THIRD AMENDMENT TO NOTE AGREEMENT


This Third  Amendment to Note Agreement (the "Third  Amendment") is entered into
as of the 29th day of December,  1995 between BEI Electronics,  Inc., a Delaware
corporation (the "Company"),  having its principal place of business at One Post
Street - Suite 2500, San Francisco,  California 94104, and Principal Mutual Life
Insurance Company, Berkshire Life Insurance Company and TMG Life Insurance
Company (each a "Holder" and together the "Holders").

                                    RECITALS

The  Company  entered  into a Note  Agreement  dated as of August 15,  1993 (the
"Original  Note  Agreement")  with  the  Holders  and  Principal  National  Life
Insurance  Company.  In accordance with the terms of the Original Note Agreement
the  Company  issued its 6.73%  Series A Senior  Notes due  October 1, 2000 (the
"Notes") in the original  principal amount of $16,800,000 and its 6.73% Series B
Senior  Notes  due  November  15,  2000  in the  original  principal  amount  of
$11,200,000.  The  Holders are the owners and  registered  holders of the entire
outstanding  principal balance of Notes.  Capitalized terms used but not defined
in this Third Amendment have the meanings set forth in the Note Agreement.

The Original  Note  Agreement was amended by First  Amendment to Note  Agreement
dated as of April 1, 1994 (the "First  Amendment")  and by Second  Amendment  to
Note  Agreement  dated as of September  30, 1994 (the "Second  Amendment").  The
Original  Note  Agreement  as  amended  by the First  Amendment  and the  Second
Amendment is hereinafter referred to as the "Note Agreement".

The Company has requested,  and the Holders have agreed, that the Note Agreement
be amended in certain particulars as set forth in this Third Amendment.

Capitalized terms used but not defined in this Third Amendment have the meanings
set forth in the Note Agreement.

NOW,  THEREFORE,  in  consideration  of the  premises  set forth  above,  and in
consideration  of the sum of $21,000 paid by the Company ratably to the Holders,
the receipt and sufficiency of which is hereby acknowledged, the Company and the
Holders agree as follows:

1.     Recitals Incorporated.   The Recitals  set  forth  above are incorporated
       herein by reference.

2.     Amendments to the Note Agreement.

       2.1        Section 5.11 of the Note  Agreement  is hereby  deleted in its
       entirety and the following inserted in lieu thereof:

                       Section 5.11.  Restricted Payments.  The Company will not
except as hereinafter provided:
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                           (a) declare or pay any  dividends,  either in cash or
                           property,  on any shares of its capital  stock of any
                           class  (except   dividends  or  other   distributions
                           payable  solely  in shares  of  capital  stock of the
                           Company);

                           (b)   directly   or   indirectly,   or  through   any
                           Subsidiary,  purchase, redeem or retire any shares of
                           its  capital  stock  of any  class  or any  warrants,
                           rights or options to  purchase  or acquire any shares
                           of its capital  stock  (other than in exchange for or
                           out of the net cash  proceeds to the Company from the
                           substantially  concurrent  issue  or  sale  of  other
                           shares of capital  stock of the Company or  warrants,
                           rights or options to  purchase  or acquire any shares
                           of its capital stock);

                           (c) make any other  payment or  distribution,  either
                           directly or indirectly or through any Subsidiary,  in
                           respect of its capital stock;

                           (d) make,  or permit  any  Restricted  Subsidiary  to
                           make, any Restricted Investment; or

                           (e) permit any  Restricted  Subsidiary to declare any
                           dividends,  either in cash or property, on any shares
                           of the capital  stock of such  Restricted  Subsidiary
                           (except for dividends which are payable solely to the
                           Company   or  to  the   Company   and   one  or  more
                           Wholly-owned Restricted Subsidiaries);

                  (such  declarations  or  payments  of  dividends,   purchases,
                  redemptions  or  retirements  of capital  stock and  warrants,
                  rights or options and all such other payments or distributions
                  and such  Restricted  Investments  being  herein  collectively
                  called "Restricted Payments"),  if after giving effect thereto
                  any Event of Default  shall have occurred and be continuing or
                  the sum of the aggregate  amount of  Restricted  Payments made
                  during the period  from and after  September  30,  1995 to and
                  including the date of the making of the Restricted  Payment in
                  question would exceed the sum of (i) $1,500,000  plus (ii) 50%
                  of  Consolidated  Net Income  (less 100%  thereof in case of a
                  deficit) for each fiscal year  commencing  after September 30,
                  1995,  plus (iii) the aggregate net cash proceeds  received by
                  the Company  from the sale of its capital  stock or  warrants,
                  rights or options  to  purchase  or acquire  any shares of its
                  capital stock during said period,  plus (iv) the aggregate net
                  proceeds from the sale of any  Restricted  Investments  during
                  such period up to but not exceeding the original cost thereof.

