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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
****
FORM 10-Q
****

[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 2, 2002.

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

For the transition period from  to  .

Commission File Number 0-10078

HEI, Inc.
(Exact name of Registrar in Its Charter)

|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Minnesota                                                      |  | 41-0944876                          
|(State or other jurisdiction
of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                              
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|6385 Old Shady Oak Road, Suite 280, Eden Prairie, MN           |  | 55344-7736                          
|(Address of principal executive offices)                       |  | (Zip Code)                          

(952) 443-2500
Issuers telephone number, including area code

None
Former name, former address and former fiscal year, if changed since last report.

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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.

State the number of shares outstanding of each of the issuers classes of
common equity, as of the latest practicable date: as of April 15, 2002,
5,985,710 shares of common stock, par value $.05.

This Form 10-Q consists of 15 pages.





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TABLE OF CONTENTS



|                              |                                                                                                                        |                                                                  |  |  |  |  |  | 
|----------------------------- | ---------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------- |  |  |  |  |  | 
|Part I. FINANCIAL INFORMATION
|                              | Item 1. Financial Statements                                                                                          
|                              |                                                                                                                        | Consolidated Balance Sheets (Unaudited)                         
|                              |                                                                                                                        | Consolidated Statements of Operations (Unaudited)               
|                              |                                                                                                                        | Consolidated Statements of Cash Flows (Unaudited)               
|                              |                                                                                                                        | Notes to Consolidated Financial Statements (Unaudited) HEI, Inc.
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (In thousands) HEI, Inc.
|                              | Item 3. Qualitative and Quantitative Disclosures About Market Risk                                                    
|PART II  OTHER INFORMATION  
|                              | Item 6. Exhibits and Reports on Form 8-K                                                                              
|SIGNATURES                   



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|                                                                                              |                                            |           |      |     | 
|--------------------------------------------------------------------------------------------- | ------------------------------------------ | --------- | ---- | --- | 
|Table of Contents                                                                             |                                            | HEI, Inc.
|                                                                                              |                                            |          
|Part I    Financial Information (unaudited)                                                  |                                            |           |      |    
|Item 1. Financial Statements                                                                  |                                            |           |      |    
|                                                                                              | Consolidated Balance Sheets                |           |      | 3   | 
|                                                                                              | Consolidated Statements of Operations      |           |      | 4   | 
|                                                                                              | Consolidated Statements of Cash Flows      |           |      | 5   | 
|                                                                                              | Notes to Consolidated Financial Statements |           |      | 6-8 | 
|Item 2. Managements Discussion and Analysis of Results of Operations and
Financial Condition |                                            |           | 9-12 |    
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                            |                                            |           | 13   |    
|Part II    Other Information                                                                 |                                            |           |      |    
|Item 6. Exhibits and Reports on Form 8-K                                                      |                                            |           | 14   |    
|                                                                                              | Signatures                                 |           |      | 15  | 

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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements

HEI, Inc.Consolidated Balance Sheets (Unaudited)(In thousands)

