##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K

|           |  |                                                                                                 
|---------- |  | ------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                 
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended June 30,
    2002                                                     
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-10981



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SBS Technologies, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|New Mexico                                                         |  | 85-0359415                              
|(State or other jurisdiction of
    incorporation or organization) |  | (IRS Employer
    Identification Number)

2400 Louisiana Blvd. NE


AFC Building 5, Suite 600


Albuquerque, New Mexico 87110


(Address of principal executive offices
including zip code)


(505) 875-0600

(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:


Title of each class

Common Stock, no par value




---

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

Indicate by check mark 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 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.    o

The aggregate market value of the voting stock
held by non-affiliates of the Registrant, based upon the closing
sale price of the Common Stock on September 3, 2002 as
reported on The Nasdaq Stock Market® was $62,255,867.
Shares of Common Stock held by each officer and director as of
September 3, 2002 and by each person who owns 5% or more of
the outstanding Common Stock according to filings with the
Securities and Exchange Commission dated June 30, 2002 have
been excluded because these persons may be deemed to be
affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.

As of September 03, 2002, Registrant had
14,602,935 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Parts of the following document are incorporated
by reference into Part III of this Form 10-K Report:
(1) Definitive Proxy Statement for Registrants 2002
Annual Meeting of Shareholders to be held November 14, 2002.



---






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TABLE OF CONTENTS



|                                                  |                                                                                                         |  |  |  |  |  |  | 
|------------------------------------------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                           
|                                                  | Item 1. Business                                                                                       
|                                                  | Item 2. Properties                                                                                     
|                                                  | Item 3. Legal Proceedings                                                                              
|                                                  | Item 4. Submission of Matters to a Vote of Security Holders                                            
|PART II                                          
|                                                  | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                          
|                                                  | Item 6. Selected Financial Data                                                                        
|                                                  | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations          
|                                                  | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                                    
|                                                  | Item 8. Financial Statements and Supplementary Data                                                    
|                                                  | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           
|PART III                                         
|                                                  | Item 10. Directors and Executive Officers of the Registrant                                            
|                                                  | Item 11. Executive Compensation                                                                        
|                                                  | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|                                                  | Item 13. Certain Relationships and Related Transactions                                                
|                                                  | Item 14. Controls and Procedures                                                                       
|PART IV                                          
|                                                  | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                              
|SIGNATURES                                       
|INDEX TO EXHIBITS                                
|EX-4.1 Rights Agreement                          
|EX-10.c 1997 Employee Incentive Stock Option Plan
|EX-10.f 1992 Employee Incentive Stock Option Plan
|EX-10.h 1993 Employee Incentive Stock Option Plan
|EX-10.i 1993 Director/Officer Stock Option Plan  
|EX-10.v 1996 Employee Stock Purchase Plan        
|EX-10.br Employment Agreement - Daniel Moore     
|EX-10.bs Fourth Modification of Credit Agreement 
|EX-10.bt Amendment #2 to Lease with Oakview Eagan
|EX-10.bu Amendment #1 to Lease with AFC-5 LLC    
|EX-10.bv Amendment #2 to Lease with AFC-5 LLC    
|EX-21 Subsidiaries of the Registrant             
|EX-23.1 Consent of KPMG LLP.                     
|EX-25 Power of Attorney                          
|EX-99.1b Certification of Chief Executive Officer
|EX-99.1c Certification of Chief Financial Officer



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##### Table of Contents



SBS TECHNOLOGIES, INC. AND
SUBSIDIARIES

FORM 10-K FOR THE YEAR ENDED
JUNE 30, 2002


TABLE OF CONTENTS

|         |  |                                                                                                    |  |      |    | 
|-------- |  | -------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                                                    |  | Page
|         |  |                                                                                                    |  |     
|PART I  
|Item 1.  |  | Business                                                                                           |  |      | 1  | 
|Item 2.  |  | Properties                                                                                         |  |      | 14 | 
|Item 3.  |  | Legal Proceedings                                                                                  |  |      | 15 | 
|Item 4.  |  | Submission of Matters to a Vote of Security
    Holders                                            |  |      | 15 | 
|PART II 
|Item 5.  |  | Market for Registrants Common Equity and
    Related Stockholder Matters                          |  |      | 15 | 
|Item 6.  |  | Selected Financial Data                                                                            |  |      | 16 | 
|Item 7.  |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations          |  |      | 16 | 
|Item 7A. |  | Quantitative and Qualitative Disclosures About
    Market Risk                                     |  |      | 29 | 
|Item 8.  |  | Financial Statements and Supplementary Data                                                        |  |      | 29 | 
|Item 9.  |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure           |  |      | 53 | 
|PART III
|Item 10. |  | Directors and Executive Officers                                                                   |  |      | 53 | 
|Item 11. |  | Executive Compensation                                                                             |  |      | 53 | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters |  |      | 53 | 
|Item 13. |  | Certain Relationships and Related Transactions                                                     |  |      | 53 | 
|Item 14. |  | Controls and Procedures                                                                            |  |      | 53 | 
|PART IV 
|Item 15. |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                                |  |      | 54 | 

i



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All statements in this Form 10-K, other
than statements of historical fact, that address future
financial performance, activities, events or developments that
SBS or management intends, expects, projects, believes or
anticipates will or may occur in the future are forward-looking
statements. These statements include, but are not limited to,
expected sales, gross margin, expectations of
internally-generated cash flows, new product introductions, and
expectations of SG&A and R&D costs. These statements and
other forward-looking statements are based upon certain
assumptions and assessments made by management of SBS in light
of its experience and its perception of historical trends,
current conditions, expected future developments and other
factors it believes to be appropriate. These assumptions and
assessments include the volume and product mix of sales,
estimates of costs and inventory and receivable levels, defense
spending levels, and other items. The forward-looking statements
included in this report are also subject to a number of risks
and uncertainties, including but not limited to economic,
competitive, supply and demand, governmental and technological
factors affecting SBS operations, markets, products,
services and prices. These forward-looking statements are not
guarantees of future performance, and actual results,
developments, and business decisions may differ from those
expressed or implied by these forward-looking
statements.




PART I




Item 1.     Business

Introduction

SBS Technologies, Inc. (SBS) designs
and builds open-architecture embedded computer products that
enable original equipment manufacturers (OEM) to
serve the commercial, communications, enterprise and government
markets. SBS products are integrated into a variety of
applications, including communications networking, medical
imaging, industrial automation and military systems. The
portfolio includes an extensive line of CPU boards, computer
interconnections, avionics, telemetry, and fully integrated
systems and enclosures that system designers can easily utilize
to create a custom solution specific to the users unique
application. SBS objective is to continue to capitalize on
its design expertise and customer service capabilities to
enhance product quality and reduce time to market for OEM
customers. SBS has grown, and intends to continue to do so,
through a combination of internal growth and acquisitions. SBS
completed ten acquisitions between 1992 and June 30, 2002
that broadened SBS product offerings and customer base.
SBS achieves internal growth by expanding its existing product
lines through new product development, through increasing
penetration of its existing customer base, and by adding new
customers.

SBS was incorporated in New Mexico in November
1986 and began operations in September 1987. SBS executive
office is located at 2400 Louisiana Boulevard, NE, AFC
Building 5, Suite 600, Albuquerque, New Mexico, 87110,
telephone number (505) 875-0600. References to
SBS are to SBS Technologies, Inc. and its
consolidated subsidiaries. As of June 30, 2002, SBS had six
subsidiaries: SBS Technologies, Inc., Commercial Group
(SBS Commercial), formerly SBS Technologies, Inc.,
Modular I/O and SBS Technologies, Inc., Connectivity Products,
which merged in May 2002, SBS Technologies, Inc., Government
Group (SBS Government), formerly SBS Technologies,
Inc., Embedded Computers, SBS Technologies, Inc., Industrial
Computers (Industrial Computers), SBS Technologies,
Inc., Communications Products (Communications
Products), SDL Communications, Inc. (SDL) and
SBS Technologies, Inc. Foreign Holding Company (Foreign
Holding). Effective July 1, 2002, the Avionics
Products division of SBS was combined with SBS Government. In
September 2002, Industrial Computers and SDL merged into
Communications Products, at which point the name was changed to
SBS Technologies, Inc., Communications and Enterprise Group. SBS
Technologies Holding GmbH (Holding GmbH) is a
subsidiary of Foreign Holding. ortecElectronic Assembly
GmbH (ortec) is a subsidiary of Holding GmbH.
A partnership exists between Holding GmbH, SBS Technologies GmbH
& Co. KG (or), and the general partner,
SBS or Computers Verwaltungs GmbH.

SBS Technologies®, IndustryPack®,
Omnispan® and Denali® are registered trademarks of
SBS. PCMIP® is a registered trademark of MEN Micro,
Inc. of Carrollton, Texas, and SBS. SBS has filed

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trademark applications for Cascade, Reliaspan and
dataBLIZZARD. All other trademarks or tradenames referred to in
this document are the property of their respective owners.


The following narrative should be read in
conjunction with the Section entitled Risk Factors.

SBS
Operating Segments and Products

SBS operates internationally through two
operating segments: the Communications and Enterprise Group, and
the Commercial and Government Group. These segments were defined
during the fourth quarter of fiscal year 2002, in conjunction
with the change in the Chief Executive Officer and
managements realignment of operations and market
development efforts. To better align similar technologies and
selling channels, the former Commercial Group and the former
Government Group were combined. The combined group consists of
SBS Commercial, SBS Government, or, ortec, and
SBS Avionics Product division. The Communications and
Enterprise Group consists of Communications Products, SDL, and
Industrial Computers. These segments are based on the markets
that are served and the products that are provided to those
markets. Each segment has its own sales and distribution
channels and has a manager who reports directly to the President
and Chief Operating Officer. The Commercial and Government
Groups primary focus is to serve customers in the medical,
semiconductor, aerospace, defense and other commercial markets.
The Communications and Enterprise Group serves major
telecommunications OEMs and OEMs that manufacture
and distribute business computing equipment.

Communications
and Enterprise Group Products

The Communications and Enterprise Group designs
and builds high performance embedded system products to serve
the needs of communications and enterprise OEM customers. SBS
provides a comprehensive portfolio of communication products,
which include single board computers, input/ output modules, and
fully integrated systems. These products are designed to meet
the evolving requirements of communications customers while
reducing cost and expediting time to market. These products are
based on standard form factor hardware designs such as
CompactPCI, PMC, PCI with open standard operating support such
as VxWorks and Linux, and consistent driver development kits for
ATM, frame relay and other software protocols. SBS
approach to product engineering and manufacture allows its OEM
customers to quickly and efficiently integrate these products
using advanced components and software. Typical OEM products in
which SBS products are used are optical switches, routers,
wireless base stations and access systems, radio network
controllers, ATM switches, media gateways, network access
servers, test and monitoring equipment, and firewall and
security appliances. In fiscal years 2002, 2001 and 2000, sales
of these products comprised approximately 30.8%, 49.2%, and
34.3%, respectively, of SBS total sales. As of
September 1, 2002, 2001, and 2000, backlog orders expected
to be filled within the current fiscal year were
$6.4 million, $17.7 million, and $40.0 million,
respectively. However, SBS has recently experienced order
cancellations and requests for extensions of product shipments
and may continue to experience these cancellations and
extensions, and as a result, shipments of the Communications and
Enterprise Groups current backlog may be delayed or
canceled.

Commercial
and Government Group Products

The Commercial and Government Group designs and
builds open-architecture computer components and systems for
CompactPCI, PCI, PMC, VME, and PC/104 standard bus
architectures. The Groups product lines include Intel and
PowerPC architecture CPU boards, serial and networking modules,
analog and digital I/O modules, computer interconnection and
expansion units, MIL-STD-1553, ARINC 429, telemetry, and
complete computer systems. These products support OEM and
end-user applications in semiconductor manufacturing equipment,
industrial automation, medical imaging, military and aerospace,
and entertainment applications. Standard commercial level
products are sold in these segments as well as ruggedized
products in the military and aerospace markets. In fiscal years
2002, 2001, and 2000, sales of these products comprised
approximately 69.2%, 50.8%, and 65.7%, respectively, of
SBS total sales. As of September 1, 2002, 2001, and
2000, backlog orders expected to be filled within the current
fiscal year were $24.1 million, $16.3 million, and
$24.5 million, respectively. However, SBS has in the past
experienced order cancellations and requests for

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extensions of product shipments and may continue
to experience these cancellations and extensions, and as a
result, shipments of the Commercial and Government Groups
current backlog may be delayed or canceled.


Segment
Financial Data

See Notes 13 and 14 to SBS
Consolidated Financial Statements for information about
SBS industry segments, geographic areas, and major
customers.

Customers and
Applications

SBS broad range of products are used by a
diversified OEM customer base in a variety of applications
including communications networking, medical imaging, industrial
automation and military systems. In fiscal 2002, 2001, and 2000,
no one customer equaled or exceeded 10% of SBS sales. Most
of the Communications and Enterprise Groups customers are
OEMs serving the telecommunications or business computing
markets. They use SBS products in applications such as
wireless base station controllers, optical switches, routers and
network monitoring and security applications. The Commercial and
Government Groups customers are primarily OEMs
building products that are used in semiconductor manufacturing,
industrial automation, medical imaging, military and aerospace,
and entertainment applications, or customers using SBS
products in applications such as mission critical components in
fighter aircraft and ground vehicles, flight and ground
simulation, electronic system test solutions, and data link and
command and control applications. Examples of these products
include semiconductor manufacturing equipment, CT scan and MRI
equipment, automotive manufacturing and test equipment, test and
measurement equipment, industrial automation equipment, aircraft
flight simulators, and audio mixing and video authoring
equipment, systems and equipment for military aircraft, military
ground vehicles, telemetry equipment, and space exploration
applications.

Sales and
Marketing

SBS markets its products both domestically and
internationally utilizing a combination of direct employee sales
personnel, independent manufacturers representatives, and
distributors. As of September 1, 2002, SBS had 104
employees, who typically hold engineering degrees, in sales,
marketing and customer relations, 16 U.S.-based independent
manufacturers representatives and 44 distributors located
outside the U.S. Domestically, SBS direct employee sales
personnel are deployed regionally throughout the U.S. as sales
specialists representing their respective operating segments.
Internationally, as of September 1, 2002, SBS had three
direct sales employees, located in the United Kingdom, Sweden
and France. Also, SBS had one direct sales employee located in
the United States who supports SBS sales and distribution
channels in the Far East. Domestically and internationally, the
direct employee sales personnel are supported by field
application engineers who provide pre-sale technical support to
SBS customers. All direct employee sales personnel refer
opportunities to appropriate product line managers within their
respective operating segments. Sales methods vary between
SBS operating segments. The Commercial and Government
Group serves a diverse set of large and small customers. In
order to gain access to this diverse customer base, all
available selling channels are used. Domestically, the direct
employee sales personnel generally sell to the larger OEM
opportunities, while manufactures representatives sell to
the smaller accounts. Internationally, the direct employee sales
personnel sell to the larger OEM opportunities, although all
quoting, pricing and final order acceptance of international
sales of U.S.-built products is controlled domestically.
Independent distributors sell to the smaller accounts. The
Communications & Enterprise Group sells to a more cohesive
customer set generally made up exclusively of large OEM
customers. Selling activities to this customer group generally
consist of sales by the direct employee sales personnel
associated with this Group. All quoting, pricing and final order
acceptance for all sales are controlled by the responsible
operating Group.

SBS maintains its primary sales offices in
Albuquerque, New Mexico, Raleigh, North Carolina, Carlsbad,
California, St. Paul, Minnesota, and Augsburg, Germany. Sales
and sales leads are generated through a range of activities,
including direct sales calls, identification of participants in
key defense and government related programs, participation in
numerous trade shows, direct mail catalogs, advertisements in
leading trade publications, and SBS web site.

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Research and
Development

SBS invests in research and development programs
to develop new products in related markets and to integrate
state of the art technology into existing products. As of
September 1, 2002, SBS had approximately 144 employees
engaged in research and development activities. Of these
employees, 73 have technical degrees and 25 have advanced
degrees. SBS seeks to combine special-purpose hardware, firmware
and software in its products to provide its customers with the
desired functionality. SBS research and development
expense was $18.5 million, $20.1 million and
$15.9 million in fiscal 2002, 2001 and 2000, respectively,
corresponding to 15.6%, 10.7% and 12.5% of sales, respectively.

SBS has several trademarks and has filed
applications for other trademarks as described in the
Introduction above. However, SBS has generally sought only
limited patent protection for its technology. Currently, SBS has
only one patent issued, expiring in November 2016, and three
patents pending. SBS primarily relies on trade secrets for
protection of its intellectual property and believes that future
financial performance is much more dependent on the timely
introduction of new products and technology and on its customer
relationships than protection of its intellectual property.

During fiscal 2002, the Communications and
Enterprise Group responded to definite shifts in market demand
and technology trends. The Groups research and development
efforts concentrated on improving the breadth of products
available as well as the quality of engineering designs. The
Group expanded its PowerPC processor portfolio to include
several PPC 750FX products (Palomar 1000) with
emphasis on high performance, low footprint technologies. Also,
the Group introduced a dual processor PMC supporting 512MB of
SDRAM and a multi-function bridge. In addition, the Group
developed two compliant PICMG 2.16 compatible Compact PCI single
processor blades, one based on the IBM 750FX technology
(Olympus 2100) and one based on the mobile Pentium III
processor (CT8). The Olympus 2100 is unique in its
capability to host two PMC sites, supporting basic packet
switching functions through on-board packet memory. The Group
also expanded its systems capabilities with the development of a
PICMIG 2.16 compatible chassis supporting multiple products,
including a system controller (Olympus 1000), a multi-port
broadband switch (Sabre 2000) and additional processing
blades (Olympus 2100). New technologies continue to be
designed for launch in the coming year. SBS expects these to
increase the ease in which the broad selection of SBS WAN I/O
and processor PMC technology can be embedded in communication
equipment based on PIGMG 2.16 and PICMG 3 standards.
During 2002, the Group moved into the packet processing market
with the development of a voice-over ATM Compact PCI product
currently supporting voice and message inter-connect in the
wireless market. An announced partnership with Spectrum Signal
Processing Inc., a vocoder supplier, will enable deployment of
voice-over IP capabilities ranging from DS-3 to products to
include support for the WAN portfolio in a common framework,
making these products easier and cheaper to integrate with
customers applications.

During fiscal 2002, the Commercial and Government
Groups research and development efforts concentrated on
improvement of existing technology, as well as the introduction
of new products and technology. In the avionics product line,
four new versions of MILSTD 1553 products were introduced
in PMC, VME and CompactPCI formats, along with a new graphical
interface for the PASS 1553 software. By adding these new
1553 products, SBS increased its product line targeted at the
avionics test marketplace. The Group also developed
conduction-cooled versions of the 1553 and ARINC 429 PMC
boards as well as the CompactPCI 1553 board. These
conduction-cooled versions of the product are used in the
Groups systems offerings for not only avionics based
platforms, but ground based platforms as well. In addition, two
new DSP based industrial I/O products were developed, also for
use in systems applications. The Group also expanded its single
board computer products with a new release of the VG4, RL4 and
CK3 PowerPC based products. All of these products are used in
military systems as well as commercial applications. The Group
continued to expand the Ethernet and Fibre Channel product
offerings with faster Fibre Channel interfaces and by
introducing multiple (4) channel gigabit Ethernet PMC
boards. The Group extended the breadth of the Ethernet and Fibre
Channel product line by adding PMC and CompactPCI board formats.
Fibre Channel and the Ethernet products are used in both
commercial and government applications. New technology products
added by the Group during fiscal 2002 include the addition of
HIPPI (high performance parallel interface) products for high
performance computer interconnection and the introduction of new
InfiniBand® products.

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HIPPI is a product line that the Group expanded
with a new PCI version of the HIPPI interface that supports
3.3 volt operation. This is required to support the newer
Silicon Graphics workstation and other high-end PCI machines.
InfiniBand is a communications standard for high bandwidth
data-transfer between servers and I/O devices. The InfiniBand
standards are new and the Group is providing key products to
enable customers to add InfiniBand capability to their product
lines.


Suppliers

SBS uses contract manufacturing to produce
substantially all of its U.S.-built board-level products. SBS
obtains parts from large electronics parts suppliers and printed
circuit boards from printed circuit board manufacturers and
provides these parts and boards as kits to contract
manufacturing companies that fabricate SBS products.
Following manufacturing, SBS performs test, packaging and
support functions for its products. During fiscal year 2002, SBS
moved and consolidated the majority of its test, packaging and
support functions previously performed at the Newark, California
facility, the Albuquerque, New Mexico facility, and the Raleigh,
North Carolina facility to the St. Paul, Minnesota
facility. In addition, these same functions previously performed
at the Mansfield, Massachusetts facility were moved and
consolidated into the Carlsbad, California facility. SBS has
begun complete turnkey outsourcing to contract manufacturers,
although it is for a small portion of its total production. SBS
reduces dependence on a particular contract manufacturer by
using multiple contract manufacturers for many of SBS
products.

SBS German operation manufactures
approximately 70% of its board-level products at its Mindelheim
facility, using contract manufacturers for its OEM production
business and certain ruggedized and military applications.

Competition

The embedded computer industry is highly
competitive and fragmented, and SBS competitors differ
depending on product type, company size, geographic market and
application type. Consolidation within the communications,
capital equipment and defense industries has resulted in
increased competition and may result in an increase in pricing
pressure across SBS product lines. SBS believes it
differentiates itself from its competition based on the
following:



| |   |                                                                     
| | - | --------------------------------------------------------------------
| |  | broad product line,                                                 
|
| |  | willingness to adapt products to customer needs
    (customization),
|
| |  | after sale support, and                                             
|
| |  | maintaining long-term customer relationships.                       

SBS competition in each of its operating
segments is described below.

The Communications and Enterprise Groups
CPU product line competes against other suppliers of CPU boards
based on PowerPC and Intel microprocessor technology, including
Motorola, Inc., Force Computers, Inc. (a wholly-owned subsidiary
of Solectron Corporation), RadiSys Corporation, Artesyn
Technologies, Inc., Ziatech Corporation (a wholly-owned
subsidiary of Intel Corporation) and others. The WAN I/O
products compete with other suppliers of similar products
supplying the telecommunications and data communications segment
of the embedded computer market. They include companies such as
Performance Technologies, Incorporated, Digi International,
Inc., and Dialogic Corporation (a subsidiary of Intel
Corporation). The systems and enclosure products compete with
other suppliers of special purpose PC and CompactPCI platforms,
enclosures and turnkey systems, such as Force Computers, Inc.,
RadiSys Corporation and Motorola, Inc.

The Commercial and Government Groups IP,
PMC and PCMIP I/O modules have two classes of competition.
The first class includes companies that compete directly by
selling these products. The second class includes companies that
compete with these products using a different implementation to
provide functionally equivalent products. Competitors in each of
these classes include Acromag, Inc., Systran, Inc., VMIC, Inc.,
and a few small companies. Companies that directly compete in
the PMC Ethernet market

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include Znyx Networks, Inc. and Ramix, Inc. The
Groups computer expansion unit product line competes
directly with Mesa Ridge Technologies, Inc. dba Magma (a
subsidiary of Mobility Electronics, Inc.) and indirectly with
personal computer manufacturers that offer specialized computer
motherboards with increasing numbers of PCI slots. The Fiber
Channel product line competes directly with Systran, Inc., VMIC,
Inc. and in some instances widely available SAN hardware.
Specialized products such as bus adapters and dataBLIZZARD have
no direct competitors. The Groups CPU products primarily
compete with other suppliers of CPU boards based on Intel and
PowerPC microprocessor technology serving the embedded computer
market, such as Force Computers, Inc. (a subsidiary of Solectron
Corporation), RadiSys Corporation, VMIC, Inc. and XYCOM, Inc. In
the ruggedized computer board and system market primarily
serving military customers, the Groups main competitors
are DY4 Systems, a business unit of Force Computers, Inc. (a
subsidiary of Solectron Corporation) and Radstone Technologies
PLC. The Groups avionics interface products compete with
other companies such as Ballard Technologies, Inc., Data Devices
Corporation, Excalibur Technologies Corporation, Condor
Engineering, Inc. and Gesellschaft Fur Angewandte Informatik und
Mikroelekemik GmbH. The Groups telemetry products compete
with suppliers such as AVTECH Systems, Inc.,
L3 Communications, Inc. and the Veridian Systems division
of Veridian Corporation.




| |          
| | ---------
| | Employees

As of September 1, 2002, SBS had
approximately 446 employees at its eight locations:
Albuquerque, New Mexico; Carlsbad, California; Newark,
California; Raleigh, North Carolina; St. Paul, Minnesota;
Mansfield, Massachusetts; and Augsburg and Mindelheim, Germany.
Of these employees, 63 were in executive and administrative
positions; 104 were in sales, marketing and customer relations;
144 were in research and development; 124 were employed in
support of ongoing production, and 11 were employed on a
part-time basis.

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Risk Factors

Statements in this Report about SBS
outlook for its business and markets, such as projections of
future performance, statements of managements plans and
objectives, and forecasts of market trends and other matters,
are forward-looking statements that involve risks and
uncertainties. SBS actual results may differ materially
from the results discussed in the forward-looking statements.
Factors that may cause such a difference include, but are not
limited to, those discussed below:

SBS period to period sales and
operating results have fluctuated, and may continue to fluctuate
significantly, which has caused, and may continue to cause,
volatility in the market price for its common
stock.SBS has experienced
fluctuations in its period to period sales and operating results
in the past, and management expects that fluctuations will occur
in the future. SBS sales, on both an annual and a
quarterly basis, can fluctuate as a result of a variety of
factors, many of which are beyond its control and which it may
not be able to predict. These factors include:



| |   |                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the timing and volume of customer orders and
    delays,                                                                                                                    
|
| |  | success in achieving design wins in which
    SBS products are designed into those of SBS
    customers,                                                                  
|
| |  | manufacturing delays,                                                                                                                                                       
|
| |  | delays in shipment due to component shortages,                                                                                                                              
|
| |  | cancellations of orders,                                                                                                                                                    
|
| |  | changes in the mix of products sold,                                                                                                                                        
|
| |  | the rate of introduction of new products,                                                                                                                                   
|
| |  | ability to maintain appropriate inventory levels,                                                                                                                           
|
| |  | excess or obsolete inventory and changes in
    valuation of inventory,                                                                                                     
|
| |  | cyclicality or downturns in the markets served by
    SBS customers, including significant reductions in
    defense, communications and capital equipment expenditures,   
|
| |  | political, legal, regulatory and economic
    conditions and developments in the areas of the world in which
    SBS operates or into which SBS might expand its operations,
|
| |  | competition from new technologies and other
    companies,                                                                                                                  
|
| |  | variations in sales channels, product costs and
    the mix of products sold, and                                                                                           
|
| |  | economic disruptions due to terrorist activity.                                                                                                                             

Because fluctuations in operating results have
happened in the past, and may continue to happen in the future,
SBS believes that comparisons of the results of its operations
for preceding quarters and fiscal years are not necessarily
meaningful, and that investors should not rely on the results
for any one quarter or year as an indication of how SBS will
perform in the future. Investors should also understand that, if
SBS sales or earnings for any quarter or year are less
than the level expected by securities analysts or the market in
general, the market price for SBS common stock has been in
the past, and may be, in the future, subject to an immediate and
significant decline.

SBS sales have been, and may to
continue to be, significantly reduced due to the currently
depressed communications and capital equipment markets and may
be further limited if anticipated increases in defense spending
do not occur or if defense spending is
reduced.SBS has derived a
significant portion of its sales from products for
communications and capital equipment applications and directly
or indirectly from the U.S. Department of Defense. The
communications and capital equipment markets are characterized
by intense competition and rapid technological change. The
communications market grew rapidly in the late 1990s, but
is currently experiencing significantly depressed conditions as
to which management has no immediate expectations of recovery.
After over a decade of downward trends, the current defense
budget outlook is one of growth. However, Congress may not
approve increased defense funding. Any increased

7



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funding may not be available for hardware
procurements or increased research and development spending, and
SBS may not win any contracts funded by any budgetary increases.
In addition, significant consolidation in the defense industry
has reduced the number of defense contractors, resulting in
increased competition for companies like SBS in establishing
customer relationships with defense contractors. If spending by
the Department of Defense declines, or if consolidation in the
defense industry continues, SBS may be unable to maintain
existing customer relationships or establish new relationships
with defense contractors. Even if SBS is successful in
maintaining existing customers and establishing new customer
relationships with defense contractors, sales of SBS
products to those customers may be reduced as a result of any
Department of Defense spending cutbacks.


