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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K

x
    
    Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended September
27, 2003 or


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


Commission file number 0-22799

B E I    T E C H N O L O
G I E S,    I N C.

(Exact name of Registrant as specified in its charter)


Delaware
(State or other jurisdiction of
incorporation or organization)
    
    94-3274498
(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)


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

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


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

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

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes x No o

The approximate aggregate market value of the voting stock held by
non-affiliates of the Registrant as of March 28, 2003 was $105,532,000 (A). As
of March 28, 2003, 14,542,068 shares of Registrants common stock were
outstanding.

The number of shares outstanding of the Registrants common stock as of
November 21, 2003 was 14,746,504.

(A) Based upon the closing sale price of the common stock on March 28, 2003 as
reported on the NASDAQ National Market System. Excludes 3,480,020 shares of
common stock held by directors, executive officers and stockholders whose
ownership exceeds ten percent of common stock outstanding on March 28, 2003.
Exclusion of shares held by any person should not be construed to indicate that
such person possesses the power, direct or indirect, to direct or cause the
direction of the management or policies of Registrant, or that such person is
controlled by or under common control with Registrant.

DOCUMENTS INCORPORATED BY REFERENCE

Registrants Proxy Statement with respect to its 2004 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission is
incorporated by reference into Part III, Items 10, 11, 12, 13 and 14 of this
report.





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|             |                                                                                               |  |  |  |  |  |  | 
|------------ | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I      
|             | ITEM 1. BUSINESS                                                                             
|             | ITEM 2. PROPERTIES                                                                           
|             | ITEM 3. LEGAL PROCEEDINGS                                                                    
|             | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|PART II     
|             | ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                
|             | ITEM 6. SELECTED FINANCIAL DATA                                                              
|             | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|             | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                          
|             | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|             | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|             | ITEM 9A. CONTROLS AND PROCEDURES                                                             
|PART III    
|             | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                  
|             | ITEM 11. EXECUTIVE COMPENSATION                                                              
|             | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|             | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|             | ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES                                              
|PART IV     
|             | ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                    
|SIGNATURES  
|Exhibit 23.1
|Exhibit 24.1
|Exhibit 31.1
|Exhibit 31.2
|Exhibit 32.1
|Exhibit 32.2



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TABLE OF CONTENTS

PagePART IItem 1.
    
    Business
    
    
    3Item 2.
    
    Properties
    
    
    18Item 3.
    
    Legal Proceedings
    
    
    19Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    19PART IIItem 5.
    

Market
for Registrants Common Equity and Related Stockholder Matters
    
    
    20Item 6.
    
    Selected Financial Data
    
    
    22Item 7.
    

Managements
Discussion and Analysis of Financial Condition and Results of Operations
    
    
    23Item 7A.
    

Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 8.
    
    Financial Statements and Supplementary Data
    
    
    30Item 9.
    

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    53Item 9A.
    
    Controls and Procedures
    
    
    53PART IIIItem 10.
    

Directors and Executive Officers of the Registrant
    
    
    53Item 11.
    
    Executive Compensation
    
    
    53Item 12.
    

Security Ownership of Certain Beneficial Owners and Management
    
    
    53Item 13.
    
    Certain Relationships and Related Transactions
    
    
    53Item 14.
    
    Principal Accountant Fees and Services
    
    
    53PART IVItem 15.
    

Exhibits, Financial Statement Schedules, and Reports on Form 8-K
    
    
    54Signatures
    
    
    
    
    58


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




PART I




ITEM 1. BUSINESS

Introduction

The principal business and operations of BEI Technologies (Technologies
or the Company) are conducted within one business segment and are carried out
by operations which design, manufacture and sell electronic devices that
provide vital sensory input and actuation for the control systems of advanced
machinery and automation systems. Sensors designed and manufactured by
Technologies, most of which are concerned with physical motion, provide
information that is essential to logical, safe and efficient operation of
sophisticated machinery. Technologies also develops and produces motors and
actuators, which are the prime movers in high performance machinery.

The Companys long-term strategy is to provide, on a global basis,
selected advanced intelligent motion control sensors, actuators and
sensor-based subsystems utilizing proprietary technologies. Management
believes that intelligent sensory input to machine control systems and
computers will be increasingly crucial to the productive functioning of a
modern economy. Accordingly, Technologies goal is to maintain, develop and
acquire a diverse offering of advanced motion control sensor products, and
manufacture and sell these with complementary products. The Company targets
technology-based markets for subsystems and end products in which its
traditional sensors, micromachined sensors, motors and actuators play an
enabling role. The Companys near term initiatives include: (a) increase
global penetration of the quartz yaw sensor for the automotive industry (as
described below); (b) leverage the advancements made to the GyroChip from
automotive efforts into current opportunities for the aerospace and defense
markets; (c) development and commercialization of other internally developed
technologies that have broad industrial and commercial applications for motion
control, rotation rate and position sensing; and (d) expand product lines
through synergistic acquisitions and strategic relationships of complementary
and value added technologies.

A key feature of the Companys strategy is to be recognized worldwide as
the most capable source for the sensor and actuator categories targeted by the
Companys product lines. The Companys traditional emphasis has been on
producing highly engineered motion control components and assemblies. The
Company believes it differentiates itself by offering: (a) superior technology
to solve a customer problem (including innovative proprietary technology); (b)
quality service; and (c) application engineering expertise in recommending and
prescribing technical solutions for customers applications. The Companys strategy is to provide
technical solutions and customer service that, together with the products
themselves, create value and give the customer confidence that the products
have been expertly prescribed and applied. The Companys
products are not sold as commodities.

By way of more specific examples, the Companys engineers regularly
address the following machine control requirements of customers:

 Many automobiles now have computer-controlled stability enhancement
systems to assist drivers in maintaining control of the vehicle in slippery
conditions or evasive maneuvers. In some of these systems sensors instantly
measure and report the presence of yaw and roll forces, which if excessive,
could cause the vehicle to spin out, fishtail or roll over. The automation
system relies on these sensors to compare the drivers indicated direction with
the actual result and can then take corrective action automatically. To this
end the Company provides special GyroChip quartz sensors.

 Commercial and military aircraft utilize many sensors to help control
movements of the aircrafts control surfaces as well as provide instrumentation
readings to the pilot on the aircrafts heading and position. The Companys
GyroChip sensors are engaged in sensing for yaw damping, back up attitude
heading and reference instruments, and navigation instrumentation on many
aircraft platforms.

 Advanced control systems in tractors, trucks, automobiles and
construction equipment need position data in order to control implements on
tractors, adjust engine speed and control steering and other automated
functions on all such equipment and vehicles. The Companys potentiometers
provide the necessary data for steering, throttle and seat position as well as
for positioning tools

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on industrial or off-road equipment.

 Semiconductor production equipment requires extremely fast yet accurate
control of start-move-stop action on x-y-z positioners and tools. The
Companys magnetic actuators provide the energizing force for such tasks.

 An automated assembly line must control positioning and movement of
handling of materials with speed and precision. Factory automation customers
typically use optical encoders to control the movement and position of products
in various operations of the manufacturing process.

 During normal operation, an elevator system needs to know exactly where
each car is (Is the car between floors or not? Are the doors open or closed?).
In both the foregoing examples, the Companys encoders measure speed, exact
location or door position.

 An antenna on a moving ship needs to be actively stabilized so that the
antenna will continuously point at a satellite or another ships pencil beam
communication signal. For such an application, the Company can supply its
proprietary GyroChip quartz rate sensor. It can also supply motor-encoders and
actuators to drive the compensating action of such a system.

 Various medical systems require compact, high reliability, airflow and
pressure regulation. The Company provides motors for blower assemblies and/or
magnetic actuators for fast acting pressure regulating valves.

 A number of todays heavy equipment vehicles used in off-road
applications are utilizing drive-by-wire technologies. A number of the
Companys sensors are utilized to provide the input for steering and throttle
functions of these vehicles.

Customers and Markets

The foregoing examples illustrate a few of the thousands of machine
control situations for which products of the Company are used. Customers who
buy the Companys products are makers and users of many different kinds of
machinery and systems used in diverse markets and industries. Important market
categories include transportation (including cars, trucks, mass transit,
construction and farm equipment), factory automation, process control, health
care and scientific equipment, military, aviation, space and telecommunications
applications.

The Company considers its large number of customers and the scope of
existing and potential applications for its products to be a source of the
Companys existing business strength and an opportunity for continued long-term
growth.

The Companys brands have been well established in North America for many
years and were distributed during the past fiscal year through Technologies
sales force to more than 6,700 different commercial customers, principally in
the United States. These customers include both end users and original
equipment manufacturers. The Company ships 90% of sales to commercial
customers, with approximately 56% to the automotive market and 34% to other
industrial markets. The value of individual orders from industrial customers
is typically less than $100,000.

Sales to the U.S. Government (or prime contractors who manage government
funded projects) represented approximately 10% of the Companys net sales in
fiscal 2003, 9% in fiscal 2002 and 8% in fiscal 2001. One commercial customer,
Continental Teves AG & Co. (Continental Teves) located in Germany, accounted
for approximately 41%, 39% and 49% of net sales in fiscal year 2003, 2002 and
2001, respectively. In fiscal 2003, approximately 54% of the Companys sales
occurred in foreign markets with approximately 4% sold in foreign currency.

The Company also seeks to use its proprietary sensor capabilities to
create value-added subsystems or products. The goal is to make such high margin
products, enabled by the Companys proprietary technology, a growing part of
the Companys business. For example, the Company can provide position feedback
inside a magnetic actuator creating a smart actuator.

Products and Proprietary Systems

The Companys main product groups may be categorized as follows;



| | 1. |  | Traditional sensors;
| | -- |  | --------------------



| | 2. |  | Micromachined sensors;
| | -- |  | ----------------------

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| | 3. |  | Magnetic actuators and motors; and
| | -- |  | ----------------------------------



| | 4. |  | Engineered subsystems (such as inertial measurement units, scanner
assemblies, electronic servo control systems and trackballs).
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------

A more detailed description of the products and systems designed,
manufactured and sold by the Company follows below.

Traditional Sensors

Optical Shaft Encoders.Optical shaft encoders translate the motion of
rotating shafts directly into digitally coded electronic signals. These
digitally coded signals facilitate interpretation of the sensed motion by
microcomputer processors that are used to control the operation of machinery
and equipment. The Company offers a wide array of optical shaft encoders to
serve a variety of applications. The most common applications are for factory
automation, office automation and transportation equipment, but specialized
versions are also used for military and space hardware. Value-added assemblies
that employ optical shaft encoders include servo motors and servo drive
electronic control systems.

Position Sensors.Similar in basic function to encoders, position sensors
are potentiometric or noncontacting technology devices that measure motion by
analog (not digital) changes in electrical potential, magnetic field or
inductive field. These changes may sometimes be subsequently translated into
digital code. Position sensors are used as economical motion sensing devices
for throttle, steering, suspension, and seat and mirror position controls in
automobiles and in some heavy equipment, such as earth movers, construction
equipment and farm machinery. They are also used to measure position in such
applications as missile fin control, sawmill controls and numerous other types
of industrial equipment and in oil well logging calipers.

Traditional Accelerometers. Traditional accelerometers using mechanical
technology (e.g., a moving mass suspended by a pivot and jewel mechanism) rely
on the movement of complex machined metallic parts to measure linear and
angular motion.

Micromachined Sensors

Rate Sensors.A rate sensor provides precise and reliable measurements of
minute linear and angular motion for control, guidance and instrumentation. In
general, these devices operate without need for direct linkage to the driving
mechanisms. Such measurements are required for heading and attitude reference
instruments and flight control needs in aircraft and missiles, stabilization of
satellites, stabilization control of antennae on aircraft, ships and other
moving platforms, navigation of aircraft and vehicles, and for intelligent
vehicle stability, roll-over and navigation systems in the automotive industry.
Technologies produces miniature, solid state quartz rate sensors based on
innovative and proprietary chemical micromachining of a single element from
crystalline quartz using photolithographic methods similar to those used in the
manufacture of silicon semiconductor chips. The advantages of quartz rate
sensors over traditional mechanical units are increased reliability, reduced
size and lower production and life cycle costs. This family of rotation rate
sensors is known as the GyroChip.

The Companys family of GyroChip quartz rate sensors, developed primarily
to accommodate the need for reliable and high precision yet economical gyros,
have found use in varied applications. The most frequent use of GyroChip units
is as yaw sensors in stability control or spinout prevention systems for
automobiles. GyroChip sensors provide performance suitable for commercial,
military, aviation and space applications while offering ruggedness, lower
cost, longer life, and smaller size than many other gyro technologies.

Pressure Sensors.Pressure sensors measure absolute, gage or differential
pressure from vacuum to 10,000 psi. Various sensing technologies are used,
including silicon micromachined systems used for commercial and industrial
markets. The Company provides standard products as well as application
specific solutions to pressure measurement requirements.

Micro-Electromechanical Systems (MEMS).MEMS are a new category of
ultra small devices, usually micromachined from crystalline materials such as
quartz or silicon. The GyroChip sensors and other quartz devices discussed
above are examples of MEMS currently being sold by Technologies. Management
expects the Companys MEMS research and development programs to lead to new
devices for sensing motion, pressure and other physical parameters.

Magnetic Actuators and Motors

Magnetic Actuators.Magnetic actuators are used in place of cams or
motors to achieve fast and precise control of short

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stroke linear or limited rotary motion. Actuators using very high-energy
magnets are also produced for specialized applications requiring intense force,
torque or acceleration relative to the size of the device.

Brushless DC Motors.Brushless DC Motors give high performance and
efficiency in compact, lightweight packages. These motors, which feature
high-energy magnets, are characterized by long life and low acoustic and
electrical noise. They are well suited to high reliability applications, such
as in respiration therapy equipment where there is a long life requirement,
where the risk of dust from a brush motor could be troublesome or where
electrical noise could disrupt computers or computer-controlled equipment.

Engineered Subsystems

Inertial Measurement Units (IMU) and Navigation Subsystems.These
subsystems are a fundamental element of virtually all inertial navigation and
position or attitude reporting systems. Even systems that rely on the Global
Positioning Satellite (GPS) network frequently must have an IMU built in to
ensure a back up in case the GPS signal is interrupted. Technologies has made
new breakthroughs in size, reliability and cost for its proprietary IMU
subsystems. BEI has integrated GPS, IMU, and software to market complete
navigation subsystems.

Scanner Assemblies.Scanner assemblies are an integral subsystem of the
optics in military night vision systems that guide the infrared image to the
focal plane sensor array. These subsystems consist of spinning or
reciprocating mirrors, a motor and an encoder in a precision servo loop. The
Companys motion control know-how helps ensure that the scanner delivers
jitter-free, well-resolved images.

Servo Systems.Servo Systems are closed-loop electronic systems that
control the position and/or velocity of rotating shafts, linear assemblies or
other moving parts by noting a desired rate of movement and position (usually
input from computers or control electronics), monitoring the actual position
and rate of movement (using an appropriate encoder or other sensor) and
constantly providing feedback that indicates whether further action is required
to achieve or maintain the desired performance.

Trackballs. BEI trackballs have flexible and rugged designs that allow
them to be an integral part of a keyboard as well as in stand-alone cursor
positioners. They are used in ultra-sound scanning machines, factory
automation and defense applications. The flexibility is provided by the
interface electronics design that accommodates various standard and customized
interfaces and rugged performance is provided by a proprietary ball sealing
technique that allows operation in harsh environments.

Backlog

Backlog for the Company at September 27, 2003 and at September 28, 2002
was approximately $111,912,000 and $72,639,000, respectively.

The Companys commercial operations typically ship standard products
within 3 to 90 days after receipt of a purchase authorization. Management of
the Company believes that its competitive position depends in part on
minimizing the time that elapses between receipt and shipment of an order.
Products that require special analysis, design or testing, such as those
produced for customers in the aviation or space technology markets, are
generally shipped from 6 to 18 months after receipt of the purchase
authorization.

In the case of U.S. Government contracts, backlog includes only the
applicable portion of contracts that are fully funded by a procuring Government
agency. All U.S. Government contracts and subcontracts are subject to
termination by the U.S. Government at-will, traditionally with compensation for
work completed and costs incurred.

The Companys backlog includes aggregate contract revenues remaining to be
earned principally over the next twelve months for scheduled deliveries under
existing contracts. Some contracts undertaken by Technologies extend beyond
one year. Accordingly, portions of certain contracts are carried forward from
one year to the next as part of backlog. All orders considered backlog for the
Company as of September 27, 2003 are scheduled for shipment during fiscal 2004.
There can be no assurance that all existing contract backlog will eventually
result in revenue and, accordingly, the amount of backlog at any date is not
necessarily a reliable indicator of future revenue or profitability trends.

Competition

Competitors for various products offered by the Company are found among
certain divisions or product lines of large,

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diversified companies such as Bosch, Siemens AG, Denso Corporation,
Danaher Corp., Northrop Grumman Corporation, BAE Systems, Panasonic, Rockwell
Automation and Invensys. There are smaller or product-specific companies, some
of whose products compete with those of the Company, including CTS Corp.,
Heidenhain, Silicon Sensing Systems, Servo Magnetics Corp., Bourns, Inc. and BI
Technologies Corp.

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

Manufacturing

The Companys manufacturing operations provide a mix of standard and
custom products designed to meet the specialized requirements of particular
customers. The Companys products, whether standard or custom, are normally
manufactured in response to customers orders and are in general not held as
finished goods. Most are assembled from parts or subassemblies that are
proprietary to the Company. The Company relies on various sources for its raw
material components. See BusinessRisk FactorsDependence Upon Key
Suppliers.

Specialized or proprietary equipment is often used to produce the
Companys products. For example, a code pattern generator designed by and
proprietary to the Company is used to produce some shaft encoder parts.
Specialized quartz micromachining equipment is used for the production of
GyroChip units. High throughput automated or semi-automated equipment is used
for the production of GyroChip assemblies, brushless motors and potentiometers.
Some parts are fabricated under clean room conditions.

The Companys production of automotive yaw sensors required scaling-up its
production to the quantities demanded by the automobile market. The Company is
continuing to refine production engineering measures to support the
fabrication, assembly, and testing of new sensors in the appropriate
quantities. There can be no assurance that the Company will be able to produce
the required quantities on time or in sufficient amounts to satisfy demand.
Failure to do so would have a material adverse effect on the Companys
business, financial condition and results of operations. See BusinessRisk
FactorsManufacturing Experience Risk; Scale-Up Risk; Product Recall Risk.

Research and Development

The Companys research and development focus has included improving
performance and yields of existing products, with special emphasis on the
quartz sensors used in high accuracy IMUs and high volume yaw rate sensors for
the automotive industry. Substantial effort has also been devoted to the
development of efficient manufacturing methods necessary for competitive
pricing of the Companys products while maintaining the required quality for
the automotive market. The Company has transitioned to the next generation
quartz fork sensor which is smaller resulting in more forks per wafer and
utilizes a new patented design. The Company also upgraded two Application
Specific Integrated Circuit (ASIC) designs, continued research on fork design
to upgrade performance for military applications and continued to upgrade
accelerometer performance for military use.

During the 2003 fiscal year, the Company continued development and
commercialization of a new non-contacting angular position sensor referred to
as NCAPS. The development was driven by the Companys perception of market
demand for a technology usable in high volume applications (e.g., steering
sensors, medium resolution absolute angular position measurement sensors) that
would overcome the limitations of contacting sensors as well as the limitations
of currently available non-contacting sensors. The design and architecture of
the NCAPS (essentially a digitally processed proprietary transceiver sensor
unit), when combined with the Companys existing manufacturing expertise, may
lend itself to high volume production. The Company believes applications for
this technology may cover a wide spectrum within the automotive and industrial
market sectors. A customized ASIC for the NCAPS sensor is in first iteration,
which the Company anticipates will provide the cost and performance required by
the market.

Management of the Company believes that its future success will depend in
part on its ability to continue to enhance its existing products, and to
develop and introduce new products that maintain technological leadership, meet
a wider range of customer needs and achieve market acceptance. Accordingly,
the Companys internally funded research, development and related engineering
expenditures were approximately $15.3 million, $15.4 million and $8.8 million
in fiscal 2003, 2002 and 2001, respectively. In addition, customer-funded
research and development expenditures charged to cost of sales were $0.5
million, $0.5 million and $0.2 million, respectively, for the same periods.
Development of the Companys portfolio of rate sensors, including the NCAPS,
comprised most of the prior years customer-funded research and development
expenditures.

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From time to time, the Companys research and development efforts may
result in the development of proprietary technology only tangentially related
to the Companys core business. During fiscal 2000, the Company undertook to
distribute shares in a majority-owned subsidiary, OpticNet, Inc. (OpticNet),
founded to exploit such derivative technology, to its stockholders. Certain
proprietary technology related to and useful in the optical networking industry
was contributed to OpticNet at such time. At the close of business on October
30, 2000, Technologies declared a distribution to its stockholders of
approximately 42% of the outstanding securities of OpticNet. In the
distribution, each holder of record of Technologies common stock as of the
close of business on October 30, 2000 received one share of OpticNet common
stock for every two shares of Technologies common stock held, and cash in lieu
of any fractional shares of OpticNet common stock.

