LOAN AGREEMENT


THIS LOAN AGREEMENT ("Agreement") is made and entered into as of August 14, 2002
by and  between  BEI  TECHNOLOGIES,  INC, a Delaware  corporation  ("BEI"),  BEI
SENSORS & SYSTEMS  COMPANY,  INC., a Delaware  corporation  ("BEISEN")  (BEI and
BEISEN each a "Borrower" and,  collectively the "Borrowers"),  and UNION BANK OF
CALIFORNIA, N.A., a national banking association ("Bank").


                              SECTION 1. THE CREDIT

1.1      CREDIT FACILITIES

1.1.1 The  Revolving  Loan.  Bank will loan to Borrowers an amount not to exceed
Twenty  Five  Million and No/100  Dollars  ($25,000,000.00)  outstanding  in the
aggregate at any one time (the "Revolving  Loan"). The proceeds of the Revolving
Loan shall be used for  Borrowers'  general  working  capital and other  general
corporate purposes.  Borrowers may borrow, repay and reborrow all or part of the
Revolving  Loan in  accordance  with the terms of the  Revolving  Note  (defined
below).  All  borrowings  of the  Revolving  Loan must be made before August 15,
2004,  at which time all unpaid  principal  and interest of the  Revolving  Loan
shall be due and  payable.  The  Revolving  Loan  shall be  evidenced  by Bank's
standard form of commercial  promissory note (the "Revolving Note").  Bank shall
enter each amount  borrowed and repaid in Bank's  records and such entries shall
be deemed  correct  absent  manifest  error.  Omission  of Bank to make any such
entries shall not discharge any Borrower of its obligation to repay in full with
interest all amounts borrowed.

          1.1.1  (a) The  Commercial  L/C  Sublimit.  As a  sublimit  under  the
          Revolving Loan, Bank shall issue, for the account of Borrowers, one or
          more  irrevocable  commercial  letters  of  credit  (individually,   a
          "Commercial L/C") with transport  documents presented in a full set to
          Bank (and,  in case of airway  bills,  consigned to Bank) or at Bank's
          option,  with transport documents presented in less than a full set to
          Bank and/or consigned to Borrowers or to any party other than Bank and
          calling for drafts at sight or usance up to one hundred  eighty  (180)
          days covering the importation or purchase of inventory.  The aggregate
          amount available to be drawn under all outstanding Commercial L/Cs and
          the aggregate amount of unpaid  reimbursement  obligations under drawn
          Commercial  L/Cs  shall not exceed  Five  Million  and No/100  Dollars
          ($5,000,000.00)  and shall  reduce,  dollar for  dollar,  the  maximum
          amount  available  under the Revolving Loan. All Commercial L/Cs shall
          be drawn on terms and conditions  acceptable to Bank in its reasonable
          determination  and shall be  governed  by the terms of (and  Borrowers
          agree to execute) Bank's standard form of commercial  letter of credit
          application  and  reimbursement  agreement.  No  Commercial  L/C shall
          expire  more than one hundred  eighty  (180) days from the date of its
          issuance, and in no event later than August 15, 2004.


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          1.1.1 (b) The Standby L/C Sublimit.  As a sublimit under the Revolving
          Loan,  Bank shall  issue,  for the account of  Borrowers,  one or more
          irrevocable standby letters of credit  (individually,  a "Standby L/C"
          ). The aggregate  amount  available to be drawn under all Standby L/Cs
          and the aggregate  amount of unpaid  reimbursement  obligations  under
          drawn  Standby L/Cs shall not exceed Five  Million and No/100  Dollars
          ($5,000,000.00)  and shall  reduce,  dollar for  dollar,  the  maximum
          amount  available  under the Revolving Loan. All Standby L/Cs shall be
          drawn on terms and  conditions  acceptable  to Bank in its  reasonable
          determination  and shall be  governed  by the terms of (and  Borrowers
          agree to execute)  Bank's  standard  form of standby  letter of credit
          application and reimbursement  agreement.  No Standby L/C shall expire
          later than August 15, 2004.

          Notwithstanding  the foregoing,  the combined amount outstanding under
          the  Commercial  L/C Sublimit  and the Standby L/C Sublimit  shall not
          exceed Five Million and No/100 Dollars ($5,000,000.00), at any time.

1.2 Terminology. The following words and phrases, whether used in their singular
or plural form,  shall have the meanings set forth below for all Loan Documents,
unless otherwise defined therein:

          (a) "Event of Default" is defined in Section 6.

          (b)  "GAAP"  means  generally  accepted   accounting   principles  and
          practices   consistently  applied.   Accounting  terms  used  in  this
          Agreement but not otherwise  expressly defined have the meanings given
          them by GAAP.

          (c) "L/C" means the  Commercial  L/Cs or the Standby L/Cs, or both, as
          the context may require.

