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 28, 2002 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 Identification No.)
   incorporation or organization

                           One Post Street, Suite 2500
                         San Francisco, California 94104
              (Address of principal executive officers) (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 December 11, 2002 was $160,941,014  (A).
As of December 11, 2002,  14,597,591  shares of  Registrant's  Common Stock were
outstanding.

(A) Based upon the closing  sale price of the Common  Stock on December 11, 2002
as reported on the NASDAQ National Market System.  Excludes  3,436,633 shares of
Common  Stock held by  directors,  executive  officers  and  stockholders  whose
ownership  exceeds ten percent of Common Stock outstanding on December 11, 2002.
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  2003  Annual  Meeting  of
Stockholders  to be  filed  with  the  Securities  and  Exchange  Commission  is
incorporated by reference into Part III, Items 10, 11, 12 and 13 of this report.


<PAGE>
<TABLE>
<CAPTION>

                                                  TABLE OF CONTENTS
                                                                                                               Page
PART I

<S>                        <C>                                                                                 <C>
         Item 1.           Business.......................................................................        3

         Item 2.           Properties.....................................................................       18

         Item 3.           Legal Proceedings..............................................................       19

         Item 4.           Submission of Matters to a Vote of Security Holders............................       19

PART II

         Item 5.           Market for Registrant's Common Equity and
                           Related Stockholder Matters....................................................       19

         Item 6.           Selected Financial Data........................................................       21

         Item 7.           Management's Discussion and Analysis of
                           Financial Condition and Results of Operations..................................       22

         Item 7a.          Quantitative and Qualitative Disclosures About Market Risk.....................       28

         Item 8.           Financial Statements and Supplementary Data....................................       29

         Item 9.           Changes in and Disagreements with Accountants
                           on Accounting and Financial Disclosure.........................................       50

PART III

         Item 10.          Directors and Executive Officers
                           of the Registrant..............................................................       50

         Item 11.          Executive Compensation.........................................................       50

         Item 12.          Security Ownership of Certain Beneficial
                           Owners and Management..........................................................       50

         Item 13.          Certain Relationships and Related Transactions.................................       50

PART IV

         Item 14.          Controls and Procedures........................................................      50

         Item 15.          Exhibits, Financial Statement Schedules,
                           and Reports on Form 8-K........................................................       50

Signatures                 ...............................................................................       54
</TABLE>

                                       2

<PAGE>


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

PART I

ITEM 1.  BUSINESS

Introduction

         BEI Technologies  ("Technologies" or the "Company") was incorporated in
Delaware in June 1997 and became publicly held on September 27, 1997 as a result
of the distribution of shares in Technologies  (the  "Distribution")  to all the
stockholders of record of BEI Electronics, Inc. ("Electronics") on September 24,
1997. BEI Electronics was subsequently renamed BEI Medical Systems Company, Inc.
and acquired by Boston  Scientific  Corporation in 2002. The principal  business
and operations of Technologies are conducted within one business segment and are
carried out by operations which design,  manufacture and sell electronic devices
that  provide  vital  sensory  input and  actuation  for the control  systems of
advanced machinery and automation systems.  Sensors designed and manufactured by
Technologies,  most  of  which  are  concerned  with  physical  motion,  provide
information  that is  essential  to logical,  safe and  efficient  operation  of
sophisticated  machinery.  Technologies  also  develops and produces  motors and
actuators, which are the prime movers in high performance machinery.

         Effective  as  of  October  30,   2000,   the  Board  of  Directors  of
Technologies declared a one-for-one stock dividend to its stockholders of record
as of the close of business on October 30,  2000.  Stockholders  of record as of
such date received one additional  share of the common stock of Technologies for
each  share held as of such date,  and cash in lieu of any  fractional  share of
Technologies common stock. The stock dividend was paid November 21, 2000.

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

         A key feature of the Company's  strategy is to be recognized  worldwide
as the most capable source for the sensor categories the Company  produces.  The
Company's  traditional  emphasis has been on producing highly engineered sensing
components and  assemblies.  The Company  believes it  differentiates  itself by
offering  (a)  superior  technology  to  solve  a  customer  problem  (including
innovative  proprietary  technology);  (b) quality service;  and (c) application
engineering  expertise in recommending and prescribing  technical  solutions for
customers' applications. The Company's products are not sold as commodities. Its
strategy is to provide technical  solutions 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) Many 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  wheel,  while
another of the Company's sensors instantly  measures and reports the presence of
yaw forces which if  excessive  could cause the vehicle to spin out or fishtail.
The automation system relies on these sensors to compare the driver's  indicated
direction  with  the  actual  result  and  can  then  take   corrective   action
automatically. To this end the Company provides special GyroChip quartz sensors.


                                       3
<PAGE>

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

         (3) Advanced  control  systems in  tractors,  trucks,  automobiles  and
construction  equipment  need  position  data in order to control  implements on
tractors  and adjust  engine  speed and other  automated  functions  on all such
equipment and vehicles. The Company's  potentiometers provide the necessary data
for  steering,  throttle and seat position as well as for  positioning  tools on
industrial or off-road equipment.

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

         (5) 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." Factory automation  customers typically use optical encoders in pick and
place robots and in other position control applications.

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

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

         (8) Various medical systems require compact, high reliability, air flow
and  pressure  regulation.  The Company  provides  motors for blower  assemblies
and/or magnetic actuators for fast acting pressure regulating valves.

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

Customers and Markets

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

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

         The Company's  brands have been well  established  in North America for
many  years  and  were   distributed   during  the  past  fiscal  year   through
Technologies'  sales force to more than 7,400  different  commercial  customers,
principally in the United  States.  These  customers  include both end users and
original equipment  manufacturers.  The Company ships 91% of sales to commercial
customers,  with  approximately  56% to the  automotive  market and 44% to other
industrial markets.  The value of individual orders from industrial customers is
typically less than $100,000.

         Sales from operations to the U.S.  Government (or prime contractors who
manage government funded projects) represented approximately 9% of the Company's
net sales in fiscal 2002, 8% in fiscal 2001 and 9% in fiscal 2000. One customer,
Continental Teves AG & Co.  ("Continental  Teves"),  accounted for approximately
39%, 49% and 37% of net sales in fiscal year 2002, 2001 and 2000,  respectively.
In fiscal 2002,  approximately  50% of the Company's  sales  occurred in foreign
markets with approximately 4% sold in foreign currency.

         The Company also seeks to use its  proprietary  sensor  capabilities to
create value-added  subsystems or products. The goal is to make such high margin
products, enabled by the Company's proprietary technology, a growing part of the
Company's business.


                                       4
<PAGE>

For  example,  the  Company  can  provide  position  feedback  inside a magnetic
actuator creating a "smart" actuator.

Products and Proprietary Systems

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

          1.   Traditional sensors;

          2.   Micromachined sensors;

          3.   Magnetic actuators and motors; and

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

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

   Traditional Sensors

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

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

         Traditional    Accelerometers.    Traditional    accelerometers   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 linear and angular motion.

   Micromachined Sensors

         Rate Sensors. A rate sensor  provides 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 and flight control needs in aircraft and missiles,  stabilization of
satellites,  stabilization  control of  antennae  on  aircraft,  ships and other
moving  platforms,  navigation  of aircraft and  vehicles,  and for  intelligent
vehicle stability,  roll-over and navigation systems in the automotive industry.
Technologies  produces  miniature,  solid  state  quartz rate  sensors  based on
innovative  and  proprietary  chemical  micromachining  of a single element from
crystalline quartz using photolithographic  methods similar to those used in the
manufacture  of silicon  semiconductor  chips.  The  advantages  of quartz  rate
sensors over  traditional  mechanical units are increased  reliability,  reduced
size, and lower production and life cycle costs.  This family of rate sensors is
known as the GyroChip.

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

         Pressure   Sensors.   Pressure  sensors  measure   absolute,   gage  or
differential  pressure from vacuum to 10,000 psi.  Various sensing  technologies
are used,  including  silicon  micromachined  systems  used for  commercial  and
industrial markets. The


                                       5
<PAGE>


Company provides standard products as well as application  specific solutions to
pressure measurement requirements.

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

    Magnetic Actuators and Motors

         Magnetic  Actuators.  Magnetic  actuators  are used in place of cams or
motors to achieve  fast and precise  control of short  stroke  linear or limited
rotary motion.  Actuators using very  high-energy  magnets are also produced for
specialized   applications  requiring  intense  force,  torque  or  acceleration
relative to the size of the device.

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

   Engineered Subsystems

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

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

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

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

Backlog

         Backlog  figures for the Company at September 28, 2002 and at September
29, 2001, were $72,639,000 and $76,272,000, respectively.

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

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


                                       6
<PAGE>


         Backlog figures for the Company  include  aggregate  contract  revenues
remaining to be earned by the Company,  principally over the next twelve months,
for scheduled deliveries under existing contracts.  Some contracts undertaken by
Technologies extend beyond one year. Accordingly,  portions of certain contracts
are carried  forward  from one year to the next as part of  backlog.  All orders
considered  backlog for the Company as of September  28, 2002 are  scheduled for
shipment  during  fiscal  2003.  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
Bosch,  Danaher Corp.,  Litton,  Panasonic,  Rockwell  International,  Invensys,
Siemens  AG  and  General  Electric.   There  are  smaller  or  product-specific
companies,  some of whose products compete with those of the Company,  including
CTS Corp.,  Heidenhain,  Silicon Sensing Systems,  Kulite  Semiconductor,  Servo
Magnetics Corp., Bourns, Inc., Kavlico Corp. and BI Technologies Corp.

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

Manufacturing

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

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

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

Research and Development

         The Company's  research and  development  focus has included  improving
performance and yields of existing products, with special emphasis on the quartz
sensors  used in high  accuracy  IMU's and high volume yaw rate  sensors for the
automotive industry. Substantial effort has also been devoted to the development
of efficient  manufacturing  methods  necessary for  competitive  pricing of the
Company's  products while  maintaining  the required  quality for the automotive
market.  The Company has begun  transition  to the next  generation  quartz fork
sensor. Value engineering reduced the size and thickness of this next generation
fork  enabling  faster  etch time and nearly  doubling  the forks per wafer from
prior generation 16 forks per wafer to current configuration 30 forks per wafer.
Several patent  applications for this  configuration  were filed and to date one
has been issued.

         During the 2002 fiscal  year,  the Company  continued  development  and
commercialization of a new non-contacting angular position sensor referred to as
NCAPS.  The development was driven by the Company's  perception of market demand
for a technology  usable in high volume  applications  (e.g.,  steering sensors,
medium resolution  absolute angular position  measurement  sensors),  that would
overcome the  limitations  of contacting  sensors as well as the  limitations of
currently available  non-contacting  sensors. The design and architecture of the
NCAPS (essentially a digitally processed  proprietary  transceiver sensor unit),
when combined  with the Company's  existing  manufacturing  expertise,  may lend
itself to high volume  production.  The Company  believes  applications for this
technology may cover a wide spectrum within the automotive and industrial market
sectors. The Company also continued to work with customers on applications using
a dual output hall effect angular position sensor for use in heavy duty off road
and military applications.


                                       7
<PAGE>

         Management of the Company  believes that its future success will depend
in part on its  ability to continue to enhance  its  existing  products,  and to
develop and introduce new products that maintain technological leadership,  meet
a wider range of customer needs and achieve market acceptance.  Accordingly, the
Company's  internally  funded  research,  development  and  related  engineering
expenditures were approximately $15.4 million,  $8.8 million and $8.9 million in
fiscal 2002, 2001 and 2000, respectively. In addition,  customer-funded research
and development  expenditures  charged to cost of sales were $0.5 million,  $0.2
million and $0.6 million, respectively, for the same periods. Development of the
Company's portfolio of rate sensors,  including the NCAPS, comprised most of the
prior years'  customer-funded  research and development  expenditures.  As these
sensors have moved from the  development  stage to production,  there has been a
corresponding decrease in customer-funded research and development expenditures.

         From time to time, the Company's  research and development  efforts may
result in the development of proprietary technology only tangentially related to
the  Company's  core  business.  During  fiscal 2000,  the Company  undertook to
distribute shares in a majority-owned  subsidiary,  OpticNet, Inc. ("OpticNet"),
founded to exploit such  derivative  technology,  to its  stockholders.  Certain
proprietary  technology related to and useful in the optical networking industry
was  contributed  to OpticNet at such time.  At the close of business on October
30,  2000,   Technologies   declared  a  distribution  to  its  stockholders  of
approximately   42%  of  the   outstanding   securities  of  OpticNet.   In  the
distribution, each holder of record of Technologies common stock as of the close
of business on October 30, 2000 received one share of OpticNet  common stock for
every two shares of  Technologies  common  stock  held,  and cash in lieu of any
fractional shares of OpticNet common stock. OpticNet has deferred development of
future  fiber  optic  components  and  subsystems  for use in  telecommunication
systems  until  additional  external  funding is  available.  Management  of the
Company  views  OpticNet's  ability to continue as a stand alone  entity  highly
uncertain,  absent significant  positive  developments in the optical networking
industry and new opportunities for OpticNet.

Employees

         As of September 28, 2002,  Technologies had 1,104 employees,  including
153 in research,  development  and  engineering,  125 in  administration,  57 in
marketing  and sales,  and 769 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  currently  hold  89  U.S.  patents  and 36  foreign  patents  with
expiration  dates ranging from  February  2003 to January 2021.  Because many of
these patents relate to technology that is important to certain of the Company's
products, the Company considers these patents to be significant to its business.

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

Environmental Matters

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

Government Regulation

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


                                       8
<PAGE>

Facility Security Clearance

         The Company  has several  facility  security  clearances  from the U.S.
Government.  During  fiscal 2002 the Company did not have any net sales  derived
from work  requiring  such  clearance,  but these  sales are  expected in future
years.  A portion of the Company's net sales in fiscal 2001 and 2000 was derived
from work for which this clearance was required.  Continuation of this clearance
requires  that the  Company  remain  free from  foreign  ownership,  control  or
influence  (FOCI).  In  addition,  the  Company is  required  to comply with the
regulations  promulgated by the Defense Security Service (DSS), 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 DSS  noncompliance  that  would  cause  any  of its  security
clearances to be revoked.

