**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)





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





**For
      the fiscal year ended** **October 31, 2006**





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 Identificationincorporation
                or organization)
            Number)




4000
      Executive Parkway, 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 is a well-known seasoned issuer, as defined
      in Rule 405 of the Securities Act. Yes  ̈ No ý





Indicate
      by check mark whether the registrant is not required to file reports pursuant
      to
      Section 13 or Section 15(d) of the Act. Yes  ̈ No ý





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 ý No  ̈





-1-


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





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





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act. Yes  ̈ No ý





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 April 30, 2006 as reported on the Nasdaq Capital
      Markets, was $8,336,445. 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 January
      23,
      2007 was 11,130,831.








-2-


**SBE,
      INC.**





**FORM
      10-K**





**TABLE
      OF CONTENTS**








PART
                IItem
                1
            Business
            4Item
                1A
            Risk
                Factors
            12Item
                2
            Properties
            17Item
                3
            Legal
                Proceedings
            17Item
                4
            Submission
                of Matters to a Vote of Security Holders
            17PART
                IIItem
                5
            Market
                for Registrant's Common Equity,Related
                Stockholder Matters and IssuerPurchases
                of Equity Securities
            19Item
                6
            Selected
                Financial Data
            20Item
                7
            Management's
                Discussion and Analysis ofFinancial
                Condition and Results of Operations
            20Item
                7A
            Quantitative
                and Qualitative Disclosures about Market Risk
            34Item
                8
            Financial
                Statements and Supplementary Data
            35Item
                9
            Changes
                in and Disagreements with Accountantson
                Accounting and Financial Disclosure
            35Item
                9A
            Controls
                and Procedures
            35Item
                9B
            Other
                Information
            36PART
                IIIItem
                10
            Directors
                and Executive Officers of the Registrant
            37Item
                11
            Executive
                Compensation
            42Item
                12
            Security
                Ownership of Certain Beneficial Ownersand
                Management and Related Stockholder Matters
            46Item
                13
            Certain
                Relationships and Related Transactions
            47Item
                14
            Principal
                Accountant Fees and Services
            48PART
                IVItem
                15
            Exhibits
                and Financial Statement Schedules
            50SIGNATURES
            
            54




-3-




***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 of storage software, our expectations regarding the market
      for client server networking products, the adequacy of anticipated sources
      of
      cash, planned capital expenditures, the effect of interest rate increases,
      and
      trends or expectations regarding our operations. Words such as “may,” “will,”
“should,” "believes," "anticipates," "expects," "intends," ”plans,” "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, even if
      new
      information becomes available or other events occur in the future. 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 1A Risk Factors" on page 12 and elsewhere
      in this Annual Report on Form 10-K.*





**PART
      I**





**ITEM
      1.**  **BUSINESS**





***Overview***





SBE
      designs, manufactures and sells embedded hardware products including wide area
      network (WAN) and local area network (LAN) network interface cards (NICs) and
      central processing units (CPUs) to OEMs who
      embed
      our hardware products into their products for the communications
      markets .
      Our
      embedded hardware products perform critical, computing and Input/Output (I/O)
      tasks in diverse markets such as high-end
      enterprise level computing servers, Linux super-computing clusters,
      workstations, media gateways, routers and Internet access devices.





We
      also
      design and provide software based storage networking solutions for an extensive
      range of business critical applications, including Disk-to-Disk Back-up and
      Disaster Recovery. We deliver an affordable, expandable, and easy-to-use
      portfolio of software solutions designed to enable optimal performance and
      rapid
      deployment across a wide range of next generation storage systems We sell
      standards-based storage software solutions to original equipment manufacturers
      (OEMs), system integrators and value added resellers (VARs) who embed our
      software into their IP
      storage area network (IP SAN) and network attached storage (NAS) systems
      to provide data storage solutions for the small and medium business (SMB)
      enterprise storage markets.





We
      experienced a decline in our sales volume of our embedded hardware products
      and
      a lack of market acceptance for our storage software that dramatically effected
      our operating cash flow for fiscal 2006. Because of the continuing decline
      of
      our cash balance, we have been evaluating strategic alternatives to return
      the
      company to cash flow positive and unlock value for our shareholders. In
      September 2006, our Board of Directors and management believed that the best
      course of action was to consider selling our embedded hardware and storage
      software businesses and to consider seeking a viable merger candidate.





-4-


On
      January 11, 2007, we signed an asset purchase agreement with One Stop Systems,
      Inc., a private California corporation, to purchase our embedded hardware
      business for $2.2 million cash plus the assumption of our corporate headquarters
      office lease and a lease for certain engineering equipment. When the divesture
      of our embedded hardware business is completed we will no longer participate
      in
      the embedded hardware markets. We will transfer all our inventor and the
      engineering and test equipment associated with the embedded hardware business
      to
      One Stop.




On
      January 19, 2007, we entered into an Agreement and Plan of Merger and
      Reorganization, with Neonode Inc., a Delaware corporation. Neonode
      is a Swedish based developer and manufacturer of multimedia mobile handsets.
      With over five years of research and development Neonode is today a
      leader and trendsetter in buttonless touch screen mobile phones and
      gesture-based user interfaces. Neonode mobile phones are based on patented
      technologies. With Neonode's open Microsoft based platform consumers can
      themselves upgrade and customize their handsets similar to a
      PC. It is
      anticipated that our name will be changed to “Neonode Inc.” in connection with
      the completion of the merger.




We
      intend
      to file a proxy statement in connection with the merger with Neonode.  The
      proxy statement, when it becomes available, will contain important information
      about the merger transaction.  Free copies of the proxy statement will be
      available at the SEC's web site at www.sec.gov .




We
      are
      evaluating strategic alternatives regarding our storage software
      business.




***Products
      & Technologies***





**Storage
      Products**





*Storage
      Software Management Solutions*





Managing,
      growing, and protecting storage is regarded as one of the most burdensome and
      expensive responsibilities of a company’s data center management. In the
      direct-attached storage (DAS) environments that most small to mid-sized
      companies deploy, the process of managing storage is made more difficult by
      the
      number of physical connection points and the number of storage systems in the
      organization. Imagine an environment with ten computers, each with its own
      storage system. That creates ten storage systems that need to be managed and
      maintained, which then equates to ten times the effort normally required in
      order to handle storage expansion, reallocation and repairs. One of the main driving
      forces behind a transition from DAS to a SAN is often high data growth and
      the
      need for operations efficiency. In these circumstances the legacy DAS
      environment becomes increasingly complex, backup/restore operations become
      increasingly unreliable, and the storage environment is unable to support the
      demands of the business.





Developed
      to extend the reach of SANs by enabling SAN functionality over the IP network, Internet
      Small Computer System Interface ( iSCSI)
      technology uses the SCSI command set over Transmission Control Protocol/
      Internet Protocol (TCP/IP), enabling any requesting node on the IP network
      (the
      initiator) to contact any remote storage server (the target) and perform block
      I/O on the target as if it was a local hard drive. Because
      of the ubiquity of IP networks, iSCSI can be used to transmit data over LANs,
      WANs, or the Internet and can enable location independent data storage and
      retrieval.  iSCSI
      has
      no distance limitations, can utilize existing network infrastructure, does
      not
      require specialized training, and takes advantage of Ethernet’s economies of
      scale. With the immediate availability of 10G adapters and switches, we believe
      that iSCSI SANs can more than double the performance levels of leading-edge
      Fibre Channel implementations, while mass adoption continues to drive costs
      down.





-5-


On
      top of
      all that, regulatory compliance pressures, the need to integrate geographically
      dispersed data assets, and the availability of effective information life-cycle
      management solutions create further issues and serve as drivers behind the
      move
      to IP SANs. Another significant driver behind IP SANs is the availability of
      data center staff. Most smaller, regional, and departmental data centers have
      to
      operate with limited staff. Often, the decision to move to a SAN environment
      hinges on whether the existing staff can handle it. In these cases an IP SAN
      solution becomes a viable alternative, since it can almost always be more easily
      managed by existing staff and skill sets.





Our
      IP
      SAN Director Suite addresses the need for easy-to-manage, inexpensive storage
      and data protection through our iSCSI transport stack, storage management
      features, and data protection modules.





The
      iSCSI
      transport stack is the foundation of our IP SAN Director Suite and is
      scalable from Wi-Fi to 10 Gigabit Ethernet. It delivers the same level of
      reliability, quality of service and system robustness as alternative solutions,
      such as Fibre Channel, but at a fraction of the cost. We believe that the
      advanced features designed into the architecture of our iSCSI protocol stack
      enables highly efficient and cost-effective storage transport by optimizing
      bandwidth usage, enabling unlimited storage to be attached to each target
      device, and leveraging existing network technologies.





Our
      iSCSI
      protocol stack provides
      multipathing I/O functionality for maximum redundancy and reliability,
      aggregation of bandwidth to reduce service costs, as well as multiple
      connections per session to increase bandwidth efficiency and data integrity.
      Enterprise-level quality of service functionality enables traffic to be
      consistently classified, prioritized, and queued at line rate. We
      believe that the
      Error
      Recovery Level 2 (ERL2) featured in our iSCSI protocol stack increases system
      reliability, availability and adaptability. ERL2 supports active/active task
      migration, which prevents session and data loss.  Our
      iSCSI
      stack is fully tested and compliant with IETF RFC-3720 iSCSI standards,
      including all mandatory and optional feature sets. Our SBE iSCSI target supports
      most Linux distributions and is compatible with any compliant iSCSI initiator
      under any OS distribution, including Linux, Windows and Solaris. An
      additional benefit of using iSCSI transport is its interoperability with any
      storage protocol disk drive interfaces (SCSI, Serial Attached SCSI (SAS), Serial
      ATA (SATA), Fiber Channel drives).




On
      top of
      our foundation iSCSI protocol stack, we have developed and manufactured a wide
      variety of storage management features and data protection modules. While the
      iSCSI protocol stack provides for a robust, inexpensive, and highly scalable
      transport infrastructure, modules included in our IP SAN Director Suite such
      as
      iSNS (Internet Storage Name Service), SNMP (Simple Network Management Protocol),
      Snapshot, High Availability, and Replication seamlessly address the needs and
      requirements of today’s IT storage managers.





The
      iSNS
      feature set provides similar functionality as a DHCP (Dynamic Host Configuration
      Protocol) server. As new storage subsystems are brought online, iSNS allows
      automatically names and adds them to the storage pool. Consistent with our
      integrated approach to system design, both an iSNS client and iSNS server are
      provided. To further ease the burdens of large-scan storage administration,
      the
      SNMP module allows the user to monitor the status of a large SAN from a single
      console.





-6-


As
      a
      component of our IP SAN Director Suite, the Snapshot add-in module provides
      critical data protection by creating point-in-time images of iSCSI data volumes.
      As a standalone application the snapshot module provides maximum protection;
      users may access data at discrete times in history when a combination of
      application error and user error overwrites, or corrupts critical data. In
      the
      event of a catastrophic event such as virus infection, the rollback feature
      allows the IT administrator to recover the entire data volume to a previously
      known healthy state. The Snapshot module conjoined with backup software running
      on an application server allows mainline, primary data access to continue,
      while
      the backup process copies the snapshot image to a secondary and offline
      storage.




Replication
      across storage subsystems is a critical part of any IP SAN data protection
      solution. Multiple versions of replication exist and are required for different
      purposes and application environments. To effectively address the wide spectrum
      of needs, we are developing 3 distinct Replication add-in modules that are
      seamlessly integrated into our IP SAN Director Suite. The first two add-in
      modules in our Replication portfolio address the need for data mirrors for
      primary storage within a SAN. With the Synchronous Online Replication module,
      both the local target and remote target must complete any writes from iSCSI
      initiators before an acknowledgment is sent. This guarantees data integrity
      and
      works well in low-latency SAN environments for primary storage.




There
      are
      some instances where performance is the top priority. In these cases, the
      Asynchronous Online Replication module is appropriate. Writes completed on
      the
      primary target are immediately acknowledged in parallel with writes that are
      sent to the mirror target, thus the latency associated with waiting for the
      mirror target to acknowledge a write are avoided. This is also beneficial in
      higher latency environments for backup when the mirror target may be on a WAN
      connection.




In
      a
      disaster recovery scenario, the mirror target is often located several hundred
      miles from the primary target and accessible only through a bandwidth-limited
      WAN connection. In this situation, the Offline Replication module is most
      appropriate. This module allows the system administrator to schedule replication
      events during discrete periods of time.




A
      complete IP SAN solution requires data availability and access features as
      well
      as data protection features. While SBE’s Snapshot and Replication add-in modules
      support data protection, SBE is proud to offer High Availability as an
      additional module to directly address the need for uninterruptible access to
      missing critical data. In the event of failure at the primary storage director,
      the mirror storage director automatically takes over with no disruption and
      interruption of service to the initiators accessing the underlying storage.
      The
      high availability functionality is transparent to the initiators requiring
      zero
      additional configuration.




-7-


**Hardware
      Products**





Upon
      closing the sale of our embedded hardware business to One Stop Systems,
      estimated to take place in the second quarter of fiscal 2007, we will no longer
      have a hardware product line and the terms and conditions of the asset sale
      agreement prohibit us from competing in the embedded hardware markets for at
      least four year after the transaction is completed.





*Network
      Interface Cards*





*Wide
      Area Networking Adapters.* A
      WANis a
      computer or communications network that spans a relatively large geographical
      area. Computers attached to a WAN are often connected through dedicated
      networks, such as the telephone system, leased lines or satellites. Our series
      of WAN adapter products is designed to address the need for WAN interfaces
      in
      data communication products, such as those used in Internet and other
      communications routers, security firewalls, Virtual Private Network (VPN)
      servers and Voice over Internet Protocol (VoIP) gateways. We provide a broad
      range of standards-based interfaces that can be easily integrated into our
      OEM
      customers’ products.




*Local
      Area Networking Adapters* .
      A LAN
      is a computer network spanning a relatively small geographical area. Often
      confined to a single building or group of buildings, most LANs connect
      workstations and personal computers in an office environment. Each computer
      in
      the LAN is able to access data and devices, such as printers, located anywhere
      on the LAN. There are many different types of LANs but Ethernet is the one
      that
      is most commonly deployed. Ethernet LAN connectivity is utilized by virtually
      every market segment in both the embedded and enterprise space.




Our
      LAN
      adapter products are focused on LAN connectivity using high speed Ethernet
      technology. We offer single, dual or quad port LAN adapters that feature
      connectivity speeds of up to 10 Megabits (Mb)/second, 100 Mb/second or 1000
      Mb/second. Our Gigabit Ethernet NICs include trunking and failover features.
      These features allow our customers’ systems to take advantage of static load
      balancing and failure recovery within a user-defined communications trunk.
      Our
      Gigabit Ethernet NICs are designed to distribute traffic across the aggregated
      links, detect port failures, and increase throughput. In the event of a system
      failure, the
      software will automatically redistribute outgoing loads across the remaining
      links.





*Storage
      Network Interface Cards* .
      Our
      storage NICs are comprised of SCSI products. SCSI is a parallel interface
      standard used by personal computers and many UNIX systems for attaching
      peripheral devices, such as printers and disk drives, to computers.  SCSI
      interfaces are designed to allow for faster transmission rates than standard
      serial ports, which transfer data one bit at a time, and parallel ports, which
      simultaneously transfer data more than one bit at a time. Our series of SCSI
      host bus adapters are specifically designed for the enterprise Sun UNIX market.
      With transfer rates ranging from 40 Megabytes (MB)/sec to 320 MB/sec, our SCSI
      adapters have been utilized in data centers and enterprise environments within
      the financial, government, manufacturing, and healthcare sectors. These SCSI
      boards are also utilized in UNIX-based SCSI tape backup systems.





*Encryption
      Adapters* .
      Our securePMC series
      of high-performance security offload solutions is designed for integration
      into
      Linux-based systems. Advanced encryption processors accelerate SSL and IPsec
      cryptographic operations, significantly improving security, performance, and
      availability of networking applications. Designed to enable quick integration
      by
      OEMs, VARs and end users, our securePMC adapters can be used in a wide variety
      of networking equipment, including routers, switches, web servers, server load
      balancers, firewalls, SANs and VPN gateways.





-8-


*TCP/IP
      Offload Engine (TOE).* A
      TOE is
      a highly specialized TCP/IP protocol accelerator. Typically, in the form of
      a
      NIC, it is designed to reduce the amount of host CPU cycles required for TCP/IP
      processing and maximize Ethernet throughput. This is accomplished by offloading
      TCP/IP protocol processing from the host processor to the hardware on the TOE.
      It is designed to provide fast, reliable, and secure access to networked storage
      devices via the Internet without seriously impacting the host CPU.





*Intelligent
      Communications Controllers*





Our
      HighWire 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.





In
      the
      telecommunications market, the HighWire series of communications controller
      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 and Advanced Intelligent Network 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 enable traditional carriers
      and new telecommunications entrants to pursue cost-reduced and
      performance-enhanced network architectures based on IP, broadband or other
      "packet" technologies.





*Other*





Although
      we continue to sell and manufacture legacy products such as Multibus, Versa
      Module Europa ( VME)
      bus,
      and ISA, we emphasize three principal lines of products: storage software
      solutions, WAN/LAN adapter products, and carrier platforms (also known as our
      “HighWire” line).





The
      following table shows sales by major product type as a percentage of net sales
      for fiscal 2006, 2005 and 2004:




Year
                Ended October 31,2006
            
            2005
            
            2004(percentage
                of net sales)VME
            
            
            8
            %
            
            20
            %
            
            43
            %Adapters
            
            
            59
            
            
            48
            
            
            46HighWire
            
            
            32
            
            
            32
            
            
            11Storage
                  Software
            
            
            1
            
            
            ---
            
            
            ---100%
            
            
            100
            %
            
            100
            %





-9-





***Distribution,
      Sales, and Marketing***





We
      sell
      and license our products, both domestically and internationally, using a direct
      sales force as well as independent manufacturers' representatives, resellers,
      and distributors. We have a network of 8 manufacturers’ representatives covering
      the United States and Canada. In addition, we have 12 distributors and resellers
      covering the United States, Canada, Western and Eastern Europe and Asia. We
      believe that our direct sales force is well suited to communicate how our
      products differ from those of our competitors. Since our products represent
      a
      complex and technical sale, our sales force is supported by field application
      engineers who provide customers with pre-sale technical assistance.





Our
      internal sales and marketing organization supports our channel marketing
      partners by providing sales collateral, such as product data sheets,
      presentations, and other sales/marketing resource tools. 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 in North America, Europe and Asia.
      All
      of our international sales are negotiated and executed in U.S. dollars. International
      sales constituted 43%, 37% and 12% of net sales in fiscal 2006, 2005 and 2004,
      respectively. . International sales are primarily executed in Europe with 31%
      to
      customers in the United Kingdom.





Our
      direct sales force is based in three locations in the United States and we
      conduct our marketing activities from our corporate headquarters in San Ramon,
      California.





***Research
      and Development***





We
      continue to invest in research and development of current and emerging
      technologies that we deem critical to maintaining our competitive position
      in
      the storage software market. Many factors are involved in determining the
      strategic direction of our product development focus, including trends and
      developments in the marketplace, competitive analyses, market demands, business
      conditions, and feedback from our customers and strategic partner s. Our
      product development efforts are focused principally on our storage software
      products, providing advanced storage software features.





Subsequent
      to year-end, we entered into an Agreement for the Purchase and Sale of Assets
      with One Stop Systems, Inc., a manufacturer of industrial-grade computing
      systems and components, pursuant to which we agreed to sell all of the assets
      associated with our embedded hardware business. In addition, we entered into
      an
      Agreement and Plan of Merger and Reorganization, with Neonode Inc., a designer
      and manufacturer of mobile telephones in which we agreed to merge the two
      companies.





Although
      we are evaluating strategic alternatives for our storage software business
      including selling the business, we continued development of our storage software
      products to bring
      a
      broader spectrum of IP storage solutions to market. In fiscal 2006, we completed
      the development of some key storage
      networking solutions that enable an extensive range of business critical
      applications, including Disk-to-Disk Back-up and Disaster Recovery to complement
      our iSCSI based transport software.





-10-


During
      fiscal 2006, 2005 and 2004, we incurred $3.9 million, $2.7 million and $2.4
      million, respectively, in product research and development
      expenses.





***Manufacturing***





We
      do not
      engage in any manufacturing operations. Instead, we utilize third-party
      manufacturers to build our embedded hardware products. We currently have
      non-exclusive manufacturing agreements with ProWorks, Inc., United
      Manufacturing, Inc. and Sonic Manufacturing Technology. We believe that
      ProWorks, United and Sonic are equipped to provide cost-efficient and timely
      product delivery, thus allowing us to focus on our core competencies of product
      development and technology innovation. The use of external manufacturing
      partners allows us to respond more quickly and effectively to fluctuations
      in
      customer demand.





***Competition***





The
      market for both storage and communications interface products is highly
      competitive. Many of our competitors have greater financial resources and are
      well established in the space. Competition within the communications market
      varies principally by application segment. Our storage software product competes
      with products designed and/or manufactured by Lefthand Networks, Wasabi Systems,
      OpenE Software, FalconStor Software and UNH. Our intelligent communications
      products compete with offerings from Radisys Corp, Performance Technologies,
      Interphase Corp, Artesyn Technologies, and Adax, along with various other
      platform and controller product providers. Our WAN/LAN products compete
      primarily with products from Performance Technologies, Motorola, Interphase
      Corp., Themis Computers, GE Fanuc and various other companies on a
      product-by-product basis. Our SCSI products compete with  LSI,
      Adaptec, Qlogic and Sun Microsystems, Inc. Our TOE products compete with Qlogic
      and Adaptec. To compete and differentiate ourselves in our markets, we emphasize
      the functionality, engineering support, quality and price of our products in
      relation to the products of our competitors, as well as our ability to customize
      our products to meet the customers’ specific application needs.




Additionally,
      we compete with the internal engineering resources of our customers. Typically,
      as our customers become successful with their products, they seek to reduce
      costs and integrate functions. To compete with the internal engineering
      resources of our customers, we position
      ourselves as an extension of our customers’ engineering teams, focusing on
      satisfying their price/performance and time-to-market challenges through product
      innovation, technological expertise, and comprehensive support. By doing so,
      we
      emphasize the advantages and efficiencies of outsourcing embedded hardware
      and
      software, and keeping internal engineering resources focused on their core
      competencies and value-added services.





***Intellectual
      Property***





We
      believe that innovation in product engineering, sales, marketing, support,
      and
      customer relations, and protection of this proprietary technology and knowledge
      impacts our future success. Subsequent to year-end we entered into separate
      agreements to sell our embedded hardware business and to merge with a designer
      of mobile telephones. We rely on a combination of copyright, trademark, trade
      secret laws and contractual provisions to establish and protect our proprietary
      rights in our products. We typically enter into confidentiality agreements
      with
      our employees, strategic partners, channel partners and suppliers, and enforce
      strict limitations and access to our proprietary information.




-11-


***Backlog***





On
      October 31, 2006, we had a sales backlog of product orders of approximately
      $1.1
      million, compared to a sales backlog of product orders of approximately $1.2
      million as of October 31, 2005. Because customer purchase orders are subject
      to
      changes in customer delivery schedules, cancellation, or price changes, our
      backlog as of any particular date may not be representative of actual sales
      for
      any succeeding fiscal period. We do not anticipate any problems in fulfilling
      our current backlog.





***Employees***




Our
      employees represent one of our most valuable assets. 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. We
      promote employee-focused programs designed to foster a positive and productive
      work environment, including specialized training/development, in-house seminars,
      and team-building activities.





On
      December 31, 2006, we had 34 employees. None of our employees are represented
      by
      a labor union. We have experienced no work stoppages. We believe our employee
      relations are positive.





**ITEM
      1A. 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**





***Our
      future capital needs will require us to seek a merger partner and sell all
      or
      portions of our operating assets.***





Our
      existing cash balances and our anticipated cash flow from operations will not
      satisfy our working capital needs for the foreseeable future. Because
      of the decline in our sales volume and the lack of market acceptance for our
      storage software, we evaluated strategic alternatives to enhance shareholder
      value. As a result of our evaluation, we
      entered into an agreement to sell our embedded hardware business to One Stop
      Systems, Inc. for $2.2 million in cash and the assumption of the lease on our
      headquarters building. We also signed an agreement to merge with Neonode, Inc.
      Both of these transactions are subject to the approval of our shareholders.
      After the sale of the embedded business and merger transactions are completed,
      we will no longer be active in the embedded hardware business and will change
      our name to “Neonode, Inc” and be active in the design and manufacturing of
      mobile telephones . Historically, the overwhelming majority of our cash flow from operations has
      been generated from our embedded hardware business that we are selling and
      after
      the sale of that business our future cash flow will be wholly dependent on
      Neonode’s ability to execute on its business plan.





