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

                                    FORM 10-Q

[X]      Quarterly  report  pursuant  to Section  13 or 15(d) of the  Securities
         Exchange Act of 1934 for the quarterly period ended June 28, 1997 or

[ ]      Transition  report  pursuant  to Section 13 or 15(d) of the  Securities
         Exchange  Act of 1934  for the  transition  period  from  _________  to
         __________.
                                        


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



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



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

                                 (415) 956-4477
                                 --------------
                         (Registrant's telephone number)


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 the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date.

       Common Stock: $.001 Par Value, 7,025,843 shares as of July 30, 1997

                                                                         1 of 28
<PAGE>

BEI ELECTRONICS, INC. AND SUBSIDIARIES

INDEX



PART 1.    FINANCIAL INFORMATION                                            PAGE
                                                                            ----
Item 1.    Financial Statements

               Condensed Consolidated Balance Sheets--June 28, 1997 and       3
               September 28, 1996

               Condensed Consolidated Statements of Operations--Quarter       4
               and Nine Months ended June 28, 1997 and June 29, 1996

               Condensed Consolidated Statements of Cash Flows--Nine          5
               Months ended June 28, 1997 and June 29, 1996

               Notes to Condensed Consolidated Financial Statements--June     6
               28, 1997

Item 2.    Management's Discussion and Analysis of Financial Condition and   14
           Results of Operations


PART II.   OTHER INFORMATION

Item 5.        Summary Description of Continuing Operations
               (Medical Systems)                                             20

Item 6.        Exhibits and Reports on Form 8-K                              27


           SIGNATURES                                                        28



                                                                         2 of 28
<PAGE>


BEI ELECTRONICS, INC. AND SUBSIDIARIES
PART I.  FINANCIAL INFORMATION
Item 1.           Financial Statements

The following financial  statements classify the Company's Sensors & Systems and
Defense Systems business  segments as  discontinued  operations,  reflecting the
Company's  current  intent to  distribute  ownership of these  operations to its
stockholders.  See Notes 1 and 3 to the Financial  Statements  and Item 5 of the
Form 10-Q for further information.

CONDENSED CONSOLIDATED BALANCE SHEETS

                                                        June 28,   September 28,
                                                          1997         1996
                                                      (Unaudited)     (Note)
                                                       (amounts in thousands)
--------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents                              $    972      $  9,128
Trade receivables, net                                    2,094         1,713
Inventories, net -- Note 2                                3,023         2,085
Deferred income taxes                                       248           456
Current assets of discontinued operations,                           
   net -- Note 3                                         49,018        55,499
Other current assets                                        317           144
                                                       --------      --------
      Total current assets                               55,672        69,025
                                                                     
Property, plant and equipment, net                          788           817
Goodwill                                                  3,655         3,835
Other assets, net                                         4,007         4,662
Non-current assets of discontinued                                   
   operations -- Note 3                                  37,650        36,672
                                                       --------      --------
                                                       $101,772      $115,011
                                                       ========      ========
                                                                     
LIABILITIES AND STOCKHOLDERS' EQUITY                                 
Trade accounts payable                                 $    834      $    683
Accrued expenses and other liabilities                    2,781         2,337
Current portion of long-term debt                           181           179
Current liabilities of discontinued                                  
   operations  -- Note 3                                 22,307        27,724
                                                       --------      --------
      Total current liabilities                          26,103        30,923
                                                                     
Long-term debt, less current portion                         62           212
Non-current liabilities of discontinued                              
   operations -- Note 3                                  18,802        24,426
Deferred income taxes and other liabilities                --           1,960
Minority interest in consolidated subsidiary              1,539         1,518
Stockholders' equity                                     55,266        55,972
                                                       --------      --------
                                                       $101,772      $115,011
                                                       ========      ========

See notes to condensed consolidated financial statements.          

Note:  The condensed  consolidated  balance sheet at September 28, 1996 has been
derived from the audited  consolidated  balance  sheet at that date after giving
effect  to the  reclassification  of  assets  and  liabilities  of  discontinued
operations.

                                                                         3 of 28
<PAGE>

BEI ELECTRONICS, INC. AND SUBSIDIARIES
<TABLE>

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

<CAPTION>
                                                          Quarter Ended               Nine Months Ended
                                                     -----------------------        ------------------------
                                                     June 28,      June 29,         June 28,       June 29,
                                                       1997          1996             1997           1996
                                                        (amounts in thousands except per share amounts)
------------------------------------------------------------------------------------------------------------
<S>                                                   <C>            <C>            <C>            <C>      
Net sales                                             $ 2,472        $ 2,336        $ 7,606        $ 6,935  
Cost of sales                                           1,534          1,410          4,426          4,323
                                                      -------        -------        -------        -------
Gross Profit                                              938            926          3,180          2,612
                                                                                                 
Selling, general and administrative expenses            2,216          1,958          6,012          4,922
Research, development and related expenses                479            334          1,380          1,004
                                                      -------        -------        -------        -------
                                                                                                 
Operating income (loss)                                (1,757)        (1,366)        (4,212)        (3,314)
                                                                                                 
Other income                                               16             87            128            223
Interest expense                                           13             24             53             86
                                                      -------        -------        -------        -------
                                                                                                 
Income (loss) before income taxes                      (1,754)        (1,303)        (4,137)        (3,177)
Income taxes (credit)                                    (617)          (440)        (1,422)        (1,070)
                                                      -------        -------        -------        -------
                                                                                                 
Income (loss) from continuing operations               (1,137)          (863)        (2,715)        (2,107)
Income from discontinued operations,                                                             
    net of income taxes                                 1,696          1,639          3,183          3,845
                                                      -------        -------        -------        -------
Income                                                $   559        $   776        $   468        $ 1,738
                                                      =======        =======        =======        =======
                                                                                                 
Earnings (loss) from continuing operations                                                       
    per common and common equivalent                                                             
    share -- Note 5                                   ($ 0.16)       ($ 0.12)       ($ 0.38)       ($ 0.30)
Earnings from discontinued operations per                                                        
    common and common equivalent share-- Note 5          0.24           0.23           0.45           0.55
                                                      -------        -------        -------        -------
Earnings per common and common                                                                   
    equivalent share -- Note 5                        $  0.08        $  0.11        $  0.07        $  0.25
                                                      =======        =======        =======        =======
                                                                                                 
Shares used in per share computations -- Note 5         7,175          7,215          7,131          7,082
                                                      =======        =======        =======        =======
                                                                                                 
                                                                                                 
Dividends per common share                            $  0.02        $  0.02        $  0.06        $  0.06
                                                      =======        =======        =======        =======
                                                                                                 
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>

                                                                         4 of 28
<PAGE>

BEI ELECTRONICS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)


                                                           Nine Months Ended
                                                         -----------------------
                                                           June 28,    June 29,
                                                            1997        1996
                                                         (amounts in thousands)
--------------------------------------------------------------------------------

Net cash used in operating activities                     ($2,231)    ($6,513)

Cash flows from investing activities:
         Acquisitions                                        --          (325)
         Proceeds from sale of Medical stock                 --         1,475
         Purchases of property, plant and
            equipment                                        (161)       (231)
         Decrease (increase) in other assets                 (218)        133
                                                          -------     -------

               Net cash provided(used) in investing
               activities                                    (379)      1,052

Cash flows from financing activities:
         Principal payments on long-term debt              (6,313)       (554)
         Proceeds from issuance of common stock               326         744
         Purchase of treasury stock                        (1,303)       --
         Payment of cash dividends                           (422)       (416)
         Funding from discontinued operations               2,166       3,604
                                                          -------     -------

               Net cash used (provided) by financing
               activities                                  (5,546)      3,378
                                                          -------     -------

Net decrease in cash and cash equivalents                  (8,156)     (2,083)

Cash and cash equivalents at beginning of period            9,128       9,023
                                                          -------     -------

Cash and cash equivalents at end of period                $   972     $ 6,940
                                                          =======     =======


See notes to condensed consolidated financial statements.

