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

                                    FORM 10-K

|X|   Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
      Act of 1934 for the fiscal year ended October 2, 1999 or

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

                         Commission file number 0-17885

                       BEI MEDICAL SYSTEMS COMPANY, INC.

             (Exact name of Registrant as specified in its charter)

               Delaware                                         71-0455756
   ---------------------------------                         -------------------
     (State or other jurisdiction                             (I.R.S. Employer
   of incorporation or organization)                         Identification No.)

                               100 Hollister Road
                           Teterboro, New Jersey 07608
               ---------------------------------------------------
               (Address of principal executive offices) (Zip code)

                                 (201) 727-4900
               ---------------------------------------------------
              (Registrant's telephone number, including area code)

           Securities registered pursuant to Section 12(b) of the Act:
                                      None
                                      ----

           Securities registered pursuant to Section 12(g) of the Act:
                          Common Stock, $.001 par value
                          -----------------------------

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 the 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
|_|

The approximate aggregate market value of the voting stock held by
non-affiliates of the Registrant as of December 10, 1999 was $8,461,497 (A). As
of December 10, 1999, 7,685,707 shares of Registrant's Common Stock were
outstanding.

(A) Based upon the closing sale price of the Common Stock on December 10, 1999,
as reported on the Nasdaq National Market System. Excludes 1,801,495 shares of
Common Stock held by directors, executive officers and stockholders whose
ownership exceeds ten percent of Common Stock outstanding on December 10, 1999.
Exclusion of shares held by any person should not be construed to indicate that
such person possesses the power, direct or indirect, to direct or cause the
direction of the management or policies of Registrant, or that such person is
controlled by or under common control with Registrant.

DOCUMENTS INCORPORATED BY REFERENCE

Registrant's Proxy Statement with respect to its 2000 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission is
incorporated by reference into Part III, Items 10, 11, 12 and 13 of this Report.


                                       1
<PAGE>

                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----
PART I
     Item 1.    Business ..................................................    3

     Item 2.    Properties ................................................   29

     Item 3.    Legal Proceedings .........................................   29

     Item 4.    Submission of Matters to a Vote of Security Holders .......   29

PART II
     Item 5.    Market for Registrant's Common Equity and
                Related Stockholder Matters ...............................   30

     Item 6.    Selected Financial Data ...................................   31

     Item 7.    Management's Discussion and Analysis of
                Financial Condition and Results of Operations .............   33

     Item 7a.   Qualitative and Quantitative Disclosures about Market Risks   40

     Item 8.    Financial Statements and Supplementary Data ...............   41

     Item 9.    Changes in and Disagreements with Accountants
                on Accounting and Financial Disclosure ....................   61

PART III
     Item 10.   Directors and Executive Officers
                of the Registrant .........................................   62

     Item 11.   Executive Compensation ....................................   62

     Item 12.   Security Ownership of Certain Beneficial
                Owners and Management .....................................   62

     Item 13.   Certain Relationships and Related Transactions ............   62

PART IV
     Item 14.   Exhibits, Financial Statement Schedules,
                and Reports on Form 8-K ...................................   63

Signatures      ...........................................................   67


                                       2
<PAGE>

                                     PART I

      Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. When used herein, the words, "intend", "anticipate", "believe",
"estimate" and "expect" and similar expressions as they relate to the Company
are intended to identify such forward-looking statements. The Company's actual
results, performance or achievements could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in Item 1, "Business",
including "Risk Factors", as well as Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations." These
forward-looking statements are based on current expectations, and the Company
assumes no obligation to update this information.

ITEM 1. BUSINESS

Asset Sale

      On December 8, 1999, BEI Medical Systems Company, Inc. (the "Company" or
"BEI") completed the sale of a substantial portion of the assets of the Company
to CooperSurgical Acquisition Corp., a Delaware corporation ("CSAC"), pursuant
to an Asset Purchase Agreement, dated as of October 1, 1999, by and between the
Company and CSAC, as amended (the "Asset Purchase Agreement") (the "Asset
Sale"). The assets sold constitute a business of developing, manufacturing,
marketing and servicing a broad array of advanced systems and devices for
minimally invasive diagnostic and therapeutic procedures in the medical fields
of gynecology and gastroenterology (the "Base Business"). During the fiscal year
ended October 2, 1999, approximately 97% of the Company's revenue was derived
from sales of products of the Base Business. In consideration for the sale of
the Base Business, the Company received approximately $10.5 million in cash
which amount is subject to post-closing adjustments. In addition, CSAC assumed
certain liabilities and contracts of the Company, and CooperSurgical, Inc.
waived royalty payments in the amount of up to $100,000 that otherwise may have
been due in the future from the Company.

      In connection with the Asset Sale, the Company and CSAC entered into a
Transition Agreement under which, for up to six months following the closing of
the Asset Sale, the Company is providing certain products and services to CSAC
in connection with the Base Business and the assets the Company sold. In
addition, the Company and CSAC entered into a Noncompetition Agreement under
which the Company made certain covenants, including a covenant that it will not
prior to December 8, 2004 engage in any business that competes with any of the
products the Company sold to CSAC. The Company retained the right, in certain
circumstances, to narrow substantially the scope of such noncompetition
covenant. For additional information regarding the Asset Sale, see the Company's
Form 8-K Current Report filed with the Securities and Exchange Commission on
December 22, 1999.

      Following the Asset Sale the Company is focusing on developing and
commercializing a new therapeutic system, the Hydro ThermAblator(R) (the
"HTA(R)") for treatment of excessive uterine bleeding. Approval to market this
system in the United States is dependent upon authorization from the U.S. Food
and Drug Administration ("FDA"), and the Company expects to complete follow-up
studies during the coming year that it anticipates will lead to the necessary
FDA authorization. In the meantime, the Company will emphasize marketing of the
HTA system in international markets and will prepare for U.S. marketing that it
anticipates could commence between October 2000 and April 2001. See
"Business--Risk Factors--Future Capital Needs and Applications"

      The following business overview includes the activities of BEI's Base
Business prior to the Asset Sale and is presented for historical purposes.


                                       3
<PAGE>

Industry Overview

      Women's healthcare represents a large and rapidly growing segment of
healthcare expenditures. Government spending on women's healthcare for Medicare
and Medicaid benefits alone is expected to exceed $200 billion annually. Women
rely on their gynecologists for specific healthcare needs from puberty, through
their childbearing years, to menopause and beyond. The National Ambulatory Care
Survey, conducted by the National Center for Health Statistics, indicates that
women in the United States make over 51 million visits to OB/GYN offices
annually. Additionally, as the women's population ages, the number of visits
annually and the incidence of gynecological conditions requiring diagnosis and
treatment will increase. The Company believes that better informed women,
combined with the fact that nearly half of the gynecologists under the age of 45
are women, has resulted in a heightened awareness of women's health issues. As a
result, women are driving the demand for the implementation of new and
innovative diagnostic and therapeutic procedures.

      Minimally invasive surgical techniques were developed in response to the
desire by physicians and patients for lower risk, less traumatic surgical
procedures. Minimally invasive procedures reduce anesthesia requirements, do not
require extensive post-operative follow-up, reduce the risk of post-operative
complications, and shorten the recovery period, allowing patients to return to
productive lifestyle activities sooner. Gynecologists have recently added
endometrial ablation to their outpatient approach to therapy.

Base Business

      Prior to the Asset Sale, the Company's goal was to provide a broad array
of minimally invasive advanced systems and devices to be used in an outpatient
setting serving the specific needs of gynecologists and their patients. The
Company's Base Business involved the manufacture and marketing of a line of
minimally invasive systems and devices for the diagnosis and treatment of high
incidence gynecological conditions affecting the cervix, uterus and other
aspects of the reproductive system, as well as products used to facilitate
oncological procedures and perform pelvic reconstructive surgery.

      The Base Business included a line of specialty instruments, procedure
kits, disposables and equipment for gynecologists, as outlined in the following
table, as well as a line of gastroenterology products. As a result of the Asset
Sale, the Company will no longer manufacture, market, sell or service any of the
following products, except the HTA and related accessories:

         Clinical Target                              Key Products
         ---------------                              ------------

Cervix........................        o   Bi-Safe I(TM) bipolar electrosurgical
                                          generator and bipolar LLETZ electrode
                                          system, for removal of abnormal tissue
                                          from the cervix
                                      o   Colposcopy instruments, including
                                          biopsy forceps and specula
                                      o   Gyne-Tech(TM) colposcopes systems, for
                                          tissue destruction
                                      o   Gyne-Tech cryosurgical systems, for
                                          tissue destruction
                                      o   OS Finder(TM) dilator, for cervical
                                          canal access
                                      o   Plus II(TM) monopolar generator and
                                          monopolar LLETZ Plus(TM) electrodes,
                                          for removal of abnormal tissue from
                                          the cervix

Uterus........................        o   Corson Office Hysteroscopy System, for
                                          examination and therapy of the inner
                                          surface of the uterus **
                                      o   HTA, for treatment of excessive
                                          menstrual bleeding*
                                      o   Hysteroscopic Insufflator, for precise
                                          control of uterine distension
                                      o   Z-Sampler(TM) endometrial suction
                                          curette, for tissue sampling to detect
                                          carcinoma or precancerous conditions


                                       4
<PAGE>

         Clinical Target                              Key Products
         ---------------                              ------------


Infertility Diagnosis.........        o   Corson Office Hysteroscopy System, for
                                          examination and therapy of the inner
                                          surface of the uterus**
                                      o   Hysteroscopic Insufflator, for precise
                                          control of uterine distension
                                      o   Laparoscopic Insufflator, with high
                                          flow capability to maintain proper
                                          peritoneal cavity distension
                                      o   OS Finder dilator, for cervical canal
                                          access
                                      o   SHG catheter, for distension during
                                          sonohysterography
                                      o   Z-Sampler endometrial suction curette,
                                          for endometrial sampling and to
                                          monitor hormonal therapy effects
                                      o   ZUI(TM) uterine injector, for
                                          hysterosalpingography
                                      o   ZUMI(TM) uterine manipulator/injector,
                                          for manipulation of the uterus

Oncological Surgery and Pelvic
Reconstruction................        o   Endo-Sock(TM)/MegaPouch(TM), for
                                          laparoscopic tissue removal
                                      o   Laparoscopic Insufflator, with high
                                          flow capability to maintain proper
                                          peritoneal cavity distension
                                      o   MIYA Hook(TM), for pelvic suspension
                                          surgery
                                      o   Nichols-Veronikis Ligature
                                          Carrier(TM), for pelvic suspension
                                          surgery
                                      o   Soderstrom LAVH Manipulator(TM), for
                                          laparoscopically assisted hysterectomy

------------

*     Not available in the United States

**    The Company will continue to sell these products, but only in conjunction
      with its sales of the HTA product.

The Hydro ThermAblator or HTA

Background

      The Company has focused its recent efforts on the development and
commercialization of the patented HTA system for treatment of menorrhagia, or
excessive uterine bleeding. This new product and its potential are more fully
discussed below.

      The female reproductive system consists of the uterus, ovaries and
fallopian tubes. The uterus is a highly vascular, muscular organ which lies
below the abdomen in the pelvis. Although the size and shape of a normal uterus
can vary significantly, the uterus is typically a pear shaped organ about 7 to 8
cm long and 4 to 5 cm at its widest point. Within the uterus lies the cavity
where fetal development takes place during pregnancy. The cavity is lined by the
endometrium, which is filled with tiny blood vessels. The endometrium can vary
in depth from 1 mm to over 10 mm. The thick muscular layer surrounding the
endometrium is called the myometrium. The bottom of the uterus is known as the
cervix. The cervix is richly supplied with nerves, making it the most sensitive
portion of the uterus. The cervix leads to the vagina, a muscular tube that
leads to the exterior of the body.

      Extending from each side near the top of the uterus are the fallopian
tubes that lead to the two ovaries. The fallopian tubes are very narrow,
convoluted in shape, with many folds, and are delicate and difficult to access.
As a result, they do not lend themselves to easy study and treatment. The
ovaries' primary functions are to secrete hormones, such as estrogen, and store
the female reproductive cells or ova. The fallopian tubes


                                       5
<PAGE>

transport the ova to the uterus for fertilization as part of the monthly
menstrual cycle. The fallopian tubes are the organs in which conception occurs
and at least one fallopian tube must be open to permit the passage of sperm. The
fallopian tubes serve a critical function in the reproductive process and are
often the focus of treatment when the objective is to increase a women's
reproductive potential, such as in the treatment of infertility.

      Normal menstruation is a 28-day cycle that repeats itself throughout a
woman's reproductive life. This cycle is controlled by the interaction between
pituitary and ovarian hormones and is associated with the release of an egg from
its ovary for possible fertilization. The ovaries secrete estrogen and a second
hormone, progesterone, which causes the endometrial lining to thicken, preparing
it to receive and nourish a fertilized egg. If an egg is fertilized, it implants
into the endometrium and is nourished by the rich endometrial blood supply. If
the egg is not fertilized, levels of estrogen and progesterone decrease, the
coil shaped arteries supplying the endometrium with blood constrict, and the
endometrial lining breaks down and is shed during menstruation. Menstruation
typically begins between the ages of 11 and 14 years and ends between the ages
of 45 and 55 with the onset of menopause, correlating with the diminution of
ovarian functional and hormonal production. At that time, the menstrual cycle
becomes irregular and eventually ceases completely.

Abnormal Uterine Bleeding

      Approximately 2.5 million women each year in the United States seek
medical treatment from their gynecologists for abnormal uterine bleeding.
Abnormal uterine bleeding includes disorders of the menstrual cycle, such as
irregular bleeding, and menorrhagia, or excessive uterine bleeding (defined as
total blood loss exceeding 80 ml per menstrual cycle or prolonged bleeding
beyond seven days). Abnormal bleeding is considered a symptom of an anatomic
irregularity, hormonal imbalance or a systemic disease. Commonly, however, it is
the result of disorders within the uterus itself, such as fibroids and, more
rarely, endometrial cancer. Abnormal uterine bleeding can also be caused by
other factors, including medication side effects from post-menopausal hormone
replacement therapy, miscarriage and retained tissue after child birth. Today,
there are over 31 million post-menopausal women in the United States and over
seven million are receiving hormonal replacement therapy. These women may
experience a return to undesired menstrual bleeding as a consequence of hormonal
replacement therapy.

      Various drug therapies and surgical approaches are available for treatment
of abnormal menstrual bleeding. Treatment of abnormal menstrual bleeding usually
begins conservatively with drug therapy and, if necessary, proceeds to more
invasive surgical methods.

      The traditional approach to treatment of menorrhagia, or excessive uterine
bleeding has included hormonal therapy, dilation & curettage ("D&C"), and
ultimately hysterectomy. Hormonal therapy can be effective in many cases,
however, the therapy can be of long-term duration at considerable monthly
expense and menorrhagia may persist despite hormonal therapy. D&C is commonly
performed, although a significant percentage of the endometrial lining of the
uterus may be missed, and there is little evidence that D&C provides any
meaningful long-term benefit. Many of the nearly two million women who annually
receive hormonal therapy or D&C fail to have satisfactory resolution of their
excessive bleeding problem.

      Hysterectomy, the surgical removal of the uterus with accompanying risks
of post surgical complications, has historically been the ultimate solution
offered for long-term relief to women who continue to bleed despite hormonal
therapy or D&C. Of the approximately 600,000 hysterectomies performed annually
in the United States, it has been estimated that more than 150,000 are performed
for the relief of heavy bleeding from benign causes. Considerable attention has
been focused on the frequency with which hysterectomy is performed, suggesting
that many of the procedures were not necessary.

Alternative Treatments

      Rather than removing the uterus, alternative approaches to the treatment
of excessive uterine bleeding have been attempted.


                                       6
<PAGE>

      The first successful endometrial ablation procedures, utilizing laser
photovaporization of the endometrium, were published in 1981 in the Journal of
the American Association of Gynecologic Laparoscopists. By 1990, reports
appeared regarding the successful use of a urologic resectoscope to deliver
electrosurgical current as the means of coagulating the endometrium. Both of
these surgical endometrial ablation techniques require significant distention of
the uterus to create working space. A risk of excessive absorption of
non-conductive (salt free) fluid into the vessels of the uterus also exists due
to the high pressures (100-150 mmHg) used to distend the uterine cavity. When
significant amounts of this non-physiologic fluid is absorbed, the resulting
fluid overload can cause hyponatremia (dilution of body fluids resulting in
electrolyte imbalance), pulmonary edema (fluid in the lungs), cerebral edema
(swelling of the brain), and even deaths have been reported.

      Both of these surgical ablation techniques require the tedious "painting"
of the entire lining of the uterus to control depth of thermal destruction, as
well as attention to safety issues (i.e., perforation or hemorrhage) throughout
the typical 30-60 minutes required to complete treatment of the entire lining of
the uterus under general anesthesia. While these surgical endometrial ablation
techniques offer advantages over traditional hysterectomy, clinical results are
extremely dependent on the skill and experience of the surgeon. In general,
because of the technical proficiency required to achieve good results, the time
required to complete the procedure, and the risks associated with laser and
electrosurgical roller-ball ablation, neither of these ablation techniques have
become widely popular.

      Other non-surgical techniques for treatment of excessive uterine bleeding
are under development and in various stages of FDA clinical trials, including
devices that employ heated fluid-filled balloons, electrodes on the surface of a
balloon, microwave energy, radio frequency (RF) currents, and cryosurgery
(freezing). One such device, the ThermaChoice balloon from Gynecare, a
subsidiary of Johnson & Johnson ("J&J") has received permission from the FDA to
market in the United States. Valleylab announced earlier this year that it would
be conducting a limited clinical trial of the Vesta System for endometrial
ablation prior to FDA approval in the United States. The Vesta System is
currently under FDA investigation and is not for sale in the United States.

      The Company believes that these devices are limited in their effectiveness
due to their inability to fully conform with the convoluted surface of the
entire uterine lining, their inability to reach into narrow cornual areas, and
their inability to conform to the shape of a broad range of uterine sizes.
Further, these devices do not allow the gynecologist to visualize the uterine
cavity prior to treatment, to definitively confirm proper placement inside the
uterine cavity, to observe treatment, or to immediately evaluate the effect of
treatment, because they do not include hysteroscopic capability. In March 1998,
the United Kingdom Department of Health, Medical Devices Agency, notified
medical administrators, surgeons and nurses of reports of a number of incidences
of uterine perforation and injury to adjacent organs involving devices for
endometrial ablation by thermal means. The notice advised practitioners to
verify the correct placement of such devices within the uterus prior to their
use. The Company believes the HTA will reduce the risk of perforation due to its
integral hysteroscope, which provides visual confirmation of uterine anatomy and
verification of instrument position. The characteristics of various endometrial
ablation technologies currently under development or commercialization are
outlined below.


                                       7
<PAGE>

                 Comparison of Endometrial Ablation Technologies

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
                                                                                     Compatibility
                                                                                     With Varying
                                 Method of                                           Uterine Size &   Pressurization of
     Device Technology          Introduction      Location of Energy Source              Shape        the Uterine Cavity
------------------------------------------------------------------------------------------------------------------------
<S>                           <C>                <C>                                      <C>           <C>
Balloon containing heated     Blind insertion    Heater inside balloon, inside            Low               High,
fluid                                            uterus                                                   150+ mmHg
------------------------------------------------------------------------------------------------------------------------
Balloon with conductive       Blind insertion    External electrosurgical                 Low               High,
electrodes                                       generator, electrodes inside                             150+ mmHg
                                                 uterus
------------------------------------------------------------------------------------------------------------------------
Microwave probe               Blind insertion    External microwave generator             Low           Not applicable
                                                 applicator inside uterus
------------------------------------------------------------------------------------------------------------------------
Cryogenic probe               Blind insertion    External unit, probe inside              Low           Not applicable
                                                 uterus
------------------------------------------------------------------------------------------------------------------------
Conductive mesh electrode     Blind insertion    External electrosurgical                 Low               Vacuum
                                                 generator, electrode inside
                                                 uterus
------------------------------------------------------------------------------------------------------------------------
Free fluid circulation        Blind insertion    Heater inside probe, inside             High                Low,
probe                                            uterus                                                   < 50 mmHg
------------------------------------------------------------------------------------------------------------------------
Free fluid circulation        Insertion with     External Heater, circulation to         High                Low,
hysteroscope                  visual control,    uterus                                                   < 50 mmHg
                              connected to
Hydro ThermAblator            video monitor
------------------------------------------------------------------------------------------------------------------------
</TABLE>

The Hydro ThermAblator Solution

      The Company has developed the patented HTA technology as an alternative to
existing treatments for menorrhagia, or excessive uterine bleeding, as well as
other proposed ablation treatments currently under development.

