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SECURITIES AND EXCHANGE COMMISSION

Form 10-K

þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the year ended December 31, 2003

Commission file number 1-11471

Registrant’s telephone number, including area code:

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

Securities registered pursuant to Section 12(g) of the Act:

      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.

Yes þ          No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein.

Not Applicable þ

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

Yes o          No þ

      As of June 30, 2003 the aggregate market value of the voting stock held by non-affiliates of the Registrant was: $17,092,840.

      As of March 15, 2004 the number of shares outstanding of the Registrant’s class of common stock was: 8,373,224.

DOCUMENTS INCORPORATED BY REFERENCE

      Part III of this Form 10-K incorporates by reference information from the Registrant’s Proxy Statement for the 2004 Annual Meeting of Shareholders to be held on May 26, 2004.

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

      This Annual Report includes forward-looking statements within the meaning of Section 27A of the Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended, regarding, among other things, our plans, strategies and prospects, both business and financial. Although we believe that our plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, we cannot assure you that we will achieve or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties, and assumptions. Many of the forward-looking statements contained in this Annual Report may be identified by the use of forward-looking words such as “believe,” “expect,” “anticipate,” “should,” “planned,” “will,” “may,” and “estimated,” among others. Important factors that could cause actual results to differ materially from the forward-looking statements we make in this Annual Report are set forth in this Annual Report, including the section under the title Trends and Uncertainties, and in other reports or documents that we file from time to time with the United States Securities and Exchange Commission (the “SEC”), and include, but are not limited to:

	•	reduced technology product sales as major suppliers increasingly sell directly to end-users;
	•	decreased margins due to price competition;
	•	increase in outsourced services to foreign countries;
	•	ineffectiveness of our business development efforts and inability to obtain new client engagements;
	•	delays and costs associated with new client engagements;
	•	non renewal or termination of existing client engagements;
	•	continued transition of electronics manufacturing to Asia;
	•	the impact of adverse weather conditions on our Recreational Products business unit; and
	•	general business conditions and economic uncertainty

      All forward looking statements attributable to us or a person acting on our behalf are expressly qualified in their entirety by this cautionary statement. We are under no obligation to update any of the forward-looking statements after the date of this Annual Report to conform these statements to actual results or to changes in our expectations.

      As used herein, “we,” “us,” “our,” “Bell,” and the “Company” refer to Bell Industries, Inc.

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PART I

      Bell Industries, Inc.’s operations include technology lifecycle and outsourced services; distribution of aftermarket products for recreational vehicles, motorcycles, snowmobiles and powerboats; and manufacturing of specialty electronic components. Bell employed approximately 775 people at December 31, 2003.

Technology Solutions

      The technology lifecycle services business, the Tech.logix Group (“BTL” or “Technology Solutions”), (2003 sales of $90.8 million) is a provider of integrated technology solutions for organizations in the Midwestern and Eastern United States. BTL is headquartered in Indianapolis, Indiana, and has offices and service facilities in the Midwest and Atlantic regions.

      BTL provides information technology lifecycle services including planning, product sourcing, migration, support, and disposal services. Recurring support services, include help desk, depot, and on-site expertise for desktop and mobile devices, business software applications, and network infrastructures. BTL meets clients’ needs by combining a comprehensive offering of technology outsourcing services with its expertise in sourcing and deploying technology access devices, servers, storage equipment, printers, network products, and software.

      BTL’s suppliers include Hewlett-Packard, IBM, Panasonic, Sun Microsystems, Cisco, Citrix, 3Com, Nortel Networks, and Veritas for technology hardware products; and Microsoft, Symantec, Lotus, Adobe Systems, and Novell for software. Three clients (two Fortune 500 companies and a Midwest healthcare provider) account for approximately 30% of BTL revenues for fiscal 2003.

      There are a number of competitors in BTL’s market. BTL competes with national and multi-regional companies such as CompuCom Systems, Pomeroy Computer Resources, and Sarcom, as well as a number of local and regional firms providing technology products and deployment services. In technology outsourcing services, BTL may compete with large multi-national organizations such as IBM Global Services and Electronic Data Systems, as well as a number of small to mid-sized firms providing specialized services for certain market sectors. Many of BTL’s competitors have greater financial and marketing resources.

