SBS Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
March 31, 2004
(Unaudited)

The following table summarizes the accounting for the consolidation and closure of the Company's Carlsbad, California facility:

Thousands
                                               Employee
                                               severance   Property     Lease
                                              and related     and     termination   Other
Description                                      costs     equipment    charge      costs      Total
- --------------------------------------------  -----------  ---------  ----------  ---------  ---------
Quarter ended June 30, 2003
Employee severance and consolidation costs.. $       290  $     841  $       --  $      --  $   1,131
Expenditures................................         (66)        --          --         --        (66)
Write-offs..................................          --       (841)         --         --       (841)
                                              -----------  ---------  ----------  ---------  ---------
Accrued at June 30, 2003....................         224         --          --         --        224

Nine months ended March 31, 2004
Employee severance and consolidation costs..         470         --       1,495        530      2,495
Expenditures................................        (694)        --        (474)      (530)    (1,698)
                                              -----------  ---------  ----------  ---------  ---------
Accrued at March 31, 2004................... $        --  $      --  $    1,021  $      --  $   1,021
                                              ===========  =========  ==========  =========  =========

The lease termination charge, recorded on the cease use date as a result of closure of the Company's Carlsbad, California facility, represents the estimated fair value of the remaining future lease payments and related obligations, net of estimated sublease income, over the term of the lease. The remaining costs represent primarily lease obligations expected to be paid monthly through April 2006.

On July 22, 2002, due to the continued depressed economic and market conditions impacting the Company's communications customers, SBS notified 19 full and part-time employees at our Madison, Wisconsin engineering design center that their jobs had been eliminated. For the same reasons, on September 30, 2002, SBS notified 22 additional employees that their jobs were being eliminated and 12 other employees were notified that their jobs had been eliminated during the three months ended December 31, 2002. Also, SBS paid lease termination fees of approximately $186,000 in connection with the closure of certain locations during the three months ended December 31, 2002. As a result, for the nine months ended March 31, 2003, SBS recorded employee severance and consolidation costs of $598,000. There are no costs remaining to be paid related to these activities at March 31, 2004.

Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

For a description of SBS' critical accounting policies and an understanding of the significant factors that influenced SBS' performance during the three and nine months ended March 31, 2004 and 2003, this "Management's Discussion and Analysis of Financial Condition and Results of Operations" (MD&A) should be read in conjunction with the consolidated financial statements, including the related notes, appearing in Item 1 of this Form 10-Q, as well as our Annual Report on Form 10-K for the year ended June 30, 2003.

We design and build open-architecture embedded computer products that enable original equipment manufacturers to serve the commercial, communications and government markets. Our embedded computer products are used in a wide range of industries, including telecommunications, medical electronics, industrial automation and defense. Embedded computers are put inside or made part of larger systems to process information, control machines, move computer data between machines, and interact with people. They are found in machines ranging from aircraft to complex medical equipment, and are used for a variety of applications, such as retrieving satellite information and controlling manufacturing assembly lines.

We serve a broad range of customers. We currently list more than 400 products in the product section of our website, www.sbs.com. We help our customers get to market more quickly, more reliably and more economically by providing a wide range of standard and customized embedded computer products. Our products include processor boards, input/output modules, networking devices, and complete computer systems.

Technology drives our growth. As embedded computer applications expand, we broaden our product lines 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, and intend to continue to do so, through a combination of internal growth and acquisitions. We grow by adding new products and improving existing products through our research and development program, attracting new customers with our products and service, and acquiring other companies. We completed eleven acquisitions between 1992 and March 31, 2004 that broadened our product offerings and customer base.

During the quarter and nine months ended March 31, 2004, we noted:

• Sales for the quarter were $36.6 million;
• Net income was $2.1 million and net income per share - assuming dilution for the quarter was $0.14, compared with $0.06 for the comparable period of the prior year.

• Our book-to-bill ratio for the quarter was .97 to 1; and our book-to-bill ratio for the nine months was 1.08 to 1.

• Order backlog was $44.4 million as of March 31, 2004, compared to $45.5 million as of December 31, 2003;

• Eleven Design Wins were achieved during the quarter.

• During the quarter, one commercial customer represented approximately 12% of our total sales and one communications customer and one government customer represented between 5% and 10% of our total sales. We had no other customer whose sales represented more than 5% of our total.

