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 September 28, 1996 or

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

                         Commission file number 0-17885
                             BEI ELECTRONICS, INC.
             (Exact name of Registrant as specified in its charter)

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

                           One Post Street, Suite 2500
                         San Francisco, California 94104
               --------------------------------------------------
               (Address of principal executive offices) (Zip code)

                                 (415) 956-4477
               --------------------------------------------------
              (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 November 29, 1996 was $59,704,975 (A). As
of November 29, 1996, 6,985,629  shares of Registrant's Common Stock,  excluding
stock held in Treasury, were outstanding.

(A) Based upon the closing  sale price of the Common  Stock on November 29, 1996
as reported on the NASDAQ National Market System.  Excludes  1,557,904 shares of
Common  Stock held by  directors,  executive  officers  and  stockholders  whose
ownership  exceeds ten percent of Common Stock outstanding on November 29, 1996.
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  1997  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.

<PAGE>

                                TABLE OF CONTENTS
                                                                            Page
                                                                            ----
PART I

   Item 1.    Business................................................        3

   Item 2.    Properties..............................................       16

   Item 3.    Legal Proceedings.......................................       17

   Item 4.    Submission of Matters to a Vote of Security Holders.....       19

PART II

   Item 5.    Market for Registrant's Common Equity and
              Related Stockholder Matters.............................       19

   Item 6.    Selected Financial Data.................................       20

   Item 7.    Management's Discussion and Analysis of
              Financial Condition and Results of Operations...........       21

   Item 8.    Financial Statements and Supplementary Data.............       25

   Item 9.    Changes in and Disagreements With Accountants
              on Accounting and Financial Disclosure..................       43

PART III

   Item 10.   Directors and Executive Officers
              of the Registrant.......................................       43

   Item 11.   Executive Compensation..................................       43

   Item 12.   Security Ownership of Certain Beneficial
              Owners and Management...................................       43

   Item 13.   Certain Relationships and Related Transactions..........       43

PART IV

   Item 14.   Exhibits, Financial Statement Schedules,
              and Reports on Form 8-K.................................       44

Signatures    ........................................................       49


                                                                               2

<PAGE>

PART I

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  Item  1,  "Business"  as  well  as  Item  7,
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations."

ITEM 1.  BUSINESS

Introduction

BEI  Electronics,  Inc.  (the  "Company") is a  diversified  manufacturer  which
focuses its activity on two principal families of technology-oriented  products.
These include:

     1.)  sensors,  engineered  subsystems and associated  components  which are
          used  for  the  control  of  precision   machinery  and  equipment  in
          industrial,  medical, automotive,  aerospace and military applications
          (Sensors and Systems segment); and

     2.)  proprietary  medical  instruments  and  supplies  for  diagnostic  and
          minimally invasive surgical procedures (Medical Systems segment).

The Company also  produced  rocket-propelled  ordnance  systems for military use
(Defense Systems segment) in fiscal 1996. (See Note C to Consolidated  Financial
Statements regarding exit of the HYDRA 70 Rocket business).

The Company  conducted its fiscal 1996 operations  through BEI Sensors & Systems
Company (Sensors and Systems), BEI Medical Systems Company (Medical Systems) and
BEI Defense Systems Company (Defense Systems).  The Company has major operations
in  Arkansas,  California,  New  Jersey and  Texas.  See Note N to  Consolidated
Financial  Statements  for Business  Segment  Data.  For a discussion of factors
relating to the Company's risks, see "Risk Factors" below.

The  Company  incorporated  in  Delaware  in 1974,  as a  successor  to  Baldwin
Electronics,  Inc., and became a publicly-owned company in 1989. BEI's principal
executive  offices are located at One Post Street,  Suite 2500,  San  Francisco,
California  94104 and its telephone  number at that location is (415)  956-4477.
Unless the context  indicates  otherwise,  "BEI" and the "Company"  refer to BEI
Electronics,  Inc.  and  its  consolidated  subsidiaries.  BEI  is a  registered
trademark of the Company.

SENSORS AND SYSTEMS SEGMENT

BEI Sensors and Systems  Company  produces  components  and systems that provide
vital  communication,  information and control links between digital  electronic
equipment and precision mechanisms.  Supplemental or complementary products such
as motors  are also  manufactured.  Sensors  and  Systems'  products  consist of
optical  encoders  and  servo  systems,  precision  potentiometers,   mechanical
accelerometers,   quartz  rate  sensors,   pressure  transducers,   cryocoolers,
actuators, brushless motors, quartz accelerometers, inertial guidance components
and subsystems, and other control electronics which sense, drive and control the
motion of a wide variety of machinery and  equipment  with the high accuracy and
reliability  required  in  modern  industrial   automation,   space  technology,
aviation,  automotive  components,  health care,  science and office  automation
applications.  Using  standard  designs,  parts and  subassemblies,  the Company
typically  manufactures  products  to meet the  specifications  of end  users or
original equipment manufacturers (OEMs), who integrate these products into their
systems, machinery and equipment. The Company's technical expertise allows it to
offer its customers the  flexibility to develop both  customized  components and
fully  integrated  sensor and control  systems  that  satisfy  their  individual
requirements.

Products of Sensors and Systems Segment

The following products, which may be used alone or in combination,  are produced
in the Sensors and Systems segment:

Shaft Encoders and Servo Systems. Shaft encoders, when mechanically connected to
rotating shafts,  translate angular motion and velocity information into digital
electronic  signals.  These  signals  are then  received  by  signal  processing
electronics and

                                                                               3

<PAGE>

used to control the operation of machinery and equipment.  Shaft encoders, which
are sometimes  called optical encoders (or,  simply,  encoders)  include a light
source,  a  rotating  slotted  code  disk  through  which the  light  passes,  a
photoelectric  sensor,  which  receives the light  through the code disk,  and a
signal processor to translate the pulses of light into digital information.  The
Company offers a wide array of encoders to serve a variety of applications.  The
most common  applications are for factory  automation,  office  automation,  and
transportation  equipment,  but specialized  versions are also used for military
and space  hardware.  Servo  systems are  closed-loop  electronic  systems  that
control the  position or velocity of rotating  shafts or other  moving  parts by
accepting  a  desired  rate or  position  input  from  computers  or  keyboards,
monitoring  the position or rate of movement  (using an  appropriate  encoder or
other sensor) and  constantly  providing  feedback which  indicates  whether the
desired performance has been achieved.

Quartz  Rate  Sensors,  Mechanical  Accelerometers,  Quartz  Accelerometers  and
Inertial  Guidance   Systems.   These  products  provide  precise  and  reliable
measurement  of minute  linear and angular  motions for  control,  guidance  and
instrumentation   requirements  in  strategic  systems,  tactical  aircraft  and
missiles,   space  systems  and  in   commercial,   industrial   and  automotive
applications.  In general, these devices operate without need for direct linkage
to the driving mechanisms.  Such measurements are required for stabilization and
other functions of satellites,  in-flight  monitoring of military and commercial
aircraft  antenna  stabilization,  navigation of oil well drill bit  assemblies,
components used in intelligent  vehicle dynamic control,  and navigation systems
in the automotive industry.

Mechanical  accelerometers and rate sensors using traditional  technology (e.g.,
pivot and jewel  sensing  mechanisms)  rely on the movement of complex  machined
metallic  parts  to  measure  motion.  The  Company's  miniature,   solid  state
accelerometers  and rate sensors are based on its innovative quartz  technology.
The Company  developed  the Quartz Rate Sensor (QRS) for  military  applications
such as a  replacement  for  traditional  rotating  wheel  gyroscopes.  Unlike a
conventional  gyroscope,  which may contain several hundred  individual parts in
the sensing assembly,  the QRS uses only one single element as its sensor.  This
element   is   chemically   micro-machined   from   crystalline   quartz   using
photolithographic  methods  similar to those used in the  manufacture of silicon
semiconductor  chips.  The advantages of quartz rate sensors and  accelerometers
over traditional mechanical units are increased  reliability,  reduced size, and
lower production and life cycle cost. These factors led the automotive  industry
to incorporate  this technology into their  intelligent  vehicle dynamic control
systems.

GyroChip(TM)  and  Automotive  Quartz Rate Sensors.  The Company's  GyroChip(TM)
sensors developed for commercial gyro  applications,  are lower cost versions of
the  Quartz  Rate  Sensor.   These  products  have  found  use  in  such  varied
requirements as navigation of autonomous guided vehicles (robotics),  ocean buoy
and sea-state  monitoring,  and  stabilization  of optical  systems.  Automotive
Quartz Rate  Sensors  (ARQS) are in use as yaw sensors in  stability  control or
anti-skid  systems  for  automobiles.   The  GyroChip(TM)  provides  performance
suitable for commercial  applications while offering  ruggedness,  long life and
small size at a lower cost than military versions of the product.

Precision  Potentiometers.  Potentiometers are used as position-sensing  devices
for throttles,  steering position,  transmission controls,  wiper delay and seat
and mirror  positions in automobiles  and heavy  equipment such as earth movers,
construction  equipment  and farm  machinery.  They are  also  used as  position
sensors in such  applications  as  actuators on molding  presses,  saw mills and
numerous other types of industrial  equipment and in oil well logging  calipers.
Because of their  resolution,  durability  and  resistance to electronic  noise,
these devices are well suited to function as control transducers (a device which
converts  an  input  to  another  form of  output;  e.g.,  analog  to  digital).
Customized  versions of some  potentiometers make these sensors suitable for the
high  acceleration,   shock  and  vibration  levels  required  for  control  and
instrumentation  of missiles,  satellites and space vehicles.  Incorporating the
potentiometer   technology  with  the  Company's   proprietary  optical  encoder
technology  has resulted in a multisensor  that could serve as a steering  wheel
position sensor for  intelligent  vehicle dynamic control and braking system for
future automobiles.

Brushless  DC  Motors.  Brushless  DC  motors  permit  high  performance,  drive
efficiency in lightweight packages,  and ease of interface with microprocessors.
The motors,  which feature high energy magnets,  are  characterized by long life
and low acoustic and electrical  noise. They are well suited to high speed, high
reliability  applications,  such as in operating  rooms where the risk of sparks
from a brush motor would be hazardous or where  electrical  noise could  disrupt
computers or computer-controlled equipment.

Pressure  Transducers.  Pressure  transducers monitor aircraft engine, oil, fuel
and cabin  pressure  and are capable of providing  voltage or  frequency  output
proportional  to pressure in the range from vacuum to 10,000 psi. These products
are produced

                                                                               4

<PAGE>

to meet the  requirements  of low  pressure  ranges such as those needed for the
measurement of altitude,  airspeed and Mach number.  Other versions  accommodate
higher pressure applications intended to provide accurate measurement, long life
and  resistance  to severe  vibration  and shock  environments.  BEI's  pressure
transducers  can be  found on  executive  jets and  turboprops,  commercial  and
military aircraft, missiles and torpedoes, and on the Space Shuttle. The Sensors
and Systems  segment is currently  developing  a product  line of silicon  based
pressure sensors designed for high volume commercial/industrial applications.

Actuators.  Actuators are used in place of motors to achieve  precise control of
short  stroke  linear or limited  rotary  motion.  Actuators  using high  energy
magnets are also produced for specialized  applications requiring intense force,
torque or acceleration relative to the size of the device.

Cryogenic  Coolers.  This newly developed  product line is a low cost, long life
Stirling cycle refrigerator for generating cryogenic  temperatures  required for
superconducting  applications  and infrared  detection  such as night vision and
surveillance cameras.

Significant Customers and Marketing for Sensors and Systems Segment

The Sensors and Systems segment sold its products during the past fiscal year to
approximately  6,400  commercial  end users and OEMs,  principally in the United
States,  through its direct sales force. Sales to the U.S.  Government (or prime
contractors to the U.S. Government) represented approximately 27% of Sensors and
Systems  net sales in  fiscal  1996 and 32% in fiscal  1995.  No other  customer
accounted  for more than 10% of net sales in fiscal 1996 or fiscal  1995.  While
the Company has received  several  large orders from  non-government  customers,
individual orders are typically less than $100,000.  (See Note N to Consolidated
Financial  Statements.) The Company's strategy is to place increased emphasis on
the development of non-government  customers to offset the effects of reductions
in government programs. (See Risk Factors below.)

The Sensors and Systems segment is represented  internationally by approximately
60 sales representatives and distributors.

Field  sales  engineers  are trained to assist in product  selection  and system
design.  Factory-based  application  engineers  assist in  defining  performance
criteria and in prototype development. Customer service staff are also available
to coordinate  after-sale service and support.  Warranties on products typically
range from a period of one to two years.  Historically,  warranty costs have not
been significant.

Backlog for Sensors and Systems Segment

The  segment's  backlog at  September  28,  1996 and  September  30, 1995 was as
follows:

                                              Backlog
                                       (dollars in thousands)
                    September 28, 1996                        September 30, 1995
                    ------------------                        ------------------

                           $39,832                                   $41,442

Backlog  includes  aggregate  contract  revenues  remaining  to be earned by the
Company over the life of existing  contracts.  Some contracts  undertaken by the
Company  extend  beyond one year.  Accordingly,  portions of such  contracts are
carried  forward  from one year to the next as part of  backlog.  Not all of the
backlog as of September 28, 1996 is scheduled for shipment during fiscal 1997.

In the case of U.S. Government contracts,  backlog includes only those contracts
that are fully  funded by a procuring  Government  agency.  All U.S.  Government
contracts and subcontracts are subject to termination by the U.S. Government for
convenience.  Year-to-year comparisons of backlog are not necessarily indicative
of future revenue or profitability  trends, and management believes that backlog
as of any  particular  date may not be  representative  of actual  sales for the
segment for any succeeding fiscal period.

                                                                               5

<PAGE>

The Sensors and Systems  segment has commercial  operations  that typically ship
standard  products  within 30 to 60 days after receipt of an order.  The Company
believes  that its  competitive  position  in this  segment  depends  in part on
minimizing  the time between  receipt and shipment of an order.  Products  which
require  special  analysis,  design  or  testing,  such as  those  produced  for
customers in the aviation and defense or space technology markets, are generally
shipped from six to twelve months after receipt of the order.

Competition for Sensors and Systems Segment

The Company's  principal  competitors in the Sensors and Systems segment include
Dynapar Corporation and Veeder-Root,  subsidiaries of Danaher Controls; Dynamics
Research Corporation;  Renco Encoders  Incorporated,  a subsidiary of Heidenhain
Corporation;   Encoder  Products  Company;   Allied  Signal;  Litton;   Northrop
Corporation; Rockwell International Corporation;  Honeywell; CTS Corporation and
Kulite Semiconductor  Products,  Inc. In addition,  the Company also may compete
with manufacturers of competing  technologies,  such as resolvers,  inductosyns,
laser and fiber optic gyros and magnetic encoders.

Manufacturing for Sensors and Systems Segment

The Sensors and Systems segment  manufacturing  operations  primarily consist of
the manufacture and assembly of encoders, accelerometers, rate sensors, pressure
sensors, potentiometers, motors, cryogenic coolers, actuators, servo systems and
other  electronics.  Special  equipment  developed by the Company  generates and
replicates,  with a high  degree of  accuracy,  optical  code  disks,  which are
components  critical  to the  production  of  optical  encoders.  Production  of
precision  components for all systems requires accurate machining  capabilities.
Because of the sensitivity of certain products to  environmental  contamination,
such as encoders,  quartz rate sensors, cryo coolers and servo systems for space
and military applications,  these products are assembled under strict clean room
conditions. The Company has initiated production engineering measures to support
fabrication,  assembly and testing of new sensors in quantities  appropriate for
the automotive industry.

Limited Manufacturing Experience; Scale-Up Risk; Product Recall Risk

The Company has only limited  experience in manufacturing  the AQRS. The Company
currently  manufactures  in  moderate  quantities  the AQRS in its  Concord,  CA
facility and the steering  sensor in its Tustin,  CA facility.  The Company does
not have extensive  experience in manufacturing these products in the quantities
required  to  fulfill  contracts  covering  1997 and 1998.  Manufacturers  often
encounter  difficulties  in scaling up  production  of new  products,  including
problems involving production yields,  quality control and assurance,  component
supply and shortages of qualified  personnel.  Difficulties  encountered  by the
Company in  manufacturing  scale-up could have a material  adverse effect on its
business,  financial  condition  and  results  of  operations.  There  can be no
assurance that future manufacturing  difficulties or product recalls,  either of
which could have a material adverse effect on the Company's business,  financial
condition and results of operations, will not occur.

Dependence Upon Key Suppliers

The Company  purchases  materials  used in the AQRS from various  suppliers  and
relies on single  sources for several  components.  Delays  associated  with any
future   material   shorages,   particularly   as  the  Company  scales  up  its
manufacturing  activities in support of commercial sales,  could have a material
adverse  effect on the Company's  business,  financial  condition and results of
operations.

Research and Development for Sensors and Systems Segment

The major focus of this  segment's  R&D effort has been to improve  performance,
yield and  predictability  of existing  products,  with special  emphasis on the
quartz sensors used in yaw rate sensing in the automotive industry.  Substantial
effort has also been devoted to the development of an automotive yaw rate sensor
and the  manufacturing  methods  necessary  to  deliver  competitive  prices and
quality in this  market.  New  applications  are being  targeted  to utilize the
combined expertise of Sensors and Systems to achieve  value-added  subsystems in
the motion  control  market such as servo systems,  platform  stabilization  and
pointing, along with intelligent sensor systems.