Recreational Products

      The Recreational Products Group (“RPG”) (2003 sales of $44.8 million) is a distributor of replacement parts and accessories for recreational and other leisure-time vehicles. RPG supplies these products in the upper Midwestern United States to dealerships and retail stores selling recreational vehicles, snowmobiles, motorcycles, ATV’s, and marine products. RPG also supplies these products to independent repair facilities. For all product groups, RPG operates distribution, sales and administration facilities in Eagan, Minnesota; Germantown, Wisconsin; and Grand Rapids, Michigan.

      RPG has significant market share in the distribution of recreational vehicle replacement parts and accessories in the upper Midwestern United States. RPG supplies over 8,000 recreational vehicle-related products, 11,000 marine items, 9,000 motorcycle and ATV items, and 5,000 snowmobile items. Major product lines distributed by RPG include Dunlop tires (motorcycle tires), Carefree of Colorado (awnings for RV’s and campers), Reese Products (trailer hitches for all types of vehicles), and Johnson Fishing, Inc. (marine motors). RPG has over 4,500 customers, with no single customer accounting for over 5% of its annual sales.

      RPG faces significant competition from national and regional distributors of after-market products for recreational vehicles, motorcycles, snowmobiles, and marine products. Significant competitors include Coast Distribution System and Stag-Parkway (recreational vehicles), Parts Unlimited and Tucker Rocky Distributing (motorcycles and snowmobiles), and Coast Distribution System and Land N’ Sea Distribution (marine).

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Electronic Components

      The J. W. Miller Division (“JWM” or “Electronic Components”) of Bell, located in Gardena, California (2003 sales of $6.3 million), manufactures and distributes over 6,000 standard and custom magnetic products. JWM’s magnetic products include inductors, coils, chokes, and transformers, among others. These products are used extensively in all types of circuitry found in electronic applications including computer, medical and telecommunications equipment.

      JWM’s products are sold through national, regional and international distributors directly and through manufacturer’s representatives located in North America, Europe and Asia. JWM’s customers include electronic distributors and manufacturers with its four largest customers representing 53% of its total 2003 sales. The majority of JWM’s sales are derived from customers located in North America.

      JWM faces significant competition from national and international manufacturers including Vishay, Sumida, Coilcraft, and Delevan.

      At December 31, 2003, the Company leased 15 facilities, containing approximately 295,000 square feet and owned one facility, containing approximately 20,000 square feet. The following table sets forth the facilities utilized by each of the Company’s business segments:

      These properties are considered in good condition and suitable for their present use. Generally, the Company’s facilities are fully utilized although excess capacity exists from time to time.

      The Company is involved in litigation which is incidental to its current and discontinued businesses. The resolution of this litigation is not expected to have a material adverse effect on the Company’s financial position, results of operations or cash flows.

      No matters were submitted to a vote of security holders during the fourth quarter of 2003.

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Executive Officers of the Registrant

      The Executive Officers of the Registrant are as follows:

(1)	Mr. Edwards was appointed President and Chief Executive Officer in February 1999. From January 1998 to February 1999, he served as Executive Vice President — Finance and Operations, and Chief Financial Officer. He also serves as Chairman of the Board of Directors.
(2)	Mr. Doll was appointed President of the BTL business unit in November 2003 and continues to serve as a Senior Vice President. Concurrent with this appointment, Mr. Doll’s Chief Financial Officer responsibilities were assumed by Mr. Edwards. From February 1999 to November 2003, Mr. Doll served as Chief Financial Officer. From April 1998 to February 1999, he served as Vice President, Finance.
(3)	Mr. Troy has served as Vice President since September 1997.
(4)	Mr. Rosen has served as Vice President and Corporate Controller since December 2000. Prior to December 2000, he was a senior manager with PricewaterhouseCoopers LLP.

PART II

      Bell’s common stock is listed on the American Stock Exchange and the Pacific Stock Exchange under the symbol “BI”. The following table shows the high, low and closing market prices for the Company’s common stock during the eight most recent quarters.

