SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-K

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

             (Mark One)

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

                   For the fiscal year ended October 31, 2003

                                       OR

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

            For the transition period from _________ to ___________

                           Commission File No. 0-8419

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

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

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

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

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

                                      None
           -----------------------------------------------------------
           Securities registered pursuant to Section 12(g) of the Act:

                                  Common Stock
                                ----------------
                                (Title of Class)

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

      Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained,  to the
best  of  the  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. |X|


                                      -1-
<PAGE>

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

      The  approximate  aggregate  market  value  of  the  common  stock  of the
registrant held by non-affiliates of the registrant,  based on the closing price
for the  registrant's  common  stock on April 30, 2003 as reported on the Nasdaq
SmallCap Market,  was $3,122,522.  Shares of Common Stock held by each executive
officer, director and stockholder whose ownership exceeds five percent of Common
Stock  outstanding  have been excluded  because such persons may be deemed to be
affiliates  of the  registrant.  This  determination  of  affiliate  status  for
purposes  of  the  foregoing   calculation  is  not   necessarily  a  conclusive
determination of affiliate status for other purposes.

      The number of shares of the  registrant's  common stock  outstanding as of
December 31, 2003 was 4,944,127.

                       Documents incorporated by reference

      Portions  of  the   registrant's   definitive   proxy  statement  for  the
registrant's Annual Meeting of Stockholders,  scheduled for March 16, 2004, have
been incorporated by reference into Part III of this Annual Report on Form 10-K.


                                      -2-
<PAGE>

                                    SBE, INC.

                                    FORM 10-K

                                TABLE OF CONTENTS

PART I

    Item 1   Business                                                          4
    Item 2   Properties                                                       17
    Item 3   Legal Proceedings                                                17
    Item 4   Submission of Matters to a Vote of Security Holders              18

PART II

    Item 5   Market for Registrant's Common Equity
                  and Related Stockholder Matters                             19
    Item 6   Selected Financial Data                                          20
    Item 7   Management's Discussion and Analysis of
                  Financial Condition and Results of Operations               21
    Item 7A  Quantitative and Qualitative Disclosures about Market Risk       33
    Item 8   Financial Statements and Supplementary Data                      33
    Item 9   Changes in and Disagreements with Accountants
                  on Accounting and Financial Disclosure                      33
    Item 9A  Controls and Procedures                                          33

PART III

    Item 10  Directors and Executive Officers of the Registrant               35
    Item 11  Executive Compensation                                           35
    Item 12  Security Ownership of Certain Beneficial Owners
                  and Management                                              35
    Item 13  Certain Relationships and Related Transactions                   35
    Item 15  Exhibits, Financial Statement Schedules
             and Reports on Form 8-K                                          36

SIGNATURES                                                                    40


                                      -3-
<PAGE>

                   SPECIAL NOTE ON FORWARD LOOKING STATEMENTS

Certain  statements  set forth in or  incorporated  by  reference in this Annual
Report on Form 10-K constitute  "forward-looking  statements" within the meaning
of Section 27A of the  Securities  Act of 1933 and Section 21E of the Securities
Exchange  Act  of  1934.  These  statements  include,  without  limitation,  our
expectations   regarding  our  sales  to  The   Hewlett-Packard   Company,   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 1 -  Business  -- Risk  Factors"  on page 13 and
elsewhere in this Form 10-K.

                                     PART I

ITEM 1. BUSINESS

Overview

SBE, Inc.  develops and provides network  communications  solutions for original
equipment  manufacturers  ("OEM")  in both  the  embedded  and  enterprise-level
information technology ("IT") computing markets.  Embedded networking technology
is hardware or software  that serves as a component  within a larger  networking
device or system  such as a Gigabit  Ethernet  input/output  card with  Linux or
Solaris  software  drivers  that  plugs  into an  expansion  slot in a  high-end
computer.  Embedded  networking  solutions  enable  the  functionality  of  many
commonly  used devices or  equipment,  such as products and  solutions for basic
telephone and internet services,  mobile phones,  medical equipment,  airplanes,
and  automobiles.  Enterprise/IT  refers  to all of  the  equipment,  processes,
procedures  and  systems  used  to  provide  and  support  computing  and  other
information systems used within an organization  including those reaching out to
customers   and   suppliers.    Enterprise    computing    technologies    power
mission-critical data management/processing and networking applications within a
corporation,  such as order  entry,  accounts  receivable,  payroll,  inventory,
email/voicemail management, internet and intranet access.

We deliver a product portfolio comprised of standards-based wide area networking
("WAN"),  local area networking ("LAN"),  storage area network ("SAN") interface
cards,  communications  controllers  with its own  microprocessor  and memory on
board,  and enabling  communications  software.  Our products are designed to be
functionally  compatible with each other and,  because we use industry  standard
form factors and  technologies,  our products are compatible with other industry
standard products. This standard scalability and modularity offers our customers
greater  flexibility to develop solutions for unique product  configurations and
applications.  Our products are designed  using  industry  standard form factors
including those known as peripheral component interconnect ("PCI"),  CompactPCI,
VersaModule-  Eurocard  ("VME"),  PCI Mezzanine  card  ("PMC"),  and PCI Telecom
Mezzanine Card ("PTMC").  Form factors are the shape and size of interface cards
used to expand the functionality of standard computer bus  architectures.  A PCI
is a 32-bit local bus architecture  used to transfer data from a computer's main
microprocessor  to peripherals such as hard disks and video adapter.  CompactPCI
is an  adaptation  of the PCI 32-bit  bus  architecture  designed  to expand the
number of  available  slots  for  peripheral  devices  from four to eight and to
improve a computer's  ability to withstand  adverse  conditions  such as extreme
vibration.  VME is a mechanical  and electrical  bus  architecture  developed in
Germany by Motorola in the late 1970s.  A PMC card plugs into a standard  PCI or
CompactPCI  card  enabling it to provide  differing  input/output  or  computing
functions.  A PTMC is a PMC card  designed  specifically  for  telecommunication
applications.


                                      -4-
<PAGE>

Our  solutions  have been  integrated  into a wide spectrum of  applications  to
enable network connectivity,  including Wi-Fi, Enhanced 911, enterprise servers,
data storage, data messaging, process control, media gateways, routers, internet
access    devices,    medical    imaging,    CAE/automated    test    equipment,
government/military   defense  systems  and  telecommunications   networks.  Our
products are distributed  worldwide through a direct sales force,  distributors,
independent manufacturers' representatives and value-added resellers.

SBE was  incorporated in 1961 as Linear Systems,  Inc. In 1976, we completed our
initial  public  offering.  In July  2000,  we  acquired  LAN Media  Corporation
("LMC"),  a privately held wide area networking  adapter company,  to complement
and  grow our WAN  adapter  product  line  from  both a  hardware  and  software
perspective.  In August  2003,  we acquired the  products  and  technologies  of
Antares  Microsystems  to  expand  into the  enterprise  information  technology
market. We continue to operate under a single business unit.

Business Strategy

Our  objective  is  to  be  a  leading  provider  of  high-performance   network
communications  solutions  by  delivering  reliable,  flexible,   cost-efficient
products in a timely  manner to our  customers,  thus  allowing them to focus on
their core competencies.

During  fiscal 2003,  we made  significant  steps in achieving  this  objective,
including:

o     Maintained Business Viability and Profitability

We took steps in fiscal 2002 to reduce our operating  expenses while  continuing
to  invest in key  product  development  initiatives.  Realigning  our  business
strategy and implementing cost controls allowed us to maintain  profitability in
fiscal year 2003.

o     Strategic Acquisitions and Investments

We believe that joining the products and  technologies  of Antares with those of
SBE has strengthened  our ability to provide  solutions to both the embedded and
enterprise  markets.  The addition of Antares products extended our portfolio of
products to include  field-tested  Ethernet,  SCSI,  Fibre Channel and specialty
input/output  ("I/O") boards for the enterprise Sun and Linux arena. The Antares
products have been integrated into a variety of applications,  including SAN and
data centers.  Our expanded portfolio of products has resulted in a wide-ranging
collection of WAN, LAN, storage, and intelligent communication controller boards
with  Linux and  Solaris  software  driver  support  for both the  embedded  and
enterprise server markets. We believe this expanded  technology  portfolio opens
up opportunities  for further  penetration into existing  customers  accounts as
well as into new markets and applications.


                                      -5-
<PAGE>

o     Expanded Market Focus

Although we have traditionally  focused on telecommunications  applications,  we
have  also  identified  and  pursued  opportunities  in  other  market  sectors,
including  finance/banking,  industry and government.  For example, in May 2003,
our HW400c/M  product was selected for use in connection with a Federal Aviation
Agency base station upgrade.

o     Ongoing New Product Developments

In  order  to  meet  the  ever-changing  requirements  of the  industry  and our
customers,  we believe  that it is  important  to maintain a strong and flexible
portfolio of products  designed for easy and quick  deployment into a variety of
unique applications.

      -     Linux "On Demand".  Recognizing the value to our customers, we began
            developing  Linux  software  drivers for SBE products using internal
            resources and those from partnering software companies.

      -     HyperTransport(TM)  Ethernet  Adapter.  SBE  developed  a dual  port
            Gigabit Ethernet adapter based on  HyperTransport(TM)  technology to
            complement  its family of LAN  interface  cards.  HyperTransport(TM)
            technology  is designed to transfer data at 6.4 Gigabytes per second
            and is  approximately  48 times faster than PCI, 6 times faster than
            PCI-X  and  5  times  faster  than  InfiniBand   using  4  channels.
            HyperTransport(TM)  technology is designed to provide more bandwidth
            than current interconnect  technologies,  use low-latency responses,
            be  compatible  with legacy PC buses,  be  extensible to new Systems
            Network  Architecture  buses, be compatible with existing and future
            operating   systems  and  be  software   compatible  with  PCI.  Its
            electrical  design is  intended  to improve  reliability  and reduce
            board design complexity.

      -     Passive   PMC-to-PCI   Adapter.   In  July   2003,   we   introduced
            adaptPCI-1PMC,  a single slot PCI card to facilitate the integration
            of PMC or PTMC boards into standard PCI systems.  The  adaptPCI-1PMC
            is designed to reduce the time  required  to  integrate  PMC or PTMC
            boards into PCI systems,  thus  allowing  our  customers to focus on
            their    core     competencies.     Well-suited    for    enterprise
            router/switch/gateway     providers    and    system    integrators,
            adaptPCI-1PMC  can be  conveniently  bundled with SBE's PMC and PTMC
            modules or sold  individually for use with any standard  third-party
            module.

In fiscal 2004, we plan to further build on the momentum that was generated over
the past year by turning our technology investments into strong, customer-driven
product  solutions,  continuing  to diversify  our customer  base,  and actively
seeking out new market opportunities.  Specifically, our key focus areas for the
upcoming year include:

o     Build  and  Strengthen   Awareness  of  Expanded  Product   Portfolio  and
      Capabilities within Target Markets

With the acquisition of Antares' products,  we have entered the enterprise arena
with an  enhanced  line of LAN and  Storage  products.  We  intend  to launch an
aggressive sales and marketing  campaign to develop and enhance awareness of our
portfolio of products and capabilities.

o     Expand Market and Customer Diversification

With the  expansion of our  products,  we intend to further  penetrate  existing
territories  and  capture  opportunities  in new markets  and  applications.  In
addition,  we have  strengthened our  distribution  channels to broaden coverage
both domestically and  internationally  and allow for a wider set of application
and market targets.


                                      -6-
<PAGE>

o     Continue to Invest in New Products and Technologies

Continued investment in new products and technologies is critical in driving the
long-term growth and success of the business.  Areas of technological focus over
the next year include:

Evolution of WAN Product Line. We are currently  planning  several  additions to
our WAN product line,  including a fully  channelized T3 adapter  supporting 672
channels and a PMC module featuring 8 or 16 T1/E1 ports.

Expansion of HighWire Line of Intelligent Communications Controllers. We plan to
enhance the HW400c/R product, a 6U CompactPCI intelligent SS7 protocol processor
with  interfaces  to 8 T1/E1/J1  ports,  to include  PICMG 2.16 Packet  Switched
Backplane and Intelligent Platform Management Interface ("IPMI") specifications.
We are also developing the next generation HighWire  CompactPCI  controller with
IPMI to the  backplane,  Ethernet  switch,  and dual PTMC  support.  As with our
currently  available  platforms,  SBE's  future  processors  will be designed to
provide  embedded  Linux with the intent to offer 100%  interoperability  with a
wide array of WAN, LAN, and Storage PMCs.

TCP/IP Offload Engine ("TOE"). As Ethernet speeds continue to increase, the need
for  significant   offloading  of  protocol   processing  becomes   increasingly
important.  TOE is  designed  to offload  CPU  processing  in order to  increase
application  performance  and  alleviate  networking   bottlenecks.   Given  the
prevalence  of  TCP/IP   networking   equipment  in  today's  global  electronic
communications,  we expect  the  opportunities  to deploy  the  board-level  TOE
solutions that we have in development to increase. We expect that demand for TOE
will continue to increase as network bandwidth requirements escalate.

Serial  Attached SCSI. As we grow and evolve our broad line of ("SCSI") or Small
Computer  System  Interface  adapters,  we will focus on the next  generation of
SCSI, namely Serial Attached SCSI. As enterprise storage  requirements  increase
and become more  complex,  factors  such as larger  capacity,  greater  density,
security, scalability and accessibility will become more critical. There will be
a greater need for  enterprise  data centers to be online at all times,  fulfill
requests  from  numerous  users  simultaneously,  allow for constant  growth and
expansion,  and be  maintained  while  in  operation.  Serial  Attached  SCSI is
designed to meet these demands.

Products

We design and provide  network  interface  cards and  communication  controllers
serving the embedded and enterprise markets.  Our network interface adapters are
open standards interface adapter cards that do not have a microprocessor onboard
("state  machine  products").   They  are  designed  to  provide  developers  of
networking  and data  communications  equipment  a simple and  effective  way to
integrate WAN, LAN, SCSI,  and/or Fibre Channel  interfaces  into their systems.
All of our products are supported by  communications  software  developed by SBE
and a select group of third party partners.


                                      -7-
<PAGE>

Although  SBE  continues  to sell and  manufacture  products  such as  multibus,
VMEbus,  and ISA, we emphasize five principal  lines of products:  WAN adapters,
LAN/Ethernet  adapters,  storage network  interface cards ("NICs"),  intelligent
communications controllers, and custom and specialty I/O.

Wide Area Networking Adapters

A wide  area  network  is a  computer  network  that  spans a  relatively  large
geographical  area.  Computers  connected to a WAN are often  connected  through
public 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  interfaces,  including  synchronous  serial,  T1/E1,  High Speed
Serial  Interface  ("HSSI") and T3 in PCI, PMC, and PTMC industry  standard form
factors.

Local Area Networking  Adapters

A  local  area  network  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.  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 most common.
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 adapter PCI and PMC
modules that feature connectivity speeds of up to 10 Mb/second, 100 Mb/second or
1000 Mb/second.  Our Gigabit Ethernet NICs include trunking and failover.  These
features allow our customers' systems to take advantage of static load balancing
and failure recovery within a user-defined  communications trunk. It is designed
to distribute  traffic across the aggregated links,  detects port failures,  and
increases  throughput.  In  the  event  of a link  failure,  the  software  will
automatically redistribute outgoing loads across the remaining links.

Storage Network Interface Cards

Our storage NICs are comprised of SCSI and Fibre Channel products  acquired from
Antares.
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 Megabyte ("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.

Fibre Channel is a serial data transfer  architecture  developed by a consortium
of computer and mass storage device  manufacturers and is now being standardized
by the American National Standards  Institute  ("ANSI").  Our Fibre Channel host
bus  adapters  are  available  in single or dual port,  1-Gigabit  or  2-Gigabit
versions with copper and/or optical Gigabit Interface Converter ("GBIC"). A GBIC
is a small  removable  I/O device  that  allows the  customer to convert the I/O
interface from different  interface  medium,  like copper to optical,  by simply
sliding out and replacing the GBIC. Our Fibre Channel adapters offer active port
failover  software  designed  to  enable  a  system  to  detect  a  failure  and
automatically  use the backup port  without the  traditional  use of a switch or
router.


