<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>v037114-10q.txt
<TEXT>


                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

                                   (Mark one)

|X|   Quarterly  report  pursuant  to  section  13 or  15(d)  of the  Securities
      Exchange Act of 1934

                  FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2004

|_|   Transition  report  pursuant to section 13 or 15(d) of the  Securities and
      Exchange Act of 1934

               For the transition period from _______ to ________

                          Commission file number 0-8419

                                    SBE, INC.
              -----------------------------------------------------
             (Exact name of registrant as specified in its charter)

            Delaware                                         94-1517641
    -------------------------------                      -----------------
    (State or other jurisdiction of                      (I.R.S. Employer
      incorporation or organization)                    Identification No.)

            2305 Camino Ramon, Suite 200, San Ramon, California 94583
            ---------------------------------------------------------
              (Address of principal executive offices and zip code)

                                 (925) 355-2000
              ----------------------------------------------------
              (Registrant's telephone number, including area code)

Indicate  by check  mark  whether  the  registrant:  (1) has filed  all  reports
required to be filed by Section 13 or 15 (d) of the  Securities  Exchange Act of
1934 during the preceding 12 months (or for such shorter period that  Registrant
was  required  to file such  reports),  and (2) has been  subject to such filing
requirements for the past 90 days.

                        Yes  |X|     No  |_|

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


                        Yes  |X|     No  |_|

The number of shares of  Registrant's  Common Stock  outstanding as of April 30,
2004 was 5,075,739.

<PAGE>


                                    SBE, INC.

                        INDEX TO APRIL 30, 2004 FORM 10-Q

<TABLE>
<CAPTION>
<S>                                                                                                   <C>
PART I     FINANCIAL INFORMATION

  ITEM 1   Financial Statements (unaudited)

     Condensed Consolidated Balance Sheets as of
        April 30, 2004 and October 31, 2003............................................................3

     Condensed Consolidated Statements of Operations for the
        three and six months ended April 30, 2004 and 2003.............................................4

     Condensed Consolidated Statements of Cash Flows for the
        six months ended April 30, 2004 and 2003.......................................................5

     Notes to Condensed Consolidated Financial Statements..............................................6

  ITEM 2   Management's Discussion and Analysis of Financial
           Condition and Results of Operations........................................................11

  ITEM 3   Quantitative and Qualitative Disclosures about
           Market Risk................................................................................26

  ITEM 4   Controls and Procedures....................................................................26

PART II  OTHER INFORMATION

  ITEM 4   Submission of Matters to a Vote of Security Holders........................................26

  ITEM 6   Exhibits and Reports on Form 8-K...........................................................28


SIGNATURES............................................................................................31

EXHIBITS..............................................................................................32
</TABLE>


                                      -2-
<PAGE>


PART I.           FINANCIAL INFORMATION
ITEM 1.         FINANCIAL STATEMENTS

                                    SBE, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (In thousands)

<TABLE>
<CAPTION>
                                               April 30,      October 31,
                                                 2004             2003
                                             ------------    ------------
                                             (Unaudited)
<S>                                          <C>             <C>
Current assets:
  Cash and cash equivalents                  $      2,389    $      1,378
  Trade accounts receivable, net                    1,633           1,818
  Inventories                                       1,751           1,880
  Other                                               413             240
                                             ------------    ------------
Total current assets                                6,186           5,316
  Property, plant and equipment, net                  337             389
  Capitalized software costs, net                     177             120
  Intellectual property, net                          918           1,122
  Other                                                28              28
                                             ------------    ------------
Total assets                                 $      7,646    $      6,975
                                             ============    ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Trade accounts payable                     $        577    $        696
  Accrued payroll and employee benefits               153             184
  Other accrued liabilities                           374             491
                                             ------------    ------------

      Total current liabilities                     1,104           1,371

Other long-term liabilities                             3             217
                                             ------------    ------------

      Total liabilities                             1,107           1,588
                                             ------------    ------------

Commitments

Stockholders' equity:
  Common stock                                     15,731          15,302
  Note receivable from stockholder                     --            (142)
  Accumulated deficit                              (9,192)         (9,773)
                                             ------------    ------------
  Total stockholders' equity                        6,539           5,387
                                             ------------    ------------
  Total liabilities and stockholders' equity $      7,646    $      6,975
                                             ============    ============
</TABLE>

      See notes to condensed consolidated financial statements.


                                      -3-
<PAGE>


                                    SBE, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                    Three months ended    Six months ended
                                         April 30,            April 30,
                                    -----------------    ------------------
                                      2004      2003       2004       2003
                                    -------   -------    -------    -------
<S>                                 <C>       <C>        <C>        <C>
Net sales                           $ 2,977   $ 1,767    $ 5,947    $ 3,628
Cost of sales                         1,417       679      2,742      1,412
                                    -------   -------    -------    -------
    Gross profit                      1,560     1,088      3,205      2,216
Product research and development        543       294      1,048        579
Sales and marketing                     564       336      1,053        643
General and administrative              400       437        764        878
Loan loss recovery                       --        --       (239)        --
                                    -------   -------    -------    -------
    Total operating expenses          1,507     1,067      2,626      2,100
                                    -------   -------    -------    -------
    Operating income                     53        21        579        116

Interest income                           1         8          2          9
                                    -------   -------    -------    -------
    Income before income taxes           54        29        581        125

Income tax benefit                       --       (22)        --        (18)
                                    -------   -------    -------    -------
Net income                          $    54   $    51    $   581    $   143
                                    =======   =======    =======    =======
Basic income per share              $  0.01   $  0.01    $  0.12    $  0.04
                                    =======   =======    =======    =======
Diluted income per share            $  0.01   $  0.01    $  0.09    $  0.04
                                    =======   =======    =======    =======
Basic - weighted average shares
used in per share computations        5,003     4,085      4,961      4,071
                                    =======   =======    =======    =======

Diluted - weighted average shares
used in per share computations        6,030     4,085      6,134      4,072
                                    =======   =======    =======    =======
</TABLE>


      See notes to condensed consolidated financial statements.


                                      -4-
<PAGE>


                                    SBE, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                               Six months ended
                                                                   April 30,
                                                              -------------------
                                                                 2004       2003
                                                              -------    -------
<S>                                                           <C>        <C>
Cash flows from operating activities:
     Net income                                               $   581    $   143
     Adjustments to reconcile net income  to net cash
     provided by operating activities:
         Depreciation and amortization:
              Property and equipment                              106        200
              Software                                             22         15
              Amortization of intellectual property               204         --
              Loss on abandonment of equipment                     --          4
         Changes in operating assets and liabilities:
              Accounts receivable                                 185         20
              Inventories                                         129        244
              Other assets                                       (173)        21
              Trade accounts payable                             (119)      (337)
              Other accrued liabilities                          (276)      (237)
                                                              -------    -------
                  Net cash provided by operating activities       659         73
                                                              -------    -------

Cash flows from investing activities:
     Purchases of property, plant  and equipment                  (55)       (42)
     Capitalized software costs                                   (78)        (9)
                                                              -------    -------
                  Net cash used in investing activities          (133)       (51)
                                                              -------    -------

Cash flows from financing activities:
     Proceeds from exercise of warrants                           116         --
     Proceeds from repayment of stockholder note                  142         25
     Proceeds from exercise of stock options                      227         26
                                                              -------    -------
                  Net cash provided by financing activities       485         51
                                                              -------    -------

              Net increase in cash and cash equivalents         1,011         73

Cash and cash equivalents at beginning of period                1,378      1,582
                                                              -------    -------
Cash and cash equivalents at end of period                    $ 2,389    $ 1,655
                                                              =======    =======
</TABLE>


      See notes to condensed consolidated financial statements.


                                      -5-
<PAGE>

                                    SBE, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


1.   INTERIM PERIOD REPORTING:

These condensed consolidated financial statements of SBE, Inc. are unaudited and
include all adjustments,  consisting of normal recurring adjustments,  that are,
in the opinion of management, necessary for a fair presentation of the financial
position and results of operations and cash flows for the interim  periods.  The
results of operations  for the three and six and months ended April 30, 2004 are
not necessarily indicative of expected results for the full 2004 fiscal year.

Certain  information and footnote  disclosures  normally  contained in financial
statements prepared in accordance with generally accepted accounting  principles
have  been  condensed  or  omitted.   These  condensed   consolidated  financial
statements should be read in conjunction with the financial statements and notes
contained in our Annual Report on Form 10-K for the year ended October 31, 2003.


MANAGEMENT ESTIMATES

The preparation of financial  statements in conformity  with generally  accepted
accounting  principles in the U.S. requires us to make estimates and assumptions
that affect the reported amounts of assets and  liabilities,  as well as certain
disclosure of contingent  assets and liabilities as of the date of the financial
statements  and the  reported  amounts  of net sales  and  expenses  during  the
reporting period. Actual results could differ from these estimates.  Significant
estimates and judgments made by us relate to matters such as potential liability
for sales  allowances,  warranty  obligations and  indemnification  obligations,
collectibility  of  accounts   receivable,   realizability  of  inventories  and
recoverability of capitalized software and deferred tax assets.

