

RESULTS OF OPERATIONS

The  following  table  sets  forth,  as  a  percentage  of  net  sales,  certain
consolidated  statements of  operations  data for the fiscal years ended October
31, 2002, 2001 and 2000. These operating results are not necessarily  indicative
of our operating results for any future period.
<TABLE>
<CAPTION>

                                                                        Year Ended October 31,
                                                              2002               2001              2000
                                                              ----               ----              ----
<S>                                                         <C>                 <C>                <C>

  Net sales                                                   100%                100%               100%
  Cost of sales                                                 46                 63                 36
                                                              ----               ----               ----
     Gross profit                                               54                 37                 64
  Operating expenses:
     Product research and development                           44                 73                 19
     Sales and marketing                                        31                 40                 16
     General and administrative                                 34                 42                 16
     Loan reserve                                                7                ---                ---
     Restructuring costs                                         6                 12                ---
                                                              ----               ----              -----
      Total operating expenses                                (122)              (168)               (51)
                                                              -----            -------             ------
  Operating income (loss)                                      (68)              (131)                13
  Forfeited deposit, net                                        39                ---                ---
  Interest  and other income                                     2                  3                  1
                                                                --               ----              -----
  Income (loss) before income taxes                            (27)              (128)                14
  Income tax benefit                                             2                ---                ---
                                                              ----              -----              -----
  Net income (loss)                                            (25)%             (128)%               14%
                                                              =====          =========            ======

</TABLE>

NET SALES

Net sales for fiscal 2002 were $6.9  million,  an 11% decrease from $7.7 million
for fiscal  2001.  Net sales for fiscal 2001 were $7.7  million,  a 74% decrease
from fiscal 2000. The decrease in both periods was primarily  attributable  to a
decrease in sales to HP. Net sales to HP were $2.1 million for fiscal  2002,  as
compared to $2.6 million in fiscal 2001 and $19.4 million in fiscal 2000.  Sales
to HP,  primarily of VMEBus  products,  represented  30% of net sales for fiscal
2002,  compared to 34% during  fiscal 2001 and 66% in fiscal 2000. A substantial
portion of such sales was  attributable  to sales of VME products  pursuant to a
long-term  supply  agreement  with HP. On October 31, 2002,  HP placed an end of
life  purchase  order  for  shipment  of these VME  products  over the first two
quarters of fiscal  2003.  We expect sales to HP will  constitute a  substantial


                                       20
<PAGE>

portion of our net sales in fiscal 2003, both as a result of the end of life VME
product  orders and  projected  sales of WAN  Adapter  products to HP. We do not
expect sales of VME products to HP to be a  substantial  portion of our revenues
after fiscal 2003. Lockheed Martin was the only other customer  representing 10%
or more of our sales,  accounting for 11% of net sales in fiscal 2002 and 20% in
fiscal 2001.

Sales of our Adapter  products were $2.1 million for fiscal 2002, as compared to
$2.0  million  in fiscal  2001 and $1.6  million  in fiscal  2000.  Sales of our
HighWire  products  were $1.0 million in fiscal 2002, as compared to $350,000 in
fiscal  2001.  Our Adapter  products are used  primarily in  edge-of-the-network
applications such as VPN and other routers,  VoIP gateways and security devices,
whereas our HighWire  products  are  primarily  targeted at  core-of-the-network
applications used primarily by  telecommunications  central offices.  The recent
introduction of our HighWire  products with the embedded Linux operating systems
software   makes   it   possible   to  now   market   these   products   to  the
military/government,  medical and industrial control market. We, however, expect
our product mix to continue to be heavily  weighted  towards our VME and Adapter
products for the foreseeable future.

On October 31,  2002,  we  announced  the  restructuring  of our product  supply
contract with HP. The restructured  agreement provides for shipment of a minimum
of approximately  $1.6 million of our VME serial  controller cards products over
the first two quarters of fiscal 2003. This will conclude the scheduled shipment
of VME products under the HP supply  contract  supporting  their  fault-tolerant
wireless base station business.  We will provide ongoing  engineering support to
HP and will  ship  future  VME  product  on an as needed  basis.  As part of the
restructured  contract,  HP  will  forfeit  $4.4  million  of its  $4.9  million
refundable deposit.  The remaining deposit of $0.5 million will be paid to HP in
the second quarter of fiscal 2003. In relation to this  restructured  agreement,
non-operating income of $2.7 million was recorded as "forfeited deposit, net" in
the statement of operations. Such amount is composed of the forfeited deposit of
$4.4 million,  net of a reserve of $1.7 million for  inventory  dedicated to the
program that is not required to fulfill the agreed-upon minimum shipments.

Due to the adverse economic conditions in the  telecommunications  industry, our
customers  have  cancelled or delayed many of their new design  projects and new
product  rollouts that included our products.  Our sales backlog at December 31,
2002 is $1.5  million  compared  to  $337,000 at  December  31,  2001.  While we
anticipate an increase in our sales volume over the course of fiscal 2003 as our
customers  slowly deploy existing  inventory and gradually return to new product
design and product  rollout there can be no  assurances  that such increase will
occur.  Over the past 12 to 18  months  there  has been a shift in the  ordering
patterns of our customers.  Previously,  our customers  would  typically place a
purchase  order  with us based on their  forecasted  sales  volumes.  Due to the
current   economic   uncertainty,   our  customers   now  typically   require  a
"just-in-time"  ordering  and  delivery  cycle  where they will place a purchase
order  with  us  after  they  receive  an  order  from  their   customer.   This
"just-in-time" inventory purchase cycle by our customers has made forecasting of
our  future  sales  volumes  very  difficult.  Because  our sales are  generally
concentrated  with  a  small  group  of  OEM  customers,   we  could  experience
significant  fluctuations  in our  quarterly  sales  volumes due to  fluctuating
demand from any major  customer or delay in the rollout of any  significant  new
product by a major customer.

International sales constituted 13%, 9% and 4% of net sales in fiscal 2002, 2001
and 2000, respectively. International sales are executed in U.S. dollars and are
principally transacted in Europe.


                                       21
<PAGE>

GROSS PROFIT

Gross profit as a  percentage  of net sales was 54%, 37% and 64% in fiscal 2002,
2001 and 2000,  respectively.  During 2001, we recorded inventory write-downs of
$1.0 million.  Excluding the inventory write-downs,  the gross margin for fiscal
2001 would have been 50%.  The  increase in the gross profit from fiscal 2001 to
fiscal 2002 was primarily  attributable to lower materials costs combined with a
more  profitable  product mix in fiscal 2002.  Gross  profit as a percentage  of
sales  decreased in fiscal 2001 as a result of inventory  valuation  write-downs
and lower  production  volumes.  We expect our gross profit to range between 50%
and  57%  for  fiscal  2003.  However,   if  market  and  economic   conditions,
particularly in the telecommunications sector, deteriorate or fail to recover as
expected, gross profit as a percentage of net sales may decline from the current
level.

PRODUCT RESEARCH AND DEVELOPMENT

Product research and development expenses were $3.0 million in fiscal 2002, $5.7
million in fiscal 2001 and $5.6  million in fiscal 2000,  representing  44%, 73%
and 19% of net sales,  respectively.  The decrease in research  and  development
expense as a percentage of revenue from fiscal 2001 to fiscal 2002 is the direct
result  of  headcount  reductions  combined  with  other   project-related  cost
containment  measures.  The increase in research and  development  spending as a
percentage  of revenue from fiscal 2000 to fiscal 2001 was due to lower  revenue
without a corresponding  reduction in research and development spending.  During
fiscal  2001,  we  emphasized  completion  of the  development  programs for the
HighWire  product  line and  software  development  for the SS7 and WAN  product
lines. During fiscal 2002, we completed the HighWire product line, including the
addition of the embedded Linux operating system  software,  and we added several
new  products  to our WAN  Adapter  line which  expand and  enhance  the adapter
product lines  capabilities  at a reduced cost point.  We also began work on the
new LAN Adapter Gigabit Ethernet product line that was released to production in
January 2003.

We  expect  a  reduction  in  overall  spending  for our  product  research  and
development in absolute  dollars and as a percentage of sales in fiscal 2003 due
to staffing reductions and other cost containment measures during the later part
of fiscal 2002. We did not capitalize any internal software development costs in
fiscal 2002, 2001 or 2000, respectively.

SALES AND MARKETING

Sales and marketing  expenses for fiscal 2002 were $2.2 million,  a 31% decrease
over fiscal 2001.  This decrease is primarily  related to lower headcount in the
marketing  departments plus a decrease in commissions due to lower sales volume.
Fiscal 2001 expense was $3.1 million, a 33% decrease over fiscal 2000. Sales and
marketing programs are focused on design wins with new customers and, therefore,
as new customer sales increase,  sales and marketing expenses will increase. New
customer's  product  design-in  sales  cycles  may span over  periods as long as
twenty-four  months.  Due to staffing  reductions and cost containment  measures
during  the  latter  part of 2002 and 2001,  we expect  the sales and  marketing
expense for fiscal 2003 will decrease in absolute dollars and as a percentage of
total sales from fiscal 2002 levels.

In the  latter  part of fiscal  2001,  we  reorganized  our sales and  marketing
groups,  enhancing the industry and product  expertise of the groups.  The sales


                                       22
<PAGE>

department  is  organized  around,  and  the  members  of  our  sales  team  are
compensated  for,  meeting  certain  objectives  referred to as "Design Wins." A
Design Win is defined as a program with an OEM customer  which will  generate at
least  $400,000 in  recurring  annual  revenue  within 12 to 18 months after the
customer  accepts and confirms the use of our product in their platform.  We had
three  Design  Wins in the fourth  quarter of 2001 and 10 Design  Wins in fiscal
2002.

GENERAL AND ADMINISTRATIVE

General and administrative expenses for fiscal 2002 decreased to $2.4 million, a
28%  decrease  over fiscal 2001.  The decrease was due to headcount  and expense
containment  measures.  Fiscal 2001 expense  decreased to $3.3 million from $4.6
million in fiscal 2000 or, 29%, as a result of headcount and expense containment
measures.  Due to staffing  reductions and cost containment  measures during the
latter part of 2002 and 2001, we expect general and  administrative  expense for
fiscal 2003 will decrease in absolute dollars and as a percentage of total sales
from fiscal 2002 levels.

LOAN RESERVE

On November 6, 1998, we made a loan to an officer and  stockholder in the amount
of $622,800 under a two-year  recourse  promissory note bearing an interest rate
of 4.47% and  collateralized by 145,313 shares of our Common Stock. The loan was
used to pay for the  exercise  of an option to  purchase  139,400  shares of our
Common Stock and related  taxes.  On April 16, 1999,  the loan was  increased to
$743,800.  The loan was  extended  for a one-year  term under the same terms and
conditions  on November 6, 2000.  On December  14,  2001,  the note was amended,
restated  and  consolidated  to extend the term to December  2003 and to require
certain  mandatory  repayments  of  principal of up to $100,000 a year while the
note is outstanding.  The loan bears interest at a rate of 2.48% per annum, with
interest due annually and the entire amount of the principal due on December 14,
2003.

While the officer is current on his payments on the loan and we plan on pursuing
all  available  courses of action to collect the amounts  ultimately  due on the
loan,  on October 31, 2002 we  determined  that it was probable  that we will be
unable to fully  recover the balance of the loan on its due date of December 14,
2003.  Accordingly,  a  valuation  allowance  of  $474,000  was  recorded  based
generally  on the fair value of the  Common  Stock  collateralizing  the note at
October  31, 2002 and the amount of the  officer's  personal  assets  considered
likely to be  available  in the future.  The  estimated  loss on the loan may be
revised in the future based on changes in the fair value of the Common Stock and
personal assets collateralizing the loan.

