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

                                    FORM 10-K

[X]    Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
       Act of 1934 for the fiscal year ended October 3, 1998 or

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

                         Commission file number 0-17885

                        BEI MEDICAL SYSTEMS COMPANY, INC.
             (Exact name of Registrant as specified in its charter)

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

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

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

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

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

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  Registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes __X__  No _____

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

The   approximate   aggregate   market   value  of  the  voting  stock  held  by
non-affiliates of the Registrant as of December 10, 1998 was $10,981,502 (A). As
of  December  10,  1998,  7,778,296  shares of  Registrant's  Common  Stock were
outstanding.

(A) Based upon the closing  sale price of the Common  Stock on December 10, 1998
as reported on the Nasdaq National Market System.  Excludes  1,921,495 shares of
Common  Stock held by  directors,  executive  officers  and  stockholders  whose
ownership  exceeds ten percent of Common Stock outstanding on December 10, 1998.
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.


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<PAGE>


DOCUMENTS INCORPORATED BY REFERENCE

Registrant's  Proxy  Statement  with  respect  to its  1999  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.


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                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----
PART I
     Item 1.  Business......................................................  4

     Item 2.  Properties.................................................... 46

     Item 3.  Legal Proceedings............................................. 46

     Item 4.  Submission of Matters to a Vote of Security Holders........... 46

PART II
     Item 5.  Market for Registrant's Common Equity and
              Related Stockholder Matters................................... 47

     Item 6.  Selected Financial Data....................................... 49

     Item 7.  Management's Discussion and Analysis of
              Financial Condition and Results of Operations................. 50

     Item 7a. Qualitative and Quantitative Disclosures about Market Risks... 57

     Item 8.  Financial Statements and Supplementary Data................... 58

     Item 9.  Changes in and Disagreements with Accountants
              on Accounting and Financial Disclosure........................ 80

PART III
     Item 10. Directors and Executive Officers
              of the Registrant............................................. 81

     Item 11. Executive Compensation........................................ 81

     Item 12. Security Ownership of Certain Beneficial
              Owners and Management......................................... 81

     Item 13. Certain Relationships and Related Transactions................ 81

PART IV
     Item 14. Exhibits, Financial Statement Schedules,
              and Reports on Form 8-K....................................... 82

Signatures    .............................................................. 86


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                                     PART I

     Except for the  historical  information  contained  herein,  the  following
discussion   contains   forward-looking   statements   that  involve  risks  and
uncertainties.  When used herein, the words, "intend", "anticipate",  "believe",
"estimate"  and "expect" and similar  expressions  as they relate to the Company
are intended to identify such forward-looking  statements.  The Company's actual
results,   performance  or  achievements  could  differ  materially  from  those
discussed  here.  Factors  that could cause or  contribute  to such  differences
include,  but are not limited to, those  discussed in Item 1, "Business" as well
as Item 7,  "Management's  Discussion  and Analysis of Financial  Condition  and
Results of Operations."


ITEM 1. BUSINESS

     BEI  Medical  Systems  Company,  Inc.  ("BEI  Medical"  or  the  "Company")
develops, manufactures and markets a broad array of advanced systems and devices
for minimally  invasive  diagnostic and  therapeutic  procedures in the field of
gynecology. BEI Medical has an existing base of systems and devices it currently
markets to  gynecologists  in over 5,000  hospitals,  clinics  and  office-based
practices  in  the  United  States  and in 45  other  countries  worldwide.  The
Company's  systems and devices  include both  disposable  and  reusable  medical
instrumentation  used in the diagnosis and treatment of selected high  incidence
gynecological  conditions affecting the cervix,  uterus and other aspects of the
reproductive  system,  as  well  as  products  used  to  facilitate  oncological
procedures and perform pelvic  reconstructive  surgery. The Company believes its
existing  product  lines  serve as a  platform  from  which it can  develop  and
introduce  innovative  products to provide  gynecologists  with a  comprehensive
selection  of  technologically  advanced  systems and  devices.  Currently,  BEI
Medical is  focusing  its  development  and  commercialization  efforts on three
systems,   including:   i.)  the  Hydro  ThermAblator(R)   ("HTA(R)")  to  treat
menorrhagia, or excessive uterine bleeding, ii.) bipolar electrosurgical therapy
systems to perform LLETZ  procedures and treat uterine  fibroids,  and iii.) the
Corson Office Hysteroscopy System (TM) to provide advanced uterine visualization
capabilities.  BEI  Medical  believes  these new  products  complement  existing
product  lines and will allow the Company to  leverage  its  established  direct
sales force to market to both new and existing customers.


Industry Overview

     Women's  healthcare  represents  a large and  rapidly  growing  segment  of
healthcare expenditures.  Government spending on women's healthcare for Medicare
and Medicaid  benefits  alone is expected to exceed $200 billion in 1998.  Women
rely on their gynecologists for specific healthcare needs from puberty,  through
their childbearing  years, to menopause and beyond. The National Ambulatory Care
Survey,  conducted by the National Center for Health Statistics,  indicates that
women in the  United  States  make over 51  million  visits  to  OB/GYN  offices
annually.  Additionally,  as the women's  population  ages, the number of visits
annually and the incidence of gynecological  conditions  requiring diagnosis and
treatment  will  increase.  The Company  believes  that better  informed  women,
combined with the fact that nearly half of the gynecologists under the age of 45
are women, has resulted in a


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heightened  awareness of women's health issues.  As a result,  women are driving
the  demand  for  and  implementation  of  new  and  innovative  diagnostic  and
therapeutic  procedures.  In view of these developments,  HMO's have become more
responsive to women's healthcare needs by increasingly  authorizing  patients to
go directly to gynecologists,  who are more aware of the latest technologies and
procedures  available  for  treating  gynecological   conditions  than  are  the
patients'   primary  care  physicians.   Functioning  as  the  gatekeeper,   the
gynecologists  are in a position to determine and recommend  which  technologies
and procedures are most appropriate for their patients.

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

     The  acceptance  of these  procedures  by the  healthcare  industry and the
subsequent  development  of the ability to perform them on an  outpatient  basis
have contributed to cost  containment and greater  efficiency in the delivery of
healthcare services. In response to these pressures, hospitals are focusing on a
limited  number of  specialties  and shifting an  ever-increasing  percentage of
surgical  procedures to an outpatient  basis to avoid the costs  associated with
the patient remaining in the hospital overnight. Current estimates indicate that
outpatient  surgery  represents 70% of the total surgical  market,  and includes
laparoscopy,  hysteroscopy and endometrial ablation.  As a result,  freestanding
outpatient  surgery  centers are the fastest  growing  segment of the healthcare
market.

     The Company  believes it is well positioned to provide  innovative  systems
and  devices  used in  minimally  invasive  procedures  which may allow  certain
gynecological  procedures to be performed in an outpatient setting in a safe and
cost-effective manner.

Business Strategy

     The Company's  goal is to become a leading  provider of minimally  invasive
advanced  systems and devices to be used in an  outpatient  setting  serving the
specific needs of gynecologists  and their patients.  Its special emphasis is on
the diagnosis and  treatment of disorders and  conditions of the cervix,  uterus
and  other  aspects  of  the  reproductive  system  and  particularly  to  offer
alternatives to existing  procedures for the treatment of abnormal  bleeding and
uterine fibroids.

     The key components of the Company's strategy are as follows:

     Offer a Broad  Gynecological  Product Line. BEI Medical intends to continue
to offer a broad array of minimally invasive  gynecological  systems and devices
to its existing customer base of gynecologists in over 5,000 hospitals,  clinics
and  office-based  practices  in  the  United  States  and  45  other  countries
worldwide. The Company plans to develop and expand its market share through


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<PAGE>


internal  development,  licensing and  acquisition  of additional  complementary
product lines.

     Leverage Existing Base of Customer Relationships. The Company's sales force
can leverage its existing customer  relationships by introducing newly developed
or acquired systems and devices that are complementary to the Company's existing
product lines. In addition,  the Company intends to expand its base of customers
through the  introduction  of new  products,  such as the HTA system and bipolar
electrosurgical  therapy systems for LLETZ treatment of abnormal cervical tissue
and for treatment of uterine fibroids.

     Develop and Commercialize Innovative  Technologies.  BEI Medical intends to
continue  to  develop  cost-effective,   minimally  invasive  technologies  that
complement its existing product lines and provide new market opportunities.  The
Company is currently  directing  product  development  efforts at  international
commercialization  of its Hydro ThermAblator system and is conducting its United
States Food and Drug  Administration  ("FDA")  Phase III clinical  trials in the
United States. The HTA is intended to provide a minimally  invasive  alternative
treatment  to  hysterectomy  and  other  procedures   currently  used  to  treat
menorrhagia, or excessive uterine bleeding.

     Acquire  and License  Complementary  Technologies.  BEI Medical  intends to
continue to expand its product line through selective business  acquisitions and
licensing of complementary technologies. In 1997, the Company acquired rights to
distribute  Gyne-Tech's colposcope and cryosurgery systems to diagnose and treat
conditions of the cervix.  Also in 1997, the Company  acquired  exclusive rights
from Valley Forge  Scientific  Corporation  to distribute  specialized  patented
bipolar electrosurgical therapy systems for LLETZ treatment of abnormal cervical
tissue and for  treatment  of uterine  fibroids.  The Company is also focused on
commercialization of the Corson Office Hysteroscopy System providing an advanced
uterine  visualization system for gynecologists.  The Company licensed exclusive
manufacturing and marketing rights to that product in 1996.

     Expand Global Sales and  Marketing.  The Company  plans to increase  market
penetration  through the expansion of its direct sales and marketing  activities
targeting the more than 33,000  gynecologists  practicing in the United  States.
Within the past year the  Company  has  broadened  its sales force in the United
States by adding 61 independent field sales representatives to complement its 12
person inside sales force. BEI Medical plans to penetrate  international markets
further  through  expansion of its network of  distributors.  In  addition,  the
Company intends to sponsor or participate in clinically based seminars conducted
by the  Company's  clinical  investigators  to  familiarize  practitioners  with
innovative systems and devices, such as the HTA and the bipolar  electrosurgical
therapy  system,  and to teach their uses. The Company also plans to continue to
support its sales and marketing  efforts through  participation  in trade shows,
both nationally and regionally and through periodic  distribution of a specialty
direct mail catalogue.

     Expand Key Relationships with Leading Clinicians. BEI Medical has developed
working  relationships  with key clinicians  regarding the evaluation and use of
innovative products and procedures that address  gynecological  conditions.  The
Company  has  formed  a  Scientific   Advisory   Board   consisting  of  leading
practitioners,  which  consults  on the  refinement  of existing  lines,  on the
development of new products, on the evaluation of new technologies and


                                       6
<PAGE>


treatment approaches,  and on changes in healthcare  reimbursement  policies and
practices.

Existing Base of Products

     The Company currently manufactures and markets a line of minimally invasive
systems  and  devices  for  the  diagnosis  and  treatment  of  high   incidence
gynecological  conditions affecting the cervix,  uterus and other aspects of the
reproductive  system,  as  well  as  products  used  to  facilitate  oncological
procedures  and perform pelvic  reconstructive  surgery.  The Company  currently
markets over 500  products to an existing  base of  gynecologists  in over 5,000
hospitals,  clinics  and  office-based  practices  in the  United  States and to
distributors in 45 other countries worldwide.

     Management  believes  the Company has  demonstrated  core  competencies  in
developing the technologies  necessary to manufacture a variety of products used
in gynecological  procedures,  including  visualization,  energy  delivery,  gas
pressure/flow  control,  fluid  delivery,   microprocessor-controlled   systems,
catheter  technology  and  surgical  instrumentation/fabrication.   BEI  Medical
intends  to  leverage  these  competencies,  as  well  as its  existing  base of
customers,  to  continue  to develop  and market  new  products  in the field of
gynecology.

     The  Company  believes  that by  providing  a broad  array of  systems  and
devices,  it will continue to differentiate  itself to its customers from single
product or narrow product offering suppliers. The Company currently sells a line
of  specialty  instruments,   procedure  kits,  disposables  and  equipment  for
gynecologists, as outlined in the following table.

--------------------------------------------------------------------------------
Clinical Target     Key Products
--------------------------------------------------------------------------------
Cervix              o    Bi-Safe  I(TM)  bipolar  electrosurgical  generator and
                         bipolar LLETZ electrode system, for removal of abnormal
                         tissue   from  the  cervix*

                    o    Colposcopy  instruments,  including  biopsy forceps and
                         specula

                    o    Gyne-Tech   (TM)   colposcopes   systems,   for  tissue
                         destruction

                    o    Gyne-Tech cryosurgical systems, for tissue destruction

                    o    OS Finder(TM) dilator, for cervical canal access

                    o    Plus II(TM)  monopolar  generator and  monopolar  LLETZ
                         Plus(TM)  electrodes,  for removal of  abnormal  tissue
                         from the cervix
--------------------------------------------------------------------------------
Uterus              o    Corson  Office  Hysteroscopy   System,  with  ancillary
                         instruments,  for  examination and therapy of the inner
                         surface of the uterus

                    o    Hydro   ThermAblator,   for   treatment   of  excessive
                         menstrual bleeding**

                    o    Hysteroscopic  Insufflator,   for  precise  control  of
                         uterine distension*

                    o    Z-Sampler(TM)  endometrial suction curette,  for tissue
                         sampling   to   detect    carcinoma   or   precancerous
                         conditions*
--------------------------------------------------------------------------------


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--------------------------------------------------------------------------------
Clinical Target     Key Products
--------------------------------------------------------------------------------
Infertility         o    Corson  Office  Hysteroscopy   System,  with  ancillary
Diagnosis                instruments,  for  examination and therapy of the inner
                         surface of the uterus

                    o    Hysteroscopic  Insufflator,   for  precise  control  of
                         uterine distension

                    o    Laparoscopic Insufflator,  with high flow capability to
                         maintain proper peritoneal cavity distension*

                    o    OS Finder dilator, for cervical canal access

                    o    SHG catheter, for distension during sonohysterography

                    o    Z-Sampler endometrial suction curette, for endometerial
                         dating and to monitor hormonal therapy effects*

                    o    ZUI(TM) uterine injector, for hysterosalpingography

                    o    ZUMI(TM) uterine manipulator/injector, for manipulation
                         of the uterus and injection of contrast media*
--------------------------------------------------------------------------------

Oncological         o    Endo-Sock(TM)/Mega   Pouch,  for  laparoscopic   tissue
Surgery and              removal*                                               
Pelvic
Reconstruction      o    Laparoscopic Insufflator,  with high flow capability to
                         maintain proper peritoneal cavity distension*

                    o    MIYA Hook(TM), for pelvic suspension surgery

                    o    Nichols-Veronikis    Ligature   Carrier,   for   pelvic
                         suspension surgery*

                    o    Soderstrom LAVH  Manipulator(TM),  for laparoscopically
                         assisted hysterectomy

                    o    Z-Clamps(TM)  &  Z-Scissors(TM),   specially   designed
                         instruments for hysterectomy
--------------------------------------------------------------------------------

*    Proprietary  technologies for which the Company or the manufacturer owns or
     licenses  patents.  See "Risk Factors -- Reliance on Patents and Protection
     of Proprietary Technology"

**   Not available in the United States

New Products and Technologies

     The  Company  intends to develop,  license  and  acquire new  complementary
technologies that it plans to phase into future product  offerings.  The Company
has focused its recent efforts on the development and  commercialization  of the
following systems:

     o    The patented Hydro  ThermAblator  system for treatment of menorrhagia,
          or excessive uterine bleeding.
 
     o    Specialized  proprietary bipolar  electrosurgical therapy systems used
          for LLETZ  treatment of abnormal  cervical tissue and for treatment of
          uterine fibroids.
 
     o    The  Corson   Office   Hysteroscopy   System  for   improved   uterine
          visualization.


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     o    These new products and their potential are more fully discussed below.

     See "Risk Factors -- Uncertainty of Market Acceptance."

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

     Extending from each side near the top of the uterus are the fallopian tubes
that lead to the two ovaries. The fallopian tubes are very narrow, convoluted in
shape,  with many folds, and are delicate and difficult to access.  As a result,
they do not lend  themselves to easy study and treatment.  The ovaries'  primary
functions  are to  secrete  hormones,  such as  estrogen,  and store the  female
reproductive  cells or ova. The fallopian  tubes transport the ova to the uterus
for  fertilization  as part of the monthly  menstrual cycle. The fallopian tubes
are the organs in which  conception  occurs and at least one fallopian tube must
be open to permit the  passage of sperm.  The  fallopian  tubes serve a critical
function in the  reproductive  process and are often the focus of treatment when
the objective is to increase a women's  reproductive  potential,  such as in the
treatment of infertility.

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

The Hydro ThermAblator or HTA

Abnormal Uterine Bleeding

     Approximately 2.5 million women each year in the United States seek medical
treatment  from their  gynecologists  for abnormal  uterine  bleeding.  Abnormal
uterine bleeding  includes  disorders of the menstrual cycle,  such as irregular
bleeding, and menorrhagia, or excessive uterine bleeding (defined as total


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

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

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

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

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

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

     Both of these surgical ablation  techniques  require the tedious "painting"
of the entire lining of the uterus to control depth of thermal destruction, as


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<PAGE>


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

     Other  non-surgical  techniques for treatment of excessive uterine bleeding
are under  development and in various stages of FDA clinical  trials,  including
devices that employ fluid-filled heated balloons, electrodes on the surface of a
balloon,  microwave  energy,  radio  frequency  (RF) currents,  and  cryosurgery
(freezing).  Two  such  devices,  the  ThermaChoice  balloon  from  Gynecare  (a
subsidiary  of  Johnson  &  Johnson)  and  the  VestaBlate  from  Valleylab,  (a
subsidiary of U. S.  Surgical/Tyco)  have recently received  permission from the
FDA to market in the United States.  The Company believes that these devices are
limited in their  effectiveness due to their inability to fully conform with the
convoluted  surface of the entire uterine lining,  their inability to reach into
narrow  cornual  areas,  and their  inability to conform to the shape of a broad
range of uterine sizes. Further,  these devices do not allow the gynecologist to
visualize the uterine cavity prior to treatment,  to definitively confirm proper
placement  inside the uterine  cavity to observe  treatment,  or to  immediately
evaluate  the effect of  treatment,  because  they do not include  hysteroscopic
capability.  Recently the United Kingdom  Department of Health,  Medical Devices
Agency,  notified  medical  administrators,  surgeons and nurses of reports of a
number of  incidences  of  uterine  perforation  and injury to  adjacent  organs
involving devices for endometrial  ablation by thermal means. The notice advised
practitioners to verify the correct  placement of such devices within the uterus
prior to their  use.  The  Company  believes  the HTA  will  reduce  the risk of
perforation due to its integral hysteroscope, which provides visual confirmation
of uterine anatomy and verification of instrument position.  The characteristics
of various  endometrial  ablation  technologies  currently under  development or
commercialization are outlined below.


