##### Table of Contents



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

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 2, 2001.

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.)



|                                                    |  |            |  | 
|--------------------------------------------------- |  | ---------- |  | 
|P.O. Box 5000, 1495 Steiger Lake Lane, Victoria, MN |  | 55386      | 
|                                                    |  |            | 
|(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.
YesX 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 June 29, 2001,
4,999,960 shares of common stock, par value .05.

This Form 10-Q consists of 12 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 Cash Flows                                                           
|                                                                   | Notes to Consolidated Financial Statements                                                   
|                                                                   | Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition
|Item 3. Quantitative and Qualitative 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                                      | 
|          
|          
|          
|          
|Item 1.    | Financial Statements                                       | 
|          
|          
|          
|          
|           | Consolidated Balance Sheets                                |  |  |    | 3    | 
|          
|          
|          
|          
|           | Consolidated Statements of Operations                      |  |  |    | 4    | 
|          
|          
|          
|          
|           | Consolidated Statements of Cash Flows                      |  |  |    | 5    | 
|          
|          
|          
|          
|           | Notes to Consolidated Financial Statements                 |  |  |    | 6-7  | 
|          
|          
|          
|          
|Item 2.    | Management's Discussion and Analysis of Results of         | 
|          
|          
|          
|          
|           | Operations and Financial Condition                         |  |  |    | 8-11 | 
|          
|          
|          
|          
|Item 3.    | Quantitative and Qualitative Disclosures About Market Risk |  |  |    | 11   | 
|          
|          
|          
|          
|Part II -  | Other Information                                          | 
|          
|          
|          
|          
|Item 6.    | Exhibits and Reports on Form 8-K                           |  |  |    | 11   | 
|          
|          
|          
|          
|Signatures |                                                            |  |  | 12 |     





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##### Table of Contents



3










Part I. FINANCIAL INFORMATION 

Item 1. Financial Statements

HEI, Inc.

Consolidated Balance Sheets(In thousands, except per share amounts)

