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UNITED STATES
SECURITIES AND EXCHANGE

COMMISSION
Washington, D.C. 20549






FORM 10-K


(Mark One)

size=1>

T ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended June 30, 2004





or
*
size=1> TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to

________.





Commission file number 1-10981



SBS Technologies, Inc.
(Exact name

of registrant as specified in its charter)






























Registrant's telephone number, including area code: (505)

875-0600
Securities registered pursuant to Section 12(b) of the Act:

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

Act:

Common Stock, no par value
(Title of Class)




Indicate by check mark whether the registrant (1) has filed all

reports required to be filed by Section 13 or 15(d) of the Securities Exchange

Act of 1934 during the preceding 12 months (or 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 [ 
size=1>P ] No [ ]

Indicate by check mark if disclosure of delinquent filers

pursuant to Item 405 of Regulation S-K is not contained herein, and will not be

contained, to the best of 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. [ ]

Indicate by check mark whether the registrant is an accelerated

filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ 
face="Wingdings 2" size=1>P ] No [ ]

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 August 25, 2004 as reported on The Nasdaq Stock Market® was

$107,364,688. Shares of Common Stock held by each officer and director as of

August 25, 2004 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, 2004 have been excluded because these persons may be deemed to be

affiliates. 

As of August 25, 2004, Registrant had 15,503,774 shares of

Common Stock outstanding.









DOCUMENTS INCORPORATED BY REFERENCE



Portions of the Company's Proxy Statement for the registrant's

2004 Annual Meeting of Shareholders to be held November 18, 2004 are

incorporated by reference into Part III of this Form 10-K.




















TABLE OF CONTENTS





  

    


      
New Mexico
    


      
85-0359415
  

    


      
(State or other jurisdiction of
    


      
(IRS Employer
  

    


      
incorporation or organization)
    


      
Identification Number)
  

    


      
 
    


      
 
  

    


      
2400 Louisiana Blvd. NE, AFC Bldg 5, Suite

      600
    
 
  

    


      
Albuquerque, New Mexico
    


      
87110
  

    


      
(Address of principal executive office)
    


      
(Zip code)



































































































































































































































































 


 



 


 















FORWARD-LOOKING STATEMENTS

 


This Form 10-K contains forward-looking statements with respect to the

financial condition, results of operations and business of SBS Technologies,

Inc. and subsidiaries (referred to variously as "SBS," the "Company," "we," "us"

and "our"). You may find many of these statements by looking for words like

"intends," "expects," "projects," "believes," "anticipates" or similar

expressions in this Form 10-K. These forward-looking statements

include:



  


    
statements regarding future events and the future financial performance

    of SBS;

    
expected sales and gross margin levels for the fiscal year ending June

    30, 2005;

    
expected sales levels for the quarter ending September 30, 2004;

    
expectations of internally-generated cash flows;

    
the continued health of the end markets we serve;

    
the expectation of several government systems design wins to start

    production in fiscal year 2005;

    
the expectation of sales to Applied Materials and Ericsson to continue

    during fiscal year 2005 at the same dollar level as in fiscal year 2004; and



    
new product and business development efforts.








These statements are based upon certain assumptions and assessments made by

the Company in light of our experience and our perception of historical trends,

current conditions, expected future developments and other factors we believe to

be appropriate. These assumptions and assessments include the volume and product

mix of sales, estimates of costs and inventory and receivable levels based on

preliminary information, and other items.


The forward-looking statements included in this document are subject to a

number of risks, uncertainties, and other factors. Among these factors are:





  


    
business and economic conditions generally affecting our customers and

    their end customers, including but not limited to the changes in size and

    program priorities of military procurement budgets, which may be less

    favorable than we expect, resulting in lower sales and earnings;

    
a high degree of uncertainty and rapid change in the markets addressed

    by our products that could reduce sales or render certain SBS products

    obsolete, resulting in reduced gross profit levels;

    
customer demand for and acceptance of our products, which may be less

    than we expect, affecting both sales and margins;

    
our ability to design, test and introduce new products on a timely

    basis, which, if we are not able, may decrease both sales and margins;

    
the other risk factors listed under "Risk Factors" included elsewhere in

    this Form 10-K. 




Because forward-looking statements are subject to risks and uncertainties,

actual results may differ materially from those expressed or implied by them.

SBS cautions you not to place undue reliance on these statements, which speak

only as of the date of this Form 10-K.


SBS does not undertake any obligation to update publicly or revise any

forward-looking statements, whether as a result of new information, future

events or otherwise.












PART I


Item 1. Business


Introduction

We design and build open-architecture embedded computer

products that enable original equipment manufacturers (OEM) to serve the

government, commercial, and communications end markets. Embedded computer

products are put inside or made part of larger systems to process information,

control machines, move computer data between machines, and interact with people.

The companies that use our products manufacture very sophisticated, expensive

devices, for example, MRI machines, flight simulators, wireless networks,

fighter jets and industrial robots. 


The SBS product line is strategically focused on embedded computing, and we

serve virtually all parts of the market. We currently list more than 450

products in the product section of our website, www.sbs.com. We offer components

like input/output (I/O) modules, bus adapters, carrier cards, system enclosures,

FPGA boards and single board computers, as well as network switches, blades and

fully integrated systems. Many of these products are available in ruggedized

versions, which can operate in conditions of extreme temperature, vibration,

shock and humidity. 


We serve a broad range of customers. We help our customers get to market

faster, more reliably and more economically, by providing a wide range of

standard and customized embedded computer products. Our products have

application in diverse industries, including space and aviation,

telecommunications, military and government, transportation, telemetry,

robotics, networking, broadcasting, wireless communications and medical imaging.



We have grown because we understand our role in the embedded computing

process: we make components which are part of larger, more complicated devices.

As embedded computer applications expand, we broaden our product line to meet

our customers' needs and to attract new customers. We invest in technology and

customer service so that we can grow with our customers. 


We have grown organically and through strategic acquisitions, acquiring

companies that supplement our core competencies - a pattern we expect to

continue. Our organic growth is driven by adding new products, improving

existing products through our research and development program, and attracting

new customers with our products and service. We also completed eleven

acquisitions between 1992 and June 2004 that broadened our product offerings and

our customer base.


SBS Technologies, Inc. was incorporated in New Mexico in November 1986 and

began operations in September 1987. Our executive office is located at 2400

Louisiana Boulevard, NE, AFC Building 5, Suite 600, Albuquerque, New Mexico,

87110, telephone number (505) 875-0600. As of June 30, 2004, SBS Technologies,

Inc. had five direct subsidiaries: SBS Technologies, Inc., Commercial Group

("SBS Commercial"), SBS Technologies, Inc., Government Group ("SBS Government"),

SBS Technologies, Inc., Communications and Enterprise Group ("SBS

Communications"), SBS Technologies, Inc. Foreign Holding Company ("Foreign

Holding"), and SBS Technologies, Inc., German Holdings, LLC ("German Holdings").

In July 2002, the Avionics Products division of SBS was combined with SBS

Government. In September 2002, SBS Technologies, Inc., Industrial Computers, and

SDL Communications, Inc., both of which were formerly subsidiaries of SBS

Technologies, Inc., merged into SBS Technologies, Inc., Communications Products,

a subsidiary of SBS Technologies, Inc., at which time its name was changed to

SBS Technologies, Inc., Communications and Enterprise Group.


In April 2003, German Holdings acquired all of the shares of

SBS Technologies Holding GmbH ("Holding GmbH"), formerly a subsidiary of Foreign

Holding, and all of the shares of SBS or Computers Verwaltungs GmbH

("Verwaltungs"), formerly a subsidiary of Holding GmbH. Later in April 2003,

Holding GmbH was merged into SBS Technologies, GmbH & Co. KG ("KG"),

formerly a subsidiary of Holding GmbH. As a result of the merger, ortec

Electronic Assembly GmbH ("ortec"), formerly a wholly-owned subsidiary of

Holding GmbH, is a wholly-owned subsidiary of KG. KG and Verwaltungs are

subsidiaries of German Holdings. KG is a partnership between German Holdings as

sole limited partner and Verwaltungs as sole general partner. 


SBS Technologies (Canada), Inc. ("SBS Canada") is a subsidiary

of Foreign Holding. Effective June 30, 2003, SBS Canada acquired all of the

shares of Avvida Holdings Corp. ("Avvida Holdings"). At that time, Avvida

Systems Inc. ("Avvida Systems") was a subsidiary of Avvida Holdings. In July

2003, both Avvida Systems and Avvida Holdings were amalgamated under Canadian

law into SBS Canada. SBS Technologies Finance LP, a limited partnership, is

owned 99% by Foreign Holding as sole general partner, and 1% by SBS

Technologies, Inc. as sole limited partner.


SBS Technologies (Shenzhen) Limited, a subsidiary of Foreign

Holding, was formed in June 2004.


A chart of our corporate structure follows:








SBS Technologies®, IndustryPack®, Omnispan®, and dataBLIZZARD®

are registered trademarks of SBS. PC MIP® is a registered trademark of MEN

Micro, Inc. of Carrollton, Texas, and SBS. All other trademarks or tradenames

referred to in this document are the property of their respective

owners.