If SBS sales do not increase, or if
they continue to decline, SBS could experience difficulty in
obtaining debt or equity
financing.Contraction and
declines in the markets SBS serves has had and may continue to
have an adverse impact on SBS sales and income. During
fiscal 2002, and at June 30, 2002, SBS incurred losses that
caused it to be in default of its bank credit facility
covenants, resulting in the inability to borrow under the
facility. On September 20, 2002, SBS canceled its bank
credit facility. SBS may require external financing in the
future, and that financing may not be available on terms
acceptable to SBS or at all. In addition, continuing losses
would likely impede SBS ability to raise funds through the
sale of debt or equity securities.

If SBS does not persuade OEMs to use
its products instead of those of other suppliers, SBS
sales could be harmed.SBS
sales depend, in part, on its ability to obtain and maintain
design wins for its components from OEMs. OEMs that
do not currently integrate SBS components into their
products may not be willing to purchase components from SBS
because the cost of integrating new components into their
products may be more expensive than continuing to use existing
components. OEMs currently using SBS components may
elect to use another suppliers components if the other
suppliers designs are superior to SBS designs. Also,
OEMs currently integrating SBS components may
redesign their products in a manner that no longer requires
SBS components. If SBS fails to maintain existing design
wins or to achieve new design wins, SBS sales could be
reduced.

SBS might have to expend substantial funds
to redesign its technology because of changes in industry
standards, customer preferences or
technology.Most of SBS
products are developed to meet industry standards that define
the basis of compatibility in operation and communication of a
system supported by different vendors. These standards are
continuing to develop. If these standards are eliminated or
changed, the design of SBS products could be inappropriate
or obsolete, and SBS could be required to undertake costly
redesign and research and development efforts. SBS sales
also depend in part on the ability to develop state of the art
products that comport with changing customer preferences. SBS
may, or may not, be successful in developing these products in a
timely manner, or in selling the products it develops. SBS
sales could significantly decrease, and its products could
become obsolete, if SBS fails to adapt timely to changing
industry standards, advances in technology, or customer
preferences.

SBS business depends upon continually
introducing new and enhanced products and solutions for business
needs. The development or adaptation of products and
technologies requires SBS to commit financial resources,
personnel and time well in advance of sales. In order to
compete, SBS decisions with respect to those commitments
must accurately anticipate both future demand and the technology
that will be available to meet that demand.

To grow, SBS must persuade customers to
outsource their component needs.Many of SBS potential customers design and manufacture
embedded computer components internally, which they may view as
a cost-savings over purchasing these components from suppliers
like SBS. To increase its sales, SBS needs to persuade them that
use of SBS components and services is cost-effective.

Increased market acceptance of SBS products
also depends on a number of other factors, including:



| |   |                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------
| |  | the quality of its design and production
    expertise,                                            
|
| |  | the increasing use and complexity of embedded
    computer systems in new and traditional products,

8



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| |   |                                                                                  
| | - | ---------------------------------------------------------------------------------
| |  | the expansion of markets that are served by
    embedded computers,              
|
| |  | time to market requirements of SBS products,                                    
|
| |  | the assessment by SBS customers of direct
    and indirect cost savings, and    
|
| |  | SBS customers willingness to rely on
    SBS for mission-critical applications.

SBS faces significant competition.The embedded computer industry is
highly competitive and fragmented. SBS competitors differ
depending on product and market type, company size, geographic
market and application type. SBS faces competition in each of
its operating segments.

Competition in all of SBS operating
segments is based on:



| |   |                                  
| | - | ---------------------------------
| |  | performance,                     
|
| |  | time-to-market,                  
|
| |  | customer support,                
|
| |  | product longevity,               
|
| |  | existing customer relationships, 
|
| |  | supplier stability,              
|
| |  | price,                           
|
| |  | breadth of product offerings, and
|
| |  | reliability.                     

Many of SBS existing and potential
competitors are bigger companies that have a number of
significant advantages over SBS, including:



| |   |                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | significantly greater financial, technological
    and marketing resources, giving them the ability to respond more
    quickly to new or changing opportunities, technologies and
    customer requirements,
|
| |  | established relationships with customers or
    potential customers, which can make it harder for SBS to sell
    its products to those customers,                                                           
|
| |  | a longer operating history, and                                                                                                                                                                              
|
| |  | more extensive name recognition and marketing
    capability.                                                                                                                                                

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

Because of increased competition, SBS might
encounter significant pricing pressures across its product
lines. These pricing pressures could result in significantly
lower average selling prices and reduced profit margins for
SBS products. SBS may not be able to offset the effects of
any price reductions with an increase in the number of its
customers, cost reductions or otherwise. SBS cannot assure
investors that it will be able to compete effectively in its
current or future markets.

SBS purchases many of the components it
uses from third party suppliers who may discontinue or change
their products or have insufficient
supply.Many of SBS products
contain state-of-the-art electronic components. SBS depends upon
third parties for its supply of many of these components. SBS
obtains some of these components from a sole supplier or a
limited number of suppliers, for which alternate sources may be
difficult to locate. SBS has experienced, and may continue to
experience, component part shortages, and has in the past built,
and may in the future build, inventory of these components.
Moreover, suppliers may discontinue or upgrade some of the
products incorporated into SBS products, which could
require SBS to redesign a product to incorporate newer or
alternative technology. SBS inventory of component parts
may become obsolete, which has in the past and may in the future
result in cost write-downs. Although SBS believes that it has
arranged for an adequate supply of components to meet its
short-term requirements, SBS

9



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does not have contracts for all components that
would assure availability and price. If sufficient components
are not available when SBS needs them, SBS product
shipments could be delayed, which could affect its sales during
certain periods as well as lead to customer dissatisfaction. If
enough components are not available, SBS might have to pay
premiums for parts in order to make shipment deadlines. Paying
premiums for parts or building inventory of scarce parts, or
having SBS existing inventory become obsolete, could lower
or eliminate its profit margin, reduce its cash flow, and
otherwise harm its business.


SBS uses contract manufacturers to produce
substantially all of its U.S-built board-level products and so
is dependent on their timeliness, quality, and
availability.SBS obtains parts
from large electronics parts suppliers and printed circuit
boards from printed circuit board manufacturers and provides
these parts and boards as kits to contract manufacturing
companies that fabricate SBS products. Many of the
contract manufacturers utilized by SBS are small companies with
limited capital resources. SBS reduces dependence on a
particular contract manufacturer by using multiple contract
manufacturers for many of its products, although there is no
assurance that SBS will not experience delays in obtaining
product from contract manufacturers. If it becomes necessary for
SBS to move its production to new contract manufacturers due to
non-performance by current contract manufacturers, additional
delays in obtaining product could be incurred, as qualifying new
contract manufacturers is costly and time-consuming. If SBS is
unable to meet its customers delivery requirements due to
delays in obtaining product from contract manufacturers,
SBS sales and results of operations could be materially
reduced.

SBS products have lengthy sales
cycles that require SBS to expend resources in advance of
receiving revenue.SBS
customers typically require several months to test and evaluate
SBS products before designing their products to
incorporate SBS components. Once SBS customers have
determined to use SBS components, they may require several
more months to begin volume production of products incorporating
these components. Because of this lengthy sales cycle, SBS may
experience delays from the time it increases its operating
expenses and its investments in inventory until the time that
SBS generates sales from these components. SBS may never
generate sales from components after incurring development
expenses if SBS customers decide not to purchase them.
Even if SBS customers select SBS components to
incorporate into their products, SBS customers may not
market or sell their products successfully.

SBS is subject to order and shipment
uncertainties that could harm its operating
results.SBS typically sells its
products pursuant to purchase orders that customers can cancel
or defer on short notice without incurring a significant
penalty. Cancellations or deferrals could cause SBS to hold
excess inventory that may not be salable to other customers at
commercially reasonable terms, which could reduce its profit
margins and restrict its ability to fund its operations.

SBS has limited patent protection covering
its technology, and SBS may not be able to protect its
intellectual property. Disputes could be
expensive.SBS success
depends, in part, on its ability to develop and protect its
intellectual property. SBS has sought only limited patent
protection for its technology. SBS currently has one patent
issued and three patents pending. SBS cannot guarantee that its
pending patents will be issued, or that if issued, its pending
or existing patents will be enforced in a court of law if
challenged. Patent applications in the United States are not
publicly disclosed until the patents are issued. Therefore,
undisclosed U.S. patent applications that relate to
SBS products and technology may have been filed. Also, SBS
cannot be certain that foreign patents have not or will not be
issued that would harm its ability to commercialize its current
and future products. Even as SBS obtains patent protection for
its intellectual property, third parties could independently
develop and patent equivalent or superior products or
technology, in which case SBS may be required to obtain licenses
to that technology from those parties.

In addition to patent rights, SBS relies upon
trade secret laws, industrial know-how and employee
confidentiality agreements to protect its intellectual property.
Third parties or employees may breach SBS agreements with
them or otherwise attempt to disclose, obtain or use SBS
products and technologies. Further, if consultants, employees
and other parties apply technological information developed
independently, by them or others, to SBS projects,
disputes may arise as to the proprietary rights to that
information. Those disputes may not be resolved in SBS
favor.

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SBS may not be able to obtain court enforcement
of its agreements, which would leave SBS with inadequate
remedies to protect its intellectual property rights. This is
particularly true in foreign countries, where laws or law
enforcement practices often do not protect intellectual property
as fully as in the United States.

SBS enters into contracts with OEMs which
typically provide for broad indemnification of the OEMs
against allegations of infringements of intellectual property
rights arising from SBS products, including costs of
defense. SBS does not carry insurance covering any such claims.
Any such claim or claims could materially affect the financial
condition of SBS.

SBS may have to litigate to enforce or defend its
intellectual proprietary rights. In addition, companies
frequently sue other companies as a means of delaying the
introduction of a competitors products or technologies.
Any litigation, regardless of outcome, including any
interference proceeding to determine priority of inventions,
oppositions to patents in foreign countries, or litigation
against SBS or any SBS indemnified OEM, may be costly and time
consuming. Further, if it were ultimately determined that
SBS claimed intellectual property rights are
unenforceable, or that its products infringe on the rights of
others, SBS may be required to pay past royalties or obtain
licenses to use technologies. SBS may not be able to obtain
licenses for these technologies on commercially reasonable
terms, or at all.

SBS success depends, in part, on its
ability to identify and to acquire and successfully integrate
new businesses.A major element of
SBS business strategy is to pursue acquisitions that
either expand or complement its business. SBS has increased the
scope of its operations through the acquisition of ten
businesses and product lines since 1992. Where business
conditions permit, SBS intends to continue to pursue actively
acquisition opportunities, including some that could be material
and that may become available in the near future. This
acquisition strategy may pose additional risks to SBS, including:



| |   |                                                                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | SBS might not be able to identify or acquire
    acceptable acquisition candidates on terms favorable to it, and
    in a timely manner.                                                                                                                                                  
|
| |  | SBS management and financial controls,
    personnel, and other corporate support systems might not be
    adequate to manage the increase in the size and the diversity of
    scope of its operations as a result of acquisitions and to
    integrate effectively acquired businesses.
|
| |  | SBS acquisitions might not increase its
    revenue or earnings and the companies acquired might not
    continue to perform at their historical levels.                                                                                                                                 
|
| |  | SBS may use cash for acquisitions that would
    otherwise be available to fund SBS operations or to use
    for other corporate purposes.                                                                                                                                               
|
| |  | SBS shareholders may experience dilution if
    SBS uses its capital stock to pay for acquisitions, and                                                                                                                                                                                  
|
| |  | SBS debt burden will increase as a result
    of any borrowings SBS may make to pay for acquisitions.                                                                                                                                                                                    

SBS may need to raise additional capital to
fund its operations and to complete
acquisitions.SBS depends on cash
flow from operations to fund its operations and pay for its
acquisitions. If SBS experiences decreased sales, increased
expenses, or a combination of the two, it may need to raise
additional capital to fund its operations or acquire other
businesses. If SBS decides to do so, SBS could attempt to issue
debt securities or capital stock. SBS may not be able to sell
these securities, particularly under the current market
conditions. Even if SBS were successful in finding buyers for
its securities, the buyers could demand commercially
unreasonable terms. For example, if SBS had to sell debt
securities, it might be forced to pay high interest rates or
agree to onerous operating covenants, which could in turn harm
SBS ability to operate its business by reducing its cash
flow and increasing restrictions on its operating activities. If
SBS were to sell its capital stock, SBS might be forced to sell
shares at a depressed market price, which could result in
substantial dilution to its existing shareholders. In addition,
any shares of capital stock SBS may issue may have rights,
privileges, and preferences superior to those of SBS
common shareholders. If SBS is unable to raise additional
capital on commercially reasonable terms, it may be required to
reduce its operations and delay or terminate any potential
acquisitions plans, which would harm SBS ability to grow.

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SBS earnings have been, and could
continue to be, adversely affected because of charges resulting
from acquisitions, or an acquisition could reduce shareholder
value.As part of SBS
strategy for growth, SBS acquires compatible businesses. In
accounting for a newly acquired business, SBS is, in many cases,
required to amortize, over a period of years, certain
identifiable intangible assets. Although usually the acquired
business current operating profit offsets the amortization
expense, a decrease in the acquired business operating
profit could reduce SBS overall net income and earnings
per share. Changes in future markets or technologies may require
SBS to amortize intangible assets faster and in such a way that
SBS overall financial condition or results of operations
are harmed. During fiscal year 2002, changes in economic and/or
business conditions caused impairment of goodwill and other
intangibles acquired in an acquisition, resulting in a
significant charge against SBS earnings. If economic
and/or business conditions do not improve, SBS may incur
additional impairment charges against earnings in the future.
SBS may also be required, under generally accepted accounting
principles, to charge against earnings upon consummation of an
acquisition the value of an acquired business technology
that does not meet the accounting definition of completed
technology. An acquired business could reduce shareholder
value if it should generate a net loss or require invested
capital.

SBS may expend resources without receiving
benefit from strategic alliances with third
parties.From time to time, SBS
may enter into strategic alliances to deliver solutions to its
customers. These alliances are typically formed to provide
products or services that SBS does not provide in its core
businesses. SBS may expend capital and resources on these
alliances but may not receive any immediate or long-term return
or economic benefit from them.

SBS depends on its employees for
success.SBS ability to
maintain its competitive position and to develop and market new
products depends, in part, upon its ability to retain key
employees and to recruit and retain additional qualified
personnel, particularly engineers. Competition for qualified
employees in the computer industry is intense. If SBS is unable
to retain and recruit key employees, SBS product
development and marketing and sales could be harmed.

SBS is subject to significant product
liability risk.SBS products
and services could subject SBS to product liability or
government or commercial warranty claims. SBS maintains primary
product liability insurance for its non-aviation products with a
general aggregate limit of $1.0/$2.0 million per occurrence
and a $50.0 million excess umbrella policy. SBS maintains,
for its aviation products, a $100.0 million liability
insurance policy, per occurrence. SBS products are widely
used in a variety of applications. If a claim is made against
SBS, SBS insurance coverage might not be adequate to pay
for SBS defense or to pay for any award, in which case SBS
would have to pay for it. Also, as a result of the terrorist
attacks of September 11, 2001, the cost of insurance
coverage has significantly increased. In the future, SBS might
not be able to continue its insurance coverage at desired
levels, for premiums acceptable to SBS. If a litigant were
successful against SBS, a lack or insufficiency of insurance
coverage could significantly harm SBS financial condition.

SBS faces political, economic and
regulatory risks associated with its international sales and
operations not faced by businesses operating only in the United
States.SBS sells its products in
countries throughout the world from its United States and German
based operations. SBS intends to continue to expand its
operations and sales outside the United States. SBS
international operations and sales subject SBS to risks not
experienced by companies operating only in the United States,
including:



| |   |                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | increased governmental regulations,                                                                                                                                                                           
|
| |  | export and import controls,                                                                                                                                                                                   
|
| |  | political, economic and other uncertainties,
    including, risk of war, revolution, expropriation, renegotiation
    or modification of existing contracts, standards and tariffs,
    and taxation policies,
|
| |  | international monetary fluctuations that may make
    payment more expensive for foreign customers who may, as a
    result, limit or reduce purchases,                                                       
|
| |  | exposure to different legal standards,
    particularly with respect to intellectual property,                                                                                                                
|
| |  | longer accounts receivable collection cycles,                                                                                                                                                                 

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| |   |                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | trade disputes or new trading policies that could
    limit, reduce, disrupt or eliminate SBS sales and business
    prospects outside the United States, and
|
| |  | unexpected changes in regulatory requirements
    that impose multiple conflicting tax laws and regulations.                                                  

Exchange rate fluctuations could reduce
SBS earnings when stated in
U.S. Dollars.Substantially
all of SBS U.S. export sales to date have been
denominated in United States dollars and substantially all sales
generated by SBS subsidiary based in Germany have been
denominated in Euros. However, some sales in the future may be
denominated in other currencies. Any decline in the value of
other currencies in which SBS makes sales against the United
States dollar or Euro will have the effect of decreasing
SBS consolidated earnings when stated in United States
dollars. SBS has not in the past, but may in the future, engage
in hedging transactions that could have the effect of minimizing
the risks associated with these types of currency fluctuations
but could have adverse consequences to SBS.

SBS common stock price can be
volatile because of several factors, including a limited public
float.During the twelve-month
period ended June 30, 2002, the sale price of SBS
common stock fluctuated from $9.94 to $20.05 per share. SBS
believes that its common stock is subject to wide price
fluctuations because of several factors, including:



| |   |                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | quarterly and annual fluctuations in SBS
    operating results,                                                                                                                           
|
| |  | a relatively thin trading market for SBS
    common stock, which causes trades of small blocks of stock to
    have a significant impact on SBS stock price,                             
|
| |  | announcements of new technologies by SBS, its
    competitors or customers,                                                                                                                
|
| |  | general conditions in the markets served by SBS,                                                                                                                                           
|
| |  | fluctuations in earnings of SBS competitors,                                                                                                                                              
|
| |  | changes in earnings estimates or investment
    recommendations by securities analysts,                                                                                                    
|
| |  | general volatility of the stock markets and the
    market prices of other publicly traded companies,                                                                                      
|
| |  | economic disruptions due to terrorist activity,
    and                                                                                                                                    
|
| |  | investor sentiment regarding equity markets
    generally, including public perception of corporate ethics and
    governance and the accuracy and transparency of financial
    reporting.

SBS is subject to credit
risk.Credit risk is inherent in
SBS commercial activities. Credit risk relates to the risk
of loss resulting from a customers failure to pay in accordance
with contractual obligations. The majority of SBS sales
are on open account, typically with 30 to 60 day payment
terms without any down payment or security. Many of SBS
customers and potential customers in various markets, including
the communications market, have had the credit ratings of their
debt reduced. As a result, some of SBS customers
creditworthiness may be reduced, which could pose a heightened
risk of bankruptcy or delayed payment that could affect
SBS earnings and cash flow.

SBS may be subject to liquidity
concerns.For a discussion of
factors affecting SBS sources of cash and liquidity,
please read the Liquidity and Financial Condition section of
Item #7 Managements Discussion and Analysis of
Financial Condition and Results of Operations.

SBS is subject to the effects of terrorist
attacks and acts of war.SBS is
currently unable to measure the ultimate impact of the terrorist
attacks of September 11, 2001 on its industry and the
United States economy as a whole. The uncertainty associated
with the retaliatory military response of the United States and
other nations and the risk of future terrorist activity may
impact SBS results of operations and financial condition
in unpredictable ways. The occurrence or risk of occurrence of
future terrorist attacks or related acts of war could adversely
affect the economy of the United States and other countries. A
lower level of economic activity could result in a decline in
demand for SBS products that could adversely affect
SBS sales and earnings and limit SBS future growth
prospects. The terrorist attacks and the associated
uncertainties have caused, and

13



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may continue to cause, adverse changes in the
insurance markets. The cost of, and scope of, insurance have
become more uncertain as a result of the terrorist attacks of
September 11, 2001 and other factors. In the future, if SBS
is unable to obtain adequate insurance coverage or if it must
pay additional significant increases in the cost of insurance,
SBS future results of operations could be materially
impacted.





Item 2.     Properties

SBS leases office and manufacturing space in
Albuquerque, New Mexico, Carlsbad, California, Newark,
California, Raleigh, North Carolina, St. Paul, Minnesota,
Mansfield, Massachusetts, Madison, Wisconsin, and Augsburg and
Mindelheim, Germany. SBS standard practice is to obtain
all of its facilities through operating leases. SBS maintains an
insurance plan covering all its facilities and contents.

The Albuquerque, New Mexico leased facility
consists of approximately 42,500 square feet located in a
multi-floor office building. This facility houses the sales and
engineering functions of SBS Commercial and Government
Groups avionics interface and telemetry product lines, as
well as certain test, packaging and support function for these
product lines. The Albuquerque facility also serves as SBS
corporate headquarters. The lease term for approximately 39,000
square feet of the Albuquerque, New Mexico facility runs through
June 30, 2005, with an option to extend the term for an
additional five years, and the lease term for approximately
3,500 square feet terminates on January 31, 2004.
Management believes that this facility will be sufficient to
serve SBS needs through the term of the lease.

SBS general purpose I/ O engineering team,
which supports the Commercial and Government Group, is located
in Newark, California. The approximate 27,000 square foot
facility, which is leased for a five-year term expiring
November 30, 2004, is a one story, multi-tenant building in
a business park. It consists of approximately 18,000 square feet
of office space and approximately 9,000 square feet of
manufacturing space. In August 2001, SBS moved and consolidated
this facilitys test, packaging and support functions with
the SBS St. Paul, Minnesota facility, creating excess
capacity at this facility. SBS is actively attempting to
sub-lease this facility, and if successful, will move the
general purpose I/ O engineering team to a smaller facility in
the immediate Newark, California area.

SBS Commercial and Government Group Intel
and PowerPC CPU sales and engineering functions are located in
Raleigh, North Carolina which leases an 11,000 square foot one
story multi-tenant facility. The lease expires on
November 30, 2002. Management is currently negotiating a
renewal of this lease.

SBS St. Paul, Minnesota facility
consists of approximately 43,650 square feet, located in a
business park. This facility consists of approximately 18,850
square feet of office space occupied by the Commercial and
Government Groups sales and engineering functions for its
connectivity, expansion and general purpose I/ O products, and
24,800 square feet of production and warehouse space utilized by
SBS as its production center for its computer connectivity and
expansion unit products, general purpose I/ O products, avionics
interface products, and all U.S. built Intel based CPU products.
The lease expires on January 31, 2006. Management believes
that this facility will be sufficient to serve its needs through
the term of the lease.

SBS Communications and Enterprise Group WAN
I/ O engineering team is located in Mansfield, Massachusetts.
The approximate 31,200 square foot facility, which is leased for
a five-year term expiring on June 14, 2005, is a one-story
multi-tenant building in a business park. In August 2001, SBS
moved and consolidated the test, packaging and support functions
for its WAN I/ O products from the Mansfield facility to its
Carlsbad, CA facility, creating excess capacity in Mansfield.
Currently, management intends to occupy this facility through
the term of the lease.

SBS Communications and Enterprise Group
leases, in Carlsbad, California, an approximate 75,200 square
foot facility, located in a business park, consisting of
approximately 32,000 square feet of office space and
approximately 43,200 square feet of test, packaging and support
space. The lease term is for seven years expiring in April 2006,
plus one option to extend the lease for three additional years.
Management believes that this facility will be sufficient to
serve the needs of these operations through the term of the
lease. The Group also leases, in Madison, Wisconsin,
approximately 7,200 square feet of a 90,000 square foot
multi-floor

14



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##### Table of Contents



office building with the lease expiring on
April 30, 2006. In July 2002, the Group vacated the
Wisconsin facility and is activity attempting to sublet this
location.


SBS leases, in Augsburg, Germany, a six floor
building, consisting of approximately 30,000 square feet of
office, test, packaging and support areas for its oroperations. The lease has a term of ten years expiring
December 31, 2005. Management believes that the facility is
sufficient to serve the needs of the oroperations
through the term of the lease. In addition, SBS leases, on a
month-to-month basis, approximately 5,000 square feet of
manufacturing space in a multi-use facility in Mindelheim,
Germany for its ortecoperations. Management believes
that the facility is sufficient to serve the needs of
ortec for the foreseeable future.






Item 3.     Legal
Proceedings


Subsequent to June 30, 2002, SBS received
notice of a claim for patent infringement regarding the sale of
SBS PCMCIA product line. Management is currently
evaluating the claim. Due to the uncertainty regarding the
ultimate outcome of this matter, SBS is currently unable to
determine an estimate of the amount or range, if any, of
potential loss. However, management believes the outcome of this
matter will not have a material impact on SBS financial
position.

SBS is subject to various claims that arise in
the ordinary course of its business. In the opinion of
management, the amount of ultimate liability with respect to
these actions will not materially affect the financial position,
results of operations, or liquidity of SBS. SBS is not a party
to, and none of its property is subject to, any material pending
legal proceedings. SBS knows of no material proceedings
contemplated by governmental authorities.






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


Not applicable.






PART II







Item 5.     Market
for Registrants Common Equity and Related Stockholder
Matters


The following table sets forth the price range
(adjusted for two-for-one stock split declared August 18,
2000) of trading in SBS Common Stock as reported on The
Nasdaq Stock Market for each full fiscal quarter within the last
two fiscal years:

|                           |  |      |        |     |  |   |        | 
|-------------------------- |  | ---- | ------ | --- |  | - | ------ | 
|                           |  | High |        | Low
|                           |  |      |        |    
|First Quarter Fiscal 2001  |  | $    | 26.219 |     |  | $ | 16.000 | 
|Second Quarter Fiscal 2001 |  |      | 35.563 |     |  |   | 18.250 | 
|Third Quarter Fiscal 2001  |  |      | 38.000 |     |  |   | 13.688 | 
|Fourth Quarter Fiscal 2001 |  |      | 24.790 |     |  |   | 12.000 | 
|First Quarter Fiscal 2002  |  |      | 20.050 |     |  |   | 9.990  | 
|Second Quarter Fiscal 2002 |  |      | 17.500 |     |  |   | 9.940  | 
|Third Quarter Fiscal 2002  |  |      | 16.000 |     |  |   | 11.760 | 
|Fourth Quarter Fiscal 2002 |  |      | 15.300 |     |  |   | 11.513 | 

SBS Common Stock is traded on The Nasdaq
Stock Market using the symbol SBSE.

Based on data provided by SBS transfer
agent and The Depository Trust Company, management believes that
as of September 3, 2002, the number of share owner accounts
of record, as defined by Rule 12g5-1 of the Exchange Act,
was approximately 230, at which date the closing market price of
SBS common stock was $7.23 per share.

SBS has not paid any cash dividends on its Common
Stock. Managements current policy is to retain earnings,
if any, for use in SBS operations and for expansion of the
business. No dividend payments are anticipated in the
foreseeable future (see Managements Discussion and
Analysis: Liquidity and Financial Condition). In addition,
under the terms of SBS Credit Agreement with Bank of
America, N.A., (Bank) as amended, SBS is prohibited
from declaring dividends without the Banks permission.

15



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##### Table of Contents








|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

The following selected financial data for the
years ended June 30, 1998 through June 30, 2002 have
been derived from the audited consolidated financial statements
of SBS. This information should be read in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and the audited
consolidated financial statements and related notes thereto
included elsewhere herein.

|                                                           |  |                    |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |        | 
|---------------------------------------------------------- |  | ------------------ | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------ | 
|                                                           |  |                   
|                                                           |  | Year Ended June 30
|                                                           |  |                   
|                                                           |  | 2002               |         | 2001 |  | 2000 |         | 1999 |  | 1998
|                                                           |  |                    |         |      |  |      |         |      |  |     
|                                                           |  |                   
|                                                           |  | Thousands         
|Sales                                                      |  | $                  | 118,856 |      |  | $    | 187,180 |      |  | $    | 128,189 |  |  | $ | 105,999 |  |  | $ | 74,214 | 
|Net income (loss)                                          |  | $                  | (24,360 | )    |  | $    | 17,184  |      |  | $    | 8,903   |  |  | $ | 12,278  |  |  | $ | 10,090 | 
|Net income (loss) per common share                         |  | $                  | (1.67   | )    |  | $    | 1.23    |      |  | $    | 0.71    |  |  | $ | 1.05    |  |  | $ | 0.90   | 
|Net income (loss) per common
    share  assuming dilution |  | $                  | (1.67   | )    |  | $    | 1.14    |      |  | $    | 0.66    |  |  | $ | 1.00    |  |  | $ | 0.82   | 
|Total assets                                               |  | $                  | 125,648 |      |  | $    | 147,172 |      |  | $    | 133,160 |  |  | $ | 92,008  |  |  | $ | 74,315 | 
|Total liabilities                                          |  | $                  | 12,002  |      |  | $    | 13,376  |      |  | $    | 34,146  |  |  | $ | 14,780  |  |  | $ | 10,051 | 
|Total stockholders equity                                 |  | $                  | 113,646 |      |  | $    | 133,796 |      |  | $    | 99,014  |  |  | $ | 77,228  |  |  | $ | 64,264 | 



---

Notes: SBS has not declared any dividends during
the periods presented. No dividend payments are expected in the
foreseeable future.