          (d) "Lien"  means any  voluntary  or  involuntary  security  interest,
          mortgage,   pledge,  claim,  charge,   encumbrance,   title  retention
          agreement,  or third party  interest,  covering all or any part of the
          property of any Borrower.

          (e) "Loan" means all the credit facilities described above.

          (f) "Loan  Documents"  means this  Agreement,  the Note, and all other
          documents, instruments and agreements required by Bank and executed in
          connection  with this  Agreement,  the Note,  the Loans,  and with all
          other credit  facilities from time to time made available to Borrowers
          by Bank.

          (g) "Note" means all the promissory notes described above.

          (h) "Note Purchase Agreement" means that Note Purchase Agreement dated
          November 16, 1998, by and between  Borrowers,  Allstate Life Insurance
          Company, and Connecticut General Life Insurance Company.

          (i) "Subsidiary(ies)" is defined in Section 3.2.

1.3  Prepayment.  The  Loan  may be  prepaid  in  full or in  part  but  only in
accordance with the terms of the Note, and any such prepayment  shall be subject
to any  prepayment  fee  provided  for  therein.  In the  event  of a  principal
prepayment on any term indebtedness, the amount


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<PAGE>

prepaid  shall be applied to the  scheduled  principal  installments  due in the
reverse order of their maturity on the Loan being prepaid.

1.4 Interest.  The unpaid  principal  balance of the Loan shall bear interest at
the rate or rates provided in the Note.

1.5  Upfront  Commitment  Fee.  On or  before  the  date  of  execution  of this
Agreement,  Borrowers shall pay to Bank a nonrefundable commitment fee of Thirty
Five Thousand and No/100 Dollars ($35,000.00).

1.6 Commitment Fee.  Beginning  September 15, 2003, and on the last calendar day
of each  three-month  period  thereafter,  Borrowers  shall pay to Bank a fee of
0.1875% per year on the unused  portion of the Revolving  Loan for the preceding
quarter, computed on the basis of a 360 day year for actual days elapsed.

1.7 Legal  Fee.  Borrowers  shall  have  reimbursed  Bank for  Bank's  costs and
expenses, including, without limitation, reasonable attorneys' fees and expenses
(including  the fees of Bank's  in-house  legal  counsel and staff)  incurred in
connection with the negotiation and drafting of this Agreement provided that the
upfront  commitment  fee  provided  for in Section  1.5 will be applied  against
payment of such costs and expenses.

1.8 Balances.  Each Borrower shall maintain its major  depository  accounts with
Bank until all  obligations  of Borrowers to Bank under the Loan  Documents have
been paid in full.

1.9  Disbursement.  Bank shall  disburse the proceeds of the Loan as provided in
Bank's standard form Authorization to Disburse executed by Borrowers.

                         SECTION 2. CONDITIONS PRECEDENT

Bank shall not be  obligated  to disburse all or any portion of the Loans unless
at or prior to the time of each such disbursement, the following conditions have
been fulfilled to Bank's satisfaction:

2.1  Compliance.  Borrowers shall have performed and complied with all terms and
conditions  required by this  Agreement to be performed  or complied  with,  and
shall have executed and delivered to Bank the Note and all other Loan Documents.

2.2  Authorization to Obtain Credit.  Borrowers shall have provided Bank with an
executed  copy of Bank's form  Authorization  to Obtain  Credit  with  certified
copies of resolutions  duly adopted by each Borrower's board of directors and in
form satisfactory to Bank,  authorizing the execution,  delivery and performance
of this  Agreement and the other Loan  Documents.  Such  resolutions  shall also
designate  the  persons  who  are  authorized  to act on  Borrowers'  behalf  in
connection with this Agreement to do the things  required of Borrowers  pursuant
to this Agreement.

2.3  Continuing  Compliance.  At the  time  any  disbursement  is to be made and
immediately  thereafter,  there  shall  not  exist  any  Event  of  Default  (as
hereinafter defined) or any event,  condition, or act which with notice or lapse
of time, or both, would constitute an Event of Default.

2.4  Schedule  of  Subsidiaries.  Each  Borrower  shall have  provided  Bank the
schedule referred to in Section 3.2 ("Schedule 3.2").


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                    SECTION 3. REPRESENTATIONS AND WARRANTIES

Each Borrower represents and warrants that:

3.1 Business  Activity.  Borrower's  principal  business is the  manufacture  of
electronic sensors, motors and actuators.

3.2 Affiliates and Subsidiaries.  Borrower's  Subsidiaries and Affiliates (those
entities in which  Borrower has either a  controlling  interest or a twenty-five
percent (25%) or more ownership interest) and their addresses,  and the names of
the persons or entities owning five percent (5%) or more of the equity interests
in  Borrower,  are as provided on a schedule  delivered to Bank on or before the
date of this Agreement.