The Company has also  produced  prototypes  of  products  incorporating  silicon
micromachined pressure sensors geared toward

                                                                               6

<PAGE>

next generation requirements for automotive, industrial and aerospace markets.

U.S. Government Contracts for Sensors and Systems Segment

Approximately 27%, 32% and 40% of the Sensors and Systems segment's net sales in
fiscal 1996, 1995 and 1994,  respectively,  were derived from contracts with the
U.S.  Government or under  subcontract to prime  contractors to the  Government.
Because a large portion of the segment's business is derived from contracts with
the Department of Defense ("DOD") or other agencies of the U.S. Government,  the
Company's  business is sensitive  to changes in  Government  spending  policies,
which can have  significant  variations from year to year. At various times, the
Company's  results have been adversely  affected by contract  cutbacks and there
can be no assurance  that the Company's  results of  operations  will not in the
future be materially and adversely affected by changes in Government procurement
policies or reductions in Government  expenditures for products  manufactured by
the Company.

Under  applicable  regulations,  various audit  agencies of the U.S.  Government
conduct regular audits of  contractors'  compliance with a variety of Government
regulations.  Because of the recurring nature of changes in laws and regulations
and related  regulatory  audits,  the Company  expects it will continue to incur
costs for monitoring and compliance  efforts.  The Government also has the right
to  review  retroactively  the cost  records  of the  Company  under  most  U.S.
Government  contracts.  Contract prices may be adjusted in the event the Company
submits incomplete, inaccurate or obsolete cost or pricing data. U.S. Government
contracts  and  subcontracts   generally  provide  for  either  a  fixed  price,
negotiated  fixed  price or  cost-plus-fixed-fee  basis  for  remuneration.  The
majority of the contracts with the U.S.  Government are competitive  fixed price
or  negotiated  fixed  price  contracts,   although  cost-plus   contracts  were
approximately  18% of U.S.  Government  net sales of the segment in fiscal 1996.
For fixed price  contracts,  the  Company  bears the risk of cost  overruns  and
derives the benefits from cost savings. As a result,  greater risks are involved
under fixed price  contracts than under cost-plus  contracts  because failure to
anticipate technical problems, estimate costs accurately or control costs during
contract  performance  may reduce or eliminate  the  contemplated  profit or may
result in a loss.

All U.S.  Government  contracts  contain  termination  clauses  that  allow  the
contract to be terminated  either for contractor  default or for the convenience
of the  Government.  In the  event of  termination  for the  convenience  of the
Government,  the clause  typically  provides  that the  contractor  will receive
payment for work-in-progress,  including profit. To date, actual terminations of
the Company's  contracts by the Government have not had a significant  effect on
the Company's  financial results.  However,  no assurance can be given that such
terminations will not have a materially  adverse effect on the Company's results
of operations in the future.  Portions of the Company's business are classified.
As a result, the Company is and will be prohibited from disclosing the substance
or status of such business.

MEDICAL SYSTEMS SEGMENT

BEI Medical Systems Company (hereafter  Medical Systems) designs,  manufactures,
and/or sells electrosurgery units, various endoscopes,  surgical instruments and
surgical-procedure-specific  intervention  products and kits. It also  assembles
endoscopic illuminators, video imaging systems and insufflators.

Products

The following  products which may be used alone or in  combination  are produced
and/or sold by Medical Systems.

Electrosurgery  Units.  These products use radio  frequency (RF) currents to cut
tissue  and/or  coagulate  bleeding.  Medical  Systems  produces  a  variety  of
electrosurgical  generators  which are designed  for use in various  medical and
surgical  procedures.  These and associated  supporting items are marketed under
the Meditron(TM) brand and the brands of OEM customers.

Devices,  Instruments & Procedure  Kits.  Medical Systems has a line of surgical
instruments,  procedure  kits and devices  which aid in or enable a physician to
apply various  technologies to an array of medical/surgical  requirements in the
field of  gastroenterology,  gynecology  and  reproductive  health  care.  These
products come in a variety of disposable  or reusable  configurations,  allowing
the caregiver's institution to select the most suitable option. Products include
ZUMI(TM) uterine manipulator/injectors,  ZUI(TM) uterine injectors, Z-Clamps(TM)
and Z-Scissors(TM) for hysterectomy,  cervical biopsy forceps,  Corson-Myoma(TM)
grasping forceps, ZSI Miya Hook(TM),  micro surgical  instruments,  hysterectomy
kits and other specialty

                                                                               7

<PAGE>

instruments.  Other products include endoscopic  illuminators,  cameras, various
types of endoscopes and an automatic electronic insufflator.  These products are
used in  laparoscopic  procedures in  gastrointestinal,  orthopedic  and general
surgery.

Significant Customers and Marketing for Medical Systems Segment

Medical Systems'  products are sold to a variety of customers  primarily for the
gynecology market.  Other markets served include  gastroenterology,  orthopedics
and  general  surgery.  In the  U.S.,  Medical  Systems  utilizes  a  system  of
independent   manufacturer's   representative   organizations,    direct   sales
representatives, and telemarketers to market its products directly to end users,
hospitals, surgical centers and doctors' offices. Products are also sold through
a network of domestic and international distributors. Additionally, a variety of
products are private label manufactured under various OEM agreements.  In fiscal
1996,  OEM sales were 15% of Medical  Systems  sales,  compared to 21% in fiscal
1995.

Backlog for Medical Systems Segment

Backlog is not a significant factor in the Medical Systems segment.  The segment
has commercial  operations  that typically  ship  instruments  within one to two
weeks of  receipt  of an order and  electronic  products  within  30 days  after
receipt of an order.  Disposable products are normally shipped within one day of
receipt of order. Products which require special development,  design, packaging
and testing are  generally  shipped  within four to six months after an order is
received.

Competition for Medical Systems Segment

The Company's  principal  competitors  in the Medical  Systems  segment  include
Valleylab,  a  subsidiary  of  Pfizer,   Microvasive,  a  subsidiary  of  Boston
Scientific, Circon-Cabot , Utah Medical, Leisegang, Wallach, and CooperSurgical,
Inc.

Manufacturing for Medical Systems Segment

Medical  Systems  segment  manufacturing  operations  consist  primarily  of the
manufacture and assembly of equipment such as electrosurgery  units,  endoscopic
illuminators, endoscopes and electronic insufflators. Some component fabrication
and assembly of various non-electrical  products,  both disposable and reusable,
is performed by the manufacturing  group.  During fiscal 1996,  Medical Systems'
manufacturing  facilities  received ISO 9001  certification from Lloyds Register
Quality  Assurance.  Additionally,  the Company's  facilities and  documentation
procedures for the manufacture of medical devices are required to conform to the
Food and Drug  Administration's  ("FDA") Good  Manufacturing  Practices ("GMP"),
enforced by the FDA through its facilities inspection program. Withdrawal of GMP
status would have a material  adverse  effect on the Company's  Medical  Systems
segment.

Research and Development for Medical Systems Segment

The  Company's  principal  development  effort for this  segment  has focused on
proprietary  devices for minimally invasive  procedures in gynecology.  Products
currently under development include the Hydro  ThermAblator(R)  technology as an
alternative  to  existing  treatment  for  abnormal  menstrual   bleeding,   the
GyneSys(R)  DX  Diagnostic  Catheter  System for the  diagnosis and treatment of
fallopian   tube   obstruction,  and  the  Flexible   HysteroSys(TM)  Diagnostic
Hysteroscope as a cost effective  solution suitable for the physician's  office.
Additionally,  the  Company  continues  development  in  monopolar  and  bipolar
electrosurgical generators and the Company is pursuing expansion of the surgical
illuminator and automatic insufflator product lines for general and laparoscopic
surgery as well as for  outpatient  and office  applications.  The  Company  has
continued  to  work  with  several  OEM  customers  for  the  adaptation  of its
proprietary technology to various private label requirements.

Government Regulation

Medical Systems  manufactures  and sells medical  devices.  In the U.S., the FDA
(among  other   governmental   agencies)  is  responsible   for  regulating  the
introduction  of  new  medical  devices  and  the  manufacturing,  labeling  and
record-keeping  for such  devices.  The FDA also  reviews  required  reports  of
adverse  events  involving  such  devices.  The  FDA has  extensive  enforcement
authority, including the power to seize products, restrain sales or prohibit the
operation of manufacturing facilities until the noted deficiencies are corrected
to the FDA's satisfaction. The FDA can also monitor recalls of products

                                                                               8

<PAGE>

from consumer locations.

Recent  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 now
requires more 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.

Medical device laws are also in effect in many of the countries outside the U.S.
in which Medical Systems 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 Community, where efforts are under
way to harmonize the regulatory  systems.  Such  regulatory  systems include ISO
9000, IEC 601 and CE marks.

Uncertainty Related to Health Care Reform

Political,  economic and  regulatory  influences  are subjecting the health care
industry in the United States to  fundamental  change.  The Company  anticipates
that  Congress  and  state  legislatures  will  continue  to review  and  assess
alternative  health care  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  health  care  reform  measure or future
private sector reform may have on its Medical Systems business.


DEFENSE SYSTEMS SEGMENT

For fiscal 1996 and prior years, BEI Defense Systems Company  (hereafter Defense
Systems) provided rocket systems,  including weapons management systems,  rocket
motors,  and combat and training warheads primarily to the Department of Defense
(DOD), and also to allied foreign  governments.  For a number of years,  Defense
Systems  was the sole  manufacturer  and  integrator  of the HYDRA 70 (H 70),  a
cost-effective,  advanced  free-flight  rocket  system  employed in a variety of
combat and training roles. In September 1995,  management of the Company reached
a decision to exit the rocket  manufacturing  line of  business  which made up a
substantial  portion of the Company's Defense Systems segment.  For fiscal 1996,
H 70 revenues represented 89% of Defense Systems' total sales. All H 70 contract
deliveries were completed during fiscal 1996. The Company anticipates no further
sales of H 70 rockets, fuzes or warheads.

Products of Defense Systems Segment

HYDRA 70 Rocket Systems.

The  H  70  is  a  2.75  inch   free-flight   rocket  system  which  features  a
microprocessor-based  weapons  management system that provides automatic control
of components  such as rocket motors,  fuzes and a variety of warheads,  each of
which  is  specifically  adapted  for  use as part of the  system.  The  Company
completed  production  of rocket  motors,  fuzes and warheads in fiscal 1996 and
anticipates no further sales of H 70 rockets, fuzes or warheads.

Weapons Management System.  Defense Systems developed and presently manufactures
an  electronic,  microprocessor-based  weapons  management  system that controls
between seven and seventy-six  2.75 inch rockets.  The systems may be programmed
to manage  simultaneously up to five different  warheads,  to set fuzes remotely
and to display the  inventory  of  warheads  remaining.  The weapons  management
system product line is ongoing and represents all of Defense  Systems backlog at
fiscal 1996 year end.

Significant Customers and Marketing for Defense Systems Segment

Defense  Systems has marketed its products  primarily to the DOD either directly
or indirectly as a  subcontractor  to prime  contractors.  Defense  Systems also
marketed its products to allied  foreign  governments  both through direct sales
and through  foreign  military  sales  programs  funded by the U.S.  Government.
Foreign sales constituted approximately 3% of Defense

                                                                               9

<PAGE>

Systems'  revenues  in each of  fiscal  1996,  1995  and  1994.  (See  Note N to
Consolidated  Financial  Statements.)  Defense  Systems  completed  its  current
backlog of rocket and warhead production during fiscal 1996.

Backlog for Defense Systems Segment

The  segment's  backlog at  September  28,  1996 and  September  30, 1995 was as
follows:

                                                  Backlog
                                           (dollars in thousands)
                           September 28, 1996                September 30, 1995
                           ------------------                ------------------

                                 $6,757                              $35,836

Backlog  includes  aggregate  contract  revenues  remaining  to be earned by the
Company over the life of existing contracts.  All of the backlog as of September
28, 1996 is for products  other than H 70 rockets,  fuzes and  warheads.  In the
case of U.S.  Government  contracts,  backlog includes only those contracts that
are fully funded by a procuring Government agency. All U.S. Government contracts
and  subcontracts  are  subject  to  termination  by  the  U.S.  Government  for
convenience.

Many factors affect the scheduling of projects;  therefore,  no assurance can be
given as to when revenue will be realized on projects  included in the Company's
backlog.  Year-to-year  comparisons of backlog are not necessarily indicative of
future revenue or profitability  trends, and management believes that backlog as
of any particular date may not be representative of actual sales for the segment
for any succeeding fiscal period.

Manufacturing for Defense Systems Segment

Defense Systems' manufacturing  operations consisted primarily of the production
and assembly of fuzes, rocket motors, warheads and explosive devices, as well as
the assembly of electronic  products.  Certain Defense Systems'  operations were
subject to  rigorous  safety  requirements  which are normal to the  handling of
munitions and explosives.

Research and Development for Defense Systems Segment

Company  funding of R&D efforts was  discontinued  during  fiscal 1995.  New R&D
funding is not  expected or required to support the weapons  management  product
line.

U.S. Government Contracts for Defense Systems Segment

Approximately  97% of the Defense Systems  segment's net sales in each of fiscal
1996,  1995 and 1994 were derived from  contracts  with the U.S.  Government  or
under subcontract to other prime  contractors to the Government.  (See Note C to
Consolidated Financial Statements.)

Under  applicable  regulations,  various audit  agencies of the U.S.  Government
conduct regular audits of  contractors'  compliance with a variety of Government
regulations.  Because of the recurring nature of changes in laws and regulations
and related  regulatory  audits,  the Company expects to continually incur costs
for  monitoring  and compliance  efforts.  During fiscal 1996,  these costs were
similar  to 1995 but  there can be no  assurance  that  such  costs  will not be
material  in fiscal  1997.  The  Government  also has the right  under most U.S.
Government  contracts to review  retroactively  the cost records of the Company.
Contract  prices may be adjusted in the event the  Company  submits  incomplete,
inaccurate or obsolete cost or pricing data.

All U.S.  Government  contracts and subcontracts  generally provide for either a
fixed  price,   negotiated   fixed  price  or   cost-plus-fixed-fee   basis  for
remuneration. The major part of the segment's contracts with the U.S. Government
are competitive fixed price or negotiated fixed price contracts. For fixed price
contracts,  the Company bears the risk of cost overruns and derives the benefits
from cost savings.  As a result,  greater  risks are involved  under fixed price
contracts than under cost-plus contracts.


                                                                              10

<PAGE>

Major Programs for Defense Systems Segment

Sales of HYDRA 70 systems and components represented  approximately 26%, 27% and
31% of the Company's revenues in fiscal 1996, 1995 and 1994, respectively. Sales
of the HYDRA 70  systems  and  components  will be  insignificant  in 1997.  The
failure of the Alliant-BEI team to win the 1995 competitive  award for continued
HYDRA 70 production  eliminated  these sales for years beyond fiscal 1996,  when
existing contract requirements were virtually 100% complete.

GENERAL - ALL SEGMENTS

Employees

As of September  28, 1996,  the Company had 1,003  employees,  including  126 in
research,  development and engineering,  76 in administration,  108 in marketing
and sales,  679 in  operations  and 14 in  corporate.  The Company  believes its
continued  success depends on its ability to attract and retain highly qualified
personnel.  The  Company's  employees  are  not  presently  represented  by  any
collective bargaining  agreements.  To date, the Company has not experienced any
work stoppages and considers its employee relations to be good.

Significant Customers

During fiscal 1996,  1995 and 1994,  the U.S.  Government  and other  Government
contractors  accounted for approximately 45%, 50%, and 57%,  respectively of the
Company's total net sales.

Competition

The Company  operates in highly  competitive  industries.  Many of the Company's
existing  competitors  in each market,  and also a number of potential  entrants
into  these  markets,   have  significantly   greater  financial  resources  and
manufacturing  capabilities,  are more  established,  have larger  marketing and
sales organizations and larger technical staffs.  There can be no assurance that
other  companies will not develop more  sophisticated,  more  cost-effective  or
otherwise superior products.

In its  principal  markets,  the  Company  believes  that  competition  is based
primarily on design,  performance,  reliability,  price,  delivery,  service and
support.  The  Company  believes  it competes  favorably  with  respect to these
factors.

Research and Development

The Company  believes that its future success will depend in part on its ability
to continue to enhance its existing  products,  and to develop and introduce new
products that maintain technological leadership,  meet a wider range of customer
needs and achieve  market  acceptance.  Accordingly,  the  Company's  internally
funded  research,   development  and  related   engineering   expenditures  were
approximately $4.9 million,  $5.0 million, and $7.2 million in fiscal 1996, 1995
and 1994, respectively.  In fiscal 1996, 1995 and 1994, customer funded research
and development  expenditures  charged to cost of sales were $3.5 million,  $9.3
million  and  $10.4  million,  respectively.  The  1996  level  represents  less
government funding of quartz product development and advanced rocket systems and
is consistent with future funding expectations.

Patents and Licenses

The  Company  primarily  relies upon trade  secrets and  know-how to develop and
maintain its competitive position. Retention of data rights by a U.S. Government
contractor is frequently  difficult because the contractor is often compelled to
negotiate  transfer of the data rights to the Government as part of the contract
for production of the product. In addition,  under certain of the Company's U.S.
Government contracts, the Government may require that proprietary information be
disclosed directly to competitors, subject to certain restrictions upon its use.