RESTRUCTURING COSTS

In response to the continued  economic  slowdown,  we implemented  restructuring
plans in fiscal 2002 and 2001 and recorded restructuring charges of $446,000 and
$964,000,  respectively.  Restructuring  costs for fiscal 2002 are  comprised of
severance costs associated with staff reductions  totaling  $115,000,  leasehold
improvements  and  equipment  write-downs  related  to  the  abandonment  of our
Madison,  Wisconsin  office of $185,000 and estimated  losses  related to future
rents net of estimated future recoveries from potential sublease of $146,000. We
reduced our headcount from 47 employees to 24 employees during fiscal 2002.


                                       23
<PAGE>

Restructuring  costs for fiscal 2001 are comprised of severance costs associated
with staff reductions  totaling  $52,000,  leasehold  improvements and equipment
write-downs related to the relocation of our headquarters of $337,000 and losses
related to its sublease of $575,000,  which is net of the reversal of a $281,000
liability  associated  with  deferred  rent.  We reduced our  headcount  from 87
employees to 47 employees during fiscal 2001.

As of October  31, 2002 and 2001,  $249,000  and  $590,000 of the  restructuring
costs were included in other current liabilities, respectively.

INTEREST AND OTHER INCOME

Interest and other  income in fiscal 2002  decreased  slightly  from 2001 due to
lower  average  cash  balances in fiscal  2002.  Fiscal  2001  income  increased
slightly from fiscal 2000 due to higher  average cash balances in fiscal 2001 as
compared to fiscal 2000.

INCOME TAXES

On March 9, 2002,  the  President of the United  States  signed into law the Job
Creation and Workers Assistance Act of 2002 which extends the net operating loss
carryback  from two to five years for losses  generated  in tax years  ending in
2001 and 2002. As a result,  we recorded a tax benefit of $91,000 in fiscal 2002
due to the expected  refund of federal income taxes related to this Act. We also
filed  amended  federal and state tax returns to claim  $86,000 in research  and
development  credits  related to LMC. We recorded tax  provisions  of $1,000 and
$126,000 in fiscal 2001 and fiscal 2000,  respectively.  Our  effective tax rate
was (8)%, 0% and 3% in fiscal 2002, 2001 and 2000,  respectively.  We recorded a
valuation  allowance in fiscal 2002,  2001, and 2000 for deferred tax assets due
to the  uncertainty of realization.  In the event of future taxable income,  our
effective  income tax rate in future  periods  could be lower than the statutory
rate as such tax assets are realized.

NET INCOME (LOSS)

As a result of the  factors  discussed  above,  we  recorded  a net loss of $1.7
million in fiscal 2002, a net loss of $9.9 million in fiscal 2001 and net income
of $4 million in fiscal 2000.

LIQUIDITY AND CAPITAL RESOURCES

Our liquidity is dependent on many factors,  including  sales volume,  operating
profit and the efficiency of asset use and turnover.  Our future  liquidity will
be affected by, among other things:

     -    actual versus anticipated sales of our products;

     -    our  actual  versus  anticipated  operating  expenses  and  results of
          ongoing cost control actions;

     -    the timing of product shipments, which occur primarily during the last
          month of the quarter;

     -    our actual versus anticipated gross profit margin;

     -    our ability to raise additional capital, if necessary; and

     -    our ability to secure credit facilities, if necessary.

We had cash and cash equivalents of $1.6 million and $3.6 million on October 31,




                                       24
<PAGE>

2002 and October 31, 2001,  respectively.  In fiscal 2002,  $2.7 million of cash
was used by operating activities,  principally as a result of net losses of $1.7
million adjusted for a $4.7 million non-cash decrease in non-current liabilities
which was the  result of the  forfeiture  of the HP  refundable  deposit.  These
decreases in cash were partially offset by $730,000 of non-cash depreciation and
amortization  charges, a $185,000 non-cash charge related to write-offs of fixed
assets  and  leasehold  improvements  included  in the  restructuring  costs,  a
non-cash  valuation  allowance  on a loan  from an  officer  and a $2.5  million
decrease in inventories.  The decrease in inventories is primarily  related to a
$1.7  million  write down of  inventories  purchased  to  support  the HP supply
agreement.  Working capital at October 31, 2002 was $3.0 million, as compared to
$7.6 million at October 31, 2001.

In fiscal 2002, we purchased $149,000 of fixed assets,  consisting  primarily of
computers and  engineering  equipment.  Purchased  software  costs  amounting to
$105,000 were  capitalized  in fiscal 2002. We expect  similar levels of capital
expenditures in fiscal 2003.

We  received  $31,000  in fiscal  2002 from  payments  related  to common  stock
purchases made by employees pursuant to the employee stock purchase plan. During
the second quarter of fiscal 2002, we sold 555,556 shares of common stock plus a
warrant  to  purchase  111,111  shares of common  stock for  approximately  $1.0
million in a private  placement  transaction  with  Stonestreet L.P. of Ontario,
Canada. The net cash proceeds after expenses were approximately $864,000.

On May 14,  2002,  we secured a twelve  month  revolving  $1.0  million  working
capital  line of credit with a bank.  The credit line is secured by a first lien
on all our  assets  and  carries a floating  annual  interest  rate equal to the
bank's  prime rate of 4.25% at October 31, 2002 plus 1.50%.  We can draw down on
the  credit  line  based  on a  formula  equal to 80% of our  domestic  accounts
receivable.  As of  October,  31,  2002,  we have not drawn down on this line of
credit.

Our future  commitments  consist  principally  of future  minimum lease payments
related to our office facilities.  Minimum lease payments are as follows: fiscal
2003: $1.1 million;  2004: $1.0 million; 2005: $0.7 million; 2006: $0.3 million.
Related  minimum  reimbursement  from sublease  payments are as follows:  fiscal
2003: $0.7 million; 2004: $0.6 million; 2005: $0.6 million; 2006: $0.3 million.

We realized significant reductions in our operating expenses due to management's
implementation  of a program of  controlled  spending  and  headcount  reduction
instituted in mid-fiscal  2001. In addition,  we had further  headcount and cost
reductions  in late fiscal 2002 which are  expected to translate to an estimated
$2.0 million  decrease in salaries  and  benefits  and other  expenses in fiscal
2003. With these reductions,  we have reduced our quarterly cash flow break-even
point to  approximately  $1.7  million to $1.9 million in revenue at an expected
50% gross  margin.  We believe the cost  reduction  and a projected  increase in
sales  during  fiscal  2003  will  generate  sufficient  cash  flows to fund our
operations through October 31, 2003 and beyond. However, our projected sales are
to a limited  number of new and existing OEM customers and are based on internal
and customer provided  estimates of future demand,  not firm customer orders. If
the projected sales do not materialize,  we will need to reduce expenses further
and raise  additional  capital through  customer  prepayments or the issuance of
debt or equity  securities.  If additional funds are raised through the issuance
of preferred stock or debt, these  securities  could have rights,  privileges or
preferences  senior to those of Common Stock,  and debt  covenants  could impose
restrictions  on our  operations.  The sale of  equity or debt  could  result in


                                       25
<PAGE>

additional  dilution  to current  stockholders,  and such  financing  may not be
available to us on acceptable terms, if at all.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
         MARKET RISK

Our cash and cash  equivalents  are  subject to  interest  rate risk.  We invest
primarily on a short-term  basis. Our financial  instrument  holdings at October
31, 2002 were analyzed to determine their  sensitivity to interest rate changes.
The fair values of these  instruments were determined by net present values.  In
our  sensitivity  analysis,  the same change in  interest  rate was used for all
maturities and all other factors were held constant. If interest rates increased
by 10%,  the  expected  effect on net income  (loss)  related  to our  financial
instruments would be immaterial.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The  financial  statements  and  supplementary  data  required  under Item 8 are
provided under Item 15.

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

None.




                                       26
<PAGE>


                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Identification  of  Directors;  Section  16(a)  Beneficial  Ownership  Reporting
--------------------------------------------------------------------------------
Compliance
----------

The information  required by Item 10 concerning our directors is incorporated by
reference from the information in the section  entitled  "Election of Directors"
appearing in our definitive  Proxy Statement to be filed with the Securities and
Exchange  Commission for the Annual Meeting of Stockholders  scheduled for March
18,  2003 (the "2003  Proxy  Statement").  The  information  required by Item 10
concerning  the  compliance  of certain  persons with the  beneficial  ownership
reporting  requirements of Section 16(a) of the Act is incorporated by reference
from the information in the section  entitled  "Compliance with Section 16(a) of
the Securities and Exchange Act of 1934" appearing in the 2003 Proxy Statement.

Identification of Executive Officers
------------------------------------

Our executive  officers and their  respective  ages and positions as of December
31, 2002 are set forth in the following table.  Executive  officers serve at the
discretion  of the  board of  directors.  There  are no  familial  relationships
between  our  directors  or our  executive  officers  and any other  director or
executive officer.
<TABLE>
<CAPTION>

Name                                    Age          Position
----------------------------------------------------------------------------------------------------
<S>                                    <C>            <C>

William B. Heye, Jr.                    64           President and Chief Executive Officer

David W. Brunton                        52           Vice President, Finance, Chief Financial
                                                     Officer, Treasurer and Secretary

Daniel Grey                             47           Senior Vice President, Sales and Marketing

Kirk Anderson                           43           Vice President, Operations
</TABLE>

Mr. Heye joined us in November 1991 as President,  Chief  Executive  Officer and
member  of the Board of  Directors.  From 1989 to  November  1991,  he served as
Executive   Vice   President   of   Ampex   Corporation,   a   manufacturer   of
high-performance  scanning  recording  systems,  and  President  of Ampex  Video
Systems  Corporation,  a  wholly-owned  subsidiary  of Ampex  Corporation  and a
manufacturer  of  professional  video  recorders  and  editing  systems  for the
television  industry.  From 1986 to 1989,  Mr.  Heye  served as  Executive  Vice
President of Airborn,  Inc., a manufacturer  of components for the aerospace and
military  markets.  Prior to 1986, Mr. Heye served in various senior  management
positions  at  Texas  Instruments,  Inc.  in the  United  States  and  overseas,
including Vice President and General Manager of Consumer  Products and President
of Texas Instruments Asia, Ltd., with headquarters in Tokyo, Japan.

Mr.  Brunton  joined  us in  November  2001 as Vice  President,  Finance,  Chief
Financial Officer,  Secretary and Treasurer.  From 2000 to 2001 he was the Chief
Financial  Officer for NetStream,  Inc., a telephony  broadband  network service
provider.  From 1997 to 2000,  Mr. Brunton was the Chief  Financial  Officer and
Senior Vice President - Operations for ReSourcePhoenix.com, a financial services


                                       27
<PAGE>

outsource provider.  From 1987 to 1997, Mr. Brunton was the Corporate Controller
for  the  Phoenix  American   Companies,   an  equipment   leasing,   cable  TV,
telecommunications  and software  development  company. Mr. Brunton is a CPA who
prior to 1987 was with Arthur Andersen & Co.