      Management believes that the patented HTA offers distinct advantages
compared to existing and emerging ablation technologies for the treatment of
excessive uterine bleeding:

      o     Integral hysteroscope provides visual confirmation of uterine
            anatomy and instrument position, as well as continuous observation
            of treatment effect.

      o     Variation in uterine size and shape are easily accommodated by
            freely circulating heated saline.

      o     Freely circulating heated saline allows even and complete treatment
            of the entire endometrium.

      o     Low pressurization of the uterine cavity reduces risk and patient
            discomfort.

      o     Does not require extensive training prior to use.

      o     Clinical outcome is not dependent on user experience or variation in
            technique.


                                       8
<PAGE>

      o     Minimally invasive short duration procedure with limited risk.

      The Company's initial target market for the HTA is the 150,000
hysterectomies performed in the United States annually for menorrhagia or
excessive menstrual bleeding from benign causes. Additionally, the Company has
identified a market opportunity among the nearly two million women suffering
from abnormal uterine bleeding in the United States for whom the prospect of
long-term hormonal therapy or repeated D&C procedures is undesirable, or for
whom such treatments are ineffective. The Company also believes that an
additional substantial market opportunity exists among the over seven million
post-menopausal women who are currently receiving hormonal replacement therapy
that can result in an undesirable resumption of menstrual bleeding. BEI also
believes marketing opportunities will develop among women seeking a cessation of
menstruation, either electively as a lifestyle choice or in conjunction with
tubal sterilization.

The HTA System

      The HTA has been designed to offer the gynecologist a minimally invasive,
non-surgical method to treat excessive uterine bleeding in an outpatient or
office setting. The HTA consists of a portable treatment unit, incorporating
microprocessor control of fluid temperature and fluid circulation. The mobile
unit provides a drawer for procedure supplies, and a shelf to house the
Company's Integrated Video System ("IVS") for display of the hysteroscopic image
on a video monitor. Precisely heated saline is circulated within the patient's
uterus, under the direct visual control of the gynecologist, for approximately
ten minutes to cause ablation of the entire endometrial lining. By utilizing
freely circulating heated saline at low pressure to distend the uterine cavity,
thermal energy is evenly transferred to all areas of the uterine cavity
including the areas of the cornua (the area where the fallopian tubes enter the
uterus) which can be difficult to treat with other devices. The use of
physiologic saline eliminates concerns about fluid absorption overload, and low
pressure prevents escape of fluid from the fallopian tubes. The incorporation of
a hysteroscopic telescope provides visual control during introduction, positive
visual confirmation of proper placement within the uterine cavity as well as
continuous visualization of the effects of the treatment. The digital displays
of the HTA control unit guide the user through the HTA procedure, providing
step-by-step visual prompts that facilitate ease of use and consistent results.
During the procedure an automated microprocessor system controls the ablating
temperature and monitors fluid volume to measure and reduce possibilities of
fluid absorption or loss and assure consistent treatment effect without
depending on user skill level. At any time, the gynecologist can interrupt the
treatment and, if desired, the circulation of room temperature saline will
rapidly cool the patient's uterus. As a result of ablation of the endometrial
lining of the uterus, the regeneration of the endometrium and resulting periodic
menstrual bleeding is either significantly reduced or eliminated.

      The need to provide a definitive diagnosis of uterine abnormalities led to
the development of hysteroscopy. A gynecologist may look inside the uterus with
a hysteroscope, a thin telescope-equipped device that is inserted through the
cervix. The hysteroscope is attached to a light source and camera allowing the
gynecologist to view the endometrial lining on a video monitor. Direct
visualization of the lining of the uterus provides a more precise diagnosis of
uterine abnormalities than D&C, hysterosalpingography, x-ray imaging of the
uterine cavity and fallopian tubes or ultrasound imaging. The HTA is the only
non-surgical technique for the treatment of excessive uterine bleeding currently
under development and in various stages of FDA clinical trials that incorporates
hysteroscopic visualization.

      In the past most therapeutic procedures for the treatment of excessive
uterine bleeding have been done in the hospital environment, often in the
operating room under general anesthesia. This has been due to a number of
factors, including the high cost of complete hospital style therapeutic
hysteroscopy systems, large diameter instrumentation that makes comfortable use
in the office with local anesthesia impractical, and the lack of third party
payor incentives for office based procedures. However, the transition of
therapeutic procedures from the hospital environment to the gynecologist's
office practice is expected to be driven by the following: (i) patient's desire
to avoid hospitalization, (ii) physician's desire for efficient use of time
resulting in improved office economics, and (iii) third party payors providing
incentives to relocate procedures to more cost-effective environments.


                                       9
<PAGE>

Results of Clinical Trials

      The Company completed FDA required Phase I clinical trials in April 1996,
and was given permission to proceed to a Phase II trial of the HTA. Phase II
treatments of 20 patients were completed in December 1997. Follow-up outcome
data from the Phase II patients was compiled and submitted to the FDA in June
1998. This outcome data compared favorably with the results of alternative
therapies, showing an amenorrhea rate of 57.9%, at six months follow-up
examinations. When these patients whose menstrual bleeding was eliminated are
grouped with the remainder of the patients whose menstrual bleeding was
significantly reduced, the overall success rate was 94.7%. A protocol violation
related to pharmaceutical administration required that one patient be removed
from consideration in the study, with only one of the remaining 19 patients
(5.3%) failing to show an improvement from HTA treatment. There is no assurance
the Phase III results will be consistent with the results obtained by the
Company in its Phase II trials or that they will support the safety and efficacy
of the HTA.

      The Company received approval to begin Phase III Clinical Trials in August
1998, and the first treatments were conducted in September 1998. BEI initiated
its Phase III clinical trials at 9 sites and enrolled 276 patients suffering
from menorrhagia, or excessive uterine bleeding. The study compared the safety
and efficacy of the HTA endometrial ablation treatment to electrosurgical
rollerball ablation, one of the current treatments for excessive uterine
bleeding. The Company completed the treatment phase of the clinical trials in
early August 1999. Data from examinations one year following treatment are
required for approval of its premarket approval ("PMA") application, but the
Company will submit six-month data to the FDA after review and analysis by its
contract research organization (Quintiles). There can be no assurance that any
data obtained from the Phase III trial will support the safety and effectiveness
of the HTA. Failure of the data to support the safety and effectiveness of the
HTA would have a material adverse effect on the Company's business, financial
condition and results of operations.

      Certain international markets will require similar regulatory approvals.
The Company has received permission from Lloyd's Registered Quality Assurance
Ltd. ("LRQA"), the Company's "notified body", to apply the CE Mark to the HTA
and to the sterile disposable HTA Procedure Kit. In February 1997, the Company
selectively initiated deliveries of HTA systems in some of those countries where
regulatory authorities permit sales. Since then treatment centers have been
established in Australia, Brazil, Canada, France, Hong Kong, Israel, Italy,
Germany, New Zealand, Portugal, Spain, Switzerland, and in the United Kingdom.
More recently, regulatory authorities in Australia and in Canada have granted
permission for the sale of the HTA system. Over 600 treatments using the HTA
have been completed worldwide, demonstrating its ease of use. Management is
encouraged by the follow-up of patients at selected international sites, which
now exceeds 24 months. The Company believes the pattern of patient follow-up
condition reflects results that are consistent with traditional laser and
electrosurgical ablation methods and superior to other emerging technologies.
See "Business - Government Regulation."

Sales and Marketing

      The Company is unable to market or sell the HTA in the U. S. prior to
receiving FDA approval. The Company anticipates that FDA approval to begin
commercial sales in the U. S. will occur between October 2000 and April 2001.
There can be no assurance that the Company will be successful in obtaining FDA
approval on a timely basis, or at all.

      Internationally, distributors in 17 countries have begun marketing the
HTA. The Company may also rely on these distributors to assist it in obtaining
reimbursement approvals from both government and private insurers in certain
international markets. The Company does not currently have distributors in a
number of significant international markets that it has targeted and would need
to establish additional international distribution relationships in order to
sell the HTA in those markets. The Company has targeted the following additional
countries for expansion of its international marketing and distribution of the
HTA: China, Japan, Norway, Philippines, South Korea and Sweden.

      Revenues from shipments of HTA products to international distributors
during fiscal years 1999 and 1998 were principally to establish demonstration
stock, and also included limited commercial sales outside


                                       10
<PAGE>

the United States to private healthcare service end-users. During fiscal year
1999, the Company continued working with its international distributors to
establish clinical treatment sites with leading gynecologists at key
institutions in their respective markets. HTA treatments have been ongoing at
these sites to produce the local clinical studies with outcomes follow-up
necessary for documentation of the economic models to influence public health
ministries and insurance providers regarding reimbursement of the cost of the
HTA procedure in these respective markets. Commercial expansion of the market
for the HTA in international public healthcare depends on successful adaptation
of favorable reimbursement policies on a country by country basis. The Company
plans to provide sponsorship for clinically-based seminars conducted by the
Company's clinical investigators, as well as clinical practitioners who
currently use the HTA, to familiarize practitioners on the use of the HTA.
Internationally, BEI will continue to support the efforts of its distributors
through sponsorship of guest speakers at national conventions and at clinical
seminars and through the sponsorship of postgraduate courses.

Competition

      The Company operates in a highly competitive industry. Many of the
Company's existing competitors have significantly greater financial resources
and manufacturing capabilities, are more established, have larger marketing and
sales organizations and have larger technical staffs than the Company.

      One of the principal competitors for the Company's HTA is Gynecare, a
subsidiary of Ethicon, Inc./Johnson & Johnson, whose ThermaChoice balloon, a
device for endometrial ablation, has been cleared to be marketed in the United
States by the FDA. While J&J has greater financial resources and more
established distribution channels than the Company to develop its presence as a
provider of an alternative treatment for dysfunctional uterine bleeding, BEI
management believes that introduction of the ThermaChoice endometrial ablation
product by J&J affirms BEI's market opportunity for non-surgical ablation
technology as well as establishes the presence of a competitor that is a
credible advocate of an alternative ablation technology. J&J entered the
ablation market when it purchased Gynecare, Inc. for approximately $80,000,000
in August 1997. Shortly thereafter, in December 1997, Gynecare received FDA
approval to market in the United States its ThermaChoice uterine balloon therapy
for dysfunctional uterine bleeding. The Company believes such FDA authorization
may have a complementary effect on the Company's prospects because the launch of
the J&J product has raised physician and public awareness of non-surgical
alternatives for hysterectomy avoidance. The gynecological community has
reported to the Company that it is receiving strong interest from women about
alternative treatments to dysfunctional uterine bleeding. Gynecologists
worldwide are beginning to adopt such alternative treatments, including BEI's
HTA, which are becoming available to serve these patients. BEI management
believes that based upon patient results 12 months following international
treatments, the HTA procedure offers a promising alternative to balloon
ablation, as evidenced by reduction in dysfunctional uterine bleeding.
Management believes the HTA procedure brings to the treatment of dysfunctional
uterine bleeding the safety attendant with direct visualization during treatment
and the potential for complete treatment of the endometrial lining of the
uterine cavity. As a result, management believes the HTA may prove to be
valuable and competitive, despite the existence of J&J's ThermaChoice balloon.

      Other principal competitors for the HTA include Cavaterm, a product of
Wallsten Medical SA, which is being sold internationally, but is not for sale in
the United States. Valleylab, a subsidiary of U.S. Surgical/Tyco, announced in
February 1999 that it would be conducting a limited clinical trial of the Vesta
System for endometrial ablation prior to FDA approval in the United States. The
Vesta System is currently under FDA investigation and is not for sale in the
United States. Other technologies available for sale internationally but not
domestically include the Gynelase product, a laser intrauterine thermal therapy
device distributed by Sharplan, and the Microsulis PLC MEA device which employs
a hand-held applicator to apply low power microwaves to the uterine cavity.

      Other large healthcare companies may enter the market in the future.
Competing companies may succeed in developing technologies and products that are
efficacious or more cost effective than the HTA.


                                       11
<PAGE>

      The Company believes that its ability to compete effectively depends on
its ability to develop and commercialize the HTA, to continue to attract and
retain highly qualified personnel and to obtain the required regulatory
approvals. See "Risk Factors Competition; Uncertainty of Technology Change".

Manufacturing

      The Company utilizes contract manufacturers to make the disposable HTA
procedure kit. Additionally, the Company intends to transfer production of the
HTA system to a third party contract manufacturer following completion of the
Transition Agreement related to the Asset Sale. Company engineers are continuing
to work with the third party contract manufacturers to reduce the cost of the
HTA disposable kit and the HTA system as volume increases by streamlining
production methods and eliminating or replacing higher cost methods and
materials. See "Risk Factors -- Dependence on Third Party Vendors"

      In order to commercialize the HTA successfully, BEI must manufacture or
assemble the HTA through third parties in accordance with FDA requirements in
commercial quantities, at high quality levels and at commercially reasonable
costs. The Company has no experience in managing the manufacture and assembly of
the HTA in commercial quantities. The HTA has not yet been produced in
commercial quantities at commercially reasonable costs, but the Company expects
that its experience with other third party manufacturers of medical electronic
systems and consumable medical products will be transferable to the HTA. Failure
of the Company or third party vendors to achieve production of the HTA in
commercial quantities at high quality levels and at commercially reasonable
prices would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Risk Factors -- Scale-up Risk"

      During fiscal 1996, BEI's facilities received ISO 9001 certification from
Lloyds Register Quality Assurance, Ltd. ("LRQA"). LRQA will conduct semiannual
audits in Teterboro, New Jersey. The most recent audit of the Company's
manufacturing facilities in Teterboro, New Jersey was in August 1999. The audit
report did not include any negative observations or identify any areas of
noncompliance thereby resulting in re-certification. This re-certification dated
effective September 1, 1999 will expire on August 31, 2002. Additionally, the
Company's facilities and documentation procedures for the manufacture of medical
devices are required to conform to the FDA's Quality System Regulations ("QSR")
through its facilities inspection program. The FDA most recently inspected the
Company's facilities in Teterboro, New Jersey in September 1998 for compliance
with the QSR. Upon completion of the inspection, the FDA did not issue a Notice
of Adverse Findings. Withdrawal of QSR compliance status would have a material
adverse effect on the Company's business, financial condition and results of
operations.

Research and Development; Technology

      The Company's principal development effort has focused on proprietary
devices for minimally invasive procedures in gynecology, including the HTA. The
Company's internally funded research and development expenditures were
$3,184,000, $2,866,000 and $1,864,000 for the fiscal years 1999, 1998 and 1997,
respectively. The Company's spending on research and development over the next
12 months will be devoted to completing the HTA clinical trials and gaining FDA
approval of the product, as well as finalizing manufacturing arrangements for
the HTA systems and the related disposable components and reducing the cost of
manufacturing.

Patents and Proprietary Technology

      The Company's policy is to protect its proprietary position by, among
other methods, filing United States and foreign patent applications to protect
technology, inventions and improvements that are important to the development of
its business.

      The Company's success will depend in part on its ability to obtain and
maintain patent protection for the HTA, to preserve its trade secrets and to
operate without infringing the proprietary rights of third parties. The
Company's strategy regarding the protection of its proprietary rights and
innovations has been to seek patents on those portions of its technology that it
believes are patentable and to protect as trade secrets other confidential and
proprietary information.


                                       12
<PAGE>

      As of October 2, 1999, the Company had a portfolio of four patents related
to the development of the HTA. Corresponding applications have been filed in
certain foreign countries relative to the HTA. The Company's policy is generally
to file patent applications in foreign countries where rights are available and
the Company believes it is commercially advantageous to do so. No assurance can
be given that any patents from pending patent applications or from any future
patent applications will be issued, that the scope of any patent protection will
exclude competitors or provide competitive advantages to the Company, that any
of the Company's patents will be held valid if subsequently challenged or that
others will not claim rights in or ownership of the patents and other
proprietary rights held by the Company. The Company also owns certain registered
trademarks, and has applied for other trademarks in certain foreign countries.

      The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights, and many companies in
the industry have employed intellectual property litigation to gain a
competitive advantage. There can be no assurance that the Company will not
become subject to patent infringement litigation or an interference proceeding
declared by the United States Patent and Trademark Office ("USPTO") to determine
the priority of inventions. The defense and prosecution of patent suits, USPTO
interference proceedings and related legal and administrative proceedings are
both costly and time consuming. Litigation may be necessary to enforce patents
issued to the Company, to protect the Company's trade secrets or know-how or to
determine the enforceability, scope and validity of the proprietary rights of
others. Any litigation or interference proceedings involving the Company will
result in substantial expense to the Company and significant diversion of effort
by the Company's technical and management personnel.

      An adverse determination in a judicial or administrative proceeding or
failure to obtain necessary license could prevent the Company from manufacturing
and selling the HTA, which would have a material adverse effect on the Company's
business, financial condition and results of operations.

      The Company also relies upon trade secrets and technical know-how and
continuing technological innovations to develop its competitive position. The
Company typically requires its employees, consultants and advisors to execute
appropriate confidentiality and assignment of invention agreements in connection
with their employment, consulting or advisory relationship with the Company.
There can be no assurance, however, that these agreements will not be breached
or that the Company will have adequate remedies for any such breach.
Furthermore, no assurance can be given that competitors will not independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to the Company's proprietary technology, or that the
Company can meaningfully protect its rights in unpatented proprietary
technology.

Government Regulation

      The preclinical and clinical testing, manufacturing, labeling,
distribution and promotion of medical devices are subject to extensive and
rigorous government regulation in the United States and other countries.
Noncompliance with applicable requirements can result in enforcement action by
the FDA, including, among other things, warning letters, fines, injunctions,
civil penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant premarket clearance or premarket
approval for devices, withdrawal of marketing clearances or approvals, and
criminal prosecution.

      The Company's HTA system is classified by the FDA as a Class III device,
which is considered to pose the greatest risk to patients (e.g., life
sustaining, life-supporting or implantable devices, or devices that are not
substantially equivalent to a predicate device). A Class III device generally
must undergo the FDA's premarket approval process ("PMA"), which requires the
manufacturer to prove the safety and effectiveness of the device to the FDA's
satisfaction. A PMA application must provide extensive preclinical and clinical
trial data and information about the device and its components regarding, among
other things, manufacturing, labeling and promotion. As part of the PMA review,
the FDA will inspect the manufacturer's facilities for compliance with the QSR,
which includes elaborate testing, control, documentation and other quality
assurance procedures.


                                       13
<PAGE>

      Upon submission, the FDA determines if the PMA application is sufficiently
complete to permit a substantive review and, if so, the application is accepted
for filing. The FDA then commences an in-depth review of the PMA application,
which the Company believes typically takes one to three years, but may take
longer. The review time is often significantly extended as a result of the FDA
asking for more information or clarification of information already provided.
The FDA also may respond with a "not approvable" determination based on
deficiencies in the application and require additional clinical trials that are
often expensive and time consuming and can delay approval for months or even
years. In recent years, the FDA has heightened its scrutiny of clinical data
submitted in support of PMA applications. During the review period, an FDA
advisory committee, typically a panel of clinicians, likely will be convened to
review the application and recommend to the FDA whether, or upon what
conditions, the device should be approved. Although the FDA is not bound by the
advisory panel decision, the panel's recommendation is important to the FDA's
overall decision making process.

      If the FDA's evaluation of the PMA application is favorable, the FDA
typically issues an "approvable letter" requiring the applicant's agreement to
comply with specific conditions (e.g., changes in labeling) or to supply
specific additional data (e.g., longer patient follow up) or information (e.g.,
submission of final labeling) in order to secure final approval of the PMA
application. Once the approvable letter is satisfied, the FDA will issue a PMA
order for the approved indications, which can be more limited than those
originally sought by the manufacturer. The PMA order can include post-approval
conditions that the FDA believes are necessary to ensure the safety and
effectiveness of the device, including, among other things, restrictions on
labeling, promotion, sale and distribution. Failure to comply with the
conditions of approval can result in enforcement action, including withdrawal of
the approval. The PMA process can be expensive and lengthy, and no assurance can
be given that any PMA application will ever be approved for marketing. Even
after approval of a PMA, a new PMA or a PMA supplement is required in the event
of a modification to the device, to its labeling or to its manufacturing process
that affects the safety or effectiveness of the device. There can be no
assurance that the Company's PMA application for the HTA will be found
approvable, or, if found approvable, will not take longer than expected to
obtain or will not include unfavorable restrictions.

      The HTA and related products, if any, manufactured or distributed by the
Company pursuant to FDA clearance or approval will be subject to pervasive and
continuing regulation by the FDA and certain state agencies. The Company will be
subject to inspection by the FDA and such state agencies, and will have to
comply with the host of regulatory requirements that usually apply to medical
devices marketed in the United States, including the FDA's labeling regulations,
the Quality System Regulations ("QSR"), the Medical Device Reporting ("MDR")
regulations (which require that a manufacturer report to the FDA certain types
of adverse events involving its products), and the FDA's general prohibitions
against promoting products for unapproved or "off-label" uses. The Company's
failure to comply with applicable regulatory requirements could result in
enforcement action by the FDA, which could have a material adverse effect on the
Company's business, financial condition and results of operations.

      Unanticipated changes in existing regulatory requirements, failure of the
Company to comply with such requirements or adoption of new requirements could
have a material adverse effect on the Company's business, financial condition
and results of operations.