The Company holds 106 U.S.  patents and 57 foreign patents with expiration dates
ranging from March 1997 to August 2014.  Because many of these patents relate to
technology that is important to certain of the Company's  products,  the Company
considers  these  patents to be  significant  to its  business.  There can be no
assurance,  however,  that any patent will provide  adequate  protection for the
technology or product it covers.
                                                                              11

<PAGE>

The Company believes that, because of the rapid pace of technological  change as
well as the  impact  of  Government  requirements,  factors  such  as  technical
expertise, frequent product enhancements, new product introductions and customer
service and support are generally  more  important to its business than patents.
The Company filed for several  patents in the 1996 fiscal year;  however,  there
can be no  assurance  that  patents  will  issue  from  any  present  or  future
applications  filed by the Company or, if patents issue, that any claims allowed
will be sufficiently broad to protect the Company's technology.

Environmental Matters

The Company uses certain  hazardous  materials in its research and manufacturing
operations and, as a result,  is subject to stringent  federal,  state and local
regulations governing the storage, use and disposal of such materials.  Although
the Company believes that it is currently in material  compliance with such laws
and  regulations,  current or future  laws and  regulations  could  require  the
Company to make  substantial  expenditures  for  remedial  action,  reduction of
chemical exposure,  waste treatment or disposal.  There can be no assurance that
the  operations,  business,  competitive  position,  earnings  or  assets of the
Company will not be materially and adversely  affected by the interpretation and
enforcement of current or future environmental laws and regulations.

Government Regulation

The Company is subject to  significant  regulation by the U.S.  Government  with
respect to a variety of matters  affecting its  business,  including the matters
set forth  below and as  discussed  in the U.S.  Government  Contracts  sections
above.

Facility Security Clearance.
The Company has several facility security clearances from the U.S. Government. A
portion of the  Company's  net sales in fiscal  1996,  1995 and 1994 was derived
from work for which this clearance was required.  Continuation of this clearance
requires  that the  Company  remain  free from  foreign  ownership,  control  or
influence  (FOCI).  In  addition,  the  Company is  required  to comply with the
regulations  promulgated  by the  Defense  Investigative  Service  (DIS),  which
relate,  in large part,  to the Company's  control of  classified  documents and
other information. Loss of such security clearances and the related loss of U.S.
Government  contracts  would have a materially  adverse  effect on the Company's
results of operations.  Management  does not believe that there is presently any
substantial  risk of FOCI  or DIS  noncompliance  that  would  cause  any of its
security clearances to be revoked.

Regulation of Foreign Sales.
All Defense  Systems' and certain of Sensors and Systems' exports are subject to
restrictions  contained in the U.S. Department of State's  International Traffic
in Arms  Regulations  and require  export  licenses in order to be sold  abroad.
Non-defense related foreign sales are generally governed by the Bureau of Export
Administration  of the U.S. Commerce  Department which also frequently  requires
export  licenses.  The  Company's  net sales to  foreign  customers  constituted
approximately  9%,  8% and 8% of  revenues  for  fiscal  1996,  1995  and  1994,
respectively.   To  date,  the  Company  has  not  experienced  any  significant
difficulties in obtaining the requisite  licenses.  In addition,  the Company is
subject to the Foreign Corrupt Practices Act, which prohibits payments or offers
of  payments  to foreign  officials  for the  purpose of  influencing  an act or
decision by a foreign  government,  politician  or  political  party in order to
assist in obtaining, retaining or directing business to any person.

Risk Factors

Defense Spending and Government Contracting.
A significant portion of the Company's net sales has been derived from contracts
with  departments and agencies of the U.S.  Government and with other Government
contractors.  In  fiscal  1996,  1995 and 1994,  such  contracts  accounted  for
approximately 45%, 50% and 57%, respectively,  of the Company's total net sales.
The  completion  of  rocket  contracts  during  1996  makes it  likely  that the
percentage  of net  sales to the  government  will be  lower in the  foreseeable
future.  The Company  believes that the success of the  Company's  business will
continue to be dependent,  in part,  upon its ability to  participate in various
Government  programs.  There can be no assurance that the U.S.  Government  will
continue  its  commitment  to  programs  to which  the  Company's  products  are
applicable or that the Company will continue to be awarded  contracts under such
programs.  Please refer to the discussion  regarding  competition in the segment
discussion  above.  Reductions in the federal  funds  available for projects the
Company is  performing  have in the past,  and may in the future have an adverse
impact on the Company's results of operations.

                                                                              12

<PAGE>

The Company's  contracts  involving the U.S.  Government  are subject to various
other  risks,  including  termination  for the  convenience  of the  Government;
potential disclosure of Company confidential  information to competitors as part
of  the   establishment  by  the  Government  of   second-source   manufacturing
arrangements  or  competitive   bidding;  the  failure  or  inability  of  prime
contractors  or  Government  designated  subcontractors  to perform  under their
contracts;  and increased or unexpected  costs causing losses or reduced profits
under fixed-price contracts.

Other Risk Factors.
For  additional  risk  factors  affecting  the Sensors and Systems  segment see:
Significant   Customers  and  Marketing,   Limited   Manufacturing   Experience,
Dependence  on  Key  Suppliers,  and U.S.  Government  Contracts  in the segment
discussion above.

For  additional  risk  factors   affecting  the  Medical  Systems  segment  see:
Government  Regulation  and  Uncertainty  Related to Health  Care  Reform in the
segment discussion above.

For  additional  risk factors  affecting the Defense  Systems  segment see: U.S.
Government Contracts and Major Programs in the segment discussion above.

                                                                              13

<PAGE>

EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY

The  executive  officers  and  directors  of the  Company  and their  ages as of
December 1, 1996 are as follows:


Name                               Age   Position
-----------------------------------------------------------------------------
Charles Crocker                    57    President, Chief Executive Officer & 
                                         Chairman of the Board of Directors
Gary D. Wrench                     63    Senior Vice President, Chief 
                                         Financial Officer & Director
Dr. Lawrence A. Wan                58    Vice President of Corporate Technology
Robert R. Corr                     50    Secretary, Treasurer & Controller
Richard M. Brooks (1) (2)          68    Director
George S. Brown (2)                75    Director
C. Joseph Giroir, Jr. (1) (2)      57    Director
William G. Howard, Jr. (1)         55    Director
Peter G. Paraskos (1)              68    Director
-----------------------------------------------------------------------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee

Mr.  Crocker,  a founder of the Company,  has served as Chairman of the Board of
Directors of the Company since October 1974. Mr.  Crocker  assumed the positions
of President and Chief Executive Officer,  effective October 1, 1995,  following
the  retirement  of Mr.  Paraskos.  Mr.  Crocker  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 Fiduciary
Trust Company International,  Superconductor Technologies,  Inc., 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. Wrench has served as Senior Vice  President and Chief  Financial  Officer of
the  Company  since July 1993 and as a Director of the  Company  since  February
1986.  From April 1985 to July 1993, he served as Vice  President of the Company
and President and Chief Executive Officer of Motion Systems Company,  Inc., then
a wholly owned subsidiary of the Company that is now a part of Sensors & Systems
Company.  Other  experience  includes twenty years with Hughes Aircraft  Company
including an assignment as President of Spectrolab,  Inc., a Hughes  subsidiary.
Mr. Wrench holds a B.A. from Pomona College and an M.B.A. from the University of
California, Los Angeles.

Dr. Wan was appointed Vice  President,  Corporate  Technology for the Company in
April 1991. From 1984 until 1990, Dr. Wan served as Vice President,  Engineering
for Systron Donner Corporation. Between 1979 and 1984, he held various technical
and general management  positions with Systron Donner Corporation.  From 1968 to
1979,  he served  as Chief  Executive  Officer  for  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 University of California,  Santa  Barbara,  where he also
taught Engineering. Dr. Wan has a B.S., M.S. and Ph.D in Engineering and Applied
Sciences from Yale University.

Mr. Corr was named  Secretary of the Company in February  1995 and has served as
Controller  since November 1989 and Treasurer  since November 1987. From 1978 to
1987, he was employed by AMPEX  Corporation,  an electronics  and magnetic media
company,  in various financial  positions.  From 1975 to 1978, he was an Auditor
for Arthur Andersen & Co. Mr. Corr received a B.B.A.  from Loyola University and
is a Certified Public Accountant in the State of California.

Mr.  Brooks  has been a director  of the  Company  since  November  1987.  He is
currently an independent financial  consultant.  From 1987 to 1990, he served as
President of SFA Management  Corporation,  the managing  general  partner of St.
Francis Associates, an investment partnership. He currently serves as a director
of Longs Drug  Store  Corporation,  Granite  Construction  Incorporated  and the
Western Farm Credit Bank, a private  company.  Mr. Brooks holds a B.S. from Yale
University and an M.B.A. from the University of California, Berkeley.

Mr.  Brown,  a founder of the  Company,  has served as a director of the Company
since October 1974. Mr. Brown served as President and Chief Executive Officer of
the Company from October 1974, until his retirement from that position in July

                                                                              14

<PAGE>

1990, when he became a consultant to the Company. Prior to founding the Company,
Mr. Brown served from 1971 until 1974 as Executive  Vice  President  and General
Manager of Baldwin  Electronics,  Inc., a subsidiary of D.H. Baldwin Company and
the predecessor of the Company.  Mr. Brown holds a B.S.E.E.  from the University
of Oklahoma.

Mr.  Giroir has served as a director of the Company since 1978. He served as the
Secretary  of the Company  from 1974 to early 1995.  He is currently a member of
the law firm of Giroir & Gregory, a Professional Association. From 1965 to 1988,
Mr. Giroir was a member of Rose Law Firm, a Professional  Association.  Both law
firms have  rendered  services to the  Company.  Mr.  Giroir holds a B.A. and an
L.L.B. from the University of Arkansas and an L.L.M. from Georgetown University.

Dr.  Howard  has been a director  of the  Company  since  December  1992.  He is
currently  an   independent   consulting   engineer  in   microelectronics   and
technology-based  business  planning.  From 1987 to 1990,  Dr.  Howard served as
Senior Fellow of the National  Academy of  Engineering  and, prior to that time,
held various  technical and  management  positions  with  Motorola,  Inc.,  most
recently as Senior Vice President and Director of Research and Development.  Dr.
Howard  holds a  B.E.E.  and an M.S.  from  Cornell  University  and a Ph.D.  in
electrical  engineering and computer sciences from the University of California,
Berkeley.  He is a member of the National Academy of Engineering and a fellow of
the  Institute  of  Electrical  and  Electronics  Engineers  and of the American
Association for the Advancement of Science.

Mr.  Paraskos  retired as President and Chief  Executive  Officer of the Company
effective  October 1, 1995. He remains a Director of the Company and also serves
on the Board of Directors  of the  Company's  Defense  Systems  subsidiary.  Mr.
Paraskos  served as  President,  Chief  Executive  Officer and a Director of the
Company from July 1990. Mr. Paraskos joined BEI in connection with the Company's
acquisition  from Thorn EMI of  substantially  all the assets of four of the six
divisions of the Systron Donner  Corporation.  From 1986 to 1990,  Mr.  Paraskos
served  as  President  and  Chief  Executive   Officer  of  the  Systron  Donner
Corporation,  a manufacturer  of avionics and aerospace  sensors and subsystems,
and served in positions as Executive Vice President and Chief Operating  Officer
and in general  management  from 1983 to 1986. Mr. Paraskos holds two degrees in
Engineering  from Columbia  University  and has served in the Marine Corps as an
infantry  officer,  fighter pilot and test pilot. He is a member of the Board of
Nominations  of the  Aviation  Hall of Fame and a life  member of the Society of
Experimental Test Pilots.

The Company has a classified  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
1997 annual meeting of stockholders,  and the term of office of the second class
to expire at the 1998 annual meeting of  stockholders  and the term of office of
the third class to expire at the 1999 annual  meeting of  stockholders.  Class I
consists of Mr. Brooks, Mr. Howard,  and Mr. Paraskos;  Class II consists of Mr.
Crocker and Mr.  Brown;  and Class III  consists of Mr.  Giroir 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.

                                                                              15

<PAGE>

<TABLE>

ITEM 2.       PROPERTIES

The Company's  principal executive offices are located in leased office space in
San Francisco, California, under a lease which expires in 1998. The Company owns
or operates 10 other facilities that relate to the Sensors and Systems,  Defense
Systems and Medical  Systems  segments  and  maintains  office  space in various
locations throughout the United States for sales and technical support.  None of
the owned  principal  properties is subject to any  encumbrance  material to the
consolidated  operations of the Company.  In addition to its executive  offices,
the Company's principal facilities are as follows:

<CAPTION>

Location                                        Description of Facility
--------------------------------------------------------------------------------------------------------------------
<S>                                             <C>    
Sensors and Systems Segment

Maumelle, Arkansas                              Owned 50,000 square foot manufacturing,  engineering,
                                                administrative and research and development facility.

Concord, California                             Owned 101,000 square foot manufacturing, engineering and
                                                administrative facilities.

Tustin, California                              Leased 80,000 square foot manufacturing, engineering and
                                                administrative facility.

Goleta, California                              Owned 22,000 square foot manufacturing, engineering and
                                                administrative facility.

Campbell, California                            Subleased 5,000 square foot manufacturing, administrative and
                                                research and development facility.

San Marcos, California                          Leased 35,000 square foot manufacturing, engineering and
                                                administrative facilities.

Sylmar, California                              Subleased 83,000 square foot manufacturing, engineering and
                                                administrative facility.
--------------------------------------------------------------------------------------------------------------------

Defense Systems Segment

Euless, Texas                                   Owned 72,000 square foot manufacturing, engineering and
                                                administrative facility and subleased  2,000 square foot warehouse
                                                facility, used primarily for record storage.
--------------------------------------------------------------------------------------------------------------------

Medical Systems Segment

Hackensack, New Jersey                          Leased 10,000 square foot manufacturing and engineering facility
                                                and 2,000 square foot administrative and marketing facility.

Chatsworth, California                          Leased 6,000 and 1,600 square foot manufacturing,  engineering
                                                and administrative facilities.

</TABLE>


                                                                              16

<PAGE>

ITEM 3.       LEGAL PROCEEDINGS

BEI Systron Donner Company vs. General Precision Industries, Inc., et al.

In connection  with the  acquisition of assets from Systron  Donner  Corporation
during  fiscal 1990, a subsidiary  of the Company  assumed an  obligation to pay
former  shareholders  of General  Precision  Industries  ("GPI") $4.3 million if
certain  levels of  confirmed  orders and  shipments  are  achieved for products
developed using technology  acquired from GPI in 1986 under a license  agreement
which expires in 2003. In September of 1991, the Licensor of the patent on which
the Company's  quartz  technology is based advised the Company that royalties in
excess of the amounts  previously  paid by the Company  were due.  The amount of
royalties involved was approximately  $400,000. The Company advised the Licensor
that based on its understanding of the license  agreement no additional  amounts
were due. The Licensor  alleged that  nonpayment of the royalties due would give
the  Licensor  the right to terminate  the license  agreement.  The parties were
unable to  resolve  these  differences.  Accordingly,  the  Company  elected  to
exercise the provision of the license  agreement  which required  arbitration of
any disputes between the parties to the agreement.

In June of 1993, the Company and the Licensor filed briefs with the  arbitration
panel. The Licensor alleged in its brief that the amount of royalties, milestone
payments and accrued  interest due as of  September  30, 1992 was  approximately
$10.0  million  (including  the $4.3  million  described  above),  and asked the
arbitration  panel  to rule  that  the  license  could  be  terminated  based on
noncompliance by the Company with the terms of the license agreement.

The  Company  asked  the  arbitration  panel  to rule  that the  amounts  of the
royalties paid by the Company had been properly determined by the Company,  that
the original license agreement should be reformed to reduce the royalties due on
future sales as a result of failure by the Licensor to disclose  certain matters
which significantly impacted the Company's timely ability to employ the licensed
patent on production units and that the license was not subject to termination.

The arbitration  panel bifurcated the issues in the  arbitration,  and issued an
interim ruling in February 1995. In that interim ruling, which will become final
at the close of the arbitration,  the Panel concluded that the license agreement
was not subject to termination, that non-recurring engineering revenues were not
royalty-bearing,  and that $1 million of the $4.3 million discussed above is due
only  if  certain  conditions  are  met in the  future.  These  conditions  were
substantially  met in fiscal  1996 and $1.0  million was accrued for these costs
and charged to operations in the fourth  quarter of fiscal 1996.  The Panel also
concluded that the Company is entitled to ownership of an  accelerometer  patent
that the former  Shareholders  developed.  Further, in September 1995, the panel
ruled that certain  development  costs incurred by the Company could not be used
to offset accrued royalties. As a result, in September 1995, the Company accrued
$3.5 million for royalties and related costs based on its  understanding  of the
amounts due under the panel's  September  ruling.  The estimate of royalties and
related  amounts  due under the  license  agreement  are based on the  Company's
proposal to the panel and are  significantly  less than amounts  proposed by the
licensor.  Under the panel's February  ruling,  $3.3 million of the $4.3 million
became due. This amount,  which is considered  part of the original  acquisition
cost of the technology,  was accrued in February 1995, paid in October 1995, and
is being amortized over the remaining term of the license.