Mr. Grey has served as Senior Vice President Sales and Marketing since May 2001.
For the 18 months  prior to SBE, he was the Senior Vice  President  of Sales for
SBS Technologies where he increased sales in the Communications  Group over 240%
in     one     year     and     consolidated     the      Communications     and
Commercial/Military/Industrial  sales  forces.  From 1999 to 2000,  Mr. Grey was
Vice  President of Sales for Lan Media  Corporation,  later acquired by SBE. Mr.
Grey was the Western  Regional  Sales Manager from 1996 to 1999 for  Performance
Technologies,  Inc. where he managed key accounts and increased  sales to become
the largest sales region for the company.  From 1989 to 1996, as the Director of
Western Sales for SBE, he drove sales to record levels through the initiation of
relationships  with industry  leaders such as Cisco Systems,  Sun  Microsystems,
Silicon  Graphics,  HP and Tandem  Computers.  Grey has  experienced 20 years of
success  propelling  sales  for  other  well  known  companies  in the  embedded
computing market including Force Computers and Mizar.

Mr.  Anderson has served as Vice  President,  Operations  since October 2001. He
joined us as  Manager,  of  Operations  in 1997 and was  promoted  to  Director,
Operations in 1999. Prior to joining us Mr. Anderson was the Manager,  Marketing
Logistics  for  Wesley  Jessen  from  1994 to 1997 were he was  responsible  for
logistical  planning and manufacturing  budgeting and control.  Prior to 1994 he
held various  management  positions in  operations,  finance and  marketing  for
several   high-tech   companies   in   Silicon   Valley,    including   Vitalink
Communications, a pioneer in internetworking products.

ITEM 11. EXECUTIVE COMPENSATION

The  information  required  by Item 11 is  incorporated  by  reference  from the
information in the section entitled  "Executive  Compensation"  appearing in the
2003 Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
         MANAGEMENT

The information required by Item 12 is incorporated by reference from the
information in the section entitled "Security Ownership of Certain Beneficial
Owners and Management" appearing in the 2003 Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The  information  required  by Item 13 is  incorporated  by  reference  from the
information  in the sections  entitled  "Certain  Transactions"  and  "Executive
Compensation" appearing in the 2003 Proxy Statement.

ITEM 14. CONTROLS AND PROCEDURES

Based  on their evaluation, as of a date within 90 days prior to the date of the
filing  of  this  report,  of  the  effectiveness of our disclosure controls and


                                       28
<PAGE>

procedures,  our Chief Executive  Officer and Chief Financial  Officer have each
concluded  that  our  disclosure  controls  and  procedures  are  effective  and
sufficient to ensure that we record, process,  summarize, and report information
required  to  be  disclosed  by us in  our  periodic  reports  filed  under  the
Securities  Exchange Act within the time periods specified by the Securities and
Exchange  Commission's  rules  and  forms.

     Subsequent  to the  date  of such  evaluation,  there  have  not  been  any
significant  changes in our  internal  controls or in other  factors  that could
significantly affect these controls, including any corrective action with regard
to significant deficiencies and material weaknesses.

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

The following documents are filed as part of this Report:
<TABLE>
<CAPTION>

(a)(1)   Financial Statements
         --------------------
                                                                                                    Page
                                                                                                    ----
<S>     <C>                                                                                         <C>

         Report of Independent Accountants                                                           36

         Consolidated Balance Sheets at October 31, 2002 and 2001                                    37

         Consolidated Statements of Operations for fiscal years 2002, 2001
                  and 2000                                                                           38

         Consolidated Statements of Stockholders' Equity for fiscal years 2002,
                  2001 and 2000                                                                      39

         Consolidated Statements of Cash Flows for fiscal years 2002, 2001
                  and 2000                                                                           40

         Notes to Consolidated Financial Statements                                                  41
</TABLE>
<TABLE>
<CAPTION>
<S>     <C>                                                                                    <C>

(a)(2)   Financial Statement Schedule
         ----------------------------

         Schedule II-- Valuation and Qualifying Accounts                                             56

         All other schedules are omitted as the required information is not
         applicable or has been included in the consolidated financial
         statements or the notes thereto.

(a)(3)   List of Exhibits

         Exhibit
         Number     Description
         -------    -----------

          3.1(1)    Certificate of  Incorporation,  as amended through  December
                    15, 1997.

                                       29
<PAGE>

          3.2(2)    Bylaws, as amended through December 8, 1998.

          10.1*     1996 Stock Option Plan, as amended.

          10.2*     1991 Non-Employee Directors' Stock Option Plan, as amended.

          10.3      1992 Employee Stock Purchase Plan, as amended.

          10.4      1998 Non-Officer Stock Option Plan as amended.

          10.5(7)   Lease for 4550 Norris  Canyon  Road,  San Ramon,  California
                    dated  November  2, 1992  between  the  Company  and  PacTel
                    Properties.

          10.6(8)   Amendment dated June 6, 1995 to lease for 4550 Norris Canyon
                    Road, San Ramon, California, between the Company and CalProp
                    L.P. (assignee of PacTel Properties).

          10.7(2)*  Full Recourse  Promissory  Note executed by William B. Heye,
                    Jr. in favor of the  Company  dated  November  6,  1998,  as
                    amended December 14, 2001.

          10.8(9)+  Amendment No.  S/M018-4 dated April 3, 2001, to the Purchase
                    Agreement  dated May 6, 1991,  between SBE,  Inc. and Compaq
                    Computer Corporation, as amended October 30, 2002

          10.9(10)  Loan and security  agreement dated May 13, 2002 between SBE,
                    Inc. and Silicon Valley Bank.

          10.10(11) Stock subscription agreement and warrant to purchase 111,111
                    of SBE, Inc.  Common Stock dated April 30, 2002 between SBE,
                    Inc. and Stonestreet LP.

          10.11(12) Amendment  dated  August  22,  2002  to  stock  subscription
                    agreement  dated  April  20,  2002  between  SBE,  Inc.  and
                    Stonestreet LP.

          10.12     Amendment to the Full Recourse  Promissory  Note executed by
                    William Heye, Jr. in favor of the Company dated December 14,
                    2001.

* Indicates management contract or compensation plans or arrangements filed
pursuant to Item 601(5)(10) of Regulation SK.

+ Certain confidential information has been deleted from this exhibit pursuant
to a confidential treatment order that has been granted.
</TABLE>

<TABLE>
<CAPTION>
<S>         <C>           <C>                                                                       <C>

         11.1          Statement re computation of per share earnings

                                       30
<PAGE>

         23.1          Consent of PricewaterhouseCoopers LLP, Independent
                       Accountants
         99.1          Certification of Chief Executive Officer
         99.2          Certification of Chief Financial Officer

     (b)  Reports on Form 8-K

          No report on Form 8-K was filed by us during the quarter ended October
          31, 2002.

          (1)  Filed as an  exhibit  to Annual  Report on Form 10-K for the year
               ended October 31, 1997 and incorporated herein by reference.

          (2)  Filed as an  exhibit  to Annual  Report on Form 10-K for the year
               ended October 31, 1998 and incorporated herein by reference.

          (3)  Filed as an  exhibit  to Form S-8 dated  September  15,  1998 and
               incorporated herein by reference.

          (4)  Filed as an  exhibit  to Annual  Report on Form 10-K for the year
               ended October 31, 1991 and incorporated herein by reference.

          (5)  Filed as an  exhibit  to Form S-8  dated  November  24,  1998 and
               incorporated herein by reference.

          (6)  Filed  as an  exhibit  to Form S-8  dated  October  16,  1998 and
               incorporated herein by reference.

          (7)  Filed as an  exhibit  to Annual  Report on Form 10-K for the year
               ended October 31, 1993 and incorporated herein by reference.

          (8)  Filed as an  exhibit  to Annual  Report on Form 10-K for the year
               ended October 31, 1995 and incorporated herein by reference.

          (9)  Filed as an  exhibit  to  Quarterly  Report  on Form 10-Q for the
               quarter  ended  April  30,  2001  and   incorporated   herein  by
               reference.

          (10) Filed  as an  exhibit  to  Quarterly  Report  on Form 10Q for the
               quarter  ended  April  30,  2002  and   incorporated   herein  by
               reference.

          (11) Filed  as  an  exhibit  to  Form  S-3  dated  May  23,  2002  and
               incorporated herein by reference.

          (12) Filed  as an  exhibit  to  Quarterly  Report  on Form 10Q for the
               quarter ended July 31, 2002 and incorporated herein by reference.

</TABLE>

                                       31
<PAGE>



                                   SIGNATURES


     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.


                                    SBE, Inc.



Date:  January 24, 2003                   By:      /s/ William B. Heye, Jr.
                                                  --------------------------
                                                  William B. Heye, Jr.
                                                  Chief Executive Officer and
                                                  President
                                                  (Principal Executive Officer)


Date:  January 24, 2003                   By:      /s/ David W. Brunton
                                                  -----------------------------
                                                  David W. Brunton
                                                  Chief Financial Officer,
                                                  Vice President, Finance
                                                  and Secretary
                                                  (Principal Financial and
                                                  Accounting Officer)

                                POWER OF ATTORNEY

     KNOW ALL PERSONS BY THESE PRESENTS,  that each of the undersigned  officers
and directors of the registrant constitutes and appoints, jointly and severally,
William  B.  Heye,  Jr.  and  David W.  Brunton,  and each of  them,  as  lawful
attorneys-in-fact and agents for the undersigned and for each of them, each with
full power of substitution  and  resubstitution,  for and in the name, place and
stead  of  each  of the  undersigned  officers  and  directors,  in any  and all
capacities, to sign any and all amendments to this report, and to file the same,
with all exhibits thereto and all other documents in connection therewith,  with
the Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents,  and each of them,  full power and  authority to do and perform each and
every  act and  thing  necessary  or  appropriate  to be done in and  about  the
premises,  as  fully  to all  intents  and  purposes  as he might or could do in
person, hereby ratifying and confirming all that each of said  attorneys-in-fact
or any of them, or any of their substitutes, may lawfully do or cause to be done
by virtue hereof.

     Pursuant to the requirements for the Securities  Exchange Act of 1934, this
report has been signed by the following persons in the capacities indicated,  as
of January 24, 2003.


                                       32
<PAGE>



      Signature                                Title
      ---------                                -----

/s/ William B. Heye, Jr.
------------------------
William B. Heye Jr.             Chief Executive Officer and President
                                (Principal Executive Officer)


/s/ David W. Brunton
--------------------
David W. Brunton                Chief Financial Officer, Vice President,
                                Finance and Secretary (Principal Financial and
                                Accounting Officer)

/s/ Raimon L. Conlisk
---------------------
Raimon L. Conlisk               Director, Chairman of the Board

/s/ Randall L-W. Caudill
------------------------
Randall L-W. Caudill            Director

/s/ Ronald J. Ritchie
---------------------
Ronald J. Ritchie               Director

                                 CERTIFICATIONS

I, William B. Heye, Jr., certify that:

1. I have reviewed this annual report on Form 10-K of SBE, Inc.;

2.  Based on my  knowledge,  this  annual  report  does not  contain  any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made,  not  misleading  with  respect to the period  covered by this annual
report;

3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of and for the periods presented in this annual 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-14 and 15d-14) for the registrant and have:

     a) Designed such disclosure controls and procedures 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 annual report is being prepared;

                                       33
<PAGE>

     b) Evaluated the effectiveness of the registrant's  disclosure controls and
procedures  as of a date  within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

     c) Presented in this annual report our conclusions  about the effectiveness
of the  disclosure  controls and  procedures  based on our  evaluation as of the
Evaluation Date;

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

     a) All  significant  deficiencies  in the design or  operation  of internal
controls  which  could  adversely  affect  the  registrant's  ability to record,
process,  summarize  and  report  financial  data  and have  identified  for the
registrant's auditors any material weaknesses in internal controls; and

     b) Any fraud,  whether or not material,  that involves  management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officer and I have indicated in this annual
report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

Date:  January 24, 2003


/s/ William B. Heye, Jr.
---------------------------
William B. Heye, Jr.
Chief Executive Officer and President


I, David W. Brunton certify that:

1. I have reviewed this annual report on Form 10-K of SBE, Inc.;

2.  Based on my  knowledge,  this  annual  report  does not  contain  any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made,  not  misleading  with  respect to the period  covered by this annual
report;

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

                                       34
<PAGE>

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-14 and 15d-14) for the registrant and have:

     a) Designed such disclosure controls and procedures 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 annual report is being prepared;

     b) Evaluated the effectiveness of the registrant's  disclosure controls and
procedures  as of a date  within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

     c) Presented in this annual report our conclusions  about the effectiveness
of the  disclosure  controls and  procedures  based on our  evaluation as of the
Evaluation Date;

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

     a) All  significant  deficiencies  in the design or  operation  of internal
controls  which  could  adversely  affect  the  registrant's  ability to record,
process,  summarize  and  report  financial  data  and have  identified  for the
registrant's auditors any material weaknesses in internal controls; and

     b) Any fraud,  whether or not material,  that involves  management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officer and I have indicated in this annual
report whether there were significant  changes in internal  controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent  evaluation,  including any corrective actions with regard to
significant deficiencies and material weaknesses.