Select financial highlights during the three and nine months ended March 31, 2004 compared to the three and nine months ended March 31, 2003 and the quarter ended December 31, 2003 follows:

                                         Three Months Ended                        Nine Months Ended
                           ---------------------------------------------------  --------------------
                                March 31,                                            March 31,
Thousands (except          --------------------     %      Dec. 31,      %      --------------------     %
  per share amounts)           2004       2003   change      2003     change        2004       2003   change
                           ---------  --------- ---------  --------- ---------  ---------  --------- ---------
Sales.................... $  36,592  $  28,906      26.6% $  32,503      12.6% $  95,672  $  85,999      11.2%
                           =========  =========            =========            =========  =========

Net income (loss)(*)..... $   2,132  $     811     162.9% $   1,532      39.2% $   2,474  $  (4,564)   -154.2%
                           =========  =========            =========            =========  =========

Net income (loss) per
  share - assuming
  dilution (**).......... $    0.14  $    0.06            $    0.10            $    0.16  $   (0.31)
                           =========  =========            =========            =========  =========

See detailed analysis of the financial results below.

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

                                                           Three Months Ended      Nine Months Ended
                                                               March 31,               March 31,
                                                         ----------------------  ----------------------
                                                             2004        2003        2004        2003
                                                         ----------  ----------  ----------  ----------
Sales..................................................      100.0 %     100.0 %     100.0 %     100.0 %
Cost of sales..........................................       51.6 %      51.1 %      51.2 %      50.4 %
                                                         ----------  ----------  ----------  ----------
Gross profit...........................................       48.4 %      48.9 %      48.8 %      49.6 %

Selling, general and administrative expense............       22.7 %      29.1 %      25.0 %      29.3 %
Research and development expense.......................       15.0 %      14.4 %      15.7 %      15.8 %
Employee severance and consolidation costs.............        0.5 %        -- %       2.6 %       0.7 %
Amortization of intangible assets......................        1.4 %       1.6 %       1.8 %       1.7 %
                                                         ----------  ----------  ----------  ----------
Operating income.......................................        8.8 %       3.8 %       3.7 %       2.1 %
                                                         ----------  ----------  ----------  ----------
Interest and other income, net.........................        0.3 %       0.4 %       0.6 %       0.4 %
Foreign exchange losses................................       (0.1)%      (0.1)%      (0.3)%      (0.0)%
                                                         ----------  ----------  ----------  ----------
                                                               0.2 %       0.3 %       0.3 %       0.4 %
                                                         ----------  ----------  ----------  ----------
Income before income taxes and cumulative
    effect of change in accounting principle...........        9.0 %       4.1 %       4.0 %       2.5 %
Income tax expense.....................................        3.2 %       1.3 %       1.4 %       0.8 %
                                                         ----------  ----------  ----------  ----------
Income before cumulative effect of
    change in accounting principle.....................        5.8 %       2.8 %       2.6 %       1.7 %
Cumulative effect of change in accounting
    principle (net of income taxes of $3,412)..........         -- %        -- %        -- %      (7.0)%
                                                         ----------  ----------  ----------  ----------
Net income (loss)......................................        5.8 %       2.8 %       2.6 %      (5.3)%
                                                         ==========  ==========  ==========  ==========

Sales

Our total sales during the three and nine months ended March 31, 2004 compared to the three and nine months ended March 31, 2003 and the quarter ended December 31, 2003 follows:

                                         Three Months Ended                        Nine Months Ended
                           ---------------------------------------------------  --------------------
                                March 31,                                            March 31,
                           --------------------     %      Dec. 31,      %      --------------------     %
Thousands                      2004       2003   change      2003     change        2004       2003   change
                           ---------  --------- ---------  --------- ---------  ---------  --------- ---------
Sales.................... $  36,592  $  28,906      26.6% $  32,503      12.6% $  95,672  $  85,999      11.2%
                           =========  =========            =========            =========  =========

For the third quarter of fiscal 2004, sales increased $7.7 million compared to the same period of fiscal 2003, of which approximately $982,000 is the result of the impact of a weakening U.S. dollar on the translation of our Europe Group financial statements. On a sequential basis, sales increased $4.1 million compared with sales for the prior quarter of fiscal 2004. Sales for the second quarter included approximately $2.0 million of sales that were delayed at the end of the quarter ended September 30, 2003 due to production issues associated with certain advanced technology systems.