-12-


***Our
      future capital needs may exceed our ability to raise
      capital.***





We
      do not
      believe that our existing cash balances and our anticipated cash flow from
      our
      currently operations will satisfy our working capital needs for the foreseeable
      future. Failure to sell our embedded hardware business to One Stop Systems
      and
      merge with Neonode will require us to seek additional financing in fiscal 2007.
      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.




***If
      our storage software products contain undetected errors, we could incur
      significant unexpected expenses and experience product returns and lost
      sales.***





Our
      storage software products are highly technical and complex. While our storage
      software products have been tested, because of their nature, we can not be
      certain of their performance either as stand-alone products or when integrated
      with our customer’s product lines. There can be no assurance that defects or
      errors may not arise or be discovered in the future. Any defects or errors
      in
      our storage software products discovered in the future could result in a loss
      of
      customers or decrease in net revenue and market share.





***We
      depend upon a small number of OEM customers. The loss of any of these customers,
      or their failure to sell their products, could limit our ability to generate
      revenues.***




Orders
      by
      our OEM customers are affected by factors such as new product introductions,
      product life cycles, inventory levels, manufacturing strategies, 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, could
      have a material adverse effect on our operating results, financial condition
      and
      cash flows.




***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 purchase components of lesser
      quality.***





The
      chip
      sets used in some of our products are currently available only from a single
      supplier. If these suppliers discontinue or upgrade some of the components
      used
      in our products, we could be required to redesign a product to incorporate
      newer
      or alternative technology. 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. If enough components are unavailable, we
      may
      have to pay a premium in order to meet customer demand. Paying premiums for
      parts, building inventories of scarce parts and obsolescence of existing
      inventories could lower or eliminate our profit margin, reduce our cash flow
      and
      otherwise harm our business. To offset potential component shortages, we have
      in
      the past, and may in the future, carry an inventory of these components. As
      a
      result, our inventory of components parts may become obsolete and may result
      in
      write-downs.





-13-


***If
      we fail to develop and produce new products, we may lose sales and our
      reputation may be harmed.***





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 VoIP, third generation wireless
      services (3G Wireless), SATA, iSCSI, SAS, Gigabit Ethernet, 10G and TOE. 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 obsolete.





We
      have
      focused a significant portion of our research and development, marketing and
      sales efforts on HighWire, WAN and LAN adapters and storage software 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,
      market acceptance of our products and our ability to sell our products. If
      the
      HighWire, adapter products, storage software 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.





***Our
      storage software products will require a substantial product development
      investment by us and we may not realize any return on our
      investment.***





The
      development of new or enhanced products is a complex and uncertain process.
      As
      we develop new features for our storage software, our customers may experience
      design, manufacturing, marketing and other difficulties that could delay or
      prevent the development, introduction or marketing of new products and
      enhancements. Development costs and expenses are incurred before we generate
      any
      net revenue from sales of the products resulting from these efforts. We expect
      to incur additional research and development expenses relating to our storage
      software product lines, which could have a negative impact on our earnings
      in
      future periods.





***The
      storage and embedded products market is intensely competitive, and our failure
      to compete effectively could reduce our revenues and
      margins.***





We
      compete directly with traditional vendors of storage software and hardware
      devices, including Fibre Channel SAN products, open source “free” software, TOE
      and application-specific storage solutions. We compete with communications
      suppliers of routers, switches, gateways, NICs and other products that connect
      to the Public Switched Telephone Network (PSTN) and the Internet. In the future,
      we expect competition from companies offering client/server access
      solutions based on emerging technologies such as Fibre Channel, switched digital
      telephone services, iSCSI, SAS, TOE and other technologies. In addition, we
      may
      encounter increased competition from operating system and network operating
      system vendors to the extent that such vendors include full communications
      and
      storage capabilities in their products. We may also encounter future competition
      from telephony service providers (such as AT&T or the regional Bell
      operating companies) and storage product providers (such as EMC Corporation,
      Network Appliance, Inc. and Qlogic Corporation).





-14-


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.





We
      signed
      an agreement to sell our embedded hardware business and that business generates
      substantially all our revenue and gross margin. We also risk the loss of
      customers for our embedded hardware products by announcing the sale of the
      embedded hardware business.





***We
      depend on our key personnel. If we are unable to retain our current personnel
      and hire additional qualified personnel as needed, our business will 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
      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 and software industries,
      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.





***We
      may be unable to protect our software, 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 and 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.




**Risks
      Associated with Ownership of Our Common Stock**




***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. Our common stock has historically had
      relatively small trading volumes. As a result, small transactions in our common
      stock can have a disproportionately large impact on the quoted price of our
      common stock.





-15-


***If
      we continue to experience losses we could experience difficulty meeting our
      business plan, and our stock price could be negatively
      affected.***





We
      experienced a decline in our sales volume of our embedded hardware products
      and
      a lack of market acceptance for our storage software that dramatically effected
      our operating cash flow for fiscal 2006. If we are unable to gain market
      acceptance of tour storage software solutions, we
      will
      experience continuing operating losses and negative cash flow from our
      operations. Any failure to achieve or maintain profitability could negatively
      impact the market price of our common stock. We anticipate that we will continue
      to incur product development, sales and marketing and administrative expenses.
      As a result, we will need to generate significant quarterly revenues if we
      are
      to achieve and maintain profitability. A substantial failure to achieve
      profitability could make it difficult or impossible for us to grow our business.
      Our business strategy may not be successful, and we may not generate significant
      revenues or achieve profitability. Any failure to significantly increase
      revenues would also harm our ability to achieve and maintain profitability.
      If
      we do achieve profitability in the future, we may not be able to sustain or
      increase profitability on a quarterly or annual basis.




***Our
      merger with Neonode, Inc. may not produce the desired
      results.***




In
      September 2006, our Board of Directors and management believed the best course
      of action was to consider selling our embedded hardware and storage software
      businesses and to consider seeking a viable merger candidate. On January 11,
      2007, we signed an asset purchase agreement with One Stop Systems, Inc., a
      private California corporation, to purchase our embedded hardware business
      for
      $2.2 million cash plus the assumption of our corporate headquarters office
      lease
      and a lease for certain engineering equipment. When the divesture of our
      embedded hardware business is completed we will no longer participate in the
      embedded hardware markets. On January 19, 2007, we entered into an Agreement
      and
      Plan of Merger and Reorganization, with Neonode Inc., a Delaware corporation. Neonode
      is a Swedish based developer and manufacturer of multimedia mobile handsets. It
      is
      anticipated that our name will be changed to “Neonode Inc.” in connection with
      the completion of the merger.





There
      can
      be no assurance that we will be successful in
      obtaining the required approval of our shareholders, and if we do, we may not
      be
      successful in increasing shareholder value and our stock price may be negatively
      affected.





***Our
      common stock is at risk for delisting from the Nasdaq Capital Market. If it
      is
      delisted, our stock price and your liquidity may be
      impacted.***





Our
      common stock is currently listed on the Nasdaq Capital Market. Nasdaq has
      requirements that a company must meet in order to remain listed on the Nasdaq
      Capital Market. These requirements include maintaining a minimum closing bid
      price of $1.00 and minimum stockholders’ equity of $2.5 million. Our
      stockholders’ equity as of October 31, 2006 was approximately $3.3 million and
      our closing bid price on October 31, 2006 was $0.37.





On
      July
      14, 2006, we received a notice from The Nasdaq Stock Market (Nasdaq) indicating
      that for 30 consecutive business days prior to the notification date, the bid
      price of our common stock closed below the $1.00 minimum bid price required
      for
      continued listing by Nasdaq Marketplace Rule 4310(c)(4) (the Rule). On January
      11, 2007, we received a notice from Nasdaq that our stock is subject to
      delisting and that we would not be given an additional 180 day compliance period
      indicating that we did not meet Nasdaq’s initial listing criteria as set forth
      in Nasdaq Marketplace Rule 4310(c). Our shareholders’ equity is less than the
      required $5.0 million and the market value of our public float is less than
      the
      required $5.0 million. We filed an appeal of the staff’s determination to a
      Listings Qualifications Panel (Panel). Delisting of our stock from Nasdaq is
      stayed pending the determination of the Listings Qualifications Panel. We have
      an appeals hearing with the Panel scheduled for February 22, 2007.




-16-


If
      we
      fail to regain compliance with the standards necessary to be quoted on Nasdaq
      or
      we are unsuccessful in our appeal of the delisting determination 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 Nasdaq, and our stock price, as well as the liquidity
      of our common
      stock ,
      may be
      adversely impacted as a result.





***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.




**ITEM
      2.**   **PROPERTIES**





We
      lease
      22,000 square feet of office space to house our engineering and administrative
      headquarters located in San Ramon, California. The lease expires in 2010. .
      In
      connection with the sale of our hardware business, on January 10, 2007, we
      signed a definitive agreement providing for the assumption of the lease of
      our
      San Ramon office space effective with the closing of the transaction. We will
      continue to be secondary guarantor on the lease for the 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
      2006.





-17-





**IDENTIFICATION
      OF EXECUTIVE OFFICERS**





Our
      executive officers and their respective ages and positions as of October 31,
      2006 are set forth in the following table. There are no familial relationships
      between our directors or our executive officers and any other director or
      executive officer.


Name
              Age
              PositionKenneth
                  G. Yamamoto
              51
              President
                  and Chief Executive OfficerDavid
                  W. Brunton
              56
              Vice
                  President, Finance, Chief FinancialOfficer,
                  Treasurer and SecretaryLeo
                  Fang
              35
              Executive
                  Vice PresidentNelson
                  Abal
              49
              Vice
                  President, Sales




Mr.
      Yamamoto  was
      appointed  President
      and CEO on March 3, 2006. Mr. Yamamoto joined SBE as Vice President and General
      Manager of the Storage Group following the acquisition of PyX Technologies,
      Inc
      in July 2005, where he had served as Chief Executive Officer since January
      2005.
      Prior to PyX Technologies, Mr. Yamamoto was Co-Founder and COO of DataPath
      Systems, Inc., a developer of mixed-signal communication integrated circuits,
      which was acquired by LSI Logic, Inc. in July 2000. Mr. Yamamoto was Senior
      Director of Business Development for the Storage and Communications Division
      of
      LSI Logic, Inc. from July 2000 until December 2004.





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 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 certified public
      accountant.





Mr.
      Fang
      was appointed Executive Vice President on May 22, 2007. He joined SBE as Vice
      President, Engineering following the acquisition of PyX Technologies in August
      2005, where Mr. Fang served as COO. From 2000 through 2005, Mr. Fang was
      Director of SERDES and USB Development at LSI Logic, where he led a large,
      multi-disciplinary engineering department that developed an industry-leading
      transceiver product line. Before LSI Logic, Mr. Fang held several senior design
      engineering positions within storage-centric companies such as
      Quantum Corporation and DataPath Systems, Inc.




Mr.
      Abal
      joined us in November 2003 a our Western Region Sales Manager. Mr. Abal was
      appointed Vice President, Sales in July 2005. Prior to joining us, from 2001
      to
      2002, Mr. Abal was self employed as a network consultant. Prior to 2001 Mr.
      Abal
      was Director of Strategic Development for Peak XV, a network consulting
      business.





-18-





**PART
      II**




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


**PURCHASES OF EQUITY** **SECURITIES**





Our
      common stock is quoted on the Nasdaq Capital 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 Capital
      Market. These prices do not include retail markups, markdowns or commissions.
      As
      of December 31, 2006, there were approximately 427 holders of record of our
      common stock.




Fiscal
                quarter endedFiscal
                2006
            
            January
                31
            
            April
                30
            
            July
                31
            
            October
                31High
            
            $
            1.44
            
            $
            1.08
            
            $
            0.40
            
            $
            0.38Low
            
            
            1.33
            
            
            1.05
            
            
            0.36
            
            
            0.35Fiscal
                2005High
            
            $
            4.59
            
            $
            3.55
            
            $
            3.65
            
            $
            3.50Low
            
            
            3.03
            
            
            2.30
            
            
            2.09
            
            
            2.17





There
      are
      no restrictions on our ability to pay dividends; however, it is currently the
      intention of our 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.





The
      following table includes information regarding our equity incentive plans as
      of
      the end of fiscal 2006:





Equity
      Compensation Plan Information





Plan
                category
            
            Number
                of securities to be issued upon exercise of outstanding
                options,
              warrants
                and rights
            
            Weighted-average
                exercise price of outstanding options, warrants
              and
                rights
            
            Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities
              reflected
                in column (a))(a)Equity
                compensation plans approved by security holders
            
            
            3,661,087(1
            )
            $
            2.53
            
            
            108,750Equity
                compensation plans not approved by security holders
            
            
            388,785(2
            )
            $
            2.24
            
            
            135,699Total
            
            
            4,049,872
            
            $
            2.50
            
            
            244,449








(1)
            Includes
                options to purchase 1,021,200 shares our common stock at $2.17 per
                share
                pursuant to the PyX 2005 Employee Stock Option Plan assumed by us
                as part
                of the PyX acquisition.


(2)
            See
                Footnote 11 “Stock Option and Stock Purchase Plans“ to the SBE, Inc.
                financial statements.





-19-




**ITEM
      6.** **SELECTED
      FINANCIAL DATA**





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





For
                years ended October 31,and
                at October 31
            
            2006
            
            2005
            
            2004
            
            2003
            
            2002(in
                thousands, except for per share amounts and number of
                employees)Net
                sales
            
            $
            6,127
            
            $
            8,056
            
            $
            11,066
            
            $
            7,456
            
            $
            6,898Net
                income (loss)
            
            $
            (16,183
            )
            $
            (4,230
            )
            $
            (1,679
            )
            $
            563
            
            $
            (1,731
            )Net
                income (loss) per share - basic
            
            $
            (1.57
            )
            $
            (0.66
            )
            $
            (0.33
            )
            $
            0.13
            
            $
            (0.46
            )Net
                income (loss) per share - diluted
            
            $
            (1.57
            )
            $
            (0.66
            )
            $
            (0.33
            )
            $
            0.12
            
            $
            (0.46
            )Product
                research and development
            
            $
            3,979
            
            $
            2,694
            
            $
            2,411
            
            $
            1,330
            
            $
            3,027ExpensesWorking
                capital
            
            $
            1,701
            
            $
            5,520
            
            $
            3,939
            
            $
            3,945
            
            $
            2,985Total
                assets
            
            $
            4,868
            
            $
            18,832
            
            $
            6,173
            
            $
            6,975
            
            $
            5,321Long-term
                liabilities
            
            $
            255
            
            $
            241
            
            $
            139
            
            $
            217
            
            $
            10Stockholders'
                equity
            
            $
            3,321
            
            $
            17,348
            
            $
            4,303
            
            $
            5,387
            
            $
            3,696Number
                of employees
            
            
            34
            
            
            37
            
            
            36
            
            
            32
            
            
            24





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





We
      experienced a decline in our sales volume of our embedded hardware products
      and
      a lack of market acceptance for our storage software that dramatically effected
      our operating cash flow for fiscal 2006. Because of the continuing decline
      of
      our cash balance, we have been evaluating strategic alternatives to return
      the
      company to cash flow positive and unlock value for our shareholders. In
      September 2006, our Board of Directors and management believed that the best
      course of action was to consider selling our embedded hardware and storage
      software businesses and to consider seeking a viable merger candidate.





We
      design, manufacture and sell embedded hardware products including wide area
      network (WAN) and local area network (LAN) network interface cards (NICs) and
      central processor units (CPUs) to OEMs who
      embed
      our hardware products into their products for the communications
      markets .
      Our
      hardware products perform critical, computing and, Input/Output (I/O) tasks
      in
      diverse markets such as high-end
      enterprise level computing servers, Linux super-computing clusters,
      workstations, media gateways, routers and Internet access devices.





-20-


We
      also
      design and provide software based storage networking solutions for an extensive
      range of business critical applications, including Disk-to-Disk Back-up and
      Disaster Recovery. We deliver an affordable, expandable and easy-to-use
      portfolio of software solutions designed to enable optimal performance and
      rapid
      deployment across a wide range of next generation storage systems. We sell
      standards-based storage software solutions to original equipment manufacturers
      (OEMs), system integrators and value added resellers (VARs) who embed our
      software into their IP
      storage area network (IP SAN) and network attached storage (NAS) systems
      to provide data storage solutions for the small and medium business (SMB)
      enterprise storage markets.





Our
      products are distributed worldwide through a direct sales force, distributors,
      independent manufacturers' representatives and value-added
      resellers.





Our
      business is characterized by a concentration of sales to a small number of
      OEMs
      and distributors who provide products and services to the communications and
      data storage markets. Consequently, the timing of significant orders from major
      customers and their product cycles cause fluctuation in our operating results.
      Data Connection Limited (DCL) was the largest of our customers representing
      31%
      of our sales in fiscal 2006. The Hewlett Packard Company (HP) has historically
      been one of our largest customer and represented 13% and 45% of net sales in
      fiscal 2005 and 2004 respectively. We
      shipped the last $1.0 million of VME products to HP in the first quarter of
      fiscal 2005. We do
      not expect to receive any future purchase orders from HP.





During
      the year ended October 31, 2006, $257,000 or 4% of our sales were sold to
      distributors compared to $640,000 or 8% and $874,000 or 8% in fiscal 2005 and
      2004, respectively. Our reserves for distributor programs total approximately
      $13,000 and $22,000 as of October 31, 2006 and 2005, respectively.





On
      January 11, 2007, we entered into an asset purchase Agreement for the Purchase
      and Sale of Assets (the Purchase Agreement) with One Stop Systems, Inc., a
      manufacturer of industrial-grade computing systems and components (One Stop),
      pursuant to which we agreed to sell all of the assets associated with our
      embedded hardware business (excluding cash, accounts receivable and other
      excluded assets specified in the asset purchase agreement) to One Stop for
      approximately $2.2 million in cash plus One Stop’s assumption of the lease of
      our corporate headquarters building and certain equipment leases. Substantially
      all our revenue has been generated from our embedded hardware business. Upon
      closing the sale of our embedded hardware business to One Stop Systems we will
      no longer have a hardware product line and the terms and conditions of the
      asset
      sale agreement prohibit us from competing in the embedded hardware markets
      for
      at least four year after the transaction is completed.




On
      January 19, 2007, we entered into an Agreement and Plan of Merger and
      Reorganization, with Neonode Inc., a Delaware corporation. Neonode
      is a Swedish based developer and manufacturer of multimedia mobile handsets.
      With over five years of research and development, Neonode is today a
      leader and trendsetter in buttonless touch screen mobile phones and gesture
      based user interfaces. Neonode mobile phones are based on patented
      technologies. With Neonode's open Microsoft based platform, consumers can
      themselves upgrade and customize their handsets similar to a
      PC. It is
      anticipated that our name will be changed to “Neonode Inc.” in connection with
      the completion of the merger.




-21-




We
      intend
      to file a proxy statement in connection with the merger with Neonode.  The
      proxy statement, when it becomes available, will contain important information
      about the merger transaction.  Free copies of the proxy statement will be
      available at the SEC's web site at www.sec.gov .




We
      are
      evaluating strategic alternatives regarding our storage software
      business.




In
      the
      future, if any of our major customers 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,
      competitive conditions and general economic conditions.




On
      October 31, 2006, we had a sales backlog of product orders of approximately
      $1.1
      million compared to a sales backlog of product orders of approximately $1.2
      million as of October 31, 2005.




***Critical
      Accounting Policies and Estimates***





The
      preparation of 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:





*Revenue
      Recognition:*





*Hardware
      Products*





Our
      policy is to recognize revenue for hardware product sales when title transfers
      and risk of loss has passed to the customer, which is generally upon shipment
      of
      our hardware products to our customers. We defer and recognize service revenue
      over the contractual period or as services are rendered. We estimate expected
      sales returns and record the amount as a reduction of revenue and cost of
      hardware and other revenue at the time of shipment. Our policy complies with
      the
      guidance provided by the Securities and Exchange Commission (SEC) Staff
      Accounting Bulletin (SAB) No. 104, *Revenue
      Recognition in Financial Statements* .
      Judgments are required in evaluating the credit worthiness of our customers.
      Credit is not extended to customers and revenue is not recognized until we
      have
      determined that collectibility is  reasonably
      assured. Our sales transactions are denominated in U.S. dollars .
      The
      software component of our hardware products is considered incidental. Therefore,
      we do not recognize software revenue related to our hardware products separately
      from the hardware product sale.





When
      selling hardware, our agreements with OEMs, such as DCL and Nortel Networks
      Corp. (Nortel), typically incorporate clauses reflecting the following
      understandings:





-22-


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


-
            title
                and risk of loss pass at the time of shipment (FOB shipping
                point);


-
            collectibility
                of the sales price is probable (the OEM is creditworthy, 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 will 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
                assist in the resale of the product by the OEMs;
                and


-
            there
                is no contractual right of return other than for defective
                products.





Our
      agreements with our distributors include certain product rotation and price
      protection rights. All distributors have the right to rotate slow moving
      products once each fiscal quarter. The maximum dollar value of inventory
      eligible for rotation is equal to 25% of our products purchased by the
      distributor during the previous quarter. In order to take advantage of their
      product rotation rights, the distributors must order and take delivery of
      additional products of ours equal to at least the dollar value of the products
      that they want to rotate.





Each
      distributor is also allowed certain price protection rights. If and when we
      reduce or plan to reduce the price of any of our products and the distributor
      is
      holding any of the affected products in inventory, we will credit the
      distributor the difference in price when they place their next order with us.
      We
      record an allowance for price protection at the time of the price reduction,
      thereby reducing our net sales and accounts receivable. The allowance is based
      on the price difference of the inventory held by our stocking distributors
      at
      the time we expect to reduce selling prices. We believe we are able to fully
      evaluate potential returns and adjustments and continue to recognize the sale
      based on shipment to our distributors. Reserves for the right of return and
      restocking are established based on the requirements of Statement of Financial Accounting Standards ( SFAS)
      SFAS 48, *Revenue
      Recognition when Right of Return Exists.*





During
      the year ended October 31, 2006, $257,000 or 4% of our sales were sold to
      distributors compared to $640,000 or 8% and $874,000 or 8% in fiscal 2005 and
      2004, respectively. Our reserves for distributor programs total approximately
      $13,000 and $22,000 as of October 31, 2006 and 2005, respectively.





*Software
      Products*





We
      derive
      revenues from the following sources: (1) software, which includes new iSCSI
      software licenses and (2) services, which include consulting. We
      account for the licensing of software in accordance with of American Institute
      of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2, *Software
      Revenue Recognition.* SOP 97-2
      requires judgment, including whether a software arrangement includes multiple
      elements, and if so, whether vendor-specific objective evidence (VSOE) of fair
      value exists for those elements. These documents include post delivery support,
      upgrades and similar services. We typically charge software maintenance equal
      to
      20% of the software license fees.





For
      software license arrangements that do not require significant modification
      or
      customization of the underlying software, we recognize new software license
      revenues when: (1) we enter into a legally binding arrangement with a customer
      for the license of software; (2) we deliver the products; (3) customer payment
      is deemed fixed or determinable and free of contingencies or significant
      uncertainties; and (4) collection is reasonably assured. We initially defer
      all
      revenue related to the software license and maintenance fees until such time
      that we are able to establish VSOE for these elements of our software products.
      Revenue deferred under these arrangements is recognized to revenue over the
      expected contract term. We
      will
      also continue to defer
      revenues that represent undelivered post-delivery engineering support until
      the
      engineering support has been completed and the software product is accepted.





-23-


For
      one
      customer we began recognizing software license fee revenue and related
      engineering support revenue by amortizing previously deferred revenue related
      to
      engineering services over 36-months beginning in March 2006, which was the
      month
      the first software license for this customer was activated. The 36-month
      amortization period is the estimated life of the related software product for
      this customer. We also amortize all fees related to the licensing of our
      software to this customer over 36-months beginning with the month the software
      license is activated. In the fiscal year ended October 31, 2006, we recognized
      $16,800 of software license fees for this customer and $26,000 of deferred
      revenue related to engineering services to this customer.





Certain
      software arrangements include consulting implementation services sold separately
      under consulting engagement contracts. For the fiscal year ended October 31,
      2006, we recognized $10,000 of software consulting revenue.





*Allowance
      for Doubtful Accounts:*





Our
      policy is to maintain allowances for estimated losses resulting from the
      inability of our customers to make required payments. Credit limits are
      established through a process of reviewing the financial history and stability
      of each customer. Where appropriate, we obtain credit rating reports and
      financial statements of the customer when determining or modifying their credit
      limits. We regularly evaluate the collectibility of our trade receivable
      balances based on a combination of factors. When a customer’s account balance
      becomes past due, we initiate dialogue with the customer to determine the cause.
      If it is determined that the customer will be unable to meet its financial
      obligation to us, such as in the case of a bankruptcy filing, deterioration
      in
      the customer’s operating results or financial position or other material events
      impacting their business, we record a specific allowance to reduce the related
      receivable to the amount we expect to recover. Should all efforts fail to
      recover the related receivable, we will write-off the account.