      The Food and Drug Administration Modernization Act of 1997 also makes
changes to the device provisions of the Food, Drug and Cosmetic ("FDC") and
other provisions in the FDC Act affecting the regulation of devices. Among other
things, the changes will affect the PMA process, and also will affect device
standards and data requirements, procedures relating to humanitarian and
breakthrough devices, tracking and postmarket surveillance, accredited third
party review, and the dissemination of off label information. The Company cannot
predict how or when these changes will be implemented or what effect the changes
will have on the regulation of the HTA and related products.

      Distribution of the Company's HTA and related products outside the United
States is also subject to regulation, which varies widely from country to
country. The time required to obtain needed regulatory clearance by particular
foreign governments may be longer or shorter than that required for FDA
clearance or approval. In addition, the export by the Company of certain of its
products that have not yet been cleared or approved for domestic distribution
may be subject to FDA export restrictions. There can be no


                                       14
<PAGE>

assurance that the Company will receive on a timely basis, if at all, any
necessary foreign government or United States export approvals.

      In January 1995, the Medical Device Directive ("MDD") was fully
implemented in the European Union, which is intended to make European Union
regulatory requirements more consistent. Under MDD, the Company is subject to
"prior notice" of intent to conduct clinical studies in the European Union. This
process, similar to the FDA investigational device exemption ("IDE") process,
requires regulatory documents and test information to be submitted to the
governmental agency of each country in which the Company intends to conduct
clinical studies. In order to commence commercial marketing of its products in
the European Union, the Company is required to file for a CE Mark approval. In
January 1997, the Company received CE Mark approval for the HTA System from
LRQA, an organization that certifies the safety of medical device products and
the quality assurance systems put in place by the manufacturer of the medical
device. There can be no assurance, however, that the Company will be successful
in obtaining CE Mark approval for any related products in a timely manner, if at
all, and any failure to receive or delay in receiving such approval could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Risk Factors Government Regulation."

Employees

      As of October 2, 1999, BEI had 61 full-time employees, including 10 in
research, development and engineering, 20 in marketing and sales, 20 in
operations and 11 in administration. There are no unions representing the
Company's employees. The Company believes that its relations with its employees
are good.

      As a result of the Asset Sale, and following the completion of the
Company's performance of transition services for CSAC, the Company anticipates
that the number of full-time employees will be reduced to approximately 27.

Risk Factors

Limited Operating History; History of Losses and Possible Future Losses;
Fluctuations in Operating Results.

      The Company has a limited medical device operating history upon which an
evaluation of its prospects can be made. Such prospects must be considered in
light of the risks, expenses and difficulties frequently encountered by entrants
into the medical device industry, which is characterized by an increasing number
of participants, intense competition and a high failure rate. Historically, BEI
Medical has incurred significant losses in its medical device business and
expects losses to continue for at least the next several years. In addition, the
Company expects that it will continue to expend substantial resources in support
of regulatory and reimbursement approvals, expansion of marketing and sales
activities and research and development. BEI's future revenues will depend upon,
among other factors, its ability to cost-effectively commercialize the Hydro
ThermAblator (HTA). There can be no assurance that the HTA will be successfully
commercialized or that the Company will achieve significant revenues from either
international or domestic sales of the HTA. In addition, there can be no
assurance that the Company will achieve or sustain profitability in the future.
In the event the Company is unable to achieve profitability or secure additional
sources of capital, its ability to continue as a going concern may be severely
impaired. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- New Products and Technologies."

      The Company expects that its operating results will fluctuate
significantly from quarter to quarter in the future and will depend on a number
of factors, many of which are outside the Company's control. These factors
include actions relating to regulatory and reimbursement matters, the extent to
which the HTA gains market acceptance and the timing of regulatory approvals.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."


                                       15
<PAGE>

Dependence on Single Product

      The Company is dependent on a single product, the HTA system, to achieve
commercial success and generate sufficient future revenues and profits to
fulfill capital needs. Although the Company's management believes that the HTA
system will ultimately achieve commercial viability, there can be no assurance
that the HTA will achieve commercial acceptance. The Company does not have an
alternative source of revenue or profits to meet capital needs in the event the
HTA does not achieve commercial acceptance.

Uncertainty of Market Acceptance

      The Company's success is dependent upon acceptance by the medical
community of the HTA and, to a lesser extent, other new products, if any,
introduced by the Company, as reliable, safe and cost-effective treatments for
the medical conditions they are intended to treat. There can be no assurance
that the HTA or such other products will gain any significant degree of market
acceptance among physicians, patients and healthcare payors, even if the
necessary international and United States regulatory approvals are obtained. BEI
believes that recommendations and endorsements by physicians will be essential
for market acceptance of the HTA and such other products, and there can be no
assurance that any such recommendations or endorsements will be obtained. The
Company believes that physicians will not use the HTA unless they determine,
based on clinical data and other factors, that the HTA is an attractive
treatment alternative for excessive menstrual bleeding and offers clinical
utility in a cost-effective manner. Although the Company believes that
physicians will not require extensive training prior to using the HTA,
acceptance among physicians will depend upon the Company's ability to train
potential users of the HTA in interventional techniques, and the willingness of
such users to learn these new techniques. Failure of the Company to achieve
significant market acceptance of the HTA and other new products introduced by
the Company would have a material adverse effect on the Company's business,
financial condition and results of operations. Any future products developed by
the Company that gain regulatory approval would have to compete for market
acceptance and market share. The timing of market introduction of competitive
products could adversely affect the competitiveness of the HTA and any other
products the Company may develop. Accordingly, the relative speed with which the
Company can develop new products, complete clinical testing and the regulatory
approval process and supply commercial quantities of the product to the market
are expected to be important competitive factors. The Company believes that
competition in the gynecological device market is based on many factors,
including clinical outcomes, ease of use, relative efficacy, safety, product
reliability, physician familiarity with the device, third-party reimbursement
policies, patent protection, sales and marketing capability, reputation and
price. There can be no assurance that FDA approval will be obtained for the HTA
or any other new products the Company, that competitors will not introduce new
products with similar or more advanced features or that the market will accept
the HTA or any other new products the Company may develop. See "Business --
Competition."

Government Regulation.

      The manufacture and distribution of the HTA are subject to extensive
regulation by the FDA and, in some instances, by foreign and state governments.
Pursuant to the Federal Food, Drug, and Cosmetic Act, as amended (the "FDC
Act"), and the regulations promulgated thereunder, the FDA regulates the
preclinical testing, manufacture, labeling, sale, distribution, and promotion of
medical devices. Before a new device can be introduced into the market, the
manufacturer must obtain market clearance through either the 510(k) premarket
notification process or the lengthier PMA application process. Noncompliance
with applicable requirements, including the FDA's QSR, can result in, among
other things, warning letters, fines, injunctions, civil penalties, public
notifications, recall or seizure of products, total or partial suspension of
product revenues, failure of the government to grant premarket clearance or
premarket approval for devices, withdrawal of marketing approvals, and criminal
prosecution. The FDA has the authority to require repair, replacement or refund
of the cost of any device manufactured or distributed by the Company.

      The process of complying with FDA regulations with respect to new and
existing products can be costly and time-consuming. FDA requirements for the
Company's HTA require obtaining FDA premarket approval. The first stage of the
PMA process is submission of an application for an IDE. The IDE permits clinical
evaluations of products on human subjects under controlled experimental
conditions by designated qualified


                                       16
<PAGE>

medical institutions. For information concerning clinical trials of the HTA, see
"Business-The HTA System-Results of Clinical Trials."

      The Company completed the treatment phase of the clinical trials of the
HTA in early August 1999. Data from examinations one year following treatment
are required for approval of its PMA application, but the Company will submit
six-month data to the FDA after review and analysis by its contract research
organization. There can be no assurance that any data obtained from the Phase
III trial will support the safety and effectiveness of the HTA. Failure of the
data to support the safety and effectiveness of the HTA would have a material
adverse effect on the Company's business, financial condition and results of
operations.

      The second stage of the PMA process is the PMA application, which is a
comprehensive report of all data and information obtained by the applicant
throughout the product's development and testing. The PMA includes reports of
prior inventions, QSR information, the results of bench testing of the device
and other data and information including the results of the IDE clinical
studies. The FDA will issue a PMA if it finds that the safety and effectiveness
of the product have been sufficiently demonstrated and that the product complies
with all applicable regulations and standards. After reviewing the PMA
application, the FDA may require further clinical evaluation of the product,
terminate the clinical studies, issue a PMA, or require additional patient
follow-up for an indefinite period of time. Approval of the Company's PMA
application for its HTA will depend on a wide variety of factors, many of which
are outside the Company's control. There can be no assurance that the Company
will reach a stage of development at which filing a PMA application will be
appropriate, nor that it will be successful in obtaining a PMA for the HTA in a
timely manner, or at all, which is necessary to market the Company's HTA
commercially in the United States. Delays in obtaining marketing approvals and
clearances in the United States, could have material adverse effects on the
Company and its operations. Although the Company has been successfully inspected
with respect to its current facilities for compliance of its operations with the
QSR, final approval of the HTA will require an inspection by the FDA to
determine whether the Company's operations at its current facilities conform
with the FDA's current QSR. Even after approval of a PMA, a new PMA or PMA
supplement is required in the event of a modification to the device, to its
labeling or to its manufacturing process that affects the safety or
effectiveness of the device. The timing of the PMA review process is
unpredictable, and the Company's failure to obtain the necessary approval on a
timely basis would have a material adverse effect on the Company's business,
financial condition and results of operations.

      The Company is subject to certain FDA regulations governing defective
products and complaints about its products. The Company's products are subject
to recall at any time by the FDA or the Company if it appears that use of the
products could result in, among other things, unwarranted health risks. The FDA
has authority to inspect the Company's facilities to ensure compliance with the
FDC Act and regulations thereunder. Failure to comply with these regulations
could have a material adverse effect on the Company's business, financial
condition and results of operations.

      The FDA regulates the export of medical devices that have not been
approved or cleared for marketing in the United States. The Company expects to
export the HTA directly to the European Union under the provisions of the FDA
Export Reform and Enhancement Act of 1996. In certain instances, however, the
Company may need to apply for export approval from the FDA. There can be no
assurance that required approvals will be granted.

      Developments such as the enactment of the Safe Medical Devices Act of 1990
and increased enforcement actions reflect a trend toward more stringent product
regulation by the FDA. One result is an increase in the typical time elapsed
between the filing of an application and the receipt of FDA clearance or
approval of commercial release of a medical device. In addition, the FDA often
requires clinical data with such applications, which can increase the cost of
obtaining such clearance to market. Furthermore, rigorous regulatory action may
be taken in response to deficiencies noted in inspections or to any product
performance problems.

      The Food and Drug Administration Modernization Act of 1997 also makes
changes to the device provisions and other provisions in the FDC Act affecting
the regulation of devices. Among other things, the


                                       17
<PAGE>

changes will affect the PMA process, and also will affect device standards and
data requirements, procedures relating to humanitarian and breakthrough devices,
tracking and postmarket surveillance, accredited third party review, and the
dissemination of off-label information. The Company cannot predict how or when
these changes will be implemented or what effect the changes will have on the
regulation of the Company's products.

      Unanticipated changes in existing regulatory requirements, failure of the
Company to comply with such requirements or adoption of new requirements could
have a material adverse effect on the Company's business, financial condition
and results of operations.

      The Company also is subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and hazardous substance disposal.
There can be no assurance the Company will not be required to incur significant
costs to comply with such laws and regulations in the future or that such laws
or regulations will not have a material adverse effect upon the Company's
business, financial condition and results of operations.

      Political, economic and regulatory influences are subjecting the
healthcare industry in the United States to fundamental change. The Company
anticipates that Congress and state legislatures will continue to review and
assess alternative healthcare delivery and payment systems. Legislative debate
is expected to continue in the future, and the Company cannot predict what
impact the adoption of any federal or state healthcare reform measure or future
private sector reform may have on its business.

      Medical device laws are also in effect in many countries outside the
United States in which the Company does business. These range from comprehensive
device approval requirements to requests for product data or certifications. The
number and scope of these requirements are increasing. This trend toward
increasing product regulation is evident in the European Union, where efforts
are under way to harmonize the regulatory systems. In January 1995, the MDD was
fully implemented in the European Union, which is intended to make regulatory
requirements of European Union countries more consistent. The time required to
obtain approvals required by foreign countries may be longer or shorter than
that required for FDA approval and requirements for licensing may differ from
FDA requirements. Under MDD, the Company is subject to "prior notice" of intent
to conduct clinical studies in the European Union. This process, similar to the
FDA IDE process, requires regulatory documents and test information to be
submitted to the governmental agency of each country in which the Company
intends to conduct clinical studies. In order to commence commercial marketing
of its products in the European Union and the European Free Trade Association,
the Company is required to file for a CE Mark approval. Although the Company
obtained a CE Mark for the HTA, which allows the Company to commence marketing
of the HTA in countries that are members of the European Union and the European
Free Trade Association, subject to limited regulations in certain countries,
there can be no assurance that the Company will be successful in obtaining CE
Mark approval for any other products on a timely basis if at all, and any
failure to receive or delay in receiving approval could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business-- Government Regulation."

Future Capital Needs and Applications

      The Company's capital requirements to complete the development and
commercialization of the HTA depend on numerous factors including the timing and
receipt of regulatory clearances and approvals, the resources required to
initiate commercialization of the HTA in the United States and the extent the
HTA gains market acceptance and sales. The timing and amount of such capital
requirements cannot be predicted accurately. Consequently, although the Company
believes that the net proceeds from the Asset Sale plus existing cash balances
will provide adequate funding to meet the Company's capital requirements for the
next twenty-four months, the Company may need to raise additional funds through
public or private financing or other arrangements. There can be no assurance
that the Company will not require additional financing or that such additional
financing, if needed, will be available on terms attractive to the Company, or
at all. Any additional equity financing may be dilutive to stockholders and debt
financing, if available, may involve restrictive covenants


                                       18
<PAGE>

      Prior to the receipt of FDA approval, in order to attempt to maximize the
return on assets of the Company and to provide a contingency plan in the event
the Company does not receive such approval in a timely manner, or at all, the
Board of Directors will be evaluating various strategic alternatives that may be
available to the Company, including: (i) an affiliation with a third party to
exploit the HTA technology, (ii) the licensing or sale of the HTA technology,
and (iii) possible reinvestment of the proceeds derived from such license or
sale in an appropriate business based on the Company's existing expertise,
goodwill and management.

Scale-Up Risk

      In order to commercialize the HTA successfully, BEI must manufacture or
assemble the HTA through third parties in accordance with FDA requirements in
commercial quantities, at high quality levels and at commercially reasonable
costs. The Company has no experience in managing the manufacture and assembly of
the HTA in commercial quantities. The HTA has not yet been manufactured in
commercial quantities at commercially reasonable costs, and there can be no
assurance that it will be. As a result, there can be no assurance that BEI will
not encounter difficulties in scaling up manufacturing, including problems
involving production yields, quality control, component supply and shortages of
qualified manufacturing personnel. Failure to produce the HTA in commercial
quantities at high quality levels and at commercially reasonable prices would
have a material adverse effect on the Company's business, financial condition
and results of operations.

Dependence on Third Party Vendors

      Following the transition period related to the Asset Sale, the Company
will cease all manufacturing and transfer its manufacturing activities for the
HTA system and disposable components to third party vendors. Additionally, a
number of significant components, such as thermisters and heater rods, are
purchased from sole source suppliers. For certain contract manufactured products
and components there are relatively few sources of supply, and establishing
additional or replacement suppliers for such components or services cannot be
accomplished quickly. Although the Company will try to maintain sufficient
quantities of inventory of such components to minimize production delays or
interruptions, there can be no assurance that the Company will find suitable
alternatives at reasonable prices, if at all, or that any such alternatives will
remain available to the Company. The Company's inability to obtain acceptable
contract manufacturing services or suppliers of components in a timely manner or
to find and maintain suitable replacement contract manufacturing services or
suppliers of components would have a material adverse effect on the Company's
business, financial condition and results of operations.

Limited Direct Sales Experience

      The Company has only limited experience in direct field sales and
marketing of the HTA both domestically and internationally. The Company has no
direct international or domestic field sales force, and has only a limited
number of partnership relationships with international distributors to market
the HTA. There can be no assurance that the Company will be successful in
establishing additional partnership relationships on commercially reasonable
terms, if at all. Achieving market acceptance for the HTA will require BEI to
establish additional marketing and direct sales capability sufficient to support
sales in commercial quantities. Establishing such capability will require
significant resources and there can be no assurance that the Company will be
able to recruit and retain additional qualified marketing personnel or direct
sales personnel or that future sales efforts by the Company will be successful.
The failure to establish and maintain an effective distribution channel for the
HTA or to establish and retain qualified and effective sales personnel to
support commercial sales of the HTA would have a material adverse effect on the
Company's business, financial condition and results of operations.

Risks Associated with International Sales

      The Company markets and sells the HTA internationally through a network of
distributors. The Company's international sales are dependent upon the marketing
efforts of, and sales by, these distributors. BEI may also rely on these
distributors to assist it in obtaining reimbursement approvals from both


                                       19
<PAGE>

government and private insurers in certain international markets. In general,
the Company has chosen to operate through small distribution firms because of
its belief that these firms will devote greater attention to the HTA. The use of
small distributors increases the risks associated with financial instability of
distributors, which includes the risk that distributors will cease operations or
will be unable to satisfy financial obligations to the Company. If a distributor
were to fail to invest adequate capital promoting the HTA or were to cease
operation, the Company would likely be unable to achieve significant revenues in
the territory. In addition, because the Company has only recently commenced
international sales, it has only limited sell-through experience with many of
its distributors. BEI also does not currently have distributors in a number of
significant international markets that it has targeted and will need to
establish additional international distribution relationships. There can be no
assurance that the Company will engage qualified distributors on commercially
reasonable terms in a timely manner. The failure to engage such distributors or
the failure of such distributors to achieve significant revenues from sales of
the HTA would have a material adverse effect on the Company's business,
financial condition and results of operations.

      A number of other risks are inherent in international operations and
transactions. International revenues and operations may be limited or disrupted
by the imposition of government controls, export license requirements, political
instability, trade restrictions, changes in tariffs, difficulties in managing
international operations and fluctuations in foreign currency exchange rates.
There can be no assurance that the Company will be able to successfully
commercialize the HTA in any international market. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

Reliance on Patents and Protection of Proprietary Technology

      BEI's ability to compete effectively will depend substantially on its
ability to develop and maintain the proprietary aspects of its technology. There
can be no assurance that any of the Company's issued patents, or any future
patents that may be issued, will offer any degree of protection to the HTA
against competitive products. There can be no assurance that any patents that
may be issued or licensed to the Company or any of the Company's patent
applications will not be challenged, invalidated or circumvented in the future.
In addition, there can be no assurance that competitors, many of whom have
substantial resources and have made substantial investments in competing
technologies, will not seek to apply for and obtain patents that will prevent,
limit or interfere with the Company's ability to make, use or sell the HTA
either in the United States or in international markets.

      The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property disputes, and some companies
in the industry have employed intellectual property litigation to gain a
competitive advantage. There can be no assurance that the Company will not in
the future become subject to patent infringement claims and litigation or
interference or other proceedings in the USPTO. The defense and prosecution of
intellectual property suits, USPTO proceedings and related legal and
administrative proceedings are both costly and time consuming. Litigation may be
necessary to enforce patents issued or licensed to the Company, to protect the
Company's trade secrets or know-how or to determine the enforceability, scope
and validity of the proprietary rights of others.

      Any litigation or USPTO proceedings involving the Company will result in
substantial expense to the Company and significant diversion of effort by the
Company's technical and management personnel. An adverse determination in
litigation or USPTO proceedings to which the Company may become a party could
subject the Company to significant liabilities to third parties or require the
Company to seek licenses from third parties. Although some patent and
intellectual property disputes in the medical device area have been settled
through licensing or similar arrangements, costs associated with such
arrangements may be substantial and could include substantial ongoing royalties.
Furthermore, there can be no assurance that necessary licenses would be
available to the Company on satisfactory terms, if at all. An adverse
determination in a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent the Company from manufacturing and selling the
HTA, which would have a material adverse effect on the Company's business,
financial condition and results of operations.

      The Company's disposable HTA procedure kit and the HTA system are or will
be manufactured by third party vendors, who are or will be responsible for
registering and maintaining their own facility


                                       20
<PAGE>

regulatory and compliance approvals. Any regulatory or compliance actions
against a third party vendor by either the FDA or any other regulatory body
could affect the third party vendor's ability to supply the Company, which in
turn could have a material adverse impact on the Company.