For the nine months ended March 31, 2004, sales increased $9.7 million compared to the same period of fiscal 2003, of which approximately $2.3 million is the result of the impact of a weakening U.S. dollar on the translation of the Company's Europe Group financial statements. Sales for the three and nine months ended March 31, 2004 include approximately $0.3 million and $0.9 million contributed from the acquisition of SBS Canada (formerly Avvida Systems) in June 2003.

Sales by end market for the current quarter and year-to-date periods of fiscal 2004 compare to the comparable periods of fiscal 2003 and the prior fiscal quarter as indicated below:

                                          SALES BY END MARKET
                                        (dollars in thousands)
                          March 31,   % of     March 31,   % of     Dec. 31,    % of
                            2004      total      2003      total      2003      total
                          --------- ---------  --------- ---------  --------- ---------
Three months ended:
  Government............ $  17,806        49% $  14,935        52% $  17,918        55%
  Commercial............    11,676        32%     8,949        31%     8,865        27%
  Communications........     7,110        19%     5,022        17%     5,720        18%
                          --------- ---------  --------- ---------  --------- ---------
Total................... $  36,592       100% $  28,906       100% $  32,503       100%
                          ========= =========  ========= =========  ========= =========

                          March 31,   % of     March 31,   % of
                            2004      total      2003      total
                          --------- ---------  --------- ---------                     
Nine months ended:
  Government............ $  48,864        51% $  43,760        51%
  Commercial............    29,203        31%    29,622        34%
  Communications........    17,605        18%    12,617        15%
                          --------- ---------  --------- ---------
Total................... $  95,672       100% $  85,999       100%
                          ========= =========  ========= =========

For the three months ended March 31, 2004, sales to government customers increased 19.2%, sales to commercial customers increased 30.5% and sales to communications customers increased 41.6%, all compared with the comparable period of the prior fiscal year. For the nine months ended March 31, 2004, sales to government customers increased 11.7%, sales to commercial customers decreased 1.4% and sales to communications customers increased 39.5%, all compared with the nine months ended March 31, 2003. To align with current management responsibility, sales to a majority of our enterprise customers are reflected as sales to commercial customers.

Looking forward, we are pleased with the design wins and increased bookings level this fiscal year. Based on projections from our customers, we expect a favorable book-to-bill ratio during the quarter ending June 30, 2004. We are continuing to see improvement in our markets. The government market is still strong with increasing requirements for system level solutions. The communications and enterprise markets are continuing to rebound, and our customers' forecasts are more aggressive. In the commercial market, we are seeing steady demand from semiconductor and medical equipment manufacturers. Based on our forecasts and order backlog, we expect sales for the quarter ending June 30, 2004 to be between $37 million and $38 million; however, actual results may vary.

Gross Profit

Gross profit during the three and nine months ended March 31, 2004 compared to the three and nine months ended March 31, 2003 and the quarter ended December 31, 2003 follows:

                                              Three months ended                         Nine months ended
                               -----------------------------------------------------  -------------------------------
                                     March 31,                                              March 31,
                               --------------------  Increase/  Dec. 31,   Increase/  --------------------  Increase/
Thousands                         2004       2003    (decrease)   2003     (decrease)    2004       2003    (decrease)
                               ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------
Gross profit................. $  17,704  $  14,131      3,573  $  16,034      1,670  $  46,671  $  42,690      3,981
                               =========  =========  =========  =========  =========  =========  =========  =========
Gross profit as a percent
  of sales...................      48.4%      48.9%                 49.3%                 48.8%      49.6%
                               =========  =========             =========             =========  =========
Utilization of inventory
  previously written down
  to zero cost............... $     210  $     192             $     225             $     665  $     742
                               =========  =========             =========             =========  =========

Gross profit as a percent of sales for the three and nine months ended March 31, 2004, decreased from levels noted in fiscal 2003 principally as a result of a higher proportion of sales of lower margin products in relation to total sales. The decrease for this quarter in gross profit as a percent of sales compared to the preceding quarter is primarily due to the impact of sales relating to several large, lower margin communications and commercial production orders. For the quarter ending June 30, 2004, we anticipate gross profit as a percentage of sales to be similar to the percentage experienced during the quarter ended March 31, 2004; however, actual results may vary.