On August 18, 2000, SBS declared a
two-for-one stock split for stockholders of record on
September 5, 2000, distributed on September 20, 2000.
All references to net income per common share, net income per
common share  assuming dilution, common stock, and
stockholders equity have been restated as if the stock
split had occurred as of the earliest period presented.

On April 12, 2000, SBS completed the
purchase of SDL. In connection with the acquisition, SBS
recorded a $4.0 million acquired in-process research and
development (IPR&D) charge in the fourth quarter
of fiscal 2000.

On December 20, 1999, SBS completed a
pooling of interests transaction with SciTech Inc.
(SciTech). SciTech was subsequently merged into
Communications Products. SciTechs historical results did
not have a material effect on combined financial position or
results of operations, therefore the financial position and
results of operations of SBS and SciTech are combined from
October 1, 1999 on a prospective basis.

On August 12, 1998, SBS completed the
purchase of Communications Products.

On July 1, 1998, SBS acquired, through its
subsidiary Holding GmbH, a 50.1% interest in or and a
50.2% interest in ortec. SBS also acquired, through its
subsidiary, Government Group, a 100% interest in or
Computers, Inc. On December 9, 1998, SBS completed the
purchases of the minority interest in or and ortec.

On November 24, 1997, SBS completed the
purchase of Industrial Computers.






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

The following discussion and analysis should
be read in conjunction with Selected Financial Data
and SBS Financial Statements and Notes thereto.
Statements, other than statements of historical fact, that
address activities, events or developments that SBS or
management intends, expects, projects, believes or anticipates
will or may occur in the future are forward-looking statements.
These statements include, but are not limited to, expected
sales, gross margin, expectations of internally-generated cash
flows, new product introductions, and expectations of SG&A
and R&D costs. These statements and other forward-looking
statements are based upon certain assumptions and assessments
made by management of SBS in light of its experience and its
perception of historical trends, current conditions, expected
future developments and other factors it believes to be
appropriate. These assumptions and assessments include the
volume and product mix of sales, estimates of costs and
inventory and receivable levels, defense spending levels, and
other items. The forward-looking

16



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##### Table of Contents



statements included in this report are also
subject to a number of risks and uncertainties, including but
not limited to economic, competitive, supply and demand,
governmental and technological factors affecting SBS
operations, markets, products, services and prices. These
forward-looking statements are not guarantees of future
performance, and actual results, developments, and business
decisions may differ from those expressed or implied by these
forward-looking statements.




| |         
| | --------
| | Overview

SBS designs and builds open-architecture embedded
computer products that enable OEMs to serve the
commercial, communications, enterprise and government markets.
SBS products are integrated into a variety of applications
including communications networking, medical imaging, industrial
automation and military systems. The portfolio includes an
extensive line of CPU boards, computer interconnections,
avionics, telemetry, and fully integrated systems and enclosures
that system designers can easily utilize to create a custom
solution specific to the users unique application.
SBS objective is to continue to capitalize on its design
expertise and customer service capabilities to enhance product
quality and reduce time to market for OEM customers. SBS has
grown, and intends to continue to do so, through a combination
of internal growth and acquisitions. SBS completed ten
acquisitions between 1992 and June 30, 2002 that broadened
SBS product offerings and customer base. SBS achieves
internal growth by expanding its existing product lines through
new product development, through increasing penetration of its
existing customer base, and by adding new customers.

Sales for the year ended June 30, 2002 were
$118.9 million, a 36.5% decrease from the $187.2 for fiscal
year 2001. Net loss for the year ended June 30, 2002 was
$(24.4) million, or net loss per common share 
assuming dilution of $(1.67). This compares to net income for
the year ended June 30, 2001 of $17.2 million, or net
income per common share  assuming dilution of $1.14.
SBS performance during fiscal 2002 was affected by
external factors, including dramatic changes in the markets that
SBS serves, and internal factors, including changes in senior
management and overall corporate strategy. The net loss for
fiscal 2002 includes $15.1 million of inventory
write-downs, $13.0 million of goodwill and identifiable
intangible impairment charges, and $3.2 million of
severance and other employee termination costs. See further
discussion regarding these items below.

During the fourth quarter of fiscal year 2002, in
conjunction with the change in the Chief Executive Officer and
managements realignment of operations and market
development efforts, SBS segment structure was redefined. To
better align similar technologies and selling channels, the
former Commercial Group and the former Government Group were
combined. The combined group consists of SBS Commercial, SBS
Government, or, ortec, and SBS Avionics
Products division. The Communications and Enterprise Group
consists of Communications Products, SDL, and Industrial
Computers. Reportable segments for all periods presented have
been restated to conform to the current segment reporting
structure.



| |                                               
| | ----------------------------------------------
| | Critical Accounting Policies and
    Estimates

The preparation of financial statements in
conformity with generally accepted accounting principles in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Estimates
are used when accounting for items such as inventory, allowances
for doubtful accounts, depreciation and amortization periods,
income taxes, and intangible assets. These estimates and
assumptions are evaluated on an on-going basis and may require
adjustment. Actual results could differ from the estimates under
different assumptions or conditions. The policies discussed
below are considered by management to be critical to an
understanding of SBS consolidated financial statements
because their application places the most significant demands on
managements judgment, with financial reporting results
relying on estimation about the effect of matters that are
inherently uncertain. For additional accounting policies, see
Note 1 to the consolidated financial statements, Summary
of Significant Accounting Policies.

17



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##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Revenue Recognition. Revenue is generally
    recognized when goods are shipped to the customer, provided that
    SBS has received a valid purchase order, the price is fixed,
    title has transferred, collection of the associated receivable
    is reasonably assured, and there are no remaining significant
    obligations. Where customer acceptance provisions exist, revenue
    is recognized only when SBS is certain that the products meet
    all of the specified criteria for customer acceptance and all
    other revenue recognition criteria have been met.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Inventory Valuation. SBS records inventory
    write-downs based on estimates of obsolescence or unmarketable
    inventory, taking into account historical usage, forecasted
    future demand, and general market conditions. Write-downs may
    also be recorded based on SBS decisions to discontinue the
    marketing of certain products or product lines. If SBS
    forecasts are incorrect, market conditions deteriorate, or SBS
    decides to exit other product lines, additional inventory
    write-downs may be required. If market conditions or demand are
    better than expected, SBS may sell inventories that have been
    previously written down.                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Allowances for Doubtful Accounts. SBS maintains
    allowances for doubtful accounts receivable resulting from the
    failure of its customers to make required payments. The estimate
    is based on the aging of SBS accounts receivable,
    SBS historical write-off experience, and the current and
    projected financial condition of customers. If SBS misinterprets
    the financial condition of customers or if the financial
    condition of customers deteriorates, additional allowances for
    doubtful accounts may be required.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Long-Lived and Intangible Assets. SBS evaluates
    the carrying value of long-lived and intangible assets whenever
    certain events or changes in circumstances indicate that the
    carrying amount may not be recoverable. Such events or
    circumstances include, but are not limited to, a prolonged
    industry or economic downturn, a significant decline in
    SBS market value, or significant reductions in projected
    future cash flows. The asset would be considered to be impaired
    if future undiscounted cash flows, without consideration of
    interest, are insufficient to recover the carrying amount of the
    asset. Once deemed impaired, a charge to expense is recognized
    to the extent that the carrying amount of the asset exceeds fair
    value. Fair value is generally determined by calculating the
    discounted future cash flows using a discount rate based upon
    SBS weighted average cost of capital. Estimates of future cash
    flows require significant judgement, and any change in these
    estimates may result in additional impairment charges.
|
| |  | Income Taxes. SBS estimates of current and
    deferred income taxes reflect SBS assessment of current
    and future taxes to be paid or received on items reflected in
    the financial statements, giving consideration to both timing
    and probability of realization. Estimates of current income
    taxes include estimates for items such as general business
    credits and benefits from foreign sales. Actual income taxes
    could vary from these estimates due to future changes in income
    tax laws or review of SBS tax returns by taxing
    authorities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     



| |                    
| | -------------------
| | Recent Acquisitions

On March 4, 2002, SBS completed the
acquisition of certain assets and assumed certain liabilities of
Essential Communications, a division of publicly held Intrusion,
Inc., for approximately $1.0 million. Founded in 1992,
Essential develops and delivers early stage InfiniBand products.
SBS utilizes Essentials InfiniBand product expertise and
industry relationships to build on its current InfiniBand
efforts in the enterprise server and storage markets. As
required under the purchase method of accounting,
Essentials results of operations have been combined with
SBS since the date of acquisition. The purchase price has
been allocated to the underlying assets acquired and liabilities
assumed based on their estimated fair values. In conjunction
with the purchase price allocation, SBS recorded approximately
$364,000 of identifiable intangibles, principally
core-technology assets, which are being amortized over a
two-year period. No goodwill was recorded. Proforma results of
operations are not presented as Essentials results of
operations in fiscal 2002 and 2001 were not material to
SBS consolidated results of operations.

18



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On April 12, 2000, SBS completed the
acquisition of SDL. Located in Mansfield, Massachusetts, SDL
specializes in the design, manufacture and sale of WAN I/ O for
the telecommunications and data communications markets. SDL
designs, manufactures, and markets T1/ EI, T3/ E3, HSSI and OC3
products based on the PCI, CompactPCI, and PMC form factors, and
supporting protocols such as Frame Relay, HDLC, PPP, X.25 and
ATM. In addition, SDLs products support the operating
systems most commonly used in communications, including Windows
NT, Solaris, and VxWorks. SBS acquired all of the outstanding
stock of SDL for $25.6 million in cash. Acquisition costs
associated with the purchase were $0.6 million. The
purchase price included $1.2 million for the fair value of
SBS options issued in exchange for unvested SDL options. The
acquisition was funded with existing cash and a
$20.0 million borrowing under SBS Credit Agreement
with Bank of America, N.A. The acquisition was accounted for
under the purchase method, whereby the purchase price was
allocated to the underlying assets and liabilities based upon
their estimated fair values. Identifiable intangibles are being
amortized over four to eight years and goodwill is being
amortized over ten years. In connection with the acquisition,
SBS recorded a $4.0 million earnings charge, based on an
assessment of purchased technology of SDL. The assessment
determined that $4.0 million of SDLs purchase price
represented technology that did not meet the accounting
definitions of completed technology, and thus should
be charged to earnings under generally accepted accounting
principles. The assessment analyzed certain products that were
in various stages of completion ranging from 35% of completion
to 85% of completion, with estimated completion dates ranging
from the third quarter of calendar 2000 to the second quarter of
calendar 2001. The value assigned to acquired IPR&D was
determined based on estimates of the resulting net cash flows
from the evaluated technology of SDL and the discounting of
those cash flows to present value. In projecting net cash flows
resulting from those products, management estimated revenues,
cost of sales, selling expenses, research and development
expenses, and income taxes for those products. These estimates
were based on the following assumptions:



| |   |                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Estimated revenues projected a compound annual
    growth rate over seven years of 18%. Projections of revenue
    growth were based on managements estimates of market size
    and growth, supported by analysts estimates and by the
    nature and expected timing of the development of the products by
    SBS and its competitors.
|
| |  | The estimated cost of sales as a percentage of
    revenue, initially at 64% declining to 50%, was consistent with
    the historical rates for SDLs business as well as
    historical results of companies operating within the industry.                                                                                               
|
| |  | Estimated selling expenses were expected to
    remain consistent as a percentage of sales, with an average of
    14% to 15%.                                                                                                                                                                                                             
|
| |  | The estimated research and development costs were
    expected to remain consistent as a percentage of sales at 3.5%
    as most research and development efforts are in the maintenance
    phase.                                                                                                                                        
|
| |  | An effective tax rate of 40% was estimated.                                                                                                                                                                                                                                                                                                

The projected net cash flows for the in-process
projects were discounted using a 30% weighted-average cost of
capital (WACC). The calculation produces the average
required rate of return of an investment in an operating
enterprise. The WACC selected was based upon the risk/return
characteristics of the subject asset class. A WACC of 25% or 26%
was used to determine the value of the return of the core
developed technology, the customer list and all other
intangibles acquired as part of the purchase of SDL. The fair
value of the purchased technology was determined in accordance
with the views expressed by the staff of the Securities and
Exchange Commission. The financial results of SDL have been
included in SBS Consolidated Financial Statements from
April 12, 2000.

In fiscal 2002, SDLs test, packaging and
support functions were consolidated into Communications
Products. In addition, during the fourth quarter of fiscal 2002,
due to recent order cancellations and a continued decline in
sales and bookings, SBS recorded a $10.3 million write-down
of goodwill and core-developed technology associated with the
acquisition of SDL. This write-down was based on SBS
projection of undiscounted future operating cash flows of SDL
over the remaining useful lives of the goodwill and
core-technology, which indicated that these cash flows were not
sufficient to recover the carrying amounts of the

19



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##### Table of Contents



related goodwill and core-technology. As such,
impairment charges were recorded to the extent that the carrying
amounts exceeded fair value.


On December 20, 1999, SBS acquired SciTech,
a Madison, Wisconsin based designer and manufacturer of
communications network I/ O products based on PMC and PCI form
factors. The acquisition qualified as a pooling of interests for
accounting purposes and constituted a tax-free reorganization
for federal income tax purposes. Under the terms of the
agreement, SciTechs shareholders exchanged all outstanding
shares of SciTech stock for 349,726 shares of SBS
stock. SciTech was subsequently merged into Communications
Products. SciTechs historical results do not have a
material effect on combined financial position or results of
operations, and as such, the financial position and results of
operations of SBS and SciTech are combined from October 1,
1999 on a prospective basis.

Results of
Operations

The following table sets forth for the periods
indicated certain operating data as a percentage of sales:

|                                               |                                   |                    |       |       |   |      |       |      |  |  |       |      | 
|---------------------------------------------- | --------------------------------- | ------------------ | ----- | ----- | - | ---- | ----- | ---- |  |  | ----- | ---- | 
|                                               |                                   |                   
|                                               |                                   | Year ended June 30
|                                               |                                   |                   
|                                               |                                   | 2002               |       | 2001  |   | 2000
|                                               |                                   |                    |       |       |   |     
|Sales                                          |                                   |                    | 100.0 | %     |   |      | 100.0 | %    |  |  | 100.0 | %   
|Cost of sales                                  |                                   |                    | 64.1  |       |   |      | 52.7  |      |  |  | 47.7  |     
|                                               |                                   |                    |       |       |   |      |       |      |  |  |       |     
|                                               | Gross profit                      |                    |       | 35.9  |   |      |       | 47.3 |  |  |       | 52.3 | 
|Selling, general and administrative expense    |                                   |                    | 32.7  |       |   |      | 17.6  |      |  |  | 20.5  |     
|Research and development expense               |                                   |                    | 15.6  |       |   |      | 10.7  |      |  |  | 12.5  |     
|Acquired IPR&D charge                          |                                   |                    |      |       |   |      |      |      |  |  | 3.1   |     
|Severance and other employee termination costs |                                   |                    | 2.7   |       |   |      |      |      |  |  |      |     
|Impairment of intangible assets                |                                   |                    | 10.9  |       |   |      |      |      |  |  |      |     
|Amortization of intangible assets              |                                   |                    | 6.3   |       |   |      | 4.1   |      |  |  | 3.9   |     
|                                               |                                   |                    |       |       |   |      |       |      |  |  |       |     
|                                               | Operating income (loss)           |                    |       | (32.3 | ) |      |       | 14.9 |  |  |       | 12.3 | 
|Interest and other income (expense), net       |                                   |                    | 0.5   |       |   |      | (0.4  | )    |  |  |      |     
|Foreign exchange gains (losses)                |                                   |                    |      |       |   |      | (0.1  | )    |  |  | (0.1  | )   
|                                               |                                   |                    |       |       |   |      |       |      |  |  |       |     
|                                               | Income (loss) before income taxes |                    |       | (31.8 | ) |      |       | 14.4 |  |  |       | 12.2 | 
|Income taxes                                   |                                   |                    | (11.3 | )     |   |      | 5.2   |      |  |  | 5.2   |     
|                                               |                                   |                    |       |       |   |      |       |      |  |  |       |     
|Net income (loss)                              |                                   |                    | (20.5 | )%    |   |      | 9.2   | %    |  |  | 7.0   | %   
|                                               |                                   |                    |       |       |   |      |       |      |  |  |       |     



| |                                                                  
| | -----------------------------------------------------------------
| | Year ended June 30, 2002 Compared to Year
    Ended June 30, 2001

Sales.In fiscal
2002, sales decreased 36.5%, or $68.3 million, from
$187.2 million in fiscal 2001, to $118.9 million. Unit
shipments declined within the Communications and Enterprise
Group, primarily due to depressed market and economic
conditions, customer order cancellations, and delays of shipment
dates by several of the Groups telecommunications
infrastructure customers. Unit shipments of the Commercial and
Government Groups avionics, telemetry and computer
processor products increased. Unit shipments of the Groups
general purpose I/ O products and computer connectivity and
expansion unit products declined, due to unfavorable economic
and market conditions and delays of shipment dates by several
customers. Management does not expect significant improvement in
the communications and commercial markets in fiscal 2003.
Management expects some growth in sales to government customers
in fiscal 2003 due to an expected increase in Department of
Defense development and field deployment expenditures. Actual
results may vary materially.

Gross Profit.In
fiscal 2002, gross profit decreased 51.9%, or $46.0 million,
from $88.6 million in fiscal 2001, to $42.6 million.
This decrease was primarily due to the decrease in sales
combined with $0.2 million of expenditures associated with
the SBS manufacturing consolidation and cost reduction
efforts, a $12.4 million

20



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##### Table of Contents



inventory write-down recorded during the second
quarter of fiscal 2002, and a $2.7 million inventory
write-down recorded during the fourth quarter of fiscal 2002.
The second quarter write-down consisted of inventory associated
with programs that are not anticipated to come back to their
previous forecasts, inventory associated with SBS decision
to exit its legacy PCI chassis product line, and inventory
associated with SBS products that will no longer be marketed.
Additionally, the implementation of a new inventory management
methodology associated with the consolidation of SBS
manufacturing operations contributed to the inventory
write-down. The consolidation efforts included a reduction in
the number of material handling employees and inventory
specialists, a reduction in the amount of floor space for the
storage of inventory, and the adoption of a purchasing
methodology based on projected component part demand to achieve
manufacturing and material handling efficiencies. This new
methodology calculates the maximum level of inventory to be
maintained by comparing historical usage over a fixed period of
time to forecasted future demand. The consolidation efforts and
new inventory methodology resulted in a reduction in required
inventory levels. The fourth quarter write-down was primarily
due to reduced demand for certain Communications and Enterprise
Group products. As of June 30, 2002, approximately
$0.7 million of inventory previously written down had been
utilized. Excluding the $15.3 million of charges noted
above, for fiscal 2002, gross profit as a percentage of sales
would have been 48.7%, compared to 47.3% for fiscal 2001. Based
on managements expectations of sales for fiscal 2003,
gross profit as a percentage of sales is expected to be
approximately 48.0%. Actual results may vary materially.


Selling, General and Administrative Expense.In fiscal 2002, selling, general and
administrative expense increased 17.5%, or $5.8 million
from $33.0 million in fiscal 2001, to $38.8 million.
This increase was primarily due to an increase in SBS
sales personnel associated with the realignment of its business,
additional corporate personnel, increases in executive
compensation, relocation expenses for recently hired employees,
additional information technology department personnel,
depreciation and consulting expenses associated with the
implementation of SBS customer relationship management
system, additional reserves for accounts receivable due to
collection issues, and costs associated with the termination of
SBS proposed acquisition of Interactive Circuit Systems
(ICS) in the quarter ended December 31, 2001.
This increase, combined with the decrease in sales, resulted in
an increase in SG&A expense as a percentage of sales to
32.7% in fiscal 2002 from 17.6% in fiscal 2001.

Research and Development Expense.In fiscal 2002, research and
development expense decreased by 7.9%, or $1.6 million,
from $20.1 million in fiscal 2001, to $18.5 million,
primarily due to cost reductions in the Communications and
Enterprise Group, resulting from depressed business conditions.
In fiscal 2002, research and development expense as a percentage
of sales increased to 15.6% from 10.7% in fiscal 2001, primarily
due to the decrease in sales volume. In July 2002, the
Communications and Enterprise Groups Madison, Wisconsin
facility was closed, resulting in the termination of
7 full-time employees and 11 part-time employees.

Severance and Other Employee Termination
Costs.In fiscal 2002, SBS recorded
severance and other employee termination charges as follows:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On April 28, 2002, SBS announced the
    resignation of its Chairman of the Board and Chief Executive
    Officer, Grahame E. Rance. During the quarter ended
    June 30, 2002, SBS recorded approximately $2.0 million
    of severance and other employee termination costs related to the
    Separation Agreement between SBS and Mr. Rance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | During the year ended June 30, 2002, based
    on unfavorable economic and market conditions, facility
    consolidation actions, and the decision to exit the legacy PCI
    Chassis product line, SBS reduced its employee base, resulting
    in elimination of 159 positions in manufacturing, R&D,
    administration, and sales and marketing. On August 14,
    2001, SBS notified 58 employees that their positions would be
    eliminated by the end of September 2001. On December 26,
    2001, the SBS Board of Directors approved additional reductions,
    to be completed through March 31, 2002 and 54 employees
    were notified that their jobs would be eliminated. On
    May 21, 2002, SBS announced further reductions, which were
    effective immediately, and 47 employees were notified that
    their jobs had been eliminated. As a result, for the year ended
    June 30, 2002, employee severance and other termination
    charges of approximately $1,253,000 were recorded. As of
    June 30, 2002, cash payments of $963,000 had been

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| |  |                                                                                                                                                                                                                                        
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | made, $21,000 of the original charge was reversed
    as a result of the decision not to terminate certain originally
    notified employees, and the remaining $269,000 will be paid
    through the quarter ending December 31, 2002.

Impairment of Assets.For fiscal 2002, $2.7 million of
the $13.0 million asset impairment charge represented the
write-off of the remaining goodwill recorded in connection with
the acquisition of Industrial Computers (formerly Micro
Alliance) in November 1997. This write-off was the result of
SBS decision in the quarter ended December 31, 2001
to exit the PCI chassis business. The remaining
$10.3 million represented the write-down of goodwill and
other identifiable intangible assets associated with the
acquisition of SDL in April of 2000. The write-down, which
occurred in the fourth quarter, was based on SBS
projection of undiscounted future operating cash flows. This
evaluation indicated that these cash flows were not sufficient
to recover the carrying amounts of the goodwill and other
identifiable intangible assets. As a result, the impairment
charge was recorded to the extent that the carrying value
exceeded fair value of the assets. The evaluation was performed
as a result of continued order cancellations and a continued
decline in sales and bookings in the fourth quarter.

Interest and Other Income, Net.In fiscal 2002, net interest and other
income of $646,000 consisted primarily of a recovery from
insurance of $307,000, and interest income associated with
surplus cash, partially offset by the fiscal 2002 second quarter
$323,000 write-down related to an other-than-temporary
decline in the fair value of SBS investment in an
unrelated software company. The investment in the software
company is currently valued at approximately $177,000. In fiscal
2001, interest income of $410,000 consisted primarily of
interest associated with SBS surplus cash.

Income Taxes.For
fiscal 2002 and fiscal 2001, income taxes represented effective
income tax rates of 35.6% and 36.1%, respectively. A tax benefit
related to the loss from operations was recorded in fiscal 2002
primarily due to SBS ability to realize the benefit
through tax loss carrybacks to prior periods.

Earnings per Share.For fiscal 2002, net loss per common
share was $(1.67) compared to net income per share of $1.23 for
fiscal 2001. For fiscal 2002, net loss per common share-assuming
dilution was $(1.67) compared to net income per common
share-assuming dilution of $1.14 for fiscal 2001.



| |                            
| | ---------------------------
| | Review of Business Segments

SBS operates internationally through two
operating segments: the Communications and Enterprise Group, and
the Commercial and Government Group. These segments were defined
during the fourth quarter of fiscal year 2002, in conjunction
with the change in the Chief Executive Officer, and
managements realignment of operations and market
development efforts. To better align similar technologies and
selling channels, the former Commercial Group and the former
Government Group were combined. The combined group consists of
SBS Commercial, SBS Government, or, ortec, and
SBS Avionics Products division. The Communications and
Enterprise Group consists of Communications Products, SDL, and
Industrial Computers. These segments are based on the markets
that are served and the products that are provided to those
markets. Each segment has its own sales and distribution
channels and has a manager who reports directly to the President
and Chief Operating Officer. Reportable segments for all periods
have been reclassified to conform to the new segment reporting
structure.

The following is a discussion of sales to
external customers and segment profit (loss) for each
reportable segment. In the measure of segment profit or loss,
SBS does not allocate the following to these segments:



| |   |                                                                                
| | - | -------------------------------------------------------------------------------
| |  | Substantially all of the amortization expense
    associated with acquisitions,
|
| |  | asset impairment charges,                                                      
|
| |  | substantially all interest income earned on cash
    balances,                 
|
| |  | interest expense associated with SBS borrowing
    facilities,                 
|
| |  | acquired in-process research and development
    charges, and                  
|
| |  | corporate overhead costs, excluding sales and
    marketing costs.             

22



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| |                                    
| | -----------------------------------
| | Communications and Enterprise Group

|     |  |                    |               |               |  |   |                | 
|---- |  | ------------------ | ------------- | ------------- |  | - | -------------- | 
|     |  | Sales to           |               | Segment      
|     |  | External Customers |               | Profit (Loss)
|     |  |                    |               |              
|FY02 |  |                    | $36.6 million |               |  | $ | (14.4) million | 
|FY01 |  |                    | $92.0 million |               |  | $ | 22.1 million   | 

Communications and Enterprise Group sales to
external customers in fiscal 2002 decreased 60.2%, or
$55.4 million, from $92.0 million in fiscal 2001, to
$36.6 million. This decrease was primarily due to depressed
market and economic conditions, customer order cancellations and
delays of shipment dates by several of the Groups
telecommunications infrastructure customers. As of the date of
this report, Communications and Enterprise Group orders remain
at severely reduced levels. Management does not expect
improvement during the remainder of fiscal 2003. Actual results
may vary materially.

For fiscal 2002, Communications and Enterprise
Group segment loss was $(14.4) million, compared to segment
profit of $22.1 million for fiscal 2001. This decrease was
primarily due to the decrease in sales, severance and other
employee termination costs, reserves for accounts receivable, a
second quarter $9.0 million inventory write-down and a
fourth quarter $2.7 million inventory write-down. The
second quarter inventory write-down was associated with programs
that were not anticipated to come back to their previous
forecasts and with SBS decision to exit its legacy PCI
chassis product line. The fourth quarter inventory write-down
was due to additional order cancellations and the continued
decline in sales and bookings. This decrease was partially
offset by a reduction in R&D expenditures resulting from
depressed business conditions. In July 2002, the Groups
Madison, Wisconsin facility was closed, resulting in the
termination of 7 full-time employees and 11 part-time
employees.



| |                                
| | -------------------------------
| | Commercial and Government Group

|     |  |                    |              |                |  |   |              | 
|---- |  | ------------------ | ------------ | -------------- |  | - | ------------ | 
|     |  | Sales to           |              |               
|     |  | External Customers |              | Segment Profit
|     |  |                    |              |               
|FY02 |  | $                  | 82.3 million |                |  | $ | 11.7 million | 
|FY01 |  | $                  | 95.2 million |                |  | $ | 21.4 million | 

Commercial and Government Group sales to external
customers in fiscal 2002 decreased 13.5%, or $12.9 million
from $95.2 million in fiscal 2001, to $82.3 million.
Sales of the Groups general purpose I/ O products and
computer connectivity and expansion unit products decreased
33.0%, primarily as a result of unfavorable economic and market
conditions and several customer delays of shipment dates. Unit
shipments of the Groups computer processor products
increased 6.2%, primarily due to the focus on high volume
production business in the quarter ended September 30,
2001, and an increase in shipments to a customer in the quarter
ended June 30, 2002, partially offset by weak demand in the
quarters ended December 31, 2001 and March 31, 2002.
Unit shipments of the Groups avionics and telemetry
products increased 3.0%, primarily due to the release of the
conduction-cooled PMC design, an increase in sales of the
PMC2 board, and an increase in sales of integrated
products. SBS does not expect significant improvement in the
commercial market in fiscal 2003. Management expects some growth
in sales to government customers in fiscal 2003 due to an
expected increase in Department of Defense development and field
deployment expenditures. Actual results may vary materially.