      In addition to patents, BEI relies on trade secrets and proprietary
know-how, which it seeks to protect, in part, through appropriate
confidentiality and proprietary information agreements. These agreements
generally provide that all confidential information developed or made known to
an individual by the Company during the course of the individual's relationship
with the Company is to be kept confidential and not disclosed to third parties
or utilized by the individual, except in specific circumstances. The agreements
also generally provide that all inventions conceived by the individual in the
course of rendering services to BEI shall be the exclusive property of the
Company. There can be no assurance that the Company's proprietary information
will not be misused or confidentiality agreements with employees, consultants
and others will not be breached, that the Company will become aware of such
breach or will have adequate remedies for any breach, or that the Company's
trade secrets will not otherwise become known to or independently developed by
competitors. See "Business -- Research and Development; Technology" and "--
Patents and Proprietary Technology."

Uncertainty Relating to Third-Party Reimbursement and Healthcare Reform

      In the United States, hospitals, physicians and other healthcare providers
that purchase medical devices generally rely on third-party payors, such as
government health administration authorities and private health insurance plans,
to reimburse all or part of the cost associated with the treatment of patients.
Although reimbursement for diagnostic and therapeutic procedures to treat
uterine disorders such as menorrhagia, or excessive uterine bleeding and fibroid
treatment have generally been available in the United States, there is no
assurance that it will continue to be the case or that the fees currently
allowed for these procedures will not be reduced. BEI could also be adversely
affected by changes in reimbursement policies of government or private
healthcare payors, particularly to the extent that any such changes affect
reimbursement for diagnostic or therapeutic procedures in which the HTA is used.
Failure by physicians, hospitals and other users of the Company's products to
obtain sufficient reimbursement from healthcare payors for procedures in which
the HTA is used, or adverse changes in government and private third-party
payors' policies toward reimbursement for such procedures, could have a material
adverse effect on the Company's business, financial condition and results of
operations.

      Market acceptance of the HTA in international markets may be dependent in
part upon the availability of reimbursement within prevailing healthcare payment
systems. Reimbursement and healthcare payment systems in international markets
vary significantly by country, and include both government sponsored and private
healthcare insurance. Although BEI will seek international reimbursement
approvals, obtaining such approvals can require 12 to 18 months or longer and
there can be no assurance that any such approvals will be obtained in a timely
manner, that the Company will obtain sufficient reimbursement, or that the
Company will obtain any reimbursement at all. Failure to receive additional
international reimbursement approvals could have a material adverse effect on
market acceptance of the HTA in the international markets in which the Company
is seeking approvals and could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business -- Sales
and Marketing."

      The Company expects that there will be continued pressure on
cost-containment throughout the United States healthcare system. Reforms may
include mandated basic healthcare benefits, controls on healthcare spending
through limitations on the growth of private health insurance premiums and
Medicare and Medicaid spending, the creation of large insurance purchasing
groups and fundamental changes to the healthcare delivery system. The Company
anticipates that Congress and state legislatures will continue to review and
assess alternative healthcare delivery systems and payment methodologies and
public debate of these issues will likely continue in the future. Due to
uncertainties regarding the ultimate features of reform initiatives and their
enactment and implementation, the Company cannot predict which, if any, of such
reform proposals will be adopted, when they may be adopted or what impact they
may have on the Company.


                                       21
<PAGE>

Competition; Uncertainty of Technology Change

      One of the principal competitors for the Company's HTA is Gynecare, a
subsidiary of Ethicon, Inc./Johnson & Johnson ("J&J"), whose ThermaChoice
balloon, a device for endometrial ablation, has been cleared to be marketed in
the United States by the FDA. Other principal competitors for the HTA include
Cavaterm, a product of Wallsten Medical SA, which is being sold internationally,
but is not for sale in the United States. Valleylab, a subsidiary of U.S.
Surgical/Tyco, announced in February 1999 that it would be conducting a limited
clinical trial of the Vesta System for endometrial ablation prior to FDA
approval in the United States. The Vesta System is currently under FDA
investigation and is not for sale in the United States. Other technologies
available for sale internationally but not domestically include the Gynelase
product, a laser intrauterine thermal therapy device distributed by Sharplan,
and the Microsulis PLC MEA device which employs a hand-held applicator to apply
low power microwaves to the uterine cavity.

      Other large healthcare companies may enter the market in the future.
Competing companies may succeed in developing technologies and products that are
efficacious or more cost effective than the HTA. There can be no assurance that
these companies will not succeed in developing technologies and products that
are more effective than the HTA or that would render the Company's technologies
or HTA obsolete or not competitive. The Company expects competition for devices
and service to treat excessive menstrual bleeding to increase. Such competition
could have a material adverse effect on the Company's business, financial
condition and results of operations See "Business -- Competition."

Product Liability Risk; Limited Insurance Coverage

      The medical device industry has historically been litigious, and BEI faces
an inherent business risk of financial exposure to product liability claims in
the event that the use of its products results in personal injury. Although the
Company has not experienced any claims to date, the Company plans to market new
technology and there can be no assurance that the Company will not experience
losses due to product liability claims in the future. The HTA is complex and
will be used in medical procedures and in situations where there is a potential
risk of serious injury, adverse side effects or death. As a result, BEI
currently maintains product liability insurance with coverage limits of
$1,000,000 per occurrence and $2,000,000 in the aggregate. It cannot be
predicted, however, whether such insurance is sufficient, or if not, whether the
Company will be able to obtain such insurance as is sufficient, to cover the
risks associated with the Company's business or whether such insurance will be
available at premiums that are commercially reasonable. A successful claim
against - or settlement by - the Company in excess of its insurance coverage or
the Company's inability to maintain insurance in the future could have a
material adverse effect on the Company's business, financial condition and
results of operations.

Dependence on Key Employees

      BEI is dependent upon a number of key management and technical personnel.
The loss of the services of one or more key employees would have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company's ability to manage its transition to commercial-scale
operations, and hence its success, will depend on the efforts of these
individuals. The Company's success will also depend on its ability to attract
and retain additional highly qualified management and technical personnel. The
Company faces intense competition for qualified personnel, and there can be no
assurance that the Company will be able to attract and retain such personnel.
The Company does not currently have key person insurance on the life of any
employee.

Risks Related to Possible Acquisitions

      The Company may seek to expand its operations through future acquisitions
of other complementary businesses or product lines. There can be no assurance
that the Company will be able to identify or acquire additional businesses, or
to successfully integrate and profitably manage acquired businesses. In
addition, increased competition for acquisition candidates may develop, in which
event there may be fewer acquisition opportunities available to BEI as well as
higher acquisition prices. Further, acquisitions involve a number of special
risks, including possible adverse effects on the Company's operating results,
diversion of


                                       22
<PAGE>

management's attention, risks related to having adequate corporate and financial
controls and procedures to manage and monitor the Company's operations as they
expand, risks associated with unanticipated events or liabilities and
amortization of acquired intangible assets, some or all of which could have a
material adverse effect on the Company's business, financial condition and
results of operations, particularly in the fiscal quarters immediately following
the consummation of such transactions. There also can be no assurance that
businesses acquired in the future will achieve anticipated revenues and
earnings. In addition, margins may be negatively impacted to the extent that
margins on acquired product lines are lower than BEI's average margins. There
can be no assurance that acquisitions can be consummated on acceptable terms,
that any acquired businesses can be integrated successfully into the Company's
operations, or that any such acquisitions will not have a material adverse
effect on BEI's business, financial condition and results of operations.

Year 2000

      Currently, many computer systems and software products are coded to accept
only two digit entries in the date code field. These date code fields will need
to accept four digit entries to distinguish 21st century dates from 20th century
dates. As a result, many companies' software and computer systems may need to be
upgraded or replaced in order to comply with such Year 2000 requirements,
especially those with internally developed systems.

      The Company and third parties with which the Company does business rely on
numerous computer programs in their day-to-day operations. The Company's Year
2000 project was divided into the following major sections: (i) infrastructure
and applications software, commonly referred to as "IT Systems", (ii) third
party suppliers and customers, commonly referred to as "External Agents", (iii)
process control and instrumentation and (iv) Company products.

      IT Systems: The Company has completed its assessment of Year 2000 issues
as they relate to the Company's IT systems. This analysis included such
activities as order taking, billing, purchasing/accounts payable, general
ledger/financial, and inventory. Systems critical to the Company's business are
commercial packages available from third party vendors and currently in use with
little modification. According to information provided by the suppliers of these
products, the versions of these systems in use are believed to be Year 2000
compliant in storage, calculation, and function. The Company has upgraded these
systems where necessary and believes that all mission critical software is now
Year 2000 compliant, based upon representations from the vendors. The Company
has used both internal and external resources to test the versions of the
software believed to be Year 2000 compliant and has found no discrepancy. The
Company believes that all server hardware and operating systems software in use
are now Year 2000 compliant. Through independent and internal testing, the
Company also believes its business systems to be compliant. The Company is
currently operating in Fiscal Year 2000 and is experiencing no date-related
problems.

      External Agents: The Company has sent questionnaires and letters of
inquiry to the External Agents to assist the Company in assessing the Year 2000
readiness of its External Agents and evaluate the scope of the Company's
exposure. Based on the responses received, the Company is not aware of any
External Agent with a Year 2000 issue that would materially impact the Company's
results of operations, liquidity or capital resources. However, the Company has
no means of ensuring that External Agents will be Year 2000 ready. The inability
of External Agents to complete their Year 2000 resolution process in a timely
fashion could materially impact the Company. The effect of non-compliance by
External Agents is not determinable.

      Process Control and Instrumentation: This category includes such items as
telephone systems, security systems, HVAC, copiers, FAX machines, production
equipment, tools and other process systems. The Company has found no significant
Year 2000 related issues and believes there will be no major disruption in this
area.

      Company Products: In addition, the Company has reviewed the Year 2000
issue as it relates to the electronic products manufactured for sale by the
Company. The Company believes that none of its products are date sensitive or
will require modification to become Year 2000 compliant. Accordingly, the
Company does not believe the Year 2000 issue presents a material exposure as it
relates to the Company's products.


                                       23
<PAGE>

      Conclusion: The Company believes that it has effectively identified and
resolved all major Year 2000 related issues that could cause a significant
disruption to its business. However management recognizes that it is possible
that unforeseen issues may arise and will keep a vigilant watch for any sign of
such issues. In addition, disruptions in the economy generally resulting from
Year 2000 issues could materially adversely affect the Company.

      The Company currently believes it does not need a contingency plan. All of
the Company's major systems have been upgraded or determined to be compliant.
Any remaining Year 2000 compliance issues should be minor and will be dealt with
as they are identified. The Company will continue to monitor and evaluate the
potential impact of the Year 2000 issue and adjust the plans accordingly.

Control by Existing Stockholders and Management

      The Company's directors, officers and their affiliates beneficially own
approximately 28.6% of the outstanding Common Stock (assuming exercise of vested
stock options). As a result of such Common Stock ownership, the Company's
directors, officers and their affiliates, if they voted together, would be able
to exercise significant influence over the election of members of the Company's
Board of Directors and other corporate actions requiring stockholder approval.

Anti-Takeover Effects of Delaware Law and Certain Charter Provisions;
Stockholder Rights Plan

      The Company's 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 Company's stockholders. The rights of holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. While the Company has no
present intention to issue shares of Preferred Stock, such issuance, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of the outstanding voting stock of the
Company. In addition, the Company is subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law (the "Delaware Law"), and
the Company's Certificate of Incorporation contains a fair price provision, the
combined effect of which prohibits the Company from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
The application of Section 203 and the fair price provision could have the
effect of delaying or preventing a change of control of the Company. The
Company's Certificate of Incorporation provides for staggered terms for the
members of the Board of Directors. The staggered Board of Directors and certain
other provisions of the Company's Certificate of Incorporation and Bylaws may
have the effect of delaying or preventing changes in control or management of
the Company, which could adversely affect the market price of the Company's
Common Stock. Furthermore, the Board of Directors of the Company has adopted a
Stockholder Rights Plan that has certain anti-takeover effects. Rights issued
under the plan will cause substantial dilution to a person or group that
attempts to acquire the Company on terms not approved by the Company's Board of
Directors.

Forward-Looking Statements

      The statements contained in this Form 10-K Annual Report that are not
historical fact are "forward-looking statements" (as such term is defined in the
Private Securities Litigation Reform Act of 1995), which can be identified by
the use of forward-looking terminology such as "believes," "expects," "may,"
"will," "should," "would," or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy that
involve risks and uncertainties. Management wishes to caution the reader that
these forward-looking statements contained in this Form 10-K Annual Report
regarding matters that are not historical facts are only predictions. The
Company's future results of operations and other forward looking statements
contained in the Form 10-K Annual Report, in particular the statements
concerning revenues, pricing, development and commercialization of the HTA,
future capital needs and Year 2000 issues, involve a number of risks and
uncertainties. No assurances can be given that the future results


                                       24
<PAGE>

indicated, whether expressed or implied, will be achieved. Forward-looking
statements are based upon a variety of assumptions relating to the business of
the Company, which, although considered reasonable by the Company, may not be
realized. Because of the number and range of the assumptions underlying the
Company's forward-looking statements, many of which are subject to significant
uncertainties and contingencies that are beyond the reasonable control of the
Company, some of the assumptions inevitably will not materialize and
unanticipated events and circumstances may occur subsequent to the date of this
Form 10-K Annual Report. These forward-looking statements are based on current
expectations, and the Company assumes no obligation to update this information.
Therefore, the actual experience of the Company and results achieved during the
period covered by any particular forward-looking statements may differ
substantially from those predicted. Consequently, the inclusion of
forward-looking statements should not be regarded as a representation by the
Company or any other person that these estimates will be realized, and actual
results may vary materially. There can be no assurance that any of these
expectations will be realized or that any of the forward-looking statements
contained herein will prove to be accurate.


                                       25
<PAGE>

Executive Officers and Directors of the Company {PENDING UPDATE}

      The directors, executive officers and key employees of the Company and
their ages and titles as of December 10, 1999 are as follows:

Name                        Age    Title
----                        ---    -----

Charles Crocker             60     Chairman of the Board of Directors

Richard W. Turner           53     President and Chief Executive Officer &
                                   Director

Samuel Dickstein            59     Vice President, New Business Development
                                   and Technology

Thomas W. Fry               55     Vice President,  Finance and  Administration,
                                   Secretary and Treasurer

Dr. Ralph M. Richart (1)    65     Director

Dr. Lawrence A. Wan (2)     61     Director

Gary D. Wrench (1) (2)      66     Director

----------
(1)   Member of the Audit Committee
(2)   Member of the Compensation Committee

      Mr. Charles Crocker, a founder of the Company, has served as Chairman of
the Board of Directors of the Company since October 1974. Mr. Crocker served as
President and Chief Executive Officer of the Company from October 1995 until the
Distribution. Mr. Crocker is President and Chief Executive Officer of
Technologies. He served as President of Crocker Capital Corporation (a Small
Business Investment Company), from 1970 to 1985, and as General Partner of
Crocker Associates, a venture capital investment partnership, from 1970 to 1990.
He currently serves as a director of Technologies, Fiduciary Trust Company
International, Pope & Talbot, Inc. and KeraVision. Mr. Crocker holds a B.S. from
Stanford University and an M.B.A. from the University of California, Berkeley.

      Mr. Richard W. Turner founded in 1991 what is now the Company as a
subsidiary of Electronics. Mr. Turner served as President of that subsidiary
from 1991 until it merged into the Company in November 1997, and then as
President of the Company until April 1998. He rejoined the Company as President
and Chief Executive Officer in January 1999. He has served as a director of the
Company since September 1997. Previously President of the Healthcare Group for
the Cooper Companies, Mr. Turner has held executive leadership positions in the
medical industry for over 20 years, including President and Director of
Cooper-LaserSonics, Inc., President of CooperVision Inc., President and Chief
Executive Officer/Director for Pancretec, Inc. and President of Kay
Laboratories. Mr. Turner holds a B.S. from Old Dominion University and an M.B.A.
from Pepperdine University.

      Mr. Samuel Dickstein served as Vice President, New Business Development
and Technology of BEI Medical Systems Company, Inc. from June 1997 until the
merger of that entity into BEI Electronics, Inc. ("Electronics") in November
1997. He served as Vice President, Operations, from the acquisition of Meditron
Devices, Inc. by BEI Medical Systems Company, Inc. in 1992 until June 1997.
Prior to the acquisition, Mr. Dickstein, a co-founder of Meditron Devices, Inc.,
served as a Vice President from 1987 to 1992. From 1979 to 1987 Mr. Dickstein,
was a vice president of Xylog Corporation, a subsidiary of Meditron Devices,
Inc. From 1970 to 1978 Mr. Dickstein served as Electro-Medical Engineering
Manager for American Cystoscope Makers (Circon Corp.). Mr. Dickstein holds a
B.S.E.E. from the City College of New York and has also completed graduate level
studies in Electrical Engineering at both New York University and the New Jersey
Institute of Technology.


                                       26
<PAGE>

      Mr. Thomas W. Fry served as Vice President, Finance and Administration of
BEI Medical Systems Company, Inc. from October 1992 until the merger of that
subsidiary into Electronics in November 1997. Mr. Fry was employed by
Disctronics Ltd. as Corporate Controller from 1989 to 1992, by Cavitron,
Inc./CUSA, a medical device, engineering and manufacturing company, as
Controller/CFO from 1986 to 1989, and by Cheeseborough-Ponds International as
Manager of Profit Planning and Manufacturing Controller from 1979 to 1986. Prior
to that time, Mr. Fry was employed by GTE from 1970 to 1979 in various
accounting and financial roles, including three years as the Controller of GTE
Sylvania in Caracas, Venezuela. Mr. Fry holds a B.S. from Southeast Missouri
State University and an M.B.A. with academic honors from Pace University.

      Dr. Ralph M. Richart has been a director of the Company since November
1997 and was a director of BEI Medical Systems Company, Inc. from 1996 until
that company's merger into Electronics in November 1997. Dr. Richart is
Professor of Pathology in Obstetrics and Gynecology at the Columbia University
College of Physicians and Surgeons and Associate Director of Gynecological
Pathology and Cytology at the Sloane Hospital for Women in New York City. He
served as a Career Research Development Awardee at the Medical College of
Virginia before moving to Columbia-Presbyterian Medical Center in 1963. His
professional interests have centered around obstetrical and gynecological
pathology and cytology with particular emphasis on the study of cervical
neoplasia and, more recently, the relationship of the human papillomavirus to
lower genital tract neoplasia. He is the past President of the International
Gynecologic Cancer Society. He received his medical training at the University
of Rochester School of Medicine and Dentistry, and completed his pathology
residency in the Harvard Hospitals system.

      Dr. Lawrence A. Wan has been a director of the Company since November
1997. He served as Vice President and Chief Technical Officer of Electronics
from July 1990 to September 1997, and is currently Vice President and Chief
Technical Officer of Technologies. From 1984 until 1990, he served as Vice
President, Engineering, of Systron Donner Corporation, and also held various
other technical and general management positions with that company between 1979
and 1984. From 1968 through 1979, he served as Chief Executive Officer of Sycom,
Inc., a commercial electronics company which he founded. From 1964 to 1968, he
worked for Hughes Aircraft Company where he headed the Radar Systems Section of
the Hughes Ground Systems Group. In 1962, Dr. Wan and two other professors
established an Engineering School at the University of California, Santa
Barbara, where he also taught Engineering. Dr. Wan holds B.S., M.S. and Ph.D.
degrees in Engineering and Applied Sciences from Yale University.

      Mr. Gary D. Wrench has been a director of the Company since 1986. He
served as Senior Vice President and Chief Financial Officer of Electronics from
July 1993 to September 1997. From April 1985 to July 1993, he served as Vice
President of Electronics and President and Chief Executive Officer of Motion
Systems Company, Inc., then a wholly owned subsidiary of Electronics that is now
a part of Technologies. Previous experience includes 20 years with Hughes
Aircraft Company including an assignment as President of Spectrolab, Inc., a
Hughes subsidiary. He currently serves as a director of Technologies. Mr. Wrench
holds a B.A. from Pomona College and an M.B.A. from the University of
California, Los Angeles.

Staggered Board of Directors

      The Company has a staggered Board of Directors, which may have the effect
of deterring hostile takeovers or delaying changes in control or management of
the Company. For purposes of determining their term of office, directors are
divided into three classes, with the term of office of the first class to expire
at the 2001 annual meeting of stockholders, the term of office of the second
class to expire at the 2002 annual meeting of stockholders and the term of
office of the third class to expire at the 2000 annual meeting of stockholders.

      Class I consists of Dr. Wan; Class II consists of Mr. Crocker and Dr.
Richart; and Class III consists of Mr. Turner and Mr. Wrench. Directors elected
to succeed those directors whose term expires will be elected for a three-year
term of office. All directors hold office until the next annual meeting of
stockholders, at which their term expires, and until their successors have been
duly elected and qualified. Executive officers serve at the discretion of the
Board. There are no family relationships among any of the officers and
directors.


                                       27
<PAGE>

Board Committees

      The Board of Directors of the Company has established an Audit Committee
(consisting of Dr. Richart and Mr. Wrench) which reviews the results and the
scope of the audit and other services provided by the Company's independent
accountants and periodically reviews the results of the Company's internal audit
controls, and a Compensation Committee (consisting of Dr. Wan and Mr. Wrench)
which makes recommendations concerning salaries, incentives and other forms of
compensation for directors, executive officers and other key employees of the
Company and administers various incentive compensation and benefits plans.


