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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission file number 1-10981

SBS Technologies, Inc.

(505) 875-0600

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

Title of each 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 þ         No o

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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

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SBS TECHNOLOGIES, INC. AND SUBSIDIARIES

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

PART I

Item 1.     Business

     Introduction

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

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

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

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      The following narrative should be read in conjunction with the Section entitled “Risk Factors.”

     SBS’ Operating Segments and Products

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

     Communications and Enterprise Group Products

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

     Commercial and Government Group Products

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

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     Segment Financial Data

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

     Customers and Applications

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

     Sales and Marketing

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

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

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     Research and Development

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

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

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

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

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     Suppliers

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

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

     Competition

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

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

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

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

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

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

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Risk Factors

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Item 2.     Properties

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

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

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

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

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

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

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

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

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

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

      Not applicable.

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

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

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

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

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