1) Summary of Significant Accounting Policies

The accounting policies as set forth in SBS Technologies, Inc.'s (SBS or the Company) Annual Report on Form 10-K for the year ended June 30, 2004 have been adhered to in preparing the accompanying interim condensed consolidated financial statements. These statements are unaudited but include all adjustments, consisting of normal recurring adjustments, that SBS considers necessary for a fair presentation of the financial position, results of operations, and cash flows for such interim periods. Results for such interim periods are not necessarily indicative of results for a full year.

The Company completed the required annual goodwill impairment analysis for the fiscal year ended June 30, 2004, as of April 1, 2004, and the estimated fair value of goodwill was determined to be in excess of its carrying value, indicating the underlying goodwill was not impaired at that date.

Changes in the carrying amount of goodwill for the three months ended September 30, 2004 are as follows:

The following table discloses information regarding the carrying amounts and associated accumulated amortization for intangible assets subject to amortization.

The net change in the gross carrying amount and accumulated amortization balances reflected above are the result of foreign currency translation adjustments. Accordingly, the net change in accumulated amortization for the period does not agree to amortization expense reported in the accompanying statements of operations for the period. The following table summarizes estimated amortization expense for future periods as follows:

Due to the reported net loss for the three months ended September 30, 2003, 133,182 potential common shares were not included in the computation of earnings per share - assuming dilution because the effect would be anti-dilutive. For the three-month periods ended September 30, 2004 and 2003, options to purchase 1,678,105 and 2,443,815 shares of common stock, respectively, were outstanding but were not included in the computation of earnings per share - assuming dilution because the options' exercise prices were greater than the average market price of the common shares.

Comprehensive income was $2.4 million for the three months ended September 30, 2004, and comprehensive loss was $822,000 for the three months ended September 30, 2003. The difference between comprehensive income (loss) and net income (loss) was related to foreign currency translation adjustments.

The Company is engaged in the design, research, development, integration and production of embedded computer products. We operate worldwide through two operating segments: the Americas Group and the Europe Group. Both the Americas Group and the Europe Group offer our complete portfolio of embedded computer products to customers in the government, commercial and communications end markets. Each segment has management who report directly to the Company's Chief Executive Officer and its own sales and distribution channels. The Americas Group consists of the Company's operations based in the United States and Canada including the engineering, test, and

SBS Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
September 30, 2004
(Unaudited)

SBS measures 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 prior to (a) the allocation of corporate overhead expenses other than marketing costs, (b) substantially all amortization associated with acquisitions and (c) interest income and interest expense from our U.S. operations. The accounting policies used to measure segment profit (loss) are the same as those referred to in note 1. Reportable segments for all periods presented have been reclassified to conform to the current segment reporting structure.

SBS Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
September 30, 2004
(Unaudited)

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

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.

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 months ended September 30, 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, 2004.

We design and build open-architecture embedded computer products that enable OEMs to serve the government, commercial, and communications end markets. Embedded computer products are put inside or made part of larger systems to process information, control machines, move computer data between machines, and interact with people. The companies that use our products manufacture very sophisticated, expensive devices, for example, MRI machines, flight simulators, wireless networks, fighter jets and industrial robots.

The SBS product line is strategically focused on embedded computing, and we serve almost all parts of the market. We currently list more than 500 products in the product section of our website, www.sbs.com. We offer components like I/O modules, bus adapters, carrier cards, system enclosures, FPGA boards and single board computers, as well as network switches, blades and fully integrated systems. Many of these products are available in ruggedized versions, which can operate in conditions of extreme temperature, vibration, shock and humidity.

We serve a broad range of customers. We help our customers get to market faster, more reliably and more economically, by providing a wide range of standard and customized embedded computer products. Our products have application in diverse industries, including space and aviation, telecommunications, military and government, transportation, telemetry, robotics, networking, broadcasting, wireless communications and medical imaging.

We have grown because we understand our role in the embedded computing process: we make components which are part of larger, more complicated devices. As embedded computer applications expand, we broaden our product line to meet our

customers' needs and to attract new customers. We invest in technology and customer service so that we can grow with our customers.

