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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 June 1, 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 Registrant as Specified in Its Charter)

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

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

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

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 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. YesX No.

Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date: as of July 18, 2002, 6,010,256
shares of common stock, par value $.05.

This Form 10-Q consists of 17 pages.





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TABLE OF CONTENTS



|                              |                                                                                                              |                                            |  |  |  |  |  | 
|----------------------------- | ------------------------------------------------------------------------------------------------------------ | ------------------------------------------ |  |  |  |  |  | 
|Part I. FINANCIAL INFORMATION
|                              | Item 1. Financial Statements                                                                                
|                              |                                                                                                              | Consolidated Balance Sheets               
|                              |                                                                                                              | Consolidated Statements of Operations     
|                              |                                                                                                              | Consolidated Statements of Cash Flows     
|                              |                                                                                                              | Notes to Consolidated Financial Statements
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations (In thousands)
|                              | 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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2

|                  |  |          
|----------------- |  | ---------
|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 Financial Condition
and Results of Operations |  |                                            | 9-14 | 
|Item 3. Qualitative and Quantitative Disclosures About
Market Risk                            |  |                                            | 15   | 
|Part II  Other Information                                                                   |  |                                            |      | 
|Item 6. Exhibits and Reports on Form 8-K                                                      |  |                                            | 16   | 
|                                                                                              |  | Signatures                                 |      |  | 17  | 





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3










Part I. FINANCIAL INFORMATION
Item 1. Financial StatementsHEI, Inc.
Consolidated Balance Sheets (Unaudited)(In thousands)

|                                               |                                                                                                 |   |              |         |                 |   |        |         |  
|---------------------------------------------- | ----------------------------------------------------------------------------------------------- | - | ------------ | ------- | --------------- | - | ------ | ------- | -
|                                               |                                                                                                 |   | June 1, 2002 |         | August 31, 2001
|                                               |                                                                                                 |   |              |         |                
|Assets                                         |                                                                                                 |   |              |         |                 |   |        |        
|Current assets:                                |                                                                                                 |   |              |         |                 |   |        |        
|                                               | Cash and cash equivalents                                                                       |   | $            | 3,475   |                 |   | $      | 4,393   |  
|                                               | Accounts receivable, net                                                                        |   |              | 4,105   |                 |   |        | 4,617   |  
|                                               | Inventories                                                                                     |   |              | 3,965   |                 |   |        | 4,284   |  
|                                               | Other current assets                                                                            |   |              | 1,269   |                 |   |        | 635     |  
|                                               |                                                                                                 |   |              |         |                 |   |        |         |  
|Total current assets                           |                                                                                                 |   | 12,814       |         |                 |   | 13,929 |        
|                                               |                                                                                                 |   |              |         |                 |   |        |         |  
|Property and equipment:                        |                                                                                                 |   |              |         |                 |   |        |        
|                                               | Land                                                                                            |   |              | 216     |                 |   |        | 216     |  
|                                               | Building and improvements                                                                       |   |              | 4,315   |                 |   |        | 4,316   |  
|                                               | Fixtures and equipment                                                                          |   |              | 20,784  |                 |   |        | 18,810  |  
|                                               | Accumulated depreciation                                                                        |   |              | (13,705 | )               |   |        | (11,714 | )
|                                               |                                                                                                 |   |              |         |                 |   |        |         |  
|Net property and equipment                     |                                                                                                 |   | 11,610       |         |                 |   | 11,628 |        
|                                               |                                                                                                 |   |              |         |                 |   |        |         |  
|Other long-term assets                         |                                                                                                 |   | 2,049        |         |                 |   | 1,971  |        
|                                               |                                                                                                 |   |              |         |                 |   |        |         |  
|Total assets                                   |                                                                                                 | $ | 26,473       |         |                 | $ | 27,528 |        
|                                               |                                                                                                 |   |              |         |                 |   |        |         |  
|Liabilities and Shareholders Equity           |                                                                                                 |   |              |         |                 |   |        |        
|Current liabilities:                           |                                                                                                 |   |              |         |                 |   |        |        
|                                               | Revolving line of credit                                                                        |   | $            | 1,755   |                 |   | $      | 10      |  
|                                               | Current maturities of long-term debt                                                            |   |              | 1,441   |                 |   |        | 1,441   |  
|                                               | Accounts payable                                                                                |   |              | 1,752   |                 |   |        | 1,912   |  
|                                               | Accrued employee related costs                                                                  |   |              | 623     |                 |   |        | 839     |  
|                                               | Accrued liabilities                                                                             |   |              | 847     |                 |   |        | 934     |  
|                                               |                                                                                                 |   |              |         |                 |   |        |         |  
|Total current liabilities                      |                                                                                                 |   | 6,418        |         |                 |   | 5,136  |        
|                                               |                                                                                                 |   |              |         |                 |   |        |         |  
|Long-term liabilities, less current maturities |                                                                                                 |   | 2,659        |         |                 |   | 3,972  |        
|                                               |                                                                                                 |   |              |         |                 |   |        |         |  
|Shareholders equity:                          |                                                                                                 |   |              |         |                 |   |        |        
|                                               | Undesignated stock; 5,000 shares authorized; none issued                                        |   |              |        |                 |   |        |        |  
|                                               | Common stock, $.05 par; 10,000 shares authorized;
6,010 and 5,956 shares issued and outstanding |   |              | 301     |                 |   |        | 298     |  
|                                               | Paid-in capital                                                                                 |   |              | 16,572  |                 |   |        | 16,310  |  
|                                               | Retained earnings                                                                               |   |              | 1,789   |                 |   |        | 3,078   |  
|                                               | Notes receivable                                                                                |   |              | (1,266  | )               |   |        | (1,266  | )
|                                               |                                                                                                 |   |              |         |                 |   |        |         |  
|Total shareholders equity                     |                                                                                                 |   | 17,396       |         |                 |   | 18,420 |        
|                                               |                                                                                                 |   |              |         |                 |   |        |         |  
|Total liabilities and shareholders equity     |                                                                                                 | $ | 26,473       |         |                 | $ | 27,528 |        
|                                               |                                                                                                 |   |              |         |                 |   |        |         |  