|                                               |                                                                                                 |   |               |         |                 |   |        |         |  
|---------------------------------------------- | ----------------------------------------------------------------------------------------------- | - | ------------- | ------- | --------------- | - | ------ | ------- | -
|                                               |                                                                                                 |   | March 2, 2002 |         | August 31, 2001
|                                               |                                                                                                 |   |               |         |                
|Assets                                         |                                                                                                 |   |               |         |                 |   |        |        
|Current assets:                                |                                                                                                 |   |               |         |                 |   |        |        
|                                               | Cash and cash equivalents                                                                       |   | $             | 4,300   |                 |   | $      | 4,393   |  
|                                               | Accounts receivable, net                                                                        |   |               | 3,519   |                 |   |        | 4,617   |  
|                                               | Inventories                                                                                     |   |               | 4,098   |                 |   |        | 4,284   |  
|                                               | Other current assets                                                                            |   |               | 1,452   |                 |   |        | 635     |  
|                                               |                                                                                                 |   |               |         |                 |   |        |        
|Total current assets                           |                                                                                                 |   | 13,369        |         |                 |   | 13,929 |        
|                                               |                                                                                                 |   |               |         |                 |   |        |        
|Property and equipment:                        |                                                                                                 |   |               |         |                 |   |        |        
|                                               | Land                                                                                            |   |               | 216     |                 |   |        | 216     |  
|                                               | Building and improvements                                                                       |   |               | 4,315   |                 |   |        | 4,316   |  
|                                               | Fixtures and equipment                                                                          |   |               | 20,662  |                 |   |        | 18,810  |  
|                                               | Accumulated depreciation                                                                        |   |               | (12,955 | )               |   |        | (11,714 | )
|                                               |                                                                                                 |   |               |         |                 |   |        |        
|Net property and equipment                     |                                                                                                 |   | 12,238        |         |                 |   | 11,628 |        
|                                               |                                                                                                 |   |               |         |                 |   |        |        
|Other long-term assets                         |                                                                                                 |   | 2,045         |         |                 |   | 1,971  |        
|                                               |                                                                                                 |   |               |         |                 |   |        |        
|Total assets                                   |                                                                                                 | $ | 27,652        |         |                 | $ | 27,528 |        
|                                               |                                                                                                 |   |               |         |                 |   |        |        
|Liabilities and Shareholders Equity           |                                                                                                 |   |               |         |                 |   |        |        
|Current liabilities:                           |                                                                                                 |   |               |         |                 |   |        |        
|                                               | Revolving line of credit                                                                        |   | $             | 1,465   |                 |   | $      | 10      |  
|                                               | Current maturities of long-term debt                                                            |   |               | 1,441   |                 |   |        | 1,441   |  
|                                               | Accounts payable                                                                                |   |               | 2,173   |                 |   |        | 1,912   |  
|                                               | Accrued employee related costs                                                                  |   |               | 1,005   |                 |   |        | 839     |  
|                                               | Accrued liabilities                                                                             |   |               | 873     |                 |   |        | 934     |  
|                                               |                                                                                                 |   |               |         |                 |   |        |        
|Total current liabilities                      |                                                                                                 |   | 6,957         |         |                 |   | 5,136  |        
|                                               |                                                                                                 |   |               |         |                 |   |        |        
|Long-term liabilities, less current maturities |                                                                                                 |   | 3,544         |         |                 |   | 3,972  |        
|                                               |                                                                                                 |   |               |         |                 |   |        |        
|Shareholders equity:                          |                                                                                                 |   |               |         |                 |   |        |        
|                                               | Undesignated stock; 5,000 shares authorized; none issued                                        |   |               |        |                 |   |        |        |  
|                                               | Common stock, $.05 par; 10,000 shares authorized;
5,986 and 5,956 shares issued and outstanding |   |               | 299     |                 |   |        | 298     |  
|                                               | Paid-in capital                                                                                 |   |               | 16,444  |                 |   |        | 16,310  |  
|                                               | Retained earnings                                                                               |   |               | 1,674   |                 |   |        | 3,078   |  
|                                               | Notes receivable                                                                                |   |               | (1,266  | )               |   |        | (1,266  | )
|                                               |                                                                                                 |   |               |         |                 |   |        |        
|Total shareholders equity                     |                                                                                                 |   | 17,151        |         |                 |   | 18,420 |        
|                                               |                                                                                                 |   |               |         |                 |   |        |        
|Total liabilities and shareholders equity     |                                                                                                 | $ | 27,652        |         |                 | $ | 27,528 |        
|                                               |                                                                                                 |   |               |         |                 |   |        |        

See accompanying notes to unaudited consolidated financial statements.

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HEI, Inc.Consolidated Statements of Operations (Unaudited)(In thousands, except per share amounts)