The second phase of the arbitration  involved the final determination of royalty
amounts due for unit sales of product  using the acquired  technology  and other
matters  including the parties'  respective claims for attorneys' fees. In April
1996 the panel issued a second interim ruling which will become final at the end
of the  arbitration.  In the  ruling  the panel  asked  both of the  parties  to
quantify royalties using guidance set forth by the panel. Both parties requested
clarification  of several issues in the April decision.  In July 1996, the panel
issued a clarification  of the April decision and both parties agreed to royalty
amounts  submitted to the panel in August 1996.  These amounts were reflected in
the  Company's  fiscal  1996  results  of  operations  and were  not  materially
different from the Company's previous estimates.

In November 1996 both parties  presented  their  respective  arguments as to why
they  were  the  substantially  prevailing  party  in the  arbitration  and thus
eligible to be awarded fees and costs at the discretion of the panel.  The panel
unexpectedly  ruled that the former  shareholders may be entitled to recover the
costs and expenses  incurred by them (including  reasonable  attorney's fees) in
connection with the arbitration. Based on presently available information, it is
not possible  for the Company to estimate the amount of costs and expenses  that
may awarded by the panel and  ultimately  payable by the  Company.  If the final
award is for all the costs and expenses of the former  shareholders,  the amount
would be substantial  and would result in a one-time charge to operations in the
quarter in which it is recognized.


                                                                              17

<PAGE>

CooperSurgical, Inc. vs. BEI Medical Systems Company, Inc. et al.

In October 1993,  CooperSurgical,  Inc., a subsidiary  of The Cooper  Companies,
filed a claim for unspecified damages alleging unfair competition due to actions
by BEI Medical Systems and its president  Richard  Turner,  a former employee of
The Cooper Companies, and others. On May 16, 1994, the Chancery Division for the
Superior Court of New Jersey granted a partial summary  judgment in favor of the
plaintiff and issued an injunction against the defendants  restraining them from
selling  certain  products  until June 20, 1996. In September  1994, BEI Medical
Systems  filed a motion to vacate the May 16, 1994 order.  On November 28, 1994,
the Court vacated the restraint  order.  On October 16, 1995 the Court clarified
that the partial  summary  judgment of its May 16, 1994 order remains in effect.
On January 31, 1996,  the Court  issued a ruling which  affirmed the legal basis
for  BEI  Medical   Systems  to  assert  a  counterclaim   for  damages  against
CooperSurgical regarding the parties' electrosurgical generator contract.

In June 1996, more than one year after fact and expert  discovery  closed in May
1995,  CooperSurgical's  counsel sent to BEI's  counsel a letter  purporting  to
supplement CooperSurgical's previous responses to interrogatories. The June 1996
letter indicated that CooperSurgical's  damages for one particular aspect of the
claim  were  between  $24 and $50  million  with  respect  to a claim  for which
CooperSurgical's  experts had previously  estimated damages of $3.4 million. BEI
will vigorously  oppose any  CooperSurgical  attempt  whatsoever to introduce at
trial  any  evidence  of a damage  claim  based  upon its June,  1996  purported
supplement.

Management has vigorously  defended its rights in this action and believes after
discussion with legal counsel that the CooperSurgical claims are exaggerated. In
1995  expert  witnesses  for  BEI  prepared  a  formal  response  to the  damage
computations  CooperSurgical previously submitted.  BEI's experts stated that if
CooperSurgical  were  entitled to damages,  those  damages would total less than
$100,000,  and would be more than offset by BEI Medical  Systems'  counterclaims
against   CooperSurgical,   if  BEI  Medical  Systems  were  successful  in  its
counterclaims.  Several  trial  dates  were set during  1996,  all of which were
postponed  by the court.  The trial is currently  scheduled  for March 17, 1997.
BEI,  after  consultation  with  counsel,  believes that the  additional  damage
figures  stated  in the June  1996  letter  from  CooperSurgical's  counsel  are
unfounded.  While the outcome of this matter  cannot be determined at this time,
management  believes,  taking known factors into account and after  consultation
with legal  counsel,  that this  matter  will not  result in a material  adverse
impact on the financial position of the Company.

Other

The Company has pending various other legal actions arising in the normal course
of business.  Management  believes  that none of these legal actions will have a
material impact on the Company's operating results or financial condition.

                                                                              18

<PAGE>

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

              None.

PART II

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

BEI's common stock was  initially  offered to the public at $9 per share in July
1989. The Company's  common stock has been traded on the NASDAQ  National Market
System under the NASDAQ symbol "BEII" since August 1, 1989.  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.


1996 Fiscal Year                                                   Cash Dividend
(ended 9/28/96)                           High          Low          Declared
--------------------------------------------------------------------------------
Fourth Quarter                         $   11.00      $   8.50       $   0.02
                                                                  
Third Quarter                          $   13.50      $   8.55       $   0.02
                                                                  
Second Quarter                         $    9.00      $   6.75       $   0.02
                                                                  
First Quarter                          $    7.63      $   6.25       $   0.02
--------------------------------------------------------------------------------
                                                                  
1995 Fiscal Year                                                  
(ended 9/30/95)                                                   
--------------------------------------------------------------------------------
Fourth Quarter                         $    8.25      $   6.50       $   0.02
                                                                  
Third Quarter                          $    7.25      $   5.50       $   0.02
                                                                  
Second Quarter                         $    5.88      $   5.00       $   0.02
                                                                  
First Quarter                          $    5.75      $   5.00       $   0.02
--------------------------------------------------------------------------------
                                                              
As of November 29, 1996, there were approximately 1,200 holders of record of the
Company's  common stock. The Board of Directors has declared and the Company has
paid  quarterly  cash  dividends  of $.02 per share of  common  stock in each of
fiscal 1996 and 1995. The Board of Directors has declared a dividend of $.02 per
share of common  stock to  stockholders  of record at December 6, 1996,  payable
December 23, 1996 for the first quarter of fiscal 1997.  Payment of dividends is
within the  discretion of the Company's  Board of Directors,  will be subject to
continual  review and will  depend,  among  other  factors,  upon the  earnings,
capital  requirements,  operating results and financial condition of the Company
from time to time.  There are no  restrictions  on the Company's  ability to pay
dividends  provided the  covenants  set forth in its bank credit  agreement  and
Senior Note agreement are met (see Notes E and G to the  Consolidated  Financial
Statements).  The  covenants  primarily  concern  certain  operating  ratios and
minimum balances of tangible net worth.

                                                                              19

<PAGE>

<TABLE>

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.

<CAPTION>

(in thousands, except per share amounts)
----------------------------------------------------------------------------------------------------------------------
                                                                               Years Ended
                                --------------------------------------------------------------------------------------
                                     September 28        September 30         October 1       October 2      October 3
                                             1996                1995              1994            1993           1992
----------------------------------------------------------------------------------------------------------------------
<S>                                      <C>                 <C>               <C>             <C>            <C>     
Statement of Income Data:
Net sales                                $148,738            $144,903          $138,658        $146,719       $156,622
Net income (loss)                           1,889              (4,391)           (1,744)          3,778          7,180
Earnings (loss) per
common share and
common equivalent share                      0.27              (0.65)            (0.26)            0.56           1.05

Cash dividends per
common share                                $0.08               $0.08             $0.08           $0.08          $0.08
Weighted average shares
outstanding                                 7,108               6,759             6,657           6,783          6,836

Balance Sheet Data:
Working capital                           $38,102             $35,923           $40,189         $35,667        $16,036
Total assets                              115,011             113,738           112,432         108,528         96,472
Long-term debt
 (excluding current portion)               24,348              30,157            30,421          20,050          3,153
Stockholders' equity                       55,972              53,319            57,829          59,606         55,560
----------------------------------------------------------------------------------------------------------------------

</TABLE>

                                                                              20

<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.


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

--------------------------------------------------------------------------------
                                                1996        1995         1994
--------------------------------------------------------------------------------
Net sales                                      100.0%      100.0%       100.0%
Cost of sales                                   68.8        74.2         70.4
--------------------------------------------------------------------------------
Gross profit                                    31.2        25.8         29.6
Operating expenses:
Selling, general and
    administrative expenses                     24.9        23.7         25.5
Provision for royalty and related
    expenses                                      --         2.4           --
Research, development and
    related expenses                             3.3         3.4          5.2
--------------------------------------------------------------------------------
Income (loss) from operations                    3.0        (3.7)        (1.1)
Other income                                     0.7         0.7          0.7
Interest expense                                 1.7         1.7          1.7
--------------------------------------------------------------------------------
Income (loss) before income taxes                2.0        (4.7)        (2.1)
Provision for income taxes (credit)              0.7        (1.7)        (0.8)
Net income (loss)                                1.3%       (3.0)%       (1.3)%
================================================================================

See Note N to the Consolidated  Financial  Statements for information on segment
data.

Fiscal Years 1996, 1995 and 1994

Net Sales

In fiscal 1996,  the Company's net sales  increased  2.6% to $148.7 million from
$144.9 million in fiscal 1995.

Sensors and Systems segment net sales increased 6.9% to $96.7 million from $90.5
million.  This  increase  reflects the  continued  growth in sales of commercial
product lines, including those for industrial, automotive and medical markets.

Offsetting the increase from the Sensors & Systems segment,  the Defense Systems
segment  net sales  decreased  6.5% to $42.6  million  from $45.6  million.  The
decline is  primarily  due to the  decline  in sales  under a  completed  rocket
development  contract for the Advanced Rocket System. This contract  represented
approximately  1.2% of Defense  Systems  sales in fiscal 1996  compared to 6% in
fiscal  1995.  This  contract has no further  funding  beyond  fiscal 1996.  The
principal  product of the Defense Systems segment was the HYDRA 70 (H 70) Rocket
produced under a competitively bid fixed price contract.  No significant  future
sales of H 70 are expected.

As discussed in detail at Note C to Consolidated Financial Statements, "HYDRA 70
Rocket  Contract and Related  Contingencies,"  the Defense  Systems  segment has
certain disputes pending with the U.S. Government. In September 1995, management
of the  Company  reached a  decision  to exit the rocket  manufacturing  line of
business which makes up a substantial  portion of the Defense  Systems  segment.
The  backlog of H 70 rockets  existing  at the end of fiscal 1995 was shipped in
fiscal 1996.

Medical  Systems sales  increased  6.8% to $9.4 million in fiscal 1996 from $8.8
million in fiscal 1995.

In fiscal 1995,  the Company's net sales  increased  4.5% to $144.9 million from
$138.7 million in fiscal 1994.  Sensors and Systems  segment net sales increased
9.9% to $90.5  million from $82.4  million  primarily  reflecting  the continued
growth

                                                                              21

<PAGE>

in sales of commercial product lines, including those for industrial, automotive
and medical markets.

Defense Systems segment net sales decreased 4.3% to $45.6 million in fiscal 1995
from $47.6 million in fiscal 1994, primarily due to the decline in sales under a
completed  rocket  development  contract for the Advanced  Rocket  System.  This
contract  represented  approximately  6% of Defense Systems sales in fiscal 1995
compared to 11% in fiscal 1994.  The  principal  product of the Defense  Systems
segment was the HYDRA 70 (H 70) Rocket produced under a competitively  bid fixed
price contract.  Fiscal 1995 sales of H 70 related products were consistent with
the prior year.

In fiscal 1995, Medical Systems sales remained relatively flat at $8.8 million ,
a 1.9% increase from $8.7 million in fiscal 1994.

The Company's sales to international customers were approximately 9.2%, 8.3% and
7.5% of the  Company's net sales for fiscal 1996,  1995 and 1994,  respectively.
International sales can vary significantly as a percentage of sales depending on
the timing of shipments and size of orders.

Cost of Sales and Gross Profit

Cost of sales as a  percentage  of net sales was  68.8%,  74.2%,  and,  70.4% in
fiscal 1996, 1995 and 1994, respectively.

The decrease in cost of sales as a  percentage  of net sales in fiscal 1996 from
fiscal 1995 results from provisions for additional  contract completion costs of
$1.5 million which were included in 1995 cost of sales to reflect the wind up of
rocket related  business,  and the settlement of claims relating to  prior  year
H 70 contracts, which increased fiscal 1996 sales by $3.6 million.  (See  Note C
to Consolidated  Financial Statements, "HYDRA 70  Rocket  Contract  and  Related
Contingencies").

During fiscal 1996, the Sensors & Systems  segment cost of sales as a percentage
of sales remained relatively flat, decreasing 0.3% to 62.5% from 62.8% in fiscal
1995.

The increase in cost of sales as a  percentage  of net sales in fiscal 1995 from
fiscal 1994  primarily  reflects  substantial  increases in the Defense  Systems
segment cost of sales.  The increase in fiscal 1995 resulted from a lower priced
product mix and from the  Company's  decision  to exit the rocket  manufacturing
line of business as described above.

Downward  pressure on gross profit  margins is expected to continue,  especially
for military  contracts.  The Company's  gross profit  margins from sales to the
U.S.  Government for military and space products are generally  lower than gross
profit margins from sales of commercial and industrial  products.  Management is
continuing measures intended to reduce costs and improve average margins.

Selling, General and Administrative Expenses

Selling,  general and administrative  expenses as a percentage of net sales were
24.9%, 23.7% and 25.5% in fiscal 1996, 1995 and 1994, respectively.

Fiscal 1996 selling,  general and administrative expenses increased $2.6 million
from $34.3 million in fiscal 1995 to $36.9 million.  The Defense Systems segment
expenses  increased $1.7 million due primarily to incentive  accruals related to
successful  completion of  outstanding  contracts and related claim issues,  and
higher than anticipated costs associated with government  contract delays during
fiscal  1996.  Medical  Systems  selling,  general and  administrative  expenses
increased by $0.7 million primarily to support continuing trials of a product in
development   in  fiscal   1996.   Sensors  &  Systems   selling,   general  and
administrative  expenses  increased  to support  operations  selling  commercial
products with a portion of the increase offset by declines in operations selling
government products.

Fiscal 1995  selling,  general  and  administrative  expenses  of $34.3  million
included  $1.1 million for the  settlement of a U.S.  Government  Administrative
contract claim. Spending was reduced in both the Defense and Medical segments as
well as  Corporate  headquarters  consistent  with  efforts to reduce  operating
losses. The Sensors and Systems segment experienced higher selling,  general and
administrative  expenses to support sales growth in commercial product lines. In
addition to selling,  general and administrative expense, the Company recorded a
charge in the fourth  quarter of fiscal  1995 in the amount of 2.4% of net sales
($3.5 million) for royalty and related costs incurred on the basis of an interim
arbitration   ruling  (see  Note  M  to   Consolidated   Financial   Statements,
"Contingencies and Litigation").


                                                                              22

<PAGE>

Research, Development and Related Expenses

The Company's internally funded research,  development and related expenses as a
percentage of net sales were 3.3%, 3.4% and 5.2% for fiscal 1996, 1995 and 1994,
respectively.

Research  and  Development  expenses  in fiscal  1996 were  concentrated  in the
Sensors and Systems segment.  Overall research and development spending declined
slightly  as  engineering  effort was  shifted to  manufacturing  support as new
automotive  sensors began to ramp up  production.  The Medical  Systems  segment
increased  research and  development  efforts  during fiscal 1996 primarily as a
result of continuing product trials.

Research and Development spending in fiscal 1995 was concentrated in the Sensors
and  Systems  segment to support  the growth of the  commercial  product  lines.
Consequently,  certain programs were phased out while emphasis on development of
sensors for the automotive industry was increased.

The Company believes that the continued  timely  development of new products and
enhancements   to  its  existing   products  is  essential  to  maintaining  its
competitive  position.  Accordingly,  the Company anticipates that such expenses
will  increase in absolute  amount,  but may  fluctuate as a percentage of sales
depending on the  Company's  success in acquiring  customers  or, in some cases,
U.S. Government funding.

Interest Expense and Other Income

Interest expense as a percentage of net sales in fiscal 1996 remained consistent
with fiscal 1995 at 1.7%.  Interest is paid  primarily  on the Senior Note debt.
There was no new long term debt issued during fiscal 1996.

Other income in fiscal 1996,  1995, and 1994 is comprised of royalty income from
H 70 licenses and interest  income  earned on highly liquid  investments.  Total
other income in fiscal 1996 increased  slightly  from  the prior year;  however,
H 70 royalties  from  the Defense Systems segment declined while interest income
on invested  cash  increased  due to  positive  inflows of cash  primarily  from
the conversion of assets to cash as a consequence of concluding H 70 operations.

Income Tax Provision

The Company's effective tax (benefit) rate was 35.8%,  (35.7%), and (40.0%), for
fiscal 1996,  1995 and 1994,  respectively.  The effective tax rate reflects the
statutory  federal tax rate and the  weighted  average tax rate of the states in
which  the  Company  conducts  business.  The  fiscal  1996  tax  rate  reflects
realization  of  additional  federal  and state tax  credits  for  research  and
development  identified  in 1996.  The fiscal 1995  effective tax rate was lower
than the  effective  rate in fiscal 1994 due to losses in certain  states  where
realization  of the  benefits  of the losses is  uncertain.  The  effective  tax
benefit for fiscal 1994 reflects a favorable settlement of an IRS examination.

Deferred Income Taxes

At  September  28, 1996,  the Company had net deferred tax assets of  $1,652,000
composed of deferred tax assets of $6,452,000, net of the valuation allowance of
$1,023,000, and  deferred tax liabilities of $3,777,000. The Company believes it
is likely that the benefits of the deferred tax assets will be realized  through
the reduction of future taxable income.

Management has considered  appropriate  factors in assessing the  probability of
realizing  these deferred tax benefits.  These factors  include the deferred tax
liabilities  of $3,777,000  and the presence of  significant  taxable  income in
fiscal 1996.