We have grown organically and through strategic acquisitions, acquiring companies that supplement our core competencies - a pattern we expect to continue. Our organic growth is driven by adding new products, improving existing products through our research and development program, and attracting new customers with our products and service. We also completed eleven acquisitions between 1992 and June 2004 that broadened our product offerings and our customer base.

During the quarter ended September 30, 2004, we noted:

• Sales for the quarter were $34.9 million;

• Net income was $1.2 million and net income per share - assuming dilution for the quarter was $0.08, compared with a net loss per share - assuming dilution of ($0.08) for the comparable period of the prior year.

• Customer orders received and booked during the quarter were $39.6 million, which represented our highest bookings quarter since March 2001. Thus, our book- to-bill ratio for the quarter was 1.13 to 1.

• Order backlog was $46.9 million as of September 30, 2004, compared to $38.9 million as of September 30, 2003 and $42.1 million for the preceding quarter ended June 30, 2004;

• We achieved seven design wins during the quarter.

• For the quarter ended September 30, 2004, as a percentage of sales, sales to one communications customer, Ericsson, represented 13%; sales to one commercial customer, Applied Materials, represented 11%; and sales to another European- based communications customer represented 5%.

Selected financial highlights during the three months ended September 30, 2004 compared to the same quarter of the prior fiscal year and the quarter ended June 30, 2004 follows:

See detailed analysis of the financial results below.

Results of Operations

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

Our total sales during the three months ended September 30, 2004 compared to the three months ended September 30, 2003 and the quarter ended June 30, 2004 follows:

For the first quarter of fiscal 2005, sales increased $8.3 million as unit shipments increased for all product lines with the exception of our WAN input/output products, which declined when compared to sales levels during the same period of fiscal 2004. Included in the increase in sales is approximately $541,000 that is the result of the impact of a weakening U.S. dollar on the translation of our Europe Group financial statements. Sales for the first quarter of the prior fiscal year ended September 30, 2003 excluded approximately $2.0 million of sales that were delayed at the end of the quarter due to production issues associated with certain advanced technology systems. On a sequential basis, sales decreased $3.3 million compared with sales for the preceding quarter ended June 30, 2004 due in part to weakness in quick-turn orders from our U.S.-based government and communications customers, component part shortages, and production issues.

Sales by end market for the first quarter of fiscal 2005 compare to the comparable period of fiscal 2004 and the prior fiscal quarter ended June 30, 2004 as indicated below:

For the three months ended September 30, 2004, sales to government customers increased 16.8%, sales to commercial customers increased 17.2% and sales to communications customers increased 95.8%, all compared with the comparable period of the prior fiscal year. On a sequential basis, sales to government customers decreased 19.8%, sales to commercial customers decreased 4.5% and sales to communications customers increased 11.3%, all compared with the preceding quarter ended June 30, 2004.

Looking forward, based on our forecasts, current backlog, and timing of new orders, we expect sales for the second quarter ending December 31, 2004 to be between $37 million and $38 million, a 14% to 17% increase compared to the second quarter of fiscal 2004; however, actual results may vary. We continue to anticipate growth in sales throughout the remainder of fiscal year 2005, resulting in total year sales of between $150 million and $160 million, all from organic growth; however, actual results may vary.

Gross Profit

Gross profit during the three months ended September 30, 2004 compared to the comparable period of fiscal 2004 and the preceding quarter ended June 30, 2004 follows:

For the quarter ended September 30, 2004, gross profit as a percent of sales was negatively impacted by lower than expected sales to our U.S.-based government customers, resulting in a higher sales mix of lower margin production orders when compared to the same quarter of the fiscal 2004 and the preceding quarter. Although gross profit as a percent of sales for the current quarter is below the range of 46% to 50% stated in our financial model of July 2003 (available in the investor relations section of our website), we currently believe that for the total fiscal year ending June 30, 2005 we will operate within that range. For the quarter ending December 31, 2004, we anticipate gross profit as a percentage of sales to be within the range stated in our financial model of July 2003; however, actual results may vary.

Selling, General and Administrative Expense

Selling, general and administrative (SG&A) expense during the three months ended September 30, 2004 as compared to the three months ended September 30, 2003 and the preceding quarter follows:

For the three months ended September 30, 2004, the decrease in SG&A expense compared to the preceding quarter is due primarily to the timing of certain discretionary expenses and cost control. As a percent of sales, SG&A expense for the first quarter of fiscal 2005 was in line with our financial model at 23.0%.