                                      -8-
<PAGE>

Intelligent Communications Controllers

The 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  ("IN") and
Advanced   Intelligent  Network  ("AIN")  services  such  as  Caller  ID,  voice
messaging,  personal number calling,  Service Provider Local Number Portability,
and customized routing and billing, as well as digital wireless services such as
Personal   Communications   Systems   ("PCS")  and  Global   System  for  Mobile
Telecommunications  ("GSM").  The HighWire products are designed for integration
with standard server platforms that enable traditional  carriers and new telecom
entrants to pursue cost-reduced and  performance-enhanced  network architectures
based on Internet Protocol ("IP"), broadband or other "packet" technologies.

We offer embedded Linux operating  system software that enables several HighWire
products to be combined  with either our WAN and LAN PMC products or other third
party PMC form  factor  products  to provide  core  computing  and  connectivity
solutions to the  communications,  military/government,  medical and  industrial
control  markets.  Utilizing  our HighWire  products in  conjunction  with other
available PMC modules,  such as A-to-D  converters or video capture PMC modules,
opens up new opportunities to market the products for factory/process control or
video surveillance applications.

VMEbus

Our  line of  VMEbus  products  is  designed  for  high  reliability  industrial
applications  and these  products are used in wireline,  wireless and  satellite
based communications  networks. Our VME products are intelligent  communications
controller  products  used to provide  connectivity  between a system  such as a
mini-computer  or  bridge/router  and a local or wide area  network.  Our VMEbus
communications   products   target  all  four  major   protocol   communications
technologies for each of the bus architectures: Fiber Distributed Data Interface
("FDDI"), Token Ring, Ethernet and high-speed serial communications.  The latter
is a WAN  technology  that  enables  computers  to  talk  to one  another  using
telephone lines. FDDI, Token Ring and Ethernet are LAN technologies that offer a
wide range of speed and reliability options.


                                      -9-
<PAGE>

The  following  table shows sales by major  product type as a percentage  of net
sales for fiscal 2003, 2002 and 2001:

<TABLE>
<CAPTION>
                                                     Year Ended October 31,
                                                --------------------------------
                                                 2003         2002         2001
                                                --------------------------------
                                                    (percentage of net sales)
<S>                                               <C>          <C>          <C>
VME                                                53%          56%          64%
WAN Adapter                                        30           31           31
LAN Adapter                                         5            0            0
Storage NIC                                         2            0            0
HighWire                                           10           13            5
                                                --------------------------------
                                                  100%         100%         100%
                                                ================================
</TABLE>

Distribution, Sales, and Marketing

We market  our WAN,  LAN,  storage,  and  intelligent  communication  controller
products to OEMs,  distributors  and systems  integrators.  We sell our products
both  domestically  and  internationally,  using a direct sales force as well as
independent  manufacturers'  representatives,  resellers,  and distributors.  We
believe that our direct sales force is well suited to differentiate our products
from  those of our  competitors.  Since our  products  represent  a complex  and
technical  sale,  our sales force is  supported  by  application  engineers  who
provide customers with pre-sale technical assistance.

Our internal  sales and  marketing  organization  supports our indirect  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  in  U.S.  dollars.
International  sales  constituted  12%,  13% and 9% of net sales in fiscal 2003,
2002 and 2001,  respectively.  International  sales are executed in U.S. dollars
and are principally transacted in Europe.

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

Research and Development

We believe  that  continued  research  and  development  in current and emerging
technologies is critical to maintaining our competitive position in the embedded
and enterprise  markets.  Many factors are involved in determining the strategic
direction of our product development focus, including trends and developments in
the  marketplace,  competitive  analyses,  and feedback  from our  customers and
strategic partners.  We actively support and contribute to standards development
organizations  and trade groups,  which define and promote existing and emerging
technologies for both the embedded and enterprise  arenas.  We belong to several
important industry  associations,  including VME International Trade Association
("VITA") and PCI Industrial Computers Manufacturers Group ("PICMG").


                                      -10-
<PAGE>

Our product development efforts are focused principally on our strategic product
lines,  providing high bandwidth connectivity and computing solutions that serve
a wide range of networking applications. Leveraging our experience in high-speed
data  communications  and  telecommunications  enables us to develop  integrated
communications  solutions for our customers.  We believe that the development of
new internetworking products,  high-performance  communications  controllers and
enabling  communications  software is essential to expanding our customer  base,
penetrating new markets, and retaining existing customers.

During the past four years, we have developed  communications  products based on
PCI,  CompactPCI,  PMC, PTMC,  and  HyperTransport  architectures.  We have also
redesigned and upgraded certain communications products to take advantage of new
technologies offering improved product performance and lower costs. In addition,
we have acquired or licensed certain hardware products that have been integrated
principally through the addition of software into our product line.

During  fiscal 2003,  we continued  to focus on further  developing  our line of
standards-based  LAN  adapters,  designing  a custom LAN adapter  that  combines
Gigabit Ethernet and HyperTransport  technology,  enhancing functionality in our
current WAN adapter  products,  and developing  software drivers for our WAN and
LAN adapters. These hardware and software design efforts have enabled us to more
effectively target enterprise markets such as VoIP, VPN and security routers, as
well   as   expand    market    coverage    within    the    telecommunications,
military/government, medical and industrial control markets.

In  August  2003,  we  acquired  the  products  and   technologies   of  Antares
Microsystems, Inc. This acquisition added a full line of field-tested, PCI-based
Ethernet,  SCSI, and Fibre Channel products to our portfolio.  We are continuing
to focus on investments in next generation technologies,  such as TCP/IP Offload
Engine  ("TOE").   As  Ethernet   speeds   increase  and  end-user   performance
expectations  grow,  the need to maximize  bandwidth  and the  efficiency of the
connection is becoming  increasingly  important.  TOE is designed to offload CPU
processing  to  increase   application   performance  and  alleviate  networking
bottlenecks.

During fiscal 2003,  2002 and 2001,  we incurred $1.3 million,  $3.0 million and
$5.7 million, respectively, in product research and development expenses.

Commitment to Quality

We have been an ISO certified supplier of communications products since 1991. In
December  2001,  we achieved  certification  to the  internationally  recognized
ISO9001:  2000 Standard.  As part of our ongoing  commitment to quality,  we are
regularly  inspected by an audit team from Bureau Veritas Quality  International
(NA) Inc.  ("BVQI").  These audits ensure that our internal quality system meets
internationally recognized quality management systems standards. We believe that
our  customers'  success  depends on the delivery of  high-quality  products and
services.  Our adherence to ISO standards and resulting quality practices is our
way of guaranteeing that customer expectations are met and exceeded.


                                      -11-
<PAGE>

Manufacturing

We do not engage in any  manufacturing  activities.  Instead,  we utilize  third
party  manufacturers  to build our  products.  We currently  have  non-exclusive
manufacturing agreements with ProWorks, Inc. and Sonic Manufacturing Technology.
We believe  that  ProWorks  and Sonic  provide  more  cost-efficient  and timely
product delivery than could otherwise be obtained if we manufactured our product
internally.  The use of external  manufacturing partners allows us to respond to
fluctuations in customer demand.

Competition

The  market for  networking  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 is
fragmented  principally by application  segment.  Our HighWire  products compete
with offerings from Radisys Corp, Performance Technologies Inc, Interphase Corp,
Artesyn  Technologies  Inc,  and Adax,  along with  various  other  platform and
controller  product   providers.   Our  VMEbus,  WAN  adapter  and  LAN  adapter
communications  controller  products  compete  primarily with products from Digi
International  Inc, Motorola Inc,  Interphase  Corp.,  Themis Computers Inc, SBS
Technologies Inc and various other companies on a product-by-product  basis. Our
SCSI products compete with LSI Logic and Sun Microsystems Inc. Our Fibre Channel
products  compete with products from Qlogic Corp and Emulex Corp. To compete and
differentiate   ourselves  in  our  markets,  we  emphasize  the  functionality,
engineering  support,  quality  and  price of our  product  in  relation  to our
competitors,  as well as our  ability  to  customize  the  product  to meet  the
customer's needs.

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

Intellectual Property

We  believe  that  our  ability  to  innovate  in  product  engineering,  sales,
marketing, support, and customer relations, and then to protect this proprietary
technology and knowledge impacts our future success. 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  currently  hold four
patents for Ethernet and Fibre Channel products.  These patents for trunking and
failover are product  differentiators for our Gigabit Ethernet and Fibre Channel
products. We typically enter into confidentiality agreements with our employees,
strategic  partners,   channel  partners  and  suppliers,   and  enforce  strict
limitations and the access to our proprietary information.

Backlog

On October 31, 2003, we had a sales backlog of product  orders of  approximately
$4.1 million compared to a sales backlog of product orders of approximately $2.2
million one year ago. 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 filling our current backlog.


                                      -12-
<PAGE>

Employees

On December 31, 2003, we had 32 employees.  None of our employees is represented
by a labor union. We have experienced no work stoppages. We believe our employee
relations are good.

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

Risk Factors

Our  business is subject  to, but not  limited  to, the risks and  uncertainties
described below.

                          Risks Related to Our Business

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

In fiscal  2003,  most of our sales were  derived  from a limited  number of OEM
customers.  In  fiscal  2003,  2002  and  2001,  sales  of VME  products  to The
Hewlett-Packard  Company  (previously Compaq Computer) ("HP") accounted for 45%,
30% and 34%, respectively, of our net sales. A substantial portion of such sales
were  attributable  to sales of VME  products  pursuant  to a  long-term  supply
agreement  with HP that is no longer in effect.  We shipped  $1.6 million of VME
products  to HP over the  first  two  quarters  of fiscal  2003  pursuant  to an
end-of-life product  discontinuation  purchase order under such contract.  After
termination of the contract,  we received  additional orders for an aggregate of
$3.6 million of which $1.6 million was shipped in fiscal 2003 with the remaining
$2.0  million of these  orders for VME  products  to be shipped in the first two
fiscal quarters of fiscal 2004. We can provide no assurance that we will succeed
in obtaining new orders from existing or new customers  sufficient to replace or
exceed the net sales previously attributable to HP.

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,  would  have a  material  adverse  effect on our  operating  results,
financial  condition  and cash flows.  In addition,  we anticipate a significant
portion of future sales will be dependent on a few new OEM customers,  and there
can be no  assurance  that we will  become  a  qualified  supplier  with new OEM
customers  or that  we will  remain  a  qualified  supplier  with  existing  OEM
customers.


                                      -13-
<PAGE>

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

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

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

We have incurred  operating  losses in the past and may not be profitable in the
future.

The consolidated  financial statements contemplate the realization of assets and
the  satisfaction  of liabilities in the normal course of business.  Although we
had net  income  of  $563,000  for  fiscal  2003 and  have had five  consecutive
profitable  quarters,  we did incur net losses of $1.7  million and $9.9 million
for the years  ended  October  31, 2002 and 2001,  respectively,  and  generated
negative cash flows from operations of $84,000, $2.7 million and $1.5 million in
the years ended October 31, 2003, 2002 and 2001,  respectively.  We believe that
prior cost reductions and a projected  increase in sales during fiscal 2004 will
generate  sufficient cash flows to fund our operations through October 31, 2004.
However,  these  projected sales are to a limited number of new and existing OEM
customers  and are based on internal and customer  provided  estimates of future
demand, not firm customer orders. If the projected sales do not materialize,  we
will need to reduce expenses further and potentially  raise  additional  capital
through customer  prepayments or the issuance of debt or equity  securities.  If
additional  funds are raised  through the issuance of  preferred  stock or debt,
these securities could have rights, privileges or preferences senior to those of
Common Stock,  and debt covenants  could impose  restrictions on our operations.
The sale of equity  or debt  could  result in  additional  dilution  to  current
stockholders, and such financing may not be available to us on acceptable terms,
if at all.

Our operating  results in future  periods are likely to fluctuate  significantly
and may fail to meet the  expectations  of  securities  analysts  or  investors,
causing our stock price to fall.

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


                                      -14-
<PAGE>

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

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

If we  are  unable  to  keep  up  with  the  rapid  technological  changes  that
characterize our industry, our business would suffer.

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

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


                                      -15-
<PAGE>

We depend on our key personnel. If we are unable to retain our current personnel
and hire additional qualified personnel as needed, our business would be harmed.

We are highly dependent on the technical, management, marketing and sales skills
of a limited number of key employees. We do not have employment agreements with,
or life  insurance  on the lives of, any of our key  employees.  The loss of the
services of any key employee could  adversely  affect our business and operating
results.  Our future  success  will depend on our ability to continue to attract
and  retain  highly  talented  personnel  to  the  extent  our  business  grows.
Competition for qualified personnel in the networking  industry,  and in the San
Francisco  Bay  Area,  is  intense.  There can be no  assurance  that we will be
successful  in  retaining  our key  employees  or that we can  attract or retain
additional skilled personnel as required.

Because of our  dependence on single  suppliers for some  components,  we may be
unable to obtain an adequate supply of such components, or we may be required to
pay higher prices or to purchase components of lesser quality.

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

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

The engineering  development and marketing of our products is capital-intensive.
While we believe that our existing cash balances and our  anticipated  cash flow
from  operations  will  satisfy  our working  capital  needs for the next twelve
months, we cannot assure that this will be the case.  Declines in our sales or a
failure  to keep  expenses  in  line  with  revenues  could  require  us to seek
additional  financing  in fiscal  2004.  In  addition,  should we  experience  a
significant  growth in customer  orders,  we may be required to seek  additional
capital  to meet our  working  capital  needs.  There can be no  assurance  that
additional financing,  if required,  will be available on reasonable terms or at
all.  To the  extent  that  additional  capital  is raised  through  the sale of
additional  equity  or  convertible  debt  securities,   the  issuance  of  such
securities could result in additional dilution to our stockholders.

We may be unable to protect our  intellectual  property,  which could reduce any
competitive advantage we have.

Since we believe  that our future  success will depend  primarily on  continuing
innovation,  sales,  marketing and technical  expertise,  the quality of product
support and customer relations,  we must also protect the proprietary technology
contained  in our  products.  We  currently  hold  two  patents  and two  patent
applications,  and also rely on a  combination  of copyright,  trademark,  trade
secret laws and  contractual  provisions  to establish  and protect  proprietary
rights of 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.


                                      -16-
<PAGE>

               Risks Associated with Ownership of Our Common Stock

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

Our common stock is currently listed on the Nasdaq SmallCap  Market.  Nasdaq has
requirements  that a company  must meet in order to remain  listed on the Nasdaq
SmallCap Market.  These requirements  include  maintaining a minimum closing bid
price of $1.00 and minimum stockholders' equity of $2.5 million. The closing bid
price for our common stock has been below $1.00 for short periods of time during
fiscal  2003.  If the closing bid price of our common stock is below $1.00 for a
period of 30  consecutive  trading  days,  our common  stock could be subject to
delisting  from the  Nasdaq  SmallCap  Market.  Our  stockholders'  equity as of
October 31, 2003 was $5.4 million.

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

The market price of our common  stock is likely to continue to be volatile.  You
may not be able to  resell  your  shares  at or above  the  price  at which  you
purchased such shares.

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

Our certificate of incorporation and bylaws and the Delaware General Corporation
Law contain provisions that could delay or prevent a change in control.

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


                                      -17-
<PAGE>

ITEM 2. PROPERTIES

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

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

Additionally, through the acquisition of LAN Media Corp. in July 2000, we leased
approximately  3,650 square feet of office space in Sunnyvale,  California.  The
Sunnyvale lease expired without renewal in May 2003.

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 2003.

IDENTIFICATION OF EXECUTIVE OFFICERS

Our executive officers and their respective ages and positions as of October 31,
2003 are set  forth in the  following  table.  Executive  officers  serve at the
discretion  of the  board of  directors.  There  are no  familial  relationships
between  our  directors  or our  executive  officers  and any other  director or
executive officer.