|                                               |                                                                                                 |   |              |         |   |                 |        |         |  
|---------------------------------------------- | ----------------------------------------------------------------------------------------------- | - | ------------ | ------- | - | --------------- | ------ | ------- | -
|                                               |                                                                                                 |   | June 2, 2001 |         |   | August 31, 2000 |       
|                                               |                                                                                                 |   |              |         |   |                 |       
|Assets                                        
|                                              
|                                              
|                                              
|                                              
|Current assets:                               
|                                              
|                                              
|                                              
|                                              
|                                               | Cash and cash equivalents                                                                       |   | $            | 50      |   |                 | $      | 484     |  
|                                              
|                                              
|                                              
|                                              
|                                               | Restricted cash                                                                                 |   |              |        |   |                 |        | 86      |  
|                                               |                                                                                                 |   |              |         |   |                 |       
|                                               |                                                                                                 |   | 50           |         |   |                 | 570    |        
|                                              
|                                              
|                                              
|                                              
|                                               | Accounts receivable, net                                                                        |   |              | 7,618   |   |                 |        | 8,582   |  
|                                              
|                                              
|                                              
|                                              
|                                               | Inventories                                                                                     |   |              | 5,851   |   |                 |        | 5,869   |  
|                                              
|                                              
|                                              
|                                              
|                                               | Other current assets                                                                            |   |              | 1,501   |   |                 |        | 807     |  
|                                               |                                                                                                 |   |              |         |   |                 |       
|Total current assets                           |                                                                                                 |   | 15,020       |         |   |                 | 15,828 |        
|                                               |                                                                                                 |   |              |         |   |                 |       
|Property and equipment:                       
|                                              
|                                              
|                                              
|                                              
|                                               | Land                                                                                            |   |              | 216     |   |                 |        | 216     |  
|                                              
|                                              
|                                              
|                                              
|                                               | Building and improvements                                                                       |   |              | 4,088   |   |                 |        | 4,170   |  
|                                              
|                                              
|                                              
|                                              
|                                               | Fixtures and equipment                                                                          |   |              | 18,740  |   |                 |        | 17,265  |  
|                                              
|                                              
|                                              
|                                              
|                                               | Accumulated depreciation                                                                        |   |              | (11,082 | ) |                 |        | (10,457 | )
|                                               |                                                                                                 |   |              |         |   |                 |       
|Net property and equipment                     |                                                                                                 |   | 11,962       |         |   |                 | 11,194 |        
|                                               |                                                                                                 |   |              |         |   |                 |       
|Long-term investments                          |                                                                                                 |   | 1,328        |         |   |                 | 1,358  |        
|                                              
|                                              
|                                              
|                                              
|Other long-term assets                         |                                                                                                 |   | 1,088        |         |   |                 | 556    |        
|                                               |                                                                                                 |   |              |         |   |                 |       
|Total assets                                   |                                                                                                 | $ | 29,398       |         |   | $               | 28,936 |        
|                                               |                                                                                                 |   |              |         |   |                 |       
|Liabilities and Shareholders Equity          
|                                              
|                                              
|                                              
|                                              
|Current liabilities:                          
|                                              
|                                              
|                                              
|                                              
|                                               | Revolving line of credit                                                                        |   | $            | 1,879   |   |                 | $      | 2,943   |  
|                                              
|                                              
|                                              
|                                              
|                                               | Current maturities of long-term debt                                                            |   |              | 1,437   |   |                 |        | 1,107   |  
|                                              
|                                              
|                                              
|                                              
|                                               | Accounts payable                                                                                |   |              | 6,376   |   |                 |        | 4,326   |  
|                                              
|                                              
|                                              
|                                              
|                                               | Accrued employee related costs                                                                  |   |              | 734     |   |                 |        | 947     |  
|                                              
|                                              
|                                              
|                                              
|                                               | Accrued liabilities                                                                             |   |              | 851     |   |                 |        | 603     |  
|                                               |                                                                                                 |   |              |         |   |                 |       
|Total current liabilities                      |                                                                                                 |   | 11,277       |         |   |                 | 9,926  |        
|                                               |                                                                                                 |   |              |         |   |                 |       
|Long-term liabilities, less current maturities |                                                                                                 |   | 4,111        |         |   |                 | 3,894  |        
|                                               |                                                                                                 |   |              |         |   |                 |       
|Total
liabilities                              |                                                                                                 |   | 15,388       |         |   |                 | 13,820 |        
|                                               |                                                                                                 |   |              |         |   |                 |       
|Shareholders equity:                         
|                                              
|                                              
|                                              
|                                              
|                                               | Undesignated stock; 5,000 shares authorized; none issued                                        |   |              |        |   |                 |        |        |  
|                                              
|                                              
|                                              
|                                              
|                                               | Common stock, $.05 par; 10,000 shares authorized;
4,998 and 4,777 shares issued and outstanding |   |              | 250     |   |                 |        | 239     |  
|                                              
|                                              
|                                              
|                                              
|                                               | Paid-in capital                                                                                 |   |              | 10,089  |   |                 |        | 8,606   |  
|                                              
|                                              
|                                              
|                                              
|                                               | Retained earnings                                                                               |   |              | 4,936   |   |                 |        | 6,271   |  
|                                              
|                                              
|                                              
|                                              
|                                               | Notes receivable                                                                                |   |              | (1,265  | ) |                 |        |        |  
|                                               |                                                                                                 |   |              |         |   |                 |       
|Total shareholders equity                     |                                                                                                 |   | 14,010       |         |   |                 | 15,116 |        
|                                               |                                                                                                 |   |              |         |   |                 |       
|Total liabilities and shareholders equity     |                                                                                                 | $ | 29,398       |         |   | $               | 28,936 |        
|                                               |                                                                                                 |   |              |         |   |                 |       