|                                            |                                       |         |       |                    |       |                  |        |              |       |              |        |        |       |   |        |        |       | 
|------------------------------------------- | ------------------------------------- | ------- | ----- | ------------------ | ----- | ---------------- | ------ | ------------ | ----- | ------------ | ------ | ------ | ----- | - | ------ | ------ | ----- | 
|                                            |                                       |         |       | Three Months Ended |       | Six Months Ended
|                                            |                                       |         |       |                    |       |                 
|                                            |                                       |         |       | Mar. 2, 2002       |       | Mar. 3, 2001     |        | Mar. 2, 2002 |       | Mar. 3, 2001
|                                            |                                       |         |       |                    |       |                  |        |              |       |             
|Net sales                                   |                                       | $       | 7,799 |                    |       | $                | 12,881 |              |       | $            | 13,925 |        |       | $ | 26,605 |       
|Cost of sales                               |                                       |         | 6,260 |                    |       |                  | 10,409 |              |       |              | 12,001 |        |       |   | 21,579 |       
|                                            |                                       |         |       |                    |       |                  |        |              |       |              |        |        |       |   |        |       
|                                            | Gross profit                          |         |       | 1,539              |       |                  |        | 2,472        |       |              |        | 1,924  |       |   |        | 5,026  |      
|                                            |                                       |         |       |                    |       |                  |        |              |       |              |        |        |       |   |        |       
|Operating expenses:                         |                                       |         |       |                    |       |                  |        |              |       |              |        |        |       |   |        |       
|                                            | Selling, general and administrative   |         |       | 1,245              |       |                  |        | 1,547        |       |              |        | 2,607  |       |   |        | 3,093  |      
|                                            | Research, development and engineering |         |       | 706                |       |                  |        | 614          |       |              |        | 1,366  |       |   |        | 1,134  |      
|                                            | Unusual charges                       |         |       |                   |       |                  |        | 1,268        |       |              |        |       |       |   |        | 1,268  |      
|                                            |                                       |         |       |                    |       |                  |        |              |       |              |        |        |       |   |        |       
|                                            | Operating loss                        |         |       | (412               | )     |                  |        | (957         | )     |              |        | (2,049 | )     |   |        | (469   | )    
|                                            |                                       |         |       |                    |       |                  |        |              |       |              |        |        |       |   |        |       
|Other expense, net                          |                                       |         | (61   | )                  |       |                  | (201   | )            |       |              | (82    | )      |       |   | (564   | )     
|                                            |                                       |         |       |                    |       |                  |        |              |       |              |        |        |       |   |        |       
|                                            | Loss before income taxes              |         |       | (473               | )     |                  |        | (1,158       | )     |              |        | (2,131 | )     |   |        | (1,033 | )    
|Income tax benefit                          |                                       |         | 163   |                    |       |                  | 393    |              |       |              | 727    |        |       |   | 350    |       
|                                            |                                       |         |       |                    |       |                  |        |              |       |              |        |        |       |   |        |       
|                                            | Net loss                              |         |       | (310               | )     |                  |        | (765         | )     |              |        | (1,404 | )     |   |        | (683   | )    
|                                            |                                       |         |       |                    |       |                  |        |              |       |              |        |        |       |   |        |       
|Net loss per common share:                  |                                       |         |       |                    |       |                  |        |              |       |              |        |        |       |   |        |       
|                                            | Basic                                 |         | $     | (0.05              | )     |                  |        | ($0.16       | )     |              | $      | (0.23  | )     |   |        | ($0.14 | )    
|                                            | Diluted                               |         | $     | (0.05              | )     |                  |        | ($0.16       | )     |              | $      | (0.23  | )     |   |        | ($0.14 | )    
|                                            |                                       |         |       |                    |       |                  |        |              |       |              |        |        |       |   |        |       
|Weighted average common shares outstanding: |                                       |         |       |                    |       |                  |        |              |       |              |        |        |       |   |        |       
|                                            |                                       | Basic   |       |                    | 5,986 |                  |        |              | 4,783 |              |        |        | 5,978 |   |        |        | 4,782 | 
|                                            |                                       | Diluted |       |                    | 5,986 |                  |        |              | 4,783 |              |        |        | 5,978 |   |        |        | 4,782 | 
|                                            |                                       |         |       |                    |       |                  |        |              |       |              |        |        |       |   |        |       

See accompanying notes to unaudited consolidated financial statements.

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HEI, Inc.Consolidated Statements of Cash Flows (Unaudited)(In thousands)

|                                                          |                                                        |   |                  |        |               |   |        |        |  
|--------------------------------------------------------- | ------------------------------------------------------ | - | ---------------- | ------ | ------------- | - | ------ | ------ | -
|                                                          |                                                        |   | Six Months Ended
|                                                          |                                                        |   |                 
|                                                          |                                                        |   | March 2, 2002    |        | March 3, 2001
|                                                          |                                                        |   |                  |        |              
|Cash flow provided by operating activities:               |                                                        |   |                  |        |               |   |        |       
|                                                          | Net loss                                               |   | $                | (1,404 | )             |   | $      | (683   | )
|                                                          | Equity in net loss from MSC                            |   |                  |       |               |   |        | 12     |  
|                                                          | Depreciation and amortization                          |   |                  | 1,413  |               |   |        | 1,461  |  
|                                                          | Accounts receivable allowance                          |   |                  | 11     |               |   |        | 1,230  |  
|                                                          | Deferred income tax benefit                            |   |                  | (456   | )             |   |        | (275   | )
|                                                          | Other                                                  |   |                  | 89     |               |   |        |        |  
|                                                          | Non-cash expenses for CMED transaction                 |   |                  |       |               |   |        | 161    |  
|                                                          | Loss on disposal of property and equipment             |   |                  |       |               |   |        | 63     |  
|Changes in operating assets and liabilities:              |                                                        |   |                  |        |               |   |        |       
|                                                          | Accounts receivable                                    |   |                  | 1,087  |               |   |        | (108   | )
|                                                          | Inventories                                            |   |                  | 186    |               |   |        | (791   | )
|                                                          | Income taxes                                           |   |                  |       |               |   |        | (86    | )
|                                                          | Other current assets                                   |   |                  | (361   | )             |   |        | (2     | )
|                                                          | Accounts payable                                       |   |                  | 261    |               |   |        | 1,079  |  
|                                                          | Accrued employee related costs and accrued liabilities |   |                  | 105    |               |   |        | (245   | )
|                                                          |                                                        |   |                  |        |               |   |        |       
|Net cash flow provided by operating activities            |                                                        |   | 931              |        |               |   | 1,816  |       
|                                                          |                                                        |   |                  |        |               |   |        |       
|Cash flow from investing activities:                      |                                                        |   |                  |        |               |   |        |       
|                                                          | Additions to property and equipment                    |   |                  | (2,090 | )             |   |        | (1,472 | )
|                                                          | Decrease in restricted cash                            |   |                  |       |               |   |        | 86     |  
|                                                          | Additions to patents                                   |   |                  | (74    | )             |   |        | (55    | )
|                                                          | Other long term prepaid assets                         |   |                  |       |               |   |        | (500   | )
|                                                          |                                                        |   |                  |        |               |   |        |       
|Net cash flow used for investing activities               |                                                        |   | (2,164           | )      |               |   | (1,941 | )     
|                                                          |                                                        |   |                  |        |               |   |        |       
|Cash flow from financing activities:                      |                                                        |   |                  |        |               |   |        |       
|                                                          | Issuance of common stock and other                     |   |                  | 135    |               |   |        | 51     |  
|                                                          | Increase in deferred financing fees                    |   |                  | (22    | )             |   |        | (8     | )
|                                                          | Net issuances (repayments) of long-term debt           |   |                  | (428   | )             |   |        | 418    |  
|                                                          | Borrowings on (repayments of) revolving line of credit |   |                  | 1,455  |               |   |        | (666   | )
|                                                          |                                                        |   |                  |        |               |   |        |       
|Net cash flow provided by (used for) financing activities |                                                        |   | 1,140            |        |               |   | (205   | )     
|                                                          |                                                        |   |                  |        |               |   |        |       
|Net decrease in cash and cash equivalents                 |                                                        |   | (93              | )      |               |   | (330   | )     
|Cash and cash equivalents, beginning of period            |                                                        |   | 4,393            |        |               |   | 484    |       
|                                                          |                                                        |   |                  |        |               |   |        |       
|Cash and cash equivalents, end of period                  |                                                        | $ | 4,300            |        |               | $ | 154    |       
|                                                          |                                                        |   |                  |        |               |   |        |       
|Supplemental disclosures of cash flow information:        |                                                        |   |                  |        |               |   |        |       
|                                                          |                                                        |   |                  |        |               |   |        |       
|Interest paid                                             |                                                        | $ | 173              |        |               | $ | 250    |       
|Income taxes paid                                         |                                                        |   |                 |        |               |   | 14     |       
|                                                          |                                                        |   |                  |        |               |   |        |       