Regulation of Foreign Sales

         Certain of Technologies' 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 to foreign customers constituted  approximately 50%, 56% and
45% of revenues  for fiscal  2002,  2001 and 2000,  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

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

Competition

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

Rapid Technological Change; Research and Development Efforts

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

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

         The Company has experienced  manufacturing quality problems in the past
and could experience  similar  problems in the future.  Certain of the Company's
products are designed for use in critical safety and mission  critical  systems.
During the Company's continuing efforts to increase manufacturing and production
capabilities to meet market demand, high quality


                                       9
<PAGE>

standards  for the  Company's  products  must be  maintained,  or risk  customer
dissatisfaction,  damage to the Company's  reputation,  or significant liability
claims if the Company's products contain undetected errors or inaccuracies.  The
Company  attempts  to  contractually  limit  exposure  to  liability  claims  by
customers,  but this may be  insufficient  in the face of very large  claims and
does not  preclude  all  potential  claims.  As a  result,  product  recalls  or
significant  liability  claims,  whether  or  not  successful,  could  harm  the
Company's reputation and business.

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

         Technologies  is continuing the process of adding  production  capacity
for its automotive yaw rate sensors to respond to the expected future demand for
quantities  required by the automobile market. The Company has relatively recent
experience in large-scale  manufacturing  having produced 1.8 million automotive
quartz rate sensors in fiscal 2001.  In fiscal  2002,  the Company  manufactured
approximately  1.2  million  units of its  automotive  quartz rate sensor in its
Concord,  California facility, which supplied sensors to approximately 5% of new
automobiles  sold in the North American and European  markets in fiscal 2002. In
years prior to fiscal 2001, the Company  encountered  difficulties in scaling up
production of the GyroChip  sensors,  including  problems  involving  production
yields,  component supplies and shortages of qualified personnel.  Although many
of these issues were resolved in fiscal 2001, a continued ramp up is expected by
management  beyond  fiscal  2002.  A failure by the Company to  manufacture  and
deliver  products in a timely  fashion could harm the Company's  reputation  and
cause the loss of potential  future sales and the Company could be forced to pay
penalties to customers  in the event of contract  breach for delivery  failures.
These types of manufacturing  delays can occur for various reasons,  including a
lack of manufacturing  capacity, the failure of a supplier to provide components
in a timely fashion or with acceptable  quality,  or an inability by the Company
to  attract  and  retain  qualified  manufacturing  personnel.  There  can be no
assurance that future manufacturing  difficulties or product recalls,  either of
which could have a material adverse effect on the Company's business,  financial
condition and results of operations, will not occur.

Manufacturing Processes and Equipment

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

Dependence Upon Key Personnel

         The  Company   depends  to  a  significant   degree  on  the  continued
contribution of key management and technical personnel. The loss of the services
of one or more  key  employees  could  have a  material  adverse  effect  on the
Company. The Company's success also depends on its ability to attract and retain
additional  highly  qualified  management  and  technical   personnel.   Skilled
technical  personnel in the  Company's  industry are in short  supply,  and this
shortage is likely to continue for some time. As a result, competition for these
people is intense and they are often subject to offers from competing employers,
particularly in northern  California  where certain of the Company's  facilities
are located and there is a high concentration of technology companies. There can
be no assurance  that the Company will be able to retain its key  employees,  or
that it will be able to  attract  or  retain  additional  skilled  personnel  as
needed.  The Company does not  currently  maintain  key person  insurance on any
employee. See  "Business-Employees" and "Part I-Directors and Executive Officers
of the Company."

Dependence Upon Key Suppliers

         Although the majority of the  components  used in Company  products are
available from multiple sources, several components are built or provided to the
Company's  specifications.  Such components  include quartz,  supplied by Sawyer
Research Products, Inc.; CAN Bus and microprocessor chip sets, supplied by Texas
Instruments; housings, supplied by C&H Casting; gold pellets, supplied by Vacuum
Engineering  & Material Co.,  Inc.;  PWB/ case  assemblies,  supplied by Kimball
Electronics  Group;  injection  molding,  supplied  by  L.  W.  Reinhold,  Inc.;
substrates,  supplied by Aurora Circuits,  LLC; two types of ASIC's, supplied by
National Semiconductor Corporation and Flextronics Semiconductor,  Inc.; and two
types of LED's,  supplied by Optek  Technology,  Inc.  and Opto Diode Corp.  The
Company currently relies on single suppliers for these components.  Any increase
in the cost of the  components  used in the  Company's  products  could make the
Company's  products  less  competitive  and lower the  Company's  gross  margin.
Additionally,  the Company's  single source suppliers could enter into exclusive
agreements with or be


                                       10
<PAGE>

acquired by one of the Company's  competitors,  increase their prices, refuse to
sell their products to the Company,  discontinue products or go out of business.
To the extent  acceptable  alternative  suppliers  are available to the Company,
identifying them and entering into  arrangements with them is difficult and time
consuming   requiring    validation   of   quality   standards.    Additionally,
consolidations  among the Company's  suppliers could result in other sole source
suppliers.  There  can be no  assurance  that  there  will not be a  significant
disruption in the supply of such  components  in the future,  or in the event of
such disruption,  that the Company will be able to locate alternative  suppliers
of the components with the same quality at an acceptable  price. An interruption
in the supply of components used in the  manufacture of the Company's  products,
particularly as the Company scales up its manufacturing activities in support of
commercial  sales,  could  have a  material  adverse  effect  on  the  Company's
business, financial condition and results of operations.

Dependence Upon Key Customers

         Approximately  39% of the net sales of the  Company in fiscal 2002 were
to  Continental  Teves for the  automotive  quartz rate sensor  product  used in
automobile stability control systems. Continental Teves integrates the Company's
sensor product into independently  developed products and markets the integrated
systems to various customers in the automobile  industry.  This concentration of
sales is expected to expand in fiscal 2003 and beyond.  The Company is currently
transitioning to its next generation  automotive quartz yaw rate sensor product,
a  multi-sensor  cluster  configuration.  The  Company  expects to  continue  to
increase    production   of   the   GyroChip   sensors   (see    "Business--Risk
Factors--Manufacturing  Experience Risk; Scale-Up Risk; Product Recall Risk") to
meet the  requirements  of its contracts with  Continental  Teves in FY 2003 and
beyond.  In addition,  the Company is in discussion with  Continental  Teves and
other automotive  customers that could lead to extensions of existing  contracts
and to new contracts. There can be no assurance that the Company will be able to
retain  or extend  its  contracts  with  Continental  Teves or other  automotive
customers,  or obtain new contracts on favorable terms, or that the product will
continue to achieve  continuing growth beyond the end of the current  contracts,
any of which could have a material  adverse  effect on the  Company's  business,
financial condition and results of operations.

Government Regulation

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

Contracting with the U.S. Government

         Approximately  9%, 8% and 9% of the net sales of Technologies in fiscal
2002,  2001 and 2000,  respectively,  were derived from  contracts with the U.S.
Government  or  under  subcontract  to  other  prime  contractors  to  the  U.S.
Government.  Because a significant portion of Technologies'  business is derived
from  contracts  with the  Department  of Defense or other  agencies of the U.S.
Government,  the Company's  business is sensitive to changes in U.S.  Government
spending  policies that can have  significant  variations  from year to year. At
various times,  the Company's  results have been adversely  affected by contract
cutbacks and there can be no assurance that the Company's  results of operations
will not in the future be materially  and adversely  affected by changes in U.S.
Government  procurement  policies or reductions in U.S. Government  expenditures
for products furnished by the Company.

         Under  applicable  regulations,  various  audit  agencies  of the  U.S.
Government  conduct regular audits of contractors'  compliance with a variety of
U.S.  Government  regulations.  The U.S. Government also has the right to review
retroactively the cost records under most U.S.  Government  contracts.  Contract
prices may be  adjusted  in the event the U.S.  Government  determines  that the
Company  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 U.S.  Government are competitive  fixed price
or negotiated  fixed price  contracts,  although  cost-plus-fixed-fee  contracts
provided approximately 1.5% of the Company's net sales in fiscal 2002. 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.


                                       11
<PAGE>

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

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

Dependence on Proprietary Intellectual Property

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

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

International Sales

         Sales to customers  located  outside the United  States  accounted  for
approximately  50%, 56% and 45% of the Company's net sales in fiscal 2002,  2001
and 2000,  respectively.  Most of these sales were to Continental Teves, located
in Germany.  The  Company  expects  that  international  sales will  continue to
represent a significant  portion of the Company's  product revenues and that the
Company  will be subject to the normal  risks of  international  sales,  such as
export laws, currency fluctuations,  longer payment cycles, greater difficulties
in accounts receivable  collections and complying with a wide variety of foreign
laws.   Although  the  Company  has  not  previously   experienced   significant
difficulties  under  foreign  law in  exporting  its  products,  there can be no
assurance that the Company will not experience such  difficulties in the future.
In addition,  because the Company  primarily  invoices its foreign sales in U.S.
dollars,  fluctuations  in exchange  rates could affect demand for the Company's
products  by causing  its prices to be out of line with  products  priced in the
local currency.  Such  difficulties  could have a material adverse effect on the
Company's  international  sales and a resulting  material  adverse effect on the
Company's business, operating results and financial condition.


                                       12
<PAGE>

Financial Risk Covered by Insurance or Uninsured

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

Possible Volatility of the Company's Common Stock Price

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

Voting Control by Officers, Directors and Affiliates

         At September  28, 2002 the  Company's  officers and directors and their
affiliates beneficially owned approximately 24% of the outstanding shares of the
Company's  Common  Stock.  Accordingly,   together  they  have  the  ability  to
significantly  influence  the  election  of the  Company's  directors  and other
corporate  actions  requiring  shareholder   approval.   Such  concentration  of
ownership  may have the effect of delaying,  deferring or preventing a change in
control of the Company.

Certain Charter Provisions

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

Risk of Extended Economic Downturn

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

         In  addition,  this  economic  downturn  has  been  exacerbated  by the
terrorist  attacks in New York and Washington,  D.C., which caused disruption to
commercial  activities in the United States and  internationally.  The long-term
impact of the terrorist  attacks on the economy as a whole,  and specifically to
the automotive  industry,  government  programs,  and other  industries to which
Technologies  sells, is not known at this time. Any future terrorist  attacks or
outbreaks, or escalation of


                                       13
<PAGE>


hostilities  arising out of any attacks, or concerns that attacks or hostilities
may  occur,  could  adversely  affect  the United  States  economy  in  general,
including  the  capital  markets,  which  in turn  could  adversely  impact  the
worldwide economy and prolong or intensify the current downturn.


                                       14
<PAGE>

DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

     The directors and executive officers of the Company and their ages as of
December 1, 2002 are as follows:

<TABLE>
<CAPTION>

                    Name                       Age                         Position
                    ----                       ---                         --------

<S>                                             <C>    <C>
     Charles Crocker........................    63     Chief Executive Officer and Chairman of the Board of Directors

     Dr. Asad Madni.........................    55     President, Chief Operating Officer and Director

     John LaBoskey..........................    49     Senior Vice President and Chief Financial Officer

     Robert R. Corr.........................    56     Vice President, Secretary, Treasurer and Controller

     Gerald D. Brasuell.....................    54     Vice President and General Manager, BEI Systron Donner
                                                       Automotive Division

     David Pike.............................    49     Senior Vice President Divisional Administration and Human
                                                       Resources

     Richard M. Brooks(1)(2)................    74     Director

     George S. Brown(2).....................    81     Director

     C. Joseph Giroir, Jr.(1)(2)............    63     Director

     Dr. William G. Howard, Jr.(1)..........    61     Director

     Gary D. Wrench ........................    69     Director
</TABLE>

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

Directors

         Mr.  Brooks  began  serving  as a  Director  in June 1997  prior to the
Distribution and resulting spin-off of the Company from Electronics in September
1997. From 1987 until his resignation as a result of the Distribution, he served
as  a  director  of  Electronics.  He  is  currently  an  independent  financial
consultant, and also serves as a director of Granite Construction,  Inc. and 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 resulting spin-off of the Company from Electronics in September
1997.  He served as a  director  of  Electronics  from  October  1974  until his
resignation as a result of the  Distribution.  Mr. Brown served as President and
Chief  Executive  Officer of Electronics  from October 1974 until July 1990. Mr.
Brown  served  from 1971 until 1974 as  Executive  Vice  President  and  General
Manager of Baldwin  Electronics,  Inc., a subsidiary of D.H. Baldwin Company and
the predecessor of Electronics.  Mr. Brown holds a B.S.E.E.  from the University
of Oklahoma.

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

         Mr.  Giroir  began  serving  as a  Director  in June 1997  prior to the
Distribution and resulting spin-off of the Company from Electronics in September
1997.  He was a director of  Electronics  from 1978 until his  resignation  as a
result of the Distribution.  He served as the Secretary of Electronics from 1974
to early  1995.  Mr.  Giroir is the sole  member  of  Giroir,  PLLC.  He is also
President of Arkansas International Development Corporation II, LLC and Chairman
of the Board of Directors for Clinical  Study  Centers,  LLC. Mr. Giroir holds a
B.A. and an L.L.B. from the University of Arkansas and an L.L.M. from Georgetown
University.