We
      also
      record an allowance for all customers based on certain other factors including
      the length of time the receivables are past due and historical collection
      experience with customers. We believe our reported allowances are adequate.
      If
      the financial conditions of those customers were to deteriorate, however,
      resulting in their inability to make payments, we may need to record additional
      allowances which would result in additional general and administrative expenses
      being recorded for the period in which such determination was made.





*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. Because 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. 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.





-24-


*Inventories:*





Inventories
      are stated at the lower of cost, using the first-in, first-out method, or market
      value. We utilize standard cost, which approximates actual costs for certain
      indirect costs.




We
      are ** exposed
      to a number of economic and industry factors that could result in portions
      of
      our inventory becoming either obsolete or in excess of anticipated usage, or
      subject to lower of cost or market issues. These factors include, but are not
      limited to, technological changes in our markets, our ability to meet changing
      customer requirements, competitive pressures in products and prices, and the
      availability of key components from our suppliers. Our policy is to establish
      inventory reserves when conditions exist that suggest that our inventory may
      be
      in excess of anticipated demand or is obsolete based upon our assumptions about
      future demand for our products and market conditions. We regularly evaluate
      our
      ability to realize the value of our inventory based on a combination of factors
      including the following: historical usage rates, forecasted sales or usage,
      product end-of-life dates, estimated current and future market values and new
      product introductions. Purchasing practices and alternative usage avenues are
      explored within these processes to mitigate inventory exposure. When recorded,
      our reserves are intended to reduce the carrying value of our inventory to
      its
      net realizable value. If actual demand for our products deteriorates, or market
      conditions are less favorable than those that we project, additional inventory
      reserves may be required.




*Income
      Taxes:*




We
      account for income taxes in accordance with SFAS No. 109, *Accounting
      for Income Taxes.* SFAS 109
      requires recognition of deferred tax liabilities and assets for the expected
      future tax consequences of items that have been included in the 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. Based on the uncertainty of future pre-tax income, we fully reserved
      our deferred tax assets as of October 31, 2006 and 2005. 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. The provision for income taxes represents
      the net change in deferred tax amounts, plus income taxes payable for the
      current period.





*Long-lived
      Assets:*





We assess
      any impairment by estimating the future cash flow from the associated asset
      in
      accordance with SFAS No. 144, *Accounting
      for the Impairment or Disposal of Long-Lived Assets* .
      If the
      estimated undiscounted cash flow related to these assets decreases in the future
      or the useful life is shorter than o riginally
      estimated, we may
      incur charges for impairment of these assets. The impairment is based on the
      estimated discounted cash flow associated with the asset. 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
      to
      cost of goods sold based on a straight-line method over the estimated useful
      life, generally two to three years. 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.





-25-


During
      fiscal 2006, we evaluated the current expected cash flow from the sale of
      storage software and determined that the net book value was in excess of the
      net
      realizable value. In the year ended October 31, 2006, we recorded asset
      impairment charges of $6.5 million against our earnings for the period, reducing
      our capitalized storage software asset to $1.3 million, which represents the
      present value of the expected future sales of our storage software products
      less
      costs. This asset impairment charge is included in amortization of purchased
      software  in
      the
      Statements of Operations for
      the
      fiscal year ended October 31, 2006 .
      Prior
      to the write-down, we amortized our storage software over 36 months at the
      rate
      of $339,000 per month. We will amortize the remaining $1.3 million software
      asset over the remaining 21-month amortization period at the rate of $63,000
      per
      month.




New
      Accounting Pronouncements:





In
      June
      2006, the FASB issued Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes* .
      FIN 48 clarifies the accounting for uncertainty in income taxes recognized
      in an enterprise’s financial statements in accordance with SFAS 109. This
      interpretation prescribes a recognition threshold and measurement attribute
      for
      the financial statement recognition and measurement of a tax position taken
      or
      expected to be taken in a tax return. FIN 48 also provides guidance on
      derecognition, classification, interest and penalties, accounting in interim
      periods, disclosure, and transition. FIN 48 will be effective for us
      beginning November 1, 2007. We are currently evaluating this interpretation
      to determine if it will have a material impact on our financial
      statements.





In
      September 2006, the SEC issued SAB 108, *Considering
      the Effects of Prior Year Misstatements in Current Year Financial
      Statements.* SAB 108 expresses the SEC Staff’s views regarding the process of
      quantifying financial statement misstatements. SAB 108 addresses the
      diversity in practice in quantifying financial statement misstatements and
      the
      potential under current practice for the build up of improper amounts on the
      balance sheet. SAB 108 will be effective for the year beginning November 1,
      2006. The cumulative effect of the initial application of SAB 108 will be
      reported in the carrying amounts of assets and liabilities as of the beginning
      of the fiscal year, with the offsetting balance to retained earnings. We do
      not
      expect the adoption of SAB 108 to have a material impact on our financial
      statements.





In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements* .
      SFAS 157 defines fair value, establishes a framework for measuring fair
      value as required by other accounting pronouncements and expands fair value
      measurement disclosures. SFAS 157 is effective for fiscal years beginning
      after November 15, 2007. We are currently evaluating the impact of
      SFAS 157 on our financial statements.







-26-




***Results
      of Operations***




The
      following table sets forth, as a percentage of net sales, certain statements
      of
      operations data for the fiscal years ended October 31, 2006, 2005 and 2004.
      These operating results are not necessarily indicative of our operating results
      for any future period.





**Year
                Ended October 31,****2006**
            
            **2005**
            
            **2004**Net
                sales
            
            
            100
            %
            
            100
            %
            
            100
            %Operating
                expenses:Amortization
                and impairment of acquiredsoftware
                and intellectual property
            
            
            161
            
            
            13
            
            
            11Cost
                of hardware and other revenue
            
            
            66
            
            
            54
            
            
            49Product
                research and development
            
            
            65
            
            
            33
            
            
            22Sales
                and marketing
            
            
            36
            
            
            28
            
            
            19General
                and administrative
            
            
            37
            
            
            24
            
            
            16Loan
                loss recovery
            
            
            ---
            
            
            ---
            
            
            (2
            )Total
                operating expenses
            
            
            365
            
            
            85
            
            
            55Operating
                loss before income taxes
            
            
            (265
            )
            
            (52
            )
            
            (15
            )Income
                tax (provision) benefit
            
            
            ---
            
            
            ---
            
            
            ---Net
                loss
            
            
            (265
            )%
            
            (52
            )%
            
            (15
            )%




***Net
      Sales***





Net
      sales
      for fiscal 2006 were $6.1 million, a 25% decrease from $8.1 million in fiscal
      2005. Our net sales for fiscal 2005 represents a
      27%
      decrease from $11.1 million in fiscal 2004. The decrease in fiscal 2006 sales
      as
      compared to fiscal 2005 were primarily attributable to a decrease in sales
      to
      what was our largest customer, HP. We did not have any sales to HP in fiscal
      2006 compared to $1.0 million in fiscal 2005. In addition, sales to other
      customers also decreased in fiscal 2006 as compared to 2005, most notably a
      $400,000 reduction in the sales of our Antares products to our distributors,
      a
      $300,000 year over year reduction in sales to DCL and a $100,000 reduction
      in
      sales to Nortel The decrease in fiscal 2005 net sales as compared to fiscal
      2004
      was primarily attributable to a decrease in sales to HP. Sales to HP were $1.0
      million in fiscal 2005 compared to $4.9 million in fiscal 2004. We
      shipped our final order for $1.0 million of VME products to HP in the first
      quarter of fiscal 2005 .
      Sales
      to HP, primarily of VME products, represented 0% of net sales in fiscal 2006
      compared to 13% of net sales for fiscal 2005 and 45% during fiscal 2004. Sales
      to
      individual customers in excess of 10% of net sales for the year ended October
      31, 2006 included sales to DCL located in the United Kingdom of $1.9 million,
      or
      31% of net sales, Nortel of $1.3 million, or 21% of net sales and Raytheon
      of
      $750,000, or 12% of net sales. In fiscal 2005, sales to DCL were $2.2 million,
      or 28% of net sales and to were Nortel of $1.4 million, or 18% of net sales.
      Sales to Nortel were $1.5 million, or 13% of net sales in fiscal 2004.





Sales
      of
      our adapter products were $4.0 million for fiscal 2006, as compared to $4.0
      million in fiscal 2005 and $4.9 million in fiscal 2004. Sales of our HighWire
      products were $2.0 million in fiscal 2006, as compared to $2.5 million in fiscal
      2005 and $1.3 million in fiscal 2004. 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.




-27-


Revenue
      from software license fees was $16,700 and from software consulting services
      $36,100 in fiscal 2006 compared to none in prior years.




Our
      sales
      backlog at October 31, 2006 was $1.1 million compared to $1.2 million at October
      31, 2005. Most of our backlog at October 31, 2006 will be shipped to customers
      in the first quarter of fiscal 2007 .





While
      we
      anticipated an increase in the sales volume of our storage software, adapter
      and
      HighWire products over the course of fiscal 2006 as certain
      of our prior design wins went into production and our
      software products gained market acceptance, the expected sales growth did not
      occur. Because of the decline in our sales volume and the lack of market
      acceptance for our storage software, we evaluated strategic alternatives to
      enhance shareholder value. As a result of our evaluation, we
      entered into an agreement to sell our embedded hardware business to One Stop
      Systems, Inc., a manufacturer of industrial-grade computing systems and
      components and an agreement to merge the company with Neonode, Inc., a designer
      and manufacturer of mobile multi-media telephones. After the sale of the
      embedded business and merger transactions are completed, we will no longer
      be
      active in the embedded hardware business and will change our name to “Neonode,
      Inc” and be active in the design and manufacturing of mobile multi-media
      telephones with
      patented buttonless touch screen mobile phones and gesture-based user
      interfaces.





We
      are
      evaluating strategic alternatives regarding our storage software business.




International
      sales constituted 43%, 37% and 12% of net sales in fiscal 2006, 2005 and 2004,
      respectively. International sales are primarily executed in Europe with 31%
      to
      customers in the United Kingdom. All international sales are executed in U.S.
      dollars.




***Amortization
      and Impairment of Purchased Software and Intellectual
      Property***





We
      recorded a software asset totaling $12.4 million when we acquired PyX and
      capitalized $256,000 related to the development of the now discontinued VoIP
      products. We also continually upgrade our software by enhancing the existing
      features of our products and by adding new features and products. We often
      evaluate whether to develop these new offerings in-house or whether we can
      achieve a greater return on investment by purchasing or licensing software
      from
      third parties. Based on our evaluations we have purchased or licensed various
      software for resale since 1996.





Recurring
      amortization of capitalized software and intellectual property costs totaled
      $3.4 million for the fiscal year ended October 31, 2006 compared to $1.0 million
      for the fiscal year ended October 31, 2005 and $408,000 for the fiscal year
      ended October 31, 2004 and is included in amortization
      of purchased software and intellectual property in our Statements of
      Operations .
      The
      increase in 2006 over 205 and 2004 was due to the amortization of the software
      asset acquired in the PyX acquisition.





-28-


In
      the
      fiscal year ended October 31, 2006 we discontinued our VoIP product development
      and as a result wrote-off $256,000 of capitalized software development costs
      related to the VoIP products. This write-off is included in our product research
      and development expense in our Statements of Operations.





In
      the
      fiscal year ended October 31, 2006, we recorded an asset impairment charge
      of
      $6.5 million against our earnings for the year, reducing our storage software
      asset to $1.3 million. This asset impairment charge is included in amortization
      and impairment of purchased software and intellectual property  in
      our
      Statements of Operations. Prior to the write-down, we amortized our storage
      software over 36 months at the rate of $339,000 per month. We will amortize
      the
      remaining $1.3 million software asset over the remaining 21 month amortization
      period at the rate of $63,000 per month.





In
      the
      fiscal ended October 31, 2004 we recorded an asset impairment charge of $713,000
      against our earnings for the year. We wrote off the remaining balance of the
      intellectual property asset related to our acquisition of Antares Microsystems,
      Inc. This asset impairment charge is included in amortization and impairment
      of
      purchased software and intellectual property  in
      our
      Statements of Operations.





***Cost
      of Hardware Products and Other Revenue***





Cost
      of
      hardware products and other revenues consists of the direct and indirect costs
      of our manufactured hardware products and the cost of personnel in our
      operations and production departments including share-based payment compensation
      expense associated with the implementation of SFAS No. 123(R) *Share
      Based Payment* .
      Cost of
      hardware products and other revenues for the year ended October 31, 2006
      decreased by 7% to $4.0 million compared with $4.4 million for the fiscal year
      ended October 31, 2005. Cost of hardware products and other revenues for the
      fiscal year ended October 31, 2005 decreased by 19.8% compared with $5.4 million
      the fiscal year ended October 31, 2004. The decrease in cost of hardware
      products and other revenue in absolute dollars for both the comparative fiscal
      periods was principally due to a lower volume of hardware sales that decreased
      the total direct and indirect cost of our manufactured products.





Included
      in cost of hardware products and other revenue expense for the fiscal year
      ended
      October 31, 2006 is $80,000 of non-cash stock-based compensation expense related
      to the stock-for-pay program, stock option expense under SFAS 123R and the
      issuance of restricted stock to employees compared to none in 2005 and
      2004 .





Gross
      profit is calculated as net sales less the cost of hardware and other revenue.
      Gross profit as a percentage of net sales was 34%, 46% and 51% in fiscal 2006,
      2005 and 2004, respectively. The decrease in our gross profit margin in fiscal
      2006 as compared to 2005 is related to the reduction in sales of higher gross
      margin products to HP combined with a
      change
      to the
      product mix of our sales and a lower sales volume not efficiently absorbing
      our
      second line production costs .  The
      decrease in our gross profit margin in fiscal 2005 as compared to 2004 is
      related to the reduction in sales of higher gross margin products to HP. In
      fiscal 2004 we sold $4.9 million of product to HP and in fiscal 2005 we sold
      $1.0 million. The
      gross
      profit on the HP sales was approximately 70% as compared to the average gross
      profit on HighWire products, which was approximately 60%, and adapter products,
      which was approximately 55%.





-29-


***Product
      Research and Development***





Product
      research and development (R&D) expenses were $3.9 million, a 48% increase
      over $2.7 million in fiscal 2006. R&D expense for fiscal 2005 increased by
      11% over $2.4 million in fiscal 2004.




The
      increase in R&D in fiscal 2006 as compared to fiscal 2005 is primarily the
      result of three factors:




·
            the
                inclusion of $543,300 of non-cash compensation expense related to
                stock
                option expense under SFAS 123(R) compared to none in 2005 and
                2004;


·
            an
                increase in engineering design projects related expenditures related
                to
                the development of our storage software;
                and


·
            a
                $256,000 asset impairment write-off of previously capitalized VoIP
                development expense that was written-off to expense in fiscal 2006
                due to
                the cancellation of the VoIP development
                project.




The
      increase in R&D in fiscal 2005 as compared to fiscal 2004 is primarily the
      result of two factors:




·
            the
                inclusion of increases related to our Storage business segment when
                we
                hired seven employees in conjunction with the PyX acquisition; and


·
            an
                increase in engineering design project related expenditures related
                to the
                development of our storage software and VoIP/DSP gateway
                products.




In
      fiscal
      2006, we continued development of our PyX storage software. During fiscal 2006
      we developed a wide variety of storage software management features and data
      protection modules. While the iSCSI protocol stack provides for a robust,
      inexpensive, and highly scalable transport infrastructure, modules included
      in
      our IP SAN Director Suite such as iSNS (Internet Storage Name Service), SNMP
      (Simple Network Management Protocol), Snapshot, High Availability, and
      Replication seamlessly address the needs and requirements of today’s IT storage
      managers.





Included
      in R&D expense for the fiscal year ended October 31, 2006, in addition to
      the $543,300 stock option expense previously mentioned, is $282,000 of non-cash
      stock-based compensation expense related to the stock-for-pay program and the
      issuance of restricted stock to employees compared to none in 2005 and
      2004 .




With
      the
      planned sale of our embedded hardware business and lack of market acceptance
      for
      our storage software products, we reduced our R&D budget significantly and
      have focused our R&D efforts on key storage management features to enhance
      the value of our storage software business.




We
      did
      not capitalize any internal software development costs in fiscal 2006, 2005
      or
      2004 and do not expect to capitalize internal software development costs in
      the
      future .





-30-





***Sales
      and Marketing***





Sales
      and
      marketing expenses for fiscal 2006 were $2.3 million, a 5% decrease from fiscal
      2005. This decrease is primarily related to a decrease in headcount and
      decreased travel and product marketing activities. We decreased our marketing
      expenditures by 30% in fiscal 2006 as we reduce cash expenditures across the
      company.





Fiscal
      2005 sales and marketing expense was $2.2 million, a 5% increase over fiscal
      2004. This increase is primarily related to an increase in headcount due to
      the
      acquisition of PyX and an increase travel and product marketing activities.
      We
      increased our marketing expenditures by 58% in fiscal 2005 as we attended more
      industry trade shows and increased our advertising and public relations efforts
      to reach our target prospects more effectively.





Included
      in sales and marketing expense for the fiscal year ended October 31, 2006 is
      $234,000 of non-cash stock-based compensation expense related to the
      stock-for-pay program, stock option expense under SFAS 123(R) and the issuance
      of restricted stock to employees compared to none in 2005 and 2004 .





We
      are
      not currently planning to attend trade shows or engage in product marketing
      activities other than via our Web site and word of mouth.





***General
      and Administrative***





General
      and administrative expenses for fiscal 2006 increased approximately $340,000
      to
      $2.2 million in fiscal 2005. General and administrative expenses for fiscal
      2006
      include $592,000 of non-cash compensation expense related to stock option
      expense under SFAS 123(R) compared to none in 2005 and 2004. General and
      administrative expenses for fiscal 2005 increased approximately $150,000 to
      $1.9
      million as compared to fiscal 2004. We
      assumed the PyX employee stock option plan as part of our acquisition of PyX
      and
      recorded $2,484,000
      of deferred compensation. Included in general and administrative expense for
      fiscal 2005 is $173,000 amortization expense related to the deferred
      compensation .





Included
      in general and administrative expense for the fiscal year ended October 31,
      2006, in addition to the $592,000 stock option expense previously mentioned,
      is
      $357,000 of non-cash stock-based compensation expense related to the
      stock-for-pay program and the issuance of restricted stock to employees compared
      to none in 2005 and 2004 .




***Loan
      Reserve Benefit***




On
      November 6, 1998, we made a loan to our former president and chief executive
      offer, who retired as of December 31, 2004. The loan was used by him to exercise
      an option to purchase 139,400 shares of our common stock and pay related taxes.
      The loan, as amended, was collateralized by shares of our common stock, bore
      interest at a rate of 2.48% per annum and was due on December 14,
      2003.





On
      October 31, 2002, we determined that it was probable that we would 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 against the loan
      at
      October 31, 2002.




-31-


During
      the fourth quarter of fiscal 2003, the officer repaid $362,800 of the loan
      and,
      as a result, we recognized a benefit of $235,000 related to the reversal of
      the
      loan impairment charge taken by us in fiscal 2002. During the first quarter
      of
      fiscal 2004, the officer repaid the remaining loan balance in full and, as
      a
      result, we recorded a benefit of $239,000 relating to the reversal of the
      remaining loan impairment charge.





***Income
      Taxes***





Our
      effective tax rate was 0% in fiscal 2006, 2005 and 2004, respectively. We
      recorded valuation allowances in fiscal 2006 and 2005 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
      Loss***





As
      a
      result of the factors discussed above, we recorded a net loss of $16.2 million
      in fiscal 2006 compared to a net loss of $4.2 million in fiscal 2005 and $1.7
      in
      fiscal 2004.




***Contractual
      Obligations and Commercial Commitments***





The
      following table sets forth a summary of our material contractual obligations
      and
      commercial commitments as of October 31, 2006:




Payments
                due by period (in thousands)Less
                than
            
            1-2
            
            3-5
            
            More
                thanContractual
                Obligations
            
            Total
            
            1
                year
            
            Years
            
            Years
            
            5
                YearsBuilding
                leases
            
            $
            2,223
            
            $
            580
            
            $
            1,160
            
            $
            483
            
            $
            —Capital
                leases
            
            
            255
            
            
            74
            
            
            149
            
            
            32
            
            
            —Total
                net lease payments
            
            $
            2,478
            
            $
            654
            
            $
            1,309
            
            $
            515
            
            $
            —





One
      Stop
      Systems, Inc. agreed to the assumption of our corporate headquarters office
      lease and a lease for certain engineering equipment as part of the consideration
      related to the purchase of our embedded hardware business. One Stop will assume
      approximately $2.2 million of future lease payments. The sale transaction to
      One
      Stop is expected to be completed in our second quarter of fiscal
      2007.





In
      addition to salary, each of our directors and executive officers is eligible
      to
      receive a bonus pursuant to our Director and Officer Bonus Plan adopted
      September 21, 2006 and each of our executive officers have severance agreements
      that provide for 6 months salary and accelerated vesting of all unvested stock
      options upon certain events triggered by a change in control. The total
      estimated amounts due under the Bonus and severance agreements is approximately
      $530,000. The amounts due will be paid to the directors and executive officers
      upon completion of the asset sale and merger.




-32-





Substantially
      all our sales backlog at October 31, 2007 of $1.1 million is scheduled for
      shipment to customers prior to the projected closing of the sale of our embedded
      hardware business to One Stop Systems, Inc.





***Off-Balance
      Sheet Arrangements***





We
      do not
      have any transactions, arrangements, or other relationships with unconsolidated
      entities that are reasonably likely to affect our liquidity or capital resources
      other than the operating leases noted above. We have no special purpose or
      limited purpose entities that provide off-balance sheet financing, liquidity,
      or
      market or credit risk support; or engage in leasing, hedging, research and
      development services, or other relationships that expose us to liability that
      is
      not reflected on the face of the financial statements.





***Liquidity
      and Capital Resources***





We
      experienced a decline in our sales volume of our embedded hardware products
      and
      a lack of market acceptance for our storage software that dramatically effected
      our operating cash flow for fiscal 2006. Because of the continuing decline
      of
      our cash balance, we have been evaluating strategic alternatives to return
      the
      company to cash flow positive. We determined the best way to enhance shareholder
      value and preserve the remaining cash balance was to sell our
      embedded hardware business to One Stop Systems, Inc. and to merge with Neonode,
      Inc. The sale of the embedded hardware business will provide cash of $2.2
      million plus relieve us of a $2.2 million real estate lease burden. After the
      sale of the embedded business and merger transactions are completed, we will
      no
      longer be active in the embedded hardware business and
      future cash will have to be derived from the operations of Neonode.





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





-
            actual
                versus anticipated sales of Neonode’s
                products;


-
            our
                actual versus anticipated operating
                expenses;


-
            the
                timing of Neonode’s product
                shipments;


-
            our
                actual versus anticipated Neonode’s 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 $1.2 million and $3.6 million on October 31, 2006
      and October 31, 2005, respectively. In
      fiscal
      2006, $2.3 million of cash was used by operating activitie s,
      primarily as a result of net losses. Our cash used was reduced by the inclusion
      of $6.5 million impairment write-down of the PyX software plus $3.9 million
      of
      amortization and depreciation expense related to property and equipment and
      capitalized software and $2.1 million of stock based compensation expense that
      are included in the $16.2 million net loss but did not require cash. Cash was
      generated by a $625,000 decrease in our accounts receivable and a $544,000
      decrease in our inventory. The decrease in trade accounts receivable is due
      to a
      general decrease in overall sales activity in fiscal 2006 as compared to the
      end
      of fiscal 2005. The decrease in inventory is due to reducing
      our inventory from $1.3 million at the beginning of the year to $740,000 at
      year-end. The current inventory level better matches our current sales levels.
      Our working
      capital (current assets less current liabilities) at October 31, 2006 was $1.7
      million, as compared to $5.2 million at October 31, 2005.





-33-


In
      fiscal
      2006, we purchased $176,000 of fixed assets, consisting primarily of computers
      and engineering equipment. Purchased software amounted to $40,000, primarily
      for
      engineering and product design activities and payments related to our cancelled
      VoIP products.





We
      received $37,000 in fiscal 2006 from proceeds associated with the exercise
      of
      employee stock options.





In
      mid-January 2006, we took steps to reduce our cash flow break-even point. We
      changed the formula for paying all officers and employees and our Board of
      Directors (Board) for their services. For the January 31, 2006 through March
      31,
      2006 payrolls, officer and employees were paid 70% in cash and 30% in shares
      of
      our common stock. Beginning with our April 15, 2006 payroll, the formula was
      changed to a range of 62% to 90% in cash and 10% to 38% in shares of our common
      stock. Our Board’s monthly fees were paid entirely in our common stock. On
      August 21, 2006, the Board suspended the stock-for-pay program for all members
      of the Board and officers. The suspension was effective August 1, 2006 for
      members of the board and effective August 16, 2006 for officers. Despite the
      suspension of the stock-for-pay program, the previously-announced salary
      reductions for officers and cessation of cash Board compensation will remain
      in
      effect until such time as the Board shall determine. The stock-for-pay program
      has continued for our non-officer employees.