                                                                         5 of 28
<PAGE>

BEI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 28, 1997

NOTE 1 -- BASIS OF PRESENTATION

On June 30, 1997, the Board of Directors of BEI Electronics, Inc. ("Electronics"
or "the  Company")  approved a plan of  distribution  to holders of  Electronics
common  stock  of  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  will transfer to  Technologies  all of the assets,  liabilities and
operations of its BEI Sensors & Systems Company,  Inc. ("Sensors & Systems") and
Defense Systems Company, Inc. ("Defense Systems") business segments.  Currently,
the  Distribution  is  expected  to occur  at the end of  September,  1997.  For
purposes of the presentation  herein, the term  "Technologies" is applied to the
combination  of the  business  segments  which  will  comprise  this  operation,
effective  upon the  Distribution.  On June 30, 1997,  the Board of Directors of
Electronics  also approved a formal plan to  discontinue  the  operations of its
Defense Systems segment (the "Discontinuation").

See Note 3 -- Discontinued  Operations for a description of the Distribution and
the Discontinuation.  See Item 5 -- Summary Description of Continuing Operations
(Medical  Systems),  for more  information  on the  continuing  business  of BEI
Electronics, Inc.

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial  information and with the  instructions to Form 10-Q and Article 10 of
Regulation  S-X.  Accordingly,  they do not include all of the  information  and
footnotes  required by generally  accepted  accounting  principles  for complete
financial statements. In the opinion of management,  all adjustments (consisting
of normal recurring  adjustments)  considered  necessary for a fair presentation
have been included.  Operating results for the interim periods presented are not
necessarily  indicative  of the results that may be expected for the year ending
September 27, 1997 or any future period. For further  information,  refer to the
consolidated  financial statements and footnotes thereto in the Company's annual
report on Form 10-K for the year ended September 28, 1996.


                                                                         6 of 28
<PAGE>

NOTE 2 -- INVENTORIES

                                                      June 28,    September 28,
                                                        1997          1996
                                                      --------      --------
                                                       (amounts in thousands)
--------------------------------------------------------------------------------
Continuing Operations:
  Finished products                                   $  1,774      $  1,116
  Work in process                                          353           182
  Materials                                                896           787
                                                      --------      --------

Net inventories                                       $  3,023      $  2,085
                                                      ========      ========

Discontinued Operations:
  Finished products                                   $  1,281      $    289
  Work in process                                        7,361         6,621
  Materials                                             12,635        10,873
  Costs incurred under long-term contracts,
          including U.S. Government contracts            1,823         3,840
  Unapplied progress payments                             (138)         (451)
                                                      --------      --------

  Net inventories                                       22,962        21,172

Inventories included in current assets of
  discontinued operations of Defense Systems,
   net of progress payments of $138 and $451               658         1,971
                                                      --------      --------
Net inventories                                       $ 22,304      $ 19,201
                                                      ========      ========


NOTE 3 -- DISCONTINUED OPERATIONS

The condensed  consolidated  financial  statements of  Technologies  shown below
present the combined  financial  position and results of operations of Sensors &
Systems and Defense Systems, wholly-owned subsidiaries of Electronics, which are
predecessor entities to Technologies. All intercompany accounts and transactions
have been  eliminated.  The financial  position and results of operations of the
Sensors & Systems  business  segment are presented as continuing  operations and
those of the Defense  Systems  business  segment are  presented as  discontinued
operations.  Long-term debt of Electronics  that will be assumed by Technologies
in  connection  with the  Distribution  has been  included  in the  accompanying
condensed consolidated balance sheets.

For more information,  please refer to the Form 10 General Form for Registration
of Securities as filed by BEI Technologies, Inc. on July 3, 1997.


                                                                         7 of 28
<PAGE>

DISCONTINUED OPERATIONS - TECHNOLOGIES
CONDENSED CONSOLIDATED BALANCE SHEETS

                                                        June 28,   September 28,
                                                         1997         1996
                                                      (Unaudited)    (Note)
                                                       (amounts in thousands)
--------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents                               $ 3,622     $ 8,201
Trade receivables, net                                   16,563      16,712
Inventories, net -- Note 2                               22,304      19,201
Refundable income taxes                                    --           388
Deferred income taxes                                     4,387       2,564
Current assets of discontinued operations
 of Defense Systems, net                                    743       6,508
Other current assets                                      1,399       1,925
                                                        -------     -------
      Total current assets                               49,018      55,499

Property, plant and equipment, net                       25,107      22,191
Goodwill                                                    668         707
Other assets, net                                        10,188      11,812
Non-current assets of discontinued operations
 of Defense Systems, net                                  1,687       1,962
                                                        -------     -------
                                                        $86,668     $92,171
                                                        =======     =======


LIABILITIES AND STOCKHOLDERS' EQUITY
Trade accounts payable                                  $ 5,574     $ 5,025
Accrued expenses and other liabilities                    9,218      12,602
Current portion of long-term debt                         5,627       5,625
Current liabilities of discontinued operations
 of Defense Systems                                       1,888       4,472
                                                        -------     -------
      Total current liabilities                          22,307      27,724

Long-term debt, less current portion                     18,516      24,137
Deferred income taxes and other liabilities                 286       1,002
Payable to Electronics                                    3,896       6,062
Stockholders' equity                                     41,663      33,246
                                                        -------     -------
                                                        $86,668     $92,171
                                                        =======     =======

Note:  The condensed  consolidated  balance sheet at September 28, 1996 has been
derived from the audited  consolidated  balance  sheet at that date after giving
effect  to the  reclassification  of  assets  and  liabilities  of  discontinued
operations. 

                                                                         8 of 28
<PAGE>

<TABLE>

DISCONTINUED OPERATIONS - TECHNOLOGIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

<CAPTION>
                                                             Quarter Ended                       Nine Months Ended
                                                         --------------------------          -------------------------
                                                         June 28,          June 29,          June 28,         June 29,
                                                          1997              1996              1997             1996
                                                               (amounts in thousands except per share amounts)
----------------------------------------------------------------------------------------------------------------------

<S>                                                      <C>               <C>               <C>               <C>     
Net sales                                                $26,824           $24,336           $74,437           $71,398 
Cost of sales                                             17,347            14,916            48,383            44,390
                                                         -------           -------           -------           -------
Gross profit                                               9,477             9,420            26,054            27,008
                                                                                                              
Selling, general and administrative expenses               5,985             6,321            19,014            18,500
Research, development and related expenses                 1,194               894             3,159             2,682
                                                         -------           -------           -------           -------
                                                                                                              
Operating income                                           2,298             2,205             3,881             5,826
                                                                                                              
Other income                                                  57                62               246               166
Interest expense                                             441               625             1,392             1,879
                                                         -------           -------           -------           -------
                                                                                                              
Income before income taxes                                 1,914             1,642             2,735             4,113
Income taxes                                                 718               567               941             1,407
                                                         -------           -------           -------           -------
                                                                                                              
Income from continuing operations                          1,196             1,075             1,794             2,706
Income from discontinued operations of Defense                                                                
  Systems, net of income taxes                               500               564             1,389             1,139
                                                         -------           -------           -------           -------
Income                                                   $ 1,696           $ 1,639           $ 3,183           $ 3,845
                                                         =======           =======           =======           =======
                                                                                                              
Earnings from continuing operations                                                                           
    per common and common equivalent                                                                          
    share                                                $  0.17           $  0.15           $  0.25           $  0.38
Earnings from discontinued operations                                                                         
    per common and common equivalent share                  0.07              0.08              0.20              0.16
                                                         -------           -------           -------           -------
Earnings per common and common                                                                                
    equivalent share                                     $  0.24           $  0.23           $  0.45           $  0.54
                                                         =======           =======           =======           =======
                                                                                                              