See accompanying notes to unaudited consolidated financial statements.

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Notes to Consolidated Financial Statements (Unaudited) HEI, Inc.
(In thousands)

(1) Basis of Financial Statement Presentation

The unaudited interim consolidated financial statements have been prepared by
the Company, under the rules and regulations of the Securities and Exchange
Commission. The accompanying financial statements contain all normal recurring
adjustments, which are, in the opinion of management, necessary for a fair
presentation in accordance with accounting principles generally accepted in the
United States of America.

The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.

Certain information and disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted under such rules and
regulations although the Company believes that the disclosures are adequate to
make the information presented not misleading. The year-end balance sheet data
was derived from audited financial statements, but does not include all
disclosures required by accounting principles generally accepted in the United
States of America. These unaudited financial statements should be read in
conjunction with the financial statements and notes included in the Companys
Annual Report to Shareholders on Form 10-K for the year ended August 31, 2001.
Interim results of operations for the six-month period ended March 2, 2002 may
not necessarily be indicative of the results to be expected for the full year.

The Companys quarterly periods end on the last Saturday of each quarter of its
fiscal year ending August 31.

In June 2001, the FASB issued SFAS No. 141, Business Combinations and SFAS
No. 142, Goodwill and Other Intangible Assets. These standards revised the
rules related to the accounting for business combinations, goodwill and other
intangible assets. SFAS No. 141 requires that all business combinations
initiated after June 30, 2001 be accounted for using the purchase accounting
method. SFAS No. 142 states that goodwill is no longer subject to amortization
over its useful life. Rather, goodwill will be subject to annual assessment
for impairment and be written down to its fair value only if the carrying
amount is greater than the fair value. In addition, intangible assets are
separately recognized if the benefit of the intangible asset can be sold,
transferred, licensed, rented or exchanged, regardless of the acquirers intent
to do so. The amount and timing of non-cash charges related to intangibles
acquired in business combinations will change significantly from prior
practice. The effect of adopting SFAS 141 and 142 in fiscal 2003 is not
expected to have an impact on the Companys financial position or results of
operations.

In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. The Company is
required to adopt this statement in its fiscal year 2003. The Company has not
yet quantified the potential effect if any of adoption of SFAS No. 144.

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(2) Inventories

Inventories are stated at the lower of cost or market and include materials,
labor and overhead costs. The weighted average cost method is used in valuing
inventories. Inventories consist of the following:

|                |  |               |       |                 |  |   |       | 
|--------------- |  | ------------- | ----- | --------------- |  | - | ----- | 
|(In thousands)  |  | March 2, 2002 |       | August 31, 2001
|                |  |               |       |                
|Purchased parts |  | $             | 2,671 |                 |  | $ | 3,209 | 
|Work in process |  |               | 481   |                 |  |   | 387   | 
|Finished goods  |  |               | 946   |                 |  |   | 688   | 
|                |  |               |       |                 |  |   |       | 
|                |  | $             | 4,098 |                 |  | $ | 4,284 | 
|                |  |               |       |                 |  |   |       | 

(3) Deferred Tax Asset

At March 2, 2002, the Company has net operating loss carryforwards, expiring at
various dates ranging from 2013 through 2022. The Company has an aggregate
deferred tax asset of $2,298 in connection with these net operating loss
carryforwards.