Date:  January 24, 2003


/s/ David W. Brunton
---------------------------
David W. Brunton
Chief Financial Officer,
Vice President, Finance
and Secretary



                                       35
<PAGE>



                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of SBE, Inc.:


In our  opinion,  the  consolidated  financial  statements  listed  in the index
appearing  under  Item  15(a)(1)  on page 29  present  fairly,  in all  material
respects,  the financial  position of SBE, Inc. and its  subsidiaries at October
31, 2002 and 2001, and the results of their  operations and their cash flows for
each of the three years in the period ended October 31, 2002 in conformity  with
accounting  principles  generally  accepted in the United States of America.  In
addition,  in our opinion,  the financial statement schedule listed in the index
appearing  under Item  15(a)(2)  on page 29  presents  fairly,  in all  material
respects,  the information  set forth therein when read in conjunction  with the
related  consolidated  financial  statements.  These  financial  statements  and
financial statement schedule are the responsibility of the Company's management;
our  responsibility  is to express an opinion on these financial  statements and
financial  statement  schedule  based on our audits.  We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United  States of America,  which  require that we plan and perform the audit to
obtain reasonable  assurance about whether the financial  statements are free of
material  misstatement.  An audit includes examining,  on a test basis, evidence
supporting the amounts and  disclosures in the financial  statements,  assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for our opinion.

The accompanying  consolidated  financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated  financial  statements,  the Company has suffered  recurring losses
from operations and has generated negative cash flows from operations that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1. The  consolidated
financial  statements do not include any adjustments  that might result from the
outcome of this uncertainty.

/s/  PricewaterhouseCoopers LLP

San Francisco, California
January 13, 2003




                                       36
<PAGE>



SBE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>

October 31                                                                    2002                 2001
------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>                      <C>
ASSETS

Current assets:
   Cash and cash equivalents                                             $       1,582         $       3,644
   Trade accounts receivable, net                                                  888                   760
   Inventories                                                                   1,910                4,428O
   Other                                                                           220                   464
                                                                         -------------           -----------
          Total current assets                                                   4,600                 9,296
Property and equipment, net                                                        533                 1,236
Capitalized software costs, net                                                    110                    86
Other                                                                               78                    72
                                                                         -------------         -------------

          Total assets                                                   $       5,321         $      10,690
                                                                         =============         =============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Trade accounts payable                                               $         488         $         545
    Accrued payroll and employee benefits                                          159                   343
    Current portion of refundable deposit                                          447                   ---
    Other                                                                          521                   813
                                                                         -------------         -------------
             Total current liabilities                                           1,615                 1,701

Other long term liabilities                                                         10                   ---
Refundable deposit                                                                 ---                 4,870
                                                                         -------------         -------------

                  Total liabilities                                              1,625                 6,571
                                                                         -------------         -------------
Commitments and contingencies (Notes 7 and 10)

Stockholders' equity:
    Convertible preferred stock:  no par value;
         Authorized 167,339 shares; issued 163,344 in fiscal 1999;
         none outstanding at October 31, 2002 and 2001                             ---                   ---
    Common stock and additional paid-in capital
         ($0.001 par value); authorized 10,000,000 shares; issued 4,137,612 and
         3,521,037 shares at October 31, 2002 and 2001, respectively (including
         treasury shares:  79,500 at October 31, 2002 and 2001)                 14,711                13,877
    Note receivable from stockholder                                              (270)                 (744)
    Treasury stock                                                                (409)                 (409)
    Retained  deficit                                                          (10,336)               (8,605)
                                                                         --------------        --------------

                  Total stockholders' equity                                     3,696                 4,119
                                                                         -------------         -------------

                  Total liabilities and stockholders' equity             $       5,321         $      10,690
                                                                         =============         =============
</TABLE>


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



                                       37
<PAGE>


<TABLE>
<CAPTION>
SBE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share amounts)

For the years ended October 31                                      2002                2001              2000
-------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>                 <C>                 <C>
Net sales                                                   $         6,898     $         7,726    $         29,178
Cost of sales                                                         3,170               4,860              10,418
                                                            ---------------     ---------------    ----------------

     Gross profit                                                     3,728               2,866              18,760

Product research and development                                      3,027               5,652               5,635
Sales and marketing                                                   2,151               3,105               4,612
General and administrative                                            2,364               3,265               4,602
Loan reserve                                                            474                 ---                 ---
Restructuring costs                                                     446                 964                 ---
                                                            ---------------     ---------------    ----------------

     Total operating expenses                                         8,462              12,986              14,849

     Operating income (loss)                                         (4,734)            (10,120)              3,911

Interest income                                                          51                 225                 185
Forfeited deposit, net                                                2,712                 ---                 ---
Other income                                                             63                 ---                 ---
                                                            ---------------     ---------------    ----------------

     Income (loss) before income taxes                               (1,908)             (9,895)              4,096

Benefit (provision) for income taxes                                    177                  (1)               (126)
                                                            ---------------     ----------------   -----------------

Net income (loss)                                           $        (1,731)    $        (9,896)   $          3,970
                                                            ================    ================   ================


Basic earnings (loss) per common share                      $         (0.46)    $         (2.92)   $          1.24
                                                            ================    ================   ===============

Diluted earnings (loss) per common share                    $         (0.46)    $         (2.92)   $          1.04
                                                            ================    ================   ===============

Basic - Shares used in per share
     computations                                                     3,759               3,390               3,208
                                                            ===============     ===============    ================

Diluted - Shares used in per share
     computations                                                     3,759               3,390               3,814
                                                            ===============     ===============    ================

</TABLE>

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

                                       38
<PAGE>

SBE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                            Common Stock
                                                                       Convertible         and Additional      Note  Receivable
                                                                     Preferred Stock       Paid-in Capital     from stockholder
<S>                                                                 <C>        <C>       <C>        <C>       <C>
                                                                     Shares     Amount    Shares     Amount

Balance, October 31, 1999                                            163,344   $ 1,429   2,984,327  $11,110    $          (744)
Stock issued in connection with stock option plans                         -         -     222,334    1,081                  -
Stock retired/issued in connection with conversion to common stock  (163,344)   (1,429)    163,344    1,429                  -
Stock issued in connection with stock purchase plan                        -         -      19,331      104                  -
Stock repurchase                                                           -         -           -        -                  -
Deferred stock-based compensation                                          -         -           -      131                  -
Amortization of deferred stock compensation                                -         -           -        -                  -
Net income                                                                 -         -           -        -                  -
                                                                    ---------  --------  ---------  --------   ---------------
Balance, October 31, 2000                                                  -         -   3,389,336   13,855               (744)
Stock issued in connection with stock option plans                         -         -      99,054       51                  -
Stock issued in connection with stock purchase plan                        -         -      32,645      109                  -
Forfeiture of unvested stock options                                       -         -           -     (138)                 -
Amortization of deferred stock compensation                                -         -           -        -                  -
Net loss                                                                   -         -           -        -                  -
                                                                    ---------  --------  ---------  --------   ---------------
Balance, October 31, 2001                                                  -         -   3,521,035   13,877               (744)
Stock issued in connection with stock purchase plan                        -         -      47,596       31                  -
Stock and warrant issued in connection with private placement              -         -     555,556      782                  -
Stock issued to Board of Directors in lieu of cash payments                -         -      13,425       21                  -
Valuation allowance on note receivable from officer                        -         -           -        -                474
Net loss                                                                   -         -           -        -                  -
                                                                    ---------  --------  ---------  -------   ----------------
Balance, October 31, 2002                                                  -   $     -   4,137,612  $14,711   $           (270)
                                                                    =========  ========  =========  ========  ================
                                                                                                        Retained
                                                                                        Deferred        Earnings
                                                                    Treasury Stock     Stock-Based    (Accumulated
                                                                    Shares   Amount    Compensation      deficit)    Total
<S>                                                                 <C>      <C>       <C>             <C>           <C>
Balance, October 31, 1999                                             74,500  $ (358)  $      (122) $      (2,679) $    8,636
Stock issued in connection with stock option plans                         -       -             -              -       1,081
Stock retired/issued in connection with conversion to common stock         -       -             -              -           -
Stock issued in connection with stock purchase plan                        -       -             -              -         104
Stock repurchase                                                       5,000     (51)            -              -         (51)
Deferred stock-based compensation                                          -       -          (131)             -           -
Amortization of deferred stock compensation                                -       -            89              -          89
Net income                                                                 -       -             -          3,970       3,970
                                                                      ------  ------   -----------  -------------  -----------
Balance, October 31, 2000                                             79,500    (409)         (164)         1,291      13,829
Stock issued in connection with stock option plans                         -       -             -              -          51
Stock issued in connection with stock purchase plan                        -       -             -              -         109
Forfeiture of unvested stock options                                       -       -           138              -           -
Amortization of deferred stock compensation                                -       -            26              -          26
Net loss                                                                   -       -             -         (9,896)     (9,896)
                                                                      ------  ------   -----------  -------------  -----------
Balance, October 31, 2001                                             79,500    (409)            -         (8,605)      4,119
Stock issued in connection with stock purchase plan                        -       -             -              -          31
Stock and warrant issued in connection with private placement              -       -             -              -         782
Stock issued to Board of Directors in lieu of cash payments                -       -             -              -          21
Valuation allowance on note receivable from officer                        -       -             -              -         474
Net loss                                                                   -       -             -         (1,731)     (1,731)

Balance, October 31, 2002                                             79,500  $ (409)  $         -  $     (10,336) $    3,696
                                                                    ========  ======   ===========  =============  ==========
</TABLE>


The accompanying notes are an integral part of these consolidated financial
statements.
table to be converted

                                       39
<PAGE>

SBE,  INC.
CONSOLIDATED  STATEMENTS  OF  CASH  FLOWS
(in  thousands)
<TABLE>
<CAPTION>



For the years ended October 31                                           2002      2001      2000
---------------------------------------------------------------------  --------  --------  --------
<S>                                                                    <C>       <C>       <C>

