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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Commission File Number 1-10981

SBS TECHNOLOGIES, INC.

2400 Louisiana Blvd. NE
AFC Building 5, Suite 600
Albuquerque, New Mexico 87110
(505) 875-0600

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 and (2) has been subject to such filing requirements for the past 90 days.

As of November 1, 2002, the Registrant had 14,592,829 shares of its common stock outstanding.

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SBS Technologies, Inc. and Subsidiaries
Form 10-Q for the Quarter Ended September 30, 2002
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SBS Technologies, Inc. and Subsidiaries
Consolidated Balance Sheets
Thousands (except share amounts)
(Unaudited)

See accompanying notes to condensed consolidated financial statements
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SBS Technologies, Inc. and Subsidiaries
Consolidated Statements of Operations
Thousands (except per share amounts)
(Unaudited)

See accompanying notes to condensed consolidated financial statements
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SBS Technologies, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders’ Equity
Thousands (except share amounts)
(Unaudited)

See accompanying notes to condensed consolidated financial statements
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SBS Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Thousands
(Unaudited)

See accompanying notes to condensed consolidated financial statements
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SBS Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2002
(Unaudited)

	1)		Summary of Significant Accounting Policies
			The accounting policies as set forth in SBS Technologies, Inc.’s (“SBS”) Annual Report on Form 10-K for the year ended June 30, 2002 have been adhered to in preparing the accompanying interim condensed consolidated financial statements except as amended for the following discussion on accounting for goodwill. 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 adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142) on July 1, 2002. SFAS 142 eliminates the amortization of goodwill and other intangible assets that have indefinite useful lives. Amortization will continue to be recorded for intangible assets with definite useful lives. SFAS 142 also requires at least an annual impairment review of goodwill and other intangible assets. Any asset deemed to be impaired is to be written down to its fair value. The Company has not completed its review of goodwill for impairment in accordance with SFAS 142; however, the review will be completed by December 31, 2002.
	2)		Receivables, net
			Receivables, net consist of the following:

	3)		Inventories
			Inventories consist of the following:

For the three-month period ended September 30, 2002, approximately $375,000 of inventory previously written down to zero had been sold.

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SBS Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2002
(Unaudited) (Continued)

	4)		Goodwill and Intangible Assets
			Effective July 1, 2002, SBS adopted Statement of Financial Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets,” and no longer amortizes goodwill. As of the date of adoption, SBS had unamortized goodwill of approximately $20.5 million, subject to the transition provisions of SFAS 142. There was no goodwill amortization expense for the three-month period ended September 30, 2002, whereas goodwill amortization amounted to $1.2 million for the three-month period ended September 30, 2001.
			The following table presents the impact of the adoption of SFAS 142 on the Company’s reported net income (loss) and net income (loss) per applicable common share had SFAS 142 been in effect in fiscal 2001:

(continued)

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SBS Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2002
(Unaudited) (Continued)

The following table discloses information regarding the carrying amounts and associated accumulated amortization for intangible assets subject to amortization after the adoption of SFAS 142.

Amortized Intangible Assets

			There were no unamortized intangible assets outstanding as of the period ending September 30, 2002 and there was one license agreement unamortized at June 30, 2002 for $136,000 which was written off during the quarter ended September 30, 2002.
			The following table summarizes the amortization expense attributable to intangible assets for the three month periods ended September 30, 2002 and 2001, as well as estimated amortization expense for the fiscal years ending in June 2003 through 2007.

(a)

Totals for the three months ended September 30, 2001 includes $1.2 million of goodwill and workforce amortization.

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SBS Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2002
(Unaudited) (Continued)

Changes in the carrying amount of goodwill for the three-month period ended September 30, 2002 are as follows:

	5)		Earnings Per Share
			Net income (loss) per common share is based on weighted average shares outstanding. Net income (loss) per common share — assuming dilution includes the dilutive effects of potential common shares outstanding during the period. A reconciliation of the numerator and denominator of the per share and per share — assuming dilution calculations follow:

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SBS Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2002
(Unaudited) (Continued)