As
      of
      October 31, 2006, we had $1.2 million in cash and we are not operating at cash
      breakeven. Unless we are able to increase our sales to get to cash breakeven,
      we
      will not have sufficient cash generated from our business activities to support
      our operations for the next twelve months. We have embarked on a strategy to
      sell all or a portion of our business and signed a definitive agreement to
      sell
      our embedded hardware business. The overwhelming majority of our cash flow
      from
      operations has been generated from the embedded hardware business that we are
      selling. We expect to close the sale of our embedded hardware business in our
      second quarter of fiscal 2007. We also signed a definitive agreement to merge
      with Neonode and have been reducing our staffing levels and other cash
      expenditures to sustainable levels. We expect the $2.2 million cash proceeds
      from the sale of our embedded hardware business to be sufficient to support
      our
      remaining operations until the merger transaction closes, or for at least the
      next twelve months if the merger is delayed. We are also seeking other strategic
      alternatives including selling our storage software business.




If
      our
      projected sales of our storage software products do not materialize or we are
      unable to consummate the sale of our embedded hardware business and the merger
      transaction, we will need to reduce expenses further and raise additional
      capital through customer prepayments or the issuance of debt or equity
      securities. If we raise additional funds 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.





**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, 2006 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 loss related to our financial instruments
      would be immaterial. We hold no assets or liabilities denominated in a foreign
      currency and all sales are denominated in U.S. dollars.




-34-


**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.





**ITEM
      9A.**  **CONTROLS
      AND PROCEDURES**





An
      evaluation as of October 31, 2006 was carried out under the supervision of
      and
      with the participation of our management, including our Chief Executive Officer
      and Chief Financial Officer, of the effectiveness of the design and operation
      of
      our “disclosure controls and procedures,” which are defined under SEC rules as
      controls and other procedures of a company that are designed to ensure that
      information required to be disclosed by a company in the reports that it files
      under the Securities Exchange Act of 1934, or the Exchange Act, is recorded,
      processed, summarized and reported within required time
      periods. In
      our
      financial reporting process, our Chief Financial Officer, in discussions with
      our independent registered public accounting firm, identified a certain
“material weakness” (as such term is defined under Public Company Accounting
      Oversight Board Auditing Standard No. 2) in disclosure controls and
      procedures.    As a result of this material weakness, our Chief
      Executive Officer and Chief Financial Officer have determined that our
      disclosure controls and procedures are ineffective.





During
      the year ended October 31, 2006, our independent registered public accounting
      firm communicated to management and the audit committee a material weakness
      arising out of an adjustment to revenue related to our software contracts which
      they identified during their review of our interim condensed consolidated
      financial statements. The material weakness identified pertains to our revenue
      recognition policies and procedures for software arrangements, which is new
      to
      us, and not adequately robust to identify vendor specific objective evidence
      and
      separate multiple element arrangements.  We are working to establish
      policies and procedures in this area.





***Limitations
      on the Effectiveness of Controls***





A
      control
      system, no matter how well conceived and operated, can provide only reasonable,
      not absolute, assurance that the objectives of the controls are met. Because
      of
      the inherent limitations in all control systems, no evaluation of controls
      can
      provide absolute assurance that all control issues within a company, if any,
      have been detected. Accordingly, our disclosure controls and procedures are
      designed to provide reasonable, not absolute, assurance that the objectives
      of
      our disclosure control system are met and, as set forth above, our Chief
      Executive Officer and Chief Financial Officer have concluded, based on their
      evaluation as of the end of the period covered by this annual report on Form
      10-K, that our disclosure controls and procedures were not sufficiently
      effective to provide reasonable assurance that the objectives of our disclosure
      control system were met.





-35-








**ITEM
      9B.**  **OTHER
      INFORMATION**





None.






-36-




**PART
      III**




**ITEM
      10.**  **DIRECTORS
      AND EXECUTIVE OFFICERS OF THE REGISTRANT**





Identification
      of Directors; Audit Committee Financial Expert; Section 16(a) Beneficial
      Ownership Reporting Compliance; Code of Ethics





The
      information required by Item 10 concerning our executive officers is set forth
      in the section entitled "Identification of Executive Officers" appearing in
      Part
      I of this annual report.





**Board
      of Directors**





The
      Board
      is divided into three classes. Each class consists, as nearly as possible,
      of
      one-third of the total number of directors, and each class has a three-year
      term. Vacancies on the Board may be filled only by persons elected by a majority
      of the remaining directors. A director elected by the Board to fill a vacancy
      in
      a class shall serve for the remainder of the full term of that class, and until
      the director’s successor is elected and qualified. This includes vacancies
      created by an increase in the number of directors.




The
      Board
      presently has five members. The following is a brief biography of each director




**Kenneth
      G. Yamamoto**





Mr.
      Yamamoto, 51,  was
      appointed as President,
      CEO and director on March 3, 2006. Mr. Yamamoto joined SBE as Vice President
      and
      General Manager of the Storage Group following the acquisition of PyX
      Technologies, Inc in July 2005, where he had served as Chief Executive Officer
      since January 2005. Prior to PyX, Mr. Yamamoto was Co-Founder and COO of
      DataPath Systems, Inc., a developer of mixed-signal communication integrated
      circuits, which was acquired by LSI Logic, Inc. in July 2000. Mr. Yamamoto
      was
      Senior Director of Business Development for the Storage and Communications
      Division of LSI Logic, Inc. from July 2000 until December 2004.





**Ronald
      J. Ritchie**




Mr.
      Ritchie, 64, has served as a director since 1997 and as Chairman since 2004.
      Mr.
      Ritchie has served as president of Ritchie Associates, a business and management
      consulting firm. From October 1999 to June 2002, Mr. Ritchie also served as
      director of PixTech, Inc., a provider of field emission displays to worldwide
      customers, and he served as interim Chief Executive Officer of PixTech from
      August 2001 to June 2002. Mr. Ritchie served as Chairman of the Board of VXI
      Electronics, Inc., a supplier of power conversion components, from February
      1998
      until its acquisition by Celestica Inc. in September 1999. Mr. Ritchie was
      President and CEO of Akashic Memories Corporation, a firm supplying thin film
      hard disk media to manufacturers of disk drive products, from November 1996
      to
      January 1998. From May 1994 to November 1996, Mr. Ritchie also served as
      President of Ritchie Associates. From August 1992 to April 1994, Mr. Ritchie
      was
      President and Chief Operating Officer of Computer Products, Inc., a supplier
      of
      power conversion components and system applications for the computer and
      networking industry.




-37-




**Marion
      M. (Mel) Stuckey**




Mr.
      Stuckey, 66, has served as a director since December 2003. Since 2003, Mr.
      Stuckey has served as Chief Executive Officer of the DECAF Company LLC, a
      high-tech polymer company. Since 2001, Mr. Stuckey has served as Chief Executive
      Officer of CEO Jumpstart LLC, a management consulting firm. From 1983 to 2001,
      Mr. Stuckey was the Chairman of the Board and Chief Executive Officer of Fourth
      Shift Corporation, a provider of supply chain and customer management software.
      From 1978 to 1982, Mr. Stuckey was the President of the CPI subsidiary of
      Control Data Corporation. From 1962 to 1978, Mr. Stuckey held various IBM prior
      to being named the Northern California and Nevada Manager for IBM
      Corporation.




**John
      Reardon**




Mr.
      Reardon, 44, has served as a director since February 2004. Mr. Reardon has
      served as President and member of the Board of Directors of The RTC Group,
      a
      technical publishing company since 1990. In 1994, Mr. Reardon founded a Dutch
      corporation, AEE, to expand the activities of The RTC Group into Europe. Mr.
      Reardon continues to serve on the Board of Directors of One Stop Systems, Inc.,
      a computing systems and manufacturing company.




**John
      D’Errico**




Mr.
      D’Errico has
      served as a director since April
      2006.  Mr. D’Errico is the former Executive Vice President of LSI Logic
      Corp’s Storage Component Business, a business unit providing solutions for the
      storage market. Mr. D’Errico began his career at LSI Logic in 1984 in LSI’s
      worldwide manufacturing organization. During his 21 year career at LSI, Mr.
      D’Errico served as Vice-President of U.S. Manufacturing, Vice-President and
      General Manager of LSI Logic’s Japanese subsidiary and Vice-President and
      General Manager of LSI Logic’s Pan Asia Marketing and Sales. From 1998 to 2003
      he was a member of the Colorado Governor’s Commission on Science and Technology.





**Information
      Regarding the Board of Directors and its Committees**





*Independence
      of the Board of Directors*




As
      required under the Nasdaq **** listing
      standards, a majority of the members of a listed company’s board of directors
      must qualify as “independent,” as affirmatively determined by the board of
      directors. The Board consults with our counsel to ensure that the Board’s
      determinations are consistent with all relevant securities and other laws and
      regulations regarding the definition of “independent,” including those set forth
      in pertinent listing standards of Nasdaq, as in effect time to time.




Consistent
      with these considerations, after review of all relevant transactions or
      relationships between each director, or any of his or her family members, and
      SBE, our senior management and its independent auditors, the Board affirmatively
      has determined that all of our directors are our independent directors within
      the meaning of the applicable Nasdaq  listing
      standards.




-38-


***Board
      Committees***




The
      Board
      has three committees: an Audit Committee, a Compensation Committee, and a
      Nominating and Governance Committee.





***Audit
      Committee*** *.* The
      Audit
      Committee of the Board oversees our corporate accounting and financial reporting
      process. For this purpose, the Audit Committee performs several functions.
      The
      Audit Committee evaluates the performance of and assesses the qualifications
      of
      the independent auditors; determines and approves the engagement of the
      independent auditors; determines whether to retain or terminate the existing
      independent auditors or to appoint and engage new independent auditors; reviews
      and approves the retention of the independent auditors to perform any proposed
      permissible non-audit services; monitors the rotation of partners of the
      independent auditors on our audit engagement team as required by law; confers
      with management and the independent auditors regarding the effectiveness of
      internal controls over financial reporting; establishes procedures, as required
      under applicable law, for the receipt, retention and treatment of complaints
      received by us regarding accounting, internal accounting controls or auditing
      matters and the confidential and anonymous submission by employees of concerns
      regarding questionable accounting or auditing matters; reviews the financial
      statements to be included in our Annual Report on Form 10-K; and discusses
      with
      management and the independent auditors the results of the annual audit and
      the
      results of our quarterly financial statements. Three directors comprise the
      Audit Committee: Messrs. Stuckey, Reardon and Ritchie. The Audit Committee
      has
      adopted a written Audit Committee Charter.





The
      Board
      annually reviews the Nasdaq listing standards definition of independence for
      Audit Committee members and has determined that all members of our Audit
      Committee are independent (as independence is currently defined in Rule
      4350(d)(2)(A)(i) and (ii) of the Nasdaq listing standards). All members of
      the
      Audit Committee meet Nasdaq’s audit committee financial sophistication
      requirements. We do not have an “audit committee financial expert” (as defined
      in the rules of the SEC) serving on the Audit Committee but the Board believes
      that the background and financial sophistication of its members are sufficient
      to satisfy the requirements of Rule 4350(d)(z)(A) of the Nasdaq listing
      standards and to fulfill the duties of the Audit Committee. Nasdaq does not
      currently require that audit committees include an “audit committee financial
      expert” Only that they meet certain requirements as to financial
      sophistication.





***Compensation
      Committee*** *.* The
      Compensation Committee of the Board reviews and approves our overall
      compensation strategy and policies. The Compensation Committee reviews and
      approves corporate performance goals and objectives relevant to the compensation
      of our executive officers and other senior management; reviews and approves
      the
      compensation and other terms of employment of our Chief Executive Officer;
      reviews and approves the compensation and other terms of employment of the
      other
      executive officers; and administers our stock option and purchase plans, pension
      and profit sharing plans, stock bonus plans, deferred compensation plans and
      other similar programs. Three directors comprise the Compensation Committee:
      Messrs. Stuckey, Reardon and Ritchie. All members of the our Compensation
      Committee are independent (as independence is currently defined in Rule
      4200(a)(15) of the Nasdaq listing standards.





***Nominating
      and Governance Committee.*** ** The
      Nominating and Governance Committee of the Board is responsible for identifying,
      reviewing and evaluating candidates to serve as our directors (consistent with
      criteria approved by the Board), reviewing and evaluating incumbent directors,
      recommending to the Board for selection candidates for election to the Board
      and
      making recommendations to the Board regarding the membership of the committees
      of the Board. Our Nominating and Governance Committee charter can be found
      on
      our corporate website at www.sbei.com. Three directors comprise the Nominating
      and Governance Committee: Messrs. Stuckey, Reardon and Ritchie. All members
      of
      the Nominating and Governance Committee are independent (as independence is
      currently defined in Rule 4200(a)(15) of the Nasdaq listing standards).





-39-


The
      Nominating and Governance Committee believes that candidates for director should
      have certain minimum qualifications, including being able to read and understand
      basic financial statements, being over 21 years of age and having the highest
      personal integrity and ethics. The committee also intends to consider such
      factors as possessing relevant expertise upon which to be able to offer advice
      and guidance to management, having sufficient time to devote to our affairs,
      demonstrated excellence in his or her field, having the ability to exercise
      sound business judgment and having the commitment to rigorously represent the
      long-term interests of our stockholders. However, the committee retains the
      right to modify these qualifications from time to time. Candidates for director
      nominees are reviewed in the context of the current composition of the Board,
      our operating requirements and the long-term interests of stockholders. In
      conducting this assessment, the committee considers diversity, age, skills,
      and
      such other factors as it deems appropriate given the current needs of the Board,
      SBE, to maintain a balance of knowledge, experience and capability. In the
      case
      of incumbent directors whose terms of office are set to expire, the Nominating
      and Governance Committee reviews such directors’ overall service to SBE during
      their term, including the number of meetings attended, level of participation,
      quality of performance, and any other relationships and transactions that might
      impair such directors’ independence. In the case of new director candidates, the
      committee also determines whether the nominee must be independent for
      Nasdaq **** purposes,
      which determination is based upon applicable Nasdaq **** listing
      standards, applicable SEC rules and regulations and the advice of counsel,
      if
      necessary. The committee then uses its network of contacts to compile a list
      of
      potential candidates, but may also engage, if it deems appropriate, a
      professional search firm. The committee conducts any appropriate and necessary
      inquiries into the backgrounds and qualifications of possible candidates after
      considering the function and needs of the Board. The committee meets to discuss
      and consider such candidates’ qualifications and then selects a nominee for
      recommendation to the Board by majority vote. To date, the Nominating and
      Governance Committee has not paid a fee to any third party to assist in the
      process of identifying or evaluating director candidates.




***Compensation
      of Directors***




In
      January 2006, as part of a company-wide reduction in salaries and other
      expenses, we revised our director compensation policy to suspend all cash fees
      and retainers payable to our directors. The Board approved a Stock-for-Pay
      plan
      that included all our employees as well as members of the Board. The
      number of shares of stock issued to employees and Board member in-lieu of their
      cash compensation is calculated at a 15% reduction from the market price on
      the
      date of issuance. Effective
      August 1, 2006, the
      Board
      approved the suspension of all cash payments of Board and Board committee fees,
      until further notice. A total of 158,295 shares of our common stock has been
      issued to Board members in lieu of such fees under the stock-for-pay plan since
      January 1, 2006. For
      the
      fiscal year ended October 31, 2006, we recorded approximately $126,000 of
      stock-based compensation and director expense associated with the stock-for-pay
      plan.




-40-


Prior
      to
      adoption of the company-wide reduction in salaries and other expenses, each
      of
      our non-employee directors received an annual retainer of $30,000, payable
      monthly in arrears. The Chairman of the Board received an annual retainer of
      $45,000, payable monthly in arrears. No director has been entitled to receive
      a
      per-meeting fee since March 2004, when our director compensation policy was
      revised to eliminate such fees and replace them with the annual retainers
      described above. In the fiscal year ended October 31, 2006, the total cash
      compensation paid to non-employee directors was $33,750. The members of the
      Board are also eligible for reimbursement for their expenses incurred in
      attending Board meetings in accordance with Company policy.




Each
      of
      our non-employee directors also receives stock option grants under the 2001
      Directors’ Stock Option Plan (Directors’ Plan). Only our non-employee directors
      are eligible to receive options under the Directors’ Plan. Options granted under
      the Directors’ Plan do not qualify as incentive stock options under the Internal
      Revenue Code. Option grants under the Directors’ Plan are non-discretionary.
      Upon a non-employee director’s initial appointment or election to the Board, he
      or she is automatically granted an option to purchase 15,000 shares of common
      stock under the Directors’ Plan. On April 1 of each year (or the next
      business day if that date is a legal holiday), each non-employee director is
      automatically granted an additional option to purchase 10,000 shares of common
      stock under the Directors’ Plan. No other options may be granted at any time
      under the Directors’ Plan. The exercise price of options granted under the
      Directors’ Plan is 100% of the fair market value of the common stock subject to
      the option on the date of the option grant. Options granted under the Directors’
Plan may not be exercised until the date upon which the optionee (or the
      affiliate of the optionee) has provided one year of continuous service as a
      non-employee director following the date of grant of such option, at which
      point
      100% of the option becomes exercisable. The
      options will fully vest upon a change of control, as defined in the Directors’
Plan, unless the acquiring company assumes the options or substitutes similar
      options. The
      term
      of options granted under the Directors’ Plan is seven years.




During
      the last fiscal year, we granted options covering 65,000 shares to our
      non-employee directors, of which 40,000 were granted at an exercise price of
      $1.08 per share and 25,000 were granted at an exercise price of $1.10 per share.
      The fair market value of such common stock on the dates of grant was $1.08
      and
      $1.10 per share, respectively (based on the closing sales price reported on
      Nasdaq for the date of grant).





***Section
      16(a) Beneficial Ownership Reporting Compliance***





Section
      16(a) of the Securities Exchange Act of 1934 (the “1934 Act”) requires our
      directors and executive officers, and persons who own more than ten percent
      of a
      registered class of our equity securities, to file with the SEC initial reports
      of ownership and reports of changes in ownership of our common stock and other
      equity securities. Officers, directors and greater than ten percent stockholders
      are required by SEC regulation to furnish us with copies of all Section 16(a)
      forms they file.




To
      our
      knowledge, based solely on a review of the copies of such reports furnished
      to
      us and written representations that no other reports were required, during
      the
      fiscal year ended October 31, 2006, all Section 16(a) filing requirements
      applicable to our officers, directors and greater than ten percent beneficial
      owners were complied with.





-41-


***Code
      Of Ethics***




We
      have
      adopted the SBE, Inc. Code of Business Conduct that applies to all officers,
      directors and employees. All of our employees must carry out their duties in
      accordance with the policies set forth in the Code of Business Conduct and
      with
      applicable laws and regulations. The Code of Business Conduct contains a
      separate Code of Ethics that applies specifically to our Chief Executive Officer
      and senior financial officers. The Code of Business Conduct and Code of Ethics
      is available on our website at www.sbei.com . If
      we
      make any substantive amendments to the Code of Business Conduct or grants any
      waiver from a provision of the Code to any executive officer or director, we
      will promptly disclose the nature of the amendment or waiver on our
      website.




**ITEM
      11.**  **EXECUTIVE
      COMPENSATION**





-42-


***Summary
      of Compensation***





The
      following table shows for the fiscal years ended October 31, 2004, 2005 and
      2006, compensation awarded or paid to, or earned by, our Chief Executive Officer
      and our other four most highly compensated executive officers at
      October 31, 2006 (the “Named Executive Officers”):




**Summary
      Compensation Table**




**Annual
                Compensation**
            **Long-Term
                Compensation Awards****Name
                and Principal**
              **Position**
            **Year**
            **Salary
                ($)**
            **Bonus
                ($)**
            **Other**
              **Annual**
              **Compen-****sation
                ($)(1)**
            **Stock**
              **Awards
                (#)(8)**
            **Securities**
              **Underlying**
              **Options
                (#)**
            **All
                Other Compen-****sation
                ($)(2)**Mr.
                Kenneth Yamamoto
              President
                and Chief Executive Officer (7)
            2006
              2005
              2004
            143,617
              75,104
              --
            --
              --
              --
            708
              --
              --
            74,088
              --
              --
            100,000
              --
              --
            1,094
              --
              --Mr.
                Leo Fang
              Executive
                Vice President(6)
            2006
              2005
              2004
            143,643
              75,104
              --
            --
              --
              --
            242
              --
              --
            62,562
              --
              --
            25,000
              --
              --
            1,094
              --
              --Mr.
                David Brunton
              Vice
                President, Finance and Chief Financial Officer
            2006
              2005
              2004
            144,649
              170,000
              167,500
            --
              --
              --
            1,103
              1,058
              541
            49,683
              --
              --
            25,000
              100,000
              25,000
            425
              3,613
              4,875Mr.
                Kirk Anderson
              Vice
                President, Operations
            2006
              2005
              2004
            136,740
              132,888
              130,000
            --
              --
              --
            324
              270
              263
            45,502
              --
              --
            75,000
              --
              --
            853
              3,879
              3,828Mr.
                Nelson Abal
              Vice
                President of Sales (10)
            2006
              2005
              2004
            118,789
              105,416
              100,000
            13,599
              37,677
              61,315
            185
              128
              121
            29,791
              --
              --
            20,000
              70,000
              --
            813
              3,163
              2,250Mr.
                Daniel Grey
              President
                and Chief Executive Officer (3)
            2006
              2005
              2004
            77,492
              200,000
              200,904
            --
              --
              --
            317
              4,052
              4,052
            13,286
              --
              --
            --
              250,000
              25,000
            625
              2,875
              6,000Mr.
                Steve Nester
              Vice
                President of Business Development(11)
            2006
              2005
              2004
            82,132
              158,583
              105,849
            --
              11,500
              --
            521
              883
              269
            25,072
              --
              --
            5,000
              50,000
              --
            1,062
              4,413
              3,532Ms.
                Yee-Ling Chin
              Vice
                President, Marketing (9)
            2006
              2005
              2004
            67,725
              120,000
              120,000
            --
              --
              --
            83
              125
              94
            9,795
              --
              --
            10,000
              25,000
              --
            750
              3,600
              3,600Mr.
                William B. Heye, Jr.
              President
                and Chief Executive Officer (4)
            2006
              2005
              2004
            --
              --
              250,000
            --
              --
              --
            --
              --
              4,968
            30,545
              --
              --
            10,000
              75,000
              125,000
            --
              208,333
              6,000Mr.
                Ignacio C. Munio
              Vice
                President, Engineering (5)
            2006
              2005
              2004
            --
              168,767
              175,000
            --
              --
              25,000
            --
              870
              1,099
            --
              195,896
              85,800(5)
            --
              28,945
              --
            --
              5,075
              5,250




-43-




(1)
            Includes
                $708, $242, $317, $1,103, $185, $521, $324 and $83 attributable in
                fiscal
                2006 to Messrs. Yamamoto, Fang, Grey, Brunton, Abal, Nester, Anderson
                and
                Ms. Chin, respectively, $693, $1,058, $128, $883, $270, $125 and
                $870
                attributable in fiscal 2005 to Messrs. Grey, Brunton, Abal, Nester,
                Anderson, Ms. Chin and Mr. Munio, respectively, $4,052, $541,$121,$269,
                $263, $94, $4,968 and $1,099 attributable in fiscal 2004 to Messrs.
                Grey,
                Brunton, Abal, Nester, Anderson, Ms. Chin and Messrs. Heye and Munio,
                respectively, for premiums paid by us for group term life insurance.
                Also
                includes $3,600 attributable in each of fiscal 2004 to Mr. Grey for
                an
                automobile allowance.




(2)
            The
                sum for each Named Executive Officer was paid by us as matching and
                profit
                sharing contributions to our Savings and Investment Plan and Trust.
                The
                sum of $208,333 was paid to Mr. Heye and we granted Mr. Heye an option
                to
                purchase 75,000 shares of common stock at an exercise price of $4.00
                per
                share as severance in connection with his retirement as President
                and
                Chief Executive Officer effective December 31,
                2004.




(3)
            Mr.
                Grey was Vice President, Sales prior to being promoted to the office
                of
                President and Chief Executive Officer effective January 1, 2005.
                Mr. Grey
                resigned as President and Chief Executive officer on March 3,
                2006.




(4)
            Mr.
                Heye retired on December 31, 2004. Mr. Heye retired from the Board
                of
                Directors on October 31, 2006.




(5)
            Mr.
                Munio left the Company on October 4, 2005.




(6)
            Mr.
                Fang was promoted to Executive Vice President on May 22,
                2006.




(7)
            Mr.
                Yamamoto was Vice President of Storage Software prior to being promoted
                to
                the office of President and Chief Executive Officer effective March
                3,
                2006.