Commercial and Government Group segment profit
decreased 45.3%, or $9.7 million, from $21.4 million
in fiscal 2001 to $11.7 million. This decrease was
primarily due to the decrease in sales, $0.2 million of
expenditures associated with SBS manufacturing
consolidation and cost reduction efforts, severance and other
employee termination costs, a second quarter $3.4 million
inventory write-down, and an increase in SG&A expenses. The
inventory write-down consisted of inventory associated with
products that will no longer be marketed and with the
implementation of a new inventory management methodology
associated with the consolidation of manufacturing operations.
The increase in SG&A expense was primarily due to an
increase in sales and marketing costs due to SBS pro-rata
allocation of certain corporate SG&A expenses among
segments, based on sales. For the same reasons, segment profit
as a percentage of sales decreased from 22.5% in fiscal 2001 to
14.2% in fiscal 2002.

23



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| |                                                                  
| | -----------------------------------------------------------------
| | Year ended June 30, 2001 Compared to
    Year Ended June 30, 2000

Sales.In fiscal
2001, sales increased 46.0%, or $59.0 million, from
$128.2 million in fiscal 2000, to $187.2 million. Of
this 46.0% increase, sales contributed by SDL, which was
acquired on April 12, 2000, comprised 14.3%, and 31.7% was
attributable to SBS other product lines. Unit shipments
increased among all product lines within the Communications and
Enterprise Group segment. Unit shipments increased within the
Commercial and Government Group, with the exception of the
Groups avionics and telemetry product line, which
decreased, primarily due to the decline in commercial satellite
and military markets and in major new aircraft development
programs.

Gross Profit.In
fiscal 2001, gross profit increased 32.2%, or
$21.6 million, from $67.0 million in fiscal 2000, to
$88.6 million. Of this 32.2% increase, 13.3% was due to the
acquisition of SDL on April 12, 2000, and 18.9% was
attributable to SBS other product lines. As expected,
gross profit as a percentage of sales decreased to 47.3% in
fiscal 2001 from 52.3% in fiscal 2000, primarily due to the
significant sales mix change that occurred, as SBS continued to
transition to higher volume, lower margin OEM production orders,
and became less dependent on its high-margin legacy products.

Selling, General and Administrative Expense.In fiscal 2001, selling, general and
administrative expense increased 25.5%, or $6.7 million
from $26.3 million in fiscal 2000, to $33.0 million.
Of this 25.5% increase, 5.4% resulted from the acquisition of
SDL on April 12, 2000, and 20.1% was primarily due to an
increase in costs commensurate with the growth of the
Communications and Enterprise Group and to the strengthening of
SBS sales and marketing efforts, partially offset by cost
reductions within the Commercial and Government Group. In fiscal
2001, selling, general and administrative expense as a
percentage of sales decreased to 17.6% from 20.5% in fiscal
2000, as the increase in sales volume more than offset the
increase in expense.

Research and Development Expense.In fiscal 2001, research and
development expense increased by 25.8%, or $4.2 million,
from $15.9 million in fiscal 2000, to $20.1 million.
Of this 25.8% increase, 22.2% resulted from the acquisition of
SDL on April 12, 2000, and 3.6% was primarily due to
increased investment in product development within the
Communications and Enterprise Group commensurate with the growth
of the segment, partially offset by cost reductions within the
Commercial and Government Group. In fiscal 2001, research and
development expense as a percentage of sales decreased to 10.7%
from 12.5% in fiscal 2000, as the increase in sales volume more
than offset the increase in expense.

Amortization of Intangible Assets.In fiscal 2001, amortization of
intangible assets increased 54.6%, or $2.7 million from
$5.0 million in fiscal 2000, to $7.7 million. This
increase was the result of the amortization of goodwill and
identifiable intangibles associated with the acquisition of SDL
on April 12, 2000 and the amortization of SBS license
agreement for fibre channel technology purchased in the fourth
quarter of fiscal 2000.

Interest Income.In
fiscal 2001, interest income of $410,000 consisted
primarily of interest associated with SBS surplus cash.

Interest Expense.In
fiscal 2001, interest expense of $1.1 million consisted
primarily of interest associated with the $20.0 million of
borrowings used to fund the acquisition of SDL on April 12,
2000.

Foreign Exchange Losses.In fiscal 2001, the $201,000 of
foreign exchange losses were primarily attributable to the
change in exchange rates relating to interest payable on debt
from SBS foreign subsidiary, partially offset by a foreign
exchange gain attributable to the change in exchange rates
relating to payments by SBS U.S. subsidiaries to an SBS
foreign subsidiary for commissions accrued at June 30, 2000.

Income Taxes.For
fiscal 2001 and fiscal 2000, income taxes represented effective
income tax rates of 36.1% and 42.9%, respectively. For fiscal
2000, the effective income tax rate, excluding the
non-deductible acquired in-process research and development
charge, would have been 34.1%.

Earnings per Share.For fiscal 2001, net income per common
share was $1.23 compared to $0.71 for fiscal 2000. Net
income per common share-assuming dilution was $1.14 for fiscal
2001 compared to $0.66 for fiscal 2000. For fiscal 2000, net
income per common share-assuming dilution, excluding the
acquired IPR&D

24



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##### Table of Contents



charge, would have been $0.95. For fiscal 2000,
net income per common share and net income per common
share-assuming dilution have been restated to reflect the
two-for-one stock split declared August 18, 2000.




| |                            
| | ---------------------------
| | Review of Business Segments

SBS operates internationally through two
operating segments: the Communications and Enterprise Group, and
the Commercial and Government Group. These segments were defined
during the fourth quarter of fiscal year 2002, in conjunction
with the change in the Chief Executive Officer, and
managements realignment of operations and market
development efforts. To better align similar technologies and
selling channels, the former Commercial Group and the former
Government Group were combined. The combined group consists of
SBS Commercial, SBS Government, or, ortec, and SBS
Avionics Products division. The Communications and Enterprise
Group consists of Communications Products, SDL, and Industrial
Computers. These segments are based on the markets that are
served and the products that are provided to those markets. Each
segment has its own sales and distribution channels and has a
manager who reports directly to the President and Chief
Operating Officer. Reportable segments for all periods have been
reclassified to conform to the new segment reporting structure.

The following is a discussion of sales to
external customers and segment profit for each reportable
segment. In the measure of segment profit or loss, SBS does not
allocate the following to these segments:



| |   |                                                                                
| | - | -------------------------------------------------------------------------------
| |  | Substantially all of the amortization expense
    associated with acquisitions,
|
| |  | asset impairment charges,                                                      
|
| |  | substantially all interest income earned on cash
    balances,                 
|
| |  | interest expense associated with SBS borrowing
    facilities,                 
|
| |  | acquired in-process research and development
    charges, and                  
|
| |  | corporate overhead costs, excluding sales and
    marketing costs.             



| |                                        
| | ---------------------------------------
| | Communications and Enterprise
    Group

|     |  |                    |              |                |  |   |              | 
|---- |  | ------------------ | ------------ | -------------- |  | - | ------------ | 
|     |  | Sales to           |              |               
|     |  | External Customers |              | Segment Profit
|     |  |                    |              |               
|FY01 |  | $                  | 92.0 million |                |  | $ | 22.1 million | 
|FY00 |  | $                  | 43.9 million |                |  | $ | 10.2 million | 

Communications and Enterprise Group sales to
external customers in fiscal 2001 increased 109.5%, or
$48.1 million, from $43.9 million in fiscal 2000, to
$92.0 million. Of this 109.5% increase, sales contributed
from the acquisition of SDL on April 12, 2000 accounted for
41.8% of the increase. The balance of the increase was primarily
attributable to a 102.1% increase in sales of the Groups
PowerPC based processor products, I/ O products, and high
availability systems products, resulting from growth in sales to
wireless internet access, high speed router, optical switch,
wide area network monitoring, and IP routing application
customers.

Communications and Enterprise Group segment
profit in fiscal 2001 increased 116.7%, or $11.9 million,
from $10.2 million in fiscal 2000, to $22.1 million.
This increase was primarily due to earnings contributed by the
acquisition of SDL on April 12, 2000 and an increase in
sales among the Groups PowerPC based processor products,
I/ O products and high availability systems products, partially
offset by an increase in selling, general and administrative and
research and development expenses commensurate with the growth
of the segment. Segment profit as a percentage of sales
increased from 23.2% in fiscal 2000 to 24.0% in fiscal 2001, as
the increase in sales volume more than offset the increase in
expense.

25



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##### Table of Contents



Commercial
and Government Group

|     |  |                    |              |                |  |   |              | 
|---- |  | ------------------ | ------------ | -------------- |  | - | ------------ | 
|     |  | Sales to           |              |               
|     |  | External Customers |              | Segment Profit
|     |  |                    |              |               
|FY01 |  | $                  | 95.2 million |                |  | $ | 21.4 million | 
|FY00 |  | $                  | 84.3 million |                |  | $ | 18.8 million | 

Commercial and Government Group sales to external
customers in fiscal 2001 increased 12.9%, or $10.9 million
from $84.3 million in fiscal 2000, to $95.2 million.
Sales of the Groups general purpose I/O and computer
connectivity and expansion unit products, and computer processor
products increased 28.8% and 13.8%, respectively, as compared to
fiscal 2000. This increase was primarily the result of the
Groups focus on OEM production business, as well as an
increase in sales to semiconductor equipment manufacturers, and
an increase in sales to entertainment production equipment and
defense and aerospace customers. The increase in sales volume of
the Groups computer processor products was partially
offset by the approximate $1.5 million negative impact of
changes in exchange rates on sales, as the U.S. dollar
strengthened against the Deutsche mark during fiscal 2001. Sales
of the Groups avionics and telemetry products decreased
3.8%, primarily the result of declines in the commercial
satellite and military markets and the decline in major new
aircraft development programs.

Commercial and Government Group segment profit
increased 13.6%, or $2.6 million, from $18.8 million in
fiscal 2000 to $21.4 million. This increase was primarily
due to the gross profit contributed by the increase in sales and
R&D and SG&A cost reductions, partially offset by the
amortization of the Groups license agreement for fibre
channel technology purchased in the fourth quarter of fiscal
2000. Segment profit as a percentage of sales was 22.5% in
fiscal 2001, consistent with fiscal 2000.



| |                                      
| | -------------------------------------
| | Liquidity and Financial
    Condition

SBS uses a combination of the sale of equity
securities, internally generated funds and bank borrowings to
finance its acquisitions, working capital requirements, capital
expenditures and operations.

Cash totaled $24.8 million at June 30,
2002, an increase of $15.1 million from June 30, 2001.
This increase was the result of $20.6 million of cash
provided by operating activities and $1.6 million from the
exercise of stock options, partially offset by $3.3 million
for the acquisition of property and equipment, $2.5 million
of payments on SBS line of credit, $1.0 million
expended for the Essential Communications asset purchase, and
$0.5 million paid to repurchase shares of SBS common
stock pursuant to a repurchase plan adopted by the Board of
Directors on September 14, 2001 and implemented from
September 20 to September 26, 2001. Accounts
receivable declined, consistent with the decline in sales.
Inventory declined $23.5 million, $15.1 million of
which was due to inventory write-downs (see Gross
Profit above). The remaining decline in inventory was
consistent with the decline in sales volume. Liabilities were in
line with the current level of business.

Between June 30, 2002 and
September 17, 2002, SBS repurchased 46,000 shares of its
common stock for approximately $324,000.

Effective June 30, 2002, SBS executed the
fourth amendment to its $30.0 million Credit Agreement
(Agreement) with Bank of America, N.A.
(Bank). At December 31, 2001 and March 31,
2002, SBS was out of compliance with the fixed charge coverage
ratio covenant of the Agreement, primarily due to losses
incurred by SBS during the quarter ended December 31, 2001,
but obtained waivers from the Bank. SBS and the Bank began
negotiations to amend the Agreement on terms acceptable to both
parties, finalizing these negotiations on June 30, 2002.
This fourth amendment lowered the maximum amount available to be
borrowed from $30.0 million to $20.0 million and
modified the compliance covenants of the Agreement.

At June 30, 2002, there were no borrowings
drawn on the Agreement. At June 30, 2002, SBS was out of
compliance with the cash flow coverage ratio covenant of the
amended Agreement, primarily due to the inventory write-down and
the charges for impairment of identifiable intangibles and
goodwill recorded in the fourth quarter of fiscal 2002. On
September 20, 2002, SBS canceled the Agreement.

26



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##### Table of Contents



Management believes that its internally generated
funds will be sufficient to finance SBS current operations
and capital expenditures, excluding acquisitions, for at least
the next twelve months. Because long-term cash flow cannot be
predicted with certainty, it is possible that SBS could require
external financing in the future, and that such financing may
not be available on terms acceptable to SBS or at all.

As of the date of this report, SBS does not have
any material capital expenditure commitments. As of
June 30, 2002, SBS had $269,000 in remaining severance
payments to employees, due at various dates through the quarter
ending December 31, 2002 (see Severance and Other
Employee Termination Costs above). SBS is also committed
under noncancelable operating leases that expire at various
dates through fiscal 2006. The following is a five-year schedule
of future minimum lease payments:

|                    |  |                |       |                |  |       |     |  |  |   |        | 
|------------------- |  | -------------- | ----- | -------------- |  | ----- | --- |  |  | - | ------ | 
|                    |  | Buildings      |       | Equipment      |  |      
|Year ending June 30 |  | Lease Payments |       | Lease Payments |  | Total
|                    |  |                |       |                |  |      
|                    |  |               
|                    |  | thousands     
|2003                |  | $              | 2,925 |                |  | $     | 125 |  |  | $ | 3,050  | 
|2004                |  |                | 2,931 |                |  |       | 112 |  |  |   | 3,043  | 
|2005                |  |                | 2,635 |                |  |       | 44  |  |  |   | 2,679  | 
|2006                |  |                | 1,194 |                |  |       | 5   |  |  |   | 1,199  | 
|2007                |  |                | 128   |                |  |       |    |  |  |   | 128    | 
|                    |  |                |       |                |  |       |     |  |  |   |        | 
|                    |  | $              | 9,813 |                |  | $     | 286 |  |  | $ | 10,099 | 
|                    |  |                |       |                |  |       |     |  |  |   |        | 

For the periods ended June 30, 2002, 2001
and 2000, there was no significant impact from inflation.



| |                         
| | ------------------------
| | New Accounting Standards

In June 2001, the FASB issued SFAS 141,
Business Combinations, and SFAS 142,
Goodwill and Other Intangible Assets. SFAS 141
requires that the purchase method of accounting be used for all
business combinations initiated or completed after June 30,
2001. SFAS 141 also specifies criteria intangible assets
acquired in a purchase method business combination must meet to
be recognized and reported apart from goodwill. Any purchase
price allocable to an assembled workforce may not be accounted
for separately. SFAS 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment at least
annually in accordance with the provisions of SFAS 142.
SFAS 142 also requires that intangible assets with
estimable useful lives be amortized over their respective
estimated useful lives to their estimated residual values, if
any, and reviewed for impairment in accordance with
SFAS 144 Accounting for the Impairment or Disposal of
Long-Lived Assets.

SBS adopted the provisions of SFAS 141 and
SFAS 142 on July 1, 2002. SFAS 141 requires that
SBS evaluate its existing intangible assets and goodwill that
were acquired in prior purchase business combinations, and make
any necessary reclassifications in order to conform with the new
criteria in Statement 141 for recognition apart from
goodwill. SFAS 142 requires SBS to reassess the useful
lives and residual values of all intangible assets acquired, and
make any necessary amortization period adjustments by the end of
the first interim period after adoption. In addition, to the
extent an intangible asset is identified as having an indefinite
useful life, SBS is required to test the intangible asset for
impairment in accordance with the provisions of SFAS 142
within the first interim period. Any impairment loss will be
measured as of the date of adoption and recognized as the
cumulative effect of a change in accounting principle in the
first interim period.

In connection with SFAS 142s
transitional goodwill impairment evaluation, SBS is required to
perform an assessment of whether there is an indication that
goodwill is impaired as of the date of adoption. To accomplish
this, the Company must identify its reporting units and
determine the carrying value of each reporting unit by assigning
the assets and liabilities, including the existing goodwill and
intangible assets, to those reporting units as of the date of
adoption. The Company will then have up to six months from the
date of adoption to determine the fair value of each reporting
unit and compare it to the reporting units carrying
amount. To the extent a reporting units carrying amount
exceeds its fair value, an indication exists that the reporting
units goodwill may be impaired and SBS must perform the
second step of the transitional impairment test. In the second
step, SBS must compare the implied fair value of the reporting
units goodwill,

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determined by allocating the reporting
units fair value to all of its assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase
price allocation in accordance with SFAS 141, to its
carrying amount, both of which would be measured as of the date
of adoption. This second step is required to be completed as
soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss will be recognized as
the cumulative effect of a change in accounting principle in
SBS statement of earnings.


Because of the extensive effort needed to comply
with the adoption of SFAS 141 and SFAS 142, it is not
practicable to reasonably estimate the impact of adoption of
these standards of SBS financial statements at the date of
this report, including whether it will be required to recognize
any transitional impairment losses as the cumulative effect of a
change in accounting principle. At June 30, 2002, the
amount of unamortized goodwill was approximately
$20.0 million. Goodwill amortization for the years ended
June 30, 2002, 2001, and 2000 was approximately
$4.5 million, $4.6 million, and $4.4 million,
respectively.

In June 2001, the FASB issued SFAS 143
Accounting for Asset Retirement Obligations, which
addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and
the associated retirement costs. The standard applies to legal
obligations associated with the retirement of long-lived assets
that result from the acquisition, construction, development
and/or normal use of the asset. SFAS 143 requires that the
fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The fair value of the
liability is added to the carrying amount of the associated
asset and this additional carrying amount is depreciated over
the life of the asset. The liability is accreted at the end of
each period through charges to operating expense. If the
obligation is settled for other than the carrying amount of the
liability, SBS will recognize a gain or loss on settlement. The
adoption of SFAS 143, effective July 1, 2002, did not
have a material impact on SBS financial statements or
results of operations.

In August 2001, the FASB issued SFAS 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, which addresses financial accounting and reporting
for the impairment or disposal of long-lived assets.
SFAS 144 supersedes SFAS 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, but retains many of the fundamental
provisions of SFAS 121. SFAS 144 also supersedes APB
Opinion No. 30, Reporting the Results of Operations,
Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. SFAS 144 retains the requirement in
Opinion 30 to report separately discontinued operations and
extends that reporting to a component of an entity that either
has been disposed of or is classified as held for sale. The
adoption of SFAS 144, effective July 1, 2002 did not
have a material impact on SBS financial statements or
results of operations.

In June 2002, the FASB issued SFAS 146,
Accounting for Costs Associated with Exit or Disposal
Activities, which addresses financial accounting and
reporting for costs associated with exit or disposal activities
and nullifies EITF Issue 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 principal difference between
SFAS 146 and EITF 94-3 relates to SFAS 146s
requirements for recognition of a liability for a cost
associated with an exit or disposal activity. SFAS 146 requires
that a liability be recognized when the liability is incurred.
Under 94-3, a liability for an exit cost was recognized at the
date of an entitys commitment to an exit plan.
SFAS 146 also establishes that fair value is the objective
for initial measurement of the liability. The provisions of
SFAS 146 are effective for exit or disposal activities that
are initiated after December 31, 2002, but early
application is encouraged. SBS does not expect the adoption of
SFAS 146 to have a material impact on its financial statements
or results of operations.



| |                 
| | ----------------
| | Business Outlook

As of the date of this report, Communications and
Enterprise Group orders remain at severely reduced levels.
Management does not expect significant improvement in the
communications or commercial markets in fiscal 2003. Management
expects some growth in sales to government customers in fiscal
2003 due to an expected increase in Department of Defense
development and field deployment expenditures. Management

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believes that SBS fiscal 2002 reduction in
employee base, combined with its consolidation efforts and the
July 2002 closing of the Communications and Enterprise
Groups Madison, Wisconsin facility, should allow SBS to
break even at $27.0 million to $28.0 million in sales
per quarter, assuming an approximate 48.0% gross margin. Sales
for the quarter ended September 30, 2002 are expected to be
between $26.0 million and $28.0 million. Actual
results may vary materially.







|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk

SBS liquid investment is cash invested
either in money market accounts or in overnight repurchase
agreements. Due to the nature of these investments, SBS believes
that the market risk related to these investments is minimal.
SBS revolving credit facility provides for interest on
borrowings based on the prime rate or LIBOR in accordance with
the LIBOR margin defined in the Agreement. As a result,
increases or decreases in these rates will have the effect of
reducing or increasing net income during the period these notes
remain outstanding. There are no outstanding borrowings under
the facility at the date of this report.

SBS, as a result of its German operating and
financing activities, is exposed to market risk from changes in
foreign currency exchange rates. To date, SBS has not entered
into any foreign exchange forward contracts to reduce its
exposure to changes in foreign currency exchange rates.






|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

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##### Table of Contents



INDEPENDENT AUDITORS REPORT

The Board of Directors

SBS Technologies, Inc.:


We have audited the accompanying consolidated
balance sheets of SBS Technologies, Inc. and subsidiaries as of
June 30, 2002 and 2001, and the related consolidated
statements of operations, changes in stockholders equity,
and cash flows for each of the years in the three-year period
ended June 30, 2002. These consolidated financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits 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 audits
provide 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 SBS Technologies, Inc. and
subsidiaries as of June 30, 2002 and 2001, and the results
of their operations and their cash flows for each of the years
in the three-year period ended June 30, 2002 in conformity
with accounting principles generally accepted in the United
States of America.



| |         
| | --------
| | KPMG LLP

Albuquerque, New Mexico

August 13, 2002, except for


Note 7, which
is as of


September 20,
2002.


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SBS Technologies, Inc. and
Subsidiaries

Consolidated Balance Sheets

|                                                           |                                                                                                                                                             |                                            |        |               |         |  |        |        |         | 
|---------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ------------- | ------- |  | ------ | ------ | ------- | 
|                                                           |                                                                                                                                                             | June 30, 2002                              |        | June 30, 2001
|                                                           |                                                                                                                                                             |                                            |        |              
|                                                           |                                                                                                                                                             |                                           
|                                                           |                                                                                                                                                             | Thousands (except share                   
|                                                           |                                                                                                                                                             | amounts)                                  
|ASSETS                                                    
|Current assets:                                            |                                                                                                                                                             |                                            |        |               |         |  |        |       
|                                                           | Cash and cash equivalents                                                                                                                                   |                                            | $      | 24,811        |         |  |        | 9,734  |        
|                                                           | Receivables, net                                                                                                                                            |                                            |        | 22,619        |         |  |        | 27,287 |        
|                                                           | Inventories                                                                                                                                                 |                                            |        | 18,428        |         |  |        | 40,752 |        
|                                                           | Deferred income taxes                                                                                                                                       |                                            |        | 9,446         |         |  |        | 5,080  |        
|                                                           | Income tax receivable                                                                                                                                       |                                            |        | 4,584         |         |  |        | 3,417  |        
|                                                           | Prepaid expenses                                                                                                                                            |                                            |        | 1,226         |         |  |        | 1,125  |        
|                                                           | Other current assets                                                                                                                                        |                                            |        | 165           |         |  |        | 802    |        
|                                                           |                                                                                                                                                             |                                            |        |               |         |  |        |       
|                                                           |                                                                                                                                                             | Total current assets                       |        |               | 81,279  |  |        |        | 88,197  | 
|                                                           |                                                                                                                                                             |                                            |        |               |         |  |        |       
|Property and equipment, net                                |                                                                                                                                                             |                                            | 11,507 |               |         |  | 11,475 |       
|Goodwill, net                                              |                                                                                                                                                             |                                            | 20,034 |               |         |  | 29,266 |       
|Intangible assets, net                                     |                                                                                                                                                             |                                            | 6,718  |               |         |  | 15,841 |       
|Deferred income taxes                                      |                                                                                                                                                             |                                            | 5,703  |               |         |  |       |       
|Other assets                                               |                                                                                                                                                             |                                            | 407    |               |         |  | 2,393  |       
|                                                           |                                                                                                                                                             |                                            |        |               |         |  |        |       
|                                                           |                                                                                                                                                             | Total assets                               |        | $             | 125,648 |  |        |        | 147,172 | 
|                                                           |                                                                                                                                                             |                                            |        |               |         |  |        |       
|LIABILITIES AND STOCKHOLDERS
    EQUITY                  
|Current liabilities:                                       |                                                                                                                                                             |                                            |        |               |         |  |        |       
|                                                           | Notes payable                                                                                                                                               |                                            | $      |              |         |  |        | 2,500  |        
|                                                           | Accounts payable                                                                                                                                            |                                            |        | 4,361         |         |  |        | 3,771  |        
|                                                           | Accrued representative commissions                                                                                                                          |                                            |        | 518           |         |  |        | 821    |        
|                                                           | Accrued salaries                                                                                                                                            |                                            |        | 3,931         |         |  |        | 4,071  |        
|                                                           | Other current liabilities                                                                                                                                   |                                            |        | 3,165         |         |  |        | 1,752  |        
|                                                           |                                                                                                                                                             |                                            |        |               |         |  |        |       
|                                                           |                                                                                                                                                             | Total current liabilities                  |        |               | 11,975  |  |        |        | 12,915  | 
|                                                           |                                                                                                                                                             |                                            |        |               |         |  |        |       
|Long-term liabilities:                                     |                                                                                                                                                             |                                            |        |               |         |  |        |       
|                                                           | Deferred income taxes                                                                                                                                       |                                            |        |              |         |  |        | 461    |        
|                                                           | Other liabilities                                                                                                                                           |                                            |        | 27            |         |  |        |       |        
|                                                           |                                                                                                                                                             |                                            |        |               |         |  |        |       
|                                                           |                                                                                                                                                             | Total long-term liabilities                |        |               | 27      |  |        |        | 461     | 
|                                                           |                                                                                                                                                             |                                            |        |               |         |  |        |       
|                                                           |                                                                                                                                                             | Total liabilities                          |        |               | 12,002  |  |        |        | 13,376  | 
|                                                           |                                                                                                                                                             |                                            |        |               |         |  |        |       
|Commitments and contingencies (notes 7, 10, 12
    and 17) |                                                                                                                                                             |                                            |        |               |         |  |        |       
|Stockholders equity:                                      |                                                                                                                                                             |                                            |        |               |         |  |        |       
|                                                           | Common stock, no par value; 200,000,000 shares
    authorized, 14,628,709 and 14,522,080 issued and outstanding at
    June 30, 2002 and 2001, respectively |                                            |        | 86,338        |         |  |        | 85,476 |        
|                                                           | Unearned compensation                                                                                                                                       |                                            |        |              |         |  |        | (478   | )      
|                                                           | Accumulated other comprehensive loss                                                                                                                        |                                            |        | (3,113        | )       |  |        | (5,983 | )      
|                                                           | Retained earnings                                                                                                                                           |                                            |        | 30,421        |         |  |        | 54,781 |        
|                                                           |                                                                                                                                                             |                                            |        |               |         |  |        |       
|                                                           |                                                                                                                                                             | Total stockholders equity                 |        |               | 113,646 |  |        |        | 133,796 | 
|                                                           |                                                                                                                                                             |                                            |        |               |         |  |        |       
|                                                           |                                                                                                                                                             | Total liabilities and stockholders equity |        | $             | 125,648 |  |        |        | 147,172 | 
|                                                           |                                                                                                                                                             |                                            |        |               |         |  |        |       

See accompanying notes to consolidated financial
statements

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SBS Technologies, Inc. and
Subsidiaries