The valuation allowance is established  primarily for state net operating losses
of the Medical  Systems  segment  which cannot be offset  against  income of the
Company or its subsidiaries in other states.  These states have relatively short
loss carryover periods of five to seven years.

Management  intends to evaluate  the  realizability  of deferred tax assets on a
quarterly basis by assessing the need for any additional valuation allowance.

Liquidity and Capital Resources

During  fiscal  1996,  operating  activities  provided  $8.4  million  in  cash.
Consolidated  net income of $1.9 million plus non-cash  charges for depreciation
and amortization of $4.8 million and $3.2 million, respectively,  were partially
offset by increases in net current assets. Defense Systems net cash inflows from
the liquidation of H 70 inventories were more than

                                                                              23

<PAGE>

offset  by  increases  in  accounts   receivable  and  the  payment  of  accrued
liabilities from fiscal 1995 related to the Sensors and Systems arbitration with
the  former  shareholders  of GPI  (see  Note M to  the  Consolidated  Financial
Statements, "Contingencies and Litigation").


Investing  activities,  which used approximately $2.3 million in cash,  included
the  purchase  of $4.0  million in  capital  equipment,  primarily  by Sensors &
Systems, which is consistent with the growth of the segment. Investment spending
was  partially  offset by cash  inflows  from a third party  investment  of $1.5
million in Medical Systems' preferred stock.

Cash was used in  financing  activities  to reduce long term debt in  connection
with   scheduled   payments   stemming   from  the   acquisitions   of  Meditron
(Meditron(TM)) and Zinnanti Surgical  Instruments in previous years. The Company
also used cash to pay dividends on common  stock.  Proceeds from the issuance of
stock included $0.8 million from the exercise of stock options.

The Company had no material  capital or other  commitments at September 28, 1996
except  as  discussed  in  Note  M to  the  Consolidated  Financial  Statements,
"Contingencies and Litigation."

The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 107
"Disclosures  About Fair Value of  Financial  Instruments"  in fiscal year 1996.
There was no  material  impact on the  consolidated  financial  statements  as a
result of adoption of SFAS 107.

The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121
"Accounting for the Impairment of Long-Lived  Assets and Long-Lived Assets to be
Disposed Of" in fiscal year 1996.  SFAS No. 121 was applied  prospectively  from
the  date of  adoption  and the  effect  of  adoption  was not  material  to the
consolidated financial statements.

As of  September  28, 1996,  the Company was in  compliance  with all  financial
covenants on outstanding debt.

Based  on the  financial  condition  of  the  Company  at  September  28,  1996,
management  believes  that the  existing  cash  balances,  cash  generated  from
operations,  and  available  lines  of  credit  will be  sufficient  to meet the
Company's  planned needs for the  foreseeable  future.  If the Company  requires
additional capital, it anticipates that such capital will be provided by bank or
other  borrowings,  although  there  can be no  assurances  that  funds  will be
available on terms as favorable as those  applicable to the Company's  currently
outstanding debt.

Effects of Inflation

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

                                                                              24

<PAGE>

<TABLE>

ITEM  8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED BALANCE SHEETS
BEI Electronics, Inc. and Subsidiaries

<CAPTION>

--------------------------------------------------------------------------------------------------------------------
                                                                                 September 28          September 30
dollars in thousands except par values                                                   1996                  1995
--------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>                   <C>    
ASSETS
Current assets
Cash and cash equivalents                                                             $17,329               $11,690
Trade receivables:
  United States Government                                                              5,335                 5,054
  Commercial customers, less allowance for doubtful
     accounts (1996--$843; 1995--$451)                                                 13,610                13,806
--------------------------------------------------------------------------------------------------------------------
                                                                                       18,945                18,860


Inventories--Note D                                                                    22,911                20,482
Refundable income taxes                                                                   356                   498
Other current assets                                                                    2,073                 2,374
Deferred income taxes--Note H                                                           3,051                 3,106
Current assets of H 70 Rocket line of business, net--Note C                             4,360                 6,820
--------------------------------------------------------------------------------------------------------------------
Total current assets                                                                   69,025                63,830


Property, plant and equipment--Notes G and L
Land                                                                                    4,093                 4,093
Structures                                                                              7,409                 7,216
Equipment                                                                              40,080                33,814
Leasehold improvements                                                                  1,410                 1,396
--------------------------------------------------------------------------------------------------------------------
                                                                                       52,992                46,519


Less allowances for depreciation and amortization                                      29,687                23,062
--------------------------------------------------------------------------------------------------------------------
                                                                                       23,305                23,457


Other assets
Tradenames, patents and related assets, less
  amortization (1996--$6,107; 1995--$4,945)                                             6,577                 6,662
Technology acquired under license agreements,
  less amortization (1996--$3,269; 1995--$2,342)--Note M                                6,939                 8,125
Goodwill, less amortization (1996--$1,315; 1995--$1,024)                                4,542                 4,833
Non-current assets of H 70 Rocket line of business, net--Note C                         1,629                 3,428
Other                                                                                   2,994                 3,403
--------------------------------------------------------------------------------------------------------------------
                                                                                       22,681                26,451
--------------------------------------------------------------------------------------------------------------------
                                                                                     $115,011              $113,738
====================================================================================================================

<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>


                                                                              25

<PAGE>

<TABLE>

CONSOLIDATED BALANCE SHEETS
BEI Electronics, Inc. and Subsidiaries

<CAPTION>

--------------------------------------------------------------------------------------------------------------------
                                                                                   September 28        September 30
dollars in thousands except par values                                                     1996                1995
--------------------------------------------------------------------------------------------------------------------
<S>                                                                                      <C>                 <C>   
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Trade accounts payable                                                                   $6,672              $8,092
Accrued expenses and other liabilities--Note F                                           15,163              16,602
Current portion of long-term debt--Note G                                                 5,809                 259
Current liabilities of H 70 Rocket line of business--Note C                               3,279               2,954
--------------------------------------------------------------------------------------------------------------------
Total current liabilities                                                                30,923              27,907


Long-term debt, less current portion--Note G                                             24,348              30,157

Deferred income taxes--Note H                                                             1,399                 886

Other liabilities                                                                           851               1,469

Commitments and contingencies--Notes C, K, L and M                                           --                  --

Minority interest in consolidated subsidiary--Note A                                      1,518                  --

Stockholders' equity--Notes I, J and K
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; 1996-9,469,008 shares; 1995--9,246,183 shares)                             9                   9
Additional paid-in capital                                                               25,773              24,112
Retained earnings                                                                        43,055              41,721
--------------------------------------------------------------------------------------------------------------------
                                                                                         68,837              65,842
Less:  Treasury stock, at cost (1996--2,455,372 shares;
       1995--2,440,372 shares)                                                          (11,947)            (11,793)

          Unearned restricted stock--Note J                                                (918)               (730)
--------------------------------------------------------------------------------------------------------------------

Total stockholders' equity                                                               55,972              53,319
--------------------------------------------------------------------------------------------------------------------
                                                                                       $115,011            $113,738
====================================================================================================================
<FN>
See notes to consolidated financial statements
</FN>
</TABLE>

                                                                              26

<PAGE>

<TABLE>

CONSOLIDATED STATEMENTS OF OPERATIONS
BEI Electronics, Inc. and Subsidiaries

<CAPTION>

                                                                                           Years Ended
                                                                       ------------------------------------------------
                                                                         September 28       September 30      October 1
dollars in thousands except per share amounts                                1996               1995            1994
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>                <C>              <C>     
Net sales -- Note C                                                        $148,738           $144,903         $138,658
Cost of sales -- Note C                                                     102,400            107,542           97,565
-----------------------------------------------------------------------------------------------------------------------
                                                                             46,338             37,361           41,093
-----------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses                                 36,918             34,261           35,354
Provision for royalty and related expenses -- Note M                             --              3,500               --
Research, development and related expenses                                    4,936              4,963            7,246
-----------------------------------------------------------------------------------------------------------------------
                                                                             41,854             42,724           42,600
-----------------------------------------------------------------------------------------------------------------------
Income (loss) from operations                                                 4,484             (5,363)          (1,507)

Other income                                                                  1,013                990            1,016
Interest expense                                                             (2,554)            (2,457)          (2,417)
-----------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes                                             2,943             (6,830)          (2,908)
Federal and state income taxes -- Note H
   Current (credit)                                                             486                 61             (569)
   Deferred (credit)                                                            568             (2,500)            (595)
-----------------------------------------------------------------------------------------------------------------------
                                                                              1,054             (2,439)          (1,164)
-----------------------------------------------------------------------------------------------------------------------
Net Income (loss)                                                            $1,889            ($4,391)         ($1,744)
=======================================================================================================================
Earnings (loss) per common and common
   equivalent share -- Note I                                                 $0.27             ($0.65)          ($0.26)
=======================================================================================================================

Weighted average shares outstanding -- Note I                             7,107,818          6,758,745        6,656,959
=======================================================================================================================

Dividends per common share -- Note I                                          $0.08              $0.08            $0.08
=======================================================================================================================
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>

                                                                              27

<PAGE>

<TABLE>

CONSOLIDATED STATEMENTS OF CASH FLOWS
BEI Electronics, Inc. and Subsidiaries

<CAPTION>

                                                                                           Years Ended
                                                                        ------------------------------------------------
                                                                           September 28     September 30      October 28
dollars in thousands                                                           1996             1995             1994
------------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>              <C>             <C>     
Cash flows from operating activities:
Net income (loss)                                                             $1,889            ($4,391)        ($1,744)
Adjustments to reconcile net income to net cash provided by operating
 activities:
Depreciation                                                                   4,753              5,390           5,449
Amortization                                                                   3,174              2,795           2,490
Provision for losses on trade receivables                                        321                145              95
Loss on sale of assets                                                           814                 86              84
Deferred income taxes                                                            568             (2,500)           (595)
Changes in operating assets and liabilities, net of
   acquisitions and dispositions:
Trade receivables                                                             (3,719)            (1,170)          5,103
Inventories                                                                   20,307              9,234         (10,098)
Progress payments on U.S. Government contracts                                 6,984             29,496          35,480
Billings related to progress payments                                        (24,154)           (31,876)        (28,201)
Other current assets                                                            (585)               198            (477)
Trade accounts payable, accrued expenses and other liabilities                (2,122)             4,778          (2,273)
Federal and state income taxes                                                   188                389          (1,803)
------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities                                      8,418             12,574           3,510

Cash flows from investing activities:
Proceeds from sale of preferred stock of subsidiary                            1,475                 --              --
Proceeds from dispositions of property, plant and equipment                      409                 --              --
Purchases of property, plant and equipment                                    (3,954)            (3,075)         (9,130)
Other                                                                           (227)              (100)         (1,217)
------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities                                         (2,297)            (3,175)        (10,347)

Cash flows from financing activities:
Borrowings on short-term debt                                                     --              6,000           9,500
Payments on short-term debt                                                       --             (6,000)         (9,500)
Proceeds from long-term debt                                                      --                 --          11,200
Principle payments on long-term debt and other liabilities                      (782)            (1,550)         (1,513)
Proceeds from issuance of common stock                                         1,009                318             641
Purchase of treasury stock                                                      (154)              (133)           (333)
Payment of cash dividends                                                       (555)              (541)           (533)
------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities                                (482)            (1,906)          9,462
------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents                                      5,639              7,493           2,625
Cash and cash equivalents at beginning of year                                11,690              4,197           1,572
------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                                     $17,329            $11,690          $4,197
========================================================================================================================
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>


                                                                              28

<PAGE>

<TABLE>

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
BEI Electronics, Inc. and Subsidiaries

<CAPTION>

                                                           Additional                                 Unearned
                                                  Common    paid-in       Retained     Treasury      restricted
dollars in thousands                               stock    capital       earnings       stock         stock          Total
----------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>      <C>           <C>          <C>               <C>       <C>    
Balances at October 2, 1993                         $9       $22,797       $48,930      ($11,327)         ($803)    $59,606

    Net loss for 1994                                                       (1,744)                                  (1,744)
   Stock options exercised                                       290                                                    290
   Employee Stock Purchase Plan
      offering--Note K                                           347                                                    347
   Restricted Stock Plan--Note J                                  99                                         97         196
   Purchase of treasury stock-
      (57,100 shares at $5.84 average
      per share)                                                                            (333)                      (333)
   Cash dividends                                                             (533)                                    (533)
----------------------------------------------------------------------------------------------------------------------------
Balances at October 1, 1994                          9        23,533        46,653       (11,660)          (706)     57,829

   Net loss for 1995                                                        (4,391)                                  (4,391)
   Stock options exercised                                        65                                                     65
   Employee Stock Purchase Plan 
      offering--Note K                                           254                                                    254
   Restricted Stock Plan--Note J                                 260                                        (24)        236
   Purchase of treasury stock-
      (19,500 shares at $6.80 average
      per share)                                                                            (133)                      (133)
   Cash dividends                                                             (541)                                    (541)
----------------------------------------------------------------------------------------------------------------------------
Balances at September 30, 1995                       9        24,112        41,721        (11,793)          (730)    53,319

   Net income for 1996                                                       1,889                                    1,889
   Stock options exercised                                       842                                                    842
   Employee Stock Purchase Plan
      offering--Note K                                           225                                                    225
   Restricted Stock Plan--Note J                                 594                                       (188)        406
   Purchase of treasury stock-
      (15,000 shares at $10.27
      average per share)                                                                    (154)                      (154)
   Cash dividends                                                             (555)                                    (555)
----------------------------------------------------------------------------------------------------------------------------
Balances at September 28, 1996                      $9       $25,773       $43,055      ($11,947)         ($918)    $55,972
============================================================================================================================
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>


                                                                              29

<PAGE>

Notes to Consolidated Financial Statements
BEI Electronics, Inc. and Subsidiaries
September 28, 1996

Note A
Acquisition and Investments

During the second  quarter of fiscal  1996,  BEI Medical  Systems  Co.,  Inc., a
subsidiary  of the Company (BEI  Medical),  sold $1.5  million of its  preferred
stock to an unrelated  third party for  $1,500,000 in cash. The costs of issuing
the stock were offset  against the proceeds.  No gain or loss was  recognized on
the sale of the minority interest.

In  February  of 1996,  BEI  Medical  acquired  the stock of Ovamed  Corporation
(OvaMed(R)) for the purpose of acquiring Ovamed's product lines.  The total cost
of the trademarks and patents  acquired was $1,371,000  which is being amortized
over lives of ten and seventeen years, respectively.

Note B
Summary of Significant Accounting Policies

Fiscal Year: The Company's  fiscal year ends on the Saturday  nearest  September
30. Fiscal years 1996, 1995 and 1994 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: For fiscal 1996 and prior years, the Company sold
a substantial portion of its products directly to the U.S. Government or to U.S.
Government prime contractors.  Sales to the U.S. Government or prime contractors
will be less  significant  in future  years.  See  Notes C and N. The  Company's
remaining products are sold to commercial customers throughout the United States
and  in  various  foreign   countries.   Substantially  all  foreign  sales  are
denominated in U.S. dollars.  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.

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.

U.S. Government and Long-Term Contracts: Fixed price contracts are accounted for
by the percentage of completion method, with percentage of completion determined
primarily by units  delivered.  Units are considered  delivered when accepted by
the customer.  Sales under cost reimbursement  contracts are recognized as costs
are incurred and include a proportion of the fees expected to be realized on the
contracts. Amounts related to billed retainages,  amounts not billed and amounts
of uncertain claims are immaterial.

Revenue Recognition:  Revenue for products not sold under long term contracts is
recognized as units are shipped or as services are provided.

Inventories:  Costs  incurred  under U.S.  Government  contracts  in process are
carried at cost less  anticipated  losses,  if any, on the  contracts.  The U.S.
Government  has title to, or a security  interest in,  certain  inventories as a
result  of  progress  payments  on  contracts.  Other  inventories  are  carried
principally  at the  lower  of cost  (first-in,  first-out  method)  or  market.
Provisions  for contract  costs in excess of inventory  are reflected as accrued
contract costs in current liabilities.

Property,  Plant and  Equipment:  Property,  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 by the
straight-line method

                                                                              30

<PAGE>

for structures and leasehold  improvements  and by accelerated or  straight-line
methods for equipment.

Tradenames,  Patents and Related  Assets:  This category  consists  primarily of
patents,  tradenames and related non-competition agreements acquired in purchase
acquisitions.  Patents and  non-competition  agreements are being amortized over
their term. Tradenames are amortized over twenty-five years.

Goodwill and Acquired  Technology:  Goodwill consists of the excess of cost over
fair value of net tangible assets acquired in purchase acquisitions. Goodwill is
amortized  by the  straight-line  method over 20 years.  The  carrying  value of
goodwill will be reviewed if the facts and circumstances  suggest that it may be
impaired.

Acquired  technology  consists  primarily  of  exclusive  rights under a license
agreement  to  make,  use  and  sell  products  utilizing  quartz  rate  sensing
technology.  Acquired technology is amortized over the average remaining life of
the underlying patents at the date of acquisition,  or the estimated useful life
of the technology, whichever is less.

Earnings  Per  Share:  Earnings  per share are  computed  based on the  weighted
average  number of shares of common  stock  (less  treasury  stock)  outstanding
during  the  year,   adjusted  for  the  effect  of  common  stock   equivalents
attributable to dilutive stock options (using the treasury stock method).