See accompanying notes to unaudited consolidated financial statements.





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4




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

|                                            |                                             |         |       |                    |       |                   |        |              |       |              |        |        |       |   |        |        |       | 
|------------------------------------------- | ------------------------------------------- | ------- | ----- | ------------------ | ----- | ----------------- | ------ | ------------ | ----- | ------------ | ------ | ------ | ----- | - | ------ | ------ | ----- | 
|                                            |                                             |         |       | Three Months Ended |       | Nine Months Ended
|                                            |                                             |         |       | June 1, 2002       |       | June 2, 2001      |        | June 1, 2002 |       | June 2, 2001
|                                            |                                             |         |       |                    |       |                   |        |              |       |             
|Net sales                                   |                                             | $       | 8,500 |                    |       | $                 | 10,331 |              |       | $            | 22,424 |        |       | $ | 36,936 |       
|Cost of sales                               |                                             |         | 6,346 |                    |       |                   | 8,663  |              |       |              | 18,346 |        |       |   | 30,242 |       
|                                            |                                             |         |       |                    |       |                   |        |              |       |              |        |        |       |   |        |       
|                                            | Gross profit                                |         |       | 2,154              |       |                   |        | 1,668        |       |              |        | 4,078  |       |   |        | 6,694  |      
|                                            |                                             |         |       |                    |       |                   |        |              |       |              |        |        |       |   |        |       
|Operating expenses:                         |                                             |         |       |                    |       |                   |        |              |       |              |        |        |       |   |        |       
|                                            | Selling, general and administrative         |         |       | 1,369              |       |                   |        | 1,434        |       |              |        | 3,976  |       |   |        | 4,527  |      
|                                            | Research, development and engineering       |         |       | 579                |       |                   |        | 696          |       |              |        | 1,945  |       |   |        | 1,830  |      
|                                            | Unusual charges                             |         |       |                   |       |                   |        | 425          |       |              |        |       |       |   |        | 1,693  |      
|                                            |                                             |         |       |                    |       |                   |        |              |       |              |        |        |       |   |        |       
|                                            | Operating income (loss)                     |         |       | 206                |       |                   |        | (887         | )     |              |        | (1,843 | )     |   |        | (1,356 | )    
|                                            |                                             |         |       |                    |       |                   |        |              |       |              |        |        |       |   |        |       
|Other expense, net                          |                                             |         | (27   | )                  |       |                   | (106   | )            |       |              | (109   | )      |       |   | (670   | )     
|                                            |                                             |         |       |                    |       |                   |        |              |       |              |        |        |       |   |        |       
|                                            | Operating income (loss) before income
taxes |         |       | 179                |       |                   |        | (993         | )     |              |        | (1,952 | )     |   |        | (2,026 | )    
|Income tax (expense) benefit                |                                             |         | (64   | )                  |       |                   | 341    |              |       |              | 663    |        |       |   | 691    |       
|                                            |                                             |         |       |                    |       |                   |        |              |       |              |        |        |       |   |        |       
|                                            | Net income (loss)                           |         |       | 115                |       |                   |        | (652         | )     |              |        | (1,289 | )     |   |        | (1,335 | )    
|                                            |                                             |         |       |                    |       |                   |        |              |       |              |        |        |       |   |        |       
|Net income (loss) per common share:         |                                             |         |       |                    |       |                   |        |              |       |              |        |        |       |   |        |       
|                                            | Basic                                       |         | $     | 0.02               |       |                   | $      | (0.13        | )     |              | $      | (0.22  | )     |   | $      | (0.28  | )    
|                                            | Diluted                                     |         | $     | 0.02               |       |                   | $      | (0.13        | )     |              | $      | (0.22  | )     |   | $      | (0.28  | )    
|                                            |                                             |         |       |                    |       |                   |        |              |       |              |        |        |       |   |        |       
|Weighted average common shares
outstanding: |                                             |         |       |                    |       |                   |        |              |       |              |        |        |       |   |        |       
|                                            |                                             | Basic   |       |                    | 5,999 |                   |        |              | 4,930 |              |        |        | 5,985 |   |        |        | 4,831 | 
|                                            |                                             | Diluted |       |                    | 6,032 |                   |        |              | 4,930 |              |        |        | 5,985 |   |        |        | 4,831 | 
|                                            |                                             |         |       |                    |       |                   |        |              |       |              |        |        |       |   |        |       