Name                   Age          Position
--------------------------------------------------------------------------------

William B. Heye, Jr.   65           President and Chief Executive Officer

David W. Brunton       53           Vice President, Finance, Chief Financial
                                    Officer, Treasurer and Secretary

Daniel Grey            48           Senior Vice President, Sales and Marketing

Carl Munio             53           Vice President, Engineering

Kirk Anderson          44           Vice President, Operations

Yee-Ling Chin          28           Vice President, Marketing


                                      -18-
<PAGE>

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

Mr.  Brunton  joined  us in  November  2001 as Vice  President,  Finance,  Chief
Financial Officer,  Secretary and Treasurer.  From 2000 to 2001 he was the Chief
Financial  Officer for NetStream,  Inc., a telephony  broadband  network service
provider.  From 1997 to 2000,  Mr. Brunton was the Chief  Financial  Officer and
Senior Vice President - Operations for ReSourcePhoenix.com, a financial services
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 who prior to 1987 was with Arthur Andersen & Co.

Mr. Grey has served as Senior Vice President Sales and Marketing since May 2001.
For the 18 months  prior to SBE, he was the Senior Vice  President  of Sales for
SBS  Technologies.  From 1999 to 2000,  Mr. Grey was Vice President of Sales for
LAN Media Corporation, a company later acquired by SBE. Mr. Grey was the Western
Regional Sales Manager from 1996 to 1999 for Performance Technologies, Inc. From
1989 to 1996, Mr. Grey served as the Director of Western Sales for SBE.

Mr.  Munio  joined SBE in August 2003  following  SBE's  acquisition  of Antares
Microsystems.  From 1996 to August  2003,  Mr.  Munio served as CTO for Antares,
where he drove product developments in emerging and existing technologies. Prior
to joining  Antares,  he was Director of Operations  Product  Engineering at Sun
Microsystems for over 11 years, and served in a variety of management  positions
during a 12-year tenure at Hewlett-Packard.

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

Ms. Chin joined us in July 2003 as Vice President, Marketing. From 1998 to 2003,
she served as Director of Marketing Communications for SBS Technologies.


                                      -19-
<PAGE>

                                     PART II

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

Our common stock is quoted on the Nasdaq  SmallCap Market under the symbol SBEI.
The following  table  presents  quarterly  information on the price range of our
common  stock,  indicating  the high and low bid prices  reported  by the Nasdaq
SmallCap  Market.  These  prices do not include  retail  markups,  markdowns  or
commissions.  As of December 31, 2003, there were  approximately  409 holders of
record of our common stock.

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.

                                               Fiscal quarter ended
                               -------------------------------------------------
Fiscal 2003                    January 31   April 30      July 31     October 31
--------------------------------------------------------------------------------
    High                         $1.26        $0.95        $2.99        $6.00
    Low                           0.56         0.64         0.77         2.42
Fiscal 2002
    High                         $1.43        $2.35        $2.18        $1.50
    Low                           0.49         1.15         1.21         0.80

The following table includes information regarding our equity incentive plans as
of the end of fiscal 2003.

                      Equity Compensation Plan Information

<TABLE>
<CAPTION>
                                                                                           Number of securities
                                                                                         remaining available for
                                Number of securities to     Weighted-average exercise     future issuance under
                                be issued upon exercise       price of outstanding      equity compensation plans
                                of outstanding options,         options, warrants         (excluding securities
Plan category                     warrants and rights              and rights            reflected in column (a))
-------------                     -------------------              ----------            ------------------------
                                          (a)                          (b)                         (c)
<S>                                   <C>                             <C>                        <C>
Equity compensation plans
   approved by security
   holders                            1,043,754                       $2.88                      273,964
Equity compensation plans
   not approved by security
   holders                              792,180                       $2.64                        3,939
                                      ---------                       -----                      -------
   Total                              1,835,934                       $2.78                      175,717
                                      =========                       =====                      =======
</TABLE>


                                      -20-
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

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

<TABLE>
<CAPTION>
For years ended October 31,
and at October 31                         2003       2002        2001        2000        1999
----------------------------------------------------------------------------------------------
(in thousands, except for per share amounts and number of employees)
<S>                                      <C>        <C>         <C>         <C>        <C>
Net sales                                $ 7,456    $ 6,898     $ 7,726     $29,178    $19,854

Net income (loss)                        $   563    $(1,731)    $(9,896)    $ 3,970    $  (254)

Net income (loss) per share - basic      $  0.13    $ (0.46)    $ (2.92)    $  1.24    $ (0.08)

Net income (loss) per share - diluted    $  0.12    $ (0.46)    $ (2.92)    $  1.04    $ (0.08)

Product research and development         $ 1,330    $ 3,027     $ 5,652     $ 5,635    $ 5,167

Working capital                          $ 3,945    $ 2,985     $ 7,595     $11,793    $ 7,191

Total assets                             $ 6,975    $ 5,321     $10,690     $17,427    $11,264

Long-term liabilities                    $   217    $    10     $ 4,870     $   288    $   503

Stockholders' equity                     $ 5,387    $ 3,696     $ 4,119     $13,829    $ 8,636

Number of employees                           32         24          47          87         72
</TABLE>

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

SBE, Inc. architects and provides network communications  solutions for original
equipment  manufacturers  ("OEM")  in both  the  embedded  and  enterprise-level
information  technology ("IT") computing markets. Our solutions enable both data
communications and telecommunications  companies in addition to enterprise class
high-end  server  clients to rapidly  deliver  advanced  networking  and storage
products and services.  The addition of the Antares  product line in August 2003
enables us to  introduce an  impressive  collection  of WAN,  LAN,  SCSI,  Fibre
Channel,  and carrier  cards  across  both the  enterprise  server and  embedded
markets.  Our products  with Linux and Solaris  drivers and software now include
wide area network  ("WAN") and local area network  ("LAN")  interface  adapters,
storage  network  interface  cards  ("NIC'S")  products  such as SCSI and  Fibre
Channel and high performance intelligent communications controllers for high-end
enterprise level servers, workstations, media gateways, routers, internet access
devices, home location registers and data messaging  applications.  Our products
are  distributed   worldwide   through  a  direct  sales  force,   distributors,
independent manufacturers' representatives and value-added resellers.


                                      -21-
<PAGE>

With  the  addition  of  Antares,   we  now  offer  an  increased  portfolio  of
field-tested  products of Ethernet,  SCSI,  Fibre  Channel,  and  specialty  I/O
adapter cards for the  Enterprise Sun and Linux  markets.  The Antares  products
have been  integrated  into a variety of  applications,  including  storage area
networks  and  mission-critical  data  centers.  We continue to operate  under a
single segment.

Our business is  characterized  by a concentration of sales to a small number of
OEMs and  distributors  who  provide  products  and  services to the datacom and
telecommunications  markets in addition  to the  enterprise  high-end  server IT
markets. Consequently, the timing of significant orders from major customers and
their product  cycles cause  fluctuation in our operating  results.  The Hewlett
Packard Company ("HP") is the largest of our customers and represented  45%, 30%
and 34% of net sales in fiscal 2003, 2002 and 2001, respectively.  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.

We shipped  $1.6  million of VME  products to HP over the first two  quarters of
fiscal 2003 pursuant to an  end-of-life  purchase  order under a product  supply
contract.  After termination of the contract,  we received additional orders for
$3.6 million of VME products. Of these new orders $1.6 million shipped in fiscal
2003 with the remaining  $2.0 million in VME products to be shipped in the first
two fiscal  quarters of fiscal 2004. We also signed a three year product support
agreement with HP with an annual fee of $135,000,  effective May 1, 2003,  which
stipulates that we will provide ongoing engineering and product warranty support
for the VME products  sold under the HP product  supply  contract.  We expect to
continue to sell our adapter products to HP.

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

In the year ended  October  31, 2003 we had nine new  "design  wins".  Since the
fourth  quarter  of  fiscal  2001 we have 22 new  design  wins and have  added a
substantial  number of new customers to our growing base of customers.  A design
win is defined as a program  with an OEM  customer  that will  generate at least
$400,000 in recurring  annual net sales  typically  within 12 to 18 months after
the customer  accepts and confirms the use of our product in their platform.  We
believe the  combination of new customers and design wins will provide the basis
for  future  sales  growth.   A  variety  of  risks  such  as  schedule  delays,
cancellations  and  changes in  customer  markets and  economic  conditions  can
adversely  affect a design win before or after  production is reached.  With the
current economic climate in the  communications  equipment  marketplace,  design
activity has slowed and reaching production volumes is proving to be elusive for
those products that have been designed.  In these difficult economic times, poor
customer visibility is causing ordering delays.  These factors often result in a
substantial portion of our net sales being derived from orders placed within the
quarter and shipped in the final month of the quarter.


                                      -22-
<PAGE>

We have taken aggressive  steps to reduce overall  operating costs over the past
two  years,  including  reducing  headcount,   relocating  our  engineering  and
headquarters  facilities and closing our office in Madison,  Wisconsin.  We have
begun to see a slight recovery in our markets and customers have been increasing
their  ordering  levels.  As a result we have begun to increase our headcount in
our  engineering  and  production  departments.  We  continue  to  focus on cost
containment and cash preservation and monitor our expense levels very closely.

On October 31, 2003, we had a sales backlog of product  orders of  approximately
$4.1 million compared to a sales backlog of product orders of approximately $2.2
million one year ago.

The market  environment  for our products is extremely  competitive  and we have
limited   visibility  into  customer   activity  due  to  the  downturn  in  the
communications equipment marketplace. In spite of this uncertain market, we have
been successful in selling and shipping our adapter and HighWire  products to 46
new customers during fiscal 2003. One of our primary sales goals is to diversify
our customer base and at the same time provide  sources of net sales to fill the
gap that will be left when HP makes its final  end-of-life  purchase  of our VME
products.

On June 27, 2003, to fund the cash portion of the  acquisition of certain assets
of Antares  Microsystems,  we  completed  a private  placement  of shares of our
common  stock and a warrant to purchase  common  stock  resulting  in gross cash
proceeds of  approximately  $550,000,  and on May 14, 2003,  we renewed our $1.0
million line of credit from a bank for one year.

Critical Accounting Policies and Estimates

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

Our critical accounting policies and estimates include the following:

Revenue Recognition

Our policy is to  recognize  revenue for product  sales when title  transfer and
risk of loss has passed to the customer, which is generally upon shipment of our
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 goods
("COGS") at the time of shipment. Our policy complies with the guidance provided
by  Staff  Accounting  Bulletin  No.  104,  "Revenue  Recognition  in  Financial
Statements",  issued by the  Securities and Exchange  Commission.  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  products  is
considered  incidental to our products.  We, therefore do not recognize software
revenue separately from the product sale.


                                      -23-
<PAGE>

Our agreements with OEMs , such as HP, Nortel Networks Corp and Lockheed Martin,
typically incorporate clauses reflecting the following understandings:

      -     all prices are fixed and determinable at the time of sale;
      -     title and risk of loss pass at the time of  shipment  (FOB  shipping
            point);
      -     collectibility  of the sales price is probable (the OEM is obligated
            to pay and such obligation is not contingent on the ultimate sale of
            the OEM's integrated solution);
      -     the OEM's obligation to us 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 twenty-five  percent 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  SBE products 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  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.
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, 2003, $191,000 or 0.3 % of our sales were sold
to distributors.

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.


                                      -24-
<PAGE>

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.

Inventories

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.

Inventories  are  stated at the lower of cost,  using  the  first-in,  first-out
method, or market value.

Acquisitions:

All business  acquisitions  have been accounted for using the purchase method of
accounting  and,  accordingly,  the  statements of income include the results of
each acquired  business since the date of  acquisition.  The assets acquired and
liabilities  assumed are recorded at estimates of fair values as  determined  by
management  based on  information  available.  Management  considers a number of
factors,  including  third-party  valuations  or  appraisals,  when making these
determinations.  We finalize the  allocation of purchase price to the fair value
of the  assets  acquired  and  liabilities  assumed  when we obtain  information
sufficient to complete the  allocation,  but in any case,  within one year after
acquisition.


                                      -25-
<PAGE>

As a result of  acquisitions,  we incur at the time of  acquisition  expenses to
exit  and  consolidate  activities  at the  acquired  companies'  locations,  to
involuntarily terminate employees,  and other costs. These acquisition expenses,
to the  extent  that  they are not  associated  with the  generation  of  future
revenues and have no future  economic  benefit were part of the purchase  price.
Acquisition   liabilities  for  the  above  items  totaled   $161,000  and  were
substantially complete by October 31, 2003.

Deferred Taxes

We record a valuation  allowance to reduce our deferred taxes to the amount that
is more  likely  than not to be  realized.  Based on the  uncertainty  of future
pre-tax income, we have fully reserved our deferred tax assets as of October 31,
2003.  In the event we were to  determine  that we would be able to realize  our
deferred tax assets in the future, an adjustment to the deferred tax asset would
increase income in the period such determination was made.

Results of Operations

The  following  table  sets  forth,  as  a  percentage  of  net  sales,  certain
consolidated  statements of  operations  data for the fiscal years ended October
31, 2003, 2002 and 2001. These operating results are not necessarily  indicative
of our operating results for any future period.

<TABLE>
<CAPTION>
                                                     Year Ended October 31,
                                                  ----------------------------
                                                  2003        2002        2001
                                                  ----        ----        ----
<S>                                                <C>         <C>         <C>
Net sales                                          100%        100%        100%
Cost of sales                                       37          46          63
                                                   ---         ---         ---
   Gross profit                                     63          54          37
Operating expenses:
   Product research and development                 18          44          73
   Sales and marketing                              20          31          40
   General and administrative                       23          34          42
   Loan reserve (benefit)                           (3)          7          --
   Restructuring costs (benefit)                    (2)          6          12
                                                   ---         ---         ---
    Total operating expenses                        56        (122)       (168)
                                                   ---         ---         ---
Operating income (loss)                              7         (68)       (131)
Forfeited deposit, net                              --          39          --
Interest  and other income                          --           2           3
                                                   ---         ---         ---
Income (loss) before income taxes                    7         (27)       (128)
Income tax benefit                                  --           2          --
                                                   ---         ---         ---
Net income (loss)                                    7%        (25)%      (128)%
                                                   ===         ===         ===
</TABLE>


                                      -26-
<PAGE>

Net Sales

Net sales for fiscal 2003 were $7.5  million,  an 8% increase  from $6.9 million
for fiscal 2002.  Net sales for fiscal 2002 were $6.9  million,  an 11% decrease
from  fiscal  2001.  The  increase in fiscal 2003 as compared to fiscal 2002 was
primarily  attributable to an increase in sales to HP. Net sales to HP were $3.4
million in fiscal  2003 as  compared  to $2.1  million  for fiscal 2002 and $2.6
million in fiscal 2001. Sales to HP,  primarily of VMEBus products,  represented
45% of net sales for fiscal 2003,  compared to 30% during fiscal 2002 and 34% in
fiscal 2001. A substantial  portion of such sales were  attributable to sales of
VME products  pursuant to a long-term supply agreement with HP that is no longer
in effect.  We shipped  $1.6  million of VME  products  to HP over the first two
quarters  of fiscal  2003  pursuant to an  end-of-life  product  discontinuation
purchase  order  under a  product  supply  contract.  After  termination  of the
contract,  we received  additional  orders for $3.6 million of VME products,  of
which $1.6  million was shipped in the second and third  quarters of fiscal 2003
with the remaining  $2.0 million to be shipped in the first two fiscal  quarters
of fiscal  2004.  No other  customer  represented  more than 10% of our sales in
fiscal  2003.  In the  previous  two years,  Lockheed  Martin was the only other
customer representing 10% or more of our sales,  accounting for 11% of net sales
in fiscal 2002 and 20% in fiscal 2001.  Antares  product sales from  acquisition
date, August 7, 2003 through October 31, 2003, were $459,000.

Sales of our adapter  products were $2.6 million for fiscal 2003, as compared to
$2.1  million  in fiscal  2002 and $2.0  million  in fiscal  2001.  Sales of our
HighWire  products were $0.8 million in fiscal 2003, as compared to $1.0 million
in fiscal  2002 and  $350,000 in fiscal  2001.  Our  adapter  products  are used
primarily in  edge-of-the-network  applications  such as VPN and other  routers,
Voice over Internet Protocol ("VoIP") gateways and security devices, whereas our
HighWire  products are primarily  targeted at  core-of-the-network  applications
used primarily by  telecommunications  central offices. In the future, we expect
our net sales to be  generated  predominantly  by sales of our adapter  products
with Linux and Solaris software,  followed by the Antares storage  products.  We
expect to see a continued  slowness in the sale of our Highwire  products due to
the  continued  downturn in the  communications  equipment  markets.  All of our
design wins and new customer are for applications  using these product families.
In addition,  we will continue to sell and support our older VME  products,  but
expect them to become a declining portion of our future net sales.