2.   INVENTORIES:

Inventories were comprised of the following (in thousands):

                                             April 30,     October 31,
                                               2004            2003
                                           ------------   ------------
          Finished goods                   $        296   $        726
      Parts and materials                         1,455          1,154
                                           ------------   ------------
                                           $      1,751   $      1,880
                                           ============   ============

3.  INTANGIBLE ASSETS:

Intangible  Assets  represent   intellectual   property  that  consists  of  the
allocation  of costs  associated  with the purchase of current and the design of
future  products from Antares  Microsystems  on August 7, 2003. All  capitalized


                                      -6-
<PAGE>


intellectual  property is amortized to cost of goods  expense on a straight line
basis over  thirty-six  months  which is the  expected  useful life and does not
materially  differ from the  expected  cash  inflow  from the sale the  acquired
Antares product line.  Intangible  Assets subject to amortization are as follows
(in thousands):

                                                     Accumulated
                                    Gross            Amortization         Net
                                    -----            ------------         ---

Intellectual Property               $1,224                $306            $918
                                    ========         =========            ====

Amortization  expense for the three months and six months  ending April 30, 2004
was $102,000 and $204,000 and is included in cost of sales.

The  estimated  aggregate  remaining   amortization  expense  for  each  of  the
succeeding fiscal years is as follows (in thousands):

      2004              $ 204
      2005                408
      2006                306
      Total             $ 918
                        =====

4.   RESTRUCTURING COSTS:

The  following   table  sets  forth  an  analysis  of  the   components  of  our
restructuring  reserve and the payments made against it during the quarter ended
April 30, 2004 (in thousands):

     Restructuring accrual at October 31, 2003                           $   58
         Less: Cash paid for accrued lease costs                            (22)
                                                                         -=----
     Total restructuring accrual included in other accrued liabilities   $   36
                                                                         ======

5.   NET INCOME PER SHARE:

Basic  income per common share for the three and six months ended April 30, 2004
and 2003 was computed by dividing the net income for such period by the weighted
average  number of shares of common stock  outstanding  for such period.  Common
stock  equivalents for the three months and six months ended April 30, 2004 were
1,026,890 and 1,173,517, respectively, and have been included in the calculation
of diluted net income per share. The common stock  equivalents for the three and
six months  ended April 30, 2004  include the  following  items:  1) 867,238 and
1,006,914  vested  employee  stock options,  respectively;  2) 90,707 and 97,658
common stock equivalents  subject to warrants,  respectively 3) 68,945 shares of
common  stock to be issued  related to the  purchase of  Antares,  respectively.
Common  stock  equivalents  for the three and six months  ended April 30,  2003,
which were 0 and 598,  respectively,  have been included in the  calculation  of
diluted net income per share.


                                      -7-
<PAGE>


<TABLE>
<CAPTION>
                                                                    Three months ended                 Six months ended
                                                                        April 30,                          April 30,
                                                             ------------------------------      ------------------------------
                                                                 2004              2003              2004              2003
                                                             ------------      ------------      ------------      ------------
<S>                                                                 <C>               <C>               <C>               <C>
      BASIC

      Weighted average number of
       common shares outstanding                                    5,003             4,085             4,961             4,071
                                                             ------------      ------------      ------------      ------------
      Number of shares for computation of
       net income per share                                         5,003             4,085             4,961             4,071
                                                             ============      ============      ============      ============
      Net income                                             $         54      $         51      $        581      $        143
                                                             ============      ============      ============      ============
      Net income per share                                   $       0.01      $       0.01      $       0.12      $       0.04
                                                             ============      ============      ============      ============

      DILUTED

      Weighted average number of
       common shares outstanding                                    5,003             4,085             4,961             4,071

      Shares  issuable  pursuant  to options  granted
      under  stock  option  plans and warrants granted,
      less assumed repurchase at the average fair
      market value for the period                                   1,027              --               1,173                 1
                                                             ------------      ------------      ------------      ------------
      Number of shares for computation of
       net income  per share                                        6,030             4,085             6,134             4,072
                                                             ============      ============      ============      ============
      Net income                                             $         54      $         51      $        581      $        143
                                                             ============      ============      ============      ============
      Net income per share                                   $       0.01      $       0.01      $       0.09      $       0.04
                                                             ============      ============      ============      ============
</TABLE>



6. STOCK BASED COMPENSATION:

At April 30, 2004, we had two stock-based  employee  compensation  plans and one
stock-based  director  compensation  plan.  We account for these plans under the
recognition  and measurement  principles of APB Opinion No. 25,  "Accounting for
Stock  Issued  to  Employees,"  and  related  interpretations.  Accordingly,  no
stock-based employee compensation cost has been recognized in net income for the
stock  option  plans.  Had  compensation  cost for our stock  option  plans been
determined  based on the fair  value  recognition  provisions  of SFAS No.  123,
"Accounting  for  Stock-Based  Compensation,"  our net income  (loss) and income
(loss) per share would have been as follows (in thousands):


                                      -8-
<PAGE>

<TABLE>
<CAPTION>
                                                       Three Months Ended            Six Months Ended
                                                            April 30,                    April 30,
                                                   --------------------------    -------------------------
                                                       2004           2003           2004          2003
                                                   -----------    -----------    -----------   -----------
<S>                                                <C>            <C>            <C>           <C>
      Net income, as  reported                     $        54    $        51    $       581   $       143

      Add: Total stock-based compensation
      expense (benefit) included in the net loss
      determined under the recognition and
      measurement principles of APB Opinion 25            --             --             --            --

      Deduct: Total stock-based employee
      compensation expense determined under
      fair value based method for all awards,
      net of related tax effects                            96            166            166           374
                                                   -----------    -----------    -----------   -----------
      Pro forma net income (loss)                  $       (42)   $      (115)   $       415   $      (231)
                                                   ===========    ===========    ===========   ===========
      Income (loss) per share:
      Basic - as reported                          $      0.01    $      0.01    $      0.12   $      0.04
                                                   ===========    ===========    ===========   ===========
      Basic - pro forma                            $     (0.01)   $     (0.03)   $      0.08   $     (0.06)
                                                   ===========    ===========    ===========   ===========
      Diluted - as reported                        $      0.01    $      0.01    $      0.09   $      0.04
                                                   ===========    ===========    ===========   ===========
      Diluted - pro forma                          $     (0.01)   $     (0.03)   $      0.07$        (0.06)
</TABLE>


There were 287,000  stock  options  granted in the quarter ended April 30, 2004.
The assumptions  regarding the annual vesting of stock options were 25% per year
for options granted in 2004. The fair value of each option grant is estimated on
the  date of  grant  using  the  Black-Scholes  option-pricing  model  with  the
following  weighted-average  assumptions used for grants in 2004: Dividend yield
of 0%;  expected  volatility  of 80%,  risk-free  interest  rate of  3.17%,  and
expected life of four years.

7.   CONCENTRATION OF RISK:

In the three and six months  ended  April 30,  2004 and 2003,  most of our sales
were  attributable to sales of  communications  products and were derived from a
limited number of original  equipment  manufacturer  ("OEM")  customers.  In our
second  quarter of fiscal  2004,  we had sales to two  customers  that were each
greater  than 10% of our net  sales  for the  quarter.  The  sales to these  two
customers  combined totaled 50% of net sales during the second quarter of fiscal
2004.  In our  second  quarter  of  fiscal  2003,  we had  sales to the same two
customers  that each  accounted  for  greater  than 10% of our net sales for the
quarter.  The sales to these two customers combined totaled 67% of our net sales
for that  quarter.  In the first six months of fiscal 2004,  we had sales to two
customers  that were each  greater  than 10% of our sales for that  period.  The
sales to these two customers  combined totaled 56% of net sales during the first
two  quarters of fiscal  2004.  In the first six months of fiscal  2003,  we had


                                      -9-
<PAGE>


sales to one customer  that  accounted for greater than 10% of our net sales for
that  period.  The sales to this  customer  totaled 49% of our net sales for the
first two quarters of fiscal 2003.

We have three  customers  that each  accounted for more than 10% of our accounts
receivable as of April 30, 2004 compared to one customer that accounted for more
than 10% of our accounts receivable at April 30, 2003.

8.  WARRANTY OBLIGATIONS AND OTHER GUARANTEES:

Warranty Reserve:
Our  products  are sold  with  warranty  provisions  that  require  us to remedy
deficiencies  in quality or performance of our products over a specified  period
of time,  generally  12  months,  at no cost to our  customers.  We  accrue  the
estimated  costs to be incurred in performing  warranty  services at the time of
revenue recognition and shipment of our products to our customers.  Our estimate
of costs to service our warranty  obligations is based on historical  experience
and  expectation  of future  conditions.  To the extent we experience  increased
warranty  claim activity or increased  costs  associated  with  servicing  those
claims, the warranty accrual may increase, resulting in decreased gross margin.

The following table sets forth an analysis of our warranty  reserve at April 30,
2004 (in thousands):

         Warranty reserve at October 31, 2003                          $53
             Less: Cost to service warranty obligations                 15
                                                                      ----

         Total warranty reserve included in other accrued expenses     $38
                                                                      ====

The following is a summary of our agreements  that we have determined are within
the scope of the  Financial  Accounting  Standards  Board  ("FASB")  issued FASB
Interpretation  No. 45 "Guarantor's  Accounting and Disclosure  Requirements for
Guarantees" ("FIN 45").