      As of March 15, 2004 there were approximately 1,000 record holders of common stock.

      A summary of shareholder approved and non-shareholder approved stock plan information as of December 31, 2003 is included at the “Stock Plans” footnote within the Notes to the Consolidated Financial Statements.

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(1)	Includes before-tax charge for staff separation and facilities consolidation ($845) and a before-tax charge for settlement costs associated with an executive change-in-control contract ($650) in 2001, before-tax gain on the disposition of a real estate asset ($2,842) and before-tax charge for facilities consolidation and staff relocation costs, asset write-downs and a corporate identity program ($2,405) in 2000, before-tax gain on the disposition of certain real estate assets ($1,497) and a before-tax loss on the disposition of an electronics manufacturing business ($455) in 1999.
(2)	Certain other per share data presented for 1999 has not been adjusted to reflect cash distributions totaling $7.00 per share made in June 1999 ($5.70 per share) and December 1999 ($1.30 per share).

      In addition to historical information, the following discussion and analysis of management contains forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements.

      The Company’s discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles

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Critical Accounting Policies

      The Summary of Accounting Policies within the Notes to the Consolidated Financial Statements includes the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements. The following is a discussion of each of the Company’s critical accounting policies:

Revenue Recognition

      Sales are recognized when products are shipped or when services are provided assuming no significant Company obligations remain and the collection of related receivables is probable. Revenue recognition on product sales is not subject to significant estimates as the Company has not experienced significant product returns.

Valuation of Receivables

      The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company performs ongoing credit evaluations of its customers. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Changes in the credit worthiness of customers, general economic conditions and other factors may impact the level of future write-offs.

Valuation of Inventory

      The Company periodically reviews inventory items and overall stocking levels to ensure that adequate reserves exist for inventory deemed obsolete or excessive. In making this determination, the Company considers historical stocking levels, recent sales of similar items and forecasted demand for these items. Changes in factors such as customer demand, technology and other matters could affect the level of inventory obsolescence in the future.

Recent Accounting Pronouncements

      In November 2002, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF No. 00-21, “Revenue Arrangements with Multiple Deliverables.” EITF No. 00-21 provides guidance as to when deliverables must be divided into separate units of accounting. This guidance was effective for revenue arrangements entered into after June 30, 2003. The adoption of EITF No. 00-21 did not have a material effect on the Company’s financial position, results of operations or cash flows.

      In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” (“SFAS 150”) that establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 was effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. On November 7, 2003, Financial Accounting Standards Board Staff Position 150-3 was issued, which indefinitely deferred the effective date of SFAS 150 for certain mandatory redeemable noncontrolling interests. The adoption of SFAS 150 had no effect on the Company’s consolidated financial position, results of operations or cash flows.

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Contractual Obligations and Commercial Commitments

      The following summarizes contractual obligations and commercial commitments as of December 31, 2003 (in thousands):

Results of Operations

      Results of operations by business segment were as follows (in thousands):

      The following summarizes comparative operating results data as a percentage of net revenues:

      The following summarizes other comparative operating results data:

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Net revenues

      Net revenues for the year ended December 31, 2003 increased 0.8% to $141.9 million from $140.8 million in 2002. Net revenues are further discussed in “Technology Solutions,” “Recreational Products,” and “Electronic Components,” below.

Operating income (loss)

      Operating loss for the year ended December 31, 2003 decreased 22.9% to $2.7 million from $3.6 million in 2002. Operating results are further discussed in “Technology Solutions,” “Recreational Products,” and “Electronic Components,” below.

Corporate costs

      Corporate costs for the year ended December 31, 2003 increased 7.7% to $2.9 million from $2.7 million in 2002. During 2002, corporate costs were reduced by miscellaneous income arising from insurance proceeds. Excluding such miscellaneous income, corporate costs were relatively consistent between the two years.

Interest, net

      Net interest income for the year ended December 31, 2003 decreased 17.0% to $166,000 from $200,000 in 2002. The decrease in net interest income is primarily attributable to lower interest rates that were partially offset by higher average cash balances during 2003.