See accompanying notes to unaudited consolidated financial statements.





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5




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

|                                                          |                                                        |   |                   |        |              |   |        |        |  
|--------------------------------------------------------- | ------------------------------------------------------ | - | ----------------- | ------ | ------------ | - | ------ | ------ | -
|                                                          |                                                        |   | Nine Months Ended
|                                                          |                                                        |   | June 1, 2002      |        | June 2, 2001
|                                                          |                                                        |   |                   |        |             
|Cash flow provided by operating activities:               |                                                        |   |                   |        |              |   |        |       
|                                                          | Net loss                                               |   | $                 | (1,289 | )            |   | $      | (1,335 | )
|                                                          | Equity in net loss from MSC                            |   |                   |       |              |   |        | 31     |  
|                                                          | Depreciation and amortization                          |   |                   | 2,155  |              |   |        | 2,213  |  
|                                                          | Accounts receivable allowance                          |   |                   |       |              |   |        | 1,230  |  
|                                                          | Deferred income tax benefit                            |   |                   | (395   | )            |   |        | (615   | )
|                                                          | Other                                                  |   |                   | 97     |              |   |        |        |  
|                                                          | Non-cash expenses for CMED transaction                 |   |                   |       |              |   |        | 161    |  
|                                                          | Loss on disposal of property and equipment             |   |                   |       |              |   |        | 63     |  
|Changes in operating assets and liabilities:              |                                                        |   |                   |        |              |   |        |       
|                                                          | Accounts receivable                                    |   |                   | 512    |              |   |        | (266   | )
|                                                          | Inventories                                            |   |                   | 319    |              |   |        | 18     |  
|                                                          | Income taxes                                           |   |                   |       |              |   |        | (86    | )
|                                                          | Other current assets                                   |   |                   | (326   | )            |   |        | (72    | )
|                                                          | Accounts payable                                       |   |                   | (160   | )            |   |        | 2,050  |  
|                                                          | Accrued employee related costs and accrued liabilities |   |                   | (216   | )            |   |        | 121    |  
|                                                          |                                                        |   |                   |        |              |   |        |        |  
|Net cash flow provided by operating activities            |                                                        |   | 697               |        |              |   | 3,513  |       
|                                                          |                                                        |   |                   |        |              |   |        |        |  
|Cash flow from investing activities:                      |                                                        |   |                   |        |              |   |        |       
|                                                          | Additions to property and equipment                    |   |                   | (2,200 | )            |   |        | (2,995 | )
|                                                          | Decrease in restricted cash                            |   |                   |       |              |   |        | 86     |  
|                                                          | Additions to patents                                   |   |                   | (87    | )            |   |        | (55    | )
|                                                          | Other long term prepaid assets                         |   |                   |       |              |   |        | (500   | )
|                                                          |                                                        |   |                   |        |              |   |        |        |  
|Net cash flow used for investing activities               |                                                        |   | (2,287            | )      |              |   | (3,464 | )     