                                       11
<PAGE>


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

The Hydro ThermAblator Solution

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

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

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


                                       12
<PAGE>


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

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

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

     o    Does not require extensive training prior to use.

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

     o    Minimally invasive short duration procedure with limited risk.

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

The HTA System

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


                                       13
<PAGE>


circulation of room temperature  saline will rapidly cool the patient's  uterus.
As  a  result  of  ablation  of  the  endometrial  lining  of  the  uterus,  the
regeneration  of the endometrium and resulting  periodic  menstrual  bleeding is
either significantly reduced or eliminated.

Results of Clinical Trials

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

     The Company received  approval to begin Phase III Clinical Trials in August
1998, and the first treatments were conducted in September 1998. BEI Medical has
initiated its Phase III clinical  trials at 11 sites and will treat 276 patients
suffering  from  menorrhagia,  or  excessive  uterine  bleeding.  The study will
compare the safety and  efficacy of the HTA  endometrial  ablation  treatment to
electrosurgical rollerball ablation, one of the current treatments for excessive
uterine bleeding.  The Company anticipates completing the treatment phase of the
clinical  trials  in early  1999.  Data  from  examinations  one year  following
treatment  is  required  for  approval  of  its   premarket   approval   ("PMA")
application,  but the Company will begin  submitting  six-month  data to the FDA
when it becomes available. There can be no assurance that any data obtained from
the Phase III trial  will  support  the  safety  and  effectiveness  of the HTA.
Failure of the data to support  the  safety and  effectiveness  of the HTA would
have a material adverse effect on the Company's business.

     Certain  international  markets will require similar regulatory  approvals.
The Company has received  permission from Lloyd's  Registered  Quality Assurance
Ltd.  ("LRQA"),  the Company's  "notified body", to apply the CE Mark to the HTA
and to the sterile  disposable  HTA Procedure Kit. In February 1997, the Company
selectively initiated deliveries of HTA systems in some of those countries where
regulatory authorities permit sales. On this basis, deliveries have been made in
Belgium,  Brazil,  France,  Hong Kong,  Israel,  Italy,  Germany,  New  Zealand,
Portugal, Spain, Switzerland,  and in the United Kingdom.  Recently,  regulatory
authorities  in Australia and in Canada have granted  permission for the sale of
the HTA system. Over 340 treatments using the HTA have been completed worldwide,
demonstrating  its ease of use.  Management  is  encouraged  by the follow-up of
patients  at selected  international  sites,  which now  exceeds 18 months.  The
Company  believes the pattern of patient  follow-up  condition  reflects results
that are consistent with traditional laser and electrosurgical  ablation methods
and  superior  to  other  emerging  technologies.  See  "Business  -  Government
Regulation."


                                       14
<PAGE>


Rights Granted Johnson & Johnson Development Corporation

     In  connection  with a $1.5  million  equity  investment  in the Company in
February 1996,  Johnson & Johnson  Development  Corporation  ("J&J")  received a
right  of  first  negotiation  to  manufacture  and/or  distribute  any  product
primarily  intended for use in endometrial  ablation acquired or developed after
the date of the  agreement  ("Ablation  Products")  and the right to  consult in
connection with FDA applications with respect to such Ablation Products.

     The  right  of first  negotiation  is  effective  for a  ninety-day  period
commencing  on the  earlier of i.) J&J's  notice to the Company of its desire to
manufacture  and/or distribute an Ablation Product and ii.) the date the Company
notifies  J&J of  approval  from the FDA to market an Ablation  Product.  In the
event that the parties are unable to agree upon mutually  acceptable terms, then
the Company may either manufacture and/or distribute the Ablation Product itself
or enter into an agreement with a third party on terms that in the aggregate are
not  materially  less  favorable  to the Company  than those  offered by J&J. In
addition,  the Company may enter into agreements with third parties prior to the
J&J negotiation  period,  provided such agreements are terminable by the Company
within two years  after the Company  and J&J enter into a  manufacturing  and/or
distribution  agreement.  Depending  upon the timing and  progress  of  clinical
trials, the Company expects that the HTA system may be subject to J&J's right of
negotiation and consultation.

Bipolar Electrosurgical Therapy System

     In July 1997 the Company licensed the rights to market proprietary  bipolar
electrosurgical  therapy  systems to perform LLETZ  procedures to treat abnormal
cervical  tissue  and  to  treat  uterine  fibroids.  The  Company  markets  and
distributes  new,  proprietary  bipolar  electrosurgical  therapy  systems which
eliminate the risk of alternate site burns  associated with currently  available
monopolar electrosurgical systems because energy travels only through the tissue
joining the two small  active  electrodes  at the  treatment  site.  The bipolar
electrosurgical  therapy  systems were introduced to the United States market at
the American College of Obstetricians and Gynecologists (ACOG) annual meeting in
May 1998.

LLETZ Procedures

     More than 50 million PAP tests are performed annually in the United States,
of which  approximately  5-7% are  interpreted  as abnormal.  These patients are
candidates  for  further  diagnosis,  which  often  takes the form of  magnified
examination  of the  suspicious  tissue  utilizing a  colposcope.  When abnormal
tissue is recognized  during a colposcopic  examination,  the  gynecologist  can
perform  electrosurgical  excision of lesions from the cervix, a procedure known
as LLETZ (Large Loop Excision of the Transformation Zone). Since 1990, the LLETZ
procedure has become a standard approach to care in the clinical office practice
of most  gynecologists.  These LLETZ  procedures  have been done using monopolar
electrosurgical  systems. The use of monopolar  electrosurgical systems requires
the use of an  external  return  electrode  and the use of  insulated  ancillary
instruments.  Electrosurgical  energy in a monopolar system flows along a random
pathway from the point of contact of the active electrode, through the patient's
body,  seeking the external  return  electrode.  Alternative  ground pathways in
contact with the patient's body present a risk


                                       15
<PAGE>

of alternate site burns as the  electrosurgical  energy exits the patient's body
at a point other than the external return electrode.

     The use of the bipolar LLETZ system removes the  requirement for the use of
insulated  ancillary  instruments  and  can  reduce  the  overall  cost  of  the
disposable  components  required for treatment  through the use of a proprietary
design bipolar  electrode and the  elimination of the  requirement for a patient
return electrode.

     The following  are  advantages  of BEI  Medical's  bipolar  electrosurgical
therapy systems when employed for LLETZ treatment:

     o    Patented  electrode  design provides  precise area of  electrosurgical
          effect.

     o    Reduces overall cost of disposable  components through  elimination of
          items required for monopolar treatments.

     o    Eliminates  risk of alternate  site burns  associated  with  monopolar
          technology.

     o    Eliminates need for insulated ancillary instruments.

Fibroid Treatments

     During the course of their lives,  it is  estimated  that as many as 50% of
all women will develop uterine fibroids  (benign tumors,  also known as myomas).
Uterine  fibroids can cause an  enlargement  of the uterus that puts pressure on
the bladder, resulting in frequency of urination or incontinence; if the fibroid
grows  towards the back,  pressure  can cause lower back pain,  discomfort  with
activity or intercourse,  or  constipation.  A fibroid may cause sterility if it
blocks the fallopian  tube.  It may also  interfere  with fetal growth,  and may
cause  difficult  childbirth.  Fibroid  growth is  stimulated  by estrogen,  and
hormonal  drug  therapies  exist  which  can be used  to  shrink  fibroids  on a
short-term  basis only.  These drugs,  which block the production of estrogen by
the  ovaries,  do not  offer a  long-term  solution  since  side  effects  mimic
menopause.  Although the majority of women with fibroids may never have symptoms
that require treatment,  it is estimated that 30% of the 600,000  hysterectomies
performed  annually  in the  United  States  are the  choice of last  resort for
symptomatic fibroids.

     Fibroids  can grow  either  subserosally  (near  the outer  surface  of the
uterus) or submucousally  (inside the uterus).  Symptomatic  subserosal fibroids
are often treated by hysterectomy,  but can also be surgically removed through a
myomectomy,  thus  leaving  the uterus  intact.  Myomectomies  require a similar
surgical  approach as an  abdominal  hysterectomy  and can expose the patient to
significant  risk.  When the fibroid is excised during a myomectomy,  there is a
risk of  hemorrhage  due to the  vascularity  of the uterus wall and the uterine
wall requires repair with sutures to regain its structural integrity. Recently a
laparoscopic  technique has been introduced to remove subserosal  fibroids which
requires the surgeon to puncture the uterine wall and cut the fibroid into small
pieces with a mechanized  device.  This procedure is highly skill  dependent and
can result in adhesion  (scar  tissue)  formation  between the uterine  wall and
adjacent organs.

     BEI Medical's  BiSafe(R)  bipolar  electrosurgical  therapy system includes
specially designed laparoscopic needle electrodes for a treatment of fibroids,


                                       16
<PAGE>


known as myolysis. Utilizing laparoscopic visualization,  the surgeon introduces
the bipolar needle electrode,  retracted into its protective  sleeve,  through a
small puncture in the abdominal wall. The electrodes are advanced and introduced
into the fibroid  tissue,  and bipolar  electrosurgical  energy  desiccates  the
fibroid and destroys its blood supply.  This  procedure can be repeated if there
are multiple  fibroids.  In the weeks  following the  treatment,  the fibroid(s)
shrink in size,  relieving  the symptoms  caused by the  original  growth of the
fibroid(s),  avoiding the need for complete surgical removal.  The Company plans
to  introduce  the  laparoscopic  portion of the BiSafe  system to the market in
calendar year 1999.

     The  gynecologist  can treat  submucousal  fibroids  using a  hysteroscopic
resectoscope,  an instrument adapted from urology,  to  electrosurgically  shave
away fragments of the fibroid. This technique requires significant distension of
the uterus to create  working  space with the risk of  excessive  absorption  of
non-conductive  (salt  free)  fluid  into the  vessels  of the uterus due to the
high-pressures  (100-150 mmHg). When significant amounts of this non-physiologic
fluid is  absorbed,  fluid  overload  can cause  hyponatremia  (dilution of body
fluids  resulting  in  electrolyte  imbalance),  pulmonary  edema  (fluid in the
lungs),  cerebral  edema  (swelling  of the  brain),  and even  deaths have been
reported.  This  technique  requires  precise  control  of the depth of  thermal
destruction  caused  by the  monopolar  electrosurgical  energy  used to cut and
coagulate.  While this surgical  technique  offers  advantages over  traditional
hysterectomy,  clinical  results  are  extremely  dependent  on  the  skill  and
experience of the surgeon.

     BEI  Medical's  BiSafe  bipolar  electrosurgical  therapy  system  to treat
submucousal  fibroids  is being  expanded  to include:  i.)  specially  designed
bipolar  needle  electrodes  to  shrink  fibroids  and ii.)  specially  designed
resectoscope  electrodes to allow the  gynecologist to shave away fragments of a
fibroid  without the major  risks of  traditional  systems.  Much of the risk of
excessive absorption of non-conductive fluid associated with the use of existing
monopolar resectoscope systems is eliminated,  since the patented bipolar system
will  allow use of  physiologically  compatible  fluids to distend  the  uterine
cavity. The Company intends to introduce the hysteroscopic portion of the BiSafe
system in late calendar year 1999.

     The following  are  advantages  of BEI  Medical's  bipolar  electrosurgical
therapy systems when employed for subserosal and submucousal fibroid treatment:

     o    Minimally  invasive  techniques  to avoid  hysterectomy  and  surgical
          myomectomy.

     o    Potential to preserve reproductive function by saving the uterus.

     o    Bipolar  hysteroscopic  electrodes  minimize  risk of  fluid  overload
          through use of saline.

     o    Bipolar  electrosurgical  technology  eliminates  damage  to  adjacent
          organs caused by random pathway monopolar current.

     o    Eliminate  risk of  alternate  site burns  associated  with  monopolar
          technology.


                                       17
<PAGE>


The Corson Office Hysteroscopy System

     The need to provide a definitive diagnosis of uterine  abnormalities led to
the development of hysteroscopy.  A gynecologist may look inside the uterus with
a hysteroscope,  a thin  telescope-equipped  device that is inserted through the
cervix.  The  hysteroscope is attached to a light source and camera allowing the
gynecologist  to view the  endometrial  lining on a video  monitor  to  identify
fibroids,  make directed biopsies,  and perform minimally  invasive  therapeutic
procedures.  Direct  visualization  of the lining of the uterus  provides a more
precise diagnosis of uterine abnormalities than D&C, HSG or ultrasound imaging.

     Gynecologists  commonly  use  hysteroscopy;   however,  in  the  past  most
hysteroscopic  procedures have been done in the hospital  environment,  often in
the operating  room under general  anesthesia.  This has been due to a number of
factors,  including  the  high  cost of  complete  hospital  style  hysteroscopy
systems, large diameter instrumentation that makes comfortable use in the office
with local anesthesia impractical,  and the lack of third party payor incentives
for office based procedures.

     The transition of hysteroscopic procedures from the hospital environment to
the  gynecologist's  office  practice  is being  driven  by the  following:  i.)
patient's desire to avoid hospitalization, ii.) physician's desire for efficient
use of time resulting in improved office economics, and iii.) third party payors
are  providing   incentives  to  relocate   procedures  to  more  cost-effective
environments.  The Company believes that only 20-25% of the approximately 19,000
gynecology  practices  in the United  States  are  currently  equipped  to offer
office-based hysteroscopic procedures to their patients, providing a significant
business opportunity to the Company.

     The Company has obtained an exclusive license to manufacture and market the
Corson Office Hysteroscopy System, developed in conjunction with Stephen Corson,
M.D., a recognized authority on and teacher of hysteroscopic techniques,  and is
currently  marketing  the  product.  This system is designed  around a specially
developed  telescope  that has a smaller  diameter (3mm) and is equipped with an
optical  system  that  provides a wider  field of view than other  hysteroscopic
telescopes.  This optical system allows panoramic  viewing of the uterine cavity
without significant maneuvering of the telescope, thus eliminating the principal
source of patient discomfort.  The system also features a patented hysteroscopic
CO2 insufflator  that allows precise control of distension of the uterine cavity
for diagnostic procedures without the need for fluid management systems.

     The Company  believes that the Corson Office  Hysteroscopy  System offers a
distinct advantage compared to traditional hysteroscopy systems by incorporating
the following features:

     o    Reduced outer diameter allows for use with patient comfort.

     o    Panoramic viewing without uncomfortable instrument manipulation.

     o    Option of CO2 gas or  continuous  flow  liquid for  distension  of the
          uterus.

     o    Modular  design  to  minimize  initial  investment,   allowing  future
          expansion of capabilities.

     o    Both diagnostic and therapeutic capabilities.


                                       18
<PAGE>


     o    Instrumentation for biopsy, cutting and grasping.

     o    Specifically  designed  for office use with a  favorable  cost/benefit
          ratio.

Sales and Marketing

     The  Company's   sales  and  marketing   strategy  is  to  increase  market
penetration  through the expansion of its direct sales and marketing  activities
targeting the more than 33,000  gynecologists  practicing in the United  States.
BEI Medical's  domestic  distribution  network includes  approximately 12 inside
sales   personnel  and  two  field   managers  in  addition  to  17  independent
manufacturers'  representative  organizations,  employing approximately 61 field
representatives  to market its products  directly to gynecologists in hospitals,
surgical  centers  and  office  based  practices.   BEI  Medical's   independent
manufacturer's  representative  organizations  generally  consist of experienced
sales  professionals  with  industry-specific  knowledge.  They  also  represent
manufacturers  of  other  medical  products  that  are  complementary  with  the
Company's products and work on a straight commission basis.

     The  Company's  direct  sales  force can  leverage  its  existing  customer
relationships by introducing  newly developed,  acquired or licensed systems and
devices which are  complementary  to the Company's  current  product  lines.  In
addition,   through  the   introduction   of  new  products   that  enhance  the
gynecologist's  practice,  such as the HTA, the bipolar  electrosurgical therapy
systems, and the Corson Office Hysteroscopy System, management intends to expand
the Company's base of customers for both existing and new products.

     The  Company  plans to  further  penetrate  international  markets  through
expansion of its network of country-specific distributors.  Internationally, BEI
Medical sells its products through distributors in 45 countries and distributors
in 14 countries have begun marketing the HTA. The Company may also rely on these
distributors  to  assist  it in  obtaining  reimbursement  approvals  from  both
government and private insurers in certain  international  markets.  The Company
does not currently have  distributors  in a number of significant  international
markets that it has targeted and will need to establish additional international
distribution relationships in order to sell its products in those markets.

     Additionally,  the Company  offers  electrosurgical  devices and disposable
electrodes designed specifically for gastrointestinal  endoscopy. These products
are  sold   through   a   separate   network   of   independent   manufacturer's
representatives.  This range of  gastrointestinal  products  is not  expected to
provide a significant  increase in future revenues.  Also, a variety of products
are manufactured by BEI Medical for sale by third parties under various original
equipment  manufacture  ("OEM")  agreements,  but the Company  expects these OEM
arrangements to decline as a percentage of revenues.  In fiscal 1998, revenue of
gastrointestinal  endoscopy  products  and OEM revenue were 9.7% and 9.9% of BEI
Medical's revenue,  respectively,  compared to 8.9% and 17.1% in fiscal 1997 and
15.5% and 14.5% in fiscal 1996.

     The Company  also markets  products  that are  manufactured  by third party
vendors,  where the  regulatory  approval and  compliance for these products has
been obtained and is controlled  exclusively by the third party vendor.  Any FDA
regulatory or compliance actions against these companies could affect the


                                       19
<PAGE>

third party vendor's  ability to supply the Company,  which in turn could have a
material adverse impact on the Company.