3.3  Organization  and  Qualification.  Borrower is duly  organized and existing
under the laws of the state of its  organization,  is duly qualified and in good
standing in any jurisdiction  where such qualification is required (except where
the failure to be so qualified would not have a materially adverse effect on the
operations or financial condition of Borrower and its Subsidiaries), and has the
power and  authority  to carry on the  business  in which it is  engaged  and/or
proposes to engage.

3.4 Power and Authorization.  Borrower has the power and authority to enter into
this Agreement and to execute and deliver the Note and all other Loan Documents.
This  Agreement  and all things  required by this  Agreement  and the other Loan
Documents have been duly authorized by all requisite action of Borrower.

3.5  Authority  to Borrow.  The  execution,  delivery  and  performance  of this
Agreement, the Note and all other Loan Documents are not in contravention of any
of the terms of any  indenture,  agreement or undertaking to which Borrower is a
party or by which it or any of its property is bound or affected.

3.6 Compliance with Laws.  Borrower is in compliance  with all applicable  laws,
rules,  ordinances  or  regulations  noncompliance  with which would  materially
adversely  affect the  operations  or  financial  condition  of Borrower and its
Subsidiaries.

3.7 Title.  Except for assets  which may have been  disposed of in the  ordinary
course of  business,  Borrower  has good and  marketable  title to all  property
reflected  in its  financial  statements  delivered  to Bank and to all property
acquired by Borrower since the date of said financial statements, free and clear
of all Liens, except Liens that are permitted under Section 5.1 hereof.

3.8 Financial  Statements.  Borrower's  financial  statements,  including both a
balance sheet at September 28, 2001, together with supporting schedules,  and an
income  statement for the nine (9) months ended June 29, 2002,  have  heretofore
been furnished to Bank, are true and complete,  and fairly represent  Borrower's
financial  condition for the period covered thereby.  Since June 29, 2002, there
has been no material adverse change in Borrower and its Subsidiaries'  financial
condition or operations.

3.9  Litigation.  There is no  litigation  or  proceeding  pending (that has not
already been disclosed to Bank) or, to Borrower's knowledge,  threatened against
Borrower  or any of its  property  which is  reasonably  likely  to  affect  the
financial condition, property or business of


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<PAGE>


Borrower  and its  Subsidiaries  in a  materially  adverse  manner  or result in
liability in excess of Borrower's insurance coverage not previously disclosed to
Bank.

3.10 ERISA. Borrower's defined benefit pension plans (as defined in the Employee
Retirement Income Security Act of 1974, as amended  ("ERISA")),  meet, as of the
date  hereof,  the minimum  funding  standards  of Section 302 of ERISA,  and no
Reportable Event or Prohibited Transaction as defined in ERISA has occurred with
respect to any such plan.

3.11 Regulation U. No action has been taken or is currently planned by Borrower,
or any agent acting on its behalf,  which would cause this Agreement or the Note
to violate Regulation U or any other regulation of the Board of Governors of the
Federal Reserve  System,  or to violate the Securities and Exchange Act of 1934,
in each  case as in  effect  now or as the  same  may  hereafter  be in  effect.
Borrower is not engaged in the business of  extending  credit for the purpose of
purchasing  or carrying  margin stock as one of its  important  activities  and,
except as may be expressly  agreed to and documented  between Borrower and Bank,
none of the proceeds of the Loan will be used  directly or  indirectly  for such
purpose.

3.12 No Event of  Default.  Borrower is not now in default in the payment of any
of its  material  obligations,  and  there  exists no Event of  Default,  and no
condition,  event or act  which  with  notice or lapse of time,  or both,  would
constitute an Event of Default.

3.13 Continuing  Representations and Warranties.  The foregoing  representations
and warranties shall be considered to have been made again at and as of the date
of each and  every  Loan  disbursement  and  shall be true  and  correct  in all
material respects as of each such date.

                        SECTION 4. AFFIRMATIVE COVENANTS

Until all sums payable  pursuant to this Agreement,  the Note and the other Loan
Documents  have been paid in full,  unless Bank  otherwise  consents in writing,
each Borrower agrees that:

4.1 Use of Proceeds. Borrower will use the proceeds of the Loan only as provided
in Section 1 above.

4.2 Payment of Obligations.  Borrower will pay and discharge promptly all taxes,
assessments and other governmental  charges and claims levied or imposed upon it
or its property,  or any part thereof;  provided,  however,  that Borrower shall
have the right in good faith to contest any such taxes, assessments,  charges or
claims  and,  pending the outcome of such  contest,  to delay or refuse  payment
thereof  provided that  adequately  funded reserves are established by it to pay
and discharge any such taxes, assessments, charges and claims.