                                       15
<PAGE>

         Dr.  Howard  began  serving  as a  Director  in June 1997  prior to the
Distribution and resulting spin-off of the Company from Electronics in September
1997. He was a director of Electronics  from December 1992 until his resignation
as a result of the  Distribution.  He is  currently  an  independent  consulting
engineer in microelectronics and technology-based  business planning.  From 1987
to 1990,  Dr.  Howard  served  as  Senior  Fellow  of the  National  Academy  of
Engineering  and,  prior to that time,  held various  technical  and  management
positions  with  Motorola,  Inc.,  most  recently as Senior Vice  President  and
Director of Research and Development. He currently serves as director of RAMTRON
International Corp., Credence Systems,  Inc.,  Thunderbird  Technologies,  Inc.,
Xilinx,  Inc., and Arete,  Inc., a private company.  Dr. Howard holds a B.S.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. Madni was appointed  President and Chief  Operating  Officer of the
Company in May 2000. He began  serving as a Director and as a Vice  President of
the Company in June 1997 prior to the Distribution and resulting spin-off of the
Company from Electronics in September 1997. Dr. Madni was appointed President of
BEI Sensors & Systems  Company,  Inc. in October  1993,  which was formed by the
consolidation  of BEI  Motion  Systems  Company  and the BEI  Sensors & Controls
Group,  of which Dr.  Madni had been  President  since  October  1992.  Prior to
joining  Electronics  in 1992,  he served over 17 years in various  senior level
technical  and  executive   positions   with  Systron  Donner   Corporation,   a
manufacturer  of avionics  and  aerospace  sensors and  subsystems.  He was most
recently Chairman, President and CEO of Systron Donner Corporation, a subsidiary
of Thorn/EMI.  Dr. Madni's degrees  include a B.S. and M.S. in Engineering  from
the  University of  California,  Los Angeles,  and a Ph.D. in  Engineering  from
California Coast University. He is also a graduate of the Engineering Management
Program from the California Institute of Technology,  the AEA/Stanford Executive
Institute from Stanford  University,  and the Program for Senior Executives from
the Massachusetts Institute of Technology,  Sloan School of Management.  He is a
Chartered  Engineer and Fellow of the  Institute of Electrical  and  Electronics
Engineers,  the  Institution  of  Electrical  Engineers,  the  Institute for the
Advancement  of  Engineering,  the New York  Academy of  Sciences,  the American
Association for the Advancement of Science,  and the International  Biographical
Association.

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

Staggered Board of Directors

         The  Company  has a staggered  Board of  Directors,  which may have the
effect of  deterring  hostile  takeovers  or  delaying  changes  in  control  of
management  of the Company.  For purposes of  determining  their term of office,
directors are divided into three  classes,  with the term of office of the Class
III directors to expire at the 2003 annual meeting of stockholders,  the term of
office  of the  Class I  directors  to  expire  at the 2004  annual  meeting  of
stockholders  and the term of office of the Class II  directors to expire at the
2005 annual  meeting of  stockholders.  Class III consists of Mr. Brooks and Dr.
Howard;  Class I consists of Mr. Brown and Mr. Crocker; and Class II consists of
Mr.  Giroir,  Dr.  Madni and Mr.  Wrench.  Directors  elected to  succeed  those
directors whose terms expire will be elected to a three-year term of office. All
directors hold office until the next annual  meetings of  stockholders  at which
their  terms  expire  and until  their  successors  have been duly  elected  and
qualified. Executive officers serve at the discretion of the Board. There are no
family relationships between any of the officers and directors.

Executive Officers

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

         Mr.  Brasuell  is Vice  President  and  General  Manager of the Systron
Donner Automotive  Division of BEI  Technologies.  Mr. Brasuell was appointed to
this  position in  December  2002.  He served as General  Manager of the Systron
Donner  Inertial  Division from October 1995 to February  2002.  Until  December
2002, Mr. Brasuell held a Corporate Development  Position.  From 1985 until 1995
Mr.  Brasuell held executive  staff level  positions at Systron Donner  Inertial
Division in Program Management and


                                       16
<PAGE>

Contracts, Advanced Product Development and Manufacturing. Between 1976 and 1986
Mr. Brasuell held various  technical and management  positions at Systron Donner
Inertial Division.

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

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

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


                                       17
<PAGE>

ITEM 2.  PROPERTIES

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

The Company has identified a property as excess space, see Note 16.

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



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


Maumelle, Arkansas                    Owns  approximately   54,000  square  foot
                                      manufacturing, engineering, administrative
                                      and research and development facility.

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

Sylmar, California                    Leases  approximately  74,000  square foot
                                      manufacturing,       engineering       and
                                      administrative facility.

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

SanMarcos, California                 Leases  approximately  35,000  square foot
                                      manufacturing,       engineering       and
                                      administrative facilities.

Goleta, California                    Owns  approximately   25,000  square  foot
                                      manufacturing,       engineering       and
                                      administrative facility.

Hayward, California                   Leases  approximately  15,000  square foot
                                      manufacturing,  research  and  development
                                      facility.

Strasbourg, France                    Owns and  subleases  approximately  20,000
                                      square foot manufacturing, engineering and
                                      administrative facility.


                                       18
<PAGE>

ITEM 3.  LEGAL PROCEEDINGS

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

During fiscal 2002, BEI Defense Systems  Company,  a discontinued  subsidiary of
Technologies, was subject to litigation with a former landlord regarding damages
to real  property  formerly  leased.  The United States  District  Court for the
Western District of Arkansas entered a judgment,  including  attorney's fees, of
approximately  $0.7 million.  Technologies  is in the process of contesting  the
award and has  determined  that it will  appeal the  judgment.  The  Company has
reserved $0.7 million for this judgment during the fiscal quarter ended June 29,
2002.

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

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

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

    2001 Fiscal Year                                            Cash Dividend
    (ended 9/29/01)           High             Low                 Declared
--------------------------------------------------------------------------------
    Fourth Quarter           $28.60           $13.50                $0.01
    Third Quarter            $37.00           $15.69                $0.01
    Second Quarter           $18.56           $11.00                $0.01
    First Quarter            $21.69           $ 9.94                $0.045


         As of December  11, 2002,  there were  approximately  4,300  holders of
record of the Company's  common stock.  The Board of Directors  declared and the
Company paid cash dividends per share of common stock noted above in fiscal 2002
and 2001.  Payment of dividends is within the discretion of the Company's  Board
of Directors,  will be subject to periodic  review and will depend,  among other
factors,  upon  the  earnings,  capital  requirements,   operating  results  and
financial  condition of the Company from time to time. There are no restrictions
on the Company's  ability to pay  dividends  provided the covenants set forth in
its bank credit  agreement and Senior Note Agreement are met (see  "Management's
Discussion  and  Analysis of  Financial  Condition  and Results of  Operations -
Liquidity  and  Capital  Resources"  and  Note 4 to the  Consolidated  Financial
Statements).  The  covenants  primarily  concern  certain  operating  ratios and
minimum balances of tangible net worth.

A dividend of $0.01 per share was declared November 8, 2002 to shareholders of
record on November 25, 2002.


                                       19
<PAGE>

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------------------------------
         Plan Category             Number of securities to be      Weighted-average exercise         Number of securities
                                     issued upon exercise of     price of outstanding options,      remaining available for
                                      outstanding options,            warrants and rights        future issuance under equity
                                     warrants and rights (a)                                          compensation plans
                                                                                                     (excluding securities
                                                                                                   reflected in column (a))
-----------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>                             <C>                            <C>
Equity Compensation plans
approved by security holders:

   1997 Equity Incentive Plan                582,349                         $10.84                         242,949

Equity Compensation plans not
approved by security holders:                     --                             --                              --


Total                                        582,349                         $10.84                         242,949
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

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

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
                                                                            Years Ended
                                           September 28,    September 29,   September 30,        October 2,      October 3,
                                                    2002             2001            2000              1999            1998
                                                          (amounts in thousands except per share amounts)
----------------------------------------------------------------------------------------------------------------------------
<S>                                             <C>              <C>             <C>               <C>             <C>
Statement of Operations Data:
Net sales                                       $185,638         $238,985        $219,216          $159,403        $124,264
Income (loss) from continuing
   operations (before extraordinary
   item)                                          (8,806)          11,717           9,607             5,339           2,515
Diluted income (loss) from continuing
   operations per share (before
   extraordinary item and discontinued
   operations)                                     (0.63)            0.81            0.65              0.37            0.17
Shares used in computing diluted
   income (loss) per share (before
   extraordinary item)                            13,993(1)        14,444(1)       14,807(1)         14,508(1)       14,548(1)
Dividends per common share                          0.04(1)         0.075(1)         0.04(1)           0.04(1)         0.04(1)
Balance Sheet Data:
Working capital                                 $ 35,481         $ 43,764        $ 41,808          $ 37,937        $ 36,124

Total assets                                     126,096          146,357         138,288           123,360         109,515

Long-term debt (excluding current
   portion)                                       22,500           29,556          36,614            36,705          37,157
Stockholders' equity                              52,359           60,320          49,096            45,843          40,194
----------------------------------------------------------------------------------------------------------------------------
</TABLE>


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


                                       21
<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 in the "Business--Risk  Factors"--section of
this Report.

         See  "Critical  Accounting  Policies  and the Use of  Estimates"  for a
description of the Company's critical accounting policies.

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

                                                                                      Years Ended
                                                                                2002       2001      2000
                                                                                ----       ----      ----
<S>                                                                           <C>        <C>       <C>
Net sales...........................................................          100.0%     100.0%    100.0%

Cost of sales.......................................................           72.4       72.8      72.3
                                                                              -----      -----     -----
Gross profit........................................................           27.6       27.2      27.7

Operating expenses:

     Selling, general and administrative expenses...................           16.6       14.7      15.6

     Research, development and related expenses.....................            8.3        3.7       4.1

Provision for excess capacity.......................................            5.5        0.0       0.0

Provision for uncollectables from a related party...................            1.7        0.0       0.0

Provision for product line move and other...........................            1.2        0.0       0.0
                                                                              -----      -----     -----

Earnings (loss) before interest and taxation (EBIT)..................          (5.7)       8.8       8.0

Other income (expense)..............................................           (0.9)       0.2       0.4

Interest expense....................................................           (1.2)      (1.0)     (1.2)
                                                                              -----      -----     -----

Income (loss) before income taxes...................................           (7.8)       8.0       7.2

Provision (benefit) for income taxes................................           (3.1)       3.1       2.8
                                                                              -----      -----     -----
Net income (loss)...................................................           (4.7)%      4.9%      4.4%
                                                                              =====      =====     =====
</TABLE>

Net Sales

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

         During fiscal 2001, net sales for the Company  increased 9.0% to $239.0
million from $219.2 million in fiscal 2000,  reflecting  continuing increases in
sales  due to growth  in the  automotive  industry's  demand  for the  Company's
GyroChip sensors used in automotive  stability systems.  Sales to the automotive
industry,  including sales of the Company's GyroChip sensors, increased 29.0% to
$138.7  million from $107.5  million in fiscal 2000.  Sales to other  industrial
customers  decreased  $11.2 million to $81.8  million from $93.0 million  during
fiscal 2001 resulting primarily from reduced sales to the semiconductor  capital
equipment  industry.  Government  related sales decreased $0.2 million in fiscal
2001 to $18.5 million from $18.7 million during fiscal 2000.

         The Company's sales to international  customers were approximately 50%,
56%,  and 45% of the  Company's  net  sales  for  fiscal  2002,  2001 and  2000,
respectively. The decrease in international sales in fiscal 2002 is attributable
to competitors supplying yaw rate sensors to the Company's largest customer. The
increase in  international  sales in fiscal 2001 is attributable to increases in
sales of the Company's GyroChip sensors.  The vast majority of sales to non-U.S.
customers are denominated in U.S. Dollars.


                                       22
<PAGE>

Cost of Sales and Gross Profit

         In fiscal 2002,  cost of sales as a percentage  of net sales  decreased
0.4 percentage  points due primarily to a lower  proportion of automotive  sales
with higher than average cost of sales  percentage  offset to some degree by the
impact of improved yields on the new automotive  sensor cluster  product.  There
may  be  additional   margin  rate  variability  in  future  years  due  to  the
introduction  of  new  products,   changes  in  product   pricing,   changes  in
manufacturing  processes  and  volumes,  and  product  life  cycles.  Management
continues  to   undertake   technological   initiatives   designed  to  increase
manufacturing  and  production  efficiencies  and  attempts  to  maintain  close
relationships  with  vendors  and  customers  in an effort  to reduce  costs and
increase margins.

         In fiscal 2001,  cost of sales as a percentage  of net sales  increased
0.5  percentage  points due to  increased  shipments of products  having  higher
average production costs. The Company also continued to expand its manufacturing
capacity for the  production of GyroChip  sensors  resulting in higher costs for
employee hiring and training in fiscal 2001.

Selling, General and Administrative Expenses

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

         Selling,  general and administrative  expenses in fiscal 2001 increased
$0.8 million from $34.3 million in fiscal 2000 to $35.1  million  primarily as a
result of costs incurred to support the increase in sales during fiscal 2001. As
a percentage of sales,  selling,  general and administrative  expenses decreased
0.9  percentage  points to 14.7% in fiscal  2001 from 15.6% in fiscal  2000 as a
result of increased sales.

Research, Development and Related Expenses

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

         Research and development expenses in fiscal 2001 decreased $0.1 million
to $8.8  million  from $8.9  million in fiscal  2000.  The  decrease is due to a
spending reduction primarily associated with SiTek, a majority-owned subsidiary,
partially  offset by  increased  spending  on the  design and  development  of a
non-contacting  position sensor (e.g.  NCAPS) and torque sensing  technology for
industrial and automotive applications.

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

Related Party Expense and Financing

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

         In October 2000, the Company agreed to provide  OpticNet with a line of
credit originally  established for up to $2.0 million,  amended in March 2002 to
allow for  borrowings  by  OpticNet  of up to $3.0  million.  During  the fiscal
quarter ended


                                       23
<PAGE>

June 29, 2002, the Company  suspended the  availability  of advances to OpticNet
under the line of credit,  under which amounts  outstanding at such time totaled
approximately  $2.7  million  in  principal  amount.  In the six  months  ending
September 28, 2002, the Company provided an additional $1.8 million of financing
to OpticNet,  which was advanced  with the intent to convert such cash  advances
into additional equity in OpticNet,  upon terms to be decided.  The $1.8 million
advanced  was  expensed  during  the  third  and  fourth  quarters,   reflecting
OpticNet's  net loss for the  six-month  period  from  March  31,  2002  through
September 28, 2002.  Effective  September 28, 2002,  OpticNet  issued a total of
18,146,420 shares of OpticNet's nonvoting and nonconvertible  Series B Preferred
Stock to the Company, in consideration of $1.8 million advanced during the third
and  fourth  quarters  to  OpticNet  by the  Company.  See Note 11 for a further
description of the relationship with OpticNet.