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 | 
|                                           |                                       |   |        |                    |       |   |                   | 
|                                           |                                       |   |        | Jun. 2, 2001       |       |   | Jun. 3, 2000      |  |  | Jun. 2, 2001 |        |       | Jun. 3, 2000 |  
|                                           |                                       |   |        |                    |       |   |                   |  |  |              |        |       |              |  
|Net sales                                  |                                       | $ | 10,331 |                    |       | $ |                   |  |  |              | 11,589 |       |              | $ | 36,936 |        |       | $ | 29,075 |       
|                                          
|                                          
|                                          
|                                          
|Cost of sales                              |                                       |   | 8,663  |                    |       |   |                   |  |  |              | 9,203  |       |              |   | 30,242 |        |       |   | 24,365 |       
|                                           |                                       |   |        |                    |       |   |                   |  |  |              |        |      
|                                           | Gross profit                          |   |        | 1,668              |       |   |                   |  |  |              |        | 2,386 |              |   |        | 6,694  |       |   |        | 4,710  |      
|                                           |                                       |   |        |                    |       |   |                   |  |  |              |        |      
|Operating expenses:                       
|                                          
|                                          
|                                          
|                                          
|                                           | Selling, general and administrative   |   |        | 1,434              |       |   |                   |  |  |              |        | 1,639 |              |   |        | 4,527  |       |   |        | 4,769  |      
|                                          
|                                          
|                                          
|                                          
|                                           | Research, development and engineering |   |        | 696                |       |   |                   |  |  |              |        | 405   |              |   |        | 1,830  |       |   |        | 1,283  |      
|                                          
|                                          
|                                          
|                                          
|                                           | Other unusual charges                 |   |        | 425                |       |   |                   |  |  |              |        |      |              |   |        | 1,693  |       |   |        | 453    |      
|                                           |                                       |   |        |                    |       |   |                   |  |  |              |        |      
|Operating income (loss)                    |                                       |   | (887   | )                  |       |   |                   |  |  |              | 342    |       |              |   | (1,356 | )      |       |   | (1,795 | )     
|                                           |                                       |   |        |                    |       |   |                   |  |  |              |        |      
|Other expense, net                         |                                       |   | (106   | )                  |       |   |                   |  |  |              | (94    | )     |              |   | (670   | )      |       |   | (204   | )     
|                                           |                                       |   |        |                    |       |   |                   |  |  |              |        |      
|Income (loss) before income taxes          |                                       |   | (993   | )                  |       |   |                   |  |  |              | 248    |       |              |   | (2,026 | )      |       |   | (1,999 | )     
|                                          
|                                          
|                                          
|                                          
|Income tax benefit                         |                                       |   | 341    |                    |       |   |                   |  |  |              | 113    |       |              |   | 691    |        |       |   | 385    |       
|                                           |                                       |   |        |                    |       |   |                   |  |  |              |        |      
|Net income (loss)                          |                                       | $ | (652   | )                  |       | $ |                   |  |  |              | 361    |       |              | $ | (1,335 | )      |       | $ | (1,614 | )     
|                                           |                                       |   |        |                    |       |   |                   |  |  |              |        |      
|Net income (loss) per common share        
|                                          
|                                          
|                                          
|                                          
|                                           | Basic                                 |   | ($0.13 | )                  |       | $ |                   |  |  |              | 0.08   |       |              |   | ($0.28 | )      |       |   | ($0.34 | )     
|                                           | Diluted                               |   |        | ($0.13             | )     |   | $                 |  |  |              |        | 0.07  |              |   |        | ($0.28 | )     |   |        | ($0.34 | )    
|                                           |                                       |   |        |                    |       |   |                   |  |  |              |        |      
|Weighted average common shares outstanding
|                                          
|                                          
|                                          
|                                          
|                                           | Basic                                 |   | 4,930  |                    |       |   |                   |  |  |              | 4,741  |       |              |   | 4,831  |        |       |   | 4,716  |       
|                                           | Diluted                               |   |        |                    | 4,930 |   |                   |  |  |              |        |       | 5,200        |   |        |        | 4,831 |   |        |        | 4,716 | 
|                                           |                                       |   |        |                    |       |   |                   |  |  |              |        |      