Cash flows from operating activities:
  Net income (loss)                                                    $(1,731)  $(9,896)  $ 3,970
  Adjustments to reconcile net income (loss) to net cash
                provided by (used in) operating activities:
    Depreciation and amortization                                          730     1,077       962
    Non-cash restructuring costs                                           185       337       ---
    Stock-based compensation expense                                        21        26        89
    Non-cash valuation allowance on loan from officer                      474       ---       ---
    Effect of remeasured warrant                                           (83)      ---       ---
    Loss on sale of assets                                                  19         5       ---
    Changes in operating assets and liabilities:
      Trade accounts receivable                                           (128)    3,536      (808)
      Inventories                                                        2,518       490    (2,951)
      Other assets                                                         238       (70)      (89)
      Trade accounts payable                                               (57)     (549)      (26)
      Other current liabilities                                            (29)   (1,060)    1,211
      Non-current liabilities                                           (4,860)    4,582       (64)
                                                                       --------  --------  --------
        Net cash provided by (used in) operating activities             (2,703)   (1,522)    2,294
                                                                       --------  --------  --------

Cash flows from investing activities:
    Purchases of property and equipment                                   (149)     (299)   (1,320)
    Proceeds from sale of assets                                           ---         4       ---
    Capitalized software costs                                            (105)      (10)     (182)
                                                                       --------  --------  --------
        Net cash used in investing activities                             (254)     (305)   (1,502)
                                                                       --------  --------  --------

Cash flows from financing activities:
  Proceeds from stock plans                                                 31       160     1,185
  Proceeds from issuance of common stock and warrants                      864       ---       ---
  Purchase of treasury stock                                               ---       ---       (51)
                                                                       --------  --------  --------
        Net cash provided by financing activities                          895       160     1,134
                                                                       --------  --------  --------

      Net decrease in cash and cash equivalents                         (2,062)   (1,667)   (1,926)

Cash and cash equivalents at beginning of year                           3,644     5,311     3,385
                                                                       --------  --------  --------
Cash and cash equivalents at end of year                               $ 1,582   $ 3,644   $ 5,311
                                                                       ========  ========  ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
  Interest                                                             $   ---   $   ---   $    24
                                                                       ========  ========  ========
  Income taxes                                                         $   ---   $   ---   $   126
                                                                       ========  ========  ========

SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES

Conversion of preferred stock into common stock                        $   ---   $   ---   $ 1,429
                                                                       ========  ========  ========

</TABLE>


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

                                       40


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

THE COMPANY AND BASIS OF PRESENTATION:

SBE,   Inc.   and   subsidiaries   design   and   manufacture   high-performance
communications   controllers  and  equipment  used  primarily  in  carrier-grade
computer systems and signaling, switching and routing networks. Our products are
sold worldwide. Our business falls primarily within one industry segment.

The consolidated financial statements include the financial position and results
of operations of LAN Media Corporation,  ("LMC"),  which we acquired on July 14,
2000.  The merger was accounted  for as a pooling of interests and  accordingly,
financial  statements  presented  for all periods have been  restated to reflect
combined operations and financial position. As consideration for all outstanding
shares of LMC, we issued  316,101  shares of our Common Stock.  In addition,  we
assumed all outstanding options held by LMC option holders.

The consolidated  financial statements contemplate the realization of assets and
the  satisfaction  of liabilities in the normal course of business.  We incurred
net losses of $1.7 million and $9.9 million for the years ended October 31, 2002
and 2001,  respectively,  and generated  negative cash flows from  operations of
$2.7  million and $1.5  million in these  years.  Our plans with respect to this
matter included the restructuring executed in the fourth quarter of fiscal 2002,
which  reduced  headcount  from 47 employees to 24 employees and has reduced our
cost  structure  going  forward.  We believe the cost  reduction and a projected
increase in sales during fiscal 2003 will generate sufficient cash flows to fund
our operations through October 31, 2003. However, these projected sales are to a
limited  number of new and existing OEM  customers and are based on internal and
customer provided  estimates of future demand,  not firm customer orders. If the
projected sales do not materialize,  we will need to reduce expenses further and
raise additional capital through customer prepayments or the issuance of debt or
equity  securities.  If  additional  funds are raised  through  the  issuance of
preferred  stock or debt,  these  securities  could have rights,  privileges  or
preferences  senior to those of Common Stock,  and debt  covenants  could impose
restrictions  on our  operations.  The sale of  equity or debt  could  result in
additional  dilution  to current  stockholders,  and such  financing  may not be
available  to us on  acceptable  terms,  if at all. The  consolidated  financial
statements do not include any  adjustments  relating to the  recoverability  and
classification of recorded assets or the amount or classification of liabilities
or any other adjustments that might be necessary should we be unable to continue
as a going concern.

PRINCIPLES OF CONSOLIDATION:

The consolidated  financial statements include the accounts of SBE, Inc. and its
wholly-owned subsidiaries.  All intercompany balances and transactions have been
eliminated in consolidation.

USE OF ESTIMATES:

The  preparation  of  consolidated   financial  statements  in  conformity  with
generally  accepted  accounting  principles  in the  United  States  of  America
requires us to make estimates and assumptions  that affect the reported  amounts
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial  statements  and the reported  amounts of revenues and



                                       41
<PAGE>

expenses during the reporting period.  Such estimates include levels of reserves
for  doubtful  accounts,  obsolete  inventory,  warranty  costs and deferred tax
assets. Actual results could differ from those estimates.

FAIR VALUE OF FINANCIAL INSTRUMENTS:

The fair value of our cash and cash equivalents,  accounts receivable,  accounts
payable and accrued  liabilities  approximate  their  carrying  value due to the
short-term maturity rate structure of those instruments.

CASH AND CASH EQUIVALENTS:

We consider all highly liquid investments  readily convertible into cash with an
original  maturity  of three  months or less upon  acquisition  by us to be cash
equivalents.  Substantially  all of our cash and cash  equivalents are held with
one large financial institution.

INVENTORIES:

Inventories  are  stated at the lower of cost,  using  the  first-in,  first-out
method, or market value. Our inventories include  high-technology parts that may
be  subject  to rapid  technological  obsolescence.  We  consider  technological
obsolescence  in  estimating  required  reserves to reduce  recorded  amounts to
market  values.  Such  estimates  could change in the future and have a material
adverse impact on our financial position and results of operations.

PROPERTY AND EQUIPMENT:

Property and equipment are carried at cost. We record depreciation  charges over
the assets'  estimated  useful lives of three to eight years, on a straight-line
basis.  Leasehold  improvements  are  amortized  over the lesser of their useful
lives or the remaining term of the related leases.

When  assets  are sold or  otherwise  disposed  of,  the  cost  and  accumulated
depreciation  are  removed  from  the  accounts  and any gain or loss on sale or
disposal is recognized in  operations.  Maintenance,  repairs and minor renewals
are charged to expense as incurred. Expenditures which substantially increase an
asset's useful life are capitalized.

We review  property and equipment for impairment  whenever  events or changes in
circumstances indicate the carrying value of an asset may not be recoverable. In
performing  the review for  recoverability,  we would  estimate the future gross
cash  flows  expected  to  result  from the use of the  asset  and its  eventual
disposition.  If such gross cash flows are less than the carrying  amount of the
asset, the asset is considered  impaired.  The amount of the impairment loss, if
any, would then be calculated  based on the excess of the carrying amount of the
asset over its fair value.

During  the year  ended  October  31,  2001,  we  committed  to  relocating  our
engineering and administrative headquarters located in San Ramon, California and
as a consequence  wrote off $337,000 in leasehold  improvements and property and
equipment  associated  with the former  headquarters  location.  During the year
ended October 31, 2002, we abandoned and closed our research facility located in
Madison,  Wisconsin,  and as a  consequence  wrote  off  $185,000  in  leasehold
improvements  and property and equipment  associated  with this location.  These
write offs are included in restructuring costs in their respective fiscal years.

                                       42
<PAGE>

CAPITALIZED SOFTWARE COSTS:

Capitalized  software  costs consist of costs to purchase  software and costs to
internally  develop  software.  Capitalization of software costs begins upon the
establishment of technological  feasibility.  All capitalized software costs are
amortized  as related  sales are  recorded  on a  per-unit  basis with a minimum
amortization  based on a straight-line  method over a two-year  estimated useful
life. We evaluate the estimated net  realizable  value of each software  product
and record  provisions to the asset value of each product for which the net book
value is in excess of the net realizable value. No internal software development
costs were capitalized in the years ended October 31, 2002, 2001 and 2000.

REVENUE RECOGNITION AND WARRANTY COSTS:

We record  product sales at the time of product  shipment  provided that we have
received a customer-executed  purchase order, the price is fixed, title and risk
of loss have transferred to the customer, collection of the resulting receivable
is reasonably assured, and there are no significant  remaining  obligations.  We
provide a reserve for estimated warranty costs, which have not been significant,
at the time of sale based on historical  experience and  expectations  of future
conditions,  and periodically adjust such amount to reflect actual expenses. Our
sales transactions are negotiated in U.S. dollars.

PRODUCT RESEARCH AND DEVELOPMENT EXPENDITURES:

Product  research  and  development  ("R&D")  expenditures,  other than  certain
software  development  costs,  are charged to expense as  incurred.  Contractual
reimbursements for R&D expenditures under joint R&D contracts with customers are
accounted  for as a reduction  of related  expenses as  incurred.  For the years
ended October 31, 2002, 2001 and 2000, direct costs incurred under R&D contracts
were $7,900, $7,000 and $203,000,  respectively,  and reimbursements earned were
$7,900, $22,913 and $290,413 , respectively.

REFUNDABLE DEPOSIT:

A refundable  deposit  associated with a multi-year  supply agreement with HP of
$4.9  million was  received in April 2001.  This  deposit was  refundable  as we
delivered certain quantities of products to HP over a four year period ending in
2005.  The supply  contact  was  restructured  in fiscal 2002 to include a final
purchase order for $1.6 million of our products to be shipped to HP in the first
two quarters of fiscal 2003 and the forfeiture by HP of $4.4 million of the $4.9
million refundable deposit.  Under the agreement,  we are required to retain for
future  production or repair all VCOM finished  goods and spare parts  inventory
through  October 31, 2005 unless notified  otherwise by HP.  Concurrent with the
forfeiture of the $4.4 million refundable deposit, we recorded a reserve of $1.7
million  related to inventory  purchased to fulfill the expected  future  orders
under the HP supply  agreement.  The $2.7 million of  forfeiture  of  refundable
deposit net of inventory  reserve is presented under Forfeited  deposit,  net on
the Statements of Operations. The remaining $447,000 of the deposit will be paid
to HP in  the  second  quarter  of  fiscal  2003  and  is  included  in  current
liabilities at October 31, 2002


                                       43
<PAGE>


STOCK-BASED COMPENSATION:

We account for stock-based employee compensation arrangements in accordance with
Accounting  Principles  Board  Opinion No. 25,  "Accounting  for Stock Issued to
Employees," ("APB 25") and comply with the disclosure provisions of Statement of
Financial  Accounting  Standards  ("SFAS") No. 123,  "Accounting for Stock-Based
Compensation". Under APB 25, compensation expense is based on the difference, if
any,  on the date of the  grant  between  the fair  value of our  stock  and the
exercise  price of the  option.  We  account  for equity  instruments  issued to
non-employees  in  accordance  with SFAS No. 123 and Emerging  Issues Task Force
("EITF") 96-18, "Accounting for Equity Instruments that are Issued to Other than
Employees for  Acquiring,  or in Conjunction  with Selling,  Goods or Services",
which require that such equity instruments be recorded at their fair value.