     BEI Medical plans to continue to support its gynecology sales and marketing
efforts through the participation in regional and national trade shows which the
Company  believes will  reinforce  market  presence,  increase  awareness of its
products,  introduce new products,  and develop  actionable  sales leads for its
sales force.  Periodic  distribution of its specialty office  gynecology  direct
mail  catalog will also be  continued.  Promotional  literature  and new product
announcements  will continue to be  distributed  via insertion with invoices and
insertion in  merchandise  shipments  to leverage  relationships  with  existing
customers as well as maintaining its on-line catalog (www.beimedical.com).

     The Company plans to participate in and sponsor postgraduate courses on the
diagnosis  and  treatment  of cervical  conditions  to support the  marketing of
products  such as the  Gyne-Tech  colposcopes  and  the  Bipolar  LLETZ  system.
Sponsorship  will be provided  for  clinically-based  seminars  conducted by the
Company's  clinical  investigators to familiarize  practitioners with innovative
systems and devices  developed by the Company,  such as the Hydro  ThermAblator.
Internationally,  BEI  Medical  will  continue  to  support  the  efforts of its
distributors  through sponsorship of guest speakers at national  conventions and
at clinical seminars and through the sponsorship of postgraduate courses.

Competition

     The  Company  operates  in a  highly  competitive  industry.  Many  of  the
Company's existing  competitors have significantly  greater financial  resources
and manufacturing capabilities,  are more established, have larger marketing and
sales  organizations  and have larger  technical  staffs than the  Company.  BEI
Medical  believes  that its  products  compete  primarily on the basis of price,
design, performance, reliability, delivery service and support.

     The  principal  competitors  for the  Company's  core  gynecology  products
include  Circon  Corporation,  CooperSurgical,  Inc., a subsidiary of The Cooper
Companies,  Inc.,  Karl Storz GmbH,  Leisegang  Medical,  Inc., a subsidiary  of
Galileo  Corporation,  Olympus  Corp.,  Utah  Medical  Products,  Inc.,  Wallach
Surgical Devices, Inc., and Richard Wolf Medical Instruments Corp. The principal
competitors for the Company's Hydro ThermAblator and the bipolar electrosurgical
therapy  system  include  FemRx,  Inc., a subsidiary of Ethicon,  Inc./Johnson &
Johnson,  Gynecare,  a  subsidiary  of Ethicon,  Inc./Johnson  & Johnson  (whose
ThermaChoice balloon, a device for endometrial ablation,  has been cleared to be
marketed in the United States by the FDA), Valleylab, Inc., a subsidiary of U.S.
Surgical/Tyco (whose VestaBlate balloon, a device for endometrial ablation,  has
been  cleared by the FDA to be  marketed  in the  United  States)  and  Wallsten
Medical SA.

     Other  large  healthcare  companies  may enter  the  market  for  minimally
invasive  diagnostic  and  therapeutic  gynecological  products  in the  future.
Competing companies may succeed in developing technologies and products that are
efficacious or more cost effective than those  currently  offered or that may be
developed by BEI Medical.

     The Company believes that its ability to compete effectively depends on its
ability  to  continue  to  develop  proprietary   products  that  fulfill  unmet
gynecological  market needs and to anticipate changing  marketplace  demands, to


                                       20
<PAGE>

continue  to  attract  and  retain  highly  qualified  personnel,  to obtain the
required regulatory  approvals,  and to continue to manufacture and successfully
market high quality products.  See "Risk Factors -- Competition;  Uncertainty of
Technology Change."

Manufacturing

     BEI Medical's manufacturing operations consist primarily of the manufacture
and  assembly of  electromechanical  equipment  such as the Hydro  ThermAblator,
electrosurgery  generators,  endoscope  illuminators,  endoscopes and electronic
insufflators.  Some component fabrication and assembly of various non-electrical
products,  both disposable and reusable, is also performed.  Approximately 29.3%
of the  Company's  annual  revenue in fiscal  1998 was derived  from  internally
manufactured  products. The Company also utilizes contract manufacturers to make
a variety of  non-electrical  medical devices to Company design  specifications,
including the  disposable HTA procedure kit,  hysteroscopy  systems,  disposable
catheters and reusable instruments.  Approximately 54.1% of the Company's annual
revenue in fiscal 1998 was derived  from  products  produced  for the Company by
contract manufacturers.  In addition, the Company purchases a number of products
for resale under both exclusive license agreements and non-exclusive  agreements
including  the  Company's  line of bipolar  generators  and  disposables,  smoke
evacuators, colposcopes and cryosurgery products. See "Risk Factors --Dependence
on Third Party Vendors."

     BEI  Medical  also  produces  a  variety  of  electrosurgical   generators,
laparoscopic  insufflators,  endoscopic light sources, and associated disposable
products designed for use in various medical/surgical  procedures and sold under
OEM labeling arrangements.

     In  the  third  quarter  of  fiscal  1998,  the  Company  consolidated  its
manufacturing, distribution and administrative activities located in Hackensack,
New Jersey and Chatsworth,  California into a single 24,400 square foot facility
located in Teterboro,  New Jersey.  The Company believes the consolidation  will
reduce  operating  costs due to the  elimination  of  redundant  operations  and
provide additional space to accommodate future growth. Additionally, engineering
efforts are underway to reduce the cost of the  disposable  HTA procedure kit as
volume increases by streamlining production methods and eliminating or replacing
higher cost methods and materials.

     In  order  to  commercialize  the  HTA   successfully,   BEI  Medical  must
manufacture  or assemble the HTA itself or through  third  parties in accordance
with the FDA requirements,  in commercial quantities, at high quality levels and
at  reasonable  costs.  The Company has not yet produced the HTA in  substantial
quantities,  but expects that its  manufacturing  experience  with other medical
electronic  systems and consumable  medical products will be transferable to the
HTA. Failure of the Company to produce the HTA in commercial  quantities at high
quality  levels  and at  commercially  reasonable  prices  would have a material
adverse  effect on the Company's  business,  financial  condition and results of
operations. See "Risk Factors -- Scale Up Risk."

     During fiscal 1996,  BEI Medical's  manufacturing  facilities  received ISO
9001 certification from Lloyds Register Quality Assurance,  Ltd. ("LRQA").  LRQA
will conduct  semiannual audits in Teterboro,  New Jersey. The most recent audit
of the  Company's  manufacturing  facilities  in  Teterboro,  New  Jersey was in

                                       21

<PAGE>

October  1998.  The audit  report did not include any negative  observations  or
identify any areas of noncompliance.  Additionally, the Company's facilities and
documentation  procedures for the manufacture of medical devices are required to
conform to the FDA's Quality System  Regulations  ("QSR") through its facilities
inspection program. The FDA most recently inspected the Company's  manufacturing
facilities in Teterboro,  New Jersey in September 1998 for  compliance  with the
QSR.  Upon  completion  of the  inspection,  the FDA did not  issue a Notice  of
Adverse  Findings.  Withdrawal  of QSR  compliance  status would have a material
adverse  effect on the Company's  business,  financial  condition and results of
operations.


Research and Development; Technology

     BEI Medical intends to develop and expand its market share through internal
development,   licensing  and  acquisition  of  additional  product  lines.  The
Company's  principal  development effort has focused on proprietary  devices for
minimally  invasive  procedures in gynecology.  The Company's  internally funded
research and development expenditures were $2,866,000, $1,864,000 and $1,328,000
for the fiscal years 1998, 1997 and 1996, respectively.  The Company anticipates
that the vast majority of current  spending on research and development over the
next 12 months will be devoted to completing the HTA clinical trials and gaining
FDA  approval  of  the  product.  Product  concepts,  internally  or  externally
originated,  are  developed  into  commercially  viable  systems  and devices by
relying on core  competencies.  The Company's areas of core  competency  include
visualization,  gas  pressure/flow  control,  fluid delivery,  energy  delivery,
microprocessor      systems,      catheter      technology      and     surgical
instrumentation/fabrication.  For instance,  development  of the HTA system from
the Goldrath patent required  application of  visualization  technology to allow
the  gynecologist to monitor the process,  precise control of fluid pressure and
energy  delivery to perform the ablation and  microprocessor  control of complex
heating and safety  systems.  Additionally,  the Company  continues  development
efforts to improve and enhance its disposable  and instrument  product lines for
both  outpatient  and office  applications.  Through  strategic  alliances,  the
Company also continues to develop new applications  related to fibroid resection
for its bipolar electrosurgical  generators. The Company also works with several
OEM  customers  for the  adaptation  of its  proprietary  technology  to various
private label requirements.

     BEI Medical has developed working  relationships with key clinicians on the
evaluation  and  use  of  innovative   products  and  procedures   that  address
gynecological  conditions.  The Company has formed a Scientific  Advisory  Board
consisting  of  leading  practitioners,  which  consults  on the  refinement  of
existing lines, on new product  development,  on evaluation of new  technologies
and treatment approaches,  and on changes in healthcare  reimbursement  policies
and practices.


Licenses, Patents and Proprietary Technology

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



                                       22

<PAGE>

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

     As of October 3, 1998,  the  Company had a  portfolio  including  16 United
States  patents and one allowed  United  States  patent,  in addition to certain
issued foreign patents.  Among the 16 patents issued in the United States,  four
patents are related to the  development of the HTA.  Corresponding  applications
have been filed in certain foreign countries  relative to the HTA. The Company's
policy is  generally  to file patent  applications  in foreign  countries  where
rights are available and the Company believes it is commercially advantageous to
do so.  No  assurance  can  be  given  that  any  patents  from  pending  patent
applications  or from any future patent  applications  will be issued,  that the
scope of any patent protection will exclude  competitors or provide  competitive
advantages to the Company,  that any of the Company's patents will be held valid
if subsequently  challenged or that others will not claim rights in or ownership
of the patents and other  proprietary  rights held by the  Company.  The Company
also owns certain registered trademarks, and has applied for other trademarks in
certain foreign countries.

     Inclusive to the patent  portfolio,  the Company holds the rights and title
to the patent for its Uterine  Manipulator/Injector  ZUMI product line, under an
agreement  with  James H.  Harris,  M.D.  This  patent was issued in 1984 and is
expected to expire in 2001.  This ZUMI product line  accounts for a  significant
percentage of the Company's disposable instrument revenues.

     In 1997, the Company entered into an agreement with Valley Forge Scientific
Corporation  giving the Company  worldwide  marketing rights for distribution of
the bipolar  electrosurgical  therapy systems, in the field of gynecology.  This
patented bipolar technology is applicable to LLETZ procedures. Patents cover the
bipolar  generator  product and the loop  electrode  product for LLETZ,  each of
which  are  owned by Valley  Forge.  Nothing  in this  agreement  constitutes  a
transfer  to BEI of any of the  patents,  intellectual  property  rights,  trade
secrets or know-how of Valley Forge  relating to the Valley Forge  products or a
license for BEI to use such patents, intellectual property rights, trade secrets
or  know-how.  The  remaining  term of the  agreement  is 57 months  subject  to
negotiating annual minimum  requirements after the first  fifteen-month  period,
for subsequent twelve-month periods.

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



                                       23

<PAGE>

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

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

Government Regulation

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

     A medical  device may be marketed in the United  States only with the FDA's
prior  authorization.  Devices  classified  by the FDA as  posing  less risk are
placed  in Class I or Class II and  require  the  manufacturer  to seek  "510(k)
clearance" from the FDA prior to marketing.  Such clearance generally is granted
when submitted information  establishes that a proposed device is "substantially
equivalent"  in  intended  use and  safety  and  effectiveness  to a  "predicate
device,"  which  is  a  legally  marketed  Class  I  or  Class  II  device  or a
"preamendment" (in commercial distribution before May 28, 1976) Class III device
for which the FDA has not called for PMA applications (defined below).

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



                                       24

<PAGE>

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

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

     A clinical study in support of a PMA application  for a "significant  risk"
device requires an Investigational Device Exemption ("IDE") application approved
in advance by the FDA for a limited number of patients. The IDE application must
be supported by appropriate data, such as animal and laboratory testing results.
The clinical  study may begin if the IDE  application is approved by the FDA and
the appropriate  institutional  review board ("IRB") at each clinical study site
or through use of a central IRB. If the device presents a "nonsignificant  risk"
to the  patient,  a sponsor may begin the  clinical  study after  obtaining  IRB
approval  without the need for FDA approval.  In all cases,  the clinical  study
must be  conducted  under the  auspices of an IRB  pursuant to FDA's  regulatory
requirements intended for the protection of subjects and to assure the integrity
and validity of the data.  During a clinical study,  the Company is permitted to
sell the products used in the study for an amount that does not exceed  recovery
of the costs of


                                       25

<PAGE>

manufacture, research, development and handling. The Company's failure to adhere
to regulatory  requirements  generally  applicable to clinical studies or to any
conditions  of IDE  approval  could  result  in a  refusal  by the FDA to  grant
marketing  clearance or approval  for the  Company's  products.  There can be no
assurance  that any clinical  study  proposed by the Company will be approved by
the FDA, will be completed or, if completed,  will provide data and  information
that support PMA approval or 510(k) clearance or that support  authorization for
additional  clinical  investigations of the type necessary to obtain approval or
clearance.

     Devices  manufactured  or  distributed  by  the  Company  pursuant  to  FDA
clearance or approval will be subject to pervasive and continuing  regulation by
the FDA and certain state agencies. The Company will be subject to inspection by
the FDA and such  state  agencies,  and  will  have to  comply  with the host of
regulatory  requirements  that usually apply to medical devices  marketed in the
United States,  including the FDA's labeling  regulations,  the QSR, the Medical
Device Reporting ("MDR")  regulations (which require that a manufacturer  report
to the FDA certain  types of adverse  events  involving its  products),  and the
FDA's  general   prohibitions  against  promoting  products  for  unapproved  or
"off-label"  uses.  In addition,  Class II devices can be subject to  additional
special controls (e.g., performance standards, postmarket surveillance,  patient
registries,  and FDA  guidelines)  that do not  apply  to Class I  devices.  The
Company's failure to comply with applicable regulatory requirements could result
in enforcement  action by the FDA, which could have a material adverse effect on
the Company's business, financial condition and results of operations.

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

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

     The Company distributes products manufactured by third party vendors, where
the regulatory  approval and compliance for these products has been obtained and
is  controlled  by the third party  vendor.  Any FDA  regulatory  or  compliance
actions against these companies could affect the third party vendor's ability to
supply the Company or require the Company's  participation  in product  recalls,
which in turn could have a material adverse impact on the Company.

     The Food and  Drug  Administration  Modernization  Act of 1997  also  makes
changes to the device  provisions  of the Food,  Drug and  Cosmetic  ("FDC") and
other provisions in the FDC Act affecting the regulation of devices. Among other
things, the changes will affect the IDE, 510(k) and PMA processes, and also will
affect  device  standards  and  data   requirements,   procedures   relating  to
humanitarian and  breakthrough  devices,  tracking and postmarket  surveillance,
accredited third party review,  and the dissemination of off label  information.
The Company cannot predict how or when these changes will


                                       26

<PAGE>

be  implemented  or what effect the changes will have on the  regulation  of the
Company's products.

     Distribution  of the Company's  products  outside the United States is also
subject to  regulation,  which varies  widely from country to country.  The time
required to obtain needed regulatory clearance by particular foreign governments
may be longer or shorter than that  required for FDA  clearance or approval.  In
addition, the export by the Company of certain of its products that have not yet
been cleared or approved for domestic  distribution may be subject to FDA export
restrictions.  There can be no  assurance  that the  Company  will  receive on a
timely  basis,  if at all,  any  foreign  government  or  United  States  export
approvals necessary for the marketing of its products abroad.

     In January 1995, the Medical Device Directive ("MDD") was fully implemented
in the  European  Union,  which is intended to make  European  Union  regulatory
requirements  more  consistent.  Under  MDD,  the  Company  is subject to "prior
notice"  of intent to  conduct  clinical  studies in the  European  Union.  This
process, similar to the FDA IDE process,  requires regulatory documents and test
information to be submitted to the governmental  agency of each country in which
the Company intends to conduct clinical studies. In order to commence commercial
marketing of its products in the European Union, the Company is required to file
for a CE Mark approval.  In January 1998, the Company  received CE Mark approval
for the HTA System  from LRQA,  an  organization  that  certifies  the safety of
medical device  products and the quality  assurance  systems put in place by the
manufacturer of the medical device. There can be no assurance, however, that the
Company will be successful in obtaining CE Mark approval for any other  products
in a timely manner,  if at all, and any failure to receive or delay in receiving
such approval could have a material  adverse  effect on the Company's  business,
financial  condition and results of operations.  See "Risk Factors -- Government
Regulation."

Employees

     As of October 3, 1998, BEI Medical had 73 full-time employees, including 11
in research,  development  and  engineering,  24 in marketing  and sales,  27 in
operations  and 11 in  administration.  There  are no  unions  representing  the
Company's employees.  The Company believes that its relations with its employees
are good.

Risk Factors

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

     The Company has a limited  medical device  operating  history upon which an
evaluation of its prospects can be made.  Such  prospects  must be considered in
light of the risks, expenses and difficulties frequently encountered by entrants
into the medical device industry, which is characterized by an increasing number
of participants,  intense competition and a high failure rate. Historically, BEI
Medical has  incurred  significant  losses in its medical  device  business  and
expects losses to continue for at least the next several years. In addition, the
Company expects that it will continue to expend substantial resources in funding
clinical trials in support of regulatory and reimbursement approvals,  expansion
of marketing and sales activities and

                                       27

<PAGE>

research and development.  BEI Medical's future revenues will depend upon, among
other  factors,   its  ability  to  cost-effectively   commercialize  the  Hydro
ThermAblator  (HTA) and any other of the  Company's  new  products,  such as its
hysteroscopy system and its bipolar electrosurgical therapy system. There can be
no  assurance  that the HTA or such  other  new  products  will be  successfully
commercialized or that the Company will achieve significant revenues from either
international or domestic sales of such products.  In addition,  there can be no
assurance that the Company will achieve or sustain  profitability in the future.
In the event the Company is unable to achieve profitability or secure additional
sources of capital,  its ability to continue as a going  concern may be severely
impaired.  See "Management's  Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- New Products and Technologies."