                                       28
<PAGE>

ITEM 2. PROPERTIES

      The Company's principal executive offices are located in leased office
space in Teterboro, New Jersey. The Company operates one other facility in
Chatsworth, California, and maintains office space in various locations
throughout the United States for sales and technical support. BEI's principal
facilities are as follows:

      Location                      Description of Facility

      Teterboro, New Jersey         Leased 24,400 square foot manufacturing,
                                    engineering, and administrative facility.

      Chatsworth, California        Leased 3,400 square foot administrative and
                                    marketing facility.

      The lease agreement for the Teterboro facility expires on June 8, 2004,
and the Company has the option to extend the term of this lease for five
additional years. The monthly base rent through February 2000 is approximately
$21,445, plus the Company's pro rata share of maintenance expenses and real
estate taxes with immaterial increases thereafter through the end of the lease
term. The lease agreement for the Chatsworth facility expires on May 31, 2000.
The monthly base rent is approximately $4,225, plus the Company's pro rata share
of certain operating expenses and real estate taxes.

      Management believes that the current facilities are adequate and suitable
for the current operations of the Company. As a result of the Asset Sale, the
Company will no longer have a need for the Chatsworth facility once the Company
has completed the transition services to be provided to CSAC.

ITEM 3. LEGAL PROCEEDINGS

      From time to time, BEI may become involved in or subject to various
litigation and legal proceedings incidental to the normal conduct of the
Company's business. The Company is not involved in any material legal
proceedings.

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

      None.


                                       29
<PAGE>

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      The Company's common stock was initially offered to the public in July
1989 and traded on the Nasdaq National Market System under the Nasdaq symbol
"BEII" from August 1, 1989 through the fiscal year end of September 27, 1997.
During the period from October 3 to October 7, 1997, the stock traded under the
Nasdaq symbol "BEIV". After October 7, 1997, the Company's common stock began
trading under the Nasdaq symbol "BMED."

      On September 27, 1997, having transferred all of its non-medical device
businesses to Technologies in exchange for all of Technologies' outstanding
common stock, Electronics distributed that stock to its stockholders in a
tax-free spin-off of Technologies (the "Distribution"). As a result of the
spin-off of Technologies, whose business represented the majority of
Electronic's assets and revenues, the market price of the Company's stock
adjusted to account for the Distribution. On November 4, 1997, Electronics
merged with its subsidiary, BEI Medical Systems Company, Inc., and changed its
name to BEI Medical Systems Company, Inc. The closing price of the Company's
common stock was $1.438 on December 10, 1999.

      Set forth below are the high and low closing sale prices on the National
Market System for the periods indicated. Such quotations do not reflect retail
markups, markdowns or commissions.

         1999 Fiscal Year
            (ended 10/2/99)                         High               Low

         Fourth Quarter                             $3.50             $1.12

         Third Quarter                              $1.56             $0.94

         Second Quarter                             $2.19             $1.44

         First Quarter                              $2.06             $1.50

         1998 Fiscal Year
            (ended 10/03/98)                        High               Low

         Fourth Quarter                             $4.25             $1.06

         Third Quarter                              $5.50             $3.13

         Second Quarter                             $4.88             $3.69

         First Quarter (from October 9, 1997)       $4.38             $3.50

      As of December 10, 1999, there were approximately 342 holders of record of
the Company's common stock. There are no restrictions on the Company's ability
to pay dividends; however, it is currently the intention of the Board of
Directors to retain any and all earnings for use in the Company's business and
the Company does not anticipate paying cash dividends in the foreseeable future.
Any future determination as to the payment of dividends will depend, among other
factors, upon the earnings, capital requirements, operating results and
financial condition of the Company


                                       30
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

      The selected financial data for the five fiscal years presented below is
derived from the audited Consolidated Financial Statements of the Company. The
data should be read in conjunction with the Consolidated Financial Statements,
related notes and other financial information included herein.

      The data and the accompanying analysis in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" cover periods in
which the Company's operations included business segments which are now operated
by Technologies and include the results of those business segments as
discontinued operations by the Company. Continuing operations of the Company are
comprised of the medical device business carried on by the Company's
majority-owned subsidiary BEI Medical Systems Company, Inc. prior to the
Distribution, which subsequent to the Distribution comprised all of the
Company's operations. For further information see Note 1 to the Consolidated
Financial Statements, Technologies' Form 10, "General Form for Registration of
Securities", as amended (File No. 0-22799) and the Technologies Form 10-K for
the fiscal year ended September 27, 1997 (File No. 0-22799).

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
in thousands, except per share amounts                                        Year Ended
                                                -----------------------------------------------------------------------
                                                October 2,     October 3,   September 28,  September 27,  September 30,
                                                   1999           1998          1997           1996           1995
-----------------------------------------------------------------------------------------------------------------------
<S>                                             <C>            <C>            <C>            <C>            <C>
Statement of Operations Data:

Revenue                                         $   8,419      $   9,651      $  10,005      $   9,357      $   8,847
Loss from continuing operations                    (6,909)        (4,971)        (4,348)        (2,682)        (2,350)
Income (loss) from discontinued operations             --             --          4,583          4,571         (2,041)
Net income (loss)                                  (6,909)        (4,971)           235          1,889         (4,391)
Loss from continuing operations per common
     share, basic and diluted                      ($0.92)        ($0.68)        ($0.64)        ($0.40)        ($0.36)
Earnings (loss) from discontinued
     operations per common share, basic and
     diluted                                           --             --           0.67           0.68          (0.30)
Earnings (loss) per common share, basic and
     diluted                                       ($0.92)        ($0.68)     $    0.03      $    0.28         ($0.66)
Cash dividends per common share                        --             --      $    0.08      $    0.08      $    0.08
Weighted average shares outstanding                 7,503          7,354          6,817          6,737          6,617

Balance Sheet Data:

Cash and cash equivalents                           1,654      $   3,504      $   9,271      $   9,128      $   9,023
Working capital (1)                                 6,905          8,284         11,085         38,102         35,923
Total assets (1)                                   10,962         17,388         22,584        115,011        113,738
Long-term debt (excluding current portion)             --             --             22            212            392
Stockholders' equity (1)                            7,699         14,440         17,660         55,972         53,319
</TABLE>


                                       31
<PAGE>

(1) Amounts for working capital, total assets and stockholders' equity include
discontinued operations for fiscal years 1996 and 1995.


                                       32
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

      Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section and in
"Business."

      The following discussion and analysis of the financial condition and
results of operations reflects historical results prior to the Asset Sale. The
Asset Sale will have a significant impact upon the financial condition and
results of operations of the Company, as both future revenues and revenue
generating assets have been significantly reduced (see " Financial Statements
and Supplementary Data"). The Company's product focus has become narrowed and
dependent upon the successful completion of the FDA Phase III clinical trials
and commercialization of the HTA technology (see "Business -- Risk Factors").
The cash proceeds of the Asset Sale have been and will be utilized by BEI: (i)
to pay expenses associated with the Asset Sale in the approximate amount of
$1,155,000, including estimated professional fees ($465,000), employee bonuses
related to completion of the Asset Sale ($185,000), estimated severance payments
($260,000) and the cost of products and services associated with the Transition
Agreement to be provided to CSAC free of charge ($275,000); (ii) to repay the
amounts outstanding to Transamerica Business Credit Corporation ("TBCC"),
including interest and cancellation fees; (iii) as working capital to finance
completion of the FDA Phase III clinical trials and initiate commercialization
of the HTA product in the United States; and (iv) to fund BEI's ongoing
operating expenses.

      The Company's capital requirements to complete the development and
commercialization of the HTA depend on numerous factors including the timing and
receipt of regulatory clearances and approvals, the resources required to
initiate commercialization of the HTA in the United States and the extent the
HTA gains market acceptance and sales. The timing and amount of such capital
requirements cannot be predicted accurately. Consequently, although the Company
believes that the net proceeds from the Asset Sale plus existing cash balances
will provide adequate funding to meet the Company's capital requirements for the
next twenty-four months, there can be no assurance that the Company will not
require additional financing or that such additional financing, if needed, will
be available on terms attractive to the Company, or at all. Any additional
equity financing may be dilutive to stockholders and debt financing, if
available, may involve restrictive covenants.


                                       33
<PAGE>

      The following table sets forth, for the fiscal periods indicated, the
percentage of revenue represented by certain items in the Company's Consolidated
Statements of Operations.

<TABLE>
<CAPTION>
                                                                Year Ended
                                                     --------------------------------
                                                      1999         1998         1997
-------------------------------------------------------------------------------------
<S>                                                  <C>          <C>          <C>
Revenue                                              100.0%       100.0%       100.0%

Cost of sales                                         61.6%        58.4         59.7
-------------------------------------------------------------------------------------
Gross profit                                          38.4%        41.6         40.3

Selling, general and administrative expenses          87.3%        90.0         78.8

Research, development and related expenses            37.8%        29.7         18.6
-------------------------------------------------------------------------------------
Loss from operations                                 (86.7%)      (78.1)       (57.1)

Interest income                                        1.2          3.2          1.3

Interest expense                                      (1.1)        (0.2)        (0.7)
-------------------------------------------------------------------------------------
Loss before income taxes                             (86.6)       (75.1)       (56.5)

Income tax benefit                                    (4.5)       (23.6)       (13.0)
-------------------------------------------------------------------------------------
Loss from continuing operations                      (82.1)       (51.5)       (43.5)

Income from discontinued operations                     --           --         45.8
-------------------------------------------------------------------------------------
Net income (loss)                                    (82.1)%      (51.5)%        2.3%
=====================================================================================
</TABLE>

Revenue
Fiscal years 1999, 1998 and 1997

      The Company's revenues decreased 12.8% to $8,419,000 in fiscal year 1999
compared to $9,651,000 in fiscal year 1998. Revenues from gynecological products
were $6,335,000 in fiscal year 1999, reflecting a decrease of $1,148,000 or
15.3%. The decline in gynecological revenues was reflected in all major product
categories but primarily reflects the impact of reduced shipments of reusable
instruments to domestic customers due to soft market conditions and increased
competition. Additionally, revenues from disposable instruments declined by
$189,000 or 5.9% reflecting the market impact early in the fiscal year of a
temporary supply shortfall from one outside vendor and soft market conditions in
the fourth quarter of fiscal 1999. Revenues from gastrointestinal products
declined $211,000 or 22.4%, reflecting lower volume in electrosurgical
generators and related disposable products. Partially offsetting the above were
higher OEM revenues which increased to $1,086,000 or 14.6% in fiscal year 1999
compared to $948,000 in fiscal year 1998.

      International revenues from shipments of the Company's HTA system for
endometrial ablation were $269,000 in fiscal year 1999 compared to $275,000 in
fiscal year 1998. Revenues from shipment of HTA products to international
distributors during fiscal years 1999 and 1998 were principally to establish
demonstration stock, and also included limited commercial sales outside the
United States to private healthcare service end-users. During fiscal year 1999,
the Company continued working with its international distributors to establish
clinical treatment sites with leading gynecologists at key institutions in their
respective markets.

      In fiscal year 1998, the Company's revenues decreased 3.5% to $9,651,000
from $10,005,000 in fiscal year 1997. Revenues from gynecological products in
fiscal year 1998 increased approximately 3.8% over fiscal year 1997, reflecting
an increase in shipments of disposable catheter products and specialty stainless
steel instruments. Additionally, international revenues from the Company's Hydro
ThermAblator grew 40.3% to $275,000 in fiscal year 1998 compared to $196,000 in
fiscal year 1997. However, offsetting the above was a decline in OEM shipments
from $1,710,000 in fiscal year 1997 to $950,000 in fiscal year 1998, reflecting
the Company's decision to reduce marketing efforts related to its lower-margin
OEM products in order to focus


                                       34
<PAGE>

on its core of higher-margin women's healthcare products. Additionally, sales of
several of the Company's OEM products declined on a year-to-year basis due to
increased competition.

      The Company's revenues from international customers were approximately
17.2%, 15.5% and 14.3% of the Company's revenue for fiscal years 1999, 1998 and
1997, respectively. International revenues can vary significantly as a
percentage of revenues depending on the timing of shipments and size of orders.

Cost of Sales and Gross Profit

      Gross profit as a percentage of revenues decreased to 38.4% in fiscal year
1999 compared to 41.6% for fiscal year 1998. The decrease was principally due a
write-down of the bipolar product line of approximately $173,000 to reflect
negotiated concessions related to the anticipated sale of this category of
inventory to CSAC pursuant to the Asset Purchase Agreement. In addition the
decrease reflects a change in the product mix, with a larger portion of lower
margin products being sold during fiscal year 1999 compared to fiscal year 1998,
and higher overhead absorption costs resulting from the reduced volume.
Partially offsetting the reduction in gross margins were decreases in direct
labor and overhead costs of $410,000 for the fiscal year 1999, compared to the
prior period. This decrease resulted primarily from the consolidation of the
Company's manufacturing and distribution facilities, which was completed in the
fourth quarter of fiscal 1998.

      The decrease in cost of sales as a percentage of revenue in fiscal year
1998 compared to fiscal year 1997 reflects a more favorable product mix
resulting primarily from the decline in lower margin OEM revenues compared to
the total revenue, plus reduced labor and overhead expenses following the
Company's facilities consolidation, which was completed at the end of the third
fiscal quarter of 1998.

Selling, General and Administrative Expenses

      Selling, general and administrative expenses decreased $1,338,000 to
$7,350,000 or 87.3% of revenues for fiscal year 1999 compared to $8,688,000 or
90.0% of revenues for fiscal year 1998. The decline in expenses reflects reduced
amortization of intangible assets of $526,000 following the sale of a previously
acquired product line, as well as the impact of a non-compete agreement that
became fully amortized during the second quarter of fiscal 1998. Selling
expenses declined approximately $841,000 for fiscal year 1999 compared to fiscal
year 1998, reflecting lower commissions and marketing expenses as a result of
Company efforts to reduce selling costs. Additionally, the decrease reflects the
absence in fiscal year 1999 of one-time net charge of $ 159,000 incurred in
fiscal 1998. Fiscal 1998 results included the benefit of $701,000 representing
the reversal of previously expensed legal fees which were reimbursed by the
Company's insurance carrier, partially offset by a charge of approximately
$329,000 related to the consolidation of the Company's facilities and a charge
of $531,000 to reduce the carrying value of certain intangible assets to their
net realizable value. Partially offsetting the above were increased
administrative expenses of approximately $511,000 reflecting higher legal and
other professional services fees, salaries and fringe benefits.

      Selling, general and administrative expenses increased from $7,883,000 in
fiscal year 1997 to $8,688,000 in fiscal year 1998. The higher expenses reflect:
a $531,000 write-down of intangible assets to realizable value (originally
estimated to be $471,000 during the third quarter of fiscal 1998) associated
with the sale of the Company's GyneSys and HysteroSys product lines to Ethicon,
Inc. and relocation and plant shutdown expenses of $329,000 associated with the
Company's facilities consolidation (originally estimated to be $354,000 during
the third quarter of fiscal 1998). The $329,000 provision for relocating the
Company's corporate headquarters and consolidation of its production facilities
to a new facility in New Jersey included charges for duplicate facilities of
$140,000, severance and personnel relocation costs of $115,000 and moving and
other related costs of $74,000. Additionally, the Company incurred increased
selling expenses of $354,000 associated with the development of the Company's
field sales force of independent sales representatives; and higher legal and
administrative expenses associated with the Company's efforts to obtain
additional financing. The above increase in expenses was partially offset by a
benefit of $701,000, net of settlement, representing the reversal of previously
expensed legal fees incurred in the completed litigation with CSI, which fees
were reimbursed by the Company's insurance carrier.


                                       35
<PAGE>

Research, Development and Related Expenses

      Research, development and related expenses as a percentage of revenue were
37.8% or $3,184,000 for the fiscal year 1999 compared to 29.7% or $2,866,000 for
the same period of fiscal year 1998. The increased spending reflects expenses
associated with recruiting and treating patients as part of the HTA Phase III
clinical trials in the United States. The Company received approval from the
Food and Drug Administration ("FDA") to proceed to the Phase III portion of the
HTA clinical trials in July 1998 and in September 1998 began to treat patients
under the approved protocol. The Company was required to treat 276 patients at
its nine U.S. clinical sites under the Phase III protocol. As of August 6, 1999,
all of the 276 patients were treated. Data from examinations one year following
treatment is one of the requirements for FDA approval.

      Research, development and related expenses increased from $1,864,000 in
fiscal year 1997 to $2,866,000 in fiscal year 1998 due to increased spending to
support the Phase II and Phase III portions of the HTA clinical trials in the
United States.

      The Company anticipates that research, development and related expenses
will decline in absolute amount in the coming fiscal year due to completion of
the patient treatment portion of the HTA Phase III clinical trials, but will
increase as a percentage of revenue due to substantially lower revenue.

Interest Expense and Other Income

      Interest income in fiscal years 1999, 1998 and 1997 was comprised of
interest income earned on highly liquid investments. Interest income declined to
$105,000 or 1.2% of revenue in fiscal year 1999 compared to $312,000 or 3.2% of
revenue in fiscal year 1998, as a result of lower average cash balances during
the period.

      Interest income in fiscal year 1998 increased as a percentage of revenue
to 3.2% from 1.3% in fiscal year 1997 reflecting larger average cash balances.

      Interest expense increased to $96,000 or 1.1% of revenue in fiscal year
1999 compared to $21,000 or 0.2% of revenue in fiscal year 1998 as a result of
the Company's $1,000,000 term note and related credit facility, which the
Company entered into in May 1999.

      Interest expense as a percentage of revenue decreased to 0.2% in fiscal
year 1998 from 0.7% in fiscal year 1997 because existing debt was paid down and
no new debt incurred.

Income Tax Benefit

      The income tax benefit was 5.2% of the pretax loss in fiscal year 1999
compared to 31.4% of the pretax loss in fiscal year 1998. The income tax benefit
reflects the Company's ability to carryback losses and collect a refund against
prior years' taxes paid on the earnings of previously discontinued operations.
The amount of carryback available to the Company is limited to the taxes paid on
earnings of the previous two fiscal years and the lower effective tax rate in
fiscal year 1999 results from the reduced amount of remaining carryback
available to the Company compared to fiscal year 1998.

      There is no remaining carryback available to the Company after fiscal year
1999. The net operating losses from fiscal year 1999 that can not be carried
back against prior years' earnings are approximately $5.4 million. These losses
remain available to the Company on a carryforward basis to offset against any
future earnings, but they have been fully offset by a valuation allowance in the
financial statements, as their future realization is uncertain.

      The fiscal year 1998 and 1997 tax rates vary from the statutory federal
income tax rate as a result of an increase in the valuation allowance due to
substantial uncertainties regarding the ability to realize certain deferred tax
assets and the Company's ability to benefit from the amortization of goodwill.

      In fiscal year 1998, an income tax benefit of $2,279,000 was derived from
the carryback of losses incurred in fiscal year 1998 against taxes paid on the
earnings of discontinued operations in fiscal years 1996 and 1997.


                                       36
<PAGE>

      In connection with the Distribution, the Company entered into a Tax
Allocation and Indemnity Agreement with Technologies, as amended December 15,
1998. Under the terms of the agreement, Technologies and Medical are each
responsible for the payment of 100% of the portion of federal and state taxes
related to their and their respective subsidiaries' activities for the periods
prior to the Distribution in which both parties were included in consolidated
income tax returns, and each is entitled to its respective portion of any income
tax refunds for the same periods. For the periods after the Distribution, the
Company is entitled to 100% of any carryback of losses or credits to prior
years.

Discontinued Operations

      Net income for business segments now operated by Technologies was $4.6
million in fiscal year 1997.

Liquidity and Capital Resources

      The Company's capital requirements to complete the development and
commercialization of the HTA depend on numerous factors including the timing and
receipt of regulatory clearances and approvals, the resources required to
initiate commercialization of the HTA in the United States and the extent the
HTA gains market acceptance and sales. The timing and amount of such capital
requirements cannot be predicted accurately. Consequently, although the Company
believes that the net proceeds from the Asset Sale plus existing cash balances
will provide adequate funding to meet the Company's capital requirements for the
next twenty-four months, there can be no assurance that the Company will not
require additional financing or that such additional financing, if needed, will
be available on terms attractive to the Company, or at all. Any additional
equity financing may be dilutive to stockholders and debt financing, if
available, may involve restrictive covenants. During fiscal year 1999, cash used
by operations was $2,788,000 principally due to the $6,909,000 net loss for the
period, partially offset by reductions in refundable income taxes ($1,897,000)
trade receivables ($381,000) inventory ($921,000) plus noncash charges for
depreciation ($331,000), amortization ($639,000) and deferred income taxes
($174,000). The above was partially offset by a reduction in accounts payable
and accrued expenses of $339,000

      Cash used in investing activities during fiscal year 1999 of $41,000
consisted of purchases of equipment.

