---

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SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-KSB

|/x/ | Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for fiscal year ended August 31, 2000.
|--- | ---------------------------------------------------------------------------------------------------------------------
|/ / | Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934.                                  

For the transition period from  to .

Commission File Number 0-10078

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HEI, Inc.(Name of Small Business Issuer in Its Charter)

Minnesota(State or other jurisdiction
of incorporation or organization)

41-0944876(I.R.S. Employer Identification No.)P.O. Box 5000, 1495 Steiger Lake Lane, Victoria, MN(Address of principal executive offices)

55386(Zip Code)


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

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

Securities
registered pursuant to Section 12(g) of the Exchange Act:

COMMON STOCK, PAR VALUE $.05 PER SHARE(Title of Class)

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

Indicate
if no disclosure of delinquent filers in response to Item 405 of Regulation S-B is contained in this form, and no disclosure will be contained, to the best
of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB. / /

HEI, Inc.
revenues for the fiscal year ended August 31, 2000 were $42,799,000.

The
aggregate market value as of November 16, 2000 (based on the closing price as reported by The Nasdaq National Market) of the voting stock held by non-affiliates
was approximately $67,000,000.

As
of November 16, 2000, 4,782,196 Common Shares, par value $.05 per share, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for Registrant's Annual Meeting of Shareholders to be held January 24, 2001 are incorporated by reference into
Part III.

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## 

Forward-Looking Statements

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

HEI, Inc.
is referred to herein as the Company, unless the context indicates otherwise.

PART I

Item 1. DESCRIPTION OF BUSINESS





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Customer

2000

1999

1998Customer A

42
%
52
%
50
%Customer B

15
%


Customer C

11
%


Customer D



13
%
12
%




Item 2. DESCRIPTION OF PROPERTY

The Company owns a 48,000 square foot facility for administration and microelectronics production in Victoria, Minnesota, which was originally completed in
August 1981. The facility was expanded during fiscal 1996 from the original 25,000 square feet with an addition of 23,000 square feet to increase production capacity. The Company mortgaged the
property to secure the credit facility with LaSalle Business Credit, Inc. In early January, 1999, the Company began leasing a 30,000 square foot facility and a 3,000 square foot facility in
Empalme, Mexico and Tucson, Arizona, respectively, for its contract assembly business. In July, 1999, the Company began leasing a 14,000 square foot facility in Tempe, Arizona for its high density
interconnect business. In July, 2000, the Company began leasing a 10,000 square foot facility in Chanhassen, Minnesota, for part of its laminate business. The Empalme, Mexico and Tucson, Arizona
facilities are leased until January, 2004 and the Tempe, Arizona and Chanhassen, Minnesota facilities are leased until August, 2005.

Item 3. LEGAL PROCEEDINGS

As of November 16, 2000 there are no material legal proceedings pending against the Company or its properties. From time to time the Company may become
involved in routine litigation incidental to its business.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS

None.

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PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's common stock is currently traded on The Nasdaq National Market under the symbol HEII. Below are the high and low closing bid prices for each
quarter of fiscal year 2000 and 1999, as reported by Nasdaq.

2000

High

LowFirst Quarter

$
6-7/8

$
5-1/4Second Quarter


16-5/8


6-7/16Third Quarter


16-1/8


9-1/16Fourth Quarter


23-1/4


11


1999

High

LowFirst Quarter

$
5-5/8

$
4-3/8Second Quarter


6-1/4


5Third Quarter


7-1/2


4-3/8Fourth Quarter


6-15/16


4-7/16


As
of August 31, 2000, the Company had 336 shareholders of record. The Company has not paid any dividends on its common stock since its initial public offering on
March 24, 1981 and expects that for the foreseeable future it will follow a policy of retaining earnings in order to finance the continued development of its business. Payment of dividends is
within the discretion of the Company's board of directors and will depend upon, among other things, the earnings, capital requirements and operating and financial condition of the Company. In
addition, the terms of the Company's agreement with LaSalle Business Credit, Inc. contain restrictions on the Company's ability to pay dividends.

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## 

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS

HEI, Inc.

Five Year Summary of Selected Financial Information

(In thousands, except per share amounts)

|Years Ended August 31                       |                                         | 2000 |        | 1999   |   | 1998   |        | 1997 |        | 1996   |  
|------------------------------------------- | --------------------------------------- | ---- | ------ | ------ | - | ------ | ------ | ---- | ------ | ------ | -
|Net sales                                   |                                         | $    | 42,799 |        | $ | 29,089 |        | $    | 24,766 |        | $
|Cost of sales                               |                                         |      | 35,544 |        |   | 22,378 |        |      | 19,104 |        |  
|                                            |                                         |      |        |        |   |        |        |      |        |        |  
|Gross profit                                |                                         |      | 7,255  |        |   | 6,711  |        |      | 5,662  |        |  
|                                            |                                         |      |        |        |   |        |        |      |        |        |  
|Operating expenses:                         |                                         |      |        |        |   |        |        |      |        |        |  
|                                            | Selling, general and administrative     |      |        | 6,338  |   |        | 4,623  |      |        | 3,498  |  
|                                            | Research, development and engineering   |      |        | 1,764  |   |        | 1,343  |      |        | 852    |  
|Acquisition transaction costs               |                                         |      | 453    |        |   |       |        |      |       |        |  
|Severance costs                             |                                         |      |       |        |   | 490    |        |      |       |        |  
|Proxy/change of control costs               |                                         |      |       |        |   |       |        |      | 5,664  |        |  
|Gain on sale of product line, net           |                                         |      |       |        |   |       |        |      |       |        |  
|                                            |                                         |      |        |        |   |        |        |      |        |        |  
|Operating income (loss)                     |                                         |      | (1,300 | )      |   | 255    |        |      | (4,352 | )      |  
|Income (loss) before income taxes           |                                         |      | (1,527 | )      |   | 635    |        |      | (3,772 | )      |  
|                                            |                                         |      |        |        |   |        |        |      |        |        |  
|Income tax expense (benefit)                |                                         |      | (372   | )      |   | 242    |        |      | (1,354 | )      |  
|                                            |                                         |      |        |        |   |        |        |      |        |        |  
|Net income (loss)                           |                                         | $    | (1,155 | )      | $ | 393    |        | $    | (2,418 | )      | $
|                                            |                                         |      |        |        |   |        |        |      |        |        |  
|Net income (loss) per basic share           |                                         | $    | (.24   | )      | $ | .08    |        | $    | (.52   | )      | $
|Net income (loss) per diluted share         |                                         | $    | (.24   | )      | $ | .08    |        | $    | (.52   | )      | $
|                                            |                                         |      |        |        |   |        |        |      |        |        |  
|Weighted average common shares Outstanding: |                                         |      |        |        |   |        |        |      |        |        |  
|                                            | Basic                                   |      |        | 4,726  |   |        | 4,698  |      |        | 4,685  |  
|                                            | Diluted                                 |      |        | 4,726  |   |        | 4,701  |      |        | 4,685  |  
|                                            |                                         |      |        |        |   |        |        |      |        |        |  
|Balance sheet:                              |                                         |      |        |        |   |        |        |      |        |        |  
|                                            | Working capital                         |      | $      | 5,902  |   | $      | 8,333  |      | $      | 12,175 |  
|                                            | Total assets                            |      |        | 28,936 |   |        | 23,739 |      |        | 23,878 |  
|                                            | Long-term debt, less current maturities |      |        | 3,894  |   |        | 3,415  |      |        | 3,835  |  
|                                            | Shareholders' equity                    |      |        | 15,116 |   |        | 15,566 |      |        | 15,135 |  
|                                            |                                         |      |        |        |   |        |        |      |        |        |  

FINANCIAL CONDITION

The Company's net cash flow used for operating activities for the year ended August 31, 2000, was $5,521,000. A significant component of this operating
net cash flow was $1,110,000 from operations before changes in current operating items mainly associated with the start up of the Mexico and high density interconnect divisions and
non-capitalized costs associated with the implementation of a new enterprise resource planning system. Additional components include a $5,275,000 increase in accounts receivable, and a
$3,623,000 increase in inventories partially offset by a $2,697,000 increase in accounts payable. The increase in accounts receivable and inventories is attributable primarily to the actual and
expected increases in revenue. The increase in accounts payable is mainly due to higher levels of inventory and expenses and timing of payments.

Accounts
receivable average days outstanding was 49 days for the year ended August 31, 2000 compared to 36 days for the same period a year ago. Inventory turns
were 7.4 turns and 8.7 turns for the years ended August 31, 2000 and 1999, respectively. The increased days outstanding and reduced inventory turns were primarily due to the start up of
operations in Mexico.

Costs
and equipment purchases for microelectronics and the high density interconnect business expansion were, in part, funded through the Company's short-term investments,
primarily commercial paper, of $3,744,000 from a year ago. The current ratio at the end of fiscal 2000 was 1.6:1 as compared to 2.9:1 at the end of fiscal 1999. The reduced current ratio is
principally due to decreased cash and

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cash equivalents and short-term investments resulting from investments in the newly established Mexico and High Density Interconnect divisions, increased revolving line of credit and
increased accounts payable, partially offset by increased accounts receivable and inventories.

The
Company has available a $5,000,000 revolving line of credit and a $5,000,000 capital expenditure term loan which both expire in August 2003 (see Notes 5 and 6 under Notes
to Consolidated Financial Statements). As of August 31, 2000, there were $2,943,000 and $1,665,000 of borrowings under the line of credit and capital expenditure term loan, respectively.