Shares used in per share computations                      7,175             7,215             7,131             7,082
                                                         =======           =======           =======           =======
</TABLE>


                                                                         9 of 28
<PAGE>

DISCONTINUED OPERATIONS
STATEMENTS OF CASH FLOWS
(Unaudited)


                                                           Nine Months Ended
                                                         -----------------------
                                                            June 28,   June 29,
                                                             1997       1996
                                                         (amounts in thousands)
--------------------------------------------------------------------------------

Net cash provided by operating activities                  $ 2,940    $ 7,891

Cash flows from investing activities:
         Purchases of property, plant and
            equipment                                       (6,033)    (3,016)
         Decrease in other assets                              699        144
                                                           -------    -------

              Net cash used in investing activities         (5,334)    (2,872)

Cash flows from financing activities:
         Principal payments on long-term debt                  (19)       (70)
         Funding of continuing operations of Electronics    (2,166)    (3,604)
                                                           -------    -------

         Net cash used in financing activities              (2,185)    (3,674)

Net increase (decrease) in cash and cash equivalents        (4,579)     1,345

Cash and cash equivalents at beginning of period             8,201      2,667
                                                           -------    -------

Cash and cash equivalents at end of period                 $ 3,622    $ 4,012
                                                           =======    =======


                                                                        10 of 28
<PAGE>


DISCONTINUED OPERATIONS OF DEFENSE SYSTEMS

In June of 1997,  the  Board  of  Directors  of the  Company  adopted  a plan to
discontinue the Defense Systems segment whose principal product was the HYDRA 70
(H 70) Rocket. The rocket line of the segment was shut down at the end of fiscal
year 1996.

As a result of the decision to exit the rocket line of business, the Company had
recorded a reserve for employee severance and facility closure costs. At the end
of fiscal year 1996,  the balance in the reserve  account  consisted of $374,000
and $500,000 for employee  severance and facility  closure costs,  respectively.
During the first nine months of fiscal 1997,  the Company  accrued an additional
$33,000 for  employee  severance  costs.  Costs  incurred  during the period for
severance and facilities  closure of $302,000 and $357,000,  respectively,  were
charged  against  the  reserve.  The  balance  in the  reserve  at June  28,1997
consisted of $105,000 for employee severance and $143,000 for facilities closure
costs.  Management believes at this time the reserve is adequate to cover future
shutdown costs.

RESERVE ACTIVITY
--------------------------------------------------------------------------------
                     September 28,                           Costs     June 28,
                              1996     Adjustments        Incurred        1997
                                          (dollars in thousands)
--------------------------------------------------------------------------------
Employee Severance            $374             $33            $302        $105
Facilities Costs               500              --             357         143
                     -----------------------------------------------------------
Total Reserve                 $874             $33            $659        $248
                     ===========================================================

NOTE 4 -- TAX CONSEQUENCES TO BEI MEDICAL SYSTEMS OF THE PROPOSED
          DISTRIBUTION

The Company files a consolidated federal income tax return which includes all of
its eligible  subsidiaries.  In accordance  with the tax allocation  arrangement
between the Company and its subsidiaries,  income taxes are allocated  generally
as if the Company and its subsidiaries  filed separate U.S. and state income tax
returns. Under this arrangement, operating losses of Medical Systems have offset
taxable income of Technologies,  and Medical Systems recorded income tax credits
as a  result  of the tax  benefit  to  Technologies  of such  operating  losses.
Subsequent to the  Distribution,  any operating losses of Medical Systems cannot
be used to offset any future taxable income of Technologies  generated after the
date of the Distribution.

As of June 28,  1997,  Medical  Systems had  recorded net deferred tax assets of
approximately  $800,000 relating primarily to the timing of deductions resulting
from an acquisition by Medical  Systems.  As a result of the  uncertainty of the
realization  of these  deferred tax assets after the  Distribution,  Electronics
will provide a valuation  allowance against certain of these deferred tax assets
at the time of the Distribution.  Management estimates that the establishment of
such a valuation  allowance will result in an additional income tax provision of
approximately $600,000 in the fourth quarter of fiscal 1997.

                                                                        11 of 28

<PAGE>



NOTE 5  --        EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
<TABLE>

Earnings  per common  and  common  equivalent  share are  computed  based on the
weighted  average number of shares of common stock and common stock  equivalents
outstanding during the period.

<CAPTION>
                                                                      Quarter Ended             Nine Months Ended
                                                              --------------------------------------------------------
                                                                     June 28,       June 29,     June 28,     June 29,
                                                                         1997           1996         1997         1996
                                                                    (amounts in thousands except per share data)
----------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>            <C>          <C>          <C>  
Weighted average shares outstanding                                     7,016          6,973        7,021        6,898

Net effect of dilutive stock options
   based on the treasury stock method                                     159            242          110          184
                                                              --------------------------------------------------------

Total fully diluted weighted average shares                             7,175          7,215        7,131        7,082
  outstanding
                                                              ========================================================

Income (loss) from continuing operations                              ($1,137)         ($863)     ($2,715)     ($2,107)
Income from discontinued operations,
    net of tax                                                          1,696          1,639        3,183        3,845
                                                              --------------------------------------------------------
Income                                                                   $559           $776         $468       $1,738
                                                              ========================================================

Earnings (loss) from continuing operations per
common and common equivalent share                                     ($0.16)        ($0.12)      ($0.38)      ($0.30)
Earnings from discontinued operations per
    common and common equivalent share                                   0.24           0.23         0.45         0.55
                                                              --------------------------------------------------------
Earnings per common and common equivalent
    share                                                               $0.08          $0.11        $0.07        $0.25
                                                              ========================================================
Pro forma loss per share from continuing operations
  based on weighted average shares outstanding                         ($0.16)        ($0.12)      ($0.39)      ($0.31)
                                                              ========================================================
</TABLE>

In February 1997, the Financial  Accounting Standards Board issued Statement No.
128, Earnings per Share,  which is required to be adopted for the quarter ending
December  27,  1997.  At that time,  the Company  will be required to change the
method  currently  used to compute  earnings  per share and to restate all prior
periods.  Had the  Statement  been  implemented  for the quarter and nine months
ended  June 28,  1997  and  June  29,  1996,  respectively,  the  impact  on the
calculation of earnings per share would not have been material.


                                                                        12 of 28

<PAGE>

NOTE 6 -- CONTINGENCIES AND LITIGATION

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

In October 1993,  CooperSurgical,  Inc., a subsidiary  of The Cooper  Companies,
filed a claim for unspecified damages alleging unfair competition due to actions
by BEI Medical Systems and its president  Richard  Turner,  a former employee of
The Cooper Companies, and others. On January 31, 1996, the Court issued a ruling
which affirmed the legal basis for BEI Medical  Systems to assert a counterclaim
for  damages  against  CooperSurgical  regarding  the  parties'  electrosurgical
generator contract.

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

Management has vigorously  defended its rights in this action and believes after
discussion with legal counsel that the CooperSurgical claims are exaggerated. In
1995 expert  witnesses for the Company  prepared a formal response to the damage
computations  CooperSurgical  previously submitted. The Company's experts stated
that if CooperSurgical were entitled to damages,  those damages would total less
than  $100,000,   and  would  be  more  than  offset  by  BEI  Medical  Systems'
counterclaims against CooperSurgical,  if BEI Medical Systems were successful in
its counterclaims.

The  trial is  currently  scheduled  for  September  1997.  The  Company,  after
consultation with counsel, believes that the additional damage figures stated in
the June 1996 letter from  CooperSurgical's  counsel are exaggerated.  While the
outcome of this matter cannot be determined at this time,  management  believes,
taking known  factors into account and after  consultation  with legal  counsel,
that this matter will not result in a material  adverse  impact on the financial
position of the Company.