INCOME TAXES:

We account for income taxes in  accordance  with SFAS No. 109,  "Accounting  for
Income Taxes." SFAS No. 109 requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of items that have been included
in the consolidated  financial statements or tax returns.  Deferred income taxes
represent  the future  net tax  effects  resulting  from  temporary  differences
between the financial  statement and tax bases of assets and liabilities,  using
enacted tax rates in effect for the year in which the  differences  are expected
to reverse.  Valuation  allowances are recorded  against net deferred tax assets
where, in our opinion,  realization is uncertain. The provision for income taxes
represents the net change in deferred tax amounts, plus income taxes payable for
the current period.

NET EARNINGS PER COMMON SHARE:

Basic earnings per common share is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding.  Diluted earnings
per common  share is  computed  by dividing  net income  (loss) by the  weighted
average  number  of  shares  of  common  stock  and  common  stock   equivalents
outstanding.  Common  stock  equivalents  relate to stock  options  and  include
605,803 shares of common stock for the year ended October 31, 2000. Common stock
equivalents  are excluded from the diluted  earnings per share  calculation  for
fiscal 2002 and 2001 due to their anti-dilutive effect.

COMPREHENSIVE INCOME:

Comprehensive income is defined as the change in equity of a business enterprise
during a period  from  transactions  and other  events  and  circumstances  from
non-owner  sources.  Through October 31, 2002, we have not had any  transactions
that  were  required  to  be  reported  in  other   comprehensive   income  and,
accordingly, comprehensive income (loss) is the same as net income (loss).

RECENT ACCOUNTING PRONOUNCEMENTS:

In June 1998, the Financial  Accounting Standards Board (the "FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." In June
1999,  the FASB issued SFAS No. 137,  which required us to adopt SFAS No. 133 in
the first quarter of fiscal 2001. The new standard required  companies to record
derivatives  on the  balance  sheet as assets or  liabilities,  measured at fair



                                       44
<PAGE>

value. Gains or losses resulting from changes in the values of those derivatives
are reported in the statement of operations or as a deferred item,  depending on
the use of the  derivatives  and whether they qualify for hedge  accounting.  We
adopted SFAS No. 133 as required for our first  quarterly  filing of fiscal year
2001 with no material impact on our consolidated financial statements.

In December  1999, the  Securities  and Exchange  Commission  (the "SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB  101").  SAB 101,  as  amended,  summarized  the SEC's  views in  applying
generally  accepted  accounting  principles to revenue  recognition in financial
statements.  We  adopted  SAB 101 in the fourth  quarter of fiscal  2001 with no
material impact on our consolidated financial statements.

In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142,  "Goodwill  and  Other  Intangibles  Assets".  SFAS  No.  141  revises  the
accounting  treatment for business  combinations,  requiring the use of purchase
accounting and  prohibiting the use of the  pooling-of-interests  method for all
business  combinations  initiated after June 30, 2001, and broadens the criteria
for  recording  intangible  assets  separate  from  goodwill  for  all  business
combinations  completed after June 30, 2001. SFAS No. 142 revises the accounting
for goodwill and other  intangibles  assets by not allowing the  amortization of
goodwill and  establishing  accounting  for the impairment of goodwill and other
intangible  assets.  We  adopted  SFAS No. 142 as of  November  1, 2002 and such
adoption  did  not  have  a  material  effect  on  our  consolidated   financial
statements.

In October 2001,  the FASB issued SFAS No. 144,  "Accounting  for  Impairment or
Disposal  of  Long-Lived   Assets."  SFAS  No.  144  supercedes  SFAS  No.  121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" and applies to all  long-lived  assets  (including  discontinued
operations) and consequently amends Accounting  Principles Board Opinion No. 30,
"Reporting Results of Operations  Reporting the Effects of Disposal of a Segment
of a Business."  SFAS No. 144 is effective for financial  statements  issued for
years  beginning  after  December  15,  2001.  The  adoption  of SFAS No. 144 on
November 1, 2002 did not have a material  impact on our  consolidated  financial
position or results of operations.

In June 2002,  the FASB issued SFAS No.  146,  "Accounting  for Exit or Disposal
Activities".   SFAS  No.  146  addresses   significant   issues   regarding  the
recognition,  measurement  and reporting of costs that are associated  with exit
and disposal activities,  including restructuring  activities that are currently
accounted for under EITF No. 94-3,  "Liability  Recognition for Certain Employee
Termination  Benefits  and Other  Costs to Exit an Activity  (including  Certain
Costs  Incurred in a  Restructuring)".  The scope of SFAS No. 146 also  includes
costs  related  to  terminating  a  contract  that is not a  capital  lease  and
termination  benefits that employees who are  involuntarily  terminated  receive
under the terms of a one-time benefit arrangement that is not an ongoing benefit
arrangement or an individual  deferred-compensation  contract. SFAS No. 146 will
be effective for exit or disposal  activities  that are initiated after December
31, 2002.  We will adopt SFAS No. 146 for exit or disposal  activities  that are
initiated after December 31, 2002. The adoption of SFAS No. 146 will change,  on
a prospective basis, the timing of when restructuring  charges are recorded from
a commitment date approach to when the liability is incurred.


                                       45
<PAGE>



Reclassifications:

Certain reclassifications have been made to the 2001 and 2000 financial
statements to conform to the 2002 presentation with no effect on net income
(loss) or stockholders' equity as previously reported.

2.  INVENTORIES

Inventories at October 31, 2002 and 2001 comprise the following (in thousands):
<TABLE>
<CAPTION>

                                                                     2002                    2001
--------------------------------------------------------------------------------------------------------
<S>                                                           <C>                     <C>
         Finished goods                                       $              985      $            1,546
         Parts and materials                                                 925                   2,882
                                                              ------------------      ------------------

         Total inventory                                      $            1,910      $            4,428
                                                              ==================      ==================
</TABLE>

3.  PROPERTY AND EQUIPMENT

Property and equipment at October 31, 2002 and 2001 are comprised of the
following (in thousands):
<TABLE>
<CAPTION>

                                                                     2002                    2001
--------------------------------------------------------------------------------------------------------
<S>                                                           <C>                     <C>
         Machinery and equipment                              $            4,948      $            7,548
         Furniture and fixtures                                              236                   1,146
         Leasehold improvements                                              290                     536
                                                              ------------------      ------------------
                                                                           5,474                   9,230
         Less accumulated depreciation
           and amortization                                               (4,941)                 (7,994)
                                                              ------------------      ------------------

                                                              $              533      $            1,236
                                                              ==================      ==================
</TABLE>

Depreciation and amortization expense totaled $649,000, $860,000 and $863,000
for the years ended October 31, 2002, 2001 and 2000, respectively.

4.  CAPITALIZED SOFTWARE COSTS

Capitalized software costs at October 31, 2002 and 2001 comprise the following
(in thousands):
<TABLE>
<CAPTION>

                                                                     2002                    2001
--------------------------------------------------------------------------------------------------------
<S>                                                           <C>                     <C>
Purchased software                                            $              881      $              776
Internally developed software                                                805                     805
                                                              ------------------      ------------------
                                                                           1,686                   1,581

Less accumulated amortization                                             (1,576)                 (1,495)
                                                              -------------------     -------------------
                                                              $              110      $               86
                                                              ==================      ==================
</TABLE>

                                       46
<PAGE>

The Company  capitalized  $105,000,  $10,000 and $182,000 of purchased  software
costs in 2002, 2001, and 2000 respectively. Amortization of capitalized software
costs totaled  $81,000,  $217,000,  and $227,000 for the years ended October 31,
2002, 2001, and 2000, respectively.

5.   STOCKHOLDERS' EQUITY

On December 15, 1997, we reincorporated in the state of Delaware.  In connection
with this event, we increased the number of authorized shares of preferred stock
to 2,000,000  shares,  and  established a par value of $0.001 per share for both
our common and preferred stock.

In May 1999,  our Board of Directors  authorized  us to repurchase up to 100,000
shares of our issued and outstanding Common Stock.  During fiscal 1999 and 2000,
we  repurchased  79,500  shares of our  Common  Stock in the open  market for an
aggregate purchase price of approximately $409,000.

We acquired LMC on July 14, 2000. As consideration for all outstanding shares of
LMC, we issued 316,101 shares of our Common Stock.  In addition,  we assumed all
outstanding options held by LMC option holders.

On April 30, 2002, we completed a private  placement of 555,556 shares of Common
Stock at $1.80 per share plus a warrant  to  purchase  111,111  shares of common
stock,  resulting in gross cash  proceeds of  approximately  $1.0  million.  The
warrant has a term of three  years and is  exercisable  at $2.00 per share.  The
equity investment was made by Stonestreet L.P., of Ontario,  Canada.  The shares
of Common Stock and the shares of Common Stock  associated  with the Stonestreet
LP and Vintage  Partners LLC warrants were  registered  with the  Securities and
Exchange  Commission and the  registration  statement was declared  effective on
June 14, 2002.

The fair value of the Stonestreet L.P. warrant of $164,000 on its issue date was
computed  using the  Black-Scholes  option  pricing  model and was recorded as a
liability  pursuant  to the  provisions  of EITF No.  00-19,  "Determination  of
Whether  Share  Settlement  is Within the Control of the Issuer for  Purposes of
Applying Issue 96-3" as cash penalties could have been payable to Stonestreet LP
in the event a registration  statement  related to the private placement was not
declared  effective  and  maintained.  The  registration  statement was declared
effective  on  June  14,  2002.  On  August  22,  2002,  the  private  placement
subscription  agreement was amended such that no cash  penalties are now payable
with respect to the warrant. Accordingly, as of August 22, 2002, the warrant was
reclassified from liabilities to equity at its fair value of $81,000,  resulting
in $83,000 of other income.

In connection  with the private  placement,  we retained the services of Vintage
Partners LLC of New York,  New York and paid to Vintage  Partners a finder's fee
of $60,000 and a warrant to purchase 11,429 shares of Common Stock.  The warrant
has a three year term and is exercisable at $3.50 per share.

During  fiscal  2002,  we  issued  13,425  shares  of our  Common  Stock  to the
non-employee  members  of our Board of  Directors  in lieu of 50% of their  cash
compensation. The value of the Common Stock of $21,000 was recorded as a general
and administrative expense.