Corporate Governance

We strive to achieve excellence and integrity in all of our

business practices, including corporate governance, oversight, accountability

and transparency. We believe we have incorporated best practices in our

governance, including those currently required by the Sarbanes-Oxley Act of 2002

and The Nasdaq Stock Market®. The following are several examples of corporate

governance initiatives implemented by the Company, many dating several years

before the passage of the Sarbanes-Oxley Act: 



  


    
The Company's Board of Directors is comprised of seven members, five of

    whom are independent from management ("Independent Directors"). The Board

    has consisted of a majority of Independent Directors since 1992.

  


  


    
The Board has three standing committees: the Audit Committee, the

    Corporate Governance and Nominating Committee, and the Management

    Development and Compensation Committee. Each Committee has a written

    charter, available for review on our web site at 
    color=#0000ff size=2>www.sbs.com, and membership on

    all Board Committees is limited to the Independent Directors.

  


  


    
At each regularly scheduled meeting of the Board of Directors, a meeting

    is held of the Independent Directors without any company officer or Employee

    Director participation. The Independent Directors' meeting is chaired by the

    Board's Lead Director, who is an Independent Director. These meetings have

    been conducted since 1998. 


  


    
The Company has an Internal Financial and Disclosure Controls Committee,

    whose primary duties are to establish, evaluate and maintain systems of

    internal controls regarding financial information of the Company and

    disclosures required by applicable laws to ensure (a) accuracy,

    completeness, reliability and timeliness of financial and other reports, (b)

    effectiveness and efficiency of operations, and (c) compliance with

    applicable laws and regulations. That committee's charter is available on

    our web site at 
    size=2>www.sbs.com.


  


    
The Company has disseminated to all of its employees a Financial

    Complaint Procedures Policy, available for review on our web site at

    www.sbs.com, to

    enable the anonymous reporting of any possible financial wrongdoing within

    the Company.


  


    
The Company has adopted a Code of Ethics, available for review on our

    web site at www.sbs.com
    size=2>, binding upon all directors and employees of the Company, designed

    to deter wrongdoing and promote honest and ethical conduct, full, fair,

    accurate and timely public disclosures, compliance with all governmental

    requirements, prompt internal reporting of violations of the Code of Ethics,

    and accountability for adherence to the Code of Ethics. We will disclose on

    our website when there have been waivers of, or amendments to, the Code of

    Ethics.


  


    
The Board of Directors has adopted a Statement on Corporate Governance,

    available for review on our website at 
    size=2>www.sbs.com, which contains corporate

    governance standards applicable to the Board, including Board functions,

    structure and operations of the Board and its Committees, and shareholder

    meetings.


  


    
The reports we file with the U.S. Securities and Exchange Commission on

    a current, quarterly and annual basis are available, as soon as practicable

    after they are filed, on our website at 
    size=2>www.sbs.com.




The following narrative should be read in conjunction with the Section

entitled "Risk Factors."


SBS' Operating Segments

Throughout our fiscal year ended June 30,

2004, we operated worldwide based on geographic markets through two operating

segments: the Americas Group and the Europe Group. These segments enable

management to focus on regional market development, alignment of sales channels

with customers' product needs, and enhancement of customer service and

satisfaction. Each segment has management who report directly to our Chief

Executive Officer and its own sales and distribution channels. The Americas

Group consists of our operations based in the United States and Canada, and most

recently Shenzhen, China. This includes the engineering, test and assembly

activities in Albuquerque, New Mexico; Mansfield, Massachusetts; Newark,

California; Raleigh, North Carolina; St. Paul, Minnesota; and Waterloo, Ontario,

Canada, the manufacturing operations located in St. Paul, Minnesota and the

sales and technical support activities located in Shenzhen, China. The Europe

Group consists of our operations based in Germany, which include the

engineering, test, assembly, and manufacturing activities located in Augsburg

and Mindelheim, Germany. For fiscal years 2004, 2003 and 2002, sales by

operating segments are listed below.







                                             SALES BY SEGMENT

                                          (dollars in millions)
       

                                            Fiscal years ended

                          June 30,   % of    June 30,   % of    June 30,   % of

                            2004     total     2003     total     2002     total

                          --------- -------  --------- -------  --------- -------



Americas Group.......... $    97.1      73% $    94.3      82% $   106.3      89%

Europe Group............      36.8      27%      21.2      18%      12.6      11%

                          --------- -------  --------- -------  --------- -------

Total................... $   133.9     100% $   115.5     100% $   118.9     100%

                          ========= =======  ========= =======  ========= =======









See Notes 13 and 14 to SBS' Consolidated Financial Statements

for additional information about SBS' operating segments, geographic areas, and

major customers.


Order Backlog

Order backlog expected to be filled within the fiscal year

ending June 2005 was approximately $28.0 million and $14.2 million, as of

September 1, 2004 for the Americas Group and Europe Group, respectively. Our

order backlog represents customer orders that have been contracted for future

delivery. Order backlog as of September 1, 2003 was approximately $19.0 million

and $8.9 million for the Americas Group and Europe Group, respectively. We have

experienced order cancellations and requests for extensions of product shipments

in the past and may continue to experience these cancellations and extensions in

the future. As a result, shipments of current backlog may be delayed or

canceled.


SBS' Products

Both the Americas Group and the Europe Group sell our complete portfolio of

embedded computer products into the government, commercial and communications

end markets. Our product line is strategically focused on open standards

embedded computing, and we serve most parts of the embedded market. We produce

more than 450 standard products which can be combined, configured and customized

in literally thousands of ways.


We offer individual components like Input/Output modules (I/O), bus adapters,

carrier cards, and single board computers, plus network switches, blades and

fully integrated computer systems. Many of these products are available in

ruggedized versions, which can operate in conditions of extreme temperature,

vibration, shock and humidity.


Within our diverse collection of product lines, we offer many different form

factors, including PCI, CompactPCI®, PMC, AMC, Processor PMC, and

Industry Packs. We support our products with software in multiple operating

systems. Our wide selection of single board computers enables a system designer

to choose between multiple processor types, speeds, form factors, memory

configurations, I/O types and rugged build grades. Similarly, our Field

Programmable Gate Array products (FPGAs) allow designers to create custom

processors by programming the hardware to execute their particular

application.


Our I/O products greatly expand the capabilities of our Single Board

Computers by adding additional networking capabilities, by adding more

processing power, by allowing incompatible systems to communicate, by providing

network switching and monitoring capabilities, or by adding more powerful

graphic processing power. Our I/O technologies include popular standards such as

SCSI, iSCSI, IEEE 1394 (Firewire), Ethernet, InfiniBand®, MIL-

STD-1553, Fibre Channel, HIPPI, and telecom standards such as T1/E1/J1, HSSI,

T3/E3, OC-3/STM-1 including HDLC, ATM, SONET, Frame Relay, TDM and IP.


In addition to producing board-level embedded computer products, SBS produces

finished computer systems. This process includes designing and building the

"boxes" the computers are housed in, installing the single board computers and

I/O modules, and testing and certifying the entire system.


We also deliver the software tools that are necessary to integrate our

products into the overall design. This includes drivers, driver development

kits, board support packages, protocol stack and specialized tools for specific

markets. 


Customers and Applications

Our broad range of products is used by a diversified OEM customer base

serving the government, commercial and communications end markets. Our products

are used in a variety of applications in diverse industries including space and

aviation, telecommunications, military and government, transportation,

telemetry, robotics, networking, broadcasting, wireless communications and

medical imaging. In fiscal year 2004, one customer (Applied Materials)

represented 10% of our total sales and in 2003 and 2002, no one customer equaled

or exceeded 10% of our sales. OEMs serving the communications market use our

products in applications such as wireless base station controllers, optical

switches, routers and network monitoring, and security applications. OEMs

serving the commercial market use our products primarily to build products that

are used in semiconductor manufacturing, industrial automation, medical imaging,

and entertainment applications. Examples of these applications include

semiconductor manufacturing equipment, CT scan and MRI equipment, automotive

manufacturing and test equipment, test and measurement equipment, industrial

automation equipment, commercial aircraft flight simulators, and audio mixing

and video authoring equipment. OEMs serving the government market use our

products in 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 applications include

systems and equipment for military aircraft, military ground vehicles, navy

vessels, telemetry equipment, and space exploration applications. 