During
fiscal 2000, the Company purchased $4,329,000 of property and equipment primarily for production equipment for the Company's new facilities in Tempe, Arizona, Enpalme, Mexico
and Chanhassen, Minnesota. The Company also purchased and implemented a new Enterprise Resource Planning (ERP) applications software system in fiscal 2000.

During
fiscal 2001, the Company intends to expend approximately $3.0 million for manufacturing and facility improvements and capital equipment. These additions will increase
manufacturing capacity to meet the anticipated production requirements. It is expected that these expenditures will be funded from operations and external financing.

The
Company believes that its current lending capacity and cash generated from operations will provide sufficient cash flow for the Company to meet its short and long-term
debt obligations.

RESULTS OF OPERATIONS

Sales. 2000 vs. 1999:Sales in fiscal 2000 increased $13,710,000, or 47%, as compared to fiscal
1999. This increase was primarily in the hearing aid market for microelectronics. Each division (Microelectronics, Cross Technology, Mexico and High Density Interconnect) contributed to the growth in
sales. The largest customer accounted for 42% of sales in 2000. The reason for the decrease in the percentage of sales to the Company's largest customer is primarily due to the diversification of the
Company's customer base as well as the start up of operations in Mexico.

1999 vs. 1998:Sales in fiscal 1999 increased $4,323,000, or 17%, as compared to fiscal 1998.
This increase was primarily in the hearing aid and communications markets. The largest customer accounted for 52% of sales in 1999, with sales to this customer up 21% over the prior fiscal year. The
business with this customer has grown steadily over the last five years, and currently the Company is producing over 20 different devices for this customer for shipment to multiple locations, both
domestic and international.

PERCENTAGE OF SALES

2000

1999

1998Sales

100
%
100
%
100
%Gross profit

17
%
23
%
23
%Selling, general and Administrative

15
%
16
%
14
%Research, development and engineering

4
%
5
%
3
%Acquisition transaction costs

1
%


Severance costs



2
%
Proxy/change of control costs





23
%


Gross Profit. 2000 vs. 1999:The Company's gross profit as a percentage of sales was 17% in
fiscal 2000, as compared to 23% in fiscal 1999. The reduction in gross profit as a percentage of sales was primarily due to lower margin sales for the Company's Mexico division and Cross operations
and start-up costs for the high density interconnect facility. The lower margins for the Company's Mexico division are primarily a result of higher material content on revenue and lower
than anticipated sales volumes. The Company expects its gross profit as a percentage of sales will improve in fiscal 2001.

1999 vs. 1998:The Company's gross profit as a percentage of sales was 23% in fiscal 1999 and
fiscal 1998.

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Operating Expenses. 2000 vs. 1999:Fiscal 2000 selling, general and administrative and
research, development and engineering expenses increased $2,136,000, or 36%, over the previous year. This increase was due to increased selling costs to develop new business and support new
operations, non-capitalizable costs associated with implementing a new enterprise resource planning (ERP) system and start-up costs related to the high density interconnect
division (which are expensed as incurred) and increased development costs to support future business opportunities. In addition to these costs, the
Company incurred $453,000 of acquisition transaction costs related to the acquisition of Cross in March, 2000.

1999 vs. 1998:Fiscal 1999 selling, general and administrative and research, development and
engineering expenses increased $1,616,000 or 37% over the previous fiscal year. This increase was due to higher legal expense, increased selling expenses, start up costs related to Mexico and high
density interconnect operations (which are expensed as incurred) and increased development costs to support future business opportunities. In addition, during the first quarter of fiscal year 1999 the
Company incurred $490,000 of costs related to the severance agreement between the Company and Eugene W. Courtney, former Chief Executive Officer. These costs are being paid over a two year period.

Other Income (Expense), Net. 2000 vs. 1999:Other income decreased $607,000 to a net expense of
$227,000 in fiscal 2000 as compared to fiscal 1999 primarily due to lower investment balances and increased short and long-term debt resulting in higher interest costs.

1999 vs. 1998:Other income decreased $200,000, or 34%, in fiscal 1999 as compared to fiscal
1998 primarily due to lower investment balances and less cash received from previously reserved notes receivable.

Net Income (Loss). 2000 vs. 1999:The Company had a net loss of $1,155,000 in fiscal 2000
compared to net income of $393,000 in fiscal 1999. The loss in fiscal 2000 was a result of lower gross profit and higher expenses associated with the ramp up of the Mexico and high density
interconnect facilities, ERP implementation costs, the Cross acquisition costs and higher debt.

1999 vs. 1998:The Company had a net income of $393,000 in fiscal 1999 compared to a net loss
of $2,418,000 in fiscal 1998. The increase in fiscal 1999 was primarily a result of increased revenues partially offset by a one-time severance cost of $490,000 and increased costs and
expenses associated with new business initiatives, including the start up of the Company's new manufacturing facility in Mexico.

ISSUES AND UNCERTAINTIES

This Annual Report contains forward-looking statements that are based on the Company's current expectations and involve a number of risks and uncertainties.
Factors that may materially affect revenues, expenses and operating results include, without limitation, adverse business or market conditions, the ability of the Company to secure and satisfy
customers, the availability and cost of materials from suppliers, adverse competitive developments, and change in or cancellation of customer requirements.

The
forward-looking statements included herein are based on current assumptions that the Company will continue to develop, market, manufacture and ship products on a timely basis,
that competitive conditions within the Company's markets will not change materially or adversely, that the Company will continue to identify and satisfy customer needs for products and services, that
the Company will be able to retain and hire key personnel, that its equipment, processes, capabilities and resources will remain competitive and compatible with the current state of technology, that
risks due to shifts in customer demand will be minimized, and that there will be no material adverse change in the Company's operations or business. Assumptions relating to the foregoing involve
judgments that are based on incomplete information and are subject to many factors that can materially affect results. The Company operates in a volatile segment of high technology markets and
applications that are subject to rapid change and technical obsolescence.

Because
of these and other factors affecting the Company's operating results, past financial performance should not be considered an indicator of future performance, and investors
should not use

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historical trends to anticipate results or trends in future periods. The following factors also may materially affect results and therefore should be considered.

Substantial Fluctuations in Future Operating Results:The Company has experienced substantial
fluctuations in its annual and quarterly operating results, and such fluctuations may continue in future periods. The Company's operating results are affected by a number of factors, many of which are
beyond the Company's control. All products manufactured by the Company are custom designed and assembled for a specific customer's requirement in anticipation of the receipt of volume production
orders from that customer, which may not always materialize to the degree anticipated, if at all. The Company typically incurs significant start-up costs in the production of a particular
product, which costs are expensed as incurred and for which the Company attempts to seek reimbursement from the customer. Accordingly, the Company's level of experience in manufacturing a particular
product and its efficiency in minimizing start-up costs will affect the Company's operating results during the periods in which production begins and ramp-up occurs. The
efficiencies of the Company in managing inventories and fixed assets, shortages of components or labor, the degree of automation used in the assembly process, fluctuations in material costs and the
mix of materials, labor, manufacturing, and overhead costs are also significant factors affecting annual and quarterly operating results. Other factors contributing to fluctuations in the Company's
operating results include unforeseen design or manufacturing problems, price competition, functional competition (other means of accomplishing the same or similar packaging end result), the inability
to pass on cost overruns, the timing of expenditures in anticipation of increased sales, customer product delivery requirements, and the range of services provided. In addition, the amount and timing
of orders placed by a customer may vary due to a number of factors, including inventory balancing, changes in manufacturing strategy, and variation in product demand attributable to, among other
things, product life cycles, competitive factors, and general economic conditions. Any one of these factors, or a combination thereof, could adversely affect the Company's annual and quarterly results
of operations.

The
Company's customers generally require short delivery cycles, and a substantial portion of the Company's backlog is typically scheduled for delivery within 90 days.
Quarterly sales and operating
results therefore depend in large part on the volume and timing of bookings received during or immediately prior to the quarter, which are difficult to forecast in advance of that time. The short
lead-time for the Company's backlog also affects its ability to accurately project production and inventory levels. In addition, a significant portion of the Company's operating expenses
is relatively fixed in nature and planned expenditures are based in part on anticipated orders. Any inability to adjust spending quickly enough to compensate for any revenue shortfall may magnify the
adverse impact of such revenue shortfall on the Company's results of operations.

Dependence on Single Industry:During the past several years, the Company has had significant
dependence on a single market. In fiscal 2000, 60% of the Company's revenues came from sales to hearing instrument manufacturers. In addition, the Company has made significant sales in the medical
products industry. Each of these industries is characterized by intense competition, relatively short product life cycles, rapid technological change, significant fluctuations in product demand, and
significant pressure on vendors to reduce or minimize cost. Although the Company is attempting to reduce its dependence on any single industry, the Company does not expect this historic dependence to
change dramatically or quickly. Accordingly, the Company will likely be affected by trends in the industries it serves.

Customer Concentration:The Company's customer base is highly concentrated. In fiscal 2000,
1999 and 1998, the Company's two largest customers accounted for 57%, 65% and 62%, respectively, of net sales. Although the Company is reducing this concentration, the Company expects that sales to a
relatively small number of original equipment manufacturers ("OEMs") will continue to account for a substantial portion of net revenues for the foreseeable future, and the loss of, or a decline in
orders from, one of the Company's key customers would have a material adverse effect on the Company's financial and operating results. The Company is working for diversification such that no one
market would account for 40% or more in revenue, no one customer at 25% or greater revenue and no one program at 10% or greater during fiscal year 2001.