Due to the continued adverse economic conditions in the communications equipment
industry,  our  customers  have  cancelled  or delayed  many of their new design
projects  and  new  product  rollouts  that  included  our  products.  With  the
acquisition  of the  Antares  products,  we have  moved into the  enterprise  IT
market,  selling  storage and LAN adapter  products  directly to users through a
network of  distributors.  We anticipate that our net sales for fiscal 2004 will
increase  when  compared  with fiscal 2003, as we expect our customers to deploy
existing inventory and return to new product design and product rollout.  One of
our major challenges on a long term basis continues to be replacement of the net
sales of VME products previously provided by HP. HP (including its predecessors,
Tandem Computer and Compaq Computer), has accounted for a substantial portion of
our net sales for the past five years. The market environment for our customers'
activities  continues to be  uncertain.  However,  during  fiscal 2003,  we were
successful  in selling and shipping our WAN, LAN and storage  products to 46 new
customers in addition to extending  our reach  towards new customers by adding a
network of distributors and value-added  resellers in the United States,  Europe
and Asia.  Many of these new customers  are in the  beginning  stages of product
development,  but with their addition we have increased our base of customers to
an all time high. In addition,  since the fourth quarter of fiscal 2001, we have
added 22 new "design  wins." We believe the  combination  of new  customers  and
design wins will provide  future growth in net sales in the  communications  and
enterprise equipment marketplace.


                                      -27-
<PAGE>

Our sales backlog at October 31, 2003 was $4.1 million  compared to $2.2 million
at October 31, 2002.  While we  anticipate  an increase in our sales volume over
the  course  of fiscal  2004 as our  customers  deploy  existing  inventory  and
gradually  return to new  product  design and product  rollout,  there can be no
assurances that such increase will occur. Our customers  typically  operate on a
"just-in-time"  ordering  and  delivery  cycle  where they will place a purchase
order  with  us  after  they  receive  an  order  from  their   customer.   This
"just-in-time" inventory purchase cycle by our customers has made forecasting of
our  future  sales  volumes  very  difficult.  Because  our sales are  generally
concentrated  with  a  small  group  of  OEM  customers,   we  could  experience
significant  fluctuations  in our  quarterly  sales  volumes due to  fluctuating
demand from any major  customer or delay in the rollout of any  significant  new
product by a major customer.

International  sales  constituted  12%,  13% and 9% of net sales in fiscal 2003,
2002 and 2001,  respectively.  International  sales are executed in U.S. dollars
and are principally transacted in Europe.

Gross Profit

Gross profit as a  percentage  of net sales was 63%, 54% and 37% in fiscal 2003,
2002 and  2001,  respectively.  Gross  profit  in 2001  includes  the  effect of
inventory  write-downs  of $1.0  million.  The increase in the gross profit from
fiscal 2001 to fiscal 2002 was primarily  attributable  to lower materials costs
combined with a more  profitable  product mix in fiscal 2002.  Gross profit as a
percentage of sales  increased in fiscal 2003  primarily as a result of sales of
$409,000 of inventory to HP that had been fully written down in fiscal 2002 when
HP placed its final order for end-of-life  VME products under its  then-existing
contract. Our gross profit would have been 58% after excluding the effect of the
HP inventory write-down. We expect our gross profit to range between 54% and 57%
for  fiscal  2004  based  on our  current  product  sales  prices  and  cost  to
manufacturer those products. We expect our cost of goods to increase in 2004 due
to the addition of approximately  $102,000 of non-cash quarterly amortization of
the intellectual property acquired in the Antares transaction.  We will continue
to amortize this  intellectual  property at the rate of $102,000 per quarter for
the next 11 quarters.  However, if market and economic conditions,  particularly
in the  telecommunications  sector,  deteriorate or fail to recover as expected,
gross profit as a percentage of net sales may decline from the current level.

Product Research and Development

Product research and development expenses were $1.3 million in fiscal 2003, $3.0
million in fiscal 2002, and $5.7 million in fiscal 2001,  representing  18%, 44%
and 73% of net sales,  respectively.  The decrease in research  and  development
expense  as a  percentage  of  revenue  from  fiscal  2001 to  fiscal  2002  and
subsequently  to fiscal 2003 is the direct  result of  headcount  reductions  of
fifteen full-time equivalent personnel combined with other  project-related cost
containment  measures.  During  fiscal 2001,  we  emphasized  completion  of the
development programs for the HighWire product line and WAN product lines. During
fiscal 2002, we completed the HighWire  product line,  including the addition of
the embedded Linux operating system software,  and we added several new products
to our WAN adapter  line  designed  to expand and  enhance  the adapter  product
lines'  capabilities  at a reduced cost point. We also began work on the new LAN
adapter Gigabit Ethernet product line that was released to production in January
2003.  During  fiscal 2003, we focused on continued  development  of the growing
line of  standards-based  LAN  adapters,  designing  a custom LAN  adapter  that
combines Gigabit Ethernet and HyperTransport technology, enhancing functionality
on current WAN adapter products, and developing software drivers for our WAN and
LAN adapters. These hardware and software design efforts have enabled us to more
effectively target enterprise markets such as VoIP, VPN and security routers, as
well   as   expand    market    coverage    within    the    telecommunications,
military/government,   medical  and  industrial   control   markets.   With  the
acquisition of the Antares products in August 2003, we continued the development
of storage NIC's and the TOE products.


                                      -28-
<PAGE>

We expect  overall  spending for our product  research and  development to range
between  15% and 18% of net sales in fiscal 2004 as we remain  committed  to the
development and enhancement of new and existing products.  We did not capitalize
any internal software development costs in fiscal 2003, 2002 or 2001.

Sales and Marketing

Sales and marketing  expenses for fiscal 2003 were $1.5 million,  a 31% decrease
over fiscal 2002.  This decrease is primarily  related to lower headcount in the
marketing department for the majority of the year declining from three people to
one person in addition to reductions in travel,  sales  commissions  and product
marketing activities.  Fiscal 2002 expense was $2.2 million, a 31% decrease over
fiscal 2001.  Sales and  marketing  programs are focused on design wins with new
customers and,  therefore,  as new customer sales increase,  sales and marketing
expenses will increase. New customers' product design sales cycles may span over
periods as long as twenty-four months. During the latter part of fiscal 2003, we
hired a Vice President of Marketing in addition to hiring a product  manager and
technical  support  engineer in conjunction  with the acquisition of the Antares
products.  In addition,  our quarterly sales and marketing expenses increased by
10% to 20%  during  the last  quarter  of  fiscal  2003 as we began to renew our
product  market  efforts  with  trade  magazine   advertising   and  trade  show
attendance.  We expect our sales and marketing expenses to range between 16% and
18% of net  sales in  fiscal  2004 as we  continue  to  accelerate  our  product
marketing  efforts and attend an increasing  number of industry  specific  trade
shows.

General and Administrative

General and administrative expenses for fiscal 2003 decreased to $1.8 million, a
26% decrease over fiscal 2002.  The decrease was due to headcount  from eight to
five  individuals  and  expense  containment   measures,   primarily  rent,  and
depreciation, put into place in the fourth quarter of fiscal 2002, with the cost
savings fully  realized in fiscal 2003.  Fiscal 2002 expenses  decreased to $2.4
million from $3.3  million in fiscal 2001 or, 28%, as a result of headcount  and
expense containment measures.  We expect general and administrative  expense for
fiscal 2004 to  increase  slightly  from  fiscal  2003 levels  partly due to the
increase  in  insurance  and  other  general  operating  expenses.  General  and
administrative  expenses are expected to range  between 14% and 18% of sales for
fiscal 2004.

Loan Reserve (Benefit)

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


                                      -29-
<PAGE>

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 generally based on
the fair value of the common stock  securing the note as of October 31, 2002 and
the amount of the officer's personal assets considered likely to be available in
the future.  During the fourth  quarter of fiscal 2003, the officer sold 139,400
shares of our common stock and used the proceeds  from the stock sale to repay a
portion of the loan.  As a result of the fiscal 2003  payment,  we  recognized a
$235,000 benefit related to the reversal of the loan impairment  charge taken by
us in fiscal 2002. Subsequent to fiscal 2003, the officer sold additional shares
of our common stock in November  2003 and used the proceeds to pay the remaining
loan balance in full. As a result, we expect to reflect a benefit of $239,000 in
our results of operations  for the first quarter of fiscal 2004  resulting  from
the reversal of the remaining loan impairment charge.

Restructuring Costs (Benefit)

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

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

In the third quarter of fiscal 2003, we  recognized a  restructuring  benefit of
$154,000 after the final  settlement of costs  associated with prior real estate
and equipment leases.

As of October 31, 2003 and 2002, $58,000 and $249,000 of the restructuring costs
were included in other current liabilities, respectively.

Interest and Other Income

Interest and other  income in fiscal 2003  decreased  slightly  from 2002 due to
lower average cash  balances in fiscal 2003 coupled with lower average  interest
rates.  Fiscal  2002  income  decreased  slightly  from fiscal 2001 due to lower
average cash balances in fiscal 2001 coupled with lower average  interest rates.
A refundable  deposit  associated with a multi-year  supply agreement with HP of
$4.9  million was  received in April 2001.  This  deposit was  refundable  as we
delivered certain quantities of products to HP over a four year period ending in
2005.  The supply  contact  was  restructured  in fiscal 2002 to include a final
purchase order for $1.6 million of our products to be shipped to HP in the first
two quarters of fiscal 2003 and the forfeiture by HP of $4.4 million of the $4.9
million refundable deposit.  Under the agreement,  we are required to retain for
future  production or repair all VCOM finished  goods and spare parts  inventory
through  October 31, 2005 unless notified  otherwise by HP.  Concurrent with the
forfeiture of the $4.4 million refundable, we recorded a reserve of $1.7 million
related  inventory we held at October 31, 2002 but may not be able to sell.  The
$2.7 million of  forfeiture of  refundable  deposit net of inventory  reserve is
presented  under  Forfeited  deposit,   net  on  the  fiscal  2002  Consolidated
Statements of Operations.


                                      -30-
<PAGE>

Income Taxes

On March 9, 2002,  the  President of the United  States  signed into law the Job
Creation and Workers  Assistance  Act of 2002,  which  extends the net operating
loss carryback  from two to five years for losses  generated in tax years ending
in 2001 and 2002. As a result, we recorded a benefit for income taxes of $22,000
in the second quarter of fiscal 2003 and a tax benefit of $91,000 in fiscal 2002
due to a refund of federal  income  taxes  related to this Act.  The net benefit
recorded for the 2003 and 2002 periods were $17,000 and $177,000,  respectively.
In fiscal  2002 we also filed  amended  federal  and state tax  returns to claim
$86,000 in research and  development  credits  related to LAN Media  Corporation
("LMC"),  a company we acquired  in July 2000.  We recorded  tax  provisions  of
$1,000 in fiscal  2001.  Our  effective  tax rate was 0%,  (8)% and 0% in fiscal
2003, 2002 and 2001,  respectively.  We recorded a valuation allowance in fiscal
2003,  2002,  and  2001  for  deferred  tax  assets  due to the  uncertainty  of
realization.  In the event of future taxable  income,  our effective  income tax
rate in future periods could be lower than the statutory rate as such tax assets
are realized.

Net Income (Loss)

As a result of the factors  discussed  above, we recorded net income of $563,000
in fiscal 2003 compared to a net loss of $1.7 million in fiscal 2002,  and a net
loss of $9.9 million in fiscal 2001.

Contractual Obligations and Commercial Commitments

The following table sets forth a summary of our material contractual obligations
and commercial commitments as of October 31, 2003:

<TABLE>
<CAPTION>
                                      Payments due by period (Dollars in thousands)
                           -----------------------------------------------------------------
                                        Less than       1-3           3-5          More than
Contractual Obligations     Total        1 year        Years         Years         5 Years
-----------------------     -----        ------        -----         -----         ---------
<S>                        <C>           <C>           <C>           <C>             <C>
Building leases            $1,027        $  336        $  692        $   --          $   --
Equipment leases              116            39            77            --              --
                           ------        ------        ------        ------          ------
Total                      $1,143        $  375        $  769        $   --          $   --
                           ======        ======        ======        ======          ======
</TABLE>


                                      -31-
<PAGE>

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.  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

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

      -     actual versus anticipated sales of our products;
      -     our actual  versus  anticipated  operating  expenses  and results of
            ongoing cost control actions;
      -     the timing of product  shipments,  which occur primarily  during the
            last month of the quarter;
      -     our actual versus anticipated gross profit margin;
      -     our ability to raise additional capital, if necessary; and
      -     our ability to secure credit facilities, if necessary.

We had cash and cash equivalents of $1.4 million and $1.6 million on October 31,
2003 and October 31, 2002,  respectively.  In fiscal  2003,  $84,000 of cash was
used  by  operating  activities,  primarily  as  a  result  of  a  reduction  in
liabilities  and other  current  assets  coupled  with an  increase in our trade
accounts receivable. The decrease in other current liabilities was primarily the
result of the $447,000  payment to HP related to the  long-term  product  supply
agreement cancellation.  The decrease in inventory is reflective of our focus on
just-in-time  inventory  practices  where we  place  orders  with  our  contract
manufacturers as we receive purchase orders from our customers.  The increase in
trade  accounts  receivable  is due to an  increase  in sales  during the fourth
quarter of fiscal 2003 as compared to the third fiscal quarter combined with the
fact that the  majority of product  shipments  occurred in the last month of the
quarter.  Working capital  (current assets less current  liabilities) at October
31, 2003 was $4.0 million, as compared to $3.0 million at October 31, 2002.

In fiscal 2003, we purchased $172,000 of fixed assets,  consisting  primarily of
computers and  engineering  equipment.  Purchased  software  costs  amounting to
$48,000 were  capitalized  in fiscal  2003.  We expect to increase our levels of
capital  expenditures  in  fiscal  2004 in order  to  purchase  test and  design
equipment upgrades.

We  received  $12,000  in fiscal  2003 from  payments  related  to common  stock
purchases  made by employees  pursuant to the employee  stock  purchase plan. On
June 27,  2003,  we completed a private  placement  of 500,000  shares of common
stock at $1.10 per share,  plus a warrant to  purchase  50,000  shares of common
stock,  resulting  in gross cash  proceeds  of  approximately  $550,000  and net
proceeds after offering  expenses of approximately  $464,000.  The proceeds from
this private  placement were used to fund the acquisition of certain assets from
Antares discussed below.


                                      -32-
<PAGE>

On October 9, 2003 we received cash proceeds of $222,222 from  Stonestreet  L.P.
for the  purchase of 111,111  shares of our Common  Stock  pursuant to a warrant
they  received  in  conjunction  with  a  private   placement  of  common  stock
transaction that was completed in fiscal 2002.

During the fourth  quarter of fiscal  2003,  an  officer  and  shareholder  sold
139,400  shares of our common stock and used the proceeds from the stock sale to
repay  $362,800  of an  outstanding  $743,800  loan we made to the  officer.  In
November  2003,  we received an  additional  loan payment of $142,000 from stock
that was sold prior to October 31, 2002.  The officer sold an additional  43,100
shares of our common stock in November 2003 and used proceed  totaling  $381,000
to repay the remaining loan balance in full.

On August 7,  2003,  we  purchased  substantially  all of the  assets of Antares
Microsystems,  Inc., a California  corporation  ("Antares"),  excluding cash and
accounts  receivable,  from the Assignee for the Benefit of Creditors of Antares
("Assignee")  for a purchase  price of $75,000  in cash plus  $582,000  in costs
associated with the payment of certain loan guarantees,  legal fees,  accounting
fees,  broker fees,  contract  transfer fees and moving expenses and $211,000 in
cash to the selling shareholders of Antares. We also issued 90,628 shares of our
common  stock with a market  value at the time of issuance of $259,000 to one of
the selling  shareholders  and  committed to issue  98,945  shares of our common
stock,  with a value of  $283,000  at the time of the  purchase  of Antares  was
completed,  in 20,000 share increments  beginning  January 2004 and ending March
2005 to a selling shareholder of Antares.