(8)
            Stock
                granted to executive officers as part of our wide salary reductions
                and
                Stock-For-Pay program instituted in January
                2006.




(9)
            Ms.
                Chin left the company on June 23,
                2006.




(10)
            Mr.
                Abal was appointed to his current position in July
                2005.




(11)
            Mr.
                Nester left the Company on May 31,
                2006.




***Stock
      Option Grants And Exercises***




We
      grant
      options to our executive officers under its 1996 Stock Option Plan (the “1996
      Plan”, 1998 Stock Option Plan (the “1998 Plan”) and 2006 Equity Inventive Plan
      (the “2006 Plan”). As of October 31, 2006, options to purchase a total of
      1,693,672 shares were outstanding under the foregoing plans and 135,699 shares
      remained available for grant under the foregoing plans. Options granted under
      the foregoing plans during the year ended October 31, 2006 vest over a 4 year
      period, 25% after one year and 2% to 3% monthly thereafter. The options will
      fully vest upon a change of control, as defined in the plans, unless the
      acquiring company assumes the options or substitutes similar options. The term
      of options granted under the plans is generally seven years. The
      following tables show for the fiscal year ended October 31, 2006, certain
      information regarding options granted to, exercised by and held at year end
      by
      the Named Executive Officers:




-44-




**Option
      Grants in Last Fiscal Year**




**Individual
                Grants**
            
            **Potential
                Realizable Value at Assumed Annual Rates of Stock Price Appreciation
                for
                Option Term(1)****Name**
            
            **Number
                of Securi****ties
                Underlying****Options
                Granted (#)**
            
            **%
                of Total****Options
                Granted to Employees in Fiscal****Year**
            
            **Exercise
                Or Base Pr****ice
                ($/Sh)**
            
            **Expiratio****n**
              **Date**
            
            **5%
                ($)**
            
            **10%
                ($)**Mr.
                Kenneth Yamamoto
            
            
            100,000
            
            
            12.2
            %
            
            1.00
            
            
            03/21/2013
            
            
            140,710
            
            
            194,871Mr.
                David Brunton
            
            
            25,000
            
            
            3.1
            %
            
            1.00
            
            
            03/21/2013
            
            
            35,177
            
            
            48,717Mr.
                Leo Fang
            
            
            25,000
            
            
            3.1
            %
            
            1.00
            
            
            03/21/2013
            
            
            35,177
            
            
            48,717Mr.
                Kirk Anderson
            
            
            75,000
            
            
            9.2
            %
            
            1.00
            
            
            03/21/2013
            
            
            105,532
            
            
            146,153Mr.
                Nelson Abal
            
            
            20,000
            
            
            2.5
            %
            
            1.00
            
            
            03/21/2013
            
            
            28,142
            
            
            38,974






(1)
            The
                potential realizable value is based on the term of the option at
                the time
                of grant. It is calculated by assuming that the stock price on the
                date of
                grant appreciates at the indicated annual rate, compounded annually
                for
                the entire term of the option and that the option is exercised and
                sold on
                the last day of its term for the appreciated stock price. These amounts
                represent certain assumed rates of appreciation only, in accordance
                with
                the rules of the SEC, and do not reflect our estimate or projection
                of
                future stock price performance ortake
                into account any taxes that may be payable in connection with the
                transaction.
                Actual gains, if any, are dependent on the actual future performance
                of
                our common stock and no gain to the optionee is possible unless the
                stock
                price increases after the date of grant, which increase, if any,
                would
                benefit all stockholders.






**Aggregated
      Option Exercises in Last Fiscal Year and Fiscal Year-End Option
      Values**




**Name**
            
            **Shares**
              **Acquired**
              **on
                Exercise (#)**
            
            **Value**
              **Realized
                ($)(1)**
            
            **Number
                of**
              **Securities**
              **Underlying**
              **Unexercised**
              **Options
                at**
              **Fiscal
                Year-End (#)**
              **Exercisable/**
              **Unexercisable(2)(3)**
            
            **Value
                of Unexercised**
              **In-the-Money**
              **Options
                at**
              **Fiscal
                Year-End ($)**
              **Exercisable/**
              **Unexercisable(2)(4)**Mr.
                Kenneth Yamamoto
            
            
            --
            
            
            --
            
            
            143,747/301,253
            
            
            0/0Mr.
                David Brunton
            
            
            --
            
            
            --
            
            
            230,187/89,813
            
            
            0/0Mr.
                Leo Fang
            
            
            --
            
            
            --
            
            
            95/831/159,169
            
            
            0/0Mr.
                Kirk Anderson
            
            
            --
            
            
            --
            
            
            117,000/75,000
            
            
            0/0Mr.
                Nelson Abal
            
            
            --
            
            
            --
            
            
            39,761/50,239
            
            
            0/0




(1)
            Value
                realized is based on the fair market value of our common stock on
                the date
                of exercise minus the exercise price without taking into account
                any taxes
                that may be payable in connection with the
                transaction.




-45-




(2)
            Reflects
                shares vested and unvested at October 31,
                2006.




(3)
            Includes
                both “in the money” and “out of the money” options. “In the money” options
                are options with exercise prices below the market price of our common
                stock at October 31, 2006 ($0.37).




(4)
            Fair
                market value of our common stock at October 31, 2006 ($0.37) minus
                the
                exercise price of the options.




**ITEM
      12.** **SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND**


**RELATED STOCKHOLDER MATTERS**





The
      following table sets forth certain information regarding the ownership of our
      common stock as of January 10, 2007 by: (i) each director and nominee for
      director; (ii) each of our “named executive officers,” as defined in Item 402
      under Regulation S-K promulgated by the Securities and Exchange Commission;
      (iii) all executive officers and directors of SBE as a group; and (iv) all
      those
      known by us to be beneficial owners of more than five percent of its common
      stock. The address for each of the persons and entities set forth below is
      c/o
      SBE, Inc., 4000 Executive Parkway, Suite 200, San Ramon, California 94583.


**Beneficial
                Ownership (1)****Beneficial
                Owner**
            **Number
                of Shares**
            **Percent
                of Total(2)**AIGH
                Investment Partners LLC
              6006
                Berkeley Avenue
              Baltimore,
                MD 21209
            788,120
            7.1%Mr.
                Andre Hedrick
              4419
                Sugarland Court
              Concord,
                CA 94521
            1,436,943
            12.9%Mr.
                Kenneth G. Yamamoto (3)(6)
            853,031
            7.7%Mr.
                John Reardon (3)
            75,545
            0.07%Mr.
                Ronald J. Ritchie (3)
            95,817
            0.09%Mr.
                Marion M. (Mel) Stuckey (3)
            75,545
            0.07%Mr.
                John D’Errico (3)
            70,863
            0.06%Mr.
                David Brunton (3)
            453,982
            4.1%Mr.
                Kirk Anderson (3)
            244,392
            2.2%Mr.
                Nelson Abal (3)
            132,271
            1.2%Mr.
                Leo Fang (3)
            354,251
            3.2%All
                executive officers and directors as a group (10 persons) (3)
            2,355,697
            21.2%





-46-





(1)
            This
                table is based upon information supplied by officers, directors and
                principal stockholders and Schedules 13D and 13G, if any, filed with
                the
                SEC. Unless otherwise indicated in the footnotes to this table and
                subject
                to community property laws where applicable, we believe that each
                of the
                stockholders named in this table has sole voting and investment power
                with
                respect to the shares indicated as beneficially
                owned.




(2)
            Applicable
                percentages are based on 11,101,554 shares outstanding on January
                10,
                2007, adjusted as required by rules promulgated by the
                SEC.




(3)
            Includes,
                445,000, 45,000, 35,000, 45,000, 50,000, 320,000, 202,000, 110,000
                and
                255,000 shares that Messrs. Yamamoto, Reardon, Ritchie, Stuckey,
                D’Errico,
                Brunton, Anderson, Abal and Fang, respectively, have the right to
                acquire
                within 60 days after the date of this table under outstanding stock
                options.




(4)
            Includes
                60,000sharesheld by UTMA as Custodian for Melanie Yamamoto and 60,000 shares
                held by
                UTMA as Custodian for Nicholas Yamamoto, the children of Mr.
                Yamamoto.







**ITEM
      13.**  **CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS**




-47-


***Certain
      Transactions***




In
      January 2006, we approved and announced a company-wide reduction in employee
      base cash salaries effective January 16, 2006 and a corresponding increase
      in
      stock grants to all employees, including officers, pursuant to our 1996 Plan. The
      number of shares of stock issued to employees and Board member in-lieu of their
      cash compensation is calculated at a 15% reduction from the market price on
      the
      date of issuance. Through
      October 31, 2006, a total of 1,016,335 shares of our common stock have been
      issued pursuant to such stock grants of which 310,452 were issued to executive
      officers. The cash salary reductions will remain in effect until such time
      as
      the Board determines to increase them.




On
      August
      21, 2006, the Board suspended the stock-for-pay program for all members of
      the
      Board and officers. The suspension is effective as of August 1, 2006 for all
      members of the Board and August 16, 2006 for our officers. Despite suspension
      of
      the stock-for-pay program, the previously-announced salary reductions for all
      officers and cessation of cash compensation for the Board will remain in effect
      until such time as the Board shall determine. The Board adopted a bonus plan
      for
      the affected individuals that will pay a prescribed amount of cash or stock
      upon
      our completion of one of a number of specified milestones set forth in the
      plan,
      provided that the affected individual remains employed by us or a member of
      the
      Board at the time such milestone is achieved. All non-officer employees remain
      on the stock-for-pay plan until such time as the Board shall
      determine.





We
      compensate our directors as described under “Compensation of Directors” above.
      We compensated our named executive officers in fiscal 2006 as described under
      “Compensation of Executive Officers” above. Prior to the salary reduction, our
      executive officers received annual salaries at the following rates:




Prior
                to Reduction
            
            After
                ReductionKenneth
                Yamamoto
            
            $
            225,000
            
            $
            140,000David
                Brunton
            
            $
            180,000
            
            $
            142,000Leo
                Fang
            
            $
            200,000
            
            $
            140,000Kirk
                Anderson
            
            $
            165,000
            
            $
            132,000Nelson
                Abal
            
            $
            140,000
            
            $
            126,000





In
      addition to salary, each of our directors and executive officers is eligible
      to
      receive a bonus pursuant to our Director and Officer Bonus Plan adopted
      September 21, 2006 and stock option and other grants as may be made in the
      sole
      discretion of the Compensation Committee. We entered into severance and change
      in control arrangements with our executive officers that provide for six months
      salary and accelerated vesting of all unvested stock options upon certain events
      triggered by a change in control.





**ITEM
      14.**  **PRINCIPAL
      ACCOUNTANT FEES AND SERVICES**





The
      Audit
      Committee of the Board has selected BDO Seidman, LLP as our independent auditors
      for the fiscal year ending October 31, 2006. BDO Seidman, LLP has audited our
      financial statements since 2003.




-48-


***Independent
      Auditors’ Fees***




The
      following table represents aggregate fees billed to us for fiscal years ended
      October 31, 2006 and 2005, by BDO Seidman, LLP, our principal accountant.




**Fiscal
                Year Ended**
              **(in
                thousands)****2006**
            
            **2005**Audit
                Fees
            
            $
            137
            
            $
            116Audit-related
                Fees (1)
            
            
            0
            
            
            36Tax
                Fees (2)
            
            
            12
            
            
            12All
                Other Fees
            
            
            0
            
            
            0Total
                Fees
            
            $
            149
            
            $
            164






(1)
            Fees
                paid in relation to our acquisition of PyX Technologies,
                Inc.


(2)
            Fees
                paid for preparation and filing of our federal and state income tax
                returns.




All
      fees
      described above were approved by the Audit Committee. **** The
      Audit
      Committee has determined that the rendering of the foregoing services separate
      from the audit services by BDO Seidman, LLP is compatible with maintaining
      the
      principal accountant’s independence.




***Pre-Approval
      of Audit and Non-Audit Services***




The
      Audit
      Committee has not approved any formal policy concerning pre-approval of the
      auditors to perform both audit and non-audit services (services other than
      audit, review and attest services). Instead, on a case by case basis, any audit
      or non-audit services proposed to be performed are considered by and, if deemed
      appropriate, approved by the Audit Committee in advance of the performance
      of
      such services. All of the fees earned by BDO Seidman, LLP described above were
      attributable to services pre-approved by the Audit Committee.





-49-





**PART
      IV**





**ITEM
      15.**  **EXHIBITS
      AND FINANCIAL STATEMENTS SCHEDULES**





The
      following documents are filed as part of this Report:





(a)(1)Financial
                StatementsPageReport
                of Independent Registered Public Accounting Firm
            56Balance
                Sheets at October 31, 2006 and 2005
            57Statements
                of Operations for fiscal years 2006, 2005and
                2004
            58Statements
                of Stockholders' Equity for fiscal years 2006,2005
                and 2004
            59Statements
                of Cash Flows for fiscal years 2006, 2005and
                2004
            60Notes
                to Financial Statements
            61(a)(2)Financial
                Statement ScheduleSchedule
                II — Valuation and Qualifying Accounts
            87All
                other schedules are omitted as the required information is not applicable
                or has been included in the financial statements or the notes
                thereto.(a)(3)List
              of Exhibits




ExhibitNumber
            Description3.1(1)
            Certificate
                of Incorporation, as amended through December
                15, 1997.3.2(2)
            Bylaws,
                as amended through December 8, 1998.3.3
            Certificate
                of Amendment of Certificate of Incorporation, dated March 26,
                2004.10.1(3)*
            1996
                Stock Option Plan, as amended.10.2(3)*
            2001
                Non-Employee Directors' Stock Option Plan, as
                amended.




-50-






10.3(3)
            1992
                Employee Stock Purchase Plan, as amended.10.4(3)
            1998
                Non-Officer Stock Option Plan as amended.


10.5(4)
            2005
                PyX Technologies Stock Option Plan.10.6(5)
            2006
                Equity Incentive Plan.10.6(6)
            Lease
                for 4000 Executive Parkway, Suite 200 dated July 27, 2005 between
                the
                Company and Alexander Properties Company.10.8+
            Letter
                Agreement, dated October 30, 2001, amending (i) Amendment No. S/M018-4
                dated April 3, 2001, and (ii) Purchase Agreement dated May 6, 1991,
                each
                between SBE, Inc. and Compaq Computer Corporation.10.10(7)
            Form
                of warrant issued to associates of Puglisi & Co. ($1.50 exercise
                price).10.11(7)
            Form
                of warrant issued to associates of Puglisi & Co. ($1.75 and $2.00
                exercise price).10.12(8)
            Unit
                Subscription Agreement, dated May 4, 2005, by and between SBE, Inc.
                and
                the other parties thereto.10.13(8)
            Agreement
                and Plan of Merger and Reorganization, dated March 28, 2005, by and
                among
                SBE, Inc., PyX Acquisition Sub, LLC, PyX Technologies, Inc. and the
                parties identified on Exhibit A thereto.10.14(8)
            Investor
                Rights Agreement, dated July 26, 2005, between SBE, Inc. and the
                investors
                listed on Exhibit A thereto.10.15(8)
            Form
              of warrant issued on July 26, 2005.10.16(9)
            Executive
                Severance Benefits Agreement between the Company and Leo Fang, dated
                May
                24, 2006.10.17
            Executive
                Severance Benefits Agreement between the Company and Kenneth G. Yamamoto,
                dated March 15, 2006.10.18(10)
            Executive
                Severance Benefits Agreement between the Company and David W. Brunton,
                dated April 12, 2004.10.19(10)
            Executive
              Severance Benefits Agreement between the Company and Kirk Anderson,
              dated
              April 12, 2004.11
            Executive
                Severance Benefits Agreement between the Company and Nelson
                Abal, dated August 4, 2006.12
            Director
                and Officer Bonus Plan, dated September 21, 200613
            Asset
              purchase agreement with One Stop Systems, Inc., dated January 11,
              2007.14
            Agreement
              and
              Plan of Merger and Reorganization, with Neonode Inc., dated
              January 19, 2007





-51-







23.1
            Consent
                of BDO Seidman LLP Independent Registered PublicAccounting
                Firm  31.1
            Certification
                of Chief Executive Officer  31.2
            Certification
                of Chief Financial Officer  32.1
            Certification
                of Chief Executive Officer and Chief Financial Officer pursuant
                to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
                the
                Sarbanes-Oxley Act of 2002  *
            Indicates
                management contract or compensation plans or arrangements filed pursuant
                to Item 601(b)(10) of Regulation SK.  +
            Certain
                confidential information has been deleted from this exhibit pursuant
                to a
                confidential treatment order that has been
                granted.





(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 endedOctober
                31, 1998 and incorporated herein by reference.





(3)
            Filed
                as an exhibit to Annual Report on Form 10-K for the year ended October
                31,
                2002 and incorporated herein by
                reference.  (4)
            Filed
                as an exhibit to Registration Statement on Form S-8 datedSeptember
                20, 2005 and incorporated herein by
                reference.  (5)
            Filed
                as an exhibit to Registration Statement on Form S-8 dated March24,
                2006 and incorporated herein by
                reference.  (6)
            Filed
                as an exhibit to Annual Report on Form 10-K for the year endedOctober
                31, 2005 and incorporated herein by
                reference.





(7)
            Filed
                as an exhibit to Registration Statement on Form S-3 dated July 11,
                2003
                and incorporated herein by
                reference.





(8)
            Filed
                as an exhibit to Proxy Statement on Form 14A dated June 24, 2005
                and
                incorporated herein by reference.





(9)
            Filed
                as an exhibit to Current Report on Form 8-K dated May 26, 2006 and
                incorporated herein by reference.





(10)
            Filed
                as an exhibit to Quarterly Report on Form 10-Q for the quarter ended
                January 31, 2005.




-52-





(11)
            Filed
                as an exhibit to Current Report on Form 8-K dated August 7, 2006
                and incorporated
                herein by reference.





(12)
            Filed
                as an exhibit to Current Report on Form 8-K dated September 21, 2006
and
                incorporated herein by
                reference





(13)
            Filed
                as an exhibit to Current Report on Form 8-K dated January 12,
                2007 and
                incorporated herein by
                reference.





(14)
            Filed
                as an exhibit to Current Report on Form 8-K dated January 19, 2007
and
                incorporated herein by
                reference.







(b) **Exhibits
      Required by Item 601**




Please refer to Part IV, Item 15(a)(3).





(c) **Financial
      Statements**




Please
      refer to Part IV, Item 15(a)(2).





-53-





**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 26, 2007
              By:
              /s/
                  Kenneth G.
                  YamamotoKenneth
                  G. YamamotoChief
                  Executive Officer andPresident*(Principal
                  Executive Officer)*Date:
                  January 26, 2007
              By:
              /s/
                  David W.
                  BruntonDavid
                  W. BruntonChief
                  Financial Officer,Vice
                  President, Financeand
                  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, Kenneth
      G.
      Yamamoto 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
      26, 2007.




-54-


Signature
              Title/s/
                  Kenneth G. YamamotoKenneth
                  G. Yamamoto
              Chief
                  Executive Officer and President*(Principal
                  Executive Officer)*/s/
                  David W. BruntonDavid
                  W. Brunton
              Chief
                  Financial Officer, Vice President,Finance
                  and Secretary
                *(Principal
                  Financial and Accounting Officer)*/s/
                  Ronald J. RitchieRonald
                  J. Ritchie
              Director,
                  Chairman of the Board/s/
                  John ReardonJohn
                  Reardon
              Director/s/
                  Marion M. Stuckey
              DirectorMarion
                  M. Stuckey/s/
                  John D’Errico
              DirectorJohn
                  D’Errico




-55-




**Report
      of Independent Registered Public Accounting Firm**




Board
      of
      Directors


SBE,
      Inc.


San
      Ramon, California




We
      have
      audited the accompanying balance sheets of SBE, Inc. as of October 31, 2006
      and
      2005 and the related statements of operations, stockholders’ equity, and cash
      flows for each of the three years in the period October 31, 2006. We have also
      audited Schedule II - Valuation and Qualifying Accounts (the Schedule). These
      financial statements are the responsibility of the Company’s management. Our
      responsibility is to express an opinion on these financial statements and the
      Schedule based on our audits.




We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement.  The
      Company is not required to have, nor were we engaged to perform, an audit of
      its
      internal control over financial reporting.  Our
      audits included consideration of internal control over financial reporting
      as a
      basis for designing audit procedures that are appropriate in the circumstances,
      but not for the purpose of expressing an opinion on the effectiveness of the
      Company’s internal control over financial reporting. Accordingly, we express no
      such opinion. An audit also 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,
      as
      well as evaluating the overall financial statement presentation. We believe
      that
      our audits provide a reasonable basis for our opinion.




In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of SBE, Inc. at October 31, 2006
      and
      2005, and the results of its operations and its cash flows for each of the
      years
      in the period ended October 31, 2006, in conformity with accounting principles
      generally accepted in the United States of America.




Also,
      in
      our opinion, the Schedule presents fairly, in all material effects, the
      information set forth therein.




The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. As discussed in Note 1 to the financial
      statements, the Company has suffered recurring losses and 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 described in
      Note 1. The financial statements do not include any adjustments that might
      result from the outcome of this uncertainty.







/s/
      BDO
      Seidman, LLP





December
      21, 2006, except for Note 1.a. and 17 to the financial statements which is
      as of
      January 24, 2007.