4.3 Maintenance of Existence. Borrower will maintain and preserve its existence,
its assets,  and all material rights,  franchises,  licenses and other authority
necessary  for the conduct of its  business,  and will maintain and preserve its
property,  equipment and  facilities in good order,  condition and repair.  Bank
may,  during  regular  business hours at reasonable  times and after  reasonable
prior notice, visit and inspect any of Borrower's properties.

4.4  Records.  Borrower  will keep and maintain  full and accurate  accounts and
records of its  operations on a consolidated  basis in accordance  with GAAP and
will  permit  Bank,  at  Borrower's  expense,  to have access  thereto,  to make
examination and photocopies thereof, and


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to make audits of Borrower's  accounts and records and Bank's  collateral during
regular business hours and after reasonable prior notice.

4.5 Information Furnished. Each Borrower will furnish to Bank:

          (a)  Within  forty-five  (45)  days  after  the  close of each  fiscal
          quarter,  except  for the  final  quarter  of each  fiscal  year,  its
          unaudited  balance sheet as of the close of such fiscal  quarter,  its
          unaudited income and expense  statement with  year-to-date  totals and
          supportive schedules,  and its statement of retained earnings for that
          fiscal quarter, all prepared in accordance with GAAP.

          (b)  Within  one  hundred  twenty  (120)  days after the close of each
          fiscal year, a copy of its statement of financial  condition including
          at least its balance sheet as of the close of such fiscal year and its
          income and expense statement,  and its retained earnings statement for
          such  fiscal  year,  examined  and  prepared  on an  audited  basis by
          independent  certified  public  accountants  selected by Borrower  and
          reasonably satisfactory to Bank, in accordance with GAAP.

          (c)  Prompt  written  notice to Bank of any Event of Default or breach
          under any of the terms or  provisions  of this  Agreement or any other
          Loan  Document,  any  litigation  which would have a material  adverse
          effect on Borrower's and its Subsidiaries'  financial  condition,  and
          any other  matter  which has resulted in, or is likely to result in, a
          material adverse change in Borrower's and its Subsidiaries'  financial
          condition or operations.

          (d)  Within  forty-five  (45)  days  after  the  close of each  fiscal
          quarter,  a certification  of compliance with all covenants under this
          Agreement,  executed by Borrower's  duly authorized  officer,  in form
          acceptable to Bank.

          (e)  Prior  written  notice  to  Bank  of any  change  in  Borrower's,
          chairman,  chief  executive  officer,  president  or  chief  financial
          officer or, Borrower's name or state of organization, and the material
          relocation of Borrower's assets.

          (f) Within  fifteen  (15) days after  Borrower  knows or has reason to
          know that any Reportable  Event or Prohibited  Transaction (as defined
          in ERISA) has  occurred  with respect to any defined  benefit  pension
          plan of  Borrower,  a statement of an  authorized  officer of Borrower
          describing  such event or  condition  and the  action,  if any,  which
          Borrower proposes to take with respect thereto.

          (g)  Such  other  financial  statements  and  information  as Bank may
          reasonably  request from time to time,  including  without  limitation
          update(s) to Schedule 3.2.

4.6 Current Ratio. Borrower will at all times maintain a ratio of current assets
to current liabilities of not less than 1.50:1.0.

4.7 Tangible Net Worth. Borrowers will not permit or suffer at any time Tangible
Net  Worth to be less than (i) the sum of (A) the  Tangible  Net Worth as of the
end of the  fiscal  year of the  Company  ended  October  3,  1998,  plus (B) an
aggregate amount equal to 50% of Consolidated Net Income (but only if a positive
number)  for the period  beginning  October 4, 1998 and ending at the end of the
most recently  completed fiscal quarter of the Company,  less (ii) Three Million
and No/100  Dollars  ($3,000,000.00).  "Tangible  Net Worth"  means at any time,
stockholders' equity as set forth on the consolidated balance sheet of Borrowers
and their Subsidiaries


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determined in accordance  with GAAP,  minus (a) the net book value of all assets
of Borrowers and their  Subsidiaries  (after  deducting any reserves  applicable
thereto)  which would be shown as  goodwill,  patents or trade names and (b) the
net book value of investments in unrestricted  Subsidiaries.  "Consolidated  Net
Income"  means,  with  reference  to any  period,  the net  income  (or loss) of
Borrower and its restricted  Subsidiaries for such period (taken as a cumulative
whole),  as determined in accordance with GAAP, after eliminating all offsetting
debits and credits  between  Borrower and its  restricted  Subsidiaries  and all
other  items  required  to be  eliminated  in the course of the  preparation  of
consolidated financial statements of Borrower and its restricted Subsidiaries in
accordance with GAAP.

