##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
      Form 10-K
  þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    September 1, 2007.oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For 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.)P.O. Box 5000,
    1495 Steiger Lake Lane,
    Victoria, MN

55386(Zip Code)(Address of principal executive
    offices)   Registrants telephone number, including area code:
 (952) 443-2500
  Securities registered pursuant to Section 12(b) of the
    Act:
  Common Stock, Par Value $.05 Per Share

NASDAQ Capital Market(Title of Each Class)

(Name of Each Exchange on Which
    Registered)   Securities registered pursuant to Section 12(g) of the
    Act:
 None
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. þ
  Rule 12b-2
  Large
    accelerated
    filer o
    Accelerated
    filer o
    Non-accelerated
    filer þ  Rule 12b-2 o þ




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##### 



TABLE OF
    CONTENTS
  
  PAGE #PART IITEM 1.


BUSINESS


4ITEM 1A.


RISK FACTORS


8ITEM 1B.


UNRESOLVED STAFF COMMENTS


17ITEM 2.


PROPERTIES


17ITEM 3.


LEGAL PROCEEDINGS


17ITEM 4.


SUBMISSION OF MATTERS TO VOTE OF SECURITY
    HOLDERS


17PART IIITEM 5.


MARKET FOR REGISTRANTS COMMON EQUITY,
    RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
    SECURITIES


18ITEM 6.


SELECTED FINANCIAL DATA


20ITEM 7.


MANAGEMENTS DISCUSSION AND ANALYSIS OF
    FINANCIAL CONDITION AND RESULTS OF OPERATIONS


21ITEM 7A.


QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
    MARKET RISK


32ITEM 8.


FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


34ITEM 9.


CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
    ACCOUNTING AND FINANCIAL DISCLOSURE


66ITEM 9A.


CONTROLS AND PROCEDURES


66ITEM 9B.


OTHER INFORMATION


66PART IIIITEM 10.


DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE
    GOVERNANCE


67ITEM 11.


EXECUTIVE COMPENSATION


67ITEM 12.


SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS
    AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS


67ITEM 13.


CERTAIN RELATIONSHIPS AND RELATD TRANSACTIONS,
    AND DIRECTOR INDEPENDENCE


67ITEM 14.


PRINCIPAL ACCOUNTANT FEES AND SERVICES


67PART IVITEM 15.


EXHIBITS AND FINANCIAL STATEMENT
    SCHEDULES


67SIGNATURES


71Subsidiaries of the RegistrantConsent of Virchow, Krause & Company, LLP302 Certification of CEO and CFO906 Certification of CEO and CFO    Documents
    Incorporated By Reference
  Form 10-K Form 10-K,
 2




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FORWARD-LOOKING
    STATEMENTS
  Some of the information included in this Annual Report on
    Form 10-K
    contains forward-looking statements made pursuant to the safe
    harbor provisions of the Private Securities Litigation Reform
    Act of 1995 that involve substantial risks and uncertainties.
    You can identify these statements by forward-looking words such
    as may, will, expect,
    anticipate, believe, intend,
    estimate, continue, and similar words.
    You should read statements that contain these words carefully
    for the following reasons: such statements may discuss our
    future expectations, such statements contain projections of
    future earnings or financial condition and such statements may
    state other forward-looking information. Although it is
    important to communicate our expectations, there may be events
    in the future that we are not accurately able to predict or over
    which we have no control. The Risk Factors included in
    Item 1A of this Annual Report on
    Form 10-K
    provide examples of such risks, uncertainties and events that
    may cause actual results to differ materially from our
    expectations and the forward-looking statements. Readers are
    cautioned not to place undue reliance on forward-looking
    statements, as we undertake no obligation to update these
    forward-looking statements to reflect ensuing events or
    circumstances, or subsequent actual results.
  GENERAL
    INFORMATION
  Form 10-K
   3




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##### Table of Contents



PART I
  Item 1.
    Business.  Divestiture
    Business
    of the Issuer
      
    high density miniaturization solutions providing a full range of
    services from front end development through the full production
    process.
    specialized substrates which are used as platforms for
    microelectronic assembly.
    innovative engineering resulting in creative technological
    solutions.
    continuous improvement and lean flow manufacturing.
    the ability to develop and implement full range test software
    and hardware solutions.    
    design, development, validation and verification services for
    medical box build products and software interfaces for
    Class I, II and III medical devices.
    transitional manufacturing services for medical products.
    complete contract manufacturing and service work for medical box
    build products.    Microelectronics
    Operations
     4




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Advanced
    Medical Operations
    Customers:
   5




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Component Supply Operations:
  Proprietary Technology:
  Government Regulations:
       6




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Dependence on Single or Few Customers and
    Backlog:
  Fiscal Years EndedCustomer

2007


2006


2005Animas (a Johnson & Johnson company)


14
%


10
%


10
%Cochlear (formerly Crystalaid)


11
%


15
%


6
%GE Medical Systems


3
%


9
%


13
%       Fiscal Years EndedMarket

2007


2006


2005Medical/Hearing


85
%


84
%


87
%Communications


13
%


14
%


11
%Industrial


2
%


2
%


2
%     Competition:
  Engineering, Research and Development:
 7




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Employees:
  Geographical Information:
  Website and Available Information: www.heii.com Form 10-K.
  Form 10-K, Form 10-Q, Form 8-K
  Item 1A.  Risk
    Factors.
    We have a history of losses.
  We may need to raise additional capital if we do not quickly
    become profitable.
  We rely on a guarantee from our Chairman in connection with
    our line of credit facility.
  The price of our stock has been volatile and we could be
    delisted from the NADSAQ Capital Market.
 8




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##### Table of Contents



penny
    stock penny stock
  We may lose business and revenues if we fail to successfully
    compete for our customers business.
      Fluctuations in the price and supply of components used to
    manufacture our products may negatively affect our results of
    operations.
    Single source components and component
    shortages.
 9




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Our costs may increase significantly if we are unable to
    forecast customer orders and production
    schedules.
  We may be unable to realize net sales from our
    backlog.
  Future quarterly and annual operating results may fluctuate
    substantially due to a number of factors, many of which are
    beyond our control and could cause our stock price to
    decline. start-up
    We may fail to adequately adjust our expenses to predicted
    net sales in any given period or we may experience significant
    fluctuations in quarterly net sales because the sales cycle for
    our products and services is lengthy and
    unpredictable.
 10




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We may have a significant accounts receivable write-off as
    well as an increase in inventory reserve due to the inability of
    our customers to pay their accounts.
  Our business success may be adversely affected by our ability
    to hire and retain employees.
  We operate in a regulated industry, and our products and
    revenue are subject to regulatory risk.
      If our customers do not promptly obtain regulatory approval
    for their products, our projects and net sales may be adversely
    affected.
  Failure to comply with our debt covenants may require us to
    immediately repay our outstanding balances
    and/or may
    affect our ability to borrow funds in the future, either of
    which may adversely affect our future operating
    results.
 11




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We may fail to have enough liquidity to operate our business
    because we may not adequately adjust our expenses to actual
    revenue in any given period, which may dramatically and
    negatively impact our cash flow.
  If the components that we design and manufacture are the
    subject of product recalls or a product liability claim, our
    business may be damaged, we may incur significant legal fees and
    our results of operations and financial condition may be
    adversely affected.
    The loss of a key customer may reduce our operating results
    and financial condition.
  If we are unable to develop new products and services our net
    sales could decrease.
 12