San
      Francisco, California




-56-


**SBE,
        INC.**
 **BALANCE
        SHEETS**
 **(in
        thousands, except share and per share amounts)**




October
                  31
              
              2006
              
              2005**ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              1,147
              
              $
              3,632Trade
                  accounts receivable, net of allowance fordoubtful
                  accounts of $26 and $54
              
              
              930
              
              
              1,555Inventories
              
              
              739
              
              
              1,283Other
              
              
              177
              
              
              293Total
                  current assets
              
              
              2,993
              
              
              6,763Property
                  and equipment, net
              
              
              508
              
              
              563Capitalized
                  software costs, net
              
              
              1,314
              
              
              11,424Other
              
              
              53
              
              
              82Total
                  assets
              
              $
              4,868
              
              $
              18,832**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**Current
                  liabilities:Trade
                  accounts payable
              
              $
              557
              
              $
              743Accrued
                  payroll and employee benefits
              
              
              105
              
              
              155Capital
                  lease obligations - current portion
              
              
              54
              
              
              29Deferred
                  software revenue
              
              
              432
              
              
              138Other
              
              
              144
              
              
              178Total
                  current liabilities
              
              
              1,292
              
              
              1,243Capital
                  lease obligations
              
              
              158
              
              
              111Deferred
                  rent
              
              
              97
              
              
              130Total
                  long-term liabilities
              
              
              255
              
              
              241Total
                  liabilities
              
              
              1,547
              
              
              1,484Commitments
                  (Notes 9, 10 and 13)Stockholders'
                  equity:Convertible
                  preferred stock:$0.001
                  par value; authorized 2,000,000 shares; noneoutstanding
              
              
              ---
              
              
              ---Common
                  stock and additional paid-in capital:$0.001
                  par value; authorized 25,000,000 shares;issued
                  and outstanding 10,951,348 and 9,892,347
              
              
              35,186
              
              
              35,431Deferred
                  compensation
              
              
              ---
              
              
              (2,401
              )Accumulated
                  deficit
              
              
              (31,865
              )
              
              (15,682
              )Total
                  stockholders' equity
              
              
              3,321
              
              
              17,348Total
                  liabilities and stockholders' equity
              
              $
              4,868
              
              $
              18,832


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








-57-




**SBE,
      INC.**


**STATEMENTS
      OF OPERATIONS**


**(in
      thousands, except for per share amounts)**





For
                  the years ended October 31,
              
              2006
              
              2005
              
              2004Net
                  sales
              
              $
              6,127
              
              $
              8,056
              
              $
              11,066Operating
                  expenses:Amortization
                  and impairment of acquiredsoftware
                  and intellectual property
              
              
              9,894
              
              
              1,048
              
              
              1,213Cost
                  of hardware and other revenue
              
              
              4,046
              
              
              4,356
              
              
              5,433Product
                  research and development
              
              
              3,979
              
              
              2,694
              
              
              2,411Sales
                  and marketing
              
              
              2,180
              
              
              2,293
              
              
              2,177General
                  and administrative
              
              
              2,246
              
              
              1,906
              
              
              1,755Loan
                  loss recovery
              
              
              ---
              
              
              ---
              
              
              (239
              )Total
                  operating expenses
              
              
              22,345
              
              
              12,297
              
              
              12,750Operating
                  loss
              
              
              (16,218
              )
              
              (4,241
              )
              
              (1,684
              )Interest
                  income
              
              
              42
              
              
              22
              
              
              5Other
                  expense
              
              
              ---
              
              
              (6
              )
              
              ---Loss
                  before income taxes
              
              
              (16,176
              )
              
              (4,225
              )
              
              (1,679
              )Income
                  tax benefit (provision)
              
              
              7
              
              
              (5
              )
              
              ---Net
                  loss
              
              $
              (16,183
              )
              $
              (4,230
              )
              $
              (1,679
              )Basic
                  and diluted loss per common share
              
              $
              (1.57
              )
              $
              (0.66
              )
              $
              (0.33
              )Basic
                  and diluted - Shares used in per sharecomputations
              
              
              10,304
              
              
              6,439
              
              
              5,022














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





-58-


**SBE,
      INC.**


**STATEMENTS
      OF STOCKHOLDERS' EQUITY**


**(in
        thousands, except shares)**
  Common
                    Stock and Additional Paid-in Capital
                
                Note
                    Receivable from
                
                Deferred
                
                Retained
                    Earnings (AccumulatedShares
                
                Amount
                
                Stockholder
                
                Compensation
                
                deficit)
                
                TotalBalance,
                    October 31, 2003
                
                4,808,650
                
                
                15,302
                
                
                (142
                )
                
                -
                
                
                (9,773
                )
                
                5,387Stock
                    issued in connection with stock purchase plan
                
                9,903
                
                
                18
                
                
                -
                
                
                -
                
                
                -
                
                
                18Stock
                    issued in connection with Stock Option Plans
                
                164,136
                
                
                233
                
                
                -
                
                
                -
                
                
                -
                
                
                233Stock
                    issued in connection with warrant exercise
                
                81,429
                
                
                116
                
                
                -
                
                
                -
                
                
                -
                
                
                116Stock
                    issued in connection with the acquisition of Antares
                
                30,000
                
                
                86
                
                
                -
                
                
                -
                
                
                -
                
                
                86Reversal
                    of valuation allowance on note receivable from officer
                
                -
                
                
                -
                
                
                (239
                )
                
                -
                
                
                -
                
                
                (239
                )Collection
                    of note receivable from officer
                
                -
                
                
                -
                
                
                381
                
                
                -
                
                
                
                
                
                381Net
                    loss
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (1,679
                )
                
                (1,679
                )Balance,
                    October 31, 2004
                
                5,094,118
                
                
                15,755
                
                
                -
                
                
                -
                
                
                (11,452
                )
                
                4,303Stock
                    issued in connection with Stock Option Plans
                
                108,234
                
                
                130
                
                
                -
                
                
                -
                
                
                -
                
                
                130Stock
                    issued in connection with the acquisition of Antares
                
                68,945
                
                
                197
                
                
                -
                
                
                -
                
                
                -
                
                
                197Stock
                    issued in connection with the acquisition of PyX
                
                2,561,050
                
                
                11,714
                
                
                -
                
                
                -
                
                
                -
                
                
                11,714Stock
                    issued in connection with private placement financing, net of
                    financing
                    costs of $175
                
                2,060,000
                
                
                4,975
                
                
                -
                
                
                -
                
                
                -
                
                
                4,975Deferred
                    compensation related to Stock Option Plans
                
                -
                
                
                2,660
                
                
                -
                
                
                (2,660
                )
                
                -
                
                
                -Stock-based
                    compensation
                
                -
                
                
                -
                
                
                -
                
                
                259
                
                
                -
                
                
                259Net
                    loss
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (4,230
                )
                
                (4,230
                )Balance,
                    October 31, 2005
                
                9,892,347
                
                
                35,431
                
                
                -
                
                
                (2,401
                )
                
                (15,682
                )
                
                17,348Reclassification
                    of deferred compensation
                
                
                
                
                (2,401
                )
                
                
                
                
                2,401
                
                
                
                
                
                -Stock
                    issued in connection with Stock Option Plans
                
                42,666
                
                
                37
                
                
                -
                
                
                -
                
                
                -
                
                
                37Stock
                    issued in connection with the Stock for Pay program
                
                1,016,335
                
                
                763
                
                
                -
                
                
                -
                
                
                -
                
                
                763Compensation
                    related to restricted stock issued to employees
                
                -
                
                
                89
                
                
                -
                
                
                -
                
                
                -
                
                
                89Stock-based
                    compensation
                
                -
                
                
                1,267
                
                
                -
                
                
                -
                
                
                -
                
                
                1,267Net
                    loss
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (16,183
                )
                
                (16,183
                )Balance,
                    October 31, 2006
                
                10,951,348
                
                $
                35,186
                
                $
                -
                
                $
                -
                
                $
                (31,865
                )
                $
                3,321
   The
          accompanying notes are an integral part of these financial
          statements.





-59-


**SBE,
      INC.**


**STATEMENTS
      OF CASH FLOWS**


**(in
      thousands)**





For
                the years ended October 31
            
            2006
            
            2005
            
            2004Cash
                flows from operating activities:Net
                loss
            
            $
            (16,183
            )
            $
            (4,230
            )
            $
            (1,679
            )Adjustments
                to reconcile loss to net cashused
                in operating activities:Depreciation
                and amortization
            
            
            3,880
            
            
            1,241
            
            
            829Impairment
                of intellectual property and software
            
            
            6,500
            
            
            ---
            
            
            713Stock-based
                compensation expense
            
            
            2,119
            
            
            259
            
            
            --Non-cash
                valuation allowance (recovery) on loan from officer
            
            
            ---
            
            
            ---
            
            
            (240
            )Loss
                on sale of assets
            
            
            ---
            
            
            6
            
            
            ---Changes
                in operating assets and liabilities:Trade
                accounts receivable
            
            
            625
            
            
            113
            
            
            150Inventories
            
            
            544
            
            
            643
            
            
            (46
            )Other
                assets
            
            
            146
            
            
            (121
            )
            
            13Trade
                accounts payable
            
            
            (186
            )
            
            (113
            )
            
            160Other
                current liabilities
            
            
            235
            
            
            (319
            )
            
            (40
            )Non-current
                liabilities
            
            
            14
            
            
            102
            
            
            ---Net
                cash used in operating activities
            
            
            (2,306
            )
            
            (2,419
            )
            
            (140
            )Cash
                flows from investing activities:Purchases
                of property and equipment
            
            
            (176
            )
            
            (337
            )
            
            (87
            )Cash
                payments related to purchase of PyX, net of cash received
            
            
            ---
            
            
            (359
            )
            
            ---Purchased
                software
            
            
            (40
            )
            
            (207
            )
            
            (136
            )Net
                cash used in investing activities
            
            
            (216
            )
            
            (903
            )
            
            (223
            )Cash
                flows from financing activities:Proceeds
                from stock plans
            
            
            37
            
            
            130
            
            
            251Proceeds
                from issuance of common stock and warrants, net
            
            
            ---
            
            
            4,975
            
            
            202Proceeds
                from repayment of shareholder note
            
            
            ---
            
            
            ---
            
            
            382Net
                cash provided by financing activities
            
            
            37
            
            
            5,105
            
            
            834Net
                increase (decrease) in cash and cash equivalents
            
            
            (2,485
            )
            
            1,783
            
            
            471Cash
                and cash equivalents at beginning of year
            
            
            3,632
            
            
            1,849
            
            
            1,378Cash
                and cash equivalents at end of year
            
            $
            1,147
            
            $
            3,632
            
            $
            1,849SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW INFORMATIONCash
                paid during the year for:Income
                taxes
            
            $
            7
            
            $
            5
            
            $
            1SUPPLEMENTAL
                SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIESAssets
                acquired under capital leases
            
            $
            ---
            
            $
            ---
            
            $
            164Non-cash
                stock portion of PyX purchase price
            
            $
            ---
            
            $
            11,714
            
            $
            ---Non-cash
                stock portion of Antares purchase price
            
            $
            ---
            
            $
            197
            
            $
            86The
                accompanying notes are an integral part of these financial
                statements.




-60-




**NOTES
      TO FINANCIAL STATEMENTS**





**1.
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





*Liquidity* *:*





The
      accompanying financial statements have been prepared on a going concern
      basis,  which  contemplates  the  realization of assets
      and the settlement of liabilities and commitments in the
      normal course of business.  As reflected in the accompanying financial
      statements,  as of October 31, 2006, we had cash and cash equivalents on
      hand of $1.2 million with cash used in operations of approximately $2.3 million
      in the twelve months ended October 31, 2006 and an accumulated deficit of
      approximately $31.9 million.  Our ability to continue as a going
      concern is dependent on our ability to raise  additional  funds and
      implement our business plan. Our independent registered public accountants
      stated in their opinion that there is substantial doubt about our ability to
      continue as a going concern.




We
      are
      not operating at cash breakeven. Unless we are able to increase our sales to
      get
      to cash breakeven, we will not have sufficient cash generated from our business
      activities to support our operations for the next twelve months. We have
      embarked on a strategy to sell all or a portion of our business and signed
      a
      definitive agreement to sell our hardware business to One Stop Systems, Inc.
      The
      overwhelming majority of our cash flow from operations has been generated from
      the embedded hardware business that we are selling. We expect to close the
      sale
      of our embedded hardware business in our second quarter of fiscal 2007 and
      all
      cash flow generated by the embedded hardware business will cease after that
      date. We also signed a definitive agreement to merge with Neonode, Inc. and
      have
      been reducing our staffing levels and other cash expenditures to sustainable
      levels. We expect the $2.2 million cash proceeds from the sale of our embedded
      hardware business to be sufficient to support our remaining operations until
      the
      merger transaction closes, or for at least the next twelve months if the merger
      is delayed. We are also seeking other strategic alternatives including selling
      our storage software business.




If
      our
      projected sales of our storage software do not materialize or we are unable
      to
      consummate the sale of our embedded hardware business and the merger
      transaction, we will need to reduce expenses further and raise additional
      capital through customer prepayments or the issuance of debt or equity
      securities. If we raise additional funds 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
      Company and Basis of Presentation:*





SBE,
      Inc., headquartered in San Ramon, California, designs, manufactures
      and sells hardware products including wide area network (WAN) and local area
      network (LAN) network interface cards (NICs) and central processor units (CPUs)
      to original equipment manufacturers (OEMs) who
      embed
      our hardware products into their products for the telecommunications
      markets .
      Our
      hardware products perform critical, computing and Input/Output (I/O) tasks
      in
      diverse markets such as high-end
      enterprise level computing servers, Linux super-computing clusters,
      workstations, media gateways, routers and Internet access devices. Our
      products are distributed worldwide through a direct sales force, distributors,
      independent manufacturers' representatives and value-added
      resellers. We also
      provide Internet Small Computer System Interface (iSCSI)-based storage
      networking solutions for an extensive range of business critical applications,
      including Disk-to-Disk Back-up and Disaster Recovery. We deliver an affordable,
      expandable, and easy-to-use portfolio of software solutions designed to enable
      optimal performance and rapid deployment across a wide range of next generation
      storage systems.





-61-


*Use
      of Estimates:*





The
      preparation of 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 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 to be cash equivalents. Substantially
      all of our cash and cash equivalents are held with one large financial
      institution and may at times be above insured limits.




*Inventories:*





Inventories
      are stated at the lower of cost, using the first-in, first-out method, or market
      value. We utilize standard costs, which approximates actual cost, for certain
      indirect costs.





We
      are ** exposed
      to a number of economic and industry factors that could result in portions
      of
      our inventory becoming either obsolete or in excess of anticipated usage, or
      subject to lower of cost or market issues. These factors include, but are not
      limited to, technological changes in our markets, our ability to meet changing
      customer requirements, competitive pressures in products and prices, and the
      availability of key components from our suppliers. Our policy is to establish
      inventory reserves when conditions exist that suggest that our inventory may
      be
      in excess of anticipated demand or is obsolete based upon our assumptions about
      future demand for our products and market conditions. We regularly evaluate
      our
      ability to realize the value of our inventory based on a combination of factors
      including the following: historical usage rates, forecasted sales or usage,
      product end-of-life dates, estimated current and future market values and new
      product introductions. Purchasing practices and alternative usage avenues are
      explored within these processes to mitigate inventory exposure. When recorded,
      our reserves are intended to reduce the carrying value of our inventory to
      its
      net realizable value. If actual demand for our products deteriorates, or market
      conditions are less favorable than those that we project, additional inventory
      reserves may be required.





-62-





*Property
      and Equipment:*





Property
      and equipment are carried at cost. We record depreciation charges on a
      straight-line basis over the assets' estimated useful lives of three years
      for
      computers and related equipment to eight years for manufacturing equipment.
      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.





*Long-lived
      Assets:*





We assess
      any impairment by estimating the future cash flow from the associated asset
      in
      accordance with Statement of Financial Accounting Standards (SFAS) No. 144, *Accounting
      for the Impairment or Disposal of Long-Lived Assets* .
      If the
      estimated undiscounted cash flow related to these assets decreases in the future
      or the useful life is shorter than o riginally
      estimated, we may
      incur charges for impairment of these assets. The impairment is based on the
      estimated discounted cash flow associated with the asset.





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
      to
      cost of goods sold based on a straight-line method over a two to three 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.





*Revenue
      Recognition:*





*Hardware
      Products*





Our
      policy is to recognize revenue for hardware product sales when title transfers
      and risk of loss has passed to the customer, which is generally upon shipment
      of
      our hardware products to our customers. We defer and recognize service revenue
      over the contractual period or as services are rendered. We estimate expected
      sales returns and record the amount as a reduction of revenue and cost of
      hardware and other revenue at the time of shipment. Our policy complies with
      the
      guidance provided by the Securities and Exchange Commission (SEC) Staff
      Accounting Bulletin (SAB) No. 104, *Revenue
      Recognition in Financial Statements* .
      Judgments are required in evaluating the credit worthiness of our customers.
      Credit is not extended to customers and revenue is not recognized until we
      have
      determined that collectibility is  reasonably
      assured. Our sales transactions are denominated in U.S. dollars .
      The
      software component of our hardware products is considered incidental. therefore,
      we do not recognize software revenue related to our hardware products separately
      from the hardware product sale.





-63-


When
      selling hardware, our agreements with OEMs, such as Data Connection Limited
      (DCL) and Nortel Networks Corp. (Nortel), 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 (FOB shipping
                point);


-
            collectibility
                of the sales price is probable (the OEM is creditworthy, 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 will 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
                assist in the resale of the product by the OEMs;
                and


-
            there
                is no contractual right of return other than for defective
                products.





Our
      agreements with our distributors include certain product rotation and price
      protection rights. All distributors have the right to rotate slow moving
      products once each fiscal quarter. The maximum dollar value of inventory
      eligible for rotation is equal to 25% of our products purchased by the
      distributor during the previous quarter. In order to take advantage of their
      product rotation rights, the distributors must order and take delivery of
      additional products of ours equal to at least the dollar value of the products
      that they want to rotate.





Each
      distributor is also allowed certain price protection rights. If and when we
      reduce or plan to reduce the price of any of our products and the distributor
      is
      holding any of the affected products in inventory, we will credit the
      distributor the difference in price when they place their next order with us.
      We
      record an allowance for price protection at the time of the price reduction,
      thereby reducing our net sales and accounts receivable. The allowance is based
      on the price difference of the inventory held by our stocking distributors
      at
      the time we expect to reduce selling prices. We believe we are able to fully
      evaluate potential returns and adjustments and continue to recognize the sale
      based on shipment to our distributors. Reserves for the right of return and
      restocking are established based on the requirements of  SFAS
      48, *Revenue
      Recognition when Right of Return Exists.*





During
      the year ended October 31, 2006, $257,000 or 4% of our sales were sold to
      distributors compared to $640,000 or 8% and $874,000 or 8% in fiscal 2005 and
      2004, respectively. Our reserves for distributor programs total approximately
      $13,000 and $22,000 as of October 31, 2006 and 2005, respectively.





*Software
      Products*





We
      derive
      revenues from the following sources: (1) software, which includes new iSCSI
      software licenses and (2) services, which include consulting. We
      account for the licensing of software in accordance with of American Institute
      of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2, *Software
      Revenue Recognition.* SOP 97-2
      requires judgment, including whether a software arrangement includes multiple
      elements, and if so, whether vendor-specific objective evidence (VSOE) of fair
      value exists for those elements. These documents include post delivery support,
      upgrades and similar services. We typically charge software maintenance equal
      to
      20% of the software license fees.





-64-


For
      software license arrangements that do not require significant modification
      or
      customization of the underlying software, we recognize new software license
      revenues when: (1) we enter into a legally binding arrangement with a customer
      for the license of software; (2) we deliver the products; (3) customer payment
      is deemed fixed or determinable and free of contingencies or significant
      uncertainties; and (4) collection is reasonably assured. We initially defer
      all
      revenue related to the software license and maintenance fees until such time
      that we are able to establish VSOE for these elements of our software products.
      Revenue deferred under these arrangements is recognized to revenue over the
      expected contract term. We
      will
      also continue to defer
      revenues that represent undelivered post-delivery engineering support until
      the
      engineering support has been completed and the software product is accepted.





For
      one
      customer we began recognizing software license fee revenue and related
      engineering support revenue by amortizing previously deferred revenue related
      to
      engineering services over 36-months beginning in March 2006 which was the month
      the first software license for this customer was activated. The 36-month
      amortization period is the estimated life of the related software product for
      this customer. We also amortize all fees related to the licensing of our
      software to this customer over 36-months beginning with the month the software
      license is activated. In the fiscal year ended October 31, 2006, we recognized
      $16,800 of software license fees to this customer and $26,000 of deferred
      revenue related to engineering services to this customer.





Certain
      software arrangements include consulting implementation services sold separately
      under consulting engagement contracts.. For the fiscal year ended October 31,
      2006, we recognized $10,000 of software consulting revenue.





*Product
      Warranty:*





Our
      embedded products are sold with warranty provisions that require us to remedy
      deficiencies in quality or performance of our products over a specified period
      of time, generally 12 months, at no cost to our customers. Our policy is to
      establish warranty reserves at levels that represent our estimate of the costs
      that will be incurred to fulfill those warranty requirements related to our
      embedded products at the time that revenue is recognized. We believe that our
      recorded liabilities are adequate to cover our future cost of materials, labor
      and overhead for the servicing of our embedded products sold through that date.
      If actual product failures, or material or service delivery costs differ from
      our estimates, our warranty liability would need to be revised
      accordingly.





*Allowance
      for Doubtful Accounts:*





Our
      policy is to maintain allowances for estimated losses resulting from the
      inability of our customers to make required payments. Credit limits are
      established through a process of reviewing the financial history and stability
      of each customer. Where appropriate, we obtain credit rating reports and
      financial statements of the customer when determining or modifying their credit
      limits. We regularly evaluate the collectibility of our trade receivable
      balances based on a combination of factors. When a customer’s account balance
      becomes past due, we initiate dialogue with the customer to determine the cause.
      If it is determined that the customer will be unable to meet its financial
      obligation to us, such as in the case of a bankruptcy filing, significant
      deterioration in the customer’s operating results or financial position or other
      material events impacting its business, we record a specific allowance to reduce
      the related receivable to the amount we expect to recover and should all
      collection efforts fail, will write-off the account.




-65-


We
      also
      record an allowance for all customers based on certain other factors including
      the length of time the receivables are past due and historical collection
      experience with customers. We believe our reported allowances are adequate.
      If
      the financial conditions of those customers were to deteriorate, however,
      resulting in their inability to make payments, we may need to record additional
      allowances which would result in additional general and administrative expenses
      being recorded for the period in which such determination is made.





*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 revenue when received.





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
      to
      cost of goods sold based on a straight-line method over a two to three 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, 2006, 2005 and 2004. All remaining capitalized software assets
      result from our costs in the acquisition of PyX Technologies, Inc. (PyX) (see
      note 15).





*Stock-Based
      Compensation* :





Effective
      November 1, 2005, we adopted the provisions of SFAS 123(R), *Share-Based
      Payment* ,
      using
      the modified prospective method, which requires measurement of compensation
      cost
      for all stock-based awards at fair value on the grant date and recognition
      of
      compensation expense over the requisite service period for awards expected
      to
      vest.





The
      fair
      value method under SFAS 123(R) is similar to the fair value method under SFAS
      123, *Accounting
      for Stock Based Compensation (SFAS 123)* ,
      as
      amended *,* with
      respect to measurement and recognition of stock-based compensation. However,
      SFAS 123 permitted us to recognize forfeitures as they occur, while SFAS 123(R)
      requires us to estimate future forfeitures and adjust our estimate on a periodic
      basis. SFAS 123(R) also requires a classification change in the statement of
      cash flows whereby the income tax benefit from stock option exercises is
      reported as a financing cash flow rather than an operating cash flow as
      previously reported.





We
      have
      several approved stock option plans for which stock options and restricted
      stock
      awards are available to grant to employees and directors. All employee and
      director stock options granted under our stock option plans have an exercise
      price equal to the market value of the underlying common stock on the grant
      date. There are no vesting provisions tied to performance conditions for any
      option as vesting for all outstanding option grants was based only on continued
      service as an employee of SBE. All of our outstanding stock options and
      restricted stock awards are classified as equity instruments.





-66-


*Stock
      For Pay Awards*




On
      January 12, 2006, our Board of Directors (Board) approved a Company-wide 30%
      reduction in employee cash base salaries, effective January 16, 2006. In order
      to continue to motivate and retain our employees despite such salary reductions,
      the Board also approved stock grants to all of our employees pursuant to the
      1996 Stock Option Plan and 2006 Equity Incentive Plan. Effective April 1, 2006,
      the Board modified the 30% reduction in employee base salaries to a cash salary
      reduction ranging from 10% to 38% of the employee’s base salaries. The level of
      reduction of the cash portion of the salary for each employee is dependent
      on
      their respective position and base salary. Employees with lower salaries
      generally have lower reductions. The stock issued to employees in-lieu of a
      portion of their cash compensation is valued at a 15% reduction from the market
      price on the date of issuance and is included in compensation expense.




In
      addition, the Board approved the suspension of all cash payments of Board and
      Board committee fees until further notice. The stock issued to Board members
      in-lieu of their cash compensation is calculated at a 15% reduction from the
      market price on the date of issuance and is included in general and
      administrative expense.




On
      August
      21, 2006, the Board suspended the stock-for-pay program for all members of
      the
      Board and officers. The suspension is effective as of August 1, 2006 for all
      members of the Board and August 16, 2006 for all officers. Despite suspension
      of
      the stock-for-pay program, the previously-announced salary reductions for the
      affected officers and cessation of cash compensation for the Board will remain
      in effect until such time as the Board shall determine. The Board adopted a
      bonus plan for the affected individuals that will pay a prescribed amount of
      cash or stock upon our completion of one of a number of specified milestones
      set
      forth in a written bonus plan, provided that the affected individual remains
      employed by us or a member of the Board at the time such milestone is achieved.
      All non-officer employees remain on the stock-for-pay plan until such time
      as
      the Board shall determine.





*Restricted
      Stock Awards*





On
      March
      21, 2006, our Board approved restricted stock grants to all employees in order
      to continue to motivate and retain our employees. The shares of restricted
      stock
      granted under the plan vest 25% on the first anniversary of the initial grant
      date with the remainder vesting monthly thereafter for the following six months.
      The total fair value of the restricted stock grants is calculated on the date
      of
      issuance and is amortized on a straight-line basis to expense over the 18-month
      vesting period.





*Advertising
      Costs:*





Advertising
      and marketing expenditures are expensed as incurred. Advertising and marketing
      costs were $225,000, $324,000 and $204,000 in fiscal 2006, 2005 and 2004,
      respectively.





-67-





*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 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.





*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, 2006, 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).




*New
      Accounting Pronouncements:*





In
      June
      2006, the FASB issued Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes* .
      FIN 48 clarifies the accounting for uncertainty in income taxes recognized
      in an enterprise’s financial statements in accordance with SFAS 109, *Accounting
      for Income Taxes* .
      This
      interpretation prescribes a recognition threshold and measurement attribute
      for
      the financial statement recognition and measurement of a tax position taken
      or
      expected to be taken in a tax return. FIN 48 also provides guidance on
      derecognition, classification, interest and penalties, accounting in interim
      periods, disclosure, and transition. FIN 48 will be effective for the
      Company beginning November 1, 2007. We are currently evaluating this
      interpretation to determine if it will have a material impact on our financial
      statements.





In
      September 2006, the SEC issued SAB 108, *Considering
      the Effects of Prior Year Misstatements in Current Year Financial
      Statements.* SAB 108 expresses the SEC Staff’s views regarding the process of
      quantifying financial statement misstatements. SAB 108 addresses the
      diversity in practice in quantifying financial statement misstatements and
      the
      potential under current practice for the build up of improper amounts on the
      balance sheet. SAB 108 will be effective for the year beginning November 1,
      2006. The cumulative effect of the initial application of SAB 108 will be
      reported in the carrying amounts of assets and liabilities as of the beginning
      of the fiscal year, with the offsetting balance to retained earnings. We do
      not
      expect the adoption of SAB 108 to have a material impact on our financial
      statements.





In
      September 2006, the FASB issued SFAS No.157, *Fair
      Value Measurements* .
      SFAS 157 defines fair value, establishes a framework for measuring fair
      value as required by other accounting pronouncements and expands fair value
      measurement disclosures. SFAS 157 is effective for fiscal years beginning
      after November 15, 2007. We are currently evaluating the impact of
      SFAS 157 on our financial statements.