Provisions

         Provisions for excess capacity, uncollectables from a related party and
for product line moves consisted of  approximately  $10.3 million related to the
expected  future losses on operating  lease  payments on facility and production
assets that partially supported OpticNet's  operations,  as well as $3.1 million
to  reserve  against  nonpayment  on the line of  credit  note  receivable  from
OpticNet and  impairment of the original  investment in OpticNet.  Additionally,
the Company  wrote down  approximately  $2.2 million for a product line move and
other costs to close a facility and relocate manufacturing  activities to a more
cost effective location.

Interest Expense and Other Income

         Interest  expense was $2.3  million,  $2.5  million and $2.6 million in
fiscal 2002, 2001 and 2000,  respectively.  Interest  expense as a percentage of
sales  increased  slightly  in fiscal  2002 as  compared  to fiscal  2001 due to
reduced sales and changes in the  Company's  debt levels.  The  Company's  fixed
interest  rate debt  decreased  in fiscal  2002 due to a  principal  payment  on
long-term  debt in November  2001.  In addition,  during fiscal 2002 the Company
borrowed on, and fully repaid,  its line of credit as described under "Liquidity
and Capital  Resources"  below. The Company's  average interest rate declined in
fiscal  2002 due to use of lower cost bank  borrowings.  The  Company's  average
interest rate in fiscal 2001  approximated  the average  interest rate in fiscal
2000.

         Other net expense of $1.8  million in fiscal 2002 was  comprised of the
Company's  interest in the net loss of OpticNet,  which included severance costs
and other expenses to support their current level of operations. Other income in
2001 and 2000 was  comprised of royalties  and interest  income earned on highly
liquid  investments.  Other  income was $0.5 million and $1.0 million for fiscal
2001and 2000  respectively.  The higher income in fiscal 2000 resulted primarily
from  the  sale in the  second  quarter  of  fiscal  2000 of an  asset  held for
investment for $0.5 million, net.

Income Taxes

         The Company's  effective tax rate was 39.6%, 39.1% and 39.3% for fiscal
2002, 2001 and 2000, respectively. The effective tax rate primarily reflects the
statutory U.S.  federal tax rate and the weighted average tax rate of the states
in which the Company  conducts  business.  The net  increase  of 0.5  percentage
points in fiscal 2002 from fiscal 2001  results  from the Company  generating  a
pre-tax loss in the current  year and the adverse  impact that result has on all
the  permanent  difference  items,  in  addition  to a decrease in both the U.S.
federal  statutory  rate and the tax  benefit  related  to  foreign  sales.  The
decrease of 0.2  percentage  points in fiscal 2001 from fiscal 2000 results from
increased  federal and state tax credits and an increase in tax benefits related
to foreign  sales for the Company  during  fiscal 2001.  Other  factors may have
favorable and unfavorable  effects upon the Company's effective tax rate in 2003
and  subsequent  years.   These  factors  include,   but  are  not  limited  to,
interpretations  of  existing  tax laws,  changes in tax laws and rates,  future
levels of  research  and  development  spending,  and  future  levels of capital
expenditures.

Deferred Income Taxes

         At September 28, 2002, the Company had net current  deferred income tax
assets of $8.3 million and net  non-current  deferred  income tax assets of $2.6
million.  Realization  of the net  deferred  tax  assets is  dependant  upon the
Company's ability to either carry back the reversal of the underlying  temporary
differences and obtain a refund of taxes previously paid or generate  sufficient
taxable  income in future years to benefit  from the reversal of the  underlying
temporary differences.

Liquidity and Capital Resources

         During fiscal 2002,  operations of the Company provided $2.8 million in
cash.  A net  loss of $8.8  million  plus  non-cash  charges  for  depreciation,
amortization   and  provisions  of  $6.9  million,   $2.1  million,   and  $15.6
respectively, together with a


                                       24
<PAGE>

decrease  in trade  receivables,  inventory,  and  assets  held for sale of $1.5
million, $2.3 million, and $2.4 million, respectively, provided $22.0 million in
cash.  These cash inflows were offset by  decreases in other  current  assets of
$3.0 million,  deferred income taxes of $1.7 million and trade accounts payable,
accrued expenses and other liabilities of $14.5 million.

         Investing activities for the Company in fiscal 2002 consisted primarily
of the purchase of $7.6 million in capital equipment to support planned capacity
increases for future production. The majority of the equipment purchased was for
the production of automotive quartz GyroChip sensor products.  This cash outflow
was offset by the receipt of $0.4 million in cash from the disposal of equipment
and  decrease  in other  assets of $1.1  million  resulting  in net cash used by
investing activities of $6.1 million.

         Fiscal 2002 financing  activities  primarily consisted of debt payments
of $52.0  million,  which  consisted of $7.0 million in principal paid on senior
notes  payable,  as well as $45.0 million in payments on the  Company's  line of
credit.  Other cash used by financing  activities included cash purchases of the
Company's stock at open market prices for $1.6 million and dividend  payments of
$0.6  million.  These cash  outflows  were  offset by  proceeds  from  recurring
borrowing on the Company's  line of credit of $45.0  million,  tax benefits from
exercised stock options of $0.4 million, and proceeds of $0.1 million from stock
issuances  related to the exercise of options  granted under the Company's  1997
Equity  Incentive Plan,  resulting in net cash used for financing  activities of
$8.7 million during fiscal 2002.

         The  Company  relies on its  $25.0  million  line of  credit  and $28.0
million of senior note  funding,  of which annual  payments are due in the first
fiscal  quarter of the following  year, to sustain  operations.  There can be no
assurance that these  facilities will continue to be available to sustain future
operating levels.

         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.

CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES

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

Product Warranty

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

Allowance for Doubtful Accounts

         The Company  continuously  monitors  collections  and payments from its
customers and maintains  allowances for doubtful  accounts based upon historical
experience  and any  specific  customer  collection  issues that the Company has
identified.  While such credit losses have historically been within management's
expectations,  there can be no  assurance  that the  Company  will  continue  to
experience  the same relative level of credit losses that it has in the past. In
addition,  although the Company's sales have historically been to many customers
in a variety of markets, in recent periods, one automotive


                                       25
<PAGE>

customer  accounted  for a significant  portion of the  Company's  net sales.  A
significant  change in the liquidity or financial position of that customer or a
further  deterioration  in the  economic  environment  in  general  could have a
material  adverse  impact  on  the  collectability  of  the  Company's  accounts
receivable  and  future  operating  results,  including  a  reduction  in future
revenues and  additional  allowances for doubtful  accounts.  If, at the time of
shipment,  the  Company  determines  that  collection  of a  receivable  is  not
reasonably  assured,  the  revenue  is  deferred  and  recognized  at  the  time
collection  becomes  reasonably  assured,  which is  generally  upon  receipt of
payment.

Inventories

         The Company  writes down its inventory for estimated  obsolescence  for
the  difference  between the cost of inventory  and the  estimated  market value
based upon  assumptions  about future  demand and market  conditions.  If actual
future demand or market  conditions are less  favorable than those  projected by
management, additional inventory write-downs may be required.

         Inventories are carried  principally at the lower of cost or fair value
and do not exceed net  realizable  value.  Cost is  determined  by the first-in,
first-out (FIFO) method, including material, labor and factory overhead.

Long-Lived and Intangible Assets and Goodwill

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

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

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

         During the quarter  ended March 30,  2002,  the Company  established  a
reserve  for the  closure of a specific  manufacturing  facility.  This  reserve
required the use of estimates.  Though the Company believes that these estimates
accurately  reflect the costs of these  plans,  they relate to matters  that are
inherently uncertain and actual results may be different.

Income Taxes

         The Company  has  significant  amounts of deferred  tax assets that are
reviewed  periodically for recoverability and valued  accordingly.  These assets
are evaluated by using the four sources of taxable income that may be considered
under FAS 109:  (1) Future  reversals  of existing  temporary  differences;  (2)
Taxable income in prior carryback years, if carryback is permitted under the tax
law; (3) Tax planning  strategies  and; (4) Future taxable  income  exclusive of
reversing temporary differences and carryforwards. In the event it is determined
more likely than not that some  portion or all of the  deferred  tax assets will
not be realized,  a valuation  allowance  would be recorded with a corresponding
charge to income in the period such determination occurs.

Litigation

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


                                       26
<PAGE>

Environmental Matters

         The Company reserves for known environmental claims, of which there are
none in fiscal 2002,  when payments  associated  with the claims become probable
and the costs can be reasonably estimated. The Company's environmental reserves,
for all periods  presented,  are recorded at the expected  payment  amount.  The
actual cost of resolving  environmental  issues may be higher than that reserved
primarily due to difficulty  in estimating  such costs and potential  changes in
the status of government regulations.

SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

         Revenues are primarily generated from the sale of electronic devices to
our customers, typically the end-user.

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

Property, Plant and Equipment and Related Depreciation

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

Accrued Expenses and Other Liabilities

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


                                       27
<PAGE>

ITEM 7A.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

         The  Company  has  approximately  $3,000,000  (calculated  based on the
conversion  rate for Euros at September  28, 2002)  permanently  invested in the
assets of Ideacod, S.A.S., located in Strasbourg,  France. The potential loss in
fair value  resulting  from a  hypothetical  10%  adverse  change in the foreign
currency  exchange rate amounts to $300,000,  which would not be material to the
consolidated financial statements.

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

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


                                       28
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


CONSOLIDATED BALANCE SHEETS
BEI Technologies, Inc. and Subsidiaries
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
                                                                             September 28,        September 29,
dollars in thousands except share and per share amounts                               2002                 2001
----------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>                 <C>
ASSETS

Current assets
Cash and cash equivalents                                                           $4,418              $16,438
Investments                                                                          6,727                7,099
Trade receivables:
   Commercial customers, less allowance for doubtful
   accounts (2002--$1,365; 2001--$1,662)                                            22,364               22,734
   United States Government                                                          2,836                4,034
                                                                        -------------------    -----------------
                                                                                    25,200               26,768

Inventories, less inventory reserves (2002-- $2,427; 2001-- $3,755)                 28,538               30,808
Deferred income taxes                                                                8,333                6,322
Assets held for sale                                                                 2,011                4,881
Other current assets                                                                 5,945                5,476
                                                                        -------------------    -----------------
Total current assets                                                                81,172               97,792

Property, plant and equipment
Land                                                                                 4,264                4,294
Structures                                                                          14,717               14,378
Equipment                                                                           61,751               66,496
Leasehold improvements                                                               1,706                1,671
                                                                        -------------------    -----------------
                                                                                    82,438               86,839

Less allowances for depreciation and amortization                                   44,668               49,032
                                                                        -------------------    -----------------
                                                                                    37,770               37,807

Other assets
Tradenames, patents and related assets,
  less amortization (2002--$3,678; 2001--$3,493)                                       331                  424
Technology acquired under license agreements,
  less amortization (2002--$9,068; 2001--$8,077)                                     1,540                2,731
Goodwill, less amortization (2002--$590; 2001--$590)                                 1,612                1,612
Deferred income taxes, non-current                                                   2,587                3,174
Other                                                                                1,084                2,817
                                                                        -------------------    -----------------

                                                                                     7,154               10,758
                                                                        -------------------    -----------------

                                                                                  $126,096             $146,357
                                                                        ===================    =================
</TABLE>

See notes to consolidated financial statements


                                       29
<PAGE>

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

<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------- -- ----------------
                                                                          September 28,      September 29,
dollars in thousands except share and per share amounts                            2002              2001
--------------------------------------------------------------------------------------- -- ----------------
<S>                                                                            <C>                 <C>
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
Trade accounts payable                                                         $13,709             $18,357
Accrued expenses and other liabilities                                          18,161              21,483
Deferred compensation liability                                                  6,727               7,099
Current portion of long-term debt                                                7,094               7,089
                                                                    -------------------    ----------------
Total current liabilities                                                       45,691              54,028

Long-term debt, less current portion                                            22,500              29,556

Other liabilities                                                                5,546               2,453

Stockholders' equity
Preferred stock
    ($.001 par value; authorized 2,000,000 shares; none issued)
Common stock                                                                        --                  --
    ($.001 par value; authorized 35,000,000 shares; issued
    and outstanding; 2002--14,599,137; 2001--14,326,272)
Retained earnings                                                                8,119               4,025
Accumulated other comprehensive loss                                            49,670              59,434
                                                                                 (239)               (458)
                                                                    -------------------    ----------------
                                                                                57,550              63,001
Less:  Unearned restricted stock                                               (5,191)             (2,681)
                                                                    -------------------    ----------------

Total stockholders' equity                                                      52,359              60,320
                                                                    -------------------    ----------------

                                                                              $126,096            $146,357
                                                                    ===================    ================
</TABLE>

See notes to consolidated financial statements


                                       30
<PAGE>


CONSOLIDATED STATEMENTS OF OPERATIONS
BEI Technologies, Inc. and Subsidiaries
<TABLE>
<CAPTION>
                                                                 --------------------------------------------------
                                                                                    Years Ended
                                                                 --------------------------------------------------

                                                                   September 28,   September 29,     September 30,
dollars in thousands except share and per share amounts                     2002            2001              2000
-------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>               <C>             <C>
Net sales                                                        $       185,638   $     238,985   $       219,216
Cost of sales                                                            134,311         173,897           158,526
                                                                 ----------------  --------------  ----------------
Gross profit                                                              51,327          65,088            60,690

Selling, general and administrative expenses                              30,912          35,077            34,300
Research, development and related expenses                                15,397           8,825             8,897
                                                                 ----------------  --------------  ----------------
          Subtotal                                                         5,018          21,186            17,493

Provision for excess capacity                                             10,275               -                 -
Provision for uncollectables from a related party                          3,072               -                 -
Provision for product line move and other                                  2,230               -                 -
                                                                 ----------------  --------------  ----------------

Earnings (loss) before interest and taxation (EBIT)                      (10,559)         21,186            17,493
Other income (expense)                                                    (1,760)            524               968
Interest expense                                                          (2,270)         (2,466)           (2,644)
                                                                 ----------------  --------------  ----------------