Indemnification Agreements:
We have agreed to indemnify  each of our  executive  officers and  directors for
certain  events or  occurrences  arising as a result of the  officer or director
serving  in such  capacity.  The term of the  indemnification  period is for the
officer's  or  director's  lifetime.  The  maximum  potential  amount  of future
payments we could be required to make under these indemnification  agreements is
unlimited.  However,  we have a directors'  and  officers'  liability  insurance
policy that should  enable us to recover a portion of any future amount paid. As
a result of our insurance policy  coverage,  we believe the estimated fair value
of these indemnification  agreements is minimal and have no liabilities recorded
for these agreements as of April 30, 2004 and October 31, 2003.

We  enter  into  agreements  with  other  companies  containing  indemnification
provisions in the ordinary course of business, typically with business partners,
contractors, customers and landlords. Under these provisions, we generally agree
to indemnify  and hold  harmless the  indemnified  party for losses  suffered or
incurred  by the  indemnified  party as a result of our  activities  or, in some
cases, as a result of the indemnified  party's  activities  under the agreement.
These indemnification provisions often relate to representations made by us with


                                      -10-
<PAGE>


regard to our intellectual  property rights.  These  indemnification  provisions
generally survive termination of the underlying agreement. The maximum potential
amount  of  future   payments   we  could  be   required  to  make  under  these
indemnification  provisions is unlimited. To date, we have not incurred material
costs to defend  lawsuits  or settle  claims  related  to these  indemnification
provisions. As a result, we believe the estimated fair value of these agreements
is minimal. Accordingly, we have no liabilities recorded for these agreements as
of April 30, 2004 and October 31, 2003.

Other:
We  are  the  secondary  guarantor  on the  lease  assignment  of  our  previous
headquarters  that  expires  in 2006.  We  believe  we will not have to make any
payments as a result of this guarantee and thus have not recorded a liability at
April 30, 2004.

9.  LOAN TO OFFICER

On  November 6, 1998,  we made a loan to one of our  officers  and  stockholders
which was used by the  officer/stockholder  to  exercise  an option to  purchase
139,400 shares of our common stock and related taxes. The loan, as amended,  was
collateralized  by shares of our common stock,  bore interest at a rate of 2.48%
per annum, with interest due annually and the entire amount of the principal was
due on December 14, 2003.

On October 31, 2002, we determined  that it was probable that we would be unable
to fully  recover the balance of the loan on its due date of December  14, 2003.
Accordingly,  a valuation  allowance of $474,000 was recorded  based on the fair
value of the common stock  collateralizing  the note at October 31, 2002 and the
amount of the officer's  personal  assets  considered  likely to be available to
settle the note in December 2003.

During the fourth quarter of fiscal 2003, the officer sold 139,400 shares of our
common stock and used the proceeds from the stock sale to repay  $362,800 of the
loan from us. As a result of the  fiscal  2003 loan  payment,  we  recognized  a
benefit in the fourth quarter of 2003 of $235,000 related to the reversal of the
loan impairment charge taken by us in fiscal 2002. In November 2003, the officer
sold  additional  shares of our common  stock and used the proceeds to repay the
remaining loan balance in full. As a result, in our first quarter of fiscal 2004
we recorded a benefit of $239,000  resulting  from the reversal of the remaining
loan impairment charge.

ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

FORWARD LOOKING STATEMENTS

The following  Management's  Discussion and Analysis of Financial  Condition and
Results of Operations contains forward-looking statements that involve risks and
uncertainties. Words such as "believes," "anticipates," "expects," "intends" and
similar expressions are intended to identify forward-looking statements, but are
not the exclusive means of identifying  such  statements.  Readers are cautioned
that the  forward-looking  statements  reflect our analysis  only as of the date
hereof, and we assume no obligation to update these statements. Actual events or
results may differ  materially  from the results  discussed in or implied by the


                                      -11-
<PAGE>


forward-looking statements.  Factors that might cause such a difference include,
but are not  limited  to,  those  risks and  uncertainties  set forth  under the
caption "Risk Factors" below.

The  following  discussion  should  be read in  conjunction  with the  Financial
Statements and the Notes thereto  included in Item 1 of this Quarterly Report on
Form 10-Q and in our Form 10-K for the fiscal year ended October 31, 2003.


RISK FACTORS

In  addition to the other  information  in this  Quarterly  Report on Form 10-Q,
stockholders or prospective  investors should  carefully  consider the following
risk factors:

                          RISKS RELATED TO OUR BUSINESS

OUR FUTURE  SUCCESS  DEPENDS ON OUR  ABILITY  TO  REPLACE  NET SALES  PREVIOUSLY
GENERATED BY SALES OF VME PRODUCTS TO HP.

In the first two  quarters  of fiscal 2004 and 2003,  sales of our Versa  Module
Europa ("VME") products to The Hewlett-Packard  Company ("HP") accounted for 42%
and 49%, respectively, of our net sales. We shipped $1.6 million of VME products
to HP over the first two  quarters  of fiscal 2003  pursuant  to an  end-of-life
product discontinuation purchase order that is no longer in effect. In September
2003, HP notified us that they would purchase an additional  $2.6 million of VME
products,  with  deliveries  scheduled for our fourth quarter of fiscal 2003 and
the first two  quarters of fiscal 2004.  In our first two  quarters of 2004,  we
shipped  $2.0 million of VME products to HP under the  September  2003  purchase
order. In April 2004, we received an additional  $2.9 million  purchase order of
VME products from HP with $0.1 million  shipped in the second  quarter of fiscal
2004 and deliveries  for the remaining $2.8 million  scheduled for the third and
fourth  quarters of fiscal 2004 and the first  quarter of fiscal 2005.  While we
have  continued  to sell VME  products  to HP pursuant  to  individual  purchase
orders, we believe that HP will cease purchasing our VME products in fiscal 2005
as the HP products in which our VME  products  are  embedded are phased out. Our
net sales derived from these  individual  purchase orders have been  significant
and when HP ceases to purchase  VME  products  we will need to increase  our net
sales from other sources in order to be successful.  We can provide no assurance
that we will  succeed in  obtaining  new orders from  existing or new  customers
sufficient to replace or exceed the net sales attributable to HP.

WE SELL OUR PRODUCTS TO A SMALL NUMBER OF OEM CUSTOMERS,  AND THE LOSS OF ANY OF
THEM,  OR THEIR  FAILURE  TO SELL THEIR  PRODUCTS,  WOULD  LIMIT OUR  ABILITY TO
GENERATE NET SALES.

In fiscal 2003 and the first two quarters of fiscal 2004, most of our sales were
derived from a limited number of OEM customers,  primarily HP. We expect that we
will always derive most our sales from a limited number of OEM customers. Orders
by our OEM customers are affected by factors such as new product  introductions,
product  life  cycles,  inventory  levels,  manufacturing  strategies,  contract
awards, competitive conditions and general economic conditions. Our sales to any
single OEM customer are also subject to significant  variability from quarter to


                                      -12-
<PAGE>


quarter.  Such  fluctuations may have a material adverse effect on our operating
results.  A significant  reduction in orders from any of our OEM customers would
have a material adverse effect on our operating results, financial condition and
cash flows.  None of our  customers is bound by a long-term  purchase  contract.
Thus, we cannot provide any assurance that we will continue to sell our products
at existing levels, if at all, to our existing OEM customers.

BECAUSE OF OUR  DEPENDENCE ON SINGLE  SUPPLIERS FOR SOME  COMPONENTS,  WE MAY BE
UNABLE TO OBTAIN AN ADEQUATE SUPPLY OF SUCH COMPONENTS, OR WE MAY BE REQUIRED TO
PAY HIGHER PRICES OR TO PURCHASE COMPONENTS OF LESSER QUALITY.

The  chipsets  used in most of our products are  currently  available  only from
Motorola.  In addition,  certain other  components are currently  available only
from  single  suppliers.  Suppliers  may  discontinue  or  upgrade  some  of the
components used in our products, which could require us to redesign a product to
incorporate newer or alternative technology.  The inability to obtain sufficient
key components as required, or to develop alternative sources if and as required
in the future,  could  result in delays or  reductions  in product  shipments or
margins that,  in turn,  would have a material  adverse  effect on our business,
operating results and financial condition. If enough components are unavailable,
we may have to pay a premium in order to meet customer  demand.  Paying premiums
for parts,  building  inventories  of scarce  parts and  obsolesce  of  existing
inventories  could lower or  eliminate  our profit  margin,  harm our  financial
condition  and  otherwise  harm our  business.  To  offset  potential  component
shortages,  we have in the past,  and may in the future,  carry an  inventory of
these  components.  As a result,  our inventory of  components  parts may become
obsolete and may result in write-downs.

IF WE FAIL TO DEVELOP AND PRODUCE NEW HIGHWIRE AND ADAPTER PRODUCTS, WE MAY LOSE
SALES AND OUR REPUTATION MAY BE HARMED.