|                                                          |                                                        |   |                   |        |              |   |        |        |  
|Cash flow from financing activities:                      |                                                        |   |                   |        |              |   |        |       
|                                                          | Issuance of common stock and other                     |   |                   | 265    |              |   |        | 68     |  
|                                                          | Increase in deferred financing fees                    |   |                   | (25    | )            |   |        | (33    | )
|                                                          | Net issuances (repayments) of long-term debt           |   |                   | (1,313 | )            |   |        | 547    |  
|                                                          | Borrowings on (repayments of) revolving line of credit |   |                   | 1,745  |              |   |        | (1,064 | )
|                                                          |                                                        |   |                   |        |              |   |        |        |  
|Net cash flow provided by (used for) financing activities |                                                        |   | 672               |        |              |   | (482   | )     
|                                                          |                                                        |   |                   |        |              |   |        |        |  
|Net decrease in cash and cash equivalents                 |                                                        |   | (918              | )      |              |   | (434   | )     
|Cash and cash equivalents, beginning of period            |                                                        |   | 4,393             |        |              |   | 484    |       
|                                                          |                                                        |   |                   |        |              |   |        |        |  
|Cash and cash equivalents, end of period                  |                                                        | $ | 3,475             |        |              | $ | 50     |       
|                                                          |                                                        |   |                   |        |              |   |        |        |  
|Supplemental disclosures of cash flow information:        |                                                        |   |                   |        |              |   |        |       
|                                                          |                                                        |   |                   |        |              |   |        |        |  
|Interest paid                                             |                                                        | $ | 262               |        |              | $ | 250    |       
|Income taxes paid  (Refunded)                            |                                                        |   | (268              | )      |              |   | 14     |       
|                                                          |                                                        |   |                   |        |              |   |        |        |  

See accompanying notes to unaudited consolidated financial statements.





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6




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

(1) Basis of Financial Statement Presentation

The Company, under the rules and regulations of the Securities and Exchange
Commission, has prepared the accompanying unaudited interim consolidated
financial statements. These 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 nine-month period ended June 1, 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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7

(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)  | June 1, 2002 |       |  | August 31, 2001
|                |              |       |  |                
|Purchased parts | $            | 1,925 |  |                 |  | $ | 3,209 | 
|Work in process |              | 476   |  |                 |  |   | 387   | 
|Finished goods  |              | 1,564 |  |                 |  |   | 688   | 
|                |              |       |  |                 |  |   |      
|                | $            | 3,965 |  |                 |  | $ | 4,284 | 
|                |              |       |  |                 |  |   |      

(3) Deferred Tax Asset

At June 1, 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 $2,237 in connection with these net operating loss
carryforwards.

Management routinely 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 $2,237 at June 1,
2002. This analysis largely relies on managements ability to return the
Companys core business to long-term profitability and taking into account a
number of cost cutting and strategic initiatives undertaken over the past 2
years. 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 $2,237 valuation
reserve for the deferred tax asset.

(4) Investment in Micro Substrates Corporation (MSC)

During the fourth quarter of fiscal 2001, the company completely reserved 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 note
balance of $713 as of June 1, 2002 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. We will record the quarterly principal payments of
$38 and interest as other income as payments are received. During the third
quarter we received the scheduled principal payment of $38 and interest of $9.

(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 June 1, 2002 we were in compliance
with these covenants and expect to maintain compliance for the foreseeable
future.