Sales and Marketing

We market our products both domestically and internationally utilizing a

combination of direct employee sales personnel, independent manufacturers'

representatives, and distributors. As of August 1, 2004, we had 92 employees,

who typically hold engineering degrees, in sales, marketing and customer

relations, 17 U.S.-based independent manufacturers' representatives and 35

distributors located outside the U.S. Within North America, our direct employee

sales personnel are deployed regionally throughout the U.S. and Canada as sales

specialists in our traditional markets. Within Europe, as of August 1, 2004, we

have direct employee sales personnel located in the United Kingdom, Sweden,

France, and Germany. Sales

into the Asian markets are primarily through distributors supported by our

employees of SBS Technologies (Shenzhen) Limited. Domestically and

internationally, the direct employee sales personnel are supported by field

application engineers, who provide pre-sale technical support to our customers,

and business development personnel, who specialize in our traditional markets of

commercial, government and communications. We serve a diverse set of large and

small customers. In order to gain access to this diverse customer base, we use

all available selling channels. Domestically, the direct employee sales

personnel generally sell to larger OEM accounts, while manufacturers'

representatives sell to smaller accounts. Internationally, our direct employee

sales personnel sell to larger OEM accounts, and independent distributors sell

to smaller accounts. All quoting, pricing and final order acceptance for all

sales are controlled by the responsible product line manager. 


We maintain our primary sales and support offices in Albuquerque, New Mexico;

Raleigh, North Carolina; Mansfield, Massachusetts; St. Paul, Minnesota;

Waterloo, Ontario, Canada; Augsburg, Germany; and Shenzhen, China. 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 our web site.


Research and Development

We invest 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 August 1, 2004, we had approximately 155 employees engaged in

research and development activities. Of these employees, 82 have technical

degrees and 36 have advanced degrees. We seek to combine special- purpose

hardware, firmware and software in our products to provide our customers with

the desired functionality. Our research and development expense was $20.6

million, $18.1 million, and $18.5 million in fiscal year 2004, 2003, and 2002,

respectively, corresponding to 15.4%, 15.6%, and 15.5% of sales,

respectively.


We have several trademarks and have one pending application for another.

However, we have generally sought only limited patent protection for our

technology. Currently, we have only six U.S. patents issued and two Canadian

patents issued, expiring December 2013 through October 2021. We primarily rely

on trade secrets for protection of our intellectual property and believe that

future financial performance is much more dependent on the timely introduction

of new products and technology and our customer relationships than protection of

our intellectual property.


With a product line of over 450 different products, a portion of our research

and development efforts is focused on sustaining and improving the existing

products. In addition, we continue to develop new standard products for all of

our markets, as well as adding new technologies to our product line. For fiscal

year 2004, we released thirty-seven new products to the marketplace. In our

single board computer product line we introduced the CT9, CR9 and CP9 Intel®

Pentium M® based compact PCI cards as well as the VR9 VME bus Pentium M card.

For 3U compact PCI we introduced the CR3 and CA3 Intel Ultra Low Voltage

Celeron® processor card. These cards are designed to be used for all of our

markets and are available in air cooled as well as conduction cooled

configurations. A new technology, FPGA centric computer platforms, was added to

the single board computer family in fiscal year 2004. The first FPGA product was

a PCI-based card and the second was an FPGA-based PC104 card. In addition to

releasing new single board computers, we also released new versions of packaged

systems. We released the ruggedized PC7 Intel Pentium III® based industrial

control computer. The PC7R is dustproof and waterproof and is designed to be

used in harsh environments. We also released the new advanced mission computer

product that is one of the only off-the-shelf standard computers available that

can be used for military flight and mission computer applications. The advanced

mission computers are available in 3U and 6U cPCI, and 6U VME, and are fully

qualified for military programs. 


In fiscal year 2004, we expanded our I/O products by increasing our Ethernet

product line with two cPCI Ethernet switches and two new gigabit Ethernet PMC

cards. We also extended our conduction cooled I/O product family by adding a

fibre channel PMC, a 1394 PMC card, a 12 channel 3U cPCI serial card, an 8

channel PMC serial card, an audio PMC card and six new MIL-STD-1553 cards in

PMC, cPCI and PCI formats. As a provider of high performance I/O solutions, we

also expanded our InfiniBand product line with a twenty-four port switch and two

new host bus adapter cards, one in PCI format and the other a PMC card. We

extended our SCSI product line by introducing a new Ultra SCSI PMC card and

adding an iSCSI PMC card, which is an internet-connected SCSI interface. To

expand our I/O products for military systems applications, we also developed and

released a new line of FPGA I/O cards in cPCI and VME formats that provide

analog, digital, serial and custom I/O required for military applications.


For our I/O products aligned with communications applications, we released

the Maxim 921-DS PMC card that provides full duplex DS3 connectivity. In

addition, we developed new variants of our Wanic T1/E1 Serial monitoring cards

and Maxim 524 T1/E1 cards, extended the Maxim 520 family to support rear panel

I/O, and developed several customer specific wide area network cards that will

be available as standard products. A major initiative was started in fiscal year

2004 to provide Advanced Mezzanine Cards (AMC) for Advanced Telecom Computing

Architecture (ATCA) carrier cards. The first AMC product is the Telum 1001 which

provides OC-3 connectivity. 


During fiscal year 2004, we expanded our software support of real-time Linux,

UNIX and Microsoft Windows® operating systems by adding drivers and new board

support packages to support our new single board computers. We also released a

development environment to support developing applications for our FPGA-based

products.


Suppliers

We use contract manufacturing to produce substantially all of our U.S.-built

board-level products. We obtain parts from large electronics parts suppliers and

printed circuit boards from printed circuit board manufacturers and provide

these parts and boards as kits to contract manufacturing companies that

fabricate our products. Following manufacturing, we perform test, packaging and

support functions for our products. We have two manufacturing facilities, St.

Paul, Minnesota and Mindelheim, Germany. We have begun complete turnkey

outsourcing to contract manufacturers, although it is for a small portion of our

total production. We reduce our dependence on a single contract manufacturer by

using multiple contract manufacturers for many of our products. 


Our German operation manufactures approximately 45% of its board-level

products at its facility in Mindelheim, Germany, and uses contract manufacturers

for the remainder of its manufacturing, consisting primarily of OEM production

business and certain ruggedized and military applications.


Competition

The embedded computer industry is highly competitive and fragmented, and our

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 our product lines. We believe we

differentiate ourselves from our competition based on the following:



  


    
broad product line,

    
willingness to adapt products to customer needs (customization),

    
after sale support, and

    
long-term customer relationships.




Our competition in each of our product lines is described below.


Our CPU product line competes against other suppliers of CPU boards based on

PowerPC® and Intel microprocessor technology, including GE Fanuc Embedded

Systems, Kontron AG, Motorola, Inc., Performance Technologies, Incorporated,

RadiSys Corporation, and others. In the ruggedized computer board and system

market primarily serving military customers, our main competitors are Curtiss-

Wright Corporation and Radstone Technologies PLC. 


Our WAN I/O products compete with other suppliers of similar products within

the embedded computer market. They include companies such as Interphase

Corporation, Performance Technologies, Incorporated, and SBE, Inc. 


Our general purpose I/O products are standards-based I/O modules for

technologies such as Ethernet, Fibre Channel, and Serial. Among our competitors

for these products are Acromag, Inc., Curtiss-Wright Corporation, GE Fanuc

Embedded Systems, and a few small companies. Specialized products such as bus

adapters and dataBLIZZARD have no direct competitors. Our InfiniBand technology

products compete with Infinicon Systems, Inc., and a number of small start-up

companies serving that market. 


Our avionics interface products compete with those of other companies such as

Ballard Technologies, Inc., Condor Engineering, Inc., Data Devices Corporation,

Excalibur Technologies Corporation, and Gesellschaft Fur Angewandte Informatik

und Mikroelekemik GmbH.


SBS Canada designs FPGA computing products that apply FPGA technology to

processing applications often associated with DSP boards or single board

computers. We compete with companies offering these technologies like Mercury

Computer Systems, and imaging companies such as Matrox Graphics Inc., as well as

a few small companies with FPGA products such as Annapolis Micro Systems,

Inc.


Our systems and enclosure products compete with other suppliers of special

purpose PC and CompactPCI platforms, enclosures and turnkey systems, such as

Motorola, Inc. and RadiSys Corporation.


Employees

As of August 1, 2004, we had approximately 472 employees at our nine

locations: Albuquerque, New Mexico; Newark, California; Raleigh, North Carolina;

St. Paul, Minnesota; Mansfield, Massachusetts; Waterloo, Ontario, Canada;

Shenzhen, China; and Augsburg and Mindelheim, Germany. Of these employees, 66

were in executive and administrative positions; 92 were in sales, marketing and

customer relations; 155 were in research and development; 148 were employed in

support of ongoing production, and 11 were employed on a part-time

basis.


Risk Factors

Statements in this Report about the outlook for our 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. The Company's actual

results may differ materially from the results discussed in the forward-looking

statements. Factors that may cause such a difference, and may impact our future

financial performance, include, but are not limited to, those discussed

below:

Risks Related to Our Business


Our 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 our common stock. Our Company

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.

Our sales, on both an annual and a quarterly basis, can fluctuate as a result of

a variety of factors, many of which are beyond our control and which we 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 our products are designed into

    those of our 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 our 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 we operate or into which we might expand our

    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 or epidemics.

  




Because fluctuations in operating results have happened in the past, and may

continue to happen in the future, we believe that comparisons of the results of

our 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 the Company will perform in the future.

Investors should also understand that, if our 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 the Company's common stock has been in the past,

and may be, in the future, subject to an immediate and significant

decline.


