8-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

Date of report (Date of earliest event reported): May 9, 2005

HEI, Inc.

(Exact Name of Registrant as Specified in Charter)

Minnesota	0-10078	41-0944876
(State or Other Jurisdiction of Incorporation)	(Commission File Number)	(IRS Employer Identification No.)

PO Box 5000, 1495 Steiger Lake Lane, Victoria, Minnesota 55386

(Address of Principal Executive Offices, Including Zip Code)

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

N/A

(Former Name or Former Address, if Changed Since Last Report)

     Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligations of the registrant under any of the following provisions (see General Instruction A.2.):

     ¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

     ¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

     ¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

     ¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

TABLE OF CONTENTS

Stock Purchase Agreement

Registration Rights Agreement

Form of Warrant

2nd Certificate of Designation of Common Stock

Certificate of Designation of Series A

Press Release

Item 3.02 Unregistered Sales of Equity Securities.

     On May 10, 2005, HEI, Inc. (the “Company”) announced that it had raised $3.4 million in gross proceeds through the sale of 130,538 shares of Series A Convertible Preferred Stock (“Preferred Stock”) in a private placement that closed on May 9, 2005 to a group of institutional and accredited investors. Each share of Preferred Stock is convertible at the option of the holder at any time into 10 shares of the Company’s common stock. In connection with the sale, the Company issued to the purchasers five-year warrants to purchase in the aggregate up to 522,152 shares of the Company’s common stock at an exercise price of $3.05 per share (the “Warrants”). The Company sold the Preferred Stock and Warrants in reliance upon exemptions from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”) provided by Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder based upon, among other things, written investment representations of the purchasers. In addition, the certificates representing the shares of Preferred Stock and the Warrants each bear a customary restrictive stock legend. The purchase price of the Series A Convertible Preferred Stock was $26.00 per share. ThinkEquity Partners, LLC served as the financial advisor to the Company in connection with the private placement and received a cash fee of $25,000, five-year warrants to purchase up to 5,000 shares of the Company’s common stock at an exercise price of $3.05 per share and reimbursement of expenses. Copies of the Company’s material agreements relating to, and the press release announcing, the sale of Preferred Stock are attached as exhibits to this Current Report.

Item 5.03 Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year.

     Effective May 9, 2005, the Company amended its amended and restated articles of incorporation to increase the number of authorized shares of the Company’s common stock by 2,000,000 resulting in a total of 13,000,000 authorized shares of the Company’s common stock. Also effective May 9, 2005, the Company amended its amended and restated articles to authorize 167,000 shares of Preferred Stock and to designate the rights and preferences of the Preferred Stock. Copies of the Company’s Certificate of Designations relating to the Company’s common stock and the Preferred Stock are attached as exhibits to this Current Report.

Item 9.01 Financial Statements and Exhibits.

(c)   Exhibits.

     The following exhibits are filed as a part of this Current Report on Form 8-K.

Item No.	Description
2.1	Stock Purchase Agreement dated May 9, 2005 by and among HEI, Inc. and the Investors listed on Exhibit A thereto.(1)
2.2	Registration Rights Agreement dated May 9, 2005 by and among HEI, Inc. and the Purchasers listed on Schedule 1 thereto.(2)
2.3	Form of Warrant issued to the Investors listed on Exhibit A to the Stock Purchase Agreement dated May 9, 2005 (see Exhibit 2.1 to this Current Report).
3.1	Second Certificate of Designation of Common Stock of HEI, Inc. dated May 9, 2005.
3.2	Certificate of Designation of Series A Convertible Preferred Stock of HEI, Inc. dated May 9, 2005.
99.1	Press Release dated May 10, 2005 announcing private placement.

     

(1) Pursuant to Item 601(b)(2) of Regulation S-K, other than Exhibit A (List of Investors included in Exhibit 2.1 to this Current Report), Exhibit B (Form of Warrant attached to this Current Report as Exhibit 2.3) and Exhibit C (the Registration Rights Agreement attached to this Current Report on Form 8-K as Exhibit 2.2), the investor acceptance pages,exhibits and schedules to the Stock Purchase Agreement have been omitted. HEI, Inc. agrees to supplementally furnish such pages, schedules and exhibits upon request from the Securities and Exchange Commission.

(2) Pursuant to Item 601(b)(2) of Regulation S-K, the acceptance schedules to the Registration Rights Agreement have been omitted. HEI, Inc. agrees to supplementally furnish such schedules upon request from the Securities and Exchange Commission.

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SIGNATURES

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

		HEI, INC.
Date: May 11, 2005	by	/s/ Timothy Clayton
		Timothy Clayton
		Chief Financial Officer (Duly Authorized Officer)

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Exhibit Index

Item No.	Description
2.1	Stock Purchase Agreement dated May 9, 2005 by and among HEI, Inc. and the Investors listed on Exhibit A thereto.(1)
2.2	Registration Rights Agreement dated May 9, 2005 by and among HEI, Inc. and the Purchasers listed on Schedule 1 thereto.(2)
2.3	Form of Warrant issued to the Investors listed on Exhibit A to the Stock Purchase Agreement dated May 9, 2005 (see Exhibit 2.1 to this Current Report).
3.1	Second Certificate of Designation of Common Stock of HEI, Inc. dated May 9, 2005.
3.2	Certificate of Designation of Series A Convertible Preferred Stock of HEI, Inc. dated May 9, 2005.
99.1	Press Release dated May 10, 2005 announcing private placement.

(1) Pursuant to Item 601(b)(2) of Regulation S-K, other than Exhibit A (List of Investors included in Exhibit 2.1 to this Current Report), Exhibit B (Form of Warrant attached to this Current Report as Exhibit 2.3) and Exhibit C (the Registration Rights Agreement attached to this Current Report on Form 8-K as Exhibit 2.2), the investor acceptance pages,exhibits and schedules to the Stock Purchase Agreement have been omitted. HEI, Inc. agrees to supplementally furnish such pages, schedules and exhibits upon request from the Securities and Exchange Commission.

(2) Pursuant to Item 601(b)(2) of Regulation S-K, the acceptance schedules to the Registration Rights Agreement have been omitted. HEI, Inc. agrees to supplementally furnish such schedules upon request from the Securities and Exchange Commission.