      Cash received from financing activities consisted of $1,000,000 from the
issuance of debt, which the Company repaid in full subsequent to the fiscal year
end. Cash flows used in financing activities consisted of $21,000 in scheduled
payments made on other notes payable.

      The Company had no material capital or other commitments as of October 2,
1999.

      The Company signed an agreement, effective as of May 7, 1999, with
Transamerica Business Credit Corporation ("TBCC") to provide senior secured
financing. TBCC provided the Company with a revolving credit facility under
which the Company could from time to time borrow an aggregate amount not to
exceed the lesser of $1,000,000 or an amount equal to 85% of the amount of the
Company's eligible accounts receivable as defined in the agreement (the
"Revolving Loan"). In addition to the Revolving Loan, TBCC provided the Company
with a ("Term Loan") in the amount of $1,000,000 on May 7, 1999 bearing interest
at a rate of 14.14%. No borrowings were outstanding under the Revolving Loan as
of October 2, 1999. On November 1, 1999, the Company borrowed $500,000 under the
Revolving Loan. All borrowings under the TBCC agreement were collaterized by all
of the assets of the Company.

      Concurrent with the above transaction, the Company provided TBCC with a
seven-year warrant to purchase 92,308 shares of common stock at an initial
exercise price of $1.625 per share, subject to adjustment. The warrant is
currently exercisable.

      As a result of the Asset Sale, both the Term Loan and the Revolving Loan
were repaid in full on December 8, 1999 and all of the related agreements were
terminated. Cancellation fees aggregating $85,000 were incurred in connection
with the termination of the agreement.


                                       37
<PAGE>

Year 2000

      Currently, many computer systems and software products are coded to accept
only two digit entries in the date code field. These date code fields will need
to accept four digit entries to distinguish 21st century dates from 20th century
dates. As a result, many companies' software and computer systems may need to be
upgraded or replaced in order to comply with such Year 2000 requirements,
especially those with internally developed systems.

      The Company and third parties with which the Company does business rely on
numerous computer programs in their day-to-day operations. The Company's Year
2000 project was divided into the following major sections: (i) infrastructure
and applications software, commonly referred to as "IT Systems", (ii) third
party suppliers and customers, commonly referred to as "External Agents", (iii)
process control and instrumentation and (iv) Company products.

      IT Systems: The Company has completed its assessment of Year 2000 issues
as they relate to the Company's IT systems. This analysis included such
activities as order taking, billing, purchasing/accounts payable, general
ledger/financial, and inventory. Systems critical to the Company's business are
commercial packages available from third party vendors and currently in use with
little modification. According to information provided by the suppliers of these
products, the versions of these systems in use are believed to be Year 2000
compliant in storage, calculation, and function. The Company has upgraded these
systems where necessary and believes that all mission critical software is now
Year 2000 compliant, based upon representations from the vendors. The Company
has used both internal and external resources to test the versions of the
software believed to be Year 2000 compliant and has found no discrepancy. The
Company believes that all server hardware and operating systems software in use
are now Year 2000 compliant. Through independent and internal testing, the
Company also believes its business systems to be compliant. The Company is
currently operating in Fiscal Year 2000 and is experiencing no date-related
problems.

      External Agents: The Company has sent questionnaires and letters of
inquiry to the External Agents to assist the Company in assessing the Year 2000
readiness of its External Agents and evaluate the scope of the Company's
exposure. Based on the responses received, the Company is not aware of any
External Agent with a Year 2000 issue that would materially impact the Company's
results of operations, liquidity or capital resources. However, the Company has
no means of ensuring that External Agents will be Year 2000 ready. The inability
of External Agents to complete their Year 2000 resolution process in a timely
fashion could materially impact the Company. The effect of non-compliance by
External Agents is not determinable.

      Process Control and Instrumentation: This category includes such items as
telephone systems, security systems, HVAC, copiers, FAX machines, production
equipment, tools and other process systems. The Company has found no significant
Year 2000 related issues and believes there will be no major disruption in this
area.

      Company Products: In addition, the Company has reviewed the Year 2000
issue as it relates to the electronic products manufactured for sale by the
Company. The Company believes that none of its products are date sensitive or
will require modification to become Year 2000 compliant. Accordingly, the
Company does not believe the Year 2000 issue presents a material exposure as it
relates to the Company's products.

      Conclusion: The Company believes that it has effectively identified and
resolved all major Year 2000 related issues that could cause a significant
disruption to its business. However management recognizes that it is possible
that unforeseen issues may arise and will keep a vigilant watch for any sign of
such issues. In addition, disruptions in the economy generally resulting from
Year 2000 issues could materially adversely affect the Company.

      The Company currently believes it does not need a contingency plan. All of
the Company's major systems have been upgraded or determined to be compliant.
Any remaining Year 2000 compliance issues should be minor and will be dealt with
as they are identified. The Company will continue to monitor and evaluate the
potential impact of the Year 2000 issue and adjust the plans accordingly.


                                       38
<PAGE>

Recent Accounting Pronouncements

      In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities" which is
required to be adopted in years beginning after June 15, 2000. Because the
Company does not enter into financial instruments for trading or speculative
purposes and does not currently utilize derivative financial instruments,
management does not anticipate that the adoption of the new Statement will have
a significant effect on the Company's consolidated financial position or results
of operations.

Effects of Inflation

      Management believes that, for the periods presented, inflation has not had
a material effect on the Company's operations.


                                       39
<PAGE>

ITEM 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

      The Company does not enter into financial instruments for trading or
speculative purposes and does not currently utilize derivative financial
instruments. The operations of the Company are conducted primarily in United
States dollars and, as such, are not subject to material foreign currency
exchange rate risk and all outstanding debt has been repaid in full subsequent
to the fiscal year end. Accordingly, the Company believes its market risk
exposures are not significant.


                                       40
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED BALANCE SHEETS
BEI Medical Systems Company, Inc. and Subsidiaries

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
dollars in thousands except share amounts                                        October 2,       October 3,
                                                                                    1999            1998
------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>             <C>
ASSETS
Current assets
  Cash and cash equivalents                                                       $  1,654        $  3,504
  Trade receivables, less allowance for doubtful accounts
           (1999--$93; 1998--$174)                                                     338           1,897
  Inventories                                                                          339           3,087
  Refundable income taxes                                                              487           2,384
  Other current assets                                                                  68             186
  Deferred income taxes                                                                 --             174
  Net assets held for sale                                                           7,282              --
------------------------------------------------------------------------------------------------------------
Total current assets                                                                10,168          11,232

Property and equipment
  Equipment                                                                          1,125           1,569
  Leasehold improvements                                                                32              31
------------------------------------------------------------------------------------------------------------
                                                                                     1,157           1,600

  Less accumulated depreciation and amortization                                      (734)           (780)
------------------------------------------------------------------------------------------------------------
Net property and equipment                                                             423             820

Other assets, less accumulated amortization
  Tradenames, patents and related assets, less accumulated
   amortization  (1999--$48; 1998--$2,028)                                             234           1,846
  Goodwill, less accumulated amortization (1998--$1,457)                                --           3,353
  Other                                                                                137             137
------------------------------------------------------------------------------------------------------------
Total other assets                                                                     371           5,336
------------------------------------------------------------------------------------------------------------
Total assets                                                                      $ 10,962        $ 17,388
============================================================================================================
</TABLE>

See notes to consolidated financial statements.


                                       41
<PAGE>

CONSOLIDATED BALANCE SHEETS
BEI Medical Systems Company, Inc. and Subsidiaries

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
dollars in thousands except share amounts                                          October 2,     October 3,
                                                                                      1999           1998
------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>             <C>
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
  Trade accounts payable                                                            $    536        $  1,551
  Accrued expenses and other liabilities                                               1,727           1,376
  Notes payable                                                                        1,000              21
------------------------------------------------------------------------------------------------------------
Total current liabilities                                                              3,263           2,948

Stockholders' equity
  Preferred stock
     ($.001 par value; authorized 2,000,000 shares; none issued)                          --              --
  Common stock
     ($.001 par value; authorized 20,000,000 shares; issued and
     outstanding; 1999--7,685,707 shares; 1998--7,778,296 shares)                         10              10
  Additional paid-in capital                                                          16,174          16,291
  Retained earnings (deficit)                                                         (8,434)         (1,525)
------------------------------------------------------------------------------------------------------------
                                                                                       7,750          14,776
  Less: Unearned restricted stock and other                                              (51)           (336)
------------------------------------------------------------------------------------------------------------
Total stockholders' equity                                                             7,699          14,440
------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity                                          $ 10,962        $ 17,388
============================================================================================================
</TABLE>

See notes to consolidated financial statements.


                                       42
<PAGE>

CONSOLIDATED STATEMENTS OF OPERATIONS
BEI Medical Systems Company, Inc. and Subsidiaries

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
                                                                                   Year Ended
------------------------------------------------------------------------------------------------------------------
dollars in thousands except share and                           October 2,         October 3,        September 27,
per share amounts                                                  1999              1998                1997
------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>                <C>                <C>
Revenue                                                        $     8,419        $     9,651        $    10,005

Cost of sales                                                        5,182              5,638              5,972
------------------------------------------------------------------------------------------------------------------
Gross profit                                                         3,237              4,013              4,033

Selling, general and administrative expenses                         7,350              8,688              7,883

Research, development and related expenses                           3,184              2,866              1,864
------------------------------------------------------------------------------------------------------------------
                                                                    10,534             11,554              9,747
------------------------------------------------------------------------------------------------------------------
Loss from operations                                                (7,297)            (7,541)            (5,714)

Interest income                                                        105                312                136

Interest expense                                                       (96)               (21)               (70)
------------------------------------------------------------------------------------------------------------------
Loss before income taxes                                            (7,288)            (7,250)            (5,648)

Income tax benefit                                                    (379)            (2,279)            (1,300)
------------------------------------------------------------------------------------------------------------------
Loss from continuing operations                                     (6,909)            (4,971)            (4,348)

Income from discontinued operations, net of
     income taxes of $1,788                                             --                 --              4,583
------------------------------------------------------------------------------------------------------------------
Net income (loss)                                                  ($6,909)           ($4,971)       $       235
==================================================================================================================

Loss from continuing  operations per common share, basic
     and diluted                                                    ($0.92)            ($0.68)            ($0.64)

Earnings (loss) from discontinued operations per common
     share, basic and diluted                                           --                 --               0.67
------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share,
     basic and diluted                                              ($0.92)            ($0.68)       $      0.03
------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding                              7,503,463          7,354,416          6,816,702
------------------------------------------------------------------------------------------------------------------
Dividends per common share                                              --                 --        $      0.08
==================================================================================================================
</TABLE>

See notes to consolidated financial statements.


                                       43
<PAGE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
BEI Medical Systems Company, Inc. and Subsidiaries

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
                                                                                 Year Ended
-----------------------------------------------------------------------------------------------------------
                                                                   October 2,    October 3,   September 27,
dollars in thousands                                                 1999           1998           1997
-----------------------------------------------------------------------------------------------------------
<S>                                                                <C>            <C>            <C>
Cash flows from operating activities:
  Loss from continuing operations                                  ($6,909)       ($4,971)       ($4,348)
Adjustments to reconcile net loss to net
     cash used in operating activities:
  Depreciation                                                         331            311            269
  Amortization                                                         639          1,115          1,356
  Provision for losses on trade receivables                             74             76             57
  Loss on sale of assets                                                --            545             --
  Deferred income taxes                                                174           (233)          (261)
Changes in operating assets and liabilities, net of
     acquisitions and dispositions:
  Trade receivables                                                    306            (15)          (302)
  Inventories                                                          921           (423)          (854)
  Refundable income taxes                                            1,897         (2,374)            --
  Other assets                                                         118            (31)          (142)
  Trade accounts payable, accrued expenses and other
     liabilities                                                      (339)          (172)           164
-----------------------------------------------------------------------------------------------------------
Net cash used in operating activities of
     continuing operations                                          (2,788)        (6,172)        (4,061)
-----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
  Purchases of plant and equipment                                     (41)          (372)          (263)
  Purchases of patents and licenses                                     --            (24)          (186)
  Proceeds from sale of assets                                          --            975             --
  Other                                                                 --             --             18
-----------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities of
     continuing operations                                             (41)           579           (431)
-----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
  Proceeds from borrowings and issuance of warrants                  1,000             --             --
  Principal payments on long-term debt and other liabilities           (21)          (191)          (715)
  Proceeds from issuance of common stock, net                           --             --            872
  Proceeds from stock option exercises                                  --             17             --
  Repurchase of stock                                                   --             --         (1,303)
  Payment of cash dividends                                             --             --           (563)
-----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing
     activities of continuing operations                               979           (174)        (1,709)
-----------------------------------------------------------------------------------------------------------
  Net cash provided by discontinued operations                          --             --          6,344
-----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents                (1,850)        (5,767)           143
  Cash and cash equivalents at beginning of year                     3,504          9,271          9,128
-----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                           $ 1,654        $ 3,504        $ 9,271
===========================================================================================================
</TABLE>

See notes to consolidated financial statements


                                       44
<PAGE>

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
BEI Medical Systems Company, Inc. and Subsidiaries

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
dollars in thousands                                                                             Unearned
                                                     Additional     Retained                    restricted
                                            Common     paid-in      earnings     Treasury       stock and
                                            Stock      capital     (deficit)       stock          other         Total
----------------------------------------------------------------------------------------------------------------------
<S>                                         <C>        <C>          <C>          <C>              <C>         <C>
Balances at September 28, 1996              $ 9        $25,773      $43,055      ($11,947)        ($918)      $ 55,972

Net income for 1997                                                     235                                        235

Stock options exercised                       1            866                                                     867

Restricted Stock Plan                                      815                                     (475)           340

Purchase of treasury stock--
     (135,000 shares at $9.67
     average per share)                                                            (1,303)                      (1,303)

Cash dividends                                                         (563)                                      (563)

Retirement of treasury stock                           (13,250)                    13,250                           --
----------------------------------------------------------------------------------------------------------------------
Balances at September 27,                    10         14,204       42,727            --        (1,393)        55,548
     1997 before Distribution

Distribution                                                        (39,281)                      1,393        (37,888)
----------------------------------------------------------------------------------------------------------------------
Balances at September 27, 1997               10         14,204        3,446            --            --         17,660

Net loss for 1998                                                    (4,971)                                    (4,971)

Restricted Stock Plan                                      329                                     (250)            79

Deferred compensation                                      218                                      (86)           132

Stock options exercised                                     17                                                      17

Conversion of minority interest                          1,523                                                   1,523
----------------------------------------------------------------------------------------------------------------------
Balances at October 3, 1998                  10         16,291       (1,525)           --          (336)        14,440
----------------------------------------------------------------------------------------------------------------------
Net loss for 1999                                                    (6,909)                       (336)        (6,909)

Restricted Stock Plan                                     (175)                                     231             56

Deferred compensation                                                                                54             54

Issuance of warrants                                        58                                                      58
----------------------------------------------------------------------------------------------------------------------
Balances at October 2, 1999                 $10        $16,174      ($8,434)           --          ($51)      $  7,699
======================================================================================================================
</TABLE>

See notes to consolidated financial statements


                                       45
<PAGE>

Note 1
Basis of Presentation

      The Distribution: On September 27, 1997, BEI Electronics, Inc.
("Electronics") distributed to holders of Electronics common stock one share of
common stock of BEI Technologies, Inc. ("Technologies"), a newly formed
subsidiary, for each share of Electronics common stock held ("the
Distribution"). In connection with the Distribution, Electronics transferred to
Technologies all of the assets, liabilities and operations of its BEI Sensors &
Systems Company, Inc. ("Sensors") and Defense Systems Company, Inc. ("Defense")
business segments. Accordingly, the results of operations of the segments have
been presented as discontinued operations for all periods presented.

      After the Distribution, the sole asset of Electronics was its investment
in BEI Medical Systems Company, Inc. On November 4, 1997, Electronics merged
with its subsidiary, BEI Medical Systems Company, Inc. ("Medical"), and became
one company with Electronics as the surviving corporation (the "Merger"). As a
result of the Merger, each outstanding share of common stock of Medical at that
date (other than shares held by Electronics) was automatically converted into
the right to receive 5.51615 shares of Electronics common stock. Certificates
for Electronics common stock were issued, rounded down to the nearest whole
number of shares. Fractional shares of Electronics common stock that would have
otherwise been issued in connection with the Merger were redeemed by Electronics
pro rata based on the last reported sale price of Electronics common stock on
the last trading day preceding the merger. After the Merger, Electronics changed
its name to BEI Medical Systems Company, Inc. (the "Company"), ("BEI").

      The Asset Sale: On December 8, 1999, BEI completed the sale of a
substantial portion of the assets of the Company to CooperSurgical Acquisition
Corp., a Delaware corporation ("CSAC"), for approximately $10.5 million in cash,
pursuant to an Asset Purchase Agreement, dated as of October 1, 1999, between
the Company and CSAC, as amended (the "Asset Purchase Agreement") (the "Asset
Sale"). The assets sold constitute a business of developing, manufacturing,
marketing and servicing a broad array of advanced systems and devices for
diagnostic and therapeutic procedures in the medical fields of gynecology and
gastroenterology (the "Base Business"). Following the Asset Sale, the Company is
focusing exclusively on developing a new therapeutic system, the Hydro
ThermAblator (the "HTA") for treatment of excessive uterine bleeding.

      The net assets of the Base Business, which totaled $7,282,000 are included
in the accompanying consolidated balance sheet as net assets held for sale and
consist of the following:

      dollars in thousands                                            October 2,
                                                                         1999
      --------------------------------------------------------------------------
      Trade receivables, net                                           $ 1,179

      Inventories                                                        1,827

      Property and equipment, net                                          107

      Tradenames, patents and related assets, net                        1,381

      Goodwill, net                                                      3,113

      Less: trade accounts payable, accrued expenses
       and other liabilities                                              (325)
      --------------------------------------------------------------------------
         Net assets held for sale                                      $ 7,282
      ==========================================================================

      The cash consideration received at the closing of the Asset Sale was
approximately $10.5 million, subject to certain post-closing adjustments. The
consideration received by the Company also included the assumption of
approximately $350,000 of specified liabilities, the assumption of liabilities
under certain contracts of the Company, and the forgiveness of royalty payments
that may in the future be owed by the Company to an affiliate of the Purchaser
in an amount of up to $100,000.


                                       46
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
BEI Medical Systems Company, Inc. and Subsidiaries
October 2, 1999

      The following unaudited pro forma statement of operations data has been
prepared assuming the Asset Sale was completed as of October 3, 1998. The pro
forma financial data is presented for illustrative purposes only and is not
necessarily indicative of any future results of operations or the results that
might have occurred if the Asset Sale had actually occurred on the indicated
date.

Statement of Operations Data
in thousands, except per share amounts

<TABLE>
<CAPTION>
                                                                     Year Ended October 2, 1999
                                                                             Pro Forma       Pro Forma
                                                            Historical      Adjustments     as Adjusted
                                                            ----------      -----------     -----------

      <S>                                                    <C>            <C>               <C>
      Revenues ........................................      $  8,419       $  8,150(1)       $    269
      Cost of sales ...................................         5,182          4,236(1)            946
                                                            ----------------------------------------------
      Gross Profit ....................................         3,237          3,914(1)           (677)(3)

      Selling, general and administrative expenses ....         7,350          3,248             4,102
      Research, development and related expenses ......         3,184             --             3,184
                                                            ----------------------------------------------
                                                               10,534          3,248             7,286

                                                            ----------------------------------------------
      Income (loss) from operations ...................        (7,297)           666            (7,963)

      Interest income .................................           105             --               105
      Interest expense ................................           (96)           (96)(2)            --
                                                            ----------------------------------------------
      Income (loss) before income taxes ...............        (7,288)           570            (7,858)

      Income tax benefit ..............................          (379)            --              (379)
                                                            ----------------------------------------------

                                                            ----------------------------------------------
      Net income (loss) ...............................      ($ 6,909)      $    570          ($ 7,479)
                                                            ==============================================

      Income (loss) per common share:
      Income (loss) per common share, basic and diluted        ($0.92)                          ($1.00)
                                                            ==============================================

      Weighted average shares outstanding .............         7,503                            7,503
                                                            ==============================================
</TABLE>

------------
(1)   To give retroactive effect to the decrease in revenues and operating
      expenses estimated by the Company to be attributable to substantially all
      operating activities of the Company, other than that which is required to
      support the on going development of its HTA product.
(2)   To reflect a reduction in interest expense incurred related to the
      $1,000,000 Transamerica Business Credit Corporation credit facility,
      assuming the application of proceeds from the Asset Sale to repay the
      outstanding indebtedness under this facility and financing charges on
      accounts receivable related to the Base Business.
(3)   The negative gross margins of $677,000 reflect direct product costs for
      the HTA business of $208,000, as well as pro forma allocations of $469,000
      of fixed manufacturing overhead costs, which are projected to continue
      following the Asset Sale.