Our sales have been, and may in the future be, significantly reduced due to

volatile communications and capital equipment markets. We derive a

significant portion of our sales from products for communications and capital

equipment applications. 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 experienced depressed

conditions during recent years, from which a recovery appears to have begun. For

example, our sales into that market dropped by over 60% between our fiscal year

2001 and fiscal year 2002 and by another 30% from fiscal year 2002 to fiscal

year 2003 before staging some recovery in fiscal year 2004. The volatility of

the communications market over recent years could result in a future dramatic

downturn in areas of the communications market targeted by us, such as wireless

telephony and network monitoring, resulting in reductions in sales into that

market.


 Our future sales may be limited if anticipated increases in U.S.

defense spending do not occur, if defense spending in the U.S. and other

countries is reduced or not allocated in a way that benefits us, or if U.S.

military actions result in reluctance by customers outside of the U.S. to

purchase our products. We derive a significant portion of our sales

directly or indirectly from the U.S. Department of Defense (DoD). The majority

of our government sales are to contractors in U.S. Government military programs

for either new military systems or upgrades of existing military platforms.

These sales may be affected by changes in procurement policies, budget

considerations, changing defense requirements, and political developments. The

influence of these factors, which are largely beyond our control, could impact

our financial position or results of operations.


The President's budget for the DoD for fiscal year 2005 and beyond responds

to increased needs for homeland security and combating terrorism. This is

evidenced by budget increases for operation readiness and personnel needs, as

well as for both procurement and research and development. This trend was

reiterated in the Future Year Defense Plan (FYDP) submitted with the President's

budget for fiscal year 2005. It projects sustained growth in both the

procurement and research and development budgets for the DoD through fiscal year

2006, and in the case of the procurement budgetary authority, through fiscal

year 2009. While there is no assurance that the increased DoD budget levels will

be approved by Congress, the current U.S. defense budget outlook appears to be

one of modest growth. However, the level and sustainability of growth and the

amount of the budget that will ultimately be allocated to programs most closely

aligned with our business, such as new military systems and upgrades of existing

military platforms, is unknown, particularly in light of: 



  


    
current record U.S. government budget deficits, and

    
increased expenditures on operations and maintenance arising from

    conflicts in Iraq, Afghanistan, and other locations, which typically do not

    benefit our business. 




In addition, non-U.S. defense budgets have generally been declining over the

past decade. This has resulted in consolidation in the European aerospace

industry. This type of environment could reduce opportunities, and increase

competition and pricing pressure, for sales of SBS products into non-U.S.

government markets. Further, international backlash against United States

government policy decisions relating to terrorism, the conflicts in Iraq and

Afghanistan, and other international events may result in reluctance in certain

foreign countries to buy products from companies, like SBS, headquartered in the

United States. 


We must persuade customers to outsource their component needs to grow our

business. Many of our 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 our sales,

we need to persuade them that use of our components and services is cost-

effective.


Increased market acceptance of our products also depends on a number of other

factors, including:



  


    
the quality of our design and production expertise,

    
the increasing use and complexity of embedded computer systems in new

    and traditional products,

    
the expansion of markets that are served by embedded computers,

    
time to market requirements of our products,

    
the assessment by our customers of direct and indirect cost savings, and



    
our customers' willingness to rely on us for mission-critical

    applications.




Any failure to persuade customers to outsource their embedded computer needs

could reduce our future revenues and earnings.


We face significant competition. The embedded computer industry is

highly competitive and fragmented, and is in the process of consolidating, such

as the recently announced acquisition of Force Computers, Inc. by Motorola Inc.

Our competitors differ depending on product and market type, company size,

geographic market and application type. We face competition in each of our

product lines.


Competition in all of our product lines 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 our existing and potential competitors are companies larger than we

are that have a number of significant advantages over us, 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 us to sell our 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, we might encounter significant pricing

pressures across our product lines. These pricing pressures could result in

significantly lower average selling prices and reduced profit margins for our

products. We may not be able to offset the effects of any price reductions with

an increase in the number of our customers, cost reductions or otherwise. We

cannot assure investors that we will be able to compete effectively in our

current or future markets.


If we do not persuade OEM's to use our products instead of those of other

suppliers, our sales could be harmed. Our sales depend, in part, on our

ability to obtain and maintain design wins for our products from OEM's. OEM's

that do not currently integrate our components into their products may not be

willing to purchase components from us because the cost of integrating new

components into their products may be more expensive than continuing to use

existing components. OEM's currently using our components often re-bid for next-

generation components and may elect to use another supplier's components if the

other supplier's designs are superior to our designs. Also, OEM's currently

integrating our components may redesign their products in a manner that no

longer requires our components. If we fail to maintain existing design wins or

to achieve new design wins, our sales could be reduced.


We might have to expend substantial funds to redesign our products because of

changes in industry standards, customer preferences or technology. Most

of our 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, changed, or are superseded with more advanced technologies, the

design of our products could be inappropriate or obsolete, and we could be

required to undertake costly redesign and research and development efforts. Our

sales also depend in part on our ability to develop state of the art products

that comport with changing customer preferences. We may not be successful in

developing these products in a timely manner, or in selling the products we

develop. Our sales could significantly decrease, and our products could become

obsolete, if we fail to adapt timely to changing industry standards, advances in

technology, or customer preferences.


We purchase many of our components from third party suppliers who may

discontinue or change their products or have insufficient supply. Many

of our products contain state-of-the-art electronic components, such as

microprocessors and memory technology. We depend upon third parties for our

supply of many of these components. We obtain some of these components from a

sole supplier or a limited number of suppliers, for which alternate sources may

be difficult to locate. We have experienced, and may experience in the future,

component part shortages, and we have 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 our products, which could require

us to redesign a product to incorporate newer or alternative technology. Our

inventory of component parts may become obsolete, which has in the past and may

in the future result in write-downs. Although we believe that we have arranged

for an adequate supply of components to meet our short-term requirements, we do

not routinely obtain long-term binding contracts with our suppliers to assure

future availability. If sufficient components are not available when we need

them, our product shipments could be delayed, which could adversely affect our

sales during certain periods as well as lead to customer dissatisfaction. If

enough components are unavailable, we might have to pay premiums for parts in

order to make shipment deadlines. Paying premiums for parts, building inventory

of scarce parts, or having our existing inventory become obsolete could lower or

eliminate our profit margin, reduce our cash flow, and otherwise harm our

financial performance.


We use contract manufacturers to produce the bulk of our board-level products

and are dependent on their timeliness, quality, and availability. We

obtain parts from large electronics parts suppliers and printed circuit boards

from printed circuit board manufacturers and provide these parts and boards as

kits to contract manufacturing companies that fabricate our products. Many of

the contract manufacturers we utilize are small companies with limited capital

resources. We reduce dependence on a particular contract manufacturer by using

multiple contract manufacturers for many of our products, although there is no

assurance that we will not experience delays in obtaining product from contract

manufacturers. If we must move our 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 we are unable to meet our customers' delivery

requirements due to delays in obtaining product from contract manufacturers, our

sales and results of operations could be materially reduced. We also use

contract manufacturers with operations in low-cost locations, such as Asia.

Those products may be subject to shipping and other delays resulting from the

location of those fabrication facilities. These manufacturers are also subject

to political, economic and regulatory risk similar to those arising from our

international sales and operations generally, as described on page 13.



We often incur substantial expense and development time well in advance of

sales, requiring accurate gauging of future market demand. Our business

depends upon continually introducing new and enhanced products and solutions for

business needs. The development or adaptation of products and technologies

requires us to commit financial resources, personnel and time significantly in

advance of sales. In order to compete, our decisions with respect to those

commitments must accurately anticipate both future demand and the technologies

that will win market acceptance to meet that demand. In addition, our customers

typically require several months to test and evaluate our products before

designing their products to incorporate our components. Once our customers have

decided to use our components, it may take up to 18 months or longer to begin

volume production of products incorporating these components. Because of this

lengthy sales cycle, we may experience delays from the time we increase our

operating expenses and our investments in inventory until the time that we

generate sales from these components. We may never generate sales from

components after incurring development expenses if our customers decide not to

purchase them. Even if our customers select our components to incorporate into

their products, our customers may not be able to market or sell their products

successfully.


We are subject to order and shipment uncertainties that could harm our

operating results. We typically sell our products pursuant to purchase

orders that customers can cancel or defer delivery on short notice without

incurring a significant penalty. Cancellations or deferrals could cause us to

hold excess inventory that may not be salable to other customers at commercially

reasonable terms, and which could reduce our profit margins, require inventory

write downs, and restrict our ability to fund our operations. This risk is

exacerbated by a current trend from our customers of requiring shorter lead

times between placing an order with us and the shipment date. That typically

necessitates an increase in our inventory of that product, raising the

likelihood that upon cancellation or deferral, we may be holding greater amounts

of inventory. 


We have limited patent protection covering our technology, and we may not be

able to protect our intellectual property. Disputes could be expensive.