Consolidated Statements of
Operations

|                                                           |                         |                             |         |         |   |      |         |        |  |  |         |        | 
|---------------------------------------------------------- | ----------------------- | --------------------------- | ------- | ------- | - | ---- | ------- | ------ |  |  | ------- | ------ | 
|                                                           |                         |                            
|                                                           |                         | Year Ended June 30         
|                                                           |                         |                            
|                                                           |                         | 2002                        |         | 2001    |   | 2000
|                                                           |                         |                             |         |         |   |     
|                                                           |                         |                            
|                                                           |                         | Thousands (except per share
|                                                           |                         | amounts)                   
|Sales                                                      |                         | $                           | 118,856 |         |   |      | 187,180 |        |  |  | 128,189 |       
|Cost of sales                                              |                         |                             | 76,228  |         |   |      | 98,615  |        |  |  | 61,174  |       
|                                                           |                         |                             |         |         |   |      |         |        |  |  |         |       
|                                                           | Gross profit            |                             |         | 42,628  |   |      |         | 88,565 |  |  |         | 67,015 | 
|Selling, general and administrative expense                |                         |                             | 38,817  |         |   |      | 33,031  |        |  |  | 26,322  |       
|Research and development expense                           |                         |                             | 18,461  |         |   |      | 20,054  |        |  |  | 15,947  |       
|Severance and other employee termination costs             |                         |                             | 3,232   |         |   |      |        |        |  |  |        |       
|Acquired in-process research and development
    charge    |                         |                             |        |         |   |      |        |        |  |  | 4,000   |       
|Impairment of intangible assets                            |                         |                             | 13,005  |         |   |      |        |        |  |  |        |       
|Amortization of intangible assets                          |                         |                             | 7,525   |         |   |      | 7,744   |        |  |  | 5,010   |       
|                                                           |                         |                             |         |         |   |      |         |        |  |  |         |       
|                                                           | Operating income (loss) |                             |         | (38,412 | ) |      |         | 27,736 |  |  |         | 15,736 | 
|                                                           |                         |                             |         |         |   |      |         |        |  |  |         |       
|Interest and other income, net                             |                         |                             | 646     |         |   |      | 410     |        |  |  | 449     |       
|Interest expense                                           |                         |                             | (15     | )       |   |      | (1,071  | )      |  |  | (451    | )     
|Foreign exchange losses                                    |                         |                             | (29     | )       |   |      | (200    | )      |  |  | (143    | )     
|                                                           |                         |                             |         |         |   |      |         |        |  |  |         |       
|                                                           |                         |                             | 602     |         |   |      | (861    | )      |  |  | (145    | )     
|                                                           |                         |                             |         |         |   |      |         |        |  |  |         |       
|Income (loss) before income taxes                          |                         |                             | (37,810 | )       |   |      | 26,875  |        |  |  | 15,591  |       
|Income tax expense (benefit)                               |                         |                             | (13,450 | )       |   |      | 9,691   |        |  |  | 6,688   |       
|                                                           |                         |                             |         |         |   |      |         |        |  |  |         |       
|Net income (loss)                                          |                         | $                           | (24,360 | )       |   |      | 17,184  |        |  |  | 8,903   |       
|                                                           |                         |                             |         |         |   |      |         |        |  |  |         |       
|Net income (loss) per common share                         |                         | $                           | (1.67   | )       |   |      | 1.23    |        |  |  | 0.71    |       
|                                                           |                         |                             |         |         |   |      |         |        |  |  |         |       
|Net income (loss) per common
    share  assuming dilution |                         | $                           | (1.67   | )       |   |      | 1.14    |        |  |  | 0.66    |       
|                                                           |                         |                             |         |         |   |      |         |        |  |  |         |       

See accompanying notes to consolidated financial
statements

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SBS Technologies, Inc. and
Subsidiaries

Consolidated Statements of Changes in
Stockholders Equity

|                                                                          |                           |                                         |            |        |   |          |        |               |   |               |     |          |   |               |      |        |   |   |         |         |        |   |        |   |        |   |        |         |   |   |         |         |        |  
|------------------------------------------------------------------------- | ------------------------- | --------------------------------------- | ---------- | ------ | - | -------- | ------ | ------------- | - | ------------- | --- | -------- | - | ------------- | ---- | ------ | - | - | ------- | ------- | ------ | - | ------ | - | ------ | - | ------ | ------- | - | - | ------- | ------- | ------ | -
|                                                                          |                           |                                         |            |        |   |          |        |               |   | Accumulated   |     |          |   |              
|                                                                          |                           | Common Stock                            |            | Common |   |          |        |               |   | Other         |     |          |   | Total        
|                                                                          |                           |                                         |            | Stock  |   | Unearned |        | Comprehensive |   | Comprehensive |     | Retained |   | Stockholders
|                                                                          |                           | Shares                                  |            | Amount |   | Warrants |        | Compensation  |   | Income        |     | Loss     |   | Earnings      |      | Equity
|                                                                          |                           |                                         |            |        |   |          |        |               |   |               |     |          |   |               |      |       
|                                                                          |                           |                                        
|                                                                          |                           | Thousands (except share amounts)       
|Balance at June 30, 1999                                                  |                           |                                         | 11,674,966 |        |   | $        | 50,554 |               |   | $             | 38  |          |   | $             |     |        |   |   |         |         |        | $ | (2,059 | ) |        | $ | 28,694 |         |   | $ | 77,227  |        
|Exercise of stock options and warrants                                    |                           |                                         | 1,264,010  |        |   |          | 9,349  |               |   |               | (38 | )        |   |               |     |        |   | $ |        |         |        |   |       |   |        |   |       |         |   |   | 9,311   |        
|Stock-based compensation                                                  |                           |                                         |           |        |   |          | 28     |               |   |               |    |          |   |               |     |        |   |   |        |         |        |   |       |   |        |   |       |         |   |   | 28      |        
|Stock issued to directors under restricted stock
    awards               |                           |                                         | 13,442     |        |   |          | 83     |               |   |               |    |          |   |               |     |        |   |   |        |         |        |   |       |   |        |   |       |         |   |   | 83      |        
|Acquisition of SciTech                                                    |                           |                                         | 349,726    |        |   |          | 242    |               |   |               |    |          |   |               |     |        |   |   |        |         |        |   |       |   |        |   | 401    |         |   |   | 643     |        
|Dividends paid to former shareholders of SciTech                          |                           |                                         |           |        |   |          |       |               |   |               |    |          |   |               |     |        |   |   |        |         |        |   |       |   |        |   | (401   | )       |   |   | (401    | )      
|Fair value of SBS options issued in exchange for
    unvested SDL options |                           |                                         |           |        |   |          | 1,232  |               |   |               |    |          |   |               |     |        |   |   |        |         |        |   |       |   |        |   |       |         |   |   | 1,232   |        
|Income tax benefit from stock options exercised                           |                           |                                         |           |        |   |          | 3,897  |               |   |               |    |          |   |               |     |        |   |   |        |         |        |   |       |   |        |   |       |         |   |   | 3,897   |        
|Comprehensive income:                                                     |                           |                                         |            |        |   |          |        |               |   |               |     |          |   |               |      |        |   |   |         |         |        |   |        |   |        |   |        |         |   |   |         |        
|                                                                          | Net income                |                                         |            |       |   |          |        |              |   |               |     |         |   |               |      |       |   |   |         | 8,903   |        |   |        |  |        |   |        | 8,903   |   |   |         | 8,903   |       
|                                                                          | Other comprehensive loss: |                                         |            |        |   |          |        |               |   |               |     |          |   |               |      |        |   |   |         |         |        |   |        |   |        |   |        |         |   |   |         |         |       
|                                                                          |                           | Foreign currency translation adjustment |            |        |  |          |        |               |  |               |     |          |  |               |      |        |  |   |         |         | (1,908 | ) |        |   | (1,908 | ) |        |         |  |   |         |         | (1,908 | )
|                                                                          |                           |                                         |            |        |   |          |        |               |   |               |     |          |   |               |      |        |   |   |         |         |        |   |        |   |        |   |        |         |   |   |         |        
|Total comprehensive income                                                |                           |                                         |            |        |   |          |        |               |   |               |     |          |   |               |      |        |   |   | 6,995   |         |        |   |        |   |        |   |        |         |   |   |         |        
|                                                                          |                           |                                         |            |        |   |          |        |               |   |               |     |          |   |               |      |        |   |   |         |         |        |   |        |   |        |   |        |         |   |   |         |        
|Balance at June 30, 2000                                                  |                           |                                         | 13,302,144 |        |   |          | 65,385 |               |   |               |    |          |   |               |     |        |   |   |         |         |        |   | (3,967 | ) |        |   | 37,597 |         |   |   | 99,015  |        
|Exercise of stock options and warrants                                    |                           |                                         | 1,180,010  |        |   |          | 12,987 |               |   |               |    |          |   |               |     |        |   |   |        |         |        |   |       |   |        |   |       |         |   |   | 12,987  |        
|Stock-based compensation                                                  |                           |                                         |           |        |   |          | 28     |               |   |               |    |          |   |               | 28   |        |   |   |        |         |        |   |       |   |        |   |       |         |   |   | 56      |        
|Stock issued to officer and directors under
    restricted stock awards   |                           |                                         | 39,926     |        |   |          | 611    |               |   |               |    |          |   |               | (506 | )      |   |   |        |         |        |   |       |   |        |   |       |         |   |   | 105     |        
|Income tax benefit from stock options exercised                           |                           |                                         |           |        |   |          | 6,465  |               |   |               |    |          |   |               |     |        |   |   |        |         |        |   |       |   |        |   |       |         |   |   | 6,465   |        
|Comprehensive income:                                                     |                           |                                         |            |        |   |          |        |               |   |               |     |          |   |               |      |        |   |   |         |         |        |   |        |   |        |   |        |         |   |   |         |        
|                                                                          | Net income                |                                         |            |       |   |          |        |              |   |               |     |         |   |               |      |       |   |   |         | 17,184  |        |   |        |  |        |   |        | 17,184  |   |   |         | 17,184  |       
|                                                                          | Other comprehensive loss: |                                         |            |        |   |          |        |               |   |               |     |          |   |               |      |        |   |   |         |         |        |   |        |   |        |   |        |         |   |   |         |         |       
|                                                                          |                           | Foreign currency translation adjustment |            |        |  |          |        |               |  |               |     |          |  |               |      |        |  |   |         |         | (2,016 | ) |        |   | (2,016 | ) |        |         |  |   |         |         | (2,016 | )
|                                                                          |                           |                                         |            |        |   |          |        |               |   |               |     |          |   |               |      |        |   |   |         |         |        |   |        |   |        |   |        |         |   |   |         |        
|Total comprehensive income                                                |                           |                                         |            |        |   |          |        |               |   |               |     |          |   |               |      |        |   |   | 15,168  |         |        |   |        |   |        |   |        |         |   |   |         |        
|                                                                          |                           |                                         |            |        |   |          |        |               |   |               |     |          |   |               |      |        |   |   |         |         |        |   |        |   |        |   |        |         |   |   |         |        
|Balance at June 30, 2001                                                  |                           |                                         | 14,522,080 |        |   |          | 85,476 |               |   |               |    |          |   |               | (478 | )      |   |   |         |         |        |   | (5,983 | ) |        |   | 54,781 |         |   |   | 133,796 |        
|Exercise of stock options and warrants                                    |                           |                                         | 179,129    |        |   |          | 1,555  |               |   |               |    |          |   |               |     |        |   |   |        |         |        |   |       |   |        |   |       |         |   |   | 1,555   |        
|Stock-based compensation                                                  |                           |                                         |           |        |   |          | 45     |               |   |               |    |          |   |               | 56   |        |   |   |        |         |        |   |       |   |        |   |       |         |   |   | 101     |        
|Stock repurchased and retired                                             |                           |                                         | (42,500    | )      |   |          | (488   | )             |   |               |    |          |   |               |     |        |   |   |        |         |        |   |       |   |        |   |       |         |   |   | (488    | )      
|Cancellation of stock issued to officer under
    restricted stock awards |                           |                                         | (30,000    | )      |   |          | (422   | )             |   |               |    |          |   |               | 422  |        |   |   |        |         |        |   |       |   |        |   |       |         |   |   |        |        
|Income tax benefit from stock options exercised                           |                           |                                         |           |        |   |          | 172    |               |   |               |    |          |   |               |     |        |   |   |        |         |        |   |       |   |        |   |       |         |   |   | 172     |        
|Comprehensive income:                                                     |                           |                                         |            |        |   |          |        |               |   |               |     |          |   |               |      |        |   |   |         |         |        |   |        |   |        |   |        |         |   |   |         |        
|                                                                          | Net loss                  |                                         |            |       |   |          |        |              |   |               |     |         |   |               |      |       |   |   |         | (24,360 | )      |   |        |  |        |   |        | (24,360 | ) |   |         | (24,360 | )     
|                                                                          | Other comprehensive loss: |                                         |            |        |   |          |        |               |   |               |     |          |   |               |      |        |   |   |         |         |        |   |        |   |        |   |        |         |   |   |         |         |       
|                                                                          |                           | Foreign currency translation adjustment |            |        |  |          |        |               |  |               |     |          |  |               |      |        |  |   |         |         | 2,870  |   |        |   | 2,870  |   |        |         |  |   |         |         | 2,870  |  
|                                                                          |                           |                                         |            |        |   |          |        |               |   |               |     |          |   |               |      |        |   |   |         |         |        |   |        |   |        |   |        |         |   |   |         |        
|Total comprehensive income                                                |                           |                                         |            |        |   |          |        |               |   |               |     |          |   |               |      |        |   | $ | (21,490 | )       |        |   |        |   |        |   |        |         |   |   |         |        
|                                                                          |                           |                                         |            |        |   |          |        |               |   |               |     |          |   |               |      |        |   |   |         |         |        |   |        |   |        |   |        |         |   |   |         |        
|Balance at June 30, 2002                                                  |                           |                                         | 14,628,709 |        |   | $        | 86,338 |               |   | $             |    |          |   | $             |     |        |   |   |         |         |        | $ | (3,113 | ) |        | $ | 30,421 |         |   | $ | 113,646 |        
|                                                                          |                           |                                         |            |        |   |          |        |               |   |               |     |          |   |               |      |        |   |   |         |         |        |   |        |   |        |   |        |         |   |   |         |        

See accompanying notes to consolidated financial
statements

33



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##### Table of Contents



SBS Technologies, Inc. and
Subsidiaries

Consolidated Statements of Cash
Flows

|                                      |                                                                                              |                                                                         |                                    |                                           |         |        |        |        |       |         |        |         |        |         |         |  
|------------------------------------- | -------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | ---------------------------------- | ----------------------------------------- | ------- | ------ | ------ | ------ | ----- | ------- | ------ | ------- | ------ | ------- | ------- | -
|                                      |                                                                                              |                                                                        
|                                      |                                                                                              | Year Ended June 30                                                     
|                                      |                                                                                              |                                                                        
|                                      |                                                                                              | 2002                                                                    |                                    | 2001                                      |         | 2000  
|                                      |                                                                                              |                                                                         |                                    |                                           |         |       
|                                      |                                                                                              |                                                                        
|                                      |                                                                                              | Thousands                                                              
|Cash flows from operating activities: |                                                                                              |                                                                         |                                    |                                           |         |        |        |        |       |         |        |        
|                                      | Net income (loss)                                                                            |                                                                         | $                                  | (24,360                                   | )       |        | $      | 17,184 |       |         | $      | 8,903   |       
|                                      |                                                                                              |                                                                         |                                    |                                           |         |        |        |        |       |         |        |        
|                                      | Adjustments to reconcile net income
    (loss) to net cash provided by operating activities: |                                                                         |                                    |                                           |         |        |        |        |       |         |        |         |       
|                                      |                                                                                              | Depreciation                                                            |                                    |                                           | 3,786   |        |        |        | 2,454 |         |        |         | 1,981  |        
|                                      |                                                                                              | Amortization of intangible assets                                       |                                    |                                           | 7,525   |        |        |        | 7,744 |         |        |         | 5,010  |        
|                                      |                                                                                              | Impairment of assets                                                    |                                    |                                           | 13,005  |        |        |        |      |         |        |         |       |        
|                                      |                                                                                              | Bad debt expense                                                        |                                    |                                           | 799     |        |        |        | 454   |         |        |         | 319    |        
|                                      |                                                                                              | Deferred income taxes                                                   |                                    |                                           | (10,204 | )      |        |        | (451  | )       |        |         | (2,505 | )      
|                                      |                                                                                              | Income tax benefit of stock options exercised                           |                                    |                                           | 172     |        |        |        | 6,465 |         |        |         | 3,897  |        
|                                      |                                                                                              | (Gain) loss on disposition of assets                                    |                                    |                                           | (15     | )      |        |        | 25    |         |        |         | 103    |        
|                                      |                                                                                              | Foreign exchange losses                                                 |                                    |                                           | 29      |        |        |        | 200   |         |        |         | 143    |        
|                                      |                                                                                              | Stock-based compensation                                                |                                    |                                           | 101     |        |        |        | 56    |         |        |         | 28     |        
|                                      |                                                                                              | Stock issued to directors under restricted stock
    awards             |                                    |                                           |        |        |        |        | 105   |         |        |         | 83     |        
|                                      |                                                                                              | Acquired in-process research and development
    charge                 |                                    |                                           |        |        |        |        |      |         |        |         | 4,000  |        
|                                      |                                                                                              | Changes in assets and liabilities (net of effects
    of acquisitions): |                                    |                                           |         |        |        |        |       |         |        |         |        |        
|                                      |                                                                                              |                                                                         | Receivables                        |                                           |         | 4,328  |        |        |       | 1,157   |        |         |        | (6,831  | )      
|                                      |                                                                                              |                                                                         | Inventories                        |                                           |         | 23,532 |        |        |       | (10,602 | )      |         |        | (12,572 | )      
|                                      |                                                                                              |                                                                         | Prepaids and other assets          |                                           |         | 2,545  |        |        |       | (2,907  | )      |         |        | (309    | )      
|                                      |                                                                                              |                                                                         | Accounts payable                   |                                           |         | 659    |        |        |       | (2,116  | )      |         |        | 1,026   |        
|                                      |                                                                                              |                                                                         | Accrued representative commissions |                                           |         | (324   | )      |        |       | 168     |        |         |        | 123     |        
|                                      |                                                                                              |                                                                         | Accrued compensation               |                                           |         | (330   | )      |        |       | (263    | )      |         |        | 59      |        
|                                      |                                                                                              |                                                                         | Income taxes                       |                                           |         | (1,473 | )      |        |       | (1,814  | )      |         |        | 366     |        
|                                      |                                                                                              |                                                                         | Other current liabilities          |                                           |         | 796    |        |        |       | (573    | )      |         |        | 1,033   |        
|                                      |                                                                                              |                                                                         |                                    |                                           |         |        |        |        |       |         |        |        
|                                      |                                                                                              |                                                                         |                                    | Net cash provided by operating activities |         |        | 20,571 |        |       |         | 17,286 |         |        |         | 4,857   |  
|                                      |                                                                                              |                                                                         |                                    |                                           |         |        |        |        |       |         |        |        
|Cash flows from investing activities: |                                                                                              |                                                                         |                                    |                                           |         |        |        |        |       |         |        |        
|                                      | Cash received from sale of marketable securities                                             |                                                                         |                                    |                                          |         |        |        |       |       |         |        | 248     |       
|                                      | Business acquisitions, net of cash acquired                                                  |                                                                         |                                    | (1,033                                    | )       |        |        |       |       |         |        | (24,682 | )     
|                                      | Purchase of license agreement                                                                |                                                                         |                                    |                                          |         |        |        | (236   | )     |         |        | (2,000  | )     
|                                      | Acquisition of property and equipment                                                        |                                                                         |                                    | (3,334                                    | )       |        |        | (6,713 | )     |         |        | (1,910  | )     
|                                      | Other                                                                                        |                                                                         |                                    | 8                                         |         |        |        | 396    |       |         |        |        |       
|                                      |                                                                                              |                                                                         |                                    |                                           |         |        |        |        |       |         |        |        
|                                      |                                                                                              |                                                                         |                                    | Net cash used in investing activities     |         |        | (4,359 | )      |       |         | (6,553 | )       |        |         | (28,344 | )
|                                      |                                                                                              |                                                                         |                                    |                                           |         |        |        |        |       |         |        |        

34



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##### Table of Contents



SBS Technologies, Inc. and
Subsidiaries


Consolidated Statements of Cash
Flows  (Continued)

|                                                                                         |                                                          |                                                                    |                                                         |        |   |        |       |         |   |        |       |        |       |        | 
|---------------------------------------------------------------------------------------- | -------------------------------------------------------- | ------------------------------------------------------------------ | ------------------------------------------------------- | ------ | - | ------ | ----- | ------- | - | ------ | ----- | ------ | ----- | ------ | 
|                                                                                         |                                                          |                                                                   
|                                                                                         |                                                          | Year Ended June 30                                                
|                                                                                         |                                                          |                                                                   
|                                                                                         |                                                          | 2002                                                               |                                                         | 2001   |   | 2000  
|                                                                                         |                                                          |                                                                    |                                                         |        |   |       
|                                                                                         |                                                          |                                                                   
|                                                                                         |                                                          | Thousands                                                         
|Cash flows from financing activities:                                                    |                                                          |                                                                    |                                                         |        |   |        |       |         |   |        |       |       
|                                                                                         | Payments on notes payable to related parties             |                                                                    | $                                                       |       |   |        | $     |        |   |        | $     | (1,391 | )    
|                                                                                         | Proceeds from notes payable to bank                      |                                                                    |                                                         |       |   |        |       |        |   |        |       | 20,000 |      
|                                                                                         | Payments on notes payable to bank                        |                                                                    |                                                         | (2,500 | ) |        |       | (17,500 | ) |        |       | (3,975 | )    
|                                                                                         | Dividends paid to former shareholders of SciTech         |                                                                    |                                                         |       |   |        |       |        |   |        |       | (401   | )    
|                                                                                         | Repurchase of common stock                               |                                                                    |                                                         | (488   | ) |        |       |        |   |        |       |       |      
|                                                                                         | Proceeds from exercise of stock options and
    warrants |                                                                    |                                                         | 1,555  |   |        |       | 12,987  |   |        |       | 9,311  |      
|                                                                                         |                                                          |                                                                    |                                                         |        |   |        |       |         |   |        |       |       
|                                                                                         |                                                          |                                                                    | Net cash (used in) provided by financing
    activities |        |   | (1,433 | )     |         |   | (4,513 | )     |        |       | 23,544 | 
|                                                                                         |                                                          |                                                                    |                                                         |        |   |        |       |         |   |        |       |       
|Effect of exchange rate changes on cash                                                  |                                                          |                                                                    | 298                                                     |        |   |        | (81   | )       |   |        | 37    |       
|                                                                                         |                                                          |                                                                    |                                                         |        |   |        |       |         |   |        |       |       
|Net increase in cash and cash equivalents                                                |                                                          |                                                                    | 15,077                                                  |        |   |        | 6,139 |         |   |        | 94    |       
|Cash and cash equivalents at beginning of period                                         |                                                          |                                                                    | 9,734                                                   |        |   |        | 3,595 |         |   |        | 3,501 |       
|                                                                                         |                                                          |                                                                    |                                                         |        |   |        |       |         |   |        |       |       
|Cash and cash equivalents at end of period                                               |                                                          | $                                                                  | 24,811                                                  |        |   | $      | 9,734 |         |   | $      | 3,595 |       
|                                                                                         |                                                          |                                                                    |                                                         |        |   |        |       |         |   |        |       |       
|Supplemental disclosure of cash flow information:                                        |                                                          |                                                                    |                                                         |        |   |        |       |         |   |        |       |       
|                                                                                         | Interest paid                                            |                                                                    | $                                                       | 15     |   |        | $     | 1,415   |   |        | $     | 99     |      
|                                                                                         | Income taxes (received) paid                             |                                                                    |                                                         | (1,991 | ) |        |       | 5,392   |   |        |       | 5,057  |      
|                                                                                         | Noncash financing and investing activities:              |                                                                    |                                                         |        |   |        |       |         |   |        |       |        |      
|                                                                                         |                                                          | Stock options issued in connection with the
    acquisition of SDL |                                                         |        |  |        |       |         |  |        |       |        | 1,232 |       
|Summary of assets and equity acquired, and
    liabilities assumed through acquisitions: |                                                          |                                                                    |                                                         |        |   |        |       |         |   |        |       |       
|                                                                                         | Cash and cash equivalents                                |                                                                    |                                                         |       |   |        |       |        |   |        |       | 1,479  |      
|                                                                                         | Marketable securities                                    |                                                                    |                                                         |       |   |        |       |        |   |        |       | 248    |      
|                                                                                         | Receivables                                              |                                                                    |                                                         |       |   |        |       |        |   |        |       | 1,799  |      
|                                                                                         | Inventories                                              |                                                                    |                                                         | 586    |   |        |       |        |   |        |       | 2,432  |      
|                                                                                         | Prepaid expenses                                         |                                                                    |                                                         | 17     |   |        |       |        |   |        |       | 82     |      
|                                                                                         | Goodwill and identifiable intangible assets              |                                                                    |                                                         | 364    |   |        |       |        |   |        |       | 26,108 |      
|                                                                                         | Property and equipment                                   |                                                                    |                                                         | 417    |   |        |       |        |   |        |       | 271    |      
|                                                                                         | Accumulated depreciation                                 |                                                                    |                                                         |       |   |        |       |        |   |        |       | (66    | )    
|                                                                                         | Accounts payable                                         |                                                                    |                                                         |       |   |        |       |        |   |        |       | (1,405 | )    
|                                                                                         | Accrued compensation                                     |                                                                    |                                                         | (99    | ) |        |       |        |   |        |       | (526   | )    
|                                                                                         | Debt                                                     |                                                                    |                                                         |       |   |        |       |        |   |        |       | (75    | )    
|                                                                                         | Deferred income taxes                                    |                                                                    |                                                         | 224    |   |        |       |        |   |        |       | (5,024 | )    
|                                                                                         | Deferred revenue                                         |                                                                    |                                                         | (426   | ) |        |       |        |   |        |       |       |      
|                                                                                         | Income taxes                                             |                                                                    |                                                         |       |   |        |       |        |   |        |       | 1,481  |      
|                                                                                         | Other current liabilities                                |                                                                    |                                                         | (50    | ) |        |       |        |   |        |       |       |      
|                                                                                         | Common stock                                             |                                                                    |                                                         |       |   |        |       |        |   |        |       | (242   | )    
|                                                                                         | Retained earnings                                        |                                                                    | $                                                       |       |   |        | $     |        |   |        | $     | (401   | )    
|                                                                                         |                                                          |                                                                    |                                                         |        |   |        |       |         |   |        |       |       

See accompanying notes to consolidated financial
statements

35



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##### Table of Contents



SBS TECHNOLOGIES, INC. AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



|    |                                               
|--- | ----------------------------------------------
|(1) | Summary of Significant Accounting
    Policies



|    |        
|--- | -------
|(a) | General

The consolidated financial statements include the
accounts of SBS Technologies, Inc. and its wholly-owned
subsidiaries. All significant intercompany accounts and
transactions have been eliminated.

SBS Technologies, Inc. (SBS) designs
and builds open architecture embedded computer products that
enable original equipment manufacturers (OEM) to
serve the commercial, communications, enterprise and government
markets. SBS products are integrated into a variety of
applications including communication networking, medical
imaging, industrial automation, and military systems. The
portfolio includes an extensive line of CPU boards, computer
interconnections, avionics, telemetry and fully integrated
systems and enclosures. SBS has operations in New Mexico,
Minnesota, North Carolina, California, Massachusetts and Germany.

On August 18, 2000, SBS declared a
two-for-one stock split for stockholders of record on
September 5, 2000, distributed on September 20, 2000.
All references to net income (loss) per common share, net income
(loss) per common share  assuming dilution, common
stock, and stockholders equity have been restated as if
the stock split occurred as of the earliest period presented.



|    |                    
|--- | -------------------
|(b) | Revenue Recognition

Revenue is generally recognized when goods are
shipped to the customer, provided that SBS has received a valid
purchase order, the price is fixed, title has transferred,
collection of the associated receivable is reasonably assured,
and there are no remaining significant obligations. Where
customer acceptance provisions exist, revenue is recognized only
when SBS is certain that the products meet all of the specified
criteria prior to customer acceptance and all other revenue
recognition criteria have been met.



|    |                          
|--- | -------------------------
|(c) | Cash and Cash Equivalents

Temporary investments with original maturities of
ninety days or less are classified as cash and cash equivalents.
Substantially all cash is held at one financial institution.



|    |            
|--- | -----------
|(d) | Inventories

Inventories are valued at standard cost, which
approximates weighted average cost and does not exceed market.



|    |                       
|--- | ----------------------
|(e) | Property and Equipment

Property and equipment are carried at cost.
Depreciation of property and equipment is provided over the
estimated useful lives (one to twelve years) of the respective
assets using straight-line and accelerated methods.



|    |                  
|--- | -----------------
|(f) | Intangible Assets

Intangible assets include goodwill, noncompete
covenants, core-developed technology, assembled work force,
customer lists and license agreements. Purchase price
consideration relating to SBS acquisitions has been
allocated based on assessments by SBS. Amortization of
intangibles is being recognized using the straight-line method
based upon the estimated economic useful lives of the assets
(four to ten years).