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Competition:The Company operates in a highly competitive industry and competes against several
domestic and foreign providers of similar microelectronics design and/or manufacturing services. The Company also faces competition from the internal operations of its current and potential OEM
customers and from offshore contract manufacturers, which, because of their lower labor rates and other related factors, enjoy a comparative advantage over the Company with respect to
high-volume production. However, the Company believes it can now also offer similar advantages through its new operation in Mexico. The Company expects to continue to encounter competition
from other electronics manufacturers that currently provide or may begin to provide contract design and manufacturing services. A number of the Company's competitors may have substantially greater
manufacturing, financial, technical, marketing, and other resources than does the Company, and may offer a broader scope and presence of operations on a worldwide basis.

Significant
competitive factors in the microelectronics market include price, quality, design capabilities, responsiveness, testing capabilities, the ability to manufacture in very
high volumes and proximity to the customers final assembly facilities. While the Company has competed favorably in the past with respect
to these factors, this is a particularly fast changing market, and there can be no assurance that the Company will continue to do so in the future. The trends toward increasingly shorter product
cycles and to off-shore production are expected to result in more intense competition as each new customer program is generally open to bidding by the Company's competitors, increasingly
including those with off-shore facilities and capabilities. Further, the Company is often one of two or more suppliers on any particular customer requirement and is therefore subject to
continuing competition on existing programs. In order to remain competitive in any of its markets, the Company must continually provide timely and technologically advanced design capabilities and
manufacturing services, ensure the quality of its products, and compete favorably with respect to turnaround and price. If the Company were to fail to compete favorably with respect to the principal
competitive factors in its markets served, the Company's business and operating results would be adversely affected.

Component Supply and Sources:Substantially all of the Company's manufacturing services are
provided on a turnkey basis in which the Company, in addition to providing design, assembly and testing services, is responsible for the procurement of the components that are assembled by the Company
for its customers. Although the Company attempts to minimize margin erosion as a result of component price increases, in certain circumstances it is required to bear some or all of the risk of such
price fluctuations, which could adversely affect the Company's profits. To date, the Company has generally been able to negotiate contracts that allow it to shift much of the impact of price
fluctuations to the customer; however, there can be no assurance that the Company will be able to do so in all cases. In addition, in order to assure an adequate supply of certain key components that
have long procurement lead times, such as integrated circuits, the Company occasionally must order such components prior to receiving formal customer purchase orders for the assemblies that require
such components. Failure to accurately anticipate the volume or timing of customer orders can result in component shortages or excess component inventory, which in either case could adversely affect
the Company's financial and operating results.

Some
of the assemblies manufactured by the Company require one or more components that are ordered from, or which may be available from, only one source or a limited number of
sources. Delivery problems relating to components purchased from any of the Company's key suppliers could have a material adverse impact on the financial performance of the Company. From time to time,
the Company's suppliers allocate components among their customers in response to supply shortages. In some cases, supply shortages will substantially curtail production of all assemblies using a
particular component. In addition, at various times there have been industry-wide shortages of electronic components. While the Company has not experienced sustained periods of shortages
of components in the recent past, there can be no assurance that substantial component shortages will not occur in the future. Any such shortages could have a material adverse effect on the Company's
operating results.

Variability of Customer Requirements and Customer Financing:The level and timing of orders
placed by customers vary due to the customers' attempts to balance their inventory, changes in customers' manufacturing strategies, and variations in demand for the customers' products. Due in part

---

to these factors, most of the Company's customers do not commit to firm production schedules for more than several weeks in advance of requirements. The Company's inability to forecast the level of
customers' orders with certainty makes it difficult to schedule production and optimize utilization of
manufacturing capacity. In the past, the Company has been required to increase staffing and incur other expenses in order to meet the anticipated demands of its customers. From time to time,
anticipated orders from some of the Company's customers have failed to materialize and delivery schedules have been deferred as a result of changes in a customer's business needs, both of which have
adversely affected the Company's operating results. On other occasions, customers have required rapid increases in production that have placed an excessive burden on the Company's resources. There can
be no assurance that the Company will not experience similar fluctuations in customer demand in the future. In addition, the Company may carry significant accounts receivable in connection with
providing manufacturing services to its customers. Although the Company has not encountered significant problems in collecting on such accounts receivable, if one or more of the Company's principal
customers were to become insolvent, or otherwise fail to pay for the services and materials provided by the Company, the Company's operating results and financial condition would be adversely
affected.

Rapid Technological Change:The Company's customers compete in markets that are characterized
by rapid technological change and short product life cycles. In particular, the hearing, medical and telecommunications markets are prone to rapid product obsolescence by new technologies. The
microelectronics industry could experience future competition from new or emerging technologies that render existing technology less competitive or obsolete. The inability of the Company to develop
technologies or acquire capability to meet the evolving market requirements of its customers could have a material adverse effect on the Company's business, financial condition and results of
operations, including the Company's ability to maintain its revenue base.

Management of Growth:The Company's sales have varied significantly as customer demand for the
Company's products increases and decreases. The Company's future operating results will depend on management's ability to manage periods of both growth and downturn, to be able to hire, train and
retain the appropriate number of qualified employees, and to forecast revenues and control expenses. Unexpected declines in revenues, without corresponding and timely reductions in expenses, could
have a material adverse effect on the Company's business, results of operations, or financial condition.

Hiring and Retention of Employees:The Company's continued growth and success depend to a
significant extent on the continued service of senior management and other key employees and the hiring of new qualified employees. Competition for skilled business, product development, technical and
other personnel is intense. There can be no assurance that the Company will be successful in recruiting new personnel and retaining existing personnel. None of the Company's employees are subject to a
long-term employment agreement, although several key employees are subject to non-competition agreements. The loss of one or more key employees could have a material adverse
effect on the growth of the Company.

Possible Volatility of Stock Price:The market price of the Company's Common Stock has
experienced significant fluctuations and may continue to fluctuate in the future. The market price of the Common Stock may be significantly affected by factors such as changes in requirements or
demands for the Company's services, the announcement of new products or product enhancements by the Company or its competitors, technological innovations by the Company or its competitors, quarterly
variations in the Company's or its competitors' results of operations, changes in prices of the Company's or its competitors' products and services, changes in revenue and revenue growth rates of the
Company, changes in earnings estimates by market analysts, speculation in the press or analyst community, and
general market conditions or market conditions specific to particular industries. The stock prices for many companies in the technology sector have experienced wide fluctuations that often have been
unrelated to their operating performance. Such fluctuations may adversely affect the market price of the Company's Common Stock.

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Market Risk:The Company has a limited market risk in terms of the variability of the interest
rate on its industrial development revenue bonds. The bonds bear interest at a rate which varies weekly, based on comparative tax exempt issues, and is limited to a maximum of 10%.

---

ITEM 7. FINANCIAL STATEMENTS

HEI, Inc.

Consolidated Balance Sheets

(Dollars in thousands, except per share amounts)

|                                              |                                                                                                             | August 31, 2000 |        | August 31, 1999 |  
|--------------------------------------------- | ----------------------------------------------------------------------------------------------------------- | --------------- | ------ | --------------- | -
|Assets                                        |                                                                                                             |                 |        |                 |  
|Current assets:                               |                                                                                                             |                 |        |                 |  
|                                              | Cash and cash equivalents                                                                                   |                 | $      | 484             |  
|                                              | Short-term investments                                                                                      |                 |        |                |  
|                                              | Restricted cash                                                                                             |                 |        | 86              |  
|                                              |                                                                                                             |                 |        |                 |  
|                                              |                                                                                                             |                 | 570    |                 |  
|                                              | Accounts receivable, net                                                                                    |                 |        | 8,582           |  
|                                              | Inventories                                                                                                 |                 |        | 5,869           |  
|                                              | Income taxes receivable                                                                                     |                 |        |                |  
|                                              | Other current assets                                                                                        |                 |        | 807             |  
|                                              |                                                                                                             |                 |        |                 |  
|Total current assets                          |                                                                                                             |                 | 15,828 |                 |  
|                                              |                                                                                                             |                 |        |                 |  
|Property and equipment:                       |                                                                                                             |                 |        |                 |  
|                                              | Land                                                                                                        |                 |        | 216             |  
|                                              | Building and improvements                                                                                   |                 |        | 4,170           |  
|                                              | Fixtures and equipment                                                                                      |                 |        | 17,265          |  
|                                              | Accumulated depreciation                                                                                    |                 |        | (10,457         | )
|                                              |                                                                                                             |                 |        |                 |  
|Net property and equipment                    |                                                                                                             |                 | 11,194 |                 |  
|                                              |                                                                                                             |                 |        |                 |  
|Restricted cash                               |                                                                                                             |                 |       |                 |  
|Investment in MSC                             |                                                                                                             |                 | 1,358  |                 |  
|Other long-term assets                        |                                                                                                             |                 | 556    |                 |  
|                                              |                                                                                                             |                 |        |                 |  
|Total assets                                  |                                                                                                             | $               | 28,936 |                 | $
|                                              |                                                                                                             |                 |        |                 |  
|Liabilities and Shareholders' Equity          |                                                                                                             |                 |        |                 |  
|Current liabilities:                          |                                                                                                             |                 |        |                 |  
|                                              | Revolving line of credit                                                                                    |                 | $      | 2,943           |  
|                                              | Current maturities of long-term debt                                                                        |                 |        | 1,107           |  
|                                              | Accounts payable                                                                                            |                 |        | 4,326           |  
|                                              | Accrued employee related costs                                                                              |                 |        | 947             |  
|                                              | Accrued liabilities                                                                                         |                 |        | 603             |  
|                                              |                                                                                                             |                 |        |                 |  
|Total current liabilities                     |                                                                                                             |                 | 9,926  |                 |  
|                                              |                                                                                                             |                 |        |                 |  
|Long-term liabilites, less current maturities |                                                                                                             |                 | 3,894  |                 |  
|Deferred tax liability                        |                                                                                                             |                 |       |                 |  
|                                              |                                                                                                             |                 |        |                 |  
|Shareholders' equity:                         |                                                                                                             |                 |        |                 |  
|                                              | Undesignated stock; 5,000,000 shares authorized; none issued                                                |                 |        |                |  
|                                              | Common stock, $.05 par; 10,000,000 shares authorized; 4,776,696 and 4,701,965 shares issued and outstanding |                 |        | 239             |  
|                                              | Paid-in capital                                                                                             |                 |        | 8,606           |  
|                                              | Retained earnings                                                                                           |                 |        | 6,271           |  
|                                              |                                                                                                             |                 |        |                 |  
|Total shareholders' equity                    |                                                                                                             |                 | 15,116 |                 |  
|                                              |                                                                                                             |                 |        |                 |  
|Total liabilities and shareholders' equity    |                                                                                                             | $               | 28,936 |                 | $
|                                              |                                                                                                             |                 |        |                 |  