Since late 1998,  we have  focused a  significant  portion of our  research  and
development,  marketing and sales efforts on our HighWire and Adapter  products.
The success of these products is dependent on several factors,  including timely
completion  of new product  designs,  achievement  of  acceptable  manufacturing
quality and yields,  introduction of competitive products by other companies and
market acceptance of our products. If the HighWire and Adapter products or other
new  products  developed  by us do not gain  market  acceptance,  our  business,
operating  results,  financial  condition  and cash  flows  would be  materially
adversely affected.

THE COMMUNICATIONS AND STORAGE PRODUCTS MARKET IS INTENSELY COMPETITIVE, AND OUR
FAILURE TO COMPETE EFFECTIVELY COULD REDUCE OUR NET REVENUES AND MARGINS.

We compete  directly with vendors of terminal  servers,  modems,  remote control
software,  terminal emulation software and  application-specific  communications
and storage solutions.  We also compete with suppliers of routers, hubs, network
interface  cards and other data  communications  and  storage  products.  In the
future,  we expect  competition  from companies  offering  client/server  access
solutions  based on emerging  technologies  such as switched  digital  telephone
services,  SCSI,  TCP/IP  Offload  Engine  ("TOE")  and other  technologies.  In
addition,  we may encounter  increased  competition  from  operating  system and


                                      -13-
<PAGE>


network  operating  system  vendors  to the extent  such  vendors  include  full
communications and storage capabilities in their products. We may also encounter
future  competition  from  telephony  service  providers  (such  as  AT&T or the
regional  Bell  operating  companies)  that may  offer  communications  services
through their telephone networks.

Increased  competition with respect to any of our products could result in price
reductions and loss of market share,  which would adversely affect our business,
operating results,  financial  condition and cash flows. Many of our current and
potential  competitors have greater  financial,  marketing,  technical and other
resources  than we do. There can be no assurance that we will be able to compete
successfully  with  our  existing   competitors  or  will  be  able  to  compete
successfully with new competitors.

OUR SALES AND OPERATING  RESULTS HAVE FLUCTUATED,  AND ARE LIKELY TO CONTINUE TO
FLUCTUATE SIGNIFICANTLY IN FUTURE PERIODS CAUSING AND MAY CONTINUE TO CAUSE, OUR
STOCK  PRICE  TO  FALL AS A  RESULT  OF  FAILURE  TO MEET  THE  EXPECTATIONS  OF
SECURITIES ANALYSTS OR INVESTORS.

Our quarterly  operating  results have fluctuated  significantly in the past and
are likely to fluctuate significantly in the future due to several factors, some
of which  are  outside  our  control  and  which we may not be able to  predict,
including the  existence or absence of  significant  orders from OEM  customers,
fluctuating market demand for, and declines in the average selling prices of our
products,  success in achieving  design wins,  delays in the introduction of our
new  products,  competitive  product  introductions,  the mix of products  sold,
changes in our distribution network, the failure to anticipate changing customer
product  requirements,  the cost and  availability  of  components  and  general
economic  conditions.  We  generally  do not operate  with a  significant  order
backlog,  and a  substantial  portion of our net sales in any quarter is derived
from orders  booked in that quarter.  Accordingly,  our sales  expectations  are
based almost entirely on our internal estimates of future demand and not on firm
customer orders.

Due to the adverse economic conditions in the  telecommunications  industry, our
customers now typically  require a  "just-in-time"  ordering and delivery  cycle
where they will place a purchase  order with us after they receive an order from
their customer.  This  "just-in-time"  inventory purchase cycle by our customers
has made forecasting of our future sales volumes very difficult.

Based on the foregoing,  we believe that quarterly  operating results are likely
to vary significantly in the future and that period-to-period comparisons of our
results of operations  are not  necessarily  meaningful and should not be relied
upon as indications of future  performance.  Further,  it is likely that in some
future quarter our net sales or operating results will be below the expectations
of public market analysts and investors.  In such event, the price of our common
stock is likely to fall.

IF WE  ARE  UNABLE  TO  KEEP  UP  WITH  THE  RAPID  TECHNOLOGICAL  CHANGES  THAT
CHARACTERIZE OUR INDUSTRY, OUR BUSINESS WOULD SUFFER.

The markets for our products are characterized by rapidly changing technologies,
evolving industry standards and frequent new product  introductions.  Our future
success  will  depend on our  ability to enhance our  existing  products  and to
introduce  new  products  and  features to meet and adapt to  changing  customer


                                      -14-
<PAGE>


requirements and emerging  technologies such as Frame Relay,  Digital Subscriber
Line ("DSL"),  Asynchronous Transfer Mode ("ATM"),  Voice over Internet Protocol
("VoIP") and Third Generation  Wireless Services ("3G").  The development of new
and  enhanced  technology  and  products  is a  complex  and  uncertain  process
requiring high levels of innovation,  highly skilled engineering and development
personnel,  and the accurate anticipation of technological and marketing trends.
There can be no assurance that we will be successful in identifying, developing,
manufacturing,  marketing or  supporting  new products or enhancing our existing
products on a timely  basis,  if at all. In addition,  there can be no assurance
that services,  products or technologies developed by others will not render our
products noncompetitive or obsolete.

WE DEPEND ON OUR KEY PERSONNEL. IF WE ARE UNABLE TO RETAIN OUR CURRENT PERSONNEL
AND HIRE ADDITIONAL QUALIFIED PERSONNEL AS NEEDED, OUR BUSINESS WOULD BE HARMED.

We are highly dependent on the technical, management, marketing and sales skills
of a limited number of key employees. We do not have employment agreements with,
or life  insurance  on the lives of, any of our key  employees.  The loss of the
services of any key employees could adversely  affect our business and operating
results.  Our future  success  will depend on our ability to continue to attract
and  retain  highly  talented  personnel  to  the  extent  our  business  grows.
Competition for qualified personnel in the networking  industry,  and in the San
Francisco  Bay  Area,  is  intense.  There can be no  assurance  that we will be
successful  in  retaining  our key  employees  or that we can  attract or retain
additional skilled personnel as required.

OUR FUTURE CAPITAL NEEDS MAY EXCEED OUR ABILITY TO RAISE CAPITAL.

While we believe that our existing cash balances and our  anticipated  cash flow
from  operations  will satisfy our working capital needs for the next 12 months,
we cannot give assurance  that this will be the case.  Declines in our net sales
or a failure to keep  expenses in line with net sales  could  require us to seek
additional  financing  in the  future.  In  addition,  should  we  experience  a
significant  growth in customer  orders,  we may be required to seek  additional
capital to meet our working capital needs through the issuance of equity or debt
securities and we may not be able to sell these equity or debt securities  under
then-existing market conditions or on acceptable terms, if at all. If additional
funds are raised through the issuance of equity or debt securities, these equity
securities  could have  rights,  privileges  or  preferences  senior to those of
common stock. If we issue debt securities, we may be forced to pay high interest
rates  or  agree to debt  covenants  that  impose  onerous  restrictions  on our
operations.  The sale of equity or debt  securities  could result in  additional
dilution to current stockholders.

WE MAY BE UNABLE TO PROTECT OUR  INTELLECTUAL  PROPERTY,  WHICH COULD REDUCE ANY
COMPETITIVE ADVANTAGE WE HAVE.

Although we believe that our future success will depend  primarily on continuing
innovation,  sales,  marketing and technical  expertise,  the quality of product
support and customer relations,  we must also protect the proprietary technology
contained in our products. We currently hold four technology related patents but
rely primarily on a combination of copyright,  trademark,  trade secret laws and
contractual  provisions  to  establish  and  protect  proprietary  rights in our


                                      -15-
<PAGE>


products.  There can be no assurance  that steps taken by us in this regard will
be adequate to deter misappropriation or independent  third-party development of
our  technology.  Although we believe that our products  and  technology  do not
infringe on the  proprietary  rights of others,  there can be no assurance  that
third parties will not assert infringement claims against us.


               RISKS ASSOCIATED WITH OWNERSHIP OF OUR COMMON STOCK

OUR COMMON STOCK HAS BEEN AT RISK FOR DELISTING FROM THE NASDAQ SMALLCAP MARKET.
IF IT IS DELISTED, OUR STOCK PRICE AND YOUR LIQUIDITY MAY BE IMPACTED.

Our common stock is currently listed on the Nasdaq SmallCap  Market.  Nasdaq has
requirements  that a company  must meet in order to remain  listed on the Nasdaq
SmallCap Market.  These requirements  include  maintaining a minimum closing bid
price of $1.00 and minimum stockholders' equity of $2.5 million. The closing bid
price for our common stock was below $1.00 for more than 30 consecutive  trading
days during  portions of fiscal 2003. Our  stockholders'  equity as of April 30,
2004 was approximately $6.5 million.  Although we currently meet all the minimum
continued listing requirements for the Nasdaq SmallCap Market,  should our stock
price again  decline our common  stock could be subject to  potential  delisting
from the Nasdaq SmallCap Market.

