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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

Commission file number 0-22799

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

One Post Street, Suite 2500
San Francisco, California 94104

(415) 956-4477

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

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

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

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

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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

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

PART I

ITEM 1. BUSINESS

Introduction

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

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

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

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

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

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

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

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on industrial or off-road equipment.

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

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

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

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

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

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

Customers and Markets

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

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

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

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

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

Products and Proprietary Systems

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

1.

Traditional sensors;

2.

Micromachined sensors;

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3.

Magnetic actuators and motors; and

4.

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

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

   Traditional Sensors

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

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

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

   Micromachined Sensors

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

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

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

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

   Magnetic Actuators and Motors

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

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

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

   Engineered Subsystems

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

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

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

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

Backlog

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

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

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

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

Competition

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

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

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

Manufacturing

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

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

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

Research and Development

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

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

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

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

Employees

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

Intellectual Property

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

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

Environmental Matters

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

Government Regulation

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

Facility Security Clearance

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

Regulation of Foreign Sales

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

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

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

Available Information

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

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

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

RISK FACTORS

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

Competition

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

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Rapid Technological Change; Research and Development Efforts

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

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

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

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

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

Manufacturing Processes and Equipment

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

Dependence Upon Key Personnel

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

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

Dependence Upon Key Suppliers

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

Dependence Upon Key Customers

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

Government Regulation

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

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

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

Contracting with the U.S. Government

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

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

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

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

Dependence on Proprietary Intellectual Property

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

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

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

International Sales

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

Financial Risk Covered by Insurance or Uninsured

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

Possible Volatility of the Company’s Common Stock Price

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

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operating results and financial condition.

Voting Control by Officers, Directors and Affiliates

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

Certain Charter Provisions

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

Risk of Extended Economic Downturn

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

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

International Conflicts May Further Adversely Affect Our Business

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

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DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

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

Directors

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

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

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

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

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

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

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

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

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

Staggered Board of Directors

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

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

Executive Officers

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

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

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

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

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

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ITEM 2. PROPERTIES

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

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

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

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ITEM 3. LEGAL PROCEEDINGS

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

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

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

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

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

     None.

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PART II

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

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

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

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

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SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

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ITEM 6. SELECTED FINANCIAL DATA

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

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

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

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

     See “Critical Accounting Policies and the Use of Estimates” for a description of the Company’s critical accounting policies.

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

Net Sales

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

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

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

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

Cost of Sales and Gross Profit

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

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

Selling, General and Administrative Expenses

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

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

Research, Development and Related Expenses

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

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

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

Related Party Expense and Financing

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

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

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

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

Provisions

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

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

Interest Expense and Other Income

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

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

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

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Income Taxes

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

Deferred Income Taxes

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

Liquidity and Capital Resources

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

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

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

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

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

Effects of Inflation

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

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CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES

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

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

Allowance for Doubtful Accounts

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

Inventories

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

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

Long-Lived and Intangible Assets and Goodwill

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

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

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Equity Investments

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

Litigation

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

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

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

Environmental Matters

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

Income Taxes

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

SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

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

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

Product Warranty

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

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

Property, Plant and Equipment and Related Depreciation

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

Accrued Expenses and Other Liabilities

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

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

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED BALANCE SHEETS
BEI Technologies, Inc. and Subsidiaries

See notes to consolidated financial statements

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

See notes to consolidated financial statements

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CONSOLIDATED STATEMENTS OF OPERATIONS
BEI Technologies, Inc. and Subsidiaries

See notes to consolidated financial statements

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

See notes to consolidated financial statements

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