We did not assume any of the liabilities associated with Antares. In connection
the acquisition,  we hired certain employees of Antares in order to continue the
development of the Antares TCP/IP Offload Engine ("TOE") technology, which is in
the developmental  stage, and other products of Antares. The TOE base technology
is being readied for commercial  development.  In the event TOE is  successfully
completed and commercialized, we have committed to make certain payments of cash
and/or  stock as  bonuses  to  certain  of these  employees  as sales of the TOE
products occur.

On May 13, 2003, we renewed our working capital line of credit for twelve months
until May 14, 2004. The credit line is secured by a first lien on all our assets
and carries a floating  annual  interest  rate equal to the bank's prime rate of
4.00%, at October 31, 2003, plus 1.50%.  Draw-downs on the credit line are based
on a formula equal to 80% of our domestic accounts receivable. As of October 31,
2003,  we are in  compliance  with all the covenants of our credit line and have
not drawn down on this line of credit.

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

We realized significant reductions in our operating expenses due to management's
implementation  of a program of  controlled  spending  and  headcount  reduction
initially  instituted  in mid-fiscal  2001 and  continued  into fiscal 2002 with
additional headcount and cost reductions. With these reductions and the addition
of the ongoing  operational  costs  associated  with the purchase of the Antares
assets,  our future quarterly  operational cash flow breakeven point is expected
to be $2.2 million to $2.4 million in net sales at an expected 55% gross margin.
We believe the cost  reduction  and a projected  increase in sales during fiscal
2004 will generate  sufficient cash flows to fund our operations through October
31, 2004 and beyond. However, our projected sales are to a limited number of new
and existing  OEM  customers  and are based on internal  and  customer  provided
estimates of future demand,  not firm customer orders. If the projected sales do
not  materialize,  we will need to reduce expenses  further and raise additional
capital  through  customer  prepayments  or  the  issuance  of  debt  or  equity
securities.  If  additional  funds are raised  through the issuance of preferred
stock or debt,  these  securities  could have rights,  privileges or preferences
senior  to  those  of  our  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.


                                      -33-
<PAGE>

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, 2003 were analyzed to determine their  sensitivity to interest rate changes.
The fair values of these  instruments were determined by net present values.  In
our  sensitivity  analysis,  the same change in  interest  rate was used for all
maturities and all other factors were held constant. If interest rates increased
by 10%,  the  expected  effect on net income  (loss)  related  to our  financial
instruments would be immaterial. We hold no assets or liabilities denominated in
a foreign currency.

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

      (a) Evaluation of Disclosure Controls and Procedures

      An evaluation as of October 31, 2003 was carried out under the supervision
of and  with  the  participation  of the  Company's  management,  including  the
Company's  Chief  Executive  Officer  and  Chief  Financial   Officer,   of  the
effectiveness of the design and operation of the Company's  "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 (the "Exchange Act") is recorded, processed, summarized and
reported within required time periods. Based upon that evaluation, the Company's
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective.


                                      -34-
<PAGE>

      (b) Changes in Internal Controls over Financial Reporting

      The Company's management,  including the Company's Chief Executive Officer
and Chief Financial Officer, has evaluated any changes in the company's internal
control over financial  reporting that occurred during the quarter ended October
31, 2003,  and has  concluded  that there was no change during such quarter that
has  materially  affected,  or is reasonably  likely to materially  affect,  the
Company's internal control over financial reporting.


                                      -35-
<PAGE>

                                    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. The information required by Item 10 concerning our directors
is  incorporated  by  reference  from the  information  in the section  entitled
"Election of Directors"  appearing in our definitive Proxy Statement to be filed
with  the  Securities  and  Exchange   Commission  for  the  Annual  Meeting  of
Stockholders  scheduled  for March 16,  2004 (the "2004 Proxy  Statement").  The
information  required by Item 10 concerning  the  compliance of certain  persons
with the beneficial ownership reporting requirements of Section 16(a) of the Act
is  incorporated  by  reference  from the  information  in the section  entitled
"Compliance  with  Section  16(a) of the  Securities  and  Exchange Act of 1934"
appearing  in the 2004 Proxy  Statement.  The  information  required  by Item 10
concerning  the  disclosure  of the  existence of an audit  committee  financial
expert  sitting on the Audit  Committee is  incorporated  by reference  from the
information in the section entitled "Audit Committee Financial Expert" appearing
in the 2004 Proxy Statement.  The information required by Item 10 concerning the
adoption of a code of ethics is  incorporated  by reference from the information
in the section entitled "Code of Ethics" appearing in the 2004 Proxy Statement.

ITEM 11. EXECUTIVE COMPENSATION

The  information  required  by Item 11 is  incorporated  by  reference  from the
information in the section entitled  "Executive  Compensation"  appearing in the
2004 Proxy Statement.

ITEM 12. SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND  MANAGEMENT AND
         RELATED STOCKHOLDER MATTERS

The  information  required  by  Item  12 is  found  under  the  heading  "Equity
Compensation  Plan  Information"  in  Item 5 of this  report  and  otherwise  is
incorporated by reference from the information in the section entitled "Security
Ownership of Certain  Beneficial  Owners and  Management"  appearing in the 2004
Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The  information  required  by Item 13 is  incorporated  by  reference  from the
information  in the sections  entitled  "Certain  Transactions"  and  "Executive
Compensation" appearing in the 2004 Proxy Statement.


                                      -36-

<PAGE>

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

The following documents are filed as part of this Report:

(a)(1) Financial Statements

                                                                            Page
                                                                            ----

       Report of Independent Accountants                                      43

       Report of Independent Accountants                                      44

       Consolidated Balance Sheets at October 31, 2003 and 2002               45

       Consolidated Statements of Operations for fiscal years 2003, 2002
          and 2001                                                            46

       Consolidated Statements of Stockholders' Equity for fiscal years 2003,
          2002 and 2001                                                       47

       Consolidated Statements of Cash Flows for fiscal years 2003, 2002
          and 2001                                                            48

       Notes to Consolidated Financial Statements                             49

(a)(2) Financial Statement Schedule

       Schedule II-- Valuation and Qualifying Accounts                        70

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

(a)(3) List of Exhibits

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

2.1(1)        Asset Purchase Agreement dated August 8, 2003, by and between D.R.
              Barthol & Company and SBE, Inc.

3.1(2)        Certificate  of  Incorporation,  as amended  through  December 15,
              1997.

3.2(3)        Bylaws, as amended through December 8, 1998.

10.1(4)*      1996 Stock Option Plan, as amended.


                                      -37-
<PAGE>

10.2(4)*      1991 Non-Employee Directors' Stock Option Plan, as amended.

10.3(4)       1992 Employee Stock Purchase Plan, as amended.

10.4(4)       1998 Non-Officer Stock Option Plan as amended.

10.5(5)       Lease for 4550 Norris  Canyon Road,  San Ramon,  California  dated
              November 2, 1992 between the Company and PacTel Properties.

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

10.7(4)*      Full Recourse  Promissory Note executed by William B. Heye, Jr. in
              favor of the  Company  dated  November  6, 1998,  as  amended  and
              restated on December 14, 2001.

10.8(4)+      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

10.9(7)       Stock  subscription  agreement and warrant to purchase  111,111 of
              SBE, Inc.  Common Stock dated April 30, 2002 between SBE, Inc. and
              Stonestreet Limited Partnership.

10.10(8)      Amendment  dated August 22, 2002 to stock  subscription  agreement
              dated April 20, 2002 between SBE, Inc. and Stonestreet LP.

10.11(9)      Securities Purchase  Agreement,  dated July 27, 2003, between SBE,
              Inc. and  purchasers of SBE's common stock  thereunder,  including
              form of warrant issued thereunder

10.12(9)      Form of  warrant  issued to  associates  of  Puglisi & Co.  ($1.50
              exercise price)

10.13(9)      Form of warrant  issued to  associates of Puglisi & Co. ($1.75 and
              $2.00 exercise price)

23.1          Consent of BDO Seidman LLP, Independent Accountants

23.2          Consent of PricewaterhouseCoopers LLP, Independent Accountants

31.1          Certification of Chief Executive Officer

31.2          Certification of Chief Financial Officer

32.1          Certification  of Chief  Executive  Officer  pursuant to 18 U.S.C.
              Section  1350,   as  adopted   pursuant  to  Section  906  of  the
              Sarbanes-Oxley Act of 2002

32.2          Certification  of Chief  Financial  Officer  pursuant to 18 U.S.C.
              Section  1350,   as  adopted   pursuant  to  Section  906  of  the
              Sarbanes-Oxley Act of 2002

                                      -38-
<PAGE>

----------
*     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 Current  Report on Form 8-K,  dated  April 30, 2002
      and incorporated herein by reference.

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

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

(4)   Filed as an  exhibit  to Annual  Report  on Form  10-K for the year  ended
      October 31, 2002 and incorporated herein by reference.

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

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

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

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

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


                                      -39-
<PAGE>


(b)      Reports on Form 8-K

On August 14, 2003, we filed a Form 8-K to report our earnings for the three and
nine months ended July 31, 2003.

On August 14, 2003, we filed a Form 8-K to report that effective as of August 7,
2003,  we  purchased  substantially  all of the assets of Antares  Microsystems,
Inc.,  a  California  corporation  ("Antares"),   excluding  cash  and  accounts
receivables, from D.R. Barthol & Company ("Barthol") as Assignee for the Benefit
of Creditors of Antares for a purchase  price of $75,000 in cash plus other cash
payments of $598,000 and non-cash consideration of $542,000.

The amount of consideration we paid in connection with the asset acquisition was
determined by arms length negotiation among the parties.  The purchase price for
the  assets  was  funded by SBE from  working  capital.  There  was no  material
relationship between Barthol or Antares and us or any of our affiliates,  any of
our directors or officers, or any associate of any such director or officer.

Antares had used the assets  acquired to develop,  market and sell  Ethernet and
SCSI products.  We will continue to use the assets acquired for these or similar
purposes.

(c)      Exhibits Required by Item 601

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

(d)      Financial Statements

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


                                      -40-
<PAGE>

                                   SIGNATURES

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


                                     SBE, Inc.


Date:  January 23, 2004              By: /s/ William B. Heye, Jr.
                                         -------------------------------------
                                         William B. Heye, Jr.
                                         Chief Executive Officer and President
                                         (Principal Executive Officer)


Date:  January 23, 2004              By: /s/ David W. Brunton
                                         -------------------------------------
                                         David W. Brunton
                                         Chief Financial Officer,
                                         Vice President, Finance and Secretary
                                         (Principal Financial and Accounting
                                         Officer)


                                POWER OF ATTORNEY

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

         Pursuant to the requirements  for the Securities  Exchange Act of 1934,
this  report  has  been  signed  by the  following  persons  in  the  capacities
indicated, as of January 23, 2004.


                                      -41-
<PAGE>

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

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


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


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


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


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


/s/ Marion M. Stuckey                   Director
---------------------------------
Marion M. Stuckey


                                      -42-
<PAGE>

               Report of Independent Certified Public Accountants

Board of Directors
SBE, Inc.
San Ramon, California

We have audited the accompanying  consolidated  balance sheet of SBE, Inc. as of
October   31,  2003  and  the  related   consolidated   statements   of  income,
stockholders'  equity,  and cash  flows  for the year then  ended.  We have also
audited  the  schedules  listed  in  the  accompanying  index.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audit.

We conducted our audit in accordance with auditing standards  generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the  financial  position of SBE, Inc. as of
October 31, 2003,  and the results of its  operations and its cash flows for the
year then ended in conformity with accounting  principles  generally accepted in
the United States of America.

Also, in our opinion,  the schedules present fairly,  in all material  respects,
the information as set forth therein.


/s/  BDO Seidman, LLP

December 8, 2003
San Francisco, California


                                      -43-
<PAGE>

                        Report of Independent Accountants

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

In our opinion,  the  consolidated  balance sheet as of October 31, 2002 and the
related  consolidated  statements of operations,  stockholders'  equity and cash
flows for each of the two years in the period ended October 31, 2002  (appearing
on pages 45  through 48 of the SBE,  Inc.  Annual  Report on Form 10-K)  present
fairly, in all material respects, the financial position,  results of operations
and cash flows of SBE,  Inc.  and its  subsidiaries  at October 31, 2002 and for
each of the two years in the period ended October 31, 2002,  in conformity  with
accounting  principles  generally  accepted in the United States of America.  In
addition,  in our opinion,  the financial statement schedule listed in the index
appearing  under Item  15(a)(2)  on page 37  presents  fairly,  in all  material
respects,  the information relating to the years ended October 31, 2001 and 2002
set  forth  therein  when  read in  conjunction  with the  related  consolidated
financial  statements.   These  financial  statements  and  financial  statement
schedule are the responsibility of the Company's management;  our responsibility
is to express an opinion on these financial  statements and financial  statement
schedule  based on our audits.  We conducted  our audits of these  statements in
accordance with auditing  standards  generally  accepted in the United States of
America,  which require that we plan and perform the audit to obtain  reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the  amounts  and  disclosures  in  the  financial  statements,   assessing  the
accounting  principles  used and significant  estimates made by management,  and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for our opinion.

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


/s/  PricewaterhouseCoopers LLP

San Francisco, California
January 13, 2003


                                      -44-
<PAGE>

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

<TABLE>
<CAPTION>
October 31                                                                                2003             2002
------------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>              <C>
ASSETS

Current assets:
    Cash and cash equivalents                                                           $  1,378         $  1,582
    Trade accounts receivable, net of allowance for
       doubtful accounts of $90 and $93 as of October 31, 2003
       2002, respectively                                                                  1,818              888
    Inventories                                                                            1,880            1,910
    Other                                                                                    240              220
                                                                                        --------         --------
             Total current assets                                                          5,316            4,600
                                                                                        ========         ========

Property and equipment, net                                                                  389              533
Capitalized software costs, net                                                              120              110
Intellectual property, net                                                                 1,122               --
Other                                                                                         28               78
                                                                                        --------         --------

             Total assets                                                               $  6,975         $  5,321
                                                                                        ========         ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Trade accounts payable                                                              $    696         $    488
    Accrued payroll and employee benefits                                                    184              159
    Current portion of refundable deposit                                                     --              447
    Other                                                                                    491              521
                                                                                        --------         --------
             Total current liabilities                                                     1,371            1,615

Other long term liabilities                                                                  217               10
                                                                                        --------         --------

                  Total liabilities                                                        1,588            1,625
                                                                                        --------         --------

Commitments  (Notes 7 and 8)

Stockholders' equity:
    Convertible preferred stock:
             ($0.001 par value) authorized  2,000,000 shares; none
              outstanding at October 31, 2003 and 2002                                        --               --
    Common stock and additional paid-in capital
         ($0.001 par value);  authorized 10,000,000 shares; issued 4,808,650 and
         4,137,612 shares at October 31, 2003 and 2002, respectively (including
         treasury shares:  79,500 at October 31, 2002)                                    15,302           14,711
    Note receivable from stockholder                                                        (142)            (270)
    Treasury stock                                                                            --             (409)
    Retained  deficit                                                                     (9,773)         (10,336)
                                                                                        --------         --------

                  Total stockholders' equity                                               5,387            3,696
                                                                                        --------         --------

                  Total liabilities and stockholders' equity                            $  6,975         $  5,321
                                                                                        ========         ========
</TABLE>

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

                                      -45-

<PAGE>

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

<TABLE>
<CAPTION>
For the years ended October 31                     2003             2002             2001
-------------------------------------------------------------------------------------------
<S>                                             <C>              <C>              <C>
Net sales                                       $  7,456         $  6,898         $  7,726
Cost of sales                                      2,749            3,170            4,860
                                                --------         --------         --------

      Gross profit                                 4,707            3,728            2,866
                                                --------         --------         --------

Product research and development                   1,330            3,027            5,652
Sales and marketing                                1,484            2,151            3,105
General and administrative                         1,752            2,364            3,265
Shareholder note valuation (benefit)                (235)             474               --
Restructuring costs (benefit)                       (154)             446              964
                                                --------         --------         --------

      Total operating expenses                     4,177            8,462           12,986
                                                --------         --------         --------

      Operating income (loss)                        530           (4,734)         (10,120)

Interest income                                       26               51              225
Forfeited deposit, net                                --            2,712               --
Other income (expense)                               (10)              63               --
                                                --------         --------         --------