			Due to the reported net loss for the three months ended September 30, 2002, 22,710 potential common shares were not included in the computation of net loss per common share — assuming dilution because the effect would be anti-dilutive. For the three months ended September 30, 2002 and 2001, options to purchase 3,376,444 and 1,817,082 shares of common stock, respectively, were outstanding but were not included in the computation of net income (loss) per common share — assuming dilution because the options’ exercise prices were greater than the average market price of the common shares.
	6)		Comprehensive Income (Loss)
			Comprehensive income (loss) for the three months ended September 30, 2002 and 2001 was ($391,000) and $1.8 million, respectively. The difference between comprehensive income (loss) and net income (loss) was related to foreign currency translation adjustments.
	7)		Segment Financial Data
			SBS operates worldwide through two operating segments: the Communications and Enterprise Group and the Commercial and Government Group. The Communications and Enterprise Group consists of SBS Technologies, Inc., Communications and Enterprise Group (formerly SBS Technologies, Inc., Communications Products which merged in September 2002 with SDL Communications, Inc. and SBS Technologies, Inc., Industrial Computers). The Commercial and Government Group consists of SBS Technologies, Inc., Commercial Group, SBS Technologies, Inc. Government Group (formerly SBS Technologies, Inc., Embedded Computers and SBS’ avionics and telemetry division whose assets were conveyed to SBS Technologies, Inc., Government Group from SBS Technologies, Inc. in July 2002), SBS Technologies GmbH & Co. KG and ortec Electronic Assembly GmbH. These segments are based on the markets that are served and the products that are provided to those markets. Each segment has its own sales and distribution channels and has a manager who reports directly to the President and Chief Operating Officer. Reportable segments for all periods presented have been reclassified to conform to the current segment reporting structure.
			SBS measures its segments’ results of operations based on income (loss) before income taxes and prior to allocation of corporate overhead expenses other than marketing costs, the majority of amortization associated with acquisitions and substantially all interest income and expense. The accounting policies used to measure segment results of operations are the same as those referred to in Note 1.

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SBS Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2002
(Unaudited) (Continued)

	8)		Severance and Other Employee Termination Charges
			For the quarter ended September 30, 2002, SBS recorded severance and other employee termination charges of $335,000. Due to the continued depressed economic and market conditions facing its Communications and Enterprise Group, on July 22, 2002, SBS notified 19 full and part-time employees at its Madison, Wisconsin engineering design center that their jobs had been eliminated. Additionally, for the same reason, on September 30, 2002, SBS notified 22 employees of the Communications and Enterprise Group that their jobs were being eliminated. Also, during the quarter ended September 30, 2002, severance costs were incurred for 2 other employees who were notified that their jobs had been eliminated. As of September 30, 2002, of the $335,000 of severance and other employee termination costs, cash payments of $89,000 were made, and the remaining $246,000 will be paid through the quarter ending March 31, 2003.
			During the year ended June 30, 2002, based on unfavorable economic and market conditions, facility consolidation actions, and the decision to exit the legacy PCI Chassis product line, SBS reduced its employee base, resulting in elimination of 159 positions in manufacturing, research and development, administration, and sales and marketing. As a result, for the year ended June 30, 2002, employee severance and other termination charges of approximately $1,253,000 were recorded. As of September 30, 2002, cash payments of $1,116,000 had been made, $21,000 of the original charge was reversed as a result of the decision not to terminate certain originally notified employees, and the remaining $116,000 will be paid through the quarter ending December 31, 2002.

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SBS Technologies, Inc. and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 2002

The following discussion and analysis should be read in conjunction with SBS’ Financial Statements and Notes thereto. Information discussed herein, other than statements of historical fact, that addresses 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 forward-looking statements include expected sales and gross margin for the quarter ending December 31, 2002, expectations of internally-generated cash flows, expectations of SBS’ breakeven sales level, and expectations for government spending. These 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 based on preliminary information, and other items. The forward-looking statements included in this Form 10-Q are also subject to a number of risks, uncertainties, and other factors which could cause the actual results to differ materially from those contained in the forward-looking statements. These include but are not limited to economic, competitive, supply and demand, governmental, and technological factors affecting SBS’ operations, markets, products, services, and prices, a high degree of uncertainty and rapid change in the markets addressed by SBS’ products, customer demand for SBS’ products, and other risk factors listed in the Company’s Form 10-K for the year ended June 30, 2002. These forward-looking statements are not guarantees of future performance, and actual results, developments, and business decisions may differ materially from those expressed or implied by these forward-looking statements.