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8

(6) Net Income or Loss Per Weighted Average Common Share

Basic income or loss per share is computed by dividing net income or loss by
the weighted average number of common shares outstanding. Diluted earnings per
share are computed by dividing net income or 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 have not been included in the diluted loss per share
calculations.

|                                 |  |                    |       |                   |  |              |       |              |  |  |       |  |  |  |       | 
|-------------------------------- |  | ------------------ | ----- | ----------------- |  | ------------ | ----- | ------------ |  |  | ----- |  |  |  | ----- | 
|                                 |  | Three Months Ended |       | Nine Months Ended
|                                 |  |                    |       |                  
|(In thousands)                   |  | June 1, 2002       |       | June 2, 2001      |  | June 1, 2002 |       | June 2, 2001
|                                 |  |                    |       |                   |  |              |       |             
|Basic common shares              |  |                    | 5,999 |                   |  |              | 4,930 |              |  |  | 5,985 |  |  |  | 4,831 | 
|Dilutive effect of
stock options |  |                    | 33    |                   |  |              |      |              |  |  |      |  |  |  |      | 
|                                 |  |                    |       |                   |  |              |       |              |  |  |       |  |  |  |      
|Diluted common shares            |  |                    | 6,032 |                   |  |              | 4,930 |              |  |  | 5,985 |  |  |  | 4,831 | 
|                                 |  |                    |       |                   |  |              |       |              |  |  |       |  |  |  |      

(7) Workforce Reductions

Beginning with the second quarter of fiscal year 2002 through July 18, 2002 we
eliminated 43 positions (29 direct labor and 14 administrative positions). We
have continued staff reductions during the fourth quarter of fiscal 2002 either
by terminating employees or through attrition. Including planned fourth
quarter workforce reductions, our cost structure of direct labor, salary costs
and associated expenses will be reduced by $411 per quarter on an ongoing
basis. The amount of savings from workforce reductions are tied to the timing
within a quarter and the amount of associated severance cost.

For the positions eliminated through June 1, 2002, the Company has realized
saving, which are in line with Company expectations, of:

|                                         |  |                    |     |                   |  |   |     |  |  |  |  | 
|---------------------------------------- |  | ------------------ | --- | ----------------- |  | - | --- |  |  |  |  | 
|                                         |  | Three Months Ended |     | Nine Months Ended |  |   |     | 
|(In thousands)                           |  | June 1, 2002       |     | June 1, 2002      |  |   |     | 
|                                         |  |                    |     |                   |  |   |     | 
|Manufacturing Cost                       |  | $                  | 140 |                   |  | $ | 146 | 
|Selling, General and Administrative Cost |  | $                  | 43  |                   |  | $ | 47  | 
|Research and Development Cost            |  | $                  | 19  |                   |  | $ | 20  | 

As a result of the cumulative workforce reductions during fiscal year 2002 the
Company expects cost saving during the fourth quarter and the fiscal year as
follows:

|                                         |  |                     |     |                      |  |   |     |  |  |  |  | 
|---------------------------------------- |  | ------------------- | --- | -------------------- |  | - | --- |  |  |  |  | 
|                                         |  | Three Months Ending |     | Twelve Months Ending |  |   |     | 
|(In thousands)                           |  | August 31, 2002     |     | August 31, 2002      |  |   |     | 
|                                         |  |                     |     |                      |  |   |     | 
|Manufacturing Cost                       |  | $                   | 163 |                      |  | $ | 309 | 
|Selling, General and Administrative Cost |  | $                   | 65  |                      |  | $ | 112 | 
|Research and Development Cost            |  | $                   | 43  |                      |  | $ | 63  | 

The Company has paid an aggregate of $10 related to severance through June 1,
2002, including $2 in third quarter, and expects severance charges to be $25 in
the fourth quarter. Substantially all of the severance charges were paid in
the same period the charges were recorded.

We will attempt to reduce and contain cost as revenues fluctuate. At the same
time we seek to balance our on going development of new products and maintain
our ability to react quickly to favorable market demands and opportunities.





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9






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

---

OVERVIEW

As the economy began to experience a down turn in early 2001, the Company
refined and adjusted its strategic focus. In June, 2001, the Company closed
the Mexico division, disposing of some assets and relocating some assets to its
other facilities. Prior to its closing, this division had generated operating
losses of $2,774 for the nine months ended June 2, 2001.