Research and Development Expense

Research and development (R&D) expense during the three months ended September 30, 2004 as compared to the three months ended September 30, 2003 and the preceding quarter follows:

Increasing our intellectual property is a key element of our growth strategy. During the current quarter, we introduced 11 new products as we continue to implement this segment of our strategy. For the three months ended September 30, 2004, research and development (R&D) expense increased over the comparable period of fiscal 2004 but was consistent with the preceding quarter. R&D expense as a percentage of sales during the current quarter was 15.8%, which is higher than the 13-15% stated in our financial model, however, we believe that for fiscal 2005, R&D expense will operate within that range.

Employee Severance and Consolidation Costs

We recorded no employee severance and consolidation costs during the quarter ended September 30, 2004.

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 $2.0 million during the three-month period ended September 30, 2003, which included the following:

• Employee severance and related costs of $429,000 (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 September 30, 2004.


• Other consolidation costs of $275,000 (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 September 30, 2004.





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• Lease termination costs of $1,350,000 (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.

Amortization of Intangible Assets

For the first quarter of fiscal 2005 ended September 30, 2004, amortization of intangible assets was $438,000, compared to $548,000 for the comparable period of fiscal 2004. Amortization expense decreased in fiscal 2005 from fiscal 2004 levels as a result of the completion of the amortization of certain purchased identifiable intangible assets recorded in connection with an asset acquisition in March 2002.

Interest and Other Income, Net

Net interest and other income in fiscal 2005 of $141,000 represented an increase from fiscal 2004 levels, excluding interest income in connection with income tax refunds of payments made in prior periods of approximately $250,000 received in September 2003, due primarily to increased cash balances.

Foreign Exchange Losses

For the three months ended September 30, 2004 and 2003, foreign exchange losses of $102,000 and $75,000, respectively, represent primarily realized and unrealized losses on inter-company transactions denominated in non-functional currencies due to changes in currency exchange rates as a result of the weakening of the U.S. dollar.

Income Tax Expense (Benefit)

We record income tax expense (benefit) based on our estimated worldwide effective tax rates for the respective fiscal years. For fiscal 2005 and 2004, our estimated worldwide effective tax rate was approximately 35.0%. Our estimated worldwide effective income tax rate incorporates a projected mix of pre-tax income from domestic and foreign sources, together with benefits from certain income tax planning strategies including benefits from foreign sales and research and experimentation tax credits.

Our estimated annual effective tax rate for fiscal 2005 does not include any impact of the recently enacted Americans Jobs Creation Act of 2004 (the Act), which was signed into law by the U.S. President in October 2004. We are currently evaluating the impact of several provisions of the Act on our annual worldwide effective tax rate.

We generally do not record deferred income taxes on the undistributed earnings of our foreign subsidiaries in accordance with the indefinite reversal criterion in APB Opinion No. 23, "Accounting for Income Taxes - Special Areas", because we currently do not expect those unremitted earnings to reverse and become taxable in the foreseeable future. Upon distribution of these earnings, which amounted to approximately $26.4 million at June 30, 2004, we may be subject to U.S. income taxes and foreign withholding taxes. It is not practical, however, to estimate the amount of taxes that may be payable on the eventual remittance of these earnings.

Earnings Per Share

For the first quarter of fiscal 2005 ended September 30, 2004, net income per common share and net income per common share - assuming dilution were $0.08. This compares to net loss per common share and net loss per common share - assuming dilution of ($0.08) for the comparable period of fiscal 2004 ended September 30, 2003. The net loss incurred in fiscal 2004 includes employee severance and consolidation costs of approximately $2.0 million, which negatively impacted earnings per common share - assuming dilution by approximately $(0.09) on an after tax basis. 