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EX-2.1

Exhibit 2.1

SERIES A CONVERTIBLE PREFERRED
STOCK PURCHASE AGREEMENT

     This Series A Convertible Preferred Stock Purchase Agreement (this “Agreement”), dated as of May 9, 2005, is entered into by and among the Investors listed on Exhibit A hereto (each an “Investor” or jointly the “Investors”) and HEI, Inc., a Minnesota corporation (the “Company”). The Investors and the Company are sometimes referred to in this Agreement individually as a “Party” and collectively as the “Parties.”

     WHEREAS, the Company will at the Closing (as defined in Section 1.3) sell up to 167,000 shares of its Series A Convertible Preferred Stock, par value $0.05 per share (the “Series A Preferred Stock”), which will be convertible into shares of the Company’s common stock, par value $0.05 per share (the “Common Stock”), in accordance with the provisions of the Series A Preferred Stock Certificate of Designation in the form attached hereto as Exhibit B (the “Certificate of Designation”) (the Common Stock issuable upon such conversion, the “Underlying Shares”), together with five-year Common Stock purchase warrants in the form attached hereto as Exhibit C (the “Warrants”), to the Investors, and the Investors will purchase the Series A Preferred Stock and the Warrants from the Company, on the terms and conditions set forth herein.

     NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties and agreements contained in this Agreement, the Parties agree as follows:

1. Subscription for Shares.

     1.1 Authorization. The Company will authorize the sale and issuance of up to 167,000 shares of its Series A Preferred Stock (the “Shares”), having the rights, privileges and preferences as set forth in the Certificate of Designation, and Warrants to purchase up to 668,000 shares of its Common Stock.

     1.2 Sale of Series A Preferred Stock and Warrants. Subject to the terms and conditions hereof, each Investor agrees, severally and not jointly, to purchase at the Closing, and the Company agrees to issue and sell to each Investor, that number of shares of the Company’s Series A Preferred Stock set forth opposite each Investor’s name on Exhibit A, at a price of $26.00 per share (the “Purchase Price”). In consideration of the purchase of the Shares, the Company agrees to issue and deliver to each Investor, at the Closing, Warrants to purchase that number of shares of Common Stock set forth opposite each Investor’s name on Exhibit A (the “Warrant Shares”), with an exercise price per share equal to 110% of the closing price of the Common Stock as reported by the NASDAQ National Market on the Closing Date. The Shares and the Warrants to be purchased by the Investors are sometime referred to in this Agreement as the “Securities.”

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     1.3 Closing. The closing (the “Closing”) of the purchase and sale of the Securities shall take place at the offices of Gray Plant Mooty, 500 IDS Center, 80 South Eighth Street, Minneapolis, MN 55402, at 10:00 a.m., on May 9, 2005, or at such other time and place (or through such other means such as by facsimile) as the Company and the Investors mutually agree upon orally or in writing (the “Closing Date”). At the Closing, the Company shall deliver to each Investor a certificate representing the Series A Preferred Stock that such Investor is purchasing (as set forth on Exhibit A) together with the Warrants representing the right to purchase that number of Warrant Shares set forth opposite such Investor’s name on Exhibit A, against delivery to the Company by such Investor of a wire transfer in immediately available funds in the amount of the aggregate Purchase Price therefore pursuant to the wire instructions set forth on Exhibit A. The Company agrees to issue a press release announcing the sale of the Securities within one (1) business day of the Closing Date and file a Current Report on Form 8-K within two (2) business days of the Closing Date.

2. Representations and Warranties of the Company. As a material inducement to the Investors to enter into this Agreement and purchase the Securities, the Company hereby represents and warrants to each Investor as follows:

     2.1 Organization and Standing. The Company and its subsidiaries are corporations duly organized, validly existing, and in good standing under the laws of the jurisdiction in which they are incorporated and have all requisite corporate power and authority and all material qualifications, licenses, permits and authorizations necessary to own and operate their properties, to carry on their businesses as now conducted and as proposed to be conducted through the fiscal year ending August 31, 2005, and to carry out the transactions contemplated by this Agreement. Each of the Company and its subsidiaries is duly qualified to do business as a foreign corporation in all jurisdictions in which the failure to be so qualified would have a Material Adverse Effect (as defined in Section 2.7) on the Company’s or its subsidiaries’ properties or business as now conducted or as proposed to be conducted through the current fiscal year.

     2.2 Subsidiaries. All of the direct and indirect subsidiaries of the Company are set forth on Schedule 2.2. The Company owns, directly or indirectly, all of the capital stock or other equity interests of each of its subsidiaries, free and clear of any liens or other encumbrances other than as disclosed in the SEC Documents, and all the issued and outstanding shares of capital stock of each Subsidiary are validly issued and are fully paid, non-assessable and free of preemptive and similar rights to subscribe for or purchase securities.

     2.3 Corporate Power. The Company has all requisite legal and corporate power to execute and deliver this Agreement and the other agreements contemplated hereby, to issue the Securities hereunder, and to carry out and perform its obligations under the terms of this Agreement.

     2.4 Capitalization.

     (a) The authorized capital stock of the Company, the designations of classes of capital stock and the rights and preferences of capital stock are set forth in the

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Company’s Amended and Restated Articles of Incorporation, as amended to date (the “Articles of Incorporation”). As of the date hereof, 8,394,102 shares of the Common Stock are issued and outstanding, excluding the Underlying Shares and the Warrant Shares, and no shares of preferred stock are issued and outstanding, excluding the Shares. All issued and outstanding shares of the Company’s capital stock as of the date hereof have been duly authorized and validly issued, are fully paid and nonassessable, and were issued in compliance with applicable federal and state securities laws.

     (b) There are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, any shares of capital stock of the Company or any of its subsidiaries, or contracts, commitments, understandings or arrangements by which the Company or any of its subsidiaries is or may become bound to issue additional shares of capital stock of the Company or any of its subsidiaries, and no person or entity has any options or warrants to purchase Common Stock, except (i) pursuant to options issued under the Company’s stock option plans, stock incentive plans, employee stock purchase plans or any other equity-based compensation plans, (ii) pursuant to a common stock purchase warrant dated August 29, 2001, to purchase up to 47,500 shares of Common Stock, (iii) pursuant to common stock purchase warrants, each dated February 13, 2004, to purchase up to an aggregate amount of 424,800 shares of Common Stock, (iv) pursuant to a common stock purchase warrant to purchase up to approximately 33,400 shares of Common Stock to be issued to ThinkEquity Partners, LLC, in connection with the transactions contemplated by this Agreement, (v) pursuant to Section 7 of that certain Industrial/Commercial Lease dated October 1, 2004, between Boulder Investor’s, LLC and HEI, Inc. to issue the greater of 100,000 shares of Common Stock or shares representing 0.11% of all of HEI’s then outstanding stock, and (vi) pursuant to this Agreement (collectively, (i) through (vi), the “Exempt Issuances”).