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


                                                                        13 of 28
<PAGE>

Item 2. 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.

On June 30, 1997, the Board of Directors of BEI Electronics,  Inc. (Electronics)
approved a plan of  distribution  to holders of Electronics  common stock of one
share of common stock of BEI Technologies,  Inc. (Technologies),  a newly formed
subsidiary,  for each share of Electronics  common stock held (the Distribution)
as part of a plan to separate the two main  businesses of BEI  Electronics,  BEI
Sensors & Systems  Company,  Inc.  and BEI  Medical  Systems  Company,  Inc.  In
connection with the Distribution,  Electronics will transfer to Technologies all
of the assets,  liabilities  and operations of its Sensors & Systems and Defense
Systems  business  segments.  See Note 3 -- Discontinued  Operations of Notes to
Condensed Consolidated Statements.

The continuing  operations of Electronics as discussed herein consist of Medical
Systems (Medical) and its related corporate expenses. Discontinued operations of
the  Company  represent  BEI  Technologies,  Inc.  and  consist of the Sensors &
Systems and Defense Systems segments and their related  corporate  expenses.  On
June 30,  1997,  the Board of  Directors  also  approved  a formal  plan for the
discontinuance of the Defense Systems business segment.  Within the Discontinued
Operations  discussion of Technologies herein, the results of operations for the
Defense Systems business segment are presented as discontinued operations.



                                                                        14 of 28
<PAGE>

CONTINUING OPERATIONS (MEDICAL)
<TABLE>

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

<CAPTION>
                                                                   Quarter Ended             Nine Months Ended
                                                            -------------------------------------------------------
                                                               June 28,      June 29,     June 28,      June 29,
                                                                 1997          1996         1997          1996
-------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>           <C>          <C>          <C>    
Net sales                                                        100.0 %       100.0 %      100.0 %      100.0 %
Cost of sales                                                     62.1          60.4         58.2         62.3
                                                            ----------    ----------    ---------    ---------
Gross profit                                                      37.9          39.6         41.8         37.7

Selling, general and administrative expenses                      89.6          83.8         79.1         71.0
Research, development and related expenses                        19.4          14.3         18.1         14.5
                                                            ----------    ----------    ---------    ---------
Operating income (loss)                                          (71.1)        (58.5)       (55.4)       (47.8)

Other income                                                       0.6           3.7          1.7          3.2
Interest expense                                                   0.6           1.0          0.7          1.2
                                                            ----------    ----------    ---------    ---------
Income (loss) before income taxes                                (71.1)        (55.8)       (54.4)       (45.8)
Income taxes                                                     (25.1)        (18.8)       (18.7)       (15.4)
                                                            ----------    ----------    ---------    ---------
Income (loss) from continuing operations                         (46.0)        (37.0)       (35.7)       (30.4)
                                                            ==========    ==========    =========    =========
</TABLE>

Quarters ended June 28, 1997 and June 29, 1996

Net sales for the quarter  ended June 28, 1997  increased  $136 thousand or 5.8%
from the same period in fiscal 1996.  Sales of gynecology  products were up at a
higher rate but were partially offset by declines in  gastrointestinal  products
and other sales. In the quarter,  shipments to  distributors  contributed to the
increased sales of gynecologic instruments as well as international shipments of
the Hydro-ThermAblator product.

Cost of sales as a percentage of net sales  increased to 62.1% from 60.4% in the
third quarter of fiscal 1997 versus the comparable  period of fiscal 1996. Labor
costs for product start-ups were the primary cause of the increase.

Selling,  general  and  administrative  expenses  as a  percentage  of net sales
increased  from 83.8% in the third  quarter of fiscal 1996 to 89.6% in the third
quarter of fiscal 1997. The increase was primarily due to costs  associated with
the  Distribution.  These  expenses  declined  from the  prior  year due to cost
reduction efforts even though  significant  effort to support FDA Phase II human
trials of the Hydra-ThermAblator continued.

Research,  development and related expenses as a percentage of net sales for the
third quarter of fiscal 1997 increased to 19.4% from 14.3% in the same period of
fiscal  1996 due to  increased  spending  for product  development.  This effort
included engineering support for the start up of new product manufacturing.

Other income as a percent of sales  declined  from 3.7% in the third  quarter of
1996 to 0.6% in the third quarter of fiscal 1997 due to lower interest from cash
balances.

                                                                        15 of 28
<PAGE>

Nine months ended June 28, 1997 and June 29, 1996

Net sales for the first nine months of fiscal 1997  increased  $671  thousand or
9.7% from the same period of the prior year.  Sales of gynecology  products were
up more than 15% as compared  to the first nine  months of the prior  year,  due
primarily  to  the  reorganization  of  telemarketing   efforts  for  gynecology
instrument  sales.  These  increases were partially  offset by declines in other
product sales.

Cost of sales as a percentage of net sales  decreased to 58.2% from 62.3% in the
first nine months of fiscal 1997 as compared to the same period of fiscal  1996.
This was primarily due to the increased volume of products as well as reductions
in overhead  costs.  Higher  labor costs  included in cost of goods sold for new
products partially offset the overall decrease in cost of goods sold.

Selling,  general  and  administrative  expenses  as a  percentage  of net sales
increased  from  71.0% in the first nine  months of fiscal  1996 to 79.1% in the
first nine months of fiscal 1997. The increase is primarily due to  Electronics'
costs associated with the Distribution. These expenses also increased to support
FDA Phase II human trials of the Hydro-ThermAblator.

Research,  development and related expenses as a percentage of net sales for the
first  nine  months of fiscal  1997  increased  to 18.1%  from 14.5% in the same
period of fiscal 1996 due to increased  spending for product  development.  This
effort   included   engineering   support  for  the  start  up  of  new  product
manufacturing.

Other income as a percent of sales  declined  from 3.2% in the first nine months
of fiscal  1996 to 1.7% in the same period of fiscal  1997,  due to a decline in
cash balances caused by operating  activities.  Interest expense as a percent of
sales also declined from 1.2% in the first nine months of fiscal 1996 to 0.7% in
the first  nine  months of fiscal  1997 as a result  of  principal  payments  on
long-term debt.

Liquidity and Capital Resources

During the first nine months of fiscal 1997, operations utilized $2.2 million in
cash.  Operating  cash inflows  consisted  primarily  of income from  continuing
operations  adjusted for the positive impact of non-cash  charges to income from
depreciation and amortization of $1.3 million,  and increases in trade payables,
accrued expenses and other liabilities of an additional $1.2 million. Offsetting
the inflows were inventory purchases of $0.9 million,  and increases in accounts
receivable  and  decreases  in deferred  income  taxes of $0.4  million and $0.6
million, respectively.

Cash  used in  financing  activities  consisted  primarily  of $6.3  million  in
scheduled  payments of  long-term  debt.  The Company  also used $1.3 million to
purchase treasury stock on the open market. Proceeds from the issuance of common
stock of $0.3 million were offset by dividend payments of $0.4 million.  Funding
from discontinued operations provided $2.2 million.

The Internal  Revenue Service (IRS) audited the Company's income tax returns for
the fiscal years 1993 through  1995.  In the third  quarter of fiscal 1997,  the
Company reached a settlement with the IRS for all issues raised for these years,
resulting in the payment of $1.7 million of additional  taxes for those years of
which  approximately  $0.7 million relates to the Medical  business  segment and
$1.0 million relates to Technologies.  The settlement  related  primarily to the
timing of  deductions  resulting  from  acquisitions  made by the  Company.  The
payment of these  additional  taxes  resulted in an  increase  in the  Company's
deferred  tax assets and did not effect the  provision  for income  taxes in the
third quarter of fiscal year 1997.