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 2, 2001      |         |   | June 3, 2000 |       
|                                                          |                                                        |   |                   |         |   |              |       
|Cash flow from operating activities:                     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Net loss                                               |   |                   | ($1,335 | ) |              |        | ($1,614 | )
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Equity in net loss from MSC                            |   |                   | 31      |   |              |        | 79      |  
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Depreciation and amortization                          |   |                   | 2,213   |   |              |        | 1,705   |  
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Accounts receivable allowance                          |   |                   | 1,230   |   |              |        | 25      |  
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Deferred income tax benefit                            |   |                   | (615    | ) |              |        | (467    | )
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Non-cash expenses for CMED transaction                 |   |                   | 161     |   |              |        | -       |  
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Loss on disposal of property and equipment and other   |   |                   | 63      |   |              |        | 3       |  
|                                                         
|                                                         
|                                                         
|                                                         
|Changes in operating assets and liabilities:             
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Accounts receivable                                    |   |                   | (266    | ) |              |        | (3,020  | )
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Inventories                                            |   |                   | 18      |   |              |        | (2,417  | )
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Income taxes                                           |   |                   | (86     | ) |              |        | 118     |  
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Other current assets                                   |   |                   | (72     | ) |              |        | 57      |  
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Accounts payable                                       |   |                   | 2,050   |   |              |        | 1,533   |  
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Accrued employee related costs and accrued liabilities |   |                   | 121     |   |              |        | (427    | )
|                                                          |                                                        |   |                   |         |   |              |       
|Net cash flow provided by (used for) operating activities |                                                        |   | 3,513             |         |   |              | (4,425 | )      
|                                                          |                                                        |   |                   |         |   |              |       
|Cash flow from investing activities:                     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Maturities of investments                              |   |                   | -       |   |              |        | 3,744   |  
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Additions to property and equipment                    |   |                   | (2,995  | ) |              |        | (3,533  | )
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Decrease in restricted cash                            |   |                   | 86      |   |              |        | 215     |  
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Additions to patents                                   |   |                   | (56     | ) |              |        | -       |  
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Other long term prepaid assets                         |   |                   | (500    | ) |              |        | -       |  
|                                                          |                                                        |   |                   |         |   |              |       
|Net cash flow provided by (used for) investing activities |                                                        |   | (3,465            | )       |   |              | 426    |        
|                                                          |                                                        |   |                   |         |   |              |       
|Cash flow from financing activities:                     
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Issuance of common stock and other                     |   |                   | 68      |   |              |        | 333     |  
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Increase in deferred financing fees                    |   |                   | (33     | ) |              |        | (33     | )
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Net issuances (repayments) of long-term debt           |   |                   | 547     |   |              |        | (810    | )
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Borrowings on (repayments of) revolving line of credit |   |                   | (1,064  | ) |              |        | 3,000   |  
|                                                          |                                                        |   |                   |         |   |              |       
|Net cash flow provided by (used for) financing activities |                                                        |   | (482              | )       |   |              | 2,490  |        
|                                                          |                                                        |   |                   |         |   |              |       
|Net decrease in cash and cash equivalents                 |                                                        |   | (434              | )       |   |              | (1,509 | )      
|                                                         
|                                                         
|                                                         
|                                                         
|Cash and cash equivalents, beginning of period            |                                                        |   | 484               |         |   |              | 2,043  |        
|                                                          |                                                        |   |                   |         |   |              |       
|Cash and cash equivalents, end of period                  |                                                        | $ | 50                |         |   | $            | 534    |        
|                                                          |                                                        |   |                   |         |   |              |       

Non-cash
disclosure:During April, 2001, the Company
issued notes receivable totaling
$1,265 to certain officers and directors in connection with their exercise of stock options.

Supplemental disclosures of cash flow information:

|                  |  |  |  |  |  |   |     |  |  |  |  |  |  |   |     | 
|----------------- |  |  |  |  |  | - | --- |  |  |  |  |  |  | - | --- | 
|Interest paid     |  |  |  |  |  | $ | 250 |  |  |  |  |  |  | $ | 180 | 
|                 
|                 
|                 
|                 
|Income taxes paid |  |  |  |  |  |   | 14  |  |  |  |  |  |  |   | 55  | 
|                  |  |  |  |  |  |   |     |  |  |  |  | 

See accompanying notes to unaudited consolidated financial statements.