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If we fail to properly anticipate the market for new products
    and service we may lose net sales.
  Our business may suffer if we are unable to protect our
    intellectual property rights.
  Third-party intellectual property infringement claims may be
    costly and may prevent the future sale of our customers
    products.
  We may pursue future significant corporate transactions, such
    as acquisitions, divestitures or investments that may adversely
    affect our financial position or cause our net sales to decline
    or loss per share to increase.
  If our customers are unable to gain market acceptance for the
    products that we develop or manufacture for them, we may lose
    net sales.
 13




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##### Table of Contents



If we fail to comply with environmental laws and regulations
    we may be fined and prohibited from manufacturing
    products.
  We are dependent on a single market, and adverse trends in
    that market may reduce our revenues.
  Our orders are subject to cancellation and cancellation can
    disrupt our business.
  Inventory management is critical to maximizing our cash
    flow. and/or
  If government or insurance company reimbursements for our
    customers products change, our products, revenues and
    profitability may be adversely
    affected.
 14




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We have customers located in foreign countries and our
    unfamiliarity of the laws and business practices of such foreign
    countries could cause us to incur increased
    costs.
  We have excess space available for sublease at our Colorado
    facility and may not be able to find qualified sublease
    tenants.
  Our Amended and Restated Articles of Incorporation and our
    Amended and Restated Bylaws, as amended, may discourage lawsuits
    and other claims against our directors.
  We have issued numerous options to acquire our common stock
    that could have a dilutive effect on our common
    stock.
  The market price of our common stock may be reduced by future
    sales of our common stock in the public
    market.
  
    1,363,000 shares beneficially owned by our executive
    officers and directors; and
    approximately 1,835,000 shares issuable to option and
    warrant holders.    The trading dynamics of our common stock makes it subject to
    large fluctuations in the per share value.
 15




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Our Amended and Restated Articles of Incorporation contain
    provisions that could discourage or prevent a potential
    takeover, even if such transaction would be beneficial to our
    shareholders.
      If we are not able to establish an effective control
    environment in Fiscal 2008, we will not comply with
    Section 404 of the Sarbanes-Oxley Act relating to internal
    controls over financial
    reporting. Form 10-K Form 10-K
  The market price of our shares may experience significant
    price and volume fluctuations for reasons over which we have
    little control.
   16




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##### Table of Contents



Item 1B.
    Unresolved
    Staff Comments.    Item 2.
    Properties.          Item 3.
    Legal
    Proceedings.      Item 4.
    Submission
    of Matters to a Vote of Security-Holders   17




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PART II
  Item 5.
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities.    Fiscal Year Ended September 1, 2007

High


LowFirst Quarter

$
2.70


$
1.50Second Quarter


1.70



1.23Third Quarter


1.40



1.09Fourth Quarter


1.19



0.65   Fiscal Year Ended September 2, 2006

High


LowFirst Quarter

$
4.00


$
3.10Second Quarter


4.53



2.50Third Quarter


2.99



2.27Fourth Quarter


2.76



1.85     Possible
    Delisting of our Common Stock from the NASDAQ Capital
    Market
    Dividends
    Repurchase
    of Equity Securities
   18




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Shareholder
    Return Performance Presentation
    Total
    Return to Shareholders
  
  RussellHEI Inc


2000


PHGILASemiCon8/31/2002



100.00




100.00




100.008/31/2003



85.94




127.23




151.928/31/2004



34.85




140.15




123.608/31/2005



66.34




170.48




157.829/2/2006



54.65




184.56




148.089/1/2007



14.65




202.80




165.74   Equity
    Compensation Plan Information
    Number of SharesWeighted-


Remaining AvailableNumber of Shares to


Average Exercise


for Future Issuancebe Issued Upon


Price of


Under EquityExercise of


Outstanding


Compensation PlansOutstanding


Options,


(Excluding SharesOptions, Warrants


Warrants and


Reflected in thePlan Category

and Rights


Rights


First Column)Equity compensation plans approved by shareholders


883,325


$
5.64



1,116,675Equity compensation plans not approved by shareholders










Total


883,325


$
5.64



1,116,675  19




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Item 6.
    Selected
    Financial Data.  Form 10-K.
  Fiscal Year Ended2007(a)


2006(b)


2005(c)


2004(d)


2003(e)(In thousands, except per share amounts)Net sales

$
38,384


$
49,061


$
52,642


$
39,945


$
35,555Cost of sales


36,817



41,223



41,880



36,122



28,925Gross profit


1,567



7,838



10,762



3,823



6,630Operating expenses:Selling, general and administrative


5,653



8,429



8,285



7,770



7,393Research, development and engineering


2,330



4,001



3,227



3,159



2,410Unusual charges (gains)










(300
)


1,359



331Operating loss


(6,416
)


(4,592
)


(450
)


(8,465
)


(3,504
)Other income (expense), net


(772
)


(810
)


133



1,507



(1,205
)Loss from continuing operations before income taxes


(7,188
)


(5,402
)


(317
)


(6,958
)


(4,709
)Income tax expense (benefit)


















(21
)Loss from continuing operations


(7,188
)


(5,402
)


(317
)


(6,958
)


(4,688
)Income (loss) from discontinued operations


(217
)


(655
)


672



(51
)


59Gain on sale of discontinued operations


1,748















Net loss


(5,657
)


(6,057
)


355



(7,009
)


(4,629
)Deemed dividend on preferred stock










1,072







Net loss attributable to common shareholders

$
(5,657
)

$
(6,057
)

$
(717
)

$
(7,009
)

$
(4,629
)Net income (loss) per common shareBasic and Diluted:Net income (loss) from continuing operations

$
(0.75
)

$
(0.57
)

$
(0.04
)

$
(0.90
)

$
(0.71
)Discontinued operations


0.16


$
(0.07
)

$
0.08


$
(0.01
)

$
0.01Deemed dividend on preferred stock





$



$
0.13


$



$
Net loss per common shareholders

$
(0.59
)

$
(0.64
)

$
(0.09
)

$
(0.90
)

$
(0.70
)Weighted average common shares outstanding:Basic


9,522



9,469



8,382



7,745



6,629Diluted


9,522



9,469



8,958



7,745



6,629Balance sheet as of year end:Working capital

$
2,988


$
5,120


$
9,781


$
3,414


$
5,728Total assets


15,702



26,872



28,494



25,112



26,503Long-term debt, less current maturities


4,350



2,824



1,813



1,833



2,555Shareholders equity


3,360



8,764



13,796



9,957



13,191     (a)
    
    The Company sold substantially all of its assets and liabilities
    of its RFID business unit effective August 31, 2007. The
    divestiture, which occurred at the end of Fiscal 2007, is
    treated as a discontinued operation for the Company. In March
    2007, the Company received a final net settlement of $225,000,
    relating to the Fant litigation, which is included in other
    income in the consolidated statements of operations for Fiscal
    2007. 20




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##### Table of Contents



(b)
    
    Fiscal 2006 includes a charge to cost of sales of approximately
    $1 million resulting from our change in accounting estimate
    relating to our inventory overhead calculations, which adversely
    impacted our gross profit by the same amount.(c)
    
    Fiscal 2005 includes an unusual net gain of $300,000 from the
    settlement of an outstanding claim against the seller of the AMO
    operations that we acquired in January 2003.(d)
    
    Fiscal 2004 unusual charges consisted of $894,000 in outside
    legal and accounting costs in connection with our litigation
    against, and other issues involving, Mr. Fant and $465,000
    of an asset impairment. Other income included $1,361,000 of
    judgment recovery against Mr. Fant and a $472,000 gain
    recognized in connection with the prepayment of a subordinated
    promissory note.(e)
    