Cumulative effect of accounting change

      During 2002, the Company recorded a pre-tax goodwill impairment loss of $2.1 million, $1.3 million after tax, following the adoption of Statement of Financial Accounting Standards No. 142 on January 1, 2002.

Technology Solutions

      Technology Solutions revenues for the year ended December 31, 2003 increased slightly to $90.8 million from $90.6 million in 2002. Services revenues for the year ended December 31, 2003 increased 56.4% to $34.9 million from $22.3 million in 2002 and rose to 38.5% of total Technology Solutions revenues during 2003 from 24.7% in 2002. Several new outsourcing engagements have contributed to the increase in services revenues during 2003. Services revenues for 2004 will be impacted due to the ending of an outsourcing engagement in March 2004 that generated approximately $6 million in revenues during 2003. Product revenues for the year ended December 31, 2003 decreased 18.2% to $55.8 million from $68.2 million. The decrease in product revenues is primarily attributable to decreased technology product deliveries, as business enterprises continued to defer information technology expenditures. Product revenues have also continued to be negatively impacted as major suppliers continued to market their products directly to end-user customers, rather than utilizing traditional distribution channels. The operating loss for the year ended December 31, 2003 decreased 3.1% to $2.1 million from $2.2 million in 2002. Operating results continue to be challenged due to the start-up and implementation costs of new engagements and a continued investment in expanded business development efforts. The costs associated with these efforts will continue to impact near term results, but are considered essential to the Company’s efforts in generating new business opportunities and expanding its market penetration.

Recreational Products

      Recreational Products revenues for the year ended December 31, 2003 increased slightly to $44.8 million from $44.6 million in 2002, and operating income increased 61.3% to $1.3 million from $819,000. Strong marine product sales have been partially offset by generally weak sales in snow related products as a result of mild winter conditions in the Northern Midwest in early 2003. Reduced operating expenses, including lower

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Electronic Components

      Electronic Components revenues for the year ended December 31, 2003 increased 13.2% to $6.3 million from $5.6 million in 2002, and operating income increased 92.0% to $939,000 from $489,000. Increased product demand contributed to the higher revenues in 2003. Increased revenues and shifts in product mix contributed to the improvement in operating income. In addition, in the prior year certain inventory reserves were increased in light of difficult market conditions at the time.

Cost of products sold

      As a percentage of product revenues, cost of products sold for the year ended December 31, 2003 decreased to 81.5% from 82.8% in 2002. This decrease is primarily due to reductions in lower margin product sales at the Technology Solutions business unit.

Cost of services provided

      As a percentage of services revenues, cost of services provided for the year ended December 31, 2003 increased to 81.4% from 76.4%. This increase is primarily due to higher payroll related costs incurred to integrate new clients and deliver services within the Technology Solutions business unit.

Selling and administrative expenses

      As a percentage of sales, selling and administrative expenses for the year ended December 31, 2003 decreased slightly to 19.0% from 19.1% in 2002. This decrease is primarily attributable to reduced operating expenses at the Recreational Products business unit offset by higher travel, telecommunications and other related costs incurred to integrate new clients at the Technology Solutions business unit.

Income tax

      For the year ended December 31, 2003, the Company’s effective income tax rate was a provision of approximately 46.9% compared to a benefit of approximately 39.5% in 2002. After consideration of relevant factors, including recent operating results and the prior utilization of all previously available tax benefit carry-back opportunities, the Company recorded a full valuation allowance against net deferred tax asset balances. The establishment of the valuation allowance, net of reversals of tax accruals no longer required, resulted in an income tax provision of $1.2 million for the year ended December 31, 2003. Before accounting changes, during the year ended December 31, 2002, the Company recognized income tax benefits of $1.3 million all of which were realized through carry-back opportunities.

Net loss

      Net loss totaled $3.8 million for the year ended December 31, 2003, an increase of $0.5 million from the net loss in the prior year. The change in net loss resulted from improvements in operating results offset by the income tax effects described above.