Management performs an analysis of the realization of the deferred tax asset
each fiscal quarter and has concluded it is more likely than not that the
Company will realize the aggregate deferred tax asset of $2,298 at March 2,
2002. This analysis largely relies on managements ability to return the
Companys core business to long-term profitability in the near term and taking
into account restructuring activities  which the Company undertook in fiscal
2001 and in the third quarter 2002. Unanticipated negative changes in future
operations of the Company would adversely effect the realization of the
Companys deferred tax asset. Such negative changes would result in the establishment of a valuation
reserve for the deferred tax asset.

(4) Investment in Micro Substrates Corporation (MSC)

During the fourth quarter of fiscal 2001, the company wrote-off the remaining
value of its investment in MSC and the related license agreement. In January
2002 we reached an agreement with MSC and Circuit Components, Inc. (CCI), the
majority shareholder in MSC, in which we received a $750 note in exchange for
our shares of MSC and the resolution of all disputes and potential claims
related to the original agreement and subsequent litigation. The $750 note bears
interest at the prime rate, with interest and principal payable quarterly
through 2007. The note is secured by one million shares of MSC held in escrow
with releases every six months as the Company receives payments. HEI has
placed no value on the note receivable at March 2, 2002. HEI will record the
quarterly principal payments of $37 and interest as other income as payments
are received.

(5) Long-Term Debt

All of the Companys long-term debt is subject to certain restrictive financial
covenants, including but not limited to, tangible net worth, interest coverage,
debt service coverage, annual loss limitations and the ability to declare or
pay dividends. As of the quarter ending March 2, 2002 we were not in compliance
with several these covenants. The bank has waived these events of default and
has reestablished these covenants as of March 18, 2002. We are currently in
compliance with these covenants and anticipate continued compliance.

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(6) Net Loss Per Weighted Average Common Share

Basic loss per share is computed by dividing net loss by the weighted average
number of common shares outstanding. Diluted earnings per share are computed by
dividing net loss by the weighted average number of common shares outstanding
assuming the exercise of dilutive stock options. The dilutive effect of stock
options is computed using the average market price of the Companys stock
during each period under the treasury stock method. In periods where losses
have occurred, options are considered anti-dilutive and thus have not been
included in the diluted loss per share calculations.

|                                 |  |                    |       |                  |  |               |       |               |  |  |       |  |  |  |       | 
|-------------------------------- |  | ------------------ | ----- | ---------------- |  | ------------- | ----- | ------------- |  |  | ----- |  |  |  | ----- | 
|(In thousands)                   |  | Three Months Ended |       | Six Months Ended
|                                 |  |                    |       |                 
|                                 |  | March 2, 2002      |       | March 3, 2001    |  | March 2, 2002 |       | March 3, 2001
|                                 |  |                    |       |                  |  |               |       |              
|Basic common shares              |  |                    | 5,986 |                  |  |               | 4,783 |               |  |  | 5,978 |  |  |  | 4,782 | 
|Dilutive effect of stock options |  |                    |       |                  |  |               |       |               |  |  |       |  |  |  |       | 
|                                 |  |                    |       |                  |  |               |       |               |  |  |       |  |  |  |       | 
|Diluted common shares            |  |                    | 5,986 |                  |  |               | 4,783 |               |  |  | 5,978 |  |  |  | 4,782 | 
|                                 |  |                    |       |                  |  |               |       |               |  |  |       |  |  |  |       | 

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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (In thousands) HEI, Inc.

FINANCIAL CONDITION  LIQUIDITY AND CAPITAL RESOURCES

The Companys net cash flow provided by operating activities was $931 for the
six months ended March 2, 2002 compared to $1,816 in the prior-year period.
Cash flows from operations in the six-month period ended March 2, 2002 and 2001
are primarily a result of each periods net loss of ($1,404) and ($683),
respectively, adjusted for non-cash depreciation and amortization of $1,413 and
$1,461, respectively, and a net decrease (increase) of $1,278 and $(153),
respectively, in working capital investments, as a result of reduced
(increased) accounts receivable balances of $1,087 and ($108), respectively,
during the first six months of fiscal 2002 and 2001, and net deferred tax
benefit of ($456) and ($275), respectively. Lower accounts receivable balances
in the 2002 period were the result of lower sales in the second quarter of
fiscal 2002 as compared to the same quarter of fiscal 2001.

Accounts receivable average days outstanding of 38 at March 2, 2002 improved
significantly from 74 days as of August 31, 2001. This improvement is largely
a result of reduced receivables terms for product sold to Siemens under the
consignment program implemented and improved collections efforts.