Overview

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

Sales for the three-month period ended September 30, 2002, were $27.8 million, a 12.5% decrease from the $31.8 million in sales for the three-month period ended September 30, 2001. Net loss for the three-month period ended September 30, 2002 was $(183,000), or net loss per common share — assuming dilution of $(0.01). This compares to net income for the three-month period ended September 30, 2001 of $648,000, or net income per common share — assuming dilution of $0.04. SBS’ continues to experience depressed market and economic conditions in its communications and commercial markets and management does not expect significant improvement in sales into these markets in fiscal 2003. Management expects some growth in sales to government customers in fiscal 2003 due to an expected increase in Department of Defense development and field deployment expenditures.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used when accounting for items such as inventory, allowances for doubtful accounts, depreciation and amortization periods, income taxes, and intangible assets. These estimates and assumptions are evaluated on an on-going basis and may require adjustment. Actual results could differ from the estimates under different assumptions or conditions. The policies discussed below are considered by management to be critical to an understanding of SBS’ consolidated financial statements because their application places the most significant demands on management’s judgment, with financial reporting results relying on estimation about the effect of matters that are inherently uncertain. SBS did not make any changes to these policies during the quarter ended September 30, 2002. For additional accounting policies, see Note 1 to the condensed consolidated financial statements, “Summary of Significant Accounting Policies.”

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SBS Technologies, Inc. and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 2002
(continued)

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

Results of Operations

Three Months Ended September 30, 2002 Compared To Three Months Ended September 30, 2001

Sales. For the three-month period ended September 30, 2002, sales decreased 12.5%, or $4.0 million, from $31.8 million for the three-month period ended September 30, 2001, to $27.8 million. Unit shipments decreased within the Communications and Enterprise Group, primarily due to the continued depressed market and economic conditions affecting this Group, customer delays of existing backlog, and order cancellations. Unit shipments of the Commercial and Government Group declined across all product lines due to the current depressed market and economic conditions, partially offset by sales related to the products acquired from the Essential Communications asset acquisition completed on March 4, 2002. Management does not expect significant improvement in the communications and commercial markets in fiscal 2003. Management expects some growth in sales to government customers in fiscal 2003 due to an expected increase in Department of Defense development and field deployment expenditures. SBS expects the consolidated sales for the quarter ending December 31, 2002 will be consistent with the quarter ended September 30, 2002 however, actual results may vary materially.

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SBS Technologies, Inc. and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 2002
(continued)

Gross Profit. For the three-month period ended September 30, 2002, gross profit decreased 15.5%, or $2.5 million, from $15.9 million for the three-month period ended September 30, 2001, to $13.5 million, primarily due to the decline in sales. Gross profit as a percentage of sales decreased to 48.3% from the 50.1% in the three-month period ended September 30, 2001. This decrease was primarily due to a change in the sales mix within the Communications and Enterprise Group to lower margin products. During the three-month period ended September 30, 2002, SBS utilized approximately $375,000 of inventory that had been written down to zero cost during fiscal 2002, favorably impacting gross margin as a percentage of sales by 1.3%. Based on management’s expectations of sales for the quarter ending December 31, 2002, management expects gross profit as a percentage of sales to be similar to that of the first quarter of fiscal 2003.

Selling, General and Administrative Expense. For the three-month period ended September 30, 2002, selling, general and administrative (SG&A) expense decreased 7.6%, or $680,000 from $8.9 million for the three-month period ended September 30, 2001, to $8.2 million. This decrease was primarily due to the cost reductions implemented throughout the quarter ended June 30, 2002 and the quarter ended September 30, 2002. For the three-month period ended September 30, 2002, SG&A expense as a percentage of sales increased from 28.0% for the quarter ended September 30, 2001, to 29.6% as the reduction in SG&A expense wasn’t sufficient to offset the reduction in sales.

Research and Development Expense. For the three-month period ended September 30, 2002, research and development (R&D) expense increased 10.3%, or $440,000, from $4.3 million for the three-month period ended September 30, 2001, to $4.7 million. This increase was primarily due to the addition of research and development employees added as a result of the acquisition of the assets of Essential Communications completed on March 4, 2002. For the three-month period ended September 30, 2002, R&D expense as a percentage of sales increased to 16.9% from 13.4% in the three-month period ended September 30, 2001, due to the decrease in sales volume and the costs associated with the additional employees discussed above.

Severance and Other Employee Termination Costs. For the quarter ended September 30, 2002, SBS recorded severance and other employee termination charges of $335,000. Due to the continued depressed economic and market conditions facing its Communications and Enterprise Group, on July 22, 2002, SBS notified 19 full and part-time employees at its Madison, Wisconsin engineering design center that their jobs had been eliminated. Additionally, for the same reason, on September 30, 2002, SBS notified 22 employees of the Communications and Enterprise Group that their jobs were being eliminated. Also, during the quarter ended September 30, 2002, severance costs were incurred for 2 other employees who were notified that their jobs had been eliminated. As of September 30, 2002, of the $335,000 of severance and other employee termination costs, cash payments of $89,000 made been made. The remaining $246,000 will be paid through the quarter ending March 31, 2003.