The accompanying notes are an integral part of the consolidated financial statements.

---

HEI, Inc.

Consolidated Statements of Operations

(In thousands, except per share amounts)

|Years Ended August 31                      |                                       | 2000 |        | 1999  |   | 1998   |      
|------------------------------------------ | ------------------------------------- | ---- | ------ | ----- | - | ------ | -----
|Net sales                                  |                                       | $    | 42,799 |       | $ | 29,089 |      
|Cost of sales                              |                                       |      | 35,544 |       |   | 22,378 |      
|                                           |                                       |      |        |       |   |        |      
|                                           | Gross profit                          |      |        | 7,255 |   |        | 6,711
|                                           |                                       |      |        |       |   |        |      
|Operating expenses:                        |                                       |      |        |       |   |        |      
|                                           | Selling, general and administrative   |      |        | 6,338 |   |        | 4,623
|                                           | Research, development and engineering |      |        | 1,764 |   |        | 1,343
|Acquisition transaction costs              |                                       |      | 453    |       |   |       |      
|Severance costs                            |                                       |      |       |       |   | 490    |      
|Proxy/change of control costs              |                                       |      |       |       |   |       |      
|                                           |                                       |      |        |       |   |        |      
|Operating income (loss)                    |                                       |      | (1,300 | )     |   | 255    |      
|                                           |                                       |      |        |       |   |        |      
|Other income (expense), net                |                                       |      | (227   | )     |   | 380    |      
|                                           |                                       |      |        |       |   |        |      
|Income (loss) before income taxes          |                                       |      | (1,527 | )     |   | 635    |      
|Income tax expense (benefit)               |                                       |      | (372   | )     |   | 242    |      
|                                           |                                       |      |        |       |   |        |      
|Net income (loss)                          |                                       | $    | (1,155 | )     | $ | 393    |      
|                                           |                                       |      |        |       |   |        |      
|Net income (loss) per common share         |                                       |      |        |       |   |        |      
|                                           | Basic                                 |      | $      | (0.24 | ) | $      | 0.08 
|                                           | Diluted                               |      | $      | (0.24 | ) | $      | 0.08 
|                                           |                                       |      |        |       |   |        |      
|Weighted average common shares outstanding |                                       |      |        |       |   |        |      
|                                           | Basic                                 |      |        | 4,726 |   |        | 4,698
|                                           | Diluted                               |      |        | 4,726 |   |        | 4,701
|                                           |                                       |      |        |       |   |        |      

The accompanying notes are an integral part of the consolidated financial statements.

---

HEI, Inc.

Statements of Changes in

Consolidated Shareholders' Equity

(Dollars in thousands)

|                                                 |                                                                          | Common Stock
Shares
Outstanding |         | Common Stock
Amount
Outstanding |     | Additional
Paid-In
Capital |   | Retained
Earnings |      | Total
Equity |      
|------------------------------------------------ | ------------------------------------------------------------------------ | ------------------------------- | ------- | ------------------------------- | --- | -------------------------- | - | ----------------- | ---- | ------------ | -----
|Balance, August 31, 1997, as previously reported |                                                                          | 4,103,176                       |         | $                               | 205 |                            | $ | 7,518             |      | $            | 9,272
|Cross Technology, Inc. pooling of interests      |                                                                          | 600,000                         |         |                                 | 30  |                            |   | 376               |      |              | 179  
|                                                 |                                                                          |                                 |         |                                 |     |                            |   |                   |      |              |      
|Balance, August 31, 1997                         |                                                                          | 4,703,176                       |         |                                 | 235 |                            |   | 7,894             |      |              | 9,451
|                                                 | Net loss                                                                 |                                 |        |                                 |     |                           |   |                   |     |              |      
|                                                 | Issuance of common shares under employee stock purchase and option plans |                                 | 26,619  |                                 |     | 1                          |   |                   | 159  |              |      
|                                                 | Common shares repurchased and retired                                    |                                 | (34,600 | )                               |     | (1                         | ) |                   | (186 | )            |      
|                                                 |                                                                          |                                 |         |                                 |     |                            |   |                   |      |              |      
|Balance, August 31, 1998                         |                                                                          | 4,695,195                       |         |                                 | 235 |                            |   | 7,867             |      |              | 7,033
|                                                 | Net income                                                               |                                 |        |                                 |     |                           |   |                   |     |              |      
|                                                 | Issuance of common shares under employee stock purchase plan             |                                 | 6,770   |                                 |     |                           |   |                   | 38   |              |      
|                                                 |                                                                          |                                 |         |                                 |     |                            |   |                   |      |              |      
|Balance, August 31, 1999                         |                                                                          | 4,701,965                       |         |                                 | 235 |                            |   | 7,905             |      |              | 7,426
|                                                 | Net loss                                                                 |                                 |        |                                 |     |                           |   |                   |     |              |      
|                                                 | Issuance of common shares under employee stock purchase and option plans |                                 | 74,731  |                                 |     | 4                          |   |                   | 438  |              |      
|                                                 | Tax benefit of nonqualified stock options                                |                                 |        |                                 |     |                           |   |                   | 199  |              |      
|                                                 | Stock-based compensation                                                 |                                 |        |                                 |     |                           |   |                   | 64   |              |      
|                                                 |                                                                          |                                 |         |                                 |     |                            |   |                   |      |              |      
|Balance, August 31, 2000                         |                                                                          | 4,776,696                       |         | $                               | 239 |                            | $ | 8,606             |      | $            | 6,271
|                                                 |                                                                          |                                 |         |                                 |     |                            |   |                   |      |              |      

The accompanying notes are an integral part of the consolidated financial statements.

---

HEI, Inc.

Consolidated Statements of Cash Flows

(In thousands)