We are engaged in the design, research, development, integration and production of embedded computer products. We operate worldwide through two operating segments: the Americas Group and the Europe Group. Both the Americas Group and the Europe Group offer our complete portfolio of embedded computer products to customers in the government, commercial and communications end markets. Each segment has management who report directly to the Company's Chief Executive Officer and its own sales and distribution channels. The Americas Group consists of the Company's 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; the manufacturing operations located in St. Paul, Minnesota; and the sales and support activities based in Shenzhen, China. The Europe Group consists of the Company's 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 before:

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

Sales to External Customers. For the three months ended September 30, 2004, sales to external customers increased approximately $3.1 million, or 15.5%, 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 our WAN I/O product line, which declined from fiscal 2004 levels. On a sequential basis, sales to external customers decreased approximately 13.7% compared to the prior quarter, due to weakness in quick-turn orders from our U.S.-based government and communications customers, component part shortages, and production issues.

Segment Profit (Loss). Segment profit increased $2.6 million during the three months ended September 30, 2004 as compared to the comparable period of the prior fiscal year. Segment profit in fiscal 2005 was negatively impacted by a higher mix of sales of lower margin production orders, partially offset by the increase in sales to external customers. Segment loss in fiscal 2004 was negatively impacted as a result of approximately $2.0 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. For these reasons, segment profit as a percentage of sales to external customers was 10.7% for the three months of fiscal 2005, compared with 9.5%, excluding the impact of the employee severance and consolidation costs, for the same period of fiscal 2004.  

Europe Group

Sales to External Customers. Unit shipments of the Group's products increased resulting in increased sales to external customers. For the three months ended September 30, 2004, sales to external customers increased $5.2 million compared to the comparable period of the prior fiscal year, of which approximately $541,000 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 $0.4 million, compared with the prior quarter. As a percent of total company sales, sales to one communications customer, Ericsson, represented 13% or $4.5 million during the first quarter of fiscal 2005 ended September 30, 2004, compared with $1.1 million in the same period of fiscal 2004.

Segment Profit. For the three month period ended September 30, 2004, segment profit increased $1.1 million compared to the comparable period of the prior fiscal year, due primarily to the increase in sales, offset by reduced gross profit as a result of a higher mix of lower margin production orders and an increase in SG&A and R&D expenses commensurate with the growth in the business. For these reasons, segment profit as a percentage of sales remained consistent at 20.8% for the three month periods of fiscal 2005 and fiscal 2004.

Our objective is to maintain adequate financial resources and liquidity to finance the operations of the Company. We use a combination of proceeds from the sale or issuance of equity securities and internally generated funds to finance our working capital requirements, capital expenditures, acquisitions, and operations.

Our cash balance of $48.6 million at September 30, 2004 represents an increase of $683,000 during the three months ended September 30, 2004. Net cash flows from operating activities and proceeds from the exercise of employee stock options were the principal sources of funding, and cash was used for a mix of activities including working capital needs and capital expenditures. We anticipate that this trend will continue during the remainder of the fiscal year ending June 30, 2005; however, future cash inflows as a result of employee stock option exercises are difficult to predict with certainty.

Changes to our cash balance during the three months ended September 30, 2004, and 2003 follows:

Cash flows from operating activities were principally the result of the receipt of income tax refunds of payments made in prior periods during the quarter, changes in working capital and the impact of non-cash and non-operating activities including depreciation and amortization of $1.4 million.

The underlying drivers of the changes in working capital during the first quarter of fiscal 2005 were as follows:

• The increase in accounts receivable used operating cash of $997,000, before foreign currency translation adjustments of $230,000, due in part to the increase in shipments at the end of the quarter.
• The increase in inventory used operating cash of $627,000, before foreign currency translation adjustments of $229,000. Our customers continue to require shorter lead times for our products, resulting in a need to maintain higher levels of inventory. Inventory levels increased slightly from June 2004 levels due principally to weakness in quick-turn orders from our U.S.-based government and communications customers.
• We received U.S. income tax refunds of $3.1 million during the quarter from the carryback of tax losses to prior tax years.
• Our total liabilities, excluding income taxes payable, decreased by $3.0 million during the quarter, net of foreign currency translation adjustments, due to the timing of payments, and we continue debt free as of September 30, 2004.

Investing Activities

Our principal recurring investing activity is the funding of capital expenditures necessary to support the growth of our business and to enhance the productivity of our operations. During the first quarter of fiscal 2005, we used $618,000 for the purchase of property and equipment.

We received proceeds of $92,000 from the issuance of common stock associated with the exercise of employee stock options during the quarter.