                                       47
<PAGE>

6.  INCOME TAXES
<TABLE>
<CAPTION>

The  components  of the provision (benefit) for income taxes for the years ended
October  31,  2002,  2001  and  2000,  comprise  the  following:
                                                                     2002               2001                2000
---------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>                <C>                <C>
    Federal:
         Current                                                $        (161)      $         ---       $         109
         Deferred                                                         ---                 ---                 ---
    State:
         Current                                                          (16)                  1                  17
         Deferred                                                         ---                 ---                 ---
                                                                -------------       -------------       -------------
              Total provision (benefit) for income taxes        $        (177)      $           1       $         126
                                                                ==============      =============       =============
</TABLE>

We recorded a tax benefit of $91,000 in fiscal 2002 due to the  expected  refund
of federal  income taxes related to the Job Creation and Workers  Assistance Act
of 2002 which extends the net operating loss  carryback  period from two to five
years for losses  generated in tax years ending in 2002.   We also filed amended
federal  and state tax  returns to claim  $86,000 in  research  and  development
credits related to LMC.
<TABLE>
<CAPTION>

The effective income tax rate differs from the statutory federal income tax rate for the following reasons:
                                                                     2002               2001                2000
---------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>               <C>                 <C>
         Statutory federal income tax rate                            (34.0)%            (34.0)%              34.0%
         Change in valuation allowance                                 25.0               34.0               (30.9)
         Other                                                          1.0                ---                 ---
                                                                        ---                ---                 ---
                                                                       (8.0)%                0%                3.1%
                                                                       ======           =========       ============
</TABLE>

Significant components of our deferred tax balances as of October 31, 2002 and
2001 are as follows:
<TABLE>
<CAPTION>
                                                                                  2002               2001
-------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>                  <C>
     Deferred tax assets:
         Current
               Accrued employee benefits                                    $        230         $        57
               Inventory allowances                                                  944                 498
               Allowance for doubtful accounts                                        37                  90
               Warranty accruals                                                      22                  22

         Noncurrent
               R&D credit carryforward                                             2,475               2,546
               Alternative minimum tax carryforward                                   80                 193
               Net operating loss carryforwards                                    4,202               2,310
               Refundable deposit                                                    178               1,940
               Depreciation and amortization                                         261                  55
               Restructuring costs                                                   164                 369
                                                                            ------------        ------------
                  Total deferred tax assets                                        8,593               8,080
                                                                            ------------        ------------
     Deferred tax liabilities:

     Deferred tax asset valuation allowance                                       (8,593)             (8,080)
                                                                            ------------        ------------
         Net deferred tax assets                                            $        ---        $        ---
                                                                            ============        ============

</TABLE>

A  valuation  allowance is recorded to offset certain deferred tax assets due to
management's  uncertainty of realizing the benefit of these items. The valuation
allowance  increased  by $0.5 million in fiscal 2002 primarily as a result of an
increase  in  unrealized  net  operating  loss carryforwards, an increase in the


                                       48
<PAGE>

inventory  allowance and an increase in accrued employee benefits.  The increase
was partially offset by the forfeiture of the $4.4 million refundable deposit in
fiscal 2002 that was  recognized  for tax purposes in fiscal 2001. The valuation
allowance increased in fiscal 2001 by $4.9 million as a result of an increase in
the  R&D  credit   carryforward,   in  increase  in  the  net   operating   loss
carryforwards,  restructuring  costs  and  advance  receipts  from a  refundable
deposit associated with a multi-year supply agreement with HP.

At  October  31,  2002,  we  have  research  and   experimentation   tax  credit
carryforwards  of $1.7  million  and $0.8  million  for  federal  and  state tax
purposes,  respectively.  These carryforwards  expire in the periods ending 2009
through  2022. We have net operating  loss  carryforwards  for federal and state
income  tax  purposes  of   approximately   $11.0   million  and  $5.3  million,
respectively, which expire in periods ending 2003 through 2022.

7. COMMITMENTS

We lease our buildings under noncancelable operating leases which expire at
various dates through the year 2007. Future minimum lease payments under
noncancelable operating leases, are as follows (in thousands):

         Year ending October 31:
              2003                                                        $1,147
              2004                                                         1,012
              2005                                                           731
              2006                                                           300
              2007                                                             6
                                                                     -----------
                                                                           3,196
              Less: total reimbursements from subleases                  (2,253)
                                                                         -------
              Total minimum lease payments                                $  943
                                                                          ======

In November  2001, we entered into a facilities  lease for our  engineering  and
administrative  headquarters located in San Ramon, California. The lease expires
in 2004. We expect the new facility to satisfy our anticipated needs through the
foreseeable  future.  Additionally,  we assigned the lease related to our former
63,000 square foot  engineering and  administrative  headquarters  facility to a
third-party  corporation.  The third-party corporation has guaranteed payment of
the remaining  lease  payments  though the  termination of the original lease in
2006.

We leased 6,100 square feet of office  space in Madison,  Wisconsin  for various
product  development  activities.  We vacated this office space prior to October
31, 2002 and reached  agreement  with the property owner to terminated the lease
releasing us from further financial obligations effective December 31, 2002.

Additionally,   through  the   acquisition   of  LMC  in  July  2000,  we  lease
approximately 3,650 square feet of office space in Sunnyvale,  CA. The Sunnyvale
lease expires in May 2003.  In fiscal 2001, we subleased  this office space to a
third party corporation for the remaining term of the lease.

Our  rent  expense  under  all  operating  leases,  net  of  reimbursements  for
subleases, for the years ended October 31, 2002, 2001 and 2000 totaled $549,000,
$844,000 and $753,000,  respectively. We had reimbursements of sublease proceeds
of $158,000,  $261,000 and $390,000 for the years ended  October 31, 2002,  2001
and 2000, respectively..

                                       49
<PAGE>

8.  STOCK OPTION AND STOCK PURCHASE PLANS

We sponsor two  employee  stock  option  plans,  the 1996 Stock Option Plan (the
"1996 Plan") and the 1998  Non-Officer  Stock Option Plan (the "1998  Plan").  A
total of 1,730,000  shares of Common Stock were reserved  under the 1996 Plan at
October 31, 2002. A total of 650,000  shares of Common Stock are reserved  under
the 1998  Plan.  Stock  options  granted  under  the 1996  and  1998  Plans  are
exercisable  over a maximum  term of ten years  from the date of grant,  vest in
various  installments  over a one to four-year  period and have exercise  prices
reflecting the market value of the shares of Common Stock on the date of grant.

Additionally,  in 1991,  stockholders  approved a  Non-Employee  Director  Stock
Option Plan (the "Director Plan"). A total of 140,000 shares of Common Stock are
reserved  for  issuance  under the  Director  Plan.  Options  granted  under the
Director  Plan vest over a one to four-year  period,  expire five to seven years
after the date of grant and have exercise prices  reflecting market value at the
date of grant.

At  October  31,  2002 and 2001,  96,253  and  191,536  shares of Common  Stock,
respectively,  were  available  for grant under the 1996 Plan. A total of 36,714
and 103,768  shares of Common Stock were available for grant under the 1998 Plan
at October 31, 2002 and 2001, respectively.  A total of 42,750 and 40,750 shares
of Common Stock were  available for grant under the Director Plan at October 31,
2002 and 2001, respectively.

A summary of the combined activity under all of the stock option plans is set
forth below:
<TABLE>
<CAPTION>

                                                                                         Weighted
                                                                                          Average
                                        Number of             Price Per                  Exercise
                                         Shares                 Share                     Price
-----------------------------------------------------------------------------------------------
<S>                                       <C>                 <C>                         <C>
       Outstanding at
           October 31, 1999                 976,213         $  0.51 - $13.00               $  5.10

       Granted                              617,995         $  1.27 -  24.81               $ 11.71
       Terminated                          (124,995)        $  0.51 -  21.56               $  6.89
       Exercised                           (222,334)        $  0.51 -  13.00               $  4.86
                                           -------------------------------------------------------
       Outstanding at
           October 31, 2000               1,246,879         $  0.51 - $24.81               $  8.24

       Granted                              791,000         $  0.98-- $ 8.63               $  2.88
       Terminated                          (403,023)        $  0.51-- $24.81               $  8.32
       Exercised                            (99,054)        $  0.51-- $ 1.27               $  0.52
                                             -----------------------------------------------------
       Outstanding at
           October 31, 2001               1,419,003         $  0.51-- $23.50               $  6.18

       Granted                              809,000         $  0.90-- $ 1.80               $  0.92
       Terminated                          (458,730)        $  0.51-- $23.50               $  7.94

       Outstanding at
           October 31, 2002               1,769,273           $0.90--$19.81                $  3.32
                                          ========================================================
</TABLE>

                                       50
<PAGE>

The  following  table  summarizes  information  with  respect to all  options to
purchase shares of Common Stock  outstanding under the 1996 Plan, the 1998 Plan,
the Director Plan and the LMC Plan at October 31, 2002:

<TABLE>
<CAPTION>

                     Options Outstanding Options Exercisable
================================================================================

                                           Weighted
                                            Average         Weighted                           Weighted
                          Number           Remaining         Average           Number           Average
       Range of         Outstanding    Contractual Life     Exercise         Exercisable       Exercise
    Exercise Price      at 10/31/02         (years)           Price          at 10/31/02         Price
    --------------    --------------  ----------------     -----------     -------------      -----------
<S>                   <C>            <C>                   <C>             <C>                <C>
  $  0.90  -$  2.48       943,632             6.5           $  1.02             93,794         $  1.67
  $  2.48  -$  4.96       341,831             4.3           $  3.28            246,069         $  3.22
  $  4.96  -$  7.44       249,871             2.7           $  5.28            205,877         $  5.28
  $  7.44  -$  9.93       134,610             2.9           $  8.16            108,023         $  8.12
  $  9.93  -$ 12.41        15,000             0.1           $ 10.50             15,000         $ 10.50
   $12.41  -$ 14.89        65,000             2.2           $ 13.23             57,500         $ 13.13
   $14.89  -$ 17.37         3,249             1.4           $ 16.03              2,841         $ 15.93
   $17.37  -$ 19.81        16,080             1.7           $ 18.87             11,588         $ 18.76
                           ------                                            ---------
                         1,769,273                                             740,692
                         =========                                           =========
</TABLE>

We sponsor an Employee  Stock  Purchase Plan (the  "Purchase  Plan") under which
300,000  shares of Common Stock were  reserved for issuance at October 31, 2002.
The Purchase Plan allows  participating  employees to purchase,  through payroll
deductions, shares of our Common Stock at 85 percent of the fair market value of
the shares at specified  dates.  At October 31, 2002, 24 employees were eligible
to  participate  in the  Purchase  Plan and 80,874  shares  were  available  for
issuance.  In fiscal year 2002, 2001 and 2000, 47,596,  32,645 and 19,331 shares
of Common Stock were issued under the Purchase Plan, respectively.

During the fiscal year ended October 31, 1999, we granted  options under the LMC
stock option plan to purchase  23,970 shares of our Common Stock to  consultants
in  conjunction  with services  performed.  We calculated  the fair value of the
options on the date of grant and  recorded  compensation  expense of $26,000 and
$89,000 in the fiscal years ended October 31, 2001 and 2000, respectively.

Had compensation cost for these plans been determined pursuant to the provisions
of SFAS No. 123, our pro forma net income (loss) would have been as follows:
<TABLE>
<CAPTION>

Years ended October 31                                                   2002              2001             2000
----------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>              <C>              <C>
(in thousands except per share amount)
Pro forma net income (loss)                                           $(2,452)       $  (11,831)       $   2,146
Pro forma net income (loss) per share -basic                           $(0.65)       $    (3.49)       $    0.67
Pro forma net income (loss) per share - diluted                        $(0.65)       $    (3.49)       $    0.67
</TABLE>

The fair value of each option  grant is estimated on the date of grant using the
Black-Scholes   option   pricing  model  with  the  following   weighted-average
assumptions:


                                       51
<PAGE>

<TABLE>
<CAPTION>
Options granted in years ended October 31                                2002              2001             2000
----------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>                 <C>               <C>
Expected life (in years)                                                 5.00              5.00             5.00
Risk-free interest rate                                                  2.00%             6.00%            6.00%
Volatility                                                             148.00%           114.00%          104.00%
Dividend yield                                                           0.00%             0.00%            0.00%
</TABLE>

The weighted  average  estimated fair value of each option granted during fiscal
2002, 2001 and 2000 was $0.92, $1.78 and $11.79, respectively.