If we fail to  maintain  the  standards  necessary  to be quoted  on the  Nasdaq
SmallCap  Market and our common stock is  delisted,  trading in our common stock
would be  conducted  on the OTC  Bulletin  Board as long as we  continue to file
reports  required by the  Securities and Exchange  Commission.  The OTC Bulletin
Board is  generally  considered  to be a less  efficient  market than the Nasdaq
SmallCap  Market,  and our stock price,  as well as the  liquidity of our common
stock, may be adversely impacted as a result.

THE MARKET PRICE OF OUR COMMON  STOCK IS LIKELY TO CONTINUE TO BE VOLATILE.  YOU
MAY NOT BE ABLE TO  RESELL  YOUR  SHARES  AT OR ABOVE  THE  PRICE  AT WHICH  YOU
PURCHASED SUCH SHARES.

The  trading  price of our  common  stock is  subject  to wide  fluctuations  in
response to quarter-to-quarter fluctuations in operating results, the failure to
meet  analyst  estimates,  announcements  of  technological  innovations  or new
products  by us or our  competitors,  general  conditions  in the  computer  and
communications  industries  and other  events or  factors.  In  addition,  stock
markets have experienced  extreme price and trading volume  volatility in recent
years.  This volatility has had a substantial  effect on the market price of the
securities of many high technology companies for reasons frequently unrelated to
the  operating  performance  of  the  specific  companies.  These  broad  market
fluctuations  may  adversely  affect the market price of our common  stock.  Our
common stock has historically had relatively small trading volumes. As a result,
small  transactions  in our  common  stock can have a  disproportionately  large
impact on the quoted price of our common stock.


                                      -16-
<PAGE>


OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND THE DELAWARE GENERAL CORPORATION
LAW CONTAIN PROVISIONS THAT COULD DELAY OR PREVENT A CHANGE IN CONTROL.

Our board of directors  has the  authority  to issue up to  2,000,000  shares of
preferred stock and to determine the price,  rights,  preferences and privileges
of those  shares  without any further  vote or action by the  stockholders.  The
rights of the holders of common stock will be subject to, and may be  materially
adversely affected by, the rights of the holders of any preferred stock that may
be issued in the future.  The issuance of preferred  stock could have the effect
of making it more  difficult  for a third  party to  acquire a  majority  of our
outstanding  voting  stock.   Furthermore,   certain  other  provisions  of  our
certificate  of  incorporation  and bylaws may have the  effect of  delaying  or
preventing  changes in control or management,  which could adversely  affect the
market price of our common stock. In addition,  we are subject to the provisions
of Section 203 of the Delaware General Corporation Law, an anti-takeover law.

MANAGEMENT'S DISCUSSION AND ANALYSIS

OVERVIEW

We architect and provide board-level network  communications  solutions for OEMs
in  both  the  embedded  and  enterprise-level   information  technology  ("IT")
computing   markets.   Our  solutions  enable  both  data   communications   and
telecommunications  companies,  in addition to enterprise-class  high-end server
clients,  to rapidly  deliver  advanced  networking  and  storage  products  and
services.  We offer a broad selection of wide area network  ("WAN"),  local area
network  ("LAN"),  SCSI,  Fibre  Channel,  and  carrier  cards  across  both the
enterprise  server  and  embedded  markets.   Our  Antares  products  have  been
integrated into a variety of applications,  including  storage area networks and
mission-critical  data centers.  Our products with Linux and Solaris drivers and
software include WAN and LAN interface adapters, storage network interface cards
("NICs")  products  such  as  SCSI  and  Fibre  Channel,  and  high  performance
intelligent  communications  controllers for high-end  enterprise level servers,
workstations,  media gateways,  routers,  internet access devices, home location
registers  and  data  messaging  applications.   Our  products  are  distributed
worldwide through a direct sales force, distributors, independent manufacturers'
representatives  and value-added  resellers.  We continue to operate in a single
business segment.

CONCENTRATIONS

Our business is  characterized  by a concentration of sales to a small number of
original equipment  manufacturers and,  consequently,  the timing of significant
orders from major customers and their product cycles causes  fluctuations in our
operating results. HP is the largest of our customers. Sales to HP accounted for
36% and 42% of our net sales in the three and six months  ended April 30,  2004,
respectively, and 54% and 49% for the same periods in fiscal 2003, respectively.
In the second quarter of fiscal 2004 and 2003, sales to Nortel in addition to HP
accounted  for greater than 10% of net sales.  No other  customer  accounted for
greater than 10% of net sales in the three or six months ended April 30, 2004 or
2003.  HP accounted  for 17% and 18% of our accounts  receivable as of April 30,
2004 and April 30, 2003,  respectively.  At April 30, 2004, two other  customers
each accounted for greater that 10% of our accounts  receivable  compared to one
other customer as of April 30, 2003. No other customers  accounted for more than


                                      -17-
<PAGE>


10% of our  accounts  receivable  as of April  30,  2004 or 2003,  respectively.
Orders  by our OEM  customers  are  affected  by  factors  such  as new  product
introductions,  product life cycles,  inventory levels,  manufacturing strategy,
contract awards,  competitive conditions and general economic conditions. If any
of our major customers  reduces orders for our products,  we would lose revenues
and could suffer damage to our business reputation.

BACKLOG

On April 30, 2004,  we had a sales  backlog of product  orders of  approximately
$4.8 million compared to a sales backlog of product orders of approximately $0.9
million one year ago. Of the April 30, 2004 backlog  approximately  $2.8 million
relates to sales of VME products for HP compared to $0.7 million as of April 30,
2003.

We have begun to see a slight  recovery in our markets and  customers  have been
increasing  their  ordering  levels.  As a result we have begun to increase  our
headcount  in  our  engineering  and  production  departments.  Although  we are
responding to current and future  customer design and support needs, we continue
to focus on cost  containment  and cash  preservation  and  monitor  our expense
levels very closely.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The  preparation  of  consolidated   financial  statements  in  conformity  with
generally accepted accounting principles in the U.S. 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.  Significant  estimates  and judgments  made by us
include  matters  such as  indemnifications  obligations,  accounts  receivable,
realizability  of inventories  and  recoverability  of capitalized  software and
deferred tax assets. Actual results could differ from those estimates.

Our critical accounting policies and estimates include the following:

Revenue Recognition:

Our policy is to recognize  revenue for product  sales when title  transfers and
risk of loss has passed to the customer, which is generally upon shipment of our
products to our  customers.  We defer and  recognize  service  revenue  over the
contractual  period or as services  are  rendered.  We estimate  expected  sales
returns and record the amount as a  reduction  of revenue and cost of goods sold
("COGS") at the time of shipment. Our policy complies with the guidance provided
by  Staff  Accounting  Bulletin  No.  104,  "Revenue  Recognition  in  Financial
Statements,"  issued by the  Securities and Exchange  Commission.  Judgments are
required in evaluating  the credit  worthiness of our  customers.  Credit is not
extended to customers  and revenue is not  recognized  until we have  determined
that   collectibility  is  reasonably   assured.   Our  sales  transactions  are
denominated  in  U.S.  dollars.  The  software  component  of  our  products  is
considered   incidental.   We,  therefore  do  not  recognize  software  revenue
separately from the product sale.


                                      -18-
<PAGE>


Our agreements with OEMs, such as HP, Nortel Networks Corp. and Lockheed Martin,
typically incorporate clauses reflecting the following understandings:

      -     all prices are fixed and determinable at the time of sale;

      -     title and risk of loss pass at the time of  shipment  (FOB  shipping
            point);

      -     collectibility  of the sales price is probable (the OEM is obligated
            to pay and such obligation is not contingent on the ultimate sale of
            the OEM's integrated solution);

      -     the OEM's obligation to us will not be changed in the event of theft
            or physical destruction or damage of the product;

      -     we do not have  significant  obligations  for future  performance to
            directly assist in the resale of the product by the OEMs; and

      -     there is no  contractual  right of return  other than for  defective
            products.

Our agreements with our distributors  include certain product rotation and price
protection  rights.  All  distributors  have the  right to  rotate  slow  moving
products  once each  fiscal  quarter.  The  maximum  dollar  value of  inventory
eligible  for  rotation  is  equal  to  25%  of our  products  purchased  by the
distributor  during the previous  quarter.  In order to take  advantage of their
product  rotation  rights,  the  distributors  must order and take  delivery  of
additional  SBE products equal to at least the dollar value of the products that
they want to rotate.

Each distributor is also allowed certain price protection rights. If and when we
reduce or plan to reduce the price of any of our products and the distributor is
holding  any  of  the  affected  products  in  inventory,  we  will  credit  the
distributor the difference in price when they place their next order with us. We
record an allowance  for price  protection,  reducing our net sales and accounts
receivable. The allowance is based on the price difference of the inventory held
by our stocking  distributors at the time we expect to reduce selling prices. We
believe we are able to fully  evaluate  potential  returns and  adjustments  and
continue to recognize the sale based on shipment to our  distributors.  Reserves
for the right of return and restocking are established based on the requirements
of SFAS 48, "Revenue Recognition when Right of Return Exists."

During the quarter ended April 30, 2004,  $361,000 or 12% of our sales were sold
to  distributors  compared to $0 in the same quarter of fiscal 2003.  During the
six  months  ended  April 30,  2004,  $590,000  or 10% of our sales were sold to
distributors compared to $0 in the same period of fiscal 2003.