Our success depends, in part, on our ability to develop and protect our

intellectual property. We have sought only limited patent protection for our

technology. We currently have six U.S. patents and two Canadian patents issued

and no U.S. patents pending. We cannot guarantee that our 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. 


We primarily rely on trade secret laws, industrial know-how and

confidentiality agreements with employees, customers, distributors and vendors

to protect our intellectual property and believe that future financial

performance is much more dependent on the timely introduction of new products

and technology and our customer relationships than protection of our

intellectual property. Third parties or employees may breach those

confidentiality agreements or otherwise attempt to disclose, obtain or use our

products and technologies. 


We enter 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 our products, including costs of

defense. We do not carry insurance covering any such claims. Any such claim or

claims could materially harm our financial condition.


We may have to litigate to enforce or defend our intellectual property

rights. Any litigation, regardless of outcome, may be costly and time consuming.

Further, if it were ultimately determined that our claimed intellectual property

rights are unenforceable, or that our products infringe on the rights of others,

we may be required to pay past royalties or obtain licenses to use technologies.

We may not be able to obtain licenses for these technologies on commercially

reasonable terms, or at all.


General business conditions are vulnerable to the effects of epidemics, which

could materially disrupt our operations and financial results. Our

Company is vulnerable to the general economic effects of epidemics and other

health-related concerns. In mid-2003, the outbreak of the SARS epidemic resulted

in quarantines and substantial curtailment of travel and business activities for

areas as geographically diverse as China and Toronto, Ontario. During that time,

the epidemic disrupted sales activities of SBS Canada with a significant

customer in China. We believe that many growth opportunities for current and

future SBS products are located in Asia and other parts of the world where

public health systems are not considered to be as advanced as in North America

and Western Europe. Further, we have significant customers, and significant end-

customers of our customers, located in Asia, including China, which are areas

SBS has specifically targeted for growth. A recurrence of SARS or any other

epidemic could substantially reduce or delay regional or worldwide demand for

our products, or disrupt supply channels, which could materially impact our

future results of operations.


Risks Related to Our Financial Condition


Our success depends, in part, on our ability to identify, acquire and

successfully integrate new businesses. A major element of our business

strategy is to pursue acquisitions that either expand or complement our

business. We have increased the scope of our operations through eleven

acquisitions since 1992, including the June 2003 acquisition of Avvida Systems,

now SBS Canada. Where business conditions permit, we intend to actively pursue

acquisition opportunities whenever they arise. This acquisition strategy may

pose additional risks to us, including:



  


    
We might not be able to identify or acquire acceptable acquisition

    candidates on favorable terms, and in a timely manner.

    
Our management, financial controls, internal controls over financial

    reporting, personnel, and other corporate support systems might not be

    adequate to manage the increase in the size and the diversity of scope of

    our operations as a result of acquisitions and to effectively integrate

    acquired businesses.

    
Our acquisitions might not increase revenue or earnings, and the

    companies acquired might not continue to perform at their historical or

    anticipated levels.

    
We may use cash for acquisitions that would otherwise be available to

    fund our operations or to use for other corporate purposes.

    
Our shareholders may experience dilution if we use the Company's capital

    stock to pay for acquisitions.

    
We may incur debt to pay for acquisitions, resulting in interest costs

    and reduced earnings.




We may need to raise additional capital to fund our operations and to

complete acquisitions. We depend on cash flow from operations to fund

our operations and pay for our acquisitions. If we experience decreased sales,

increased expenses, or a combination of the two, we may need to raise additional

capital to fund our operations or acquire other businesses. If we decide to do

so, we could attempt to issue debt securities or capital stock. We may not be

able to sell these securities under then current market conditions. Even if we

were successful in finding buyers for our securities, the buyers could demand

commercially unreasonable terms. For example, if we had to sell debt securities,

we might be forced to pay high interest rates or agree to onerous operating

covenants, which could in turn harm our ability to operate our business by

reducing our cash flow and restricting our operating activities. If we were to

sell the Company's capital stock, we might be forced to sell shares at a

depressed market price, which could result in dilution to our existing

shareholders. In addition, any shares of capital stock we may issue may have

rights, privileges, and preferences superior to those of our common

shareholders. If we are unable to raise additional capital on commercially

reasonable terms, we may be required to reduce our operations and delay or

terminate any potential acquisition plans, which would harm our ability to

grow.


If our sales do not increase, or if they decline, we could experience

difficulty in obtaining debt or equity financing. Contraction and

declines in the markets we serve have had and may in the future have an adverse

impact on our sales and income. We currently do not have any bank credit

facility in place. We may require external financing in the future, and that

financing may not be available on terms acceptable to management or at all. In

the future, if our sales do not increase, or if they decline, it would likely

impede our ability to raise funds through the sale of debt or equity securities.



Our future results are subject to the efficiency of our past and future

consolidation efforts. We have consolidated operations in the past,

including Communications and Enterprise Group operating facilities previously

based in Madison, Wisconsin, and Carlsbad, California. These consolidations

included moving manufacturing, testing and support functions to the St. Paul,

Minnesota, facility, and moving certain product design functions to the

Mansfield, Massachusetts and Raleigh, North Carolina facilities in fiscal years

2003 and 2004. We may elect to consolidate other operations in the future.

Failure to effect a consolidation efficiently could result in missed customer

deliveries, higher costs, reductions in quality, and lost productivity on other

important projects, any of which could adversely affect our future results of

operations.


Our earnings have been, and could in the future be, adversely affected

because of charges resulting from acquisitions, or an acquisition could reduce

shareholder value. As part of our strategy for growth, we acquire

compatible businesses. In accounting for a newly acquired business, we are, in

many cases, required to amortize, over a period of years, certain identifiable

intangible assets. Although the acquired business' current operating profit may

offset the amortization expense, a decrease in the acquired business' operating

profit could reduce our overall net income and earnings per share. Changes in

future markets or technologies may require us to amortize intangible assets

faster and in such a way that our overall financial condition or results of

operations are harmed. If economic and/or business conditions decline in the

future, we may incur impairment charges against earnings which could be

significant. We may also be required, under accounting principles generally

accepted in the United States of America, 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." Acquired

businesses could also reduce shareholder value if they generate a net loss or

require invested capital.


We may expend resources without receiving benefit from strategic alliances

with third parties. From time to time, we enter into strategic alliances

to deliver solutions to our customers. These alliances are typically formed to

provide products or services that we do not provide in our core businesses. We

may expend capital and resources on these alliances but may not receive any

immediate or long-term return or economic benefit from them, thereby reducing

our sales and earnings.


We depend on our employees for success. Our ability to maintain our

competitive position and to develop and market new products depends, in part,

upon our 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. In addition, we have traditionally relied

in large part on granting of stock options as incentive compensation to recruit

and retain qualified personnel. If proposed changes to accounting standards that

require us to expense the fair value of stock option grants results in a

reduction or elimination of future stock option awards to our employees, we

could have difficulty recruiting and retaining qualified persons. If we are

unable to retain and recruit key employees, our product development, and

marketing and sales could be harmed.


We are subject to product liability risk. Our products and services

could subject us to product liability or government or commercial warranty

claims. We maintain primary product liability insurance for our non- aviation

products with a general aggregate limit of $1.0/$2.0 million per occurrence and

a $50.0 million excess umbrella policy. We maintain, for our aviation products,

a $100.0 million liability insurance policy, per occurrence. Our products are

widely used in a variety of applications. If a claim is made against us, our

insurance coverage might not be adequate to pay for our defense or to pay for

any award, in which case we would have to pay for it. Also, in the future we

might not be able to continue our insurance coverage at desired levels for

premiums acceptable to us. If a litigant were successful against us, a lack or

insufficiency of insurance coverage could significantly harm our financial

condition.


We face political, economic and regulatory risks associated with our

international sales and operations not faced by businesses operating only in the

United States. We sell our products in countries throughout the world

from our United States, Canadian and German based operations. We intend to

continue to expand our operations and sales outside the United States and have

specifically targeted Asia, in addition to Europe, for future growth. Consistent

with that policy, we opened our sales support and customer support office in

Shenzhen, China in June 2004. Our international operations and sales subject the

Company 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, terrorist attacks, epidemics, 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 and inconsistent legal standards, particularly

    with respect to intellectual property,

    
longer accounts receivable collection cycles,

    
trade disputes or new trading policies that could limit, reduce, disrupt

    or eliminate our sales and business prospects outside the United States, and



    
unexpected changes in regulatory requirements that impose multiple

    conflicting tax laws and regulations.




Those risks could reduce our sales and earnings in the future.


Exchange rate fluctuations could reduce our earnings when stated in U.S.

Dollars. Substantially all of our U.S. export sales transactions to date

have been denominated in United States dollars and substantially all sales

transactions of our Germany operation have been denominated in Euros. Due to the

transfer of all sales and support of European customers to our European

operation and the recent growth in sales experienced by our European operation,

a growing percentage of our overall sales transactions has been denominated in

Euros. Some sales in the future may be denominated in other currencies,

including the Canadian dollar. Any decline in the value of other currencies in

which we make sales against the United States dollar, the Canadian dollar or the

Euro, or any decline in the value of the Canadian dollar or the Euro against the

United States dollar, will have the effect of decreasing our consolidated

earnings when stated in United States dollars. In the future, we may engage in

hedging transactions to minimize the effect of the risks associated with these

types of currency fluctuations; however, such hedging transactions could

adversely impact our financial position and results of operations.