    Fiscal 2003 unusual charges consisted of an impaired asset
    write-down of $331,000. Other expense included costs related to
    the non-cash write off of bank fees of $181,000 related to the
    terminated revolving line of credit with LaSalle Business
    Credit, LLC and a reserve of $841,000 for Mr. Fants
    promissory note and other amounts due from Mr. Fant.  Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations.  CRITICAL
    ACCOUNTING POLICIES
    Revenue
    recognition, sales returns and warranty
        Allowance
    for Doubtful Accounts Estimation
   21




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Inventories
  first-in-first-out
  Long-lived
    Assets
    Valuation
    of Deferred Taxes
   22




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RESULTS
    OF OPERATIONS
  Percentage
    of Net Sales
  Fiscal Year Ended2007


2006


2005Net Sales


100
%


100
%


100
%Cost of Sales


96
%


84
%


80
%Gross profit


4
%


16
%


20
%Selling, general and administrative


15
%


17
%


16
%Research, development and engineering


6
%


8
%


6
%Other


1
%


2
%



%Discontinued operations


(4
)%


1
%


(1
)%     Fiscal Years EndedMarket

2007


2006


2005Medical/Hearing


85
%


84
%


87
%Communications


13
%


14
%


11
%Industrial


2
%


2
%


2
%   Net
    Sales
       23




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Gross
    Profit
       24




---



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Operating
    Expenses
  Selling,
    general and administrative
    Research,
    development, and engineering expenses
    Gain
    on Settlement
   25




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Interest
    Expense
    Income
    Tax Expense (Benefit)
      Deemed
    Dividend on Preferred Stock
  paid-in-capital.
  FINANCIAL
    CONDITION
   26




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27




---



##### Table of Contents



TERM-DEBT
  Long-term
    debt
             28




---



##### Table of Contents



Short-term
    debt
       29




---



##### Table of Contents



FISCAL
    2007 LIQUIDITY
           30




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##### Table of Contents




    Refinancing our debt to improve cash flow.
    Emphasis on sales efforts in all of our business segments.
    Focusing on gross margin improvements at all segments by
    focusing on our material costs, labor costs and overhead
    structures.
    Structuring our staffing to work within our current sales levels
    for all of our general and administrative costs and engineering
    costs, and to reorganize the staff as necessary to position the
    Company for growth.
    Pursuing additional sublease tenants for the excess space in our
    Boulder facility while allowing for adequate room for expansion.
    This will help to offset a portion of the operating costs and
    lease costs of that facility.
    Reduction in inventories by reviewing buying procedures and
    reducing any excess on hand inventory while maintaining the
    required inventories to meet customer demand.        Off
    Balance Sheet Arrangements
   31




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##### Table of Contents



Contractual
    Obligations
    Payments Due By PeriodMoreLess Than


1-3


3-5


ThanTotal


1 Year


Years


Years


5 YearsIn thousands (000s)Long-term debt obligations

$
3,817


$
224


$
3,593


$



$
Capital lease obligations


1,911



917



994







Operating lease obligations


21,872



1,751



3,485



3,297



13,339Total contractual obligations

$
27,600


$
2,892


$
8,072


$
3,297


$
13,339   New
    Accounting Pronouncements
      Item 7A.
    Qualitative
    and Quantitative Disclosures About Market Risk.  Market
    Risk
    Interest
    Rate Risk
     32




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33




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Item 8.
    Financial
    Statements and Supplementary Data.  Form 10-K
  Page No.Consolidated Balance Sheets


35Consolidated Statements of Operations


36Consolidated Statements of Changes in
    Shareholders Equity


37Consolidated Statements of Cash Flows


38Notes to Consolidated Financial Statements


39-64Report of Independent Registered Public Accounting Firm


65  34




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##### Table of Contents



HEI,
    INC.
  CONSOLIDATED BALANCE SHEETS
  September 1,


September 2,2007


2006(In thousands, except shareand per share data)ASSETSCurrent assets:Cash and cash equivalents

$
177


$
674Accounts receivable, net of allowance for doubtful accounts of
    $106 and $113, respectively


4,449



8,588Inventories


3,260



6,192Deferred income taxes


528



830Other current assets


321



287Current assets of discontinued operations






1,454Total current assets


8,735



18,025Property and equipment:Land


216



216Building and improvements


4,302



3,984Fixtures and equipment


21,829



22,585Accumulated depreciation


(20,456
)


(19,536
)Net property and equipment


5,891



7,249Net property and equipment of discontinued operations






468Security deposit


526



550Other long-term assets


550



580Total assets

$
15,702



26,872LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Checks issued in excess of cash in bank

$
191


$
Line of credit






5,948Current maturities of long-term debt


848



1,038Accounts payable


3,215



3,529Accrued liabilities


1,493



2,177Current liabilities of discontinued operations






213Total current liabilities


5,747



12,905Deferred income taxes


528



830Other long-term liabilities, less current maturities


1,717



1,549Long-term debt, less current maturities


4,350



2,824Total other long-term liabilities, less current maturities


6,595



5,203Total liabilities


12,342



18,108Shareholders equity:Undesignated stock; 5,000,000 shares authorized; none issued






Convertible preferred stock, $.05 par; 167,000 shares
    authorized; 32,000 shares issued and outstanding;
    liquidation preference at $26 per share (total liquidation
    preference $832,000)


2



2Common stock, $.05 par; 20,000,000 and
    13,000,000 shares authorized; 9,570,000 and
    9,563,000 shares issued and 9,543,000 and 9,504,000
    outstanding


478



475Paid-in capital


27,763



27,581Accumulated deficit


(24,883
)


(19,226
)Notes receivable-related parties-officers and former directors






(68
)Total shareholders equity


3,360



8,764Total liabilities and shareholders equity

$
15,702


$
26,872    35




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##### Table of Contents



HEI,
    INC.
  CONSOLIDATED STATEMENTS OF OPERATIONS
  Fiscal Year EndedSeptember 1,


September 2,


August 31,2007


2006


2005(In thousands, except shareand per share data)Net sales

$
38,384


$
49,061


$
52,642Cost of sales


36,817



41,223



41,880Gross profit


1,567



7,838



10,762Operating expenses:Selling, general and administrative


5,653



8,429



8,285Research, development and engineering


2,330



4,001



3,227Gain on settlement










(300
)Operating loss


(6,416
)


(4,592
)


(450
)Interest expense


(1,312
)


(776
)


(667
)Other income (expense), net


540



(34
)


800Loss from continuing operations before income taxes


(7,188
)


(5,402
)


(317
)Income tax provision (benefit)










Loss from continuing operations


(7,188
)


(5,402
)


(317
)Income (loss) from discontinued operations


(217
)


(655
)


672Gain on sale of discontinued operations


1,748







Net income (loss)


(5,657
)


(6,057
)


355Deemed dividend on preferred stock










1,072Loss attributable to common shareholders

$
(5,657
)

$
(6,057
)

$
(717
)Income (loss) per common share  basic and diluted:Continuing operations

$
(0.75
)

$
(0.57
)

$
(0.04
)Discontinued operations


0.16



(0.07
)


0.08Net income (loss)


(0.59
)


(0.64
)


0.04Deemed dividend on preferred stock










(0.13
)Net loss attributable to common shareholders

$
(0.59
)

$
(0.64
)