Allowance for Doubtful Accounts:

Our policy is to maintain  allowances  for estimated  losses  resulting from the
inability  of our  customers  to  make  required  payments.  Credit  limits  are
established  through a process of reviewing the financial  history and stability
of each  customer.  Where  appropriate,  we obtain  credit  rating  reports  and
financial  statements of the customer when determining or modifying their credit
limits.  We  regularly  evaluate  the  collectibility  of our  trade  receivable
balances based on a combination of factors.  When a customer's  account  balance
becomes past due, we initiate dialogue with the customer to determine the cause.
If it is  determined  that the  customer  will be unable  to meet its  financial
obligation to us, such as in the case of a bankruptcy  filing,  deterioration in
the customer's  operating results or financial position or other material events


                                      -19-
<PAGE>


impacting their business,  we record a specific  allowance to reduce the related
receivable to the amount we expect to recover.

We also record an allowance  for all  customers  based on certain  other factors
including  the  length  of time the  receivables  are  past  due and  historical
collection  experience  with customers.  We believe our reported  allowances are
adequate.  If the financial  conditions of those  customers were to deteriorate,
however,  resulting in their  inability to make payments,  we may need to record
additional   allowances   which   would   result  in   additional   general  and
administrative   expenses   being   recorded   for  the  period  in  which  such
determination was made.

Warranty Reserves

We accrue the estimated costs to be incurred in performing  warranty services at
the time of  revenue  recognition  and  shipment  of the  products  to the OEMs.
Because  there  is no  contractual  right of  return  other  than for  defective
products,  we can reasonably estimate such returns and record a warranty reserve
at the  point  of  shipment.  Our  estimate  of costs to  service  our  warranty
obligations  is  based  on  historical  experience  and  expectation  of  future
conditions.  To the extent we experience  increased  warranty  claim activity or
increased costs  associated with servicing  those claims,  the warranty  accrual
will increase, resulting in decreased gross margin.

Inventories

We are exposed to a number of economic and industry factors that could result in
portions of our inventory  becoming  either obsolete or in excess of anticipated
usage, or subject to lower of cost or market issues.  These factors include, but
are not limited to,  technological  changes in our markets,  our ability to meet
changing customer  requirements,  competitive  pressures in products and prices,
and the  availability  of key components  from our  suppliers.  Our policy is to
establish  inventory  reserves  when  conditions  exist  that  suggest  that our
inventory may be in excess of  anticipated  demand or is obsolete based upon our
assumptions  about  future  demand for our products  and market  conditions.  We
regularly  evaluate our ability to realize the value of our inventory based on a
combination  of  factors  including  the  following:   historical  usage  rates,
forecasted sales or usage,  product  end-of-life  dates,  estimated  current and
future market  values and new product  introductions.  Purchasing  practices and
alternative  usage  avenues are  explored  within  these  processes  to mitigate
inventory  exposure.  When  recorded,  our  reserves  are intended to reduce the
carrying  value of our inventory to its net realizable  value.  If actual demand
for our products  deteriorates,  or market  conditions  are less  favorable than
those that we project, additional inventory reserves may be required.

Inventories  are  stated at the lower of cost,  using  the  first-in,  first-out
method, or market value.

Deferred Taxes

We record a valuation  allowance to reduce our deferred taxes to the amount that
is more  likely  than not to be  realized.  Based on the  uncertainty  of future
pre-tax  income,  we have fully reserved our deferred tax assets as of April 30,
2004 and October 31, 2003, respectively.  In the event we were to determine that


                                      -20-
<PAGE>


we would be able to realize our deferred tax assets in the future, an adjustment
to the deferred tax asset would increase income in the period such determination
was made.


RESULTS OF OPERATIONS

The  following  table sets forth,  as a  percentage  of net sales,  consolidated
statements of operations  data for the three and six months ended April 30, 2004
and  2003.  These  operating  results  are  not  necessarily  indicative  of our
operating results for any future period.

<TABLE>
<CAPTION>
                                             THREE MONTHS ENDED              SIX MONTHS ENDED
                                                   APRIL 30,                    APRIL 30,
                                         --------------------------    ---------------------------
                                             2004           2003           2004            2003
                                         -----------    -----------    -----------     -----------
<S>                                      <C>            <C>            <C>             <C>
      Net sales                                  100%           100%           100%            100%
      Cost of sales                               48             38             46              39
                                         -----------    -----------    -----------     -----------
        Gross profit                              52             62             54              61
                                         -----------    -----------    -----------     -----------
      Product research and development            18             17             18              16
      Sales and marketing                         19             19             18              18
      General and administrative                  13             24             12              24
      Loan benefit                              --             --               (4)           --
                                         -----------    -----------    -----------     -----------
      Total operating expenses                    50             60             44              58
                                         -----------    -----------    -----------     -----------
        Operating income                           2              1             10               3
      Interest income                           --                1           --              --
      Income tax benefit                        --                1           --                 1
                                         -----------    -----------    -----------     -----------
        Net income                                 2%             3%            10%              4%
                                         ===========    ===========    ===========     ===========
</TABLE>

NET SALES

Net sales  for the  second  quarter  of fiscal  2004  were $3.0  million,  a 66%
increase from $1.8 million in the second  quarter of fiscal 2003.  For the first
six months of fiscal 2004, net sales were $5.9 million,  which represented a 64%
increase over net sales of $3.6 million for the same period in fiscal 2003. This
increase was primarily  attributable  to an increase in shipments to HP combined
with an  increase  in  shipments  in our WAN and LAN  adapter  products  plus an
increase in our Highwire business. Approximately $517,000 or 29% of the increase
is from our purchase of Antares.  Sales to HP were $1.1 million and $2.5 million
in the three and six months  ending  April 30, 2004,  respectively,  compared to
$962,000 and $1.7  million for the same  periods of fiscal  2003,  respectively.
Sales to HP,  primarily of VME products,  represented 36% and 42% of total sales
for the three and six months  ending  April 30, 2004  compared to 54% and 49% of
total sales  during the  comparable  periods in fiscal 2003.  In April 2004,  we
received an  additional  $2.9  million  purchase  order from HP with  deliveries
scheduled for the third and fourth quarters of fiscal 2004 and the first quarter
of fiscal  2005.  We can provide no  assurance  that we will receive any further
purchase orders for VME products from HP or succeed in obtaining new orders from
existing  or new  customers  sufficient  to  replace  or  exceed  the net  sales
attributable  to HP. Nortel was our only other  customer that accounted for over
10% of sales in the three-month period ended April 30, 2004.


                                      -21-
<PAGE>


Antares product sales for the quarter were $517,000  compared to $314,000 in the
prior  quarter and $831,000 for the six months ended April 30, 2004  compared to
$0 in the same period in Fiscal 2003.  Sales of our adapter  products  were $1.6
million and $2.9  million for the three and six months  ending  April 30,  2004,
respectively,  as compared  to $364,000  and  $929,000  for the same  periods in
fiscal 2003,  respectively.  Sales of our HighWire  products  were  $323,000 and
$476,000 for the three and six months  ending April 30, 2004,  respectively,  as
compared  to  $277,000  and  $465,000  for the  same  periods  in  fiscal  2003,
respectively.  Our adapter  products are used  primarily in  edge-of-the-network
applications  such as VPN and in routers,  VoIP  gateways and security  devices,
whereas our HighWire  products  are  primarily  targeted at  core-of-the-network
applications used primarily by  telecommunications  central offices. The Gigabit
Ethernet and other adapter  products we acquired in the Antares  acquisition are
used primarily in enterprise  applications  such as high-end servers and storage
arrays using both Solaris and Linux software.  In the future,  we expect our net
sales to be generated  predominantly by sales of our adapter products with Linux
and Solaris  software,  followed by the Antares SCSI and Fibre  Channel  storage
products.  We expect to see a  continued  slowness  in the sale of our  Highwire
products due to the continued downturn in the communications  equipment markets.
All of our design wins and new customers are for applications  using our adapter
product  families.  In addition,  we will continue to sell and support our older
VME products,  but expect them to decline  significantly  as the OEM products in
which they are embedded are phased out.

Our sales backlog at April 30, 2004 was $4.8  million,  including an HP order of
VME products of $2.8 million to be shipped over our next three fiscal  quarters,
compared to $0.9  million at April 30, 2003,  which  included an HP order of VME
products of $0.7  million.  While we  anticipate an increase in our sales volume
over the course of fiscal 2004 as our customers  deploy  existing  inventory and
return to new product  design and product  rollout,  there can be no  assurances
that such an increase will occur. Due to the current economic  uncertainty,  our
customers  typically require a "just-in-time"  ordering and delivery cycle where
they will place a purchase  order with us after they receive an order from their
customer. This "just-in-time" inventory purchase cycle by our customers has made
forecasting  of our future sales volumes very  difficult.  Because our sales are
generally concentrated with a small group of OEM customers,  we could experience
significant  fluctuations  in our  quarterly  sales  volumes due to  fluctuating
demand from any major  customer or delay in the rollout of any  significant  new
product by a major customer.