Selling, General and Administrative Expense

Selling, general and administrative (SG&A) expense during the three and nine months ended March 31, 2004 as compared to the three and nine months ended March 31, 2003 follows:

                                     Three months ended               Nine months ended
                               -------------------------------  -------------------------------
                                    March 31,                        March 31,
                               --------------------  Increase/  --------------------  Increase/
Thousands                          2004       2003   (decrease)     2004       2003   (decrease)
                               ---------  ---------  ---------  ---------  ---------  ---------                      
SG&A expense................. $   8,307  $   8,409  $    (102) $  23,924  $  25,176  $  (1,252)
                               =========  =========  =========  =========  =========  =========

As a percent of sales........      22.7%      29.1%                 25.0%      29.3%
                               =========  =========             =========  =========

For the three and nine months ended March 31, 2004, SG&A expense decreased 1.2% and 5.0%, respectively, compared to the same periods of the prior fiscal year, due primarily to the cost reduction efforts implemented in connection with the consolidation of operations during the past several quarters, partially offset by the costs added as a result of the acquisition of SBS Canada in June 2003. For these reasons, together with increased sales, SG&A expense as a percentage of sales declined in fiscal 2004 compared with fiscal 2003.

Research and Development Expense

Research and development (R&D) expense during the three and nine months ended March 31, 2004 as compared to the three and nine months ended March 31, 2003 follows:

                                     Three months ended               Nine months ended
                               -------------------------------  -------------------------------
                                    March 31,                        March 31,
                               --------------------  Increase/  --------------------  Increase/
Thousands                          2004       2003   (decrease)     2004       2003   (decrease)
                               ---------  ---------  ---------  ---------  ---------  ---------                      
R&D expense.................. $   5,471  $   4,160  $   1,311  $  15,029  $  13,581  $   1,448
                               =========  =========  =========  =========  =========  =========

As a percent of sales........      15.0%      14.4%                 15.7%      15.8%
                               =========  =========             =========  =========

Increasing our intellectual property is a key element of our growth strategy. During the quarter ended March 31, 2004, we introduced 10 new products as we continue to implement this segment of our strategy. As a result, for the three and nine months ended March 31, 2004, research and development (R&D) expense increased over fiscal 2003 levels as the life cycle of research and development efforts causes these expenses to fluctuate from quarter to quarter. R&D expense as a percentage of sales during fiscal 2004 was in line with our current development plan and remained consistent with fiscal 2003 levels.

Employee Severance and Consolidation Costs

On June 12, 2003, we announced that we would be closing our Carlsbad, California facility and consolidating its manufacturing operations into our St. Paul, Minnesota facility, centralizing all manufacturing in the United States to one facility. This consolidation was completed in August, 2003. As a result of these actions, we recorded employee severance and consolidation costs totaling $165,000 and $2.5 million during the three-month and nine-month periods ended March 31, 2004, respectively.

These costs included the following for the three and nine months ended March 31, 2004:

• Employee severance and related costs of $20,000 and $470,000, respectively, (recorded over the remaining service period in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities) due to the reduction of our workforce. There were no amounts remaining to be paid at March 31, 2004.
• Other consolidation costs of $135,000 and $530,000, respectively, (recorded as incurred in accordance with SFAS 146) as a result of the consolidation of our communications operations to other facilities. There were no amounts remaining to be paid at March 31, 2004.
• Lease termination costs of $10,000 and $1,495,000, respectively, (recorded on the cease use date in accordance with SFAS 146) as a result of the closure of our Carlsbad, California facility in August 2003. The lease termination costs represent the estimated fair value of the remaining future lease payments and related obligations, net of estimated sublease income, over the term of the lease. The remaining lease obligations are expected to be paid monthly through April 2006.

Employee severance and consolidation costs of $598,000 recorded during the nine months ended March 31, 2003 were primarily the result of workforce reductions implemented as a result of the depressed market conditions impacting our communications market customers.