Research and Development Costs: Company-sponsored research and development costs
include research and development efforts related to U.S. Government products and
services. U.S. Government contractual arrangements limit the amounts of research
and development  and bid and proposal costs  recoverable  under U.S.  Government
contracts.  Company-sponsored  product  development costs are charged to expense
when  incurred.  Customer-sponsored  research  and  development  costs  incurred
pursuant to contracts are accounted for as other contract costs.

Postretirement  Benefits: The Company does not provide  postretirement  benefits
other than pensions under a plan. Liabilities for postretirement  benefits under
individual contracts are recorded over the term of employment.

Stock-Based  Compensation:  In  October  1995,  the  FASB  issued  Statement  of
Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation"
("SFAS No. 123").  Under the provisions of SFAS No. 123,  companies can elect to
account for  stock-based  compensation  plans using a fair value based method or
continue  measuring  compensation  expense for those  plans using the  intrinsic
value  method  prescribed  in  Accounting   Principles  Board  Opinion  No.  25,
"Accounting  for Stock Issued to Employees"  (APB No. 25). SFAS No. 123 requires
that companies  electing to continue using the intrinsic  value method must make
pro forma  disclosures  of net  income  and  earnings  per  share in its  annual
financial statements as if the fair value method of accounting had been applied.
SFAS No. 123 will be effective for the Company's  fiscal year 1997.  The Company
currently  accounts  for its  stock-based  compensation  plans  and  intends  to
continue to account  for  stock-based  compensation  using the  intrinsic  value
method,  and  accordingly,  this  pronouncement  will not have an  effect on the
Company's financial position or results of operations.

Impairment  of Assets:  The Company  adopted  Statement of Financial  Accounting
Standards No. 121 ("SFAS No. 121"), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived  Assets to be Disposed Of," on October 1, 1995.  Under
SFAS No. 121,  impairment  losses are recognized when information  indicates the
carrying  amount of long-lived  assets,  identifiable  intangibles  and goodwill
related to those assets will not be recovered through future operations or sale.
Impairment  losses for assets to be held or used in operations  will be based on
the excess of the  carrying  amount of the asset over the  asset's  fair  value.
Assets held for disposal, except for discontinued operations, will be carried at
the lower of carrying  amount or fair value less cost to sell.  SFAS No. 121 was
applied  prospectively  from the date of adoption and the effect of adoption was
not material.

Reclassifications:  Certain  reclassifications have been made to the fiscal 1995
and 1994 financial statements to conform to the fiscal 1996 presentation.

Note C
HYDRA 70 Rocket Contract and Related Contingencies

In  September  1995,  management  of the Company  reached a decision to exit the
rocket manufacturing line of business which made up a substantial portion of the
Company's Defense Systems segment. The principal product of the Defense Systems

                                                                              31

<PAGE>

segment was the HYDRA 70 (H 70) Rocket produced under a competitively  bid fixed
price  contract.  Contract  production  was  conducted  in Camden,  Arkansas and
Euless,  Texas.  Rockets  and  components  are  subjected  to various  tests and
inspections  by the U.S.  Government.  Production  is based on  "build to print"
technical  data  packages  ("TDP")  supplied  by the  U.S.  Government  for each
significant component.

As a result of the  failure of certain  fuze  production  lots to meet  required
acceptance specifications,  the Company, in 1995 and 1996, experienced delays in
production  and delivery of rockets which  contained  the fuzes.  As a result of
these delays, the Company incurred additional costs relating to materials, labor
and overhead.  Based upon the lack of constructive  response from the government
in addressing TDP issues, the Company reevaluated the estimated cost to complete
the H 70 contract and in September  1995 recorded a reduction in gross margin on
the contract of $1,468,000. Deliveries under the H 70 contract were completed by
September 28, 1996.

As a result of the decision to exit the rocket line of business, the Company has
and will  incur  costs  relating  to  employee  severance  and the  closure  and
withdrawal  from the leased  facility  in Camden,  Arkansas  and  similar  costs
related to its owned facility in Euless,  Texas.  The Company  recorded costs of
sales of $1,250,000  as exit costs at September 30, 1995  consisting of employee
severance  of $750,000,  leasehold  abandonment  of $250,000 and owned  facility
costs of $250,000.  During fiscal 1996, the Company  incurred  $726,000 of costs
for employee severance and leasehold and facility costs of $350,000.  Additional
amounts  were accrued  during  fiscal 1996 for  severance  costs of $350,000 and
facility costs of $350,000.  During fiscal 1996, the Company recorded net losses
of $640,000 on disposals  of assets of the rocket  business.  At  September  28,
1996,  an  additional  charge of $313,000 was  recorded to reflect  management's
estimate  of the fair  value of the  Euless  facility  based on  current  market
conditions.  As of September 28, 1996, substantially all inventory and equipment
assets  of the  rocket  business  had been  written  off or  disposed  of except
remaining assets at the Euless facility which  management  expects to dispose of
in fiscal 1997.

Sales and cost of sales  for the H 70 rocket  system  line of  business  were as
follows for the fiscal periods indicated.


(dollars in thousands)              1996               1995               1994
--------------------------------------------------------------------------------
Sales                             $37,927            $38,517            $38,292
Cost of Sales                      33,449             39,979             36,251
--------------------------------------------------------------------------------

Non-H 70 sales in the Defense  Systems  segment  include sales under a cost-plus
fee advanced  rocket  development  contract which has no further  funding beyond
1996.  Sales under this contract were  $521,000,  $2,893,000  and $5,021,000 for
fiscal 1996, 1995 and 1994, respectively.

Sales for other non-H 70 products  (weapons  management  systems) in the Defense
Systems segment were $4,187,000, $4,171,000 and $4,306,000 for fiscal 1996, 1995
and 1994, respectively.

In October 1995, the Company's Defense Systems subsidiary received  notification
from the Procuring Contracting Officer for the H 70 Rocket Systems Contract that
the Government  considered  Defense Systems'  "failure to maintain  satisfactory
fuze  production  along with  projected  manufacturing  cost overrun  conditions
endangering  performance of the subject  contract."  The notice further  advised
that the Government  may terminate the contract for default unless  evidence was
provided showing that this condition could be cured. Counsel for Defense Systems
responded to the  notification  in early  November  1995. The response set forth
Defense  Systems'  position that  termination for default was not an appropriate
Government  option due to Defense Systems'  compliance with the contract and the
Government's  responsibility  for fuze  technical  difficulties,  as a result of
defective  technical data provided to Defense  Systems.  The Company received no
further  communications  regarding this issue and deliveries  under the contract
were substantially completed in September 1996.

In August,  1995, Defense Systems filed a claim against the Government  relative
to the fuze  technical  data problems  experienced  on previous  contracts.  The
amount of the claim was  approximately  $5 million.  This claim was settled with
the Government in September  1996 for $3.6 million.  The settlement was effected
through a contract  modification  to increase  the selling  price of the related
rockets by $3.6 million and was recorded as additional  sales in September 1996.
Defense  Systems also believes it has rights for  additional  claims against the
Government arising out of the H 70 contract and a substantial claim was filed in
1996.  Due to the  uncertainties  inherent  in the formal  claims  process,  the
Company  has  not  recorded  any  recoveries   for  unresolved   claims  in  the
accompanying financial statements.

                                                                              32

<PAGE>

During a vendor  survey  conducted by BEI Defense  Systems  Company in the first
quarter of fiscal 1994, a component used in the H 70 rocket motor was identified
as being  produced by a process that  differed  from the one that the vendor had
certified.  BEI's customer, the U.S. Government, was notified of the potentially
non-conforming  material.  The customer  subsequently agreed to accept completed
but  undelivered  rocket  motors and the Company  agreed to replace the affected
parts under warranty.  The Company provided for the cost of warranty replacement
of the affected  parts in all  undelivered  rocket  motors in 1994.  This rework
effort was completed in fiscal 1995.

Note D
Inventories


(dollars in thousands)                       1996              1995
--------------------------------------------------------------------------------
Finished products                          $1,405            $1,607
Work in process                             6,803             6,085
Materials                                  11,660             9,991
Costs incurred under long-term contracts,
  including U.S. Government contracts       3,840            26,269
Unliquidated progress payments               (451)          (17,621)
--------------------------------------------------------------------------------
                                           23,257            26,331

Less inventories included in current
  assets of  H 70 Rocket line of business,
  net of progress payments of
  (1996 -- $451; 1995 -- $17,621)             346             5,849
--------------------------------------------------------------------------------
Net inventories                           $22,911           $20,482
================================================================================

Note E
Bank Credit Agreements

At September  28, 1996 and  September  30,  1995,  the Company had a $15 million
unsecured  credit line with a bank.  There were no borrowings  under the line at
these dates. Based on the borrowing capacity limitations contained in the Senior
Notes  described in Note G,  approximately  $7.1 million could be borrowed under
the credit line at September  28,  1996.  Interest on  borrowings  is based upon
either the Prime Commercial  Lending Rate of Canadian  Imperial Bank of Commerce
("CIBC")  or the rate  which  would  be  offered  by CIBC to prime  banks in the
interbank Eurodollar market depending on the term of borrowing.

Under the line of credit, the bank will also issue standby letters of credit. At
September 28, 1996,  $5.0 million was available to fund letters of credit issued
on behalf of the Company. There were no letters of credit outstanding under this
facility at September 28, 1996.

The credit agreement,  if not further extended or renewed by the lender, expires
on February 28, 1997. The agreement has covenants  concerning  certain financial
ratios and minimum balances of net worth. At September 28, 1996, the Company was
in compliance with these financial covenants.


                                                                              33

<PAGE>

<TABLE>

Note F
Accrued Expenses and Other Liabilities

<CAPTION>

(dollars in thousands)                                                                         1996             1995
--------------------------------------------------------------------------------------------------------------------
<S>                                                                                          <C>              <C>   
Employee compensation                                                                        $1,946           $2,082
Vacation                                                                                      1,880            2,176
Interest                                                                                      1,165              939
Contract costs                                                                                  830            1,348
Commissions                                                                                     661              649
Payroll and other taxes                                                                         531              404
Royalties and related costs                                                                   4,049            4,066
Other                                                                                         5,556            7,243
--------------------------------------------------------------------------------------------------------------------
                                                                                             16,618           18,907

Less accrued expenses included in current liabilities of H 70 Rocket line of                  1,455            2,305
business
--------------------------------------------------------------------------------------------------------------------
Accrued Expenses and Other Liabilities                                                      $15,163          $16,602
=====================================================================================================================

</TABLE>

<TABLE>

Note G
Long-Term Debt

<CAPTION>

(dollars in thousands)                                                                         1996             1995
--------------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>              <C>    
6.73% Series A Senior Notes; due in annual installments of $3,360 from
October 1, 1996 through October 1, 2000                                                     $16,800          $16,800

6.73% Series B Senior Notes; due in annual installments of $2,240 from
November 15, 1996 through November 15, 2000                                                  11,200           11,200

Mortgage note payable with  interest at 7.96%;  due in monthly  installments  of
principal  and  interest  of $14  until  1998  when  the  remaining  balance  of
approximately $1,700 is due; collateralized by property with a book value of
approximately $2,047 at September 28, 1996                                                    1,762            1,785

Other notes payable with interest ranging from  5.0% to 8.0%; payable in
monthly installments through 1998                                                               395              560

Capitalized equipment lease obligations                                                          --               71
--------------------------------------------------------------------------------------------------------------------
                                                                                             30,157           30,416
Less current portion                                                                          5,809              259
--------------------------------------------------------------------------------------------------------------------
                                                                                            $24,348          $30,157
=====================================================================================================================

</TABLE>

Annual  maturities of long-term  debt are as follows:  fiscal  1997--$5,809,000;
1998--$9,178,000;    1999--$7,330,000;    2000--$5,600,000;    2001--$2,240,000;
thereafter -- none.

Interest of approximately $2,328,000,  $2,413,000 and $2,423,000 was paid during
fiscal 1996, 1995 and 1994, respectively.

The Senior  Note  Agreement  contains  covenants  concerning  certain  financial
ratios,  dividend  payments and minimum  balances of net worth. At September 28,
1996, the Company was in compliance with all covenants.

                                                                              34

<PAGE>

Note H
Income Taxes

The Company files a  consolidated  federal  income tax return which includes all
its eligible  subsidiaries.  In accordance  with the tax allocation  arrangement
between the Company and its subsidiaries,  income taxes are allocated  generally
as if the Company and its subsidiaries  filed separate U.S. and state income tax
returns.

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 September 28, 1996 and September 30, 1995 are as follows (in thousands):



Deferred tax assets                                        1996        1995
-----------------------------------------------------------------------------
  Accrued expenses                                       $3,871      $2,604
  Inventory valuation                                       204       1,254
  Contract reserves                                         420         565
  State net operating loss carryovers                     1,023       1,223
  Other                                                     934       1,678
-----------------------------------------------------------------------------
    Total deferred tax assets                             6,452       7,324
    Valuation allowance for deferred tax assets           1,023       1,220
-----------------------------------------------------------------------------
    Total deferred tax assets                             5,429       6,104
-----------------------------------------------------------------------------
Deferred tax liabilities
  Depreciation and property basis difference              2,316      $2,422
  Amortization of intangibles                               260         179
  Prepaid expenses                                          163         358
  Accrued expenses                                          227         379
  Other                                                     811         546
-----------------------------------------------------------------------------
    Total deferred tax liabilities                        3,777       3,884
-----------------------------------------------------------------------------
    Net deferred tax assets                               1,652      $2,220
=============================================================================

The  valuation  allowance  for deferred  tax assets  decreased by a net $197,000
during the year ended  September 28, 1996. The valuation  allowance was adjusted
due to the changing uncertainties in realizing net operating loss carryovers for
state income taxes. State net operating loss carryovers generally expire in five
to seven years.

Significant components of the provision for income taxes are as follows:


                                          1996         1995            1994
-----------------------------------------------------------------------------
Current (credit)
     Federal                              $414         $148          $(835)
     State                                  72          (87)           266
-----------------------------------------------------------------------------
     Total Current                         486           61           (569)
Deferred (credit)
     Federal                               305       (2,199)           (95)
     State                                 263         (301)          (500)
-----------------------------------------------------------------------------
     Total Deferred                        568       (2,500)          (595)
-----------------------------------------------------------------------------
Total income tax expense (benefit)      $1,054      ($2,439)       ($1,164)
=============================================================================


                                                                              35

<PAGE>

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


                                                    1996        1995       1994
-------------------------------------------------------------------------------
Income tax (credit) at the statutory rate of 34%  $1,001     ($2,322)     ($989)
Federal income tax effect of state income taxes     (113)        132         80
Goodwill amortization                                100         100         92
R & D and related credits                           (246)         --         --
Other                                                (23)         39       (113)
-------------------------------------------------------------------------------
  Federal income taxes (credit)                      719      (2,051)      (930)
  State income taxes (credit)                        335        (388)      (234)
-------------------------------------------------------------------------------
    Provision(credit) for income taxes            $1,054     ($2,439)   ($1,164)
================================================================================

Income taxes of  approximately  $1,000,000;  $1,420,000 and $1,601,000 were paid
during  fiscal  1996,  1995  and 1994  respectively.  Refunds  of  approximately
$800,000 and $1,400,000 were received in fiscal 1996 and 1995, respectively.

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

During  fiscal 1992 and 1990,  the Board of Directors of the Company  authorized
the purchase from time to time in open market  transactions of up to 300,000 and
500,000 shares of common stock, respectively. During fiscal year 1996, the Board
approved an additional repurchase of up to 200,000 shares on the open market. As
of  September  28,  1996,  799,424  shares  had  been  repurchased  at a cost of
$5,664,000. These shares are included as treasury stock at September 28, 1996.

Note J
Stock Option and Restricted Stock Plans

In 1982,  the Company's  stockholders  voted to adopt an incentive  stock option
plan.  The plan provided for option prices based on the fair market value of the
stock on the date the option is granted. The Incentive Stock Option Plan of 1982
terminated  December 15, 1991; no further  shares can be granted and the options
outstanding at September 28, 1996 will expire if not exercised by 1998.

<TABLE>

Transactions  relating to the Incentive Stock Option Plan of 1982 are summarized
as follows:

<CAPTION>

                                                                       Number of common shares         Price per share
----------------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>              <C>       
Options outstanding at October 2, 1993                                                  36,000           $3.13 - $3.75
Exercised                                                                               (8,000)                  $3.13
----------------------------------------------------------------------------------------------------------------------
Options outstanding at October 1, 1994                                                  28,000                   $3.75
Exercised                                                                                   --
----------------------------------------------------------------------------------------------------------------------
Options outstanding at September 30, 1995                                               28,000                   $3.75
Exercised                                                                               (4,000)                  $3.75
----------------------------------------------------------------------------------------------------------------------
Options outstanding at September 28, 1996                                               24,000                   $3.75
======================================================================================================================
</TABLE>

In  November  1987,  the  Company's  stockholders  voted to adopt an  additional
incentive stock option plan and a supplemental (nonqualified) stock option plan.
The  incentive  stock option plan  provides for option  prices based on the fair
market value of the stock on the date the option is granted,  as  determined  by
the Board of  Directors.  The  supplemental  stock option plan requires that the
exercise  price of each  option  shall not be less  than 50% of the fair  market
value on the date the  option is  granted.  Under  both  plans the  options  are
generally  exercisable in three approximately equal installments  commencing one
year from the date of grant with accumulation privileges.

                                                                              36

<PAGE>

Shares issued pursuant to options granted under these two plans shall not exceed
1,250,000 in the aggregate.