4.8 Fixed Charge Coverage Ratio. Borrowers will not permit or suffer at any time
the ratio of  earnings  available  for Fixed  Charges to Fixed  Charges  for the
period  comprised  of the  immediately  preceding  four  fiscal  quarters of the
Company  to be less than 1.25 to 1.00  from the date of this  Agreement  through
March 29,  2003;  not less than  1.35:1.00  from March 30, 2003 through June 28,
2003; and not less than 1.50:1.00  from June 29, 2003 and  thereafter,  provided
however,  notwithstanding  anything to the contrary in the  foregoing,  one time
charges of up to  $15,600,00.00  for excess  capacity  and  uncollectables  with
respect to  OpticNet,  Inc., a related  party,  and a product line move shall be
excluded from the  calculation  of  Consolidated  Net Income for the purposes of
calculating  the ratio of earnings  available for Fixed Charges to Fixed Charges
for each of the fiscal quarters ending March 30, 2002, June 29, 2002,  September
28, 2002,  and  December  28, 2002 and one time  charges of up to Seven  Hundred
Fifty  Thousand and No/100 Dollars  ($750,000.00)  for litigation and settlement
expenses related to a property in Camden,  Arkansas,  shall be excluded from the
calculation of Consolidated Net Income for the purposes of calculating the ratio
of earnings  available for Fixed Charges to Fixed Charges for each of the fiscal
quarters ending September 28, 2002,  December 28, 2002 , March 29, 2003 and June
28, 2003. "Earnings Available for Fixed Charges" means consolidated net earnings
(as  defined in the Note  Purchase  Agreement)  plus taxes,  interest  and lease
payments. "Fixed Charges" means interest charges and lease payments.

4.9 Maximum Total Debt/EBITDA  Ratio.  Borrowers will not at any time permit the
ratio  of,  (A)  Total  Debt to (B)  Consolidated  EBITDA  for  the  immediately
preceding four fiscal  quarters of Borrowers,  to exceed 3.00 to 1.00,  provided
however,  that  notwithstanding  anything to the contrary in the foregoing,  one
time charges of up to $15,600,000.00 for excess capacity and uncollectables with
respect to  OpticNet,  Inc., a related  party,  and a product line move shall be
excluded  from the  calculation  of  Consolidated  Net Income for the purpose of
calculating  the  ratio of Total  Debt to  Consolidated  EBITDA  for each of the
fiscal quarters  ending March 30, 2002,  June 29, 2002,  September 28, 2002, and
December 28, 2002 and one time  charges of up to Seven  Hundred  Fifty  Thousand
($750,000.00)  for litigation and settlement  expenses  related to a property in
Camden,  Arkansas,  shall be excluded from the calculation of  Consolidated  Net
Income  for the  purposes  of  calculating  the ratio of (A)  Total  Debt to (B)
Consolidated  EBITDA for each of the four fiscal quarters  ending  September 28,
2002,  December 28, 2002 , March 29, 2003 and June 28, 2003. "Total Debt" means,
as of any date of  determination,  the total of all indebtedness of Borrower and
its restricted  Subsidiaries  determined on a  consolidated  basis in accordance
with GAAP. "Consolidated EBITDA" means, with reference to any period, the sum of
consolidated  net earnings (as defined in the Note Purchase  Agreement) for such
period plus all amounts  deducted in the  computation  thereof on account of (a)
taxes imposed on or measured by income or excess profits,  (b) interest expense,
(c) depreciation, and (d) amortization.

4.10 Insurance.  Borrower will keep all of its insurable property, whether real,
personal or mixed,  adequately insured by good and responsible companies against
fire and such other risks


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for  damages to persons  and  property  as are  customarily  insured  against by
companies conducting similar business with respect to like properties.  Borrower
will maintain adequate worker's compensation insurance.

4.11 Additional  Requirements.  Upon Bank's demand,  Borrower will promptly take
such further action and execute all such additional documents and instruments in
connection  with this  Agreement  and the other  Loan  Documents  as Bank in its
reasonable discretion deems necessary,  and promptly supply Bank with such other
information  concerning its affairs as Bank may reasonably  request from time to
time.

4.12 Litigation and Attorneys' Fees. Upon Bank's demand,  Borrower will promptly
pay to Bank reasonable attorneys' fees, including the reasonable estimate of the
allocated  costs and  expenses of  in-house  legal  counsel  and staff,  and all
reasonable  costs and other  expenses  paid or incurred  by Bank in  collecting,
modifying or  compromising  the Loan or in enforcing or exercising its rights or
remedies  created by,  connected  with or provided for in this Agreement and the
other Loan Documents. If any judicial action, arbitration or other proceeding is
commenced,  only the prevailing  party shall be entitled to attorneys'  fees and
court costs.

4.13 Bank Expenses. Upon Bank's request, Borrower will promptly pay or reimburse
Bank for all reasonable  costs,  expenses and fees incurred by Bank in preparing
and   documenting   this   Agreement  and  the  Loan,  and  all  amendments  and
modifications to any Loan Documents, including but not limited to all filing and
recording fees, costs of appraisals,  insurance and attorneys'  fees,  including
the  reasonable  estimate of the allocated  costs and expenses of in-house legal
counsel and staff.