Income (loss) before income taxes                                        (14,589)         19,244            15,817
Provision (benefit) for income taxes                                      (5,783)          7,527             6,210
                                                                 ----------------  --------------  ----------------

Net income (loss)                                                $        (8,806)  $      11,717   $         9,607
                                                                 ================  ==============  ================

                          Basic Income (Loss) Per Share
                                                                 ----------------  --------------  ----------------
Net income (loss) per common share                               $         (0.63)  $        0.84   $          0.68
                                                                 ================  ==============  ================
Shares used in computing basic income (loss) per
    common share                                                      13,993,013      13,904,937        14,113,156
                                                                 ================  ==============  ================
                       Diluted Income(Loss) Per Share
                                                                 ----------------  --------------  ----------------
Net income (loss) per common and common equivalent share         $         (0.63)  $        0.81   $          0.65
                                                                 ================  ==============  ================
Shares used in computing diluted income (loss) per common
and common equivalent share                                           13,993,013      14,443,609        14,806,504
                                                                 ================  ==============  ================
</TABLE>

See notes to consolidated financial statements


                                       31
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
BEI Technologies, Inc. and Subsidiaries
<TABLE>
<CAPTION>

                                                                                        Years Ended
                                                                   ---------------------------------------------------
                                                                     September 28,    September 29,    September 30,
dollars in thousands                                                          2002             2001             2000
----------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>              <C>                      <C>
Cash flows from operating activities:
Net income (loss)                                                   $       (8,806)  $       11,717    $       9,607

Adjustments to reconcile net income (loss) to net cash provided
    by operating activities:

Depreciation                                                                 6,926            6,456            6,067
Amortization                                                                 2,172            3,247            2,826
Deferred income taxes                                                       (1,669)           1,250          (3,036)
Loss (gain) on disposition of assets                                          (397)              17            (415)
Foreign currency translation                                                   219              (60)            (292)
Provision for excess capacity                                               10,275               --               --
Provision for uncollectables from a related party                            3,072               --               --
Provision for product line move and other                                    2,230               --               --
Changes in operating assets and liabilities:
Trade receivables                                                            1,569            6,298           (3,511)
Inventories                                                                  2,270              276              (47)
Assets held for sale                                                         2,411           (6,383)              --
Other current assets                                                        (3,023)          (4,013)             997
Trade accounts payable, accrued expenses and other liabilities             (14,488)          (3,706)          11,375
                                                                    --------------   --------------    --------------
Net cash provided by operating activities                                    2,761           15,099           23,571

Cash flows from investing activities:
Investment in minority owned equity investee - OpticNet                         --           (1,000)              --
Purchase of property, plant and equipment                                  (7,596)           (8,436)          (8,408)
Proceeds from sale of assets                                                   400              109            1,868
Other                                                                        1,085             (194)             (27)
                                                                    --------------   --------------    --------------
Net cash used by investing activities                                       (6,111)          (9,521)          (6,567)




Cash flows from financing activities:
Proceeds from long-term debt                                                44,966                3            1,472
Principal payments on debt and other financing                            (52,017)             (153)          (2,121)
Proceeds from issuance of common stock                                         160              667              903
Tax benefit from exercised stock options                                       433              654               31
Repurchase of stock                                                        (1,636)           (1,531)          (7,586)
Payment of cash dividend                                                     (576)           (1,076)            (588)
                                                                    --------------   --------------    --------------

Net cash used by financing activities                                      (8,670)           (1,436)          (7,889)
                                                                    --------------   --------------    --------------

Net increase (decrease) in cash and cash equivalents                      (12,020)            4,142            9,115
Cash and cash equivalents at beginning of year                              16,438           12,296            3,181

Cash and cash equivalents at end of year                            $        4,418   $       16,438    $      12,296
                                                                    ==============   ==============    ==============
</TABLE>

See notes to consolidated financial statements


                                       32
<PAGE>

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

<TABLE>
<CAPTION>

                                                                                        Years Ended
                                                                    --------------------------------------------------
                                                                      September 28,     September 29,   September 30,
dollars in thousands                                                           2002              2001            2000
----------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>               <C>             <C>
Supplemental disclosures of non cash investing and financing
activities:

Grants of restricted stock                                                   $3,808            $1,596          $1,097
Cancellations of restricted stock                                               323               180             179
Tax benefit from restricted stock                                               269             1,139              --
Repurchase of stock paid in subsequent year                                      --               999              --
Disposal recognition of fully depreciated equipment                         $12,450            $   --          $   --
</TABLE>



See notes to consolidated financial statements


                                       33
<PAGE>

CONSOLIDATED  STATEMENT  OF CHANGES IN  STOCKHOLDERS'  EQUITY AND  COMPREHENSIVE
INCOME (LOSS)
BEI Technologies, Inc. and Subsidiaries
<TABLE>
<CAPTION>

                                                                      Accumulated
                                                                         Other                         Unearned
                                           Common       Retained     Comprehensive   Comprehensive    Restricted
dollars in thousands                       Stock        Earnings        Income           Income          Stock         Total
-------------------------------------------------------------------------------------------------------------------------------
<S>                 <C>                      <C>            <C>             <C>        <C>              <C>           <C>
Balances at October 2, 1999                  $3,731         $44,498         $(106)                       $(2,280)      $45,843
Net income for 2000                                           9,607                           9,607                      9,607
    Other comprehensive income
       Foreign currency translation
       loss, net of income tax of $96                                        (292)             (292)                      (292)
                                                                                     ---------------
Comprehensive income                                                                          9,315
                                                                                     ===============
Restricted stock plan                           918                                                          260         1,178
Stock options exercised                         903                                                                        903
Tax benefit from exercised stock
options                                          31                                                                         31
Repurchase of stock                          (3,262)         (4,324)                                                    (7,586)
Cash dividends                                                 (588)                                                      (588)
                                         ----------- --------------- --------------                   ------------ ------------
Balances at September 30, 2000                2,321          49,193          (398)                        (2,020)       49,096
Net income for 2001                                          11,717                          11,717                     11,717
    Other comprehensive income
       Foreign currency translation
       loss, net of income tax of $39                                         (60)              (60)                       (60)
                                                                                     ---------------
Comprehensive income                                                                         11,657
                                                                                     ===============
Restricted stock plan                         1,416                                                         (661)          755
Stock options exercised                         390                                                                        390
Tax benefit from exercised stock
options                                         654                                                                        654
Tax benefit from restricted stock             1,139                                                                      1,139
Repurchase of stock                          (2,130)           (400)                                                    (2,530)
Cash dividends                                               (1,076)                                                    (1,076)
Contributed capital and other                   235                                                                        235
                                         ----------- --------------- --------------                   ------------ ------------
Balances at September 29, 2001                4,025          59,434          (458)                        (2,681)       60,320
Net loss for 2002                                            (8,806)                        (8,806)                     (8,806)
    Other comprehensive income
       Foreign currency translation
       gain, net of income tax of $144                                        219              219                         219
                                                                                     ---------------
Comprehensive income (loss)                                                                 (8,587)
                                                                                     ===============
Restricted stock plan                         3,485                                                       (2,510)          975
Stock options exercised                         160                                                                        160
Tax benefit from exercised stock
options                                         433                                                                        433
Tax benefit from restricted stock               269                                                                        269
Repurchase of stock                            (253)           (382)                                                      (635)
Cash dividends                                                 (576)                                                      (576)
                                         ----------- --------------- --------------                   ------------ ------------
Balances at September 28, 2002               $8,119         $49,670         $(239)                       $(5,191)      $52,359
                                         =========== =============== ==============                   ============ ============
</TABLE>

See notes to consolidated financial statements


                                       34
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BEI Technologies, Inc. and Subsidiaries
September 28, 2002

Note 1 Summary of Significant Accounting Policies

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

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

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

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

         Fiscal Year:  The  Company's  fiscal year ends on the Saturday  nearest
September 30. Fiscal years 2002, 2001 and 2000 each contained 52 weeks.

         Use of Estimates: The preparation of financial statements in conformity
with  accounting  principles  generally  accepted in the United States  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 from product sales is generally recognized
upon shipment provided that a purchase order has been received or a contract has
been executed, there are no uncertainties regarding customer acceptance, any fee
is fixed or determinable and collectibility is deemed probable. If uncertainties
regarding   customer   acceptance   exist,   revenue  is  recognized  when  such
uncertainties  are  resolved.  Generally,  shipments  are made  F.O.B.  point of
origin, with variations due to contract specific agreements. The Company records
a warranty liability on its products at the time of revenue recognition.

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

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

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

                                       35
<PAGE>

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

at cost.

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

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

         Technology  acquired under license agreements consists primarily of the
cost of exclusive  rights to make, use and sell products  utilizing  quartz rate
sensing technology.  Technology acquired is being amortized over 13 years, which
approximates  its  estimated  useful  life  from  the date of  acquisition.  The
amortization  expense relating to intangible assets for fiscal year 2002 totaled
approximately   $1.1  million.   In  fiscal  2003  and   thereafter,   estimated
amortization will be $1.1 million and $0.8 million, respectively.

         Goodwill consists of the excess of cost over fair value of net tangible
assets acquired in purchase  acquisitions.  Goodwill is maintained at fair value
and is reviewed for  impairment  when an event occurs that might reduce the fair
value of the asset.

         Long-Lived  Assets:   The  Company  recognizes   impairment  losses  in
accordance with Financial  Accounting Statement ("FAS") No. 121, "Accounting for
the Impairment of Long-Lived  Assets and  Long-Lived  Assets to be Disposed of."
Long-lived assets, including property, plant and equipment and other assets, are
reviewed and impairment recognized when indicators of impairment are present and
the  undiscounted  cash flows estimated to be generated by those assets are less
than the carrying amounts of the assets.

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

         Recent Accounting Pronouncements: In July 2001, the FASB issued FAS No.
142 ("FAS 142"),  "Goodwill  and Other  Intangible  Assets." FAS 142 changes the
accounting  for  goodwill  from an  amortization  method  to an  impairment-only
approach.  Thus  amortization of goodwill,  including  goodwill recorded in past
transactions,  will cease upon adoption of this statement.  FAS 142 is effective
for fiscal  years  beginning  after  December  15,  2001,  with  early  adoption
permitted for entities  with fiscal years  beginning  after March 15, 2001.  The
Company chose to adopt FAS 142 for its fiscal year beginning September 30, 2001.
Impact of  adopting  FAS 142 was that  approximately  $137,000  of  amortization
expense  which  otherwise  would have been  recognized  was not recorded  during
fiscal 2002.

         In October 2001,  the FASB issued FAS No. 144  ("FAS 144"), "Accounting
for the  Impairment  or Disposal of Long-Lived  Assets,"  which is effective for
fiscal  periods  beginning  after  December 15, 2001.  FAS 144 provides a single
accounting  model for,  and  supersedes  previous  guidance on,  accounting  and
reporting for the  impairment/disposal  of long-lived  assets.  FAS 144 sets new
criteria  for  the  classification  of  assets  held-for-sale  and  changes  the
reporting  of  discontinued  operations.  The Company  does not believe that the
adoption of FAS 144 will have a significant impact on its financial statements.

         In June 2002,  the FASB issued FAS No. 146 ("FAS 146") "Accounting  for
Costs  Associated  with Exit or Disposal  Activities."  FAS 146 is effective for
exit or disposal  activities  that are initiated  after December  31,2002.  This
standard addresses financial  accounting and reporting for costs associated with
exit or  disposal  activities  and  replaces  EITF  Issue No.  94-3,  "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity  (including  Certain  Costs  Incurred  in a  Restructuring)."  FAS  146
requires  that a  liability  for a cost  associated  with an  exit  or  disposal
activity be  recognized  when the  liability is incurred.  FAS 146 also requires
that liabilities recorded in connection with exit plans be initially measured at
fair value. The Company does not believe the adoption of FAS No. 146 will have a
material impact on its financial statements.

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

                                       36
<PAGE>

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

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

         Related  Party   Financing  and   Arrangements:   During  fiscal  2000,
Technologies   made  a  $1.0  million  equity   investment  in  OpticNet,   Inc.
("OpticNet"),   the  Company's  then  majority  owned  subsidiary.   The  equity
investment was provided as initial  financing with the expectation that OpticNet
would seek additional  funding from third parties in the future. At the close of
business  on October  30,  2000,  Technologies  declared a  distribution  to its
stockholders of approximately 42% of the outstanding securities of OpticNet. See
Note 11 "Related Party Transactions" for further description.

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

         Reclassification: Certain reclassifications have been made to the 2002,
2001, and 2000  consolidated  financial  statements to conform with current year
presentations.

Note 2 Inventories

                                                September 28,      September 29,
                                                         2002               2001
                                                      -------            -------
                                                            (in thousands)

Finished products ........................            $ 2,945            $ 4,919
Work in process ..........................              7,238              7,354
Materials ................................             18,355             18,535
                                                      -------            -------
Total inventories ........................            $28,538            $30,808
                                                      =======            =======

Note 3 Accrued Expenses and Other Liabilities

                                                 September 28,   September 29,
                                                          2002            2001
                                                       -------         -------
                                                          (in thousands)

Employee compensation ...........................      $ 1,513         $ 3,548
Vacation ........................................        1,967           2,066
Accrued taxes ...................................          984           1,846
Contract costs ..................................           75             550
Accrued professional fees .......................        1,858           1,088
Insurance .......................................          846             762
Royalties and related costs .....................        3,639           5,593
Customer advances ...............................           31             245
Commissions .....................................          422             589
Interest ........................................          711             885
Warranty ........................................          654             791
Reserve for excess capacity .....................        2,082            --
Reserve for product line move and other .........        1,583            --
Repurchase of stock .............................         --               999
Other ...........................................        1,796           2,521
                                                       -------         -------
Total accrued expenses and other liabilities ....      $18,161         $21,483
                                                       =======         =======

                                       37
<PAGE>

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

Note 4 Long-Term Debt
<TABLE>
<CAPTION>
                                                                                       September 28,      September 29,
                                                                                                2002               2001
                                                                                             -------            -------
                                                                                           (in thousands)
<S>                                                                                          <C>                <C>
6.70% Senior Notes; due in annual installments of $7,000 from
  November 16, 2001 through November 16, 2005...................................             $28,000            $35,000

Mortgage note payable with interest at 6.87%; due in monthly installments of
  principal and interest of $14 until December, 2003 when the remaining
  balance of approximately $1,400 is due; collateralized by certain real
  property .....................................................................               1,594              1,626

Capitalized equipment lease obligations.........................................                --                   19
                                                                                             -------            -------
                                                                                              29,594             36,645
Less current portion............................................................               7,094              7,089
                                                                                             -------            -------
                                                                                             $22,500            $29,556
                                                                                             =======            =======
</TABLE>


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

         On December 13, 1998, the mortgage note payable was refinanced with the
original lender and the due date extended from fiscal 1999 to fiscal 2003.