SBS periodically evaluates the carrying amounts
of goodwill, as well as the related amortization periods, to
determine whether adjustments to these amounts or useful lives
are required. The evaluation is based on the projection of
undiscounted future operating cash flows of the acquired
operations over the remaining useful life

36



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##### Table of Contents



SBS TECHNOLOGIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

of the related goodwill. To the extent such
projections indicate that future undiscounted cash flows are not
sufficient to recover the carrying amounts of goodwill, a charge
to expense is recognized to the extent that the carrying amounts
exceed fair value.



|    |             
|--- | ------------
|(g) | Income Taxes

SBS accounts for income taxes under the asset and
liability method. Deferred income taxes are recognized for the
tax consequences of differences between the financial statement
carrying amounts and the tax bases of existing assets and
liabilities by applying enacted statutory tax rates applicable
to future years. The effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the
change.



|    |                      
|--- | ---------------------
|(h) | Financial Instruments

SBS financial instruments are cash and cash
equivalents, accounts receivable, accounts payable, and notes
payable. The carrying amounts of cash and cash equivalents,
accounts receivable, accounts payable, and notes payable,
because of their nature, approximate fair value.



|    |                  
|--- | -----------------
|(i) | Reclassifications

Certain amounts in the 2001 and 2000 financial
statements have been reclassified to conform to the 2002
presentation.



|    |                 
|--- | ----------------
|(j) | Use of Estimates

The preparation of financial statements in
conformity with generally accepted accounting principles in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.



|    |                   
|--- | ------------------
|(k) | Stock Option Plans

SBS accounts for its stock option plans in
accordance with the provisions of SFAS 123,
Accounting for Stock-Based Compensation.
SFAS 123 allows entities to continue to apply the
provisions of APB Opinion 25, Accounting for Stock
Issued to Employees, and provide pro forma net income and
pro forma earnings per share disclosures for employee stock
option grants as if the fair-value-based method defined in
SFAS 123 had been applied. SBS has elected to continue to
apply the provisions of APB Opinion 25 and provide the pro
forma disclosure provisions of SFAS 123.



|    |                                                                            
|--- | ---------------------------------------------------------------------------
|(l) | Impairment of Long-Lived Assets and
    Long-Lived Assets to Be Disposed Of

SBS reviews its long-lived and certain
identifiable intangible assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount
of an asset to future net cash flows (undiscounted and without
interest charges) expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying
amounts of the assets exceed the fair value of the assets.
Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.



|    |                     
|--- | --------------------
|(m) | Comprehensive Income

SBS reports comprehensive income from non-owner
changes in stockholders equity in the consolidated
financial statements including net income and foreign currency
translation adjustments in the Consolidated

37



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##### Table of Contents



SBS TECHNOLOGIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Statements of Changes in Stockholders
Equity. Comprehensive income does not affect SBS
consolidated financial position or results of operations.



|    |                     
|--- | --------------------
|(n) | Currency Translation

For operations outside of the United States that
prepare financial statements in functional currencies other than
the U.S. dollar, SBS translates the statement of operations
amounts at average exchange rates for the year and translates
assets and liabilities at year-end exchange rates. The
translation adjustments are presented as a component of
accumulated other comprehensive loss within stockholders
equity. Foreign currency transaction gains and losses are
recognized in the statement of operations based on changes in
the exchange rates for transactions and balances denominated in
non-functional currencies.



|    |                         
|--- | ------------------------
|(o) | New Accounting Standards

SBS adopted the provisions of SFAS 141
Business Combinations, and SFAS 142
Goodwill and Other Intangible Assets on July 1,
2002. SFAS 141 requires that the purchase method of
accounting be used for all business combinations initiated or
completed after June 30, 2001. SFAS 141 also specifies
criteria intangible assets acquired in a purchase method
business combination must meet to be recognized and reported
apart from goodwill. SFAS 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment at least
annually in accordance with the provisions of SFAS 142. Any
intangible assets with indefinite useful lives must be tested
for impairment during the first interim period following
adoption. Any impairment losses measured at the date of adoption
will be recognized as the cumulative effect of a change in
accounting principle. SFAS 142 also requires that
intangible assets with estimable useful lives be amortized over
their respective estimated useful lives to their estimated
residual values, if any, and reviewed for impairment in
accordance with SFAS 144 Accounting for the
Impairment or Disposal of Long-Lived Assets, which
supercedes SFAS 121. Because of the extensive effort needed
to comply with the adoption of SFAS 141 and SFAS 142,
it is not practicable to reasonably estimate the impact of
adoption of these standards on SBS financial statements.
At June 30, 2002, the amount of unamortized goodwill was
approximately $20.0 million. Goodwill amortization for
fiscal 2002, 2001, and 2000 was approximately $4.4 million,
$4.6 million, and $4.5 million respectively. Beginning
July 1, 2002, goodwill amortization expense will no longer
be recorded.



|    |                      
|--- | ---------------------
|(2) | Business Acquisitions

SBS completed the acquisitions described below
during the fiscal years ended June 30, 2002 and 2000.
Unless otherwise disclosed, the acquisitions have been accounted
for as purchases, whereby the results of operations of the
acquired company have been combined with SBS since the
respective dates of acquisition. The purchase price has been
allocated to the underlying assets acquired and liabilities
assumed based on their estimated fair values with goodwill, if
any, representing the excess of the purchase price over the fair
value of the net assets acquired as indicated below.

On March 4, 2002, SBS completed the
acquisition of certain assets and assumed certain liabilities of
Essential Communications, a division of publicly held Intrusion,
Inc., for approximately $1.0 million. Founded in 1992,
Essential develops and delivers early stage InfiniBand®
products. SBS utilizes Essentials InfiniBand product
expertise and industry relationships to build on its current
InfiniBand efforts in the enterprise server and storage markets.
In conjunction with the purchase price allocation, SBS recorded
approximately $364,000 of identifiable intangible assets,
principally core-technology assets, which are being amortized
over a two-year period. No goodwill was recorded. Proforma
results of operations are not presented as Essentials
results of operations in fiscal 2002 and 2001 were not material
to SBS consolidated results of operations.

On April 12, 2000, SBS completed the
acquisition of SDL Communications, Inc. (SDL).
Located in Mansfield, Massachusetts, SDL specializes in the
design, manufacture and sale of WAN I/O for the

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SBS TECHNOLOGIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

telecommunications and data communications
markets. SDL designs, manufactures, and markets T1/EI, T3/E3,
HSSI and OC3 products based on the PCI, CompactPCI, and PMC form
factors, and supporting protocols such as Frame Relay, HDLC,
PPP, X.25 and ATM. In addition, SDLs products support the
operating systems most commonly used in communications,
including Windows NT, Solaris, and VxWorks. SBS acquired all of
the outstanding stock of SDL for $25.6 million in cash.
Acquisition costs associated with the purchase were
$0.6 million. The purchase price also included
$1.2 million for the fair value of SBS options issued in
exchange for unvested SDL options. The acquisition was funded
with existing cash and a $20.0 million borrowing under
SBS Credit Agreement with Bank of America, N.A.
Identifiable intangibles are being amortized over four to eight
years and goodwill is being amortized over ten years. In
connection with the acquisition, SBS recorded a
$4.0 million earnings charge, based on an assessment by
SBS, of purchased technology of SDL. The assessment determined
that $4.0 million of SDLs purchase price represented
technology that did not meet the accounting definitions of
completed technology, and thus should be charged to
earnings under generally accepted accounting principles. The
assessment analyzed certain products that were in various stages
of completion ranging from 35% of completion to 85% of
completion, with estimated completion dates ranging from the
third quarter of calendar 2000 to the second quarter of calendar
2001. The fair value of the purchased technology was determined
in accordance with the views expressed by the staff of the
Securities and Exchange Commission.

On December 20, 1999, SBS acquired SciTech
Inc. (SciTech), a Madison, Wisconsin based designer
and manufacturer of communications network I/O products based on
PMC and PCI form factors. The acquisition qualified as a pooling
of interests for accounting purposes and constituted a tax free
reorganization for federal income tax purposes. Under the terms
of the agreement, SciTechs shareholders exchanged all
outstanding shares of SciTech stock for 349,726 shares of
SBS stock. SciTech was subsequently merged into
Communications Products. SciTechs historical results do
not have a material effect on combined financial position or
results of operations, and as such, the financial position and
results of operations of SBS and SciTech are combined from
October 1, 1999 on a prospective basis.



|    |            
|--- | -----------
|(3) | Receivables

Receivables, net consisted of the following:

|                    |                                  |                                                                       |        |        |        |   |        |        |      |  
|------------------- | -------------------------------- | --------------------------------------------------------------------- | ------ | ------ | ------ | - | ------ | ------ | ---- | -
|                    |                                  |                                                                      
|                    |                                  | June 30                                                              
|                    |                                  |                                                                      
|                    |                                  | 2002                                                                  |        | 2001  
|                    |                                  |                                                                       |        |       
|                    |                                  |                                                                      
|                    |                                  | Thousands                                                            
|Accounts receivable |                                  | $                                                                     | 23,992 |        |        | $ | 28,267 |       
|                    | Allowance for doubtful accounts: |                                                                       |        |        |        |   |        |        |     
|                    |                                  | Beginning balance                                                     |        |        | (980   | ) |        |        | (829 | )
|                    |                                  | Provision for bad debts                                               |        |        | (799   | ) |        |        | (454 | )
|                    |                                  | Accounts written off and foreign currency
    translation adjustments |        |        | 406    |   |        |        | 303  |  
|                    |                                  |                                                                       |        |        |        |   |        |       
|                    |                                  | Ending balance                                                        |        |        | (1,373 | ) |        |        | (980 | )
|                    |                                  |                                                                       |        |        |        |   |        |       
|                    | Accounts receivable, net         |                                                                       | $      | 22,619 |        |   | $      | 27,287 |     
|                    |                                  |                                                                       |        |        |        |   |        |       

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SBS TECHNOLOGIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |            
|--- | -----------
|(4) | Inventories

Inventories consisted of the following:

|                              |  |           |        |      |  |   |        | 
|----------------------------- |  | --------- | ------ | ---- |  | - | ------ | 
|                              |  |          
|                              |  | June 30  
|                              |  |          
|                              |  | 2002      |        | 2001
|                              |  |           |        |     
|                              |  |          
|                              |  | Thousands
|Raw materials                 |  | $         | 9,663  |      |  | $ | 22,743 | 
|Work in process               |  |           | 5,328  |      |  |   | 6,873  | 
|Finished goods                |  |           | 3,437  |      |  |   | 9,892  | 
|Inventory consigned to others |  |           |       |      |  |   | 1,244  | 
|                              |  |           |        |      |  |   |        | 
|                              |  | $         | 18,428 |      |  | $ | 40,752 | 
|                              |  |           |        |      |  |   |        | 

SBS recorded a $12.4 million inventory
write-down during the second quarter of fiscal 2002, and a
$2.7 million inventory write-down during the fourth quarter
of fiscal 2002. The second quarter write-down consisted of
inventory associated with programs that are not anticipated to
come back to their previous forecasts, inventory associated with
SBS decision to exit its legacy PCI chassis product line,
and inventory associated with SBS products that will no longer
be marketed. Additionally, the implementation of a new inventory
management methodology associated with the consolidation of
SBS manufacturing operations contributed to the inventory
write-down. This new methodology calculates the maximum level of
inventory to be maintained by comparing historical usage over a
fixed period of time to forecasted future demand. The
consolidation efforts and new inventory methodology resulted in
a reduction in required inventory levels. The fourth quarter
write-down was primarily due to customer order cancellations and
reduced demand for certain communications and enterprise
products noted during the fourth quarter. As of June 30,
2002, approximately $0.7 million of inventory previously
written down had been utilized.

(5) Property and Equipment

Property and equipment, net consisted of the
following:

|                        |                                                |           |        |         |   |   |        |        |  
|----------------------- | ---------------------------------------------- | --------- | ------ | ------- | - | - | ------ | ------ | -
|                        |                                                |          
|                        |                                                | June 30  
|                        |                                                |          
|                        |                                                | 2002      |        | 2001   
|                        |                                                |           |        |        
|                        |                                                |          
|                        |                                                | Thousands
|Computers               |                                                | $         | 5,756  |         |   | $ | 4,820  |       
|Purchased software      |                                                |           | 7,979  |         |   |   | 5,729  |       
|Furniture and equipment |                                                |           | 5,762  |         |   |   | 5,300  |       
|Leasehold improvements  |                                                |           | 3,270  |         |   |   | 3,248  |       
|                        |                                                |           |        |         |   |   |        |       
|                        |                                                |           | 22,767 |         |   |   | 19,097 |       
|                        | Less accumulated depreciation and amortization |           |        | (11,260 | ) |   |        | (7,622 | )
|                        |                                                |           |        |         |   |   |        |       
|                        |                                                | $         | 11,507 |         |   | $ | 11,475 |       
|                        |                                                |           |        |         |   |   |        |       

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SBS TECHNOLOGIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                               
|--- | ------------------------------
|(6) | Goodwill and Intangible Assets

Goodwill, net consisted of the following:

|         |                               |           |        |           |   |             |        |         |   |  |            |  | 
|-------- | ----------------------------- | --------- | ------ | --------- | - | ----------- | ------ | ------- | - |  | ---------- |  | 
|         |                               |           |        |          
|         |                               | June 30   |        |          
|         |                               |           |        | Estimated
|         |                               | 2002      |        | 2001      |   | useful life
|         |                               |           |        |           |   |            
|         |                               |           |        |          
|         |                               | Thousands |        |          
|Goodwill |                               | $         | 41,453 |           |   | $           | 45,386 |         |   |  | 5-10 years | 
|         | Less accumulated amortization |           |        | (21,419   | ) |             |        | (16,120 | ) |  |            |  | 
|         |                               |           |        |           |   |             |        |         |   |  |            | 
|         |                               | $         | 20,034 |           |   | $           | 29,266 |         |   |  |            | 
|         |                               |           |        |           |   |             |        |         |   |  |            | 

Intangible assets, net consisted of the following:

|                          |                               |           |        |           |   |             |        |        |   |  |           |  | 
|------------------------- | ----------------------------- | --------- | ------ | --------- | - | ----------- | ------ | ------ | - |  | --------- |  | 
|                          |                               |           |        |          
|                          |                               | June 30   |        |          
|                          |                               |           |        | Estimated
|                          |                               | 2002      |        | 2001      |   | useful life
|                          |                               |           |        |           |   |            
|                          |                               |           |        |          
|                          |                               | Thousands |        |          
|Core-developed technology |                               |           | 8,753  |           |   |             | 14,800 |        |   |  | 2-7 years | 
|License agreements        |                               |           | 2,236  |           |   |             | 2,236  |        |   |  | 2-5 years | 
|Other                     |                               |           | 2,523  |           |   |             | 2,505  |        |   |  | 3-8 years | 
|                          |                               |           |        |           |   |             |        |        |   |  |           | 
|                          |                               |           | 13,512 |           |   |             | 19,541 |        |   |  |           | 
|                          | Less accumulated amortization |           |        | (6,794    | ) |             |        | (3,700 | ) |  |           |  | 
|                          |                               |           |        |           |   |             |        |        |   |  |           | 
|                          |                               | $         | 6,718  |           |   | $           | 15,841 |        |   |  |           | 
|                          |                               |           |        |           |   |             |        |        |   |  |           | 

On December 26, 2001, the SBS Board of
Directors approved SBS plan to exit its legacy PCI Chassis
product line. This product line was associated with SBS
acquisition of SBS Technologies, Inc. Industrial Computers
(formerly Micro Alliance) in November 1997. In conjunction with
the acquisition, SBS recorded approximately $4.5 million of
goodwill, of which $2.7 million was unamortized at
December 26, 2001. Based on SBS decision to exit the
PCI Chassis product line, the remaining unamortized goodwill was
determined to be impaired and was written off in the quarter
ended December 31, 2001, as the fair value of projected
future cash flows was zero. Additionally, during the fourth
quarter of fiscal 2002, due to recent order cancellations and a
continued decline in sales and bookings, SBS recorded a
$10.3 million write-down of core-developed technology and
related goodwill associated with the acquisition of SDL in April
2000. This write-down was based on SBS projection of
undiscounted future operating cash flows of SDL over the
remaining useful lives of the core-technology asset and related
goodwill, which indicated that these cash flows were not
sufficient to recover the carrying amounts of the assets. As
such, impairment charges were recorded to the extent that the
carrying amount of the assets exceeded fair value.



|    |              
|--- | -------------
|(7) | Notes Payable

Notes payable consist of revolving credit
facility notes. As of June 30, 2002, there were no notes
outstanding on the credit facility. Effective June 30,
2002, SBS executed the fourth amendment to its
$30.0 million credit agreement, changing the maximum amount
available to be borrowed from $30.0 million to
$20.0 million and modifying certain covenants of the
agreement. The agreement expires December 31, 2002. The
revolving credit facility provides, at SBS option,
interest at the prime rate or LIBOR in accordance with the LIBOR
margin. The facility calls for a commitment fee, payable
quarterly, of 0.20% times the average daily unused portion. At
June 30, 2002, SBS was out of compliance with the cash flow
coverage ratio covenant of the amended agreement. The facility
is secured by accounts receivable and inventory and is
guaranteed by each of SBS U.S. subsidiaries. In addition,
the amended agreement requires that SBS shall not permit its
cash balance maintained in its investment account at Bank of
America, N.A., (Bank) to be less

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SBS TECHNOLOGIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

than $10.0 million at any time. Dividends cannot
be declared without the Banks permission. On
September 20, 2002, SBS canceled the credit facility.



|    |             
|--- | ------------
|(8) | Income Taxes

Income (loss) before income taxes is comprised of
the following:

|        |  |                    |         |      |  |      |        |   |  |   |        |  
|------- |  | ------------------ | ------- | ---- |  | ---- | ------ | - |  | - | ------ | -
|        |  |                   
|        |  | Year Ended June 30
|        |  |                   
|        |  | 2002               |         | 2001 |  | 2000
|        |  |                    |         |      |  |     
|        |  |                   
|        |  | Thousands         
|U.S.    |  | $                  | (38,833 | )    |  | $    | 27,128 |   |  | $ | 15,643 |  
|Foreign |  |                    | 1,021   |      |  |      | (253   | ) |  |   | (52    | )
|        |  |                    |         |      |  |      |        |   |  |   |        |  
|        |  | $                  | (37,810 | )    |  | $    | 26,875 |   |  | $ | 15,591 |  
|        |  |                    |         |      |  |      |        |   |  |   |        |  

Income tax expense (benefit) is comprised of
the following:

|          |              |                    |         |        |   |      |       |       |   |   |       |        |  
|--------- | ------------ | ------------------ | ------- | ------ | - | ---- | ----- | ----- | - | - | ----- | ------ | -
|          |              |                   
|          |              | Year Ended June 30
|          |              |                   
|          |              | 2002               |         | 2001   |   | 2000
|          |              |                    |         |        |   |     
|          |              |                   
|          |              | Thousands         
|Current:  |              |                    |         |        |   |      |       |       |   |   |       |       
|          | U.S. Federal |                    | $       | (3,911 | ) |      | $     | 8,572 |   |   | $     | 6,915  |  
|          | State        |                    |         | 32     |   |      |       | 1,694 |   |   |       | 1,402  |  
|          | Foreign      |                    |         | 722    |   |      |       | (210  | ) |   |       | 824    |  
|Deferred: |              |                    |         |        |   |      |       |       |   |   |       |       
|          | U.S. Federal |                    |         | (8,953 | ) |      |       | (536  | ) |   |       | (1,717 | )
|          | State        |                    |         | (1,540 | ) |      |       | (86   | ) |   |       | (290   | )
|          | Foreign      |                    |         | 200    |   |      |       | 257   |   |   |       | (446   | )
|          |              |                    |         |        |   |      |       |       |   |   |       |       
|          |              | $                  | (13,450 | )      |   | $    | 9,691 |       |   | $ | 6,688 |       
|          |              |                    |         |        |   |      |       |       |   |   |       |       

Income tax expense (benefit) was provided
for at effective rates of 35.6, 36.1 and 42.9 percent in
2002, 2001 and 2000, respectively. Actual tax expense
(benefit) differ from the expected income taxes
(computed by applying the statutory U.S. Federal tax rate to
income before income taxes) as follows:

|                                                        |  |                    |         |      |  |      |       |   |  |   |       |  
|------------------------------------------------------- |  | ------------------ | ------- | ---- |  | ---- | ----- | - |  | - | ----- | -
|                                                        |  |                   
|                                                        |  | Year Ended June 30
|                                                        |  |                   
|                                                        |  | 2002               |         | 2001 |  | 2000
|                                                        |  |                    |         |      |  |     
|                                                        |  |                   
|                                                        |  | Thousands         
|Computed expected tax expense
    (benefit)           |  | $                  | (13,234 | )    |  | $    | 9,406 |   |  | $ | 5,457 |  
|State income tax, net of federal income tax
    benefit |  |                    | (980    | )    |  |      | 1,045 |   |  |   | 722   |  
|Non-deductible IPR&D                                    |  |                    |        |      |  |      |      |   |  |   | 1,400 |  
|Non-deductible goodwill                                 |  |                    | 1,599   |      |  |      | 325   |   |  |   | 504   |  
|Foreign operations, net                                 |  |                    | 433     |      |  |      | (76   | ) |  |   | (464  | )
|Non-taxable S-Corp income from SciTech                  |  |                    |        |      |  |      |      |   |  |   | (118  | )
|Benefit from foreign sales                              |  |                    | (646    | )    |  |      | (700  | ) |  |   | (350  | )
|Research and experimental tax credits                   |  |                    | (648    | )    |  |      | (378  | ) |  |   | (420  | )
|Other                                                   |  |                    | 26      |      |  |      | 69    |   |  |   | (43   | )
|                                                        |  |                    |         |      |  |      |       |   |  |   |       |  
|                                                        |  | $                  | (13,450 | )    |  | $    | 9,691 |   |  | $ | 6,688 |  
|                                                        |  |                    |         |      |  |      |       |   |  |   |       |  

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SBS TECHNOLOGIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The significant components of deferred income tax
assets and liabilities are as follows:

|                           |                                             |           |        |        |   |   |        |        |  
|-------------------------- | ------------------------------------------- | --------- | ------ | ------ | - | - | ------ | ------ | -
|                           |                                             |          
|                           |                                             | June 30  
|                           |                                             |          
|                           |                                             | 2002      |        | 2001  
|                           |                                             |           |        |       
|                           |                                             |          
|                           |                                             | Thousands
|Deferred tax assets:       |                                             |           |        |        |   |   |        |       
|                           | Vacation and severance accruals             |           | $      | 536    |   |   | $      | 343    |  
|                           | Inventory                                   |           |        | 9,116  |   |   |        | 4,010  |  
|                           | Acquired IPR&D                              |           |        | 2,647  |   |   |        | 2,967  |  
|                           | Accrued expenses                            |           |        | 332    |   |   |        | 303    |  
|                           | Amortization                                |           |        | 3,356  |   |   |        | 1,844  |  
|                           | Allowance for uncollectible accounts        |           |        | 520    |   |   |        | 420    |  
|                           | Foreign tax credits                         |           |        | 789    |   |   |        | 1,024  |  
|                           | Other                                       |           |        | 920    |   |   |        | 332    |  
|                           |                                             |           |        |        |   |   |        |       
|                           |                                             |           | 18,216 |        |   |   | 11,243 |       
|                           | Valuation allowance for deferred tax assets |           |        | (789   | ) |   |        | (1,024 | )
|                           |                                             |           |        |        |   |   |        |       
|Total deferred tax assets  |                                             |           | 17,427 |        |   |   | 10,219 |       
|Deferred tax liabilities  |                                             |           |        |        |   |   |        |       
|                           | Identifiable intangible assets              |           |        | (1,924 | ) |   |        | (5,455 | )
|                           | Depreciation                                |           |        | (354   | ) |   |        | (145   | )
|                           |                                             |           |        |        |   |   |        |       
|Net deferred tax assets    |                                             | $         | 15,149 |        |   | $ | 4,619  |       
|                           |                                             |           |        |        |   |   |        |       

SBS has not recorded deferred income taxes on the
undistributed earnings of its foreign subsidiaries as long as
those earnings are permanently reinvested. At June 30,
2002, the undistributed earnings of the foreign subsidiaries
amounted to approximately $6.7 million. Upon distribution
of these earnings, SBS may be subject to U.S. income taxes and
foreign withholding taxes. It is not practical, however, to
estimate the amount of taxes that may be payable on the eventual
remittance of these earnings.

As of June 30, 2002, SBS had a foreign tax
credit carryforward of approximately $0.8 million. Excess
foreign tax credits may be carried back two years and forward
five years. Due to the uncertainty of the realization of the
foreign tax credit carryforward, SBS has established a valuation
allowance of approximately $0.8 million as of June 30,
2002. This valuation allowance decreased approximately
$0.2 million during the year ended June 30, 2002. In
assessing the realizability of the remaining deferred tax
assets, management considered projected future taxable income
and tax planning strategies. Based on SBS historical
taxable transactions, the timing of the reversal of existing
temporary differences, and the evaluation of tax planning
strategies, management believes it is more likely than not that
SBS future taxable income will be sufficient to realize
the benefit of the remaining deferred tax assets existing at
June 30, 2002.

(9) Earnings Per Share

Net income (loss) per common share is based
on weighted average shares outstanding. Net income
(loss) per common share-assuming dilution includes the
dilutive effects of potential common shares

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SBS TECHNOLOGIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

outstanding during the period. A reconciliation
of the numerator and denominator of the per share and per
share-assuming dilution calculation follows:

|                                                  |  |                                    |         |               |  |           |        |  |  |   |       |  
|------------------------------------------------- |  | ---------------------------------- | ------- | ------------- |  | --------- | ------ |  |  | - | ----- | -
|                                                  |  | Income                             |         | Shares        |  | Per-Share
|Year Ended June 30                                |  | (Numerator)                        |         | (Denominator) |  | Amount   
|                                                  |  |                                    |         |               |  |          
|                                                  |  |                                   
|                                                  |  | Thousands except per share amounts
|2002                                              |  |                                    |         |               |  |           |        |  |  |   |       |  
|Net loss per common share                         |  |                                    |         |               |  |           |        |  |  |   |       |  
|Net loss                                          |  | $                                  | (24,360 | )             |  |           | 14,559 |  |  | $ | (1.67 | )
|                                                  |  |                                    |         |               |  |           |        |  |  |   |       |  
|Effect of dilutive securities                     |  |                                    |         |               |  |           |        |  |  |   |       |  
|Dilutive options                                  |  |                                    |        |               |  |           |       |  |  |   |       |  
|                                                  |  |                                    |         |               |  |           |        |  |  |   |       |  
|Net loss per common share-assuming
    dilution   |  |                                    |         |               |  |           |        |  |  |   |       |  
|Net loss                                          |  | $                                  | (24,360 | )             |  |           | 14,559 |  |  | $ | (1.67 | )
|                                                  |  |                                    |         |               |  |           |        |  |  |   |       |  
|2001                                              |  |                                    |         |               |  |           |        |  |  |   |       |  
|Net income per common share                       |  |                                    |         |               |  |           |        |  |  |   |       |  
|Net income                                        |  | $                                  | 17,184  |               |  |           | 13,926 |  |  | $ | 1.23  |  
|                                                  |  |                                    |         |               |  |           |        |  |  |   |       |  
|Effect of dilutive securities                     |  |                                    |         |               |  |           |        |  |  |   |       |  
|Dilutive options and warrants                     |  |                                    |        |               |  |           | 1,197  |  |  |   |       |  
|                                                  |  |                                    |         |               |  |           |        |  |  |   |       |  
|Net income per common share-assuming
    dilution |  |                                    |         |               |  |           |        |  |  |   |       |  
|Net income                                        |  | $                                  | 17,184  |               |  |           | 15,123 |  |  | $ | 1.14  |  
|                                                  |  |                                    |         |               |  |           |        |  |  |   |       |  
|2000                                              |  |                                    |         |               |  |           |        |  |  |   |       |  
|Net income per common share                       |  |                                    |         |               |  |           |        |  |  |   |       |  
|Net Income                                        |  | $                                  | 8,903   |               |  |           | 12,463 |  |  | $ | 0.71  |  
|                                                  |  |                                    |         |               |  |           |        |  |  |   |       |  
|Effect of dilutive securities                     |  |                                    |         |               |  |           |        |  |  |   |       |  
|Dilutive options and warrants                     |  |                                    |        |               |  |           | 1,127  |  |  |   |       |  
|                                                  |  |                                    |         |               |  |           |        |  |  |   |       |  
|Net income per common share-assuming
    Dilution |  |                                    |         |               |  |           |        |  |  |   |       |  
|Net income                                        |  | $                                  | 8,903   |               |  |           | 13,590 |  |  | $ | 0.66  |  
|                                                  |  |                                    |         |               |  |           |        |  |  |   |       |  

Due to the reported net loss for the year ended
June 30, 2002, 190,757 potential common shares were not
included in the computation of net loss per common
share-assuming dilution because the effect would be
anti-dilutive. For the years ended June 30, 2002, 2001 and
2000, options to purchase 2,381,237, 420,517 and
350,008 shares of common stock, respectively, were
outstanding but were not included in the computation of net
income per common share-assuming dilution, because the
options exercise prices were greater than the average
market price of the common shares.