After the  Distribution,  the Company  expects to have $9.0 million in cash. See
"Discontinued Operations

                                                                        16 of 28
<PAGE>

-- Liquidity and Capital Resources" below. Management believes that the existing
cash  balances  of  Electronics  will be  sufficient  to meet the  planned  cash
requirements  of the  Medical  business  segment  for  approximately  two years.
Subsequent to the Distribution,  the continuing operations of Electronics, which
currently  comprise the Medical  business  segment of the Company,  will have no
existing credit facilities.

The Company had no material capital commitments at June 28, 1997.

Based on the  financial  condition of the Company at June 28,  1997,  management
believes that the existing cash balances,  cash generated from  operations,  and
available lines of credit will be sufficient to meet the Company's planned needs
for the immediate future. If the Company requires additional capital, management
anticipates  that such  capital  will be provided  by bank or other  borrowings,
although  there can be no  assurances  that funds will be  available on terms as
favorable as those applicable to the Company's currently outstanding debt.

Effects of Inflation

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

DISCONTINUED OPERATIONS (TECHNOLOGIES)

         The following  table sets forth,  for BEI  Technologies,  Inc., for the
fiscal periods  indicated,  the  percentage of net sales  represented by certain
items of Technologies operations.
<CAPTION>
                                                                         Quarter Ended          Nine Months Ended
                                                                         -------------          -----------------
                                                                     June 28,     June 29,     June 28,     June 29,
                                                                       1997         1996         1997         1996
                                                                       ----         ----         ----         ----
<S>                                                                   <C>           <C>          <C>          <C>   
Net sales.....................................................        100.0%        100.0%       100.0%       100.0%
Cost of sales.................................................         64.7          61.3         65.0         62.2
                                                                      -----         -----        -----        ----- 
Gross profit..................................................         35.3          38.7         35.0         37.8
Operating expenses:
     Selling, general and administrative expenses.............         22.3          26.0         25.5         25.8
     Research, development and related expenses...............          4.5           3.7          4.2          3.8
                                                                      -----         -----        -----        ----- 
Operating income..............................................          8.5           9.0          5.3          8.2
Other income..................................................          0.2           0.3          0.3          0.2
Interest expense..............................................         (1.6)         (2.6)        (1.9)        (2.6)
                                                                      -----         -----        -----        ----- 
Income before income taxes from continuing
   operations.................................................          7.1           6.7          3.7          5.8
Income taxes .................................................          2.7           2.2          1.3          2.0
                                                                      -----         -----        -----        ----- 
Income  from continuing operations............................          4.4           4.5          2.4          3.8
Income from discontinued operations, net of income
   taxes......................................................          1.9           2.3          1.9          1.6
                                                                      -----         -----        -----        ----- 
Income .......................................................          6.3%          6.8%         4.3%         5.4 %
                                                                      =====         =====        =====        =====
</TABLE>

Quarters ended June 28, 1997 and June 29, 1996

Net sales for  Technologies  for the quarter ended June 28, 1997  increased $2.5
million or 10.2% from the prior year.  Sales of automotive and other  commercial
products  increased  $1.2  million  and  $4.5  million,  respectively,  but were
partially   offset  by  decreases  in  sales  to   government   contractors   or
subcontractors

                                                                        17 of 28

<PAGE>

of $3.2 million.

Technologies  cost of sales as a percentage of net sales increased from 61.3% in
the third  quarter of fiscal 1996 to 64.7% in the third  quarter of fiscal 1997.
Technologies  incurred  cost  overruns on the  development  of some products for
aerospace applications. In addition, average costs of goods sold as a percentage
of sales  for new  automotive  applications  have  been  higher  than for  other
commercial products due to start-up efforts.

Technologies selling, general and administrative expenses as a percentage of net
sales  decreased  from 26.0% in the third quarter of fiscal 1996 to 22.3% in the
third quarter of fiscal 1997, as a result of increased  sales and cost reduction
efforts in the past year.

Research,  development and related expenses as a percentage of net sales for the
third quarter of fiscal 1997  increased 0.8% from the same period in fiscal 1995
due  to   increased   research   spending   to   support   the   production   of
micro-electromechanical sensors and product development for automotive and other
commercial products.

Interest  costs in the third quarter of fiscal 1997 decreased as a percentage of
net sales from 1.6% to 2.6%  during the same  period in fiscal  1996.  The lower
interest  expense  is the  result of the  repayment  of $5.6  million of debt in
October and November 1996.

The  increase  in income  from  continuing  operations  of $0.1  million to $1.2
million  in the third  quarter  of fiscal  1997 from $1.1  million  in the third
quarter of fiscal 1996  primarily  reflects  reductions in interest  expense and
selling, general and administrative costs.

Nine months ended June 28, 1997 and June 29, 1996

Net sales for  Technologies  for the first nine months of fiscal 1997  increased
$3.0  million  or 4.3%  from the  prior  year.  Sales of  automotive  and  other
commercial products increased $1.9 million and $6.7 million,  respectively,  but
were  partially  offset  by  decreases  in sales to  government  contractors  or
subcontractors of $5.5 million.

Technologies  cost of sales as a percentage of net sales increased from 62.2% in
the first nine months of fiscal 1996 to 65.0% in the first nine months of fiscal
1997.  Technologies operations incurred cost overruns on the development of some
products for aerospace applications. In addition, average costs of goods sold as
a percentage of sales for new automotive  applications have been higher than for
other commercial products due to start-up efforts.

Technologies selling, general and administrative expenses as a percentage of net
sales  decreased  from 25.8% in the first nine months of fiscal 1996 to 25.5% in
the first nine months of fiscal 1997.  This was mainly the result of  settlement
and other related  charges  associated with the settlement of a legal dispute by
arbitration that was resolved in the first quarter of fiscal year 1997.

Research,  development and related expenses as a percentage of net sales for the
first nine months of fiscal 1997  increased  0.5% from the same period in fiscal
1996  due  to  increased   research   spending  to  support  the  production  of
micro-electromechanical  sensors and the  development  of  automotive  and other
commercial products.

Interest costs in the first nine months of fiscal 1997 decreased by $0.5 million
from the same period in fiscal 1996. The lower interest expense is the result of
the repayment of $5.6 million of debt in the first

                                                                        18 of 28
<PAGE>

quarter of fiscal 1997.

The decline in income from continuing operations, from $2.7 million in the first
nine  months of fiscal  1996 to $1.8  million in the first nine months of fiscal
1997,  primarily  reflects  the  after tax  charge  in fiscal  year 1997 of $1.1
million  incurred in connection  with an arbitration to settle a royalty dispute
and a 2.8% decrease in gross profit as a percentage of sales.

Income from Discontinued Operations of Defense Systems

In June 1997, the Board of Directors of  Electronics  approved a formal plan for
the  discontinuation  of the operations of the Defense Systems business segment.
This segment was primarily a manufacturer of Hydra 70 ("H 70") military  rockets
whose  production  was shut down at the end of  fiscal  1996.  Accordingly,  the
results of  operations  of the Defense  Systems  segment  have been  reported as
discontinued  operations  for all  periods  presented.  Defense  Systems  income
decreased slightly from $0.6 million in the third quarter of fiscal 1996 to $0.5
million in the third quarter of fiscal 1997.  Defense  Systems'  improved  gross
profit  on the  non-H 70  products,  together  with a $1.3  million  decline  in
selling,  general  and  administration  expenses  due to the closure of the H 70
production line, resulted in income from discontinued  operations  increasing to
$1.4  million in the first nine months of fiscal  1997 from $1.1  million in the
first nine months of fiscal 1996.