<TABLE>

Transactions  relating to the Incentive and  Supplemental  Stock Option Plans of
1987 are summarized as follows:

<CAPTION>

                                                                       Number of common shares         Price per share
----------------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>               <C>          
Options outstanding at October 2, 1993                                                 820,327           $2.88 - $9.13
Granted                                                                                  3,000                   $6.13
Exercised                                                                              (26,121)          $2.88 - $7.25
Terminated                                                                            (129,741)          $3.75 - $9.13
----------------------------------------------------------------------------------------------------------------------
Options outstanding at October 1, 1994                                                 667,465           $2.88 - $9.13
Granted                                                                                 31,000                   $5.00
Exercised                                                                              (16,814)          $2.88 - $4.38
Terminated                                                                             (71,256)          $4.38 - $9.13
----------------------------------------------------------------------------------------------------------------------
Options outstanding at September 30, 1995                                              610,395           $2.88 - $9.13
Granted                                                                                 11,000           $6.00 - $7.13
Exercised                                                                             (115,922)          $2.88 - $9.13
Terminated                                                                             (48,511)          $1.72 - $9.13
----------------------------------------------------------------------------------------------------------------------
Options outstanding at September 28, 1996                                              456,962           $2.88 - $9.13
============================================================================================----======================

</TABLE>

As of  September  28,  1996,  options for 439,288  shares were  exercisable  and
373,819 shares were available for stock option grants under the 1987 plans.

In February 1992, the Company's Board of Directors  approved the 1992 Restricted
Stock Plan,  ratified by the  Company's  shareholders  in  February,  1993,  and
authorized up to 350,000 shares to be issued to certain key individuals  subject
to forfeiture if employment  terminated prior to the end of prescribed  periods.
The  effective  date of the plan was January 1, 1992.  As of September 28, 1996,
341,426 shares had been granted and of these, 277,143 shares are outstanding. Of
the  outstanding  shares,  92,111  have fully  vested.  There are 72,857  shares
reserved  for  issue.  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.
Compensation  expense of $406,000,  $236,000 and $196,000 was recorded in fiscal
1996, 1995 and 1994, respectively.

Note K
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.  The plan  provides  for a minimum  annual  employer
contribution  of 1% of total  employee  compensation  and an  employer  matching
contribution equal to 25% of the participant's  contribution to the plan up to a
maximum  employer  matching  contribution  of  1%  of  compensation.  Additional
contributions  are at the  discretion of the Board of  Directors.  The Company's
contributions  to the plan for  fiscal  1996,  1995 and 1994 were  approximately
$676,000, $736,000 and $777,000, respectively.

The  Company  also has an  employee  stock  purchase  plan.  The  purchase  plan
qualifies as an employee  stock  purchase plan under Section 423 of the Internal
Revenue Code.  Under the purchase plan, the Board of Directors may authorize the
participation by employees  (excluding certain highly compensated  employees) in
offerings of its common stock. Under the purchase plan, employees may have up to
10% of their salary  withheld to be used to purchase shares of common stock at a
price  equal to not  less  than 85% of the  fair  market  value of the  stock at
specified  applicable  dates.  The purchase  plan was  suspended as of August 1,
1996,  due to efforts to  simplify  the  Company's  equity  accounts  to support
analysis of various organization alternatives.  At that date, 459,174 shares had
been issued and 140,826 shares were reserved for purchase over the ten year life
of the purchase plan.

                                                                              37

<PAGE>

Note L
Lease Commitments

Operating leases consist  principally of leases for structures and land. 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 September 28, 1996:


(dollars in thousands)
--------------------------------------------------------------------------------
1997                                                                      $1,541
1998                                                                       1,253
1999                                                                         732
2000                                                                          37
Thereafter                                                                    --
--------------------------------------------------------------------------------
Total minimum lease payments                                              $3,563
================================================================================

There are no minimum capital lease payments beyond fiscal 1996.

Total rental expense  attributable to property,  plant and equipment amounted to
approximately $1,758,000,  $2,436,000,  and $3,082,000 for fiscal 1996, 1995 and
1994 respectively.

Note M
Contingencies and Litigation

BEI Systron Donner Company vs. General Precision Industries, Inc., et al.

In connection  with the  acquisition of assets from Systron  Donner  Corporation
during  fiscal 1990, a subsidiary  of the Company  assumed an  obligation to pay
former  shareholders  of General  Precision  Industries  ("GPI") $4.3 million if
certain  levels of  confirmed  orders and  shipments  are  achieved for products
developed using technology  acquired from GPI in 1986 under a license  agreement
which expires in 2003. In September of 1991, the Licensor of the patent on which
the Company's  quartz  technology is based advised the Company that royalties in
excess of the amounts  previously  paid by the Company  were due.  The amount of
royalties involved was approximately  $400,000. The Company advised the Licensor
that based on its understanding of the license  agreement no additional  amounts
were due. The Licensor  alleged that  nonpayment of the royalties due would give
the  Licensor  the right to terminate  the license  agreement.  The parties were
unable to  resolve  these  differences.  Accordingly,  the  Company  elected  to
exercise the provision of the license  agreement  which required  arbitration of
any disputes between the parties to the agreement.

In June of 1993, the Company and the Licensor filed briefs with the  arbitration
panel. The Licensor alleged in its brief that the amount of royalties, milestone
payments and accrued  interest due as of  September  30, 1992 was  approximately
$10.0  million  (including  the $4.3  million  described  above),  and asked the
arbitration  panel  to rule  that  the  license  could  be  terminated  based on
noncompliance by the Company with the terms of the license agreement.

The  Company  asked  the  arbitration  panel  to rule  that the  amounts  of the
royalties paid by the Company had been properly determined by the Company,  that
the original license agreement should be reformed to reduce the royalties due on
future sales as a result of failure by the Licensor to disclose  certain matters
which significantly impacted the Company's timely ability to employ the licensed
patent on production units and that the license was not subject to termination.

The arbitration  panel bifurcated the issues in the  arbitration,  and issued an
interim ruling in February 1995. In that interim ruling, which will become final
at the close of the arbitration,  the Panel concluded that the license agreement
was not subject to termination, that non-recurring engineering revenues were not
royalty-bearing,  and that $1 million of the $4.3 million discussed above is due
only  if  certain  conditions  are  met in the  future.  These  conditions  were
substantially  met in fiscal  1996 and $1.0  million was accrued for these costs
and charged to operations in the fourth  quarter of fiscal 1996.  The Panel also
concluded that the Company is entitled to ownership of an  accelerometer  patent
that the former  Shareholders  developed.  Further, in September 1995, the panel
ruled that certain  development  costs incurred by the Company could not be used
to offset accrued royalties. As a result, in September 1995, the Company accrued
$3.5 million for royalties and related costs based on its  understanding  of the
amounts due under the panel's  September  ruling.  The estimate of royalties and
related

                                                                              38

<PAGE>

amounts due under the license  agreement are based on the Company's  proposal to
the panel and are  significantly  less than  amounts  proposed by the  licensor.
Under the panel's February ruling,  $3.3 million of the $4.3 million became due.
This amount,  which is considered part of the original  acquisition  cost of the
technology,  was accrued in February  1995,  paid in October 1995,  and is being
amortized over the remaining term of the license.

The second phase of the arbitration  involved the final determination of royalty
amounts due for unit sales of product  using the acquired  technology  and other
matters  including the parties'  respective claims for attorneys' fees. In April
1996 the panel issued a second interim ruling which will become final at the end
of the  arbitration.  In the  ruling  the panel  asked  both of the  parties  to
quantify royalties using guidance set forth by the panel. Both parties requested
clarification  of several issues in the April decision.  In July 1996, the panel
issued a clarification  of the April decision and both parties agreed to royalty
amounts  submitted to the panel in August 1996.  These amounts were reflected in
the  Company's  fiscal  1996  results  of  operations  and were  not  materially
different from the Company's previous estimates.

In November 1996 both parties  presented  their  respective  arguments as to why
they  were  the  substantially  prevailing  party  in the  arbitration  and thus
eligible to be awarded fees and costs at the discretion of the panel.  The panel
unexpectedly  ruled that the former  shareholders may be entitled to recover the
costs and expenses  incurred by them (including  reasonable  attorney's fees) in
connection with the arbitration. Based on presently available information, it is
not possible  for the Company to estimate the amount of costs and expenses  that
may awarded by the panel and  ultimately  payable by the  Company.  If the final
award is for all the costs and expenses of the former  shareholders,  the amount
would be substantial  and would result in a one-time charge to operations in the
quarter in which it is recognized.

CooperSurgical, Inc. vs. BEI Medical Systems Company, Inc. et al.

In October 1993,  CooperSurgical,  Inc., a subsidiary  of The Cooper  Companies,
filed a claim for unspecified damages alleging unfair competition due to actions
by BEI Medical Systems and its president  Richard  Turner,  a former employee of
The Cooper Companies, and others. On May 16, 1994, the Chancery Division for the
Superior Court of New Jersey granted a partial summary  judgment in favor of the
plaintiff and issued an injunction against the defendants  restraining them from
selling  certain  products  until June 20, 1996. In September  1994, BEI Medical
Systems  filed a motion to vacate the May 16, 1994 order.  On November 28, 1994,
the Court vacated the restraint  order.  On October 16, 1995 the Court clarified
that the partial  summary  judgment of its May 16, 1994 order remains in effect.
On January 31, 1996,  the Court  issued a ruling which  affirmed the legal basis
for  BEI  Medical   Systems  to  assert  a  counterclaim   for  damages  against
CooperSurgical regarding the parties' electrosurgical generator contract.

In June 1996, more than one year after fact and expert  discovery  closed in May
1995,  CooperSurgical's  counsel sent to BEI's  counsel a letter  purporting  to
supplement CooperSurgical's previous responses to interrogatories. The June 1996
letter indicated that CooperSurgical's  damages for one particular aspect of the
claim  were  between  $24 and $50  million  with  respect  to a claim  for which
CooperSurgical's  experts had previously  estimated damages of $3.4 million. BEI
will vigorously  oppose any  CooperSurgical  attempt  whatsoever to introduce at
trial  any  evidence  of a damage  claim  based  upon its June,  1996  purported
supplement.

Management has vigorously  defended its rights in this action and believes after
discussion with legal counsel that the CooperSurgical claims are exaggerated. In
1995  expert  witnesses  for  BEI  prepared  a  formal  response  to the  damage
computations  CooperSurgical previously submitted.  BEI's experts stated that if
CooperSurgical  were  entitled to damages,  those  damages would total less than
$100,000,  and would be more than offset by BEI Medical  Systems'  counterclaims
against   CooperSurgical,   if  BEI  Medical  Systems  were  successful  in  its
counterclaims.  Several  trial  dates  were set during  1996,  all of which were
postponed  by the court.  The trial is currently  scheduled  for March 17, 1997.
BEI,  after  consultation  with  counsel,  believes that the  additional  damage
figures  stated  in the June  1996  letter  from  CooperSurgical's  counsel  are
unfounded.  While the outcome of this matter  cannot be determined at this time,
management  believes,  taking known factors into account and after  consultation
with legal  counsel,  that this  matter  will not  result in a material  adverse
impact on the financial position of the Company.

Other

The Company has pending  various legal  actions  arising in the normal course of
business.  Management  believes  that none of these  legal  actions  will have a
material impact on the Company's operating results or financial condition.

                                                                              39

<PAGE>

Note N
Business Segment Data

The Company  operates  principally  in three  business  segments,  the Sensors &
Systems  segment,  the Defense Systems segment and the Medical Systems  segment.
The Sensors & Systems segment includes  precision  sensors,  control devices and
systems  used in a wide  variety  of  equipment  and  machinery  for  aerospace,
industrial,  automotive  and medical  applications  requiring  high accuracy and
reliability. These products are produced by BEI Sensors and Systems Company. The
Defense Systems segment produces  primarily  rocket motors,  combat and training
warheads,  special ordnance  components and rocket control  systems.  See Note C
regarding  the  Company's  decision  to exit the  rocket  manufacturing  line of
business. These systems are produced by BEI Defense Systems Company. The Medical
Systems segment consists primarily of electrosurgical units and instruments used
in  minimally  invasive  surgery  and  procedures.  These  products  are  either
manufactured by BEI Medical  Systems Company or purchased from the  manufacturer
and marketed by BEI Medical Systems Company.

Intersegment sales are not significant.  Identifiable assets by business segment
include both assets directly  identified with those  operations and an allocable
share of jointly used assets.  General  corporate  assets  consist  primarily of
cash.

<TABLE>

The following information reflects business segment data:

<CAPTION>

(dollars in thousands)                                                         1996             1995               1994
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>              <C>                <C>    
Net sales
Sensors & Systems                                                           $96,746          $90,475            $82,361
Defense Systems                                                              42,635           45,581             47,619
Medical Systems                                                               9,357            8,847              8,678
-----------------------------------------------------------------------------------------------------------------------
Net sales                                                                  $148,738         $144,903           $138,658
=======================================================================================================================
Segment operating profit (loss)
Sensors & Systems                                                           $10,897            4,729              8,557
Defense Systems                                                               2,277           (2,358)              (210)
Medical Systems                                                              (4,437)          (3,068)            (3,710)
-----------------------------------------------------------------------------------------------------------------------
Segment operating profit (loss)                                              $8,737            $(697)            $4,637
=======================================================================================================================
Corporate expenses                                                          $(4,253)         $(4,666)           $(6,144)
Other income                                                                  1,013              990              1,016
Interest expense                                                             (2,554)          (2,457)            (2,417)
-----------------------------------------------------------------------------------------------------------------------
Income (loss)  before income taxes                                           $2,943          ($6,830)           ($2,908)
=======================================================================================================================
Identifiable assets
Sensors & Systems                                                           $73,057          $74,028            $68,199
Defense Systems                                                              10,933           18,198             28,790
Medical Systems                                                              13,692           12,944             14,854
General corporate assets                                                     17,329            8,568                589
-----------------------------------------------------------------------------------------------------------------------
Total assets                                                               $115,011         $113,738           $112,432
=======================================================================================================================
Depreciation and amortization expense
Sensors & Systems                                                            $5,835           $5,850             $5,462
Defense Systems                                                                 457              894              1,127
Medical Systems                                                               1,635            1,441              1,350
-----------------------------------------------------------------------------------------------------------------------
                                                                             $7,927           $8,185             $7,939
=======================================================================================================================
Capital expenditures for property plant and equipment
Sensors & Systems                                                            $3,636           $2,635             $8,080
Defense Systems                                                                  --               51                830
Medical Systems                                                                 318              389                220
-----------------------------------------------------------------------------------------------------------------------
                                                                             $3,954           $3,075             $9,130
=======================================================================================================================

</TABLE>

Net sales to customers in foreign countries amounted to $13,641,000, $11,961,000
and  $10,436,000 in fiscal 1996,  1995 and 1994,  respectively.  In fiscal 1996,
1995 and 1994, foreign sales did not exceed 10% of consolidated net sales in any
individual geographic area.

                                                                              40

<PAGE>

Net sales to the U.S.  Government for the Sensors & Systems  segment's  products
amounted to  $25,986,000,  $28,930,000  and $32,718,000 in fiscal 1996, 1995 and
1994,  respectively.  Net sales to the U.S.  Government for the Defense  Systems
segment's products amounted to $41,219,000, $44,012,00 and $46,043,000 in fiscal
1996, 1995 and 1994, respectively.

Note O
Quarterly Results of Operations (Unaudited)

<TABLE>

The tables below present unaudited  quarterly  financial  information for fiscal
1996 and 1995:

<CAPTION>

(dollars in thousands except per share amounts)
-------------------------------------------------------------------------------------------------------------------------
                                                                        Three months ended
-------------------------------------------------------------------------------------------------------------------------
                                                     Dec 30,           Mar 30,            Jun 29,            Sep 28,
                                                        1995              1996               1996               1996
-------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>               <C>                <C>                <C>    
Net sales                                            $34,666           $39,995            $35,172            $38,905
Gross profit                                          10,119            11,229             11,918             13,072
Net income                                               353               609                776                151
Earnings per common share                               0.05              0.09               0.11               0.02

-------------------------------------------------------------------------------------------------------------------------
                                                     Dec 31,            Apr 1,             Jul 1,            Sep 30,
                                                        1994              1995               1995               1995
-------------------------------------------------------------------------------------------------------------------------
Net sales                                            $36,698           $36,531            $36,634            $35,040
Gross profit                                           9,912             8,690             10,858              7,901
Net income(loss)                                        (445)             (402)               403             (3,947)(1)
Earnings(loss) per common share                        (0.07)            (0.06)              0.06              (0.58)

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

<FN>
(1)   Net loss for the fourth  quarter of fiscal 1995 includes after tax charges
      of $2.1 million related to the GPI arbitration (see Note M to Consolidated
      Financial  Statements) and $750,000  related to the Company's  decision to
      exit the rocket  manufacturing line of business and $910,000 related to an
      adjustment  for the estimated cost to complete the H 70 contract (see Note
      C to Consolidated Financial Statements).
</FN>
</TABLE>

Note P
Fair Value of Financial Instruments

Statement  of  Financial   Accounting   Standards  No.  107  ("Statement  107"),
"Disclosures about Fair Value of Financial  Instruments," requires disclosure of
fair value information about financial instruments, whether or not recognized in
the balance sheet, for which it is practicable to estimate that value.  Whenever
possible,  quoted market prices were used to develop fair values. In cases where
quoted market prices are not available, fair values are based on estimates using
present value or other valuation techniques.  Those techniques are significantly
affected by the assumptions  used,  including the discount rate and estimates of
future cash flows. In that regard,  the derived fair value  estimates  cannot be
substantiated by comparison to independent  markets,  and, in many cases,  could
not be  realized  in  immediate  settlement  of the  instrument.  Statement  107
excludes certain financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of the Company.  The following methods and
assumptions were used by the Company in estimate its fair value  disclosures for
financial instruments as of September 28, 1996, and as of September 30, 1995.