|Years ended August 31                                     |                                                        | 2000 |        | 1999   |   | 1998   |       
|--------------------------------------------------------- | ------------------------------------------------------ | ---- | ------ | ------ | - | ------ | ------
|Cash flow from operating activities:                      |                                                        |      |        |        |   |        |       
|                                                          | Net income (loss)                                      |      | $      | (1,155 | ) | $      | 393   
|                                                          | Equity in net loss of MSC                              |      |        | 110    |   |        | 32    
|                                                          | Depreciation and amortization                          |      |        | 2,407  |   |        | 1,577 
|                                                          | Accounts receivable allowance                          |      |        | 75     |   |        | (90   
|                                                          | Deferred income tax expense (benefit)                  |      |        | (571   | ) |        | 103   
|                                                          | Stock-based compensation and other                     |      |        | 244    |   |        | 4     
|Changes in operating assets and liabilities:              |                                                        |      |        |        |   |        |       
|                                                          | Accounts receivable                                    |      |        | (5,275 | ) |        | 736   
|                                                          | Inventories                                            |      |        | (3,623 | ) |        | (531  
|                                                          | Income taxes                                           |      |        | (14    | ) |        | 1,243 
|                                                          | Other current assets                                   |      |        | (66    | ) |        | 242   
|                                                          | Accounts payable                                       |      |        | 2,697  |   |        | (387  
|                                                          | Accrued employee related costs and accrued liabilities |      |        | (350   | ) |        | 31    
|                                                          |                                                        |      |        |        |   |        |       
|Net cash flow provided by (used for) operating activities |                                                        |      | (5,521 | )      |   | 3,353  |       
|                                                          |                                                        |      |        |        |   |        |       
|Cash flow from investing activities:                      |                                                        |      |        |        |   |        |       
|                                                          | Purchases of investments                               |      |        |       |   |        | (9,536
|                                                          | Maturities of investments                              |      |        | 3,744  |   |        | 13,962
|                                                          | Additions to property and equipment                    |      |        | (4,329 | ) |        | (3,886
|                                                          | Investment in MSC                                      |      |        |       |   |        | (1,500
|                                                          | Licensing agreement                                    |      |        |       |   |        | (129  
|                                                          | Proceeds from sales of product lines                   |      |        |       |   |        | 55    
|                                                          | Decrease (increase) in restricted cash                 |      |        | 292    |   |        | (378  
|                                                          |                                                        |      |        |        |   |        |       
|Net cash flow provided by (used for) investing activities |                                                        |      | (293   | )      |   | (1,412 | )     
|                                                          |                                                        |      |        |        |   |        |       
|Cash flow from financing activities:                      |                                                        |      |        |        |   |        |       
|                                                          | Issuance of common stock and other                     |      |        | 506    |   |        | 38    
|                                                          | Issuance of long-term debt                             |      |        | 1,665  |   |        | 250   
|                                                          | Repayment of long-term debt                            |      |        | (821   | ) |        | (628  
|                                                          | Increase in deferred financing fees                    |      |        | (38    | ) |        | (41   
|                                                          | Borrowings on revolving line of credit                 |      |        | 2,943  |   |        |      
|                                                          | Repurchase of common shares                            |      |        |       |   |        |      
|                                                          |                                                        |      |        |        |   |        |       
|Net cash flow provided by (used for) financing activities |                                                        |      | 4,255  |        |   | (381   | )     
|                                                          |                                                        |      |        |        |   |        |       
|Net increase (decrease) in cash and cash equivalents      |                                                        |      | (1,559 | )      |   | 1,560  |       
|Cash and cash equivalents, beginning of year              |                                                        |      | 2,043  |        |   | 483    |       
|                                                          |                                                        |      |        |        |   |        |       
|Cash and cash equivalents, end of year                    |                                                        | $    | 484    |        | $ | 2,043  |       
|                                                          |                                                        |      |        |        |   |        |       
|Supplemental disclosures of cash flow information:        |                                                        |      |        |        |   |        |       
|Interest paid                                             |                                                        | $    | 294    |        | $ | 160    |       
|Income taxes paid                                         |                                                        |      | 279    |        |   | 229    |       

The accompanying notes are an integral part of the consolidated financial statements.

---

## 

Notes to Consolidated Financial Statements

NOTE 1  Summary of Significant Accounting Policies

HEI, Inc. and its subsidiaries (the Company) specialize in the design and manufacture of ultraminiature microelectronic devices and high technology
products incorporating those devices. The Company also operates a contract manufacturing facility in Mexico as well as a producer of quality flex circuits and high performance laminate based
substrates in Arizona.

Principles of Consolidation.The consolidated financial statements include the accounts of the
Company, HEI Export, Inc. and Cross Technology, Inc., its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

Business Combination.On March 3, 2000 HEI acquired Cross Technology, Inc.
(Cross), a manufacturer and marketer of wireless Smart Cards and other ultra-miniature radio frequency (RF) applications. Under the terms of the agreement, 600,000 shares of HEI common stock were
exchanged for all of the outstanding common stock of Cross. The transaction has been accounted for as a pooling of interests and, accordingly, all prior period consolidated financial statements have
been restated to include the combined results of operations, financial position and cash flows of Cross Technology, Inc.

The
following information presents certain income statement data of the separate companies for the periods preceding the acquisition:

Six Months Ended
March 4, 2000

Year Ended
August 31, 1999

Year Ended
August 31, 1998(In thousands)RevenuesHEI

$
14,127

$
24,323

$
20,805Cross Technology


3,359


4,766


3,961Consolidated


17,486


29,089


24,766Operating income (loss)HEI


(2,126
)

(718
)

(4,678
)Cross Technology


(11
)

973


326Consolidated


(2,137
)

255


(4,352
)Net income (loss)HEI


(1,968
)

(223
)

(2,627
)Cross Technology


(7
)

616


209Consolidated

$
(1,975
)
$
393

$
(2,418
)


Cash, Cash Equivalents and Short-Term Investments.The Company considers its
investments in all highly liquid debt instruments with original maturities of three months or less at date of purchase to be cash equivalents. The carrying amount approximates fair value because of
the short maturity of those instruments. Short-term investments consist mainly of high quality commercial paper with maturities of
less than one year. The short-term investments are carried at amortized cost which approximates fair value and are classified as held to maturity.

Inventories.Inventories are stated at the lower of cost or market and include materials, labor
and overhead costs. The first-in, first-out cost method is used to value inventories.

Property and Equipment.Property and equipment are stated at cost. Depreciation and
amortization are provided on the straight-line method over the estimated useful lives of the property and equipment. The approximate useful lives of building and improvements are
10-39 years and fixtures and equipment are 3-10 years.

---

Maintenance and repairs are charged to expense as incurred. Major improvements and tooling costs are capitalized and depreciated over their estimated useful lives. The cost and
accumulated depreciation of property and equipment retired or otherwise disposed of are removed from the related accounts, and any resulting gain or loss charged or credited to operations.

Capitalized Software.The Company capitalizes certain costs associated with significant
software obtained and developed for internal use. Certain costs are capitalized when both the preliminary project stage is completed and management deems the project will be completed and used to
perform the internal function. Capitalization of such costs ceases no later than the point at which the project is substantially complete and ready for its intended purpose.

Capitalized
software costs are amortized over the estimated useful life of the project which is generally 3 years. Capitalized software costs of approximately $1,113,000 and
$517,000 are included in fixtures and equipment as of August 31, 2000 and 1999, respectively.

Long-Lived Assets.Long-lived assets and certain identifiable
intangibles are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. As of August 31, 2000, the Company did
not consider any of its assets to be impaired.

Income Taxes.Deferred income tax assets and liabilities are recognized for the expected future
tax consequences of events that have been included in the financial statements or tax returns. Deferred income tax assets and liabilities are determined based on the differences between the financial
statement and tax bases of assets and liabilities using currently enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense (benefit) is
the tax payable (receivable) for the periods and the change during the period in deferred income tax assets and liabilities.

Stock-based Compensation.The Company accounts for stock based compensation under Accounting
Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." APB 25 requires compensation cost to be recorded on the date of the grant only if the current market price
of the underlying stock exceeds the exercise price. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards Board (SFAS) No. 123,
"Accounting for Stock-based Compensation."

Revenue Recognition.Revenue and related cost of sales are recognized upon shipment.

Net Income (Loss) Per Weighted Average Common Share.Basic earnings per share (EPS) is computed
by dividing net income (loss) by the weighted average number of common shares outstanding during each period. 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 the stock options is computed using the average market price of the Company's stock
during each period under the treasury stock method.

Use of Estimates.The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates.

New Accounting Pronouncements.In June 1998, the Financial Accounting Standards Board
(FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which, as amended, becomes effective for fiscal years beginning after June 15, 2000.

SFAS
No. 133 requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from change in the value
of those derivatives would be accounted for depending on the use and whether the derivatives qualify for hedge accounting. The

---

effect of adopting SFAS No. 133 is not expected to have a material effect on the Company's financial position or results of operations.

In
December, 1999, the Securities and Exchange Commission (SEC) staff issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB 101). SAB 101
summarizes certain SEC staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. SAB 101 will be effective for the Company in the fourth
quarter of fiscal year 2001. The adoption is not expected to have a material impact on the Company's financial position or results of operations.

NOTE 2  Proxy/Change of Control Costs

In fiscal year 1998, the Company incurred $5,664,000 of one-time expenses related to proxy contest and change of control costs which resulted from
the efforts of Fant Industries Inc. in the second half of the year to gain control of the Board of Directors. These expenses included preparation of proxy materials and other information to
shareholders and litigation expenses related to the takeover activity, cash-out payments made to all stock option holders which were required as a result of the change of control and
reimbursement to Fant Industries Inc. for its expenses as agreed to by the shareholders. These one-time expenses of $5,664,000 were entirely a cash outlay with the final amounts
paid out in the first quarter of fiscal 1999.

NOTE 3  Major Customers, Concentration of Credit Risk and Geographic Data

Major customers, each of which accounted for more than 10% of the Company's net sales for the years ended August 31, were as follows:

2000

1999

1998Customer A

42
%
52
%
50
%Customer B

15
%


Customer C

11
%


Customer D



13
%
12
%


The
Company generally sells its products to original equipment manufacturers in the United States and abroad in accordance with supply contracts specific to certain manufacturer
product programs. The Company performs ongoing credit evaluations of its customers' financial conditions and, generally, does not require collateral from its customers. The Company's continued sales
to these customers are often dependent upon the continuance of the customers' product programs. The Company's ten largest customers accounted for approximately 89%, 90% and 91% of net sales in fiscal
years 2000, 1999 and 1998, respectively, and approximately 88% and 89% of accounts receivable at August 31, 2000 and 1999, respectively.

The
Company had net sales of $17,687,000, $14,190,000 and $10,407,000 that were shipped to Singapore in fiscal 2000, 1999 and 1998. Net export sales were $20,026,000, $16,658,000 and
$12,761,000 in fiscal 2000, 1999 and 1998, respectively. The majority of the international sales were to multinational companies who instructed HEI to ship products to their own off-shore
assembly facilities.