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

Future Capital Needs

     The Company's capital  requirements  depend on numerous factors,  including
the  progress  of  the  Company's  clinical  research  and  product  development
programs, the timing and receipt of regulatory clearances and approvals, and the
resources the Company  devotes to  developing,  manufacturing  and marketing its
products.  The  Company's  capital  requirements  also  depend on the  resources
required to expand and develop a direct sales force in the United  States and to
expand  the  Company's  manufacturing  capacity,  and the  extent  to which  the
Company's  products gain market  acceptance and sales.  The timing and amount of
such  capital  requirements  cannot be  predicted  accurately.  The  Company  is
currently  seeking  additional  financing.  Consequently,  although  the Company
believes its existing  cash  balances  together  with  operating  revenues,  tax
refunds and anticipated  working capital financing will provide adequate funding
to meet the Company's liquidity  requirements for the next twelve months,  there
can be no  assurance  that  additional  financing  will be  available  on  terms
favorable  to the  Company,  or at all.  In the event the  Company  is unable to
generate  sufficient  cash flows from revenues or secure  additional  sources of
capital,  its ability to continue as a going  concern may be severely  impaired.
Any  additional  equity  financing  may be  dilutive  to  stockholders  and debt
financing,  if  available,  may  involve  restrictive  covenants  and/or also be
dilutive to stockholders. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."

Government Regulation

     The medical  devices to be  marketed  and  manufactured  by the Company are
subject to extensive  regulation by the FDA and, in some  instances,  by foreign
and state governments.  Pursuant to the Federal Food, Drug, and Cosmetic Act, as
amended (the "FDC Act"),  and the regulations  promulgated  thereunder,  the FDA
regulates the preclinical testing,  manufacture,  labeling,  sale, 


                                       28

<PAGE>

distribution,  and  promotion  of  medical  devices.  Before a new device can be
introduced  into the  market,  the  manufacturer  must obtain  market  clearance
through either the 510(k)  premarket  notification  process or the lengthier PMA
application process. Noncompliance with applicable requirements, including FDA's
QSR can result in, among other  things,  warning  letters,  fines,  injunctions,
civil penalties,  public notifications,  recall or seizure of products, total or
partial  suspension  of product  revenues,  failure of the  government  to grant
premarket  clearance or premarket approval for devices,  withdrawal of marketing
approvals,  and  criminal  prosecution.  The FDA has the  authority  to  require
repair,  replacement  or  refund  of the  cost  of any  device  manufactured  or
distributed by the Company.

     The  process of  complying  with FDA  regulations  with  respect to new and
existing  products can be costly and  time-consuming.  FDA  requirements for the
Company's HTA require obtaining FDA premarket  approval.  The first stage of the
PMA process is submission of an application for an IDE. The IDE permits clinical
evaluations  of  products  on  human  subjects  under  controlled   experimental
conditions  by  designated  qualified  medical  institutions.   The  Company  is
conducting  clinical  trials of the HTA  pursuant  to a phased IDE that has been
approved by the FDA. The Company completed a Phase I safety feasibility study of
the HTA in April 1996 and in June 1998  completed a Phase II  feasibility  study
limited to twenty  patients.  The  Company  has also  obtained  FDA  conditional
approval for Phase III trials and is currently  enrolling and treating patients.
The Company is required to conduct a  full-scale  Phase III safety and  efficacy
study to obtain data necessary to support the  submission of a PMA  application.
There can be no assurance  that any data  obtained from the Phase III study will
support the safety and effectiveness of the HTA.

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


                                       29

<PAGE>

its  labeling  or to its  manufacturing  process  that  affects  the  safety  or
effectiveness of the device.

     Until the Company  receives a PMA for the HTA,  the Company will be subject
to FDA-imposed limitations on the number of HTA procedures that may be performed
in the United  States,  as well as the number and location of clinical  sites at
which procedures may be performed.  As the Company approaches these limitations,
it will be required to apply to the FDA for approval of  additional  procedures,
but there can be no assurance  that such  approval  will be received on a timely
basis, if at all. Should it reach the limits  authorized by the FDA, the Company
would be unable to conduct  additional HTA procedures in the United States until
such time as a PMA is  approved,  if at all, or until such time as approval  for
additional clinical procedures is obtained. The timing of the PMA review process
is unpredictable,  and the failure to obtain the necessary  approval on a timely
basis would have a material adverse effect on the Company's business,  financial
condition and results of operations.

     The Company manufactures and markets a number of general  gynecological and
surgical   devices  for  which  510(k)   clearances  have  been  obtained.   Any
modifications   to  the  Company's   currently   marketed   devices  that  could
significantly  affect their safety or efficacy or that would  constitute a major
change to the intended use will require new 510(k) submissions.  There can be no
assurance that Company can obtain such 510(k) clearances in a timely fashion, or
at all.  Delays in  modifications  resulting from the  510(k)-clearance  process
could materially adversely effect the Company. In addition, the Company has made
modifications  to its 510(k)  cleared  devices that the Company  believes do not
require  new 510(k)  notices  based upon an FDA  guidance  document  intended to
assist  the  companies  in  performing  the  analysis  of  whether a new  510(k)
submission is required.  There can be no assurance,  however, that the FDA would
agree with any of the Company's determinations not to submit a new 510(k) notice
for any of the changes  made to the device.  If the FDA  requires the Company to
submit a new 510(k)  notice  for any device  modification,  the  Company  may be
prohibited from marketing the modified device until the 510(k) notice is cleared
by the FDA.

     In addition,  the Company manufactures and markets products,  including ZSI
gynecological  products and  Meditron  medical  devices,  the rights to which it
obtained through the acquisition of other medical device companies. There can be
no assurance that the acquired  companies were in compliance with applicable FDA
regulations  at the time they were  acquired and that any  noncompliance  on the
part of the acquired  companies would not have regulatory  consequences  for the
Company.  Noncompliance  on the  part of the  acquired  companies  could  have a
material  adverse  effect on the  Company's  business,  financial  condition and
results of operations.

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



                                       30

<PAGE>

     The Company distributes products  manufactured by third party vendors, such
as the  bipolar  electrosurgical  systems  provided  by  Valley  Forge  and  the
colposcope and cryosurgical systems provided by Gyne-Tech Instrument Corporation
("Gyne-Tech"),  where the regulatory  approval and compliance for these products
has  been  obtained  and is  controlled  by the  third  party  vendor.  Any  FDA
regulatory or compliance  actions against these companies could affect the third
party  vendor's   ability  to  supply  the  Company  or  require  the  Company's
participation  in product  recalls,  which in turn could have a material adverse
impact on the Company.

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

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

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

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

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

     Political, economic and regulatory influences are subjecting the healthcare
industry in the United States to  fundamental  change.  The Company  anticipates
that  Congress  and  state  legislatures  will  continue  to review  and  assess
alternative  healthcare  delivery  and payment  systems.  Legislative  debate is
expected to continue in the future,  and the Company  cannot predict what impact

                                       31

<PAGE>

the adoption of any federal or state healthcare reform measure or future private
sector reform may have on its business.

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

Risks Related to Possible Acquisitions

     The Company may seek to expand its operations  through future  acquisitions
of other  complementary  businesses or product lines.  There can be no assurance
that the Company will be able to identify or acquire additional  businesses,  or
to  successfully  integrate  and  profitably  manage  acquired  businesses.   In
addition, increased competition for acquisition candidates may develop, in which
event there may be fewer acquisition  opportunities  available to BEI Medical as
well as higher acquisition  prices.  Further,  acquisitions  involve a number of
special risks,  including  possible  adverse effects on the Company's  operating
results,  diversion of management's attention,  risks related to having adequate
corporate  and  financial  controls  and  procedures  to manage and  monitor the
Company's  operations as they expand, risks associated with unanticipated events
or liabilities and amortization of acquired  intangible  assets,  some or all of
which could have a material adverse effect on the Company's business,  financial
condition  and  results  of  operations,  particularly  in the  fiscal  quarters
immediately  following the consummation of such transactions.  There also can be
no assurance  that  businesses  acquired in the future will achieve  anticipated
revenues and earnings.  In addition,  margins may be negatively  impacted to the
extent  that  margins on  acquired  product  lines are lower than BEI  Medical's
average margins.  There can be no assurance that acquisitions can be consummated
on acceptable terms, that any acquired businesses can be integrated successfully
into the Company's  operations,  or that any such  acquisitions  will not have a
material  adverse

                                       32

<PAGE>

effect on BEI Medical's business, financial condition and results of operations.

Uncertainty of Market Acceptance

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

Scale-Up Risk

     In  order  to  commercialize  the  HTA   successfully,   BEI  Medical  must
manufacture or assemble the HTA by itself or through third parties in accordance
with FDA  requirements in commercial  quantities,  at high quality levels and at
commercially  reasonable  costs.  The Company has no experience in manufacturing
and  assembling  the  HTA in  commercial  quantities.  The  Company  has not yet
produced the HTA in commercial quantities at commercially  reasonable costs, and
there can be no assurance that it will be able to do so. As a result,  there can
be no assurance that BEI Medical will not encounter  difficulties  in scaling up
its manufacturing capabilities,  including problems involving production yields,
quality  control,  component  supply and  shortages of  qualified  manufacturing
personnel. Failure of the Company to produce the


                                       33

<PAGE>

HTA in  commercial  quantities  at  high  quality  levels  and  at  commercially
reasonable  prices  would  have a  material  adverse  effect  on  the  Company's
business, financial condition and results of operations.

Limited Direct Sales Experience

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

Risks Associated with International Sales

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



                                       34

<PAGE>

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

Reliance on Patents and Protection of Proprietary Technology

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

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

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



                                       35

<PAGE>

     The Company  also markets  products  that are  manufactured  by third party
vendors,  where the  regulatory  approval and  compliance for these products has
been obtained and is controlled  exclusively by the third party vendor.  Any FDA
regulatory or compliance  actions against these companies could affect the third
party  vendors'  ability  to supply  the  Company,  which in turn  could  have a
material adverse impact on the Company.

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

Uncertainty Relating to Third-Party Reimbursement and Healthcare Reform

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

     Market acceptance of the Company's products in international markets may be
dependent  in part upon the  availability  of  reimbursement  within  prevailing
healthcare  payment  systems.  Reimbursement  and healthcare  payment systems in
international markets vary significantly by country, and include both government
sponsored  and private  healthcare  insurance.  Although  BEI Medical  will seek
international  reimbursement approvals,  obtaining such approvals can


                                       36

<PAGE>

require  12 to 18 months or longer and there can be no  assurance  that any such
approvals  will be obtained  in a timely  manner,  that the Company  will obtain
sufficient  reimbursement,  or that the Company will obtain any reimbursement at
all. Failure to receive additional  international  reimbursement approvals could
have a material adverse effect on market acceptance of the Company's products in
the  international  markets in which the Company is seeking  approvals and could
have a material adverse effect on the Company's  business,  financial  condition
and results of operations. See "Business -- Sales and Marketing."

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

Competition; Uncertainty of Technology Change

     The medical device  industry is highly  competitive  and  characterized  by
constant  innovation and technological  change.  Many of the Company's  existing
competitors have significantly greater financial and manufacturing capabilities,
are more established,  have larger marketing and sales  organizations,  and have
larger  technical  staffs than the Company.  Such  companies are  developing and
marketing  devices  directly  competitive  with the  Company's  products for the
diagnosis and treatment of disorders  and  conditions of the cervix,  uterus and
other aspects of the reproductive system, as well as products used to facilitate
oncological procedures and perform pelvic reconstructive  surgery. The principal
competitors   for  the  Company's  core  gynecology   products   include  Circon
Corporation,  CooperSurgical,  Inc., a subsidiary of The Cooper Companies, Inc.,
Karl Storz GmbH,  Leisegang Medical,  Inc., a subsidiary of Galileo Corporation,
Olympus Corp., Utah Medical Products,  Inc., Wallach Surgical Devices, Inc., and
Richard  Wolf  Medical  Instruments  Corp.  The  principal  competitors  for the
Company's Hydro ThermAblator and the bipolar  electrosurgical therapy system for
fibroid treatment include FemRx,  Inc., a subsidiary of Ethicon,  Inc./Johnson &
Johnson;  Gynecare,  a  subsidiary  of Ethicon,  Inc./Johnson  & Johnson  (whose
ThermaChoice  balloon  has been  cleared by the FDA to be marketed in the United
States),  Valleylab,  Inc., a subsidiary of U.S. Surgical/Tyco (whose VestaBlate
has been cleared by the FDA to be marketed in the United  States),  and Wallsten
Medical SA. See "Business -- Competition."

     Other  large  healthcare  companies  may enter  the  market  for  minimally
invasive diagnostic and surgical gynecological products in the future. Competing
companies  may  succeed  in  developing   technologies  and  products  that  are
efficacious  or more cost  effective  than those  currently  offered or that the
Company may develop.  There can be no assurance  that these  companies  will not
succeed in developing technologies and products that are more effective than any
which have been or are being  developed  by BEI Medical or that would


                                       37

<PAGE>

render the Company's  technologies or products obsolete or not competitive.  The
Company also  competes with such other  companies for clinical  sites to conduct
trials.  Such competition  could have a material adverse effect on the Company's
business,  financial  condition and results of operations.  The Company  expects
competition  for devices and service to treat  excessive  menstrual  bleeding to
increase. See "Business -- Competition."

Product Liability Risk; Limited Insurance Coverage

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

Dependence on Key Employees

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

Dependence on Third Party Vendors

     The  Company  relies on third party  vendors  for  certain of the  contract
manufacturing  services and for certain of the components  used in the Company's
products.  Approximately  54.1% of BEI  Medical's  fiscal 1998 net revenues were
realized  from  products  produced  by  contract  manufacturers.   Two  contract
manufacturers  supply products that accounted for approximately 32.8% and 11.9%,
respectively,   of  the  Company's  net  revenues  for  the  1998  fiscal  year.
Additionally, a number of significant components, such as thermisters and heater
rods,  are  purchased  from  sole  source   suppliers.   For  certain   contract

                                       38

<PAGE>

manufactured  products and components  there are relative few sources of supply,
and  establishing  additional or  replacement  suppliers for such  components or
services cannot be accomplished quickly.  Although the Company tries to maintain
sufficient  quantities of inventory of such  components  to minimize  production
delays or  interruptions,  there can be no assurance  that the Company will find
suitable  alternatives  at  reasonable  prices,  if at  all,  or that  any  such
alternatives  will remain available to the Company.  The Company's  inability to
obtain acceptable contract  manufacturing services or suppliers of components in
a timely manner or find and maintain suitable replacement contract manufacturing
services or suppliers of components  would have a material adverse effect on the
Company's business, financial condition and results of operations, including its
ability to manufacture its products and supply its customers.

Year 2000

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

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

     IT Systems. The Company has completed a preliminary assessment of Year 2000
issues as they relate to the Company's IT systems.  This analysis  includes such
activities  as  order  taking,  billing,  purchasing/accounts  payable,  general
ledger/financial,  and inventory. Systems critical to the Company's business are
commercial packages available from third party vendors and currently in use with
little modification. According to information provided by the suppliers of these
products,  Year 2000 compliant versions of these systems are available.  In some
cases, the version of the software the Company is currently using is believed to
be compliant in all storage and calculation  functions but may have some screens
that  display a two-digit  year.  In other  cases,  the version of the  software
currently  in use is  believed  to be fully  Year  2000  compliant,  based  upon
representation  received from the vendors.  In still other cases, the version of
the software currently being operated by the Company is not Year 2000 compliant.
However, for software that is not Year 2000 compliant,  the Company has acquired
an updated  version of the software  that is believed to be Year 2000  compliant
based  upon  representations  from the  vendor.  The  Company  plans to use both
internal and external resources to test the versions of the software believed to
be Year 2000  compliant  and to complete  such testing by the middle of calendar
year 1999 and plans to implement  these  versions  before the end of fiscal year
1999.  The Year 2000  analysis  and  upgrading  of  existing  systems  are being
performed as a part of the Company's routine maintenance of computer systems and
are not anticipated to be material to the Company's financial results.

     External Agents. The Company is currently assessing the impact of Year 2000
readiness of External Agents with which the Company relies for critical products
and services. The Company is developing questionnaires and letters of inquiry to
be sent to the External  Agents to assist the Company in assessing the Year 2000
readiness  of its  External  Agents  and  evaluate  the  scope of the  Company's
exposure. The letter to be sent to each External Agent will be


                                       39

<PAGE>

tailored to the  significance  of the  contribution  each makes to the Company's
business.  The Company anticipates that the assessment phase of this part of the
project will be completed by early  calendar year 1999. To date,  the Company is
not aware of any  External  Agent with a Year 2000  issue that would  materially
impact the  Company's  results of  operations,  liquidity or capital  resources.
However,  the Company has no means of ensuring that External Agents will be Year
2000  ready.  The  inability  of  External  Agents to  complete  their Year 2000
resolution process in a timely fashion could materially impact the Company.  The
effect of non-compliance by External Agents is not determinable.

     Process  Control and  Instrumentation.  All other items with potential Year
2000 issues are currently being  inventoried  and evaluated.  These include such
items as telephone  systems,  security  systems,  HVAC,  copiers,  FAX machines,
production  equipment,  tools and other process systems. The Company anticipates
that the assessment phase of this part of the project will be completed by early
calendar  year 1999 and  anticipates  it will utilize both internal and external
resources to reprogram,  replace and test noncompliant  equipment.  Although the
Company is in the early phases of this portion of the Year 2000  project,  based
upon a preliminary  review the Company does not anticipate costs related to this
portion of the project to be material to the financial results of the Company.

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

     While the Company  currently  believes that it has an effective  program in
place to resolve the Year 2000 issues in a timely  manner,  as noted above,  the
Company has not yet completed all necessary phases of the Year 2000 project.  In
the event that the Company does not complete any additional  phases, the Company
would be  unable to  efficiently  take  customer  orders,  manufacture  and ship
products, invoice customers or collect payments. In addition, disruptions in the
economy  generally  resulting  from  Year  2000  issues  could  also  materially
adversely affect the Company.

     The Company currently has no contingency plan in place in the event it does
not successfully complete all phases of its Year 2000 project. The Company plans
to evaluate the status of completion  in early  calendar year 1999 and determine
whether such a plan is necessary.

Control by Existing Stockholders and Management

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

Limitation on New Equity

     The   Company   completed   the   spin-off   of  BEI   Technologies,   Inc.
("Technologies")  at the end of fiscal year end September 1997. Shortly prior to
the transaction, on August 5, 1997, President Clinton signed the Taxpayer Relief
Act of 1997 (the  "Act"),  which would deny  tax-free  treatment to any spin-off
that is "part of a plan (or series of related  transactions)  pursuant


                                       40

<PAGE>

to which one or more persons  acquire  directly or  indirectly" a 50% or greater
(measured  by  vote  or  value)  equity  interest  in  either  the  distribution
corporation of the spun-off corporation.  Under the Act, transactions  occurring
within the period beginning two years before the date of distribution and ending
two years after the  distribution  generally  would be presumed to have occurred
pursuant to a plan.