Liquidity and Capital Resources

During the first nine months of fiscal 1997, operations provided $2.9 million in
cash.  Operating  cash inflows  consisted  primarily of income  adjusted for the
positive impact of non-cash  charges from  depreciation and amortization of $4.3
million, a change in income taxes payable of $1.0 million, and changes in assets
and liabilities of  discontinued  operations of Defense Systems of $2.7 million.
Offsetting these inflows were inventory increases of $3.1 million,  the negative
impact of a change in  deferred  taxes of $1.8  million,  and a net  decrease in
trade  payables and accrued  expenses  and other  liabilities  of $3.6  million,
primarily due to a payment $5.3 million of amounts accrued in fiscal 1996 and in
the first quarter of fiscal 1997 in connection  with the final  settlement of an
arbitration.

Cash used in  investing  activities  in the  first  nine  months of fiscal  1997
consisted  primarily  of  $6.0  million  for  capital  expenditures,   which  is
consistent  with  spending  in the first nine months of the prior  fiscal  year.
Capital  equipment  requirements  may increase in future periods and the Company
may expand the use of lease financing to fund such requirements.

In  connection  with  the  Distribution  and  subject  to  the  approval  of the
noteholders,  Technologies  will assume existing  indebtedness of Electronics in
the amount of  approximately  $22.4 million.  Cash in the amount of $9.0 million
will remain in Electronics after the Distribution. A portion of that amount will
consist of debt assumed by Technologies in repayment of intercompany obligations
arising prior to the Distribution.  Management  believes that new financing will
be  available to  Technologies  and intends to negotiate a line of credit from a
financial  institution  and on  terms  which  will,  in the  aggregate,  be more
favorable than those available on new financing  available to Electronics  prior
to the Distribution.  However, there can be no assurances that Technologies will
be able to negotiate the assumption of such Electronics  debt,  obtain a line of
credit from a financial  institution as discussed  above,  or that funds will be
available on terms as favorable as those  applicable to the Company's  currently
outstanding debt, if at all.

                                                                        19 of 28
<PAGE>
PART II.  OTHER INFORMATION

Item 5.  SUMMARY DESCRIPTION OF CONTINUING OPERATIONS
         (MEDICAL SYSTEMS)

The following business description may contain  forward-looking  statements that
involve  risks  and  uncertainties.   When  used  herein,  the  words  "intend",
"anticipate", "believe", "estimate" and "expect" and similar expressions as they
related to BEI Medical Systems Company,  Inc.  (hereafter Medical Systems or the
Company) are intended to identify such forward-looking statements. The Company's
actual  results,  performance or achievements  could differ  materially from the
results expressed in, or implied by, these forward-looking statements.

Background

BEI Electronics,  Inc. is a diversified  technology based manufacturing  company
which has historically  conducted its business in several operating segments. On
July 2, 1997, the company  announced a plan to form a new company  consisting of
all of the  non-medical  business of BEI  Electronics,  Inc.  and to  distribute
shares  in the  new  company  pro  rata  to  the  existing  shareholders  of BEI
Electronics, Inc. Therefore,  following this distribution,  which is expected to
occur  at the end of  September,  1997,  the  sole  continuing  business  of BEI
Electronics, Inc. will be that carried on by its subsidiary, Medical Systems.

The following narrative text expands on previous descriptions of the business of
Medical  Systems.  For  a  more  complete  historic  description  of  the  other
businesses of BEI  Electronics,  the reader may refer to previous reports of BEI
Electronics,  Inc.  published on Form 10-K. In addition,  a  description  of the
newly  formed  company,  BEI  Technologies,  Inc.  is more fully set forth in an
Information Statement on Form 10 filed with the SEC on July 3, 1997.

Introduction

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

Business Strategy

The Company  intends to become the leading medical device  manufacturer  focused
exclusively  on serving  the  specific  needs of the  gynecologist.  Its special
emphasis is on the diagnosis,  manipulation and treatment of the cervix,  uterus
and  fallopian   tubes.  A  particular   goal  is  to  offer   alternatives   to
hysterectomies for the physician and patient.

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

         Broaden its existing  gynecological product line. The Company currently
         markets  over 500 medical  products to its  existing  base of customers
         worldwide. The Company intends to develop or acquire additional product
         lines.  The Company acquired  Zinnanti  Surgical  Instruments,  Inc. in
         February  1993,  and further  broadened  its product  lines through the
         acquisition of OvaMed Corporation in February 1996.

         Develop and commercialize innovative medical technologies.  The Company
         is currently directing

                                                                        20 of 28
<PAGE>

         product    development    efforts   at    commercialization    of   its
         Hydro-ThermAblator(R)  (HTA(R)) system,  which is currently  undergoing
         U.S. Food and Drug Administration  (FDA) Phase II human trials. The HTA
         is intended to provide  minimally  invasive  treatment  for abnormal or
         excessive uterine bleeding.

         Acquire complementary technologies.  The Company intends to continue to
         expand  its  product  line  through  selective  business  acquisitions,
         licensing, joint ventures, and internal development.  In December 1993,
         the Company acquired exclusive rights to use the Goldrath patents which
         cover endometrial ablation. In 1996 the Company acquired the GyneSys(R)
         Dx System for cervical and fallopian tube  diagnosis and treatment.  In
         1997 the Company acquired  exclusive rights to distribute a specialized
         electrosurgery system for removal of benign uterine fibroids.

         Expand  global  sales  and  distribution.  The  Company  also  plans to
         increase sales through the expansion of its marketing activities to the
         over  33,000  gynecologists  practicing  in the  United  States.  A key
         component of this  strategy is increasing  the Company's  complementary
         direct sales effort through manufacturers'  representatives assisted by
         an  internal  sales  team and a niche  specialty  direct  catalogue  to
         gynecologists  in the U.S. The sales  effort has also been  expanded to
         select international areas through a network of distributors.

         Expand key  relationships  with  leading  clinicians.  The  Company has
         developed  working  relationships  with key  clinicians  for innovative
         products and procedures to address  women's  healthcare  disorders.  To
         further  enhance  this  activity,  the Company has formed a  Scientific
         Advisory  Committee to review and evaluate new products and  procedures
         for future  development and  commercialization.  This committee will be
         chaired by Stephen L. Corson, M.D.

Products

The Company's medical products include:
         1.       A small diameter flexible hysteroscope for viewing the uterus.
         2.       The  Hydro-ThermAblator   system  for  treatment  of  abnormal
                  uterine bleeding.
         3.       A  specialized  bipolar  electrosurgery  system for removal of
                  benign uterine fibroids.
         4.       The GyneSys catheter system for access to and treatment of the
                  uterus and fallopian tubes.
         5.       Complementary  products such as  disposable  kits for biopsies
                  and other procedures and stainless steel instrumentation.

These products and their potential are more fully discussed below:

1.       Hysteroscopes
         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,  identify
various  pathology,  make  directed  biopsies,  and perform  minimally  invasive
therapeutic procedures.

         Direct  visualization  of the  uterus  enables a precise  diagnosis  of
uterine   abnormalities,   but  at  this  time  less  than  20%  of   diagnostic
hysteroscopies  are  being  performed  in the  office  setting  due to the large
diameter of traditional  instrumentation for hysteroscopy  requiring dilation of
the cervix combined with sedation.

         The Company has developed an integrated  hysteroscopy  system featuring
the Company's

                                                                        21 of 28
<PAGE>

HysteroSys(TM) flexible hysteroscope,  which has an atraumatic outer diameter of
only  3.7mm,  making it  suitable  for use in the  office  setting  without  the
discomfort  associated  with  larger  traditional  hysteroscopes.   This  office
hysteroscopy system includes the Company's Integrated Video System(TM) featuring
miniaturized  digital video camera  technology  combined  with a high  intensity
illumination  source in a compact  control unit that,  when mounted on a compact
mobile cart together with video monitor and video recording  capability,  can be
easily moved from one examination room to another.