Cash and Cash  Equivalents:  The carrying  amounts reported in the balance sheet
for cash and cash equivalents approximate those assets' fair values.

Long-Term  Debt: The fair value of these  liabilities  has been estimated  based
upon the  discounted  future cash flows.  The discount rate used included a risk
free  rate  derived  from  the  Treasury  yield  curve  plus  a  risk  weighting
commensurate  with the  Company's  borrowing  position.  The  fair  value of the
Company's  long-term debt is approximately  $23,620,00 and $28,756,000  compared
with the carrying  amounts of $24,348,000  and $30,157,000 at September 28, 1996
and September 30, 1995, respectively.


                                                                              41

<PAGE>

Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
BEI Electronics, Inc.

We have audited the accompanying consolidated balance sheets of BEI Electronics,
Inc. and  subsidiaries  as of September 28, 1996 and September 30, 1995, and the
related  consolidated  statements of operations,  stockholders'  equity and cash
flows for each of the three years in the period ended September 28, 1996.  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  financial  position of BEI  Electronics,  Inc. and
subsidiaries at September 28, 1996 and September 30, 1995, and the  consolidated
results of their  operations and their cash flows for each of the three years in
the period  ended  September  28, 1996 in  conformity  with  generally  accepted
accounting principles.



                                                               Ernst & Young LLP

San Francisco, California
November 20, 1996


                                                                              42

<PAGE>

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

                  None.


                                          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 and Exchange Act of 1934" of the Proxy
                  Statement  related to the  Company's  1997  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  "Certain  Transactions"
                  and   "Compensation    Committee    Interlocks   and   Insider
                  Particpation" of the Definitive Proxy Statement.

                                                                              43

<PAGE>

                                         PART IV

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


<TABLE>

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

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

            The following Consolidated Financial Statements of BEI Electronics,
            Inc. and its subsidiaries are filed as part of this Form 10-K:

            Report of Ernst & Young LLP, Independent Auditors                                           42

            Consolidated Balance Sheets -
               September 28, 1996 and September 30, 1995                                                25

            Consolidated Statements of Operations -
              Years ended September 28, 1996, September 30, 1995
               and October 1, 1994                                                                      27

            Consolidated  Statements of Cash Flows - 
              Years ended  September  28, 1996, September 30, 1995 
               and October 1, 1994                                                                      28

            Consolidated   Statements  of   Stockholders'   Equity -
              Years  ended September 28, 1996, September 30, 1995
               and October 1, 1994                                                                      29

            Notes to Consolidated Financial Statements -
              September 28, 1996                                                                        30

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

            The following Consolidated Financial Statement Schedule of BEI
            Electronics, Inc. and its subsidiaries for each of the years ended
            September 28, 1996, September 30, 1995 and October 1, 1994 is filed
            as part of this Form 10-K:

            Schedule II     Valuation and Qualifying Accounts                                          S-1

                            Report of Ernst & Young LLP, Independent Auditors as                       S-2
                            to Schedule

                            Consent of Ernst & Young LLP, Independent Auditors                         S-3

</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.


                                                                              44

<PAGE>

<TABLE>

(a)(3)      Listing of Exhibits

<CAPTION>

            Exhibit Numbers                        Description                                               Footnote
            ---------------                        -----------                                               --------
                 <S>                     <C>                                                                   <C>
                  3.1                    Restated Certificate of Incorporation                                   (i)

                  3.2                    Amended by-laws of the Company as of  April 1, 1996

                  4.1                    Reference is made to exhibits 3.1, 3.2, 10.14, 10.17 and
                                         10.19

                 10.1  *                 Registrant's 1982 Incentive Stock Option Plan, as                     (iii)
                                         amended and standard option grant form used in
                                         connection with the plan.

                 10.2  *                 Registrant's 1987 Incentive Stock Option Plan, as                     (iii)
                                         amended and standard option grant form used in
                                         connection with the plan

                 10.3  *                 Additional standard option grant form used in connection               (ii)
                                         with Registrant's 1987 Incentive Stock Option Plan, as
                                         amended

                 10.4  *                 Registrant's 1987 Supplemental Stock Option Plan, as                    (v)
                                         amended November 12, 1990, and standard option grant
                                         form used in connection with the plan

                 10.5  *                 Option grant forms used in connection with options                      (i)
                                         granted to certain employees on May 1, 1989

                 10.6  *                 Description of Management Incentive Bonus Plan                          (i)

                 10.7  *                 Consulting Agreement, dated July 3, 1990, between BEI                  (iv)
                                         Electronics, Inc. and George S. Brown

                 10.8  *                 Registrant's 1992 Restricted Stock Plan and standard                   (vi)
                                         form of restricted stock agreement used in connection
                                         with the plan

                 10.9                    HYDRA 70 Rocket Systems Contract, dated April 20,                     (vii)
                                         1992

                10.10                    Credit Agreement, dated June 1, 1993, between BEI                    (viii)
                                         Electronics, Inc., Defense Systems Company, Inc.,
                                         Motion Systems Company, Inc., New SD, Inc., BEI
                                         Medical Systems Company, Inc. and Canadian Imperial
                                         Bank of Commerce

                10.11                    Personal Service Contract, dated June 14, 1993, between              (viii)
                                         BEI Electronics, Inc. and William G. Howard, Jr.


                                                                              45

<PAGE>

                10.12                    First Amendment to Credit Agreement, dated September                   (ix)
                                         23, 1993, between  BEI Electronics, Inc., Defense
                                         Systems Company, Inc., Motion Systems Company, Inc.,
                                         New SD, Inc., BEI Medical Systems Company, Inc. and
                                         Canadian Imperial Bank of Commerce

                10.13                    Note Agreement, dated August 15, 1993, between BEI                     (ix)
                                         Electronics, Inc. and Principal Mutual Life Insurance
                                         Company, Principal National Life Insurance Company,
                                         Berkshire Life Insurance Company and  TMG Life
                                         Insurance Company

                10.14  *                 1989 Employee Stock Purchase Plan, adopted June 1,                     (ix)
                                         1989, as Amended through November 18, 1993

                10.15                    Second Amendment to Credit Agreement, dated April 1,                    (x)
                                         1994, between BEI Electronics, Inc., Defense Systems
                                         Company, Inc., Motion Systems Company, Inc., New SD
                                         Inc., BEI Medical Systems Company, Inc. and Canadian
                                         Imperial Bank of Commerce

                10.16                    First Amendment to Note Agreement, dated April 1,                       (x)
                                         1994, between BEI Electronics, Inc. and Principal Mutual
                                         Life Insurance Company, Principal National Life
                                         Insurance Company, Berkshire Life Insurance Company
                                         and TMG Life Insurance Company

                10.17                    Third Amendment to Credit Agreement, dated September                   (xi)
                                         30, 1994, between BEI Electronics, Inc., Defense
                                         Systems Company, Inc., BEI Sensors & Systems
                                         Company, Inc., BEI Medical Systems Company, Inc. and
                                         Canadian Imperial Bank of Commerce

                10.18                    Second Amendment to Note Agreement, dated September                    (xi)
                                         30, 1994, between BEI Electronics, Inc. and Principal
                                         Mutual Life Insurance Company, Principal National Life
                                         Insurance Company, Berkshire Life Insurance Company
                                         and TMG Life Insurance Company

                10.19                    Fourth Amendment to Credit Agreement, dated June 1,                   (xii)
                                         1995, between BEI Electronics, Inc., BEI Sensors &
                                         Systems Company, Inc., Defense Systems Company, Inc.,
                                         BEI Medical Systems Company, Inc. and Canadian
                                         Imperial Bank of Commerce

                10.20                    Fifth Amendment to Credit Agreement, dated June 1,                    (xvi)
                                         1996 between BEI Electronics, Inc., BEI Sensors &
                                         Systems Company, Inc.,  Defense Systems Company, Inc.,
                                         BEI Medical Systems Company, Inc. and Canadian
                                         Imperial Bank of Commerce.

                10.21  *                 Extension to Consulting Agreement, effective June 30,
                                         1996, between BEI Electronics, Inc. and George S.
                                         Brown.


                                                                              46

<PAGE>

                10.22                    Sixth Amendment to Credit Agreement, dated October
                                         31, 1996, between BEI Electronics, Inc., BEI Sensors &
                                         Systems Company, Inc.,  Defense Systems Company, Inc.,
                                         BEI Medical Systems Company, Inc. and Canadian
                                         Imperial Bank of Commerce.

                 11.1                    Statement regarding computation of per share earnings

                 21.1                    Subsidiaries of the Registrant

                 27.1                    Financial Data Schedule (EDGAR only)


<FN>
         *  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  Registration   Statement on   Form S-1  (File No.
            33-29032).

      (ii)  Incorporated  by  reference.  Previously  filed  as  an  exhibit  to
            Amendment No. 1 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 Report on Form 10-Q, dated December 30, 1989.

      (iv)  Incorporated  by  reference.  Previously  filed as an exhibit to the
            Registrant's Report on Form 10-Q, dated June 30, 1990.

       (v)  Incorporated  by  reference. Previously  filed  as an exhibit to the
            Registrant's Report on Form 10-K, dated September 29, 1990.

      (vi)  Incorporated   by reference.  Previously  filed as an exhibit to the
            Registrant's Registration Statement on Form S-8 (File No. 33-46766).

     (vii)  Incorporated  by  reference.  Previously  filed as an exhibit to the
            Registrant's Report on Form 10-K, dated October 3, 1992.

    (viii)  Incorporated  by  reference.  Previously  filed as an exhibit to the
            Registrant's Report on Form 10-Q, dated July 3, 1993.

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

       (x)  Incorporated  by  reference.  Previously  filed as an exhibit to the
            Registrant's Report on Form 10-Q, dated April 2, 1994.

      (xi)  Incorporated  by  reference.  Previously  filed as an exhibit to the
            Registrant's Report on Form 10-K, dated October 1, 1994.

     (xii)  Incorporated  by  reference.  Previously  filed as an exhibit to the
            Registrant's Report on Form 10-Q, dated July 1, 1995.

    (xiii)  Incorporated  by  reference.  Previously  filed as an exhibit to the
            Registrant's Report on Form 10-K, dated September 30, 1995.

     (xiv)  Incorporated  by  reference.  Previously  filed as an exhibit to the
            Registrant's Report on Form 10-Q, dated June 29, 1996.
</FN>
</TABLE>

(b)  No reports on Form 8-K were filed by the Company during the quarter ended
     September 28, 1996. 


                                                                              47
<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  in the  City  of San
Francisco, County of San Francisco, State of California, on December 9, 1996.








                                     By:    /S/ Robert R. Corr
                                            -----------------------------------
                                            Robert R. Corr
                                            Secretary, Treasurer and Controller
                                            (Principal Accounting Officer)
                                            BEI ELECTRONICS, INC.




                                POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE  PRESENTS,  that each person whose  signature  appears
below  constitutes and appoints Charles Crocker and Gary D. Wrench,  and each of
them, as his true and lawful  attorneys-in-fact  and agents,  with full power of
substitution and  resubstitution,  for him and in his name, place, and stead, in
any and all  capacities,  to sign any and all  amendments  to this Report and to
file the same,  with all exhibits  thereto,  and other  documents in  connection
therewith,  with the  Securities  and Exchange  Commission,  granting  unto said
attorneys-in-fact  and agents,  and each of them, full power and authority to do
and perform each and every act and thing  requisite  and necessary to be done in
connection therewith,  as fully to all intents and purposes as he might or could
do in person,  hereby  ratifying and confirming all that said  attorneys-in-fact
and agents,  or any of them,  or their or his  substitute  or  substitutes,  may
lawfully do or cause to be done by virtue hereof.
 


                                                                              48
<PAGE>

<TABLE>

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following  persons on behalf of the  Registrant and
in the capacities and on the dates indicated.

<CAPTION>


Signature                                       Title                                      Date
---------                                       -----                                      -----

<S>                                             <C>                                        <C>    
/S/Charles Crocker                              President, Chief Executive                 December 9, 1996
--------------------------------------          Officer and Chairman of the Board of    
(Charles Crocker)                               Directors (Principal Executive Officer) 
                                                

/S/Gary D. Wrench                               Senior Vice President, Chief               December 9, 1996
--------------------------------------          Financial Officer and Director
(Gary D. Wrench)                                

/S/Peter G. Paraskos                            Director                                   December 9, 1996
--------------------------------------
(Peter G. Paraskos)

/S/William G. Howard, Jr.                       Director                                   December 9, 1996
--------------------------------------
(William G. Howard, Jr.)

/S/Richard M. Brooks                            Director                                   December 9, 1996
--------------------------------------
(Richard M. Brooks)

/S/George S. Brown                              Director                                   December 9, 1996
--------------------------------------
(George S. Brown)

/S/C. Joseph Giroir, Jr.                        Director                                   December 9, 1996
--------------------------------------
(C. Joseph Giroir, Jr.)

/S/Robert R. Corr                               Secretary, Treasurer, Controller           December 9, 1996
--------------------------------------          and Principal Accounting Officer
(Robert R. Corr)                                

</TABLE>

                                                                              49

<PAGE>

                                                                     SCHEDULE II

<TABLE>
                     BEI ELECTRONICS, INC. AND SUBSIDIARIES

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

                        VALUATION AND QUALIFYING ACCOUNTS



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

(in thousands)

<S>                                       <C>              <C>          <C>               <C>              <C>        
Year ended September 28, 1996: 
Deducted from asset accounts:
Allowance for doubtful accounts            $    451        $  525       $     --          $  122(C)        $    843
                                                                                              11(D)
Valuation allowance for deferred   
   tax assets                                 1,220                         (197)(E)          --              1,023
                                           --------        ------       --------          --------         --------
      Total                                $  1,671        $  525       $   (197)         $    133         $  1,866
                                           ========        ======       ========          ========         ========

Year ended September 30, 1995: 
Deducted from asset accounts:
Allowance for doubtful accounts            $    398        $  145       $     --          $    92(B)       $    451
Valuation allowance for deferred
  tax assets                                    603           617             --               --             1,220
                                           --------        ------       --------          --------         --------
      Total                                $  1,001        $  762             --          $    92          $  1,671
                                           ========        ======       ========          ========         ========

Year ended October 1, 1994: 
Deducted from asset accounts:
Allowance for doubtful accounts            $    303        $   95       $     --          $    --          $    398
Valuation allowance for deferred
  tax assets                                    428           430             --              255(A)            603
                                           --------        ------       --------          --------         --------
      Total                                $    731        $  525       $     --          $   255          $  1,001
                                           =========       ======       ========          ========         ========


<FN>
(A)    Allowance  adjustment  resulting from evaluation of the  realizability of
       the related deferred tax assets

(B)    Uncollectible accounts written off, net of recoveries ($2)

(C)    Uncollectible accounts written off, net of recoveries ($4)

(D)    Miscellaneous adjustments to the allowance

(E)    Adjustment  based on evaluation of  uncertainties  in the  realization of
       state net operating loss carryovers
</FN>
</TABLE>

                                       S-1

                                                                              50

<PAGE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS, AS TO SCHEDULE


The Board of Directors and Shareholders
BEI Electronics, Inc.

We have audited the consolidated  financial statements of BEI Electronics,  Inc.
and  subsidiaries  as of September 28, 1996 and September 30, 1995, and for each
of the three years in the period ended  September 28, 1996,  and have issued our
report  thereon dated  November 20, 1996. Our audits also included the financial
statement  schedule listed in Item 14(a) 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.




                                                      Ernst & Young LLP


San Francisco, California
November 20, 1996







                                       S-2

                                                                              51

<PAGE>


CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS


We consent to the incorporation by reference in the Registration Statement (Form
S-8 No.  33-31459),  as amended,  pertaining to the 1982 Incentive  Stock Option
Plan, the 1987 Incentive Stock Option Plan, the 1987  Supplemental  Stock Option
Plan,  and the 1989 Employee Stock  Purchase Plan of BEI  Electronics,  Inc. and
subsidiaries,  of our reports  dated  November  20,  1996,  with  respect to the
consolidated  financial  statements and schedule of BEI  Electronics,  Inc., and
subsidiaries  included  in the  Annual  Report  (Form  10-K) for the year  ended
September 28, 1996.




                                                      Ernst & Young LLP


San Francisco, California
December 6, 1996





                                       S-3

                                                                              52


<PAGE>
INDEX TO EXHIBITS


Exhibit                                                              Sequential
Number            Description                                        Page Number
------            -----------                                        -----------

 4.1              Reference is made to exhibits 3.1 and 3.2

 3.2              Amended by-laws of the Company

10.21             Extension to consulting agreement

10.22             Sixth amendment to credit agreement
 
11.1              Statement regarding computation of per share earnings

21.1              Subsidiaries of the Registrant

23.1              Consent of Ernst & Young LLP
                  Independent Auditors (Reference is made on  
                  on Page 52 within the 10-K)

24.1              Power of Attorney (Reference is made on Page 48
                  within the 10-K)

27.1              Financial Data Schedule

                                                                              53