-68-


**2.**  **INVENTORIES**





Inventories
      at October 31, are comprised of the following (in thousands):


2006
              
              2005Finished
                  goods
              
              $
              273
              
              $
              815Parts
                  and materials
              
              
              466
              
              
              468Total
                  inventory
              
              $
              739
              
              $
              1,283
  The
      total
      reserve for slow moving and obsolete inventory is $2,567,000 and $2,313,000
      at
      October 31, 2006 and 2005, respectively. All the inventory relates to the
      embedded hardware business and will be transferred to One Stop Systems upon
      the
      close of the sale transaction. (See note 17)





**3.**  **PROPERTY
      AND EQUIPMENT**





Property
      and equipment at October 31, are comprised of the following (in
      thousands):


2006
              
              2005Machinery
                  and equipment
              
              $
              3,792
              
              $
              3,476Furniture
                  and fixtures
              
              
              64
              
              
              226Leasehold
                  improvements
              
              
              153
              
              
              1454,009
              
              
              3,847Less
                  accumulated depreciationand
                  amortization
              
              
              (3,502
              )
              
              (3,284
              )$
              508
              
              $
              563


Depreciation
      and amortization expense totaled $230,000, $194,000 and $213,000 for the years
      ended October 31, 2006, 2005 and 2004, respectively. Depreciation expense on
      capital leases in fiscal 2006, 2005 and 2004 was $12,600, $25,000 and $25,000,
      respectively. Approximately $320,000 of our fixed assets will be sold to One
      Stop Systems upon the close of sale of the embedded hardware
      business.





**4.**  **CAPITALIZED
      SOFTWARE COSTS**





Capitalized
      software costs at October 31, 2006 and 2005 comprise the following (in
      thousands):




2006
              
              2005Purchased
                  software
              
              $
              14,217
              
              $
              14,177Less
                  accumulated amortization
              
              
              (12,903
              )
              
              (2,753
              )$
              1,314
              
              $
              11,424





Capitalized
      software costs consist of software relating to current products and the design
      of future storage software
      products acquired with our acquisition of PyX in July 2005. We capitalized
      $40,000, $12,424,000 and $136,000 of purchased software costs in 2006, 2005,
      and
      2004 respectively. We
      amortized capitalized software related to the acquisition of PyX on a straight
      line basis over 36 months at the rate of $339,000 per month, beginning August
      1,
      2005. Recurring
      amortization of capitalized software costs totaled $3,394,000, $1,048,000,
      and
      $208,000 for the years ended October 31, 2006, 2005 and 2004, respectively.





-69-


In
      the
      fiscal year ended October 31, 2006 we discontinued our Voice over IP (VoIP)
      product development and, as a result, wrote-off $256,000 of capitalized software
      development costs related to the VoIP products. This write-off is included
      in
      our Product Research and Development expense in our Statements of Operations
      for
      the fiscal year ended October 31, 2006.





In
      the
      fiscal year ended October 31, 2006, we recorded an asset impairment charge
      of
      $6.5 million against our earnings for the period, reducing our storage software
      asset to $1.3 million, which represents the present value of the expected future
      sales of our storage software products less costs. This asset impairment charge
      is included in amortization and impairment of acquired software and
      intellectual property in
      the
      Statements of Operations for
      the
      fiscal year ended October 31, 2006 .
      Prior
      to the write-down, we amortized our storage software over 36 months at the
      rate
      of $339,000 per month. We will amortize the remaining $1.3 million software
      asset over the remaining 21-month amortization period at the rate of $63,000
      per
      month.





**5.
      INTANGIBLE ASSETS**





**Antares**





At
      the
      end of fiscal 2004 we completed our asset impairment review and determined
      that
      the estimated fair market value of the balance of the intellectual property
      acquired when we purchased certain assets of Antares Microsystems, Inc.
      (Antares), a California corporation, was nominal. As a result, we recorded
      an
      impairment charge of $713,000, thus writing off the remaining value, at October
      31, 2004, of the intellectual property asset recorded when we acquired Antares
      in August 2003.




The
      non-cash amortization expense related to the Antares intellectual property
      in
      fiscal 2004 was $1.1 million and consisted of $408,000 of regularly scheduled
      annual amortization expense plus $713,000 write down related to the Antares
      impairment valuation analysis. This write-down plus the regularly scheduled
      amortization is included as an expense item in amortization and impairment
      of
      acquired software and intellectual property for fiscal 2004.





**6.**  **STOCKHOLDERS'
      EQUITY**





On
      June
      27, 2003, we completed a private placement of 500,000 shares of common
      stock plus a
      warrant to purchase 50,000 shares of common stock, resulting in gross cash
      proceeds of $ 550,000
      and net cash proceeds of approximately $464,000. The
      warrant has a term of five years with an
      exercise price of $1.50
      per share  subject
      to certain adjustment provisions .





In
      connection with the private placement we paid
      Puglisi & Co. and
      its
      associates (together,
      Puglisi) a placement fee of $33,000 and warrants to purchase 150,000 shares of common
      stock. The warrants have a five-year term with exercise
      prices between
      $1.50 and $2.00 per share ,
      subject
      to certain adjustment provisions .
      The
      warrants to purchase a total of 200,000 shares of common stock have a calculated
      fair value of approximately $225,000. This value was derived using the
“Black-Scholes” pricing model based on the following assumptions:





-70-


1)  
      expected life: 5 years,


2)  
      risk free interest rate: 3%,


3)  
      volatility: 121.71%.





We
      registered for resale all of the shares of common stock sold in this offering
      and the shares subject to sale pursuant to the exercise of the warrants with
      the
      Securities and Exchange Commission. During fiscal 2004, Puglisi exercised a
      portion of their warrants and purchased 70,000 shares of common stock for a
      total purchase price of $116,000.





During
      fiscal 2005 and 2004, we issued 68,945 and 30,000 shares of our common stock,
      respectively, to an employee who was one of the owners of Antares pursuant
      to
      the original purchase agreement. The value of the common stock was
      $282,982.





In
      fiscal
      year 2004, we issued 9,903 shares of common stock under the Employee Stock
      Purchase Plan.





On
      July
      26, 2005, we closed a private placement with AIGH Investment Partners, LLC
      and
      other accredited investors providing for the sale and issuance of shares of
      our
      common stock and warrants to purchase shares of our common stock, with gross
      proceeds to us of $5,150,000. T he
      investors purchased units consisting of one share of our common stock and a
      warrant to purchase 0.5 of a share of our common stock at a price per unit
      of
      $2.50. We issued 2,060,000 shares of our common stock and warrants to purchase
      an additional 1,030,000 shares of our common stock in the future in connection
      with the private placement. The warrants issued in connection with the private
      placement have a term of five years and are exercisable at $3.33 per share,
      subject to proportional adjustments for stock splits, stock dividends,
      recapitalizations and the like. The warrants also contain a cashless exercise
      feature. We registered for resale all of the shares of common stock sold in
      this
      offering and the shares subject to sale pursuant to the exercise of the warrants
      with the Securities and Exchange Commission effective November 14,
      2005.





On
      July
      26, 2005, we acquired PyX for a total purchase price of $11,714,000
      paid to the selling shareholders of PyX in the form of shares of our common
      stock and the assumption of PyX’s employee stock option plan plus cash expenses
      totaling $359,000 for legal, accounting and valuation services. A
      total
      of 2,561,050 shares of our common stock were issued in respect of outstanding
      PyX common stock. We
      registered for resale all of the shares of common stock issued to the selling
      shareholders of PyX with the Securities and Exchange Commission effective
      November 14, 2005 (see Note 15).





During
      fiscal 2006, we issued 158,295 shares of our common stock to the non-employee
      members of our Board of Directors in lieu of 100% of their cash compensation.
      The value of the common stock of $126,000 was recorded as a general and
      administrative expense.





During
      fiscal 2006, we issued 858,040 shares of our common stock to our employees
      and
      contractors in lieu of a portion of their cash compensation. The value of the
      common stock of $637,000 was recorded as compensation expense in the Statements
      of Operations.








-71-




**7.
      DEFERRED COMPENSATION**





On
      January 1, 2005, our retiring President and Chief Executive Officer was awarded
      options to purchase 75,000 shares of our common stock at a price of $4.00 per
      share (closing price on December 31, 2004). The
      fair
      value of this option grant was estimated on the date of grant using the
      Black-Scholes option-pricing model and was included as deferred compensation
      on
      the balance sheet. The $120,000 deferred compensation was amortized to general
      and administrative expense at the rate of $8,000 per month over the 15 month
      vesting period ending March 2006 based on his continued service as a director.
      For the fiscal year ended ,October 31, 2005, $80,000 of the deferred
      compensation has been amortized to expense and is included in general and
      administrative expense. In
      connection with the adoption of SFAS 123R, we reduced deferred compensation
      and
      common stock by $40,000, the value of the unamortized balance of the deferred
      compensation as of November 1, 2005.





We
      awarded stock option grants to certain non-employee strategic business advisors
      as a part of their fee structure. The
      fair
      value of these option grants is estimated on the date of grant using the
      Black-Scholes option-pricing model and is included as deferred compensation
      on
      the balance sheet. The deferred compensation balance is recalculated on a
      quarterly basis based on market price. The $56,000 deferred compensation is
      amortized to general and administrative expense at the rate of $2,000 per month
      over the vesting period of the grants. As of October 31, 2005, $6,000 of the
      deferred compensation has been amortized to expense and is included in General
      and Administrative expense. In
      connection with the adoption of SFAS 123R, we reduced deferred compensation
      and
      common stock by $48,000, the value of the unamortized balance of the deferred
      compensation as of November 1, 2005





We
      assumed the PyX employee stock option plan as part of the July 2005 acquisition
      of PyX and as a result an additional 2,038,950 shares of our common stock,
      with
      an exercise price of $2.17, will be issuable upon exercise of assumed stock
      options. The
      intrinsic value of the unvested portion of these option is included as deferred
      compensation on the balance sheet as of October 31, 2005. As of October 31,
      2005, $173,000 of the deferred compensation has been amortized to expense and
      is
      included in General and Administrative expense. In
      connection with the adoption of SFAS 123(R), we reduced deferred compensation
      and common stock by $2.3 million, the value of the unamortized balance of the
      deferred compensation as of November 1, 2005.





**8.**  **INCOME
      TAXES**





The
      components of the benefit for income taxes for the years ended October 31,
      2006,
      2005 and 2004 are comprised of the following:





2006
              
              2005
              
              2004Federal:Current
              
              $
              ---
              
              $
              ---
              
              $
              ---Deferred
              
              
              ---
              
              
              ---
              
              
              ---State:Current
              
              
              7
              
              
              5
              
              
              ---Deferred
              
              
              ---
              
              
              ---
              
              
              ---Net
                  income tax (benefit) provision
              
              $
              7
              
              $
              5
              
              $
              ---





The
      effective income tax rate differs from the statutory federal income tax rate
      for
      the following reasons:




-72-




2006
              
              2005
              
              2004Statutory
                  federal income tax rate
              
              
              (34.0
              )%
              
              (34.0
              )%
              
              (34.0
              )%Basis
                  difference in acquisition
              
              
              ---
              
              
              104.5
              
              
              ---Change
                  in valuation allowance
              
              
              47.6
              
              
              (95.3
              )
              
              34.0True-up
                  of prior year and other
              
              
              (13.6
              )
              
              24.8
              
              
              ---(0
              )%
              
              (0
              )%
              
              (0
              )%




Significant
      components of our deferred tax balances as of October 31, 2006 and 2005 are
      as
      follows:




2006
              
              2005Deferred
                  tax assets:CurrentAccrued
                  employee benefits
              
              $
              27
              
              $
              32Inventory
                  allowances
              
              
              1,039
              
              
              926Allowance
                  for doubtful accounts
              
              
              26
              
              
              21Warranty
                  accruals and other assets
              
              
              8
              
              
              11Distributor
                  reserves
              
              
              4
              
              
              8Stock
                  compensation
              
              
              506
              
              
              103Deferred
                  revenue
              
              
              186
              
              
              ---NoncurrentDeferred
                  rent
              
              
              52
              
              
              87R&D
                  credit carryforward
              
              
              3,053
              
              
              2,859Net
                  operating loss carryforwards
              
              
              7,828
              
              
              5,437Depreciation
                  and amortization, net
              
              
              446
              
              
              ---Restructuring
                  costs
              
              
              ---
              
              
              10Total
                  deferred tax assets
              
              
              13,175
              
              
              9,494Less:
                  Deferred tax asset valuation allowance
              
              
              (12,649
              )
              
              (4,923
              )Net
                  deferred tax asset
              
              
              526
              
              
              4,571Deferred
                  tax liability - acquired software
              
              
              (526
              )
              
              (4,461
              )Deferred
                  tax liability - capitalized assets
              
              
              ---
              
              
              (110
              )Net
                  deferred tax assets
              
              $
              ---
              
              $
              ---


Valuation
      allowances are recorded to offset certain deferred tax assets due to
      management's uncertainty of realizing the benefit of these items. The valuation
      allowance increased by $7.7 million in fiscal 2006 primarily as a result of
      a
      increases in inventory allowances, stock compensation, deferred revenue, R&D
      tax credit carryforwards and operating loss carryforwards. At October 31, 2006,
      we have research and experimentation tax credit carryforwards of $2.0 million
      and $1.4 million for federal and state tax purposes, respectively. These
      carryforwards expire in the periods ending 2013 through 2026. The State of
      California Research and Development tax credits do not expire. We have net
      operating loss carryforwards for federal and state income tax purposes of
      approximately $21.0 million and $11.7 million, respectively, which expire in
      periods ending 2007 through 2026.





Under
      the
      Tax Reform Act of 1986, the amounts of benefits from net operating loss
      carryforwards are limited as we have incurred a cumulative ownership change
      of
      more than 50%, as defined, over a three-year period. Usage of net operating
      loss
      carryforwards is limited based on the Company’s capital at the date of change
      times a risk-free interest rate.





-73-





**9.
      WARRANTY OBLIGATIONS AND OTHER GUARANTEES:**





The
      following is a summary of our agreements that we have
      determined are within the scope of FIN 45 *Guarantor's
      Accounting and Disclosure Requirements for Guarantees, including Indirect
      Guarantees of Indebtedness of Others* -- *an
      interpretation of FASB Statements No. 5, 57 and 107 and rescission of FIN
      34.* ** **





We
      accrue
      the estimated costs to be incurred in performing warranty services at the time
      of revenue recognition and shipment of the products to our
      customers .
      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.





The
      following table sets forth an analysis of our warranty reserve at October 31
      (in
      thousands):







2006
            
            2005
            
            2004Warranty
                reserve at beginning of period
            
            $
            22
            
            $
            20
            
            $
            53Less:
                Cost to service warranty obligations
            
            
            (9
            )
            
            (12
            )
            
            (33
            )Plus:
                Increases to reserves
            
            
            ---
            
            
            14
            
            
            ---Total
                warranty reserve included in other accrued expenses
            
            $
            13
            
            $
            22
            
            $
            20




We have
      agreed to indemnify each
      of our executive officers
      and directors for certain events or occurrences arising as a result of the
      officer or director serving
      in such capacity. The term of the indemnification period is for the officer's
      or
      director's lifetime. The maximum potential amount of future payments we could
      be
      required to make under these indemnification agreements is unlimited. However,
      we have a directors ’ and officers’ liability insurance policy that should
      enable us to
      recover a portion of future
      amounts paid. As a result of our insurance policy coverage, we believe the
      estimated fair value of these indemnification agreements is minimal and have
      no
      liabilities recorded for these agreements as of October 31, 2006 and 2005,
      respectively.





We
      enter
      into indemnification provisions under our agreements with other companies in
      the
      ordinary course of business, typically with business partners, contractors,
      customers and  landlords.
      Under these provisions we generally indemnify and hold harmless the indemnified
      party for losses suffered or incurred by the indemnified party as a result
      of
      our activities or, in some cases, as a result of the indemnified party's
      activities under the agreement. These indemnification provisions often include
      indemnifications relating to representations made by us with regard to software
      rights. These indemnification provisions generally survive termination of the
      underlying agreement. The maximum potential amount of future payments we could
      be required to make under these indemnification provisions is unlimited. We
      have
      not incurred material costs to defend lawsuits or settle claims related to
      these
      indemnification agreements. As a result, we believe the estimated fair value
      of
      these agreements is minimal. Accordingly, we have no liabilities recorded for
      these agreements as of October 31, 20 06
      and 2005,
      respectively.





*Other*




Our
      commitment as the secondary guarantor on the sublease of our previous
      headquarters terminated in March 2006.





-74-


**10.
      COMMITMENTS**





We
      lease
      our buildings under noncancelable operating leases which expire at various
      dates
      through the year 2010. Additionally, we have acquired assets with capital lease
      obligations. Future
      minimum lease payments under noncancelable operating leases and capital leases,
      are as follows (in thousands):







Operating
            
            CapitalYear
                ending October 31:2007
            
            $
            580
            
            $
            742008
            
            
            580
            
            
            742009
            
            
            580
            
            
            742010
            
            
            483
            
            
            322011
                and thereafter
            
            
            ---
            
            
            1Total
                minimum lease payments
            
            $
            2,223
            
            $
            255Less:
                Amount representing interest1
            
            
            
            
            
            (42
            )Present
                value of net minimum lease payments2
            
            
            
            
            $
            213




1 Amount
      necessary to reduce net minimum lease payments to present value calculated
      at
      the actual lease interest rate of 12% per annum at the inception of the
      leases.


2 Reflected in the balance sheet as other current liabilities and other long-term
      liabilities of $54,000 and $159,000, respectively.





In
      October 2005, we entered into a facilities lease for our engineering and
      administrative headquarters located in San Ramon, California. The lease expires
      in 2010. On January 11, 2007, we signed a definitive agreement to sell our
      hardware business to One Stop Systems, Inc. and as part of the sales price
      One
      Stop will assume the lease of our San Ramon office space. The assumption of
      the
      lease payments by One Stop will relieve us of approximately $2.2 million of
      future lease payments. We are projecting to close the sale to One Stop in our
      second quarter of fiscal 2007. We will continue to be the secondary guarantor
      on
      the lease for the term of the lease.





Our
      rent
      expense under all operating leases, net of reimbursements for subleases, for
      the
      years ended October 31, 2006, 2005 and 2004 totaled $546,000, $381,000 and
      $384,000, respectively. We had reimbursements of sublease proceeds of $265,000,
      $637,000 and $637,000 for the years ended October 31, 2006, 2005 and 2004,
      respectively.





In
      connection with the retirement of Mr. William Heye, Jr. as our President and
      Chief Executive Officer in 2004, we paid Mr. Heye $250,000 at the rate of
      $20,833 each month for the period January 1, 2005 through December 31, 2005.
      The
      commitment to pay $250,000 was accrued as of October 31, 2004 and is included
      in
      general and administrative expense and accrued payroll and employee benefits
      liability as of that date.





**11.
      STOCK OPTION AND STOCK PURCHASE PLANS**





-75-


Effective
      November 1, 2005, we adopted SFAS 123(R) using the modified prospective method,
      which requires measurement of compensation cost for all stock-based awards
      at
      fair value on the grant date and recognition of compensation expense over the
      requisite service period for awards expected to vest. The fair value of stock
      option grants is determined using the Black-Scholes valuation model, which
      is
      consistent with our valuation techniques previously utilized for options in
      footnote disclosures required under SFAS No. 123, *Accounting
      for Stock Based Compensation* as
      amended. The fair value of restricted stock awards is determined based on the
      number of shares granted and the quoted price of our common stock. Such fair
      values will be recognized as compensation expense over the requisite service
      period, net of estimated forfeitures, using the straight line method under
      SFAS
      123R.





The
      fair
      value method under SFAS 123(R) is similar to the fair value method under SFAS
      123 with respect to measurement and recognition of stock-based compensation.
      However, SFAS 123 permitted us to recognize forfeitures as they occur, while
      SFAS 123(R) requires us to estimate future forfeitures and adjust our estimate
      on a quarterly basis. SFAS 123(R) also requires a classification change in
      the
      statement of cash flows whereby the income tax benefit from stock option
      exercises is reported as financing cash flow rather than an operating cash
      flow
      as previously reported.





We
      have
      several approved stock option plans for which stock options and restricted
      stock
      awards are available to grant to employees and directors. All employee and
      director stock options granted under our stock option plans have an exercise
      price equal to the market value of the underlying common stock on the grant
      date. There are no vesting provisions tied to performance conditions for any
      options, as vesting for all outstanding option grants was based only on
      continued service as an employee of the Company. All of our outstanding stock
      options and restricted stock awards are classified as equity instruments.





*Stock
      Options*





We
      sponsor four employee stock option plans:





·
            The1996
                Stock Option Plan (the 1996 Plan), terminated January 17, 2006;


·
            the
                1998 Non-Officer Stock Option Plan (the 1998 Plan);


·
            the
                PyX 2005 Stock Option Plan (the PyX Plan); and


·
            the
                2006 Equity Incentive Plan (the 2006 Plan).





We
      also
      sponsor one non-employee stock option plan:





·
            The
                2001 Non-Employee Director Stock Option Plan (the Director
                Plan).





The
      following table details the options to purchase shares pursuant to each plan
      at
      October 31, 2006:





Plan
            
            Shares
              Reserved
            
            Options
              Outstanding
            
            Available
              for
                Issue
            
            Outstanding
              Options
                Vested1996
                Plan
            
            
            2,730,000
            
            
            1,049,887
            
            
            ---
            
            
            757,1491998
                Plan
            
            
            650,000
            
            
            258,785
            
            
            135,699
            
            
            220,545PyX
                Plan
            
            
            2,038,950
            
            
            1,021,200
            
            
            ---
            
            
            425,4952006
                Plan
            
            
            1,500,000
            
            
            385,000
            
            
            ---
            
            
            ---Director Plan
            
            
            340,000
            
            
            175,000
            
            
            108,750
            
            
            120,000Total
            
            
            7,258,950
            
            
            2,889,872
            
            
            244,449
            
            
            1,523,189




-76-





The
      1996
      Plan terminated effective January 17, 2006 and although we can no longer issue
      stock options out of the plan, the outstanding options at the date of
      termination will remain outstanding and vest in accordance with their terms.
      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 of the shares of our common stock on the date of grant.
      Stock options granted under the 1996, 1998, 2006 and PyX 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.





On
      November 1, 2005, the date of adoption of SFAS 123(R), there were options to
      purchase 4,213,704 shares of our common stock outstanding, of which 1,400,397
      were fully vested. The
      fair
      value of the unearned portion of stock-based compensation related to the
      unvested employee stock options outstanding on November 1, 2005 is calculated
      using the Black-Scholes option pricing model as of the grant date of the
      underlying stock options. We recognized no net deferred tax impact on the
      adoption of SFAS 123(R). The remaining unamortized stock-based compensation
      expense associated with unvested employee stock options outstanding on November
      1, 2005 is expensed over the remaining service period through September
      2009.





Included
      in the outstanding but unvested stock options on November 1, 2005, are options
      to purchase 2,038,950 shares of our common stock related to the PyX 2005 Stock
      Option Plan that was assumed by us in our acquisition of PyX. The fair value
      related to the unvested portion of the PyX stock options totaled $2,484,000
      and
      was recorded as deferred compensation in the fourth quarter of fiscal 2005.
      In
      connection with the adoption of SFAS 123(R), we reduced deferred compensation
      and common stock by $2,311,000, the value of the unamortized balance of the
      deferred PyX compensation as of November 1, 2005.





We
      granted options to purchase 797,500 shares of our common stock to employees
      and
      members of the Board of Directors during the twelve months ended October 31,
      2006, respectively. The fair value of the unearned portion of stock-based
      compensation related to the employee and director stock options is calculated
      using the Black-Scholes option pricing model as of the grant date of the
      underlying stock options. The stock-based compensation expense associated with
      the stock options granted to employees and directors during the twelve months
      ended October 31, 2006, will be expensed over the remaining service period
      through September 2010.





Employee
      and Director stock-based compensation expense related to stock options in the
      accompanying statements of operations (in thousands):




Year
                Ended
              October
                31,
              2006
            
            Remaining
              Unamortized
              ExpenseStock
                option compensation
            
            $
            1,245
            
            $
            2,237








-77-





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




Options
                GrantedUnvested
                Options
            
            During
                Year EndedOn
                November 1,
            
            October
                31,2005
            
            2006Expected
                life (in years)
            
            
            4.19
            
            
            5.13Risk-free
                interest rate
            
            
            2.65%
                - 4.36
            %
            
            4.63
            %Volatility
            
            
            53.76%
                -151.22
            %
            
            106.4
            %Dividend
                yield
            
            
            0.00
            %
            
            0.00
            %Forfeiture
                rate
            
            
            6.71
            %
            
            6.01
            %





The
      fair
      value of stock-based awards to employees is calculated using the Black-Scholes
      option pricing model, even though this model was developed to estimate the
      fair
      value of freely tradable, fully transferable options without vesting
      restrictions, which differ significantly from the our stock options. The
      Black-Scholes model also requires subjective assumptions, including future
      stock
      price volatility and expected time to exercise, which greatly affect the
      calculated values. The expected term and forfeiture rate of options granted
      is
      derived from historical data on employee exercises and post-vesting employment
      termination behavior, as well as expected behavior on outstanding options.
      The
      risk-free rate is based on the U.S. Treasury rates in effect during the
      corresponding period of grant. The expected volatility is based on the
      historical volatility of our stock price. These factors could change in the
      future, which would affect the stock-based compensation expense in future
      periods.