         The Company believes that its flexible  hysteroscope  system offers the
following  advantages  compared to  traditional  rigid and other  flexible scope
systems:
         o        reduced outer diameter reduces patient discomfort.
         o        steerable   tip  allows   panoramic   view   without   awkward
                  manipulation.
         o        complete system cost is as low as one-half that of traditional
                  systems.
         o        modular scope design reduces operating and maintenance costs.
         o        a working  channel in the  hysteroscope  allows  direct visual
                  placement   of  the  Uterine   Cornual   Access   Catheter(TM)
                  (UCAC(TM))  into the proximal  fallopian tube for  infertility
                  diagnosis.
         o        the  integrated   video  system is also  compatible  with  the
                  Hydro-ThermAblator system.

2.       The Hydro-ThermAblator System
         Approximately  2.5  million  women each year in the United  States seek
medical  treatment from the gynecologist for abnormal  uterine  bleeding.  Also,
many of the nearly 2 million women who receive  hormonal therapy or dilation and
curettage (D&C) fail to have satisfactory resolution of their menstrual 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.

         The Company has developed the patented Hydro-ThermAblator technology as
an  alternative  to  hysterectomy  or to  traditional  treatments  for  abnormal
menstrual bleeding as well as other proposed ablation treatments currently under
development.

         The Company believes that its HTA offers distinct  advantages  compared
to existing and emerging  ablation  technologies  for the  treatment of abnormal
menstrual bleeding:
         o        Does not require extensive training prior to use.
         o        Clinical  outcome  is not  dependent  on  user  experience  or
                  variation in technique.
         o        Freely  circulating  heated  saline  allows even and  complete
                  treatment of the entire endometrium.
         o        Variation in uterine size and shape is easily  accommodated by
                  freely circulating heated saline.
         o        Integral hysteroscope provides confirmation of uterine anatomy
                  and instrument position, as well as continuous  observation of
                  treatment effect.

         The  Hydro-ThermAblator  has been designed to offer the  gynecologist a
minimally-invasive,  nonsurgical  method to treat abnormal menstrual bleeding in
an outpatient or office setting.  The HTA consists of a portable  treatment unit
incorporating microprocessor control of fluid circulation, closed-loop volume of
the circulating saline, and fluid temperature. The mobile unit provides a drawer
for  procedure  supplies,  and a shelf to house the Company's  Integrated  Video
System for display of the hysteroscopic image.

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Precisely-heated  saline is circulated  within the patient's  uterus,  under the
direct visual control of the gynecologist, for sufficient time to cause ablation
of the entire  endometrial  lining. The digital displays of the HTA control unit
guide the user through the steps of the HTA  procedure,  providing  step-by-step
prompts that assure 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. At
any time,  the  gynecologist  can interrupt the treatment  and, if desired,  the
circulation of room temperature  saline will rapidly cool the fluid  circulation
system and the patient's  uterus. As a result of the ablation of the endometrial
lining of the uterus, the regeneration of the endometrium and resulting periodic
menstrual bleeding is either significantly reduced or eliminated.

         The  Company  completed  FDA-required  Phase I clinical  trials with 20
patients in April  1996.  The  Company  began  Phase II clinical  trials with 20
patients  in late 1996.  Sales of the HTA system to date have been  limited.  In
February,  1997, the Company  selectively  initiated  delivery of units in those
countries  where  regulatory  authorities  permit  sales.  In addition,  certain
clinical  sites in  international  markets  have  received  units for use in the
accumulation  of additional  clinical  data.  The HTA may not be marketed in the
United  States until the Company has  completed  Phase III  clinical  trials and
filed for and received a Pre-Marketing  Authorization ( PMA) from the FDA. There
can be no assurance that the FDA will permit the Company to proceed to Phase III
clinical trials. Moreover, there can be no assurance that any data obtained from
such trials, if they are permitted, will support the safety and effectiveness of
the HTA.  Failure on the part of the  Company  to proceed to Phase III  clinical
trials or failure of the data to support the safety and effectiveness of the HTA
would  have a  material  adverse  effect on the  Company's  business,  financial
condition and results of operations.  Certain international markets will require
similar approvals.

3.       Fibroid Removal System
         The newly licensed  bipolar  fibroid removal system will be utilized by
gynecologists  for a transcervical  approach to the removal of fibroids found in
the internal  surface of the uterus.  It is anticipated that these fibroids will
be  removed   under  fluid   conditions   with  the  added   safety  of  bipolar
electrosurgery  technology.  This same  technology is  successfully  utilized in
neurosurgery and other critical medical specialities.

4.       The GyneSys Catheter System
         The  Company  has  developed  a catheter  system for use by a physician
attempting  to  diagnose  whether  the cause of female  infertility  is due to a
blockage of the fallopian tubes. The current  diagnostic  procedure of choice is
hysterosalpingography  ("HSG"),  a  hospital-based  procedure which involves the
injection of an x-ray contrast media (or dye) transcervically into the uterus to
allow  the  physician  to  observe  and  evaluate  the flow of dye  through  the
fallopian tubes under fluoroscopy (imaging-ray). This procedure is often painful
and is also known to be highly  inaccurate,  with  false-positive  results in as
many as 40% of HSG-diagnosed cases of proximal tubal occlusion ("PTO").

         The Company believes that its GyneSys Dx System of catheters  overcomes
the limitations of  conventional  HSG and may obviate the need and inherent risk
of exploratory  laparoscopy  in the diagnosis of PTO. The Company  believes that
the use of its  GyneSys Dx catheter  system,  rather  than the  traditional  HSG
catheter,  can improve the  diagnostic  accuracy of HSG procedures by adding the
ability to direct fluid flow to the opening of each  fallopian  tube  (selective
salpingography),  or even  direct a guidewire  and  catheter  into the  proximal
fallopian  tube  (proximal  tubal  cannulation)  to dislodge a  blockage.  While
fluoroscopy is the prevalent imaging modality for HSG, the Company believes that
the proliferation of ultrasound  equipment in gynecologists'  offices,  combined
with  nationwide  pressure  from  third  party  reimbursement  agencies  to move
procedures out of the hospital  environment into outpatient and office practice,
and the ease of use of the GyneSys Dx system will  create a  significant  market
opportunity  for the  GyneSys  Dx system as the first step in the  diagnosis  of
tubal occlusion in the work-up of female infertility patients.

         The  American  Society  for  Reproductive   Medicine   recommends  that
selective salpingography be

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performed, following positive HSG indication of proximal tubal occlusion, before
use of more invasive  techniques.  It is estimated that, of the  approximately 1
million  potential HSG  procedures,  30% of all patients will require  selective
salpingography, and that 10% will require proximal tubal cannulation.

         BEI's Cervical Access  Catheter(TM)  (CAC(TM)) with its  non-allergenic
balloon  technology and unique locking mechanism provides safety and ease of use
for passing  additional  catheters and devices.  The Cervical Access Catheter is
designed for the routine  introduction of contrast media or dye into the uterine
cavity     for     hysterosalpingography,      sonohysterosalpingography     and
chromopertubation. Well suited to visualization using fluoroscopy or ultrasound,
the larger center lumen is designed for the  introduction  of other catheters or
instruments.


The high false positive rates  associated  with  conventional  HSG for fallopian
tube  obstruction  under both  fluoroscopy and ultrasound,  can be significantly
reduced  with  selective  salpingography  using the BEI  Uterine  Ostial  Access
Catheter(TM)  (UOAC(TM)).  With  direct  examination  of the  tubal  ostia,  the
physician  can  easily  distinguish   tubocornual  spasm  from  true  mechanical
obstruction.  The pre-formed  atraumatic distal tip of the UOAC advances through
the CAC in the  direction  of the  tactile  indicator  to provide  access to the
uterine ostia.