     In response to the new law, and in conjunction  with tax counsel's  opinion
regarding the tax-free nature of the spin-off of Technologies, the management of
the Company represented to tax counsel that it had no plan or intention to issue
shares  after  the  transaction  in an amount  such that 50% of the  outstanding
shares of the Company (measured by vote or value) after such issuance would have
been issued during the four-year period beginning two years prior to the date of
the spin-off.

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

     The Company's Board of Directors has the authority to issue up to 2,000,000
shares of Preferred  Stock and to determine the price,  rights,  preferences and
privileges  of those shares  without any further vote or action by the Company's
stockholders.  The rights of holders of Common Stock will be subject to, and may
be adversely  affected by, the rights of the holders of any Preferred Stock that
may be issued in the future. While the Company has no present intention to issue
shares of Preferred Stock, such issuance,  while providing desirable flexibility
in connection with possible  acquisitions  and other corporate  purposes,  could
have the  effect of  making it more  difficult  for a third  party to  acquire a
majority of the  outstanding  voting  stock of the  Company.  In  addition,  the
Company  is  subject  to the  anti-takeover  provisions  of  Section  203 of the
Delaware  General  Corporation  Law  (the  "Delaware  Law"),  and the  Company's
Certificate  of  Incorporation  contains a fair price  provision,  the  combined
effect of which prohibits the Company from engaging in a "business  combination"
with an "interested  stockholder"  for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
business  combination  is approved in a prescribed  manner.  The  application of
Section  203 and the fair price  provision  could have the effect of delaying or
preventing  a change of control of the Company.  The  Company's  Certificate  of
Incorporation  provides  for  staggered  terms for the  members  of the Board of
Directors.  The staggered Board of Directors and certain other provisions of the
Company's  Certificate  of  Incorporation  and  Bylaws  may have the  effect  of
delaying or preventing  changes in control or  management of the Company,  which
could  adversely  affect  the  market  price  of  the  Company's  Common  Stock.
Furthermore,  the Board of  Directors  of the Company has adopted a  Stockholder
Rights Plan that has certain anti-takeover effects. Rights issued under the plan
will cause  substantial  dilution to a person or group that  attempts to acquire
the Company on terms not approved by the Company's Board of Directors.

Forward-Looking Statements

     The  statements  contained  in this Form 10-K  Annual  Report  that are not
historical fact are "forward-looking statements" (as such term is defined in the
Private  Securities  Litigation Reform Act of 1995),  which can be identified by
the use of  forward-looking  terminology such as "believes,"  "expects,"  "may,"
"will,"  "should,"  "would," or  "anticipates"  or the negative thereof or


                                       41

<PAGE>

other  variations  thereon  or  comparable  terminology,  or by  discussions  of
strategy that involve risks and uncertainties.  Management wishes to caution the
reader that these forward-looking  statements contained in this Form 10-K Annual
Report regarding matters that are not historical facts are only predictions. The
Company's  future  results of operations  and other forward  looking  statements
contained  in  the  Form  10-K  Annual  Report,  in  particular  the  statements
concerning revenues, pricing, new products development, future capital needs and
Year 2000 issues, involve a number of risks and uncertainties. No assurances can
be given that the future results indicated,  whether expressed or implied,  will
be achieved.  Forward-looking statements are based upon a variety of assumptions
relating to the business of the Company,  which,  although considered reasonable
by the  Company,  may not be  realized.  Because  of the number and range of the
assumptions underlying the Company's forward-looking  statements,  many of which
are subject to significant  uncertainties and contingencies  that are beyond the
reasonable control of the Company,  some of the assumptions  inevitably will not
materialize and  unanticipated  events and circumstances may occur subsequent to
the date of this Form 10-K Annual Report. These  forward-looking  statements are
based on current  expectations,  and the Company assumes no obligation to update
this  information.  Therefore,  the actual experience of the Company and results
achieved during the period covered by any particular  forward-looking statements
may differ  substantially from those predicted.  Consequently,  the inclusion of
forward-looking  statements  should not be regarded as a  representation  by the
Company or any other person that these  estimates  will be realized,  and actual
results  may  vary  materially.  There  can be no  assurance  that  any of these
expectations  will be  realized  or that any of the  forward-looking  statements
contained herein will prove to be accurate.




                                       42

<PAGE>

Executive Officers and Directors of the Company

     The  directors,  executive  officers  and key  employees of the Company and
their ages and titles as of December 10, 1998 are as follows:

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

Charles Crocker             59       Chairman of the Board of Directors

Herbert H. Spoon            54       President and Chief Executive Officer

Samuel Dickstein            58       Vice President, New Business
                                     Development and Technology

Thomas W. Fry               54       Vice President, Finance and
                                     Administration, Secretary and Treasurer

Dr. Ralph M. Richart(1)     64       Director

Richard W. Turner           52       Director

Dr. Lawrence A. Wan(2)      60       Director

Gary D. Wrench(1)(2)        65       Director

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

(2) Member of the Compensation Committee

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

     Mr. Herbert H. Spoon has served as President and Chief Executive Officer of
the Company  since  April 1998.  Prior to joining  the  Company,  Mr.  Spoon was
President and Chief Executive  Officer of LifeQuest  Medical,  Inc., a designer,
developer, manufacturer and distributor of disposable and reusable gynecological
and  general  surgical  devices.  Mr.  Spoon  also  served as the  President  of
Gynopharma,  Inc., from 1987 to 1991, a company  specializing in the development
and distribution of gynecological pharmaceuticals, devices and diagnostics which
was acquired by Johnson & Johnson.  He also served as Vice President and General
Manager of Lederle Laboratories,  the U. S. pharmaceutical  division of American
Cyanamid.  Prior to that, Mr. Spoon had 15 years of experience with  Ciba-Geigy,
including senior management positions. Mr. Spoon holds a B.S. degree from Howard
Payne University.

     Mr. Samuel Dickstein served as Vice President, New Business Development and
Technology of BEI Medical Systems Company,  Inc. from June 1997 until the


                                       43

<PAGE>

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

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

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

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

     Dr. Lawrence A. Wan has been a director of the Company since November 1997.
He served as Vice President and Chief Technical Officer of Electronics from July
1990 to September  1997,  and is currently  Vice  President and Chief  Technical
Officer  of  Technologies,   and  President  of  SiTek,   Inc.,  a  Technologies
subsidiary.  From 1984 until 1990, he served as Vice President,


                                       44

<PAGE>

Engineering,  of  Systron  Donner  Corporation,  and  also  held  various  other
technical and general  management  positions with that company  between 1979 and
1984.  From 1968 through  1979,  he was founder and Chief  Executive  Officer of
Sycom,  Inc., a commercial  electronics  company.  Prior to that,  he worked for
Hughes Aircraft  Company where he headed the Radar Systems Section of the Hughes
Ground Systems Group. In 1962, Dr. Wan and two other  professors  established an
Engineering School at the University of California, Santa Barbara, where he also
taught  Engineering.  Dr. Wan holds B.S., M.S. and Ph.D.  degrees in Engineering
and Applied Sciences from Yale University.

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

Staggered Board of Directors

     The Company has a staggered  Board of Directors,  which may have the effect
of deterring  hostile  takeovers or delaying changes in control or management of
the Company.  For purposes of  determining  their term of office,  directors are
divided into three classes, with the term of office of the first class to expire
at the 2001  annual  meeting of  stockholders,  the term of office of the second
class to expire  at the 1999  annual  meeting  of  stockholders  and the term of
office of the third class to expire at the 2000 annual meeting of stockholders.

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

Board Committees

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




                                       45

<PAGE>

ITEM 2. PROPERTIES

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

     Location                  Description of Facility
     --------                  -----------------------

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

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

     The lease agreement for the Teterboro facility expires on June 8, 2004, and
the Company has the option to extend the term of this lease for five  additional
years.  The monthly base rent through  February 2000 is  approximately  $21,445,
plus the Company's pro rata share of maintenance  expenses and real estate taxes
with  immaterial  increases  thereafter  through the end of the lease term.  The
lease agreement for the Chatsworth facility expires on May 31, 1999. The monthly
base rent is approximately  $4,225, plus the Company's pro rata share of certain
operating expenses and real estate taxes.

     Management  believes that the current  facilities are adequate and suitable
for the current operations of the Company.

ITEM 3. LEGAL PROCEEDINGS

     In  July  1998,  the  Company  settled  a  lawsuit  commenced  in  1993  by
CooperSurgical,  Inc., a subsidiary of The Cooper Companies  ("CooperSurgical"),
for  unspecified  damages  alleging  unfair  competition  due to  actions by the
Company and its then president  Richard Turner,  a former employee of The Cooper
Companies, and others.

     In July 1998, the parties signed a final settlement  agreement  whereby the
Company paid $300,000 in cash, net of insurance reimbursement, and agreed to pay
up to $100,000 in royalties on future product revenues.

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

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

     None.

                                       46

<PAGE>

                                     PART II

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

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

     On September 27, 1997,  having  transferred all of its  non-medical  device
businesses  to  Technologies  in exchange for all of  Technologies'  outstanding
common  stock,  Electronics  distributed  that  stock to its  stockholders  in a
tax-free  spin-off  of  Technologies  (the  "Distribution").  As a result of the
spin-off  of   Technologies,   whose  business   represented   the  majority  of
Electronic's  assets and  revenues,  the  market  price of the  Company's  stock
adjusted to account  for the  Distribution.  On  November  4, 1997,  Electronics
merged with its subsidiary,  BEI Medical Systems Company,  Inc., and changed its
name to BEI Medical  Systems  Company,  Inc. The closing  price of the Company's
common stock was $1.875 on December 10, 1998.

     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.

<TABLE>
<CAPTION>
    1998 Fiscal Year                                                                  Cash Dividend
       (ended 10/03/98)                                  High              Low           Declared

<S>                                                     <C>               <C>             <C>  
    Fourth Quarter                                      $4.25             $1.06           $0.00

    Third Quarter                                       $5.50             $3.13           $0.00

    Second Quarter                                      $4.88             $3.69           $0.00

    First Quarter 
       (from October 9, 1997)                           $4.38             $3.50           $0.00

<CAPTION>
    1997 Fiscal Year                                                                  Cash Dividend
       (ended 9/27/97)                                  High              Low           Declared

<S>                                                    <C>               <C>              <C>  
    Fourth Quarter                                     $14.50            $10.38           $0.02

    Third Quarter                                      $11.00             $8.00           $0.02

    Second Quarter                                     $12.38            $10.38           $0.02

    First Quarter                                      $11.25             $9.25           $0.02
    -----------------------------------------------------------------------------------------------
</TABLE>

     As of December 10, 1998, there were  approximately  1,100 holders of record
of the  Company's  common  stock.  There are no  restrictions  on the  Company's
ability to pay dividends; however, it is currently the intention of the Board

                                       47

<PAGE>

of Directors to retain any and all  earnings for use in the  Company's  business
and the Company does not  anticipate  paying cash  dividends in the  foreseeable
future.  Any future  determination  as to the payment of dividends  will depend,
among other factors, upon the earnings, capital requirements,  operating results
and financial condition of the Company.  The Board of Directors has not declared
and the Company did not pay dividends in fiscal 1998. Prior to the Distribution,
the Board of Directors declared and the Company paid quarterly cash dividends of
$.02 per share of common stock in each quarter of fiscal 1997.






                                       48

<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

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

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

<TABLE>
<CAPTION>
(in thousands, except per share amounts)
-----------------------------------------------------------------------------------------------------------------------------
                                                                           Year Ended
                                                   --------------------------------------------------------------------------
                                                   October 3,      September       September      September        October 1,
                                                     1998          28, 1997        27, 1996       30, 1995          1994
-----------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>             <C>             <C>             <C>             <C>   
Statement of Operations Data:
Revenue                                           $   9,651       $  10,005       $   9,357       $   8,847       $   8,678
Loss from continuing operations                      (4,971)         (4,348)         (2,682)         (2,350)         (2,458)
Income (loss) from discontinued operations               --           4,583           4,571          (2,041)            714

Net income (loss)                                    (4,971)            235           1,889          (4,391)         (1,744)
Loss from continuing operations per common
     share, basic and diluted                     ($   0.68)      ($   0.64)      ($   0.40)      ($   0.36)      ($   0.38)
Earnings (loss) from discontinued
     operations per common share, basic and
     diluted                                             --            0.67            0.68           (0.30)           0.11
Earnings (loss) per common share, basic and
     diluted                                      ($   0.68)      $    0.03       $    0.28       ($   0.66)      ($   0.27)
Cash dividends per common share                          --       $    0.08       $    0.08       $    0.08       $    0.08
Weighted average shares outstanding                   7,354           6,817           6,737           6,617           6,541

Balance Sheet Data:
Cash and cash equivalents                         $   3,504       $   9,271       $   9,128       $   9,023       $   1,103
Working capital (1)                                   8,284          11,085          38,102          35,923          40,189
Total assets (1)                                     17,388          22,584         115,011         113,738         112,432
Long-term debt (excluding current
     portion)                                            --              22             212             392             560
Stockholders' equity (1)                             14,440          17,660          55,972          53,319          57,829
</TABLE>

(1)  Amounts for working capital,  total assets and stockholders' equity include
     discontinued operations for fiscal years 1996, 1995 and 1994.

                                       49

<PAGE>

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

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

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

<TABLE>
<CAPTION>
                                                                            Year Ended
                                                            -------------------------------------------------
                                                             1998                1997               1996
-------------------------------------------------------------------------------------------------------------
<S>                                                         <C>                  <C>                <C>   
Revenue                                                     100.0%               100.0%             100.0%
Cost of sales                                                58.4                 59.7               61.9
-------------------------------------------------------------------------------------------------------------
Gross profit                                                 41.6                 40.3               38.1
Operating expenses:
Selling, general and administrative expenses                 90.0                 78.8               69.6
Research, development and related expenses                   29.7                 18.6               14.2
-------------------------------------------------------------------------------------------------------------
Loss from operations                                        (78.1)               (57.1)             (45.7)
Other income                                                  3.2                  1.3                3.5
Interest expense                                             (0.2)                (0.7)              (1.2)
-------------------------------------------------------------------------------------------------------------
Loss before income taxes                                    (75.1)               (56.5)             (43.4)
Income taxes (benefit)                                      (23.6)               (13.0)             (14.8)
Loss from continuing operations                             (51.5)               (43.5)             (28.6)
Income  from discontinued operations                           --                 45.8               48.8
-------------------------------------------------------------------------------------------------------------
Net income (loss)                                           (51.5)%                2.3%              20.2%
=============================================================================================================
</TABLE>

                                       50

<PAGE>

Revenue

Fiscal years 1998, 1997 and 1996

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

     The Company's  revenues  increased  6.9% to $10,005,000 in fiscal year 1997
from $9,357,000 in fiscal year 1996. Revenues from gynecology products in fiscal
year 1997 increased 3.2% compared to fiscal year 1996 due to higher shipments of
disposable  catheters  and reusable  instruments.  Additionally,  OEM  shipments
increased to  $1,710,000  in fiscal year 1997  compared to  $1,360,000 in fiscal
year 1996 reflecting  shipments of special orders for minimally invasive surgery
equipment in fiscal year 1997 and increased  shipments of disposable  catheters.
Sales of the  Hydro  ThermAblator  for  endometrial  ablation  also  contributed
$196,000 in revenue in fiscal year 1997 following  introduction of the system in
certain international markets in that year. Partially offsetting the above was a
decline in revenue from  orthopedic  products  following the sale of the product
line in fiscal year 1996.

     The Company's  revenues from  international  customers  were  approximately
15.5%,  14.3% and 13.8% of the Company's revenue for fiscal years 1998, 1997 and
1996,   respectively.   International  revenues  can  vary  significantly  as  a
percentage of revenues depending on the timing of shipments and size of orders.

Cost of Sales and Gross Profit

     Cost of sales as a  percentage  of revenue  was  58.4%,  59.7% and 61.9% in
fiscal years 1998, 1997 and 1996, respectively.

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

     The  decrease  in cost of sales as a  percentage  of revenue in fiscal year
1997 from fiscal year 1996 resulted primarily from improved overhead  absorption
resulting from higher sales volume plus reduced overhead spending resulting from
lower personnel costs.

                                       51

<PAGE>

Selling, General and Administrative Expenses

     Selling,  general and  administrative  expenses as a percentage  of revenue
were 90.0%, 78.8% and 69.6% in fiscal years 1998, 1997 and 1996, respectively.

     Selling,  general and administrative  expenses increased from $7,883,000 in
fiscal year 1997 to $8,688,000 in fiscal year 1998. The higher expenses reflect:
a $531,000  write-down of intangible  assets to realizable value associated with
the sale of the Company's GyneSys and HysteroSys product lines to Ethicon, Inc.;
relocation and plant shutdown expenses of $329,000 associated with the Company's
facilities consolidation; increased selling expenses of $354,000 associated with
the  development  of the  Company's  field  sales  force  of  independent  sales
representatives;  and higher legal and administrative  expenses  associated with
the Company's efforts to obtain additional  financing.  The increase in expenses
was partially offset by a benefit of $701,000,  net of settlement,  representing
the  reversal  of  previously  expensed  legal fees  incurred  in the  completed
litigation  with  CooperSurgical,  Inc.,  which  fees  were  reimbursed  by  the
Company's insurance carrier.

     Fiscal year 1997 selling,  general and administrative expenses increased by
$1,366,000  from  $6,517,000  in fiscal year 1996 to  $7,883,000  in fiscal year
1997. The higher  expenses  resulted from increased  selling expense of $698,000
due to expansion of the domestic sales force,  higher  marketing and promotional
expenses,  and the launch of the Hydro  ThermAblator in  international  markets.
Fiscal year 1997 expenses also included  higher  administrative  and legal costs
primarily   associated  with  the  Distribution  of  the  common  stock  of  BEI
Technologies to the shareholders of BEI Electronics and other legal matters. See
Note 1 of Notes to Consolidated Financial Statements.