      Income (loss) before income taxes              546           (1,908)          (9,895)

Benefit (provision) for income taxes                  17              177               (1)
                                                --------         --------         --------

Net income (loss)                               $    563         $ (1,731)        $ (9,896)
                                                ========         ========         ========


Basic earnings (loss) per common share          $   0.13         $  (0.46)        $  (2.92)
                                                ========         ========         ========

Diluted earnings (loss) per common share        $   0.12         $  (0.46)        $  (2.92)
                                                ========         ========         ========

Basic - Shares used in per share
      computations                                 4,259            3,759            3,390
                                                ========         ========         ========

Diluted - Shares used in per share
      computations                                 4,709            3,759            3,390
                                                ========         ========         ========
</TABLE>

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

                                      -46-
<PAGE>

SBE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except shares)

<TABLE>
<CAPTION>
                                                                              Convertible                    Common Stock and
                                                                            Preferred Stock             Additional Paid-in Capital
                                                                        Shares           Amount           Shares          Amount
                                                                      ---------        ---------        ---------       ---------
<S>                                                                   <C>              <C>              <C>             <C>
Balance, October 31, 2000                                                    --        $      --        3,389,336       $  13,855
Stock issued in connection with stock option plans                           --               --           99,054              51
Stock issued in connection with stock purchase plan                          --               --           32,645             109
Forfeiture of unvested stock options                                         --               --               --            (138)
Amortization of deferred stock compensation                                  --               --               --              --
Net loss                                                                     --               --               --              --
                                                                      ---------        ---------        ---------       ---------
Balance, October 31, 2001                                                    --               --        3,521,035          13,877
Stock issued in connection with stock purchase plan                          --               --           47,596              31
Stock and warrant issued in connection with private placement                --               --          555,556             782
Stock issued to Directors in lieu of cash payments                           --               --           13,425              21
Valuation allowance on note receivable from officer                          --               --               --              --
Net loss                                                                     --               --               --              --
                                                                      ---------        ---------        ---------       ---------
Balance, October 31, 2002                                                    --               --        4,137,612          14,711
                                                                      ---------        ---------        ---------       ---------
Stock issued in connection with stock purchase plan                          --               --           11,012              12
Stock and warrant issued in connection with private placement                --               --          500,000             464
Stock issued to Directors in lieu of cash payments                           --               --           37,787              43
Stock issued in connection with the acquisition of Antares                                                 90,628             259
Stock issued in connection with warrant exercise                                                          111,111             222
Retirement of treasury stock                                                                              (79,500)           (409)
Reversal of valuation allowance on note receivable from officer              --               --               --              --
Net income                                                                   --               --               --              --
                                                                      ---------        ---------        ---------       ---------
Balance, October 31, 2003                                                    --        $      --        4,808,650       $  15,302
                                                                      =========        =========        =========       =========
</TABLE>

<TABLE>
<CAPTION>
                                                                         Note
                                                                      Receivable                                         Deferred
                                                                         from               Treasury Stock              Stock-Based
                                                                      Stockholder        Shares          Amount        Compensation
                                                                      -----------       --------        --------       ------------
<S>                                                                    <C>                <C>           <C>              <C>
Balance, October 31, 2000                                              $   (744)          79,500        $   (409)        $   (164)
Stock issued in connection with stock option plans                           --               --              --               --
Stock issued in connection with stock purchase plan                          --               --              --               --
Forfeiture of unvested stock options                                         --               --              --              138
Amortization of deferred stock compensation                                  --               --              --               26
Net loss                                                                     --               --              --               --
                                                                       --------         --------        --------         --------
Balance, October 31, 2001                                                  (744)          79,500            (409)              --
Stock issued in connection with stock purchase plan                          --               --              --               --
Stock and warrant issued in connection with private placement                --               --              --               --
Stock issued to Directors in lieu of cash payments                           --               --              --               --
Valuation allowance on note receivable from officer                         474               --              --               --
Net loss                                                                     --               --              --               --
                                                                       --------         --------        --------         --------
Balance, October 31, 2002                                                  (270)          79,500            (409)              --
                                                                       --------         --------        --------         --------
Stock issued in connection with stock purchase plan                          --               --              --               --
Stock and warrant issued in connection with private placement                --               --              --               --
Stock issued to Directors in lieu of cash payments                           --               --              --               --
Stock issued in connection with the acquisition of Antares
Stock issued in connection with warrant exercise
Retirement of treasury stock                                            (79,500)             409
Reversal of valuation allowance on note receivable from officer             128               --              --               --
Net income                                                                   --               --              --               --
                                                                       --------         --------        --------         --------
Balance, October 31, 2003                                              $   (142)              --        $     --         $     --
                                                                       ========         ========        ========         ========
</TABLE>

<TABLE>
<CAPTION>
                                                                       Retained
                                                                       Earnings
                                                                     (Accumulated
                                                                       deficit)          Total
                                                                       --------         --------
<S>                                                                    <C>              <C>
Balance, October 31, 2000                                              $  1,291         $ 13,829
Stock issued in connection with stock option plans                           --               51
Stock issued in connection with stock purchase plan                          --              109
Forfeiture of unvested stock options                                         --               --
Amortization of deferred stock compensation                                  --               26
Net loss                                                                 (9,896)          (9,896)
                                                                       --------         --------
Balance, October 31, 2001                                                (8,605)           4,119
Stock issued in connection with stock purchase plan                          --               31
Stock and warrant issued in connection with private placement                --              782
Stock issued to Directors in lieu of cash payments                           --               21
Valuation allowance on note receivable from officer                          --              474
Net loss                                                                 (1,731)          (1,731)
                                                                       --------         --------
Balance, October 31, 2002                                               (10,336)           3,696
                                                                       --------         --------
Stock issued in connection with stock purchase plan                          --               12
Stock and warrant issued in connection with private placement                --              464
Stock issued to Directors in lieu of cash payments                           --               43
Stock issued in connection with the acquisition of Antares                                   259
Stock issued in connection with warrant exercise                                             222
Retirement of treasury stock                                                                  --
Reversal of valuation allowance on note receivable from officer              --              128
Net income                                                                  563              563
                                                                       --------         --------
Balance, October 31, 2003                                              $ (9,773)        $  5,387
                                                                       ========         ========
</TABLE>

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

                                      -47-
<PAGE>

SBE, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

<TABLE>
<CAPTION>
For the years ended October 31                                                                  2003            2002          2001
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                          <C>             <C>           <C>
Cash flows from operating activities:
         Net income (loss)                                                                   $   563         $(1,731)      $(9,896)
         Adjustments to reconcile net income (loss) to net cash
                       provided by (used in) operating activities:
                Depreciation and amortization                                                    443             730         1,077
                Non-cash restructuring (benefit)                                                (154)            185           337
                Stock-based compensation expense                                                  21              26            43
                Non-cash valuation allowance (recovery) on loan from officer                    (142)            474            --
                Effect of re-measured warrant                                                     --             (83)           --
                Loss on sale of assets                                                            13              19             5
                Changes in operating assets and liabilities:
                           Trade accounts receivable                                            (930)           (128)        3,536
                           Inventories                                                            30           2,518           490
                           Other assets                                                           30             238           (70)
                           Trade accounts payable                                                208             (57)         (549)
                           Other current liabilities                                            (184)            (29)       (1,060)
                           Non-current liabilities                                                (4)         (4,860)        4,582
                                                                                             -------         -------       -------

                                  Net cash  used in operating activities                         (84)         (2,703)       (1,522)
                                                                                             -------         -------       -------

Cash flows from investing activities:
                Purchases of property and equipment                                             (172)           (149)         (299)
                Cash payments related to purchase of Antares assets and related costs           (868)             --            --
                Proceeds from sale of assets                                                      --              --             4
                Capitalized software costs                                                       (48)           (105)          (10)
                                                                                             -------         -------       -------

                                  Net cash used in investing activities                       (1,088)           (254)         (305)
                                                                                             -------         -------       -------

Cash flows from financing activities:
                Proceeds from stock plans                                                         12              31           160
                Proceeds from issuance of common stock and warrants                              686             864            --
                Proceeds from repayment of shareholder note                                      270              --            --
                                                                                             -------         -------       -------

                                  Net cash provided by financing activities                      968             895           160
                                                                                             -------         -------       -------

                           Net decrease in cash and cash equivalents                            (204)         (2,062)       (1,667)

Cash and cash equivalents at beginning of year                                                 1,582           3,644         5,311
                                                                                             -------         -------       -------
Cash and cash equivalents at end of year                                                     $ 1,378         $ 1,582       $ 3,644
                                                                                             =======         =======       =======

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

         Income taxes                                                                        $     1         $     1       $     1
                                                                                             =======         =======       =======

SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES

Non-cash stock portion of Antares purchase price                                             $   542         $    --       $    --
                                                                                             =======         =======       =======
</TABLE>

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


                                      -48-
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company and Basis of Presentation:

SBE, Inc. architects and provides network communications  solutions for original
equipment  manufacturers  ("OEM")  in both  the  embedded  and  enterprise-level
information  technology ("IT") computing markets. Our solutions enable both data
communications and telecommunications  companies in addition to enterprise class
high-end  server  clients to rapidly  deliver  advanced  networking  and storage
products and services.  The addition of the Antares  product line in August 2003
enables us to introduce a collection  of WAN,  LAN,  SCSI,  Fibre  Channel,  and
carrier  cards  across both the  enterprise  server and  embedded  markets.  Our
products  with Linux and Solaris  drivers  and  software  now include  wide area
network  ("WAN") and local area  network  ("LAN")  interface  adapters,  storage
products  such as SCSI  and  Fibre  Channel  and  high  performance  intelligent
communications controllers for high-end enterprise level servers,  workstations,
media gateways,  routers,  internet access devices,  home location registers and
data messaging  applications.  Our products are distributed  worldwide through a
direct   sales  force,   stocking   distributors,   independent   manufacturers'
representatives and value-added  resellers.  Our business falls primarily within
one industry segment.

Liquidity

Fiscal 2003:

We had net  income of  $563,000  in fiscal  2003 and  negative  cash  flows from
operations  of $84,000.  We believe the  combination  of cost  reductions  and a
projected  increase in sales  during  fiscal 2004 will  continue to generate net
income and sufficient cash flows to fund our operations.

Fiscal 2002 and 2001:

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


                                      -49-
<PAGE>

Principles of Consolidation:

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

Use of Estimates:

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

Fair Value of Financial Instruments:

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

Cash and Cash Equivalents:

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

Inventories:

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.

                                      -50-
<PAGE>

Inventories  are  stated at the lower of cost,  using  the  first-in,  first-out
method, or market value.

Property and Equipment:

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

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

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

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

Intangible Assets:

We adopted the  Financial  Accounting  Standards  Board  ("FASB")  Statements of
Financial  Accounting  Standards ("SFAS") No. 141,  "Business  Combinations" and
SFAS No. 142,  "Goodwill and Other Intangible Assets" on accounting for business
combinations and goodwill as of the beginning of fiscal year 2002.  Accordingly,
we will not amortize goodwill from  acquisitions,  but will continue to amortize
other  acquisition-related  intangibles and costs. All of the intangible  assets
that  we  currently  own  are  intellectual  property  acquired  in the  Antares
acquisition.

As required by these rules, we will perform an impairment  review  annually,  or
earlier if  indicators of potential  impairment  exist.  This annual  impairment
review  was  completed  during the fourth  quarter of fiscal  year 2003,  and no
impairment was found.  The impairment  review is based on a discounted cash flow
approach  that uses  estimates of future market share and revenues and costs for
our segments as well as  appropriate  discount  rates.  The  estimates  used are
consistent  with the plans and  estimates  that we use to manage the  underlying
business.  However, if we fail to deliver new products,  if the products fail to
gain  expected  market  acceptance,  or if market  conditions  are  unfavorable,
revenue and cost  forecasts  may not be achieved,  and we may incur  charges for
impairment of goodwill.


                                      -51-
<PAGE>

For  identifiable  intangible  assets,  we amortize the cost over the  estimated
useful life and 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 originally estimated,  we may incur charges for impairment of these
assets. The impairment is based on the estimated discounted cash flow associated
with the asset. An impairment could result if the underlying technology fails to
gain  market  acceptance,  we fail to  deliver  new  products  related  to these
technology  assets,  the products fail to gain expected market  acceptance or if
market conditions are unfavorable.

Intellectual  property costs consist of the allocation of costs  associated with
the  purchase  of  current  and the  design  of  future  products  from  Antares
Microsystems  on  August 7,  2003.  All  capitalized  intellectual  property  is
amortized to expense over  thirty-six  months which is the expected useful life.
The amortization expense in fiscal 2003 was approximately $102,000.

Acquisitions:

All business  acquisitions  have been accounted for using the purchase method of
accounting and, accordingly,  the consolidated  statements of operations include
the results of each acquired business since the date of acquisition.  The assets
acquired  and  liabilities  assumed are  recorded at estimates of fair values as
determined by management based on information  available we consider a number of
factors,  including  third-party  valuations  or  appraisals,  when making these
determinations.  We finalize the  allocation of purchase price to the fair value
of the  assets  acquired  and  liabilities  assumed  when we obtain  information
sufficient to complete the  allocation,  but in any case,  within one year after
acquisition.

As a result of  acquisitions,  we incur at the time of acquisition  expenses for
the  incremental  costs  to exit  and  consolidate  activities  at the  acquired
companies'  locations,  to involuntarily  terminate employees,  and other costs.
These acquisition  expenses, to the extent that they are not associated with the
generation of future revenues and have no future  economic  benefit were part of
the purchase price. Acquisition liabilities for the above items totaled $161,000
and were substantially complete by October 31, 2003.

Revenue Recognition:

Our policy is to  recognize  revenue for product  sales when title  transfer and
risk of loss has passed to the customer, which is generally upon shipment of our
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 at the time of shipment.
Our policies comply with the guidance provided by Staff Accounting  Bulletin No.
104, "Revenue Recognition in Financial Statements", issued by the Securities and
Exchange Commission.  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  the  collectibility  is  reasonably
assured. Our sales transactions are determined in U.S. dollars.

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 twenty-five  percent 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  SBE products equal to at least the dollar value of the products that
they want to rotate.


                                      -52-
<PAGE>

Each distributor is also allowed certain price protection rights. If and when we
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 it  places  its next  order  with us.  We  record  an
allowance for price protection  reducing our net sales and accounts  receivable.
The  allowance is based on the price  difference  of the  inventory  held by our
distributors  at the time we expect to reduce selling  prices.  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, 2003,  $191,000 or 0.3 % of our sales were to
distributors.

Product Warranty:

Our  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  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
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.

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 a reduction  of related  expenses as  incurred.  For the years
ended October 31, 2003, 2002 and 2001, direct costs incurred under R&D contracts
were $109,000, $7,900 and $7,000,  respectively,  and reimbursements earned were
$109,000, $7,900 and $22,913 , respectively.


                                      -53-
<PAGE>

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-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, 2003, 2002 and 2001.

Refundable Deposit:

A refundable  deposit  associated with a multi-year  supply agreement with HP of
$4.9  million was  received in April 2001.  This  deposit was  refundable  as we
delivered certain quantities of products to HP over a four year period ending in
2005. The supply contract was  restructured in fiscal 2002 to include a purchase
order for $1.6 million of our  products  that was shipped to HP in the first two
quarters of fiscal  2003 and the  forfeiture  by HP of $4.4  million of the $4.9
million refundable deposit.  Under the agreement,  we are required to retain for
future  production or repair all VCOM finished  goods and spare parts  inventory
through  October 31, 2005 unless notified  otherwise by HP.  Concurrent with the
forfeiture of the $4.4 million refundable deposit, we recorded a reserve of $1.7
million  related to inventory we held at October 31, 2002 but may not be able to
sell.  The $2.7 million of  forfeiture  of  refundable  deposit net of inventory
reserve is presented under Forfeited deposit, net on the Consolidated Statements
of Operations. The remaining $447,000 of the deposit was paid to HP in the third
quarter of fiscal  2003 and is included  in current  liabilities  at October 31,
2002.