Risks Related to Our Securities


Our common stock price can be volatile because of several factors, including

a limited public float. During the twelve-month period ended June 30,

2004, the sales price of our common stock fluctuated between $9.17 and $19.46

per share. We believe that the Company's common stock is subject to wide price

fluctuations because of several factors, including:



  


    
quarterly and annual fluctuations in our operating results,

    
a relatively thin trading market for our common stock, which causes

    trades of small blocks of stock to have a significant impact on the

    Company's stock price,

    
announcements of new technologies by us, our competitors or customers,

    
general conditions in the markets we serve,

    
fluctuations in earnings of our 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,

    
investor sentiment regarding equity markets generally, including public

    perception of corporate ethics and governance and the accuracy and

    transparency of financial reporting, and

    
investor sentiment regarding the valuation of technology companies

    generally.




A lower stock value for SBS could make it more difficult to raise, or

preclude us from raising, capital through sales of stock or other securities or

obtaining debt financing.




Item 2. Properties

We lease office and manufacturing space in Albuquerque, New Mexico, Newark,

California, Raleigh, North Carolina, St. Paul, Minnesota, Mansfield,

Massachusetts, Waterloo, Ontario, Canada, Augsburg and Mindelheim, Germany and

Shenzhen, China. We are also obligated under a lease for our former facility in

Carlsbad, California, which we vacated in August 2003 and have subleased to a

third party throughout the remaining term of the lease. Our standard practice is

to obtain all of our facilities through operating leases. We maintain an

insurance plan covering all our 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

certain sales, engineering and support functions for SBS Government, a part of

the Americas Group segment. The Albuquerque facility also serves as our

corporate headquarters. The lease term runs through June 30, 2005. We believe

that this facility will be sufficient to serve our needs through June 2005.

Effective July 2004, we executed a lease for a one-story build-to-suit facility

consisting of approximately 47,500 square feet. The term of the lease, which

commences upon the later of substantial completion of construction or May 1,

2005, will run for a period of approximately 122 months expiring June 2015. We

contemplate moving our entire Albuquerque operations to the new facility before

the June 30, 2005 expiration of our current Albuquerque lease. The new lease

contains a right of first refusal to purchase the facility, a right of early

termination exercisable on or after July 1, 2012, a right to expand the premises

by 10,000 square feet on or before July 1, 2010, a right to contract within the

premises by 10,000 square feet on or after July 1, 2010, and a right to extend

the term for up to three additional five-year terms. We believe that the new

facility will be sufficient to serve our needs through the term of the lease.



Our general purpose I/O engineering team is located in Newark, California.

The facility, which contains approximately 13,000 square feet and is leased for

a term expiring November 30, 2007, is a one-story, multi-tenant building in a

business park. We believe that this facility will be sufficient to serve our

needs through the term of the lease. 


Our Intel and PowerPC CPU sales and engineering functions are located in

Raleigh, North Carolina, where we lease approximately 11,700 square feet of a

one-story multi-tenant facility. The lease expires January 31, 2008, subject to

one option to extend the term of the lease for three additional years. We

believe that this facility will be sufficient to serve our needs through the

term of the lease.


Our 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 certain sales, engineering, and support

functions for SBS Commercial, a part of the Americas Group segment, and 24,800

square feet of manufacturing and warehouse space utilized by our U.S.

manufacturing center. The lease expires on January 31, 2006. We believe that

this facility will be sufficient to serve our needs through the term of the

lease.


Our facility, located in Mansfield, Massachusetts is a one-story multi-tenant

building in a business park. The facility consists of approximately 31,200

square feet occupied by sales, engineering and support functions for SBS

Communications, a part of the Americas Group segment. The lease is for a five-

year term expiring on June 14, 2005. We believe that this facility will be

sufficient to serve our needs through the term of the lease. 


We lease in Waterloo, Ontario, Canada, approximately 19,400 square feet of a

two-story multi-tenant building located within a business park. This location

includes office space, and engineering, assembly and test facilities for the

operations of SBS Canada, a part of the Americas Group segment. The lease term

expires November 30, 2006, subject to one option to extend the term of the lease

for five additional years. We also have a right of first refusal to expand into

any adjacent unoccupied portions of the building during the term of the lease.

We believe that this facility will be sufficient to serve our needs through the

term of the lease.


We lease in Augsburg, Germany, a six-floor building,

consisting of approximately 30,000 square feet of office, test, packaging and

support areas for the operations of KG, a part of the Europe Group. The lease

has a term of ten years expiring December 31, 2005. We are currently negotiating

an extension of the lease to January 31, 2011 to include an addition consisting

of approximately 7,500 square feet, bringing the total area to approximately

37,500 square feet. We believe that the facility, as expanded, will be

sufficient to serve our needs through the term of the lease. 




We lease in Mindelheim, Germany approximately 6,200 square feet of a single-

story multi-tenant building located within a business area, consisting of

approximately 1,200 square feet of office space and approximately 5,000 square

feet of manufacturing and warehouse space for the operations of ortec, a part of

the Europe Group. The lease term expires August 31, 2008, subject to one option

to extend the term of the lease for five additional years. We believe this

facility will be sufficient to serve our needs through the term of the lease.



We lease in Shenzhen, China approximately 4,400 square feet of office space

in a multi-story multi-tenancy building located within a high technology

business area that houses certain sales and technical support personnel for the

Americas Group. The lease term expires May 9, 2006, subject to three options to

extend the term of the lease for two additional years each. We believe this

facility will be sufficient to serve our needs through the term of the lease.



In August 2003, we vacated our facility located in a business park in

Carlsbad, California and subsequently subleased the building to an unrelated

third party. This facility consists of approximately 75,200 square feet; 32,000

square feet of office space and 43,200 square feet of warehouse space, and the

lease term for both our lease and the sublease expires in April 2006. 




Item 3. Legal Proceedings

We are subject to various claims that arise in the ordinary course of our

business. In our opinion, the amount of ultimate liability with respect to these

actions will not materially affect our financial position, results of

operations, or liquidity. We are not a party to, and none of our property is

subject to, any material pending legal proceedings. We know 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, Related

Stockholder Matters and Issuer Purchases of Equity Securities


Market price per share

The Company's common stock is traded on the Nasdaq Stock Market

using the symbol SBSE. Quarterly market prices (as reported on the Nasdaq Stock

Market) for the last two fiscal years were:





                                2004                 2003

                         -------------------- --------------------

Fiscal quarters            High        Low      High        Low

- -----------------------  ---------  --------- ---------  ---------  

First                   $   13.93       9.17 $   12.30       5.00

Second                      17.00       9.89     12.00       6.25

Third                       17.75      14.30      9.90       7.06

Fourth                      19.46      12.72      9.94       6.51









Record Holders

Based on data provided by SBS' transfer agent and The Depository Trust

Company, management believes that as of 
August 25, 2004, the number of share

owner accounts of record, as defined by Rule 12g5-1 of the Exchange Act, was

approximately 215, at which date the closing market price of SBS' common stock

was $11.15 per share.


Dividends

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"). 


Unregistered Securities

On June 30, 2003, we issued an aggregate of 386,940 shares of

our common stock in connection with the acquisition of 100 percent of the

outstanding common stock of Avvida Holdings Corp. and its wholly-owned

subsidiary, Avvida Systems Inc. The offer and sale of these securities were

affected without registration in reliance on the exemption afforded by

Regulation S of the Securities Act of 1933, as amended. We filed a registration

statement on Form S-3 to register the 386,940 shares issued on June 30, 2003,

which was declared effective by the Securities and Exchange Commission on

January 14, 2004.


Equity Compensation Plan Information

The following sets forth certain information as of June 30,

2004 with respect to equity compensation plans of SBS under which securities may

be issued:






 


 


Page


 




PART I

 


 


 
 


 




Forward Looking Statements	



  1


Item 1.




Business	 



  2


Item 2.




Properties	



14


Item 3.




Legal Proceedings	



15


Item 4.




Submission of Matters to a Vote of Security Holders	



16


 


 
 


 




PART II

 


 


 
 


Item 5.




Market for Registrant's Common Equity, Related Stockholder

Matters and Issuer Purchases of Equity Securities	



16


Item 6.




Selected Financial Data	



17


Item 7.




Management's Discussion and Analysis of Financial Condition and

Results of Operations	



18


Item 7A.




Quantitative and Qualitative Disclosures About Market

Risk	



33


Item 8.




Financial Statements and Supplementary Data	



33


Item 9.




Changes in and Disagreements with Accountants on Accounting and

Financial Disclosure	



59


Item 9A.




Controls and Procedures	



59


Item 9B.




Other Information	



60


 


 
 


 




PART III

 


 


 
 


Item 10.