Amortization of Intangible Assets

For the three and nine months ended March 31, 2004, amortization of intangible assets was $538,000 and
$1.6 million, respectively, compared to $452,000 and $1.5 million for the comparable periods of fiscal 2003. Amortization expense increased in fiscal 2004 due to the purchased identifiable intangible assets recorded in connection with the acquisition of SBS Canada (formerly Avvida Systems) in June 2003. In addition, amortization expense in fiscal 2003 included a write-down of $136,000 recorded in connection with a prepaid license agreement for a product that SBS determined during the quarter ended September 30, 2002 would not be brought to market.

Interest and Other Income, Net

For the three and nine months ended March 31, 2004, net interest and other income of $95,000 and $541,000, respectively, included interest received in September 2003 in connection with income tax refunds of payments made in prior periods of approximately $250,000. Excluding the interest on the tax refunds in fiscal 2004, net interest and other income represented primarily interest income associated with surplus cash, which declined from fiscal 2003 levels due to lower interest rates.

Foreign Exchange Losses

For the three and nine months ended March 31, 2004, foreign exchange losses of $38,000 and $320,000, respectively, represent primarily realized and unrealized losses on certain inter-company transactions that are denominated in non-functional currencies due to changes in currency exchange rates as a result of the weakening of the U.S. dollar during fiscal 2004.

Income Tax Expense

For the three and nine months ended March 31, 2004, income tax expense was recorded based upon our estimated worldwide effective tax rates for fiscal year 2004 of 35.0%. This compares to income tax expense recorded for the three and nine months ended March 31, 2003, using estimated worldwide effective tax rates of 32.3% and 30.0%, respectively. The change in the estimated worldwide effective income tax rates was due principally to the impact of a shift in the mix of pre-tax income from domestic and foreign sources.

Cumulative Effect of Change in Accounting Principle

For the nine month period ended March 31, 2003, we recorded a transitional impairment charge of $9.5 million ($6,058,000 net of tax), reported as a cumulative effect of change in accounting principle, as a result of our adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, (SFAS 142) effective July 1, 2002.

Earnings Per Share

For the three and nine months ended March 31, 2004, net income per common share and net income per common share - assuming dilution were $0.14 and $0.16, respectively. This compares to net income per common share and net income per common share - assuming dilution of $0.06 for the three month period ended March 31, 2003, and income per share before the cumulative effect of the change in accounting principle of $0.10 during the nine month period ended March 31, 2003. For the nine-month period ended March 31, 2003, net loss per share and net loss per common share - assuming dilution of $(0.31) included the impact of the cumulative effect of change in accounting for goodwill of $(0.41) per common share as a result of our adoption of SFAS 142 effective July 1, 2002.

During fiscal 2004, we changed our reportable segments to a structure based on geographic markets as a result of changes in management responsibility, our desire to enhance our regional-based sales and service to our European customers, and the June 2003 acquisition of SBS Canada (formerly Avvida Systems). This change has enabled management to focus on regional market development, alignment of sales channels with customers' product needs, and enhancement of customer service and satisfaction.

We operate worldwide through two operating segments: the Americas Group and the Europe Group. 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, including the engineering, test, and assembly activities in Albuquerque, New Mexico; Mansfield, Massachusetts; Newark, California; Raleigh, North Carolina; St. Paul, Minnesota; and Waterloo, Ontario, Canada; as well as the manufacturing operations located in St. Paul, Minnesota. 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.

The following is a discussion of sales to external customers and segment profit (loss) for each reportable segment. We measure the results of operations for segments (Segment Profit (Loss)) based on income (loss) before income taxes and the cumulative effect of change in accounting principle and before:

• the allocation of corporate overhead expenses other than marketing costs;
• substantially all amortization expense associated with acquisitions; and
• interest income earned on U.S. operations cash balances.

Americas Group

Sales to External Customers. For the three months ended March 31, 2004, sales to external customers increased approximately $3.5 million, or 15.6%, compared to the comparable period of the prior fiscal year, as unit shipments increased across all the Group's product lines with the exception of telecommunications product shipments which declined from prior year levels. On a sequential basis, sales to external customers increased $2.8 million, or 12.0%, compared to the prior quarter as shipments of government and commercial products increased. For the nine months ended March 31, 2004, sales to external customers decreased approximately $1.8 million, or (2.5)%, compared to fiscal 2003 primarily as a result of reduced shipments of the Group's telecommunications products. Sales to external customers for the second quarter include approximately $2.0 million of sales that were delayed at the end of the first quarter due to production issues associated with certain advanced technology systems. The Group's sales to external customers for the three and nine months ended March 31, 2004 exclude approximately $500,000 and $2.5 million of sales that, after the transfer of sales and support for our European customers to our German operations, were included in sales for the Europe Group. Sales contributed by the acquisition of SBS Canada (formerly Avvida Systems) in June 2003 of approximately $0.3 million and $0.9 million for the three and nine months ended March 31, 2004 partially offset the decline in sales in fiscal 2004.