The events of September 11, 2001 and the continued sluggish economy in all of
our markets during the first fiscal quarter of 2002 resulted in our reporting
the lowest revenue in nine quarters. In order to right size our business we
reduced our employees base by 13 at the end of the second quarter of fiscal
year 2002 with an estimated quarterly cost saving of $126. Even though our
revenue continued to increase in the third quarter we continued our efforts to
reduce cost by eliminating an additional 21 employees. For the positions
eliminated through the third quarter, the Company has realized saving of $140,
$43 and $19, respectively, in manufacturing costs, selling, general and
administrative expenses and research and development expenses for the
three-month period ended June 1, 2002 and $146, $47 and $20, respectively, for
the nine-month period ended June 1, 2002. These cost savings are in line with
the Companys expectations. For the fourth quarter, the Company expects costs
savings of $163, $65 and $43, respectively, in manufacturing costs, selling,
general and administrative expenses and research and development expenses as a
result of the cumulative workforce reductions during fiscal year 2002. The
amount of savings from workforce reductions are tied to the timing within a
quarter and the amount of associated severance cost.

We will attempt to reduce and contain cost as revenues fluctuate. At the same
time we seek to balance our on going development of new products and maintain
our ability to react quickly to favorable market demands and opportunities.

FINANCIAL CONDITION  LIQUIDITY AND CAPITAL RESOURCES

The Companys net cash flow provided by operating activities was $697 for the
nine months ended June 1, 2002 compared to $3,513 in the prior-year period.
Cash flows from operating activities in the nine-month period ended 2002 and
2001 are primarily a result of each periods net loss of ($1,289) and ($1,335),
respectively, adjusted for non-cash depreciation and amortization of $2,155 and
$2,213, respectively, and a net decrease of $129 and $1,765, respectively, in
working capital requirements. For the nine months ended June 1, 2002, the
Company generated cash of $512 from reduced accounts receivable balances, as
fiscal 2002 sales were lower than 2001 sales. The 2002 period included a $395
non-cash tax benefit, which is reflected as an adjustment to the periods net
loss. For the nine months ended June 2, 2001, the Company generated cash from
operating activities due to an increase in accounts payable of $2,050 resulting
from reduced cash balances pending the closure of the equity financing
transaction in August 2001. The 2001 period also included a $1,230 non-cash
charge for increased accounts receivable allowances related to the closing of
the Mexico division.

Accounts receivable average days outstanding of 42 at June 1, 2002 was a
significant improvement from 74 days as of August 31, 2001. This improvement
is largely a result of reduced receivables terms for product sold to Siemens
under a consignment program implemented in September 2001, improved collections
efforts and the final resolution of receivables pertaining to the closed Mexico
division.

Annualized inventory turns were 6.3 for the nine-month period ending June 1,
2002 compared to 6.0 turns for the same period a year ago. This improvement is
a result of the following factors: 1) Improved supply chain management, 2)
Improved product mix to higher value added products, and 3) Increased shipments
to Agere Systems that included raw materials we had previously classified as
slow moving inventory.





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10

The Company has Industrial Development Revenue Bonds outstanding totaling
$1,735. 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 $700. 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 are limited to a maximum rate of 10%. The
interest rate at June 1, 2002 and August 31, 2001 was 1.46% 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 June 1, 2002. The
Company also has an $8,500 capital expenditure term loan with the bank. Both of
these agreements expire in August 2004. At June 1, 2002, $1,755 and $2,248 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. The bank established new financial covenants as of
March 18, 2002. We are currently in compliance with these covenants

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.

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, we intend to expend approximately $2,500 for manufacturing
and facility improvements and capital equipment, of which $2,200 has been
expended during the first nine months of fiscal 2002. These additions will
increase manufacturing capacity to meet anticipated production requirements and
add technological capabilities. We expect that these expenditures will be
funded from operations, existing cash and cash equivalents and available debt
financing.

We believe that our existing cash and cash equivalents, current lending
capacity and cash generated from operations will provide sufficient cash flow
for us to meet our 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 a new lending relationship.





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11

RESULTS OF OPERATIONS

Net Sales

Fiscal 2002 vs. 2001:The Companys net sales for the three and nine-month
periods ended June 1, 2002 decreased 18% and 39%, 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 and the resulting impact
in the hearing, communications, RFID/Access and electronic contact
manufacturing markets. Focusing on this fiscal year, we have experienced
quarterly increases in revenue of 27% from the first quarter to the second
quarter and 9% from the second quarter to the third quarter. The majority of
the increase during this fiscal year results from stronger hearing/medical
business and a slight increase in demand for our communications products.