Annualized inventory turns were 5.9 for the 6-month period ending March 2, 2002
compared to 6.8 turns for the same period a year ago. The lower inventory
turns is a result of two main factors: the lower revenue experienced in the
second quarter of fiscal 2002 compared to the prior year and the deferral of
shipments under existing purchase orders from Agere, which has resulted in
approximately $600 of inventory which we are carrying on their behalf. We have
received a $450 purchase order from Agere for delivery of this inventory during
the third and fourth quarters of this fiscal year. We anticipate using the
remaining inventory in the first and second quarters of fiscal year 2003.

The Company has Industrial Development Revenue Bonds outstanding totaling
$2,435. These bonds were originally issued in April 1996 in connection with the
construction of a new addition to the Companys manufacturing facility in
Victoria, Minnesota and for production equipment purchases. In April of each year, these
bonds require annual principal payments of $700K. The Company has limited market
risk with of the variability of the interest rate on these bonds. The bonds
bear interest at a rate, which varies weekly, based on comparable tax-exempt
issues, and is limited to a maximum rate of 10%. The interest rate at March 2,
2002 and August 31, 2001 was 1.21% and 2.11%, respectively. The bonds are
collateralized by two irrevocable letters of credit and essentially all of the
Companys property and equipment. A commitment fee is paid annually to the
bank at a rate of 1.25% of the letters of credit. The Company has a maximum of
$5,000 available under a bank revolving line of credit, based on the eligible
accounts receivable balances at March 2, 2002. The Company also has an $8,500
capital expenditure term loan with the bank. Both of these agreements expire in
August 2004. At March 2, 2002, $1,465 and $2,421 are outstanding under the
revolving line of credit and capital expenditure term loan, respectively.
There are minimum interest requirements under our agreements, which results in
us carrying a balance in the revolving line of credit. These borrowings are
subject to certain restrictive financial covenants, including but not limited
to: tangible net worth, interest coverage ratio, debt service coverage ratio,
annual loss limitations and the ability to declare or pay dividends. As of the
quarter ended March 2, 2002 we were not in compliance with several these
covenants. The bank has waived these events of default and has established new
financial covenants as of March 18, 2002. We are currently in compliance with
these covenants and anticipate continued compliance.

Although we are currently in compliance with the debt covenants, the bank has
put certain restrictions on our ability to borrow additional funds under the
capital expenditure term loan. These restrictions require us to maintain a Debt
Service Coverage Ratio, as defined in the term-loan agreement, equal to or
greater than 1.0 to 1.0 as of the fiscal year ending August 31, 2002.

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As a result of these restrictions, we are currently not able to borrow
additional funds under the capital expenditure term loan facility. We
currently have sufficient financial resources to implement our business plan,
however, we continue to work to increase sales and improve our operating
results to eliminate this restriction and regain the ability to borrow
additional funds under the capital expenditure loan.

During fiscal 2002, the Company intends to expend approximately $2,500 for
manufacturing and facility improvements and capital equipment, of which $2,090
has been expended during the first six months of fiscal 2002. These additions
will increase manufacturing capacity to meet anticipated production
requirements and add technological capabilities. It is expected that these
expenditures will be funded from operations, existing cash and cash equivalents
and available debt financing.

The Company believes that its existing cash and cash equivalents, current
lending capacity and cash generated from operations will provide sufficient
cash flow for the Company to meet its short and long-term debt obligations and
operating requirements for at least the next twelve months. If we fail to meet
our bank covenants and are not able to obtain a waiver, we may be required to
immediately repay our outstanding balances and find a new lender, which may
cause us to incur additional costs, including higher interest costs, in
connection with establishing new lending relationship.

REVIEW OF OPERATIONS

Net Sales

Fiscal 2002 vs. 2001:The Companys net sales for the three and six-month
periods ended March 2, 2002 decreased 39% and 48%, respectively, compared to
the same periods a year ago. The decrease in net sales in the current year
periods is largely a result of the general economic slowdown specifically in
the hearing, communications, RFID/Access and electronic contract manufacturing markets.

Net sales for the six-month period ended March 2, 2002 of $13,925 decreased
$12,680 compared to the same period last year, reflecting a decrease in all
markets. Sales by market for the three and six- months ended March 2, 2002 and
March 3, 2001 are as follows:

|                |               |             |        |       |     |                     |       |                   |       |               |        |               |       |   |        |       |       |       |     | 
|--------------- | ------------- | ----------- | ------ | ----- | --- | ------------------- | ----- | ----------------- | ----- | ------------- | ------ | ------------- | ----- | - | ------ | ----- | ----- | ----- | --- | 
|                |               |             |        |       |     | Three Months Ending |       | Six Months Ending
|                |               |             |        |       |     |                     |       |                  
|                |               |             |        |       |     | March 2, 2002       |       | March 3, 2001     |       | March 2, 2002 |        | March 3, 2001
|                |               |             |        |       |     |                     |       |                   |       |               |        |              
|Hearing/Medical |               | $           | 5,528  |       |     | $                   | 7,614 |                   |       | $             | 10,033 |               |       | $ | 15,396 |      
|                |               | RFID/Access |        |       | 824 |                     |       |                   | 1,432 |               |        |               | 1,806 |   |        |       | 3,856 |      
|                | Communication |             |        | 698   |     |                     |       | 1,933             |       |               |        | 1,102         |       |   |        | 3,442 |      
|                |               |             |        | Other |     |                     | 749   |                   |       |               | 447    |               |       |   | 984    |       |       |       | 644 | 
|                |               |             | Mexico |       |     | 0                   |       |                   |       | 1,455         |        |               |       | 0 |        |       |       | 3,267 |    