                  The Company will not declare any dividend which  constitutes a
                  Restricted Payment payable more than 60 days after the date of
                  declaration thereof.

                  For  the  purposes  of  this  ss.  5.11,  the  amount  of  any
                  Restricted  Payment declared,  paid or distributed in property
                  shall be deemed to be the  greater  of the book  value or fair
                  market  value  (as  determined  in good  faith by the Board of
                  Directors of the
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                  Company)  of such  property  at the time of the  making of the
                  Restricted Payment in question.

       2.2 Section  5.13(b) of the Note Agreement is deleted in its entirety and
       the following inserted in lieu thereof:

                      (b) The Company will not permit any Restricted  Subsidiary
                  to issue or sell any  shares of stock of any class  (including
                  as "stock" for purposes of this ss.5.13, any warrants,  rights
                  or options to purchase  or  otherwise  acquire  stock or other
                  Securities exchangeable for or convertible into stock) of such
                  Restricted  Subsidiary to any Person other than the Company or
                  a Wholly Owned Restricted  Subsidiary,  except (i) the sale of
                  stock  described  in Section  5.13(b)  and  Section B-1 of the
                  Disclosure   Letter,   (ii)  for  the  purpose  of  qualifying
                  directors,  (iii) in satisfaction of the validly  pre-existing
                  rights  of  minority   shareholders  in  connection  with  the
                  simultaneous  issuance  of  stock  to  the  Company  and/or  a
                  Restricted   Subsidiary   whereby  the  Company   and/or  such
                  Restricted   Subsidiary   maintain  their  same  proportionate
                  interest in such Restricted  Subsidiary,  or (iv) the issuance
                  and sale of  stock of BEI  Medical  Systems,  Inc.,  provided,
                  however,   the  Company   and/or  one  or  more   Wholly-owned
                  Restricted  Subsidiaries  will at all  times own not less than
                  80% of the Voting Stock of BEI Medical Systems, Inc.

       2.3 Section 8.1 of the Note  Agreement is hereby  amended by deleting the
       definition of "Adjusted  Funded Debt" and inserting the following in lieu
       thereof:

                      "Adjusted  Funded  Debt"  shall  mean  the  sum of (i) all
                  Indebtedness  of the Company and its  Restricted  Subsidiaries
                  for borrowed  money or which has been  incurred in  connection
                  with the  acquisition  of assets  in each case  having a final
                  maturity  of one or more than one year from the date of origin
                  thereof (or which is renewable or  extendible at the option of
                  the  obligor  for a period or periods  more than one year from
                  the date of origin)  including all payments in respect thereof
                  that are  required to be made within one year from the date of
                  any  determination  of Adjusted  Funded Debt,  and (ii) Deemed
                  Funded Debt.

       2.4 Section 8.1 of the Note  Agreement is hereby  amended by deleting the
       definition of "Net Income  Available for Fixed Charges" and inserting the
       following in lieu thereof:

                               "Net Income  Available for Fixed Charges" for any
                  period shall mean (I) the sum of (w)  Consolidated  Net Income
                  during  such  period,   plus  (  to  the  extent  deducted  in
                  determining  Consolidated  Net Income) (x) all  provisions for
                  any  Federal,  state or other income taxes made by the Company
                  and its Restricted  Subsidiaries  during such period, plus (y)
                  Fixed Charges of the Company and its  Restricted  Subsidiaries
                  during such period,  and (z)  amortization  as reported in the
                  published   financial   statements  of  the  Company  and  its
                  Restricted   Subsidiaries   prepared  using  GAAP;   provided,
                  however, that for any period which includes the fourth quarter
                  of fiscal year 1995 of the Company,  "Net Income Available for
                  Fixed  Charges"   shall  be  calculated   without  regard  for
                  non-recurring charges taken

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                  during  such  quarter  as  a  result  of  (x)  a   preliminary
                  arbitration  ruling regarding a royalty payment  dispute,  (y)
                  related to ending the HYDRA 70 rocket business of the Company,
                  and (z) a settlement with the U.S.  government relating to the
                  testing of accelerometers from 1986 to 1992.