GROSS MARGIN

Gross margin as a percentage  of sales in the second  quarter of fiscal 2004 was
52%  compared to 62% for the second  quarter of fiscal  2003.  For the first six
months of fiscal  2004 our gross  margin  was 54%  compared  to 61% for the same
period in fiscal 2003.  Our gross margin on sales of HP products for the quarter
was 70% versus 71% in 2003 due, in part, to the sales of previously written down
inventory  to HP.  The  decrease  in the  gross  margin is due  primarily  to an
increase in our cost of goods that resulted  from the addition of  approximately
$102,000  of  non-cash  quarterly  amortization  of  the  intellectual  property
acquired from Antares.  We will continue to amortize this intellectual  property
at the rate of $102,000  per quarter for the next 9 quarters.  We have also seen
some  erosion  in  gross  margin  due  to  slightly   higher  raw  material  and
manufacturing  costs.  The  latest  quarter's  cost of goods  sold also had some
one-time  manufacturing  tooling  start-up  costs  associated  with the  Antares
product lines.  To help counteract the lead-time and price increase  issues,  we


                                      -22-
<PAGE>


have decided to purchase  certain  critical  components  ahead of our customer's
orders.  Although we continue to have  limited  visibility  into our  customer's
product  demand,  our  critical  inventory  purchase  plan is  based on our best
estimate of current customer demand and their past ordering patterns.

Including  this  non-cash  amortization  expense,  we expect our gross margin to
range between 50% and 55% for fiscal 2004.

However,   if   market   and   economic   conditions,    particularly   in   the
telecommunications  sector,  deteriorate or fail to recover, gross margin may be
lower than projected.

PRODUCT RESEARCH AND DEVELOPMENT

Product  research and  development  expenses for the three and six month periods
ended April 30, 2004 were $543,000 and $1.1 million,  respectively,  an increase
from  $294,000 and  $579,000  for the same periods in fiscal 2003.  The increase
resulted  primarily from engineering  staffing  increases.  When we acquired the
Antares  assets in August 2003,  we hired a Vice  President of  Engineering  and
three  design   engineers  to  enhance  our  product   development  and  support
activities.  We expect overall spending for our product research and development
to range between 15% and 18% of net sales in fiscal 2004 as we remain  committed
to the  development  and  enhancement of new and existing  products.  We did not
capitalize  any  internal  software  development  costs in the six month  period
ending April 30, 2004.

SALES AND MARKETING

Sales and marketing expenses for the three and six month periods ended April 30,
2004 were $564,000 and $1.1 million, respectively, an increase from $336,000 and
$643,000 for the same periods in fiscal 2003.  The increase is primarily  due to
increased marketing program spending for products,  in addition to new marketing
and sales personnel hired during the latter part of fiscal 2003. We hired a Vice
President of Marketing,  a product manager and a technical  support  engineer in
conjunction  with the acquisition of the Antares  products.  We expect our sales
and marketing  expenses to range between 16% and 18% of net sales in fiscal 2004
as we  continue  to  accelerate  our  product  marketing  efforts  and attend an
increasing number of industry-specific trade shows.

GENERAL AND ADMINISTRATIVE

General and  administrative  expenses for the three and six months periods ended
April 30,  2004 were  $400,000  and  $764,000,  respectively,  a  decrease  from
$437,000 and $878,000 for the same periods of fiscal 2003. This decrease was due
to the effect of a continued focus on controlling spending,  primarily legal and
depreciation expense,  during the first two quarters of fiscal 2004. General and
administrative  expenses are expected to range  between 14% and 18% of net sales
for fiscal 2004.


                                      -23-
<PAGE>


LOAN LOSS RECOVERY

On  November 6, 1998,  we made a loan to one of our  officers  and  stockholders
which was used by the  officer/stockholder  to  exercise  an option to  purchase
139,400 shares of our common stock and related taxes. The loan, as amended,  was
collateralized  by shares of our common stock,  bore interest at a rate of 2.48%
per annum, with interest due annually and the entire amount of the principal was
due on December 14, 2003.

On October 31, 2002, we determined  that it was probable that we would be unable
to fully  recover the balance of the loan on its due date of December  14, 2003.
Accordingly,  a valuation  allowance of $474,000 was recorded  based on the fair
value of the common stock  collateralizing  the note at October 31, 2002 and the
amount of the officer's  personal  assets  considered  likely to be available to
settle the note in December 2003.

During the fourth quarter of fiscal 2003, the officer sold 139,400 shares of our
common stock and used the proceeds from the stock sale to repay  $362,800 of the
loan from us. As a result of the  fiscal  2003 loan  payment,  we  recognized  a
benefit in the fourth quarter of 2003 of $235,000 related to the reversal of the
loan impairment charge taken by us in fiscal 2002. In November 2003, the officer
sold  additional  shares of our common  stock and used the proceeds to repay the
remaining loan balance in full. As a result, in our first quarter of fiscal 2004
we recorded a benefit of $239,000  resulting  from the reversal of the remaining
loan impairment charge

NET INCOME

As a result of the factors  discussed  above,  we recorded net income of $54,000
and  $581,000  in the three and six  month  periods  ended  April 30,  2004,  as
compared to net income of $51,000 and  $143,000  for the same  periods in fiscal
2003.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any  transactions,  arrangements,  or  other  relationships  with
unconsolidated  entities that are  reasonably  likely to affect our liquidity or
capital  resources.  We have no special purpose or limited purpose entities that
provide  off-balance  sheet  financing,  liquidity,  or market  or  credit  risk
support.  We also do not engage in leasing,  hedging,  research and  development
services,  or other  relationships that could expose us to liability that is not
reflected on the face of the financial statements.

LIQUIDITY AND CAPITAL RESOURCES

Our liquidity is dependent on many factors,  including  sales volume,  operating
profit and the efficiency of asset use and turnover.  Our future  liquidity will
be affected by, among other things:

      -     the actual versus anticipated increase in sales of our products;

      -     ongoing cost control  actions and  expenses,  including for example,
            research and development and capital expenditures;

      -     timing of product  shipments which occur  primarily  during the last
            month of the quarter;


                                      -24-
<PAGE>


      -     the gross profit margin;

      -     the ability to raise additional capital, if necessary; and

      -     the ability to secure credit facilities, if necessary.

At April 30, 2004, we had cash and cash equivalents of $2.4 million, as compared
to $1.4  million at October 31,  2003.  In the first six months of fiscal  2004,
$659,000 of cash was provided by operating  activities  primarily as a result of
generating  net income  for the six  months  ended  April 30,  2004 of  $581,000
combined with a decrease in our inventory and trade accounts receivable that was
partially  offset by a decrease  in trade  accounts  payable  and other  accrued
liabilities.  The  decrease  in  inventory  is  reflective  of the  shipment  of
inventory  that was  received  from  our  contract  manufacturers  at the end of
January 2004. The decrease in trade accounts receivable is due the collection of
amounts due from customers. The decrease in trade accounts payable was primarily
due  to  payment   upon  the  receipt  of  finished   goods  from  our  contract
manufacturers. Working capital, comprised of our current assets less our current
liabilities,  at April 30, 2004 was $5.1 million, as compared to $3.9 million at
October 31, 2003.

In the first six months of fiscal 2004,  we purchased  $55,000 of fixed  assets,
consisting  primarily  of  computer  and  engineering  equipment  and $78,000 in
software  primarily  for  engineering  and product  design  activities.  Capital
expenditures  for each of the remaining  quarters of fiscal 2004 are expected to
range from $25,000 to $100,000 per quarter.

We  received  $227,000  in the first six  months  of fiscal  2004 from  payments
related to common stock  purchases  made by  employees  pursuant to our employee
stock  purchase  plan and the  exercise of employee  stock  options.  During the
quarter,  we also  received  cash  proceeds of $116,000 from an investor for the
purchase of 70,000 shares of our common stock pursuant to a warrant the investor
received in  conjunction  with a private  placement of common stock  transaction
that was completed in fiscal 2003.

During the fourth  quarter of fiscal  2003,  an  officer  and  stockholder  sold
139,400  shares of our common stock and used the proceeds from the stock sale to
repay  $362,800  of an  outstanding  $743,800  loan we made to the  officer.  In
November  2003, we received an additional  loan payment from the same officer of
$142,000 from stock that was sold prior to October 31, 2002.
Our projected quarterly cash flow break-even point is approximately $2.5 million
to $2.7 million in net sales if gross margin is 53% to 55%. Our projected  sales
are to a  limited  number of new and  existing  OEM  customers  and are based on
internal and  customer-provided  estimates of future  demand,  not firm customer
orders.  If our  projected  sales  do not  materialize,  we may  need to  reduce
expenses  and raise  additional  capital  through  customer  prepayments  or the
issuance of debt or equity  securities.  If additional  funds are raised through
the issuance of preferred  stock or debt,  these  securities  could have rights,
privileges or  preferences  senior to those of common stock,  and debt covenants
could impose  restrictions on our  operations.  The sale of equity or debt could
result in additional  dilution to current  stockholders,  and such financing may
not be available to us on acceptable terms, if at all.