                                       47
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
BEI Medical Systems Company, Inc. and Subsidiaries
October 2, 1999

Balance Sheet Data:
dollars in thousands

<TABLE>
<CAPTION>
                                                                                        As of October 2, 1999
                                                             Historical      Assets          Proceeds         Debt        Pro Forma
                                                                             Sold (4)       of Sale (5)   Repayment (7)  as Adjusted
                                                             -----------------------------------------------------------------------
<S>                                                            <C>           <C>            <C>               <C>          <C>
ASSETS
Current assets:
  Cash and cash equivalents .............................      $  1,654      $     --       $ 10,481(6)      ($1,000)      $ 11,135
  Trade receivables, net ................................           338                                                         338
  Inventories ...........................................           339                                                         339
  Refundable income taxes ...............................           487                                                         487
  Other current assets ..................................            68                                          (48)            20
  Net assets held for sale ..............................         7,282        (7,282)                                           --
                                                             -----------------------------------------------------------------------
Total current assets ....................................        10,168        (7,282)                        (1,048)        12,319

Plant and equipment, net ................................           423                                           --            423
Tradenames, patents and other, net ......................           234                                                         234
Other assets ............................................           137                                                         137
                                                             -----------------------------------------------------------------------
Total assets ............................................      $ 10,962       ($7,282)      $ 10,481         ($1,048)      $ 13,113
                                                             ======================================================================

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
  Trade accounts payable ................................      $    536      $     --       $     --        $     --       $    536
  Accrued expenses and other liabilities ................         1,727                        1,185                          2,912
  Notes payable .........................................         1,000                                       (1,000)            --
                                                             -----------------------------------------------------------------------
Total current liabilities ...............................         3,263            --          1,185          (1,000)         3,448

Stockholders' equity ....................................         7,699        (7,282)         9,296             (48)         9,665
                                                             -----------------------------------------------------------------------
Total liabilities and stockholders' equity ..............      $ 10,962       ($7,282)      $ 10,481         ($1,048)      $ 13,113
                                                             ======================================================================
</TABLE>

----------

(4)   Represents assets to be sold to and liabilities assumed by CSAC, as well
      as goodwill attributable to the Base Business.
(5)   Reflects estimated proceeds from the Asset Sale, less estimated
      transaction costs of $1,155,000. Such costs include estimated professional
      fees to be paid by BEI in connection with the Asset Sale ($465,000),
      employee bonuses related to completion of the Asset Sale ($185,000),
      estimated severance payments ($260,000) , and the cost of products and
      services associated with the Transition Agreement to be provided to CSAC
      free of charge ($275,000). The resulting estimated gain on the sale of the
      Base Business of $2,014,000 (estimated net proceeds of $9,296,000 less
      basis of $7,282,000) and estimated transaction costs have not been
      considered or reflected in the accompanying pro forma statement of
      operations. In addition, as a condition to the consummation of the Asset
      Sale, the Company was required to enter into a noncompetition agreement
      with and for the benefit of CSAC for a period of five years. No value has
      been assigned to the noncompetition agreement.


                                       48
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
BEI Medical Systems Company, Inc. and Subsidiaries
October 2, 1999

(6)   Represents gross cash sales price of $11,206,000 less estimated downward
      adjustments of $500,000 and $225,000, respectively, based upon the
      unaudited net book value of inventory and accounts receivable at October
      2, 1999 (assuming the closing was completed on October 2, 1999) and the
      annualized unaudited sales for the nine month period. Such adjustments
      have been calculated in accordance with the terms prescribed by the Asset
      Purchase Agreement.
(7)   Represents repayment of outstanding amounts owed under the $1,000,000 TBCC
      credit facility, as well as the write-off of the unamortized debt
      financing fees associated with such debt. Following the close of the
      fiscal year on November 1, 1999, the Company borrowed an additional
      $500,000 under the revolving credit facility, therefore the actual
      principal repayment under the credit facility was $1,500,000.
(8)   Represents the write-off of the fair value of stock purchase warrants
      issued to Transamerica Business Credit Corporation in connection with the
      $1,000,000 credit facility.

Note 2
Summary of Significant Accounting Policies

      Operations: Prior to the Asset Sale, the Company was a manufacturer of
diagnostic and therapeutic products focused on gynecology and women's health
issues. In the U.S., the Company utilized independent manufacturers'
representative organizations, direct sales representatives, telemarketers and
domestic distributors to market its products directly to end users, hospitals,
surgical centers and doctors' offices. Products were also sold through a network
of international distributors. BEI's operations consisted of Zinnanti Surgical
Instruments in Chatsworth, California and Xylog Corporation, Meditron Devices,
Inc., and BEI Medical Systems International, Inc. in Teterboro, New Jersey.

      The accompanying consolidated financial statements reflect the historical
results of operations of the Company prior to the Asset Sale. The Asset Sale
will have a significant impact upon the financial condition and results of
operations of the Company, as both future revenues and revenue generating assets
have been significantly reduced and the Company's product focus has become
narrowed and dependent upon the successful completion of the FDA Phase III
clinical trials and commercialization of the HTA technology.

      The Company believes its existing cash balances together with operating
revenues and funds resulting from the Asset Sale will provide adequate funding
to meet the Company's liquidity requirements for the next twenty-four months.
The Company may need to raise additional funds through public or private
financing or other arrangements. There can be no assurance the Company will not
require additional financing or that such additional financing, if needed, will
be available on terms favorable to the Company, or at all. Any additional equity
financing may be dilutive to stockholders and debt financing, if available, may
involve restrictive covenants and may also be dilutive to stockholders.

      Fiscal Year: The Company's fiscal year ends on the Saturday nearest
September 30. Fiscal year 1998 contained 53 weeks. Fiscal years 1999 and 1997
each contained 52 weeks.

      Consolidation: The consolidated financial statements include the accounts
of the Company and its wholly and majority owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.

      Cash and Cash Equivalents: The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents.

      Concentration of Credit Risk: The Company's products were sold to
commercial customers throughout the United States and in various foreign
countries. The Company performs ongoing credit evaluations of its commercial
customers and generally does not require collateral. The Company maintains
reserves for potential credit losses. Historically, such losses have been within
the expectations of management.


                                       49
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
BEI Medical Systems Company, Inc. and Subsidiaries
October 2, 1999

      Use of Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and the accompanying notes. Actual results could differ from these
estimates.

      Revenue Recognition: Revenue is recognized as units are shipped.

      Inventories: Inventories are carried at the lower of cost (first-in,
first-out method) or market.

      Depreciation and Amortization: Plant and equipment are recorded at cost.
Depreciation and amortization are provided in amounts sufficient to amortize the
cost of such assets over their estimated useful lives, which range from three to
ten years, using the straight-line method.

      Long-Lived Assets: The Company accounts for any impairment of its
long-lived assets using Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 121 ("FAS No. 121") "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
Long-lived assets consists of plant and equipment, patents, and trade names,
related non-competition agreements and goodwill acquired in purchase
acquisitions. Patents and non-competition agreements are being amortized on a
straight-line basis over their terms. Trade names are amortized on a
straight-line basis over ten to twenty-five years. Goodwill consists of the
excess of cost over fair value of net tangible assets and identifiable
intangible acquired in purchase acquisitions. Goodwill is amortized by the
straight-line method over twenty years. The carrying value of long-lived assets
will be reviewed if the facts and circumstances suggest that they may be
impaired. Impairment is determined based on undiscounted future cash flows over
the expected period of use. If impairment is indicated, the carrying value of
long-lived assets would be reduced to fair value. In connection with the sale of
the Company's GyneSys and HysteroSys product lines in fiscal 1998, intangible
assets of $1,133,000 were sold. Based upon the final sales price of these
assets, the Company reduced the carrying value of the intangible assets to be
disposed of to net realizable value. The total amount of the charge, $531,000
has been included in the selling, general and administrative expenses for the
year ended October 3, 1998.

      Stock Option Plan: The Company has elected to continue to follow
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and related interpretations in accounting for its employee
stock options. Under APB No. 25, if the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.

      Per Share Information: Earnings per common share are calculated in
accordance with SFAS No. 128, "Earnings Per Share." This statement requires the
dual presentation of basic and diluted earnings per share ("EPS"). Basic EPS
excludes dilution and is computed by dividing net income or loss available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
stock options or other contracts to issue common stock were exercised and
resulted in the issuance of common stock that then shared in the earnings or
loss of the Company. Diluted EPS is computed using the treasury stock method
when the effect of common stock equivalents would be dilutive. As a result of
the net loss from continuing operations for all periods presented, weighted
average shares used in the calculation of basic and diluted loss per share are
the same. Weighted average shares exclude unvested restricted stock, which
amounted to approximately 139,000, 184,000 and 211,000 shares for 1999, 1998 and
1997, respectively. Common stock equivalents are excluded from the loss per
share calculation for all periods presented because the effect would be
anti-dilutive.

      Research and Development Costs: Company-sponsored product development
costs are charged to expense when incurred.


                                       50
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
BEI Medical Systems Company, Inc. and Subsidiaries
October 2, 1999

      Advertising Costs: Advertising costs are charged to expense when incurred
and were approximately $371,000, $489,000 and $412,000 in fiscal years 1999,
1998 and 1997, respectively.

      Recent Accounting Pronouncements: In June 1998, the Financial Accounting
Standards Board issued Statement No. 133, "Accounting for Derivative Instruments
and Hedging Activities" which is required to be adopted in years beginning after
June 15, 2000. Because the Company does not enter into financial instruments for
trading or speculative purposes and does not currently utilize derivative
financial instruments, management does not anticipate that the adoption of the
new statement will have a significant effect on the Company's consolidated
financial position or results of operations.

Note 3
Discontinued Operations

      Technologies was incorporated on June 30, 1997 in the State of Delaware,
as a wholly owned subsidiary of Electronics. On September 27, 1997, Electronics
distributed to holders of Electronics common stock one share of common stock of
Technologies for each share of Electronics common stock held on September 24,
1997. In connection with the Distribution, Electronics transferred to
Technologies all of the assets, liabilities and operations of its Sensors and
Defense business segments. Accordingly, the financial position and results of
operations of Sensors and Defense are shown as discontinued operations for all
periods presented.

Note 4
Inventories

        dollars in thousands                                  1999      1998
        ------------------------------------------------------------------------
        Finished products                                    $   87    $2,128

        Work in process                                         118       196

        Materials                                               134       763
        ------------------------------------------------------------------------
           Inventories                                       $  339    $3,087
        ========================================================================

      Included in fiscal year 1999 and 1998 finished goods is $87,000 and
$245,000, respectively of HTA inventory which is currently subject to FDA
approval prior to its sale in the United States.

Note 5
Bank Credit Agreements

      The Company signed an agreement, effective as of May 7, 1999, with
Transamerica Business Credit Corporation ("TBCC") to provide senior secured
financing. TBCC provided the Company with a revolving credit facility under
which the Company could from time to time borrow an aggregate amount not to
exceed the lesser of $1,000,000 or an amount equal to 85% of the amount of the
Company's eligible accounts receivable as defined in the agreement (the
"Revolving Loan"). In addition to the Revolving Loan, TBCC provided the Company
with a ("Term Loan") in the amount of $1,000,000 on May 7, 1999 bearing interest
at a rate of 14.14%. No borrowings were outstanding under the Revolving Loan as
of October 2, 1999. On November 1, 1999, the Company borrowed $500,000 under the
Revolving Loan. All borrowings under the TBCC agreement were collaterized by all
of the assets of the Company.


                                       51
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
BEI Medical Systems Company, Inc. and Subsidiaries
October 2, 1999

      Concurrent with the above transaction, the Company provided TBCC with a
seven-year warrant to purchase 92,308 shares of common stock at an initial
exercise price of $1.625 per share, subject to adjustment. The warrant is
currently exercisable.

      As a result of the Asset Sale, both the Term Loan and the Revolving Loan
were repaid in full on December 8, 1999 and all of the related agreements were
terminated. Cancellation fees aggregating $85,000 were incurred in connection
with the termination of the agreement.

      Interest of approximately $89,000, $7,000 and $11,000 was paid on
long-term debt by the Company during fiscal 1999, 1998 and 1997, respectively.
Interest of approximately $35,000 and $50,000 was paid on noncompetition
agreements by the Company during fiscal 1998 and 1997, respectively.

Note 6
Accrued Expenses and Other Liabilities

        dollars in thousands                                    1999      1998
        ------------------------------------------------------------------------
        Professional fees                                      $  522    $  134

        Employee compensation                                     114       268

        Taxes                                                     161       141

        Commissions                                                97       180

        Royalties and related costs                                74       130

        Tax refund payable to BEI Technologies                    420       327

        Other                                                     339       196
        ------------------------------------------------------------------------
           Accrued Expenses and Other Liabilities              $1,727    $1,376
        ========================================================================

Note 7
Income Taxes

      Deferred income taxes reflect the net tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes. Significant components of the
Company's deferred tax liabilities and assets as of October 2, 1999 and October
3, 1998 are as follows:


                                       52
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
BEI Medical Systems Company, Inc. and Subsidiaries
October 2, 1999

        dollars in thousands                                  1999        1998
        ------------------------------------------------------------------------
        Deferred tax liabilities

           Property and equipment                              ($68)       ($20)

        Deferred tax assets

           Federal tax credits                                  141          --

           Federal net operating loss carryforwards           1,840          --

           Intangibles                                          435         465

           Other                                                 60         193

           Inventory valuation                                  221          92

           State net operating loss carryforwards             1,758       1,177

           Allowance for doubtful accounts                       58          51
        ------------------------------------------------------------------------
              Total deferred tax assets                       4,513       1,978

           Valuation allowance for deferred tax assets       (4,445)     (1,784)
        ------------------------------------------------------------------------
              Net deferred tax assets                       $    --     $   174
        ========================================================================

      As of October 2, 1999, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $5.4 million, which expire
through 2014 and net operating loss carryforwards for state income tax purposes
of approximately $19.5 million, which expire from 2001 through 2006. As of
October 2, 1999, a valuation allowance has been established equal to the entire
net tax benefit associated with all carryforwards and temporary differences, as
their realization is uncertain. The net deferred tax assets of $174,000 as of
October 3, 1998, represented the net federal tax benefit available for carryback
as of that date.


                                       53
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
BEI Medical Systems Company, Inc. and Subsidiaries
October 2, 1999

      Significant components of the provision (benefit) for income taxes from
continuing operations are as follows:

<TABLE>
<CAPTION>
                                                                            Year Ended
                                                                 ------------------------------
      dollars in thousands                                        1999        1998        1997
      -----------------------------------------------------------------------------------------
      <S>                                                        <C>       <C>         <C>
      Current

         Federal                                                 ($553)    ($2,046)    ($1,039)

         State                                                      --          --          --
      -----------------------------------------------------------------------------------------
            Total current                                         (553)     (2,046)     (1,039)

      Deferred

         Federal                                                   174        (233)       (261)

         State                                                      --          --          --
      -----------------------------------------------------------------------------------------
            Total deferred                                         174        (233)       (261)
      -----------------------------------------------------------------------------------------
      Total income tax benefit                                   ($379)    ($2,279)    ($1,300)
      =========================================================================================
</TABLE>

      A reconciliation of the statutory federal income tax rate to the Company's
effective rate from continuing operations is presented below.

<TABLE>
<CAPTION>
                                                                            Year Ended
                                                                 ------------------------------
      dollars in thousands                                        1999        1998        1997
      -----------------------------------------------------------------------------------------
      <S>                                                        <C>       <C>         <C>
      Expected tax benefit at the statutory rate of 34%        ($2,478)    ($2,465)    ($1,920)

      Goodwill amortization                                        121         131          81

      Increase in valuation allowance                            2,661          --         607

      Other                                                         75          55         (68)
      -----------------------------------------------------------------------------------------
         Income tax benefit                                    ($  379)    ($2,279)    ($1,300)
      =========================================================================================
</TABLE>

      In connection with the Distribution, the Company entered into a Tax
Allocation and Indemnity Agreement with Technologies as amended December 15,
1998. Under the terms of the agreement, Technologies and the Company are each
responsible for the payment of 100% of the portion of federal and state taxes
related to their and their respective subsidiaries activities for the periods
prior to the Distribution in which both parties were included in consolidated
income tax returns and are entitled to their portion of any income tax refunds
for the same periods. For the periods after the Distribution, the Company is
entitled to 100% of any carryback of losses or credits to prior years.

Note 8
Stockholders' Equity

      The Company's preferred stock may be issued from time to time in one or
more series. The Board of Directors is authorized to establish from time to time
the number of shares to be included in each series, and


                                       54
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
BEI Medical Systems Company, Inc. and Subsidiaries
October 2, 1999

to designate the dividend rights, dividend rate, conversion rights, voting
rights, rights and terms of redemption, redemption price or prices and
liquidation preferences.

Note 9
Stock Option and Restricted Stock Plans

      The Amended Plan: Pursuant to the Company's Amended 1987 Stock Option Plan
(the "Amended Plan") the Company may grant both incentive and non-statutory
stock options to employees as well as grant stock options to non-employee
consultants to the Company. The Amended plan provides for the grant of options
to purchase up 2,100,000 shares of common stock, of which 390,749 remain
available for grant as of October 2, 1999. The Amended plan expires on January
15, 2007. The exercise price of options granted pursuant to the Amended Plan
must be not less than the fair market value of the common stock on the date such
options are granted, as determined by the Board of Directors.. Options generally
become exercisable in four equal installments commencing one year from the date
of grant and such vesting may be accelerated upon the occurrence of certain
events.

      As a result of the Distribution, all the outstanding options for common
stock of the Company at the date of the Distribution, both vested and unvested,
were converted to options for common stock of Technologies, at a rate of
approximately 1.07 options for Technologies stock for every 1.0 Electronics
option held. The exercise price of the options was also adjusted so that the
aggregate value of all outstanding options was the same after the Distribution
as before.

      On November 4, 1997, Medical and Electronics merged with Electronics as
the surviving legal entity. As a result of the Merger, options outstanding under
separate stock option plans of Medical were converted to Electronics options at
a rate of 5.51615 Electronics options for every one Medical option outstanding.
Electronics' outstanding options increased to 595,739 after the Merger from zero
outstanding at September 27, 1997 after the Distribution. Medical's stock option
plans were cancelled as a result of the Merger.

      In December 1998, options representing the right to purchase 102,847
shares of the Company's common stock outstanding under the Amended Plan at
exercise prices ranging from $3.7437 to $4.00 per share were repriced to $1.625
per share, an amount equal to the fair market value of the common stock
outstanding at that time.


                                       55
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
BEI Medical Systems Company, Inc. and Subsidiaries
October 2, 1999

      Transactions relating to the Amended Plan are summarized as follows:

<TABLE>
<CAPTION>
                                                                               Weighted Average
                                                  Number of    Exercise Price   Exercise Price
                                                Common Shares     Per Share       Per Share
----------------------------------------------------------------------------------------------
<S>                                               <C>           <C>               <C>
Options outstanding at September 28, 1996           456,962     $2.88 - $9.13       $5.36

   Exercised                                       (137,866)    $2.88 - $7.25       $5.33

   Terminated                                        (3,500)    $3.75 - $9.13       $7.95
----------------------------------------------------------------------------------------------
Options outstanding prior to Distribution           315,596     $2.88 - $9.13       $5.35

   Distribution conversion of outstanding
     options to Technologies                       (315,596)    $2.88 - $9.13       $5.35
----------------------------------------------------------------------------------------------
Options outstanding as of September 27, 1997             --                --          --

   Conversion of outstanding Medical options        595,739     $0.31 - $3.74       $0.48

   Granted                                          203,489     $1.94 - $4.00       $3.04

   Exercised                                        (55,161)            $0.31       $0.31
----------------------------------------------------------------------------------------------
Options outstanding at October 3, 1998              744,067     $0.31 - $4.00       $1.19

   Granted                                          459,908     $1.44 - $1.63       $1.56

   Terminated                                      (106,970)    $1.63 - $4.00       $2.24
----------------------------------------------------------------------------------------------
Options outstanding at October 2, 1999            1,097,005     $0.31 - $1.94       $1.02
==============================================================================================
</TABLE>

      Details of the options outstanding as of October 2, 1999 were as follows:

<TABLE>
<CAPTION>
                                                                                                Weighted
                                       Weighted Average                                         Average
                                           Remaining     Weighted Average                       Exercise
        Exercise          Options      Contractual Life   Exercise Price         Number           Price
         Prices         Outstanding         (Years)          Per Share        Exercisable       Per Share
     ----------------------------------------------------------------------------------------------------
       <S>                 <C>                <C>              <C>              <C>               <C>
       $0.31                 366,821          5.8              $0.31             366,821          $0.31

       $0.54                  52,403          6.3              $0.54              40,681          $0.54

       $0.70                 107,564          6.6              $0.70              80,673          $0.70

       $1.44                 166,000          9.5              $1.44                  --            --

       $1.63                 380,467          8.2              $1.63             119,027          $1.63

       $1.94                  23,750          8.5              $1.94              23,750          $1.94
     ====================================================================================================
       $0.31 - $1.94       1,097,005          7.4              $1.02             630,952          $0.69
     ====================================================================================================
</TABLE>


                                       56
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
BEI Medical Systems Company, Inc. and Subsidiaries
October 2, 1999

      The Restricted Plan: In February 1992, the Company's Board of Directors
approved the 1992 Restricted Stock Plan (the "Restricted Plan"), ratified by the
Company's stockholders in February 1993, authorizing up to 350,000 shares of the
Company's common stock to be issued to certain key individuals subject to
forfeiture if employment terminated prior to the end of prescribed vesting
periods. In March 1997, the stockholders approved an amendment to the Restricted
Plan to increase the shares reserved for issuance under the plan from 350,000 to
700,000, imposed a limit on the number of shares which any one participant may
receive under the Restricted Plan in any one fiscal year and extended the term
of the restricted Plan to January 15, 2007. In March of 1999 the stockholders
approved an amendment to the Restricted Plan to increase the shares reserved for
issuance under the plan from 700,000 to 900,000.