3.     Representations  and  Warranties.  The Company represents and warrants to
each  Holder  as of the date of this  Agreement  that,  upon  execution  of this
Agreement, all of the following statements will be true and correct:

       3.1  As of the date of this  Agreement,  no  Default or Event of  Default
       under the Note  Agreement,  as amended,  or under any other agreement for
       borrowed money to which the Company is subject,  exists or is continuing,
       after giving effect to the waivers set forth herein.

       3.2  Except  as set forth in a letter  dated  December  21,1995  from the
       Company to the  Holders  relating  to certain  legal  proceedings  and to
       certain  matters  affecting  the Company's  HYDRA 70 rocket  contract and
       related contingencies,  the representations and warranties of the Company
       referred to in Section 3.1 of the Note Agreement are true and correct and
       complete in all material  respects as if made on the date hereof,  except
       as to those  representations  and warranties  made as of a specific date,
       which are true and correct and materially complete as of such date.

       3.3   No dissolution proceedings with respect to  the Company  have  been
       commenced or are contemplated, and, except as previously disclosed in 10Q
       or 10K reports  delivered to each holder of the Notes,  there has been no
       material  adverse  change  in  the  business,   condition  or  operations
       (financial or otherwise) of the Company,  taken as a whole,  since August
       15, 1993.

       3.4   This Agreement has been duly authorized,  executed and delivered by
       the Company and constitutes a legal,  valid and binding obligation of the
       Company.

       3.5   The Company has not made any modification of any material agreement
       with any creditor of the Company,  other than by this  Agreement,  unless
       the Company has disclosed the terms of such  modification  to each Holder
       in writing.

       3.6   The  Company has not paid or caused  to be paid and will not pay or
       cause to be paid,  directly or indirectly,  any remuneration,  whether by
       way of  supplemental  or additional  interest,  fee or otherwise,  to any
       Holder as consideration  for or as an inducement to entering into by such
       Holder of this Third Amendment, except as set forth herein.

4.     Effective  Date.  This  Agreement  shall become  effective as of the date
first written above upon receipt by each of the Holders of a counterpart of this
Agreement duly executed by the Company and the other Holders.
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Page 5

5.      Miscellaneous

       5.1   Except as  specifically amended in this Agreement all of the terms,
       conditions and covenants of the Note Agreement and the Notes shall remain
       unaltered  and in full  force  and  effect  and shall be  binding  on the
       Company. The Note Agreement is hereby ratified, confirmed and approved.

       5.2   Except  as expressly set forth  in this Agreement the terms of this
       Agreement  shall not operate as a waiver by the Holders of any provisions
       of, or otherwise  prejudice  the rights or remedies of the Holders  under
       the Note Agreement,  the Notes or applicable law and shall not operate as
       a waiver of or  otherwise  prejudice  any  rights  the  Holders  may have
       against  any other  Person.  This  Agreement  shall not be  construed  as
       establishing  a course of conduct on the part of the  Holders  upon which
       the Company may rely in the future.

       5.3   All  headings  and  captions  preceding  the  text  of the  several
       sections  of this  Agreement  are  intended  solely  for  convenience  of
       reference and shall not  constitute a part of this  Agreement,  nor shall
       they alter its meaning, construction or effect.

       5.4   This  Agreement embodies  the  entire  agreement and  understanding
       between the Company and the Holders  with regard to the matters set forth
       herein, and supersedes all prior agreements and undertakings  relating to
       such matters.

       5.5   This Agreement may be executed  by  the  parties hereto in separate
       counterparts,  each of which when so executed shall be deemed an original
       and all of  which  taken  together  shall  constitute  one  and the  same
       agreement.

       5.6   This  Agreement  shall be governed by, and construed and enforce in
       accordance with the laws of the State of Illinois.

IN WITNESS  WHEREOF the parties hereto have caused this Agreement to be executed
by their authorized officers as of the date first above written.

BEI ELECTRONICS, INC.


By /s/ Gary D. Wrench
  -------------------
  Gary D. Wrench, Sr. Vice President & CEO


By /s/ Robert R. Corr
  -------------------
  Robert R. Corr, Treasurer & Controller

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PRINCIPAL MUTUAL LIFE INSURANCE COMPANY


By: /s/ Austin Ramzy
   -----------------
   Austin Ramzy
   Assistant Director
   Securities Investment



By: /s/ Donald D. Brattabo
   -----------------------
   Donald D. Brattabo
   Second Vice President-Securities Investment


BERKSHIRE LIFE INSURANCE COMPANY


By:__________________________________



TMG LIFE INSURANCE COMPANY

By:  THE MUTUAL GROUP, its Agent


By:___________________________________



By:____________________________________