Employees

As of September 27, 2003, Technologies had 1,018 employees, including 135
in research, development and engineering, 103 in administration, 58 in
marketing and sales, and 722 in operations. The Company believes that its
continued success depends on its ability to attract and retain highly qualified
personnel. The Companys employees are not covered by collective bargaining
agreements. The Company has not experienced any work stoppages and considers
its relationship with its employees to be good.

Intellectual Property

The Company relies primarily upon trade secrets and know-how to develop
and maintain its competitive position. The Company and its subsidiaries
currently hold 96 U.S. patents and 41 foreign patents with expiration dates
ranging from January 2004 to October 2021. 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. In
addition, the Company has acquired various licenses for externally developed
technology and incorporates this licensed technology in certain of its current
products. The Company expects to incorporate similar licensed technology in
future products.

While management believes that the Companys intellectual property rights
are important, management also believes that because of the rapid pace of
technological change in the industries in which the Company competes, factors
such as innovative skills, technical expertise, development and utilization of
customized ASICs, the ability to adapt quickly to technological change and
evolving customer requirements, product support and customer relations are of
equal competitive significance.

Environmental Matters

The Company uses certain controlled or hazardous materials in its research
and manufacturing operations and, as a result, is subject to federal, state and
local regulations governing the storage, use and disposal of such materials.
Management of the Company believes that it is currently in compliance with such
laws and regulations, and that the cost of such compliance has not had a
material effect on the Companys capital expenditures, earnings or competitive
position, and is not expected to have a material adverse effect in the
foreseeable future.

Government Regulation

The Company is subject to significant regulation by the U.S. Government
with respect to a variety of matters affecting its business, including the
matters set forth below and as discussed in the Risk FactorsGovernment
Regulation and Risk FactorsContracting with the U.S. Government below.

Facility Security Clearance

The Company has several facility security clearances from the U.S.
Government. During fiscal 2003 and 2002 the Company did not have any net sales
derived from work requiring such clearance, but these sales are expected in
future years. A portion of the Companys net sales in fiscal 2001 was derived
from work for which this clearance was required. Continuation of this
clearance requires that the Company remain free from foreign ownership, control
or influence (FOCI). In addition, the Company is required to comply with the
regulations promulgated by the Defense Security Service (DSS) that relate, in
large part, to the Companys control of classified documents and other
information. Management does not believe that there is presently any
substantial risk of FOCI or DSS noncompliance that would cause any of its
security clearances to be revoked.

Regulation of Foreign Sales

The Company is subject to the Foreign Corrupt Practices Act, which
prohibits payments or offers of payments to foreign

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officials for the purpose of influencing an act or decision by a foreign
government, politician or political party in order to assist in obtaining,
retaining or directing business to any person. In addition, certain of
Technologies exports are subject to restrictions contained in the U.S.
Department of States (the State Department) International Traffic in Arms
Regulations and require export licenses in order to be sold abroad.
Non-defense related foreign sales are generally governed by the Bureau of
Export Administration of the U.S. Commerce Department, which also frequently
requires export licenses. The Companys net sales to foreign customers
constituted approximately 54%, 50% and 56% of revenues for fiscal 2003, 2002
and 2001, respectively.

In July 2003, the State Department contacted Technologies, its customers
and other companies in the aviation industry concerning exports and re-exports
of Technologies QRS11 GyroChip quartz rate sensors, which are controlled under
the International Traffic in Arms Regulations. The QRS11 sensors are used in
military and commercial aircraft, among other applications. Noncompliance with
the International Traffic in Arms Regulations could subject Technologies, its
customers and other companies in the aviation industry to criminal, civil and
administrative sanctions. Delays associated with obtaining export licenses and
other approvals, and the inability to obtain export licenses and other
approvals in some cases, could subject Technologies, its customers and other
companies in the aviation industry to financial losses. Technologies annual
revenues could decline by approximately 2% if commercial aircraft manufacturers
elect to use an alternative to the QRS11. In addition, Technologies could be
subject to claims from its customers and other companies in the aviation
industry. Technologies cannot at this time ascertain the likelihood of any
lost revenues or administrative or civil sanctions from the State Departments
actions, but there can be no assurance that any such loss in revenues or
administrative or civil sanctions would not have a material adverse effect on
the Companys business, financial condition and results of operations.

Available Information

The Company files with the Securities and Exchange Commission (SEC)
pursuant to Section 13(a) or 15(d) of the Exchange Act annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports filed or furnished. These reports may be accessed
at the SECs Public Reference Room at 450 Fifth Street, NW, Washington, D.C.
20549. Information on the operation of the Public Reference Room is available
by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that
contains reports, proxy and information statements, and other information about
us. The SECs Internet address is http://www.sec.gov.

The Companys Internet address is http://www.bei-tech.com. The Company
makes available, free of charge through its Internet website, its annual report
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,
proxy statements and amendments to those reports, as soon as reasonably
practicable after the Company electronically files such material with, or
furnishes it to, the SEC.

The Company has adopted a code of ethics that applies to all officers,
directors and employees regarding their obligations in the conduct of Company
affairs. This code of ethics is available free of charge upon written request
to BEI Technologies, Inc., One Post Street, Suite 2500, San Francisco,
California, 94104, Attention: Secretary.

RISK FACTORS

Stockholders or investors considering the purchase of shares of the
Companys common stock should carefully consider the following risk factors, in
addition to the other information contained in this Annual Report on Form 10-K.
Additional risks and uncertainties not presently known to the Company or that
the Company currently deems immaterial could also impair the Companys business
operations.

Competition

The principal competitive factors affecting the market for the Companys
products include product functionality, performance, quality, reliability,
price, compatibility and conformance with industry standards, and changing
customer systems requiring product customization. Several of the Companys
existing and potential competitors, including those noted above under Business
 Competition, have substantially greater financial, engineering,
manufacturing and marketing resources than does the Company. Further, the
technologies offered by the Company may compete for customer acceptance with
technologies offered by other manufacturers, such as resolvers, inductosyns,
magnetic encoders, laser gyros, fiber optic gyros and silicon gyros. There can
be no assurance that other companies will not develop more sophisticated, more
cost-effective or otherwise superior products which could have a material
adverse effect on the Companys business, financial condition and results of
operations.

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Rapid Technological Change; Research and Development Efforts

The market for the Companys products is affected by rapidly changing
technology and evolving industry standards and the emergence of new
technologies and protocols. The Company believes that its future success will
depend upon its ability to enhance its existing products and to further develop
and introduce new products that meet a wide range of evolving customer needs
and can achieve market acceptance. There can be no assurance that the Company
will be successful in these efforts. The Company has incurred, and the Company
expects to continue to incur, substantial expenses associated with the
introduction and promotion of new products. There can be no assurance that the
expenses incurred will not exceed research and development cost estimates or
that new products will achieve market acceptance and generate sales sufficient
to offset development costs. In order to develop new products successfully,
the Company is dependent upon key management and technical personnel who
continuously contribute ideas to develop new products and enhancements of the
Companys existing products. There can be no assurance that products or
technologies developed by others will not render the Companys products
non-competitive or obsolete.

Risks from Manufacturing and Design Defects; Ability to Meet Customers Performance Criteria

The Company has experienced manufacturing quality problems in the past and
could experience similar problems in the future. Certain of the Companys
products are designed for use in critical safety and mission critical systems.
During the Companys continuing efforts to increase manufacturing and
production capabilities to meet market demand, high quality standards for the
Companys products must be maintained, or risk customer dissatisfaction, damage
to the Companys reputation, or significant liability claims if the Companys
products contain undetected errors or inaccuracies. The Company attempts to
contractually limit exposure to liability claims by customers, but this may be
insufficient in the face of very large claims and does not preclude all
potential claims. As a result, product recalls or significant liability
claims, whether or not successful, could harm the Companys reputation and
business.

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

Technologies is continuing the process of adding production capacity for
its automotive yaw rate sensors to respond to the expected future demand for
quantities required by the automobile market. The Company has relatively
recent experience in large-scale manufacturing having produced 1.2 million
automotive quartz rate sensors and 1.8 million automotive quartz rate sensors
in fiscal 2002 and 2001, respectively. In fiscal 2003, the Company
manufactured approximately 2.0 million units of its automotive quartz rate
sensor in its Concord, California facility, which supplied sensors to
approximately 6% of new automobiles sold in the North American and European
markets in fiscal 2003. In years prior to fiscal 2001, the Company encountered
difficulties in scaling up production of the GyroChip sensors, including
problems involving production yields, component supplies and shortages of
qualified personnel. Although many of these issues were resolved in fiscal
2001, management expects a continued ramp up beyond fiscal 2003. A failure by
the Company to manufacture and deliver products in a timely fashion could harm
the Companys reputation and cause the loss of potential future sales and the
Company could be liable for penalties to customers in the event of contract
breach for delivery failures. These types of manufacturing delays can occur
for various reasons, including a lack of manufacturing capacity, the failure of
a supplier to provide components in a timely fashion or with acceptable
quality, or an inability by the Company to attract and retain qualified
manufacturing personnel. There can be no assurance that future manufacturing
difficulties or product recalls, either of which could have a material adverse
effect on the Companys business, financial condition and results of
operations, will not occur.

Manufacturing Processes and Equipment

The Company manufactures certain products such as quartz rate sensors,
potentiometers and some shaft encoders using extremely complex proprietary
processes and equipment. The fabrication of these products requires
manufacturing efforts to occur in a highly controlled and ultra-clean
environment, and accordingly these products are extremely sensitive to changes
in manufacturing conditions. The Company is largely dependent on its Concord,
California facility to meet the volume of manufacturing required by the
automotive market. In the event of a production disruption, the possibility
exists that equipment could be damaged or that process disciplines and controls
could be temporarily lost, which would cause the Company to experience problems
achieving acceptable manufacturing rates and yields. Such a disruption of
production could have a material adverse effect on the Companys business,
financial condition and results of operations.

Dependence Upon Key Personnel

The Company depends, to a significant degree, on the continued
contribution of key management and technical personnel. The loss of the
services of one or more key employees could have a material adverse effect on
the Company. The Companys

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success also depends on its ability to attract and retain additional
highly qualified management and technical personnel. Skilled technical
personnel in the Companys industry are typically in short supply. As a
result, competition for these people is intense and they are often subject to
offers from competing employers, particularly in northern California where
certain of the Companys facilities are located and there is a high
concentration of technology companies. There can be no assurance that the
Company will be able to retain its key employees, or that it will be able to
attract or retain additional skilled personnel as needed. The Company does not
currently maintain key person insurance on any employee. See
BusinessEmployees and BusinessDirectors and Executive Officers of the
Company.

Dependence Upon Key Suppliers

Although the majority of the components used in Company products are
available from multiple sources, several components are built or provided to
the Companys specifications. Such components include quartz, supplied by
Sawyer Research Products, Inc.; Control Area Network (CAN) Bus and
microprocessor chip sets, supplied by Texas Instruments; housings, supplied by
C&H Casting and ZSNP, a.s.; gold pellets, supplied by Vacuum Engineering &
Material Co., Inc.; PWB/case assemblies, supplied by Kimball Electronics Group;
injection molding, supplied by L. W. Reinhold, Inc.; substrates, supplied by
Aurora Circuits, LLC; two types of ASICs, supplied by National Semiconductor
Corporation, Flextronics Semiconductor, Inc. and American Megatrends, Inc.; and
two types of LEDs, supplied by Optek Technology, Inc. and Opto Diode Corp.
The Company currently relies on single or a limited number of suppliers for
these components. Any increase in the cost of the components used in the
Companys products could make the Companys products less competitive and lower
the Companys gross margin. Additionally, the Companys single source
suppliers could enter into exclusive agreements with or be acquired by one of
the Companys competitors, increase their prices, refuse to sell their products
to the Company, discontinue products or go out of business. To the extent
acceptable alternative suppliers are available to the Company, identifying them
and entering into arrangements with them is difficult and time consuming
requiring validation of quality standards. Additionally, consolidations among
the Companys suppliers could result in other sole source suppliers. There can
be no assurance that there will not be a significant disruption in the supply
of such components in the future, or in the event of such disruption, that the
Company will be able to locate alternative suppliers of the components with the
same quality at an acceptable price. An interruption in the supply of
components used in the manufacture of the Companys products, particularly as
the Company scales up its manufacturing activities in support of commercial
sales, could have a material adverse effect on the Companys business,
financial condition and results of operations.

Dependence Upon Key Customers

Approximately 41% of the net sales of the Company in fiscal 2003 were to
Continental Teves for the automotive quartz rate sensor product used in
advanced vehicle stability control systems. Continental Teves integrates the
Companys sensor product into independently developed products and markets the
integrated systems to various customers in the automobile industry. This
concentration of sales is expected to expand in fiscal 2004 and beyond. The
Company is currently transitioning to its next generation of automotive
inertial quartz based sensor products, remotely mounted multi-sensor clusters
with CAN Bus and a multi rate sensor package suitable for incorporation into
electronic systems modules. The Company expects to continue to increase
production of the GyroChip sensors (see BusinessRisk FactorsManufacturing
Experience Risk; Scale-Up Risk; Product Recall Risk) to meet the requirements
of its contracts with Continental Teves in fiscal 2004 and beyond. In
addition, the Company is in discussion with Continental Teves and other
automotive customers that could lead to extensions of existing contracts and to
new contracts. There can be no assurance that the Company will be able to
retain or extend its contracts with Continental Teves or other automotive
customers, or obtain new contracts on favorable terms, or that the product will
continue to achieve continuing growth beyond the end of the current contracts,
any of which could have a material adverse effect on the Companys business,
financial condition and results of operations.

Government Regulation

Certain aspects of the industry in which the Companys products are sold
are regulated both in the United States and in foreign countries. Imposition
of public carrier tariffs, foreign taxation and the necessity of incurring
substantial costs and the expenditure of managerial resources to obtain
regulatory approvals, particularly in foreign countries where safety standards
differ from those in the United States, or the inability to obtain regulatory
approvals within a reasonable period of time, could have a material, adverse
effect on the Companys business, operating results and financial condition.
The Companys products must comply with a variety of equipment, interface and
installation standards promulgated by regulatory authorities in different
countries. Changes in government policies, regulations and interface standards
could require the redesign of products and result in product shipment delays
which could have a material, adverse impact on the Companys business,
operating results and financial condition.

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Certain of the Companys exports, such as its GyroChip quartz rate
sensors, are subject to restrictions contained in the State Departments
International Traffic in Arms Regulations and require export licenses in order
to be sold abroad. Non-defense related foreign sales are generally governed by
the Bureau of Export Administration of the U.S. Commerce Department, which also
frequently requires export licenses. We can give no assurance that we will be
successful in obtaining these necessary licenses in order to conduct business
abroad.

In July 2003, the State Department contacted Technologies, its customers
and other companies in the aviation industry concerning exports and re-exports
of Technologies QRS11 GyroChip quartz rate sensors, which are controlled under
the International Traffic in Arms Regulations. The QRS11 sensors are used in
military and commercial aircraft, among other applications. Noncompliance with
the International Traffic in Arms Regulations could subject Technologies, its
customers and other companies in the aviation industry to criminal, civil and
administrative sanctions. Delays associated with obtaining export licenses and
other approvals, and the inability to obtain export licenses and other
approvals in some cases, could subject Technologies, its customers and other
companies in the aviation industry to financial losses. Technologies annual
revenues could decline by approximately 2% if commercial aircraft manufacturers
elect to use an alternative to the QRS11. In addition, Technologies could be
subject to claims from its customers and other companies in the aviation
industry. Technologies cannot at this time ascertain the likelihood of any
lost revenues or administrative or civil sanctions from the State Departments
actions, but there can be no assurance that any such loss in revenues or
administrative or civil sanctions would not have a material adverse effect on
the Companys business, financial condition and results of operations.

Contracting with the U.S. Government

Approximately 10%, 9% and 8% of the net sales of Technologies in fiscal
2003, 2002 and 2001, respectively, were derived from contracts with the U.S.
Government or under subcontract to other prime contractors to the U.S.
Government. Because a significant portion of Technologies business is derived
from contracts with the Department of Defense or other agencies of the U.S.
Government, the Companys business is sensitive to changes in U.S. Government
spending policies that can have significant variations from year to year. At
various times, the Companys results have been adversely affected by contract
cutbacks and there can be no assurance that the Companys results of operations
will not in the future be materially and adversely affected by changes in U.S.
Government procurement policies or reductions in U.S. Government expenditures
for products furnished by the Company.

Under applicable regulations, various audit agencies of the U.S.
Government conduct regular audits of contractors compliance with a variety of
U.S. Government regulations. The U.S. Government also has the right to review
retroactively the cost records under most U.S. Government contracts. Contract
prices may be adjusted in the event the U.S. Government determines that the
Company submitted incomplete, inaccurate or obsolete cost or pricing data.
Government contracts and subcontracts generally provide for either a fixed
price, negotiated fixed price or cost-plus-fixed-fee basis for remuneration.
The majority of the Companys contracts with the U.S. Government are
competitive fixed price or negotiated fixed price contracts, although
cost-plus-fixed-fee contracts provided approximately 2.4% of the Companys net
sales in fiscal 2003. For fixed price contracts, the Company bears the risk of
cost overruns and derives the benefits from cost savings. As a result, greater
risks are involved under fixed price contracts than under cost-plus contracts
because failure to anticipate technical problems, estimate costs accurately or
control costs during contract performance may reduce or eliminate the
contemplated profit or may result in a loss.

All U.S. Government contracts contain termination clauses that allow the
contract to be terminated either for contractor default or for the convenience
of the U.S. Government. In the event of termination for the convenience of the
Government, the clause typically provides that the contractor will receive
payment for work-in-progress, including profit. To date, termination of
Technologies contracts by the U.S. Government has not had any significant
effect on the Companys financial results. However, no assurance can be given
that such terminations will not have a materially adverse effect on the
Companys results of operations in the future.

Portions of the Companys government business are sometimes classified.
As a result, the Company may be prohibited from disclosing the substance or
status of such business.

Dependence on Proprietary Intellectual Property

Success for the Company depends, in part, on the Companys ability to
protect its intellectual property. The Company relies on a combination of
patent, copyright, trademark and trade secret laws to protect its proprietary
technologies and processes. Nevertheless, such measures may not be adequate to
safeguard the proprietary technology underlying its products. In addition, the
Companys existing and future patents could be challenged, invalidated or
circumvented, and any right granted thereunder may not provide meaningful
protection to the Company. The failure of any patents to provide protection to
the Companys technology

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might make it easier for competitors to offer similar products and use similar
manufacturing techniques. Despite precautions, it may be possible for a third
party to copy or otherwise obtain and use the Companys products or technology
without authorization, develop similar technology independently or design
around those patents issued to the Company. In addition, effective patent,
copyright, trademark and trade secret protection may be unavailable or limited
outside of the United States, Europe and Japan. The Company may not be able to
obtain any meaningful intellectual property protection in such countries and
territories. Additionally, the Company may, for a variety of reasons, decide
not to file for patent, copyright, or trademark protection outside of the
United States. Further, at the request of customers, the Company occasionally
incorporates a customers intellectual property into designs, in which case the
Company will have obligations with respect to the non-use and non-disclosure of
that intellectual property. However, the steps taken by the Company to prevent
misappropriation or infringement of Company intellectual property or that of
customers may not be successful. Moreover, costly and time intensive
litigation could be necessary to enforce the Companys intellectual property
rights, to protect the Companys trade secrets or to determine the validity and
scope of proprietary rights of others, including customers.

The industries in which the Company operates can be characterized by their
vigorous protection and pursuit of intellectual property rights. In this
regard, the invalidity of the Companys patents could be asserted and claims
made against the Company. Furthermore, in a patent or trade secret action, the
Company could be required to withdraw certain products from the market or
redesign products offered for sale or under development. The Company has also
entered into certain indemnification obligations in favor of customers and
strategic partners that could be triggered upon an allegation or finding of
infringement of other parties proprietary rights. Irrespective of the
validity or successful assertion of such claims, the Company would likely incur
significant costs and diversion of resources with respect to the defense of
such claims. To address any potential claims or actions asserted in
opposition, the Company may seek to obtain a license under a third partys
intellectual property rights. Under such circumstances, a license may not be
available on commercially reasonable terms, if at all.

International Sales

Sales to customers located outside the United States accounted for
approximately 54%, 50% and 56% of the Companys net sales in fiscal 2003, 2002
and 2001, respectively. Most of these sales were to Continental Teves, located
in Germany. The Company expects that international sales will continue to
represent a significant portion of the Companys product revenues and that the
Company will be subject to the normal risks of international sales, such as
export laws, currency fluctuations, longer payment cycles, greater difficulties
in accounts receivable collections and complying with a wide variety of foreign
laws. Although the Company has not previously experienced significant
difficulties under foreign law in exporting its products, there can be no
assurance that the Company will not experience such difficulties in the future.
In addition, because the Company primarily invoices its foreign sales in U.S.
dollars, fluctuations in exchange rates could affect demand for the Companys
products by causing its prices to be out of line with products priced in the
local currency. Such difficulties could have a material adverse effect on the
Companys international sales and a resulting material adverse effect on the
Companys business, operating results and financial condition.

Financial Risk Covered by Insurance or Uninsured

It is the policy of the Company to insure for certain property and
casualty risks consisting primarily of physical loss to property, business
interruptions resulting from property losses, workers compensation,
comprehensive general liability and auto liability. Insurance coverage is
obtained for catastrophic property and casualty exposures as well as those
risks required to be insured by law or contract. Although the Company believes
that its insurance coverage is reasonable, significant events such as judicial
decisions, legislation, economic conditions and large losses could materially
affect the Companys insurance obligations and future expense.

Possible Volatility of the Companys Common Stock Price

The price of the Companys common stock has fluctuated widely in the past.
Sales of substantial amounts of the Companys common stock, or the perception
that such sales could occur, could adversely affect prevailing market prices
for the Companys common stock. The management of the Company believes that
such past fluctuations may have been caused by the factors identified above as
well as announcements of new products, quarterly fluctuations in the results of
operations and other factors, including recent volatility in stock prices for
technology focused companies as a whole. These factors, as well as general
economic, political, market and other factors unrelated to operating
performance may adversely affect the market price of the Companys common
stock. The Company anticipates that the price for Technologies common stock
may continue to be volatile for the same reasons. Future stock price
volatility for Technologies common stock could provoke the initiation of
securities litigation, which may divert substantial management resources and
have a material adverse effect on the Companys business,

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operating results and financial condition.

Voting Control by Officers, Directors and Affiliates

At September 27, 2003, the Companys officers and directors and their
affiliates beneficially owned approximately 24% of the outstanding shares of
the Companys common stock. Accordingly, together they have the ability to
significantly influence the election of the Companys directors and other
corporate actions requiring stockholder approval. Such concentration of
ownership may have the effect of delaying, deferring or preventing a change in
control of the Company.

Certain Charter Provisions

The Companys Board of Directors has authority to issue up to 2,000,000
shares of preferred stock and to fix the rights, preferences, privileges and
restrictions, including voting rights, of these shares without any further vote
or action by the stockholders. The rights of the holders of the Companys
common stock will be subject to, and may be adversely affected by, the rights
of the holders of any preferred stock that may be issued in the future. The
issuance of preferred stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire a majority
of the outstanding voting stock of the Company, thereby delaying, deferring or
preventing a change in control of the Company. Furthermore, such preferred
stock may have other rights, including economic rights, senior to the common
stock, and as a result, the issuance thereof could have a material adverse
effect on the market value of the Companys common stock.

Risk of Extended Economic Downturn

The United States has been experiencing a general economic downturn,
particularly in the manufacturing sector. Although economic conditions may
have leveled off, the Company has yet to see significant improvement in
economic conditions and cannot predict when improvements might occur. As a
result of this uncertainty, forecasting and financial and strategic planning
are more difficult than usual. If the current downturn in the economy remains
for an extended period, Technologies will suffer from the lack of opportunities
to grow sales as customers will continue to limit their spending. Specifically,
the recent downturn and continuing lack of growth in the economy has resulted
and may continue to result in diminished factory utilization and decreased
consumer demand in the automobile, aviation, aerospace and factory automation
markets, resulting in lower demand for Technologies products. Moreover, the
continuing adverse impact of the downturn on the capital markets could impair
Technologies ability to raise capital as needed and impede the Companys
ability to expand.

In addition, this economic downturn has been exacerbated by the terrorist
attacks in New York and Washington, D.C., which disrupted commercial activities
in the United States and internationally. The long-term impact of the
terrorist attacks on the economy as a whole, and specifically to the automotive
industry, government programs, and other industries to which Technologies
sells, is not known at this time. Any future terrorist attacks or outbreaks,
or escalation of hostilities arising out of any attacks, or concerns that
attacks or hostilities may occur, could adversely affect the United States
economy in general, including the capital markets, which in turn could
adversely impact the worldwide economy and prolong or intensify the current
downturn.

International Conflicts May Further Adversely Affect Our Business

International conflicts such as the war in Iraq and the political turmoil
in the Middle East cause significant uncertainty with respect to U.S. and other
business and financial markets and adversely affect our business. Although our
military and aerospace business may experience greater demand for products as a
result of increased government defense spending, factors arising (directly or
indirectly) from international conflicts have adversely affected our business
in the past, and may further adversely affect our business.

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DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The directors and executive officers of the Company and their ages as of
December 1, 2003 are as follows:

Name
    
    Age
    
    PositionCharles Crocker
    
    
    64
    
    
    Chief Executive Officer and Chairman of the
Board of DirectorsDr. Asad Madni
    
    
    56
    
    
    President, Chief Operating Officer and DirectorJohn LaBoskey
    
    
    50
    
    
    Senior Vice President and Chief Financial OfficerRobert R. Corr
    
    
    57
    
    
    Vice President, Treasurer, Controller and SecretaryGerald D. Brasuell
    
    
    55
    
    
    Vice President and General Manager, BEI Systron
Donner Automotive DivisionDavid Pike
    
    
    50
    
    
    Senior Vice President Divisional Administration
and Human ResourcesRichard M. Brooks (1)(2)
    
    
    75
    
    
    DirectorGeorge S. Brown (2)
    
    
    82
    
    
    DirectorC. Joseph Giroir, Jr. (1)(2)
    
    
    64
    
    
    DirectorDr. William G. Howard, Jr. (1)
    
    
    62
    
    
    DirectorJ. Lavon Morton (1)
    
    
    53
    
    
    DirectorGary D. Wrench
    
    
    70
    
    
    Director




---

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

Directors

Mr. Brooks began serving as a Director in June 1997 prior to the
Distribution and resulting spin-off of the Company from BEI Electronics, Inc.
(Electronics) in September 1997. From 1987 until his resignation as a result
of the Distribution, he served as a director of Electronics. He is currently
an independent financial consultant, and also serves as a director of Granite
Construction, Inc. and U.S. AgBank, FCB, a private company. Mr. Brooks holds a
B.S. from Yale University and a M.B.A. from the University of California,
Berkeley.

Mr. Brown began serving as a Director in June 1997 prior to the
Distribution and resulting spin-off of the Company from Electronics in
September 1997. He served as a director of Electronics from October 1974 until
his resignation as a result of the Distribution. Mr. Brown served as President
and Chief Executive Officer of Electronics from October 1974 until July 1990.
Mr. Brown served from 1971 until 1974 as Executive Vice President and General
Manager of Baldwin Electronics, Inc., a subsidiary of D.H. Baldwin Company and
the predecessor of Electronics. Mr. Brown holds a B.S.E.E. from the University
of Oklahoma.

Mr. Crocker began serving as a Director in June 1997 prior to the
Distribution and resulting spin-off of the Company from Electronics in
September 1997. He was a founder of Electronics and was named Chairman of the
Board of Directors of Electronics in October 1974. He continued to serve as a
Director of BEI Medical Systems, Inc. (formerly Electronics prior to September
1997) until the sale of BEI Medical Systems, Inc. in June 2002. Mr. Crocker
has served as Chairman of the Board of Directors of Technologies since October
1997. Mr. Crocker assumed the positions of President (in which position he
served until May 2000) and Chief Executive Officer of Technologies, effective
October 1, 1997, after resigning as President and CEO of Electronics as a
result of the Distribution. Mr. Crocker served as President of Crocker Capital
Corporation, a Small Business Investment Company, from 1970 to 1985, and as
General Partner of Crocker Associates, a venture capital investment
partnership, from 1970 to 1990. He currently serves as a director of Franklin
Resources, Inc. and its subsidiary Fiduciary Trust International, Pope &
Talbot, Inc. and Teledyne Technologies, Inc. Mr. Crocker also serves as
director of OpticNet, Inc., a minority owned subsidiary of the Company. Mr.
Crocker holds a B.S. from Stanford University and a M.B.A. from the University
of California, Berkeley.

Mr. Giroir began serving as a Director in June 1997 prior to the
Distribution and resulting spin-off of the Company from Electronics in
September 1997. He was a director of Electronics from 1978 until his
resignation as a result of the Distribution. He

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served as the Secretary of Electronics from 1974 to early 1995. Mr.
Giroir is the sole member of the law firm Giroir, PLLC. Mr. Giroir is also
Chairman of the Board of Two JJ Ranch, LLC. Mr. Giroir holds a B.A. and a
L.L.B. from the University of Arkansas and a L.L.M. from Georgetown University.

Dr. Howard began serving as a Director in June 1997 prior to the
Distribution and resulting spin-off of the Company from Electronics in
September 1997. He was a director of Electronics from December 1992 until his
resignation as a result of the Distribution. He is currently an independent
consulting engineer in microelectronics and technology-based business planning.
From 1987 to 1990, Dr. Howard served as Senior Fellow of the National Academy
of Engineering and, prior to that time, held various technical and management
positions with Motorola, Inc., most recently as Senior Vice President and
Director of Research and Development. He currently serves as director of
RAMTRON International Corp., Credence Systems, Inc., Thunderbird Technologies,
Inc., Xilinx, Inc., and Innovative Micro Technology, Inc. Dr. Howard holds a
B.S.E.E. and a M.S. from Cornell University and a Ph.D. in electrical
engineering and computer sciences from the University of California, Berkeley.

Dr. Madni was appointed President and Chief Operating Officer of the
Company in May 2000. He began serving as a Director and as a Vice President of
the Company in June 1997 prior to the Distribution and resulting spin-off of
the Company from Electronics in September 1997. Dr. Madni was appointed
President of BEI Sensors & Systems Company, Inc. in October 1993, which was
formed by the consolidation of BEI Motion Systems Company and the BEI Sensors
& Controls Group, of which Dr. Madni had been President since October 1992.
Prior to joining Electronics in 1992, he served over 17 years in various senior
level technical and executive positions with Systron Donner Corporation, a
manufacturer of avionics and aerospace sensors and subsystems. He was most
recently Chairman, President and CEO of Systron Donner Corporation, a
subsidiary of Thorn/EMI. Dr. Madnis degrees include a B.S. and M.S. in
Engineering from the University of California, Los Angeles, and a Ph.D. in
Engineering from California Coast University. He is also a graduate of the
Engineering Management Program from the California Institute of Technology, the
AEA/Stanford Executive Institute from Stanford University, and the Program for
Senior Executives from the Massachusetts Institute of Technology, Sloan School
of Management. He is a Chartered Engineer and Fellow of the Institute of
Electrical and Electronics Engineers, the Institution of Electrical Engineers,
the Institute for the Advancement of Engineering, the New York Academy of
Sciences, the American Association for the Advancement of Science, and the
International Biographical Association.

Mr. Morton began serving as a Director in January 2003. He is Vice
President Tax and Chief Internal Auditor for Arkansas Best Corporation, a
transportation company. Mr. Morton has been responsible for the Audit and Tax
Departments of that company since January 1, 2000. From 1997 to 1999, Mr.
Morton was Vice-President Financial Reporting of Arkansas Best Corporation.
His responsibilities in that position included financial statements contained
in annual and quarterly SEC filings. From 1984 to 1996, Mr. Morton served as a
Partner in Ernst & Young LLP or its predecessors. During that time, Mr. Morton
served as engagement partner on a number of SEC registrants, including
manufacturing companies. Mr. Morton served as engagement partner on the audit
of Electronics from 1984 to 1990 and from 1994 to 1996. Mr. Morton received a
B.B.A. from the University of Central Arkansas in 1972 and his CPA in 1974 from
the State of Arkansas.

Mr. Wrench began serving as a Director in June 1997 prior to the
Distribution and resulting spin-off of the Company from Electronics in
September 1997. He was Senior Vice President and Chief Financial Officer of
Electronics from July 1993 until his resignation as a result of the
Distribution, and held these same positions with Technologies until his
retirement in May 2000. Mr. Wrench was named a Director of Electronics in
February 1986. He continued to serve as a Director of BEI Medical Systems,
Inc. (formerly Electronics prior to September 1997) until the sale of BEI
Medical Systems, Inc. in June 2002. He also serves as a director of OpticNet,
Inc., a minority owned subsidiary of the Company, and has served as Chief
Financial Officer of that company since May 2000. From April 1985 to July
1993, he served as Vice President of Electronics and President and Chief
Executive Officer of BEI Motion Systems Company, Inc., then a wholly owned
subsidiary of Electronics that is now a part of the Company. Mr. Wrench holds
a B.A. from Pomona College and a M.B.A. from the University of California, Los
Angeles.

Staggered Board of Directors

The Company has a staggered Board of Directors, which may have the effect
of deterring hostile takeovers or delaying changes in control of management of
the Company. For purposes of determining their term of office, directors are
divided into three classes, with the term of office of the Class I directors to
expire at the 2004 annual meeting of stockholders, the term of office of the
Class II directors to expire at the 2005 annual meeting of stockholders and the
term of office of the Class III directors to expire at the 2006 annual meeting
of stockholders. Class I consists of Mr. Brown, Mr. Crocker and Mr. Morton;
Class II consists of Mr. Giroir, Dr. Madni and Mr. Wrench; and Class III
consists of Mr. Brooks and Dr. Howard. Directors elected to succeed those
directors whose terms expire will be elected to a three-year term of office.
All directors hold office until the next annual meetings of stockholders at
which their terms expire and until their successors have been duly elected and
qualified. Executive

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officers serve at the discretion of the Board. There are no family
relationships between any of the officers and directors.

Executive Officers

In addition to Mr. Crocker and Dr. Madni, whose positions with
Technologies, experience and educational background are described under
Directors above, the following persons are also Executive Officers of
Technologies:

Mr. Brasuell is Vice President and General Manager of the Systron Donner
Automotive Division of BEI Technologies (formerly part of Systron Donner
Inertial Division). Mr. Brasuell was appointed to this position in December
2002. Mr. Brasuell held a Corporate Development position from June 2002 until
December 2002. Mr. Brasuell served as General Manager of the Systron Donner
Inertial Division from October 1995 to February 2002. From 1985 until 1995 Mr.
Brasuell held executive staff level positions at Systron Donner Inertial
Division in Program Management and Contracts Administration, Advanced Product
Development and Manufacturing. Between 1976 and 1985 Mr. Brasuell held various
technical and management positions at Systron Donner Inertial Division.

Mr. Corr was named a Vice President of Technologies in March 2000. He has
served as Treasurer, Controller and Secretary of Technologies since September
1997 and held these same positions with Electronics prior to the Distribution
in September 1997. Mr. Corr resigned from his positions with Electronics
immediately prior to the Distribution. Mr. Corr served as Secretary of
Electronics from February 1995, served as Controller from November 1989 and
served as Treasurer from November 1987 until his resignation immediately prior
to the Distribution. From 1978 to 1987, he was employed by AMPEX Corporation,
an electronics and magnetic media company, in various financial positions.
From 1975 to 1978, he was an auditor with Arthur Andersen LLP. Mr. Corr
received a B.B.A. from Loyola University in 1968 and his CPA in 1978 from the
State of California.

Mr. LaBoskey began serving as Senior Vice President and Chief Financial
Officer of the Company, in May 2000. He was appointed Vice President and Chief
Financial Officer of BEI Sensors & Systems Company Inc., in October 1993, which
was formed by the consolidation of BEI Motion Systems Company and the BEI
Sensors & Controls Group, of which Mr. LaBoskey had served as Vice President
and Controller since 1992. Prior to joining Electronics in 1992, he served for
7 years as Controller for Systron Donner Corporation, Microwave Division, a
manufacturer of avionics and aerospace sensors and subsystems. Mr. LaBoskeys
degrees include a Bachelor of Arts from the University of California, Irvine,
and a Masters in Business Administration from the University of Colorado. He
is also a graduate of the Executive Program from the University of California,
Los Angeles, Anderson School of Management. He is a Certified Management
Accountant (CMA) through the Institute of Management Accountants (IMA), and
Certified in Production and Inventory Management (CPIM) through the American
Production and Inventory Control Society (APICS).

Mr. Pike serves as Senior Vice President of Divisional Administration and
Human Resources for Technologies. Mr. Pike joined Electronics in 1983, and
prior to his present position served in various operational, administrative and
financial positions with BEI Sensors & Systems Company, a subsidiary of
Technologies. Prior to joining Electronics, he was employed by Coastal Oil &
Gas and AFCO Metals in their respective financial departments. He received a
B.A. from Ouachita Baptist University in 1973 and his CPA in 1979 from the
State of Arkansas.

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ITEM 2. PROPERTIES

The Companys principal executive offices are located in leased office
space in San Francisco, California under a lease that expires in 2006. The
Company owns or operates eight other facilities that relate to the business and
maintains office space in various locations throughout the United States and in
Europe for sales and technical support. None of the owned principal properties
is subject to any encumbrance material to the consolidated operations of the
Company. Management believes that its existing owned or leased facilities are
adequate to meet the Companys needs for the foreseeable future.

The Company has identified a property as excess space. See Note 14 to the
consolidated financial statements.

In addition to its executive offices, the Companys principal facilities
are as follows:

Location
    
    Description of FacilityMaumelle, Arkansas
    
    Owns approximately 54,000 square foot
manufacturing, engineering, administrative and
research and development facility.Concord, California
    
    Owns approximately 101,000 square foot
manufacturing, engineering and administrative
facilities.Sylmar, California
    
    Leases approximately 74,000 square foot facility of
which approximately 6,000 square feet is used for
engineering and administrative facility; the
remainder is subleased to third parties.Tustin, California
    
    Leases approximately 80,000 square foot
manufacturing, engineering and administrative
facility.San Marcos, California
    
    Leases approximately 24,000 square foot
manufacturing, engineering and administrative
facilities.Goleta, California
    
    Owns approximately 25,000 square foot
manufacturing, engineering and administrative
facility.Hayward, California
    
    Leases approximately 15,000 square foot
manufacturing, research and development facility.Strasbourg, France
    
    Leases approximately 19,000 square foot
manufacturing, engineering and administrative
facility.


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ITEM 3. LEGAL PROCEEDINGS

During fiscal 2002, BEI Defense Systems Company, a subsidiary of the
Company with discontinued operations (Defense Systems), was subject to
litigation with a former landlord regarding damages to real property formerly
leased. The United States District Court for the Western District of Arkansas
entered a judgment, including attorneys fees, of approximately $0.7 million
against the Company. Technologies is in the process of contesting the award
and has filed an appeal of the judgment. Due to the uncertainty of success in
the appeal, the Company reserved $0.7 million for this judgment during the
fiscal quarter ended June 29, 2002.

The Company believes that Defense Systems suffered substantial monetary
damages due to actions of the U.S. Government in connection with the parties
H70 contract in effect during the 1992-1996 timeframe. As a result, Defense
Systems filed a substantial claim against the U.S. Government in 1996. During
fiscal 2002, an Administrative Judge at the Armed Services Board of Contract
Appeals ruled that Defense Systems was entitled to an equitable reformation
of the prices on certain rockets and motors in the H70 contract. Effective
December 2002, the parties finalized mediation that resulted in a settlement,
net of expenses, of $5.4 million paid to Technologies. This amount was
recorded in other income for the quarter ended December 28, 2002.

During fiscal 2002, the Company initiated litigation against a competitor
alleging patent infringement of certain quartz technologies. Effective
September 2003, the parties finalized mediation that resulted in a cash
settlement, net of expenses, of $7.6 million. This settlement includes legal
expense recovery which is recorded as an offset to selling, general and
administrative expense in the fiscal quarter ended September 27, 2003. This
legal expense recovery amounted to approximately $3.5 million, of which $2.7
million and $0.8 million were incurred in fiscal 2003 and 2002, respectively.
An additional $2.1 million was recorded in other income, net of other direct
costs associated with the settlement, in the quarter ended September 27, 2003.
Additional favorable impacts of approximately $1.0 million and $1.1 million
will be recognized in other income during fiscal years 2004 and 2005,
respectively.

The Company has other various pending legal actions arising in the normal
course of business. Management believes that none of the legal actions not
already recognized in the financial statements as material, individually or in
the aggregate, will have a material impact on the Companys business, financial
condition or operating results.




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

None.

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PART II




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

The Companys common stock commenced regular way trading on the NASDAQ
National Market System under the symbol BEIQ on October 8, 1997. Set forth
below are the high and low closing sale prices on the National Market System
for the periods indicated, adjusted for the one-for-one stock dividend paid
November 21, 2000 to stockholders of record as of October 30, 2000. Such
quotations do not reflect retail mark-ups, markdowns or commissions.

2003 Fiscal Year
    
    
    
    
    
    
    
    
    
    Cash Dividend(ended 9/27/03)
    
    High
    
    Low
    
    DeclaredFourth Quarter
    
    $
    16.68
    
    
    $
    11.55
    
    
    $
    0.01Third Quarter
    
    $
    12.34
    
    
    $
    8.27
    
    
    $
    0.01Second Quarter
    
    $
    12.15
    
    
    $
    8.83
    
    
    $
    0.01First Quarter
    
    $
    15.00
    
    
    $
    9.16
    
    
    $
    0.01


2002 Fiscal Year
    
    
    
    
    
    
    
    
    
    Cash Dividend(ended 9/28/02)
    
    High
    
    Low
    
    DeclaredFourth Quarter
    
    $
    13.30
    
    
    $
    8.51
    
    
    $
    0.01Third Quarter
    
    $
    22.08
    
    
    $
    11.16
    
    
    $
    0.01Second Quarter
    
    $
    22.54
    
    
    $
    15.20
    
    
    $
    0.01First Quarter
    
    $
    20.09
    
    
    $
    14.00
    
    
    $
    0.01


As of November 24, 2003, there were approximately 3,600 holders of record
of the Companys common stock. The Board of Directors declared, and the
Company paid, cash dividends per share of common stock noted above in fiscal
2003 and 2002. Payment of dividends is within the discretion of the Companys
Board of Directors, will be subject to periodic review and will depend, among
other factors, upon the earnings, capital requirements, operating results and
financial condition of the Company from time to time. There are no
restrictions on the Companys ability to pay dividends provided the covenants
set forth in its bank credit agreement and Senior Note Agreement are met (see
Managements Discussion and Analysis of Financial Condition and Results of
Operations  Liquidity and Capital Resources and Note 4 to the Consolidated
Financial Statements). The covenants primarily concern certain operating
ratios and minimum balances of tangible net worth.

A regular quarterly dividend of $0.01 per share, and a special dividend of
$0.01 per share, were declared November 5, 2003 to stockholders of record on
November 20, 2003.

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SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

Number ofsecuritiesremaining availableNumber of
    
    
    
    
    
    for future issuancesecurities to be
    
    
    
    
    
    under equityissued upon
    
    Weighted-average
    
    compensation plansexercise of
    
    exercise price of
    
    (excludingoutstanding
    
    outstanding
    
    securitiesoptions, warrants
    
    options, warrants
    
    reflected inPlan Category
    
    and rights
    
    and rights
    
    column (a))(a)
    
    (b)
    
    (c)Equity compensation
plans approved by
security holders:1997 Equity
Incentive Plan
    
    
    527,646
    
    
    $
    11.11
    
    
    
    881,463Equity compensation
plans not approved
by security
holders:
    
    
    
    
    
    
    
    Total
    
    
    527,646
    
    
    $
    11.11
    
    
    
    881,463


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ITEM 6. SELECTED FINANCIAL DATA

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

Years EndedSeptember 27,
    
    September 28,
    
    September 29,
    
    September 30,
    
    October 2,2003
    
    2002
    
    2001
    
    2000
    
    1999(amounts in thousands except per share amounts)Statement of Operations Data:Net sales
    
    $
    213,674
    
    
    $
    185,638
    
    
    $
    238,985
    
    
    $
    219,216
    
    
    $
    159,403Income (loss) from
continuing operations
(before extraordinary item)
    
    
    5,565
    
    
    
    (8,806
    )
    
    
    11,717
    
    
    
    9,607
    
    
    
    5,339Diluted income (loss) from
continuing operations per
share (before extraordinary
item and discontinued
operations)
    
    
    0.39
    
    
    
    (0.63
    )
    
    
    0.81
    
    
    
    0.65
    
    
    
    0.37Shares used in computing
diluted income (loss) per
share (before extraordinary
item)
    
    
    14,291
    
    
    
    13,993
    
    
    
    14,4441
    
    
    
    14,8071
    
    
    
    14,5081Dividends per common share
    
    
    0.04
    
    
    
    0.04
    
    
    
    0.0751
    
    
    
    0.041
    
    
    
    0.041Balance Sheet Data:Working capital
    
    $
    37,783
    
    
    $
    36,551
    
    
    $
    43,764
    
    
    $
    41,808
    
    
    $
    37,937Total assets
    
    
    133,453
    
    
    
    127,166
    
    
    
    146,357
    
    
    
    138,288
    
    
    
    123,360Long-term debt (excluding
current portion)
    
    
    17,494
    
    
    
    22,500
    
    
    
    29,556
    
    
    
    36,614
    
    
    
    36,705Stockholders equity
    
    
    58,641
    
    
    
    52,359
    
    
    
    60,320
    
    
    
    49,096
    
    
    
    45,843


1 Share numbers have been adjusted for the one-for-one stock dividend paid
November 21, 2000 to stockholders of record as of October 30, 2000

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

Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Companys actual results could differ materially from those
discussed in, or implied by, these forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed in this section and in the BusinessRisk Factors section of
this Report.

See Critical Accounting Policies and the Use of Estimates for a
description of the Companys critical accounting policies.

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

Years Ended2003
    
    2002
    
    2001Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    75.4
    
    
    
    72.4
    
    
    
    72.8Gross profit
    
    
    24.6
    
    
    
    27.6
    
    
    
    27.2Operating expenses:Selling, general and administrative expenses
    
    
    14.7
    
    
    
    16.6
    
    
    
    14.7Research, development and related expenses
    
    
    7.2
    
    
    
    8.3
    
    
    
    3.7Provision for excess capacity
    
    
    0.6
    
    
    
    5.5
    
    
    
    0.0Provision for uncollectables from a related party
    
    
    0.0
    
    
    
    1.7
    
    
    
    0.0Provision for product line move and other
    
    
    0.0
    
    
    
    1.2
    
    
    
    0.0Income (loss) from operations
    
    
    2.1
    
    
    
    (5.7
    )
    
    
    8.8Other income (expense)
    
    
    2.7
    
    
    
    (0.9
    )
    
    
    0.2Interest expense
    
    
    (0.9
    )
    
    
    (1.2
    )
    
    
    (1.0
    )Income (loss) before income taxes
    
    
    3.9
    
    
    
    (7.8
    )
    
    
    8.0Provision (benefit) for income taxes
    
    
    1.4
    
    
    
    (3.1
    )
    
    
    3.1Net income (loss)
    
    
    2.5
    %
    
    
    (4.7
    )%
    
    
    4.9
    %


Net Sales

During fiscal 2003 net sales for the Company increased 15.1% to $213.7
million from $185.6 million in fiscal 2002. The sales volume increase was
primarily due to increased commercial sales to domestic and foreign automotive
customers, and to a lesser extent government sales. Sales to the automotive
industry, including sales of the Companys GyroChip sensors, increased 25.8% to
$119.2 million from $94.7 million in fiscal 2002 due to the launch of new
platforms into the North American and European markets and an increase in
quantities shipped and engineering development billings of $3.0 million to the
Companys largest customer. Sales to other industrial customers decreased $1.3
million to $72.7 million from $74.0 million during fiscal 2003 resulting
primarily from continued weakness in factory automation. Government related
sales increased $4.9 million in fiscal 2003 to $21.8 million from $16.9 million
during fiscal 2002 primarily from increased military based sensor shipments.

During fiscal 2002 net sales for the Company decreased 22.3% to $185.6
million from $239.0 million in fiscal 2001. The sales volume decrease was
primarily due to lower commercial sales to domestic and foreign automotive
customers due to competition supplying yaw rate sensors to the Companys
largest customer, lower automotive production levels for vehicles containing
Electronic Stability Program (ESP) systems, lower product pricing and, to a
lesser extent, reduced sales to industrial customers primarily due to the
continuing soft economy. Sales to the automotive industry, including sales of
the Companys GyroChip sensors, decreased 31.7% to $94.7 million from $138.7
million in fiscal 2001. Sales to other industrial customers decreased $7.8
million to $74.0 million from $81.8 million during fiscal 2002 resulting
primarily from reduced sales to the semiconductor capital equipment industry.
Government related sales decreased $1.6 million in fiscal 2002 to $16.9 million
from $18.5 million during fiscal 2001 primarily from shipment timing on
contracts.

The Companys sales to international customers were approximately 54%, 50%
and 56% of the Companys net sales for fiscal

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2003, 2002 and 2001, respectively. The increase in international sales in
fiscal 2003 is attributable to the launch of new automotive platforms with
stability control systems and an increase in quantities shipped for older
platforms. The decrease in international sales in fiscal 2002 was attributable
to competitors supplying yaw rate sensors to the Companys largest customer.
The vast majority of sales to non-U.S. customers are denominated in U.S.
Dollars.

Cost of Sales and Gross Profit

In fiscal 2003, cost of sales as a percentage of net sales increased 3.0
percentage points due to a higher automotive product mix with lower associated
margins, higher overhead spending associated with GyroChip capacity expansion
not yet fully absorbed, additional inventory reserves at the Companys
facilities, the impact of low yields associated with model launches and scrap
issues with two automotive vendors. There may be additional margin rate
variability in future years due to the introduction of new products, changes in
product pricing, negotiation of development revenues and changes in
manufacturing processes, volumes and product life cycles. Management continues
to undertake technological initiatives designed to increase manufacturing and
production efficiencies and attempts to maintain close relationships with
vendors and customers in an effort to reduce costs and increase margins.

In fiscal 2002, cost of sales as a percentage of net sales decreased 0.4
percentage points due primarily to a lower proportion of automotive sales with
higher than average cost of sales percentage offset to some degree by the
impact of improved yields on the new automotive sensor cluster product.

Selling, General and Administrative Expenses

Selling, general and administrative expenses in fiscal 2003 increased $0.5
million from $30.9 million in fiscal 2002 to $31.4 million. Included in
selling, general and administrative expense is the legal expense recovery of
$3.5 million associated with the favorable settlement of the Companys patent
infringement litigation against a competitor. More than offsetting this
recovery is increased spending primarily due to the legal costs associated with
the patent infringement litigation settlement of $2.7 million and other
spending of $1.3 million to support higher revenue. As a percentage of sales,
selling, general and administrative expenses decreased 1.9 percentage points to
14.7% in fiscal 2003 from 16.6% in fiscal 2002 primarily due to increased sales
revenue.

Selling, general and administrative expenses in fiscal 2002 decreased $4.2
million from $35.1 million in fiscal 2001 to $30.9 million primarily due to
management actions to reduce spending in light of sales decreases in fiscal
2002, which reduction was partially offset by an increase in the provision for
allowance for doubtful accounts as compared to fiscal 2001. As a percentage of
sales, selling, general and administrative expenses increased 1.9 percentage
points to 16.6% in fiscal 2002 from 14.7% in fiscal 2001 primarily as a result
of reduced sales.

Research, Development and Related Expenses

Research and development expenses in fiscal 2003 decreased $0.1 million to
$15.3 million from $15.4 million in fiscal 2002. Research and development
expenditures have remained constant as management remains dedicated to the
development of new and enhanced products, such as the next generation quartz
automotive gyro sensor, NCAPS, and improvements to other existing product
families.

Research and development expenses in fiscal 2002 increased $6.6 million to
$15.4 million from $8.8 million in fiscal 2001. The increase was due to
managements dedication to the development of new and enhanced products, such
as the next generation quartz and silicon automotive gyro sensors, NCAPS and
improvements to other existing product families.

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

Related Party Expense and Financing

In August 2003, the Company entered into a tender offer (the Tender
Offer) to purchase the outstanding common shares of OpticNet at $0.04 per
share. The board of directors of both companies approved the proposed
transaction. If successful, the Tender Offer will enable the Company to
purchase the 6.1 million outstanding common shares of OpticNet it does not
already own at an aggregate cost of approximately $0.2 million. Upon
completion, the Company intends to terminate the registration of

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OpticNets common stock under the Securities Exchange Act of 1934, as amended
(the Exchange Act). The Company expects to benefit from cost reductions
associated with OpticNets terminated operations and the absence of Exchange
Act reporting requirements for OpticNet.

Since
inception, all capital for OpticNet (see Business  Research and
Development) has been provided by the Company as debt or equity financing, as
a result of OpticNets inability to gain outside financing from independent
parties to date, in light of the severe downturn in the optical networking
industry. OpticNets net loss for the three-month period from October 1, 2000
through December 30, 2000 of $176,000 is included in the consolidated results
of the Company. Originally, the Company accounted for its investment in
OpticNet under the equity method of accounting until March 31, 2002, when the
Company deemed its investment impaired. The Company has recognized OpticNets
entire net loss for the six months ended September 28, 2002 and fiscal year
2003. As of March 30, 2002, the Company fully reserved its initial $1.0
million investment in OpticNet.

In October 2000, the Company agreed to provide OpticNet with a line of
credit originally established for up to $2.0 million, amended in March 2002 for
borrowings of up to $3.0 million. During the fiscal quarter ended June 29,
2002, the Company suspended the availability of advances to OpticNet under the
line of credit, under which amounts outstanding at such time totaled
approximately $2.7 million in principal amount. In the six months ending
September 28, 2002, the Company provided an additional $1.8 million of
financing to OpticNet, which was advanced with the intent to convert such cash
advances into additional equity in OpticNet, upon terms to be decided. The
$1.8 million advanced was expensed during the third and fourth quarters of
fiscal 2002, reflecting OpticNets net loss for the six-month period from March
31, 2002 through September 28, 2002. Effective September 28, 2002, the Company
and OpticNet had determined that OpticNet would authorize and issue to the
Company a series of nonvoting preferred stock. In November 2002, OpticNet
issued a total of 18,146,420 shares of nonvoting and nonconvertible Series B
preferred stock to Technologies, in consideration of the $1.8 million advanced
during the third and fourth quarters of fiscal 2002. See Note 11 for a further
description of the relationship with OpticNet.

Provisions

In fiscal 2003, the Company recognized a provision for the impairment of
silicon gyro research and development equipment of approximately $1.2 million
related to excess capacity. Silicon gyro designs will continue to be
evaluated, but the Company will not continue to operate its silicon fabrication
facility in California. The Company believes that continuing progress with
quartz technology will remain competitive in future years.

Provisions for excess capacity, uncollectables from a related party and
product line move in fiscal 2002 consisted of approximately $10.3 million
related to the expected future losses on operating lease payments on facility
and production assets that partially supported OpticNet, as well as $3.1
million to reserve for the note receivable due from OpticNet and the Companys
initial investment in OpticNet. Additionally, the Company recognized a product
line move charge of approximately $2.2 million for a plan to close a facility
and relocate manufacturing activities to a more cost-effective location.

Interest Expense and Other Income

Interest expense was $1.9 million, $2.3 million and $2.5 million in fiscal
2003, 2002 and 2001, respectively. Interest expense as a percentage of sales
decreased slightly in fiscal 2003 as compared to fiscal 2002 due to reduced
debt levels and lower interest rates on the Companys line of credit as
compared to the senior notes. The Companys fixed interest rate debt decreased
in fiscal 2003 due to a principal payment on long-term debt in November 2002.
In addition, during fiscal 2003 the Company borrowed on, and fully repaid, its
line of credit as described under Liquidity and Capital Resources below. The
Companys average interest rate in fiscal 2003 approximated the average
interest rate in fiscal 2002.

Other income of $5.9 million in fiscal 2003 was primarily comprised of the
favorable settlement of litigation with the U.S. Government regarding the H70
contract of $5.4 million, the favorable settlement of litigation with a
competitor regarding patent infringement of certain quartz technologies of $2.1
million, net of legal recovery, offset by the $1.0 million of funding provided
to OpticNet and the $1.5 million impairment charge of the Companys investment
in Athena Technologies.

Other net expense of $1.8 million in fiscal 2002 was comprised of the
Companys interest in the net loss of OpticNet, which included severance costs
and other expenses to support its current level of operations. Other income in
2001 was comprised of royalties and interest income earned on highly liquid
investments. Other income was $0.5 million for fiscal 2001.

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Income Taxes

The Companys effective tax rate was 35.1%, 39.6% and 39.1% for fiscal
2003, 2002 and 2001, respectively. The effective tax rate primarily reflects
the statutory U.S. federal tax rate and the weighted average tax rate of the
states in which the Company conducts business. The net decrease of 4.5
percentage points in fiscal 2003 from fiscal 2002 results from many factors
including: the relative proportion of tax credits generated to pre-tax book
income for 2003, the true-up of estimated prior year tax credits, increased
export sales benefit generated in the current year and other prior year items.
The net increase of 0.5 percentage points in fiscal 2002 from fiscal 2001
resulted from the Company generating a pre-tax loss in fiscal 2002 and the
adverse impact that result had on all the permanent difference items, in
addition to a decrease in both the U.S. federal statutory rate and the tax
benefit related to foreign sales. Other factors may have favorable and
unfavorable effects upon the Companys effective tax rate in 2004 and
subsequent years. These factors include, but are not limited to,
interpretations of existing tax laws, changes in tax laws and rates, future
levels of research and development spending, and future levels of capital
expenditures.

Deferred Income Taxes

At September 27, 2003, the Company had net current deferred income tax
assets of $8.4 million and net non-current deferred income tax assets of $2.2
million. Realization of the net deferred tax assets is dependant upon the
Companys ability to either carry back the reversal of the underlying temporary
differences and obtain a refund of taxes previously paid or generate sufficient
taxable income in future years to benefit from the reversal of the underlying
temporary differences.

Liquidity and Capital Resources

During fiscal 2003, operations of the Company provided $22.5 million in
cash. Cash provided by operations included net income of $5.6 million plus
non-cash charges for depreciation, amortization, impairment of investments and
provision for excess capacity of $8.5 million, $2.4 million, $1.5 million and
$1.2 million, respectively, together with a decrease in inventory, assets held
for sale and other current assets of $4.3 million, $2.0 million and $0.8
million respectively. In addition, other positive impacts include collection
of an income tax receivable recognized in the second quarter of $3.0 million
and favorable net settlements with the U.S. Government and under patent
litigation of $5.4 million and $7.6 million, respectively, as well as an
increase in trade accounts payable, accrued expenses and other liabilities of
$7.7 million. These cash inflows were offset by an increase in trade
receivables of $12.1 million due to higher activity levels and a delayed
payment by the Companys largest customer.

Investing activities for the Company in fiscal 2003 consisted primarily of
the purchase of $6.4 million in capital equipment to support planned capacity
increases for future production and an increase in other long term assets of
$3.5 million primarily due to the Companys investment in Athena Technologies.
The majority of the equipment purchased was for the production of automotive
quartz GyroChip sensor products. This cash outflow was offset by the receipt
of $0.6 million in cash from the disposal of equipment resulting in net cash
used by investing activities of $9.3 million.

Fiscal 2003 financing activities primarily consisted of debt payments of
$39.6 million, which consisted of $7.0 million in principal paid on senior
notes payable, as well as $32.6 million in payments on the Companys line of
credit. Other cash used by financing activities included cash purchases of the
Companys stock at open market prices for $1.0 million and dividend payments of
$0.6 million. These cash outflows were primarily offset by proceeds from
recurring borrowing on the Companys line of credit of $32.6 million and
proceeds of $0.2 million from stock issuances related to the exercise of
options granted under the Companys 1997 Equity Incentive Plan, resulting in
net cash used for financing activities of $8.4 million during fiscal 2003.

While the Company believes that its available credit line and cash derived
from operations will be sufficient to meet the Companys capital requirements
for the next twelve months, the Company may need to raise additional funds
through public or private financings or other arrangements. Revenue and
profitability may be negatively affected until there is clear evidence of an
upswing in the industrial economy. There can be no assurance that the Company
will not require additional funding, or that such additional funding, if
needed, will be available on terms attractive to the Company, or at all. Any
additional equity financing may be dilutive to the stockholders, and debt
financing, if available, may involve restrictive covenants.

The Company had no material capital commitments other than the commitments
under capital leases at September 27, 2003.

Effects of Inflation

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

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CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES

Managements discussion and analysis of financial condition and results of
operations is based upon the Companys consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The Company reviews the accounting policies
used in reporting its financial results on a regular basis. The preparation of
these consolidated financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses and related disclosure of contingent assets and liabilities. The
estimates are based on historical experience and on various other assumptions
that management believes to be reasonable under the circumstances. On an
ongoing basis, the Company evaluates its estimates. Results may differ from
these estimates due to actual outcomes being different from those on which the
Company based its assumptions.

The United States Securities and Exchange Commission (SEC) has defined
critical accounting policies as those that are most important to the portrayal
of an issuers financial condition and results of operations and require
management to make the most difficult and subjective judgments, often as a
result of the need to make estimates on matters that are inherently uncertain.
Based upon this definition, the Company believes the following critical
accounting policies affect its more significant judgments and estimates used in
the preparation of its consolidated financial statements.

Allowance for Doubtful Accounts

The Company continuously monitors collections and payments from its
customers and maintains allowances for doubtful accounts based upon historical
experience and any specific customer collection issues that the Company has
identified. While such credit losses have historically been within managements
expectations, there can be no assurance that the Company will continue to
experience the same relative level of credit losses that it has in the past.
In addition, although the Companys sales have historically been to many
customers in a variety of markets, in recent periods, one automotive customer
accounted for a significant portion of the Companys net sales. A significant
change in the liquidity or financial position of that customer or a further
deterioration in the economic environment in general could have a material
adverse impact on the collectability of the Companys accounts receivable and
future operating results, including a reduction in future revenues and
additional allowances for doubtful accounts. If, at the time of shipment, the
Company determines that collection of a receivable is not reasonably assured,
the revenue is deferred and recognized at the time collection becomes
reasonably assured, which is generally upon receipt of payment.

Inventories

Inventories are carried principally at the lower of cost or fair value and
does not exceed net realizable value. Cost is determined by the first-in,
first-out (FIFO) method, including material, labor and factory overhead. The
Company writes down its inventory for estimated obsolescence for the difference
between the cost of inventory and the estimated market value based upon
assumptions about future demand and market conditions. If actual future demand
or market conditions are less favorable than those projected by management,
additional inventory write-downs may be required.

The Companys inventories are evaluated for obsolescence and excess
quantity at least annually, with quarterly updates for the most significant
operations.

Long-Lived and Intangible Assets and Goodwill

Management reviews goodwill and intangible assets with indefinite useful
lives for impairment on an annual basis or more regularly if an event occurs
that represents an indicator of possible impairment. All other long-lived and
intangible assets are reviewed for impairment whenever events or circumstances
indicate that the carrying amount of the asset may not be recoverable. An
impairment loss would be recognized based on the difference between the
carrying value of the asset and its estimated fair value, which would be
determined based on undiscounted cash flows estimated to be generated by those
assets. The evaluation of goodwill and intangibles with indefinite useful
lives for impairment requires management to use significant judgments and
estimates including, but not limited to, projected future revenue, operating
results and cash flows.

Although management currently believes that the estimates used in the
evaluation of goodwill and intangibles with indefinite lives are reasonable,
differences between actual and expected revenue, operating results and cash
flow could cause these assets to be deemed impaired. If this were to occur, the
Company would be required to charge to earnings the write-down in value of such
assets, which could have a material adverse effect on the Companys results of
operations and financial position.

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Equity Investments

The Company records its equity investment in a private company on the cost
basis if the Company owns less than 20% of the outstanding equity of the
investee company. The Company periodically evaluates the fair market value of
its equity investment to determine if an other-than-temporary impairment in the
value of its investment has taken place.

Litigation

The Company reserves for legal claims when payments associated with the
claims become probable and can be reasonably estimated. Due to the difficulty
in estimating costs of resolving legal claims, actual costs may be
substantially different than the amounts reserved.

Provision for Excess Capacity, Uncollectables from a Related Party and Product
Line Move and Other

During the quarter ended March 30, 2002, the Company established reserves
for portions of assets held under leases and owned in excess of requirements,
receivables from a related party and the closure of a specific manufacturing
facility, as discussed in Note 14 to the Companys consolidated financial
statements. These reserves required the use of significant estimates. Though
the Company believes that these estimates accurately reflect the costs of these
plans, they relate to matters that are inherently uncertain and actual results
may be different.

Environmental Matters

The Company reserves for known environmental claims, of which there are
none as of September 27, 2003, when payments associated with the claims become
probable and the costs can be reasonably estimated. The Companys environmental
reserves, for all periods presented, are recorded at the expected payment
amount. The actual cost of resolving environmental issues may be higher than
that reserved primarily due to difficulty in estimating such costs and
potential changes in the status of government regulations.

Income Taxes

The Company has significant amounts of deferred tax assets that are
reviewed periodically for recoverability and valued accordingly. These assets
are evaluated by using the four sources of taxable income that may be
considered under Financial Accounting Standards (FAS) No. 109: (1) future
reversals of existing temporary differences; (2) taxable income in prior
carryback years, if carryback is permitted under the tax law; (3) tax planning
strategies and; (4) future taxable income exclusive of reversing temporary
differences and carryforwards. In the event it is determined more likely than
not that some portion or all of the deferred tax assets will not be realized, a
valuation allowance would be recorded with a corresponding charge to income in
the period such determination occurs.

SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

Revenues are primarily generated from the sale of electronic devices to
our customers, typically the end-user. Revenues also include other items such
as negotiated development billings, licensing fees or royalties that may not
occur on a regular basis.

The Company recognizes revenue using the guidance from SEC Staff
Accounting Bulletin No. 101 Revenue Recognition in Financial Statements.
Under these guidelines, revenue recognition is deferred on transactions where:
(1) persuasive evidence of an arrangement does not exist; (2) revenue
recognition is contingent upon performance of one or more obligations of the
Company; (3) the price is not fixed or determinable or (4) payment is not
reasonably assured.

Product Warranty

The Company records a warranty liability on its products at the time of
revenue recognition based on historical experience and any specific warranty
issues that the Company has identified. Although historical warranty costs
have been within expectations, there can be no assurance that future warranty
costs will not exceed historical amounts. If actual future warranty costs
exceed historical amounts, additional allowances may be required, which could
have a material adverse impact on the Companys

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operating results in future periods. See Note 1 to the consolidated
financial statements for product warranty disclosure.

Property, Plant and Equipment and Related Depreciation

The Company records property, plant and equipment at cost, which is
depreciated using the straight-line method for structures and equipment over
their estimated useful lives. Leasehold improvements and assets acquired under
capital leases are amortized over the shorter of the lease term or their
estimated useful lives. Management reviews the estimated useful lives of
property, plant and equipment to verify that the assets are being depreciated
in accordance with their usage and all assets no longer in service are fully
depreciated.

Accrued Expenses and Other Liabilities

The Company records liabilities for services or products received in the
period in which the benefit was recognized. Due to the difficulty in
estimating costs of these services or products received, actual costs may be
substantially different than the amounts recorded.




ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risk in the form of changes in foreign
exchange rates, changes in the prices of marketable equity securities held as
part of a deferred compensation plan (a Rabbi trust) and changes in interest
rates.

The Company has approximately $3,200,000 (calculated based on the
conversion rate for Euros at September 27, 2003) permanently invested in the
assets of Ideacod, S.A.S., located in Strasbourg, France. The potential loss
in fair value resulting from a hypothetical 10% adverse change in the foreign
currency exchange rate amounts to $320,000, which would not be material to the
consolidated financial statements.

The Rabbi trust assets, consisting of cash equivalents and debt and equity
securities, are offset by an equivalent deferred compensation liability to the
trust participants. The liability fluctuates equally with changes in the value
of the assets. Because the liability completely offsets the assets of the
trust, changes in asset value have no effect on the Companys results of
operations or financial position.

The Company is affected by changes in the general level of U.S. interest
rates, as a portion of the Companys investments are in short-term debt
securities issued by corporations. The Companys investments are placed with
high-quality issuers and the Company attempts to limit the amount of credit
exposure to any one issuer. Due to the nature of the Companys short-term
investments, the Company believes that it is not subject to any material market
risk exposure. The Company does not have any foreign currency or other
derivative financial instruments.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED BALANCE SHEETSBEI Technologies, Inc. and Subsidiaries

September 27,
    
    September 28,dollars in
thousands except share and per share amounts
    
    2003
    
    2002ASSETSCurrent assetsCash and cash equivalents
    
    $
    9,211
    
    
    $
    4,418Restricted investments
    
    
    5,185
    
    
    
    6,727Trade receivables:Commercial customers, less allowance for doubtful accounts (2003$783; 2002$1,365)
    
    
    36,243
    
    
    
    22,364United States Government
    
    
    1,028
    
    
    
    2,83637,271
    
    
    
    25,200Inventories, less inventory reserves (2003 $3,400; 2002 $2,427)
    
    
    24,190
    
    
    
    28,538Deferred income taxes
    
    
    8,372
    
    
    
    8,333Assets held for sale
    
    
    
    
    
    
    2,011Other current assets
    
    
    4,543
    
    
    
    7,015Total current assets
    
    
    88,772
    
    
    
    82,242Property, plant and equipmentLand
    
    
    4,466
    
    
    
    4,264Structures
    
    
    15,977
    
    
    
    14,717Equipment
    
    
    65,250
    
    
    
    61,751Leasehold improvements
    
    
    2,162
    
    
    
    1,70687,855
    
    
    
    82,438Less allowances for depreciation and amortization
    
    
    50,732
    
    
    
    44,66837,123
    
    
    
    37,770Other assetsTradenames, patents and related assets,
less amortization (2003$3,786; 2002$3,678)
    
    
    223
    
    
    
    331Technology acquired under license agreements, less amortization (2003$10,066; 2002$9,068)
    
    
    542
    
    
    
    1,540Goodwill
    
    
    1,612
    
    
    
    1,612Deferred income taxes, non-current
    
    
    2,235
    
    
    
    2,587Other
    
    
    2,946
    
    
    
    1,0847,558
    
    
    
    7,154$
    133,453
    
    
    $
    127,166


See notes to consolidated financial statements

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CONSOLIDATED BALANCE SHEETS (Continued)BEI Technologies, Inc. and Subsidiaries

|
|

dollars in
thousands except share and per share amounts
    
    September
27,
2003
    
    September
28,
2002LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesTrade accounts payable
    
    $
    15,680
    
    
    $
    13,709Accrued expenses and other liabilities
    
    
    22,318
    
    
    
    18,161Income tax payable
    
    
    689
    
    
    
    Deferred compensation liability
    
    
    5,185
    
    
    
    6,727Current portion of capital lease obligation
    
    
    93
    
    
    
    Current portion of long-term notes payable
    
    
    7,024
    
    
    
    7,094Total current liabilities
    
    
    50,989
    
    
    
    45,691Capital
lease obligation, less current portion
    
    
    1,958
    
    
    
    Long-term notes payable, less current portion
    
    
    15,536
    
    
    
    22,500Other liabilities
    
    
    6,329
    
    
    
    6,616Stockholders equityPreferred
stock
($.001 par value; authorized 2,000,000 shares; none issued)
    
    
    
    
    
    
    Common
stock
($.001 par value; authorized 35,000,000 shares; issued and
outstanding; 200314,524,910;
200214,599,137)
    
    
    7,931
    
    
    
    8,119Retained earnings
    
    
    54,466
    
    
    
    49,670Accumulated other comprehensive income (loss)
    
    
    59
    
    
    
    (239
    )62,456
    
    
    
    57,550Less: Unearned restricted stock
    
    
    (3,815
    )
    
    
    (5,191
    )Total stockholders equity
    
    
    58,641
    
    
    
    52,359$
    133,453
    
    
    $
    127,166


See notes to consolidated financial statements

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CONSOLIDATED STATEMENTS OF OPERATIONSBEI Technologies, Inc. and Subsidiaries

Years EndedSeptember 27,
    
    September 28,
    
    September 29,dollars in
thousands except share and per share amounts
    
    2003
    
    2002
    
    2001Net sales
    
    $
    213,674
    
    
    $
    185,638
    
    
    $
    238,985Cost of sales
    
    
    161,215
    
    
    
    134,311
    
    
    
    173,897Gross margin
    
    
    52,459
    
    
    
    51,327
    
    
    
    65,088Selling, general and administrative expenses
    
    
    31,383
    
    
    
    30,912
    
    
    
    35,077Research, development and related expenses
    
    
    15,288
    
    
    
    15,397
    
    
    
    8,8255,788
    
    
    
    5,018
    
    
    
    21,186Provision for excess capacity
    
    
    1,222
    
    
    
    10,275
    
    
    
    Provision for uncollectables from a related party
    
    
    
    
    
    
    3,072
    
    
    
    Provision for product line move and other
    
    
    
    
    
    
    2,230
    
    
    
    Income (loss) from operations
    
    
    4,566
    
    
    
    (10,559
    )
    
    
    21,186Other income (expense)
    
    
    5,862
    
    
    
    (1,760
    )
    
    
    524Interest expense
    
    
    (1,855
    )
    
    
    (2,270
    )
    
    
    (2,466
    )Income (loss) before income taxes
    
    
    8,573
    
    
    
    (14,589
    )
    
    
    19,244Provision (benefit) for income taxes
    
    
    3,008
    
    
    
    (5,783
    )
    
    
    7,527Net income (loss)
    
    $
    5,565
    
    
    $
    (8,806
    )
    
    $
    11,717Basic Earnings (Loss) Per Common ShareNet income (loss) per common share
    
    $
    0.39
    
    
    $
    (0.63
    )
    
    $
    0.84Shares used in computing basic income (loss) per
common share
    
    
    14,118,731
    
    
    
    13,993,013
    
    
    
    13,904,937Diluted Earnings (Loss) Per Common ShareNet income (loss) per common and common equivalent share
    
    $
    0.39
    
    
    $
    (0.63
    )
    
    $
    0.81Shares used in computing diluted income (loss) per common
and common equivalent share
    
    
    14,290,603
    
    
    
    13,993,013
    
    
    
    14,443,609


See notes to consolidated financial statements

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CONSOLIDATED STATEMENTS OF CASH FLOWSBEI Technologies, Inc. and Subsidiaries

Years EndedSeptember 27,
    
    September 28,
    
    September 29,dollars in thousands
    
    2003
    
    2002
    
    2001Cash flows from operating activities:Net income (loss)
    
    $
    5,565
    
    
    $
    (8,806
    )
    
    $
    11,717Adjustments to reconcile net income (loss) to net cash provided
by operating activities:Depreciation
    
    
    8,474
    
    
    
    6,926
    
    
    
    6,456Amortization
    
    
    2,359
    
    
    
    2,172
    
    
    
    3,247Impairment of investment in equity securities
    
    
    1,500
    
    
    
    
    
    
    
    Deferred income taxes
    
    
    313
    
    
    
    (1,669
    )
    
    
    1,250Loss (gain) on disposition of assets
    
    
    (37
    )
    
    
    (397
    )
    
    
    17Foreign currency translation
    
    
    298
    
    
    
    219
    
    
    
    (60
    )Provision for excess capacity
    
    
    1,222
    
    
    
    10,275
    
    
    
    Provision for uncollectables from a related party
    
    
    
    
    
    
    3,072
    
    
    
    Provision for product line move and other
    
    
    
    
    
    
    2,230
    
    
    
    Changes in operating assets and liabilities:Trade receivables
    
    
    (12,071
    )
    
    
    1,569
    
    
    
    6,298Inventories
    
    
    4,348
    
    
    
    2,270
    
    
    
    276Assets held for sale
    
    
    2,011
    
    
    
    2,411
    
    
    
    (6,383
    )Other current assets
    
    
    789
    
    
    
    (4,093
    )
    
    
    (4,013
    )Trade accounts payable, accrued expenses and other liabilities
    
    
    7,723
    
    
    
    (13,418
    )
    
    
    (3,706
    )Net cash provided by operating activities
    
    
    22,494
    
    
    
    2,761
    
    
    
    15,099Cash flows from investing activities:Investment in minority owned equity investee  OpticNet
    
    
    
    
    
    
    
    
    
    
    (1,000
    )Investment
in equity securities  Athena
    
    
    (2,000
    )
    
    
    (500
    )
    
    
    Purchase of property, plant and equipment
    
    
    (6,427
    )
    
    
    (7,596
    )
    
    
    (8,436
    )Disposition of property, plant and equipment
    
    
    624
    
    
    
    400
    
    
    
    109Other assets
    
    
    (1,471
    )
    
    
    1,585
    
    
    
    (194
    )Net cash used by investing activities
    
    
    (9,274
    )
    
    
    (6,111
    )
    
    
    (9,521
    )Cash flows from financing activities:Proceeds from debt borrowings
    
    
    32,576
    
    
    
    44,966
    
    
    
    3Principal payments on debt and other liabilities
    
    
    (39,613
    )
    
    
    (52,017
    )
    
    
    (153
    )Proceeds from issuance of common stock
    
    
    176
    
    
    
    160
    
    
    
    667Tax benefit from exercised stock options
    
    
    35
    
    
    
    433
    
    
    
    654Repurchase of common stock
    
    
    (1,021
    )
    
    
    (1,636
    )
    
    
    (1,531
    )Payment of cash dividends
    
    
    (580
    )
    
    
    (576
    )
    
    
    (1,076
    )Net cash used by financing activities
    
    
    (8,427
    )
    
    
    (8,670
    )
    
    
    (1,436
    )Net increase (decrease) in cash and cash equivalents
    
    
    4,793
    
    
    
    (12,020
    )
    
    
    4,142Cash and cash equivalents at beginning of period
    
    
    4,418
    
    
    
    16,438
    
    
    
    12,296Cash and cash equivalents at end of period
    
    $
    9,211
    
    
    $
    4,418
    
    
    $
    16,438


See notes to consolidated financial statements

33



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##### Table of Contents



CONSOLIDATED STATEMENTS OF CASH
FLOWS (Continued)BEI Technologies, Inc. and Subsidiaries

Years EndedSeptember 27,
    
    September 28,
    
    September 29,dollars in thousands
    
    2003
    
    2002
    
    2001Supplemental disclosures of non cash investing and
financing activities:Grants of restricted stock
    
    $
    9
    
    
    $
    3,808
    
    
    $
    1,596Cancellations of restricted stock
    
    
    225
    
    
    
    323
    
    
    
    180Tax benefit from restricted stock
    
    
    874
    
    
    
    269
    
    
    
    1,139Repurchase of stock paid in subsequent year
    
    
    
    
    
    
    
    
    
    
    999Capital lease obligation incurred
    
    
    2,051
    
    
    
    
    
    
    
    Disposal recognition of fully depreciated equipment
    
    $
    
    
    
    $
    12,450
    
    
    $
    


See notes to consolidated financial statements

34



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##### Table of Contents



CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVEINCOME (LOSS)BEI Technologies, Inc.
and Subsidiaries


CommonStockRetained
    
    Accumulated Other
    
    Comprehensive
    

UnearnedRestricteddollars in
thousand except shares
    
    Shares
    
    Amount
    
    Earnings
    
    Comprehensive Loss
    
    Income (Loss)
    
    Stock
    
    TotalBalances at September 30, 2000
    
    
    14,308,776
    
    
    $
    2,321
    
    
    $
    49,193
    
    
    $
    (398
    )
    
    
    
    
    
    $
    (2,020
    )
    
    $
    49,096Net income for 2001
    
    
    
    
    
    
    
    
    
    
    11,717
    
    
    
    
    
    
    $
    11,717
    
    
    
    
    
    
    
    11,717Other
comprehensive incomeForeign
currency translation loss,
net of income tax of $39
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (60
    )
    
    
    (60
    )
    
    
    
    
    
    
    (60
    )Comprehensive income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    11,657Restricted stock plan
    
    
    84,841
    
    
    
    1,416
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (661
    )
    
    
    755Stock options exercised
    
    
    81,220
    
    
    
    390
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    390Tax benefit from exercised stock options
    
    
    
    
    
    
    654
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    654Tax benefit from restricted stock
    
    
    
    
    
    
    1,139
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,139Repurchase of stock
    
    
    (148,565
    )
    
    
    (2,130
    )
    
    
    (400
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,530
    )Cash dividends
    
    
    
    
    
    
    
    
    
    
    (1,076
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,076
    )Contributed capital and other
    
    
    
    
    
    
    235
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    235Balances at September 29, 2001
    
    
    14,326,272
    
    
    
    4,025
    
    
    
    59,434
    
    
    
    (458
    )
    
    
    
    
    
    
    (2,681
    )
    
    
    60,320Net loss for 2002
    
    
    
    
    
    
    
    
    
    
    (8,806
    )
    
    
    
    
    
    $
    (8,806
    )
    
    
    
    
    
    
    (8,806
    )Other comprehensive incomeForeign
currency translation gain,
net of income tax of $144
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    219
    
    
    
    219
    
    
    
    
    
    
    
    219Comprehensive income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (8,587
    )Restricted stock plan
    
    
    282,714
    
    
    
    3,485
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,510
    )
    
    
    975Stock options exercised
    
    
    31,471
    
    
    
    160
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    160Tax benefit from exercised stock options
    
    
    
    
    
    
    433
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    433Tax benefit from restricted stock
    
    
    
    
    
    
    269
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    269Repurchase of stock
    
    
    (41,320
    )
    
    
    (253
    )
    
    
    (382
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (635
    )Cash dividends
    
    
    
    
    
    
    
    
    
    
    (576
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (576
    )Balances at September 28, 2002
    
    
    14,599,137
    
    
    
    8,119
    
    
    
    49,670
    
    
    
    (239
    )
    
    
    
    
    
    
    (5,191
    )
    
    
    52,359Net income for 2003
    
    
    
    
    
    
    
    
    
    
    5,565
    
    
    
    
    
    
    $
    5,565
    
    
    
    
    
    
    
    5,565Other comprehensive incomeForeign
currency translation gain,
net of income tax of $160
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    298
    
    
    
    298
    
    
    
    
    
    
    
    298Comprehensive income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5,863Restricted stock plan
    
    
    (21,412
    )
    
    
    (228
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,376
    
    
    
    1,148Stock options exercised
    
    
    37,601
    
    
    
    176
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    176Tax benefit from exercised stock options
    
    
    
    
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35Tax benefit from restricted stock
    
    
    
    
    
    
    874
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    874Repurchase of stock
    
    
    (90,416
    )
    
    
    (832
    )
    
    
    (189
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,021
    )Cash dividends
    
    
    
    
    
    
    
    
    
    
    (580
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (580
    )Contributed capital and other
    
    
    
    
    
    
    (213
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (213
    )Balances at September 27, 2003
    
    
    14,524,910
    
    
    $
    7,931
    
    
    $
    54,466
    
    
    $
    59
    
    
    
    
    
    
    $
    (3,815
    )
    
    $
    58,641


See notes to consolidated financial statements

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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTSBEI Technologies, Inc. and Subsidiaries
September 27, 2003

Note 1     Summary of Significant Accounting Policies

Basis of Presentation: BEI Technologies (Technologies or the Company)
was incorporated in Delaware in June 1997 and became publicly held on September
27, 1997 as a result of the distribution of shares in Technologies (the
Distribution) to all the stockholders of BEI Electronics, Inc.,
(Electronics) on September 24, 1997. BEI Electronics was subsequently
renamed BEI Medical Systems Company, Inc. and was acquired by Boston Scientific
Corporation in 2002.

Effective October 30, 2000, the Board of Directors of Technologies
declared a one-for-one stock dividend to its stockholders. Stockholders of
record as of the close of business on October 30, 2000, received one additional
share of common stock of Technologies for each share held as of such date, and
cash in lieu of any fractional share of Technologies common stock. All per
share numbers and per share data included within the Companys consolidated
financial statements have been adjusted as appropriate to reflect the stock
dividend.

The accompanying financial statements present the consolidated financial
position and results of operations of the Company and its wholly owned
subsidiaries. All intercompany accounts and transactions have been eliminated.

The Company provides sensors, engineered subsystems and associated
components which are used for controlled precision machinery and equipment in
automotive, industrial, medical, aerospace and military applications.

Fiscal Year:The Companys fiscal year ends on the Saturday nearest
September 30. Fiscal years 2003, 2002 and 2001 each contained 52 weeks.

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

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

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

Restricted Investments:The Companys restricted investments consist of
investments in debt and equity securities that are held in a Rabbi Trust and
are restricted for payment to the participants of the Companys deferred
compensation plan. The Company accounts for its restricted investments in
accordance with FAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities. As required by FAS No. 115, the Company determines the
proper classification of its investments at the time of purchase and reassesses
such designations at each balance sheet date. At September 27, 2003 and
September 28, 2002, the Companys restricted investments were classified as
trading securities and were recorded in restricted investments in the
accompanying consolidated balance sheets.

Inventories:Inventories are carried principally at the lower of cost or
fair value and do not exceed net realizable value. Cost is determined by the
first-in, first-out (FIFO) method, including material, labor and factory
overhead. The Company writes down its inventory for estimated obsolescence for
the difference between the cost of inventory and the estimated market value
based upon assumptions about future demand and market conditions. If actual
future demand or market conditions are less favorable than those projected by
management, additional inventory write-downs may be required.

The Companys inventories are evaluated for obsolescence and excess
quantity on the minimum of an annual basis, with quarterly updates for the most
significant operations.

Assets Held for Sale:Assets held for sale at September 28, 2002 include
approximately $2.0 million for the current portion of deposits and advances on
production equipment that a significant customer has agreed to fund over a
period of two years.

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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)BEI Technologies, Inc. and Subsidiaries

Assets held for sale are carried at cost.

Depreciation and Amortization:Property, plant and equipment are recorded
at cost. Depreciation and amortization are provided in amounts sufficient to
amortize the cost of such assets over their estimated useful lives, which range
from 3 to 30 years, using the straight-line method for structures and
equipment. Leasehold improvements and assets acquired under capital leases are
amortized over the shorter of the lease term or their estimated useful lives.

Other Assets:Tradenames, patents and related assets are being amortized
over their remaining lives at the date of acquisition up to a period of 17
years.

Technology acquired under license agreements consists primarily of the
cost of exclusive rights to make, use and sell products utilizing quartz rate
sensing technology. Technology acquired is being amortized over 13 years,
which approximates its estimated useful life from the date of acquisition. The
amortization expense relating to intangible assets for fiscal year 2003 totaled
approximately $1.1 million. In fiscal 2004 and thereafter, estimated
amortization will be $0.3 million and $0.5 million, respectively.

Goodwill:Goodwill consists of the excess of cost over fair value of net
tangible assets acquired in purchase acquisitions. In accordance with the
impairment provisions of Statement of Financial Accounting Standard (FAS) No.
142, Goodwill and Other Intangible Assets, the Company evaluates the carrying
value of goodwill annually as of the first day of the fourth quarter of each
fiscal year, or more often if certain indicators arise. In evaluating
goodwill, as the Company operates in one reportable segment, the Company
compares the total carrying value of goodwill to the Companys fair value as
determined by its market capitalization. To date, there has been no impairment
of this asset.

Long-Lived Assets:The Company recognizes impairment losses in accordance
with FAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. Long-lived assets, including property, plant and equipment and other
assets, are reviewed and impairment recognized when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amounts of the assets.

Product Warranty:The Company offers limited warranties for its products
for a period that lasts generally from one to four years. The specific terms
and conditions of those warranties vary depending upon the products sold that
are specific to different industries and customers. The Company estimates the
costs that may be incurred under its limited warranty and records a liability
in the amount of such costs at the time product revenue is recognized. Factors
that affect the Companys warranty liability include the number of installed
units, historical and anticipated rates of warranty claims, and cost per claim.
The Company assesses the adequacy of its recorded warranty liabilities on a
minimum of a quarterly basis and adjusts that amount as necessary. Changes in
the Companys product warranty liability during the period are as follows (in
thousands):

Balance, September 28, 2002
    
    $
    603Warranties issued during the period
    
    
    1,185Settlements made during the period
    
    
    (1,190
    )Changes in liability for pre-existing warranties
during the period, including expirations
    
    
    569Balance, September 27, 2003
    
    $
    1,167


Equity Investments: The Company records its equity investment in a private
company on the cost basis as the Company owns less than 20% of the outstanding
equity of the investee company. Equity investments totaling approximately $2.5
million at September 27, 2003, and $0.5 million at September 28, 2002, were
included in other assets in the accompanying consolidated balance sheets.

The Company periodically evaluates the fair market value of its equity
investment to determine if an other-than-temporary impairment in the value of
its investment has taken place. The Company recorded an impairment charge of
$1.5 million for the year ended September 27, 2003 to reduce its equity
investment to estimated fair value primarily due to the risk associated with
investing in a early stage company with limited capitalization.

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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)BEI Technologies, Inc. and Subsidiaries

Revenue Recognition:Revenue from product sales is generally recognized
upon shipment provided that a purchase order has been received or a contract
has been executed, there are no uncertainties regarding customer acceptance,
any fee is fixed or determinable and collectibility is deemed probable. If
uncertainties regarding customer acceptance exist, revenue is recognized when
such uncertainties are resolved. Generally, shipments are made F.O.B. point of
origin, with variations due to contract specific agreements. The Company
records a warranty liability on its products at the time of revenue
recognition. Costs associated with shipping and handling are primarily
included in cost of sales.

Revenues also include other items such as negotiated development billings,
licensing fees or royalties that may not occur on a regular basis.

Research and Development:Costs to develop the Companys products are
expensed as incurred.

Stock Based Compensation:The Companys 1997 Equity Incentive Plan
provides for the granting of incentive stock options to employees and stock or
options to consultants, employees and directors. The Company accounts for
stock based compensation using the intrinsic value method prescribed in
Accounting Principles Board (APB) Opinion No. 25 whereby the options are
granted at market price, and therefore no compensation costs are recognized.
The Company has elected to retain its current method of accounting as described
above and has adopted the disclosure requirements of FAS Nos. 123 and 148. If
compensation expense for the Companys stock option plan had been determined
based upon fair values at the grant dates for awards under those plans in
accordance with FAS No. 123, the Companys pro forma net earnings, basic and
diluted earnings (loss) per common share would have been as follows (in
thousands except per share amounts):

Years Ended2003
    
    2002
    
    2001Net income (loss), as reported
    
    $
    5,565
    
    
    $
    (8,806
    )
    
    $
    11,717Deduct:
    
    Total stock based employee compensation expense determined under fair value based method for all awards, net of related tax effects
    
    
    (727
    )
    
    
    (783
    )
    
    
    (545
    )Pro forma net income (loss)
    
    $
    4,838
    
    
    $
    (9,589
    )
    
    $
    11,172Earnings (Loss) per Common Share:Basic-as reported
    
    $
    0.39
    
    
    $
    (0.63
    )
    
    $
    0.84Basic-pro forma
    
    $
    0.34
    
    
    $
    (0.69
    )
    
    $
    0.80Diluted-as reported
    
    $
    0.39
    
    
    $
    (0.63
    )
    
    $
    0.81Diluted-pro forma
    
    $
    0.34
    
    
    $
    (0.69
    )
    
    $
    0.77


The fair value of options at date of grant was estimated using the
Black-Scholes option valuation model with the following weighted average
assumptions:

Years Ended2003
    
    2002
    
    2001Expected life (years)
    
    
    5
    
    
    
    5
    
    
    
    5Risk-free interest rate
    
    
    2.51
    %
    
    
    4.13
    %
    
    
    4.00
    %Expected volatility
    
    
    50.00
    %
    
    
    80.46
    %
    
    
    83.33
    %Expected dividend yield
    
    
    0.40
    %
    
    
    0.30
    %
    
    
    0.40
    %


The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Companys employee stock options have characteristics
significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
managements opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. The effects of
applying FAS 123 in the pro forma disclosures may not be indicative of the
valuations for future awards because the Black-Scholes option valuation model
involves subjective assumptions.

38



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)BEI Technologies, Inc. and Subsidiaries

Recent Accounting Pronouncements:In January 2003, the FASB issued
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities. The primary objectives of FIN 46 are to provide guidance on the
identification of entities for which control is achieved through means other
than through voting rights (variable interest entities or VIEs) and how to
determine when and which business enterprise should consolidate the VIE (the
primary beneficiary). This new model for consolidation applies to an entity
in which either (1) the equity investors (if any) do not have a controlling
financial interest or (2) the equity investment at risk is insufficient to
finance that entitys activities without receiving additional subordinated
financial support from other parties. In addition, FIN 46 requires that both
the primary beneficiary and all other enterprises with a significant variable
interest in a VIE make additional disclosures. FIN 46 applies immediately to
VIEs created after January 31, 2003 or to VIEs obtained after that date. For
variable interests held in VIEs acquired prior to February 1, 2003, FIN 46 was
originally effective July 1, 2003. However, in October 2003, the Financial
Accounting Standards Board (FASB) deferred the effective date of FIN 46 for
VIEs created prior to February 1, 2003 to the first reporting period after
December 15, 2003.

The Company plans to adopt FIN 46 during the fiscal quarter ending January
3, 2004. FIN 46s consolidation criteria are based on analysis of risks and
rewards, not control, and represent a significant and complex modification of
previous accounting principles. FIN 46 represents an accounting change, not a
change in the underlying economics of legally independent businesses. Under
the provisions of FIN 46, the activities of OpticNet Inc. (OpticNet) will need
to be consolidated by the Company. The Company has determined that OpticNet
meets the definition of a VIE under the criteria outlined in FIN 46 and
Technologies would be deemed to be the Primary Beneficiary which requires
Technologies to consolidate OpticNets activities. The Company is not deemed
to have any additional legal ownership, the Companys legal rights and
obligations have not changed, and the Company is not legally obligated for
OpticNets liabilities. Management believes the consolidation by the Company
of OpticNets activities will not have a material impact on the Companys
financial position or its results of operations. See Note 11 for a further
description of OpticNet and its relationship with the Company.

In December 2002, the FASB issued FAS No. 148, Accounting for Stock-Based
Compensation: Transition and Disclosure (FAS 148). FAS No.148 amends FAS
No. 123, Accounting for Stock-Based Compensation, to provide alternative
methods of transition for a voluntary change to the fair value-based method of
accounting for stock-based employee compensation (transition provisions). In
addition, FAS 148 amends the disclosure requirements of APB Opinion No. 28,
Interim Financial Reporting, to require pro forma disclosure in interim
financial statements by companies that elect to account for stock-based
compensation using the intrinsic value method prescribed in APB Opinion No. 25
(disclosure provisions). The transition methods of FAS 148 are effective for
the Companys September 27, 2003 Form 10-K. The Company continues to use the
intrinsic value method of accounting for stock-based compensation. As a
result, the transition provisions will not have an effect on the Companys
consolidated financial statements. The Company has elected adoption of the
interim disclosure requirements.

In May 2003, the FASB issued FAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity
(FAS 150). FAS 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. FAS 150 applies specifically to a number of financial instruments
that companies have historically presented within their financial statements as
either equity or between the liabilities section and the equity section, rather
than as liabilities. FAS 150 is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The
adoption of FAS 150 has not had a material impact on the Companys financial
statements.

Net Income (Loss) Per Common Share:Basic income (loss) per common share
is computed using the weighted average number of common shares outstanding
during the period. Diluted income (loss) per common share is computed using
the weighted average number of common shares outstanding during the period,
adjusted for the incremental shares attributed to unvested stock and
outstanding options to purchase common stock calculated using the treasury
stock method.

Foreign Subsidiary: The financial statements of Ideacod, S.A.S., a wholly
owned subsidiary, have been translated into U.S. dollars at fiscal year-end,
using the exchange rates on those dates for assets and liabilities and the
average exchange rates during the period for income and expenses. The
resulting unrealized translation adjustments are recorded as a component of
other comprehensive income (loss).

Related Party Financing and Arrangements: During fiscal 2000, Technologies
made a $1.0 million equity investment in OpticNet, the Companys then majority
owned subsidiary. The equity investment was provided as initial financing with
the expectation that OpticNet would seek additional funding from third parties
in the future. At the close of business on October 30, 2000, Technologies
declared a distribution to its stockholders of approximately 42% of the
outstanding securities of OpticNet.

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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)BEI Technologies, Inc. and Subsidiaries

See Note 11 Related Party Transactions for a further description.

Since inception, all operating capital for OpticNet has been provided by
the Company as debt or equity financing. OpticNets net loss for the
three-month period from October 1, 2000 through December 30, 2000 of $176,000
is included in the consolidated results of the Company. Originally, the
Company accounted for its investment in OpticNet under the equity method of
accounting until March 31, 2002, when the Company deemed its investment
impaired. The Company has recognized OpticNets entire net loss for the six
months ended September 28, 2002 and for all of fiscal year 2003. As of March
30, 2002, the Company recognized as impaired the carrying value of its initial
$1.0 million investment in OpticNet and reduced the investment to zero and
fully reserved as uncollectable its $2.7 million loan to OpticNet.

In August 2003, the Company entered into a tender offer (the Tender
Offer) to purchase the outstanding common shares of OpticNet at $0.04 per
share. The board of directors of both companies approved the proposed
transaction. If successful, the Tender Offer will enable the Company to
purchase the 6.1 million outstanding common shares of OpticNet it does not
already own at an aggregate cost of approximately $0.2 million. Upon
completion, the Company intends to terminate the registration of OpticNets
common stock under the Securities Exchange Act of 1934, as amended (the
Exchange Act). The Company expects to benefit from the cost reduction
associated with OpticNets terminated operations and the absence of Exchange
Act reporting requirements for OpticNet.

Reclassification:Certain reclassifications have been made to the 2002 and
2001 consolidated financial statements to conform to current year
presentations.

Note 2     Inventories

September 27,
    
    September 28,2003
    
    2002( in thousands)Finished products
    
    $
    3,503
    
    
    $
    2,945Work in process
    
    
    5,284
    
    
    
    7,238Materials
    
    
    15,403
    
    
    
    18,355Total inventories
    
    $
    24,190
    
    
    $
    28,538


Note 3     Accrued Expenses and Other Liabilities

September 27,
    
    September 28,2003
    
    2002(in thousands)Employee compensation
    
    $
    2,451
    
    
    $
    1,513Vacation
    
    
    2,121
    
    
    
    1,967Accrued taxes
    
    
    728
    
    
    
    984Contract costs
    
    
    75
    
    
    
    75Accrued professional fees
    
    
    1,785
    
    
    
    1,858Insurance
    
    
    675
    
    
    
    846Royalties and related costs
    
    
    4,583
    
    
    
    3,639Customer advances
    
    
    3,013
    
    
    
    31Commissions
    
    
    360
    
    
    
    422Interest
    
    
    538
    
    
    
    711Warranty
    
    
    1,167
    
    
    
    603Reserve for excess capacity
    
    
    2,534
    
    
    
    2,082Reserve for product line move and other
    
    
    238
    
    
    
    1,583Other
    
    
    2,050
    
    
    
    1,847Total accrued expenses and other liabilities
    
    $
    22,318
    
    
    $
    18,161


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)BEI Technologies, Inc. and Subsidiaries

Note 4     Long-Term Debt

September 27,
    
    September 28,2003
    
    2002(in thousands)6.70% Senior Notes; due in annual
installments of $7,000 from November 16,
2001 through November 16, 2005
    
    $
    21,000
    
    
    $
    28,000Mortgage note payable with interest at
6.87%; due in monthly installments of
principal and interest of $14 until
December 2003 when the remaining balance
of approximately $1,400 is due;
collateralized by certain real property
    
    
    1,560
    
    
    
    1,59422,560
    
    
    
    29,594Less current portion
    
    
    7,024
    
    
    
    7,094$
    15,536
    
    
    $
    22,500


On November 16, 1998, the Company sold $35.0 million of senior notes in a
private placement. The notes have an interest rate of 6.7% and mature in
annual installments of $7.0 million beginning November 16, 2001 up to and
including November 16, 2005. The note agreement contains covenants regarding
certain operating ratios, limitations on debt, dividend payments and minimum
net worth. The proceeds from the senior notes were used to repay the
pre-existing senior notes and pay down outstanding borrowings on the Companys
line of credit as they matured.

On December 13, 1998, the mortgage note payable was refinanced with the
original lender and the due date extended from fiscal 1999 to fiscal 2004. The
Company intends to refinance any unpaid amounts under the mortgage note payable
on a long term basis under similar terms when it matures in fiscal
2004. As such, the amount of $1,560,000 has been excluded from
current liabilities in the accompanying consolidated balance sheet at
September 27, 2003.

As of the quarter ended March 30, 2002, the Company completed an amendment
with its senior note holders, which provided that the net impact of the
provisions for excess capacity, uncollectables from a related party and product
line move recognized in the second quarter of fiscal 2002 would not cause an
event of default. The Companys operating results for the quarter ended March
30, 2002, excluding these provisions from the calculation of debt covenants,
result in the Company maintaining compliance as of that date.

On August 14, 2002, the Company established a $25.0 million line of
credit, which matures on August 15, 2004, with a bank and terminated the $25.0
million facility in place at the end of fiscal 2001 with another bank. On
August 13, 2003, the line of credit was amended to extend the maturity date to
November 14, 2004. No borrowings were outstanding under the line of credit at
September 27, 2003.

During December 2002, the Company received a waiver of one of its
financial covenants of its senior notes for the fiscal quarter ended September
28, 2002. Additionally, the Company completed an amendment reducing the
coverage level required with its senior note holders, related to the same
financial covenant discussed above, for the fiscal quarter ended December 28,
2002. The Companys operating results for the quarter ended December 28, 2002,
resulted in the Company maintaining compliance as of that date based on the
reduced coverage levels.

Maturities of long-term debt including the senior notes and the mortgage
note payable are approximately as follows: fiscal 2004 $7.0 million; fiscal
2005 $7.0 million; fiscal 2006 $7.0 million; thereafter $1.6 million.

Interest of approximately $1.9 million, $2.4 million and $2.5 million was
paid during fiscal years 2003, 2002 and 2001, respectively.

Note 5     Research and Development

The Companys internally funded research, development and related
engineering expenditures were approximately $15.3 million, $15.4 million and
$8.8 million in fiscal 2003, 2002 and 2001, respectively. In addition,
customer-funded research and development expenditures charged to cost of sales
were $0.5 million, $0.5 million and $0.2 million, respectively, for the same
periods.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)BEI Technologies, Inc. and Subsidiaries

Note 6     Income Taxes

The Company accounts for income taxes under FAS No. 109, Accounting for
Income Taxes. Under this method, deferred tax liabilities and assets are recognized for the expected future tax
consequences of temporary differences between the carrying amounts and the tax
bases of assets and liabilities. Deferred tax assets and liabilities are
determined based on the differences between financial reporting and the tax
bases of assets and liabilities and are measured using the enacted tax rates
and laws known at this time and that will be in effect when the differences are
expected to reverse.

The provision (benefit) for income tax expense consists of the following
(in thousands):

Year EndedSeptember 27,
    
    September 28,
    
    September 29,2003
    
    2002
    
    2001CurrentForeign
    
    $
    850
    
    
    $
    
    
    
    $
    Federal
    
    
    1,029
    
    
    
    (3,987
    )
    
    
    5,691State
    
    
    816
    
    
    
    (127
    )
    
    
    586Total Current
    
    
    2,695
    
    
    
    (4,114
    )
    
    
    6,277DeferredForeign
    
    
    
    
    
    
    
    
    
    
    
    Federal
    
    
    
    886
    
    
    
    (865
    )
    
    
    815State
    
    
    
    (573
    )
    
    
    (804
    )
    
    
    435Total Deferred
    
    
    
    313
    
    
    
    (1,669
    )
    
    
    1,250Total income tax provision (benefit)
    
    $
    3,008
    
    
    $
    (5,783
    )
    
    $
    7,527


Tax benefits of $909,000, $702,000 and $1,793,000 related to the 1997
Equity Incentive Plan were credited to stockholders equity and decreased the
amount of taxes payable or increased the amount of taxes currently refundable
during fiscal year 2003, 2002 and 2001, respectively.

Significant components of the Companys net deferred tax assets are as
follows (in thousands):

September 27,
    
    September 28,2003
    
    2002Deferred tax assetsNet operating loss carryforwards
    
    $
    125
    
    
    $
    150Tax credits
    
    
    996
    
    
    
    427Accrued expenses
    
    
    5,811
    
    
    
    5,979Asset impairment
reserves
    
    
    5,351
    
    
    
    4,636Inventory valuation
    
    
    1,491
    
    
    
    1,186Other reserves
    
    
    1,264
    
    
    
    923Other
    
    
    1,031
    
    
    
    938Total deferred tax assets
    
    
    16,069
    
    
    
    14,239Valuation allowance against deferred tax assets
    
    
    (972
    )
    
    
    15,097
    
    
    
    14,239Deferred tax liabilitiesDepreciation and property basis difference
    
    
    3,302
    
    
    
    2,551Other
    
    
    1,188
    
    
    
    768Total deferred tax liabilities
    
    
    4,490
    
    
    
    3,319Net deferred tax assets
    
    $
    10,607
    
    
    $
    10,920


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)BEI Technologies, Inc. and Subsidiaries

The differences between the provision for income taxes and the income tax
determined by applying the statutory federal income tax rate of 34% for 2003
and 2002 and 35% for 2001 (in thousands) are as follows:

September 27,
    
    September 28,
    
    September 29,2003
    
    2002
    
    2001Income tax at the statutory rate
    
    $
    2,915
    
    
    $
    (4,960
    )
    
    $
    6,735State income tax, net of federal income tax effect
    
    
    519
    
    
    
    (585
    )
    
    
    616Goodwill amortization
    
    
    
    
    
    
    
    
    
    
    118Increase in valuation allowance
    
    
    972
    
    
    
    
    
    
    
    Changes in prior year estimates (1)
    
    
    (743
    )
    
    
    
    
    
    
    Tax credits
    
    
    (463
    )
    
    
    (292
    )
    
    
    (260
    )Export sales benefit
    
    
    (216
    )
    
    
    (163
    )
    
    
    (593
    )Other
    
    
    24
    
    
    
    217
    
    
    
    911Total income taxes
    
    $
    3,008
    
    
    $
    (5,783
    )
    
    $
    7,527


(1) Changes in prior year estimates relate principally to events occurring
during 2003 that provided greater certainty as to the expected outcome of
matters for which an estimate was provided in prior years.

The valuation allowance increased during fiscal year 2003 by $972,000.
The valuation allowance increased during the current year to partially offset a
deferred tax asset for which it is more likely than not that it will not be
realized.

Cash paid for income taxes in fiscal year 2003, 2002 and 2001 was
$410,000, $428,000 and $6,341,000, respectively.

As of September 27, 2003, the Company has state net operating loss
carryforwards of $2.0 million, which begin to expire in the year 2013. The
Company has California research and development credit carryforwards of
$996,000, which have no expiration date.

Note 7     Equity Incentive Plans

The Companys 1997 Equity Incentive Plan (the Incentive Plan) was
adopted by the Board of Directors in September 1997. The Incentive Plan
provides for the granting of incentive stock options to employees and
nonstatutory stock options, restricted stock purchase awards, and stock bonuses
(collectively, Stock Awards) to consultants, employees and directors. The
Company has reserved 2,878,890 shares of common stock for issuance under the
Incentive Plan, which included shares for substitute options granted to the
option holders of Electronics in connection with the Distribution.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)BEI Technologies, Inc. and Subsidiaries

Option and restricted stock activity under the Technologies Incentive
Plan is summarized below:

Restricted SharesOutstanding
    
    Options OutstandingCommon stockavailable for
    
    Number of common
    
    
    
    
    
    Weighted averagegrant
    
    shares
    
    Number of common shares
    
    exercise price per shareBalances, September 30, 2000
    
    
    943,616
    
    
    
    1,171,842
    
    
    
    361,928
    
    
    $
    5.72Restricted stock
granted
    
    
    (116,421
    )
    
    
    116,421
    
    
    
    
    
    
    
    Restricted stock
terminated
    
    
    31,580
    
    
    
    (31,580
    )
    
    
    
    
    
    
    Granted
    
    
    (131,440
    )
    
    
    
    
    
    
    131,440
    
    
    
    15.74Exercised
    
    
    
    
    
    
    
    
    
    
    (81,220
    )
    
    
    4.70Terminated
    
    
    30,388
    
    
    
    
    
    
    
    (30,388
    )
    
    
    11.58Balances, September 29, 2001
    
    
    757,723
    
    
    
    1,256,683
    
    
    
    381,760
    
    
    
    8.98Restricted stock
granted
    
    
    (305,500
    )
    
    
    305,500
    
    
    
    
    
    
    
    Restricted stock
terminated
    
    
    22,786
    
    
    
    (22,786
    )
    
    
    
    
    
    
    Restricted stock
retired
    
    
    
    
    
    
    (41,320
    )
    
    
    
    
    
    
    Granted
    
    
    (262,000
    )
    
    
    
    
    
    
    262,000
    
    
    
    13.19Exercised
    
    
    
    
    
    
    
    
    
    
    (31,471
    )
    
    
    5.09Terminated
    
    
    29,940
    
    
    
    
    
    
    
    (29,940
    )
    
    
    13.40Balances, September 28, 2002
    
    
    242,949
    
    
    
    1,498,077
    
    
    
    582,349
    
    
    
    10.84Restricted stock
granted
    
    
    (6,000
    )
    
    
    6,000
    
    
    
    
    
    
    
    Restricted stock
terminated
    
    
    27,412
    
    
    
    (27,412
    )
    
    
    
    
    
    
    Restricted stock
retired
    
    
    
    
    
    
    (40,271
    )
    
    
    
    
    
    
    Additional shares
reserved
    
    
    600,000
    
    
    
    
    
    
    
    
    
    
    
    Granted
    
    
    (15,700
    )
    
    
    
    
    
    
    15,700
    
    
    
    12.90Exercised
    
    
    
    
    
    
    
    
    
    
    (37,601
    )
    
    
    4.74Terminated
    
    
    32,802
    
    
    
    
    
    
    
    (32,802
    )
    
    
    15.21Balances, September 27, 2003
    
    
    881,463
    
    
    
    1,436,394
    
    
    
    527,646
    
    
    $
    11.11


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)BEI Technologies, Inc. and Subsidiaries

Weighted Average
    
    WeightedRemaining Contractual
    
    Average ExerciseRange of Exercise Prices
    
    Number Outstanding
    
    Life (Years)
    
    Price Per Share$2.33
    
    
    6,440
    
    
    
    1.15
    
    
    $
    2.33$3.50
    
    
    42,140
    
    
    
    5.02
    
    
    $
    3.50$5.25 - $6.22
    
    
    7,669
    
    
    
    5.81
    
    
    $
    5.80$6.25
    
    
    92,255
    
    
    
    6.20
    
    
    $
    6.25$7.44 - $12.78
    
    
    173,121
    
    
    
    8.51
    
    
    $
    10.42$13.25 - $14.58
    
    
    79,622
    
    
    
    6.64
    
    
    $
    13.42$16.21 - $28.60
    
    
    126,399
    
    
    
    7.65
    
    
    $
    17.44$2.33 - $28.60
    
    
    527,646
    
    
    
    7.19
    
    
    $
    11.11


As of September 27, 2003, options for 322,127 shares were vested and
exercisable at a weighted average exercise price of $9.75.

Under the Incentive Plan, the holders of the 1,400,000 shares of
Electronics common stock that had been issued under the Electronics 1992
Restricted Stock Plan (1992 Plan) who became employees of Technologies
received Technologies common stock of equal value subject to forfeiture if
employment terminated prior to the end of prescribed vesting periods. The
market value at the date of grant of shares is recorded as unearned restricted
stock and is amortized to compensation expense over its vesting periods.

Under both the 1992 Plan and Incentive Plan, as of September 27, 2003,
1,794,373 restricted shares have been granted, of which 1,436,394 shares are
outstanding, and 1,077,932 shares have fully vested. Compensation expense of
approximately $1,148,000, $975,000 and $755,000 for the amortization of
restricted stock was recorded in fiscal years 2003, 2002 and 2001,
respectively.

During fiscal years 2003 and 2002, options to acquire 15,700 and 262,000
shares were granted with a weighted average fair value of $6.51 and $9.55 per
share, respectively.

In addition to options, during fiscal years 2003 and 2002, 6,000 and
305,500 shares of nonvested stock were granted with a weighted average fair
value of $13.84 and $12.45 per share, respectively. The fair value at date of
grant of nonvested stock is amortized to compensation expense over its related
vesting period.

Note 8     Employee Benefit Plan

The Company has a defined contribution retirement plan for the benefit of
all eligible employees of BEI Technologies, Inc. and subsidiaries. Matching
non-discretionary contributions are based on a percentage of employee
contributions. Contributions to the plan by the Company for the benefit of its
employees for fiscal years 2003, 2002 and 2001 were approximately $1,285,000,
$1,290,000 and $1,068,000, respectively.

The Company has a grantor trust to fund deferred compensation for certain
employees (a Rabbi Trust or trust). As determined by the trustee, the
assets in the Rabbi Trust, consisting of cash equivalents and debt and equity
securities, are recorded at current market prices principally based upon
national exchange and over-the-counter markets. The trust assets are available
to satisfy claims of the Companys general creditors in the event of its
bankruptcy. The trusts assets, included in restricted investments, and the
corresponding deferred compensation liability of approximately $5.2 million at
September 27, 2003 and $6.7 million at September 28, 2002 are included in the
accompanying balance sheets.

Note 9     Lease Commitments

Operating leases consist principally of leases for real properties,
manufacturing equipment and land. Certain of the operating leases contain
various options for renewal and/or purchase of the related assets for amounts
approximating their fair market value

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)BEI Technologies, Inc. and Subsidiaries

at the date of exercise of the option. At September 27, 2003 and September 28,
2002, assets recorded under capital leases consist of land, buildings and
equipment of approximately $2,051,000 and $0, net of accumulated amortization
of $0 and $0, respectively. The future minimum payments for operating and
capital leases, net of future minimum rentals to be received under
noncancelable subleases, consist of the following at September 27, 2003 (in
thousands):

Capital
    
    OperatingFiscal Year
    
    Leases
    
    Leases2004
    
    $
    185
    
    
    $
    3,8192005
    
    
    184
    
    
    
    2,8992006
    
    
    138
    
    
    
    2142007
    
    
    184
    
    
    
    332008
    
    
    184
    
    
    
    23Thereafter
    
    
    1,575
    
    
    
    16Total minimum lease payments, net of future minimum rental
income
    
    
    2,450
    
    
    $
    7,004Less amounts representing interest
    
    
    (399
    )Less current portion
    
    
    (93
    )Amounts included in long-term debt
    
    $
    1,958


On September 28, 2001, the Company completed the leasing of research and
development equipment placed in service during the quarter ended September 29,
2001, which had been previously purchased by the Company for $700,000. In
addition, on December 20, 2001 and March 28, 2002, the Company executed
additional equipment lease schedules under this agreement to lease equipment
similar to that described above valued at approximately $3.5 million and $2.8
million, respectively. Under the terms of the lease transaction, the Company
sold the equipment and then immediately leased the equipment from the sole
purchaser under a non-cancelable operating lease with a lease term of three
years and an interest rate of approximately 6.9%. Total rent expense,
including interest is included in the table of future minimum annual rental
commitments under operating leases. In September 2003 the Company recognized
an impairment of these assets. See Note 14 for a further discussion of this
impairment.

The Company has entered into an agreement with OpticNet to rent capacity
of this equipment to OpticNet from month to month based on OpticNets usage of
the equipment beginning in October 2001. In March 2002, OpticNet significantly
reduced operations to support only its current customer base, resulting in
lower use of this equipment. See Note 11 Related Party Transactions for a
further description.

Total rental expense amounted to approximately $2,320,000, $2,342,000 and
$2,304,000 for fiscal years 2003, 2002 and 2001, respectively.

Note 10     Contingencies and Litigation

Claim against U.S. Government

The Company believes that BEI Defense Systems Company (Defense Systems),
a subsidiary of the Company with discontinued operations, suffered substantial
monetary damages due to actions of the U.S. Government in connection with the
parties H70 contract in effect during the 1992-1996 timeframe. As a result,
Defense Systems filed a substantial claim against the U.S. Government in 1996.
Following attempts to negotiate a settlement, Defense Systems filed an appeal
of its claim that has been heard before an Administrative Judge at the Armed
Services Board of Contract Appeals (ASBCA). In fiscal 2002, the Judge ruled
that Defense Systems is entitled to an equitable reformation of the prices on
certain rockets and motors in the H70 contract. The decision was remanded to
the parties to negotiate the amount. The parties were unable to negotiate an
amount on their own, so the parties then agreed to enter a non-binding
mediation of Alternate Dispute Resolution process with the same Administrative
Judge from the ASBCA who had rendered the original entitlement decision.
Effective December 2002, the parties finalized mediation that resulted in a
settlement, net of expenses, of $5.4 million. This amount was recorded in
other income for the quarter ended December 28, 2002.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)BEI Technologies, Inc. and Subsidiaries

Other

During fiscal 2002, Defense Systems was subject to litigation with a
former landlord regarding damages to real property formerly leased. The United
States District Court for the Western District of Arkansas entered a judgment,
including attorneys fees, of approximately $0.7 million against the Company.
The Company is in the process of contesting the award and has filed an appeal
of the judgment. Due to the uncertainty of success in the appeal, the Company
reserved $0.7 million for this judgment during the fiscal quarter ended June
29, 2002.

During fiscal 2002, the Company initiated litigation against a competitor
alleging patent infringement of certain quartz technologies. Effective
September 2003, the parties finalized mediation that resulted in a cash
settlement, net of expenses, of $7.6 million. This settlement includes legal
expense recovery which is recorded as an offset to selling, general and
administrative expense in the fiscal quarter ended September 27, 2003. This
legal expense recovery amounted to approximately $3.5 million, of which $2.7
million and $0.8 were incurred in fiscal 2003 and 2002, respectively. An
additional $2.1 million was recorded in other income, net of other direct costs
associated with the settlement, in the quarter ended September 27, 2003. An
additional favorable impact of approximately $2.1 million will be recognized in
other income during fiscal 2004 and 2005.

The Company has various other pending legal actions arising in the normal
course of business. Management believes that none of the legal actions not
already recognized in the financial statements, individually or in the
aggregate, will have a material impact on the Companys business, financial
condition or operating results.

Note 11 Related Party Transactions

During fiscal 2001, the Company agreed to provide OpticNet with a line of
credit originally established for up to $2.0 million, amended in March 2002 to
allow for borrowings by OpticNet of up to $3.0 million and in October 2002 to
extend the maturity date to December 31, 2002. The outstanding principal on
the note evidencing the line of credit bears interest at prime plus 1.5% per
annum. During the fiscal quarter ended June 29, 2002, the Company suspended
the availability of advances to OpticNet under the line of credit, as the
Company concluded that the note receivable totaling $2.7 million in principal
amount at such time was uncollectable and the Companys original investment in
OpticNet was impaired. This determination was a result of OpticNets inability
to attract significant strategic partners or third party financing necessary to
sustain operations. Therefore, a charge of $3.1 million was recorded in the
Companys statement of operations in fiscal 2002 as the note receivable was
deemed uncollectable and the carrying value of the original investment in
OpticNet was deemed impaired.

On September 28, 2001, the Company completed the leasing of research and
development equipment placed in service during the quarter ended September 29,
2001, which had been previously purchased by the Company for $0.7 million. In
addition, on December 20, 2001 and March 28, 2002, the Company executed
additional equipment lease schedules under this agreement to lease equipment
similar to that described above valued at approximately $3.5 million and $2.8
million, respectively. Under the terms of the lease transaction, the Company
sold the equipment and then immediately leased the equipment from the sole
purchaser under a non-cancelable operating lease with a lease term of three
years and an interest rate of approximately 6.9%.

The Company entered into an agreement with OpticNet to rent capacity on
this equipment to OpticNet from month to month based on OpticNets usage of the
equipment beginning in October 2001. In March 2002, OpticNet significantly
reduced operations to support only its current customer base, resulting in lower
use of this equipment.

The Company also leases 15,571 square feet of office and manufacturing
facilities used for research and development and manufacturing activities in
Hayward, California, which it originally subleased entirely to OpticNet under
an agreement entered into in October 2001, for an initial term expiring
December 2005. During March 2002, OpticNet concluded it was necessary to
reduce operating costs due to its inability to obtain significant strategic
partners or third party financing. The companies both agreed that a reduction
in operations would lower usage of the subleased facilities described above.
Beginning March 31, 2002, the Company agreed to prorate the annual lease
payments for the space and equipment from OpticNet, based on the portion of the
facilities OpticNet requires to support its current customers.

The Company is party to an intercompany services agreement with OpticNet,
entered into in October 2000, under which the company provides certain
administrative services to OpticNet at a cost of $25,000 per fiscal quarter.
During the third quarter of fiscal 2002, the Company agreed to suspend current
and future charges under the agreement, in light of the inability of OpticNet
to

47



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)BEI Technologies, Inc. and Subsidiaries

obtain outside financing to such date.

In the quarter ended March 30, 2002, the Company concluded that portions
of the assets held under leases were in excess to the Companys requirements.
See Note 14 for further discussion of this provision for excess capacity.

In the six months ending September 28, 2002, the Company provided an
additional $1.8 million of financing to OpticNet, which was advanced with the
intent to convert such cash advances into additional equity in OpticNet, upon
terms to be decided. The $1.8 million advanced was expensed during the third
and fourth quarters of fiscal 2002, reflecting OpticNets net loss for the
six-month period from March 31, 2002 through September 28, 2002. Effective
September 28, 2002, the Company and OpticNet had determined that OpticNet would
authorize and issue to the Company a series of nonvoting preferred stock. In
November 2002, OpticNet issued a total of 18,146,420 shares of nonvoting and
nonconvertible Series B preferred stock to Technologies, in consideration of
the $1.8 million advanced during the third and fourth quarters of fiscal 2002.

In fiscal 2003 the Company provided approximately $1.0 million of
additional funding to OpticNet for general operating expenses. This funding
was expensed during fiscal year 2003 and is included in other expense.

In August 2003, the Company entered into a Tender Offer to purchase the
outstanding common shares of OpticNet at $0.04 per share. The board of
directors of both companies approved the proposed transaction. If successful,
the Tender Offer will enable the Company to purchase the 6.1 million
outstanding common shares of OpticNet it does not already own at an aggregate
cost of approximately $0.2 million. Upon acquisition of these securities, the
Company would fully reserve their value in the period that the transaction is
finalized. Management does not expect the additional cost to accomplish this
transaction will be material. The Company intends to terminate the
registration of OpticNets common stock under the Exchange Act and expects to
benefit from the cost reduction associated with OpticNets terminated
operations and the absence of Exchange Act reporting requirements for OpticNet.

Summary of financial information for non-consolidated equity investee 
OpticNet (in thousands):

September 27,2003
    
    September 28,
    
    September 29,(unaudited)
    
    2002
    
    2001Total assets
    
    $
    130
    
    
    $
    9
    
    
    $
    1,049Total liabilities
    
    
    3,006
    
    
    
    2,925
    
    
    
    1,663Net loss
    
    $
    (973
    )
    
    $
    (4,131
    )
    
    $
    (1,575
    )


Note 12 Fair Value of Financial Instruments

FAS No. 107 (FAS 107), Disclosures about Fair Value of Financial
Instruments, requires disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet, for which it is
practicable to estimate that value. Whenever possible, quoted market prices
were used to develop fair values. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets, and, in many cases, could
not be realized in immediate settlement of the instrument. FAS 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company. The following methods and
assumptions were used by the Company in estimating its fair value disclosures
for financial instruments as of September 27, 2003 and as of September 28,
2002.

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

Long-Term Debt:The fair value of long-term debt has been estimated based
upon discounted future cash flows. The discount
rate used included a risk free rate derived from the Treasury yield curve plus
a risk weighting commensurate with the Companys
borrowing position. The fair value of long-term debt is approximately $15.9
million and $21.4 million compared with the carrying amounts of $17.5 million
and $22.5 million at September 27, 2003 and September 28, 2002, respectively.

48



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)BEI Technologies, Inc. and Subsidiaries

Note 13 Earnings (Loss) Per Common Share

The following table sets forth the computation of basic and diluted
earnings (loss) per common share:

Year EndedSeptember 27,
    
    September 28,
    
    September 29,2003
    
    2002
    
    2001(in thousands, except per share amounts)NumeratorNet income
    
    $
    5,565
    
    
    $
    (8,806
    )
    
    $
    11,717DenominatorDenominator for basic earnings (loss) per common share Weighted average shares, net of nonvested shares
(fiscal 2003593 shares; fiscal 2002699 shares;
fiscal 2001501 shares)
    
    
    14,119
    
    
    
    13,993
    
    
    
    13,905Effect of dilutive securities:Nonvested shares
    
    
    62
    
    
    
    
    
    
    
    299Employee stock options
    
    
    110
    
    
    
    
    
    
    
    240Denominator for diluted earnings (loss) per share
    
    
    14,291
    
    
    
    13,993
    
    
    
    14,444Basic income (loss) per common share
    
    $
    0.39
    
    
    $
    (0.63
    )
    
    $
    0.84Diluted income (loss) per common and common equivalent share
    
    $
    0.39
    
    
    $
    (0.63
    )
    
    $
    0.81


If the Company had reported net income in fiscal 2002, the calculation of
diluted earnings (loss) per share would have included the shares used in the
computation of historical net loss per share as well as an additional 232,000
common equivalent shares related to outstanding stock options and nonvested
restricted stock (determined using the treasury stock method) for the year
ended September 28, 2002.

Note 14 Restructuring Charges

In March 2002, the Company approved a plan to close a facility and
relocate manufacturing activities to a more cost effective location. As a
result, the Company accrued $2.2 million related primarily to the closure of
manufacturing facilities and administrative functions including the accrual of
remaining payments on the facility operations lease, less future anticipated
sublease payments. Other costs included write-downs of fixed assets and
inventories to their fair value. The facility closure and relocation was
completed within the 12 month period ending March 29, 2003. The Company
continues to incur costs related to the facility closure and these costs are
charged to the remaining balance of the provision.

The detail of the Companys provision for product line move and other is
as follows (in thousands):

Facility Closure
    
    Property ImpairmentCharges
    
    ChargesBalance, September 29, 2001
    
    $
    
    
    
    $
    Charges
    
    
    2,075
    
    
    
    155Amounts utilized
    
    
    (492
    )
    
    
    Balance, September 28, 2002
    
    
    1,583
    
    
    
    155Amounts utilized
    
    
    (1,345
    )
    
    
    (155
    )Balance, September 27, 2003
    
    $
    238
    
    
    $
    0


49



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)BEI Technologies, Inc. and Subsidiaries

In the quarter ended March 30, 2002, the Company concluded that portions
of the assets held under leases were in excess to the Companys requirements.
As discussed above, these assets had been primarily used by OpticNet. This
determination was a result of OpticNets lack of success in attracting
strategic partners or third party financing. In March 2002, the Company
recorded a charge of $10.3 million for expected future losses on the leases of
the facility and production assets noted above.

In September 2003, the Company approved a plan to cease operation of its
silicon fabrication facility. To date, the Company has made significant
investments in designing a silicon rate sensor, including related equipment and
facilities. Technologies assessment is that its continuing progress with
quartz technology will remain competitive and therefore will not continue to
operate its silicon fabrication facility. The Company recognized an impairment
related to the discontinued use of these assets of $1.2 million included in the
provision for excess capacity.

The detail of the Companys provision for excess capacity is as follows
(in thousands):

Asset Impairment
    
    Equipment Lease
    
    Facility LeaseCharges
    
    Charges
    
    Impairment Charges
    
    Other CommitmentsBalance, September 29, 2001
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Charges
    
    
    3,106
    
    
    
    6,100
    
    
    
    660
    
    
    
    409Amounts utilized
    
    
    (3,106
    )
    
    
    (865
    )
    
    
    (82
    )
    
    
    Balance, September 28, 2002
    
    
    
    
    
    
    5,235
    
    
    
    578
    
    
    
    409Additional charges
    
    
    341
    
    
    
    881
    
    
    
    
    
    
    
    Amounts utilized
    
    
    (341
    )
    
    
    (1,694
    )
    
    
    (174
    )
    
    
    (187
    )Balance, September 27, 2003
    
    $
    
    
    
    $
    4,422
    
    
    $
    404
    
    
    $
    222


Note 15 Sales and Major Customers

The principal business and operations of Technologies are conducted within
one business segment and are carried out by operations which design,
manufacture and sell electronic devices that provide vital sensory input and
actuation for the control systems of advanced machinery and automation systems
for the commercial automotive, government and industrial industries. The sales
to major industries are as follows (in thousands):

September 27,
    
    September 28,
    
    September 29,2003
    
    2002
    
    2001Commercial automotive sensors
    
    $
    119,139
    
    
    $
    94,694
    
    
    $
    138,702Government
    
    
    21,814
    
    
    
    16,901
    
    
    
    18,501Industrial
    
    
    72,721
    
    
    
    74,043
    
    
    
    81,782Total sales from operations
    
    $
    213,674
    
    
    $
    185,638
    
    
    $
    238,985


Although the Company is directly affected by the economic well being of
the above industries, management does not believe significant credit risk
exists at September 27, 2003.

The Companys foreign sales are conducted throughout Europe and Asia. A
summary of foreign and domestic sales follows (in thousands):

September 27,
    
    September 28,
    
    September 29,2003
    
    2002
    
    2001Domestic
    
    $
    98,323
    
    
    $
    92,558
    
    
    $
    104,377Foreign
    
    
    115,351
    
    
    
    93,080
    
    
    
    134,608Total sales from operations
    
    $
    213,674
    
    
    $
    185,638
    
    
    $
    238,985


Foreign sales accounted for approximately 54%, 50% and 56% of total sales
for fiscal 2003, 2002 and 2001, respectively.

In fiscal 2003, 2002 and 2001, one customer accounted for 41%, 39% and
49%, respectively, of the Companys net sales.

50



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)BEI Technologies, Inc. and Subsidiaries

Note 16 Quarterly Results of Operations (Unaudited)

The tables below present quarterly financial information for fiscal 2003
and 2002:

OperationsThree months endedDecember 28,
    
    March 29,
    
    June 28,
    
    September 27,2002
    
    2003
    
    2003
    
    2003(dollars in thousands except per share amounts)Net sales
    
    $
    47,088
    
    
    $
    54,715
    
    
    $
    57,103
    
    
    $
    54,768Gross margin
    
    
    12,315
    
    
    
    12,757
    
    
    
    14,205
    
    
    
    13,182Net income (loss)
    
    
    2,973
    
    
    
    (321
    )
    
    
    663
    
    
    
    2,250Basic Earnings (Loss) Per Common ShareBasic net income (loss) per common share
    
    $
    0.21
    
    
    $
    (0.02
    )
    
    $
    0.05
    
    
    $
    0.16Diluted Earnings (Loss) Per Common ShareDiluted net income (loss) per common share
    
    $
    0.21
    
    
    $
    (0.02
    )
    
    $
    0.05
    
    
    $
    0.16


December 29,
    
    March 30,
    
    June 29,
    
    September 28,2001
    
    2002
    
    2002
    
    2002Net sales
    
    $
    45,605
    
    
    $
    48,800
    
    
    $
    47,815
    
    
    $
    43,418Gross margin
    
    
    11,291
    
    
    
    13,160
    
    
    
    13,960
    
    
    
    12,916Net income (loss)
    
    
    240
    
    
    
    (9,246
    )
    
    
    966
    
    
    
    (766
    )Basic Earnings (Loss) Per Common ShareBasic net income (loss) per common share
    
    $
    0.02
    
    
    $
    (0.66
    )
    
    $
    0.07
    
    
    $
    (0.05
    )Diluted Earnings (Loss) Per Common ShareDiluted net income (loss) per common share
    
    $
    0.02
    
    
    $
    (0.66
    )
    
    $
    0.07
    
    
    $
    (0.05
    )


51



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##### Table of Contents



Report of Ernst & Young LLP, Independent Auditors

The Board of Directors and Stockholders
BEI Technologies, Inc.

We have audited the accompanying consolidated balance sheets of BEI
Technologies, Inc. and subsidiaries as of September 27, 2003 and September 28,
2002, and the related consolidated statements of operations, stockholders
equity and comprehensive income (loss) and cash flows for each of the three
years in the period ended September 27, 2003. These financial statements are
the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of BEI Technologies,
Inc. and subsidiaries at September 27, 2003 and September 28, 2002, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 27, 2003 in conformity with
accounting principles generally accepted in the United States.



| | /s/ Ernst & Young LLP
| | ---------------------

San Francisco, California
October 28, 2003

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

None.






|         |                        
|-------- | -----------------------
|ITEM 9A. | CONTROLS AND PROCEDURES

Evaluation and Disclosure Controls and Procedures

Based on their evaluation of our disclosure controls and procedures
(as defined in the rules promulgated under the Securities Exchange
Act of 1934), our chief executive officer and our chief financial
officer concluded that our disclosure controls and procedures were
effective as of the end of the period covered by this report.

We believe that a controls system, no matter how well designed and
operated, can provide only reasonable, not absolute assurance that
the objectives of the controls system are met. Because of the
inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and
instances of fraud, if any, within a company have been detected.
Our disclosure controls and procedures are designed to provide
reasonable assurance of achieving their objectives, and our chief
executive officer and our chief financial officer have concluded
that these controls and procedures are effective at the reasonable
assurance level.

Changes in Internal Controls

There was no change in the Companys internal control over financial
reporting, known to our chief executive officer or our chief
financial officer, that occurred during the period covered by this
report that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial
reporting.




PART III






|         |                                                   
|-------- | --------------------------------------------------
|ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Certain information with respect to directors and executive officers
is set forth in Part I of this Report. Additional information
required by this Item is incorporated herein by reference to the
section entitled Compliance with Section 16(a) of the Securities
and Exchange Act of 1934 of the Proxy Statement related to the
Companys 2004 Annual Meeting of Stockholders to be filed by the
Company with the Securities and Exchange Commission (the Definitive
Proxy Statement).






|         |                       
|-------- | ----------------------
|ITEM 11. | EXECUTIVE COMPENSATION

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






|         |                                                               
|-------- | --------------------------------------------------------------
|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Certain information with respect to securities authorized for
issuance under equity compensation plans is set forth in Part II,
Item 5 of this Report. Additional information required by this
Item is incorporated herein by reference to the section entitled
Security Ownership of Certain Beneficial Owners and Management
of the Definitive Proxy Statement.






|         |                                               
|-------- | ----------------------------------------------
|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is incorporated herein by
reference to the sections entitled Certain Transactions and
Compensation Committee Interlocks and Insider Participation of the
Definitive Proxy Statement.






|         |                                       
|-------- | --------------------------------------
|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item is incorporated herein to the
section entitled Principal Accountant Fees and Services of the
Definitive Proxy Statement.

53



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##### Table of Contents






PART IV






|         |                                                                 
|-------- | ----------------------------------------------------------------
|ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

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

Form 10-K(a)(1)
    
    Index to
Consolidated Financial Statements
    
    Page
NumberThe following Consolidated Financial Statements of BEI Technologies, Inc. and its Subsidiaries are filed as part of this Form 10-K:Report of Ernst & Young LLP, Independent Auditors
    
    
    52Consolidated Balance Sheets -
September 27, 2003 and September 28, 2002
    
    
    30Consolidated Statements of Operations -
Years ended September 27, 2003, September 28, 2002
and September 29, 2001
    
    
    32Consolidated Statements of Cash Flows -
Years ended September 27, 2003, September 28, 2002
and September 29, 2001
    
    
    33Consolidated Statement of Changes in Stockholders Equity and Comprehensive
Income (Loss) - Years ended September 27, 2003, September 28, 2002
and September 29, 2001
    
    
    35Notes to Consolidated Financial Statements -
September 27, 2003
    
    
    36(a)(2)
    

Index
to Financial Statement ScheduleThe following Consolidated Financial Statement Schedule of BEI
Technologies, Inc. for each of the years in the period ended
September 27, 2003 is filed as part of this Form 10-K:Schedule II
    Valuation and Qualifying Accounts
    
    
    S-1Report of Ernst & Young LLP, Independent Auditors as to Schedule
    
    
    S-2


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

(a)(3)
    
    Listing of ExhibitsExhibit Numbers
    
    Description
    
    Footnote2.1
    
    Distribution Agreement between BEI Electronics, Inc.
and BEI Technologies, Inc.
    
    
    i2.2
    
    Corporate Services Agreement between BEI Technologies, Inc. and BEI Electronics, Inc.
    
    
    i2.3
    
    Tax Allocation and Indemnity Agreement between BEI
Electronics, Inc. and BEI Technologies, Inc.
    
    
    i


54



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##### Table of Contents



(a)(3)
    
    Listing of ExhibitsExhibit Numbers
    
    Description
    
    Footnote2.4
    
    Assumption of Liabilities and Indemnity Agreement
between BEI Electronics, Inc. and BEI Technologies,
Inc.
    

    i2.5
    
    Technology Transfer and License Agreement by and
between BEI Electronics, Inc. and BEI Technologies,
Inc.
    
    
    i2.6
    
    Trademark Assignment and Consent Agreement by and
between BEI Electronics, Inc. and BEI Technologies,
Inc.
    
    
    i2.7
    
    Agreement Regarding Certain Representations and
Covenants by and between BEI Electronics, Inc. and
BEI Technologies, Inc.
    

    i3.1
    
    Certificate of Incorporation of BEI Technologies, Inc.
    

    i3.2
    
    Bylaws of BEI Technologies, Inc.
    

    i3.3
    
    Registrants Certificate of Designation of Series A
Junior Participating Preferred Stock (filed as
Exhibit 99.3 hereto)
    
    
    i4.1
    
    Specimen Common Share Certificate
    
    
    i4.2
    
    Certificate of Incorporation of BEI Technologies,
Inc. (filed as Exhibit 3.1 hereto)
    
    
    i4.3
    
    Bylaws of BEI Technologies, Inc. (filed as Exhibit
3.2 hereto)
    
    
    i4.4
    
    Registrants Certificate of Designation of Series A
Junior Participating Preferred Stock (filed as
Exhibit 99.3 hereto)
    
    
    i4.5
    
    Form of Rights Certificate (filed as Exhibit 99.4
hereto)
    

    i10.1
    *
    Registrants 1997 Equity Incentive Plan and forms of
related agreements
    
    
    i10.2
    *
    Executive Change in Control Benefits Agreement
between BEI Technologies, Inc. and Certain Named
Executive Officers
    
    
    i10.5
    
    Note Purchase Agreement dated November 16, 1998 by
and between BEI Technologies, Inc., BEI Sensors &
Systems Company, Inc., Connecticut General Life
Insurance Company and Allstate Life Insurance Company
    
    
    ii10.6
    
    Amendment to Tax Allocation and Indemnity Agreement
between BEI Electronics, Inc. and BEI Technologies,
Inc.
    
    
    ii10.9
    
    Development and Supply Agreement, dated April 26,
2001, by and between Systron Donner Inertial Division
and Continental Teves AG & Co.
    
    
    iv


55



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##### Table of Contents



(a)(3)
    
    Listing of ExhibitsExhibit Numbers
    
    Description
    
    Footnote10.10
    
    Amendment to Note Purchase Agreement as amended as of
March 30, 2002, by and between BEI Technologies,
Inc., BEI Sensors & Systems Company, Inc.,
Connecticut General Life Insurance Company and
Allstate Life Insurance Company
    
    
    v10.11
    
    Credit Agreement dated August 14, 2002, by and
between BEI Technologies, Inc., BEI Sensors & Systems
Company, Inc. and Union Bank of California
    
    
    vi10.12
    
    Second amendment to Note Purchase Agreement and
Waiver dated December 20, 2002, by and between BEI
Technologies, Inc., BEI Sensors & Systems Company,
Inc., Connecticut General Life Insurance Company and
Allstate Life Insurance Company
    
    
    vi21.1
    
    Subsidiaries of the Registrant
    
    
    ii23.1
    
    Consent of Ernst &Young LLP, Independent Auditors24.1
    
    Power of Attorney31.1
    
    CEO Certification Pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934 as adopted Pursuant
to Section 302 of the Sarbanes  Oxley Act of 200231.2
    
    CFO Certification Pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934 as adopted Pursuant
to Section 302 of the Sarbanes  Oxley Act of 200232.1
    
    CEO Certification Pursuant to Rule 13a-14(b) of the
Securities Exchange Act of 1934 and 18 U.S.C. 1350 as
adopted Pursuant to Section 906 of the Sarbanes 
Oxley Act of 200232.2
    
    CFO Certification Pursuant to Rule 13a-14(b) of the
Securities Exchange Act of 1934 and 18 U.S.C. 1350 as
adopted Pursuant to Section 906 of the Sarbanes 
Oxley Act of 200299.1
    
    BEI Technologies, Inc. Information Statement dated
September 24, 1997
    
    
    ii99.2
    
    Rights Agreement dated as of September 11, 1997 among
BEI Technologies, Inc. and ChaseMellon Shareholder
Services, L.L.C
    
    
    i99.3
    
    Registrants Certificate of Designation of Series A
Junior Participating Preferred Stock
    
    
    i99.4
    
    Form of Rights Certificate
    
    
    i




---

|(i)   |  | Incorporated by reference. Previously filed as an exhibit to the Registrants Information Statement on Form 10 (File No. 0-22799) as filed on
September 22, 1997.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|     
|(ii)  |  | Incorporated by reference. Previously filed as an exhibit to the Form 10-K (File No. 0-22799) as filed
on December 30, 1998.                                     
|     
|(iii) |  | Incorporated by reference. Previously filed as an exhibit to the Form 10-Q (File No. 000-22799) as filed on February 13, 2001.                                   
|     
|(iv)  |  | Incorporated by reference. Previously filed as an exhibit to the Form 10-Q (File No. 000-22799) as filed on August 14, 2001.                                     
|     
|(v)   |  | Incorporated by reference. Previously filed as an exhibit to the Form 10-Q (File No. 000-22799) as filed on May 13, 2002.                                        
|     
|(vi)  |  | Incorporated by reference. Previously filed as an exhibit to the Form 10-K (File No. 000-22799) as filed on December 23, 2002.                                   

56



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##### Table of Contents





|* |  | Items which are management contracts or compensatory plans or arrangements required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------



|(b) |  | Reports on Form 8-K:
|--- |  | --------------------



| |  |  | Previously filed a Report on Form 8-K on July 24, 2003 to announce results of operations and financial condition for the three months ended
June 28, 2003.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Incorporated by reference. Previously filed a Report on Form 8-K on September 23, 2003 to announce the settlement of a patent infringement
action filed against a competitor.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

57



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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 on December 10, 2003.

BEI TECHNOLOGIES, INC.By:
    
    /s/ Robert R. CorrRobert R. CorrVice President, Treasurer, Controller and Secretary


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SCHEDULE II

BEI TECHNOLOGIES, INC.

VALUATION AND QUALIFYING ACCOUNTS

Column A
    
    Column B
    
    Column C
    
    Column D
    
    Column EAdditionsBalance at
    
    Charged to
    
    
    
    
    
    
    
    
    
    Balance atBeginning
    
    Costs and
    
    Charged to
    
    
    
    
    
    End ofDescription
    
    of Period
    
    Expenses
    
    Other Accounts
    
    Deductions
    
    Period(in thousands)Year ended September 27, 2003:Deducted from asset accounts:Allowance for doubtful accounts
    
    $
    1,365
    
    
    $
    873
    
    
    $
    
    
    
    $
    1,455
    (A)
    
    $
    783Inventory reserve
    
    
    2,427
    
    
    
    3,707
    
    
    
    
    
    
    
    2,734
    (B)
    
    
    3,400Provision for excess capacity
    
    
    6,222
    
    
    
    1,222
    
    
    
    
    
    
    
    2,396
    (C)
    
    
    5,048Total
    
    $
    10,014
    
    
    $
    5,802
    
    
    $
    
    
    
    $
    6,585
    
    
    $
    9,231Year ended September 28, 2002:Deducted from asset accounts:Allowance for doubtful accounts
    
    $
    1,662
    
    
    $
    1,526
    
    
    $
    
    
    
    $
    1,823
    (A)
    
    $
    1,365Inventory reserve
    
    
    3,755
    
    
    
    1,053
    
    
    
    
    
    
    
    2,381
    (B)
    
    
    2,427Provision for excess capacity
    
    
    
    
    
    
    10,275
    
    
    
    
    
    
    
    4,053
    (C)
    
    
    6,222Total
    
    $
    5,417
    
    
    $
    12,854
    
    
    $
    
    
    
    $
    8,257
    
    
    $
    10,014Year ended September 29, 2001:Deducted from asset accounts:Allowance for doubtful accounts
    
    $
    1,084
    
    
    $
    1,093
    
    
    $
    
    
    
    $
    515
    (A)
    
    $
    1,662Inventory reserve
    
    
    4,452
    
    
    
    4,843
    
    
    
    
    
    
    
    5,540
    (B)
    
    
    3,755Provision for excess capacity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    5,536
    
    
    $
    5,936
    
    
    $
    
    
    
    $
    6,055
    
    
    $
    5,417




|(A) |  | Write-offs of uncollectible accounts
|--- |  | ------------------------------------



|(B) |  | Write-offs of obsolete and scrap items
|--- |  | --------------------------------------



|(C) |  | Provision utilized
|--- |  | ------------------

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

The Board of Directors and Stockholders
BEI Technologies, Inc.

We have audited the consolidated financial statements of BEI Technologies, Inc.
and subsidiaries as of September 27, 2003 and September 28, 2002, and for each
of the three years in the period ended September 27, 2003, and have issued our
report thereon dated October 28, 2003. Our audits also included the financial
statement schedule listed in Item 15(a)2 of this Form 10-K. This schedule is
the responsibility of the Companys management. Our responsibility is to
express an opinion based on our audits.

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



| | /s/ Ernst & Young LLP
| | ---------------------

San Francisco, California
October 28, 2003

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INDEX TO EXHIBITS

ExhibitNumber
    
    Description23.1
    
    Consent of Ernst & Young LLP
Independent Auditors24.1
    
    Power of Attorney31.1
    
    CEO Certification Pursuant to Rule 13a-14(a) of the Securities Exchange
Act of 1934 as adopted Pursuant to Section 302 of the Sarbanes  Oxley Act
of 200231.2
    
    CFO Certification Pursuant to Rule 13a-14(a) of the Securities Exchange
Act of 1934 as adopted Pursuant to Section 302 of the Sarbanes  Oxley Act
of 200232.1
    
    CEO Certification Pursuant to Rule 13a-14(b) of the Securities Exchange
Act of 1934 and 18 U.S.C 1350 as adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    CFO Certification Pursuant to Rule 13a-14(b) of the Securities Exchange
Act of 1934 and 18 U.S.C. 1350 as adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002