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6




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

(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 consolidated 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.

In accordance with Accounting Principles Board Opinion No. 18, the Company
evaluates equity method investments for impairment whenever events or changes
in circumstances indicate that the carrying value of the investment may not be
recoverable. As of June 2, 2001, the Company did not consider its equity method
investment in Micro Substrates Corporation (MSC) to be impaired. On June 29,
2001, the Company exercised its option to acquire an additional twenty-five
percent of MSC, which will increase the Companys ownership to fifty-three
percent.

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 consolidated financial statements, but does not
include all disclosures required by accounting principles generally accepted in
the United States of America. These unaudited consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes included in the Companys Annual Report to Shareholders on Form 10-KSB
for the year ended August 31, 2000. Interim results of operations for the three
and nine-month periods ended June 2, 2001 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.

(2)   Mexico Closing Costs

During the third quarter of fiscal 2001, the Company announced the closing of
the Mexico operations. The Company recorded costs associated with the closing
of these operations of approximately $425 consisting of $150 in severance
costs, $185 in facilities costs and $90 of other costs.

The severance costs relate to contractual severance obligations to contract
employees located in Mexico as well as HEI employees located in Mexico and
Tucson.

The facilities costs relate to consolidation of facilities including
non-cancelable lease payments on the closed facilities and the write off of
leasehold improvements and fixed assets.





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7

|                 |  |                  |     |  |                 |                     |    |              |            |   |     | 
|---------------- |  | ---------------- | --- |  | --------------- | ------------------- | -- | ------------ | ---------- | - | --- | 
|                 |  |                  |     |  |                 | Paid or utilized as |    |              | Accrued at |  
|                 |  | Expensed in 2001 |     |  | of June 2, 2001 |                     |    | June 2, 2001 |           
|                 |  |                  |     |  |                 |                     |    |              |           
|Severance costs  |  | $                | 150 |  |                 | $                   | 10 |              |            | $ | 140 | 
|                
|                
|                
|                
|Facilities costs |  |                  | 185 |  |                 |                     |   |              |            |   | 185 | 
|                
|                
|                
|                
|Other            |  |                  | 90  |  |                 |                     |   |              |            |   | 90  | 
|                 |  |                  |     |  |                 |                     |    |              |           
|                 |  | $                | 425 |  |                 | $                   | 10 |              |            | $ | 415 | 
|                 |  |                  |     |  |                 |                     |    |              |           

The accruals of $415 remaining at June 2, 2001 are expected to be paid or
utilized during fiscal 2001 and are included in accrued liabilities on the
consolidated balance sheet.

(3)   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:

|                |  |              |       |  |                 |   |       | 
|--------------- |  | ------------ | ----- |  | --------------- | - | ----- | 
|                |  | June 2, 2001 |       |  | August 31, 2000 |  
|                |  |              |       |  |                 |  
|Purchased parts |  | $            | 4,082 |  |                 | $ | 5,158 | 
|               
|               
|               
|               
|Work in process |  |              | 558   |  |                 |   | 418   | 
|               
|               
|               
|               
|Finished goods  |  |              | 1,211 |  |                 |   | 293   | 
|                |  |              |       |  |                 |  
|               
|               
|               
|               
|                |  | $            | 5,851 |  |                 | $ | 5,869 | 
|                |  |              |       |  |                 |  

(4)   Net Income (Loss) Per Weighted Average Common Share

Basic income (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding. Diluted earnings per
share is computed by dividing net income (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 anti-dilutive and thus have not
been included in the diluted loss per share calculations.