Research, Development and Related Expenses

     The Company's internally funded research,  development and related expenses
as a percentage  of revenue  were 29.7%,  18.6% and 14.2% for fiscal years 1998,
1997 and 1996, respectively.

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

     Research and development expenses in fiscal year 1997 increased from fiscal
year 1996 primarily because of increased spending for the development of the HTA
and other new products and the Phase II clinical trials of the HTA.

     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 continue to increase in absolute amount,  but may fluctuate as a percentage
of revenue.

Interest Expense and Other Income

     Interest  expense as a  percentage  of revenue  decreased to 0.2% in fiscal
year 1998 from 0.7% in fiscal  year 1997 and  decreased  to 0.7% in fiscal  year
1997  from 1.2% in fiscal  year 1996 as  existing  debt was paid down and no new
debt incurred.

                                       52

<PAGE>

     Other income in fiscal years 1998, 1997, and 1996 was comprised of interest
income  earned on highly  liquid  investments.  Other income in fiscal year 1998
increased  as a  percentage  of  revenue  to 3.2% from 1.3% in fiscal  year 1997
reflecting  the larger  average cash balance over the course of fiscal year 1998
compared to fiscal year 1997.

Income Tax Benefit

     The  Company's  effective  tax rate from  operations  was 31.4%,  23.0% and
34.0%, for fiscal years 1998, 1997 and 1996, respectively.  The fiscal year 1998
and fiscal year 1997 tax rate vary from the statutory federal income tax rate as
a  result  of  an  increase  in  the  valuation  allowance  due  to  substantial
uncertainties regarding the realizability of certain deferred tax assets and the
Company's ability to benefit from the amortization of goodwill.

     In fiscal year 1998, an income tax benefit of  $2,279,000  was derived from
the  carryback of losses  incurred in fiscal year 1998 against taxes paid on the
earnings of  discontinued  operations  in fiscal year 1996 and fiscal year 1997.
The amount of the  carryback  available  to the  Company is limited to the taxes
paid on the  earnings of the previous two fiscal years and, in fiscal year 1999,
any carryback will be limited to approximately $300,000 remaining.

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

Discontinued Operations

     Net income for business segments now operated by BEI Technologies, Inc. was
$4.6 million in each of fiscal years 1997 and 1996, respectively.

Liquidity and Capital Resources

     The Company's capital  requirements  depend on numerous factors,  including
the  progress  of  the  Company's  clinical  research  and  product  development
programs, the timing and receipt of regulatory clearances and approvals, and the
resources the Company  devotes to  developing,  manufacturing  and marketing its
products.  The  Company's  capital  requirements  also  depend on the  resources
required to expand and develop a direct sales force in the United  States and to
expand  the  Company's  manufacturing  capacity,  and the  extent  to which  the
Company's  products gain market  acceptance and sales.  The timing and amount of
such  capital  requirements  cannot be  predicted  accurately.  The  Company  is
currently  seeking  additional  financing.  Consequently,  although  the Company
believes its existing  cash  balances  together  with  operating  revenues,  tax
refunds and anticipated  working capital financing will provide adequate funding
to meet the Company's liquidity  requirements for the next twelve

                                       53

<PAGE>

months, there can be no assurance that additional financing will be available on
terms favorable to the Company, or at all. In the event the Company is unable to
generate  sufficient  cash flows from revenues or secure  additional  sources of
capital,  its ability to continue as a going  concern may be severely  impaired.
Any  additional  equity  financing  may be  dilutive  to  stockholders  and debt
financing,  if  available,  may involve  restrictive  covenants,  and/or also be
dilutive to stockholders.

     During fiscal 1998, operating activities of continuing  operations utilized
$6,172,000 in cash. The loss from operations of $4,971,000,  plus an increase in
refundable  income  taxes of  $2,374,000,  inventory  purchases  of $423,000 and
decreases  in  accounts  payable,  accrued  expenses  and other  liabilities  of
$172,000,  were  partially  offset by  non-cash  charges  for  depreciation  and
amortization of $311,000 and $1,115,000, respectively, and a loss on the sale of
assets of $545,000.

     Investing  activities,  which  generated  $579,000  in cash,  consisted  of
$975,000  from the sale of a  product  line  offset  by  purchases  of plant and
equipment of $372,000 and purchases of patents and licenses of $24,000.

     Cash used in  financing  activities  consisted  primarily  of  $191,000  in
principal  payments on long-term  debt and other  liabilities  and proceeds from
$17,000 for options exercised.

     The  Company  had no material  capital or other  commitments  at October 3,
1998.

Year 2000

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

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

     IT Systems. The Company has completed a preliminary assessment of Year 2000
issues as they relate to the Company's IT systems.  This analysis  includes such
activities  as  order  taking,  billing,  purchasing/accounts  payable,  general
ledger/financial,  and inventory. Systems critical to the Company's business are
commercial packages available from third party vendors and currently in use with
little modification. According to information provided by the suppliers of these
products,  Year 2000 compliant versions of these systems are available.  In some
cases, the version of the software the Company is currently using is believed to
be compliant in all storage and calculation  functions but may have some screens
that  display a two-digit  year.  In other  cases,  the version of the  software
currently  in use is  believed  to be fully  Year  2000  compliant,  based  upon
representation  received from the vendors.  In still other cases, the version of
the software currently being operated by the Company is

                                       54

<PAGE>

not Year 2000 compliant.  However, for software that is not Year 2000 compliant,
the Company has acquired an updated  version of the software that is believed to
be Year 2000 compliant based upon  representations  from the vendor. The Company
plans to use both  internal and  external  resources to test the versions of the
software  believed to be Year 2000 compliant and to complete such testing by the
middle of calendar year 1999 and plans to implement  these  versions  before the
end of fiscal  year 1999.  The Year 2000  analysis  and  upgrading  of  existing
systems are being  performed as a part of the Company's  routine  maintenance of
computer  systems  and are  not  anticipated  to be  material  to the  Company's
financial results.

     External Agents. The Company is currently assessing the impact of Year 2000
readiness of External Agents with which the Company relies for critical products
and services. The Company is developing questionnaires and letters of inquiry to
be sent to the External  Agents to assist the Company in assessing the Year 2000
readiness  of its  External  Agents  and  evaluate  the  scope of the  Company's
exposure.  The letter to be sent to each External  Agent will be tailored to the
significance  of the  contribution  each makes to the  Company's  business.  The
Company  anticipates  that the assessment phase of this part of the project will
be completed by early  calendar year 1999. To date,  the Company is not aware of
any  External  Agent with a Year 2000 issue  that  would  materially  impact the
Company's results of operations,  liquidity or capital resources.  However,  the
Company has no means of ensuring that  External  Agents will be Year 2000 ready.
The inability of External Agents to complete their Year 2000 resolution  process
in a  timely  fashion  could  materially  impact  the  Company.  The  effect  of
non-compliance by External Agents is not determinable.

     Process  Control and  Instrumentation.  All other items with potential Year
2000 issues are currently being  inventoried  and evaluated.  These include such
items as telephone  systems,  security  systems,  HVAC,  copiers,  FAX machines,
production  equipment,  tools and other process systems. The Company anticipates
that the assessment phase of this part of the project will be completed by early
calendar  year 1999 and  anticipates  it will utilize both internal and external
resources to reprogram,  replace and test noncompliant  equipment.  Although the
Company is in the early phases of this portion of the Year 2000  project,  based
upon a preliminary  review the Company does not anticipate costs related to this
portion of the project to be material to the financial results of the Company.

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

     While the Company  currently  believes that it has an effective  program in
place to resolve the Year 2000 issues in a timely  manner,  as noted above,  the
Company has not yet completed all necessary phases of the Year 2000 project.  In
the event that the Company does not complete any additional  phases, the Company
would be  unable to  efficiently  take  customer  orders,  manufacture  and ship
products, invoice customers or collect payments. In addition, disruptions in the
economy  generally  resulting  from  Year  2000  issues  could  also  materially
adversely affect the Company.

                                       55

<PAGE>

     The Company currently has no contingency plan in place in the event it does
not successfully complete all phases of its Year 2000 project. The Company plans
to evaluate the status of completion  in early  calendar year 1999 and determine
whether such a plan is necessary.

Recent Accounting Pronouncements

     In June 1997, the Financial Accounting Standards Board issued Statement No.
130  "Reporting  Comprehensive  Income,"  ("FAS  130"),  and  Statement  No. 131
"Disclosure  about  Segments of an  Enterprise  and Related  Information"  ("FAS
131").  The Company is required to adopt these  statements  in fiscal year 1999.
FAS 130  establishes  new standards for reporting and  displaying  comprehensive
income and its components.  FAS 131 requires  disclosure of certain  information
regarding  operating  segments,  products  and  services,  geographic  areas  of
operation and major customers.  Adoption of these Statements is expected to have
no  impact  on  the  Company's  consolidated  financial  position,   results  of
operations or cash flows.

     In June 1998, the Financial Accounting Standards Board issued Statement No.
133,  "Accounting for Derivative  Instruments and Hedging  Activities"  which is
required  to be adopted in years  beginning  after June 15,  1999.  Because  the
Company does not enter into  financial  instruments  for trading or  speculative
purposes  and does  not  currently  utilize  derivative  financial  instruments,
management  does not anticipate that the adoption of the new Statement will have
any  effect on the  Company's  consolidated  financial  position  or  results of
operations.

Effects of Inflation

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








                                       56

<PAGE>

ITEM 7a. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

     The  Company  does not enter  into  financial  instruments  for  trading or
speculative  purposes  and  does  not  currently  utilize  derivative  financial
instruments. The operations of the Company are conducted primarily in the United
States and, as such, are not subject to material foreign currency  exchange rate
risk and outstanding debt which is not material,  is at fixed rates of interest.
The Company believes its market risk exposures are not material.






                                       57

<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

--------------------------------------------------------------------------------
(dollars in thousands except share amounts)          October 3,    September 27,
                                                        1998           1997
--------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents                              $3,504         $9,271
Trade receivables, less allowance for doubtful
     accounts (1998--$174; 1997--$112)                  1,897          1,958
Inventories--Note 4                                     3,087          2,939
Refundable income taxes                                 2,384             10
Other current assets                                      186            286
Deferred income taxes--Note 8                             174             --
--------------------------------------------------------------------------------
Total current assets                                   11,232         14,464

Plant and equipment
Equipment                                               1,569          1,461
Leasehold improvements                                     31            130
--------------------------------------------------------------------------------
                                                        1,600          1,591
Less allowances for depreciation and amortization         780            780
--------------------------------------------------------------------------------
Net plant and equipment                                   820            811

Other assets
Tradenames, patents and related assets, less 
    amortization (1998--$4,560; 1997--$4,142)           1,846          3,708
Goodwill, less amortization (1998--$1,457;
    1997--$1,215)                                       3,353          3,595
Other                                                     137              6
--------------------------------------------------------------------------------
Total other assets                                      5,336          7,309
--------------------------------------------------------------------------------
Total assets                                          $17,388        $22,584
================================================================================
See notes to consolidated financial statements.

                                       58

<PAGE>

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

--------------------------------------------------------------------------------
(dollars in thousands except share amounts)            October 3,  September 27,
                                                          1998         1997
--------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Trade accounts payable                                    $1,551        $346
Accrued expenses and other liabilities -- Note 6           1,376       2,785
Current portion of long-term debt--Note 7                     21         190
Deferred income taxes                                         --          58
--------------------------------------------------------------------------------
Total current liabilities                                  2,948       3,379

Long-term debt, less current portion -- Note 7                --          22
Minority interest in consolidated subsidiary -- Note 1        --       1,523
Commitments and contingencies -- Notes 12 and 13              --          --

Stockholders' equity -- Notes 2, 9 and 10
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; 1998--7,778,296 shares;
     1997--7,114,513 shares)                                  10          10
Additional paid-in capital                                16,291      14,204
Retained earnings (deficit)                               (1,525)      3,446
--------------------------------------------------------------------------------
                                                          14,776      17,660
Less:  Unearned restricted stock and other -- Note 10       (336)         --
--------------------------------------------------------------------------------
Total stockholders' equity                                14,440      17,660
--------------------------------------------------------------------------------
Total liabilities and stockholders' equity               $17,388     $22,584
================================================================================
See notes to consolidated financial statements.

                                       59

<PAGE>

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

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                                                                   Year Ended
-------------------------------------------------------------------------------------------------------------------
                                                                  October 3,      September 27,      September 28,
(dollars in thousands except share and per share amounts)            1998              1997              1996
-------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>               <C>               <C>   
Revenue                                                             $9,651            $10,005           $9,357
Cost of sales                                                        5,638              5,972            5,792
-------------------------------------------------------------------------------------------------------------------
Gross profit                                                         4,013              4,033            3,565

Selling, general and administrative expenses                         8,688              7,883            6,517
Research, development and related expenses                           2,866              1,864            1,328
-------------------------------------------------------------------------------------------------------------------
                                                                    11,554              9,747            7,845
-------------------------------------------------------------------------------------------------------------------
Loss from operations                                                (7,541)            (5,714)          (4,280)

Other income                                                           312                136              324
Interest expense                                                       (21)               (70)            (110)
-------------------------------------------------------------------------------------------------------------------
Loss before income taxes                                            (7,250)            (5,648)          (4,066)
Income tax benefit -- Note 8                                        (2,279)            (1,300)          (1,384)
-------------------------------------------------------------------------------------------------------------------
Loss from continuing operations                                     (4,971)            (4,348)          (2,682)
Income (loss) from discontinued operations, net of
income taxes of $1,788 and $1,412, for 1997 and 1996,
respectively                                                            --              4,583            4,571
-------------------------------------------------------------------------------------------------------------------
Net income (loss)                                                  ($4,971)              $235           $1,889
===================================================================================================================

Loss from continuing operations per common share, basic
     and diluted                                                    ($0.68)            ($0.64)          ($0.40)
Earnings (loss) from discontinued operations  per
     common share, basic and diluted                                    --               0.67             0.68
-------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share, basic and diluted --
     Note 2                                                         ($0.68)             $0.03            $0.28
-------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding -- Note 2                     7,354,416         6,816,702        6,737,399
-------------------------------------------------------------------------------------------------------------------
Dividends per common share -- Note 2                                    --              $0.08            $0.08
===================================================================================================================
</TABLE>
See notes to consolidated financial statements.

                                       60

<PAGE>

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

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
                                                                                     Year Ended
--------------------------------------------------------------------------------------------------------------------
                                                                     October 3,    September 27,       September 28,
(dollars in thousands)                                                  1998           1997                1996
--------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>             <C>                <C>     
Cash flows from operating activities:
Loss from continuing operations                                       ($4,971)        ($4,348)           ($2,682)
Adjustments to reconcile net loss to net cash  used in
     operating activities:
Depreciation                                                              311             269                217
Amortization                                                            1,115           1,356              1,530
Provision for losses on trade receivables                                  62              57                 39
Loss on sale of assets                                                    545              --                 --
Deferred income taxes                                                    (233)           (261)               (26)
Changes in operating assets and liabilities, net of acquisitions and
     dispositions:
Trade receivables                                                          (1)           (302)              (187)
Inventories                                                              (423)           (854)              (267)
Refundable income taxes                                                (2,374)             --                 --
Other assets                                                              (31)           (142)               192
Trade accounts payable, accrued expenses and other
     liabilities                                                         (172)            164             (3,955)
--------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities of continuing
     operations                                                        (6,172)         (4,061)            (5,139)
--------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of plant and equipment                                         (372)           (263)              (316)
Purchases of patents and licenses                                         (24)           (186)              (136)
Proceeds from sale of assets                                              975              --                 --
Other                                                                      --              18               (297)
--------------------------------------------------------------------------------------------------------------------
Net cash provided by (used  in) investing activities of
     continuing operations                                                579            (431)              (749)
--------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of minority interest                                    --              --              1,488
Principal payments on long-term debt and other liabilities               (191)           (715)              (678)
Proceeds from issuance of common stock, net                                --             872              1,067
Proceeds from stock option exercises                                       17              --                 --
Repurchase of stock                                                        --          (1,303)              (154)
Payment of cash dividends                                                  --            (563)              (555)
--------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities of
     continuing operations                                               (174)         (1,709)             1,168
--------------------------------------------------------------------------------------------------------------------
Net cash provided by discontinued operations--Note 3                       --           6,344              4,825
--------------------------------------------------------------------------------------------------------------------
Net increase (decrease)  in cash and cash equivalents                  (5,767)            143                105
Cash and cash equivalents at beginning of year                          9,271           9,128              9,023
--------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                               $3,504          $9,271             $9,128
====================================================================================================================
</TABLE>
See notes to consolidated financial statements.




                                       61

<PAGE>

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

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                                                                                Unearned
                                                      Additional    Retained                   restricted
(dollars in thousands)                       Common     paid-in     earnings      Treasury      stock and
                                              Stock     capital     (deficit)       stock         other        Total
---------------------------------------------------------------------------------------------------------------------
<S>                                             <C>     <C>          <C>          <C>             <C>        <C>    
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 11                                      225                                                  225
Restricted Stock Plan--Note 10                              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
Net income for 1997                                                      235                                     235
Stock options exercised                          1          866                                                  867
Restricted Stock Plan--Note 10                              815                                    (475)         340
Purchase of treasury stock--(135,000
     shares at $9.67 average per share)                                             (1,303)                   (1,303)
Cash dividends                                                          (563)                                   (563)
Retirement of treasury stock                            (13,250)                    13,250
---------------------------------------------------------------------------------------------------------------------
Balances at September 27, 1997 before           10       14,204       42,727            --       (1,393)      55,548
     Distribution

Distribution                                                         (39,281)                     1,393      (37,888)
---------------------------------------------------------------------------------------------------------------------
Balances at September 27, 1997                  10       14,204        3,446            --           --       17,660
Net loss for 1998                                                     (4,971)                                 (4,971)
Restricted Stock Plan--Note 10                              329                                    (250)          79
Deferred Compensation                                       218                                     (86)         132
Stock options exercised                                      17                                                   17
Conversion of minority interest--Note 1                   1,523                                                1,523
---------------------------------------------------------------------------------------------------------------------
Balances at October 3, 1998                    $10      $16,291      ($1,525)           --        ($336)     $14,440
=====================================================================================================================
</TABLE>
See notes to consolidated financial statements.