(10) Leases

SBS leases its main facilities in Albuquerque,
New Mexico, Carlsbad, California, Newark, California, St. Paul,
Minnesota, Raleigh, North Carolina, Madison, Wisconsin,
Mansfield, Massachusetts, Augsburg, Germany, and Mindelheim,
Germany under noncancelable operating leases which expire at
various dates through fiscal 2007. SBS also leases various items
of equipment under noncancelable operating leases which

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SBS TECHNOLOGIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

expire at various dates through fiscal 2006. The
following is a five-year schedule of future minimum lease
payments:

|                    |  |                |       |                |  |       |     |  |  |   |        | 
|------------------- |  | -------------- | ----- | -------------- |  | ----- | --- |  |  | - | ------ | 
|                    |  | Building Lease |       | Equipment      |  |      
|Year ending June 30 |  | Payments       |       | Lease Payments |  | Total
|                    |  |                |       |                |  |      
|                    |  |               
|                    |  | Thousands     
|2003                |  | $              | 2,925 |                |  | $     | 125 |  |  | $ | 3,050  | 
|2004                |  |                | 2,931 |                |  |       | 112 |  |  |   | 3,043  | 
|2005                |  |                | 2,635 |                |  |       | 44  |  |  |   | 2,679  | 
|2006                |  |                | 1,194 |                |  |       | 5   |  |  |   | 1,199  | 
|2007                |  |                | 128   |                |  |       |    |  |  |   | 128    | 
|                    |  |                |       |                |  |       |     |  |  |   |        | 
|                    |  | $              | 9,813 |                |  | $     | 286 |  |  | $ | 10,099 | 
|                    |  |                |       |                |  |       |     |  |  |   |        | 

Total rental expense for operating leases for the
years ended June 30, 2002, 2001, and 2000 was approximately
$3.5 million, $3.0 million and $2.5 million,
respectively.

(11) Stock Option Plans and
Warrants



| |                                                                     
| | --------------------------------------------------------------------
| | (a) 1992, 1993, 1995, 1996 and 1997
    Incentive Stock Option Plans

SBS has 1992, 1993, 1995, 1996 and 1997 Incentive
Stock Option Plans whereby a total of 2,800,000 shares of its
common stock are reserved for discretionary grant of options by
the Board to officers and employees. The plans all terminate ten
years after inception, from the years 2001 to 2006. The options
are intended to qualify as incentive stock options
within the meaning of Section 422A of the Internal Revenue
Code (the Code). The plans generally permit options
to be granted (i) only to employees or officers and not to
directors as such; (ii) for a period of up to ten years;
and (iii) at prices not less than fair market value of the
underlying common stock at the date of grant. Under the Code,
holders of more than 10 percent of SBS stock cannot
be granted options with a duration of more than five years or
exercisable at a price less than 110 percent of the fair
market value of the underlying common stock on the date of
grant. Options granted under the plans may be exercised as
provided by the administering committee or Board of Directors of
SBS. All of these options are exercisable at the quoted market
value of SBS common stock in effect on the respective
dates of the grants.



| |                                                    
| | ---------------------------------------------------
| | (b) 1993 Director and Officer Stock
    Option Plan

SBS has a 1993 Director and Officer Stock Option
Plan whereby a total of 5% of the number of shares of its common
stock outstanding at the first day of each fiscal year plus
shares not awarded in prior years and underlying expired or
terminated options are reserved for grant of options to all
Directors of SBS who are not employees and all Executive
Officers of SBS. Directors who are not employees of SBS receive
automatic grants on the anniversary date of their service as a
Director of SBS. Executive Officers receive grants at the
discretion of the Board of Directors. All options are granted at
a price equal to fair market value of the underlying common
stock on the date of grant. The Directors options become
exercisable one year from the date of grant and terminate twelve
months from the date the optionee ceases to be a member of the
Board of Directors or in five years, whichever occurs first.



| |                                          
| | -----------------------------------------
| | (c) 1996 Employee Stock Purchase
    Plan

The 1996 Employee Stock Purchase Plan was adopted
by the Board of Directors on January 21, 1996 and was
subsequently approved at the November 1996 Annual
Shareholders Meeting. The plan, as amended, provided for
the grant of options to eligible employees on January 21,
1996 through January 21, 2003. In fiscal 1999, a subsequent
amendment changed the grant date from January 21 to
December 31 for grants made

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SBS TECHNOLOGIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

subsequent to January 21, 1999. Individual
grants are issued for a percentage of the employees annual
base salary, as determined each year by the Board of Directors,
up to 10%, divided by the fair market value of one share of
SBS common stock on the date of grant. Options are
eligible to be exercised beginning 18 months after the date
of grant for a period of nine months, at which time they will
expire.



| |                                             
| | --------------------------------------------
| | (d) 1998 Long-Term Equity Incentive
    Plan

The 1998 Long-Term Equity Incentive Plan was
adopted by the Board of Directors on September 15, 1997 and
subsequently approved at the December 1997 reconvened Annual
Shareholders Meeting. All full-time employees of SBS and
its subsidiaries and all non-employee Directors of SBS are
eligible to participate in the plan, except that no person
owning, directly or indirectly, more than 15% of the total
combined voting power of all classes of stock shall be eligible
to participate. The plan provides for the grant of any or all of
the following types of awards: (i) stock options, including
incentive stock options; (ii) stock appreciation rights;
(iii) restricted stock; (iv) performance shares and units;
and (v) other stock-based awards. The maximum number of
shares of common stock that shall be available for grant of
awards under the plan shall not exceed 3,000,000, subject to
adjustment in accordance with the provisions of the plan. The
exercise price of each option granted under (i) is
determined by the Board of Directors but cannot be less than
100% of the fair market value of the underlying common stock on
the date of grant. The exercise price of each option granted
under (v) is determined by the Board of Directors and can
be less than the fair market value of the underlying common
stock on the date of grant. The term of these options cannot
exceed ten years from grant date. The plan expires in January
2008.



| |                                             
| | --------------------------------------------
| | (e) 2000 Long-Term Equity Incentive
    Plan

The 2000 Long-Term Equity Incentive Plan was
adopted by the Board of Directors on August 31, 2000 and
subsequently approved at the December 2000 reconvened Annual
Shareholders Meeting. Any employee of SBS or its
subsidiaries, and any consultants, directors, or other persons
providing services to SBS or its subsidiaries are eligible to
participate in the plan. The plan provides for the grant of
nonqualified stock options and a limited number of grants of
restricted stock. The number of shares of stock available for
award under the plan during any fiscal year of SBS is equal to
ten percent of the adjusted average of the outstanding stock, as
that number is determined by SBS to calculate net income per
common share-assuming dilution for the preceding fiscal year,
reduced by any shares of stock under the plan subject to
unexercised options and any shares of stock under the plan
subject to restrictions. The exercise price of each option
granted shall be the fair market value of the underlying common
stock on the date of grant unless otherwise specified by the
Board at the time of grant. If options are awarded in exchange
for previously earned cash compensation, or in connection with
an acquisition, merger, combination or other similar event
involving SBS, or in substitution or replacement for options
granted to employees by the other entities, the Board has the
authority to establish an exercise price that is less that 100%
of the fair market value of the underlying common stock on the
date of grant. The term of these options cannot exceed ten years
from grant date. The plan expires in July 2010.



| |             
| | ------------
| | (f) Warrants

In connection with the acquisition of Modular I/
O, warrants to purchase 800,000 shares of common stock at $2.25
were issued to the former shareholders and option holders of
Modular I/ O. All of these warrants were fully vested at
June 30, 1996. At June 30, 2000, all of the warrants
had been exercised or were forfeited under the net issuance
method.

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SBS TECHNOLOGIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Information regarding SBS stock option
plans and warrants is summarized in the table below:

|                               |           |       |           |         |  |      |         |         |  |      |         |          |  |       |           |           |  |  |         |         |  |  |         |         |  |  |           |           | 
|------------------------------ | --------- | ----- | --------- | ------- |  | ---- | ------- | ------- |  | ---- | ------- | -------- |  | ----- | --------- | --------- |  |  | ------- | ------- |  |  | ------- | ------- |  |  | --------- | --------- | 
|                               |           | ALL   |           | 1993    |  | 1996 |         | 1998    |  | 2000 |         |          |  |      
|                               |           | ISOPs |           | D&O     |  | ESPP |         | LT      |  | LT   |         | Warrants |  | Total
|                               |           |       |           |         |  |      |         |         |  |      |         |          |  |      
|Outstanding at 6/30/99         |           |       | 1,513,396 |         |  |      | 256,000 |         |  |      | 228,672 |          |  |       | 1,705,732 |           |  |  |        |         |  |  | 153,698 |         |  |  | 3,857,498 |          
|                               | Granted   |       |           |        |  |      |         | 59,926  |  |      |         | 106,372  |  |       |           | 1,546,926 |  |  |         |        |  |  |         |        |  |  |           | 1,713,224 | 
|                               | Exercised |       |           | 609,872 |  |      |         | 72,000  |  |      |         | 58,014   |  |       |           | 370,426   |  |  |         |        |  |  |         | 153,698 |  |  |           | 1,264,010 | 
|                               | Cancelled |       |           | 130,000 |  |      |         |        |  |      |         | 71,540   |  |       |           | 297,686   |  |  |         |        |  |  |         |        |  |  |           | 499,226   | 
|                               |           |       |           |         |  |      |         |         |  |      |         |          |  |       |           |           |  |  |         |         |  |  |         |         |  |  |           |          
|Outstanding at 6/30/00         |           |       | 773,524   |         |  |      | 243,926 |         |  |      | 205,490 |          |  |       | 2,584,546 |           |  |  |        |         |  |  |        |         |  |  | 3,807,486 |          
|                               | Granted   |       |           | 50,012  |  |      |         | 325,000 |  |      |         | 115,850  |  |       |           | 79,560    |  |  |         | 746,500 |  |  |         |        |  |  |           | 1,316,922 | 
|                               | Exercised |       |           | 433,964 |  |      |         | 50,043  |  |      |         | 108,788  |  |       |           | 587,215   |  |  |         |        |  |  |         |        |  |  |           | 1,180,010 | 
|                               | Cancelled |       |           |        |  |      |         |        |  |      |         | 27,450   |  |       |           | 507,812   |  |  |         | 72,000  |  |  |         |        |  |  |           | 607,262   | 
|                               |           |       |           |         |  |      |         |         |  |      |         |          |  |       |           |           |  |  |         |         |  |  |         |         |  |  |           |          
|Outstanding at 6/30/01         |           |       | 389,572   |         |  |      | 518,883 |         |  |      | 185,102 |          |  |       | 1,569,079 |           |  |  | 674,500 |         |  |  |        |         |  |  | 3,337,136 |          
|                               | Granted   |       |           |        |  |      |         | 404,479 |  |      |         | 188,650  |  |       |           | 25,000    |  |  |         | 482,337 |  |  |         |        |  |  |           | 1,100,466 | 
|                               | Exercised |       |           | 41,000  |  |      |         | 10,000  |  |      |         |         |  |       |           | 128,129   |  |  |         |        |  |  |         |        |  |  |           | 179,129   | 
|                               | Cancelled |       |           |        |  |      |         | 256,883 |  |      |         | 147,552  |  |       |           | 230,695   |  |  |         | 268,988 |  |  |         |        |  |  |           | 904,118   | 
|                               |           |       |           |         |  |      |         |         |  |      |         |          |  |       |           |           |  |  |         |         |  |  |         |         |  |  |           |          
|Outstanding at 6/30/02         |           |       | 348,572   |         |  |      | 656,479 |         |  |      | 226,200 |          |  |       | 1,235,255 |           |  |  | 887,849 |         |  |  |        |         |  |  | 3,354,355 |          
|                               |           |       |           |         |  |      |         |         |  |      |         |          |  |       |           |           |  |  |         |         |  |  |         |         |  |  |           |          
|Exercisable at 6/30/00         |           |       | 421,854   |         |  |      | 184,000 |         |  |      |        |          |  |       | 413,316   |           |  |  |        |         |  |  |        |         |  |  | 1,019,170 |          
|Exercisable at 6/30/01         |           |       | 319,566   |         |  |      | 182,800 |         |  |      | 78,052  |          |  |       | 547,850   |           |  |  |        |         |  |  |        |         |  |  | 1,128,268 |          
|Exercisable at 6/30/02         |           |       | 315,234   |         |  |      | 252,000 |         |  |      | 74,650  |          |  |       | 835,750   |           |  |  | 279,079 |         |  |  |        |         |  |  | 1,756,713 |          
|                               |           |       |           |         |  |      |         |         |  |      |         |          |  |       |           |           |  |  |         |         |  |  |         |         |  |  |           |          
|Available for grant at 6/30/02 |           |       | 94,380    |         |  |      | 731,435 |         |  |      | 138,942 |          |  |       | 658,123   |           |  |  | 563,591 |         |  |  |        |         |  |  | 2,186,471 |          
|                               |           |       |           |         |  |      |         |         |  |      |         |          |  |       |           |           |  |  |         |         |  |  |         |         |  |  |           |          

Weighted average option exercise price
information for fiscal years 2002, 2001, and 2000 follows:

|                          |                              |      |       |       |  |      |       |       |  |   |       |       | 
|------------------------- | ---------------------------- | ---- | ----- | ----- |  | ---- | ----- | ----- |  | - | ----- | ----- | 
|                          |                              | 2002 |       | 2001  |  | 2000
|                          |                              |      |       |       |  |     
|Outstanding at July 1     |                              | $    | 17.78 |       |  | $    | 12.71 |       |  | $ | 10.07 |      
|Granted during the year:  |                              |      |       |       |  |      |       |       |  |   |       |      
|                          | Grants at market value       |      |       | 13.20 |  |      |       | 25.33 |  |   |       | 15.08 | 
|                          | Exchanged in SDL acquisition |      |       |      |  |      |       |      |  |   |       | 1.31  | 
|Exercised during the year |                              |      | 8.68  |       |  |      | 11.05 |       |  |   | 7.38  |      
|Cancelled during the year |                              |      | 18.58 |       |  |      | 15.56 |       |  |   | 11.40 |      
|Outstanding at June 30    |                              |      | 16.60 |       |  |      | 17.78 |       |  |   | 12.71 |      
|Exercisable at June 30    |                              |      | 17.00 |       |  |      | 13.29 |       |  |   | 10.78 |      

47



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SBS TECHNOLOGIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Significant option groups outstanding and
exercisable at June 30, 2002 and related weighted average
price and life information follows:

|                         |  |             |           |             |  |          |      |             |  |          |       |  |  |  |           |  |  |   |       | 
|------------------------ |  | ----------- | --------- | ----------- |  | -------- | ---- | ----------- |  | -------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                         |  |             |           | Weighted    |  |          |      |             |  |         
|                         |  |             |           | Average     |  | Weighted |      |             |  | Weighted
|                         |  |             |           | Remaining   |  | Average  |      |             |  | Average 
|                         |  | Number      |           | Contractual |  | Exercise |      | Number      |  | Exercise
|Range of Exercise Prices |  | Outstanding |           | Life        |  | Price    |      | Exercisable |  | Price   
|                         |  |             |           |             |  |          |      |             |  |         
|$ 2.25 - $12.31          |  |             | 977,408   |             |  |          | 7.76 |             |  | $        | 10.71 |  |  |  | 349,309   |  |  | $ | 8.74  | 
|$12.50 - $14.94          |  |             | 872,654   |             |  |          | 5.14 |             |  | $        | 14.07 |  |  |  | 461,686   |  |  | $ | 14.00 | 
|$15.00 - $18.22          |  |             | 844,913   |             |  |          | 6.57 |             |  | $        | 16.65 |  |  |  | 553,884   |  |  | $ | 16.58 | 
|$18.35 - $36.13          |  |             | 659,380   |             |  |          | 7.25 |             |  | $        | 28.52 |  |  |  | 391,834   |  |  | $ | 28.48 | 
|                         |  |             |           |             |  |          |      |             |  |          |       |  |  |  |           |  |  |   |       | 
|$ 2.25 - $36.13          |  |             | 3,354,355 |             |  |          | 6.68 |             |  | $        | 16.60 |  |  |  | 1,756,713 |  |  | $ | 17.00 | 
|                         |  |             |           |             |  |          |      |             |  |          |       |  |  |  |           |  |  |   |       | 

The per share weighted average fair value of
stock options granted at a price equal to fair market value of
the underlying common stock during 2002, 2001 and 2000 was
$6.37, $12.43 and $8.06, respectively, on the date of grant. The
fair value of options at date of grant was estimated using the
Black-Scholes Model with the following weighted average
assumptions:

|                        |  |      |       |      |  |      |       |   |  |  |       |  
|----------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                        |  | 2002 |       | 2001 |  | 2000
|                        |  |      |       |      |  |     
|Expected life (years)   |  |      | 2.95  |      |  |      | 3.09  |   |  |  | 3.47  |  
|Risk free interest rate |  |      | 3.74  | %    |  |      | 3.97  | % |  |  | 6.12  | %
|Volatility              |  |      | 72.08 | %    |  |      | 72.32 | % |  |  | 70.09 | %
|Dividend yield          |  |      |      |      |  |      |      |   |  |  |      |  

SBS applies APB Opinion 25 accounting for its
plans. Had SBS determined compensation cost based on fair value
at grant date for its stock options under SFAS 123,
SBS net income (loss) and EPS would have been reduced
(increased) to the pro forma amounts indicated below:

|                               |  |                                  |         |      |  |      |        |  |  |   |       | 
|------------------------------ |  | -------------------------------- | ------- | ---- |  | ---- | ------ |  |  | - | ----- | 
|                               |  | 2002                             |         | 2001 |  | 2000
|                               |  |                                  |         |      |  |     
|                               |  |                                 
|                               |  | Thousands, except per-share data
|Net income (loss), as reported |  | $                                | (24,360 | )    |  | $    | 17,184 |  |  | $ | 8,903 | 
|Net income (loss), pro forma   |  |                                  | (28,673 | )    |  |      | 9,178  |  |  |   | 3,473 | 
|EPS, as reported (basic)       |  |                                  | (1.67   | )    |  |      | 1.23   |  |  |   | 0.71  | 
|EPS, pro forma (basic)         |  |                                  | (1.97   | )    |  |      | 0.66   |  |  |   | 0.28  | 
|EPS, as reported (diluted)     |  |                                  | (1.67   | )    |  |      | 1.14   |  |  |   | 0.66  | 
|EPS, pro forma (diluted)       |  |                                  | (1.97   | )    |  |      | 0.65   |  |  |   | 0.28  | 

(12) Retirement Plan

SBS maintains a retirement plan under
Section 401(k) of the Code for all U.S. employees of
SBS. The plan provides for employees to selectively defer a
percentage of their wages, which SBS matches at a predetermined
rate not to exceed 4 percent of the employees wages.
The plan also provides for additional contributions at the
discretion of the Board of Directors. SBS contributions to
the plan during the years ended June 30, 2002, 2001 and
2000 were approximately $1.1 million, $1.1 million and
$0.8 million, respectively.

(13) Segment Financial Data

SBS operates internationally through two
operating segments: the Communications and Enterprise Group, and
the Commercial and Government Group. These segments were defined
during the fourth quarter of fiscal year 2002, in conjunction
with the change in the Chief Executive Officer and
managements

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SBS TECHNOLOGIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

realignment of operations and market development
efforts. To better align similar technologies and selling
channels, the former Commercial Group and the former Government
Group were combined and now consists of SBS Technologies, Inc.,
Commercial Group (formerly SBS Technologies Inc. Modular I/ O
and SBS Technologies, Inc. Connectivity Products, which merged
in May 2002, SBS Technologies, Inc., Government Group (formerly
SBS Technologies, Inc., Embedded Computers, SBS Technologies
GmbH & Co. KG (or), ortecElectronic Assembly GmbH, and SBS Avionics Products
division. The Communications and Enterprise Group consists of
Communications Products, SDL, and SBS Technologies, Inc.,
Industrial Computers. These segments are based on the markets
that are served and the products that are provided to those
markets. Each segment has its own sales and distribution
channels and has a manager who reports directly to the President
and Chief Operating Officer. Reportable segments for all periods
have been reclassified to conform to the new segment reporting
structure. A description of these segments follows:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Communications and Enterprise Group designs
    and builds high performance embedded system products to serve
    the needs of communications and enterprise OEM customers. The
    Group provides a comprehensive portfolio of communication
    products, which include single board computers, input/output
    modules and fully integrated systems. These products are
    designed to meet the evolving requirements of communications
    customers while reducing cost and expediting time to market.
    These products are based on standard form factor hardware
    designs such as CompactPCI, PMC, PCI and open standard operating
    support such as VxWorks and Linux, and consistent driver
    development kits for ATM, frame relay and other software
    protocols.
|
| |  | The Commercial and Government Group designs and
    builds open-architecture computer components and systems for
    CompactPCI, PCI, VME, and PC/104 standard bus architectures. The
    Groups product lines include Intel and PowerPC
    architecture CPU boards, serial and networking modules, analog
    and digital I/ O modules, computer interconnection and expansion
    units, MIL-STD-1553, ARINC 429, telemetry and complete
    computer systems. These products support OEM and end-user
    applications in semiconductor manufacturing equipment,
    industrial automation, medical imaging, military and aerospace,
    and entertainment applications.                                                                                                                

SBS measures its segments results of
operations based on income (loss) before income taxes and prior
to allocation of corporate overhead expenses other than
corporate sales and marketing costs, asset impairment charges,
substantially all amortization associated with acquisitions,
substantially all interest income and expense, and acquired
in-process research and development charges associated with
purchase business combinations. The accounting policies used to
measure segment results of operations are the same as those
described in note 1.

|                    |                             |           |      |                |  |              |        |                |  |          |        |        |  |  |   |   |  |  |   |   |  |   |         |         | 
|------------------- | --------------------------- | --------- | ---- | -------------- |  | ------------ | ------ | -------------- |  | -------- | ------ | ------ |  |  | - | - |  |  | - | - |  | - | ------- | ------- | 
|                    |                             |           |      | Communications |  | Government & |        |                |  |          |        |       
|                    |                             |           |      | & Enterprise   |  | Commercial   |        | Corporate and  |  |          |        |       
|                    |                             |           |      | Group          |  | Group        |        | Unallocated(1) |  | Other(2) |        | Total 
|                    |                             |           |      |                |  |              |        |                |  |          |        |       
|                    |                             |          
|                    |                             | Thousands
|Year ended June 30: |                             |           |      |                |  |              |        |                |  |          |        |        |  |  |   |   |  |  |   |   |  |   |         |        
|Gross Sales         |                             |           | 2002 |                |  | $            | 36,882 |                |  | $        | 85,122 |        |  |  |  |   |  |  |  |   |  | $ | 122,004 |        
|Intersegment sales  |                             |           |      |                |  |              | (292   | )              |  |          | (2,856 | )      |  |  |  |   |  |  |  |   |  |   | (3,148  | )      
|                    |                             |           |      |                |  |              |        |                |  |          |        |        |  |  |   |   |  |  |   |   |  |   |         |        
|                    | Sales to external customers |           |      |                |  |              |        | 36,590         |  |          |        | 82,266 |  |  |   |  |  |  |   |  |  |   |         | 118,856 | 
|                   
|Gross Sales         |                             |           | 2001 |                |  |              | 96,924 |                |  |          | 98,463 |        |  |  |  |   |  |  |  |   |  |   | 195,387 |        
|Intersegment sales  |                             |           |      |                |  |              | (4,903 | )              |  |          | (3,304 | )      |  |  |  |   |  |  |  |   |  |   | (8,207  | )      
|                    |                             |           |      |                |  |              |        |                |  |          |        |        |  |  |   |   |  |  |   |   |  |   |         |        
|                    | Sales to external customers |           |      |                |  |              |        | 92,021         |  |          |        | 95,159 |  |  |   |  |  |  |   |  |  |   |         | 187,180 | 

49



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##### Table of Contents



SBS TECHNOLOGIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                   |                             |           |      |                |  |              |         |                |  |          |        |        |  |  |         |   |  |  |        |   |  |  |         |         | 
|-------------------------------------------------- | --------------------------- | --------- | ---- | -------------- |  | ------------ | ------- | -------------- |  | -------- | ------ | ------ |  |  | ------- | - |  |  | ------ | - |  |  | ------- | ------- | 
|                                                   |                             |           |      | Communications |  | Government & |         |                |  |          |        |       
|                                                   |                             |           |      | & Enterprise   |  | Commercial   |         | Corporate and  |  |          |        |       
|                                                   |                             |           |      | Group          |  | Group        |         | Unallocated(1) |  | Other(2) |        | Total 
|                                                   |                             |           |      |                |  |              |         |                |  |          |        |       
|                                                   |                             |          
|                                                   |                             | Thousands
|Gross Sales                                        |                             |           | 2000 |                |  |              | 44,260  |                |  |          | 84,593 |        |  |  |        |   |  |  |       |   |  |  | 128,853 |        
|Intersegment sales                                 |                             |           |      |                |  |              | (334    | )              |  |          | (330   | )      |  |  |        |   |  |  |       |   |  |  | (664    | )      
|                                                   |                             |           |      |                |  |              |         |                |  |          |        |        |  |  |         |   |  |  |        |   |  |  |         |        
|                                                   | Sales to external customers |           |      |                |  |              |         | 43,926         |  |          |        | 84,263 |  |  |         |  |  |  |        |  |  |  |         | 128,189 | 
|Interest and other income (net)                    |                             |           | 2002 |                |  |              | 382     |                |  |          | 67     |        |  |  | 197     |   |  |  |       |   |  |  | 646     |        
|                                                   |                             |           | 2001 |                |  |              | 15      |                |  |          | 23     |        |  |  | 372     |   |  |  |       |   |  |  | 410     |        
|                                                   |                             |           | 2000 |                |  |              | 14      |                |  |          | 15     |        |  |  | 420     |   |  |  |       |   |  |  | 449     |        
|Interest expense                                   |                             |           | 2002 |                |  |              |        |                |  |          |       |        |  |  | 15      |   |  |  |       |   |  |  | 15      |        
|                                                   |                             |           | 2001 |                |  |              |        |                |  |          | 1      |        |  |  | 1,070   |   |  |  |       |   |  |  | 1,071   |        
|                                                   |                             |           | 2000 |                |  |              | 15      |                |  |          | 50     |        |  |  | 386     |   |  |  |       |   |  |  | 451     |        
|Depreciation and Amortization                      |                             |           | 2002 |                |  |              | 834     |                |  |          | 1,910  |        |  |  | 8,567   |   |  |  |       |   |  |  | 11,311  |        
|                                                   |                             |           | 2001 |                |  |              | 812     |                |  |          | 1,691  |        |  |  | 7,695   |   |  |  |       |   |  |  | 10,198  |        
|                                                   |                             |           | 2000 |                |  |              | 452     |                |  |          | 1,286  |        |  |  | 5,253   |   |  |  |       |   |  |  | 6,991   |        
|Segment profit (Income (loss) before income taxes) |                             |           | 2002 |                |  |              | (14,381 | )              |  |          | 11,691 |        |  |  | (35,120 | ) |  |  |       |   |  |  | (37,810 | )      
|                                                   |                             |           | 2001 |                |  |              | 22,122  |                |  |          | 21,368 |        |  |  | (16,615 | ) |  |  |       |   |  |  | 26,875  |        
|                                                   |                             |           | 2000 |                |  |              | 10,207  |                |  |          | 18,812 |        |  |  | (9,428  | ) |  |  | (4,000 | ) |  |  | 15,591  |        
|As of June 30:                                     |                             |           |      |                |  |              |         |                |  |          |        |        |  |  |         |   |  |  |        |   |  |  |         |        
|Total assets                                       |                             |           | 2002 |                |  |              | 15,465  |                |  |          | 35,217 |        |  |  | 74,966  |   |  |  |       |   |  |  | 125,648 |        
|                                                   |                             |           | 2001 |                |  |              | 38,358  |                |  |          | 38,754 |        |  |  | 70,060  |   |  |  |       |   |  |  | 147,172 |        



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The corporate and unallocated column includes
    amounts for corporate items. With regard to results of
    operations, corporate and unallocated includes corporate
    overhead expenses other than corporate sales and marketing
    costs, asset impairment charges, substantially all interest
    expense, substantially all interest income, investment
    write-downs, and substantially all amortization of associated
    with acquisitions. Corporate assets primarily include cash and
    cash equivalents, deferred and current income tax assets,
    goodwill, and intangible assets.
|   
|(2) | Fiscal 2000 includes a charge for acquired
    in-process research and development associated with a purchase
    business combination that management does not consider in
    assessing segment profit.                                                                                                                                                                                                                                                                                                                                                                                              

(14) Geographic Areas and Major
Customers

|                               |  |  |      |               |  |               |         |         |  |       |        |  |  |  |        |  |  |   |         | 
|------------------------------ |  |  | ---- | ------------- |  | ------------- | ------- | ------- |  | ----- | ------ |  |  |  | ------ |  |  | - | ------- | 
|                               |  |  |      | United States |  | United States |         |         |  |      
|                               |  |  |      | Domestic      |  | Exports       |         | Germany |  | Total
|                               |  |  |      |               |  |               |         |         |  |      
|                               |  |  |      |              
|                               |  |  |      | Thousands    
|Sales to External Customers(1) |  |  | 2002 |               |  | $             | 87,087  |         |  |       | 19,201 |  |  |  | 12,568 |  |  | $ | 118,856 | 
|                               |  |  | 2001 |               |  |               | 140,887 |         |  |       | 34,448 |  |  |  | 11,845 |  |  |   | 187,180 | 
|                               |  |  | 2000 |               |  |               | 91,438  |         |  |       | 25,365 |  |  |  | 11,386 |  |  |   | 128,189 | 
|Long-lived assets, net         |  |  | 2002 |               |  | $             | 11,090  |         |  |       |       |  |  |  | 417    |  |  | $ | 11,507  | 
|                               |  |  | 2001 |               |  |               | 11,063  |         |  |       |       |  |  |  | 412    |  |  |   | 11,475  | 



---



|    |                                                                    
|--- | -------------------------------------------------------------------
|(1) | Sales are classified according to the location of
    the shipment.