Net sales for the nine-month period ended June 1, 2002 of $22,424 decreased
$14,512 compared to the same period last year, reflecting a decrease in all
markets. Sales by market for the three and nine-months ended June 1, 2002 and
June 2, 2001 are as follows. HDI represents sales for the High Density
Interconnect Division in Tempe Arizona which manufactures flexible circuit
boards.

|                |  |                     |       |                    |  |              |        |              |  |   |        |  |  |   |        | 
|--------------- |  | ------------------- | ----- | ------------------ |  | ------------ | ------ | ------------ |  | - | ------ |  |  | - | ------ | 
|                |  | Three Months Ending |       | Nine Months Ending
|                |  | June 1, 2002        |       | June 2, 2001       |  | June 1, 2002 |        | June 2, 2001
|Hearing/Medical |  | $                   | 5,419 |                    |  | $            | 5,208  |              |  | $ | 15,431 |  |  | $ | 19,490 | 
|RFID/Access     |  | $                   | 681   |                    |  | $            | 1,335  |              |  | $ | 2,487  |  |  | $ | 5,194  | 
|Communication   |  | $                   | 1,174 |                    |  | $            | 1,696  |              |  | $ | 2,010  |  |  | $ | 5,834  | 
|HDI             |  | $                   | 946   |                    |  | $            | 681    |              |  | $ | 1,932  |  |  | $ | 1,325  | 
|Industrial      |  | $                   | 280   |                    |  | $            | 113    |              |  | $ | 564    |  |  | $ | 528    | 
|Mexico          |  | $                   | 0     |                    |  | $            | 1,298  |              |  | $ | 0      |  |  | $ | 4,565  | 
|Total Net
Sales |  | $                   | 8,500 |                    |  | $            | 10,331 |              |  | $ | 22,424 |  |  | $ | 36,936 | 

Sales to hearing/medical customers increased by $202 for the quarter and
decreased $4,050 year to date compared to same periods last year. We
experienced an improvement in demand during the third quarter partially due to
the introduction of new programs with current customers. The year-to-date
decrease is mainly due to the reduction in demand as a result of the overall
economic conditions. 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 by us for Siemens products are being
consigned to us by Siemens. The result of this program is that our finished
goods inventory has increased, while raw materials for these programs has
decreased.

The closure of our Mexico division late in fiscal 2001 resulted in reduced
sales of $1,298 for the three months period and $4,565 for the nine-month
period during 2002 as compared to the same fiscal 2001 period. None of the
product manufactured in Mexico was transferred to other HEI facilities.

Sales for the three-month and nine-month periods ended June 1, 2002 of Radio
Frequency Identification (RFID) products declined by $654 and $2,707
respectively compared to same periods last year, primarily due to a significant
drop in revenue from one major customer. This significant customer sold one
division and terminated operations of another division during the first quarter
of fiscal year 2002. We have developed new products and expanded our
capabilities to improved revenue; however, the actual level of market
acceptance is currently unknown.

Decreased sales to customers in the communications market are largely a result
of the current weakness 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 and have
shipped $431 of product in last two months of this quarter.