Sales to hearing/medical customers decreased by $2,086 for the quarter and
$5,363 year to date, which is largely a result of excess inventory positions at
our significant hearing and medical customers, as well as the move to
consignment inventory for Siemens. We believe our significant customers have
inventory levels at March 2, 2002, which are more consistent with historical
levels and do not expect our customers to be in an over stock position. During
the first quarter of fiscal 2002, we entered into a program with Siemens in
which finished goods inventory is held by us at Siemens and revenue is
recognized when they use the product. In connection with this program, certain
raw materials used for Siemens products are being consigned to us by Siemens.
The result of this program is that finished goods inventory has increased,
while raw materials for this product has decreased.

The closure of our Mexico division late in fiscal 2001 resulted in reduced
sales of $1,455 for the three months period and $3,267 for the six-month period
during 2002 as compared to the same fiscal 2001 period.

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Sales for the three-month and six-month periods ended March 2, 2002 of Radio
Frequency Identification (RFID) products declined by $608 and $2,050
respectively compared to the prior year period, due to a significant drop in
revenue from a major customer. This significant customer sold one division and
terminated operations of another division during the first quarter of fiscal
year 2002.

Decreased sales to customers in the communications market is largely a result
of the push out of purchase orders by Agere and the general recession in the
telecommunications markets. However, during the third quarter of this fiscal
year we have received new purchase orders from Agere totaling $450 for
deliveries of products during this fiscal year.

We continue to experience strong demand for our hearing products and expect
this to continue into the third and fourth quarters of fiscal 2002. The
communications and RFID markets remain soft as our customers are awaiting
market acceptance and increase demand for their products. As the demand for
these products increase, we are positioned for an increase in sales in these
markets. In addition, we are experiencing continued external interest in our
proprietary products, for which we are currently working on new designs,
qualification testing and prototype orders with numerous customers.

Because the Companys sales are generally tied to the customers projected
sales and production of the related product, the Companys sales levels are
subject to fluctuations beyond our control. To the extent that sales to any one
customer represent a significant portion of the Companys sales, any change in
the sales levels to that customer can have a significant impact on the
Companys total sales. In addition, production for one customer may conclude
while production for a new customer has not yet begun or is not yet at full
volume. These factors may result in significant fluctuations in sales from
quarter to quarter.

Gross Profit

Fiscal 2002 vs. 2001:For the three and six-month periods ended March 2, 2002,
gross profit decreased $933 and $3,102, respectively from the same periods last
year. The gross profit margin for the three-months ended March 2, 2002
slightly improved to 20% as compared to 19% in the comparable period last year
due to cost containment measures and from the closure of the Mexico division
which generated negative gross margins of ($129) for the three months ended
March 3, 2001. Gross profit margin for the six-months ended March 2, 2002
decreased to 14%, as compared to 19% in the same period last year reflecting
the decreased economies of scale from fixed manufacturing costs as a result of
the lower sales levels during the first quarter of this fiscal year offset by
the negative gross margins incurred by the Mexico division of ($425) for the
six months ended March 3, 2001. The Company expects gross margins to increase
as sales increase. In addition, as market acceptance of our proprietary
broadband communications products occurs, gross margins should increase, as
these products are expected to have higher gross margin than we have
historically experienced.

Operating Expenses

Fiscal 2002 vs. 2001:Operating expenses in total were 25% and 28% of net sales
for the three and six-month periods, respectively, compared to 27% and 21% for
the same periods last year. Operating expenses for the three and six-month
periods ended March 2, 2002 decreased $1,478 and $1,522 respectively, from last
years comparable periods. The decrease in the selling, general and
administrative expenses of $302 and $486 respectively, for the current three
and six-month periods as compared to the same periods a year ago was primarily
due to the closure of the Mexico operations and other cost containment measures
offset by increases in professional fees and insurance costs. The increase in
research, development and engineering expenses of $92 and $232 respectively,
for the current year three and six-month periods as compared to the prior year
periods were primarily due to increased development costs to support future
business opportunities. The unusual charges of $1,268 incurred in the second
quarter of

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fiscal year 2001 relates to the write-off of accounts receivable related to
customers of the Mexico division.

Total operating expenses are expected to decrease slightly as a percentage of
sales throughout fiscal 2002 as sales levels increase.