---

NOTE 4  Other Financial Statement Data

The following provides additional information concerning selected consolidated balance sheet accounts at August 31, 2000 and 1999:

2000

1999(In thousands)Accounts receivable, net:Trade accounts receivable

$
8,797

$
3,522Less allowance for doubtful accounts


(215
)

(140
)$
8,582

$
3,382Inventories:Purchased parts

$
5,158

$
1,201Work in process


418


812Finished goods


293


233$
5,869

$
2,246Other current assets:Deferred tax assets

$
506

$
673Other current assets


301


235$
807

$
908Accrued liabilities:Real estate taxes

$
86

$
82Income taxes payable


86


209Other


431


449$
603

$
740


NOTE 5  Long-Term Debt

Long-term debt consists of the following:

|                                                                                                                                                                                                                                                                                                   |  | 2000 |       | 1999
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | ----
|
|Industrial Development Revenue Bonds payable on a yearly basis with principal installments from $95 to $700 through April, 2011 and variable interest ranging from 3.60% to 5.85% during fiscal year 2000.                                                                                         |  | $    | 3,135 |     
|Commercial loan payable in fixed monthly installments of $5 at 8.19% interest maturing June, 2004; secured with certain machinery and equipment.                                                                                                                                                   |  |      | 201   |     
|Capital expenditure note payable on a monthly basis with principal installments of $28 and interest due monthly at the prime rate plus 1/4% (9.75% at August 31, 2000); secured by machinery and
equipment and cross collateralized with revolving line of credit and letter of credit facilities. |  |      | 1,665 |     
|Employment agreement with monthly payments of $21 and no interest over a
two-year period from January, 1998 to December, 2000.                                                                                                                                                                     |  |      |      |     
|                                                                                                                                                                                                                                                                                                   |  |      |       |     
|Total                                                                                                                                                                                                                                                                                              |  |      | 5,001 |     
|Less current maturities                                                                                                                                                                                                                                                                            |  |      | 1,107 |     
|                                                                                                                                                                                                                                                                                                   |  |      |       |     
|Total long-term debt                                                                                                                                                                                                                                                                               |  | $    | 3,894 |     
|                                                                                                                                                                                                                                                                                                   |  |      |       |     

The
notes above are subject to certain restrictive financial covenants, including but not limited to, tangible net worth interest coverage, debt service coverage, annual loss
limitations and the ability to declare or pay dividends. The Company was in compliance with all applicable financial covenants at August 31, 2000.

---

## 

Principal
maturities of long-term debt at August 31, 2000 are as follows (in thousands):

Years ending August 31,2001

$
1,1072002


1,0832003


1,7262004


4002005


115Thereafter


570$
5,001


In
April 1996, the Company received proceeds of $5,625,000 from the issuance of Industrial Development Revenue Bonds. Of these funds, approximately $1,500,000 was used for the
construction of the new addition to the Company's manufacturing facility, and the remainder was used for equipment purchases. The bonds related to the facility expansion require annual principal
payments of $90,000 in the first year and $95,000 on April 1 of each year thereafter through 2011. The bonds related to the purchased equipment require payments over seven years from the date
of purchase of the equipment through April 1, 2005. In April and May 2000 and April 1999 the Company repaid $700,000 each year of the construction and equipment 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 August 31, 2000 was 4.70%. The bonds are
collateralized by two irrevocable letters of credit and essentially all property and equipment. A commitment fee is paid annually to the bank at a rate of 1.25% of the letters of credit

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 $5,000,000 reimbursement
for capital equipment expenditures and will make equal monthly payments based on a term of 60 months from when 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.

NOTE 6  Short Term Bank Borrowings

The Company has a revolving commitment with a financial institution for total borrowings of the lesser of $5,000,000 or the borrowing base, as defined in the
agreement, with interest, based on the
Company's option, at the prime rate of interest or 2.5% above the LIBOR rate. At August 31, 2000 and during fiscal year 2000 the interest rate on the revolving commitment was 9.5%. The balance
outstanding under this commitment was $2,943,000 at August 31, 2000. There was no balance outstanding under this commitment at August 31, 1999. The agreement requires the Company to
maintain certain financial covenants. The Company was in compliance with these covenants at August 31, 2000.

NOTE 7  Investment in Micro Substrates Corporation

On June 24, 1999, the Company obtained an exclusive, worldwide license from Micro Substrates Corporation (MSC) to manufacture and market a new
high-frequency chip carrier for applications in Local Multipoint Distribution Services, ultra high-speed Internet routing and satellite communications. In a related
transaction, the Company made an initial cash equity investment of $1.5 million in MSC (28%) and will supply goods and services, such as thin film substrate processing, to MSC. The Company's
investment in MSC is being accounted for under the equity method. For the years ended August 31, 2000 and 1999, the Company's equity in net losses of MSC were $110,000 and $32,000,
respectively, and are included in other income (expense), net.

---

NOTE 8  Income Taxes

Income tax expense (benefit) for the years ended August 31 consisted of the following:

(In thousands)

2000

1999

1998Current:Federal

$


$
103

$
(1,146
)State





36


14Deferred


(372
)

103


(222
)Income tax expense (benefit)

$
(372
)
$
242

$
(1,354
)


The
components of the deferred tax assets and liabilities at August 31, 2000 and 1999 are as follows:

(In thousands)

2000

1999Deferred tax assets (short-term):Receivables

$
79

$
52Inventories


266


213Accrued liabilities


161


176Net operating loss carry-forward





232506


673Deferred tax assets (long-term):Net operating loss carry-forward


910


AMT credit carryforward


86


Other


4


1,000


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


(626
)

(364
)Net deferred tax asset

$
880

$
309


In
the recognition of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Based upon
the level of historical taxable income and projections for future taxable income over the periods during which the deferred tax assets are deductible, the Company believes it is more likely than not
that the benefit of these deductible differences will be realized.

Actual
income tax expense (benefit) differs from the expected amount based upon the statutory federal tax rates as follows:

2000

1999

1998Federal statutory tax rate

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

(1.9
)
5.0

(3.1
)Non-deductible acquisition costs

10.1



Other

1.4

(.9
)
1.2Effective tax rate

(24.4
)%
38.1
%
(35.9
)%


NOTE 9  Stock Benefit Plans

1998 Plan.Under the Company's 1998 Stock Option Plan (the "1998 Plan"), a maximum of 600,000
shares of common stock may be issued pursuant to qualified and nonqualified stock options.

---

Stock options granted become exercisable in varying increments with a portion tied to the closing stock price or up to a maximum of eight years, whichever comes first. The exercise
price for options granted is equal to the average closing market price of the common stock on the date of the grant.

At
August 31, 2000 and 1999, the number of shares available for grant were 1,800 and 63,700, respectively.

1989 Plan.Under the Company's 1989 Omnibus Stock Compensation Plan (the "1989 Plan"), a
maximum of 2,000,000 shares of common stock may be issued pursuant to qualified and nonqualified stock options, stock purchase rights and other stock-based awards.

Stock
options granted become exercisable in varying increments with a portion tied to the closing stock price or up to a maximum of eight years, whichever comes first. Generally, the
exercise price for options granted is equal to the average closing market price of the common stock on the date of the grant or for the five days preceding the date of grant. At August 31, 2000
there were 150,000 outstanding options under the 1989 Plan.

Under
the 1989 Plan, substantially all regular full-time employees are given the opportunity to designate up to 10% of their annual compensation to be withheld, through
payroll deductions, for the purchase of common stock at 85% of the lower of (i) the market price at the beginning of the plan year, or (ii) the market price at the end of the plan year.
During fiscal 2000, 1999 and 1998, 14,431, 6,770 and 11,619 shares at prices of $4.59, $4.68 and $5.79, respectively, were purchased under the 1989 Plan.

At
August 31, 2000, 1999 and 1998, the number of shares available for grant were 126,861, 291,292 and 298,062, respectively.

Directors' Plan.During fiscal year 1999, the shareholders approved the 1998 Stock Option Plan
for Non-employee Directors. This plan replaced and superceded the Company's prior Stock Option Plan for Non-employee Directors. Under the new directors' plan, 425,000 shares
are authorized for issuance, with an initial year grant of 55,000 shares and an annual grant thereafter of 10,000 shares to each non-employee director. These grants are effective on the
day of the annual shareholders' meeting upon adjournment at an exercise price equal to the market price on the date of grant. The options become exercisable at the earlier of seven years after the
grant date or on the first day the market value equals or exceeds $25.00. These options expire ten years after the grant date. Options to purchase 30,000 shares were granted to the three
non-employee directors at $10.75 in 2000. Options to purchase 275,000 shares were granted to the five non-employee directors at $5.50 per share in 1999. At August 31,
2000, 295,000 shares remain outstanding and 120,000 shares are available for grant.

Change of Control.Under the terms and conditions of the Company's 1989 Plan and the Directors'
Plan, a change of control in the Company's Board of Directors, under certain circumstances, requires a liquidation of all unexercised stock options. In fiscal 1998, all stock options were liquidated
under this provision. The required payments relating to stock options outstanding due to the change of control liquidation made in fiscal 1998 were approximately $3,700,000 which are included in
proxy/change of control costs in the statement of operations.