Stock-based Compensation:

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

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


                                      -54-
<PAGE>


<TABLE>
<CAPTION>
                                                       For the Year Ended October 31,
                                                ----------------------------------------------
                                                   2003              2002              2001
                                                ----------        ----------        ----------
<S>                                             <C>               <C>               <C>
Net income (loss) - as reported .........       $      563        $   (1,731)       $   (9,896)
Stock based employee compensation
  (recovery)/expense included in reported
  net loss, net of related tax effects ..               --                --                --
Less total stock based employee
  compensation expense determined
  under fair value based method for
  all awards, net of related tax
  effects ...............................             (231)             (721)           (1,935)
                                                ----------        ----------        ----------

Pro forma net loss ......................       $     (332)       $   (2,452)       $  (11,831)
                                                ==========        ==========        ==========

Income (loss) per share:
Basic - as reported .....................       $     0.13        $    (0.46)       $    (2.92)

Basic - pro forma .......................       $     0.08        $    (0.65)       $    (3.49)

Diluted - as reported ...................       $     0.12        $    (0.46)       $    (2.92)

Diluted - pro forma .....................       $     0.07        $    (0.65)       $    (3.49)
</TABLE>

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

<TABLE>
<CAPTION>
Options granted in years ended October 31          2003           2002           2001
-------------------------------------------------------------------------------------
<S>                                              <C>            <C>            <C>
Expected life (in years)                           5.00           5.00           5.00
Risk-free interest rate                            2.00%          2.00%          6.00%
Volatility                                       126.00%        148.00%        114.00%
Dividend yield                                     0.00%          0.00%          0.00%
</TABLE>

The weighted  average fair value of options granted during 2003,  2002, and 2001
was $1.79, $0.92 and $1.78 per option, respectively.

Advertising Costs:

Advertising  expenditures  are  expensed  as  incurred.  Advertising  costs were
$79,000 in fiscal 2003 and $37,000 in fiscal 2002.

Income Taxes:

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


                                      -55-
<PAGE>

Net Earnings Per Common Share:

Basic earnings per common share is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding.  Diluted earnings
per common  share is  computed  by dividing  net income  (loss) by the  weighted
average  number  of  shares  of  common  stock  and  common  stock   equivalents
outstanding.  Common  stock  equivalents  relate to stock  options and  warrants
include  450,000  shares of common stock and warrants for the year ended October
31, 2003.  Common stock  equivalents are excluded from the diluted  earnings per
share calculation for fiscal 2002 and 2001 due to their anti-dilutive effect.

Comprehensive Income:

Comprehensive income is defined as the change in equity of a business enterprise
during a period  from  transactions  and other  events  and  circumstances  from
non-owner  sources.  Through October 31, 2003, we have not had any  transactions
that  were  required  to  be  reported  in  other   comprehensive   income  and,
accordingly, comprehensive income (loss) is the same as net income (loss).

Recent Accounting Pronouncements:

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

In January  2003,  the FASB  issued  Interpretation  No. 46,  "Consolidation  Of
Variable Interest  Entities".  This  Interpretation  requires that if a business
enterprise has a controlling  financial  interest in a variable interest entity,
the assets,  liabilities,  and results of  activities  of the variable  interest
entity  should be  included  in the  consolidated  financial  statements  of the
business  enterprise.  This Interpretation is effective  immediately for all new
variable  interest  entities  created or acquired  after  January 31, 2003.  For
variable  interest  entities  created or acquired prior to February 1, 2003, the
provisions  of this  Interpretation  must be  applied  for the first  interim or
annual  period  beginning  after June 15,  2003.  We  currently  do not have any
financial  interest  in  variable  interest  entities.   The  adoption  of  this
Interpretation  did not have a  material  impact on our  consolidated  financial
statements.


                                      -56-
<PAGE>

Effective   prospectively  for  arrangements  entered  into  in  fiscal  periods
beginning  after June 15, 2003,  EITF Issue 00-21,  "Revenue  Arrangements  with
Multiple  Deliverables,"  addresses the  accounting by a vendor for  contractual
arrangements in which multiple  revenue-generating  activities will be performed
by the vendor. In some situations, the different  revenue-generating  activities
(deliverables) are sufficiently  separable and there exists sufficient  evidence
of fair values to account  separately for the different  deliverables  (that is,
there are separate units of accounting). In other situations, some or all of the
different  deliverables  are  interrelated  closely  or there is not  sufficient
evidence of fair value to account  separately  for the  different  deliverables.
EITF  Issue  00-21  addresses  when and,  if so,  how an  arrangement  involving
multiple  deliverables should be divided into separate units of accounting.  The
adoption  of  this  Interpretation  did  not  have  a  material  impact  on  our
consolidated financial statements.

In April 2003,  the FASB issued SFAS No. 149,  "Amendment  of  Statement  133 on
Derivative  Instruments  and  Hedging  Activities."  SFAS  No.  149  amends  and
clarifies  financial  accounting  and  reporting  for  derivative   instruments,
including  certain  derivative  instruments  embedded in other contracts and for
hedging  activities under SFAS No. 133,  "Accounting for Derivative  Instruments
and Hedging  Activities."  This  statement  will be effective in fiscal 2004 for
contracts  entered  into or  modified  after  June  30,  2003  and  for  hedging
relationships  designated  after June 30, 2003.  Since we do not use  derivative
instruments or engage in hedging  activities,  the adoption of this statement is
not expected to have a material impact on our consolidated financial statements.

In May 2003,  the  Financial  Accounting  Standards  Board  issued SFAS No. 150,
"Accounting  for Certain  Financial  Instruments  with  Characteristics  of both
Liabilities  and  Equity,"  which  establishes   standards  for  how  an  issuer
classifies and measures certain financial  instruments with  characteristics  of
both liabilities and equity.  Financial instruments that are within the scope of
the statement,  which  previously were often  classified as equity,  must now be
classified as liabilities. This statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise shall be effective at
the beginning of the first interim period  beginning  after June 15, 2003. We do
not expect  the  adoption  of this  statement  to have a material  impact on our
financial statements.


Reclassifications:

Certain  reclassifications  have  been  made  to the  2002  and  2001  financial
statements  to  conform  to the 2003  presentation  with no effect on net income
(loss) or stockholders' equity as previously reported.

2.   INVENTORIES

Inventories at October 31, 2003 and 2002 comprise the following (in thousands):

                                                  2003            2002
------------------------------------------------------------------------
         Finished goods                          $  726          $  985
         Parts and materials                      1,154             925
                                                 ------          ------

         Total inventory                         $1,880          $1,910
                                                 ======          ======


                                      -57-
<PAGE>

3.   PROPERTY AND EQUIPMENT

Property  and  equipment  at  October  31,  2003 and 2002 are  comprised  of the
following (in thousands):

                                                  2003            2002
------------------------------------------------------------------------
         Machinery and equipment                $ 4,482        $ 4,948
         Furniture and fixtures                     278            236
         Leasehold improvements                     118            290
                                                -------        -------
                                                  4,878          5,474
         Less accumulated depreciation
           and amortization                      (4,489)        (4,941)
                                                -------        -------

                                                $   389        $   533
                                                =======        =======

Depreciation and amortization  expense totaled  $303,000,  $649,000 and $860,000
for the years ended October 31, 2003, 2002 and 2001, respectively.

4.   CAPITALIZED SOFTWARE COSTS

Capitalized  software  costs at October 31, 2003 and 2002 comprise the following
(in thousands):

                                                 2003            2002
-----------------------------------------------------------------------
         Purchased software                     $   929        $    81
         Internally developed software              805            805
                                                -------        -------
                                                  1,734          1,686

         Less accumulated amortization           (1,614)        (1,576)
                                                -------        -------
                                                $   120        $   110
                                                =======        =======

We  capitalized  $48,000,  $105,000 and $10,000 of purchased  software  costs in
2003, 2002, and 2001  respectively.  Amortization of capitalized  software costs
totaled  $38,000,  $81,000,  and $217,000 for the years ended  October 31, 2003,
2002, and 2001, respectively.

5.   STOCKHOLDERS' EQUITY

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

In May 1999,  our Board of Directors  authorized  us to repurchase up to 100,000
shares of our issued and outstanding Common Stock.  During fiscal 1999 and 2000,
we  repurchased  79,500  shares of our  Common  Stock in the open  market for an
aggregate purchase price of approximately $409,000. We retired the 79,500 shares
of our Common Stock that we purchased under this  repurchase  program on October
16, 2003.


                                      -58-
<PAGE>

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

On April 30, 2002, we completed a private  placement of 555,556 shares of Common
Stock at $1.80 per share plus a warrant  to  purchase  111,111  shares of common
stock,  resulting in gross cash  proceeds of  approximately  $1.0  million.  The
warrant has a term of three  years and is  exercisable  at $2.00 per share.  The
equity investment was made by Stonestreet L.P., of Ontario,  Canada.  The shares
of Common Stock and the shares of Common Stock  associated  with the Stonestreet
LP warrants were registered with the Securities and Exchange  Commission and the
registration statement was declared effective on June 14, 2002. Stonestreet L.P.
exercised its warrant to purchase  111,111 shares of our Common Stock on October
9, 2003 for cash consideration of $222,222.

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

In connection  with the private  placement,  we retained the services of Vintage
Partners LLC of New York,  New York and paid to Vintage  Partners a finder's fee
of $60,000 and warrants to purchase 21,429 shares of Common Stock.  The warrants
have a three year term and are exercisable at $3.50 per share.

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 $478,000.
The warrant  has a term of five years and bears an  exercise  price of $1.50 per
share subject to certain adjustment provisions.

In connection with the private placement,  we retained the services of Puglisi &
Co. as placement agent,  and in connection  therewith paid Puglisi & Co. and its
associates  a fee of $33,000 and warrants to purchase  150,000  shares of common
stock. The warrants have a five-year term and bear 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.  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 on Form S-3.

During  fiscal  2003,  we  issued  37,787  shares  of our  Common  Stock  to the
non-employee  members  of our Board of  Directors  in lieu of 50% of their  cash
compensation. The value of the Common Stock of $43,000 was recorded as a general
and administrative expense.


                                      -59-
<PAGE>

6.   INCOME TAXES

The  components of the provision  (benefit) for income taxes for the years ended
October 31, 2003, 2002 and 2001, comprise the following:

<TABLE>
<CAPTION>
                                                                        2003         2002         2001
-------------------------------------------------------------------------------------------------------
<S>                                                                    <C>          <C>          <C>
         Federal:
                Current                                                $ (18)       $(161)       $  --
                Deferred                                                  --           --           --
         State:
                Current                                                    1          (16)           1
                Deferred                                                  --           --           --
                                                                       -----        -----        -----
                      Total provision (benefit) for income taxes       $ (17)       $(177)       $   1
                                                                       =====        =====        =====
</TABLE>

We  recorded  a tax  benefit  of $18,000  and  $91,000 in fiscal  2003 and 2002,
respectively, due to refunds of federal income taxes related to the Job Creation
and  Workers  Assistance  Act of  2002  which  extends  the net  operating  loss
carryback period from two to five years for losses generated in tax years ending
in 2002. We also filed amended federal and state tax returns to claim $86,000 in
research and  development  credits  related to LMC in fiscal 2002. As of October
31, 2003, we have received all of these tax refunds.

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

<TABLE>
<CAPTION>
                                                 2003         2002         2001
-----------------------------------------------------------------------------------
<S>                                              <C>         <C>          <C>
         Statutory federal income tax rate      (34.0)%      (34.0)%      (34.0)%
         Change in valuation allowance           34.0         25.0         34.0
         Other                                     --          1.0           --
                                                -----        -----        -----
                                                   (0)%       (8.0)%          0%
                                                =====        =====        =====
</TABLE>

Significant  components  of our deferred tax balances as of October 31, 2003 and
2002 are as follows:

<TABLE>
<CAPTION>
                                                                      2003            2002
--------------------------------------------------------------------------------------------
<S>                                                                 <C>            <C>
         Deferred tax assets:
               Current
                       Accrued employee benefits                    $    36        $   230
                       Inventory allowances                             828            944
                       Allowance for doubtful accounts                   39             37
                       Warranty accruals                                 --             22

               Noncurrent
                       R&D credit carryforward                        2,871          2,475
                       Alternative minimum tax carryforward              --             80
                       Net operating loss carryforwards               4,619          4,202
                       Refundable deposit                               191            178
                       Depreciation and amortization                     --            261
                       Reserve on shareholder note receivable           103             --
                       Restructuring costs                              (25)           164
                                                                    -------        -------
                           Total deferred tax assets                  8,662          8,593
                                                                    -------        -------
         Deferred tax liabilities:

         Deferred tax asset valuation allowance                      (8,662)        (8,593)
                                                                    -------        -------
               Net deferred tax assets                              $    --        $    --
                                                                    =======        =======
</TABLE>


                                      -60-
<PAGE>

A valuation  allowance is recorded to offset certain  deferred tax assets due to
management's  uncertainty of realizing the benefit of these items. The valuation
allowance  increased  by $ 0.1 million in fiscal 2003  primarily  as a result of
increases in R&D credit carry  forwards,  NOL  carryforwards  and the reserve in
shareholder note receivable.  These increases were partially offset by decreases
in accrued employee benefits,  refundable deposit, depreciation and amortization
timing  differences and a reduction in our estimated  restructuring  costs.  The
valuation  allowance  increased  by $0.5  million in fiscal 2002  primarily as a
result of an  increase in  unbenefited  net  operating  loss  carryforwards,  an
increase  in  the  inventory  allowance  and an  increase  in  accrued  employee
benefits.  The  increase  was  partially  offset by the  forfeiture  of the $4.4
million  refundable  deposit in fiscal 2002 that was recognized for tax purposes
in fiscal 2001.

At  October  31,  2003,  we  have  research  and   experimentation   tax  credit
carryforwards  of $1.7  million  and $1.2  million  for  federal  and  state tax
purposes,  respectively.  These carryforwards  expire in the periods ending 2010
through  2023. We have net operating  loss  carryforwards  for federal and state
income  tax  purposes  of   approximately   $12.7   million  and  $6.7  million,
respectively, which expire in periods ending 2004 through 2023.

Under the Tax Reform Act of 1986,  the  amounts of benefits  from net  operating
loss  carryforwards  may be impaired or limited as we have incurred a cumulative
ownership change of more than 50%, as defined, over a three-year period.

7.  WARRANTY OBLIGATIONS AND OTHER GUARANTEES:

In  November  2002,  the  FASB  issued  FASB   Interpretation   ("FIN")  No.  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." The  following  is a
summary of our  agreements  that we have  determined are within the scope of FIN
45.

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, 2003 (in thousands):

<TABLE>
<CAPTION>
<S>                                                                      <C>
         Warranty reserve at October 31, 2002                            $ 55
             Less: Cost to service warranty obligations                   (13)
             Plus: Warranty accrual                                        11
                                                                         ----
         Total warranty reserve included in other accrued expenses       $ 53
                                                                         ====
</TABLE>


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, 2003 and 2002, respectively.


                                      -61-
<PAGE>

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 intellectual  property 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, 2003 and 2002, respectively.

As  discussed  below,  we are the  secondary  guarantor  on the  sublease of our
previous headquarters.  We believe we will have no liabilities on this guarantee
and have not recorded a liability at October 31, 2003.

8. COMMITMENTS

We lease our  buildings  under  noncancelable  operating  leases which expire at
various  dates  through  the year 2008.  Future  minimum  lease  payments  under
noncancelable operating leases, are as follows (in thousands):

       Year ending October 31:
             2004                                                     $  1,012
             2005                                                        1,005
             2006                                                          660
             2007                                                            6
             2008                                                           --
                                                                      --------
                                                                         2,683
             Less: total reimbursements from sublease                   (1,539)
                                                                      --------
             Total minimum lease payments                             $  1,144
                                                                      ========

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


                                      -62-
<PAGE>

Our  rent  expense  under  all  operating  leases,  net  of  reimbursements  for
subleases, for the years ended October 31, 2003, 2002 and 2001 totaled $434,000,
$549,000 and $844,000,  respectively. We had reimbursements of sublease proceeds
of $713,000,  $158,000 and $261,000 for the years ended  October 31, 2003,  2002
and 2001, respectively.

In  connection  with the  acquisition  of Antares,  we committed to issue 98,945
shares of our Common Stock in 20,000 share increments beginning January 2004 and
ending March 2005 to a selling shareholder of Antares.