                          SECTION 5. NEGATIVE COVENANTS

Until all sums payable  pursuant to this Agreement,  the Note and the other Loan
Documents  have been paid in full,  unless Bank  otherwise  consents in writing,
each Borrower agrees that:

5.1 Liens.  Borrower will not create,  assume or suffer to exist any Lien on any
of its  property,  whether  real,  personal  or mixed,  now  owned or  hereafter
acquired,  or upon the income or profits  thereof,  except (a) Liens in favor of
Bank,  (b)  Liens  for  taxes,  assessments  and other  government  charges  not
delinquent and taxes,  assessments and other government  charges and other items
being  contested in good faith,  (c) minor  encumbrances  and  easements on real
property which do not affect its market value,  (d) existing Liens on Borrower's
personal  property,  (e)  statutory  Liens of  landlords  and Liens of carriers,
warehousemen,  mechanics,  materialmen  and other similar Liens  incurred in the
ordinary  course of  business,  (f)  attachment  or judgment  Liens,  unless the
judgment it secures shall not, within  forty-five (45) days after entry thereof,
have been  discharged  within  forty-five  (45) days after the expiration of any
such  stay,  (g) Liens  incurred  or  deposits  made in the  ordinary  course of
business in connection with worker's  compensation,  unemployment  insurance and
other  types of social  security  or  retirement  benefits,  or to secure (or to
obtain  letters of credit that  secure) the  performance  of tenders,  statutory
obligations,  surety  bonds,  appeal bonds,  bids,  leases,  performance  bonds,
purchase,  construction  or sales contracts and other similar  obligations,  (h)
Liens  existing  on  property  of  a  person  immediately  prior  to  its  being
consolidated with or merged into a Borrower or subsidiary,  or any Lien existing
on any property  acquired by a Borrower or  subsidiary at the time such property
is acquired,  and (i) future purchase money security interests  encumbering only
the personal property purchased.


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5.2  Borrowings.  Borrower  will not sell,  discount or  otherwise  transfer any
account receivable or any note, draft or other evidence of indebtedness,  except
to Bank or except to a  financial  institution  at face  value  for  deposit  or
collection  purposes  only,  and  without  any fees  other  than  the  financial
institution's normal fees for such services. Borrower will not borrow any money,
become  contingently  liable to borrow money, or enter any agreement to directly
or indirectly  obtain  borrowed  money,  except (a) pursuant to agreements  with
Bank, (b) operating  leases executed in the normal course of business,  provided
that the cumulative amount of such leases does not exceed an aggregate amount of
Four Million and No/100 Dollars ($4,000,000.00) each fiscal year.

5.3 Sale of Assets, Liquidation or Merger. Borrower will not liquidate, dissolve
or enter into any consolidation,  merger,  partnership or other combination,  or
convey,  sell or lease all or the  greater  part of its assets or  business,  or
purchase or lease all or the greater  part of the assets or business of another.
Notwithstanding  the  foregoing,  Borrowers  may enter into any of the foregoing
transactions if (a) the successor  formed by such  consolidation or the survivor
of such merger or the person that acquires such assets,  as the case may be (the
"Surviving  Corporation"),  shall be solvent and organized under the laws of the
United States or any state thereof  (including the District of Columbia),  shall
be  acceptable  to Borrowers  and Bank and, if any Borrower is not the Surviving
Corporation,  (i) prior written  approval shall be obtained from Bank,  (ii) the
Surviving  Corporation  shall  have  assumed  in  writing  the due and  punctual
performance  of each  provision of this  Agreement  and the other  documents and
(iii) shall have  delivered  a legal  opinion as to the  enforceability  of such
assumption;  and (b)  immediately  after giving effect to such  transaction,  no
Event of  Default,  or event or  circumstance  that with the giving of notice or
passage of time would result in an Event of Default,  shall have occurred and be
continuing,  and the Surviving  Corporation  shall be able to incur at least One
and No/100 Dollars ($1.00) of indebtedness under Section 4.9.

5.4 Loans,  Advances and  Guaranties.  Borrower will not, except in the ordinary
course of business, make any loans or advances, become a guarantor or surety, or
pledge  its  credit  except  for the  following:  (a) loans or  advances  to, or
guaranties  in favor of,  Subsidiaries  of  Borrowers,  (b) loans,  advances and
guaranties existing on the date of this Agreement and disclosed to Bank, and (c)
loans,  advances  and  guaranties  not  otherwise  permitted by this Section 5.4
provided that the  aggregate  amount at any time does not exceed an amount equal
to five percent (5%) of Tangible  Net Worth as of the then most  recently  ended
fiscal quarter of Borrower.