---

Summary of Activity.The following is a summary of all activity involving options:

Options
Outstanding

Weighted Average
Exercise Price
Per ShareBalance, August 31, 1997

447,000

$
5.680Granted

575,000


5.160Exercised

(15,000
)

5.308Change of control liquidation

(972,000
)

5.397Cancelled

(35,000
)

5.305Balance, August 31, 1998

0


0.000Granted

629,300


5.610Cancelled

(18,000
)

5.875Balance, August 31, 1999

611,300


5.602Granted

481,000


10.886Exercised

(60,300
)

6.049Cancelled

(39,100
)

7.949Balance, August 31, 2000

992,900

$
8.042


The
following table summarizes information about stock options outstanding as of August 31, 2000:

Options OutstandingOptions ExercisableWeighted
Average
Remaining
Contractual
LifeRange of Exercise Prices

Number of
Options

Weighted
Average
Exercise
Price

Number of
Options

Weighted
Average
Exercise
Price$4.438 - $5.75

321,750

$
5.33

8.3

283,750

$
5.43$5.875 - $7.625

243,900


6.04

8.6

86,400


5.97$10.00 - $11.75

346,250


10.76

9.5

105,000


10.75$13.125 - $14.563

81,000


13.21

9.5

20,250


13.21$4.438 - $14.563

992,900

$
8.04

8.9

495,400

$
6.97


Accounting for Stock-based Compensation.Had the Company used the fair-value-based
method of accounting for its stock option plans beginning in fiscal year 1997 and charged compensation cost
against income over the vesting period, net income (loss) for fiscal years 2000, 1999 and 1998 would have been changed to the following pro forma amounts:

2000

1999

1998Net income (loss)

$
(1,899,000
)
$
155,000

$
(2,427,000
)Net income (loss) per share, diluted

$
(.46
)
$
.04

$
(.59
)


The
weighted average grant-date fair value of options granted during 2000, 1999 and 1998 was $4.48, $3.30 and $1.22, respectively. The weighted average
grant-date fair value of options was determined separately for each grant under the Company's various plans by using the fair value of each option grant on the date of grant, utilizing the
Black-Scholes option-pricing model and the following key weighted average assumptions:

2000

1999

1998Risk-free interest rates

6.00% to 6.70%

6.00% to 6.00%

5.00% to 5.5%Expected life

.5 to 8 years

.5 to 8 years

.5 to 3 yearsExpected volatility

62%

61%

62%Expected dividends

None

None

None


---

## 

NOTE 10  Employee Benefit Plans

The Company has a 401(k) plan covering all eligible employees. Employees can make voluntary contributions to the plan of up to 20% of their compensation not to
exceed the maximum specified by the Internal Revenue Code. The plan also provides for a discretionary contribution by the Company. During fiscal years 2000, 1999 and 1998, the Company contributed
$130,000, $87,000 and $93,000, respectively, to the plan.

The
Company has a defined benefit cash balance pension plan which was available to all eligible employees of Cross Technology, Inc. prior to the acquisition by the Company.
Plan benefits were based upon the employees' years of service and compensation.

2000

1999(In thousands)Change in benefit obligation:Benefit obligation at beginning of year

$
682

$
446Service cost


138


203Interest cost


51


33Benefit obligation at end of year

$
871

$
682Change in plan assets:Fair value of plan assets at the beginning of year

$
589

$
326Actual return on plan assets


88


79Employer contribution


207


184Fair value of plan assets at end of year

$
884

$
589Funded status:Unrecognized actuarial gain

$
(93
)
$
(58
)Unrecognized prior service cost





66Additional liability





(8
)Net amount recognized

$
(93
)
$
Amounts recognized in the statement of financial position consist of:Accrued benefit liability

$
80

$
93Weighted-average assumptions as of August 31:Discount rate


7.5
%

7.5
%Expected return on plan assets


7.5
%

7.5
%Rate of compensation increase





Components of net periodic benefit cost:Service cost

$
138

$
203Interest cost


51


33Expected return on plan assets


(53
)

(31
)Amortization of prior service costs


6


7Termination, settlement and curtailment costs


60


Total benefit cost

$
202

$
212


The
Company intends to terminate the plan and distribute all funds to the participants during fiscal year 2001. As a result, termination, settlement and curtailment costs of $60,000
were recorded for the year ended August 31, 2000.

NOTE 11  Commitments

Future commitments under non-cancelable operating leases, primarily for manufacturing equipment, are approximately $488,000 in 2001, $422,000 in
2002, $245,000 in 2003, $202,000 in 2004,

---

$188,000 in 2005. Total expense under non-cancelable operating leases was approximately $533,000 in 2000, $457,000 in 1999 and $227,000 in 1998.

NOTE 12  Severance Costs

In fiscal year 1999, the Company incurred $490,000 of severance costs related to the severance agreement between the Company and Eugene W. Courtney, former
Chief Executive Officer. These costs are being paid over a two year period. Restricted cash on the balance sheet represents an
investment pledged as payment on a severance agreement, is held in a separate account, and will be released to the Company's regular accounts in fiscal years 2000 and 2001 as the obligation is paid.

NOTE 13  Net Income (Loss) Per Weighted Average Share Computation

The components of net income (loss) per basic and diluted share are as follows:

2000

1999

1998(In thousands, except per share amounts)Basic:Net income (loss)

$
(1,155
)
$
393

$
(2,418
)Net income (loss) per share

$
(.24
)
$
.08

$
(.52
)Weighted average number of common shares outstanding


4,726


4,698


4,685Diluted:Net income (loss)

$
(1,155
)
$
393

$
(2,418
)Net income (loss) per share

$
(.24
)
$
.08

$
(.52
)Weighted average number of common shares outstanding


4,726


4,698


4,685Assumed conversion of stock options





3


Weighted average common and assumed conversion shares


4,726


4,701


4,685


During
fiscal year 2000, 1999 and 1998 approximately 993,000, 608,000 and 0 stock options, respectively, have been excluded from the diluted net income (loss) per common share
calculation as they are antidilutive.

NOTE 14  Segment Information

The Company has concluded that it operates in one operating segment.

The
Company has a plant in Empalme, Mexico which began operations in fiscal year 2000. This plant had net sales of $3,326,000 in fiscal year 2000. Net property plant and equipment as
of August 31, 2000 located at the Empalme, Mexico facility is $1,172,000.

NOTE 15  Subsequent Event

During the first quarter of fiscal year 2001, the Company intended to acquire and subsequently merge with Colorado MEDtech, Inc. (CMED) by initially
agreeing to purchase approximately 10% of CMED's outstanding shares from CMED's largest shareholder, Anthony J. Fant, CEO of HEI, Inc. Later in the quarter the Company and CMED's largest
shareholder mutually agreed to rescind and unwind its purchase of those shares. In connection with this proposed transaction, the Company will incur approximately $161,000 of non-cash
expenses in the first quarter of fiscal year 2001.

---

## 

Report of Independent Auditors'

To the Shareholders of HEI, Inc.:

We
have audited the accompanying consolidated balance sheets of HEI, Inc. and subsidiaries as of August 31, 2000 and 1999 and the related consolidated statements of
operations, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended August 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial positions of HEI, Inc. and subsidiaries as of
August 31, 2000 and 1999 and the results of their operations and their cash flows for each of the years in the three-year period ended August 31 2000, in conformity with
accounting principles generally accepted in the United States of America.

| |  | KPMG LLP
| |  | --------

Minneapolis,
Minnesota
October 20, 2000

---

## 

Statement of Financial Responsibility

The accompanying consolidated financial statements, including the notes thereto, and other financial information presented in this Annual Report, were prepared
by management, which is responsible for their integrity and objectivity. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the
United States of America and include amounts that are based upon management's best estimates and judgments.

The
Company maintains a system of internal accounting controls designed to provide reasonable assurance that the Company's assets are protected and that transactions are executed in
accordance with established authorizations and are recorded properly. The reasonable assurance concept is based on recognition that the cost of a system of internal accounting controls should not
exceed the benefit derived.

The
Audit Committee of the Board of Directors is responsible for recommending the independent accounting firm to be retained for the coming year. The Audit Committee meets
periodically and privately with the independent accountants, as well as with management, to review accounting, auditing, and financial reporting matters.

The
Company's independent certified public accountants, KPMG LLP, are engaged to audit the consolidated financial statements of the Company and to issue their report thereon. See the
accompanying Report of Independent Auditors'.

Summary of Quarterly Operating Results(unaudited)  (In thousands, except per share amounts)

Fiscal Year 2000

First

Second

Third

FourthNet sales

$
8,094

$
9,392

$
11,589

$
13,724Gross profit


1,299


1,025


2,386


2,545Acquisition transaction costs





453





Operating income (loss)


(447
)

(1,690
)

342


495Net income (loss)


(319
)

(1,656
)

361


459Net income (loss) per shareBasic

$
(.07
)
$
(.35
)
$
.08

$
.10Diluted

$
(.07
)
$
(.35
)
$
.07

$
.09


Fiscal Year 1999

First

Second

Third

FourthNet sales

$
7,437

$
8,301

$
6,329

$
7,022Gross profit


1,601


2,060


1,392


1,658Severance costs


490








Operating income (loss)


(198
)

540


(8
)

(79
)Net income (loss)


(88
)

398


131


(48
)Net income (loss) per shareBasic

$
(.02
)
$
.08

$
.03

$
(.01
)Diluted

$
(.02
)
$
.08

$
.03

$
(.01
)


---

NOTE:

The
summation of quarterly net income (loss) per share for 2000 does not equate to the calculation for the year on a diluted basis since the quarterly calculations are performed on a discrete basis.