Segment Profit (Loss). Segment profit increased $1.6 million, or 55.8%, for the three months ended March 31, 2004, and segment profit decreased approximately $433,000, or (5.1)%, for the nine months ended March 31, 2004, both compared to the comparable periods of the prior fiscal year. On a sequential basis, segment profit increased $977,000, or 27.1%, compared with the prior quarter. Segment profit in the nine months of fiscal 2004 declined primarily as a result of approximately $2.5 million of employee severance and consolidation costs being recorded from the consolidation of our communications operations that resulted in the closure of our Carlsbad, California facility in August 2003, partially offset by a change in sales mix to higher margin products together with reduced SG&A expenses as a result of the actions discussed above. For these reasons, segment profit as a percentage of sales to external customers was 17.4% and 11.5% for the three and nine months of fiscal 2004, compared with 12.9% and 11.8% for the same periods of fiscal 2003.

Europe Group

                                             Three Months Ended                       Nine Months Ended
                                ---------------------------------------------------  --------------------
                                     March 31,                                            March 31,
                                --------------------     %      Dec. 31,      %      --------------------     %
Thousands                          2004       2003    change      2003     change       2004       2003    change
                                ---------  --------- ---------  --------- ---------  ---------  --------- ---------
Sales to External Customers... $  10,342  $   6,191      67.0% $   9,063      14.1% $  25,705  $  14,223      80.7%
                                =========  =========            =========            =========  =========

Segment Profit................ $   2,105  $   1,495      40.8% $   2,066       1.9% $   5,481  $   3,138      74.7%
                                =========  =========            =========            =========  =========

Sales to External Customers. Unit shipments of the Group's products increased for all periods resulting in increased sales to external customers. For the three and nine months ended March 31, 2004, sales to external customers increased $4.1 million and $11.5 million, respectively, compared to the comparable periods of the prior fiscal year, of which approximately $982,000 and $2.5 million, respectively, was the result of changes in currency exchange rates used to translate the Group's financial statements to U.S. dollars. On a sequential basis, sales to external customers increased $1.3 million, compared with the prior quarter. The Group's sales to external customers for the three and nine months ended March 31, 2004 included an increase of approximately $500,000 and $2.5 million, respectively, of sales that, before the transfer of sales and support for our European customers to our German operations, would have been included in sales of the Americas Group.

Segment Profit. For the three and nine month periods ended March 31, 2004, segment profit increased $610,000 or 40.8%, and $2.3 million, or 74.7%, respectively, compared to the comparable periods of the prior year, due primarily to the increase in sales, offset partially by an increase in SG&A and R&D expenses commensurate with the growth in the business. On a sequential basis, segment profit was relatively unchanged compared with the prior quarter. For these reasons, segment profit as a percentage of sales was 20.4% and 21.3% for the three and nine month periods of fiscal 2004, respectively, compared to 24.1% and 22.1% for the comparable periods of fiscal 2003.

We use a combination of internally generated funds, the sale of equity securities, and bank borrowings to finance our operations, acquisitions, working capital requirements and capital expenditures. Management believes that our internally generated funds will be sufficient to finance our current operations and capital expenditures, excluding acquisitions, for at least the next twelve months. Because long-term cash flow cannot be predicted with certainty, in the future we might require external financing through bank facilities, the sale of equity or debt securities, or other sources of capital. The sale of any equity or debt securities, if required, may result in additional dilution to the shareholders. We cannot be certain that additional financing will be available, in amounts, or on terms, acceptable to us.