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Net revenues

      Net revenues for the year ended December 31, 2002 decreased 23.3% to $140.8 million from $183.6 million in 2001. Net revenues are further discussed in “Technology Solutions,” “Recreational Products,” and “Electronic Components” below.

Operating income (loss)

      Operating loss for the year ended December 31, 2002 increased 63.2% to $3.6 million from $2.2 million in 2001. Operating results are further discussed in “Technology Solutions,” “Recreational Products,” and “Electronic Components” below.

Special items

      Operating results for 2001 include pre-tax charges totaling $1.5 million composed of $845,000 of costs related to the strategic repositioning of BTL’s Midwest operations and $650,000 in settlement costs associated with a change-in-control contract. The $845,000 repositioning charge has been included in the operating results of Technology Solutions and is further discussed in “Technology Solutions” below.

Corporate costs

      Corporate costs for the year ended December 31, 2002 decreased 15.1% to $2.7 million from $3.1 million in 2001. The decrease is primarily attributable to reduced costs associated with the Company’s strategic change initiatives, miscellaneous income arising from insurance proceeds and reduced bonus awards during 2002 as compared to 2001.

Interest, net

      Net interest income for the year ended December 31, 2002 decreased 56.5% to $200,000 from $460,000 in 2001. The decrease in net interest income is primarily attributable to lower interest rates and lower average cash balances during 2002.

Cumulative effect of accounting change

      The Company recorded a pre-tax goodwill impairment loss of $2.1 million, $1.3 million after tax, following the adoption of Statement of Financial Accounting Standards No. 142 effective January 1, 2002.

Technology Solutions

      Technology Solutions revenues for the year ended December 31, 2002 decreased 30.5% to $90.6 million from $130.4 million in 2001. Approximately half of the decrease in revenues is attributable to decreased technology product deliveries, as business enterprises have continued to defer information technology expenditures. Revenues have also been negatively impacted as major suppliers increasingly market their products directly to end-user customers, rather than utilizing traditional distribution channels. Product revenues for the year ended December 31, 2002 decreased 35.0% to $68.2 million from $105.0 million in 2001. Services revenues for the year ended December 31, 2002 decreased 12.0% to $22.3 million from $25.4 million in 2001. The decrease in services revenues is primarily attributable to a significant technology project in 2001 and no such similar project in 2002. The operating loss totaled $2.2 million for the year ended December 31, 2002 compared to a $938,000 loss in 2001, which includes the $845,000 special charge associated with this business unit in 2001. Components of the 2001 special charge included facilities consolidation costs and asset write-downs in connection with the opening of a technology center and separation costs. The results for 2002 have been adversely impacted by continued costs associated with building BTL’s technology outsourcing practices. This business unit also discontinued its application development service line, in response to weak market demand, that further contributed to the operating loss during 2002.

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Recreational Products

      Recreational Products revenues for the year ended December 31, 2002 decreased 3.1% to $44.6 million from $46.0 million in 2001, and operating income decreased 14.2% to $819,000 from $954,000. The decrease in revenues for 2002 is attributable to lower snow product sales during the first quarter as compared to the comparable period in 2001. Operating results were also impacted by the relocation of this business unit’s Minnesota distribution center to a new facility during the second half of 2002.

Electronic Components

      Electronic Components revenues for the year ended December 31, 2002 decreased 22.2% to $5.6 million from $7.2 million in 2001, and operating income decreased 69.2% to $489,000 from $1.6 million. The decrease in revenues and operating income is attributable to weak demand for electronics components in the computer and telecommunications sectors, shifts in product mix, pricing pressures, and additions to inventory reserves arising from difficult market conditions.

Cost of products sold

      As a percentage of product revenues, cost of products sold for the year ended December 31, 2002 decreased to 82.8% from 84.1% in 2001. The decrease is primarily due to reductions in lower margin product sales at the Technology Solutions business unit.

Cost of services provided

      As a percentage of services revenues, cost of services provided for the year ended December 31, 2002 increased to 76.4% from 75.3% in 2001. This increase is primarily due to higher margins associated with a technology project in 2001.

Selling and administrative expenses

      As a percentage of sales, selling and administrative expenses for the year ended December 31, 2002 increased to 19.1% from 16.3% in 2001. This increase is primarily due to the overall reduction in sales in 2002 and the existence of certain fixed costs.