                                       62

<PAGE>

                        BEI MEDICAL SYSTEMS COMPANY, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1
Basis of Presentation

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

     As of  September  27,  1997,  the  sole  asset of BEI  Electronics  was its
investment in BEI Medical Systems Company, Inc. On November 4, 1997, Electronics
merged with its subsidiary,  BEI Medical Systems Company, Inc. ("Medical"),  and
became one company with Electronics as the surviving corporation (the "Merger").
As a result of the Merger,  each outstanding share of common stock of Medical at
that date (other than shares held by Electronics)  was  automatically  converted
into  the  right  to  receive  5.51615  shares  of  Electronics   common  stock.
Certificates  for  Electronics  common  stock were  issued,  rounded down to the
nearest whole number of shares.  Fractional  shares of Electronics  common stock
that would have  otherwise  been issued in connection  with the Merger have been
redeemed  by  Electronics  pro rata  based on the last  reported  sale  price of
Electronics common stock on the last trading day preceding the merger. After the
Merger,  Electronics changed its name to BEI Medical Systems Company,  Inc. (the
"Company").

     The following  table shows the  conversion as of November 4, 1997 of the 6%
minority  interest in Medical  common  stock to  Electronics  common  stock at a
conversion  rate of 5.51615  shares of  Electronics  common  stock for every one
share of Medical common stock held.

                                                        Common Shares

                                                 Pre-Merger        Post-Merger
                                                  Medical          Electronics
                                                Common Stock      Common Stock
     ---------------------------------------------------------------------------
     Johnson & Johnson                             52,131           287,561

     Management                                    12,650            69,778

     Others                                        15,721            86,716
     ---------------------------------------------------------------------------
                                                   80,502           444,055
     ===========================================================================

     Prior to the  merger of Medical  with  Electronics,  Medical  had shares of
Series A and B  preferred  stock  outstanding  which were  converted  to Medical
common stock on a share-for-share basis.

                                       63
<PAGE>

                        BEI MEDICAL SYSTEMS COMPANY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Note 2
Summary of Significant Accounting Policies

     Operations:  The Company is a manufacturer  of diagnostic  and  therapeutic
products  focused on gynecology  and women's  health  issues.  In the U.S.,  the
Company utilizes independent manufacturers' representative organizations, direct
sales  representatives,  telemarketers  and domestic  distributors to market its
products  directly  to end  users,  hospitals,  surgical  centers  and  doctors'
offices. Products are also sold through a network of international distributors.
Medical's  operations  consist of Zinnanti  Surgical  Instruments in Chatsworth,
California  and Xylog  Corporation,  Meditron  Devices,  Inc.,  and BEI  Medical
Systems International,  Inc. in Teterboro,  New Jersey. The Company is currently
seeking additional  financing.  Consequently,  although the Company believes its
existing  cash  balances  together  with  operating  revenues,  tax  refunds and
anticipated  working capital financing will provide adequate funding to meet the
Company's  liquidity  requirements  for the next twelve months,  there can be no
assurance that additional  financing will be available on terms favorable to the
Company,  or at all. In the event the  Company is unable to generate  sufficient
cash flows from revenues or secure additional sources of capital, its ability to
continue as a going  concern may be severely  impaired.  Any  additional  equity
financing may be dilutive to stockholders and debt financing, if available,  may
involve restrictive covenants and/or also be dilutive to stockholders.

     Fiscal  Year:  The  Company's  fiscal  year  ends on the  Saturday  nearest
September  30. Fiscal year 1998  contained 53 weeks.  Fiscal years 1997 and 1996
each contained 52 weeks.

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

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

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

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

     Revenue Recognition: Revenue is recognized as units are shipped.

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

                                       64

<PAGE>

                        BEI MEDICAL SYSTEMS COMPANY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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

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


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

     Per Share  Information:  During the fiscal year ended October 3, 1998,  the
Company  adopted SFAS No. 128,  "Earnings  Per Share." SFAS No. 128 requires the
dual  presentation  of basic and diluted  earnings per share ("EPS").  Basic EPS
excludes  dilution and is computed by dividing  net income or loss  available to
common  stockholders by the weighted average number of common shares outstanding
for the period.  Diluted EPS reflects the potential dilution that could occur if
stock  options or other  contracts  to issue  common  stock were  exercised  and
resulted  in the  issuance of common  stock that then shared in the  earnings or
loss of the Company.  Diluted EPS is computed  using the  treasury  stock method
when the effect of common stock equivalents would be dilutive. All prior periods
have been restated to comply with the provisions of SFAS No. 128. As a result of
the net loss from  continuing  operations  for all periods  presented,  weighted
average  shares used in the  calculation of basic and diluted loss per share are
the same.  Weighted  average  shares  exclude  unvested  restricted  stock which
amounted to approximately 184,000, 211,000 and 190,000 shares for 1998, 1997 and
1996,  respectively.  Common stock  equivalents  are excluded  from the loss per
share  calculation  for all  periods  presented  because  the  effect  would  be
anti-dilutive.

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

                                       65

<PAGE>

                        BEI MEDICAL SYSTEMS COMPANY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

     Advertising  Costs:  Advertising costs are charged to expense when incurred
and were  approximately  $489,000,  $412,000  and $423,000 in fiscal years 1998,
1997 and 1996, respectively.

     Recent Accounting  Pronouncements:  In June 1997, the Financial  Accounting
Standards Board issued Statement No. 130 "Reporting Comprehensive Income," ("FAS
130"),  and Statement No. 131  "Disclosure  about  Segments of an Enterprise and
Related  Information"  ("FAS  131").  The  Company is  required  to adopt  these
statements in fiscal year 1999. FAS 130  establishes new standards for reporting
and  displaying  comprehensive  income  and its  components.  FAS  131  requires
disclosure of certain information  regarding  operating  segments,  products and
services,  geographic areas of operation and major customers.  Adoption of these
Statements is expected to have no impact on the Company's consolidated financial
position, results of operations or cash flows.

     In June 1998, the Financial Accounting Standards Board issued Statement No.
133,  "Accounting for Derivative  Instruments and Hedging  Activities"  which is
required  to be adopted in years  beginning  after June 15,  1999.  Because  the
Company does not enter into  financial  instruments  for trading or  speculative
purposes  and does  not  currently  utilize  derivative  financial  instruments,
management  does not anticipate that the adoption of the new Statement will have
any  effect on the  Company's  consolidated  financial  position  or  results of
operations.

Note 3
Discontinued Operations

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

Note 4
Inventories

     (dollars in thousands)                             1998            1997
     ---------------------------------------------------------------------------
     Finished products                                  $2,128           $1,843
     Work in process                                       196              230
     Materials                                             763              866
     ---------------------------------------------------------------------------
        Inventories                                     $3,087           $2,939
     ===========================================================================



                                       66

<PAGE>

                        BEI MEDICAL SYSTEMS COMPANY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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

Note 5
Bank Credit Agreements

     The Company had no bank credit  agreements at October 3, 1998 and September
27, 1997.

Note 6
Accrued Expenses and Other Liabilities

     (dollars in thousands)                                1998        1997
     --------------------------------------------------------------------------
     Insurance reimbursement                               $ --        $946
     Noncompetition contract                                 --         562
     Professional fees                                      134         205
     Employee compensation                                  268         337
     Taxes                                                  141         136
     Commissions                                            180         127
     Royalties and related costs                            130         102
     Tax refund payable to BEI Technologies                 327          --
     Other                                                  196         370
     --------------------------------------------------------------------------
        Accrued Expenses and Other Liabilities           $1,376      $2,785
     ==========================================================================

Note 7
Long-Term Debt

     (dollars in thousands)                             1998           1997
     ------------------------------------------------------------------------
     Note payable to the previous owner of 
       Zinnanti Surgical Instruments, Inc. with
       interest at 5.0%; payable in monthly
       installments of $10,883 through 
       December 1998                                     $21            $147
     Note payable to a related party                      --              60
     Asset purchase agreement with zero interest;
       payable in monthly installments through 1998       --               5
     ------------------------------------------------------------------------
                                                         $21            $212
     Less current portion                                 21             190
     ------------------------------------------------------------------------
     Long-term debt                                      $--             $22
     ========================================================================

                                       67

<PAGE>

                        BEI MEDICAL SYSTEMS COMPANY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

     Interest of approximately $7,000, $11,000 and $31,000 was paid on long-term
debt by Medical  during fiscal 1998,  1997 and 1996,  respectively.  Interest of
approximately $35,000, $50,000 and $96,000 was paid on noncompetition agreements
by Medical during fiscal 1998, 1997 and 1996,  respectively.  In connection with
the Distribution,  Technologies assumed Electronics'  obligations related to the
service and  repayment of $22.4 million in Senior  Notes.  The interest  expense
related to the notes was  allocated  to  Technologies  for fiscal years 1996 and
1997.

Note 8
Income Taxes

     Deferred income taxes reflect the net tax effects of temporary  differences
between  carrying  amounts of assets and  liabilities  for  financial  reporting
purposes and amounts used for income tax purposes. Significant components of the
Company's  deferred  tax  liabilities  and  assets  as of  October  3,  1998 and
September 27, 1997 are as follows:

    (dollars in thousands)                             1998             1997
    ----------------------------------------------------------------------------
    Deferred tax liabilities
       Depreciation and property basis difference        $20               $12
       Accrued expenses                                   --               213
    ----------------------------------------------------------------------------
          Total deferred tax liabilities                  20               225

    Deferred tax assets
       Intangibles                                       465               536
       Other                                             193                98
       Inventory valuation                                92                85
       State net operating loss carryovers             1,177             1,177
       Allowance for bad debt                             51                55
    ----------------------------------------------------------------------------
          Total deferred tax assets                    1,978             1,951
       Valuation allowance for deferred tax assets    (1,784)           (1,784)
    ----------------------------------------------------------------------------
          Net deferred tax assets/(liabilities)         $174              ($58)
    ============================================================================

     The valuation allowance reflects uncertainties  regarding  realizability of
deferred tax assets related to certain  intangibles and state net operating loss
carryovers.  As  of  October  3,  1998,  the  Company  has  net  operating  loss
carryforwards  for state income tax  purposes of  approximately  $19.6  million,
which  expire from 2001  through  2004.  The Company has no net  operating  loss
carryforwards for federal income tax purposes.



                                       68
<PAGE>

                        BEI MEDICAL SYSTEMS COMPANY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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

    (dollars in thousands)             1998            1997           1996
    -------------------------------------------------------------------------
    Current (credit)
       Federal                       ($2,046)        ($1,039)        ($1,358)
       State                              --              --              --
    -------------------------------------------------------------------------
          Total Current               (2,046)         (1,039)         (1,358)
    Deferred (credit)
       Federal                          (233)           (261)            (23)
       State                              --              --              (3)
    -------------------------------------------------------------------------
          Total Deferred                (233)           (261)            (26)
    -------------------------------------------------------------------------
    Total income tax (benefit)       ($2,279)        ($1,300)        ($1,384)
    =========================================================================

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

<TABLE>
<CAPTION>
    (dollars in thousands)                                      1998              1997             1996
    ----------------------------------------------------------------------------------------------------------
<S>                                                           <C>               <C>               <C>     
    Income tax credit at the statutory rate of 34%            ($2,465)          ($1,920)          ($1,382)
    Federal income tax effect of state income taxes                --                --                 1
    Goodwill amortization                                         131                81                81
    Increase in federal valuation allowance                        --               607                --
    Other                                                          55               (68)              (81)
    ----------------------------------------------------------------------------------------------------------
       Federal income taxes (credit)                           (2,279)           (1,300)           (1,381)
       State income tax credit, net of increase in state
       valuation allowance                                         --                --                (3)
    ----------------------------------------------------------------------------------------------------------
       Provision (credit) for income taxes                    ($2,279)          ($1,300)          ($1,384)
    ==========================================================================================================
</TABLE>

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

                                       69

<PAGE>

                        BEI MEDICAL SYSTEMS COMPANY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Note 9
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. At the end of fiscal year 1997, 934,424 shares had been repurchased
at a cost of $6,969,178 under this program.  The treasury stock shares were then
retired at September 27, 1997.

Note 10
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. The remaining 24,000 options  outstanding
under the plan at an exercise price of $3.75 were  exercised  during fiscal year
1997. No shares were outstanding or available for grant at September 27, 1997.

     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.

     In January 1997,  the Board combined the Incentive and  Supplemental  Plans
into one plan,  and  amended  it to change  the name to the  Amended  1987 Stock
Option Plan (the "Amended Plan"), provide for the granting of both incentive and
non-statutory stock options,  provide for grants to non-employee  consultants to
the Company, and increase the share reserve for option grants by 100,000.

     In March 1997, the  shareholders  approved an increase in the share reserve
for option grants by 250,000 so that shares issued  pursuant to options  granted
under the Amended Plan cannot exceed 1,600,000 in the aggregate.

     As a result of the  Distribution,  all the  outstanding  options for common
stock of the Company at the date of the Distribution,  both vested and


                                       70

<PAGE>

                        BEI MEDICAL SYSTEMS COMPANY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

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

     See Note 1 -- Basis of Presentation for more information.

     Transactions  relating to the Amended 1987 Stock Option Plan are summarized
as follows:

<TABLE>
<CAPTION>
                                                                                             Weighted
                                                                                              Average
                                                           Number of         Exercise        Exercise 
                                                             Common            Price           Price
                                                             Shares          Per Share       Per Share
-----------------------------------------------------------------------------------------------------------
<S>                                                         <C>            <C>                 <C>  
Options outstanding at September 30, 1995                   610,395        $2.88 - $9.13       $5.71
   Granted                                                   11,000        $6.00 - $7.13       $6.42
   Exercised                                               (115,922)       $2.88 - $9.13       $6.27
   Terminated                                               (48,511)       $5.00 - $9.13       $7.80
-----------------------------------------------------------------------------------------------------------
Options outstanding at September 28, 1996                   456,962        $2.88 - $9.13       $5.36
   Exercised                                               (137,866)       $2.88 - $7.25       $5.33
   Terminated                                                (3,500)       $3.75 - $9.13       $7.95
-----------------------------------------------------------------------------------------------------------
Options outstanding prior to Distribution                   315,596        $2.88 - $9.13       $5.35
   Distribution conversion to Technologies
   options                                                 (315,596)       $2.88 - $9.13       $5.35
-----------------------------------------------------------------------------------------------------------
Options outstanding as of September 27, 1997                     --                   --          --
   Conversion of BEI Medical                                595,739        $0.31 - $3.74       $0.48
   Granted                                                  203,489        $1.94 - $4.00       $3.04
   Exercised                                                (55,161)               $0.31       $0.31
-----------------------------------------------------------------------------------------------------------
Options outstanding at October 3, 1998                      744,067        $0.31 - $4.00       $1.19
===========================================================================================================
</TABLE>

     As of October 3, 1998,  243,687  shares were  available for grant under the
Amended Plan.  Details of the 744,067 options  outstanding as of October 3, 1998
were as follows:

                                       71

<PAGE>

                        BEI MEDICAL SYSTEMS COMPANY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

<TABLE>
<CAPTION>
                                         Weighted
                                          Average          Weighted                           Weighted
                                         Remaining          Average                            Average
                                        Contractual        Exercise                           Exercise
   Exercise             Options            Life            Price Per           Number           Price
    Prices            Outstanding         (Years)            Share           Exercisable      Per Share
---------------------------------------------------------------------------------------------------------
<S>                     <C>                 <C>              <C>               <C>              <C>  
    $0.31               366,821             6.8              $0.31             366,821          $0.31
    $0.54                52,403             7.3              $0.54              28,960          $0.54
    $0.70               107,564             7.6              $0.70              53,782          $0.70
    $1.94                95,000             9.5              $1.94                  --            --
    $3.74                13,790             8.4              $3.74               3,448          $3.74
    $4.00               108,489             9.1              $4.00                  --            --
---------------------------------------------------------------------------------------------------------
$0.31 - $4.00           744,067             7.7              $1.19             453,011          $0.40
=========================================================================================================
</TABLE>

     In July 1995, Medical's stockholders adopted an incentive stock option plan
and a  supplemental  (nonqualified)  stock  option plan for Medical  stock.  The
incentive  stock option plan provided for option prices based on Medical's  fair
market value of the stock on the date the option is granted,  as  determined  by
Medical's Board of Directors.  The supplemental  stock option plan required that
the exercise  price of each option shall not be less than 85% of the fair market
value on the date the option is granted.

     Transactions related to the incentive and supplemental Medical stock option
plans of 1995 are summarized as follows:

<TABLE>
<CAPTION>
                                                                                               Weighted
                                                          Number of           Exercise          Average
                                                            Common              Price        Exercise Price
                                                            Shares            Per Share         Per Share
----------------------------------------------------------------------------------------------------------
<S>                                                          <C>            <C>                   <C>  
Options outstanding at September 30, 1995                    85,500                 $1.72         $1.72
    Granted                                                  34,800         $3.00 - $3.85         $3.48
----------------------------------------------------------------------------------------------------------
Options outstanding at September 28, 1996                   120,300         $1.72 - $3.85         $2.23
    Granted                                                   2,500                $20.65        $20.65
    Exercised                                                (9,000)                $1.72         $1.72
    Terminated                                               (5,800)                $3.00         $3.00
----------------------------------------------------------------------------------------------------------
Options outstanding at September 27, 1997                   108,000        $1.72 - $20.65         $2.66
   Options converted to Electronics                        (108,000)       $1.72 - $20.65         $2.66
----------------------------------------------------------------------------------------------------------
Options outstanding at October 3, 1998                           --                   --             --
==========================================================================================================
</TABLE>

                                       72

<PAGE>

                        BEI MEDICAL SYSTEMS COMPANY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

     On November 4, 1997, Medical and Electronics merged with Electronics as the
surviving legal entity. As a result of the Merger, options outstanding under the
Medical stock option plans of 1995 were  converted to  Electronics  options at a
rate of approximately  5.51615  Electronics options for every one Medical option
outstanding.  Electronics'  outstanding  options  increased to 595,739 after the
Merger from zero  outstanding  at  September  27,  1997.  Medical's  outstanding
options  decreased  to zero and the  Medical  stock  option  plans of 1995  were
cancelled as a result of the Merger.

     In February  1992,  the  Company's  Board of  Directors  approved  the 1992
Restricted  Stock  Plan  (the  "Restricted  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.  In January  1997,  the  Restricted  Plan was
amended to increase the shares reserved for issuance under the plan from 350,000
to 700,000. As of October 3, 1998, 589,926 shares had been granted and of these,
517,850 shares were  outstanding  and are included in the Company's total common
stock  outstanding.  Of the outstanding  shares,  197,801 had vested.  There are
182,150 shares reserved for future 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.  No compensation  expense for Medical was recorded in fiscal
1997 or 1996. In fiscal 1998, $79,000 of compensation expenses was recorded.