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

         On August 14, 2002,  the Company  established  a $25.0  million line of
credit,  which matures on August 15, 2004,  with a bank and terminated the $25.0
million  facility  in place at the end of fiscal  2001  with  another  bank.  No
borrowings were outstanding under the new line of credit at September 28, 2002.

         During  December  2002,  the  Company  received  a waiver of one of its
financial  covenants of its senior notes for the fiscal quarter ended  September
28, 2002. Additionally, the Company completed an amendment reducing the coverage
level  required  with its senior  note  holders,  related to the same  financial
covenant discussed above, for the fiscal quarter ended December 28, 2002.

         Maturities of long-term  debt,  adjusted for the effect of senior notes
and the mortgage  refinancing  are  approximately  as follows:  fiscal 2003 $7.1
million;  fiscal 2004 $8.5 million;  fiscal 2005 $7.0 million;  fiscal 2006 $7.0
million.

         Interest of approximately  $2.4 million,  $2.5 million and $2.5 million
was paid during fiscal years 2002, 2001, and 2000, respectively.

Note 5 Research and Development

         The  Company's  internally  funded  research,  development  and related
engineering expenditures were approximately $15.4 million, $8.8 million and $8.9
million  in  fiscal   2002,   2001,   and  2000,   respectively.   In  addition,
customer-funded  research and

                                       38
<PAGE>

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

development  expenditures  charged  to cost of sales  were  $0.5  million,  $0.2
million and $0.6 million,  respectively,  for the same periods.  The increase is
due to management's  dedication to the development of new and enhanced products,
such as the next  generation  quartz and  silicon  automotive  gyro  sensors and
improvements to other existing product families.

Note 6 Income Taxes

         The Company  accounts for income  taxes under FAS No. 109,  "Accounting
for Income Taxes." Under this method,  deferred tax  liabilities  and assets are
recognized for the expected  future tax  consequences  of temporary  differences
between  the  carrying  amounts  and the tax  bases of assets  and  liabilities.
Deferred tax assets and  liabilities  are  determined  based on the  differences
between financial  reporting and the tax 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.

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

<TABLE>
<CAPTION>
                                                                                          Year Ended
                                                                         --------------------------------------------
                                                                         September 28,   September 29,  September 30,
                                                                                 2002             2001           2000
                                                                              -------           ------         ------
<S>                                                                           <C>               <C>            <C>
Current
     Federal..........................................................        $(3,987)          $5,691         $7,504
     State............................................................           (127)             586          1,742
                                                                              -------           ------         ------
          Total Current...............................................         (4,114)           6,277          9,246
Deferred
      Federal ........................................................           (865)             815        (2,500)
      State   ........................................................           (804)             435          (536)
                                                                              -------           ------         ------
           Total Deferred.............................................         (1,669)           1,250        (3,036)
                                                                              -------           ------         ------
Total income tax provision (benefit)..................................        $(5,783)          $7,527         $6,210
                                                                              =======           ======         ======
</TABLE>

         Tax benefits of $702,000,  $1,793,000,  and $31,000 related to employee
stock option plans were  credited to  stockholders'  equity,  and  increased the
amount of taxes currently  refundable  during fiscal year 2002,  2001, and 2000,
respectively.

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

<TABLE>
<CAPTION>
                                                                                          September 28,   September 29,
                                                                                                   2002            2001
                                                                                                -------         -------
<S>                                                                                             <C>             <C>
                                  Deferred tax assets
Net operating loss carryforwards........................................................        $   150         $    --
Tax credits.............................................................................            427              --
Accrued expenses........................................................................          5,979           8,218
Asset impairment reserves...............................................................          4,636              --
Inventory valuation.....................................................................          1,186           1,572
Other reserves..........................................................................            923           1,396
Other...................................................................................            938             847
                                                                                                -------         -------
        Total deferred tax assets.......................................................         14,239          12,033
                                                                                                -------         -------

                                Deferred tax liabilities
Depreciation and property basis difference..............................................          2,551           2,135
Other...................................................................................            768             647
                                                                                                -------         -------
     Total deferred tax liabilities.....................................................          3,319           2,782
                                                                                                -------         -------
     Net deferred tax assets............................................................        $10,920         $ 9,251
                                                                                                =======         =======
</TABLE>
                                       39
<PAGE>

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

         The  differences  between the provision for income taxes and the income
tax determined by applying the statutory federal income tax rate of 34% for 2002
and 35.0% for 2001 and 2000 (in thousands) are as follows:

<TABLE>
<CAPTION>
                                                                              September 28,       September 29,       September 30,
                                                                                       2002                2001                2000
                                                                                    -------             -------             -------
<S>                                                                                 <C>                 <C>                 <C>
Income tax at the statutory rate .......................................            $(4,960)            $ 6,735             $ 5,536
State income tax, net of federal income tax effect .....................               (585)                616                 789
Goodwill amortization ..................................................               --                   118                  19
Tax credits ............................................................               (292)               (260)               --
Other ..................................................................                 54                 318                (134)
                                                                                    -------             -------             -------
Total income taxes .....................................................            $(5,783)            $ 7,527             $ 6,210
                                                                                    =======             =======             =======
</TABLE>

         Cash paid for  income  taxes in  fiscal  year  2002,  2001 and 2000 was
$428,000, $6,341,000 and $9,245,000, respectively.

         As of September  28,  2002,  the Company has state net  operating  loss
carryforwards of $2.4 million, which begin to expire in the year 2007. Total tax
credit  carryforwards of $427,000 expire in the years 2012 through 2022,  except
for $164,000 of  California  research and  development  tax credits that have no
expiration date.

Note 7 Equity Incentive Plans

         The Company has adopted the disclosure only  alternative for its equity
incentive  plan as  described  in FAS  No.  123,  "Accounting  for  Stock  Based
Compensation"(FAS 123). The Company accounts for employee stock awards using the
intrinsic value method in accordance with APB 25.

         The Company's  1997 Equity  Incentive Plan (the  "Incentive  Plan") was
adopted by the Board of Directors in September 1997. The Incentive Plan provides
for the granting of incentive stock options to employees and nonstatutory  stock
options,  restricted  stock purchase  awards,  and stock bonuses  (collectively,
"Stock  Awards")  to  consultants,  employees  and  directors.  The  Company has
reserved 2,278,890 shares of common stock for issuance under the Incentive Plan,
which included  shares for substitute  options  granted to the option holders of
Electronics in connection with the Distribution.

                                       40
<PAGE>

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

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

<TABLE>
<CAPTION>
                                                                   Restricted Shares
                                                                      Outstanding               Options Outstanding
                                                                      ----------           ------------------------------
                                                 Common stock          Number of            Number of        Weighted average
                                                 available for          common               common           exercise price
                                                    grant               shares               shares             per share
                                                 ----------           ----------           ----------           ---------
<S>                                               <C>                  <C>                    <C>               <C>
Balances, October 2, 1999                         1,222,328            1,060,666              334,082           $    3.82
          Restricted stock granted                 (145,000)             145,000                 --             $   --
          Restricted stock
            terminated                               33,824              (33,824)                --             $   --
          Granted                                  (215,000)                --                215,000           $    7.24
          Exercised                                    --                   --               (139,690)          $    3.75
          Terminated                                 47,464                 --                (47,464)          $    5.12
                                                 ----------           ----------           ----------           ---------
Balances, September 30, 2000                        943,616            1,171,842              361,928           $    5.72
          Restricted stock granted                 (116,421)             116,421                 --             $   --
          Restricted stock
            terminated                               31,580              (31,580)                --             $   --
          Granted                                  (131,440)                --                131,440           $   15.74
          Exercised                                    --                   --                (81,220)          $    4.70
          Terminated                                 30,388                 --                (30,388)          $   11.58
                                                 ----------           ----------           ----------           ---------
Balances, September 29, 2001                        757,723            1,256,683              381,760           $    8.98
          Restricted stock granted                 (305,500)             305,500                 --             $   --
          Restricted stock
            terminated                               22,786              (22,786)                --             $   --
          Restricted stock retired                     --                (41,320)                --             $   --
          Granted                                  (262,000)                --                262,000           $   13.19
          Exercised                                    --                   --                (31,471)          $    5.09
          Terminated                                 29,940                 --                (29,940)          $   13.40
                                                 ----------           ----------           ----------           ---------
Balances, September 28, 2002                        242,949            1,498,077              582,349           $   10.84
                                                 ==========           ==========           ==========           =========
</TABLE>

                                       41
<PAGE>

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

<TABLE>
<CAPTION>
                                                                    Weighted Average       Weighted Average
                                                        Number    Remaining Contractual    Exercise Price Per
Range of Exercise Prices                             Outstanding     Life (Years)               Share
------------------------                             -----------     ------------               -----
<C>     <C>                                             <C>              <C>                   <C>
$2.33 - $2.97...............................            14,890           1.38                  $ 2.66
$3.50 ......................................            56,478           6.02                  $ 3.50
$5.25 - $6.22...............................            13,002           6.79                  $ 5.65
$6.25 ......................................           105,322           7.19                  $ 6.25
$7.44 - $12.78..............................           171,168           9.49                  $10.44
$13.25 .....................................            72,923           8.19                  $13.25
$14.58 .....................................            10,000           3.19                  $14.58
$15.25 - $28.60 ............................           138,566           8.66                  $17.63
---------------                                        -------           ----                  ------
$2.33 - $28.60..............................           582,349           8.00                  $10.84
                                                       ======
</TABLE>

         As of September  28, 2002,  options for 204,149  shares were vested and
exercisable at a weighted average exercise price of $7.35.

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

         Under both the 1992 Plan and Incentive  Plan, as of September 28, 2002,
1,788,373  shares had been granted,  of which 1,498,077  shares are outstanding,
and 940,968 shares have fully vested. Compensation expense of $975,000, $755,000
and $1,178,000  for the  amortization  of the  restricted  stock was recorded in
fiscal years 2002, 2001, and 2000, respectively.

         The Company computed the pro forma  disclosures  required under FAS No.
123 for  options  granted  in  fiscal  years  2002,  2001,  and 2000  using  the
Black-Scholes  option pricing model.  For fiscal years 2002,  2001 and 2000, the
significant  assumptions used in the Black-Scholes  calculation were a risk-free
interest rate of 4.13%,  4.00% and 5.98%, a weighted average expected life of 5,
5 and 3 years, a volatility  rate of 80%, 83% and 85%, and an expected  dividend
yield of 0.3%, 0.4% and 0.4%, respectively.

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

         During  fiscal  years 2002 and 2001,  options to  acquire  262,000  and
131,440  shares were  granted  with a weighted  average  fair

                                       42
<PAGE>

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

value of $9.55 and $10.85 per share, respectively.  For the year ended September
28, 2002,  the  compensation  cost of options under FAS 123 would have increased
net loss from $8.8  million to $9.6  million,  and  diluted  loss per share from
$0.63 to $0.69. For the year ended September 29, 2001, the compensation  cost of
options  under FAS 123 would have reduced net income from $11.7 million to $11.2
million, and diluted earnings per share from $0.81 to $0.77.

         In addition to options,  during fiscal years 2002 and 2001, 305,500 and
116,421  shares of nonvested  stock were  granted  with a weighted  average fair
value of $12.45 and $14.17 per share,  respectively.  The weighted  average fair
value of nonvested stock is amortized to  compensation  expense over its related
vesting period.

Note 8 Employee Benefit Plan

         The Company has a multi-employer  defined contribution  retirement plan
for  the  benefit  of  all  eligible   employees.   Matching   non-discretionary
contributions are based on a percentage of employee contributions. Contributions
to the plan by the  Company for the benefit of its  employees  for fiscal  years
2002,  2001 and 2000 were  approximately  $1,290,000,  $1,068,000  and $960,000,
respectively.  The  plan  includes  employees  of  BEI  Technologies,  Inc.  and
subsidiaries and employees of OpticNet, Inc.

         The  Company  has a grantor  trust to fund  deferred  compensation  for
certain  employees (a "Rabbi  Trust" or "trust").  As determined by the trustee,
the  assets in the Rabbi  Trust,  consisting  of cash  equivalents  and debt and
equity securities,  are recorded at current market prices principally based upon
national exchange and  over-the-counter  markets. The trust assets are available
to  satisfy  claims  of the  Company's  general  creditors  in the  event of its
bankruptcy.  The  trust's  assets and the  corresponding  deferred  compensation
obligation  of  approximately  $7.0  million are  included  in the  accompanying
balance sheets at September 28, 2002 and September 29, 2001.

Note 9 Lease Commitments

         Operating  leases consist  principally  of leases for real  properties,
manufacturing  equipment  and land.  Certain  of the  operating  leases  contain
various  options for renewal  and/or  purchase of the related assets for amounts
approximating their fair market value at the date of exercise of the option. The
future minimum payments for operating  leases,  net of future minimum rentals to
be received under noncancelable subleases, consist of the following at September
28, 2002 (in thousands):
<TABLE>
<CAPTION>

                                                                                         Operating
     Fiscal Year                                                                            Leases
     -----------                                                                            ------
<S>                                                                                         <C>
         2003  ...................................................................          $4,089
         2004  ...................................................................           3,920
         2005  ...................................................................           1,426
         2006  ...................................................................             869
         2007  ...................................................................             669
         Thereafter...............................................................             662
                                                                                           -------
               Total minimum lease payments, net of future minimum rental
                      income......................................................         $11,635
                                                                                           =======
</TABLE>

         On September  28, 2001,  the Company  completed the leasing of research
and development  equipment  placed in service during the quarter ended September
29, 2001,  which had been previously  purchased by the Company for $700,000.  In
addition,  on  December  20,  2001  and  March  28,2002,  the  Company  executed
additional  equipment  lease  schedules  under this agreement to lease equipment
similar to the  described  above valued at  approximately  $3.5 million and $2.8
million,  respectively.  Under the terms of the lease  transaction,  the Company
sold the  equipment  and then  immediately  leased the  equipment  from the sole
purchaser  under a  non-cancelable  operating  lease  with a lease term of three
years and an interest rate of approximately 6.9%. Total rent expense,  including
interest,  during  the lease  term will be  approximately  $6.6  million  and is
included  in the  table  of  future  minimum  annual  rental  commitments  under
operating leases.