     (c) No shareholder of the Company has any rights or preferences not afforded all shareholders of the Company, except pursuant to this Agreement. No shareholder has any pre-emptive or approval right pertaining to the sale and purchase of the Series A Preferred Stock pursuant to this Agreement, whether by statute, contractual obligation or otherwise. There are no stockholders agreements, voting agreements or other similar agreements with respect to the Company’s capital stock to which the Company is a party.

     2.5 Authorization. All corporate action on the part of the Company, its officers, directors and shareholders necessary (a) for the authorization, execution, delivery and performance by the Company of this Agreement, and each of the other agreements contemplated by this Agreement to which the Company is a Party, (b) for the authorization, issuance, sale and delivery of the Shares and the Warrants, and (c) for the performance of all of the Company’s obligations hereunder and thereunder, has been taken. This Agreement, and each of the other agreements contemplated by this Agreement to which the Company is a Party, when executed and delivered by the Company and each Investor, shall constitute a valid and legally binding obligation of the Company, enforceable against the Company in accordance with its terms,

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subject to laws of general application relating to bankruptcy, insolvency or creditors’ rights and rules of law governing specific performance, injunctive relief or other equitable remedies.

     2.6 Valid Issuance. The Shares, when issued, sold and delivered in accordance with this Agreement, will be duly authorized and validly issued, fully paid and nonassessable, and will be free and clear of any liens or encumbrances, except for restrictions imposed under applicable state and federal securities laws. The Warrant Shares, when issued, sold and delivered in accordance with the Warrants, will be duly authorized and validly issued, fully paid and nonassessable, and will be free and clear of any liens or encumbrances, except for restrictions imposed under applicable state and federal securities laws. The Underlying Shares, when issued, sold and delivered in accordance with the Certificate of Designation, will be duly authorized and validly issued, fully paid and nonassessable, and will be free and clear of any liens or encumbrances, except for restrictions imposed under applicable state and federal securities laws.

     2.7 No Conflicts. The Company is not in violation of any term of the Articles of Incorporation or its Second Amended and Restated Bylaws (the “Bylaws”), or any contract, agreement, mortgage, indebtedness, indenture, instrument, judgment, decree or order to which the Company is subject, or any statute, rule or regulation applicable to the Company, except for any such violations that, individually or in the aggregate, are not likely to have a material adverse effect on the Company’s condition (financial or otherwise), operations, properties or business, taken as a whole (“Material Adverse Effect”). The execution and delivery by the Company of this Agreement and each of the other agreements contemplated hereby to which the Company is a Party, the offering, sale and issuance of the Securities and the consummation of the contemplated transactions will not conflict with or result in a breach of the terms, conditions or provisions of, constitute a default under, result in the creation of any lien, security interest, charge or encumbrance upon the Company’s capital stock or assets pursuant to, give any third party the right to modify, terminate or accelerate any obligation under, result in a violation of, or require any authorization, consent, approval, exemption or other action by or notice to any court or administrative or governmental body pursuant to, (a) the Articles of Incorporation or Bylaws of the Company, (b) any law, statute, rule or regulation to which the Company is subject, or (c) any agreement, instrument, order, judgment or decree to which the Company is subject, except with respect to any of the foregoing (a) through (c) which would not have a Material Adverse Effect.

     2.8 SEC Documents; Financial Statements; Material Changes.

     (a) Since September 1, 2003, the Company has filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “1934 Act”) (all of the foregoing filed prior to the date hereof and all exhibits included therein and financial statements and schedules thereto and documents incorporated by reference therein being hereinafter referred to as the “SEC Documents”). The Company (i) has delivered or made available to each Investor or its representative true and complete copies of the SEC Documents to the extent that each Investor or its representative has requested any such SEC Documents from the Company, and (ii) agrees to deliver or make available to each Investor or its representative true and complete copies of any additional

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SEC Documents, upon request. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the 1934 Act and the rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at the time they were filed with the SEC, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The Company does not have pending before the SEC any request for confidential treatment of information.

     (b) As of their respective dates, the financial statements of the Company included in the SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Such financial statements have been prepared in accordance with United States generally accepted accounting principles, consistently applied during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments).

     (c) To the Company’s knowledge, no other information provided by or on behalf of the Company to any Investor that is not included in the SEC Documents, including, without limitation, information referred to in Section 3.6 of this Agreement, contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they are or were made, not misleading.

     (d) Since the date of the latest audited financial statements included within the SEC Documents, except as specifically disclosed in the SEC Documents or as disclosed on Schedule 2.8(d), (i) there has been no event, occurrence or development that has had or that could reasonably be expected to result in a Material Adverse Effect, (ii) the Company has not incurred any liabilities (contingent or otherwise) other than (A) trade payables and accrued expenses incurred in the ordinary course of business consistent with past practice, (B) liabilities not required to be reflected in the Company’s financial statements pursuant to GAAP or required to be disclosed in filings made with the SEC and (C) indebtedness pursuant to existing loan agreements disclosed in the SEC Documents, (iii) the Company has not materially altered its method of accounting, (iv) the Company has not declared or made any dividend or distribution of cash or other property to its stockholders or purchased, redeemed or made any agreements to purchase or redeem any shares of its capital stock and (v) the Company has not issued any equity securities to any officer, director or affiliate, except pursuant to existing Company stock option plans, stock incentive plans, employee stock purchase plans or any other equity-based compensation plans.

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     2.9 Litigation. Except as disclosed on Schedule 2.9 or as disclosed in the SEC Documents, there are no actions, suits, proceedings orders, investigations or claims pending or, to the Company’s knowledge, threatened in writing against or affecting the Company or its subsidiaries or their respective properties (or, to the Company’s knowledge, pending or threatened against or affecting any of the officers, directors or employees of the Company or its subsidiaries with respect to the Company’s or its subsidiaries business or proposed business activities) at law or in equity, or before or by any governmental department, commission, board, bureau, agency or instrumentality (including, without limitation, any actions, suit, proceedings or investigations with respect to the transactions contemplated by this Agreement).

     2.10 Tax Matters. Except as set forth on Schedule 2.10, and except for matters that would not, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect, the Company and each Subsidiary has filed all necessary federal, state and foreign income and franchise tax returns and has paid or accrued all taxes shown as due thereon, and the Company has no knowledge of a tax deficiency which has been asserted or threatened in writing against the Company or any Subsidiary.

     2.11 Consents. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any governmental authority or third-party on the part of the Company is required in connection with the valid execution and delivery of this Agreement, the offer, sale or issuance of the Securities, or the consummation of the contemplated transactions, except (a) under applicable state securities laws, which filings and qualifications, if required, will be accomplished within the required statutory period, (b) for the filing pursuant to Regulation D promulgated under the Securities Act of 1933, as amended (the “1933 Act”), which filing will be made within 15 days of the execution hereof, (c) for the filing of the NASDAQ National Market Additional Listing Application, which filing will be made within 15 days of the execution hereof, and (d) the registration statement contemplated by the Registration Rights Agreement.

     2.12 Labor Relations. No material labor dispute exists or, to the knowledge of the Company, is imminent with respect to any of the employees of the Company that could reasonably be expected to result in a Material Adverse Effect.

     2.13 Patents and Trademarks. The Company and its subsidiaries have, or have rights to use, all patents, patent applications, trademarks, trademark applications, service marks, trade names, copyrights, licenses and other similar rights that are necessary or material for use in connection with their respective businesses as now conducted and as proposed to be conducted through the fiscal year ending August 31, 2005, except where the failure to so have would not have a Material Adverse Effect (collectively, the “Intellectual Property Rights”). Except as set forth on Schedule 2.13, neither the Company nor any subsidiary has received a written notice that the Intellectual Property Rights used by the Company or any subsidiary violates or infringes upon the rights of any third party. To the knowledge of the Company, all such Intellectual Property Rights are enforceable and there is no existing material infringement by any third party of any of the Intellectual Property Rights.

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     2.14 Environmental Laws.

     (a) To the Company’s knowledge, the Company and its subsidiaries (i) are in compliance with any and all Environmental Laws (as defined below), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses, and (iii) are in compliance with all terms and conditions of any such permit, license or approval, except with respect to any of the foregoing (i) through (iii) where the failure would not have a Material Adverse Effect. To the Company’s knowledge, with respect to the Company (A) there are no past or present releases of any Hazardous Materials (as defined below) into the environment, (B) there are no actions, activities, circumstances, conditions, events, incidents, or contractual obligations that may cause the Company to have any liability under any Environmental Law, and (C) the Company has not received any notice with respect to the foregoing, nor is any action pending or, to the Company’s knowledge, threatened in connection with the foregoing, except with respect to any of the foregoing (A) through (C) where the condition or obligation would not have a Material Adverse Effect. The term “Environmental Laws” means all federal, state, local or foreign laws relating to pollution or protection of human health or the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata), including, without limitation, laws relating to emissions, discharges, releases or threatened releases of chemicals, pollutants, contaminants, or toxic or hazardous substances or wastes (collectively, “Hazardous Materials”) into the environment, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials, as well as all authorizations, codes, decrees, demands or demand letters, injunctions, judgments, licenses, notices or notice letters, orders, permits, plans or regulations issued, entered, promulgated or approved thereunder.

     (b) Other than those that are or were stored, used or disposed of in compliance with applicable law, to the Company’s knowledge, no Hazardous Materials are contained on or about any real property currently owned, leased or used by the Company, and no Hazardous Materials were released on or about any real property previously owned, leased or used by the Company during the period the property was owned, leased or used by the Company.

     (c) To the Company’s knowledge, there are no underground storage tanks on or under any real property owned, leased or used by the Company or any of its subsidiaries that are not in compliance with applicable Environmental Laws.

     2.15 Regulatory Permits; Compliance. Except as would not result in a Material Adverse Effect, each of the Company and its subsidiaries (a) possess all franchises, grants, authorizations, licenses permits, easements, consents, certificates, approvals and orders necessary to own, lease and operate its properties and to conduct its business as currently being conducted (collectively, the “Permits”), (b) has not received notice of a claim that it is in default under or that it is in violation of, the Permits, any indenture, loan or credit agreement or any other agreement or instrument to which it is a party or by which it or any of its properties is bound

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(whether or not such default or violation has been waived), (c) is not in violation of any order of any court, arbitrator or governmental body, and (d) is not in violation of any statute, rule or regulation of any governmental authority. Neither the Company nor any subsidiary has received any notice of proceedings relating to the revocation or modification of any Permit.

     2.16 Investment Company Status. The Company is not and upon consummation of the sale of the Securities will not be an “investment company,” a company controlled by an “investment company” or an “affiliated person” of, or “promoter” or “principal underwriter” for, an “investment company” as such terms are defined in the Investment Company Act of 1940, as amended.

     2.17 Accuracy of Public Information. No event or circumstance has occurred or information exists with respect to the Company or its business, properties, operations or financial condition, which, under applicable law, rule or regulation, requires public disclosure or announcement by the Company but which has not been so publicly disclosed or announced.

     2.18 Internal Accounting Controls. Except as disclosed in the SEC Documents, the Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that: (a) transactions are recorded as necessary to permit preparation of financial statements in conformity with United States generally accepted accounting principles and to maintain accountability for assets; (b) transactions are executed in accordance with management’s general or specific authorization; (c) access to assets is available only if permitted in accordance with management’s general or specific authorization; and (d) the recorded accountability for amounts is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. The Company’s certifying officers have evaluated the effectiveness of the Company’s controls and procedures as of the end of the period covered by the most recently filed periodic report under the Exchange Act (the end of such period, the “Evaluation Date”). The Company presented in such periodic report the conclusions of the certifying officers about the effectiveness of the disclosure controls and procedures based on their evaluations as of the Evaluation Date.