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

     The  Black-Scholes   option  valuation  model  was  developed  for  use  in
estimating the fair value of traded  options which have no vesting  restrictions
and are fully  transferable.  In addition,  option  valuation models require the


                                       73

<PAGE>

                        BEI MEDICAL SYSTEMS COMPANY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

input of highly  subjective  assumptions  including  the  expected  stock  price
volatility.  Because the Company's  employee stock options have  characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially  affect the fair value estimate,  in
management's  opinion, the existing models do not necessarily provide a reliable
single measure of the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.

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

     The  pro  forma  disclosures   presented  for  fiscal  year  1998  may  not
necessarily  be  indicative  of the pro forma  effect of SFAS No. 123 for future
periods in which options may be granted.

     The impact of the calculation  required by FAS No. 123 on pro forma results
of operations and earnings  (loss) per share was determined to be immaterial for
fiscal years 1997 and 1996.

Note 11
Employee Benefit Plans

     The Company has a defined  contribution  retirement plan for the benefit of
all eligible employees.  The plan qualifies under Section 401(k) of the Internal
Revenue  Code  thereby  allowing  eligible  employees  to  make   tax-deductible
contributions to the plan. Non-discretionary employer contributions are based on
a fixed percentage of total eligible  employee  compensation and a formula based
matching of the participant's contribution to the plan. Additional contributions
are at the discretion of the Board of Directors.  The Company's contributions to
the plan for fiscal  1998,  1997 and 1996 for the  benefit of the  employees  of
continuing   operations  were  approximately   $76,000,   $62,000  and  $54,000,
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  organizational  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.  This  plan  will  terminate  May 31,  1999  unless
extended.

                                       74

<PAGE>

                        BEI MEDICAL SYSTEMS COMPANY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Note 12
Lease and Other Commitments

     Leases:  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 October 3, 1998:

     (dollars in thousands)
     ------------------------------------------------------------------
     1999                                                     $355
     2000                                                      318
     2001                                                      312
     2002                                                      311
     2003                                                      306
     Thereafter                                                204
     ------------------------------------------------------------------
     Total minimum lease payments                           $1,806
     ==================================================================

     Total rental  expense  attributable  to property,  plant and  equipment for
continuing operations amounted to approximately $297,000, $268,000, and $228,000
for fiscal 1998, 1997 and 1996, respectively.

     Minimum  Purchase  Requirements:  In  1997,  the  Company  entered  into an
agreement with Valley Forge Scientific  Corporation giving the Company worldwide
marketing  rights  for  distribution  of  the  bipolar  electrosurgical  therapy
systems,  in the field of  gynecology.  The  agreement is for 63 months from the
date the product first becomes  available and includes minimum  requirements for
the first  fifteen-month  period and is subject to  negotiating  annual  minimum
requirements in subsequent  twelve-month  periods. As of October 3, 1998, future
minimum purchases for the initial  fifteen-month period of approximately $80,000
are still required.

     Minimum  Royalty  Payments:  In 1993,  the Company  entered  into a license
agreement for the HTA endometrial  ablation  technology whereby royalty payments
of 10% are payable on net revenues of certain disposal components. The agreement
is subject to minimum royalty payments for a period of three years following the
first shipment of product for revenue.  The minimum royalty  payments during the
next two fiscal years are as follows:

     (dollars in thousands)
     ---------------------------------------------------------------
     1999                                                   $33
     2000                                                    33
     ---------------------------------------------------------------
     Total minimum royalty payments                         $66
     ===============================================================

     The Company  has also  entered  into a number of other  license and royalty
agreements  that require  payments  based upon  revenues on the sales of certain
products ranging from 4% to 10% of revenue.  Except for the endometrial ablation
technology agreement

                                       75

<PAGE>

                        BEI MEDICAL SYSTEMS COMPANY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

mentioned  above,  there are no  minimum  requirements.  Total  royalty  expense
attributable to various license agreements  amounted to approximately  $314,000,
$270,000 and $238,000 for fiscal 1998, 1997 and 1996, respectively.

     Other  Commitments:  In connection with a $1.5 million equity investment in
Medical in February  1996,  Johnson & Johnson  Development  Corporation  ("J&J")
received a right of first  negotiation  to  manufacture  and/or  distribute  any
product primarily intended for use in endometrial ablation acquired or developed
after the date of the agreement  ("Ablation  Products") and the right to consult
in connection with FDA applications with respect to such Ablation Products.

     The  right  of first  negotiation  is  effective  for a  ninety-day  period
commencing  on the  earlier of i.) J&J's  notice to the Company of its desire to
manufacture  and/or distribute an Ablation Product and ii.) the date the Company
notifies  J&J of  approval  from the FDA to market an Ablation  Product.  In the
event that the parties are unable to agree upon mutually  acceptable terms, then
the Company may either manufacture and/or distribute the Ablation Product itself
or enter into an agreement with a third party on terms that in the aggregate are
not  materially  less  favorable  to the Company  than those  offered by J&J. In
addition,  the Company may enter into agreements with third parties prior to the
J&J negotiation  period,  provided such agreements are terminable by the Company
within two years  after the Company  and J&J enter into a  manufacturing  and/or
distribution  agreement.  Depending  upon the timing and  progress  of  clinical
trials, the Company expects that the HTA system may be subject to J&J's right of
negotiation and consultation.

     The Company  entered  into a  consulting  agreement  with a director of the
Company  to  assist  with  medical   research  and  clinical   information.   In
consideration  for these  services,  the  Company  has issued  50,000  shares of
restricted stock, approximately 20,000 of which vested immediately upon issuance
and the remainder  will vest ratable from October 1998 through  March 2000.  The
agreement also provides for  commissions on sales of the HTA in the Far East and
Latin  America  territories  at $1,000 per unit and a 2%  commission  on certain
disposable units sold.

Note 13
Contingencies and Litigation

     In  July  1998,  the  Company  settled  a  lawsuit  commenced  in  1993  by
CooperSurgical,  Inc., a subsidiary of The Cooper Companies  ("CooperSurgical"),
for  unspecified  damages  alleging  unfair  competition  due to  actions by the
Company and its then president  Richard Turner,  a former employee of The Cooper
Companies, and others.

     In July 1998, the final settlement agreement was signed whereby the Company
paid $300,000 in cash, net of insurance  reimbursement,  and agreed to pay up to
$100,000 in royalties on future product revenues.

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

     The Company has  developed a  Company-wide  Year 2000 plan (the "Plan") to,
among other things, prepare its computer equipment and software and devices with
date-sensitive  embedded  technology for the year 2000.  The estimated  dates by
which the  Company  believes  it will have  completed  the Plan,  are based upon
management's  best  estimates,  which rely upon numerous  assumptions  regarding
future events,  including vendor supplied software,  the availability of certain
resources, third-party remediation plans and other factors.



                                       76

<PAGE>

                        BEI MEDICAL SYSTEMS COMPANY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

These estimates, however, may prove not to be accurate, and results could differ
materially  from  those  anticipated.  Factors  that  could  result in  material
differences  include,  without  limitation,  the  availability of personnel with
appropriate training and experience,  the ability to identify, assess, remediate
and test all  relevant  computer  codes and  embedded  technology,  and  similar
uncertainties.  In  addition,  Year  2000-related  issues  may lead to  possible
third-party  claims,  the impact of which cannot yet be estimated.  No assurance
can be given that the aggregate cost of defending and resolving such claims,  if
any, would not have a material adverse effect on the Company.

Note 14
Sales

     Revenue  from  continuing  operations  to  customers  in foreign  countries
amounted to $1,500,000, $1,430,000 and $1,287,000 in fiscal 1998, 1997 and 1996,
respectively.  In fiscal 1998, 1997 and 1996, foreign revenue did not exceed 10%
of consolidated revenue in any individual geographic area.





                                       77

<PAGE>

                        BEI MEDICAL SYSTEMS COMPANY, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued

Note 15
Quarterly Results of Operations (Unaudited)

     The tables below present  unaudited  quarterly  financial  information  for
fiscal 1998 and 1997:

<TABLE>
<CAPTION>
                                                                            Three months ended
     (dollars in thousands except per share amounts)
     ----------------------------------------------------------------------------------------------------------
                                                              Dec. 27,     Mar. 28,     Jun. 27,      Oct. 3,
                                                                1997         1998         1998         1998
     ----------------------------------------------------------------------------------------------------------
<S>                                                            <C>          <C>          <C>          <C>   
     Revenue                                                   $2,418       $2,535       $2,293       $2,405
     Gross profit                                                 923        1,141          943        1,006
     Loss from continuing operations                           (1,196)      (1,151)        (977)      (1,647)
     Net loss                                                 ($1,196)     ($1,151)       ($977)     ($1,647)
     Loss from continuing operations per common share,                                              
          basic and diluted                                    ($0.17)      ($0.16)      ($0.13)      ($0.22)
     Earnings from discontinued operations per common                                               
          share, basic and diluted                                 --           --           --           --
     Loss per common share, basic and diluted                  ($0.17)      ($0.16)      ($0.13)      ($0.22)

<CAPTION>
     ----------------------------------------------------------------------------------------------------------
                                                              Dec. 28,     Mar. 29,     Jun. 28,     Sep. 27,
                                                                1996         1997         1997         1997
     ----------------------------------------------------------------------------------------------------------
<S>                                                            <C>          <C>          <C>          <C>   
     Revenue                                                   $2,584       $2,550       $2,472       $2,399
     Gross profit                                               1,152        1,090          938          853
     Loss from  continuing operations                            (746)        (833)      (1,136)      (1,633)
     Income from  discontinued operations                          35        1,452        1,696        1,400
     Net income (loss)                                          ($711)        $619         $560        ($233)
     Loss from continuing operations per common share,
          basic and diluted                                    ($0.11)      ($0.12)      ($0.17)      ($0.24)
     Earnings from discontinued  operations per common
          share, basic and diluted                              $0.01        $0.21        $0.25        $0.21
     Earnings (loss)  per common share, basic and diluted      ($0.10)       $0.09        $0.08       ($0.03)
</TABLE>

                                       78

<PAGE>

                         Report of Independent Auditors



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

     We have audited the accompanying consolidated balance sheets of BEI Medical
Systems Company, Inc. (formerly BEI Electronics, Inc.) as of October 3, 1998 and
September  27, 1997,  and the related  consolidated  statements  of  operations,
stockholders'  equity and cash  flows for each of the three  years in the period
ended October 3, 1998. These financial  statements are the responsibility of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audits.

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

     In our opinion,  the financial statements referred to above present fairly,
in all material  respects,  the consolidated  financial  position of BEI Medical
Systems  Company,  Inc.  at  October 3, 1998 and  September  27,  1997,  and the
consolidated  results of their  operations  and their cash flows for each of the
three years in the period ended  October 3, 1998 in  conformity  with  generally
accepted accounting principles.


                                                               Ernst & Young LLP

Hackensack, New Jersey
November 13, 1998




                                       79

<PAGE>

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

          None



                                       80

<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Certain information with respect to directors and executive officers is set
forth in Part I of this Report.  Additional information required by this Item is
incorporated  herein by  reference  to the  section  entitled  "Compliance  with
Section  16(a) of the  Securities  Exchange Act of 1934" of the Proxy  Statement
related to the Company's 1998 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 Relationships and
Related Transactions" of the Company's Definitive Proxy Statement.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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





                                       81

<PAGE>

                                     PART IV

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

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

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

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

        Consolidated Balance Sheets -
           Years ended October 3, 1998 and September 27, 1997                       58

        Consolidated  Statements of Operations Years ended October 3, 1998,
           September 27, 1997
           and September 28, 1996                                                   60

        Consolidated  Statements of Cash Flows Years ended October 3, 1998,
           September 27, 1997
           and September 28, 1996                                                   61

        Consolidated Statements of Stockholders' Equity Years ended October
           3, 1998, September 27, 1997
           and September 28, 1996                                                   62

        Notes to Consolidated Financial Statements -
          October 3, 1998                                                           63

        Report of Independent Auditors                                              S-2
</TABLE>

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

        The  following  Consolidated  Financial  Statement  Schedule of BEI
        Medical Systems Company, Inc. (formerly BEI Electronics,  Inc.) for
        each of the years  ended  October 3, 1998,  September  27, 1997 and
        September 28, 1996 is filed as part of this Form 10-K:

        Schedule II           Valuation and Qualifying Accounts          S-1

                              Report of Independent                      S-2
                               Auditors as to Schedule

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.



                                       82

<PAGE>

(a)(3)  Listing of Exhibits

<TABLE>
<CAPTION>
        Exhibit Numbers      Description                                                  Footnote
        ---------------      -----------                                                  --------
        <S>                  <C>                                                            <C> 
                 2.1         Distribution Agreement between BEI Electronics, Inc.
                             and BEI Technologies, Inc. dated September 26, 1997            (i)

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

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

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

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

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

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

                 3.1         Restated Certificate of Incorporation                         (ii)

                 3.2         Amended Bylaws of the Company as of June 30, 1997             (iii)
</TABLE>

                                       83

<PAGE>

<TABLE>
<CAPTION>
        Exhibit Numbers          Description                                              Footnote
        ---------------          -----------                                              --------
        <S>                  <C>                                                            <C> 
                 3.3         Certificate of Designation of Series A Junior
                             Participating Preferred Stock                                 (iii)

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

                 4.2         Form of Rights Certificate                                    (iii)

                 4.3         Summary of Rights to Purchase Preferred Shares                (iii)

                10.2  *      Registrant's Amended 1987 Stock Option Plan                    (iv)

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

                10.6  *      Description of Management Incentive Bonus Plan                 (ii)

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

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

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

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

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

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

                10.31        Amendment to Tax Allocation and Indemnity  Agreement
                             dated December 15, 1998 between the Registrant and
                             BEI Technologies dated September 1997
</TABLE>

                                       84

<PAGE>

                 21.1        Subsidiaries of the Registrant

                 23.1        Consent of Independent Auditors

                 24.1        Power of Attorney

                 27.1        Financial Data Schedule (EDGAR only)

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

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

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

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

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

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


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


                                       85

<PAGE>

                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.



                                               BEI MEDICAL SYSTEMS COMPANY, INC.
                                               By: /s/ Thomas W. Fry 
                                                  ------------------------------
                                               Thomas W. Fry
                                               Vice President of Finance and
                                               Administration,
                                               Secretary & Treasurer

                                               January 4, 1999







                                       86

<PAGE>

<TABLE>
                                                                                                                         SCHEDULE II
                                                  BEI MEDICAL SYSTEMS COMPANY, INC.
                                                          ----------------
                                                  VALUATION AND QUALIFYING ACCOUNT

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

<S>                                         <C>                 <C>              <C>                <C>           <C>   
Year ended October 3, 1998:
---------------------------
Deducted from asset accounts:
Allowance for doubtful accounts               $112               $76              $--               $14 (B)         $174
Valuation allowances of deferred                                                                                
     tax assets                              1,784                --               --                --            1,784
                                         -------------     -------------    -------------     -------------    -------------
     Total                                  $1,896               $76              $--               $14           $1,958
                                         =============     =============    =============     =============    =============

Year ended September 27, 1997:
------------------------------
Deducted from asset accounts:
Allowance for doubtful accounts               $236               $57              $--              $181 (B)         $112
Valuation allowances of deferred                                                                                
     tax assets                                929               855 (A)           --                --            1,784
Valuation allowances of                                                                                         
     discontinued operations                   701                75              (94)              682               --
                                         -------------     -------------    -------------     -------------    -------------
     Total                                  $1,866              $987             ($94)             $863           $1,896
                                         =============     =============    =============     =============    =============

Year ended September 28, 1996:
------------------------------
Deducted from asset accounts:
Allowance for doubtful accounts                $56               $39             $162 (D)           $21 (B)         $236
Valuation allowance for deferred                                                                                
     tax assets                              1,077                --             (148)(C)            --              929
Valuation allowances of                                                                                         
     discontinued operations                   538               282              (49)               70              701
                                         -------------     -------------    -------------     -------------    -------------
     Total                                  $1,671              $321             ($35)              $91           $1,866
                                         =============     =============    =============     =============    =============
</TABLE>

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

(B)  Uncollectible accounts written off

(C)  Adjustment based on evaluation of uncertainties in the realization of state
     net operating loss carryovers

(D)  Purchased allowance from acquisition

                                       S-1

<PAGE>

                 REPORT OF INDEPENDENT AUDITORS, AS TO SCHEDULE



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


     We have  audited  the  consolidated  financial  statements  of BEI  Medical
Systems Company, Inc. (formerly BEI Electronics, Inc.) as of October 3, 1998 and
September 27, 1997,  and for each of the three years in the period ended October
3, 1998,  and have issued our report thereon dated November 13, 1998. Our audits
also included the financial  statement  schedule listed in Item 14(a)(2) of this
Form 10-K. This schedule is the responsibility of the Company's management.  Our
responsibility is to express an opinion based on our audits.

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



                                                               Ernst & Young LLP
Hackensack, New Jersey
November 13, 1998






                                       S-2

<PAGE>


                                                                            23.1


                         CONSENT OF INDEPENDENT AUDITORS



We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-82867),  pertaining to the 1987 Stock Option Plan and the Restricted
Stock Plan of BEI Medical  Systems  Company,  Inc.  (formerly  BEI  Electronics,
Inc.), of our reports dated November 13, 1998, with respect to the  consolidated
financial statements and schedule of BEI Medical Systems Company,  Inc. included
in this Annual Report (Form 10-K) for the year ended October 3, 1998, filed with
the Securities and Exchange Commission.





                                                               Ernst & Young LLP
Hackensack New Jersey
December 29, 1998


<PAGE>

                                INDEX TO EXHIBITS


Exhibit
Number

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

10.29     Employment  Agreement  between the  Registrant and Herbert Spoon dated
          February 27, 1998

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

10.31     Amendment to Tax Allocation and Indemnity Agreement dated December 15,
          1998 between the Registrant and BEI Technologies dated September 1997

21.1      Subsidiaries of the Registrant

23.1      Consent of Independent  Auditors

24.1      Power of Attorney

27.1      Financial Data Schedule