9.   STOCK OPTION AND STOCK PURCHASE PLANS

We sponsor two  employee  stock  option  plans,  the 1996 Stock Option Plan (the
"1996 Plan") and the 1998  Non-Officer  Stock Option Plan (the "1998  Plan").  A
total of 1,730,000  shares of Common Stock were reserved  under the 1996 Plan at
October 31, 2003. A total of 650,000  shares of Common Stock are reserved  under
the 1998  Plan.  Stock  options  granted  under  the 1996  and  1998  Plans  are
exercisable  over a maximum  term of ten years  from the date of grant,  vest in
various  installments  over a one to four-year  period and have exercise  prices
reflecting the market value of the shares of Common Stock on the date of grant.

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

At  October  31,  2003 and 2002,  273,964  and  96,253  shares of Common  Stock,
respectively, were available for grant under the 1996 Plan. A total of 3,939 and
36,714  shares of Common Stock were  available  for grant under the 1998 Plan at
October  31,  2003 and 2002,  respectively.  A total of 42,750  shares of Common
Stock were  available  for grant under the Director Plan at October 31, 2003 and
2002, respectively.

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

                                                                      Weighted
                                                                      Average
                                Number of         Price Per           Exercise
                                 Shares             Share              Price
                              -------------------------------------------------
Outstanding at
      October 31, 2000          1,246,879        $0.51--$24.81         $   8.24

Granted                           791,000        $0.98--$8.63          $   2.88
Cancelled or expired             (403,023)       $0.51--$24.81         $   8.32
Exercised                         (99,054)       $0.51--$1.27          $   0.52
                              -------------------------------------------------

Outstanding at
      October 31, 2001          1,419,003        $0.51--$23.50         $   6.18

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

Outstanding at
      October 31, 2002          1,769,273        $0.90--$19.81         $   3.32

Granted                           140,500        $0.70--$2.86          $   1.90
Cancelled or expired             (285,238)       $0.51--$19.81         $   5.13
                              -------------------------------------------------

Outstanding at
      October 31, 2003          1,624,505        $0.70--$19.81         $   2.88
                              =================================================


                                      -63-
<PAGE>


         The following table summarizes  information with respect to all options
to purchase  shares of Common Stock  outstanding  under the 1996 Plan,  the 1998
Plan, the Director Plan and the LMC Plan at October 31, 2003:

<TABLE>
<CAPTION>
                                                   Options Outstanding                                 Options Exercisable
===================================================================================================================================
                                                        Weighted
                                                         Average             Weighted                                   Weighted
                                    Number              Remaining             Average            Number                  Average
           Range of               Outstanding       Contractual Life         Exercise          Exercisable              Exercise
        Exercise Price        at 10/31/03                (years)               Price           at 10/31/03                Price
-----------------------------------------------------------------------------------------------------------------------------------
<S>                              <C>                       <C>               <C>              <C>                       <C>
    $  0.00    - $  1.00              817,000              5.9               $  0.90               751,451              $  0.91
    $  1.01    - $  2.50              157,000              5.4               $  1.65               106,248              $  1.79
    $  2.51    - $  3.50              242,000              5.1               $  2.71               151,213              $  2.66
    $  3.51    - $  5.50              227,306              2.9               $  5.06               204,357              $  5.08
    $  5.51    - $  7.50                2,000              3.2               $  6.63                 1,874              $  6.63
    $  7.51    - $  9.50              107,699              2.5               $  8.23               104,365              $  8.22
    $  9.51    -  $14.50               65,000              1.2               $ 13.23                61,250              $ 13.18
     $14.51    -  $19.85                6,500              3.6               $ 18.44                 5,518              $ 18.44
                                 ------------                                                 ------------
                                    1,624,505                                                    1,386,276
                                 ============                                                 ============
</TABLE>

We sponsor an Employee  Stock  Purchase Plan (the  "Purchase  Plan") under which
300,000  shares of Common Stock were  reserved for issuance at October 31, 2003.
The Purchase Plan allows  participating  employees to purchase,  through payroll
deductions, shares of our Common Stock at 85 percent of the fair market value of
the shares at specified  dates.  At October 31, 2003, 32 employees were eligible
to  participate  in the  Purchase  Plan and 69,862  shares  were  available  for
issuance.  In fiscal year 2003, 2002 and 2001, 11,012,  47,596 and 32,645 shares
of Common Stock were issued under the Purchase Plan, respectively.

10.   NET INCOME (LOSS) PER SHARE:

Basic net income  (loss) per common share for the years ended  October 31, 2003,
2002 and 2001 was  computed by dividing  the net income  (loss) for the relevant
period by the weighted  average  number of shares of common  stock  outstanding.
Common stock equivalents for the years ended October 31, 2002 and 2001 have been
excluded from shares used in calculating  diluted net loss per share because the
effect would have been anti-dilutive.


                                      -64-
<PAGE>

<TABLE>
<CAPTION>
                                                     Years ended October 31
                                              ------------------------------------
                                                2003          2002           2001
                                              -------       -------        -------
<S>                                           <C>           <C>            <C>
Basic earnings per share:

Net income (loss)                             $   563       $(1,731)       $(9,896)

Number of shares for computation of
earnings per share                              4,259         3,759          3,390
                                              =======       =======        =======

Basic earnings (loss) per share               $  0.13       $ (0.46)       $ (2.92)
                                              =======       =======        =======

Diluted earnings per share:

Weighted average number of common
shares outstanding during the year              4,259         3,759          3,390

Assumed issuance of stock under warrant
plus stock issued the employee and
non-employee stock option plans                   450           (a)            (a)
                                              -------       -------        -------

Number of shares for computation of
earnings per share                              4,709         3,759          3,390
                                              =======       =======        =======

Diluted earnings (loss) per share             $  0.12       $ (0.46)       $ (2.92)
                                              =======       =======        =======
</TABLE>

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

11.   EMPLOYEE SAVINGS AND INVESTMENT PLAN

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

For the years ended  October 31, 2003,  2002 and 2001,  total  expense under the
employee  savings  and  investment  plan  was  $61,730,  $99,471  and  $148,974,
respectively.

12.   CONCENTRATION OF CREDIT AND BUSINESS RISKS

Our  trade  accounts  receivable  are  concentrated  among  a  small  number  of
customers,  principally located in the United States.  Three customers accounted
for 62% of our outstanding  accounts  receivable at October 31, 2003 compared to
two customers who  accounted for more than 34% of total  accounts  receivable at
October 31, 2002. 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
$90,000 and $93,000 at October 31, 2003 and 2002, respectively.

Sales to  individual  customers in excess of 10% of net sales for the year ended
October  31,  2003  included  sales to HP of $3.1  million,  or 45% of net sales
compared to sales to HP in fiscal  2002 of $2.1  million,  or 30%,  and sales to
Lockheed  Martin of $0.8 million,  or 12%, and sales to HP of $2.6  million,  or
34%, and Lockheed Martin of $1.5 million, or 19%, in fiscal 2001.  International
sales  accounted for 12%, 13% and 9% of total sales during fiscal 2003, 2002 and
2001, respectively.


                                      -65-
<PAGE>

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  two
independent companies.

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

13.  ACQUISITION OF ANTARES MICROSYSTEMS, INC.

Effective as of August 7, 2003, we purchased  substantially all of the assets of
Antares Microsystems, Inc., a California corporation ("Antares"), excluding cash
and  accounts  receivable,  from the  Assignee  for the Benefit of  Creditors of
Antares ("Assignee"). The acquisition enabled us to obtain intellectual property
such as the TCP/IP  Offload  Engine  and other  intellectual  property  which we
consider to be  complementary  to our  business.  While this product has reached
technological  feasibility and is being  capitalized as an intangible  asset, we
continue to  customize it to meet SBE's  specific  customer  needs.  We acquired
Antares  for a  purchase  price  of  $75,000  in cash  plus  $582,000  in  costs
associated with the payment of certain loan guarantees,  legal fees,  accounting
fees,  broker fees,  contract  transfer fees and moving expenses and $211,000 in
cash to the selling shareholders of Antares. We also issued 90,628 shares of our
Common  Stock with a market  value at the time of issuance of $259,000 to one of
the selling  shareholders  and  committed to issue  98,945  shares of our Common
Stock valued at $283,000 in 20,000 share increments  beginning  January 2004 and
ending March 2005 to a selling shareholder of Antares.

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

         Tangible assets acquired                             $  187,000
         Intellectual property                                 1,223,000
                                                              ----------
         Total assets acquired                                 1,410,000
         Liabilities assumed                                          --
                                                              ----------
         Net assets acquired                                  $1,410,000
                                                              ==========

         Cash consideration or costs paid or to be paid       $  868,000
         Fair value of stock provided                            542,000
                                                              ----------
         Total consideration                                  $1,410,000
                                                              ==========

We used the  purchase  method of  accounting  for the  acquisition  and combined
Antares  results of  operations  beginning  August 7,  2003.  We  allocated  the
purchase price to the tangible  assets based on fair market value at the time of
the acquisition and to intellectual property based on future expected cash flows
to be derived from the acquired  product  lines in addition to new products that
have reach technological feasibility, but have not gone into production.


                                      -66-
<PAGE>

The unaudited pro forma results are provided for  comparative  purposes only and
are not  necessarily  indicative of what actual  results would have been had the
Antares  acquisition,   and  the  private  equity  offering   transactions  been
consummated  on such  dates,  nor do they  give  effect to the  synergies,  cost
savings and other changes expected to result from the acquisitions. Accordingly,
the pro forma  financial  results do not purport to be  indicative of results of
operations  as of the date hereof or for any period  ended on the date hereof or
for any other future date or period.  Had we acquired  Antares at the  beginning
the prior period, our results of operations for would have been as follows:

<TABLE>
<CAPTION>
For the Years ended October 31,               2003             2002
                                           ----------       ----------
<S>                                        <C>              <C>
         Revenues                          $    8,845       $   10,702
         Net loss                              (1,173)          (2,665)
         Basic loss per common share            (0.28)           (0.67)
         Diluted earnings per common            (0.25)           (0.67)
</TABLE>

We did not assume any of the liabilities  associated with Antares. In connection
with the acquisition, we hired certain employees of Antares in order to continue
the development of the Antares TCP/IP Offload Engine ("TOE")  technology,  which
is in the  developmental  stage,  and other  products of  Antares.  The TOE base
technology  is being  readied for  commercial  development.  In the event TOE is
successfully  completed and  commercialized,  we have  committed to make certain
payments of cash and/or stock as bonuses to certain of these employees, as sales
of the TOE products occur.

The amount of  consideration  paid in connection with the asset  acquisition was
determined by extensive  "arms-length"  negotiation among the parties. We funded
the  acquisition  of the assets in cash from our working  capital plus  proceeds
from the sale of our common  stock as described in Note 5. There was no material
relationship between Assignee or Antares and us or any of our affiliates, any of
our directors or officers, or any associate of any such director or officer.

We amortize the  intellectual  property  acquired in the Antares  acquisition to
expense  over  36  months  which  is the  estimated  useful  life.  We  recorded
approximately $102,000 in amortization in fiscal 2003.

14. RESTRUCTURING COSTS

In response to the economic  slowdown,  we  implemented  restructuring  plans in
fiscal  2002  and  2001 and  recorded  restructuring  charges  of  $446,000  and
$964,000,  respectively.  Restructuring  costs for fiscal 2002 are  comprised of
severance costs associated with staff reductions  totaling  $115,000 (we reduced
our headcount from 47 employees to 24 employees  during fiscal 2002),  leasehold
improvements  and  equipment  write-downs  related  to  the  abandonment  of our
Madison,  Wisconsin  office of $185,000 and accrued  lease and  brokerage  costs
totaling $146,000. We reached agreement with the property owner to terminate the
Madison office lease releasing us from further  obligations  effective  December
31, 2002. As part of the  agreement we paid the lease  payments for November and
December 2002 in addition to certain costs and commissions  related to releasing
the office space.


                                      -67-
<PAGE>

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

As of October 31, 2003 and 2002, $58,000 and $249,000 of the restructuring costs
were included in other current liabilities, respectively.

In our third quarter of fiscal 2003, we  recognized a  restructuring  benefit of
$154,000 after the final  settlement of costs  associated with prior real estate
and equipment leases.

The  following   table  sets  forth  an  analysis  of  the   components  of  the
restructuring  reserve and the payments made against it through October 31, 2003
(in thousands):

<TABLE>
<CAPTION>
<S>                                                                 <C>
         Restructuring accrual at October 31, 2002                  $ 249
         Less:
             Cash paid and adjustment for accrued lease costs        (191)
                                                                    -----
         Total restructuring costs included in liabilities          $  58
                                                                    =====
</TABLE>

15.  LOAN TO OFFICER

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

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 based generally on
the fair value of the Common Stock  collateralizing the note at October 31, 2002
and  the  amount  of the  officer's  personal  assets  considered  likely  to be
available to settle the note in December 2003.


                                      -68-
<PAGE>

During the fourth  quarter of fiscal  2003,  an  officer  and  shareholder  sold
139,400  shares of our common stock and used the proceeds from the stock sale to
repay  $362,800  of an  outstanding  $743,800  loan we made to the  officer.  In
November  2003,  we received an  additional  loan payment of $142,000 from stock
that was sold prior to October 31, 2002.  The officer sold an additional  43,100
shares of our common stock in November 2003 and used proceed  totaling  $381,000
to repay the remaining loan balance in full.

 As a result of these  payments,  we expect to reflect a benefit of  $239,000 in
our results of operations  for the first quarter of fiscal 2004  resulting  from
the reversal of the remaining loan impairment charge.


QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
 (in thousands except                                First         Second          Third         Fourth
  per share amounts)                                Quarter        Quarter        Quarter        Quarter
---------------------------------------------------------------------------------------------------------
<S>                                                 <C>            <C>            <C>            <C>
         2003: Net sales                            $ 1,861        $ 1,767        $ 1,621        $ 2,207
                    Gross profit                      1,128          1,088          1,062          1,429
                    Net income                           91             51            141            280
                    Basic income per
                    common share                    $  0.02        $  0.01        $  0.03        $  0.07
                    Diluted income per
                    common share                    $  0.02        $  0.01        $  0.03        $  0.06

         2002: Net sales                            $ 1,283        $ 1,724        $ 2,786        $ 1,105
                    Gross profit                        696            914          1,695            423
                    Net income (loss)                (1,218)          (961)          (178)           626
                    Basic income (loss) per
                    common share                    $ (0.35)       $ (0.28)       $ (0.04)       $  0.15
                    Diluted income (loss) per
                    common share                    $ (0.35)       $ (0.28)       $ (0.04)       $  0.15
</TABLE>


                                      -69-
<PAGE>

                                    SBE, Inc.
                 Schedule II - Valuation and Qualifying Accounts
               For the Years Ended October 31, 2003, 2002 and 2001


<TABLE>
<CAPTION>
                     Column A                        Column B           Column C           Column D           Column E
                     --------                        --------           --------           --------           --------
                                                    Balance at         Additions                               Balance
                                                    Beginning       charged to costs                           End of
                   Description                      of Period         and expenses        Deductions           Period
--------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>               <C>                <C>                <C>
         Year ended October 31, 2003

         Allowance for Doubtful Accounts
          and sales programs                        $    93,000       $    11,000        $   (14,000)       $    93,000
         Allowance for Warranty Claims55,315             11,000           (13,000)            53,315
         Allowance for Deferred Tax Assets            8,593,000            69,000                 --          8,662,000
         Allowance for Stockholder Loan                 474,000                --           (235,000)           239,000

         Year ended October 31, 2002

         Allowance for Doubtful Accounts
          and sales programs                        $   225,000       $        --        $  (132,000)       $    93,000
         Allowance for Warranty Claims55,627                 --              (312)            55,315
         Allowance for Deferred Tax Assets            8,080,000           513,000                 --          8,593,000
         Allowance for Stockholder Loan                      --           474,000                 --            474,000

         Year ended October 31, 2001

         Allowance for Doubtful Accounts
          and sales programs                        $   251,620       $        --        $   (26,620)       $   225,000
         Allowance for Warranty Claims144,676                --           (89,049)            55,627
         Allowance for Deferred Tax Assets            3,088,000         4,992,000                 --          8,080,000
         Allowance for Stockholder Loan                      --                --                 --                 --
</TABLE>


                                      -70-