     2.19 Use of Proceeds; Commissions. The proceeds received from the sale of the Securities shall be used for general business purposes of the Company. Except as set forth in Schedule 2.19, there are no brokerage or finder’s fees or commissions payable by the Company to any broker, financial advisor or consultant, finder, placement agent, investment banker, bank or other third party with respect to the transactions contemplated by this Agreement.

     2.20 Acknowledgment Regarding Purchase of Securities. The Company acknowledges and agrees that each of the Investors is acting solely in the capacity of an arm’s length purchaser with respect to this Agreement and the transactions contemplated hereby. The Company further acknowledges that no Investor is acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to this Agreement and the transactions contemplated hereby and any advice given by any Investor or any of their respective representatives or agents in connection with this Agreement and the transactions contemplated hereby is merely incidental to the such Investor’s purchase of the Securities. The Company

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further represents to each Investor that the Company’s decision to enter into this Agreement has been based solely on the independent evaluation of the transactions contemplated hereby by the Company and its representatives.

     2.21 Foreign Corrupt Practices. Neither the Company, nor to the knowledge of the Company, any agent or other person acting on behalf of the Company, has (a) directly or indirectly, used any funds for unlawful contributions, gifts, entertainment or other unlawful expenses related to foreign or domestic political activity, (b) made any unlawful payment to foreign or domestic government officials or employees or to any foreign or domestic political parties or campaigns from corporate funds, (c) failed to disclose fully any contribution made by the Company (or made by any person acting on its behalf of which the Company is aware) which is in violation of law, or (d) violated in any material respect any provision of the Foreign Corrupt Practices Act of 1977, as amended.

     2.22 Insurance. The Company and its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are customary in the businesses in which the Company and its subsidiaries are engaged.

     2.23 Transactions With Employees, Officers and Directors. Except as set forth in the SEC Documents, none of the officers or directors of the Company and, to the knowledge of the Company, none of the employees of the Company is presently a party to any transaction with the Company or any subsidiary (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner, in each case in excess of $60,000 other than (a) for payment of salary or consulting fees for services rendered, (b) reimbursement for expenses incurred on behalf of the Company and (c) for other employee benefits, including stock option agreements under any stock option plan, stock incentive plans, employee stock purchase plans or any other equity-based compensation plans of the Company.

     2.24 No Integrated Offering. Assuming the accuracy of the Investors’ representations and warranties set forth in Section 3, neither the Company, nor any of its affiliates, nor any third-party acting on its or their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would cause this offering of the Securities to be integrated with prior offerings by the Company for purposes of the 1933 Act or any applicable shareholder approval provisions, including, without limitation, under the rules and regulations of the NASDAQ National Market.

     2.25 No General Solicitation. Neither the Company nor any person acting on behalf of the Company has offered or sold any of the Securities by any form of general solicitation or general advertising. The Company has offered the Securities for sale only to the Investors and certain other “accredited investors” within the meaning of Rule 501 under the 1933 Act.

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3. Representations and Warranties of Investor. Each Investor hereby represents and warrants, severally and not jointly, to the Company as follows:

     3.1 Organization and Standing; Power.

     (a) With respect to each Investor that is an entity, such Investor is an entity duly organized, validly existing, and in good standing under the laws of the jurisdiction in which it is formed and has all requisite power and authority and all material qualifications, licenses, permits and authorizations necessary to own and operate its properties, to carry on its business as now conducted and as proposed to be conducted through the current fiscal year and to carry out the transactions contemplated by this Agreement. Such Investor has all requisite power to execute and deliver this Agreement and the other agreements contemplated hereby to which it is a party, and to carry out and perform its obligations under the terms of this Agreement.

     (b) With respect to each Investor who is a natural person, such Investor has full right, power, authority and capacity to execute and deliver this Agreement and the other agreements contemplated hereby to which such Investor is a party, and to carry out and perform such Investor’s obligations under the terms of this Agreement.

     3.2 Authorization. This Agreement, and each of the other agreements contemplated hereby to which the Investor is a party, when executed and delivered by the Investor and the Company, will constitute a valid and legally binding obligation of Investor, enforceable against the Investor in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency or creditors’ rights and rules of law governing specific performance, injunctive relief or other equitable remedies.

     3.3 No Conflicts. The execution and delivery by the Investor of this Agreement and each of the other agreements contemplated hereby to which the Investor is a party, the purchase of the Securities and the consummation of the contemplated transactions will not conflict with or result in a breach of the terms, conditions or provisions of, constitute a default under, result in the creation of any lien, security interest, charge or encumbrance upon the Investor’s capital stock, if any, or assets pursuant to, give any third party the right to modify, terminate or accelerate any obligation under, result in a violation of, or require any authorization, consent, approval, exemption or other action by or notice to any court or administrative or governmental body pursuant to, (a) the Investor’s organizational documents, if an entity, (b) any law, statute, rule or regulation to which the Investor is subject, or (c) any agreement, instrument, order, judgment or decree to which the Investor is subject, except with respect to any of the foregoing (a) through (c) that would not, individually or in the aggregate, have a material adverse effect on the Investor’s business, properties or prospects, taken as a whole.

     3.4 Experience. The Investor has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of its investment in the Company and has the capacity to protect its own interests. The Investor acknowledges that investment in the Shares, the Underlying Shares, the Warrants and the Warrant Shares is a

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speculative risk. The Investor is able to fend for itself in the transactions contemplated by this Agreement, can bear the economic risk of its investment in the Shares, the Underlying Shares, the Warrants and the Warrant Shares (including possible complete loss of such investment) for an indefinite period of time, and has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the investment in the Shares, the Underlying Shares, the Warrants and the Warrant Shares. The Investor understands that nothing in this Agreement or any other materials presented to the Investor in connection with the purchase and sale of the Shares, the Underlying Shares, the Warrants and the Warrant Shares constitutes legal, tax or investment advice. The Investor has consulted such legal, tax and investment advisors as the Investor, in its sole discretion, has deemed necessary or appropriate.