$
(0.09
)Weighted average common shares outstanding:Basic


9,522,000



9,469,000



8,382,000Diluted


9,522,000



9,469,000



8,958,000    36




---



##### Table of Contents



HEI,
    INC.
  CONSOLIDATED STATEMENTS OF CHANGES IN
    SHAREHOLDERS EQUITY
  Convertible











Related


TotalCommon





Preferred


Convertible


Additional





Party


Share-Stock Shares


Common


Stock Shares


Preferred


Paid-In


Accumulated


Notes


HoldersOutstanding


Stock


Outstanding


Stock


Capital


Deficit


Receivable


Equity(In thousands, except share data)Balance, August 31, 2004


8,357,000


$
418






$



$
22,426


$
(12,452
)

$
(435
)

$
9,957Net income






















355







355Payments on officers loans


























228



228Issuance of Convertible Preferred Stock and warrants, net of
    expenses










130,538



7



3,155











3,162Conversion of Convertible Preferred Stock into common stock


985,000



49



(98,538
)


(5
)


(44
)










Issuance of common shares under stock benefit plans and option
    plans


37,000



2











92











94Deemed dividend on preferred stock


















1,072



(1,072
)






Balance, August 31, 2005


9,379,000



469



32,000



2



26,701



(13,169
)


(207
)


13,796Net loss






















(6,057
)






(6,057
)Payments on officers loans


























139



139Stock based compensation expense


















503











503Issuance of common stock to landlord recognized as long-term
    asset


100,000



5











331











336Issuance of common shares under stock benefit plans and option
    plans


25,000



1











46











47Balance, September 2, 2006


9,504,000



475



32,000



2



27,581



(19,226
)


(68
)


8.764Net loss






















(5,657
)






(5,657
)Payments on former director loan


























51



51Write-off of former director loan


























17



17Stock based compensation expense


















185











185Issuance of common shares under stock benefit plans and option
    plans


39,000



3











(3
)










Balance, September 1, 2007


9,543,000


$
478



32,000


$
2


$
27,763


$
(24,883
)

$
(
)

$
3.360    37




---



##### Table of Contents



HEI,
    INC.
  CONSOLIDATED STATEMENTS OF CASH FLOWS
  Fiscal Year EndedSeptember 1,


September 2,


August 31,2007


2006


2005(In thousands, except share data)Cash flow from operating activities:Net income (loss)

$
(5,657
)

$
(6,057
)

$
355Depreciation and amortization


1,989



2,473



2,454Adjustments to reconcile net income (loss) to cash flow from
    operating activities:Accounts receivable allowance (recovery)


(18
)


(33
)


36(Gain) loss on disposal of property and equipment and other


4



49



(130
)Gain on sale of discontinued operations


(1,748
)






Write off of former director loan


17







Stock based compensation expense


185



503



Changes in operating assets and liabilities:Restricted cash related to deferred litigation recovery










481Accounts receivable


4,211



106



(2,544
)Inventories


3,108



1,044



(1,257
)Other current assets


(25
)


820



85Other long-term assets










152Accounts payable


(199
)


(284
)


(1,644
)Accrued liabilities


(569
)


(1,269
)


(944
)Net cash flow provided by (used in) operating activities


1,298



(2,648
)


(2,956
)Cash flow from investing activities:Additions to property and equipment


(451
)


(955
)


(1,314
)Proceeds from the sale of assets


177



96



155Additions to patents


(10
)


(22
)


(90
)Security deposit


24



1,030



Proceeds from sale of discontinued operations


2,953







Net cash flow provided by (used in) investing activities


2,693



149



(1,249
)Cash flow from financing activities:Checks written in excess of cash in bank


191







Issuance of common stock under stock plans






47



94Proceeds from issuance of convertible preferred stock and
    warrants, net of expenses










3,162Officer/former director note repayment


51



139



228Payment of debt issuance costs


(118
)






Repayment of long-term debt


(1,121
)


(749
)


(381
)Proceeds from long-term debt


2,457







Net borrowings (repayments) on line of credit


(5,948
)


3,385



1,253Net cash flow provided by (used in) financing activities


(4,488
)


2,822



4,356Net increase (decrease) in cash and cash equivalents


(497
)


323



151Cash and cash equivalents, beginning of year


674



351



200Cash and cash equivalents, end of year

$
177


$
674


$
351Supplemental disclosures of cash flow information:Interest paid

$
1,269


$
799


$
645Income taxes paid










  Supplemental disclosures of non-cash financing and
    investing activities:
       38




---



##### Table of Contents



HEI,
    INC.
  NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS
  Note 1
  Overview
    Fiscal
    Year
    Discontinued
    operations
    Summary
    of Significant Accounting Policies
  Principles of Consolidation.
  Revenue Recognition.
    Cash Equivalents.
 39




---



##### Table of Contents



HEI,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Accounts Receivable.
  Inventories.
  Property and Equipment. 10-39 years
    Patents.
  As of September 1,


As of September 2,2007


2006Patent asset balance

$
590,000


$
580,000Less accumulated amortization


(429,000
)


(342,000
)Net patent value

$
161,000


$
238,000   Impairment of Notes Receivable.
 40




---



##### Table of Contents



HEI,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Valuation
    of Long-Lived Assets
          Research, Development and Engineering.
  Shipping and Handling.
  Advertising.
  Income Taxes.
  Stock-based Compensation.
 41




---



##### Table of Contents



HEI,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
               42




---



##### Table of Contents



HEI,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Fiscal Year EndedAugust 31,2005(In thousands, exceptshare data)Loss attributable to common shareholders as reported

$
(717
)Add: Stock-based employee compensation included in reported net
    loss, net of related tax effects


Deduct: Total stock-based employee compensation (expense
    determined under fair value based method for all awards)


(2,974
)Loss attributable to common shareholders pro forma

$
(3,691
)Basic and diluted loss attributable to common shareholders per
    share as reported

$
(0.09
)Stock-based compensation expense


(0.35
)Basic and diluted loss attributable to common shareholders per
    share pro forma

$
(0.44
)   Customer Deposits.
  Income (Loss) Per Common Share.
  Reclassifications.
  Use of Estimates.
  Change in Accounting Estimate.
 43




---



##### Table of Contents



HEI,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Financial Instruments.
  Discontinued Operations: 87-24,
  New Accounting Pronouncements.
    Note 2
  Liquidity
   44




---



##### Table of Contents



HEI,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
           45




---



##### Table of Contents



HEI,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
            
    Refinancing our debt to improve cash flow.
    Emphasis on sales efforts in all of our business segments.
    Focusing on gross margin improvements at all segments by
    focusing on our material costs, labor costs, overhead structures
    and product mix.
    Structuring our staffing to work within our current sales levels
    for all of our general and administrative costs and engineering
    costs, and to reorganize the staff as necessary to position the
    Company for growth.
    Pursuing additional sublease tenants for the excess space in our
    Boulder facility while allowing for adequate room for expansion
    in the AMO segment. This will help to offset a portion of the
    operating and lease costs of that facility.
    Reduction in inventories by reviewing buying procedures and
    reducing any excess on hand inventory while maintaining the
    required inventories to meet customer demand.     46




---



##### Table of Contents



HEI,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Note 3
  Other
    Financial Statement Data
    Fiscal Year EndedSeptember 1,


September 2,2007


2006(In thousands)Inventories:Purchased parts

$
2,591


$
4,377Work in process


325



625Finished goods


344



1,190$
3,260


$
6,192Accrued liabilities:Employee related costs

$
973


$
1,347Real estate taxes


16



193Customers deposits


31



126Current portion of long-term liabilities


79



79Warranty reserve


11



12Other accrued liabilities


383



420$
1,493


$
2,177Other long-term liabilities:Remaining sublease lease obligation

$
474


$
513Unfavorable operating lease, net


487



527Accrued lease expense


835



588Total


1,796



1,628Less current maturities


79



79Total other long-term liabilities

$
1,717


$
1,549   Note 4
  Warranty
    Obligations
   47




---



##### Table of Contents



HEI,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Balance at








Balance atBeginning of Year


Provisions


Claims


End of Year(In thousands)Fiscal 2007

$
12


$
7


$
8


$
11Fiscal 2006

$
132


$
(79
)