Directors and Executive Officers of the Registrant	



60


Item 11.




Executive Compensation	



60


Item 12.




Security Ownership of Certain Beneficial Owners and

Management	



60


Item 13.




Certain Relationships and Related Transactions	



60


Item 14.




Principal Accounting Fees and Services	



60


 


 
 


 




PART IV

 


 


 
 


Item 15.




Exhibits, Financial Statement Schedules, and Reports on Form 8-

K	



61









































* Certain equity compensation plans of the Company contain a formula that

automatically increases the number of securities available for issuance by a

percentage of the number of outstanding securities of the Company as

follows:



  

  

  


    
the 1993 Director and Officer Stock Option Plan provides securities

    available for grant equal to 5% of the number of shares of the Company's

    common stock outstanding the first day of each fiscal year plus shares

    underlying expired or terminated options (1,405,824 shares available at June

    30, 2004).

    
the 2000 Long-Term Equity Incentive Plan provides securities available

    for grant 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 (452,921 shares

    available at June 30, 2004).




Issuer Purchases of Equity Securities 

Not applicable. 


 




Item 6. Selected Financial Data

The following selected financial data for the years ended June

30, 2000 through June 30, 2004 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

to the consolidated financial statements included elsewhere in this

report.





                                                                       Years ended June 30,

                                                        ----------------------------------------------------

                                                           2004     2003         2002      2001      2000

                                                        --------- ---------    --------- --------- ---------

                                                                      (Thousands except per share data)     

Statements of Operations Data:                                                                              

  Sales............................................... $ 133,874   115,521      118,856   187,180   128,189

  Gross profit........................................    64,729    57,519       42,628    88,565    67,015

  Operating income (loss).............................     7,132     2,165      (38,412)   27,736    15,736

  Net income (loss)...................................     5,193    (4,450)(a)  (24,360)   17,184     8,903



Per Share Data:

  Net income (loss) per common share:

    Income (loss) before cumulative effect

      of change in accounting principle............... $    0.34      0.11 (a)    (1.67)     1.23      0.71

    Net income (loss).................................      0.34     (0.30)       (1.67)     1.23      0.71



Net income (loss) per common share -

  assuming dilution:

    Income (loss) before cumulative effect

      of change in accounting principle............... $    0.34      0.11 (a)    (1.67)     1.14      0.66

    Net income (loss).................................      0.34     (0.30)       (1.67)     1.14      0.66

                                                                                                            

Balance Sheet Data:                                                                                         

  Working capital..................................... $  86,715    73,187       69,304    75,282    37,535

  Total assets........................................   145,136   128,610      125,648   147,172   133,160

  Total liabilities...................................    15,509    12,503       12,002    13,377    34,146

  Total stockholders' equity..........................   129,627   116,107      113,646   133,795    99,014





__________




Notes: We have not declared any dividends during the periods presented and we

do not expect to pay dividends in the foreseeable future.


(a) The fiscal year 2003 summary financial data includes a transitional impairment charge

of $6,058,000 (or ($0.41) per common share), net of tax, reported as a cumulative effect of

change in accounting principle as a result of the Company's adoption of Statement of Financial

Accounting Standards No. 142 (SFAS 142), "Goodwill and Other Intangible Assets," on July 1, 2002.



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 June 30, 2003, SBS completed the purchase of Avvida Holdings

and Avvida Systems (subsequently amalgamated under Canadian law into SBS

Canada).


On April 12, 2000, SBS completed the purchase of SDL

Communications, Inc. (subsequently merged into SBS Communications). 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

SBS Communications. 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.



Item 7. Management's Discussion and Analysis of Financial

Condition and Results of Operations


Company Overview

We design and build open-architecture embedded computer

products that enable OEMs to serve the government, commercial, and

communications end markets. Embedded computer products are put inside or made

part of larger systems to process information, control machines, move computer

data between machines, and interact with people. The companies that use our

products manufacture very sophisticated, expensive devices, for example, MRI

machines, flight simulators, wireless networks, fighter jets and industrial

robots. 


The SBS product line is strategically focused on embedded

computing, and we serve virtually all parts of the market. We currently list

more than 450 products in the product section of our website, www.sbs.com. We

offer components like I/O modules, bus adapters, carrier cards, system

enclosures, FPGA boards and single board computers, as well as network switches,

blades and fully integrated systems. Many of these products are available in

ruggedized versions, which can operate in conditions of extreme temperature,

vibration, shock and humidity. 


We serve a broad range of customers. We help our customers get

to market faster, more reliably and more economically, by providing a wide range

of standard and customized embedded computer products. Our products have

application in diverse industries, including space and aviation,

telecommunications, military and government, transportation, telemetry,

robotics, networking, broadcasting, wireless communications and medical imaging.



We have grown because we understand our role in the embedded

computing process: we make components which are part of larger, more complicated

devices. As embedded computer applications expand, we broaden our product line

to meet our customers' needs and to attract new customers. We invest in

technology and customer service so that we can grow with our customers. 


We have grown organically and through strategic acquisitions,

acquiring companies that supplement our core competencies - a pattern we expect

to continue. Our organic growth is driven by adding new products, improving

existing products through our research and development program, and attracting

new customers with our products and service. We also completed eleven

acquisitions between 1992 and June 2004 that broadened our product offerings and

our customer base.


Executive Summary

During the fiscal year ended June 30, 2004, we made significant

progress in the implementation of our strategic plan. As a team, we completed a

major restructure of the Company and developed an outward looking, aggressive

approach to the market. As an example, we expanded into China with the opening

and staffing of a sales and technical support office in June 2004.


For the past two years, we have maintained an annual book-to-

bill ratio of greater than one-to-one. Throughout fiscal 2004, our customers

required shorter lead times for our products, increasing our turn business and

resulting in more extensive variability of our bookings. In addition, we believe

the number and quality of design win opportunities in all of our markets are

strong, and we remain committed to providing an excellent base of products.


During the fiscal year ended June 30, 2004 (fiscal 2004), we

noted the following:



  


    
Our book-to-bill ratio for fiscal 2004 was 1.04 to 1.






Book-to-bill ratio represents the net value of customer orders

received and booked each period divided by total sales. 



  


    
Order backlog was $42.1 million as of June 30, 2004, compared to $36.2

    million as of June 30, 2003; 






Order backlog represents customer orders that have been

contracted for future delivery. Accordingly, these orders have not yet been

recognized as revenue, but represent potential future revenue. 



  


    
Thirty-four design wins were achieved during fiscal 2004.

  






Each reported design win represents an initial purchase order

of a minimum of $100,000 and is forecasted to produce a minimum of $500,000 in

sales annually when in production. 

By end market, the design wins included twenty in the

government market, seven in the commercial market, and seven in the

communications market.



  


    
During fiscal 2004, one commercial customer represented approximately

    10% of our total sales and one communications customer represented

    approximately 8% of our total sales. We had no other customer whose sales

    represented more than 5% of our total in fiscal 2004.




Financial Highlights

Select financial highlights during the year ended June 30, 2004

compared to the years ended June 30, 2003 and 2002 follows:







                                                 Fiscal Years Ended

                                   ---------------------------------------------------

                                           June 30,                 June 30,

Thousands (except                  --------------------     %      ---------     %

  per share amounts)                 2004       2003     change      2002     change

                                   ---------  --------- ---------  --------- --------- 

Sales............................ $ 133,874  $ 115,521      15.9% $ 118,856      12.6%

                                   =========  =========            =========



Operating income (loss).......... $   7,132  $   2,165     229.4% $ (38,412)    118.6%

                                   =========  =========            =========



Income (loss) before

  cumulative effect of change

  in accounting.................. $   5,193  $   1,608     222.9% $ (24,360)    121.3%

                                   =========  =========            =========



Net income (loss)(*)............. $   5,193  $  (4,450)    216.7% $ (24,360)    121.3%

                                   =========  =========            =========



Income (loss) per share

  before cumulative effect of

  change in accounting........... $    0.34  $    0.11     209.1% $   (1.67)    120.4%

                                   =========  =========            =========



Net income (loss) per

  share - assuming

  dilution (**).................. $    0.34  $   (0.30)    213.3% $   (1.67)    120.4%

                                   =========  =========            =========





Sales for fiscal 2004 were $133.9 million, a 15.9% increase from sales of

$115.5 million for the prior year.


Operating income for fiscal 2004 increased approximately $5.0 million, or

229.4% from the fiscal 2003 balance.


Net income for fiscal 2004 was $5.2 million, compared with income before the

cumulative effect of change in accounting for goodwill of $2.4 million and net

loss of $(4.4) million for the prior fiscal year.




* Included in the determination of net loss in fiscal year 2003 is a

transitional goodwill impairment charge of 
$6.1 million (or ($0.41) per

common share), net of tax, which is reported as a cumulative effect of change in

accounting principle, as a result of our adoption of SFAS 142 effective on July

1, 2002. 

Net income per share - assuming dilution for fiscal 2004 was $0.34, compared

with income per common share - assuming dilution before the cumulative effect of

change in accounting for goodwill of $0.11 and net loss per common share -

assuming dilution of $(0.30) for the prior fiscal year.