|                                 |  |                    |       |  |                   |  |       |              |  |  |              |  |  |  |       | 
|-------------------------------- |  | ------------------ | ----- |  | ----------------- |  | ----- | ------------ |  |  | ------------ |  |  |  | ----- | 
|                                 |  | Three Months Ended |       |  | Nine Months Ended | 
|                                 |  | June 2, 2001       |       |  | June 3, 2000      |  |       | June 2, 2001 |  |  | June 3, 2000 | 
|                                 |  |                    |       |  |                   |  |       |              |  |  |              | 
|Basic common shares              |  |                    | 4,930 |  |                   |  | 4,741 |              |  |  | 4,831        |  |  |  | 4,716 | 
|                                
|                                
|                                
|                                
|Dilutive effect of stock options |  |                    |      |  |                   |  | 459   |              |  |  |             |  |  |  |      | 
|                                 |  |                    |       |  |                   |  |       |              |  |  |              | 
|                                
|                                
|                                
|                                
|Diluted common shares            |  |                    | 4,930 |  |                   |  | 5,200 |              |  |  | 4,831        |  |  |  | 4,716 | 
|                                 |  |                    |       |  |                   |  |       |              |  |  |              | 

(5)   Notes Receivable

During April 2001, the Company recorded notes receivable of $1,265 from certain
employees and directors in connection with the exercise of stock options. These
notes provide for full recourse to the individuals and bear interest at 8.25%
and have a term of five years with quarterly interest payments for the first
two years and quarterly interest and principal payments thereafter. These notes
receivable are classified as a reduction to shareholders equity on the
consolidated balance sheet.





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##### Table of Contents



8




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

REVIEW OF OPERATIONS

Net Sales

Fiscal 2001 vs. 2000:HEI, Inc.s net sales for the three and nine-month
periods ended June 2, 2001 decreased 11% and increased 27%, respectively,
compared to the same periods a year ago. The decrease in net sales in the
three-month period ended June 2, 2001 is largely a result of the general
economic slowdown specifically in the hearing, RFID/Access and electronic
contract manufacturing markets. The increase in sales in the nine-month period
ended June 2, 2001 is a result of general increases in almost all markets,
including communications, hearing and laminates compared to the previous
nine-month period. Sales for the Mexico operations that were closed in the
third quarter were $1,298 and $4,565 for the three and nine-months ended June
2, 2001, respectively, compared to $1,177 and $1,849 for the same fiscal 2000
periods.

The Companys sales are generally subject to the customers projected sales,
production demands and inventory levels of the related product. To the extent
that sales to any one customer represent a significant portion of the Companys
sales, any change in the level of sales 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 result in significant fluctuations in sales
from quarter to quarter.

Gross Profit

Fiscal 2001 vs. 2000:For the three and nine-month periods ended June 2, 2001,
gross profit decreased $718 and increased $1,984, respectively, from the same
periods last year. The gross profit margin for the three months ended June 2,
2001 decreased to 16% as compared to 21% in the comparable period last year.
This decrease primarily reflects the decreased sales in the third quarter as
compared to the third quarter of last year. The gross profit margin for the
nine-months ended June 2, 2001 increased to 18% as compared to 16% in the same
period last year. This increase primarily reflects increased economies of scale
from fixed manufacturing costs as a result of increased revenues, improved
product mix to more value added products and production efficiencies resulting
in yield improvement. In addition, margins during the previous fiscal year
included lower margin sales for the Companys Mexico division and the Cross
operations, start-up costs for the Tempe, Arizona laminate facility and
significantly higher material costs on portions of the sales during the
start-up of new programs.

Operating Expenses

Fiscal 2001 vs. 2000:Operating expenses in total were 25% and 22% of net sales
for the three and nine-month periods, respectively, compared to 18% and 22% for
the same periods last year. Operating expenses for the three and nine-month
periods ended June 2, 2001 increased from last years comparable periods. For
the first nine-months of this fiscal year, selling, general and administrative
expenses decreased $242 primarily due to a decrease in costs associated
with implementation of our Enterprise Resource Planning System. The increases
in research, development and engineering expenses of $291 and $547 for the
three and nine-month periods, respectively, were primarily due to increased
development costs to support future business opportunities. Other unusual
charges for the nine-month period ended June 2, 2001 includes $1,268 of
allowance for doubtful accounts relating to the Mexico Division as well as $425
recognized during the third quarter for additional costs associated with the
closing of the Mexico Division. During the second quarter of fiscal 2000, the
Company expensed $453 of other unusual charges related to the acquisition of
Cross.