$
41


$
12Fiscal 2005

$
139


$
125


$
132


$
132   Note 5
  Long-Term
    Debt, including Revolving Line of Credit Facility
    September 1,


September 2,2007


2006(In thousands)Commerce Bank mortgage payable in monthly installments of
    principal and interest of $9 based on a twenty-year amortization
    with a final payment of approximately $1,039 due in November
    2009; collateralized by our Victoria facility

$
1,097


$
1,122Commerce Financial Group, Inc. equipment loan which was paid in
    full during Fiscal 2007






361Wells Fargo Business Credit Term Loan payable in monthly
    principal installments of $6 through May 2010 based on a
    60 month amortization with a final payment of approximately
    $150 due in May 2010; collateralized by equipment located at our
    Tempe facility


323



Wells Fargo Business Credit Revolving Line of Credit with a
    three year term through May 2010; available borrowing is based
    on advance rates of accounts receivable and certain inventories;
    collateralized by substantially all assets of the Company and
    additional collateral provided by Mr. Leahy, the
    Companys chairman


2,114



Capital lease and commercial loan obligations; payable in
    installments of $83 with periods ending July 2008 through
    February 2010; collateralized with certain machinery and
    equipment


1,664



2,379Total


5,198



3,862Less current maturities


848



1,038Total long-term debt

$
4,350


$
2,824    48




---



##### Table of Contents



HEI,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
            Fiscal Years Ending

(In thousands)2008

$
982009


1022010


3,334Total

$
3,534  49




---



##### Table of Contents



HEI,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Fiscal Years Ending

(In thousands)2008

$
9172009


7362010


258Total


1,911Less: amount representing interest


(247
)Present value of future minimum lease payments


1,664Less: current portion


(750
)Capital lease obligations, net of current portion

$
914     As of September 1,


As of September 2,2007


2006Capital lease asset balance

$
3,092,000


$
3,092,000Less accumulated amortization


(908,000
)


(346,000
)Net capital lease asset value

$
2,184,000


$
2,746,000   Note 6
  Line
    of Credit
     50




---



##### Table of Contents



HEI,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 7
  Income
    Taxes
    Fiscal Year EndedSeptember 1,


September 2,


August 31,2007


2006


2005(In thousands)Current:Federal

$



$



$
State










Deferred










Income tax expense (benefit)

$



$



$
     Fiscal Year EndedSeptember 1,


September 2,


August 31,2007


2006


2005Federal statutory tax rate


34.0
%


34.0
%


(34.0
)%State income tax rate (net of federal tax effect)


5.2



5.2



Change in valuation allowance


(40.3
)


(43.3
)


34.0Other


1.1



4.1



Effective tax rate



%



%



%  51




---



##### Table of Contents



HEI,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Fiscal Year EndedSeptember 1,


September 2,2007


2006(In thousands)Deferred tax assets (current):Receivables

$
40


$
46Inventories


263



402Accrued liabilities


225



382528



830Deferred tax assets (long-term):Net operating loss carry-forward


11,829



8,929Capital loss carry-forward


235



235Licensing agreement reserve


0



196Stock based compensation


68



188Other


189



189Gross deferred tax assets (long-term)


12,321



9,737Less: Deferred tax assets valuation allowance


(12,103
)


(9,821
)Net deferred tax assets (long-term)


218



(84
)Deferred tax liabilities (long-term):Property and equipment


(746
)


(746
)Net deferred tax liabilities (long-term)


(746
)


(746
)Net deferred tax asset

$



$
       Note 8
  Stock
    Benefit Plans
  1998 Plan.
 52




---



##### Table of Contents



HEI,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    1989 Plan.
    Directors Plan.
  2005 HEI, Inc. Employee Stock Purchase
    Plan.
  Change of Control.
 53




---



##### Table of Contents



HEI,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Summary of Activity.
  WeightedAverageOptions


Exercise Price


Aggregate IntrinsicOutstanding


Per Share


ValueBalance, August 31, 2004


1,446,100



5.05Granted


384,000



2.96Exercised






Cancelled


(173,125
)


5.01Balance, August 31, 2005


1,656,975



4.59Granted


5,000



3.69Exercised


(25,000
)


1.87Cancelled


(300,000
)


3.87Balance, September 2, 2006


1,336,975


$
4.80Granted






Exercised






Cancelled


(453,650
)


3.16Balance, September 1, 2007


883,325


$
5.64


$
0Options exercisable


712,606


$
5.86


$
0         Options OutstandingWeighted


Options ExercisableWeighted


Average





WeightedAverage


Remaining





AverageNumber of


Exercise


Contractual


Number of


ExerciseRange of Exercise Prices

Options


Price


Life


Options


Price$1.28-1.68


90,000


$
1.50



6.16



80,000


$
1.53$2.16-3.18


173,500



2.81



6.30



152,375



2.84$3.27-4.38


228,375



3.45



6.66



130,031



3.52$5.50-7.70


222,350



6.24



2.54



202,350



6.27$9.00-13.13


90,500



11.70



2.45



89,250



11.71$13.56-14.56


73,600



13.89



3.33



53,600



13.89$20.38-20.38


5,000



20.38



3.01



5,000



20.38883,325


$
5.64



4.77



712,606


$
5.86  54




---



##### Table of Contents



HEI,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Fiscal Year EndedSeptember 1,

September 2,

August 31,2007

2006

2005Risk-free interest rates

N/A

4.50%

3.72%Expected life

N/A

4 years

8 yearsVolatility

N/A

61%

72%Expected dividends

N/A

None

None   Common Stock Warrants.
  Restricted Stock Awards.
  Weighted


WeightedAverage


AverageGrant


RemainingDate Fair


ContractualShares


Value


TermUnvested, beginning of period


58,800


$
3.24Granted


28,570



1.40Vested


(38,320
)


1.86Forfeited


(22,050
)


3.32Unvested, end of period


27,000


$
3.18



2.38 years    55




---



##### Table of Contents



HEI,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 9
  Net
    Income ( Loss) Per Share Computation
    Fiscal Year EndedSeptember 1,


September 2,


August 31,2007


2006


2005(In thousand, except share data)Basic:Loss from continuing operations

$
(7,188
)

$
(5,402
)

$
(317
)Income (loss) from discontinued operations


(217
)


(655
)


672Gain on sale of discontinued operations


1,748







Net income (loss)


(5,657
)


(6,057
)


355Deemed dividend on preferred stock










1,072Loss attributable to common shareholders

$
(5,657
)

$
(6,057
)

$
(717
)Income (loss) per common share:Continuing operations

$
(0.75
)

$
(0.57
)

$
(0.04
)Discontinued operations


0.16



(0.07
)


0.08Net income (loss)


(0.59
)


(0.64
)


0.04Deemed dividend on preferred stock










(0.13
)Net loss attributable to common shareholders

$
(0.59
)

$
(0.64
)

$
(0.09
)Weighted average number of common shares outstanding


9,522,000



9,469,000



8,382,000Diluted:Loss from continuing operations

$
(7,188
)

$
(5,402
)

$
(317
)Income (loss) from discontinued operations


(217
)


(655
)


672Gain on sale of discontinued operations


1,748







Net income (loss)