Income tax

      The Company’s effective income tax rate was a benefit of approximately 39.5% in both 2002 and 2001. Taxable losses during the year ended December 31, 2002 resulted in a federal tax refund of approximately $2.4 million as losses in this year have been carried back to previously profitable years.

Net loss

      Net loss totaled $3.3 million for the year ended December 31, 2002, an increase of $2.3 million from the net loss in the prior year. The increase in net loss resulted from the factors described above, including the goodwill impairment charge of $1.3 million.

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Changes in Financial Condition

Liquidity and Capital Resources

      Selected financial data is set forth in the following table (dollars in thousands, except per share amounts):

      Net cash provided by operating activities was $2.9 million for the year ended December 31, 2003 compared with $1.9 million in 2002. The cash flow from operating activities in 2003 reflects an increase in accounts payable and accrued payroll and the collection of a $2.4 million federal tax refund, partially offset by an increase in accounts receivable. The increase in accounts payable was primarily due to a $1.5 million increase in December 2003 inventory purchases at the Technology Solutions business unit as compared to December 2002. This inventory was sold prior to December 31, 2003. The increases in accounts receivable and accrued payroll were primarily attributable to the increase in sales at the Technology Solutions business unit during the fourth quarter of 2003 as compared to the prior year and an increase in accrued payroll costs at year-end for employees hired on new services engagements. The cash flow from operating activities in 2002 reflects cash collected on accounts receivable partially offset by payment of accounts payable and accrued liabilities and an increase in income tax receivable. The decrease in accounts receivable was primarily due to the $5.1 million decline in revenues during the fourth quarter of 2002 as compared to 2001. Accounts payable was also lower at the end of 2002 as a result of reduced inventory purchases in light of the reduced sales levels. The increase in income tax receivable totaling $1.7 million represents the increase in 2002 federal tax refund over the refund received related to the 2001 tax year.

      Net cash used in investing activities totaled $789,000 for the year ended December 31, 2003 compared to $1.5 million in 2002. Investing activities included the addition of fixed assets as well as expenditures for a relocated distribution center in 2002.

      Net cash used in financing activities totaled $819,000 for the year ended December 31, 2002. This total included funds utilized to purchase shares of common stock under the Company’s 2001 Stock Repurchase Program, offset by proceeds from stock issued under the Company’s Employees’ Stock Purchase Plan.

      Despite recent operating losses, the Company believes that sufficient cash resources exist for 2004 to support requirements for its operations and commitments through available cash and cash generated by operations. The Company has a line of credit for general corporate purposes in the amount of $10.0 million, expiring in May 2004. No amounts were borrowed under the line during 2003 or 2002. The Company is currently able to borrow up to $2.5 million of the $10.0 million credit line, subject to certain requirements, including maintaining minimum cash and cash equivalents on deposit of at least $3.5 million. Management does not currently anticipate the need to borrow under the line of credit and is evaluating its options in regards to renewing or terminating the facility.

      The Company does not have any material off-balance sheet arrangements.

Trends and Uncertainties

      The challenging technology market conditions and costs associated with building our technology outsourcing practices have impacted results during 2003 and are expected to continue to impact near term financial performance. Operating results continue to be challenged due to the start-up and implementation

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      The Company has no investments in market risk-sensitive investments for either trading purposes or purposes other than trading purposes.

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INDEX TO FINANCIAL STATEMENTS

      The financial data included in the financial statement schedule should be read in conjunction with the consolidated financial statements. All other schedules have been omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.

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REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and

      In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Bell Industries, Inc. and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      As discussed in the notes to the consolidated financial statements, effective January 1, 2002, the Company changed its method of accounting for goodwill in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”

PRICEWATERHOUSECOOPERS LLP

Los Angeles, California

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CONSOLIDATED STATEMENT OF OPERATIONS

See Accompanying Notes to Consolidated Financial Statements.

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CONSOLIDATED BALANCE SHEET

See Accompanying Notes to Consolidated Financial Statements.

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CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY