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, 1997 or

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

                         Commission file number 0-22799
                             BEI TECHNOLOGIES, INC.
             (Exact name of Registrant as specified in its charter)

         Delaware                                             94-3274498
-------------------------------                  -------------------------------
(State or other jurisdiction of                          (I.R.S. Employer 
incorporation or organization)                           Identification No.)

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

                                 (415) 956-4477
               --------------------------------------------------
              (Registrant's telephone number, including area code)

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

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

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

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

The   approximate   aggregate   market   value  of  the  voting  stock  held  by
non-affiliates of the Registrant as of November 24, 1997 was $66,654,900 (A). As
of  November  24,  1997,  7,112,479  shares of  Registrant's  Common  Stock were
outstanding.

(A) Based upon the closing  sale price of the Common  Stock on November 24, 1997
as reported on the NASDAQ National Market System.  Excludes  1,557,904 shares of
Common  Stock held by  directors,  executive  officers  and  stockholders  whose
ownership  exceeds ten percent of Common Stock outstanding on November 24, 1997.
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  1998  Annual  Meeting  of
Stockholders  to be  filed  with  the  Securities  and  Exchange  Commission  is
incorporated by reference into Part III, Form 10 "General Form for  Registration
of Securities," as amended (File No.  0-22799)(the "Form 10") is incorporated by
reference into Part IV.


<PAGE>


<TABLE>
                                                  TABLE OF CONTENTS
<CAPTION>
                                                                                                               Page
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<S>                                                                                                              <C>
PART I

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

         Item 2.           Properties.....................................................................       15

         Item 3.           Legal Proceedings..............................................................       16

         Item 4.           Submission of Matters to a Vote of Security Holders............................       16

PART II

         Item 5.           Market for Registrant's Common Equity and
                           Related Stockholder Matters....................................................       16

         Item 6.           Selected Financial Data........................................................       17

         Item 7.           Management's Discussion and Analysis of
                           Financial Condition and Results of Operations..................................       18

         Item 8.           Financial Statements and Supplementary Data....................................       21

         Item 9.           Changes in and Disagreements With Accountants
                           on Accounting and Financial Disclosure.........................................       40

PART III

         Item 10.          Directors and Executive Officers
                           of the Registrant..............................................................       40

         Item 11.          Executive Compensation.........................................................       40

         Item 12.          Security Ownership of Certain Beneficial
                           Owners and Management..........................................................       40

         Item 13.          Certain Relationships and Related Transactions.................................       40

PART IV

         Item 14.          Exhibits, Financial Statement Schedules,
                           and Reports on Form 8-K........................................................       41

Signatures                 ...............................................................................       45
</TABLE>

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Except for the historical information contained herein, the following discussion
contains  forward-looking  statements that involve risks and uncertainties.  The
Company's  actual results could differ  materially  from those  discussed  here.
Factors that could cause or contribute to such differences  include, but are not
limited  to,  those  discussed  in  Item  1,  "Business"  as  well  as  Item  7,
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations."

PART I

ITEM 1.  BUSINESS

Introduction

     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  tax-free  distribution  of  all  of the  outstanding  common  stock  of
Technologies  to the holders of record of BEI  Electronics,  Inc. (now named BEI
Medical Systems  Company,  Inc.)  ("Electronics")  common stock on September 24,
1997, on a basis of one share of  Technologies  common stock for every one share
of Electronics common stock outstanding on that date (the  "Distribution".)  For
further  information  including  copies  of  the  agreements  governing  ongoing
relationships between Technologies and Electronics, see the Form 10.

 The principal  business and continuing  operations of Technologies  are carried
out by its 100% owned subsidiary,  BEI Sensors & Systems Company, Inc. ("Sensors
& Systems")  which  designs,  manufactures  and sells  electronic  devices  that
provide vital sensory  input for the control  systems of advanced  machinery and
automation  systems.  These  sensors,  most of which are concerned with physical
motion,  provide  information  that is essential to logical,  safe and efficient
operation of  sophisticated  machinery.  Technologies'  discontinued  operations
consist  of the  operations  of its wholly  owned  subsidiary,  Defense  Systems
Company ("Defense Systems").

     The Company's long-term strategy is to provide, on a global basis, selected
advanced  intelligent  sensors based on  proprietary  technology.  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, Sensors & Systems' goal is to maintain, develop and
acquire a diverse offering of advanced sensor products, and manufacture and sell
these with  certain  complimentary  products.  Finally,  the Company will target
proprietary,  high margin niche markets for subsystems and end products in which
its traditional sensors,  micromachined sensors and complementary  products play
an  enabling  role.  The  Company's  near term  initiatives  include:  (a) broad
commercialization  of the "yaw" quartz rate sensor for the  automotive  industry
(as described below); (b) development and  commercialization of other internally
developed technologies that have broad applications and that management believes
to be promising;  and (c) expansion of the product line through  acquisitions of
complementary technologies.

     A key feature of the Company's  strategy is to be widely  recognized as the
most capable source for the sensor  categories it has selected.  Its traditional
emphasis is on highly engineered motion sensing  components and assemblies.  The
Company believes it differentiates itself by offering (a) appropriate technology
to solve a customer problem (including innovative proprietary  technology);  (b)
quality service; and (c) engineering  assistance in recommending and prescribing
technical solutions for its customers'  applications.  Sensors' products are not
sold as commodities.  Its strategy is to provide  technical  advice and customer
service that, together with the products  themselves,  create value and give the
customer confidence that the product has been expertly prescribed and applied.

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

     (1) A pick and place robot needs to know how far its elbow and wrist joints
have moved in order to control the speed and position of its "hand."

     (2) After a power  outage,  an elevator  system needs to know exactly where
each car is before  permitting  motion to resume.  (Is the car between floors or
not?  Are the  doors  open or  closed?)  In both  the  foregoing  examples,  the
Company's encoders could measure speed, distance, or exact location.

                                        3

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     (3) 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
laser signal.  For such an application the Company might provide its proprietary
GyroChip(R)  quartz  rate  sensor.  It might  also  provide  motor-encoders  and
actuators to drive the compensating action of such a system.

     (4)  Some  luxury  automobiles  now  have   computer-controlled   stability
enhancement  systems to assist drivers in maintaining  control of the vehicle in
slippery conditions. In some of these systems one of the Company's sensors tells
the computer  system the present  direction  and angle of the  steering  wheels,
while  another of the  Company's  sensors  instantly  measures  and  reports the
presence of "yaw" forces  which--if  not  corrected--could  cause the vehicle to
spin out or "fishtail".  The automation system in this case relies on sensors to
compare the driver's indicated  directions and the actual result. The system can
then take corrective  action  automatically.  Here the Company  provides special
GyroChip quartz sensors as well as encoder and potentiometer combinations.

     (5) Advanced  engine  control  systems in tractors,  trucks,  and materials
handling and construction equipment need to know throttle position data in order
to assure  efficient and clean combustion and safe and reliable gear changes and
other automated functions.  The Company's  potentiometers  provide the necessary
throttle position data.

     (6) Semiconductor production equipment requires extremely fast yet accurate
control of  start-move-stop  action on x-y positioners and tools.  The Company's
magnetic  actuators  provide the energizing  force for such tasks and its linear
encoders can measure travel and location.

     (7) Process  automation  systems and various  medical systems such as those
for cryosurgery  and  respiration  therapy  require  compact,  high  reliability
pressure  measurement  and fast acting  valves,  which are  accommodated  by the
Company's silicon pressure sensors and/or magnetic actuators.

Customers and Markets

     The foregoing examples illustrate a few of the thousands of machine control
situations for which the 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 factory automation, process automation,  transportation (including cars,
trucks,  mass  transit,  construction  and  farm  equipment),  health  care  and
scientific equipment, and military, space and telecommunications applications.

     The Company  considers  its large number of customers and the vast scope of
existing  and  potential  applications  for its  products  to be a source of the
Company's  existing  business  strength and an opportunity for substantial  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  Sensors &
Systems' direct sales force to more than 8,200 different  commercial  customers,
principally in the United States.  These  customers  included both end users and
original equipment manufacturers. The value of individual orders from commercial
customers--which  account for more than two thirds of total sales--is  typically
less than $100,000.

     Sales  from  continuing   operations  to  the  U.S.  Government  (or  prime
contractors who manage government funded projects) represented approximately 22%
of the  Company's  sales in fiscal  1997,  27% in fiscal  1996 and 32% in fiscal
1995. No commercial customer accounted for more than 10% of sales in fiscal year
1997,  1996 or 1995.  The  Company  sold  approximately  12% of its  products in
international  markets. The Company has initiated actions which it believes will
increase its penetration of international markets in fiscal year 1997.

     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's success in providing components
for pointing and stabilizing

                                        4

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telecommunications antennae has led to it exploring the market for a proprietary
stabilized platform for optical systems that the Company may offer as a product.

Products and Proprietary Systems

     The Company's main product groups may be categorized as follows:

     1.  Traditional sensors and complementary products,

     2.  Micromachined sensors, and

     3.  Engineered  Subsystems (such as inertial measurement units,  electronic
         servo control systems, cryocoolers, scanner assemblies and trackballs)

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

   Traditional Sensors and Complementary Products:

     Shaft  Encoders.  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.  Sensors & Systems
offers a wide array of  encoders  to serve a variety of  applications.  The most
common  applications  are  for  factory  automation,   office  automation,   and
transportation  equipment,  but specialized  versions are also used for military
and space hardware.  Value-added  assemblies which employ shaft encoders include
servo motors and servo drive electronic control systems.

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

     Precision   Potentiometers.   Similar  in  basic   function  to   encoders,
potentiometers  measure  motion by analog (not  digital)  changes in  electrical
potential.  These changes may sometimes be subsequently  translated into digital
code.  Potentiometers are used as economical motion or position-sensing  devices
for throttle,  steering,  suspension,  and seat and mirror position  controls in
automobiles and in some heavy equipment,  such as earth movers, and construction
and farm machinery.  They are also used as position sensors in such applications
as  actuators  on  molding  presses,  saw  mills  and  numerous  other  types of
industrial equipment and in oil well logging calipers.  Incorporating  Sensors &
Systems' potentiometer  technology with its proprietary shaft encoder technology
has resulted in a highly  engineered  steering  wheel  position  sensor used for
intelligent  stability control systems for automobiles and potentially for other
vehicles in the future.

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

     Accelerometers.   Accelerometers   and  rate  sensors   using   traditional
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
motion.

                                        5

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     Linear  Encoders.  Linear  encoders  give very high  accuracy,  scale-based
optical  measurement  of  linear  travel  over  distances  ranging  from  a  few
millimeters  to tens of meters.  The Company has  recently  commenced  exclusive
marketing in North America of linear encoders developed by the well known German
optical company, Carl Zeiss.

   Micromachined Sensors:

     Rate  Sensors  and  Accelerometers.  These  products  provide  precise  and
reliable  measurement 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 in aircraft and missiles,  stabilization of
satellites, pointing and control of antennae on aircraft, ships and other moving
platforms,  navigation  of oil well drill bit  assemblies,  and for  intelligent
vehicle  stability  and  navigation  systems  in  the  automotive  industry.  In
contrast,  Sensors & Systems'  miniature,  solid state  accelerometers  and rate
sensors are based on innovative and proprietary  chemical  micro-machining  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 and accelerometers over traditional  mechanical units are
increased reliability, reduced size, and lower production and life cycle costs.

     BEI  GyroChip(R)  Sensors.  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 such varied  requirements as
navigation of autonomous  (robotic)  guided  vehicles,  ocean buoy and sea-state
monitoring,  and  stabilization  of pointing  systems for  antennas  and optical
systems.  The most frequent use of GyroChip units is as yaw sensors in stability
control or spin-out prevention systems for automobiles. GyroChip sensors provide
performance  suitable for commercial  applications  while  offering  ruggedness,
longer life and smaller  size at a lower cost than  military  versions of quartz
rates sensors.

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

     Micro-Electromechanical Structures (MEMS). MEMS are a new category of ultra
small devices,  usually micro-machined 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  Electronics.  Management  expects the
Company's  MEMS  research  and  development  programs to lead to new devices for
sensing motion, pressure and other physical parameters.

   Engineered Subsystems:

     Inertial  Measurement  Units  (IMU's).  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 assure a back-up in case the GPS
signal  is  interrupted.   Technologies'  quartz  rate  sensors  have  made  new
breakthroughs  in size,  reliability and cost for the proprietary IMU subsystems
it sells.

     Cryocoolers.  The Company's  proprietary,  compact and lightweight stirling
cycle  refrigerators are designed for cooling advanced electronic vision sensors
to liquid  nitrogen  temperatures.  These  cryocoolers  are utilized in infrared
cameras used in surveillance,  night vision pilotage systems and superconducting
applications.

     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  assure  that  the  scanner   delivers   jitter-free,
well-resolved images.

                                        6

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     Servo  Systems.  Servo  Systems are  closed-loop  electronic  systems  that
control the  position or velocity of rotating  shafts or other  moving  parts by
noting a desired rate of movement or position  (usually  input from computers or
keyboards),  monitoring  the  actual  position  or 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 has been achieved.

     Trackballs.  BEI's  trackballs  have flexible and rugged designs that allow
them  to be an  integral  part of a  keyboard  as  well  as  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  of the  Company's  continuing  business,  Sensors  &  Systems,  at
September 27, 1997 and at September 28, 1996, was $46,696,000  and  $39,832,000,
respectively.

     The Company's commercial operations typically ship standard products within
30 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,  defense or space technology  markets,  are generally
shipped from six to eighteen months after receipt of the purchase authorization.

     Backlog includes  aggregate contract revenues remaining to be earned by the
Company  principally  over the next twelve months of scheduled  deliveries under
existing contracts. Some contracts undertaken by Sensors & Systems extend beyond
one year.  Accordingly,  portions of certain  contracts are carried forward from
one year to the next as part of backlog.  Approximately 88% of the backlog as of
September  27, 1997 is scheduled  for shipment  during  fiscal 1998;  all of the
remainder of the backlog is scheduled for shipment during fiscal 1999.

     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 for  convenience.  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,  diversified  companies  such as
Allied-Signal, Boeing, Danaher Corp., Honeywell, Litton and Panasonic. There are
smaller or  product-specific  companies,  some of whose products compete include
Axsys Technologies, CTS Corp., Dynamics Research Corp., Heidenhain,  Kollmorgen,
Kulite Semiconductor, Pacific Scientific, and Servo Magnetics 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 catalog
products  and  products  designed  to meet  the  specialized  requirements  of a
particular customer.  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.

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     A special code pattern generator designed by and proprietary to the Company
is used to produce shaft encoder parts. Special quartz micromachining  equipment
is used for the production of QRS units.  Special high  throughput  automated or
semi-automated equipment is used for the production of QRS assemblies, brushless
motors  and   potentiometers.   Some  parts  are  fabricated  under  clean  room
conditions.

     The Company's  production of automotive yaw sensors requires scaling-up its
normal  production to the  quantities  required by the  automobile  market.  The
Company  has   initiated   production   engineering   measures  to  support  the
fabrication, assembly, and testing of new sensors in the appropriate quantities.

Research and Development

     The major research and  development  focus has been to improve  performance
and yield 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
manufacturing methods necessary to deliver competitive prices and quality in the
automotive  market.  Other development has focused on expanding  applications of
existing sensors and utilizing the Company's various  complimentary  products to
create the capability to electronically stabilize platforms.

     The Company has also produced  prototypes of future products  incorporating
silicon micro-electromechanical structures (MEMS) geared towards next generation
requirements for automotive, medical, industrial and aerospace markets.

     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  $4.9 million,  $3.6 million and $4.0 million in
fiscal 1997, 1996, and 1995, respectively. In addition, customer funded research
and development  expenditures  charged to cost of sales were $1.1 million,  $3.0
million and $6.3 million, respectively, for the same periods. Development of the
quartz rate sensor  comprised most of prior years'  customer funded research and
development  expenditures.  As these  sensors  have  gone  from  development  to
production,  there has been a corresponding decrease in customer funded research
and development expenditures.

Employees

     As of  September  27,  1997,  the  units  comprising  Technologies  had 977
employees,  including  122  in  research,  development  and  engineering,  77 in
administration,  72 in marketing and sales,  and 706 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. In addition the Company and its subsidiaries
own 79 U.S.  patents and 45 foreign patents with  expiration  dates ranging from
December  1997  to  October  2014.  Because  many of  these  patents  relate  to
technology that is important to certain of the Company's  products,  the Company
considers these patents to be significant to its business.

     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, the ability to adapt quickly to
technological  change and evolving  customer  requirements,  product support and
customer relations are of equal competitive significance.

                                        8

<PAGE>


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.

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--Contracting with
the U.S. Government" below.

Facility Security Clearance

     The  Company  has  several  facility  security  clearances  from  the  U.S.
Government.  A portion of the Company's net sales in fiscal 1997,  1996 and 1995
was derived from work for which this  clearance  was required.  Continuation  of
this  clearance  requires that the Company  remain free from foreign  ownership,
control or influence (FOCI). In addition, the Company is required to comply with
the regulations  promulgated by the Defense  Investigative  Service (DIS), which
relate,  in large part,  to the Company's  control of  classified  documents and
other  information.  Management  does not believe  that there is  presently  any
substantial  risk of FOCI  or DIS  noncompliance  that  would  cause  any of its
security clearances to be revoked.

Regulation of Foreign Sales

     Certain  of Sensors  and  Systems'  exports  are  subject  to  restrictions
contained  in the U.S.  Department  of  State's  International  Traffic  in Arms
Regulations and require export licenses in order to be sold abroad.  Non-defense
related   foreign  sales  are  generally   governed  by  the  Bureau  of  Export
Administration  of the U.S. Commerce  Department which also frequently  requires
export licenses.  The Company's net sales from continuing  operations to foreign
customers  constituted  approximately  11.8%,  11.3% and 11.0% of  revenues  for
fiscal  1997,  1996  and  1995,  respectively.  To  date,  the  Company  has not
experienced any significant difficulties in obtaining the requisite licenses. In
addition,  the Company is subject to the Foreign  Corrupt  Practices  Act, which
prohibits payments or offers of payments to foreign officials for the purpose of
influencing an act or decision by a foreign government,  politician or political
party in order to assist in  obtaining,  retaining or directing  business to any
person.

RISK FACTORS

Competition

     Competitors for various  products  offered by Technologies  are noted above
under  "Business--Competition".  In addition,  the Company also may compete with
manufacturers of competing technologies,  such as resolvers,  inductosyns, laser
and fiber optic gyros and  magnetic  encoders.  Many of the  Company's  existing
competitors in each market,  and also a number of potential  entrants into these
markets,  have  significantly  greater  financial  resources  and  manufacturing
capabilities,   are  more   established,   have  larger   marketing   and  sales
organizations and larger technical staffs.  There can be no assurance that other
companies will not develop more sophisticated,  more cost-effective or otherwise
superior  products  which could have a material  adverse effect on the Company's
business, financial condition and results of operations.

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

     Technologies  is in the process of scaling up production of its  automotive
yaw sensors for the quantities  required by the automobile  market.  The Company
has  relatively  limited  experience in large-scale  manufacturing.  The Company
currently  manufactures  moderate quantities of its automotive yaw sensor in the
Concord, California facility and its

                                        9

<PAGE>


steering  sensor in the Tustin,  California  facility.  Manufacturers  sometimes
encounter  difficulties  in scaling up  production  of new  products,  including
problems involving production yields,  quality control and assurance,  component
supply  and  shortages  of  qualified  personnel.   If  such  difficulties  were
encountered by the Company in manufacturing scale-up, they could have a material
adverse effect on its business,  financial  condition and results of operations.
There can be no  assurance  that future  manufacturing  difficulties  or product
recalls,  either of which could have a material  adverse effect on the Company's
business, financial condition and results of operations, will not occur.

Research and Development

     The Company depends in part on its research and development  initiatives to
provide new products and product  improvements which will maintain the Company's
favorable reputation in its various markets.  There can be no assurance that the
outcome of its research and development activity will yield the desired results.

Manufacturing Processes and Equipment

     The Company  manufactures  certain products such as quartz rate sensors and
some shaft encoders using highly  complex  proprietary  processes and equipment.
The  possibility  exists  that  equipment  could  be  damaged  or  that  process
disciplines  and controls could be temporarily  lost.  Such events could disrupt
production, which could have a material adverse effect on the Company's business
and results of operations.

Dependence Upon Key Personnel

     The Company is  dependent  upon a number 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  success will also depend
on its ability to attract and retain additional highly qualified  management and
technical  personnel.  The  Company  faces  intense  competition  for  qualified
personnel,  many of whom are often subject to offers from  competing  employers.
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  required.  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
Technologies' specifications. Such components include quartz, supplied by Sawyer
Research Products,  Inc.; scanner motors,  supplied by Litton Industries,  Inc.;
three types of ASIC's, supplied by National Semiconductor Corporation, Honeywell
Inc. and Semtech Corp.;  and two types of LED's,  supplied by Optek  Technology,
Inc. and Opto Diode Corp. While the Company currently relies on single suppliers
for these  components,  in each  instance,  the Company is aware of  alternative
suppliers and believes the components could be manufactured by these alternative
suppliers with minimal supply reduction should the need arise to change vendors.
To date, the Company has not experienced any  significant  interruptions  in the
supply of these components, but 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.

Contracting with the U.S. Government

     Approximately  22%,  27% and 32% of the net sales of units  comprising  the
continuing   operations  of   Technologies   in  fiscal  1997,  1996  and  1995,
respectively,  were derived from  contracts  with the U.S.  Government  or under
subcontract to other prime contractors to the Government.  Because a significant
portion of Technologies'  business is derived from contracts with the Department
of Defense or other  agencies  of the  Government,  the  Company's  business  is
sensitive to changes in Government spending policies, which can have significant
variations from year to year. At various times,

                                       10

<PAGE>


the  Company's  results have been  adversely  affected by contract  cutbacks and
there can be no assurance that the Company's  results of operations  will not in
the future be  materially  and  adversely  affected  by  changes  in  Government
procurement  policies or  reductions  in  Government  expenditures  for products
furnished by the Company.

     Under  applicable  regulations,  various audit  agencies of the  Government
conduct regular audits of  contractors'  compliance with a variety of Government
regulations.  The Government also has the right to review retroactively the cost
records under most Government contracts.  Contract prices may be adjusted in the
event the Government determines that the Company submits 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 contracts with
the Government are competitive  fixed price or negotiated fixed price contracts,
although  cost-plus-fixed-fee  contracts were  approximately 3% of the Company's
net sales from continuing  operations in fiscal 1997. 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  Government  contracts  contain  termination  clauses  that  allow  the
contract to be terminated  either for contractor  default or for the convenience
of the  Government.  In the  event of  termination  for the  convenience  of the
Government,  the clause  typically  provides  that the  contractor  will receive
payment for work-in-progress,  including profit. To date, termination of Sensors
& Systems' contracts by the 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.

                                       11

<PAGE>


DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

     The directors  and  executive  officers of the Company and their ages as of
December 1, 1997 are as follows:



                    Name                 Age                      Position
     Charles Crocker..................   58   President, Chief Executive Officer
                                              and   Chairman  of  the  Board  of
                                              Directors
     Gary D. Wrench...................   64   Senior   Vice  President,    Chief
                                              Financial Officer and Director
     Dr. Asad Madni...................   50   Vice President and Director
     Richard M. Brooks(1)(2)..........   69   Director
     George S. Brown(2)...............   76   Director
     C. Joseph Giroir, Jr.(1)(2)......   58   Director
     Dr. William G. Howard, Jr.(1)....   56   Director
     Dr. Robert Mehrabian(1)..........   56   Director
     Dr. Lawrence A. Wan..............   59   Vice  President,  Chief  Technical
                                              Officer
     Robert R. Corr...................   51   Secretary, Treasurer & Controller

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

Directors

     Mr.  Crocker  began  serving  as a  Director  in  June  1997  prior  to the
Distribution  and spin-off of the Company from Electronics in September 1997. He
was a  founder  of  Electronics  and has  served  as  Chairman  of the  Board of
Directors  of  Electronics  since  October  1974,  and  Chairman of the Board of
Directors of Technologies  since October 1997. Mr. Crocker assumed the positions
of President 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 Fiduciary Trust Company International, Pope
& Talbot, Inc. and KeraVision. Mr. Crocker holds a B.S. from Stanford University
and an M.B.A. from the University of California, Berkeley.

     Mr.  Wrench  began  serving  as a  Director  in  June  1997  prior  to  the
Distribution  and 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.  He currently holds
these same positions with  Technologies.  He served as a Director of Electronics
since February  1986,  and continues to serve as a director of both  Electronics
and  Technologies.  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  Sensors & Systems.  Other  experience  includes  twenty  years  with  Hughes
Aircraft  Company  including an assignment as President of  Spectrolab,  Inc., a
Hughes  subsidiary.  Mr. Wrench holds a B.A.  from Pomona  College and an M.B.A.
from the University of California, Los Angeles.

     Dr.  Madni  began  serving as a  Director  and as a Vice  President  of the
Company in June 1997 prior to the  Distribution and spin-off of the Company from
Electronics in September  1997.  Dr. Madni was appointed  President of Sensors &
Systems in October  1993,  which was formed by the  consolidation  of BEI Motion
Systems  Company and the BEI Sensors and Controls  Group, of which Dr. Madni was
President  since  October  1992.  Prior to joining BEI in 1992, he served for 17
years in various  executive  and  technical  management  positions  with Systron
Donner  Corporation,  a  manufacturer  of  avionics  and  aerospace  sensors and
subsystems. He was most recently Chairman, President and CEO

                                       12

<PAGE>


of Systron Donner  Corporation,  a subsidiary of Thorn/EMI.  Dr. Madni's degrees
include a Bachelor  of Science  and  Master of Science in  Engineering  from the
University of California, Los Angeles and a Ph.D. in Engineering from California
Coast University.  He is a fellow of the Institute of Electrical and Electronics
Engineers.

     Mr.  Brooks is  currently an  independent  financial  consultant.  He began
serving as a Director in June 1997 prior to the Distribution and spin-off of the
Company from Electronics in September 1997. From 1987 until his resignation as a
result of the Distribution, he served as a director of Electronics. From 1987 to
1990, he served as President of SFA Management Corporation, the managing general
partner of St.  Francis  Associates,  an  investment  partnership.  He currently
serves as a  director  of Longs  Drug Store  Corporation,  Granite  Construction
Incorporated  and the Western Farm Credit Bank, a private  company.  Mr.  Brooks
holds  a B.S.  from  Yale  University  and an  M.B.A.  from  the  University  of
California, Berkeley.

     Mr.  Brown  began  serving  as  a  Director  in  June  1997  prior  to  the
Distribution  and 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.  Giroir  began  serving  as a  Director  in  June  1997  prior  to  the
Distribution  and 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 served as the Secretary of Electronics from 1974 to early 1995.
He is  currently a member of the law firm of Giroir,  Gregory,  Holmes & Hoover,
plc. From 1965 to 1988, Mr. Giroir was a member of Rose Law Firm, a Professional
Association.  Mr.  Giroir  holds a B.A.  and an L.L.B.  from the  University  of
Arkansas and an L.L.M. from Georgetown University.

     Dr.  Howard  began  serving  as a  Director  in  June  1997  prior  to  the
Distribution  and 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 a director of Credence  Systems,  Inc.,
RAMTRON  International  Corp.,  VLSI  Technologies,  Inc., and Xilinx,  Inc. Dr.
Howard  holds a  B.E.E.  and an M.S.  from  Cornell  University  and a Ph.D.  in
electrical  engineering and computer sciences from the University of California,
Berkeley.

     Dr.  Mehrabian  began  serving  as a  Director  in June  1997  prior to the
Distribution  and spin-off of the Company from Electronics in September 1997. He
was a director of Electronics  from June 1997 until his  resignation as a result
of the  Distribution.  He is Senior Vice  President  and  Executive in charge of
Aeronautics and Electronic segment of Allegheny Teledyne, Inc. From 1990 through
June  1997,  he  was  president  of  Carnegie  Mellon   University.   He  is  an
internationally  recognized materials scientist,  with numerous awards including
membership in the National  Academy of  Engineering.  He serves on the boards of
directors of Allegheny  Teledyne,  Inc., Mellon Bank  Corporation,  Mellon Bank,
N.A.,  and PPG  Industries.  Dr.  Mehrabian  holds B.S.  and Sc.D.  degrees from
Massachusetts Institute of Technology (MIT).

Classified Board of Directors

     The Company has a classified 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 first class to expire
at the 1998 annual meeting of stockholders, and the term of office of the second
class to expire  at the 1999  annual  meeting  of  stockholders  and the term of
office of the third class to expire at the 2000 annual meeting of  stockholders.
Class I consists of Mr. Brown and Mr. Crocker;  Class II consists of Mr. Giroir,
Dr. Madni and Mr. Wrench; and Class III consists of Mr. Brooks, Dr.

                                       13

<PAGE>


Howard and Dr.  Mehrabian.  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 meeting of stockholders at which their terms expire
and until  their  successors  have been duly  elected and  qualified.  Executive
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 Messrs.  Crocker and Wrench 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:

     Dr. Wan is Vice  President  of  Engineering  for  Sensors & Systems  and is
President  of Sensors & Systems'  subsidiary,  SiTek Inc. Dr. Wan served as Vice
President,  Corporate  Technology  for  Electronics  since  April 1991 until the
Distribution in September 1997. Dr. Wan resigned from his current  position with
Electronics immediately prior to the Distribution and is now Vice President, and
Chief Technical  Officer for  Technologies  and a director of Electronics.  From
1984 until  1990,  Dr. Wan served as Vice  President,  Engineering  for  Systron
Donner Corporation. Between 1979 and 1984, he held various technical and general
management  positions  with Systron  Donner  Corporation.  From 1968 to 1979, he
served as Chief  Executive  Officer  for Sycom,  Inc. a  commercial  electronics
company  which he  founded.  From 1964 to 1968,  he worked for  Hughes  Aircraft
Company,  where he headed the Radar Systems Section of the Hughes Ground Systems
Group.  In 1962,  Dr. Wan and two other  professors  established  an Engineering
School  at  University  of  California,  Santa  Barbara,  where  he also  taught
Engineering.  Dr. Wan holds B.S.,  M.S.  and Ph.D.  degrees in  Engineering  and
Applied Sciences from Yale University.

     Mr. Corr became  Secretary,  Treasurer and  Controller of  Technologies  in
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 was named Secretary
of Electronics in February 1995 and served as Controller  from November 1989 and
as Treasurer  from November 1987 until 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  and is a
Certified Public Accountant in the State of California.

                                       14

<PAGE>


ITEM 2.           PROPERTIES

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


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

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

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

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

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

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

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

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

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


                                       15

<PAGE>


ITEM 3.           LEGAL PROCEEDINGS

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

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

None.

PART II

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

On September 26, 1997,  Technologies  issued and sold 7,114,803 shares of common
stock to Electronics in exchange for those assets of Electronics  which were not
related to  Electronics'  medical  device  business,  and on September 27, 1997,
pursuant to Division of  Corporation  Finance  Staff Legal  Bulletin No. 4 dated
September 16, 1997,  all of the  outstanding  common stock of  Technologies  was
distributed  by Electronics  to its  stockholders,  on the basis of one share of
Technologies  common stock received for each share of  Electronics  common stock
held on that date. For further discussion of this transaction see the Form 10.

The Company's common stock commenced  regular way trading on the NASDAQ National
Market  System  under the symbol  "BEIQ" on October 8, 1997.  The closing  stock
price on November 24, 1997 was $12.00 per share.

As of November 24, 1997, there were approximately 1,300 holders of record of the
Company's  common stock.  The Board of Directors has declared a dividend for the
first  quarter  of  fiscal  1998 of $.02 per share of common  stock  payable  to
stockholders  of record at December 8, 1997,  on December 23,  1997.  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 5 to the Consolidated  Financial  Statements).  The covenants primarily
concern certain operating ratios and minimum balances of tangible net worth.

                                       16

<PAGE>


ITEM 6.           SELECTED FINANCIAL DATA

<TABLE>
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.


<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                 Year Ended
                                                       -----------------------------------------------------------------------------
                                                       September 27,   September 28,   September 30,       October 1,     October 2,
                                                               1997            1996            1995             1994            1993
------------------------------------------------------------------------------------------------------------------------------------
                                                                      (dollars in thousands except per share amounts)
<S>                                                        <C>             <C>             <C>              <C>             <C>     
Statement of Income Data:
Net sales                                                  $101,539        $ 96,746        $ 90,475         $ 82,361        $ 89,391
Net income(loss) from
    continuing operations                                     2,997           2,873            (964)             321             599
Earnings(loss) from continuing
    operations per common and
    common equivalent share                                    0.42            0.40           (0.14)            0.05            0.09
Weighted average shares
    outstanding                                               7,203           7,108           6,759            6,807           6,783

Balance Sheet Data:
Working capital                                            $ 26,967        $ 27,775        $ 29,774         $ 39,179        $ 35,052
Total assets                                                 89,409          92,171          92,418           97,852          92,361
Long-term debt (excluding
    current portion)                                         27,508          24,137          29,765           29,860          18,779
Stockholders' equity                                         36,617          33,246          28,863           30,928          41,318
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                                                 17

<PAGE>



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

     Except for the  historical  information  contained  herein,  the  following
discussion   contains   forward-looking   statements   that  involve  risks  and
uncertainties.  The Company's actual results could differ  materially from those
discussed  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 "Business."

<TABLE>
     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.  The table and the accompanying analysis
covers  periods in which the  businesses  now  carried on by  Technologies  were
operated by Electronics.  However,  the table and analysis have been prepared as
if the  Company  and its  businesses  were a  separate  entity  for all  periods
discussed.

<CAPTION>
                                                                            Year Ended
                                                                            ----------

                                                                    1997       1996      1995
                                                                    -----     -----     ----- 
<S>                                                                 <C>       <C>       <C>   
Net sales .....................................................     100.0%    100.0%    100.0%
Cost of sales .................................................      64.3      62.5      62.8
                                                                    -----     -----     ----- 
Gross profit ..................................................      35.7      37.5      37.2
Operating expenses:
     Selling, general and administrative expenses .............      24.6      27.0      28.3
     Provision for royalty and related expenses ...............       --        --        3.9
     Research, development and related expenses ...............       4.8       3.7       4.4
                                                                    -----     -----     ----- 
Operating income ..............................................       6.3       6.8       0.6
Other income ..................................................       0.3       0.2       0.2
Interest expense ..............................................      (1.9)     (2.5)     (2.5)
                                                                    -----     -----     ----- 
Income (loss) before income taxes from continuing operations ..       4.7       4.5      (1.7)
Income taxes (benefit) ........................................       1.8       1.5      (0.7)
                                                                    -----     -----     ----- 
Income (loss) from continuing operations ......................       2.9       3.0      (1.0)
Income (loss) from discontinued operations, net of income taxes       1.6       1.7      (1.3)
                                                                    -----     -----     ----- 
Net Income (loss) .............................................       4.5%      4.7%     (2.3)%
                                                                    =====     =====     ===== 
</TABLE>


Continuing Operations

Net Sales

     In fiscal 1997,  net sales from  continuing  operations  increased  5.0% to
$101.5  million from $96.7  million in fiscal  1996,  primarily  reflecting  the
continued  growth  in  sales  to  commercial  customers,   including  those  for
industrial,  automotive  and  medical  markets,  offset by  decreased  sales for
government programs.

     In fiscal 1996,  net sales from  continuing  operations  increased  6.9% to
$96.7  million from $90.5  million in fiscal 1995.  This  increase  reflects the
continued  growth  in  sales  to  commercial  customers,   including  those  for
industrial, automotive and medical markets.

     The Company's sales to international  customers were  approximately  11.8%,
11.3%,  and 11.0% of the  Company's  net sales from  continuing  operations  for
fiscal 1997, 1996 and 1995, respectively.

                                       18

<PAGE>



Cost of Sales and Gross Profit

     In fiscal 1997,  cost of sales as a percentage of net sales  increased 1.8%
due  primarily  to costs  associated  with the  startup  of  production  for new
automotive sensors and cryocoolers, as well as changes in product mix.

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

     Downward pressure on gross profit margins continues for both commercial and
government  contracts.  Management  continues to implement  measures intended to
reduce costs and improve average margins.

Selling, General and Administrative Expenses

     Selling,  general and administrative  expenses as a percentage of net sales
from continuing operations were 24.6%, 27.0%, and 28.3% in fiscal 1997, 1996 and
1995, respectively.

     Fiscal 1997 selling,  general and  administrative  expenses  decreased $1.2
million  from $26.2  million in fiscal 1996 to $25.0  million in fiscal 1997 due
primarily to increased effort to control corporate costs.

     Fiscal 1996 selling,  general and  administrative  expenses  increased $0.6
million from $25.6 million in fiscal 1995 to $26.2 million. Selling, general and
administrative expenses increased to support sales to commercial customers, with
a portion of the  increase  offset by declines in expenses  related to sales for
government programs.

Research, Development and Related Expenses

     The Company's internally funded research,  development and related expenses
as a percentage of net sales from  continuing  operations  were 4.8%,  3.7%, and
4.4% for fiscal 1997, 1996 and 1995 respectively.

     Research and development expenses in fiscal 1997 increased 34.9% reflecting
the  Company's  continued  emphasis on  developing  new products for  commercial
markets.  Product  programs  included  work on  silicon  micro-electromechanical
structures  (MEMS),  stabilized  platforms,  and sensors for  stability  control
systems.

     Research and  development  expenses  declined  slightly in fiscal 1996 from
fiscal  1995 as  engineering  effort  was  shifted to  manufacturing  support as
production of new automotive sensors began to ramp up.

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

Interest Expense and Other Income

     Interest expense was $1.9 million , $2.4 million and $2.3 million in fiscal
1997, 1996 and 1995  respectively.  Interest  expense  primarily  relates to the
Senior  Note debt which was  assumed by  Technologies  from  Electronics  in the
Distribution.  New term debt of $9.0 million was issued by BEI Sensors & Systems
Company  immediately  prior to fiscal year end to pay a portion of  intercompany
balances  due to  Electronics  prior  to  the  Distribution  (see  Note 5 to the
Consolidated Financial Statements.)

     Other income in fiscal 1997,  1996, and 1995 is comprised of royalty income
and  interest  income  earned on highly  liquid  investments.  Other income as a
percentage of sales was approximately  0.3% in fiscal 1997 and has remained flat
since fiscal 1995.

                                       19

<PAGE>


Income Taxes

     The Company's  effective tax (benefit)  rate was 37.4%,  33.0% and (38.4%),
for fiscal 1997,  1996 and 1995,  respectively.  The effective tax rate reflects
the statutory  federal tax rate and the weighted  average tax rate of the states
in which the  Company  conducts  business.  The  fiscal  1996 tax rate  reflects
realization  of  additional  federal  and state tax  credits  for  research  and
development.

Deferred Income Taxes

     At September  27,  1997,  the Company had net current  deferred  income tax
assets of $4.6 million.  Realization of the net deferred tax assets is dependent
upon the Company generating  sufficient taxable income in future years to obtain
benefit from the reversal of the underlying temporary differences.

Discontinued Operations

     Income (loss) for Defense Systems was $1.6 million, $1.7 million and $(1.1)
million in fiscal  1997,  1996 and 1995,  respectively.  The fiscal  1997 income
reflects  follow-on  orders  for  electronics  products  to  support  customers'
requirements.  The fiscal 1996  income  reflects  the receipt of a $3.6  million
pre-tax  settlement  for  a  prior  year  H 70  contract  (see  Note  2  to  the
Consolidated  Financial  Statements.)  The $(1.1)  million  loss in 1995 was due
primarily to additional  contract  completion  costs of $1.5 million  associated
with the wind up of the rocket related business.

Liquidity and Capital Resources

     In  connection  with  the   Distribution,   the  Company  assumed  existing
indebtedness  of  Electronics  consisting of $22.4  million of Senior Notes.  In
order to support its initial  funding  needs,  Sensors & Systems  borrowed  $9.0
million from a bank.  Sensors & Systems  transferred $9.0 million to Electronics
prior to the  Distribution to repay a portion of amounts payable to Electronics.
Subsequent to the fiscal year end and the Distribution, Technologies established
a $25.0 million line of credit with the same bank under which it borrowed  $13.0
million to repay the $9.0  million  borrowed  by Sensors & Systems and to make a
scheduled  payment  on the  Senior  Notes.  The new line of  credit  expires  in
September 2000 (see Note 5 to the Consolidated Financial Statements).

     During fiscal 1997,  operations  provided  $5.7 million in cash,  including
cash provided by  discontinued  operations  of $3.5 million.  Net income of $4.6
million plus non-cash  charges for depreciation and amortization of $4.3 million
and $1.6 million, respectively, were partially offset by an increase in deferred
tax  assets  of $2.7  million,  inventory  purchases  of $3.5  million,  and net
payments of accounts  payable,  accrued  expenses and other  liabilities of $1.7
million.

     Investing  activities in fiscal 1997 consisted primarily of the purchase of
$6.8 million in capital equipment to support new commercial product  production,
primarily for automotive sensors.

     Fiscal 1997 financing  activities  consisted mainly of $9.0 million in cash
received by Sensors & Systems from  borrowings on a bank line of credit prior to
the Distribution.  Technologies reduced its payable to BEI Electronics,  Inc. by
$11.1 million during the fiscal year. The reduction was funded by borrowings and
other recurring intercompany activity (see Note 15 to the Consolidated Financial
Statements).

     The Company anticipates that its existing capital resources, including cash
provided by operating activities and available bank borrowings, will be adequate
to fund the Company's operations for at least the next twelve months.

Effects of Inflation

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

                                       20

<PAGE>


ITEM  8.          FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED BALANCE SHEETS
BEI Technologies, Inc. and Subsidiaries

--------------------------------------------------------------------------------
                                                     September 27, September 28,
dollars in thousands except share amounts                    1997           1996
--------------------------------------------------------------------------------
ASSETS                                                                
Current assets                                                        
Cash and cash equivalents                                 $ 5,034        $ 8,201
Trade receivables:                                                    
   Commercial customers, less allowance for doubtful                  
       accounts (1997--$363; 1996--$607)                   12,917         11,537
United States Government                                    4,324          5,175
                                                          -------        -------
                                                           17,241         16,712
                                                                      
Inventories--Note 3                                        22,656         19,201
Deferred income taxes--Note 6                               4,579          2,564
Other current assets                                        1,039          2,313
Current assets of discontinued operations--Note 2           1,418          6,508
                                                          -------        -------
Total current assets                                       51,967         55,499
                                                                      
                                                                      
Property, plant and equipment--Notes 5 and 10                         
Land                                                        4,093          4,093
Structures                                                  8,936          7,409
Equipment                                                  41,611         35,947
Leasehold improvements                                      1,036          1,284
                                                          -------        -------
                                                           55,676         48,733
                                                                      
Less allowances for depreciation and amortization          30,315         26,542
                                                          -------        -------
                                                           25,361         22,191
                                                                      
Other assets                                                          
Tradenames, patents and related assets, less                          
  amortization (1997--$2,521; 1996--$2,335)                 1,753          1,939
Technology acquired under license agreements,                         
  less amortization (1997--$4,231; 1996--$3,269)--Note 11   5,977          6,939
Goodwill, less amortization (1997--$393; 1996--$340)          654            707
Non-current assets of discontinued operations--Note 2       1,625          1,962
Other                                                       2,072          2,934
                                                          -------        -------
                                                           12,081         14,481
                                                          -------        -------
                                                          $89,409        $92,171
                                                          =======        =======
                                                                      
See notes to consolidated financial statements.                     
                                                                   

                                       21

<PAGE>


<TABLE>
CONSOLIDATED BALANCE SHEETS
BEI Technologies, Inc. and Subsidiaries

<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                September 27,          September 28,
dollars in thousands except share amounts                                                                1997                  1996
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                  <C>                   <C>     
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Trade accounts payable                                                                               $  6,317              $  5,025
Accrued expenses and other liabilities--Note 4                                                         10,497                12,602
Current portion of long-term debt--Note 5                                                               5,628                 5,625
Current liabilities of discontinued operations--Note 2                                                  2,558                 4,472
                                                                                                     --------              --------
Total current liabilities                                                                              25,000                27,724

Long-term debt, less current portion--Note 5                                                           27,508                24,137

Deferred income taxes--Note 6                                                                            --                     712
Payable to BEI Electronics, Inc.--Note 15                                                                --                   6,062
Other liabilities                                                                                         284                   290

Commitments and contingencies--Notes 2, 9, 10 and 11

Stockholders' equity--Notes 7 and 8
Preferred stock
    ($.001 par value; authorized 2,000,000 shares; none issued)                                          --                    --
Common stock
    ($.001 par value; authorized 20,000,000 shares; issued
    and outstanding; 1997--7,114,813; 1996--Note 7)                                                         7                  --
Retained earnings                                                                                      38,003                34,164
                                                                                                     --------              --------
                                                                                                       38,010                34,164

Less:  Unearned restricted stock--Note 8                                                               (1,393)                 (918)
                                                                                                     --------              --------
                                                                                                                             33,246
Total stockholders' equity                                                                             36,617                  
                                                                                                     --------              --------
                                                                                                     $ 89,409              $ 92,171
                                                                                                     ========              ========

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


                                                                 22

<PAGE>


<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
BEI Technologies, Inc. and Subsidiaries

<CAPTION>
                                                                                                  Year Ended
                                                                              -----------------------------------------------------
                                                                            September 27,        September 28,        September 30,
dollars in thousands except per share amounts                                        1997                 1996                 1995
-----------------------------------------------------------------------------------------------------------------------------------
<S>               <C>                                                         <C>                  <C>                  <C>        
Net sales -- Note 2                                                           $   101,539          $    96,746          $    90,475
Cost of sales -- Note 2                                                            65,291               60,494               56,841
                                                                              -----------          -----------          -----------
Gross profit                                                                       36,248               36,252               33,634
                                                                              -----------          -----------          -----------
Selling, general and administrative expenses                                       24,959               26,157               25,641
Provision for royalty and related expenses -- Note 11                                --                   --                  3,500
Research, development and related expenses                                          4,866                3,608                3,964
                                                                              -----------          -----------          -----------
                                                                                   29,825               29,765               33,105
                                                                              -----------          -----------          -----------
Income from operations                                                              6,423                6,487                  529
Other income                                                                          304                  242                  210
Interest expense                                                                   (1,942)              (2,444)              (2,303)
                                                                              -----------          -----------          -----------
Income (loss) before income taxes                                                   4,785                4,285               (1,564)
Income taxes (benefit) -- Note 6                                                    1,788                1,412                 (600)
                                                                              -----------          -----------          -----------
Income (loss) from continuing operations                                            2,997                2,873                 (964)

Income (loss) from discontinued operations, net of
    income taxes -- Note 2                                                          1,586                1,698               (1,077)
                                                                              -----------          -----------          -----------
Net income (loss)                                                             $     4,583          $     4,571          $    (2,041)
                                                                              ===========          ===========          ===========
Earnings (loss) from continuing operations per
    common and common equivalent share -- Note 7                              $      0.42          $      0.40          $     (0.14)

Earnings (loss) from discontinued operations per
    common and common equivalent share -- Note 7                                     0.22                 0.24                (0.16)
                                                                              -----------          -----------          -----------
Earnings (loss) per common and common equivalent
    share -- Note 7                                                           $      0.64          $      0.64          $     (0.30)
                                                                              ===========          ===========          ===========
Weighted average shares outstanding -- Note 7                                   7,203,448            7,107,818            6,758,745
                                                                              ===========          ===========          ===========

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

                                                                 23

<PAGE>


<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
BEI Technologies, Inc. and Subsidiaries

<CAPTION>
                                                                                                     Year Ended
                                                                                       --------------------------------------------
                                                                                  September 27,     September 28,     September 30,
dollars in thousands                                                                       1997              1996              1995
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>               <C>               <C>      
Cash flows from operating activities:
Net income (loss)                                                                      $  4,583          $  4,571          $ (2,041)
Adjustments to reconcile net income to net cash provided
    by operating activities:
Discontinued operations                                                                   3,513             5,954             7,617
Depreciation                                                                              4,304             4,204             4,456
Amortization                                                                              1,636             1,711             1,457
Deferred income taxes                                                                    (2,727)              675            (2,630)
Other                                                                                      (672)             (121)             (483)
Changes in operating assets and liabilities:
Trade receivables                                                                          (604)             (835)           (2,541)
Inventories                                                                              (3,455)           (2,229)             (882)
Other current assets                                                                        886                80               175
Trade accounts payable, accrued expenses and other liabilities                           (1,744)             (479)            4,444
                                                                                       --------          --------          --------
Net cash provided by operating activities                                                 5,720            13,531             9,572

Cash flows from investing activities:
Purchase of property, plant and equipment                                                (6,761)           (3,624)           (2,573)
Other                                                                                        28                44                35
                                                                                       --------          --------          --------
Net cash used by investing activities                                                    (6,733)           (3,580)           (2,538)

Cash flows from financing activities:
Borrowings on short-term debt                                                             9,000              --                --
Principal payments on long-term debt and other liabilities                                  (26)              (75)             (138)
Decrease in payable to BEI Electronics, Inc.                                            (11,128)           (4,342)           (7,323)
                                                                                       --------          --------          --------
Net cash used by financing activities                                                    (2,154)           (4,417)           (7,461)
                                                                                       --------          --------          --------
Net increase (decrease) in cash and cash equivalents                                     (3,167)            5,534              (427)
Cash and cash equivalents at beginning of year                                            8,201             2,667             3,094
                                                                                       --------          --------          --------
Cash and cash equivalents at end of year                                               $  5,034          $  8,201          $  2,667
                                                                                       ========          ========          ========

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


                                                                 24

<PAGE>


<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
BEI Technologies, Inc. and Subsidiaries

<CAPTION>
                                                                   Common            Retained           Unearned
dollars in thousands                                               stock             earnings       restricted stock         Total
------------------------------------------------------------------------------------------------------------------------------------
<S>                 <C>                                           <C>                <C>                <C>                <C>     
Balances at October 1, 1994                                       $   --             $ 31,634           $   (706)          $ 30,928

Net loss for 1995                                                                      (2,041)                               (2,041)
Restricted Stock Plan--Note 8                                                                                (24)               (24)

                                                                  --------           --------           --------           --------
Balances at September 30, 1995                                        --               29,593               (730)            28,863

Net income for 1996                                                                     4,571                                 4,571
Restricted Stock Plan--Note 8                                                                               (188)              (188)

                                                                  --------           --------           --------           --------
Balances at September 28, 1996                                        --               34,164               (918)            33,246
Net income for 1997                                                                     4,583                                 4,583
Restricted Stock Plan--Note 8                                                                               (475)              (475)
Common stock issued in connection with 
    the Distribution                                                     7                 (7)              --                 --
Net equity transactions with BEI
    Electronics, Inc--Note 15                                         --                 (737)              --                 (737)
                                                                  --------           --------           --------           --------
Balances at September 27, 1997                                    $      7           $ 38,003           $ (1,393)          $ 36,617
                                                                  ========           ========           ========           ========

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


                                                                 25

<PAGE>


Notes to Consolidated Financial Statements
BEI Technologies, Inc. and Subsidiaries
September 27, 1997

Note 1--Summary of Significant Accounting Policies

     Basis  of  Presentation:   BEI  Technologies,   Inc.   (Technologies)   was
incorporated  on June 30,  1997 in the  State  of  Delaware,  as a wholly  owned
subsidiary  of BEI  Electronics,  Inc.  (Electronics).  On  September  27, 1997,
Electronics  distributed  to holders of  Electronics  common  stock one share of
common stock of the Company for each share of  Electronics  common stock held on
September 24, 1997 (the  "Distribution").  In connection with the  Distribution,
Electronics  transferred  to  Technologies  all of the assets,  liabilities  and
operations of its BEI Sensors & Systems  Company,  Inc.  (Sensors & Systems) and
Defense Systems Company,  Inc. (Defense Systems) business  segments.  As further
described  in Note 2, on June 30, 1997,  the Board of  Directors of  Electronics
also approved a formal plan to discontinue the operations of its Defense Systems
segment.

     The accompanying  consolidated financial statements of Technologies present
the  consolidated  financial  position  and results of  operations  of Sensors &
Systems and Defense Systems,  former subsidiaries of Electronics and predecessor
entities to the Company,  on a combined basis for all dates and periods prior to
the  Distribution.   All  intercompany   accounts  and  transactions  have  been
eliminated.  The  financial  position and results of operations of the Sensors &
Systems business segment are presented as continuing operations and those of the
Defense  Systems  business  segment are  presented as  discontinued  operations.
Intercompany  accounts and transactions between Technologies and Electronics are
summarized in Note 15.

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

     Fiscal  Year:  The  Company's  fiscal  year  ends on the  Saturday  nearest
September 30. Fiscal years 1997, 1996 and 1995 each contained 52 weeks.

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

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

     Concentration of Credit Risk: The Company's  products are primarily sold to
commercial  customers  throughout  the  United  States  and in  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.

     Revenue Recognition: Revenue is recognized generally as units are shipped.

     Inventories:  Inventories  are  carried  principally  at the  lower of cost
(first-in,  first-out  method) or fair  value and do not  exceed net  realizable
value.

     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 the
accelerated or straight-line methods for equipment.

     Leasehold  improvements are amortized over the shorter of the lease term or
their estimated useful life.

                                       26

<PAGE>


                             BEI TECHNOLOGIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

         Other  Assets:  Tradenames,   patents  and  related  assets  are  being
amortized over their  remaining  lives at the date of acquisition up to a period
of seventeen 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 thirteen years,
which approximates its estimated useful life from the date of acquisition.

         Goodwill consists of the excess of cost over fair value of net tangible
assets  acquired  in  purchase  acquisitions.   Goodwill  is  amortized  by  the
straight-line method over 20 years.

         Long Lived  Assets:  The Company  accounts  for any  impairment  of its
long-lived assets using Financial Accounting Standards Board issued Statement of
Financial  Accounting  Standard  No.  121 ("FAS No.  121")  "Accounting  for the
Impairment of Long-Lived  Assets and  Long-Lived  Assets to be Disposed Of". The
Company recognizes  impairment losses on long-lived assets,  including property,
plant and equipment and other assets,  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.

         Research and Development:  Costs to develop the Company's  products are
expensed  as incurred in  accordance  with  Statement  of  Financial  Accounting
Standards  No.  2  "Accounting  for  Research  and  Development  Costs",   which
establishes accounting and reporting standards for research and development.

         Recent  Accounting  Pronouncements:  Statement of Financial  Accounting
Standards  No.  123 ("FAS  123"),  "Accounting  for  Stock-Based  Compensation,"
established a fair-value based method of accounting for stock-based compensation
plans and requires  additional  disclosures for those companies who elect not to
adopt the new method of accounting.  The Company has adopted the disclosure-only
alternative  as described in FAS 123 in fiscal year 1997.  The Company  accounts
for employee  stock awards using the intrinsic  value method in accordance  with
APB Opinion No. 25.

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

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

         Earnings  (loss)  Per Share:  For  periods  prior to the  Distribution,
earnings  (loss) per share is based on the weighted  average number of shares of
outstanding  Electronics common stock and dilutive  equivalent shares from stock
options (using the treasury stock method) based on the distribution of one share
of  Technologies  common stock for each share of Electronics  common stock.  For
periods subsequent to the Distribution,  earnings per share will be based on the
weighted average number of shares of outstanding  Technologies  common stock and
dilutive  equivalent  shares  from stock  options  (after  giving  effect to the
conversion of such stock options - see Note 8).

                                       27

<PAGE>


                             BEI TECHNOLOGIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 2--Discontinued Operations

     On June 30, 1997, the Board of  Directors of Electronics announced a formal
plan to discontinue the operations of the Defense Systems segment.  Accordingly,
the results of  operations  of the segment have been  presented as  discontinued
operations  for all  periods  presented  and the assets and  liabilities  of the
segment have been segregated in the consolidated  balance sheets.  The remaining
assets are stated at cost, which management believes approximates net realizable
value,  and  management  does not expect  any  material  loss from the  on-going
operations  or  abandonment  of the  Defense  Systems  segment.  Previously,  in
September  1995,  Electronics had reached a decision to exit the HYDRA 70 (H 70)
rocket manufacturing line of business which made up a substantial portion of the
Defense Systems  segment.  Additional  products of the segment  included weapons
management  systems and sales under a cost-plus fee advanced rocket  development
contract.

     As result of the decision to exit the rocket line of business,  the Company
has incurred costs relating to employee severance and the closure and withdrawal
from the leased  facility in Camden,  Arkansas and similar  costs related to its
owned  facility  in  Euless,  Texas.  The  Company  recorded  costs  of sales of
$1,250,000 as exit costs at September 30, 1995 consisting of employee  severance
of  $750,000,  leasehold  abandonment  of $250,000 and owned  facility  costs of
$250,000.  During fiscal year 1996, the Company  incurred  $726,000 of costs for
employee  severance  and leasehold  and facility  costs of $350,000.  Additional
amounts were accrued during fiscal year 1996 for severance costs of $350,000 and
facility costs of $350,000.  During fiscal year 1996,  the Company  recorded net
losses of $640,000 on disposal of assets of the rocket  business.  At  September
28, 1996, an additional charge of $313,000 was recorded to reflect  management's
estimate  of the fair  value of the  Euless  facility  based on  current  market
conditions.  At the end of fiscal year 1996, the balance in the reserve  account
consisted of $374,000 and $500,000 for employee  severance and facility  closure
costs, respectively.  During fiscal year 1997, the Company accrued an additional
$33,000 for  employee  severance  costs.  Costs  incurred  during the period for
severance and facilities  closure of $362,000 and $362,000,  respectively,  were
charged  against  the  reserve.  The balance in the reserve at the end of fiscal
1997  consisted of $45,000 for employee  severance  and $138,000 for  facilities
closure costs. Management believes at this time the reserve is adequate to cover
future shutdown costs.  At September 27, 1997,  substantially  all inventory and
equipment assets of the rocket business had been written off or disposed of. The
remaining  assets of Defense  Systems are  classified as assets of  discontinued
operations on the balance sheet.  Management expects to complete the disposition
of these assets during fiscal 1998.

     Net sales of the Defense Systems segment were as follows:


                                                      Year Ended
                                   ---------------------------------------------

                                   September 27,   September 28,   September 30,
                                            1997           1996            1995
                                         -------         -------         -------

                                                  (dollars in thousands)
                                         ---------------------------------------

Sales--HYDRA 70 ................         $ 2,160         $37,927         $38,517
Other ..........................           6,889           4,708           7,064
                                         -------         -------         -------
                                         $ 9,059         $42,635         $45,581
                                         =======         =======         =======


                                       28

<PAGE>


                             BEI TECHNOLOGIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 3--Inventories


                                                     September 27, September 28,
                                                             1997           1996
                                                          -------        -------
                                                          (dollars in thousands)
                                                          ----------------------

Finished products ......................................  $   557        $   289
Work in process ........................................    7,412          6,622
Materials ..............................................   12,302         10,873
Costs incurred under long-term contracts, including
   U.S. Government contracts ...........................    2,385          1,417
                                                          -------        -------
Inventories ............................................  $22,656        $19,201
                                                          =======        =======
                                                                 


Note 4--Accrued Expenses and Other Liabilities



                                                     September 27, September 28,
                                                              1997          1996
                                                           -------       -------

                                                          (dollars in thousands)
                                                           ---------------------

Employee compensation ..............................       $ 1,923       $ 1,623
Vacation ...........................................         1,648         1,621
Accrued taxes ......................................         1,166           343
Royalties and related costs ........................           806         3,951
Accrued professional fees ..........................           784           501
Insurance ..........................................           690           812
Contract costs .....................................           578           790
Commissions ........................................           700           484
Other ..............................................         2,202         2,477
                                                           -------       -------
Accrued Expenses and Other Liabilities .............       $10,497       $12,602
                                                           =======       =======


                                       29

<PAGE>


<TABLE>
                                                       BEI TECHNOLOGIES, INC.

                                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 5--Long-Term Debt


<CAPTION>
                                                                                                       September 27,   September 28,
                                                                                                                1997            1996
                                                                                                             -------         -------
                                                                                                              (dollars in thousands)
<S>                                                                                                          <C>             <C>    
6.73% Series A Senior Notes; due in annual installments of $3,360 from
   October 1, 1996 through October 1, 2000 .........................................................         $13,440         $16,800
6.73% Series B Senior Notes; due in annual installments of $2,240 from
   November 15, 1996 through November 15, 2000 .....................................................           8,960          11,200
Borrowings under bank line of credit ...............................................................           9,000            --  
Mortgage note payable with  interest at 7.96%;  due in monthly  installments  of
   principal and interest of $14 until 1999 when the remaining balance of
   approximately $1,700 is due; collateralized by certain real property ............................           1,736           1,762
                                                                                                             -------         -------
                                                                                                              33,136          29,762
Less current portion ...............................................................................           5,628           5,625
                                                                                                             -------         -------
                                                                                                             $27,508         $24,137
                                                                                                             =======         =======
</TABLE>

     The Senior Notes,  which were  obligations of Electronics,  were assumed by
Technologies  in connection  with the  Distribution at an interest rate of 7.23%
for years subsequent to fiscal year 1997. The interest  expense  associated with
the  Senior  Notes  was  allocated  to  Technologies  and  is  included  in  the
consolidated  results of operations  for fiscal years 1996 and 1997.  The Senior
Note Agreement contains covenants concerning certain financial ratios,  dividend
payments and minimum balances of net worth. At September 27, 1997,  Technologies
was in compliance with these covenants.

     At September  27,  1997,  Sensors & Systems had a $15.0  million  unsecured
credit line with a bank that expired October 31, 1997. At the end of fiscal year
1997, $9.0 million was outstanding. The $9.0 million was used to partially repay
the  intercompany  payable  from Sensors & Systems to  Electronics  prior to the
Distribution.  Interest on the borrowings is based upon the bank's prime rate of
8.5% at September 1997.

     The  credit  facility  also  allowed  for  letters  of credit up to certain
limits.  At  September  27,  1997,  the  Company had one letter of credit in the
amount of $0.4 million outstanding.

     The credit  line  contained  covenants  which  require  the Company to meet
certain  financial  ratios and net worth  balances.  At September 27, 1997,  the
Company was in compliance with these covenants.

     On September 28, 1997, Technologies entered into an agreement with the same
bank for a $25.0  million  unsecured  line of credit which  expires in September
2000. On September 29, 1997,  the Company  borrowed  $13.0 million under the new
line of  credit  and used the  funds to repay the $9.0  million  of  outstanding
borrowings  and accrued  interest on the prior Sensors & Systems' line of credit
and to make a  scheduled  principal  payment  on the  Senior  Note  obligations.
Accordingly,  the borrowings under the bank line of credit at September 27, 1997
in the amount of $9.0 million have been classified as a non-current liability in
the accompanying consolidated financial statements.

                                       30

<PAGE>


                             BEI TECHNOLOGIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


     The new  agreement  also  provides  that up to $3.0  million of the line of
credit may be used to fund  letters of credit  issued on behalf of the  Company.
The  agreement  contains  covenants  which  require the Company to meet  certain
financial ratios and minimum net worth balances.

     Maturities   of   long-term   debt   are  as   follows:   1998--$5,628,000;
1999--$10,668,000; 2000--$14,600,000; 2001--$2,240,000.

     Interest of  approximately  $1,942,000,  $2,202,000 and $2,308,000 was paid
during fiscal years 1997, 1996 and 1995, respectively.


Note 6--Income Taxes

     Technologies was included in the consolidated federal income tax returns of
Electronics  for  fiscal  years  1997  and  prior,  in  accordance  with the tax
allocation  arrangement  between the  companies.  Income  taxes were  accrued at
estimated  tax  rates by each of the  former  subsidiaries  of  Electronics  and
settlement of fiscal year 1997 tax  liabilities  was  estimated  using these tax
rates.  Subsequent to fiscal year 1997,  Technologies  will no longer be part of
Electronics' consolidated group.

     Deferred tax assets and liabilities are determined based on the differences
between financial  reporting and the tax basis 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.

                                       31

<PAGE>


                             BEI TECHNOLOGIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

<TABLE>
     The  provision  for  income  tax  expense  consists  of the  following  (in
thousands):


<CAPTION>
                                                                                                        Year Ended
                                                                                     ----------------------------------------------

                                                                                     September 27,    September 28,   September 30,
                                                                                              1997             1996            1995
                                                                                           -------          -------         -------
<S>                                                                                        <C>              <C>             <C>    
Current
     Federal .....................................................................         $ 4,688          $ 1,716         $ 1,306
     State .......................................................................             799               47              46
                                                                                           -------          -------         -------
          Total Current ..........................................................           5,487            1,763           1,352
Deferred
     Federal .....................................................................          (2,330)             408          (2,303)
     State .......................................................................            (397)             267            (327)
                                                                                           -------          -------         -------
          Total Deferred .........................................................          (2,727)             675          (2,630)
Total income tax provision (benefit) .............................................         $ 2,760          $ 2,438         $(1,278)
                                                                                           =======          =======         =======
Income tax expense (benefit) attributable to continuing operations ...............         $ 1,788          $ 1,412         $  (600)
Income tax expense (benefit) attributable to discontinued operations .............             972            1,026            (678)
                                                                                           -------          -------         -------
Total income tax provision (benefit) .............................................         $ 2,760          $ 2,438         $(1,278)
                                                                                           =======          =======         =======
</TABLE>


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


                                                    September 27,  September 28,
                                                             1997          1996
                  Deferred tax assets                      ------        ------

Accrued expenses ...................................       $3,930        $3,675
Inventory valuation ................................        1,862            80
Contract reserves ..................................          124           420
Other ..............................................          820           964
                                                           ------        ------
        Total deferred tax assets ..................       $6,736        $5,139
                                                           ======        ======
                  Deferred tax liabilities

Depreciation and property basis difference .........        1,694         2,309
Prepaid expenses ...................................         --             131
Accrued expenses ...................................          223           252
Other ..............................................          240           595
                                                           ------        ------
     Total deferred tax liabilities ................        2,157         3,287
                                                           ------        ------
     Net deferred tax assets .......................       $4,579        $1,852
                                                           ======        ======


                                       32

<PAGE>


                             BEI TECHNOLOGIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


<TABLE>
     The provision  for income taxes  differs from the income tax  determined by
applying the applicable  U.S.  statutory  federal income tax rate as a result of
the following differences (in thousands):

<CAPTION>
                                                                                                    Year Ended
                                                                              -----------------------------------------------------

                                                                              September 27,       September 28,       September 30,
                                                                                       1997                1996                1995
                                                                                    -------             -------             -------
<S>                                                                                 <C>                 <C>                 <C>     
Income tax (credit) at the statutory rate of 34% .......................            $ 2,497             $ 2,383             $(1,128)
Federal income tax effect of state income taxes ........................               (137)               (106)                 96
Goodwill amortization ..................................................                 18                  19                  18
Research and development and related credits ...........................               --                  (246)               --
Other ..................................................................                (20)                 74                  17
                                                                                    -------             -------             -------
     Federal income taxes (credit) .....................................              2,358               2,124                (997)
     State income taxes (credit) .......................................                402                 314                (281)
                                                                                    -------             -------             -------
Provision (credit) for income taxes ....................................            $ 2,760             $ 2,438             $(1,278)
                                                                                    =======             =======             =======
</TABLE>

     Pursuant to the tax  sharing  agreement  with  Electronics,  the  Company's
income  taxes  have been paid by  Electronics  and  credited  to  payable to BEI
Electronics, Inc. (see Note 15 to the Consolidated Financial Statements).

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

     Realization  of the net deferred  tax assets is dependent  upon the Company
generating  sufficient taxable income in future years to obtain benefit from the
reversal of the underlying temporary differences.

Note 7--Stockholders' Equity

     The authorized  capital stock of Technologies  consists of 2,000,000 shares
of  preferred  stock  ($.001 par value) and  20,000,000  shares of common  stock
($.001 par value).  In connection  with the  Distribution,  7,114,813  shares of
Technologies  common stock were issued to holders of  Electronics  common stock.
Prior to the  incorporation  of Technologies  and the  Distribution,  all of the
capital stock of Sensors & Systems and Defense Systems was held by Electronics.

Note 8--Equity Incentive Plan

     The  Technologies  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.  Technologies  has
reserved 1,139,445 shares of common stock for issuance under the Incentive Plan,
including  shares  for  substitute  options  granted  to the  option  holders of
Electronics in connection with the Distribution.

                                       33

<PAGE>


                             BEI TECHNOLOGIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

     Under  the  terms of  Distribution,  holders  of vested  stock  options  to
purchase  Electronics  common stock were entitled to exercise such options prior
to the Distribution  and receive an equivalent  number of shares of Technologies
common stock in the Distribution.  Unexercised  vested and unvested  Electronics
stock options were  converted to options to purchase  Technologies  common stock
under the  Incentive  Plan based on a conversion  formula that retained the same
intrinsic  value of the options and the same ratio of exercise  price per option
to market value per share of common stock as prior to the Distribution,  without
any additional benefits to the holders.

<TABLE>
     Option  activity under the  Electronics'  1987 Incentive  Stock Option Plan
prior to the  Distribution and the adjustment for the conversion to Technologies
options in connection with the Distribution are summarized below:


<CAPTION>
                                                                         Weighted average
                                                               Number of   exercise price
                                                            common shares    per share
                                                            -------------    ---------
<S>                            <C>                              <C>          <C>     
Options outstanding at October 1, 1994 .....................    667,465      $   5.88
               Granted .....................................     31,000      $   5.00
               Exercised ...................................    (16,814)     $   3.85
               Terminated ..................................    (71,256)     $   7.41
                                                               --------      --------
Options outstanding at September 30, 1995 ..................    610,395      $   5.71
               Granted .....................................     11,000      $   6.42
               Exercised ...................................   (115,922)     $   6.27
               Terminated ..................................    (48,511)     $   7.80
                                                               --------      --------
Options outstanding at September 28, 1996 ..................    456,962      $   5.36
               Exercised ...................................   (137,200)     $   5.33
               Terminated ..................................     (3,500)     $   7.95
                                                               --------      --------
Options outstanding at September 27, 1997
    prior to the Distribution ..............................    316,262      $   5.35
Distribution adjustment ....................................     23,183          --
                                                               --------      --------
Adjusted options outstanding at September 27, 1997 .........    339,445      $   4.98
                                                               ========      ========
</TABLE>


<TABLE>
<CAPTION>
                                                                                              Weighted Average          Weighted
                                                                              Number        Remaining Contractual   Average Exercise
Exercise Prices                                                            Outstanding          Life (Years)         Price Per Share
---------------                                                            -----------          ------------         ---------------
<S>                                                                         <C>                      <C>                  <C>  
$2.68 ...................................................                     59,295                 2.2                  $2.68
$4.08 ...................................................                    142,450                 1.7                  $4.08
$4.66 ...................................................                     19,316                 7.2                  $4.66
$5.00 ...................................................                        666                 5.7                  $5.00
$5.59 ...................................................                      5,368                 6.3                  $5.59
$5.71 ...................................................                      1,073                 6.5                  $5.71
$5.94 ...................................................                     19,928                 5.7                  $5.94
$6.75 ...................................................                     23,619                 5.1                  $6.75
$7.92 ...................................................                     52,702                 3.7                  $7.92
$8.50 ...................................................                     15,028                 4.7                  $8.50
-----                                                                        -------               ------                 -----
$2.68 - $8.50 ...........................................                    339,445                 3.1                  $4.98
=============                                                                =======               ======                 =====
</TABLE>

                                                                 34

<PAGE>


                             BEI TECHNOLOGIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

     As of  September  27,  1997,  options  for  330,537  shares were vested and
exercisable.

     Under the 1992  Restricted  Stock Plan of  Electronics,  700,000  shares of
Electronics common stock were authorized to be issued to certain key individuals
who have become employees of  Technologies,  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. The market
value of shares  granted is amortized to  compensation  expense over the vesting
periods.  As of September 27, 1997,  419,926  shares had been granted,  of which
352,350  shares  are   outstanding,   and  145,316  shares  have  fully  vested.
Compensation  expense of $274,000,  $406,000 and $236,000 was recorded in fiscal
years 1997, 1996 and 1995, respectively.

The impact on the  calculation  of proforma  results of operations  and earnings
(loss) per share  required by FAS 123 was determined to be immaterial for fiscal
years 1997 and 1996.

Note 9--Employee Benefit Plan

     Technologies has a defined contribution  retirement plan for the benefit of
all eligible  employees.  Non-discretionary  contributions  are based on a fixed
percentage  of  eligible  payroll  plus a  formula-based  matching  of  employee
contributions.  Contributions to the plan by Technologies for the benefit of its
employees  for fiscal  years 1997,  1996 and 1995 were  approximately  $626,000,
$622,000 and $684,000 respectively.

Note 10--Lease Commitments

     Operating  leases  consist  principally  of leases for real  properties and
land. Certain of the operating leases contain various options for renewal and/or
purchase of the related assets for amounts approximating their fair market value
at the date of exercise of the option. The future minimum payments for operating
leases consisted of the following at September 27, 1997 (in thousands):


  Fiscal Year
     1998 .................................................          $1,312
     1999 .................................................             692
     2000 .................................................             481
     2001 .................................................             464
     2002 .................................................             423
     Thereafter ...........................................             800
                                                                     ------
         Total minimum lease payments .....................          $4,172
                                                                     ======

                                       35

<PAGE>


                             BEI TECHNOLOGIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

     Total rental expense amounted to approximately  $1,616,000,  $1,530,000 and
$2,238,000 for fiscal years 1997, 1996 and 1995, respectively.

Note 11--Contingencies and Litigation

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

    In January 1997, BEI Systron Donner Company, a division of the Company,  and
the former  shareholders of General Precision  Industries,  Inc. (GPI) reached a
confidential  settlement  of the last  remaining  issues of the dispute that had
been in  arbitration  since  1992.  Following  the  November  1996 ruling by the
arbitration panel that GPI may be due costs and expenses,  the parties agreed in
their  January 1997  settlement on a final payment to fully resolve the dispute.
The impact of the  settlement and related legal expenses in the first quarter of
1997 was an after tax charge of approximately  $1.1 million.  The settlement and
all  remaining  amounts  accrued  for GPI  under  prior  rulings  by the  panel,
including  royalties for 1993 through 1996,  were paid in the second  quarter of
fiscal 1997.

   Claim against U.S. Government

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

   Other

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


Note 12--Sales

     Net sales from  continuing  operations  to customers  in foreign  countries
amounted to  $11,998,000,  $10,938,000 and $9,680,000 in fiscal years 1997, 1996
and 1995,  respectively.  In fiscal years 1997, 1996 and 1995, foreign sales did
not exceed 10% of consolidated net sales in any individual geographic area.

     Net sales to the U.S.  Government  for the Sensors  and  Systems  segment's
products  amounted to  $22,479,000,  $25,986,000 and $28,930,000 in fiscal years
1997,  1996 and 1995,  respectively.  Net sales to the U.S.  Government  for the
discontinued Defense Systems segment were $8,323,000, $41,219,000 and $44,012,00
for fiscal years 1997, 1996 and 1995, respectively.

                                       36

<PAGE>


                             BEI TECHNOLOGIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Note 13--Quarterly Results of Operations (Unaudited)

<TABLE>
     The tables below present  unaudited  quarterly  financial  information  for
fiscal years 1997 and 1996:


<CAPTION>
                                                                                              Continuing Operations
                                                                                                 Three months ended
                                                                              ------------------------------------------------------
                                                                             December 28,      March 29,      June 28, September 27,
                                                                                     1996           1997          1997          1997
                                                                                     ----           ----          ----          ----
                                                                                   (dollars in thousands except per share amounts)
                                                                              ------------------------------------------------------
<S>                                                                              <C>             <C>           <C>           <C>    
Net sales ................................................................       $ 22,903        $24,710       $26,824       $27,102
Gross profit .............................................................          7,767          8,810         9,477        10,194
Income (loss) from continuing operations .................................           (359)           957         1,196         1,202
Income from discontinued operations ......................................            394            495           500           198
Net income ...............................................................             35          1,452         1,696         1,400
Earnings (loss) from continuing operations per common and common
    equivalent share .....................................................       $  (0.05)       $  0.13       $  0.17       $  0.17
Earnings from discontinued operations per common and common
    equivalent share .....................................................       $   0.05        $  0.07       $  0.07       $  0.03
Earnings per common and common equivalent share ..........................       $   0.00        $  0.20       $  0.24       $  0.19


                                                                             December 30,      March 30,      June 29, September 28,
                                                                                     1996           1997          1997          1997
                                                                                     ----           ----          ----          ----
Net sales ................................................................       $ 22,354        $24,708       $24,336       $25,348
Gross profit .............................................................          8,183          9,405         9,420         9,244
Income (loss) from continuing operations .................................            649            767         1,019           438
Income from discontinued operations ......................................            239            335           574           550
Net income ...............................................................            888          1,102         1,593           988
Earnings from continuing operations per common and common
    equivalent share .....................................................       $   0.09        $  0.11       $  0.14       $  0.06
Earnings from discontinued operations per common and common               
    equivalent share .....................................................       $   0.03        $  0.05       $  0.08       $  0.08
Earnings per common and common equivalent share ..........................       $   0.12        $  0.16       $  0.22       $  0.13
</TABLE>


Note 14--Fair Value of Financial Instruments

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

                                       37

<PAGE>


                             BEI TECHNOLOGIES, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


the underlying value of the Company.  The following methods and assumptions were
used by the  Company  in  estimate  its fair  value  disclosures  for  financial
instruments as of September 27, 1997, and as of September 28, 1996.

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

         Long-Term Debt: The fair value of these  liabilities has been estimated
based upon the discounted  future cash flows.  The discount rate used included a
risk free rate  derived  from the  Treasury  yield  curve plus a risk  weighting
commensurate with the Company's borrowing position.  The fair value of long-term
debt is approximately  $27,570,000,  and $23,648,000  compared with the carrying
amounts of $27,508,000  and  $24,137,000 at September 27, 1997 and September 28,
1996, respectively.

Note 15--Intercompany Transactions

     Amounts payable to Electronics  included in the consolidated balance sheets
represent net balances as the result of various transactions between Electronics
and Technologies.  There were no terms of settlement associated with the account
balance.  The balance resulted primarily from of the Company's  participation in
Electronics'  central  cash  management  program,  wherein  the  Company's  cash
receipts  were remitted to  Electronics  and cash  disbursements  were funded by
Electronics.  Other  transactions  include  the  Company's  share of the current
portion of Electronics  consolidated  federal and state income tax  liabilities,
administrative   and  other  expenses  incurred  by  Electronics  on  behalf  of
Technologies, and interest charges on a portion of the outstanding balances.

<TABLE>
     Intercompany transactions are summarized follows:


<CAPTION>
                                                                                                        Year Ended
                                                                                           ----------------------------------------
                                                                                      September 27,   September 28,   September 30,
                                                                                               1997            1996            1995
                                                                                           --------        --------        --------
                                                                                                   (dollars in thousands)
<S>                                                                                        <C>             <C>             <C>     
Balance payable to Electronics at beginning of year ................................       $  6,062        $ 10,404        $ 17,727

Net cash remitted to Electronics ...................................................        (31,304)        (22,537)        (26,277)
Net transfers of assets and liabilities ............................................          5,553           1,648          (2,086)
Allocations of Electronics' current federal and state tax liabilities ..............          3,034           1,891           2,161
Administrative expenses and other intercompany activity ............................         16,655          14,656          18,879
                                                                                           --------        --------        --------
Balance payable to Electronics at end of year ......................................       $   --          $  6,062        $ 10,404
                                                                                           ========        ========        ========
Average balance during year ........................................................       $  4,418        $  9,897        $ 14,418
                                                                                           ========        ========        ========
</TABLE>


   Net  equity  transactions  with  Electronics  included  in  the  consolidated
statement of stockholders'  equity for fiscal year 1997 consists of intercompany
liabilities of  Electronics  and costs of the  Distribution,  both of which were
assumed by Technologies in connection with the Distribution, partially offset by
payments made during the year by Electronics on Senior Notes payable.

                                       38

<PAGE>


                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. as of September  27, 1997 and  September  28, 1996,  and the
related  consolidated  statements of operations,  stockholders'  equity and cash
flows for each of the three years in the period ended September 27, 1997.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the  financial  position of BEI  Technologies,  Inc. at
September 27, 1997 and September 28, 1996, and the  consolidated  results of its
operations  and its cash flows for each of the three  years in the period  ended
September 27, 1997 in conformity with generally accepted accounting principles.



                                                               Ernst & Young LLP


San Francisco, California
November 12, 1997

                                       39

<PAGE>


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

                  None.


                                    PART III

ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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


ITEM 11.          EXECUTIVE COMPENSATION

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


ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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


ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

                                       40

<PAGE>


                                     PART IV

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


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


<CAPTION>
                                                                                                                          Form
                                                                                                                        10-K Page
(a)(1)      Index to Consolidated Financial Statements.                                                                   Number
            -------------------------------------------                                                                   ------
<S>                                                                                                                         <C>
            The 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                                                               39

            Consolidated Balance Sheets -
               September 27, 1997 and September 28, 1996                                                                    21

            Consolidated Statements of Operations -
              Years ended September 27, 1997, September 28, 1996
               and September 30, 1995                                                                                       23

            Consolidated Statements of Cash Flows -
               Years ended September 27, 1997, September 28, 1996
               and September 30, 1995                                                                                       24

            Consolidated Statements of Stockholders' Equity -
               Years ended September 27, 1997, September 28, 1996
               and September 30, 1995                                                                                       25

            Notes to Consolidated Financial Statements -
               September 27, 1997                                                                                           26

(a)(2)      Index to Financial Statement Schedule.
            The following Consolidated Financial Statement Schedule of BEI Technologies, Inc. for
            each of the years in the period ended September 27, 1997 is filed as part of this Form
            10-K:

           Schedule II                            Valuation and Qualifying Accounts                                       S-1

                                                  Report of Ernst & Young LLP, Independent Auditors as                    S-2
                                                  to Schedule
</TABLE>

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

                                       41

<PAGE>


<TABLE>
(a)(3)      Listing of Exhibits

<CAPTION>
            Exhibit Numbers                        Description                                  Footnote
            ---------------                        -----------                                  --------
<S>                             <C>                                                                <C>
                  2.1           Distribution Agreement between BEI Electronics, Inc.               i
                                and BEI Technologies, Inc.
                  2.2           Corporate Services Agreement between BEI
                                Technologies, Inc. and BEI Electronics, Inc.                       i
                  2.3           Tax Allocation and Indemnity Agreement between BEI
                                Electronics, Inc. and BEI Technologies, Inc.                       i
                  2.4           Assumption of Liabilities and Indemnity Agreement
                                between BEI Electronics, Inc. and BEI Technologies,
                                Inc.                                                               i
                  2.5           Technology Transfer and License Agreement by and
                                between BEI Electronics, Inc. and BEI Technologies,
                                Inc.                                                               i
                  2.6           Trademark Assignment and Consent Agreement by and
                                between BEI Electronics, Inc. and BEI Technologies,
                                Inc.                                                               i
                  2.7           Agreement Regarding Certain Representations and
                                Covenants by and between BEI Electronics, Inc. and
                                BEI Technologies, Inc.                                             i
                  3.1           Certificate of Incorporation of BEI Technologies, Inc.             i
                  3.2           Bylaws of BEI Technologies, Inc.                                   i
                  3.3           Registrant's Certificate of Designation of Series A
                                Junior Participating Preferred Stock (filed as Exhibit
                                99.3 hereto)                                                       i
                  4.1           Specimen Common Share Certificate                                  i
                  4.2           Certificate of Incorporation of BEI Technologies, Inc.
                                (filed as Exhibit 3.1 hereto)                                      i
                  4.3           Bylaws of BEI Technologies, Inc. (filed as Exhibit 3.2
                                hereto)                                                            i
                  4.4           Registrant's Certificate of Designation of Series A
                                Junior Participating Preferred Stock (filed as Exhibit
                                99.3 hereto)                                                       i
                  4.5           Form of Rights Certificate (filed as Exhibit 99.4 hereto)          i
                 10.1           Registrant's 1997 Equity Incentive Plan and forms of
                                related agreements                                                 i

                                                    42

<PAGE>


                 10.2  *        Executive Change in Control Benefits Agreement
                                between BEI Technologies, Inc. and Certain Named
                                Executive Officers                                                 i
                 10.3           Assumption Agreement--Series A and Series B Senior
                                Notes dated September 15, 1997 by and between BEI                  i
                                Technologies, Inc., Principal Mutual Life Insurance
                                Company, Berkshire Life Insurance Company and
                                TMG Life Insurance Company
                 10.4           Credit Agreement dated as of September 27, 1997                    i
                                among BEI Technologies, Inc., BEI Sensors & Systems
                                Company, Inc., Defense Systems Company, Inc., CIBC,
                                Inc., Canadian Imperial Bank of Commerce and CIBC
                                Wood Gundy Securities Corp.
                 11.1           Statement regarding Computation of Per Share
                                Earnings
                 23.1           Consent of Ernst &Young LLP, Independent Auditors
                 24.1           Power of Attorney
                 27.1           Financial Data Schedule
                 99.1           BEI Technologies, Inc. Information Statement dated
                                September 24, 1997                                                 i
                 99.2           Rights Agreement dated as of September 11, 1997
                                among BEI Technologies, Inc. and ChaseMellon
                                Shareholder Services, L.L.C.                                       i
                 99.3           Registrant's Certificate of Designation of Series A
                                Junior Participating Preferred Stock                               i
                 99.4           Form of Rights Certificate                                         i

<FN>
(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.

*        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.
</FN>
</TABLE>

(b)      No  reports on Form 8-K were filed by the  Company  during the  quarter
         ended September 27, 1997.


                                       43

<PAGE>


                                   SIGNATURES


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




                                             BEI TECHNOLOGIES, INC.



                                         By: /S/ Robert R. Corr
                                             -----------------------------------
                                             Robert R. Corr
                                             Secretary, Treasurer and Controller
                                             (Principal Accounting Officer)
                                             December 5, 1997



                                POWER OF ATTORNEY

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

                                       44

<PAGE>


<TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  registrant and
in the capacities and on the dates indicated.


<CAPTION>
Signature                                       Title                                      Date
---------                                       -----                                      ----
<S>                                             <C>                                        <C>
/s/ Charles Crocker                             President, Chief Executive                 December 5, 1997
--------------------------------------          Officer and Chairman of the Board of
(Charles Crocker)                               Directors (Principal Executive Officer)

/s/ Richard M. Brooks                           Director                                   December 5, 1997
--------------------------------------
(Richard M. Brooks)

/s/ George S. Brown                             Director                                   December 5, 1997
--------------------------------------
(George S. Brown)

/s/ C. Joseph Giroir, Jr.                       Director                                   December 5, 1997
--------------------------------------
(C. Joseph Giroir, Jr.)

/s/ William G. Howard, Jr.                      Director                                   December 5, 1997
--------------------------------------
(William G. Howard, Jr.)

/s/ Asad M. Madni                               Director                                   December 5, 1997
--------------------------------------
(Asad M. Madni)

/s/ Robert Mehrabian                            Director                                   December 5, 1997
--------------------------------------
(Robert Mehrabian)

/s/ Gary D. Wrench                              Senior Vice President, Chief               December 5, 1997
--------------------------------------          Financial Officer and Director
(Gary D. Wrench)                      
</TABLE>

                                                     45

<PAGE>


<TABLE>
                                                                                                                         SCHEDULE II

                                                       BEI TECHNOLOGIES, INC.

                                                  VALUATION AND QUALIFYING ACCOUNTS


<CAPTION>
                       Column A                                         Column B           Column C            Column D    Column E

                                                                                            Additions
                                                                        Balance at  Charged to   Charged to               Balance at
                                                                        Beginning   Costs and  Other Accounts  Deductions    End of
                     Description                                        of Period    Expenses     Describe      Describe     Period
                                                                                      
                                                                                             (in thousands)
                                                                                      
<S>                                                                        <C>          <C>        <C>            <C>         <C> 
Year ended September 27, 1997: 
Deducted from asset accounts:                          
     Allowance for doubtful accounts ...................................   $607         $ 75       $    --        $319(C)     $363
     Valuation allowance for deferred tax                                             
        assets .........................................................     94          --           (94)(B)      --          --
                                                                           ----         ----       ---------      ------      ----
          Total ........................................................   $701         $          $    --        $           $
                                                                           ====         ====       =========      ======      ====
Year ended September 28, 1996:
Deducted from asset accounts:                           
     Allowance for doubtful accounts ...................................   $395         $282       $    --        $ 70(A)     $607
                                                                           ----         ----       ---------      ------      ----
     Valuation allowance for deferred tax                                             
        assets .........................................................    143          --           (49)(B)      --           94
                                                                           ----         ----       ---------      ------      ----
          Total ........................................................   $538         $282       $  (49)        $ 70        $701
                                                                           ====         ====       =========      ======      ====
Year ended September 30, 1995: 
Deducted from asset accounts:                          
     Allowance for doubtful accounts ...................................   $315         $119       $    --        $ 39(A)     $395
                                                                           ----         ----       ---------      ------      ----
     Valuation allowance for deferred tax                                             
        assets .........................................................    --           143(B)         --         --          143
                                                                           ----         ----       ---------      ------      ----
          Total ........................................................   $315         $262            --        $ 39        $538
                                                                           ====         ====       =========      ======      ====
                                                                                   
<FN>
(A)  Miscellaneous adjustments to the allowance

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

(C)  Write-offs of uncollectible accounts
</FN>
</TABLE>

                                                                 S-1

<PAGE>


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


The Board of Directors and Shareholders
BEI Technologies, Inc.

We have audited the consolidated financial statements of BEI Technologies,  Inc.
as of September 27, 1997 and September 28, 1996, and for each of the three years
in the period ended September 27, 1997, and have issued our report thereon dated
November 12, 1997.  Our audits also  included the financial  statement  schedule
listed in Item 14(a) of this Form 10-K. This schedule is the  responsibility  of
the Company's  management.  Our responsibility is to express an opinion based on
our audits.

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


                                                               Ernst & Young LLP


San Francisco, California
November 12, 1997

                                      S-2

<PAGE>


INDEX TO EXHIBITS


Exhibit
Number         Description
------         -----------
11.1           Statement regarding computation of per share earnings

23.1           Consent of Ernst & Young LLP Independent Auditors

24.1           Power of Attorney

27.1           Financial Data Schedule