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

         Total rental expense amounted to approximately  $2,342,000,  $2,304,000
and $2,192,000 for fiscal years 2002, 2001 and 2000, respectively.

                                       43
<PAGE>

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

Note 10 Contingencies and Litigation

Claim against U.S. Government

         The Company  believes  that its now  discontinued  subsidiary,  Defense
Systems,  suffered  substantial  monetary  damages  due to  actions  of the U.S.
Government  in  connection  with the parties' H70 contract in effect  during the
1992-1996  timeframe.  As a result,  Defense  Systems filed a substantial  claim
against  the  U.S.  Government  in  1996.  Following  attempts  to  negotiate  a
settlement,  Defense  Systems  filed an appeal of its claim  that has been heard
before an  Administrative  Judge at the Armed Services Board of Contract Appeals
("ASBCA").  In fiscal 2002, the Judge ruled that Defense  Systems is entitled to
an "equitable  reformation"  of the prices on certain  rockets and motors in the
H70 contract.  The decision was remanded to the parties to negotiate the amount.
The parties were unable to negotiate an amount on their own, so the parties then
agreed to enter a non-binding  mediation of Alternate Dispute Resolution process
with the same Administrative  Judge from the ASBCA who had rendered the original
entitlement  decision.  The  process  is  in an  advanced  stage  of  continuing
discussion and may result in a resolution in the near future.

Other

         During  fiscal  2002,  BEI  Defense  Systems  Company,  a  discontinued
subsidiary of  Technologies,  was subject to litigation  with a former  landlord
regarding damages to real property  formerly leased.  The United States District
Court  for the  Western  District  of  Arkansas  entered a  judgment,  including
attorney's fees, of approximately  $0.7 million.  Technologies is in the process
of contesting the award and has determined that it will appeal the judgment. The
Company has reserved  $0.7 million for this judgment  during the fiscal  quarter
ended June 29, 2002.

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

Note 11 Related Party Transactions

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

         On September 28, 2001, the Company  entered into an equipment  sublease
agreement  with  OpticNet  to  rent  capacity  on  research,   development   and
manufacturing  equipment  to OpticNet  from month to month  based on  OpticNet's
usage of the equipment beginning in October 2001.

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

         The  Company  is  party  to an  intercompany  services  agreement  with
OpticNet, entered into in October 2000, under which the

                                       44
<PAGE>

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

Company  provides  certain  administrative  services  to  OpticNet  at a cost of
$25,000 per fiscal quarter. During the third quarter of fiscal 2002, the Company
agreed to suspend  current and future charges under the  agreement,  in light of
the inability of OpticNet to obtain outside financing to such date.

         In the  quarter  ended  March 30,  2002,  the  Company  concluded  that
portions  of  the  assets  held  under  leases  were  excess  to  the  Company's
requirements.  Historically,  these assets had been  primarily used by OpticNet.
This  determination  was a result of  OpticNet's  lack of success in  attracting
strategic   partners  or  third  party  financing  given  the  current  negative
conditions  prevailing in the fiber optic  telecommunications  market.  In March
2002 the Company  recorded a charge of $10.3 million for expected  future losses
on the leases of the facility and  production  assets noted above.  A portion of
the  facility  and  equipment  will  continue  to be used by the Company for its
ongoing silicon MEMS research and development  effort. As of September 28, 2002,
the  Company  has  recognized  approximately  $1.0  million  against the related
accrual.

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

         OpticNet's business is focused on developing fiber optic components and
subsystems,  such as are used in optical switches and telecommunication systems.
OpticNet's  primary  activities  since inception have been devoted to developing
its product  offerings and related  technologies,  recruiting key management and
technical  personnel and seeking capital to fund operations.  To date,  OpticNet
has shown  operating  losses  and the sole  source  of  funding  for  OpticNet's
operations  is from BEI. In fiscal 2002,  OpticNet  undertook to further  reduce
operations,  including  layoffs and  reduction  in capital  expenditures.  As of
September  28, 2002,  Technologies  owns  approximately  40% of the  outstanding
voting  securities  of  OpticNet.  Management  of the Company  views  OpticNet's
ability to continue as a stand alone entity highly uncertain, absent significant
positive  developments  in the fiber optic  telecommunications  industry and new
opportunities for OpticNet.

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

<TABLE>
<CAPTION>
                                                                       Cash paid during                          Accrued balance at
                                                       Charges            fiscal 2002        Asset write downs    September 28, 2002
                                                       -------            -----------        -----------------    ------------------
<S>                                                   <C>                   <C>                   <C>                   <C>
Asset impairment
  charges ...................................         $  3,106              $   --                $ (3,106)             $   --
Equipment lease
  charges ...................................            6,100                  (865)                 --                   5,235
Facility lease
  impairment charge .........................              660                   (82)                 --                     578
Other commitments ...........................              409                  --                    --                     409
                                                      --------              --------              --------              --------
                                                      $ 10,275              $   (947)             $ (3,106)             $  6,222
                                                      ========              ========              ========              ========
</TABLE>

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

                                  September 28,   September 29,   September 30,
                                           2002            2001            2000
                                        -------         -------         -------
Total assets ...................        $     9         $ 1,049         $ 1,013
Total liabilities ..............          2,925           1,663              69
Net income (loss) ..............        $(4,131)        $(1,575)        $  (106)

Note 12 Sales and Major Customers (Unaudited)

         The principal  business and  operations of  Technologies  are conducted
within one business segment and are carried out by

                                       45
<PAGE>

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

operations  which design,  manufacture and sell electronic  devices that provide
vital sensory input for the control systems of advanced machinery and automation
systems for the commercial automotive, government and industrial industries. The
sales to major industries are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                         September 28,          September 29,          September 30,
                                                                                  2002                   2001                   2000
                                                                              --------               --------               --------
<S>                                                                           <C>                    <C>                    <C>
Commercial automotive sensors sales ...........................               $ 94,694               $138,702               $107,459
Government ....................................................                 16,901                 18,501                 18,723
Industrial sales ..............................................                 74,043                 81,782                 93,034
                                                                              --------               --------               --------
Total sales from operations ...................................               $185,638               $238,985               $219,216
                                                                              ========               ========               ========
</TABLE>

         Although the Company is directly affected by the economic well being of
the above industries, management does not believe significant credit risk exists
at September 28, 2002.

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

<TABLE>
<CAPTION>
                                                                       September 28,           September 29,           September 30,
                                                                                2002                    2001                    2000
                                                                            --------                --------                --------
<S>                                                                         <C>                     <C>                     <C>
Domestic sales .............................................                $ 92,558                $104,377                $120,894
Foreign ....................................................                  93,080                 134,608                  98,322
                                                                            --------                --------                --------
Total sales from operations ................................                $185,638                $238,985                $219,216
                                                                            ========                ========                ========
</TABLE>

         Foreign  sales  accounted  for  approximately 50%, 56% and 45% of total
sales for fiscal 2002, 2001 and 2000, respectively.

         In fiscal 2002,  2001 and fiscal 2000, one customer  accounted for 39%,
49% and 37%, respectively, of the Company's net sales.

Note 13 Quarterly Results of Operations (Unaudited)

         The tables below present unaudited quarterly financial  information for
fiscal years 2002 and 2001:

<TABLE>
<CAPTION>
                                                                                              Operations
                                                                                          Three months ended
                                                                   ----------------------------------------------------------------
                                                                   December 29,        March 30,          June 29,    September 28,
                                                                           2001             2002              2002             2002
                                                                       --------         --------          --------         --------
                                                                             (dollars in thousands except per share amounts)
<S>                                                                    <C>              <C>               <C>              <C>
Net sales ....................................................         $ 45,605         $ 48,800          $ 47,815         $ 43,418
Gross profit .................................................           11,291           13,160            13,960           12,916
Net income (loss) ............................................              240           (9,246)              960             (766)

Basic Income (Loss) Per Share
Net income (loss) per share-basic (rounded) ..................         $   0.02         $  (0.66)         $   0.07         $  (0.05)

Diluted Income (Loss) Per Share
Net income (loss) per share-diluted (rounded) ................         $   0.02         $  (0.66)         $   0.07         $  (0.05)
</TABLE>


                                       46
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
BEI Technologies, Inc. and Subsidiaries
<TABLE>
<CAPTION>


                                                                  December 30,         March 31,          June 30,     September 29,
                                                                          2000              2001              2001              2001
                                                                       -------           -------           -------           -------
<S>                                                                    <C>               <C>               <C>               <C>
Net sales ..................................................           $60,221           $65,116           $61,811           $51,837
Gross profit ...............................................            17,494            18,259            14,877            14,458
Net income .................................................             3,292             3,460             2,853             2,112

Basic Income Per Share
Net income per share-basic (rounded) .......................           $  0.24           $  0.25           $  0.20           $  0.15

Diluted Income Per Share
Net income per share-diluted (rounded) .....................           $  0.23           $  0.24           $  0.20           $  0.15
</TABLE>

Note 14 Fair Value of Financial Instruments

         FAS No. 107 (FAS  107),  "Disclosures  about  Fair  Value of  Financial
Instruments,"  requires  disclosure of fair value  information  about  financial
instruments,  whether or not  recognized in the balance  sheet,  for which it is
practicable to estimate that value. Whenever possible, quoted market prices were
used to  develop  fair  values.  In cases  where  quoted  market  prices are not
available,  fair  values are based on  estimates  using  present  value or other
valuation  techniques.  Those  techniques  are  significantly  affected  by  the
assumptions  used,  including  the  discount  rate and  estimates of future cash
flows. In that regard,  the derived fair value estimates cannot be substantiated
by comparison to independent markets,  and, in many cases, could not be realized
in immediate  settlement of the instrument.  FAS 107 excludes certain  financial
instruments and all nonfinancial  instruments from its disclosure  requirements.
Accordingly,  the aggregate  fair value  amounts  presented do not represent the
underlying value of the Company. The following methods and assumptions were used
by  the  Company  in  estimating  its  fair  value   disclosures  for  financial
instruments as of September 28, 2002 and as of September 29, 2001.

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

         Long-Term  Debt:  The fair value of long-term  debt has been  estimated
based upon discounted  future cash flows. The discount rate used included a risk
free  rate  derived  from  the  Treasury  yield  curve  plus  a  risk  weighting
commensurate with the Company's borrowing position.  The fair value of long-term
debt is  approximately  $21,446,000 and  $30,567,000  compared with the carrying
amounts of $22,500,000  and  $29,556,000 at September 28, 2002 and September 29,
2001, respectively.

                                       47
<PAGE>

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

Note 15 Income (Loss) Per Share

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


<TABLE>
<CAPTION>
                                                                                          Year Ended
                                                                          --------------------------------------------
                                                                          September 28,   September 29,  September 30,
                                                                                   2002            2001           2000
                                                                                 ------          ------         ------
                                                                              (in thousands, except per share amounts)
<S>                                                                            <C>              <C>             <C>
                               Numerator

Income (loss) from operations, net of taxes                                    $(8,806)         $11,717         $9,607
                                                                               ========         =======         ======

                              Denominator

Denominator for basic income (loss) per share - Weighted average shares, net of
    nonvested shares (fiscal 2002--699 shares; fiscal 2001--501 shares;
    fiscal 2000--543 shares)                                                     13,993          13,905         14,113
Effect of dilutive securities:
    Nonvested shares                                                                 --             299            422
    Employee stock options                                                           --             240            272
                                                                                 ------          ------         ------
    Denominator for diluted earnings (loss) per share                            13,993          14,444         14,807
                                                                                 ======          ======         ======
</TABLE>

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

Note 16 Provision for Product Line Move and Other

         In March  2002,  the  Company  approved a plan to close a facility  and
relocate  manufacturing  activities  to a  more  cost-effective  location.  As a
result,  the Company  accrued $2.2 million  related  primarily to the closure of
manufacturing  facilities and administrative  functions including the accrual of
remaining  payments on the facility  operations lease,  less future  anticipated
sublease  payments.  Other  costs  included  write-downs  of  fixed  assets  and
inventories  to their fair value.  As of  September  28,  2002,  the Company has
recognized approximately $492,000 against this accrual. The Company expects this
plan to be completed within 12 months.

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

<TABLE>
<CAPTION>
                                                                            Cash paid during                     Accrued balance at
                                                           Charges             fiscal 2002    Asset write downs   September 28, 2002
                                                           -------             -----------    -----------------   ------------------
<S>                                                        <C>                    <C>                 <C>               <C>
Facility closure
  charges .......................................          $ 2,075                $(492)              $--               $ 1,583
Property impairment
  charges .......................................              155                 --                  --                   155
                                                           -------                -----               ---               -------
                                                           $ 2,230                $(492)              $--               $ 1,738
                                                           =======                =====               ===               =======
</TABLE>

                                       48
<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. and  subsidiaries as of September 28, 2002 and September 29,
2001,  and the related  consolidated  statements  of  operations,  stockholders'
equity  and  comprehensive  income  (loss)  and cash flows for each of the three
years in the period ended September 28, 2002. These financial statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the consolidated financial position of BEI Technologies,
Inc. and  subsidiaries  at September 28, 2002 and  September  29, 2001,  and the
consolidated  results of their  operations  and their cash flows for each of the
three years in the period ended September 28, 2002 in conformity with accounting
principles generally accepted in the United States.