Our cash balance of $37.5 million at March 31, 2004 represents an increase of $0.4 million during the nine months ended March 31, 2004. Sources of the increase include:

Cash flows from:                                Thousands
   Operating activities.........................  $      32
   Investing activities.........................     (2,269)
   Financing activities.........................      2,330
   Net effect of exchange rate changes on cash..        268
                                                   ---------
                                                  $     361
                                                   =========

Net cash inflows are comprised of cash provided by operating activities of $32,000, which includes cash flows of
$4.6 million from depreciation and amortization and $2.2 million from the receipt of income tax refunds of payments made in prior periods, and cash provided by financing activities of $2.3 million as a result of the exercise of stock options. However, future cash inflows as a result of employee stock option exercises are difficult to predict with certainty. These cash inflows were offset by $2.4 million used for the purchase of capital equipment during the period as we upgraded some of our manufacturing and test equipment. During the nine month period ended March 31, 2004, the increase in accounts receivable used cash from operations of $579,000, and the increase in inventory levels, in line with the current level of business, used cash from operations of $9.7 million, both excluding the impact of foreign currency translation adjustments. Liabilities also increased by approximately $1.2 million, consistent with our current level of business.

As of the date of this report, we do not have any material capital expenditure commitments.

As of March 31, 2004, we were committed under noncancelable operating leases that expire at various dates through fiscal 2008, as described in Management's Discussion and Analysis in our Annual Report on Form 10-K for the fiscal year ended June 30, 2003.

For the nine-month period ended March 31, 2004 there was no significant impact from inflation.

We are pleased with the design wins and increased bookings level this fiscal year. Based on projections from our customers, we expect a favorable book-to-bill ratio during the quarter ending June 30, 2004. We are continuing to see improvement in our markets. The government market is still strong with increasing requirements for system level solutions. The communications and enterprise markets are continuing to rebound, and our customers' forecasts are more aggressive. In the commercial market, we are seeing steady demand from semiconductor and medical equipment manufacturers. Based on our forecasts and order backlog, we expect sales for the quarter ending June 30, 2004 to be between $37 million and $38 million; however, actual results may vary.

Management expects that corporate representatives of SBS will meet privately during the quarter with investors, investment analysts, the media and others, and may reiterate the Business Outlook published in this Form 10-Q. At the same time, this Form 10-Q and the included Business Outlook will remain publicly available on our Web site (www.sbs.com). Unless a notice stating otherwise is published, the public can continue to rely on the Business Outlook published on the Web site as representing our current expectations on matters covered.

In December 2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition.  SAB 104 revises or rescinds portions of the interpretive guidance included in Topic 13 of the codification of staff accounting bulletins in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations.  The adoption of SAB 104 did not impact our results of operations or financial condition.

SBS' liquid investment is cash invested in either money market accounts or in overnight repurchase agreements. Due to the nature of these investments, we believe that the market risk related to these investments is minimal. As a result of our German and Canadian operating and financing activities, we are exposed to market risk from changes in foreign currency exchange rates. As of March 31, 2004, we have no plans or intentions to enter into foreign exchange forward contracts to reduce exposure to changes in foreign currency exchange rates.

As of the end of the period covered by this Quarterly Report on Form 10- Q, we evaluated the effectiveness of the design and operation of "disclosure controls and procedures" (Disclosure Controls). The controls evaluation was done under the supervision and with the participation of management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO).

Attached as Exhibits to this Quarterly Report on Form 10-Q are certifications of the CEO (Exhibit 31.1) and the CFO (Exhibit 31.2), which are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934 (the Exchange Act). This Controls and Procedures section includes the information concerning the controls evaluation referred to in the certifications and it should be read in conjunction with the certifications for a more complete understanding of the topics presented.

Disclosure Controls are procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission's rules and forms. Disclosure Controls are also designed to ensure that the information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Internal control over financial reporting (Internal Controls) are procedures which are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of SBS; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of SBS are being made only in accordance with authorizations of management and directors of SBS; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of SBS' assets that could have a material effect on the financial statements.  To the extent that components of our Internal Controls are included in our Disclosure Controls, they are included in the scope of our quarterly controls evaluation.

Our management, including the CEO and CFO, does not expect that our Disclosure Controls or Internal Controls will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Based on our controls evaluation (with the participation of our CEO and CFO), as of the end of the period covered by this report, our CEO and CFO have concluded that, subject to the limitations noted above, our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

There was no change in our internal control over financial reporting during our third fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

(a) Exhibits (exhibit reference numbers refer to Item 601 of Regulation S-K)

(b) Reports on Form 8-K during the quarter

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: May 14, 2004