     3.5 Investment Purpose. The Investor is acquiring the Shares, and upon conversion of the Shares, will acquire the Underlying Shares, and the Warrants, and upon exercise of the Warrants, will acquire the Warrant Shares, for investment for its own account, not as a nominee or agent, and not with a view to, or for resale in connection with, any distribution thereof. The Investor understands that the Shares, the Underlying Shares, the Warrants and the Warrant Shares have not been registered under the 1933 Act, by reason of a specific exemption from the registration provisions of the 1933 Act, the availability of which depends upon, among other things, the bona fide nature of the investment intent and the accuracy of the Investor’s representations as expressed herein. The Investor understands that the Shares, the Underlying Shares, the Warrants and the Warrant Shares are characterized as “restricted securities” under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving any public offering and that under such laws and applicable regulations the Shares, the Underlying Shares, the Warrants and the Warrant Shares may be resold without registration under the 1933 Act only in certain limited circumstances. The Investor shall not, directly or indirectly, offer, sell, pledge, transfer or otherwise dispose of (or solicit any offers to buy, purchase or otherwise acquire or take a pledge of) any of the Shares, the Underlying Shares, the Warrants or the Warrant Shares except in compliance with the 1933 Act, applicable state securities laws and the respective rules and regulations thereunder.

     3.6 Access to Data. The Investor and its representatives have been afforded an opportunity to ask such questions of the Company’s officers and employees concerning the Company’s existing and proposed business, operations, financial condition, assets, liabilities and other relevant matters as they have deemed necessary or desirable in order to evaluate the merits and risks of the prospective investments contemplated herein. The Investor further represents and acknowledges that it has been solely responsible for its own “due diligence” investigation of the Company and its management and business, for its own analysis of the merits and risks of this investment, and for its own analysis of the fairness and desirability of the terms of the investment. The foregoing, however, does not limit or modify the representations and warranties of the Company contained in Section 2 hereof.

     3.7 Residency. For purposes of the application of state securities laws, the Investor represents and warrants to the Company that it is a bona fide resident of, or a duly formed entity domiciled in, the state or country set forth in its address opposite its name on Exhibit A hereto.

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     3.8 Accredited Investor. The Investor is an accredited investor within the meaning of Rule 501(a) of Regulation D of the Securities and Exchange Commission and has substantial experience in evaluating and investing in private placement transactions of securities in companies similar to the Company so that the Investor is capable of evaluating the merits and risks of its investment in the Company and has the capacity to protect its own interests.

     3.9 Not an Affiliate or Group. Except as specified on Exhibit A, the Investor represents that it is not under the control of, controlled by or under common control with any other Investor, and the Investor represents that it, along with any other Investor or Investors, is not a Person or a Group as defined in Section 13(d)(3) of the 1934 Act and the rules and regulations promulgated thereunder.

     3.10 Restrictive Legends. The Investor agrees that, so long as the Shares, the Underlying Shares, the Warrants or the Warrant Shares remain restricted securities, the Company shall place a restrictive legend on the certificate(s) representing the Shares, the Underlying Shares, the Warrants or the Warrant Shares in substantially the following form:

“The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, and may not be transferred without registration under such Act or an opinion of counsel reasonably acceptable to the Company that such registration is not required.”

At any time after (a) the effective date of a registration statement covering the Underlying Shares or the Warrant Shares or (b) the date the Underlying Shares or the Warrant Shares may be sold without limitation under Rule 144(k) promulgated under the 1933 Act, the Company will use its best efforts to instruct its Transfer Agent and Registrar for Common Stock to remove the restrictive legend from certificate(s) representing the Underlying Shares or the Warrant Shares within five (5) business days of receipt of the Investor’s written request to remove such legend from such Underlying Shares or Warrant Shares.

     3.11 Transactions in Common Stock. The Investor has not, during the thirty (30) trading days immediately preceding the Closing Date, sold or established a short position in any shares of the Common Stock or other capital stock of the Company.

     3.12 No General Solicitation. The Investor did not learn of the investment in the Securities as a result of any public advertising or general solicitation.

4. Registration Rights. The Underlying Shares and the Warrant Shares will have the registration rights set forth in the Registration Rights Agreement, substantially in the form as set forth in Exhibit D attached hereto.

5. Closing Conditions.

     5.1 Conditions to the Company’s Obligation to Sell. The Company’s obligation to sell and deliver the Shares and the Warrants to the Investors shall, unless waived by the

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Company, be subject to the satisfaction, with respect to each Investor, prior to or on the Closing Date, of each of the following conditions:

     (a) Each Investor shall have executed this Agreement and the Registration Rights Agreement and delivered the same to the Company.

     (b) Each Investor shall have delivered to the Company the aggregate Purchase Price for the Shares being purchased by such Investor at the Closing by wire transfer of immediately available funds pursuant to the wire instructions provided by the Company.

     (c) The representations and warranties contained in Section 3 hereof shall be true and correct in all material respects at and as of the Closing as though then made, except to the extent of changes caused by the transactions expressly contemplated herein, and each Investor shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied and complied with by such Investor at or prior to the Closing.

     5.2 Conditions to each Investor’s Obligation to Purchase. Each Investor’s obligation hereunder to purchase the Shares and the Warrants at the Closing shall, unless waived by such Investor, be subject to the satisfaction, prior to or on the Closing Date, of each of the following conditions:

     (a) The Company shall have executed this Agreement and the Registration Rights Agreement and delivered the same to such Investor.

     (b) The representations and warranties contained in Section 2 hereof shall be true and correct in all material respects at and as of the Closing as though then made, except to the extent of changes caused by the transactions expressly contemplated herein, and the Company shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied and complied with by the Company at or prior to the Closing.

     (c) Each Investor shall have received from Gray, Plant, Mooty, Mooty & Bennett, P.A., counsel for the Company, an opinion substantially as set forth in Exhibit E attached hereto, which shall be addressed to Investors and dated as of the Closing Date.

     (d) The Company shall have delivered to the Investors all of the following documents, which shall be satisfactory in form and substance to the Investors:

     (i) An Officer’s Certificate, executed by the Company’s Chief Executive Officer and Chief Financial Officer and dated the Closing Date, stating that the conditions specified in Section 5.2(b) have been fully satisfied;

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     (ii) Certified copies of the resolutions duly adopted by the Company’s Board of Directors authorizing the execution, delivery and performance of this Agreement and each of the other agreements contemplated hereby, the issuance and sale of the Shares, the Underlying Shares, the Warrants and the Warrant Shares, and all other transactions contemplated by this Agreement;

     (iii) Evidence that the Company has filed the Certificate of Designation with the Minnesota Secretary of State; and

     (iv) Certificates representing the Shares and the Warrants as described in Section 1 hereof, in the amount set forth on Exhibit A.