50



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SBS TECHNOLOGIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

During the years ended June 30, 2002, 2001
and 2000, United States export sales as a percentage of total
United States sales were 18.1%, 19.6%, and 21.7%, respectively.
United States export sales were made primarily in the following
foreign markets:

|               |  |         |        |      |  |         |       |   |  |         |        |   |  |  |       |  |  |   |        |  |  |  |       | 
|-------------- |  | ------- | ------ | ---- |  | ------- | ----- | - |  | ------- | ------ | - |  |  | ----- |  |  | - | ------ |  |  |  | ----- | 
|               |  |         |        |      |  |        
|               |  | 2002    |        | 2001 |  | 2000   
|               |  |         |        |      |  |        
|               |  | Sales   |        |      |  | Sales   |       |   |  | Sales   |        |  
|               |  | (000s) |        | %    |  | (000s) |       | % |  | (000s) |        | %
|               |  |         |        |      |  |         |       |   |  |         |        |  
|Canada         |  | $       | 3,494  |      |  |         | 18.2  |   |  | $       | 5,424  |   |  |  | 15.7  |  |  | $ | 2,892  |  |  |  | 11.4  | 
|Japan          |  |         | 3,066  |      |  |         | 16.0  |   |  |         | 4,784  |   |  |  | 13.9  |  |  |   | 4,271  |  |  |  | 16.9  | 
|Sweden         |  |         | 2,339  |      |  |         | 12.2  |   |  |         | 12,539 |   |  |  | 36.4  |  |  |   | 9,097  |  |  |  | 35.9  | 
|France         |  |         | 1,682  |      |  |         | 8.8   |   |  |         | 1,752  |   |  |  | 5.1   |  |  |   | 1,495  |  |  |  | 5.9   | 
|Germany        |  |         | 1,528  |      |  |         | 8.0   |   |  |         | 2,275  |   |  |  | 6.6   |  |  |   | 1,433  |  |  |  | 5.6   | 
|Korea          |  |         | 1,240  |      |  |         | 6.5   |   |  |         | 720    |   |  |  | 2.1   |  |  |   | 934    |  |  |  | 3.7   | 
|China          |  |         | 1,096  |      |  |         | 5.7   |   |  |         | 762    |   |  |  | 2.2   |  |  |   | 360    |  |  |  | 1.4   | 
|United Kingdom |  |         | 932    |      |  |         | 4.8   |   |  |         | 1,327  |   |  |  | 3.9   |  |  |   | 1,929  |  |  |  | 7.6   | 
|Singapore      |  |         | 658    |      |  |         | 3.4   |   |  |         | 87     |   |  |  | 0.3   |  |  |   | 68     |  |  |  | 0.3   | 
|Brazil         |  |         | 624    |      |  |         | 3.2   |   |  |         | 89     |   |  |  | 0.3   |  |  |   | 4      |  |  |  |      | 
|Israel         |  |         | 527    |      |  |         | 2.7   |   |  |         | 1,865  |   |  |  | 5.4   |  |  |   | 691    |  |  |  | 2.7   | 
|All others     |  |         | 2,015  |      |  |         | 10.5  |   |  |         | 2,824  |   |  |  | 8.2   |  |  |   | 2,191  |  |  |  | 8.6   | 
|               |  |         |        |      |  |         |       |   |  |         |        |   |  |  |       |  |  |   |        |  |  |  |       | 
|               |  | $       | 19,201 |      |  |         | 100.0 |   |  | $       | 34,448 |   |  |  | 100.0 |  |  | $ | 25,365 |  |  |  | 100.0 | 
|               |  |         |        |      |  |         |       |   |  |         |        |   |  |  |       |  |  |   |        |  |  |  |       | 

In fiscal 2002, 2001 and 2000, no one customer,
or group of entities known to be under common control, exceeded
10% of SBS sales.



|     |                           
|---- | --------------------------
|(15) | Related Party Transactions

Effective March 9, 2001, Grahame E.
Rance was appointed to the positions of President and Chief
Executive Officer of SBS and member of the Board of Directors.
Mr. Rance succeeded Christopher J. Amenson, who
remained as Chairman of the Board of Directors of SBS until
November 8, 2001, at which time Mr. Rance was
appointed as Chairman. As part of his compensation package,
Mr. Rance received a $1,893,750 interest free loan from
SBS, paid in cash on April 4, 2001. Forgiveness of the loan
was to occur ratably over six annual anniversaries of
Mr. Rances employment with SBS. Additionally,
Mr. Rance received a $570,000 interest free loan from SBS
that was repaid upon the sale of his former home during the
quarter ended December 31, 2001.

On April 26, 2002, at its regularly
scheduled Board meeting, Christopher J. Amenson was elected
Chairman of the Board of Directors and Chief Executive Officer
and David H. Greig was elected President and Chief
Operating Officer. Former Chairman and Chief Executive Officer,
Grahame E. Rance, resigned to pursue other business
opportunities. As part of the Separation Agreement between
Mr. Rance and SBS, the unamortized portion of the loan to
Mr. Rance of $1,573,700 was forgiven, Mr. Rance
received 8 months base pay, and he returned 30,000 shares
of restricted SBS common stock, 5,000 of which were vested and
25,000 of which were unvested. This resulted in severance and
other employee termination costs of approximately
$2.0 million in the quarter ended June 30, 2002.



|     |                                                     
|---- | ----------------------------------------------------
|(16) | Severance and Other Employee Termination
    Charges

On April 28, 2002, SBS announced the
resignation of its Chairman of the Board and Chief Executive
Officer, Grahame E. Rance. During the quarter ended
June 30, 2002, SBS recorded approximately

51



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SBS TECHNOLOGIES, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

$2.0 million of severance and other employee
termination costs related to the Separation Agreement between
SBS and Mr. Rance.

During the year ended June 30, 2002, based
on unfavorable economic and market conditions, facility
consolidation actions, and the decision to exit the legacy PCI
Chassis product line, SBS reduced its employee base, resulting
in elimination of 159 positions in manufacturing, research and
development, administration, and sales and marketing. On
August 14, 2001, SBS notified 58 employees that their
positions would be eliminated by the end of September, 2001. On
December 26, 2001, the SBS Board of Directors approved
additional reductions, to be completed through March 31,
2002 and 54 employees were notified that their jobs would be
eliminated. On May 21, 2002, SBS announced further
reductions, which were effective immediately, and 47 employees
were notified that their jobs had been eliminated. As a result,
for the year ended June 30, 2002, employee severance and
other termination charges of approximately $1,253,000 were
recorded. As of June 30, 2002, cash payments of $963,000
had been made, $21,000 of the original charge was reversed as a
result of the decision not to terminate certain originally
notified employees, and the remaining $269,000 will be paid
through the quarter ending December 31, 2002.



|     |              
|---- | -------------
|(17) | Contingencies

Subsequent to June 30, 2002, SBS received
notice of a claim for patent infringement regarding the sale of
SBS PCMCIA product line. Management is currently
evaluating the claim. Due to the uncertainty regarding the
ultimate outcome of this matter, SBS is currently unable to
determine an estimate of the amount or range, if any, of
potential loss. However, management believes the outcome of this
matter will not have a material impact on SBS financial
position.

SBS is subject to various claims which arise in
the ordinary course of its business. In the opinion of
management, the amount of ultimate liability with respect to
these actions will not materially affect the financial position,
results of operations, or liquidity of SBS.

52



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##### Table of Contents








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

Not applicable.




PART III

Certain information required by Part III is
incorporated by reference to the SBS definitive proxy
statement pursuant to Regulation 14A (the Proxy
Statement) for its annual meeting to be held
November 14, 2002.






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

The information required by this item, pertaining
to information on directors, is incorporated by reference to
SBS Proxy Statement under the section entitled Proxy
Item No. 1  Election of Directors.
The information required by this item, pertaining to information
on executive officers, is incorporated by reference to SBS
Proxy Statement under the sub-section of Proxy
Item No. 1 entitled Executive Officers Who Are
Not Directors.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information required by this item is
incorporated by reference to SBS Proxy Statement under the
section entitled Compensation of Named Executive
Officers.






|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters

The following sets forth certain information as
of June 30, 2002 with respect to compensation plans of SBS
under which securities may be issued:

Equity Compensation Plan Information

|                                                               |  |                              |           |                             |  |                            |       |  |  |  |           | 
|-------------------------------------------------------------- |  | ---------------------------- | --------- | --------------------------- |  | -------------------------- | ----- |  |  |  | --------- | 
|                                                               |  |                              |           |                             |  | Number of securities      
|                                                               |  | Number of securities to be   |           | Weighted-average exercise   |  | remaining available for   
|                                                               |  | issued upon exercise of      |           | price of outstanding        |  | future issuance under     
|                                                               |  | outstanding options, rights, |           | options, rights, restricted |  | equity compensation plans 
|                                                               |  | restricted stock, and other  |           | stock, and other stock-     |  | (excluding securities     
|Plan Category                                                  |  | stock-based awards           |           | based awards                |  | reflected in first column)
|                                                               |  |                              |           |                             |  |                           
|Equity compensation plans approved by security
    holders     |  |                              | 3,354,355 |                             |  | $                          | 16.60 |  |  |  | 1,845,264 | 
|Equity compensation plans not approved by
    security holders |  |                              |          |                             |  |                            |      |  |  |  |          | 
|                                                               |  |                              |           |                             |  |                            |       |  |  |  |           | 
|Total                                                          |  |                              | 3,354,355 |                             |  | $                          | 16.60 |  |  |  | 1,845,264 | 
|                                                               |  |                              |           |                             |  |                            |       |  |  |  |           | 

All other information required by this item is
incorporated by reference to SBS Proxy Statement under the
section entitled Ownership of SBS Common Stock.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

The information required by this item is
incorporated by reference to SBS Proxy Statement under the
section entitled Proxy Item No. 1 
Election of Directors and sub-section of Proxy
Item No. 1 entitled Executive Officers Who Are
Not Directors.






|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures

As of the date of this report, there were no
significant changes in SBS internal controls or in other
factors that could significantly affect these controls
subsequent to the date of this report.

53



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PART IV






|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K



| |     |                                                                                                                                                                                                             
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | Financial StatementsConsolidated Balance Sheets 
     Consolidated Statements of Operations 
     Consolidated Statements of Changes in Stockholders Equity
    
     Consolidated Statements of Cash Flows

(b) Financial Statement Schedules

Not applicable

(c) Exhibits. The Exhibits listed on
the accompanying Index to Exhibits at the end of this Report are
filed as part of, or incorporated by reference into, this
Report. Management contracts or compensatory plans or
arrangements are indicated in the index by an asterisk (*).

(d) Reports on Form 8-K during the
fourth quarter.

On April 30, 2002, SBS filed Form 8-K
relating to changes in senior management that were effective
April 26, 2002.

54



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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.



| |                       
| | ----------------------
| | SBS TECHNOLOGIES, INC.



| |     |                           
| | --- | --------------------------
| | By: | /s/ CHRISTOPHER J. AMENSON

| |                                     
| | ------------------------------------
| |                                     
| | Christopher J. Amenson              
| | Chairman and Chief Executive Officer



| |     |                        
| | --- | -----------------------
| | By: | /s/ JAMES E. DIXON, JR.

| |                                             
| | --------------------------------------------
| |                                             
| | James E. Dixon, Jr.                         
| | Vice President, Chief Financial
    Officer,
| | Secretary and Treasurer                     

Date: September 26, 2002

55



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CERTIFICATION

I, James E. Dixon, Jr. certify that:

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

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

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



| |                                         
| | ----------------------------------------
| | /s/ JAMES E. DIXON, JR.                 
| |                                         
| | James E. Dixon, Jr.                     
| | Vice President, Chief Financial Officer,
| | Secretary, and Treasurer                

Dated:     September 20,
2002

56



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##### Table of Contents



CERTIFICATION

I, Christopher J. Amenson certify that:

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

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

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



| |                                     
| | ------------------------------------
| | /s/ CHRISTOPHER J. AMENSON          
| |                                     
| | Christopher J. Amenson              
| | Chairman and Chief Executive Officer

Dated:     September 20,
2002

57



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##### Table of Contents



SBS TECHNOLOGIES, INC. AND
SUBSIDIARIES

ANNUAL REPORT ON FORM 10-K


FISCAL YEAR ENDED JUNE 30, 2002







INDEX TO EXHIBITS

|        |           |  |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------- | --------- |  |  | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |           |  |  |            
|No.     |           |  |  | Description
|        |           |  |  |            
|        | 3.i(13)   |  |  |            |  | Restated Articles of Incorporation dated
    November 10, 2000                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|        | 3.ii(14)  |  |  |            |  | Restated and amended By-laws dated
    November 10, 2000                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        | 4.a(13)   |  |  |            |  | Article VI of the Articles of Incorporation,
    as amended, as included in the Articles of Incorporation of SBS
    Technologies, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                      
|        | 4.b(14)   |  |  |            |  | Articles I and II of the Restated and
    Amended Bylaws of SBS Technologies, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | 4.c(15)   |  |  |            |  | Form of certificate evidencing Common Stock                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 4.1       |  |  |            |  | Rights Agreement dated as of September 15,
    1997 between SBS Technologies, Inc. and First Security Bank (now
    Wells Fargo), National Association, as Rights Agent, which
    includes the form of Right Certificate as Exhibit A, and
    the Summary of Rights to Purchase Common Stock as
    Exhibit B.2. Agreement to Serve as Rights Agent. On
    January 21, 1998, pursuant to Section 21 of the Rights
    Agreement, SBS appointed Norwest Bank Minnesota, N.A. (now Wells
    Fargo) as Successor Rights Agent. Filed herewith electronically
|        | 10.c*     |  |  |            |  | 1997 Employee Incentive Stock Option Plan. Filed
    herewith electronically                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 10.f*     |  |  |            |  | 1992 Incentive Stock Option Plan. Filed herewith
    electronically                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 10.h*     |  |  |            |  | 1993 Incentive Stock Option Plan. Filed herewith
    electronically                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        | 10.i*     |  |  |            |  | 1993 Director and Officer Stock Option Plan (as
    amended). Filed herewith electronically                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        | 10.v*     |  |  |            |  | 1996 Employee Stock Purchase Plan (as amended).
    Filed herewith electronically                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        | 10.ac(1)  |  |  |            |  | Office/ Warehouse Lease Between Lutheran
    Brotherhood, (a Minnesota Corporation), and Bit 3 Computer
    Corporation, a wholly-owned subsidiary of SBS Technologies,
    Inc., dated September 5, 1997                                                                                                                                                                                                                                                                                                                                                    
|        | 10.ad(1)  |  |  |            |  | Amendment #1 to Lease between Lutheran
    Brotherhood, a Minnesota Corporation, and Bit 3 Computer
    Corporation, a wholly owned subsidiary of SBS Technologies,
    Inc., dated December 23, 1997                                                                                                                                                                                                                                                                                                                                                        
|        | 10.ah(2)  |  |  |            |  | Standard Industrial Lease Between Carlsbad
    Business Park, LLC, (a California Limited Liability Company),
    and SBS Technologies, Inc. dated September 10, 1998                                                                                                                                                                                                                                                                                                                                                                                         
|        | 10.ai(3)  |  |  |            |  | Credit Agreement between SBS Technologies, Inc.,
    as borrower, and Bank of America N.A., formerly Nationsbank,
    N.A., as lender, dated December 1, 1998                                                                                                                                                                                                                                                                                                                                                                                                
|        | 10.al(4)  |  |  |            |  | Lease Agreement between Mair GmbH & Co.
    KG and or Industrial Computers GmbH, a wholly-owned subsidiary
    of SBS Holding GmbH, a wholly-owned subsidiary of SBS
    Technologies, Inc.                                                                                                                                                                                                                                                                                                                                                                  
|        | 10.am(5)* |  |  |            |  | 1998 Long-Term Equity Incentive Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        | 10.an(6)  |  |  |            |  | Partnership Agreement between SBS or Industrial
    Computer GmbH & Co. KG and SBS or Industrial Computers
    Verwaltungs GmbH, general partner, and SBS Technologies Holding
    GmbH, limited partner                                                                                                                                                                                                                                                                                                                                                     
|        | 10.ao(7)  |  |  |            |  | Lease Agreement between 8-L Newark 8371, LLC
    and SBS Technologies, Inc. dated August 14, 1999                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        | 10.aq(8)  |  |  |            |  | Modification of Credit Agreement, Guaranty
    Agreements and Related Loan Documents, between SBS Technologies,
    Inc., and Bank of America, N.A., formerly NationsBank, N.A.,
    dated January 31, 2000                                                                                                                                                                                                                                                                                                                                                  
|        | 10.ar(8)  |  |  |            |  | Amended and Restated Revolving Promissory Note,
    between SBS Technologies, Inc. and Bank of America, N.A.,
    formerly NationsBank, N.A., dated January 31, 2000                                                                                                                                                                                                                                                                                                                                                                                         
|        | 10.as(9)  |  |  |            |  | Stock Purchase Agreement dated April 12,
    2000 between SBS Technologies, Inc., and SDL Communications,
    Inc. and the stockholders of SDL Communications, Inc.                                                                                                                                                                                                                                                                                                                                                                                          

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|        |           |   |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                           
|------- | --------- | - |  | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |           |   |  |            
|No.     |           |   |  | Description
|        |           |   |  |            
|        | 10.at(10) |   |  |            |  | Second Modification of Credit Agreement, Guaranty
    Agreements and Related Loan Documents, between SBS Technologies,
    Inc., and Bank of America, N.A., and the Subsidiaries of SBS
    Technologies, Inc. dated March 31, 2000                                                                                                                                                                       
|        | 10.au(10) |   |  |            |  | Second Amended and Restated Revolving Promissory
    Note, between SBS Technologies, Inc., and Bank of America, N.A.,
    formerly NationsBank, N.A., dated March 31, 2000                                                                                                                                                                                                                                
|        | 10.av(10) |   |  |            |  | Supplement I to Loan Documents, made and
    executed as of April 14, 2000 by SBS Technologies, Inc.,
    and SDL Communications, Inc.                                                                                                                                                                                                                                                                    
|        | 10.aw(10) |   |  |            |  | Security Agreement, entered into as of
    March 31, 2000, by SBS Technologies, Inc., and all
    Subsidiaries of SBS Technologies, Inc., in favor of Bank of
    America, N.A., formerly NationsBank, N.A.                                                                                                                                                                                               
|        | 10.ax(11) |   |  |            |  | Lease between AFC-5, LLC, a New Mexico limited
    liability Company, and SBS Technologies, Inc., dated
    May 16, 2000                                                                                                                                                                                                                                                                                  
|        | 10.ay(11) |   |  |            |  | Lease between Long Gate, LLC, a Delaware limited
    liability company, and SDL Communications, Inc., a Massachusetts
    corporation, dated June 15, 2000                                                                                                                                                                                                                                                
|        | 10.ba(16) |   |  |            |  | Lease between Rosa Point II, LLC and SBS
    Technologies, Inc., dated February 15, 2001                                                                                                                                                                                                                                                                                                                  
|        | 10.bc(16) | * |  |            |  | Employment agreement between SBS Technologies,
    Inc. and Christopher J. Amenson, dated December 27, 2000
    and addendum to employment agreement between SBS Technologies,
    Inc. and Christopher J. Amenson, dated April 27, 2001                                                                                                                                                                  
|        | 10.bd(16) |   |  |            |  | Third Modification of Credit Agreement,
    Promissory Note, Guaranty Agreements and Related Loan Documents,
    between SBS Technologies, Inc., and Bank of America, N.A.,
    formerly NationsBank, N.A., dated March 31, 2001                                                                                                                                                                          
|        | 10.be(12) | * |  |            |  | 2000 Long-Term Equity Incentive Plan                                                                                                                                                                                                                                                                                                                                                                      
|        | 10.bf(17) | * |  |            |  | Employment agreement between Registrant and
    Grahame E. Rance, dated March 9, 2001                                                                                                                                                                                                                                                                                                                     
|        | 10.bg(17) | * |  |            |  | Employment agreement between Registrant and James
    E. Dixon, Jr. dated March 8, 2001                                                                                                                                                                                                                                                                                                                   
|        | 10.bh(17) | * |  |            |  | Employment agreement between Registrant and
    Charles Tompkins, dated January 15, 2001                                                                                                                                                                                                                                                                                                                  
|        | 10.bl(18) | * |  |            |  | Employment agreement between Registrant and Dan
    Moore dated April 6, 2001                                                                                                                                                                                                                                                                                                                             
|        | 10.bm(18) | * |  |            |  | Employment agreement between Registrant and Penny
    St. Clair-Holmes, dated April 23, 2001                                                                                                                                                                                                                                                                                                              
|        | 10.bn(19) |   |  |            |  | Asset Purchase Agreement dated as of
    March 4, 2002, by and among SBS Technologies, Inc.
    Connectivity Products, SBS Technologies, Inc. and Intrusion,
    Inc. with respect to certain assets of its Essential
    Communications Division                                                                                                                                                         
|        | 10.bo(19) | * |  |            |  | Separation Agreement between Grahame Rance and
    SBS Technologies, Inc. effective April 26, 2002                                                                                                                                                                                                                                                                                                        
|        | 10.bp(19) | * |  |            |  | Employment Agreements between David Greig and SBS
    Technologies, Inc., Clarence Peckham and SBS Technologies, Inc.
    and James E. Dixon, Jr. and SBS Technologies, Inc.,
    effective April 26, 2002, dated May 9, 2002                                                                                                                                                                             
|        | 10.bq(19) | * |  |            |  | Employment Agreements between Christopher J.
    Amenson and SBS Technologies, Inc., effective April 26,
    2002, dated April 26, 2002.                                                                                                                                                                                                                                                                  
|        | 10.br*    |   |  |            |  | Employment Agreement between Daniel Moore and SBS
    Technologies, Inc., effective April 26, 2002, dated
    May 15, 2002. Filed herewith electronically                                                                                                                                                                                                                                                 
|        | 10.bs     |   |  |            |  | Fourth Modification of Credit Agreement, Note,
    Guaranty Agreements and Related Loan Documents between SBS
    Technologies, Inc., and Bank of America, N.A., formerly
    NationsBank, N.A., dated June 30, 2002. Filed herewith
    electronically                                                                                                                                                   
|        | 10.bt     |   |  |            |  | Amendment #2 to Lease between Oakview Eagan
    Investors, LLC (a Delaware Limited Liability Company), as
    successor in interest to Lutheran Brotherhood, (a Minnesota
    Corporation), and SBS Technologies, Inc., Commercial Group,
    formerly known as Bit 3 Computer Corporation, a
    wholly-owned subsidiary of SBS Technologies, Inc., dated
    May 22, 2002. Filed herewith electronically

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|        |       |  |  |             |  |                                                                                                                                                                                                                                  
|------- | ----- |  |  | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |  |            
|No.     |       |  |  | Description
|        |       |  |  |            
|        | 10.bu |  |  |            |  | Amendment #1 to Lease between AFC-5, LLC (a
    New Mexico Limited Liability Company) and SBS Technologies,
    Inc., dated February 1, 2001. Filed herewith electronically                                                      
|        | 10.bv |  |  |            |  | Amendment #2 to Lease between AFC-5, LLC (a
    New Mexico Limited Liability Company) and SBS Technologies,
    Inc., dated April 1, 2002. Filed herewith electronically                                                         
|        | 21    |  |  |            |  | Subsidiaries of the registrant. Filed herewith
    electronically                                                                                                                                                                
|        | 23.1  |  |  |            |  | Consent of KPMG LLP. Filed herewith electronically                                                                                                                                                                               
|        | 25    |  |  |            |  | Power of attorney. Filed herewith electronically                                                                                                                                                                                 
|        | 99.1b |  |  |            |  | Certification of Christopher J. Amenson, Chairman
    and Chief Executive Officer, Pursuant to 18 U.S.C.
    Section 1350 as adopted pursuant To Section 906 of the
    Sarbanes-Oxley Act of 2002. Filed herewith electronically
|        | 99.1c |  |  |            |  | Certification of James E. Dixon, Jr., Chief
    Financial Officer, Pursuant to 18 U.S.C. Section 1350
    as adopted pursuant To Section 906 of the Sarbanes-Oxley Act of
    2002. Filed herewith electronically                



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NOTES:



|    |                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to Exhibits 10.ac
    and 10.ad of the Registrants Quarterly Report on
    Form 10-Q for the quarter ended December 31, 1997.                 
|   
|(2) | Incorporated by reference to Exhibit 10.ah
    of the Registrants Quarterly Report on Form 10-Q for
    the quarter ended September 30, 1998.                           
|   
|(3) | Incorporated by reference to Exhibits 10.ai
    of the Registrants Quarterly Report on Form 10-Q for
    the quarter ended December 31, 1998.                           
|   
|(4) | Incorporated by reference to Exhibit 10.al
    of the Registrants Quarterly Report on Form 10-Q for
    the quarter ended March 31, 1999.                               
|   
|(5) | Incorporated by reference to
    Exhibit B of the Registrants Proxy
    Statement for its annual meeting held November 11, 1997,
    originally filed October 6, 1997.
|   
|(6) | Incorporated by reference to Exhibits 10.an
    of the Registrants Annual Report on Form 10-K for the
    fiscal year ended June 30, 1999.                              
|   
|(7) | Incorporated by reference to Exhibit 10.ao
    of the Registrants Quarterly Report on Form 10-Q for
    the quarter ended September 30, 1999.                           
|   
|(8) | Incorporated by reference to Exhibits 10.aq,
    and 10.ar of the Registrants Quarterly Report on
    Form 10-Q for the quarter ended December 31, 1999.                
|   
|(9) | Incorporated by reference to Exhibit 10.as
    of the Registrants Form 8-K dated April 26, 2000.                                                                        



|     |                                                                                                                                                                         
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to Exhibits 10.at,
    10.au, 10.av and 10.aw of the Registrants Quarterly Report
    on Form 10-Q for the quarter ended March 31, 2000.     
|    
|(11) | Incorporated by reference to Exhibits 10.ax
    and 10.ay of the Registrants Annual Report on
    Form 10-K for the fiscal year ended June 30, 2000.                   
|    
|(12) | Incorporated by reference to
    Exhibit A of the Registrants Proxy
    Statement for its annual meeting held November 9, 2000,
    originally filed October 2, 2000.
|    
|(13) | Incorporated by reference to Exhibit 3.i of
    the Registrants Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2000.                            
|    
|(14) | Incorporated by reference to Exhibit 3.ii of
    the Registrants Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2000.                           
|    
|(15) | Incorporated by reference to Exhibit 4.c, of
    the Registrants Quarterly Report on Form 10-Q for the
    quarter ended March 31, 2001.                               

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|     |                                                                                                                                                             
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|(16) | Incorporated by reference to Exhibits 10.ba,
    10.bc and 10.bd of the Registrants Quarterly Report on
    Form 10-Q for the quarter ended March 31, 2001.
|    
|(17) | Incorporated by reference to Exhibits 10.bf,
    10.bg, 10.bh, of the Registrants Report on Form 10-K
    for the year ended June 30, 2001.                
|    
|(18) | Incorporated by reference to Exhibits 10.bl
    and 10.bm of the Registrants Report on Form 10-Q for
    the quarter ended September 30, 2001.             
|    
|(19) | Incorporated by reference to Exhibits 10.bn,
    10.bo, 10.bp and 10.bq of the Registrants Report on
    Form 10-Q for the quarter ended March 31, 2002.   



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Note: An asterisk (*) indicates a management
contract or compensatory plan or arrangement required to be
filed as an exhibit.

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