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##### Table of Contents



9

Other Expense, Net

Fiscal 2001 vs. 2000:Other expense, net for the three and nine-month periods ended June 2, 2001,
includes higher interest expense due to higher borrowings on the credit
facility. Additionally, during the nine-month period the Company incurred a
non-cash charge of $161 ($106 net of tax) related to costs associated with the
abandoned Colorado MEDtech transaction. These expenses were assumed by Anthony
J. Fant, the largest shareholder in HEI. Accounting rules require HEI to record
a charge for the Colorado MEDtech transaction even though these costs were
assumed by Mr. Fant.

Income Taxes

Fiscal 2001 vs. 2000:The Company records income tax expense for interim
periods based on the expected effective rate for the full year. The expected
effective income tax rate for fiscal 2001 is approximately 34%. The Company
recorded an income tax benefit of $341 and $691 for the three and nine-month
periods ended June 2, 2001, respectively, compared to an income tax benefit of
$113 and $385 for the same periods a year ago. Management has performed an
analysis of the recoverability of its net deferred tax asset which includes the
impact of restructuring activities and the closing of the Mexico Division.
Management believes it is more likely than not that the Company will realize
the aggregate deferred tax asset of $1,495. Unanticipated negative changes in
future operations of the Company could, however, adversely effect the
realization of the Companys deferred tax asset.

Net Income (Loss)

Fiscal 2001 vs. 2000:The Company had net losses of $652 and $1,335 for the
three and nine-month periods ended June 2, 2001, respectively, compared to net
income of $361 and net loss of $1,614 for the same periods a year ago. The net
loss in the current year was principally the result of the increased reserve
for doubtful accounts and other costs associated with the termination of the
Mexico Division, increased development for new business opportunities and the
non-cash charge associated with the abandoned Colorado MEDtech transaction.

FINANCIAL CONDITION  LIQUIDITY AND CAPITAL RESOURCES

The Companys net cash flow provided by operating activities was $3,513 for the
nine-months ended June 2, 2001. This cash flow provided by operating activities
is primarily a result of net loss of $1,335 and an increase in the deferred tax
benefit of $615, which is offset by non-cash expenses totaling $3,698 and an
increase in accounts payable of $2,050.

Accounts receivable average days outstanding were 61 days as of June 2, 2001 as
compared to 50 days as of June 3, 2000. In the second quarter of fiscal 2001,
the Company increased its reserves for doubtful accounts by $1,268 mostly
related to the Mexico Division. The Company believes that the current allowance
for doubtful accounts balance is adequate to cover any uncollectable accounts.