6. Right of First Refusal.

     6.1 Right of First Refusal. Subject to the terms and conditions contained in this Section 6, the Company hereby grants to each Investor the right of first refusal, for 180 days after the Closing Date, to purchase such Investor’s Pro Rata Portion (as defined below) of any New Securities (as defined below) which the Company may, from time to time, propose to sell and issue. An Investor’s “Pro Rata Portion” for purposes of this Section 6.1 is equal to the fraction obtained by dividing (a) the number of Common Shares into which an Investor’s shares of Series A Preferred are then convertible by (b) the aggregate number of shares of Common Stock then outstanding, assuming in each case the conversion, exercise or exchange of all securities by their terms convertible into or exercisable for Common Stock and the exercise of all options to purchase or rights to subscribe for Common Stock or such convertible or exchangeable securities, whether or not the terms of such securities or rights then permit such conversion, exercise or exchange.

     6.2 Definition of New Securities. Except as set forth below, “New Securities” shall mean any shares of capital stock of the Company, and rights, options or warrants to purchase such shares of capital stock, and securities of any type whatsoever that are, or may become, convertible into such shares of capital stock. Notwithstanding the foregoing, “New Securities” does not include (a) securities offered in an underwritten public offering pursuant to a registration statement under the 1933 Act, (b) all shares of Common Stock, warrants or options to purchase Common Stock or other securities issued upon the approval of the Board of Directors to employees, officers, directors and consultants of the Company who have (i) provided bona fide services to the Company not in connection with the offer or sale of securities in a capital raising transaction and (ii) who do not, directly or indirectly, promote or maintain a market for the Company’s securities, pursuant to any plan or arrangement approved by the Board of Directors or the shareholders of the Company, (c) all securities issued to lending or leasing institutions upon the approval of the Board of Directors in connection with loans from or leasing transactions with such institutions, (d) stock issued pursuant to any private placement completed on substantially similar terms within 45 days of the Closing Date, (e) stock issued in connection with any merger or acquisition by the Company, or (f) all shares of Common Stock issued pursuant to Exempt Issuances.

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     6.3 Notice of Right. In the event the Company proposes to undertake an issuance of New Securities, it shall give each Investor written notice of its intention, describing the type of New Securities and the price and terms upon which the Company proposes to issue the same. Each Investor shall have 15 days from the date of receipt of any such notice to agree to purchase shares of such New Securities (up to the amount referred to in Section 6.1), for the price and upon the terms specified in the notice, by giving written notice to the Company and stating therein the quantity of New Securities to be purchased.

     6.4 Exercise of Right. If any Investor exercises its right of first refusal hereunder, the closing of the purchase of the New Securities by such Investor with respect to which such right has been exercised shall take place on the date set by the Company for the sale of New Securities; provided that such closing shall not occur prior to the date 20 days following the date of the written notice provided to the Investors, and provided, further, that the date of such closing shall be extended in order to comply with applicable laws and regulations.

     6.5 Lapse and Reinstatement of Right. In the event a Investor fails to exercise the right of first refusal provided in Section 6.1 within such 15 day period, the Company shall have 60 days thereafter to sell the New Securities not elected to be purchased by such Investor at the price and upon the terms no more favorable to the purchasers of such securities than specified in the Company’s notice. In the event the Company has not sold the New Securities or entered into an agreement to sell the New Securities within such 60 day period, the Company shall not thereafter issue or sell any New Securities without first offering such securities to the Investors in the manner provided above.

7. Miscellaneous.

     7.1 Governing Law. This Agreement shall be governed by and construed under the laws of the State of Minnesota, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of Minnesota or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Minnesota.

     7.2 Expenses. Except for the $10,000 of legal fees of the Investors’ counsel that the Company has previously paid, the Company and each of the Investors shall bear its own expenses in connection with the transactions contemplated by this Agreement.

     7.3 Survival. The representations, warranties, covenants, and agreements made herein by the Company and each Investor shall survive any investigation made by the Company or any Investor and shall survive the Closing. All statements as to factual matters contained in any certificate or other instrument delivered by or on behalf of the Company or each Investor pursuant hereto shall be deemed to be representations and warranties by the Company or such Investor, as appropriate, hereunder as of the date of such certificate or instrument.

     7.4 Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the Parties hereto.

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     7.5 Entire Agreement. This Agreement, including the Exhibits and Schedules hereto, and the other agreements contemplated by this Agreement constitute the full and entire understanding and agreement among the Parties with regard to the subjects hereof, and no Party shall be liable or bound to any other Party in any manner by and representations, warranties, covenants, or agreements except as specifically set forth herein or therein. Nothing in this Agreement, express or implied, is intended to confer upon any Party, other than the Parties hereto and their respective successors and assigns, any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided herein.

     7.6 Assignment and Transfer. The Investors may transfer such Shares and the Warrants, in whole or in part, to another person or entity and may, in connection with such transfer, assign its rights in whole or in part under this Agreement in accordance with the provisions of this Section 7.6. If a transfer is permitted, the Company agrees to execute and deliver such instruments, documents and certificates as the Investors, holders or any such transferees may reasonably request in order to document the transfer in whole or in part of rights hereunder, which instruments, documents and certificates shall be satisfactory in form and substance to counsel for the Investors, or holders or such transferees. Any such transfer shall be subject to compliance with applicable federal and state securities laws.

     7.7 Amendment and Waiver. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Company and each Investor.

     7.8 Notices. All notices or other communications to a Party required or permitted hereunder shall be in writing and shall be delivered personally or by telecopy (receipt confirmed) to such Party (or, in the case of an entity, to an executive officer of such Party) or shall be sent by a reputable express delivery service or by certified mail, postage prepaid with return receipt requested, addressed as follows:

     If to an Investor:

To the address set forth on Exhibit A or such other address as may be designated in writing hereafter, in the same manner, by such Investor.

     If to the Company:

HEI, Inc.
1495 Steiger Lake Lane
Victoria, MN 55386
Attention: Mack V. Traynor, III
Fax: 952-443-2668

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     with copy to:

Mark D. Williamson, Esq.
Gray, Plant, Mooty, Mooty & Bennett, P.A.
500 IDS Center
80 South Eighth Street
Minneapolis, MN 55402
Fax: 612-632-4379

     Any Party may change the above-specified recipient and/or mailing address by notice to all other Parties given in the manner herein prescribed. All notices shall be deemed given on the day when actually delivered as provided above (if delivered personally or by telecopy) or on the day shown on the return receipt (if delivered by mail or delivery service).