There
      was
      no stock-based compensation expense related to employee stock options and
      employee stock purchases recognized during the fiscal years ended
      October  31,
      2005
      and 2004.





We
      award
      stock option grants to certain non-employee strategic business advisors as
      part
      of their fee structure. The fair value of these option grants is estimated
      on
      the date of grant using the Black-Scholes option-pricing model and is
      recalculated on a monthly basis based on market price until vested. For the
      fiscal year ended October 31, 2006 we recorded $2,900 of compensation expense
      related to non-employee stock options.




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




WeightedAverage
            
            ExerciseNumber
                of
            
            Price
                Per
            
            ExerciseShares
            
            Share
            
            PriceOutstanding
                atOctober
                31, 2003
            
            
            1,624,505
            
            
            $0.70--$19.81
            
            $
            2.90Granted
            
            
            422,500
            
            
            $2.86--$7.13
            
            $
            4.99Cancelled
                or expired
            
            
            (67,874
            )
            
            $2.86--$7.00
            
            $
            3.98Exercised
            
            
            (182,012
            )
            
            $0.90--$5.13
            
            $
            1.69Outstanding
                atOctober
                31, 2004
            
            
            1,797,119
            
            
            $0.70--$19.41
            
            $
            3.48Granted
            
            
            856,154
            
            
            $2.17--$4.00
            
            $
            3.48PyX
                Plan assumed
            
            
            2,038,950
            
            
            $2.17--$2.17
            
            $
            2.17Cancelled
                or expired
            
            
            (301,340
            )
            
            $0.90--$7.13
            
            $
            4.03Exercised
            
            
            (177,179
            )
            
            $0.70--$2.86
            
            $
            1.84Outstanding
                atOctober
                31, 2005
            
            
            4,213,704
            
            
            $0.70--$18.38
            
            $
            3.05Granted
            
            
            817,500
            
            
            $0.36--$2.59
            
            $
            1.42Cancelled
                or expired
            
            
            (2,098,666
            )
            
            $0.90--$16.19
            
            $
            2.75Exercised
            
            
            (42,666
            )
            
            $0.90--$0.90
            
            $
            0.90Outstanding
                atOctober
                31, 2006
            
            
            2,889,872
            
            
            $0.36--$18,38
            
            $
            2.10




-78-




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 2006 Plan ,
      the PyX
      Plan and the
      Director Plan at October 31, 2006:


Options
                  Outstanding
              
              Options
                  ExercisableWeightedAverage
              
              Weighted
              
              
              
              WeightedNumber
              
              Remaining
              
              Average
              
              Number
              
              AverageRange
                  of
              
              Outstanding
              
              Contractual
                    Life
              
              Exercise
              
              Exercisable
              
              ExerciseExercise
                  Price
              
              at
                    10/31/06
              
              (years)
              
              Price
              
              at
                    10/31/06
              
              Price$
                  0.00-$
                  1.00
              
              
              806,500
              
              
              4.76
              
              $
              0.72
              
              
              430,666
              
              $
              0.91$
                  1.01-$
                  2.00
              
              
              145,000
              
              
              3.18
              
              $
              1.33
              
              
              63,000
              
              $
              1.64$
                  2.01-$
                  3.00
              
              
              1,424,076
              
              
              5.32
              
              $
              2.34
              
              
              589,659
              
              $
              2.35$
                  3.01-$
                  4.00
              
              
              206,000
              
              
              3.14
              
              $
              3.55
              
              
              141,912
              
              $
              3.71$
                  4.01-$
                  5.00
              
              
              175,796
              
              
              1.64
              
              $
              4.51
              
              
              171,601
              
              $
              4.51$
                  5.01-
                  $
                  6.00
              
              
              94,000
              
              
              0.82
              
              $
              5.28
              
              
              94,000
              
              $
              5.29$
                  6.01-$
                  7.00
              
              
              13,000
              
              
              3.44
              
              $
              6.87
              
              
              9,977
              
              $
              6.85$
                  7.01-$
                  8.00
              
              
              25,000
              
              
              4.16
              
              $
              7.09
              
              
              21,874
              
              $
              7.10$
                  8.01-$20.00
              
              
              500
              
              
              0.56
              
              $
              18.38
              
              
              500
              
              $
              18.382,889,872
              
              $
              4.52
              
              $
              2.10
              
              
              1,523,189
              
              $
              2.57


The
      weighted average grant-date fair value of options granted during the fiscal
      years ended October 31, 2006, 2005 and 2004 was $1.42, $3.48 and $4.99,
      respectively. The total intrinsic value of options exercised during the fiscal
      years ended October 31, 2006, 2005 and 2004 was $38,400, $128,200 and $221,300,
      respectively.





*Restricted
      Stock Awards*





On
      March
      21, 2006, our Board approved restricted stock grants to all employees in order
      to continue to motivate and retain our employees. The shares of restricted
      stock
      granted by the board vest 25% on the first anniversary of the initial grant
      date
      with the remainder vesting monthly thereafter for the following six months.
      A
      total of 290,000 restricted shares of our common stock were issued to employees
      under the restricted stock grants with initial vesting to commence between
      April
      1, 2007 and June 19, 2007. A total of 48,000 of the restricted shares have
      been
      cancelled that were issued to employees who have terminated their employment
      prior to vesting. The total fair value of the restricted stock grants on the
      date of issuance is $301,000 and will be amortized over the 18-month vesting
      period. For the fiscal year ended October 31, 2006, we recorded $88,500 of
      amortization expense related to the restricted stock grants.






-79-








Weighted
                Average
            
            AverageShares
            
            Grant
                DateUnvested
                Stock Units
            
            Fair ValueUnvested
                at November 1, 2005
            
            
            ---
            
            
            ---Granted
            
            
            290,000
            
            $
            1.04Vested
            
            
            ---
            
            
            ---Cancelled
            
            
            (48,000
            )
            
            1.04Unvested
                at October 31, 2006
            
            
            242,000
            
            $
            1.04





*Stock
      For Pay Plan*




On
      January 12, 2006, our Board approved a company-wide 30% reduction in employee
      base salaries, effective January 16, 2006. In order to continue to motivate
      and
      retain our employees despite such salary reductions, the Board approved stock
      grants to all of our employees pursuant to the 1996 Plan and 2006 Plan.
      Effective April 1, 2006, the Board modified the 30% across the board reduction
      in employee and contractor base salaries to a cash salary reduction ranging
      from
      10% to 38% of the employees base salaries. The level of reduction of the cash
      portion of the salary for each employee and contractor is dependent on their
      respective position and base salary, and employees with lower salaries generally
      have lower reductions. A total of 858,040 shares of our common stock have been
      issued since January 1, 2006 pursuant to the stock-for-pay plan. For
      the
      fiscal year ended October 31, 2006, we recorded approximately $637,000 of
      stock-based compensation associated with such stock grants.




In
      addition, the Board approved the suspension of all cash payments of Board and
      Board committee fees, until further notice. A total of 158,295 shares of our
      common stock has been issued to Board members in lieu of such fees under the
      stock-for-pay plan since January 1, 2006. For
      the
      fiscal year ended October 31, 2006, we recorded approximately $126,000 of
      stock-based compensation and director expense associated with the stock-for-pay
      plan.




On
      August
      21, 2006, the Board suspended the stock-for-pay program for all members of
      the
      Board and executive officers of SBE. The suspension is effective as of August
      1,
      2006 for all members of the Board and August 16, 2006 for all affected executive
      officers. Despite suspension of the stock-for-pay program, the
      previously-announced salary reductions for the affected officers and cessation
      of cash compensation for the Board will remain in effect until such time as
      the
      Board shall determine. The Board adopted a bonus plan for the affected
      individuals that will pay a prescribed amount of cash or stock upon our
      completion of one of a number of specified milestones set forth in the plan,
      provided that the affected individual remains employed by the Company or a
      member of the Board at the time such milestone is achieved. All non-officer
      employees remain on the stock-for-pay plan until such time as the Board shall
      determine.





*Prior
      Year*





Prior
      to
      November 1, 2005, we accounted for stock-based awards under the intrinsic value
      method, which followed the recognition and measurement principles of Accounting
      principles board (APB) Opinion No. 25, *Accounting
      for Stock Issued to Employees (APB Opinion 25)* ,
      and
      related interpretations. Under this method, compensation expense was recorded
      on
      the date of grant only if the current market price of the underlying stock
      exceeded the exercise price. Our practice is to award employee stock options
      with an exercise price equal to the market price on the date of the award.
      Accordingly, no stock-based employee compensation cost has previously been
      recognized in net income for the stock option plans. Had compensation cost
      for
      our stock option plans been determined based on the fair value recognition
      provisions of SFAS 123, our net income and income per share would have been
      as
      follows (in thousands):





-80-





For
                the Year Ended October 31,2005
            
            2004Net
                loss - as reported
            
            $
            (4,230
            )
            $
            (1,679
            )Stock
                based employee compensationexpense
                included in reportednet
                loss, net of related tax effects
            
            
            168
            
            
            ---Less
                total stock based employeecompensation
                expense determinedunder
                fair value based method forall
                awards, net of related tax effects
            
            
            (1,237
            )
            
            (1,177
            )Pro
                forma net loss
            
            $
            (5,299
            )
            $
            (2,856
            )Loss
                per share:Basic
                and diluted - as reported
            
            $
            (0.66
            )
            $
            (0.33
            )Basic
                and diluted - pro forma
            
            $
            (0.82
            )
            $
            (0.57
            )





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





Options
                granted in years ended October 31
            
            
            2005
            
            
            2004Expected
                life (in years)
            
            
            4.00
            
            
            4.00Risk-free
                interest rate
            
            
            4.25
            %
            
            3.29
            %Volatility
            
            
            99.88
            %
            
            120.20
            %Dividend
                yield
            
            
            0.00
            %
            
            0.00
            %




The
      weighted average fair value of options granted during 2005 and 2004 was $2.91
      and $2.93 per option, respectively.




**12.**  **N** **ET
      LOSS PER SHARE:**





Basic net loss
      per
      common share for the years ended October 31, 2006, 2005 and 2004 was computed
      by
      dividing the net loss for the
      relevant period by the
      weighted average number of shares of common stock outstanding. Diluted earnings
      per common share is computed by dividing net loss by the weighted average number
      of shares of common stock and common stock equivalents outstanding.





-81-


Common
      stock equivalents of approximately 149,000, 937,000 and 792,000 options are
      excluded from the diluted earnings per share calculation for fiscal 2006, 2005
      and 2004, respectively, due to their anti-dilutive effect.





(in
                thousands, except per share amounts)
            
            **Years
                ended October 31****2006**
            
            **2005**
            
            **2004****Basic
                earnings per share:**Net
                loss
            
            $
            (16,183
            $)
            $
            (4,230
            $)
            $
            (1,679
            $)Number
                of shares for computation ofearnings
                per share
            
            
            10,304
            
            
            6,439
            
            
            5,022Basic
                loss per share
            
            $
            (1.57
            )
            $
            (0.66
            )
            $
            (0.33
            )**Diluted
                earnings per share:**Weighted
                average number of commonshares
                outstanding during the year
            
            
            10,304
            
            
            6,439
            
            
            5,022Assumed
                issuance of stock under warrantplus
                stock issued the employee andnon-employee
                stock option plans
            
            
            (a
            )
            
            (a
            )
            
            (a
            )Number
                of shares for computation ofearnings
                per share
            
            
            10,304
            
            
            6,439
            
            
            5,022Diluted
                loss per share
            
            $
            (1.57
            )
            $
            (0.66
            )
            $
            (0.33
            )




(a)
            In
                loss periods, common share equivalents would have an anti-dilutive
                effectonnetlossper share and therefore have been
                excluded.




**13.**  **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, until January 2006 we made matching payments to the employee
      savings and investment plan of 50% of each employee's contribution up to three
      percent of employees' earnings. We suspended the matching payments program
      in
      January 2006.




For
      the
      years ended October 31, 2006, 2005 and 2004, total expense under the employee
      savings and investment plan was $18,685, $87,918 and $90,099,
      respectively.




**14.**  **CONCENTRATION
      OF CREDIT AND BUSINESS RISKS**





Our
      trade
      accounts receivable are concentrated among a small number of customers,
      principally located in the United States and Europe. Two customers accounted
      for
      52% of our outstanding accounts receivable at October 31, 2006 compared to
      two
      customers who accounted for more than 41% of total accounts receivable at
      October 31, 2005. 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
      $26,000 and $54,000 at October 31, 2006 and 2005, respectively.





-82-


Sales
      to
      individual customers in excess of 10% of net sales for the year ended October
      31, 2006 included sales to DCL located in the United Kingdom of $1.9 million,
      or
      31% of net sales, Nortel of $1.3 million, or 21% of net sales and Raytheon
      of
      $750,000, or 12% of net sales compared to sales to DCL in fiscal 2005 of $2.2
      million, or 28% and Nortel of $1.4 million, or 18% of net sales, and sales
      to HP
      of $1.0 million, or 13% of net sales, in fiscal 2005.





International
      sales constituted 43%, 37% and 12% of net sales in fiscal 2006, 2005 and 2004,
      respectively. International sales are primarily executed in Europe with 31%
      to
      customers in the United Kingdom. All international sales are executed in U.S.
      dollars.





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 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 three independent
      companies. The
      chipsets used in some of our hardware products are currently available from
      single source 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.




**15.** **ACQUISITION
      OF PYX TECHNOLOGIES, INC. (PyX)**





In
      July
      2005, we acquired PyX for a total purchase price of $11,714,000
      paid to the selling shareholders of PyX in the form of shares of our common
      stock and the assumption of PyX’s employee stock option plan, plus cash expenses
      totaling $359,000 for legal, accounting and valuation services. A
      total
      of 2,561,050 shares of our common stock were issued in respect of outstanding
      PyX common stock. We registered these shares for resale with the Securities
      and
      Exchange Commission. An additional 1,021,200 shares of our common stock will
      be
      issuable upon exercise of assumed stock options for services of selling
      shareholders who became our employees. The option shares are issuable upon
      exercise of options, subject to vesting restrictions, except that if an
      optionee’s employment is terminated without cause or the optionee resigns for
      certain specified reasons, the vesting on the option will accelerate and become
      fully vested.




The
      acquisition enabled us to obtain storage software which
      we
      consider to be complementary to our business. While this product has reached
      technological feasibility and is being capitalized, we will continue to
      customize it to meet our specific customer needs.





A
      summary
      of the assets acquired and consideration paid is as follows:







-83-




Tangible
                  assets acquired
              
              $
              31,000Software
              
              
              12,217,000Total
                  assets acquired
              
              
              12,248,000Liabilities
                  assumed
              
              
              534,000Net
                  assets acquired
              
              $
              11,714,000Fair
                  value of common stock provided
              
              $
              9,040,000Fair
                  value of stock options assumed
              
              
              5,158,000Less:
                  value of deferred compensationrelated
                  to stock options
              
              
              (2,484,000
              )Total
                  consideration
              
              $
              11,714,000


We
      used
      the purchase method of accounting for the acquisition and combined PyX results
      of operations with our own beginning July 26, 2005. The fair value of the common
      stock provided to the PyX shareholders was calculated as the value of the
      2,561,050 shares of common stock multiplied by the closing price of our common
      stock on July 26, 2005 ($3.53 per share). The fair value of the vested portion
      of the 2,038,950 PyX stock options assumed by us was calculated using the
      Black-Scholes valuation model and included in the purchase price. The intrinsic
      value of the unvested portion of the 2,038,950 PyX stock options assumed by
      us
      was recorded as deferred compensation (see Note 7) and was amortized to
      compensation expense over the remaining 43-month vesting period. In connection
      with the adoption of SFAS 123(R), we reduced deferred compensation and common
      stock by $2,401,000, the value of the unamortized balance of the deferred
      compensation as of November 1, 2005. We allocated the purchase price to the
      tangible assets and liabilities based on fair market value at the time of the
      acquisition and to software based on future expected cash flows to be derived
      from the acquired iSCSI software product line.




**16.** **NASDAQ
      NOTICE OF NON-COMPLIANCE**





On
      July
      14, 2006, we received a notice from The Nasdaq Stock Market (Nasdaq) indicating
      that for the preceding 30 consecutive business days, the bid price of our common
      stock closed below the $1.00 minimum bid price required for continued listing
      by
      Nasdaq Marketplace Rule 4310(c)(4) (the Rule). The notice stated that we would
      be provided 180 calendar days, or until January 10, 2007, to regain compliance
      with the Rule. The notice further states that if we were not in compliance
      with
      the Rule by January 10, 2007, the Nasdaq staff would determine whether we meet
      the Nasdaq initial listing criteria as set forth in Nasdaq Marketplace Rule
      4310(c), except for the bid price requirement. If we met the initial listing
      criteria, the Nasdaq staff would notify us that we had been granted an
      additional 180 calendar day compliance period. If we were not eligible for
      an
      additional compliance period, the Nasdaq staff would provide us written
      notification that our securities would be delisted from Nasdaq, and at that
      time
      we would be able to appeal the staff’s determination to a Listings
      Qualifications Panel.




On
      January 11, 2007, we received a notice from Nasdaq that our stock is subject
      to
      delisting and that we would not be given the additional 180 day compliance
      period and that we did not meet the Nasdaq initial listing criteria as set
      forth
      in Nasdaq Marketplace Rule 4310(c). Our shareholders’ equity and the market
      value of our public float are each less than the required $5.0 million. We
      filed
      an appeal of the staff’s determination to a Listings Qualifications Panel.
      Delisting of our stock from Nasdaq is stayed pending the determination of the
      Listings Qualifications Panel. The appeals hearing is scheduled for February
      22,
      2007.







-84-




**17.
      SUBSEQUENT EVENTS**





**Sale
      of Embedded Hardware Business**





On
      January 11, 2007, we entered into an Agreement for the Purchase and Sale of
      Assets (the “Purchase Agreement”) with One Stop Systems, Inc., a manufacturer of
      industrial-grade computing systems and components (One Stop), pursuant to which
      we agreed to sell all of the assets associated with our hardware business
      (excluding cash, accounts receivable and other excluded assets specified in
      the
      asset purchase agreement) to One Stop for approximately $2,200,000 in cash
      plus
      One Stop’s assumption of the lease of our corporate headquarters building and
      certain equipment leases. The purchase price will be reduced dollar-for-dollar
      to the extent our hardware business inventory has a net book value of less
      than
      $680,000 as of the closing date. The purchase price will be increased
      dollar-for-dollar to the extent our hardware business inventory has a net book
      value of more than $800,000 as of the closing date. A total of $500,000 will
      be
      held back from the purchase price for a period of 60 days and will be used
      to
      pay certain liabilities of the embedded business and satisfy any indemnification
      obligations to One Stop that arise under the asset purchase agreement during
      such period. Any funds not used will be released to us after 60
      days.





The
      Purchase Agreement contains customary representations and warranties, covenants
      and closing conditions. In addition, we have agreed that for four years
      following the closing of the asset sale, we will not directly or indirectly
      engage in the hardware business or have any interest in any entity engaged
      in
      the hardware business. Each party has agreed to indemnify the other party for
      damages arising for any breach of any of the representations or warranties
      or
      covenants or obligations in the Purchase Agreement. In addition, we have agreed
      to indemnify One Stop for any liabilities arising out of the ownership or
      operation of the hardware business prior to the closing of the transaction.
      All
      representations, warranties and covenants will expire on the first anniversary
      of the closing. Our liability for indemnification claims made by One Stop
      pursuant to the asset purchase agreement is capped at $2,200,000 in the
      aggregate.





**Merger
      and Reorganization**





On
      January 19, 2007, we entered into an Agreement and Plan of Merger and
      Reorganization with Neonode Inc., a Delaware corporation.  It is
      anticipated that our name will be changed to “Neonode Inc.” upon completion of
      the merger. The securities offered in the merger will not be registered under
      the Securities Act of 1933 and may not be offered or sold in the United States
      absent registration or an applicable exemption from registration
      requirements.




Although
      the exact number of shares to be issued in the merger will be determined at
      closing according to a formula contained in the merger agreement, it is
      currently estimated that we will issue approximately 57 million shares of its
      common stock in exchange for outstanding shares of Neonode common stock and
      will
      assume Neonode’s options and warrants exercisable for approximately 17 million
      additional shares of SBE common stock.




-85-


We
      expect
      to complete the transaction in our second quarter of fiscal 2007, subject to
      satisfaction of closing conditions set forth in the merger agreement. In
      addition to customary closing conditions, the transaction is subject to the
      approval of both our and Neonode’s shareholders and a reverse split of our
      outstanding common stock. The number of shares referenced above is presented
      on
      a pre-split basis. After the merger is completed, the combined company's
      headquarters will be in Stockholm, Sweden, where Neonode’s corporate
      headquarters and research and development activities are located. The combined
      company’s stock is expected to continue to trade on the Nasdaq Capital
      Market.







**QUARTERLY
      FINANCIAL INFORMATION (UNAUDITED)**




(in
              thousands except
            
            First
            
            Second
            
            Third
            
            Fourthper
              share amounts)
            
            Quarter
            
            Quarter
            
            Quarter
            
            Quarter2006:
            Net
                  sales
            
            $
            1,400
            
            $
            1,816
            
            $
            1,552
            
            $
            1,359Gross
                loss
            
            
            (425
            )
            
            (487
            )
            
            (6,010
            )
            
            (895
            )Net
                loss
            
            
            (2,727
            )
            
            (3,029
            )
            
            (7,842
            )
            
            (2,585
            )Basic
                and diluted loss percommon
                share
            
            $
            (0.28
            )
            $
            (0.30
            )
            $
            (0.76
            )
            $
            (0.23
            )2005:
            Net
                  sales
            
            $
            2,815
            
            $
            1,706
            
            $
            1,720
            
            $
            1,815Gross
                profit (loss)
            
            
            1,585
            
            
            630
            
            
            648
            
            
            (212
            )Net
                income (loss)
            
            
            177
            
            
            (936
            )
            
            (945
            )
            
            (2,526
            )Basic
                income (loss) percommon
                share
            
            $
            0.03
            
            $
            (0.18
            )
            $
            (0.17
            )
            $
            (0.26
            )Diluted
                income (loss) percommon
                share
            
            $
            0.03
            
            $
            (0.18
            )
            $
            (0.17
            )
            $
            (0.26
            )







-86-








**SBE,
      Inc.**


**Schedule
      II - Valuation and Qualifying Accounts**


**For
      the Years Ended October 31, 2006, 2005 and 2004**


**(amounts
      in thousands)**







Column
                A
            
            
            Column
                B
            
            
            Column
                C
            
            
            Column
                D
            
            
            Column
                EBalance
                at
            
            
            Additions
            
            
            
            
            
            BalanceBeginning
            
            charged
                to costs
            
            
            
            
            End
                ofDescription
            
            
            of
                Period
            
            
            and
                expenses
            
            
            Deductions
            
            
            Period**Year
                ended October 31, 2006**Allowance
                for Doubtful Accountsand
                sales programs
            
            $
            54
            
            $
            ---
            
            $
            (28
            )
            $
            26Allowance
                for Warranty Claims
            
            
            22
            
            
            ---
            
            
            (9
            )
            
            13Allowance
                for Deferred Tax Assets
            
            
            4,923
            
            
            7,726
            
            
            ---
            
            
            12,649**Year
                ended October 31, 2005**Allowance
                for Doubtful Accountsand
                sales programs
            
            $
            42
            
            $
            27
            
            $
            (15
            )
            $
            54Allowance
                for Warranty Claims
            
            
            20
            
            
            14
            
            
            (12
            )
            
            22Allowance
                for Deferred Tax Assets
            
            
            8,944
            
            
            ---
            
            
            (4,021
            )
            
            4,923**Year
                    ended October 31, 2004**Allowance
                for Doubtful Accountsand
                sales programs
            
            $
            90
            
            $
            ---
            
            $
            (48
            )
            $
            42Allowance
                for Warranty Claims
            
            
            53
            
            
            ---
            
            
            (33
            )
            
            20Allowance
                for Deferred Tax Assets
            
            
            8,662
            
            
            282
            
            
            ---
            
            
            8,944Allowance
                for Stockholder Loan
            
            
            239
            
            
            ---
            
            
            (239
            )
            
            ---




-87-