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12

We continue to experience fluctuations in demand for our hearing products and
expect this to continue into the fourth quarter of fiscal 2002. The
communications and RFID markets remain soft as our customers are awaiting
market acceptance of new products and increased demand for exiting products.
As the demand for these products increases, 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 nine-month periods ended June 1, 2002,
gross profit increased (decreased) $486 and ($2,616), respectively from the
same periods last year. The gross profit margin for the three-months ended
June 1, 2002 improved to 25% as compared to 16% in the comparable period last
year. This improvement is due to reduced employees, improved manufacturing
yields, improved product mix and the closure of the Mexico division, which
generated negative gross margins of ($125) for the three months ended June 2,
2001. Gross profit margin for the nine-months ended June 1, 2002 of 18%
remained constant compared to the same period last year. Maintaining a
year-to-date gross margin of 18% on 40% less revenue than the prior periods is
due to the items listed above, including negative gross margins incurred by the
Mexico division of ($550) for the nine months ended June 2, 2001. Our gross
margin percentages are heavily impacted by revenue due to the fixed nature of
many of our manufacturing costs. Consequently, we expect gross margins to be
impacted in a similar manner as revenues increase and decrease. As noted
above, the reduction of employees during the fiscal year 2002 resulted in
reduced cost of sales of $140 and $146 for the three and nine months ended June
1, 2002, respectively. For the fourth quarter the Company expects cost savings
of $163 in cost of sales resulting from the cumulative workforce reductions.
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 23% and 26% of net sales
for the three and nine-month periods, respectively, compared to 25% and 22% for
the same periods last year. Operating expenses for the three and nine-month
periods ended June 1, 2002 decreased $607 and $2,129 respectively, from last
years comparable periods. The decrease in the selling, general and
administrative expenses of $65 and $551, respectively, for the current three
and nine-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, including reduction of employees, offset by increases in professional
fees and insurance costs. As noted above, the reduction of employees during
the fiscal year 2002 will result in reduced selling, general and administrative
expenses of $43 and $47 for the three and nine months ended June 1, 2002,
respectively. For the fourth quarter the Company expects cost savings of $65
in selling, general and administrative expenses resulting from the cumulative
workforce reductions. Research, development and engineering expenses
(decrease) increase by ($117) and $115 respectively, for the current year three
and nine-month periods as compared to the prior year periods. The decrease in
this quarter compared to the same period last year is a result of cost
containment measures implemented and from the reduction of outside services due
to the increase in internal purchases from our Microelectronic division to our
HDI division. The cost containment measures including the reduction of
employees during the fiscal year 2002 resulted in saving of $19 and
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13

$20 for the three and nine months ended June 1, 2002, respectively. For the
fourth quarter the Company expects cost savings of $43 in research and
development expenses resulting from the cumulative workforce reductions. The
unusual charges of $425 incurred in the third quarter and $1,693 for the
nine-month period in fiscal year 2001 relates to the write-off of accounts
receivable related to customers of the Mexico division and the closure of that
division.

These overall decreasing expenses are a result of our continued efforts to
right size the business balanced with our commitment to maintain our research
and development efforts and continued sales and marketing focus.

Other Expense, Net

Fiscal 2002 vs. 2001:Other expense, net decreased for the three and nine-month
periods ended June 1, 2002, is a result of decreased net interest expense for
the quarter. Net interest expense for the nine-month period decreased versus
the prior year by $111 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 nine-month period ended June 2, 2001
of $670 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 (benefit) 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 35%. At June
1, 2002, the Company has net operating loss carryforwards, expiring at various
dates ranging from 2013 through 2022.

Management performs a routine 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 $2,237 at June 1,
2002. This analysis largely relies on managements ability to return the
Companys core business to long-term profitability and taking into account a
number of cost cutting and strategic initiatives over the past 2 years.
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 $2,237 valuation
reserve for the deferred tax asset.

Net Income (loss)

Fiscal 2002 vs. 2001:The Company fiscal year 2002 third quarter resulted in a
positive $.02 earning per share, which is our first profitable quarter since
November 2001, six quarters ago. We believe that this improvement in earnings
is the result of the Companys cost cutting initiatives described above. The
Company had net income (losses) of $115 and ($1,289) for the three and
nine-month periods ended June 1, 2002, respectively, compared to net losses of
($652) and ($1,335) for the same periods a year ago.





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14

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 the Company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. The Company undertakes no obligation to update
these statements to reflect ensuing events or circumstances, or subsequent
actual results.
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15




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 June 1, 2002, the outstanding balance on the
revolving line of credit, capital expenditure loans and IDRBs were $1,755,
$2,248 and $1,735, 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 June 1, 2002 the interest rates on the revolving commitment
and capital expenditure loans were 5.5% and 5.75%, 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 June 1, 2002 the interest
rate on the IDRBs was 1.46%. 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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16




PART II  OTHER INFORMATION




Item 6. Exhibits and Reports on Form 8-K

a) Reports on Form 8-K



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



| |  |  | 04/12/02
| | - |  | --------





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17




SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

|      |          |  |                                       | 
|----- | -------- |  | ------------------------------------- | 
|      |          |  | HEI, Inc.                            
|      |          |  | (Registrant)                         
|      |          | 
|Date: | 07/19/02 |  | /s/ Steve E. Tondera, Jr.            
|      |          |  |                                      
|      |          |  | Steve E. Tondera, Jr.                
|      |          |  | Vice President of Finance,           
|      |          |  | Chief Financial Officer and Treasurer
|      |          |  | (a duly authorized officer)