Changes in foreign currency exchange rates impacted beginning cash balances during the quarter by approximately $157,000. Due to the Company's international operations, where transactions are recorded in functional currencies other than the U.S. dollar, the effects of changes in foreign currency exchange rates on existing cash balances during any given period results in amounts on the consolidated statements of cash flows that may not reflect the changes in the corresponding accounts on the consolidated balance sheets.

We believe that our internally generated cash flows will provide us with sufficient capital resources and liquidity to manage our operations, meet our contractual obligations, and fund capital expenditures, excluding acquisitions, for at least the next twelve months. Because long-term cash flow cannot be predicted with certainty, it is possible that SBS could require external financing in the future and that such financing may not be available on terms acceptable to SBS or at all.

As of the date of this report, SBS does not have any material capital expenditure commitments.

SBS is committed under non-cancelable operating leases for buildings and equipment that expire at various dates through fiscal 2015. There has been no material change in our contractual obligations during the quarter ended September 30, 2004.

As of September 30, 2004, we have no transactions that would be considered off-balance sheet arrangements in accordance with the definition under SEC rules.

For the three month periods ended September 30, 2004 and 2003, there was no significant impact from inflation.

Business Outlook

The financial results for the quarter ended September 30, 2004 were below our original expectations.  Although these results were disappointing, we continue to execute our strategy and remain optimistic about the future. We believe that we are well positioned to meet our longer range financial goals. Our design win opportunities are continuing to grow, and the new products that we introduced last year are generating significant quoting activity. Geographically, we are still seeing strong sales in Europe, and our new Asian office is generating increased quoting activity and new orders.

Looking forward, based on our forecasts, current backlog, and timing of new orders, we expect sales for the second quarter ending December 31, 2004 to be between $37 million and $38 million, a 14% to 17% increase compared to the second quarter of fiscal 2004; however, actual results may vary. We continue to anticipate growth in sales throughout the remainder of fiscal year 2005 resulting in total year sales of between $150 million and $160 million, all from organic growth; however, actual results may vary.

The assumptions on which we've based our sales projections for fiscal 2005 include continued health of our end markets, the expectation of several government system design wins to start production, and sales to Applied Materials and Ericsson to continue at the same dollar sales level as in fiscal year 2004. Based on the sales performance of these two customers in the first quarter and their forecasts, strong overall bookings, and growing opportunities for design wins, we believe these assumptions remain valid for the remainder of fiscal year 2005. We are confident that our new product introductions, business development efforts and continued focus on our customers will expand our opportunities in each market contributing to our performance.

Our principal 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. At present we do not utilize any derivative instruments to manage this risk.

Currency translation.  The results of operations of our foreign subsidiaries are translated into U.S. dollars at the average exchange rates for each period concerned. The balance sheets of foreign subsidiaries are translated into U.S. dollars at the closing exchange rates. Any adjustments resulting from the translation are recorded as translation adjustments in other comprehensive income. Foreign currency exchange rate exposure is most significant with respect to the euro. For the three months ended September 30, 2004, net sales were positively impacted by the appreciation of foreign currencies, primarily the euro, versus the U.S. dollar by approximately $541,000.

Currency transaction exposure.  Currency transaction exposure arises where a business or company makes actual sales and purchases in a currency other than its own functional currency. We generally source raw materials and sell our products within our local markets in their functional currencies and therefore have limited currency transaction exposure.

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 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.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (the Act), beginning with our Annual Report on Form 10-K for the fiscal year ending June 30, 2005, we will be required to furnish a report by our management on our internal control over financial reporting. This report will contain, among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year, including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management. If we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert our internal control over financial reporting is effective. This report will also contain a statement that our independent registered public accountants have issued an attestation report on management's assessment of such internal controls and a conclusion on the operating effectiveness of such controls.

Management acknowledges its responsibility for internal controls over financial reporting and seeks to continually improve those controls. In order to achieve compliance with Section 404 of the Act within the prescribed period, we are currently performing the system and process documentation and evaluation needed to comply with Section 404, which is both costly and challenging. We believe our process, which began in fiscal 2004 and is continuing in fiscal 2005 for documenting, evaluating and monitoring our internal control over financial reporting is consistent with the objectives of Section 404 of the Act.

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 first fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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: November 9, 2004