Amortization of Intangible Assets. For the three-month period ended September 30, 2002, amortization of intangible assets was $584,000, compared to $1.9 million for the three-month period ended September 30, 2001. Effective July 1, 2002, SBS adopted Statement of Financial Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets,” and no longer amortizes goodwill. As of the date of adoption, SBS had unamortized goodwill of approximately $20.5 million, subject to the transition provisions of SFAS 142. There was no goodwill amortization expense for the three-month period ended September 30, 2002, whereas goodwill amortization amounted to approximately $1.2 million for the three-month period ended September 30, 2001. Additionally, a write-down of $136,000 was 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-month period ended September 30, 2002, net interest and other income of $125,000 consisted primarily of interest income associated with surplus cash. For the three-month period ended September 30, 2001, net interest and other income of $436,000 consisted primarily of a recovery from insurance of $307,000 and interest income associated with surplus cash.

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SBS Technologies, Inc. and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 2002
(continued)

Income Tax Expense (Benefit). For the three-month periods ended September 30, 2002 and 2001, income tax expense (benefit) represented effective rates of (41.2)% and 41.3%, respectively. A tax benefit related to the net loss for the quarter ended September 30, 2002 was recorded primarily due to SBS’ ability to realize the benefit through tax loss carry-backs to prior periods.

Earnings Per Share. For the three-month period ended September 30, 2002, net loss per common share and net loss per common share — assuming dilution was $(0.01) compared to net income per share and net income per common share — assuming dilution of $0.04 for the three-month period ended September 30, 2001.

Review of Business Segments

SBS operates internationally through two operating segments: the Communications and Enterprise Group and the Commercial and Government Group. The Communications and Enterprise Group consists of SBS Technologies, Inc., Communications and Enterprise Group (formerly SBS Technologies, Inc., Communications Products which merged in September 2002 with SDL Communications, Inc. and SBS Technologies, Inc., Industrial Computers). The Commercial and Government Group consists of SBS Technologies, Inc., Commercial Group, SBS Technologies, Inc. Government Group (formerly SBS Technologies, Inc., Embedded Computers and SBS’ avionics and telemetry division whose assets were conveyed to SBS Technologies, Inc., Government Group from SBS Technologies, Inc. in July 2002), SBS Technologies GmbH & Co. KG and ortec Electronic Assembly GmbH. 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 following is a discussion of sales to external customers and segment profit (loss) for each reportable segment. In the measure of segment profit or loss (“Segment Profit (Loss)”), SBS does not allocate the following to these segments:

	•		A majority of the amortization expense associated with acquisitions,
	•		substantially all interest income earned on cash balances, and
	•		corporate overhead costs, excluding corporate marketing costs.

Communications and Enterprise Group

For the three-month period ended September 30, 2002, Communications and Enterprise Group sales to external customers decreased 33.7%, or $3.5 million, from $10.4 million for the three-month period ended September 30, 2001, to $6.9 million. This decrease was primarily due to the continued depressed market and economic conditions affecting this Group. This Group continues to experience customer delays of existing backlog and cancellations of backlog orders by the Group’s telecommunications infrastructure customers. SBS expects that the Group’s sales in the quarter ending December 31, 2002 will be lower than sales in the quarter ended September 30, 2002, primarily due to continued depressed market conditions although, actual results may vary materially.

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SBS Technologies, Inc. and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 2002
(continued)

For the three-month period ended September 30, 2002, Communications and Enterprise Group Segment (Loss) was $(1.7) million, compared to Segment Profit of $834,000 for the three-month period ended September 30, 2001. This decrease was primarily due to the decrease in sales and a change in product mix to lower margin products, severance expense relating to employee reductions implemented during the quarter, and the write-down of a prepaid license agreement for a product that SBS determined during the quarter, would not be brought to market. This was partially offset by a reduction of SG&A expense and R&D expense resulting from cost reductions implemented over the past several quarters. For the same reasons, Segment Profit (Loss) as a percentage of sales decreased from 8.0% for the three-month period ended September 30, 2001 to (24.3%) for the three-month period ended September 30, 2002.

Commercial and Government Group

For the three-month period ended September 30, 2002, Commercial and Government Group sales to external customers decreased 2.1%, or $500,000 from $21.4 million for the three-month period ended September 30, 2001 to $20.9 million. Sales declined across all product lines due to the current depressed market and economic conditions, partially offset by approximately $795,000 in sales related to the products acquired from the Essential Communications asset acquisition completed on March 4, 2002. SBS expects that the Group’s sales in the quarter ending December 31, 2002 will be slightly higher than sales in the quarter ended September 30, 2002, primarily due to an expected increase in sales to government customers however, actual results may vary materially.