                                      -25-
<PAGE>


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our cash and cash  equivalents  are  subject to  interest  rate risk.  We invest
primarily  on a  short-term  basis,  maturity  of less than  three  months.  Our
financial instrument holdings at April 30, 2004 were analyzed to determine their
sensitivity to interest rate changes.  The fair values of these instruments were
determined by net present values. In our sensitivity  analysis,  the same change
in interest  rate was used for all  maturities  and all other  factors were held
constant.  If interest rates increased by 10%, the expected effect on net income
related to our financial  instruments would be immaterial.  We hold no assets or
liabilities denominated in a foreign currency. Since October 31, 2003, there has
been no change in our exposure to market risk.


ITEM 4.  CONTROLS AND PROCEDURES

         (a) Evaluation of Disclosure Controls and Procedures

         An  evaluation  as  of  April  30,  2004  was  carried  out  under  the
supervision of and with the participation of the Company's management, including
the  Company's  Chief  Executive  Officer and Chief  Financial  Officer,  of the
effectiveness of the design and operation of the Company's  "disclosure controls
and  procedures,"  which  are  defined  under SEC  rules as  controls  and other
procedures of a company that are designed to ensure that information required to
be  disclosed  by a company in the reports  that it files  under the  Securities
Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and
reported within required time periods. Based upon that evaluation, the Company's
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective.

         (b) Changes in Internal Controls over Financial Reporting

         The  Company's  management,  including the  Company's  Chief  Executive
Officer and Chief Financial Officer,  has evaluated any changes in the company's
internal control over financial reporting that occurred during the quarter ended
April 30, 2004,  and has concluded  that there was no change during such quarter
that has materially affected,  or is reasonably likely to materially affect, the
Company's internal control over financial reporting.

PART II. OTHER INFORMATION


ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a)   The annual meeting of stockholders was held on Tuesday, March 16, 2004, at
      our corporate offices located at 2305 Camino Ramon,  Suite 200, San Ramon,
      California.


                                      -26-
<PAGE>


The stockholders approved the following five items:

      (i)   The  election of two  directors to hold office until the 2007 Annual
            Meeting of Stockholders:

                                                       For           Withhold
                  John Reardon                      4,695,062         72,584
                  Marion (Mel) Stuckey              4,695,062         72,584

      (ii)  To increase the aggregate  number of shares of Common Stock reserved
            for issuance under the Company's 1996 Stock Option Plan by 1,000,000
            shares.

                                        For           Against        Abstain
                                        ---           -------        -------
                                     1,098,226       677,695          28,640

      (iii) To increase the aggregate  number of shares of Common Stock reserved
            for issuance under the Company's 2001 Non-Employee  Director's Stock
            Option Plan by 200,000 shares.

                                        For           Against        Abstain
                                        ---           -------        -------
                                     1,113,855       663,037          27,669

      (iv)  An  amendment  to the  Company's  Certificate  of  Incorporation  to
            increase  the  authorized  number of shares  of  Common  Stock  from
            10,000,000 to 25,000,000 shares.

                                       For            Against       Abstain
                                       ---            -------       -------
                                     4,489,085       275,254          3,307


      (v)   The  ratification  of  the  selection  of  BDO  Seidman  LLP  as our
            independent auditors for the fiscal year ending October 31, 2004.

                                      For            Against       Abstain
                                      ---            -------       -------
                                    4,746,925        8,216           12,505

The stockholders did not approve the following item:

      (i)   An amendment to the Company's  Certificate of Incorporation to allow
            stockholders to remove directors without cause.  (Note:  approval of
            this  measure  required  66.7%  votes of all  outstanding  shares of
            Common Stock, or 3,342,065, affirmative votes for passage)

                                       For            Against       Abstain
                                       ---            -------       -------
                                    1,760,623        34,323          9,615


                                      -27-
<PAGE>


PART II. OTHER INFORMATION

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)(3)   List of Exhibits

 Exhibit
  Number          Description
  ------          -----------
  2.1             (1) Asset  Purchase  Agreement  dated  August 8, 2003,  by and
                  between D.R. Barthol & Company and SBE, Inc.

  3.1(2)          Certificate of Incorporation,  as amended through December 15,
                  1997.

  3.2(3)          Bylaws, as amended through December 8, 1998.

  10.1(4)*        1996 Stock Option Plan, as amended.

  10.2(4)*        1991 Non-Employee Directors' Stock Option Plan, as amended.

  10.3(4)         1992 Employee Stock Purchase Plan, as amended.

  10.4(4)         1998 Non-Officer Stock Option Plan as amended.

  10.5(5)         Lease for 4550 Norris Canyon Road, San Ramon, California dated
                  November 2, 1992 between the Company and PacTel Properties.

  10.6(6)         Amendment  dated June 6, 1995 to lease for 4550 Norris  Canyon
                  Road, San Ramon,  California,  between the Company and CalProp
                  L.P. (assignee of PacTel Properties).

  10.7(4)*        Full Recourse Promissory Note executed by William B. Heye, Jr.
                  in favor of the Company dated November 6, 1998, as amended and
                  restated on December 14, 2001.

  10.8(4)+        Letter  Agreement,   dated  October  30,  2001,  amending  (i)
                  Amendment No.  S/M018-4 dated April 3, 2001, and (ii) Purchase
                  Agreement dated May 6, 1991, each between SBE, Inc. and Compaq
                  Computer Corporation

  10.9(7)         Stock  subscription  agreement and warrant to purchase 111,111
                  of SBE,  Inc.  Common  Stock dated April 30, 2002 between SBE,
                  Inc. and Stonestreet Limited Partnership.

  10.10(8)        Amendment   dated  August  22,  2002  to  stock   subscription
                  agreement   dated  April  20,  2002  between  SBE,   Inc.  and
                  Stonestreet LP.


                                      -28-
<PAGE>


 Exhibit
  Number          Description
  ------          -----------
  10.11(9)        Securities  Purchase  Agreement,  dated July 27, 2003, between
                  SBE,  Inc. and  purchasers  of SBE's common stock  thereunder,
                  including form of warrant issued thereunder

  10.12(9)        Form of warrant  issued to  associates of Puglisi & Co. ($1.50
                  exercise price)

  10.13(9)        Form of warrant  issued to  associates of Puglisi & Co. ($1.75
                  and $2.00 exercise price)


  31.1            Certification of Chief Executive Officer  31.2Certification of
                  Chief Financial Officer

  32.1            Certification of Chief Executive Officer pursuant to 18 U.S.C.
                  Section  1350,  as  adopted  pursuant  to  Section  906 of the
                  Sarbanes-Oxley Act of 2002

  32.2            Certification of Chief Financial Officer pursuant to 18 U.S.C.
                  Section  1350,  as  adopted  pursuant  to  Section  906 of the
                  Sarbanes-Oxley Act of 2002

  *               Indicates   management   contract  or  compensation  plans  or
                  arrangements  filed pursuant to Item  601(b)(10) of Regulation
                  SK.

  +               Certain  confidential  information  has been deleted from this
                  exhibit  pursuant to a confidential  treatment  order that has
                  been granted.

  (1)             Filed as an exhibit to Current Report on Form 8-K, dated April
                  30, 2002 and incorporated herein by reference.

  (2)             Filed as an exhibit to Annual Report on Form 10-K for the year
                  ended October 31, 1997 and incorporated herein by reference.

  (3)             Filed as an exhibit to Annual Report on Form 10-K for the year
                  ended October 31, 1998 and incorporated herein by reference.

  (4)             Filed as an exhibit to Annual Report on Form 10-K for the year
                  ended October 31, 2002 and incorporated herein by reference.

  (5)             Filed as an exhibit to Annual Report on Form 10-K for the year
                  ended October 31, 1993 and incorporated herein by reference.

  (6)             Filed as an exhibit to Annual Report on Form 10-K for the year
                  ended October 31, 1995 and incorporated herein by reference.

  (7)             Filed as an  exhibit  to  Registration  Statement  on Form S-3
                  dated May 23, 2002 and incorporated herein by reference.

  (8)             Filed as an exhibit to  Quarterly  Report on Form 10-Q for the
                  quarter  ended  July  31,  2002  and  incorporated  herein  by
                  reference.


                                      -29-
<PAGE>


 Exhibit
  Number          Description
  ------          -----------
  (9)             Filed as an  exhibit  to  Registration  Statement  on Form S-3
                  dated July 11, 2003 and incorporated herein by reference.


(b)   REPORTS ON FORM 8-K

      A report on Form 8-K was filed with the Securities and Exchange Commission
on February 24, 2004.  The report  furnished  our press release  announcing  our
financial results for the quarter ended January 31, 2004.



                                      -30-
<PAGE>


                                   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, on May 26, 2004.


                                               SBE, INC.
                                               Registrant


Date:  May 26, 2004                            By: /s/ William B. Heye, Jr.
                                                   ----------------------------
                                                   William B. Heye, Jr.
                                                   Chief Executive Officer and
                                                   President
                                                   (Principal Executive Officer)

Date:  May 26, 2004                            By: /s/ David W. Brunton
                                                   -----------------------------
                                                   David W. Brunton
                                                   Chief Financial Officer,
                                                   Vice President, Finance
                                                   and Secretary
                                                   (Principal Financial and
                                                   Accounting Officer)


                                      -31-
<PAGE>

</TEXT>
</DOCUMENT>