      As of October 2, 1999, 517,850 shares of the Company's common stock had
been issued pursuant to awards of restricted stock granted under the Restricted
Plan (excluding any shares that have been returned to the Restricted Plan as a
result of termination or forfeiture) and 465,750 shares (plus any shares that
might in the future be returned to the Restricted Plan as a result of
termination or forfeiture) remained available for future issuance under the
Restricted Plan. Of the outstanding shares, 288,371 had vested. Restricted
shares outstanding are included in the Company's total common stock outstanding.
The market value at the date of grant of shares awarded under the plan is
recorded as unearned restricted stock. The market value of shares granted is
amortized to compensation expense over the periods of vesting. In fiscal years
1999 and 1998, $56,000 and $79,000, respectively of compensation expense was
recognized. No compensation expense for Medical was recorded in fiscal 1997.

      Pro forma Information: Pro forma information regarding net loss and net
loss per common share, basic and diluted is required by SFAS No. 123, and has
been determined as if the Company had been accounting for its employee stock
options under the fair value method of that Statement. The fair value of these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following assumptions for fiscal years 1999 and 1998:
weighted-average risk-free interest rate of 6.10% and 4.92%, respectively; no
dividends; volatility factors of the expected market price of the Company's
common stock of .611 and 0.562, respectively and a weighted average expected
life of the options of 9.3 and 9.3 years for, respectively .

      The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options are subject to vesting
and have characteristics significantly different from those of traded options,
and because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value.

      For purposes of pro forma disclosures, the estimated fair value of the
options granted in 1999 is amortized to expense over the options' vesting
period. The weighted-average grant date fair value of options granted during
fiscal years 1999 and 1998 was $1.45 and $2.10, respectively. The Company's pro
forma net loss was $7,171,000 and $5,036,000 for 1999 and 1998, respectively,
and pro forma net loss per common share, basic and diluted, was $0.96 and $0.68,
respectively

The pro forma disclosures presented for fiscal year 1999 may not necessarily be
indicative of the pro forma effect of SFAS No. 123 for future periods in which
options may be granted. The impact of the calculation required by FAS No. 123 on
pro forma results of operations and earnings (loss) per share was determined to
be immaterial for fiscal year 1997.


                                       57
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
BEI Medical Systems Company, Inc. and Subsidiaries
October 2, 1999

Note 11
Employee Benefit Plans

      The Company has a defined contribution retirement plan for the benefit of
all eligible employees. The plan qualifies under Section 401(k) of the Internal
Revenue Code thereby allowing eligible employees to make tax-deductible
contributions to the plan. Non-discretionary employer contributions are based on
a fixed percentage of total eligible employee compensation and a formula based
matching of the participant's contribution to the plan. Additional contributions
are at the discretion of the Board of Directors. The Company's contributions to
the plan for fiscal year 1999, 1998 and 1997 were approximately $72,000, $76,000
and $62,000, respectively.

Note 12
Lease and Other Commitments

      Leases: Operating leases consist principally of leases for facilities and
equipment, which expire through 2004. Certain of the operating leases contain
various options for renewal and/or purchase of the related assets for amounts
approximating their fair market value at the date of exercise of the option. The
future minimum payments for operating leases consisted of the following at
October 2, 1999:

       dollars in thousands
       -----------------------------------------------------------
       2000                                                   $354

       2001                                                    327

       2002                                                    323

       2003                                                    334

       2004                                                    304

       Thereafter                                               --
       -----------------------------------------------------------
       Total minimum lease payments                         $1,642
       ===========================================================

      Total rental expense attributable to property and equipment amounted to
approximately $374,000, $297,000, and $268,000 for fiscal 1999, 1998 and 1997,
respectively.

      Minimum Royalty Payments: In 1993, the Company entered into a license
agreement for the HTA endometrial ablation technology whereby royalty payments
of 10% are payable on net revenues of certain disposable products. The agreement
is subject to minimum royalty payments through fiscal year 2001. The minimum
royalty payment due during the next fiscal year is $33,000.

      The Company has also entered into a number of other license and royalty
agreements that require payments based upon revenues on the sales of certain
products ranging from 4% to 10% of revenue. Except for the endometrial ablation
license agreement mentioned above all other license and royalty agreements were
either assigned to CSAC in connection with the Asset Sale or terminated by the
Company by December 8, 1999. Total royalty expense attributable to various
license agreements amounted to approximately $207,000, $314,000, and $270,000
for fiscal 1999, 1998 and 1997, respectively.


                                       58
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
BEI Medical Systems Company, Inc. and Subsidiaries
October 2, 1999

Note 13
Contingencies and Litigation

      From time to time, the Company may become involved in or subject to
various litigation and legal proceedings incidental to the normal conduct of its
business. The Company is not currently involved in any material legal
proceedings.

Note 14
Revenues

      Revenue from customers in foreign countries amounted to $1,441,000,
$1,500,000 and $1,430,000 in fiscal 1999, 1998 and 1997, respectively. In fiscal
1999, 1998 and 1997, foreign revenue did not exceed 10% of consolidated revenue
in any individual geographic area. All of the Company's revenues related to HTA
products were to customers in foreign countries.

Note 15
Quarterly Results of Operations (Unaudited)

      The tables below present unaudited quarterly financial information for
fiscal 1999 and 1998:

      dollars in thousands except per share amounts

<TABLE>
<CAPTION>
                                                              Three months ended
      ----------------------------------------------------------------------------------------
                                                   Jan. 2,    Apr. 3,     Jul. 3,      Oct. 2,
                                                    1999       1999         1999        1999
      ----------------------------------------------------------------------------------------
      <S>                                         <C>         <C>         <C>         <C>
      Revenue                                     $ 2,164     $ 2,001     $ 2,347     $ 1,907

      Gross profit                                    856         820         958         603

      Net loss                                    ($1,527)    ($1,654)    ($1,710)    ($2,018)

      Loss per common share, basic and diluted    ($ 0.20)    ($ 0.22)    ($ 0.23)    ($ 0.27)

      ----------------------------------------------------------------------------------------
                                                  Dec. 27,   Mar. 28,     Jun. 27,     Oct. 3,
                                                    1997       1998         1998        1998
      ----------------------------------------------------------------------------------------
      Revenue                                     $ 2,418     $ 2,535     $ 2,293     $ 2,405

      Gross profit                                    923       1,141         943       1,006

      Net loss                                    ($1,196)    ($1,151)    ($  977)    ($1,647)

      Loss per common share, basic and diluted    ($ 0.17)    ($ 0.16)    ($ 0.13)    ($ 0.22)
</TABLE>


                                       59
<PAGE>

                         Report of Independent Auditors

The Board of Directors and Stockholders
BEI Medical Systems Company, Inc.

      We have audited the accompanying consolidated balance sheets of BEI
Medical Systems Company, Inc. (formerly BEI Electronics, Inc.) as of October 2,
1999 and October 3, 1998, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended October 2, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

      We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of BEI Medical
Systems Company, Inc. at October 2, 1999 and October 3, 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended October 2, 1999 in conformity with generally
accepted accounting principles.


                                                       /s/ ERNST & YOUNG LLP

Hackensack, New Jersey
December 8, 1999


                                       60
<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

      None


                                       61
<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      Certain information with respect to directors and executive officers is
set forth in Part I of this Report. Additional information required by this Item
is incorporated herein by reference to the section entitled "Compliance with
Section 16(a) of the Securities Exchange Act of 1934" of the Proxy Statement
related to the Company's 2000 Annual Meeting of Stockholders to be filed by the
Company with the Securities and Exchange Commission (the "Definitive Proxy
Statement").

ITEM 11. EXECUTIVE COMPENSATION

      The information required by this Item is incorporated herein by reference
to the sections entitled "Executive Compensation" and "Certain Transactions" of
the Company's Definitive Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The information required by this Item is incorporated herein by reference
to the section entitled "Security Ownership of Certain Beneficial Owners and
Management" of the Company's Definitive Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The information required by this Item is incorporated herein by reference
to the sections entitled "Executive Compensation" and "Certain Transactions" of
the Definitive Proxy Statement.


                                       62
<PAGE>

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

      The following documents are filed as part of this Form 10-K.

<TABLE>
<CAPTION>
                                                                                  Form 10-K
                                                                                 Page Number
<S>                                                                                  <C>
(a)(1)  Index to Consolidated Financial Statements.

        The following Consolidated Financial Statements of BEI
        Medical Systems Company, Inc. are filed as part of this Form 10-K:

        Consolidated Balance Sheets -
           October 2, 1999 and October 3, 1998                                        39

        Consolidated Statements of Operations -
           Years ended October 2, 1999, October 3, 1998 and
           September 27, 1997                                                         40

        Consolidated Statements of Cash Flows -
           Years ended October 2, 1999, October 3, 1998 and
           September 27, 1997                                                         41

        Consolidated Statements of Stockholders' Equity -
           Years ended October 2, 1999, October 3, 1998 and
           September 27, 1997                                                         42

        Notes to Consolidated Financial Statements -
          October 2, 1999                                                             43

      Report of Independent Auditors                                                  58

(a)(2)  Index to Financial Statement Schedule.

        The following Consolidated Financial Statement Schedule of BEI
        Medical Systems Company, Inc. (formerly BEI Electronics, Inc.) for
        each of the years ended October 2, 1999, October 3, 1998 and
        September 27, 1997 is filed as part of this Form 10-K:

        Schedule II     Valuation and Qualifying Accounts                            S-1


                        Independent Auditors' Report                                 S-2
</TABLE>

Schedules not listed above have been omitted because they are not applicable or
are not required or the information required to be set forth therein is included
in the Consolidated Financial Statements or Notes thereto.

      (b) The Registrant did not file any reports in Form 8-K during its fiscal
quarter ended October 2, 1999.


                                       63
<PAGE>

(a)(3) Listing of Exhibits

<TABLE>
<CAPTION>
       Exhibit Numbers  Description                                                 Footnote
       ---------------  -----------                                                 --------

            <S>         <C>                                                           <C>
            2.1         Distribution Agreement between BEI Electronics, Inc.
                        and BEI Technologies, Inc. dated September 26, 1997            (i)

            2.2         Corporate Services Agreement between BEI Technologies,
                        Inc. and BEI Electronics, Inc. dated as of September
                        26, 1997                                                       (i)

            2.3         Tax Allocation and Indemnity Agreement between BEI
                        Electronics, Inc. and BEI Technologies, Inc. dated as
                        of September 26, 1997                                          (i)

            2.4         Assumption of Liabilities and Indemnity Agreement
                        between BEI Electronics, Inc. and BEI Technologies,
                        Inc. dated as of September 26, 1997                            (i)

            2.5         Technology Transfer and License Agreement by and
                        between BEI Electronics, Inc. and BEI Technologies,
                        Inc. dated as of September 26, 1997                            (i)

            2.6         Trademark Assignment and Consent Agreement by and
                        between BEI Electronics, Inc. and BEI Technologies,
                        Inc. dated as of September 26, 1997                            (i)

            2.7         Agreement Regarding Certain Representations and
                        Covenants by and between BEI Electronics, Inc. and BEI
                        Technologies, Inc. dated as of September 26, 1997              (i)

            3.1         Restated Certificate of Incorporation                         (ii)

            3.2         Amended Bylaws of the Company as of June 30, 1997            (iii)

            3.3         Certificate of Designation of Series A Junior
                        Participating Preferred Stock                                (iii)

            4.1         Reference is made to exhibits 3.1, 3.2 and 3.3               (iii)

            4.2         Form of Rights Certificate                                   (iii)

            4.3         Summary of Rights to Purchase Preferred Shares               (iii)

           10.2  *      Registrant's Amended 1987 Stock Option Plan                   (iv)
</TABLE>


                                       64
<PAGE>

          10.3    *     Standard option grant form used in
                        connection with Registrant's Amended 1987
                        Stock Option Plan.                                (v)

          10.6    *     Description of Management Incentive Bonus
                        Plan                                              (ii)

          10.8    *     Registrant's 1992 Restricted Stock Plan, as
                        amended                                           (iv)

          10.27         Rights Agreement dated June 30, 1997 between
                        the Registrant and ChaseMellon Shareholder
                        Services, LLC                                     (vi)

          10.28   *     Consulting Agreement between the Registrant
                        and Ralph Richart, M.D. dated as of March 1,     (vii)
                        1998

          10.29  *      Employment agreement between the Registrant
                        and Herbert H. Spoon dated February 27, 1998

          10.30  *      Severance Agreement between the Registrant
                        and Thomas W. Fry dated February 12, 1997        (vii)

          10.31         Amendment to Tax Allocation and Indemnity
                        Agreement dated December 15, 1998 between
                        the Registrant and BEI Technologies dated as
                        of September 26, 1997                            (vii)

          10.32         Asset Purchase Agreement between the
                        Registrant and CooperSurgical Acquisition
                        Corp. dated October 1, 1999, as amended on
                        November 2, 1999.                               (viii)

          10.33         Amendment No. 2 to the Asset Purchase
                        Agreement, dated as of December 7, 1999           (ix)

          10.34         Transition Agreement between the Registrant
                        and CooperSurgical Acquisition Corp. dated
                        December 8, 1999.

          10.35         Noncompetition Agreement between the
                        Registrant and CooperSurgical Acquisition
                        Corp. dated December 8, 1999.

          10.36  *      Employment Agreement between the Registrant
                        and Richard W. Turner dated October 7, 1999.

          10.37         Loan and Security Agreement between the
                        Registrant and Transamerica Business Credit
                        Corporation, and Streamlined Facility
                        Agreement between the same parties, each
                        dated May 6, 1999.


                                       65
<PAGE>

          10.38         Agreement of Lease between the Registrant
                        and Hollister '97, L.L.C. for 100 Hollister
                        Road, Teterboro, New Jersey facility, dated
                        January 20, 1998.

          10.39*        Separation letter to Herbert H. Spoon dated
                        January 29, 1999.

          10.40         Nonqualified Deferred Compensation Plan
                        Trust Agreement between the Registrant and
                        Merrill Lynch Trust, dated July 15, 1999.

          21.1          Subsidiaries of the Registrant

          23.1          Consent of Independent Auditors

          24.1          Power of Attorney

          27.1          Financial Data Schedule (EDGAR only)

*     Indicates management contracts or compensatory plans or arrangements filed
      pursuant to Item 601(b)(10) of regulation S-K.

(i)     Incorporated by reference. Previously filed as an exhibit to the
        Registrant's Current Report on Form 8-K, dated September 27, 1997.

(ii)    Incorporated by reference. Previously filed as an exhibit to the
        Registrant's Registration Statement on Form S-1 (File No. 33-29032).

(iii)   Incorporated by reference. Previously filed as an exhibit to the
        Registrant's Current Report on Form 8-K, dated June 30, 1997.

(iv)    Incorporated by reference. Previously filed as an exhibit to the
        Registrant's Registration Statement on Form S-8 (File No. 333-64155).

(v)     Incorporated by reference. Previously filed as an exhibit to Amendment
        No. 1 to the Registrant's Registration Statement on Form S-1 (No.
        33-29032).

(vi)    Incorporated by reference. Previously filed as an exhibit to the
        Registrant's Report on Form 10-K, dated October 2, 1993.

(vii)   Incorporated by reference. Previously filed as an exhibit to the
        Registrant's Report on Form 10-K, dated October 3, 1998.

(viii)  Incorporated by reference. Previously filed as an exhibit to the
        Registrant's definitive proxy statement for the special meeting of
        stockholders held December 7, 1999 (0000929624-99-001921).

(ix)    Incorporated by reference. Previously filed as an exhibit to the
        Registrant's Report on Form 8-K, dated December 22, 1999.


                                       66
<PAGE>

                                   SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) 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.

                                      BEI MEDICAL SYSTEMS COMPANY, INC.


                                   By: /s/ Thomas W. Fry
                                       --------------------
                                   Thomas W. Fry
                                   Vice President of Finance and Administration,
                                   Secretary & Treasurer

                                   December 30, 1999


                                       67
<PAGE>

                                                                     SCHEDULE II

                        BEI MEDICAL SYSTEMS COMPANY, INC.
                                ----------------
                        VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                                        Column C
          Column A                  Column B            Additions             Column D       Column E
------------------------------    -----------   ------------------------     ----------     -----------
                                   Balance at   Charged to      Charged                       Balance
                                   Beginning     Costs and      to Other                    at End of
         Description               of Period     Expenses       Accounts     Deductions       Period
------------------------------    -----------   -----------    ---------     ----------     -----------
<S>                                 <C>           <C>               <C>         <C>           <C>
dollars in thousands

Year ended October 2, 1999:
---------------------------

Deducted from asset accounts:

Allowance for doubtful accounts     $  174        $   74            $           ($155)(C)     $   93

Valuation allowance for
    deferred tax assets              1,784         2,661(A)          --            --          4,445
                                    ------        ------           ----         -----         ------
    Total                           $1,958        $2,735            $--         ($155)        $4,538
                                    ======        ======           ====         =====         ======
 dollars in thousands

Year ended October 3, 1998:
---------------------------

Deducted from asset accounts:

Allowance for doubtful accounts     $  112        $   76            $--          ($14) (B)    $  174

Valuation allowance for
    deferred tax assets              1,784            --             --            --          1,784
                                    ------        ------           ----         -----         ------
    Total                           $1,896        $   76            $--          ($14)        $1,958
                                    ======        ======           ====         =====         ======
Year ended September 27, 1997:
------------------------------

Deducted from asset accounts:

Allowance for doubtful accounts     $  236        $   57            $--         ($181)(B)     $  112

Valuation allowance for
    deferred tax assets                929           855 (A)         --            --          1,784

Valuation allowance for
    discontinued operations            701            75            (94)         (682)            --
                                    ------        ------           ----         -----         ------
    Total                           $1,866        $  987           ($94)        ($863)        $1,896
                                    ======        ======           ====         =====         ======
</TABLE>

      (A)   Allowance adjustment resulting from evaluation of the realizability
            of the related deferred tax assets.
      (B)   Uncollectible accounts written off.
      (C)   Includes adjustment based on allowance allocated to CSAC in the
            Asset Sale ($80,000) and uncollectible accounts written off
            ($75,000).


                                       S-1
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
BEI Medical Systems Company, Inc.

      We have audited the consolidated financial statements of BEI Medical
Systems Company, Inc. (formerly BEI Electronics, Inc.) as of October 2, 1999 and
October 3, 1998, and for each of the three years in the period ended October 2,
1999, and have issued our report thereon dated December 8, 1999. Our audits also
included the financial statement schedule listed in Item 14(a)(2) of this Form
10-K. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.

      In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects, the information set forth therein.


                                                        /s/ ERNST & YOUNG LLP

Hackensack, New Jersey
December 8, 1999


                                       S-2

<PAGE>

                                INDEX TO EXHIBITS

Exhibit
Number

10.34         Transition Agreement between the Registrant and CooperSurgical
              Acquisition Corp. dated December 8, 1999.

10.35         Noncompetition Agreement between the Registrant and CooperSurgical
              Acquisition Corp. dated December 8, 1999.

10.36*        Employment Agreement between the Registrant and Richard W. Turner
              dated October 7, 1999.

10.37         Loan and Security Agreement between the Registrant and
              Transamerica Business Credit Corporation, and Streamlined Facility
              Agreement between the same parties, each dated May 6, 1999.

10.38         Agreement of Lease between the Registrant and Hollister '97,
              L.L.C. for 100 Hollister Road, Teterboro, New Jersey facility,
              dated January 20, 1998.

10.39*        Separation letter to Herbert H. Spoon dated January 29, 1999.

10.40         Nonqualified Deferred Compensation Plan Trust Agreement between
              the Registrant and Merrill Lynch Trust, dated July 15, 1999.

21.1          Subsidiaries of the Registrant

23.1          Consent of Independent Auditors (Reference is made to page 69 of
              the 10-K)

24.1          Power of Attorney (Reference is made to page 66 of the 10-K)

27.1          Financial Data Schedule