For the three-month period ended September 30, 2002, Commercial and Government Group Segment Profit was $4.5 million, compared to Segment Profit of $5.0 million for the three-month period ended September 30, 2001. This decrease was primarily due to the decrease in sales and the additional R&D expense resulting from the Essential Communications asset acquisition, partially offset by a reduction in SG&A expense due to cost reductions implemented during fiscal year 2002. For the same reasons, Segment Profit as a percentage of sales declined from 23.2% for the three-month period ended September 30, 2001 to 21.5% for the three-month period ended September 30, 2002.

Liquidity and Financial Condition

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

Cash totaled $24.8 million at September 30, 2002, unchanged from June 30, 2002. Net cash provided by operating activities was $851,000 and proceeds from the exercise of stock options totaled $13,000. The receipt of this cash was offset by $200,000 for the prepayment of a license agreement, $343,000 for the purchase of capital equipment, and $321,000 paid to repurchase shares of SBS common stock pursuant to a repurchase plan initially adopted for a one year period by the Board of Directors on September 14, 2001 and extended until September 2003. During the three-month period ended September 30, 2002, accounts receivable declined $942,000 due to a decline in sales and an improvement in collection days, and inventory declined $600,000 due to SBS’ continued improvement in the management of its inventories. Liabilities were in line with the current level of business.

At June 30, 2002, SBS was out of compliance with the cash flow coverage ratio covenant of its amended $30.0 million Credit Agreement (“Agreement”) with Bank of America, N.A., primarily due to the inventory write-down and charges for impairment of identifiable intangibles and goodwill recorded in the fourth quarter of fiscal 2002. At no time during the three-month period ended September 30, 2002 were any borrowings drawn on the Agreement. On September 20, 2002, SBS canceled the Agreement. Management does not believe, as of the date of this report and based upon management’s assessment of future cash needs and sources of cash, that SBS’ liquidity needs require SBS to have a credit facility in place at this time.

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SBS Technologies, Inc. and Subsidiaries
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
September 30, 2002
(continued)

Management believes that SBS’ internally generated funds will be sufficient to finance its current operations and capital expenditures, excluding acquisitions, for at least the next twelve months. Because long-term cash flow cannot be predicted with certainty, it is possible in the future that SBS could 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 facilities, if required, may result in additional dilution to the shareholders. SBS cannot be certain that additional financing will be available, in amounts, or on terms, acceptable to SBS or at all.

As of the date of this report, SBS does not have any material capital expenditure commitments. As of September 30, 2002, SBS had $362,000 in remaining severance payments to employees, due at various dates through the quarter ending March 31, 2003 (see “Severance and Other Employee Termination Charges”). SBS is also committed under noncancelable operating leases that expire at various dates through fiscal 2006, as described in Management’s Discussion and Analysis in SBS’ Annual Report on Form 10-K for the fiscal year ended June 30, 2002.

For the three-month period ended September 30, 2002, there was no significant impact from inflation.

New Accounting Standards

In June 2002, the FASB issued SFAS 146, “Accounting for Costs Associated with Exit of Disposal Activities,” which addresses financial accounting and reporting for costs associated with exit of disposal activities and nullifies EITF Issue No. 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The principal difference between SFAS 146 and EITF 94-3 is SFAS 146’s requirement for recognition of a liability for a cost associated with an exit or disposal activity. SFAS 146 requires that a liability be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost was recognized at the date of an entity’s commitment to an exit plan. SFAS 146 also establishes that fair value is the objective for initial measurement of the liability. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. SBS does not expect the adoption of SFAS 146 to have a material impact on its financial statements or results of operations.

Business Outlook

Consistent with SBS’ press release dated October 15, 2002, SBS management expects sales for the second quarter of fiscal 2003 to be similar to the first quarter. Management believes that, excluding any transitional impairment charges and costs associated with any future employee severance or asset write-offs caused by unfavorable customer circumstances, SBS is structured so that it is reasonable to expect the company to break-even at a quarterly sales rate of between $27.0 million and $27.5 million.

Quantitative and Qualitative Disclosures about Market Risk

SBS’ liquid investment is cash invested in either money market accounts or in overnight repurchase agreements. Due to the nature of these investments, SBS believes that the market risk related to these investments is minimal.

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

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