(5,657
)


(6,057
)


355Deemed dividend on preferred stock










1,072Loss attributable to common shareholders

$
(5,657
)

$
(6,057
)

$
(717
)Income (loss) per common share:Continuing operations

$
(0.75
)

$
(0.57
)

$
(0.04
)Discontinued operations


0.16



(0.07
)


0.08Net income (loss)


(0.59
)


(0.64
)


0.04Deemed dividend on preferred stock










(0.13
)Net loss attributable to common shareholders

$
(0.59
)

$
(0.64
)

$
(0.09
)Weighted average number of common shares outstanding


9,522,000



9,469,000



8,382,000Effect of convertible preferred stock










382,000Effect of dilutive stock options










194,000Weighted average shares assuming dilution


9,522,000



9,469,000



8,958,000  56




---



##### Table of Contents



HEI,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Note 10
  Equity
    Offerings and Deemed Dividend
    Sale of
    Convertible Preferred Stock
    S-1
    Deemed
    Dividend on Convertible Preferred Stock
  paid-in-capital.
 57




---



##### Table of Contents



HEI,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Note 11
  Related
    party Note Payable, Guarantee by Related Party and Notes
    Receivable-Related Parties-Officers and Former
    Directors
        Note 12
  Litigation
    Recoveries
     58




---



##### Table of Contents



HEI,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 13
  Employee
    Benefit Plans
    Note 14
  Commitments
    and Contingencies
          Minimum OperatingFiscal Year Ending

Lease Commitments(In thousands)2008

$
1,7512009


1,7652010


1,7202011


1,6252012


1,672Thereafter


13,339Total minimum lease payments

$
21,872  59




---



##### Table of Contents



HEI,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 15
  Discontinued
    Operation and Sale of RFID Business Unit
        (In thousands)Cash received

$
3,000Less: Transferred assets, net of liabilities of RFID


(1,205
)Less: Transaction costs


(47
)Gain on sale

$
1,748     2007


2006(In thousands)Accounts receivable, net

$



$
617Inventories






808Other current assets






29Current assets of discontinued operations






1,454Net property and equipment of discontinued operations






468Accounts payable






206Accrued liabilities






7Current liabilities of discontinued operations






213     Fiscal Year2007


2006


2005(In thousands)Net sales

$
3,234


$
3,570


$
3,989Gross profit


538



124



822Selling, general and administrative


583



534



98Research and development


183



237



37Other income (expense), net


11



(8
)


(15
)Income (loss) from discontinued operations

$
(217
)

$
(655
)

$
672    60




---



##### Table of Contents



HEI,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Note 16
  Major
    Customers and Concentration of Credit Risk
    Fiscal Years EndedCustomer

2007


2006


2005Animas (a Johnson & Johnson company)


14
%


10
%


10
%Cochlear (formerly Crystalaid)


11
%


15
%


6
%GE Medical Systems


3
%


9
%


13
%Total


28
%


34
%


29
%       Note 17
  Geographic
    Data
    Fiscal Year EndedSeptember 1, 2007


September 2, 2006


August 31, 2005Dollars


% of Sales


Dollars


% of Sales


Dollars


% of Sales(In thousands)





(In thousands)





(In thousands)United States

$
29,745



77
%

$
36,723



75
%

$
36,714



70
%Canada/Mexico


582



2
%


31



0
%


3,540



7
%Europe


3,219



8
%


4,378



9
%


4,859



9
%Asia-Pacific


4,838



13
%


7,929



16
%


7,325



14
%South America






0
%






0
%


204



0
%Total

$
38,384



100
%

$
49,061



100
%

$
52,642



100
%   Note 18
  Segment
    Information
    Microelectronics Operations:
  Advanced Medical Operations:
 61




---



##### Table of Contents



HEI,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Fiscal Years EndedMarket

2007


2006


2005Medical/Hearing


85
%


84
%


87
%Communications


13
%


14
%


11
%Industrial


2
%


2
%


2
%     Fiscal 2007Microelectronics


Advanced Medical


DiscontinuedCorporate


Operations


Operations


Operations


TotalNet sales

$



$
22,720


$
15,664






$
38,384Gross profit






2,270



(703
)






1,567Operating expense


3,587



3,798



598







7,983Operating income (loss)


(3,587
)


(1,528
)


(1,301
)






(6,416
)Loss from discontinued operations net of gain on sale of
    discontinued operations














1,531



1,531Total assets






11,028



4,674







15,702Depreciation and amortization






1,623



239



127



1,989Capital expenditures






317



97



37



451   Fiscal 2006Microelectronics


Advanced Medical


DiscontinuedCorporate


Operations


Operations


Operations


TotalNet sales

$



$
31,183


$
17,878






$
49,061Gross profit






6,185



1,653







7,838Operating expense


7,400



3,512



1,518







12,430Operating income (loss)


(7,400
)


2,673



135







(4,592
)Loss from discontinued operations














(655
)


(655
)Total assets






19,483



5,467



1,922



26,872Depreciation and amortization






1,886



338



249



2,473Capital expenditures






602



318



35



955   62




---



##### Table of Contents



HEI,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Fiscal 2005Microelectronics


Advanced Medical


DiscontinuedCorporate


Operations


Operations


Operations


TotalNet sales

$



$
29,388


$
23,254






$
52,642Gross profit






5,847



4,915







10,762Operating expense


7,046



2,242



1,924







11,212Operating income (loss)


(7,046
)


3,605



2,991







(450
)Income from discontinued operations














672



672Total assets






16,422



9,417



2,655



28,494Depreciation and amortization






1,793



405



256



2,454Capital expenditures






1,110



119



85



1,314   Note 19
  Settlement
    Gain
    Note 20
  Summary
    of Quarterly Operating Results (Unaudited)
    Fiscal Year 2007

First


Second


Third


Fourth


Total(Unaudited)(In thousands, except per share amounts)Net Sales

$
12,106


$
9,906


$
8,903


$
7,469


$
38,384Gross Profit


1,276



745



281



(735
)


1,567Operating Loss


(1,254
)


(1,165
)


(1,588
)


(2,408
)


(6,416
)Loss from continuing operations


(1,494
)


(1,652
)


(1,422
)


(2,620
)


(7,188
)Income (loss) from discontinued operations


(57
)


41



(167
)


(34
)


(217
)Gain on sale of discontinued operations














1,748



1,748Net loss

$
(1,551
)

$
(1,611
)

$
(1,589
)

$
(906
)

$
(5,657
)Loss per share from continuing operations  basic and
    diluted

$
(0.16
)

$
(0.17
)

$
(0.15
)

$
(0.27
)

$
(0.75
)Income (loss) per share from discontinued operations 
    basic and diluted


(0.01
)


0.00



(0.01
)


(0.00
)


(0.02
)Gain on sale of discontinued operations  basic and
    diluted














0.18



0.18Net loss per share  basic and diluted

$
(0.16
)

$
(0.17
)

$
(0.17
)

$
(0.09
)

$
(0.59
)Weighted average shares outstanding  basic and diluted


9,505



9,509



9,514



9,519



9,522   63




---



##### Table of Contents



HEI,
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Fiscal Year 2006

First


Second


Third


Fourth


Total(Unaudited)(In thousands, except per share amounts)Net Sales

$
13,057


$
10,712


$
12,393


$
12,899


$
49,061Gross Profit


2,744



1,417



2,429



1,248



7,838Operating Loss


(387
)


(1,727
)


(671
)


(1,806
)


(4,592
)Loss from continuing operations


(486
)


(1,826
)


(911
)


(2,179
)