Inventory is relatively consistent with the August 31, 2000 balance. Annualized
inventory turns were 6.0 for the third quarter of fiscal 2001 compared to 8.0
turns for the same period a year ago resulting from higher finished goods to
comply with customer contracts and to better meet our customer needs as well as
delayed orders by customers.
Table of Contents10In April 1996, the Company received proceeds of $5,625 from the issuance of
Industrial Development Revenue Bonds. Of these proceeds, approximately $1,500
was used for the construction of the addition to the Companys manufacturing
facility in Victoria, Minnesota and the remainder was used for equipment
purchases. The bonds relating to the facility expansion require annual
principal payments of $90 in the first year and $95 on April 1 of each year
thereafter through 2011. The bonds relating to the purchased equipment require
payments over seven years from the date of purchase of the equipment through no
later than April 1, 2005. During each third quarter of fiscal years 2000 and
1999, the Company repaid $700 of the construction and equipment bonds and in
April 2001, another $700 was repaid. The Company has limited market risk in
terms 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 June 2, 2001 and
August 31, 2000 was 3.02% and 4.70%, respectively. The bonds are collateralized
by two irrevocable letters of credit and certain of the Companys property and
equipment. A commitment fee is paid annually to a financial institution at a
rate of 1.25% in connection with these letters of credit.The Company has a revolving commitment with a financial institution for total
borrowings of the lesser of $5,000 or the borrowing base, as defined in the
agreement, with interest, based on the Companys option, at 1% above the prime
rate of interest or 3.5% above the LIBOR rate. At June 2, 2001 the interest
rate on the revolving commitment was 8%. The balance outstanding was $1,879 and
$2,943 at June 2, 2001 and August 31, 2000, respectively.In August 2000, the Company arranged for financing of a capital expenditure
loan. According to the terms of the loan, the Company will receive up to $5,000
reimbursement for capital equipment expenditures and will make equal monthly
payments based on a term of 60 months from the date the money is borrowed. The
capital expenditure loan is due and payable in August 2003 or later, contingent
on the renewal of the bank agreement. At June 2, 2001, the Company has borrowed
$3,256 in connection with the capital expenditure loan.The revolving commitment and capital expenditure loan require the Company to
maintain certain restrictive covenants. The Company was not in compliance with
the tangible net worth or year to date net loss covenants at June 2, 2001. The
financial institution has waived the covenants for the third quarter and the
Company is currently in discussions with the financial institution to reset the
covenants for the fourth quarter of fiscal 2001 and going forward. The Company
expects to reach an agreement with the financial institution prior to August
31, 2001 and accordingly has continued to classify the debt as non-current.The Company has $167 of debt outstanding, which requires monthly payments until
May 2004 of approximately $5 for principal and interest and carries an interest
rate of 8.19%.Restricted cash on the balance sheet represented an investment pledged as
payment on a severance agreement, was held in a separate account and was
released to the Companys regular accounts as the obligation was paid.During fiscal 2001, the Company intends and the Board of Directors has approved
approximately $4,200 of capital expenditures for manufacturing and facility
improvements, of which $2,995 has been expended in the first nine-months of
fiscal 2001. These additions will increase manufacturing capacity to meet
anticipated requirements including additional equipment for the Companys new
facilities mainly in Tempe, Arizona and for the expected ramp up of Broadband
products. It is expected that these expenditures will be funded primarily from
operations and external financing. Management believes that cash, cash
equivalents and other working capital provided from operations, together with
other external financing sources, are sufficient to meet current and
foreseeable operating requirements of the Companys business.
Table of Contents11Forward-Looking StatementsInformation 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. Statements contained in this
document, including risk assessment of doubtful accounts, the importance of
specific technologies within specific markets, market projections, the
estimated HEI and HEI Broadband revenue and profit growth and growth rates and
the ability to generate income to utilize existing deferred tax assets are
forward-looking statements. All of such forward-looking statements involve
risks and uncertainties including, without limitation, adverse business or
market conditions, the ability of HEI 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, and other
risks detailed from time to time in HEIs SEC filings.
Item 3. Qualitative and
Quantitative Disclosures About Market Risk (In Thousands)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 2, 2001, the outstanding balance
on the revolving line of credit, capital expenditure loans and IDRBs were
$1,879, $3,113 and $2,435, respectively. The revolving line of credit agreement
bears interest, at the Companys option, at 1% above the prime rate of interest
or 3.5% above the LIBOR rate. One capital expenditure loan bears interest, at
the Companys option, at 1.25% above the prime rate of interest or 3.75% above
the LIBOR rate. At June 2, 2001 the interest rates on the revolving commitment
and capital expenditure loans were 8%, 8.25% and 8.19%, 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 2, 2001 the interest
rate on the IDRBs was 3.02%. Consequently, the Company is exposed to a change
in borrowing costs as interest rates change.
PART II  OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-Ka)
        
        Reports on Form 8-KThe Company filed a Form 8-K on May 16, 2001 in connection with an
investor and financial analyst information memorandum dated May 15,
2001. The Company filed a Form 8-K on April 20, 2001 in connection with
a press release providing a business and financial update dated April
19, 2001.Table of Contents12
SIGNATURESIn 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

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|      |          |  |  |  |  | HEI, Inc.                                                                                                         
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|      |          |  |  |  |  | (Registrant)                                                                                                      
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|Date: | 07/17/01 |  |  |  |  | /s/ Steve E. Tondera, Jr.                                                                                         
|      |          |  |  |  |  |                                                                                                                   
|      |          |  |  |  |  | Steve E. Tondera, Jr.
Vice President of Finance,
Chief Financial Officer and Treasurer
(a duly authorized officer)