** Included in the results for fiscal 2004 are employee severance and

consolidation costs associated with the closure of the Carlsbad, California

facility of approximately $2.4 million, which negatively impacted net income per

common share - assuming dilution by ($0.11) on an after tax basis. This compares

to employee severance and consolidation costs associated with closure of the

Carlsbad facility and other management actions totaling approximately $1.7

million for fiscal 2003, which negatively impacted income per common share -

assuming dilution before the cumulative effect of change in accounting for

goodwill by ($0.08) on an after tax basis.

For a more complete analysis of the financial results, see

"Results of Operations" below.


Critical Accounting Policies and Estimates

The preparation of consolidated financial statements and

related disclosures in accordance with accounting principles generally accepted

in the United States of America requires us to make estimates and assumptions

that affect the reported amounts of assets and liabilities at the date of the

financial statements and the reported amounts of revenues and expenses during

the reporting period. We use estimates when we account for items such as

inventory, allowances for uncollectible accounts receivable, depreciation and

amortization periods for property and equipment and certain identifiable

intangible assets, goodwill and intangible asset impairment analysis, and income

taxes (see Note 1 to the SBS' consolidated financial statements). These

estimates and assumptions are based upon our continuous evaluation of historical

results and anticipated future events. Actual results could differ from these

estimates under different assumptions or conditions.


The Securities and Exchange Commission defines critical

accounting polices as those that are, in management's view, most important to

the portrayal of SBS' financial condition and results of operations and those

that require significant judgments and estimates. We believe the following

critical accounting policies affect our more significant judgments and estimates

used in preparing our consolidated financial statements: 



  


    


    
Revenue Recognition. We recognize revenue from product sales upon

    shipment to customers, provided we have 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, we defer revenue

    recognition until acceptance by the customer unless we demonstrate the

    product meets the customer specified criteria upon shipment provided all

    other revenue recognition criteria were met.

    


    


    
Inventory Valuation. We record inventory write- downs based on

    estimates of obsolete or unmarketable inventory, taking into account

    historical usage, forecasted future demand, and general market conditions.

    Write-downs may also be recorded based on our decision to discontinue the

    marketing of certain products or product lines. If our forecasts are

    incorrect, market conditions deteriorate, or we decide to exit other product

    lines, further inventory write-downs may be required which result in an

    increase to cost of sales and reduced gross profit. If market conditions or

    demand are better than expected, we may sell inventories that have been

    previously written down, resulting in reduced or zero cost of sales and

    improved gross profit.

    


    


    
Allowance for Uncollectible Accounts. We maintain allowances

    for uncollectible accounts receivable resulting from the failure of our

    customers to make required payments. Our estimate is based on, among other

    things, the aging of accounts receivable, historical write-off experience,

    and the current and projected financial condition of our customers. If we

    misinterpret the financial condition of our customers or if the financial

    condition of customers deteriorates, additional allowances for uncollectible

    accounts may be required, which would increase operating costs and reduce

    operating profit.

    


    


    
Goodwill. In conjunction with the implementation of SFAS 142 as of

    the beginning of fiscal year 2003, we no longer amortize goodwill, but

    instead test for impairment at least annually. The first step of the

    goodwill impairment test is a comparison of the fair value of a reporting

    unit to its carrying value. The fair value of a reporting unit is the amount

    which the unit as a whole could be bought or sold in a current transaction

    between willing parties. The goodwill impairment test requires us to

    identify our reporting units and obtain estimates of the fair values of

    those units as of the testing date. We estimate the fair values of our

    reporting units using discounted cash flow and public company market

    multiple valuation models. Those models require estimates of future

    revenues, profits, capital expenditures and working capital for each

    reporting unit. We estimate these amounts by evaluating historical trends,

    current budgets, operating plans and industry data. A decline in the fair

    value of any of our reporting units below its carrying value is an indicator

    that the underlying goodwill of the unit is potentially impaired. If that

    occurs, we are required to complete the second step of the goodwill

    impairment test to determine whether the unit's goodwill is impaired. The

    second step of the goodwill impairment test is a comparison of the implied

    fair value of a reporting unit's goodwill to its carrying value. An

    impairment loss is required for the amount which the carrying value of a

    reporting unit's goodwill exceeds its implied fair value. If an impairment

    loss is recognized, the implied fair value of the reporting unit's goodwill

    becomes the new cost basis of the unit's goodwill.

    






We conduct our annual goodwill impairment test as of April 1 of

each fiscal year when our budgets and operating plans for the forthcoming year

are finalized. The timing and frequency of our goodwill impairment tests are

based on an ongoing assessment of events and circumstances that would more than

likely reduce the fair value of a reporting unit below its carrying value. We

will continue to monitor our goodwill balance for impairment and conduct formal

tests when impairment indicators are present. 



  


    


    
Long-Lived and Intangible Assets. We evaluate 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.

    These 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. An asset is

    considered to be impaired if future undiscounted cash flows, without

    consideration of interest, are insufficient to recover the carrying amount

    of the asset. Once an asset is 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 our weighted average cost

    of capital. Estimates of future cash flows require significant judgment, and

    any change in these estimates may result in additional impairment charges

    and reduced operating profits.

    


    


    
Income Taxes. Our estimate of current and deferred income taxes

    reflects our assessment of current and future taxes to be paid or received

    on items reflected in the financial statements, giving consideration to the

    recoverability of certain of the deferred tax assets, which arise from

    temporary differences between the tax and financial statement recognition of

    revenue and expense. Estimates of current income taxes include benefits for

    items such as general business and other credits, U.S. sales to foreign

    jurisdictions, and utilization of foreign tax credits. Actual income taxes

    may vary from our estimates due to future changes in tax laws or because of

    a review of our tax returns by taxing authorities, which may result in an

    increase or decrease to income tax expense. We must also assess the

    likelihood that we will be able to recover our deferred tax assets. If

    recovery is determined not to be more likely than not, we must increase our

    provision for taxes by recording a reserve, in the form of a valuation

    allowance, for the deferred tax assets that we estimate will not ultimately

    be recoverable. As of June 30, 2004, excluding certain operating losses and

    tax credits for U.S. State income purposes, we believe our recorded deferred

    tax assets will ultimately be recovered. However, should there be a change

    in our ability to recover the deferred tax assets, our tax provision would

    increase in the period we determine that recovery is no longer more likely

    than not.

    




Recent Acquisitions

We made no acquisitions during the fiscal year ended June 30,

2004. SBS completed the acquisitions described below during the fiscal year

ended June 30, 2003. The acquisition was accounted for using the purchase method

of accounting, and the results of operations of the acquired companies have been

combined with SBS' since the date of the 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. 


On June 30, 2003, SBS acquired 100 percent of the outstanding

common stock of Avvida Holdings Corp. and its wholly-owned subsidiary, Avvida

Systems Inc. (Avvida), located in Waterloo, Canada. Avvida provides image

processing solutions to customers serving a wide variety of applications.

Avvida's focus is emerging programmable logic, including fully programmable

gateway array (FPGA) technology utilized in high performance video, image and

data processing solutions. We plan to incorporate FPGA technology into existing

and future products across all SBS product lines. 


The aggregate purchase price of $6.2 million, including

acquisition costs of $0.6 million, was paid in cash and shares of SBS common

stock valued at $3,574,020. The value of the 386,940 shares of SBS common stock

was determined based on the average market price of SBS' common shares over the

two-day period before and after the terms of the acquisition were agreed to and

announced. In conjunction with the purchase price allocation, the estimated fair

value of identifiable intangible assets, specifically a core technology asset

valued at $970,000 and a covenant not-to-compete valued at $1.2 million, was

based on an assessment of their fair value determined by management, and

goodwill of approximately $3.5 million was recorded which is not deductible for

tax purposes. During the year ended June 30, 2004, we received an income tax

refund that exceeded the amount recorded at acquisition by $104,000 which was

recorded as a reduction to goodwill. The identifiable intangible assets will be

amortized over a period of 5 years based on the estimated economic useful life

of the core technology asset and the contractual period of the covenant. 


 Results of Operations

The 


  

    


      
 


      
 


      
 


      
Plan Category
    


      

    


      
Number of securities to be issued upon exercise of

      outstanding options, rights, restricted stock, and other stock-based

      awards
    


      

    


      
Weighted-average exercise price of outstanding options,

      rights, restricted stock, and other stock-based awards
    


      

    


      
Number of securities remaining available for future

      issuance under equity compensation plans (excluding securities reflected

      in first column)
  

    


      
Equity compensation plans approved by security holders
    


      
 
    


      
2,952,505
    


      
 
    


      
$14.91
    


      
 
    


      
2,794,638 *
  

    


      
Equity compensation plans not approved by security

holders
    


      
 
    


      
-
    


      
 
    


      
-
    


      
 
    


      
-
  

    


      

      

      
Total
    


      
 
    


      
2,952,505
    


      
 
    


      
$14.91
    


      
 
    


      
2,794,638 *