5.5 Investments. Borrower will not purchase the debt or equity of another except
for the following:  (a) savings accounts and certificates of deposit,  direct or
guaranteed U.S. Government  obligations,  repurchase agreements,  and commercial
paper  issued by  corporations  with the top  ratings of  Moody's or  Standard &
Poor's,  provided that all such  permitted  investments  shall mature within one
year of  purchase,  (b)  purchases  of the debt and or  equity  of  another  not
exceeding   the   aggregate   amount  of  Five   Million   and  No/100   Dollars
($5,000,000.00)  per fiscal year and (c)  purchases of the debt and or equity of
another  exceeding  the  aggregate  amount of Five  Million  and No/100  Dollars
($5,000,000.00)  per fiscal year  previously  approved in writing by Bank.  This
approval shall not be unreasonably withheld.

5.6 Redemption of Stock.  Borrowers will not declare or pay any dividend (except
dividends  in its  capital  stock) or redeem or retire any share of its  capital
stock (except when in exchange for capital stock),  or incur any liability to do
any of the foregoing, unless after giving effect to such action, on a cumulative
basis,  (i) the aggregate  amount of such dividends and redemptions  declared or
made at any time after March 30,  2002 is less than the sum of (A) an  aggregate


                                     Page 9
<PAGE>

amount  equal to fifty  percent  (50%) of the  Consolidated  Net  Income for the
period  beginning  March 31,  2002 and  ending  at the end of the most  recently
completed   fiscal   quarter,   plus  (B)  Five   Million  and  No/100   Dollars
($5,000,000.00)  plus (C) the aggregate  amount of net proceeds of capital stock
for such period,  and (ii) no Event of Default,  or event or  circumstance  that
with the  giving  of  notice  or  passage  of time  would  result in an Event of
Default, would exist.

5.7  Affiliate  Transactions.  Borrower  will not  transfer  any property to any
affiliate, except for value received in the normal course of business and for an
amount,  including any management or service  fee(s),  as would be conducted and
charged with an  unrelated or  unaffiliated  entity.  Borrower  will not pay any
management fee or fee for services to any affiliate without Bank's prior written
consent if any Event of Default shall occur and be continuing.

                          SECTION 6. EVENTS OF DEFAULT

The  occurrence  of any of the  following  events  ("Events of  Default")  shall
terminate  any  obligation  of Bank  to make or  continue  the  Loan  and  shall
automatically,  unless  otherwise  provided  under  the  Note,  make all sums of
interest and principal  and any other  amounts owing under the Loan  immediately
due and payable,  without notice of default,  presentment or demand for payment,
protest or notice of nonpayment or dishonor, or any other notices or demands:

6.1 Borrowers shall default in the due and punctual  payment of the principal of
the Note when due or the interest on the Note or on any amounts  owing under any
of the Loan Documents within five (5) business days after the date when due.

6.2 Any default shall occur under the Note.

6.3 Any event of default  under the Note Purchase  Agreement  shall occur and be
continuing.

6.4 Borrowers shall default in the due performance or observance of any covenant
or condition of the Loan Documents.

6.5 Any guaranty or subordination agreement required hereunder shall be breached
or becomes  ineffective,  or any Guarantor or subordinating  creditor shall die,
disavow  or  attempt  to revoke or  terminate  such  guaranty  or  subordination
agreement.

                          SECTION 7. GENERAL PROVISIONS

7.1 Additional Remedies. The rights, powers and remedies given to Bank hereunder
shall be cumulative and not  alternative and shall be in addition to all rights,
powers and remedies  given to Bank by law against  Borrowers or any other person
or entity  including  but not  limited to Bank's  rights of setoff and  banker's
lien.

7.2  Nonwaiver.  Any  forbearance  or failure or delay by Bank in exercising any
right,  power or remedy  hereunder  shall not be deemed a waiver thereof and any
single or partial exercise of any right,  power or remedy shall not preclude the
further exercise  thereof.  No waiver shall be effective unless it is in writing
and signed by an officer of Bank.

7.3 Suretyship Releases and Waivers. In further consideration of Bank permitting
inter-Borrower  advances,  borrowing  and  lending and other  credit  extensions
between  and among  Borrowers,  each and every  Borrower  expressly  waives  and
forgoes any and all rights  and/or  claims it has or may have  against any other
Borrower for contribution, reimbursement,


                                     Page 10
<PAGE>


subrogation,  indemnity  and/or the like, and any and all defenses it has or may
have by reason of any such rights or claims, arising out of any payment or other
performance or any breach,  default or other  non-performance by any Borrower of
any obligation,  duty or liability under this Agreement,  any Note or other Loan
Document.