9.   EMPLOYEE SAVINGS AND INVESTMENT PLAN

We  contribute  a  percentage  of income  before  income  taxes into an employee
savings and investment plan. The percentage is determined  annually by the Board
of Directors.  These  contributions are payable annually,  vest over five years,
and cover  substantially all employees who have been employed by us at least one
year.  Additionally,  we make  matching  payments  to the  employee  savings and
investment  plan of 50% of each  employee's  contribution up to three percent of
employees' earnings.

For the years ended  October 31, 2002,  2001 and 2000,  total  expense under the
employee  savings  and  investment  plan was  $99,471,  $148,974  and  $391,066,
respectively.

10.  CONCENTRATION OF CREDIT AND BUSINESS RISKS

Our  trade  accounts  receivable  are  concentrated  among  a  small  number  of
customers, principally located in the United States. Two customers accounted for
more than 34% of total  accounts  receivable  at October  31,  2002.  We had one
customer who  accounted  for 21% and a second  customer who accounted for 13% of
accounts receivable at October 31, 2002. One customer accounted for 10% of total
accounts   receivable  at  October  31,  2001.  Ongoing  credit  evaluations  of
customers'  financial condition are performed and,  generally,  no collateral is
required.  We maintain an allowance for doubtful  accounts for potential  credit
losses.  Actual bad debt losses have not been material and have not exceeded our
expectations.  Trade  accounts  receivable  are recorded net of an allowance for
doubtful  accounts  of  $93,000  and  $225,000  at  October  31,  2002 and 2001,
respectively.

Sales to individual customers in excess of 10% of net sales included sales to HP
of $2.1 million,  or 30% of net sales,  and Lockheed Martin of $0.8 million,  or
12%, in 2002,  compared to sales to HP of $2.6  million,  or 34%,  and  Lockheed
Martin of $1.5  million,  or 19%,  in 2001 and HP of $19.4  million,  or 66%, in
2000. On October 31, 2002, we restructured  the supply  agreement with HP. Under
the restructured agreement, HP submitted an end-of-life  non-cancelable purchase
order for approximately  $1.6 million of our VME products to be shipped over the
first two quarters of fiscal 2003.  Upon the fulfillment of this purchase order,
we do not expect to receive future purchase  orders for  significant  amounts of
VME products from HP. We expect to continue to sell our Adapter  products to HP.
International  sales  accounted  for 13%, 9% and 4% of total sales during fiscal
2002, 2001 and 2000, respectively.

We depend on a limited  number of  customers  for  substantially  all revenue to
date. Failure to anticipate or respond adequately to technological  developments
in our  industry,  changes in customer or  supplier  requirements  or changes in
regulatory  requirements or industry standards, or any significant delays in the


                                       52
<PAGE>

development  or  introduction  of  products or  services,  could have a material
adverse effect on our business, operating results and cash flows.

Substantially  all  of  our  manufacturing   process  is  subcontracted  to  two
independent companies.

The  chipsets  used in most of our products are  currently  available  only from
Motorola.  In addition,  certain other  components are currently  available only
from single  suppliers.  The inability to obtain  sufficient  key  components as
required,  or to develop  alternative  sources if and as required in the future,
could result in delays or  reductions  in product  shipments or margins that, in
turn, could have a material adverse effect on our business,  operating  results,
financial condition and cash flows.

11.  ACQUISITION OF LAN MEDIA CORPORATION

On July 14, 2000, we completed the acquisition of LAN Media Corporation ("LMC"),
a privately  held wide area  network  communications  company  headquartered  in
Sunnyvale,  California.  As a  result,  the  outstanding  LMC  common  stock was
converted into approximately  316,000 shares of SBE, Inc. common stock, based on
an exchange  ratio of  approximately  7.99  shares of LMC common  stock for each
share   of   our   common   stock.   The   merger   was   accounted   for  as  a
pooling-of-interests  under  Accounting  Principles  Board  Opinion  No. 16, and
accordingly,  financial  statements  for the  fiscal  2000  period  prior to the
combination  were  restated to reflect the  combined  operations  and  financial
position. All intercompany transactions have been eliminated.

The following  reconciles  revenue and net income (loss) previously  reported to
the restated information presented in the consolidated financial statements:

                                                  Six Months Ended
                                                   April 30, 2000
------------------------------------------------------------------------

Net Sales
      Previously Reported                                 $14,433
      LAN Media Corporation                                 1,480
                                                          -------
     Restated                                             $15,913
                                                           ======

Net income (loss)
      Previously Reported                                   2,743
      LAN Media Corporation                                   202
                                                         --------
      Restated                                          $   2,945
                                                          =======

In connection with the acquisition,  we recorded a charge to operating  expenses
of approximately $383,000 for acquisition related costs during the third quarter
of 2000.

12. RESTRUCTURING COSTS

In response to the continued  economic  slowdown,  we implemented  restructuring
plans in fiscal 2002 and 2001 and recorded restructuring charges of $446,000 and
$964,000,  respectively.  Restructuring  costs for fiscal 2002 are  comprised of
severance costs associated with staff reductions  totaling  $115,000 (we reduced
our headcount from 47 employees to 24 employees  during fiscal 2002),  leasehold
improvements  and  equipment  write-downs  related  to  the  abandonment  of our
Madison,  Wisconsin  office of $185,000 and accrued  lease and  brokerage  costs


                                       53
<PAGE>

totaling $146,000. We reached agreement with the property owner to terminate the
Madison office lease releasing us from further  obligations  effective  December
31, 2002. As part of the  agreement we paid the lease  payments for November and
December 2002 in addition to certain costs and commissions  related to releasing
the office space.

Restructuring  costs for fiscal 2001 are comprised of severance costs associated
with staff reductions  totaling  $52,000,  leasehold  improvements and equipment
write-downs related to the relocation of our headquarters of $337,000 and losses
related to its sublease of $575,000, net of the reversal of a $281,000 liability
associated  with deferred rent. We reduced our headcount from 87 employees to 47
employees  during fiscal 2001. The reduction in headcount plus the relocation of
the XeTel manufacturing  facility from our engineering and headquarters facility
to Texas  left us with  excess  facility  space.  We were able to enter  into an
agreement  with a third  party  corporation  to assign  the lease for our 63,000
square foot facility located at 4550 Norris Canyon Rd, San Ramon, California and
simultaneously sublease a 15,000 square foot facility also located in San Ramon,
California. We abandoned the leasehold improvements and certain of our equipment
in conjunction with the relocation. As a result of this transaction,  a non-cash
$337,000  write down of leasehold  improvements  and  equipment  was expensed in
fiscal 2001. Real estate  commissions and building  expenses  totaling  $442,000
were accrued in fiscal 2001 and were paid in fiscal 2002. An  additional  amount
totaling  $133,000  was accrued  related to a loss  associated  with  facilities
acquired  with the purchase of LMC in fiscal 2000 and subleased to a third party
corporation  in fiscal 2001.  This amount will be paid over 36 months  beginning
May 2001.

As of October  31, 2002 and 2001,  $258,000  and  $590,000 of the  restructuring
costs were included in other current  liabilities,  respectively.  As of October
31, 2002,  $154,000 of the  restructuring  costs was included in other long-term
liabilities. This amount relates to rents associated with the Madison, Wisconsin
office that are due twelve months or longer from the balance sheet date.

The  following   table  sets  forth  an  analysis  of  the   components  of  the
restructuring  reserve and the payments made against it through October 31, 2002
(in thousands):

             Restructuring accrual at October 31, 2001           $    590
             Plus:
                 Severance and benefits                               115
                 Accrued lease costs                                  331
             Less:
                 Cash paid for severance and benefits
                    and accrued lease costs                          (787)
                                                                     -----
             Total restructuring costs included in liabilities    $   249
                                                                      ====

13.  LOAN TO OFFICER

On November 6, 1998, we made a loan to an officer and  stockholder in the amount
of $622,800 under a two-year  recourse  promissory note bearing an interest rate
of 4.47% and  collateralized by 145,313 shares of our Common Stock. The loan was
used to pay for the  exercise  of an option to  purchase  139,400  shares of our
Common Stock and related  taxes.  On April 16, 1999,  the loan was  increased to
$743,800.  The loan was  extended  for a one-year  term under the same terms and
conditions  on November 6, 2000.  On December  14,  2001,  the note was amended,
restated  and  consolidated  to extend the term to December  2003 and to require
certain  mandatory  repayments  of  principal of up to $100,000 a year while the


                                       54
<PAGE>

note is outstanding.  The loan bears interest at a rate of 2.48% per annum, with
interest due annually and the entire amount of the principal due on December 14,
2003.

While the officer is current on his payments on the loan and we plan on pursuing
all  available  courses of action to collect the amounts  ultimately  due on the
loan,  on October 31, 2002 we  determined  that it was probable  that we will be
unable to fully  recover the balance of the loan on its due date of December 14,
2003.  Accordingly,  a  valuation  allowance  of  $474,000  was  recorded  based
generally  on the fair value of the  Common  Stock  collateralizing  the note at
October  31, 2002 and the amount of the  officer's  personal  assets  considered
likely to be  available  to settle the note in  December  2003.  This  valuation
allowance  is subject to  adjustment  in the future based on changes in the fair
value of the Common Stock and personal assets collateralizing the loan.

QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>

 (in thousands except                                   First         Second          Third          Fourth
  per share amounts)                                   Quarter        Quarter        Quarter         Quarter
------------------------------------------------------------------------------------------------------------
<S>         <C>                                       <C>             <C>            <C>            <C>
     2002:   Net sales                                 $1,283         $1,724          $2,786         $1,105
             Gross profit                                 696            914           1,695            423
             Net income (loss)                         (1,218)          (961)           (178)           626
             Basic income (loss) per
             common share                              $(0.35)        $(0.28)        $(0.04)          $0.15
             Diluted income (loss) per
             common share                              $(0.35)        $(0.28)        $(0.04)          $0.15

     2001:   Net sales                                 $3,418         $1,813          $1,449         $1,046
             Gross profit                               2,039            290             534              3
             Net loss                                  (1,313)        (3,212)         (2,244)        (3,127)
             Basic loss per common share               $(0.39)        $(0.95)         $(0.66)        $(0.91)
             Diluted loss per common share             $(0.39)        $(0.95)         $(0.66)        $(0.91)

</TABLE>


                                       55
<PAGE>

<TABLE>
<CAPTION>


                                    SBE, INC.
                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                  FOR THE YEARS ENDED OCTOBER 31, 2002 AND 2001

                  Column A              Column B          Column C          Column D         Column E
                  --------              --------          --------          --------         --------
                                       Balance at         Additions                           Balance
                                        Beginning     charged to costs                        End of
                 Description            of Period       and expenses     Deductions (a)       Period
----------------------------------------------------------------------------------------------------------
<S>                                   <C>               <C>              <C>                 <C>
YEAR ENDED OCTOBER 31, 2002

Allowance for Doubtful Accounts       $   225,000              ---          (132,000)      $   93,000
Allowance for Warranty Claims              55,627              ---              (312)          55,315
Allowance for Deferred Tax Assets       8,080,000          513,000               ---        8,593,000
Allowance for Stockholder Loan                ---          474,000               ---          474,000

YEAR ENDED OCTOBER 31, 2001

Allowance for Doubtful Accounts       $   251,620              ---           (26,620)     $   225,000
Allowance for Warranty Claims             144,676              ---           (89,049)          55,627
Allowance for Deferred Tax Assets       3,088,000        4,992,000               ---        8,080,000
Allowance for Stockholder Loan                ---              ---               ---              ---

</TABLE>



                                       56
<PAGE>