                                                       Ernst & Young LLP

San Francisco, California
October 29, 2002

                                       49
<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  2003  Annual
         Meeting of  Stockholders to be filed by the Company with the Securities
         and Exchange Commission (the "Definitive Proxy Statement").

ITEM 11. EXECUTIVE COMPENSATION

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

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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


                                     PART IV

ITEM 14. CONTROLS AND PROCEDURES

         The Company's  management,  including the Chief  Executive  Officer and
         Chief   Financial   Officer,   has   conducted  an  evaluation  of  the
         effectiveness  of  disclosure   controls  and  procedures  pursuant  to
         Exchange  Act Rule 13a-15  within 90 days of the filing of this report.
         Based  on that  evaluation,  the  Chief  Executive  Officer  and  Chief
         Financial Officer concluded that the disclosure controls and procedures
         are effective in ensuring that all material  information required to be
         filed in this  annual  report  has been made  known to them in a timely
         fashion.  There have been no significant  changes in internal controls,
         or in  factors  that  could  significantly  affect  internal  controls,
         subsequent to the date the Chief Executive  Officer and Chief Financial
         Officer completed their evaluation.

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

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

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


                                       50
<PAGE>

            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                                             49

            Consolidated Balance Sheets -
               September 28, 2002 and September 29, 2001                                                  29

            Consolidated Statements of Operations - Years ended September 28,
              2002, September 29, 2001 and September 30, 2000                                             31


            Consolidated Statements of Cash Flows - Years ended September 28,
              2002, September 29, 2001  and September 30, 2000                                            32

            Consolidated Statement of Changes in Stockholders' Equity and Comprehensive
               Income (Loss) - Years ended September 28, 2002, September 29, 2001
              and September 30, 2000                                                                      34

            Notes to Consolidated Financial Statements -
               September 28, 2002                                                                         35

(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 28, 2002 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 to
                                            Schedule                                                      S-2
</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.

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

            Exhibit Numbers                 Description                                                    Footnote
            ---------------                 -----------                                                    --------

<S>                                         <C>                                                             <C>
                         2.1                Distribution Agreement between BEI Electronics, Inc.
                                            and BEI Technologies, Inc.                                      i

                         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

                                       51
<PAGE>

                                            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

                        10.2  *             Executive Change in Control Benefits Agreement between
                                            BEI Technologies, Inc. and Certain Named Executive
                                            Officers                                                        i


                        10.5                Note Purchase Agreement dated November 16, 1998 by and
                                            between BEI Technologies, Inc., BEI Sensors & Systems
                                            Company, Inc., Connecticut General Life Insurance
                                            Company and Allstate Life Insurance Company                    ii

                        10.6                Amendment to Tax Allocation and Indemnity Agreement
                                            between BEI Electronics, Inc. and BEI Technologies, Inc.       ii

                        10.9                Development and Supply Agreement, dated April 26, 2001,
                                            by and between Systron Donner Inertial Division and
                                            Continental Teves  AG & Co.                                    iv

                       10.10                Amendment to Note Purchase Agreement as amended as of
                                            March 30, 2002, by and between BEI Technologies, Inc.,
                                            BEI Sensors & Systems Company, Inc., Connecticut
                                            General Life Insurance Company and Allstate Life
                                            Insurance Company                                               v

                       10.11                Credit Agreement dated August 14, 2002, by and between
                                            BEI Technologies, Inc., BEI Sensors & Systems Company,
                                            Inc. and Union Bank of California

                       10.12                Second  Amendment to Note Purchase  Agreement and Waiver
                                            dated   December   20,   2002,   by  and   between   BEI
                                            Technologies, Inc., BEI Sensors & Systems Company, Inc.,
                                            Connecticut  General Life Insurance Company and Allstate
                                            Life Insurance Company.


                                       52
<PAGE>

                        21.1                Subsidiaries of the Registrant                                 ii

                        23.1                Consent of Ernst &Young LLP, Independent Auditors

                        24.1                Power of Attorney


                        99.1                BEI Technologies, Inc. Information Statement dated
                                            September 24, 1997                                             ii

                        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


                        99.5                CEO Certification Pursuant to 18 U.S.C. as adopted
                                            Pursuant to Section 906 of the Sarbanes - Oxley Act of
                                            2002

                        99.6                CFO Certification Pursuant to 18 U.S.C. as adopted
                                            Pursuant to Section 906 of the Sarbanes - Oxley Act of
                                            2002
</TABLE>

(i)      Incorporated  by  reference.  Previously  filed  as an  exhibit  to the
         Registrant's  Information  Statement  on Form 10 (File No.  0-22799) as
         filed on September 22, 1997.

(ii)     Incorporated by reference.  Previously  filed as an exhibit to the Form
         10-K (File No. 0-22799) as filed on December 30, 1998.

(iii)    Incorporated by reference.  Previously  filed as an exhibit to the Form
         10-Q (File No. 000-22799) as filed on February 13, 2001.

(iv)     Incorporated by reference.  Previously  filed as an exhibit to the Form
         10-Q (File No. 000-22799) as filed on August 14, 2001.

(v)      Incorporated by reference.  Previously  filed as an exhibit to the Form
         10-Q (File No. 000-22799) as filed on May 13, 2002.

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

(b)      No  reports  on Form 8-K were  filed by the  Company  during the fiscal
         2002.

                                       53
<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
                                                          Vice President,
                                                          Secretary, Treasurer
                                                          and Controller

                                                      Date December 19, 2002
                                                           -----------------

                                       54
<PAGE>

                                CERTIFICATION OF
                             CHIEF EXECUTIVE OFFICER

I, Charles Crocker, certify that:

1.       I have reviewed  this annual  report on Form 10-K of BEI  Technologies,
         Inc.;

2.       Based on my  knowledge,  this annual report does not contain any untrue
         statement of a material fact or omit to state a material fact necessary
         to make the statements made, in light of the circumstances  under which
         such  statements  were made, not misleading  with respect to the period
         covered by this annual report;

3.       Based on my knowledge,  the financial  statements,  and other financial
         information  included  in this  annual  report,  fairly  present in all
         material  respects the financial  condition,  results of operations and
         cash flows of the  registrant as of, and for, the periods  presented in
         this annual report;

4.       The registrant's  other  certifying  officers and I are responsible for
         establishing  and  maintaining  disclosure  controls and procedures (as
         defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
         have:

         a)       designed  such  disclosure  controls and  procedures to ensure
                  that  material   information   relating  to  the   registrant,
                  including its consolidated  subsidiaries,  is made known to us
                  by others  within  those  entities,  particularly  during  the
                  period in which this annual report is being prepared;

         b)       evaluated the  effectiveness  of the  registrant's  disclosure
                  controls and procedures as of a date with 90 days prior to the
                  filing date of this annual report (the "Evaluation Date"); and

         c)       presented  in  this  annual  report  our   conclusions   about
                  effectiveness of the disclosure  controls and procedures based
                  on our evaluation as of the Evaluation Date;

5.       The registrant's other certifying officers and I have disclosed,  based
         on our most recent  evaluation,  to the  registrant's  auditors and the
         audit  committee  of  registrant's   board  of  directors  (or  persons
         performing the equivalent functions):

         a)       all  significant  deficiencies  in the design or  operation of
                  internal   controls   which   could   adversely   affect   the
                  registrant's ability to record, process,  summarize and report
                  financial  data  and  have  identified  for  the  registrant's
                  auditors and material weakness in internal controls; and

         b)       any fraud,  whether or not material,  that involves management
                  or  other  employees  who  have  a  significant  role  in  the
                  registrant's internal controls; and

6.       The registrant's other certifying officers and I have indicated in this
         annual  report  whether  there were  significant  changes  in  internal
         controls or in other factors that could  significantly  affect internal
         controls  subsequent  to  the  date  of  our  most  recent  evaluation,
         including   any   corrective   actions   with  regard  to   significant
         deficiencies and material weaknesses.

Dated December 19, 2002

/s/ Charles Crocker
-----------------------------------
Charles Crocker
Chief Executive Officer and Chairman of the Board of Directors

<PAGE>

                                CERTIFICATION OF
                             CHIEF FINANCIAL OFFICER

I, John LaBoskey, certify that:

1.       I have reviewed  this annual  report on Form 10-K of BEI  Technologies,
         Inc.;

2.       Based on my  knowledge,  this annual report does not contain any untrue
         statement of a material fact or omit to state a material fact necessary
         to make the statements made, in light of the circumstances  under which
         such  statements  were made, not misleading  with respect to the period
         covered by this annual report;

3.       Based on my knowledge,  the financial  statements,  and other financial
         information  included  in this  annual  report,  fairly  present in all
         material  respects the financial  condition,  results of operations and
         cash flows of the  registrant as of, and for, the periods  presented in
         this annual report;

4.       The registrant's  other  certifying  officers and I are responsible for
         establishing  and  maintaining  disclosure  controls and procedures (as
         defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
         have:

         a)       designed  such  disclosure  controls and  procedures to ensure
                  that  material   information   relating  to  the   registrant,
                  including its consolidated  subsidiaries,  is made known to us
                  by others  within  those  entities,  particularly  during  the
                  period in which this annual report is being prepared;

         b)       evaluated the  effectiveness  of the  registrant's  disclosure
                  controls and procedures as of a date with 90 days prior to the
                  filing date of this annual report (the "Evaluation Date"); and

         c)       presented  in  this  annual  report  our   conclusions   about
                  effectiveness of the disclosure  controls and procedures based
                  on our evaluation as of the Evaluation Date;

5.       The registrant's other certifying officers and I have disclosed,  based
         on our most recent  evaluation,  to the  registrant's  auditors and the
         audit  committee  of  registrant's   board  of  directors  (or  persons
         performing the equivalent functions):

         a)       all  significant  deficiencies  in the design or  operation of
                  internal   controls   which   could   adversely   affect   the
                  registrant's ability to record, process,  summarize and report
                  financial  data  and  have  identified  for  the  registrant's
                  auditors and material weakness in internal controls; and

         b)       any fraud,  whether or not material,  that involves management
                  or  other  employees  who  have  a  significant  role  in  the
                  registrant's internal controls; and


6.       The registrant's other certifying officers and I have indicated in this
         annual  report  whether  there were  significant  changes  in  internal
         controls or in other factors that could  significantly  affect internal
         controls  subsequent  to  the  date  of  our  most  recent  evaluation,
         including   any   corrective   actions   with  regard  to   significant
         deficiencies and material weaknesses.

Dated December 19, 2002

/s/ John LaBoskey
-----------------------------
John LaBoskey
Senior Vice President and Chief Financial Officer

<PAGE>

                                                                     SCHEDULE II

                             BEI TECHNOLOGIES, INC.

                        VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
              Column A                                  Column B                  Column C           Column D         Column E
              --------                                  --------         -------------------------   --------         --------
                                                                                     Additions
                                                        ---------------------------------------------------------------------
                                                        Balance at      Charged to                                   Balance at
                                                        Beginning       Costs and     Charged to                       End of
             Description                                of Period        Expenses   Other Accounts  Deductions         Period
             -----------                                ---------        --------   --------------  ----------         ------
                                                                                    (in thousands)
<S>                                                       <C>            <C>            <C>           <C>               <C>
Year ended September 28, 2002:
Deducted from asset accounts:
     Allowance for doubtful accounts ..................   $1,662         $1,526         $--           $1,823(A)         $1,365
     Inventory reserve ................................    3,755          1,053          --            2,381(B)          2,427
                                                          ------         ------         -----         ------            ------
            Total .....................................   $5,417         $  460         $--           $2,125            $3,792
                                                          ======         ======         =====         ======            ======
Year ended September 29, 2001:
Deducted from asset accounts:
     Allowance for doubtful accounts ..................   $1,084         $1,093         $--           $  515(A)         $1,662
     Inventory reserve ................................    4,452          4,843          --            5,540(B)          3,755
                                                          ------         ------         -----         ------            ------
            Total .....................................   $5,536         $5,936         $--           $6,055            $5,417
                                                          ======         ======         =====         ======            ======
Year ended September 30, 2000:
Deducted from asset accounts:
     Allowance for doubtful accounts ..................   $  597         $  550         $--           $   63(A)         $1,084
     Inventory reserve ................................    3,154          4,685          --            3,387(B)          4,452
                                                          ------         ------         -----         ------            ------
            Total .....................................   $3,751         $5,235         $--           $3,450            $5,536
                                                          ======         ======         =====         ======            ======
</TABLE>

(A) Write-offs of uncollectible accounts

(B) Write-offs of obsolete and scrap items

                                      S-1

<PAGE>

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


The Board of Directors and Shareholders
BEI Technologies, Inc.

We have audited the consolidated financial statements of BEI Technologies,  Inc.
and  subsidiaries  as of September 28, 2002 and September 29, 2001, and for each
of the three years in the period ended  September 28, 2002,  and have issued our
report  thereon dated  October 29, 2002.  Our audits also included the financial
statement schedule listed in Item 15(a)2 of this Form 10-K. This schedule is the
responsibility of the Company's management.  Our responsibility is to express an
opinion based on our audits.

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


                                                Ernst & Young LLP


San Francisco, California
Date October 29, 2002

                                       S-2
<PAGE>


INDEX TO EXHIBITS


Exhibit
Number                              Description
------                              -----------

10.11             Credit  Agreement  dated August 14,  2002,  by and between BEI
                  Technologies,  Inc., BEI Sensors & Systems  Company,  Inc. and
                  Union Bank of California

10.12             Second  Amendment to Note Purchase  Agreement and Waiver dated
                  December 20, 2002,  by and between BEI Technologies, Inc.,
                  BEI Sensors & Systems Company,  Inc., Connecticut General Life
                  Insurance Company and Allstate Life Insurance Company.

23.1              Consent of Ernst & Young LLP Independent Auditors

24.1              Power of Attorney

99.5              CEO Certification  Pursuant to 18 U.S.C as adopted Pursuant to
                  Section 906 of the Sarbanes-Oxley Act of 2002

99.6              CFO Certification Pursuant to 18 U.S.C. as adopted Pursuant to
                  Section 906 of the Sarbanes-Oxley Act of 2002