In the event any  Borrower  is at any time deemed to be a surety,  guarantor  or
accommodation  party in connection with the obligations  ("Indebtedness") of any
other Borrower hereunder (in such capacity, a "Guarantor"), then:

To the  maximum  extent  permitted  by law,  Guarantor  waives (a) all rights to
require Bank to proceed against  Borrower,  or any other  guarantor,  or proceed
against,  enforce or exhaust  any  security  for the  Obligations  or to marshal
assets  or to pursue  any other  remedy  in  Bank's  power  whatsoever;  (b) all
defenses  arising by reason of any disability or other defense of Borrower,  the
cessation  for any reason of the  liability  of  Borrower,  any defense that any
other  indemnity,  guaranty or security was to be obtained,  any claim that Bank
has  made  Guarantor's  obligations  more  burdensome  or more  burdensome  than
Borrower's  obligations,  and the use of any proceeds of the  Obligations  other
than as intended  or  understood  by Bank or  Guarantor;  (c) all  presentments,
demands  for  performance,  notices  of  nonperformance,  protests,  notices  of
dishonor,  notices  of  acceptance  of this  Guaranty  and of the  existence  or
creation of new or additional  Obligations,  and all other notices or demands to
which Guarantor might otherwise be entitled; (d) all conditions precedent to the
effectiveness  of this  Guaranty;  (e) all rights to file a claim in  connection
with the Obligations in an Insolvency  Proceeding filed by or against  Borrower;
(f) all rights to require Bank to enforce any of its remedies; and (g) until the
Obligations are satisfied or fully paid with such payment not subject to return:
(i) all rights of subrogation,  contribution,  indemnification or reimbursement,
(ii) all rights of recourse to any assets or  property  of  Borrower,  or to any
collateral  or  credit  support  for  the  Obligations,   (iii)  all  rights  to
participate  in or benefit from any security or credit  support Bank may have or
acquire,  and (iv) all  rights,  remedies  and  defenses  Guarantor  may have or
acquire against Borrower.

7.4 Inurement. The benefits of this Agreement and the other Loan Documents shall
inure to the  successors  and assigns of Bank and the permitted  successors  and
assigns of any Borrower,  but any attempted  assignment by any Borrower  without
Bank's prior written consent shall be null and void.

7.5  Applicable  Law.  This  Agreement  and the other  Loan  Documents  shall be
governed by and construed according to the laws of the State of California.

7.6  Severability.  Should any one or more  provisions of this  Agreement or any
other Loan  Document be  determined  to be illegal or  unenforceable,  all other
provisions of such document shall nevertheless be effective.

7.7 Construction.  The section and subsection headings herein are for convenient
reference  only and shall not limit or otherwise  affect the  interpretation  of
this Agreement.

7.8  Amendments.  This  Agreement  may be amended only in writing  signed by all
parties hereto.

7.9  Counterparts.  Borrowers and Bank may execute one or more  counterparts  to
this  Agreement,  each of  which  shall  be  deemed  an  original,  but all such
counterparts when taken together, shall constitute one and the same agreement.


                                     Page 11
<PAGE>


7.10  Notices.  Any  notices  or other  communications  provided  for or allowed
hereunder shall be effective only when given by one of the following methods and
addressed to the parties at their  respective  addresses and shall be considered
to have been validly given (a) upon delivery, if delivered personally,  (b) upon
receipt, if mailed,  first class postage prepaid,  with the United States Postal
Service,  (c) on the next business day, if sent by overnight  courier service of
recognized  standing,  or  (d)  upon  telephoned  confirmation  of  receipt,  if
telecopied  or e-mailed.  The  addresses  to which  notices or demands are to be
given may be changed from time to time by notice delivered as provided above.

7.11  Integration  Clause.  Except for the other Loan Documents,  this Agreement
constitutes the entire agreement between Bank and Borrowers  regarding the Loan,
and all prior oral or written communications between Borrowers and Bank shall be
of no further effect or evidentiary value.

THIS  AGREEMENT  is executed  on behalf of the parties by their duly  authorized
representative(s) as of the date first above written.


UNION BANK OF CALIFORNIA, N.A.                       BEI TECHNOLOGIES, INC.



  /s/ Ryan Bradley                        By: /s/ Charles Crocker
-------------------------                    ----------------------------
        Ryan Bradley                                Charles Crocker
        Vice President                              Chairman of the Board/
                                                    CEO


Address for Notices:                      By: /s/ Robert R. Corr
                                             ----------------------------
350 California Street, 10th Floor                   Robert R. Corr
San Francisco, California  94104                    Secretary/Treasurer

                                                   BEI SENSORS & SYSTEMS
                                                   COMPANY, INC.


                                          By: /s/ Charles Crocker
                                             ----------------------------
                                                    Charles Crocker
                                                    Chairman of the Board


                                          By: /s/ Robert R. Corr
                                             ----------------------------
                                                    Robert R. Corr
                                                    Secretary/Treasurer


                                        Address for Notices for Borrowers:
                                        One Post Street, Suite 2500
                                        San Francisco, California 94104


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