In March 2002, the Company implemented cost reduction initiatives including
delayed compensation increases, mandated vacation or time off without pay,
workforce reductions, and minimizing non-labor expenses such as outside
services. The Company anticipates that these initiatives will reduce expenses
by $250 and $150, in the quarters ending June 1, 2002 and August 31, 2002,
respectively.

Other Expense, Net

Fiscal 2002 vs. 2001:Other expense, net decreased for the three and six-month
periods ended March 2, 2002, as a result of decreased net interest expense for
the quarter. Net interest expense for the six-month period decreased versus
the prior year by $77 as a result of the lower average debt and higher average
cash balances, along with lower interest rates during the current-year period
compared to the prior-year period. The lower average debt and higher average
cash balances are the result of the net offering proceeds of $6,222 received in
August 2001. Other expense, net for the six-month period ended March 3, 2001 of
$564 includes a non-cash charge of $161 ($106 net of tax) related to costs
associated with the abandoned Colorado MEDtech transaction.

Income Taxes

Fiscal 2002 vs. 2001:The Company records income tax expense for interim
periods based on the expected effective rate for the full year. The estimated
effective income tax rate for fiscal 2002 and 2001 was 34%. Management performs
an analysis of the realization of the deferred tax asset each fiscal quarter
and has concluded it is more likely than not that the Company will realize the
aggregate deferred tax asset of $2,298 at March 2, 2002. This analysis largely
relies on managements ability to return the Companys core business to
long-term profitability in the near term and taking into account restructuring
activities which the Company undertook in fiscal 2001 and in the third
quarter 2002. Unanticipated negative changes in future operations of the
Company would adversely effect the realization of the Companys deferred tax
asset, resulting in the establishment of a valuation reserve for the deferred
tax asset.

Net Income

Fiscal 2002 vs. 2001:The Company had net losses of $310 and $1,404 for the
three and six-month periods ended March 2, 2002, respectively, compared to net
losses of $765 and $683 for the same periods a year ago.

Forward-Looking Statements

Information in this document, which is not historical, includes forward-looking
statements made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. These statements are made based on
the Companys current assumptions regarding technology, markets, growth and
earnings expectations, and all of such forward-looking statements involve a
number of risks and uncertainties. There are certain important factors that can
cause actual results to differ materially from the forward-looking statements,
including without limitation, adverse business or market conditions; the
ability of the Company to secure and satisfy customers, the availability and
cost of materials from HEIs suppliers, adverse competitive developments,
change in or cancellation of customer requirements, the ability to generate
income to utilize existing deferred tax assets and other factors discussed from
time to time in the Companys filings with the Securities and Exchange
Commission. Readers are cautioned not to place undue reliance on
forward-looking statements. HEI undertakes no obligation to update these
statements to reflect ensuing events or circumstances, or subsequent actual
results.

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Item 3. Qualitative and Quantitative Disclosures About Market Risk

The Company is exposed to certain market risks with its $5,000 revolving line
of credit, capital expenditure loans and, to a lesser extent, its Industrial
Development Bonds (IDRBs). At March 2, 2002, the outstanding balance on the
revolving line of credit, capital expenditure loans and IDRBs were $1,465,
$2,421 and $2,435, respectively. The revolving line of credit agreement bears
interest, at the Companys option, at 0.75% above the prime rate of interest or
3.25% above the LIBOR rate. The capital expenditure loan bears interest, at the
Companys option, at 1.00% above the prime rate of interest or 3.5% above the
LIBOR rate. At March 2, 2002 the interest rates on the revolving commitment and
capital expenditure loans were 5.25 and 5.5%, respectively. The IDRBs bear
interest at a rate, which varies weekly, based on comparable tax exempt issues,
and is limited to a maximum rate of 10%. At March 2, 2002 the interest rate on
the IDRBs was 1.21%. Consequently, the Company is exposed to a change in
borrowing costs as interest rates change. We have completed a market risk
sensitivity analysis of these debt instruments based upon an assumed 1%
increase in interest rates. If market interest rates had increased by 1%, this
would have resulted in an increase to interest expense of approximately $56
over a one-year period. Because this is only an estimate, any actual change in
expense due to a change in interest rates could differ from this estimate.

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PART II  OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

a) Reports on Form 8-K



| |                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------
| | HEI filed two Form 8-K Current Report with the Securities and Exchange
Commission during the second quarter of fiscal year 2002 as follows:



| |             
| | ------------
| |  02/20/2002
|
| |  01/07/2002

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SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized

|      |  |          |  |                                                                                                                                            
|----- |  | -------- |  | -------------------------------------------------------------------------------------------------------------------------------------------
|      |  |          |  | HEI, Inc.                                                                                                                                  
|     
|      |  |          |  | (Registrant)                                                                                                                               
|     
|Date: |  | 04/15/02 |  | /s/ Steve E. Tondera, Jr.Steve E. Tondera, Jr.
Vice President of Finance,
Chief Financial Officer and Treasurer
(a duly authorized officer)

15