---

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

On September 3, 1998, PricewaterhouseCoopers LLP resigned as independent accountants for the Company. During the two most recent years through the date
of resignation, there were no disagreements with PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure.
PricewaterhouseCoopers LLP's report on the Company's consolidated financial statements for the two most recent years through the date of resignation did not contain an adverse opinion or disclaimer of
opinion, nor was it qualified or modified as to uncertainty, audit scope or accounting principles.

The
Company selected KPMG LLP, upon the approval of the Board, to be its independent certified public accountants for fiscal 1998, 1999 and again for 2000. The Board has also approved
the selection of KPMG LLP to be its independent certified public accountants for fiscal 2001.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT

The information regarding directors called for by Item 9 is contained in the Proxy Statement under the caption "Election of Directors" and is incorporated
herein by reference.

The
following is a list of HEI, Inc. executive officers, their ages, positions and offices as of November 16, 2000.

Name

Age

PositionAnthony J. Fant

40

Chairman and Chief Executive OfficerDonald R. Reynolds

42

President and Chief Operating OfficerSteve E. Tondera, Jr.

37

Chief Financial Officer, Treasurer, Secretary, Vice President Finance and DirectorW. Thomas Goodnow

47

Vice President Sales and MarketingStephen K. Petersen

48

Vice President Operations


BUSINESS EXPERIENCE

ANTHONY J. FANT became Chief Executive Officer of the Company in November 1998. Mr. Fant has been a director, President and Chief Executive
Officer of Fant Industries, LLC, and Fant Broadcasting Company (including, for these purposes, various affiliated companies engaged primarily in television and radio broadcasting) since 1986. From
1986 to 1996, Fant Broadcasting Company acquired, built or managed a number of television and radio stations. Mr. Fant currently owns a number of businesses in diverse industries.

DONALD
R. REYNOLDS joined the Company in March 1998 as Executive Vice President and was appointed President in April 1998 and Chief Operating Officer in
January 1999. Before joining the Company, he was employed with BF Goodrich Aerospace in senior executive positions in product engineering, marketing and business unit management, and most
recently as Business Unit Director for a business unit having approximately $30 million in revenues. This business unit designed and manufactured high technology products (sensors, electronics,
software) for the aerospace industry.

STEVE
E. TONDERA, JR. joined the Company in January, 1999 as Managing Director of HEI-Mexico Division and became Chief Financial Officer and Treasurer in June, 2000.
Mr. Tondera has been Senior Vice President and Chief Financial Officer of Fant Broadcasting Company (including, for these purposes, various affiliated companies engaged primarily in television
and radio broadcasting) since 1994.

---

WILLIAM T. GOODNOW joined the Company in June of 1999 as Vice President of Sales and Marketing. He was made an officer in September 2000. Before joining the Company, he was
employed as the Director of Sales for GSI Incorporated, Laser Systems Division.

STEPHEN
K. PETERSEN joined the Company in March 1998 as Director of Manufacturing. He was appointed Vice President of Operations in September 2000. Before joining the
Company, he was employed with Sheldahl in a variety of positions ranging from Engineer to Plant Manager and most recently as the Operations Manager.

The
information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 called for by Item 9 is contained in the Proxy Statement under the caption
"Section 16(a) Beneficial Ownership Reporting Compliance" and is incorporated herein by reference.

ITEM 10. EXECUTIVE COMPENSATION

The information called for by Item 10 is contained in the Proxy Statement under the captions "Executive Officers and Executive Compensation" and is
incorporated herein by reference.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information called for by Item 11 is contained in the Proxy Statement under the caption "Shares and Principal Shareholders" and is incorporated herein by
reference.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information called for by Item 12 is contained in the Proxy Statement under the caption "Executive Officers and Executive CompensationChange
in Control Agreements" and "Certain Relationships and Related Transactions" and is incorporated herein by reference.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K



---



|2.1   |  | Cross Technology, Inc., Agreement and Plan of Reorganization                                                                                                                   |  | Note 7
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------
|3.1   |  | Restated Articles of Incorporation, as amended.                                                                                                                                |  | Note 1
|3.2   |  | Bylaws, as amended.                                                                                                                                                            |  | Note 6
|4.1  |  | Loan and Security Agreement with LaSalle Bank, N.A. dated July 31, 2000.                                                                                                       |  | Note 2
|4.2  |  | Capital Expenditure Note with LaSalle Bank, N.A. dated July 31, 2000.                                                                                                          |  | Note 2
|4.3  |  | Reimbursement Agreement by and between HEI, Inc. and LaSalle Bank, N.A. dated July 31, 2000.                                                                                   |  | Note 2
|4.4  |  | Mortgage, Security Agreement, Fixture Financing Statement and Assignment of Leases and Rents by HEI, Inc. as Mortgagor to LaSalle Bank, N.A. as Mortgagee dated July 31, 2000. |  | Note 2
|4.5  |  | Patent, Trademark and License Mortgage by HEI, Inc. in favor of LaSalle Bank, N.A. dated July 31, 2000.                                                                        |  | Note 2
|4.6  |  | Security Agreement with LaSalle Bank, N.A. dated July 31, 2000.                                                                                                                |  | Note 2
|4.7  |  | Revolving Note with LaSalle Bank, N.A. dated July 31, 2000.                                                                                                                    |  | Note 2
|10.1  |  | Form of Indemnification Agreement between HEI and officers and directors.                                                                                                      |  | Note 3
|*10.2 |  | HEI 1989 Omnibus Stock Compensation Plan adopted April 3, 1989, as amended to date.                                                                                            |  | Note 4
|*10.3 |  | 1991 Stock Option Plan for Non-employee Directors, as amended to date.                                                                                                         |  | Note 5
|*10.4 |  | 1998 Stock Option Plan adopted November 18, 1998.                                                                                                                              |  | Note 6
|*10.5 |  | 1998 Stock Option Plan for Non-employee Directors adopted November 18, 1998.                                                                                                   |  | Note 6
|21   |  | Subsidiaries of the Registrant                                                                                                                                                 |  |       
|23   |  | Consent of KPMG LLP.                                                                                                                                                           |  |       
|27    |  | Financial Data Schedule                                                                                                                                                        |  |       

---

Notes
to Exhibits above:

---



## 

SIGNATURES

In accordance with Section 13 or 15(c) of the Exchange Act, the Registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized

| |  | HEI, INC.
| |  | ---------
| |  | BY:      
| |  | Date:    

In
accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

|/s/ANTHONY J. FANTAnthony J. Fant, Chairman and Chief Executive
Officer                                                              |  | November 29, 2000Date
|------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------
|/s/STEVE E. TONDERA, JR.Steve E. Tondera, Jr., Chief Financial Officer, Treasurer, Secretary,
Vice President of Finance and Director |  | November 29, 2000Date
|/s/CRAIG E. ROBLECraig E. Roble, Company Controller                                                                                  |  | November 29, 2000Date
|/s/EDWIN W. FINCH, IIIEdwin W. Finch, Director                                                                                       |  | November 29, 2000Date
|/s/DAVID W. ORTLIEBDavid W. Ortlieb, Director                                                                                        |  | November 29, 2000Date
|/s/MACK V. TRAYNOR, IIIMack V. Traynor, III, Director                                                                                |  | November 29, 2000Date

---

Corporate Information

Board of Directors

Anthony J. Fant, ChairmanChief Executive Officer of the Company,
President and Chief Executive Officer,
Fant Industries LLC

Edwin W. Finch, IIIPresident, FHL Capital Corporation

David W. OrtliebIndependent Management Consultant
Chairman of Cronus BioPharma, Inc.

Steve E. Tondera, Jr.Chief Financial Officer of the Company

Mack V. Traynor, IIIPresident
Manitou Investments

Corporate Officers and Management

Anthony J. FantChief Executive Officer

Donald R. ReynoldsPresident and Chief Operating Officer

Steve E. Tondera, Jr.Chief Financial Officer, Treasurer, Secretary
and Vice President of Finance

W. Tom GoodnowVice President of Sales and Marketing

Stephen K. PetersenVice President of Operations

Scott M. StoleDirector of Advanced Process Development

Robert R. ShueDirector of Design Engineering

Wray A. WentworthDirector of Corporate Quality

Tim LoveGeneral Manager of HEI-Mexico Division

Jeffrey FlammerGeneral Manager of HEI-High Density
Interconnect Division

General CounselWeil, Gotshal & Manges LLP
New York, New York

Gray
Plant Mooty
Minneapolis, Minnesota

Independent Certified Public
AccountantsKPMG LLP
Minneapolis, Minnesota

Stock Transfer Agent
and RegistrarWells Fargo Bank Minnesota, N.A.
Box 64854
161 North Concord Exchange
South St. Paul
Minnesota 55075-0738

Corporate HeadquartersHEI, Inc.
P.O. Box 5000
1495 Steiger Lake Lane
Victoria, Minnesota 55386-5000
(952) 443-2500
E-mail: headqtrs@heii.com
Internet: www.heii.com

Form 10-KSBA copy of the Company's Annual Report to the Securities and Exchange Commission on Form 10-KSB is available without charge by written or oral request to:

Shareholder
Relations
HEI, Inc.
P.O. Box 5000
Victoria, Minnesota 55386
Phone (952) 443-2500
Facsimile (952) 443-2668

Annual Meeting of ShareholdersThe Company's annual meeting of shareholders will be held on January 24, 2001 at 3:00 PM at The Planets (50th floor), IDS Center, 80 South Eighth Street,
Minneapolis,
Minnesota

---

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