         If obstruction  of the fallopian  tube is observed,  the GyneSys System
also accommodates the Uterine Cornual Access Catheter (UCAC) and guidewire, with
which the  physician  can often open the  fallopian  tube  without  the need for
laparoscopic surgery.

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

         Devices,  Instruments & Procedure Kits.  Medical Systems markets a line
of surgical  instruments,  procedure  kits and  devices  that aid in or enable a
physician  to  apply  various  technologies  to  an  array  of  medical/surgical
requirements  in the  field of  gastroenterology,  gynecology  and  reproductive
health  care.  These  products  come in a  variety  of  disposable  or  reusable
configurations, allowing the caregiver's institution to select the most suitable
option. Products include ZUMI(TM) uterine manipulator/injectors, ZUI(TM) uterine
injectors,  Z-Clamps(TM) and  Z-Scissors(TM)  for hysterectomy,  cervical biopsy
forceps,  Corson-Myoma(TM)  grasping forceps, ZSI Miya Hook(TM),  micro surgical
instruments,  hysterectomy kits and other specialty instruments.  Other products
include  endoscopic  illuminators,  cameras,  various types of endoscopes and an
automatic  electronic  insufflator.  These  products  are  used in  laparoscopic
procedures in gastrointestinal, gynecological and general surgery.

         Electrosurgery  Units.  These products use radio  frequency  electrical
energy to cut tissue  and/or  coagulate  bleeding.  Medical  Systems  produces a
variety  of  electrosurgical  generators  that are  designed  for use in various
medical and  surgical  procedures.  These and  associated  supporting  items are
marketed under the Company's Meditron  Devices(TM)  tradename and the tradenames
of OEM customers.

Significant Customers and Markets

         Medical Systems' products are sold to a variety of customers  primarily
for the gynecology  market.  Other markets served include  gastroenterology  and
general surgery.  In the U.S.,  Medical Systems utilizes a system of independent
manufacturer's representative organizations,  direct sales representatives,  and
telemarketers to market its products directly to end users, hospitals,  surgical
centers  and  doctors'  offices.  Products  are also sold  through a network  of
domestic and international  distributors.  In fiscal 1996,  international  sales
were  14% of  Medical  Systems'  sales,  compared  to 10% in  fiscal  1995.  The
Company's

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international  sales are  dependent on the  marketing  efforts of, and sales by,
these distributors. 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  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.  Additionally,  a variety of products are manufactured by Medical
Systems for sale by third parties under various OEM agreements.  In fiscal 1996,
OEM sales were 15% of Medical Systems' sales, compared to 21% in fiscal 1995.

Backlog

         Backlog is not currently a significant factor for Medical Systems.  The
Company  typically  ships  instruments  within one to two weeks of receipt of an
order  and  electronic  products  within  30 days  after  receipt  of an  order.
Disposable  products  are normally  shipped  within one day of receipt of order.
Products that require  special  development,  design,  packaging and testing are
generally shipped within four to six months after an order is received.

Competition

         The Company's principal competitors include Valleylab,  a subsidiary of
Pfizer;  Microvasive,  a  subsidiary  of Boston  Scientific;  Imagyn;  Gynecare;
Conceptus;  Karl Storz;  Richard Wolf;  Circon-Cabot;  Utah Medical;  Leisegang;
Wallach; and CooperSurgical, Inc. 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 may be developed by the Company in production and marketing.

         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
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.

Manufacturing

         Medical  Systems'  manufacturing  operations  consist  primarily of the
manufacture and assembly of equipment such as electrosurgery  units,  endoscopic
illuminators, endoscopes and electronic insufflators. Some component fabrication
and assembly of various non-electrical  products,  both disposable and reusable,
is performed by the manufacturing  group.  During fiscal 1996,  Medical Systems'
manufacturing  facilities  received ISO 9001  certification from Lloyds Register
Quality  Assurance.  Additionally,  the Company's  facilities and  documentation
procedures for the manufacture of medical devices are required to conform to the
Good Manufacturing Practices ("GMP"), enforced by the FDA through its facilities
inspection  program.  The  Company's  manufacturing  facilities  in  Chatsworth,
California and Hackensack, New Jersey were most recently inspected by the FDA in
January 1996 for compliance  with GMP. Upon completion of the  inspections,  the
FDA did not issue a Notice of Adverse Findings at either facility. Withdrawal of
GMP status  would  have a material  adverse  effect on the  Company's  business,
financial condition and results of operations.

         In  order to  commercialize  the HTA  successfully,  the  Company  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
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 transferrable to the
HTA. Failure of the Company to produce the HTA

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

Research and Development

         The Company's  principal  development effort has focused on proprietary
devices for minimally invasive procedures in gynecology. Products that have been
under development include the Hydro-ThermAblator technology as an alternative to
existing  treatment for abnormal menstrual  bleeding,  the GyneSys DX Diagnostic
Catheter  System for the diagnosis and treatment of fallopian tube  obstruction,
and the flexible HysteroSys Diagnostic Hysteroscope as a cost effective solution
suitable for the physician's office. Although the Hydro-ThermAblator  technology
has not yet received FDA approval in the United States, it has been approved for
use and sold in several foreign countries.  Additionally,  the Company continues
development efforts to improve monopolar and bipolar electrosurgical  generators
and the Company is developing  new  applications  for surgical  illuminator  and
automatic insufflator product lines for general and laparoscopic surgery as well
as for outpatient and office  applications.  The Company also works with several
OEM  customers  for the  adaptation  of its  proprietary  technology  to various
private label requirements.

Government Regulation

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

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

         Medical  device laws are also in effect in many  countries  outside the
U.S. in which  Medical  Systems does  business.  These range from  comprehensive
device approval requirements to requests for product data or certifications. The
number  and  scope of these  requirements  are  increasing.  This  trend  toward
increasing  product  regulation is evident in the European Union,  where efforts
are under way to harmonize  the  regulatory  systems.  Such  regulatory  systems
include ISO 9000, IEC 601 and CE marks.

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


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Employees

As of June 28, 1997, Medical Systems had 95 employees, including 13 in research,
development and engineering,  30 in marketing and sales, 40 in operations and 12
in administration.

Patents and Licenses
The  Company  primarily  relies upon trade  secrets and  know-how to develop and
maintain  its  competitive  position.  The Company  holds 24 U.S.  patents and 7
foreign  patents with  expiration  dates ranging from May 2009 to February 2013.
Because many of these patents relate to technology  that is important to certain
of the Company's products, the Company considers these patents to be significant
to its  business.  There can be no  assurance,  however,  that any  patent  will
provide  adequate  protection for the  technology or product it covers.  Item 6.
Exhibits and Reports on Form 8-K

(a)      Exhibits

         10.25  Eighth  Amendment  to Credit  Agreement,  dated  July 31,  1997,
                between BEI  Electronics,  Inc., BEI Sensors & Systems  Company,
                Inc.,  Defense  Systems  Company,   Inc.,  BEI  Medical  Systems
                Company,  Inc.,  and CIBC Inc.  and  Canadian  Imperial  Bank of
                Commerce.

         27.1   Financial Data Schedule

(b)      Reports on Form 8-K

         No  reports on Form 8-K were filed by the  Company  during the  quarter
         ended June 28, 1997.



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SIGNATURES


Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  Registrant  has duly  caused  this Report to be signed on its
behalf  by  the  undersigned,  thereunto  duly  authorized  in the  City  of San
Francisco, County of San Francisco, State of California, on August 12, 1997.




                                   BEI ELECTRONICS, INC.


                                   By:       /s/ Robert R. Corr
                                            -----------------------------------
                                            Robert R. Corr
                                            Secretary, Treasurer and Controller
                                            (Principal Accounting Officer)



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