(5,402
)Income (loss) from discontinued operations


(145
)


139



(200
)


(450
)


(655
)Net loss

$
(630
)

$
(1,687
)

$
(1,111
)

$
(2,629
)

$
(6,057
)Loss per share from continuing operations  basic and
    diluted

$
(0.05
)

$
(0.19
)

$
(0.10
)

$
(0.23
)

$
(0.57
)Income (loss) per share from discontinued operations 
    basic and diluted


(0.02
)


0.01



(0.02
)


(0.04
)


(0.07
)Net loss per share  basic and diluted

$
(0.07
)

$
(0.18
)

$
(0.12
)

$
(0.27
)

$
(0.64
)Weighted average shares outstanding  basic and diluted


9,401



9,480



9,491



9,505



9,469  64




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
                 65




---



##### Table of Contents



Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosures.    Item 9A.
    Controls
    and Procedures.      Rules 13a-15(e) 15d-15(e) Form 10-K.
    Form 10-K Regulation S-K) Regulation S-K. Form 10-K
    Item 9B.
    Other
    Information   66




---



##### Table of Contents



PART III
  Item 10.
    Directors
    and Executive Officers and Corporate Governance.    Item 11.
    Executive
    Compensation.    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Maters.    Item 13.
    Certain
    Relationships and Related Transactions, and Director
    Independence .    Item 14.
    Principal
    Accounting Fees and Services.    PART IV
  Item 15.
    Exhibits,
    Financial Statement Schedules.    Form 10-K.
  Exhibits:
  3
.1

Amended and Restated Articles of Incorporation of HEI, Inc.

Note 13
.2

Amended and Restated Bylaws of HEI, Inc.

Note 13
.3

Amendments to the Amended and Restated Bylaws of HEI, Inc.,
    effective as of March 19, 2003

Note 63
.4

Articles of Amendment of the Amended and Restated Articles of
    Incorporation of HEI, Inc.

Note 133
.5

Second Amended and Restated Bylaws of HEI, Inc.

Note 144
.1

Certificate of Designation of Common Stock of HEI, Inc.

Note 74
.2

Second Certificate of Designation of Common Stock of HEI,
    Inc.

Note 154
.3

Certificate of Designation of Series A Convertible
    Preferred Stock of HEI, Inc.

Note 154
.4

Form of Stock Certificate for shares of Series A
    Convertible Preferred Stock of HEI, Inc.

Note 16*10
.1

Form of Indemnification Agreement between HEI and officers and
    directors

Note 2*10
.2

HEI, Inc. 1989 Omnibus Stock Compensation Plan, adopted
    April 3, 1989, and as Amended and Restated effective
    November 15, 1991, and as amended effective April 29,
    1992, May 11, 1994, and October 31, 1996

Note 3*10
.3

HEI, Inc. 1998 Stock Option Plan, adopted November 18,
    1998, and amended effective January 20, 2000,
    January 24, 2001, February 20, 2002 and
    January 12, 2006.

Note 4*10
.4

HEI, Inc. 1998 Stock Option Plan for Nonemployee Directors,
    adopted November 18, 1998, and amended effective
    June 7, 1999 and December 12, 2002.

Note 6 67




---



##### Table of Contents



10
.12

Accounts Receivable Agreement, dated May 29, 2003, by and
    between HEI, Inc. and Beacon Bank.

Note 510
.14

Promissory Note, dated October 14, 2003, by HEI, Inc. in
    favor of Commerce Bank.

Note 610
.15

Term Loan Agreement, dated October 14, 2003, by HEI, Inc.
    and Commerce Bank.

Note 610
.16

Combination Mortgage, Security Agreement, Assignment of Rents
    and Fixture Financing Statement, dated October 14, 2003, by
    HEI, Inc. in favor of Commerce Bank.

Note 610
.17

Environmental Investigation Letter, dated October 14, 2003,
    by HEI, Inc. in favor of Commerce Bank.

Note 610
.18

Promissory Note, dated October 28, 2003, by HEI, Inc. in
    favor of Commerce Financial Group, Inc.

Note 610
.19

Term Loan Agreement, dated October 28, 2003, by HEI, Inc.
    and Commerce Financial Group, Inc.

Note 610
.20

Commercial Security Agreement, dated October 28, 2003, by
    HEI, Inc. in favor of Commerce Financial Group, Inc.

Note 610
.21

Combination Mortgage, Security Agreement, Assignment of Rents
    and Fixture Financing Statement, dated October 28, 2003, by
    HEI, Inc. in favor of Commerce Financial Group, Inc.

Note 610
.22

Environmental Investigation Letter, dated October 28, 2003,
    by HEI, Inc. in favor of Commerce Financial Group, Inc.

Note 610
.24

Amendment dated December 12, 2003, to Accounts Receivable
    Agreement, dated May 29, 2003, by and among HEI, Inc. and
    Beacon Bank.

Note 610
.30

Amendment dated July 1, 2004, to Accounts Receivable
    Agreement, dated May 29, 2003, and previously amended on
    December 13, 2003, by and among HEI, Inc. and Beacon Bank.

Note 1110
.31

Lease Agreement, dated October 1, 2004, by and between HEI,
    Inc. and Boulder Investors LLC.

Note 810
.32

Waiver and Amendment, dated November 30, 2004, and executed
    as of December 3, 2004, by and between HEI, Inc. and
    Commerce Bank.

Note 910
.33

Waiver and Amendment, dated November 30, 2004, and executed
    as of December 3, 2004, by and between HEI, Inc. and
    Commerce Financial Group, Inc.

Note 910
.34

Amendment dated December 7, 2004, to Accounts Receivable
    Agreement, dated May 29, 2003, and previously amended on
    December 13, 2003, and July 1, 2004, by and among HEI,
    Inc. and Beacon Bank.

Note 1010
.36

Amendment dated July 7, 2005, to Accounts Receivable
    Agreement, dated May 29, 2003, and previously amended on
    July 1, 2004 and December 13, 2003, by and among HEI,
    Inc. and Beacon Bank.

Note 1710
.37

Consulting Agreement, dated January 12, 2005, between
    Emerging Capital and HEI, Inc.

Note 1210
.39

Waiver and Amendment dated as of December 29, 2004, and
    executed as of January 5, 2005, by and between HEI, Inc.
    and Commerce Bank.

Note 1810
.40

Waiver and Amendment dated as of December 29, 2004, and
    executed as of January 5, 2005, by and between HEI, Inc.
    and Commerce Financial Group, Inc.

Note 1810
.41

Notice, Waiver and Amendment dated as of December 29, 2004,
    and executed as of January 5, 2005, by and between HEI,
    Inc. and Beacon Bank.

Note 1810
.42

Amendment dated January 12, 2005 to the Accounts Receivable
    Agreement dated May 29, 2003, and previously amended
    December 12, 2003, July 1, 2004, December 7, 2004
    and December 29, 2004 by and between HEI, Inc. and Beacon
    Bank.

Note 1910
.43

Waiver and Release Agreement dated January 26, 2005 between
    HEI, Inc. and Douglas Nesbit.

Note 20*10
.44

Engagement Letter dated January 12, 2005, effective as of
    February 28, 2005, between HEI, Inc. and Emerging Capital.

Note 21*10
.45

HEI, Inc. 2006 Nonemployee Director Stock Purchase Plan, dated
    January 13, 2006.

Note 22*10
.46

Nonemployee Director Stock Purchase Agreement.

Note 2210
.47

Form of Commercial Loan Agreement and Note dated as of
    April 18, 2006 by and between HEI, Inc. and Beacon Bank.

Note 23 68




---



##### Table of Contents



10
.48

Waiver and Amendment dated as of May 27, 2006 by and
    between HEI, Inc. and Commerce Bank.

Note 2410
.49

Waiver and Amendment dated as of May 27, 2006 by and
    between HEI, Inc. and Commerce Financial Group, Inc.

Note 2410
.50

Waiver dated as of May 27, 2006 by and between HEI, Inc.
    and Commerce Leasing Corporation, a division of Commerce
    Financial Group, Inc.

Note 24*10
.51

Independent Contractor Agreement dated June 26, 2006
    between HEI, Inc. and Mark Thomas Enterprises, LLC.

Note 25*10
.53

Employment Agreement dated July 10, 2006 between HEI, Inc.
    and Scott Stole.

Note 26*10
.54

Severance and Release Agreement dated October 20, 2006
    between HEI, Inc. and Mack V. Traynor III

Note 27*10
.55

Promissory Note dated November 3, 2006 made payable to
    Thomas F. Leahy in the original principal amount of $5,000,000.

Note 28*10
.56

2005 Employee Stock Purchase Plan.

Note 29*10
.57

2006 Amendment to 1998 Stock Option Plan

Note 3021


Subsidiaries of the Registrant.23
.1

Consent of Virchow, Krause & Company, LLP.31
.1

Certification of Chief Executive Officer and Chief Financial
    Officer pursuant to Section 302 of the Sarbanes-Oxley Act
    of 2002.32
.1

Certification of Chief Executive Officer and Chief Financial
    Officer pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002.        (1)
    
    Filed as an exhibit to the Definitive Proxy Statement on
    Schedule 14A for the 2002 Annual Meeting of Shareholders,
    filed with the Securities and Exchange Commission on
    January 23, 2002, and incorporated herein by reference.(2)
    
    Filed as an exhibit to the Registration Statement on
    Form S-2
    (SEC No.
    33-37285),
    filed with the Securities and Exchange Commission on
    October 15, 1990, and incorporated herein by reference.(3)
    
    Filed as an exhibit to the Annual Report on
    Form 10-KSB
    for the fiscal year ended August 31, 1996, and incorporated
    herein by reference.(4)
    
    Filed as an exhibit to the Annual Report on
    Form 10-KSB
    for the fiscal year ended August 31, 1998, and incorporated
    herein by reference.(5)
    
    Filed as an exhibit to the Quarterly Report on
    Form 10-Q
    for the quarterly period ended May 31, 2003, and
    incorporated herein by reference.(6)
    
    Filed as an exhibit to the Annual Report on
    Form 10-K
    for the fiscal year ended August 31, 2003, and incorporated
    herein by reference.(7)
    
    Filed as an exhibit to the Registration Statement on
    Form S-3
    (SEC No.
    333-115982),
    filed with the Securities and Exchange Commission on
    May 28, 2004, and incorporated herein by reference.(8)
    
    Filed as an exhibit to the Current Report on
    Form 8-K,
    filed with the Securities and Exchange Commission on
    December 21, 2004.(9)
    
    Filed as an exhibit to the Current Report on
    Form 8-K,
    filed with the Securities and Exchange Commission on
    December 9, 2004, and incorporated herein by reference.(10)
    
    Filed as an exhibit to the Current Report on
    Form 8-K,
    filed with the Securities and Exchange Commission on
    December 10, 2004, and incorporated herein by reference.(11)
    
    Filed as an exhibit to the Annual Report on
    Form 10-K
    for the fiscal year ended August 31, 2004, and incorporated
    herein by reference.(12)
    
    Filed as an exhibit to the Current Report on
    Form 8-K,
    filed with the Securities and Exchange Commission on
    January 18, 2005, and incorporated herein by reference. 69




---



##### Table of Contents



(13)
    
    Form of which was filed as Appendix C to the Definitive
    Proxy Statement on Schedule 14A for the 2006 Annual Meeting
    of the Shareholders filed with the SEC on December 12, 2005(14)
    
    Filed as an exhibit to the Current Report on
    Form 8-K
    filed with the SEC on March 8, 2005.(15)
    
    Filed as an exhibit to the Current Report on
    Form 8-K
    filed with the SEC on May 11, 2005.(16)
    
    Filed as Exhibit 3.6 to the Registration Statement on
    Form S-1
    filed with the SEC on June 23, 2005.(17)
    
    Filed as an exhibit to the Annual Report on
    Form 10-K
    for the fiscal year ended August 31, 2005, and incorporated
    herein by reference.(18)
    
    Filed as an exhibit to the Current Report on
    Form 8-K
    filed with the SEC on January 5, 2005.(19)
    
    Filed as an exhibit to the Current Report on
    Form 8-K
    filed with the SEC on January 13, 2005.(20)
    
    Filed as an exhibit to the Current Report on Amendment
    No. 1 to
    Form 8-K
    filed with the SEC on February 1, 2005.(21)
    
    Filed as an exhibit to the Current Report on Amendment
    No. 1 to
    Form 8-K
    filed with the SEC on March 4, 2005.(22)
    
    Filed as an exhibit to the Current Report on
    Form 8-K
    filed with the SEC on January 13, 2006.(23)
    
    Filed as an exhibit to the Current Report on
    Form 8-K
    filed with the SEC on April 18, 2006.(24)
    
    Filed as an exhibit to the Current Report on
    Form 8-K
    filed with the SEC on June 22, 2006.(25)
    
    Filed as an exhibit to the Current Report on
    Form 8-K
    filed with the SEC on June 30, 2006.(26)
    
    Filed as an exhibit to the Current Report on
    Form 8-K
    filed with the SEC on July 11, 2006.(27)
    
    Filed as an exhibit to the Annual Report on
    Form 10-K
    for the fiscal year ended September 2, 2006, and
    incorporated herein by reference.(28)
    
    Filed as an exhibit to the Current Report on
    Form 8-K
    filed with the SEC on November 3, 2006.(29)
    
    Filed as Appendix B to the Definitive Proxy Statement on
    Schedule 14A for the 2006 Annual Meeting of the
    Shareholders filed with the SEC on December 12, 2005.(30)
    
    Filed as an exhibit to the Annual Report on
    Form 10-K
    for the fiscal year ended September 2, 2006, and
    incorporated herein by reference.*
    
    Denotes management contract or compensation plan or arrangement.
    
    Filed herewith. 70




---



##### Table of Contents



SIGNATURES
      By:
    /s/  MARK
    B. THOMAS   Chief Executive Officer, Chief Financial Officer, Treasure
    and Secretary Principal Executive Officer and Principal
    Financial Officer
      Date/s/  THOMAS
    F. LEAHYThomas
    F. Leahy

Chairman of the Board of Director

November 30, 2007/s/  TIMOTHY
    F. FLOEDERTimothy
    F. Floeder

Director

November 30, 2007/s/  MICHAEL
    J.  EVERSMichael
    J.  Evers

Director

November 30, 2007/s/  ROBERT
    W. HELLERRobert
    W. Heller

Director

November 30, 2007/s/  MARK
    B. THOMASMark
    B. Thomas

Director, Principal Executive Officer and Principal Financial
    Officer

November 30, 2007  71




---



##### Table of Contents



INDEX TO
    EXHIBITS
  The
    following exhibits are filed with this annual Report on
    Form 10-K:
  21


Subsidiaries of the Registrant.23
.1

Consent of Virchow, Krause & Company, LLP31
.1

Certification of Chief Executive Officer/Chief Financial Officer
    pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32
.1

Certification of Chief Executive Officer/Chief Financial Officer
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  72