     7.9 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which together shall constitute one instrument. A facsimile signature shall be considered due execution and shall be binding upon the signatory thereto with the same force and effect as if the signature were an original, not a facsimile signature.

[THE REMAINDER OF THIS PAGE IS BLANK. SIGNATURE PAGES FOLLOW.]

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     IN WITNESS WHEREOF, the Company and the Investors have executed this Agreement as of the date first written above.

HEI, INC.
By:	/S/ Mack V. Traynor, III
	Name:	Mack V. Traynor, III
	Title:	Chief Executive Officer and President

Signature Page to Stock Purchase Agreement.

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EXHIBIT A

LIST OF INVESTORS

	No. of Series A				Shares
	Preferred		Purchase		under		State of
Investor Name and Address	Shares		Price		Warrants		Domicile
Thomas Leahy 16411 Ringer Rd. Wayzata, MN 55391		77,000	$	2,002,000		308,000	Minnesota
Thomas A. Harenburg, IRA 6360 E. Decorah Lane Oshkosh, WI 54902		4,000	$	104,000		16,000	Wisconsin
Harenburg Limited Family Partnership Thomas A. Harenburg, Trustee 6360 E. Decorah Lane Oshkosh, WI 54902		1,000	$	26,000		4,000	Wisconsin
Hennig Employees Profit Share Plan Thomas A. Harenburg, Trustee P.O. Box 1069 Oshkosh, WI 54903-1069		10,000	$	260,000		40,000	Wisconsin
Jack R. Swenson, IRA Piper Jaffery, Inc. 319 Barry Ave. South Wayzata, MN 55391		5,000	$	130,000		20,000	Minnesota
Dave Schultz 5559 N. Santa Monica Blvd. Whitefish Bay, WI 53217		17,000	$	442,000		68,000	Wisconsin
Gale F. Weishalla 16600 Flourine St. NW Ramsey, MN 55303		2,500	$	65,000		10,000	Minnesota
Donna L. Weishalla 16600 Flourine St. NW Ramsey, MN 55303		2,500	$	65,000		10,000	Minnesota
Cranshire Capital, LP c/o Lawrence A. Prosber Downsview Capital, Inc. 666 Dundee Road, Suite 1901 Northbrook, IL 60062		5,769	$	149,994		23,076	Illinois
Nite Capital c/o Keith Goodman Manager of the General Partner 100 East Cook Ave, Suite 201 Libertyville, IL 60048		5,769	$	149,994		23,076	Illinois
Totals		130,538	$	3,393,988		522,152

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EX-2.2

Exhibit 2.2

REGISTRATION RIGHTS AGREEMENT

     This Registration Rights Agreement (this “Agreement”) is made and entered into as of May 9, 2005, among HEI, Inc., a Minnesota corporation (the “Company”), and the individuals and entities listed on Schedule 1 hereto (each, a “Purchaser” and, collectively, the “Purchasers”). The Company and the Purchasers are sometimes referred to in this Agreement individually as a “Party” and collectively as the “Parties”.

     WHEREAS, the Parties hereto have executed the Stock Purchase Agreement (the “Purchase Agreement”) of even date herewith pursuant to which the Purchasers are purchasing Shares and Warrants (capitalized terms used but not otherwise defined herein shall have the meanings given them in the Purchase Agreement); and

     WHEREAS, in connection with the Purchase Agreement the Parties desire to provide certain registration rights and benefits with respect to the Underlying Shares and the Warrant Shares.

     NOW, THEREFORE, in consideration of the respective covenants and agreements contained herein, and for other valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Parties hereto agree as follows.

ARTICLE I
DEFINITIONS

     1.1 Specific Definitions. As used in this Agreement, the following terms shall have the meanings set forth or as referenced below:

     “Agent” means ThinkEquity Partners, LLC, a Delaware limited liability company.

     “Agent’s Warrant” means the warrant issued to the Agent in connection with the closing of the transactions contemplated by the Purchase Agreement.

     “Common Stock” means the Company’s common stock, par value $.05 per share.

     “Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

     “Form S-1” means such form under the Securities Act in effect on the date hereof or any successor registration form under the Securities Act subsequently adopted by the SEC.

     “Form S-3” means such form under the Securities Act in effect on the date hereof or any successor registration form under the Securities Act subsequently adopted by the SEC that

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permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC.

     “Holder” means a Purchaser, any person owning of record Registrable Securities that have not been sold to the public or any assignee of record of such Registrable Securities in accordance with Article 2.

     “Register,” “Registered” and “Registration” mean a registration effected by preparing and filing a Registration Statement in compliance with the Securities Act, and the declaration or ordering by the SEC of effectiveness of such Registration Statement.

     “Registrable Securities” means the Underlying Shares, the Warrant Shares, and the shares of Common Stock issuable to the Agent pursuant to the Agent’s Warrant. Notwithstanding the foregoing, Registrable Securities shall not include any securities sold by a person to the public either pursuant to a Registration Statement or pursuant to Rule 144 under the Securities Act or sold in a private transaction in which the transferor’s rights under Article 2 of this Agreement are not assigned.

     “Registration Expenses” means all expenses incurred by the Company in complying with Article 2 hereof, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel and accountants for the Company, reasonable fees and disbursements of a single special counsel for the Holders of Registrable Securities, fees and disbursements of counsel for the underwriter or underwriters of such securities (if the Company and/or the Holders are required to bear such fees and disbursements), all internal Company expenses, all legal fees and disbursements and other expenses of complying with state securities or blue sky laws of any jurisdictions in which the securities to be offered are to be registered or qualified, and the premiums and other costs of policies of insurance against liability (if any) arising out of such public offering and underwriting discounts and commissions and transfer taxes relating to the shares included in the offering by the Holders.

     “Registration Statement” means any Registration Statement filed by the Company with the SEC for a public offering and sale of Common Stock (other than a Registration Statement on Form S-8 or Form S-4, or their successors, or any other form for a similar purpose).

     “Rule 144” means Rule 144 promulgated under the Securities Act, as such rule may be amended from time to time, or any similar successor rule.

     “SEC” means the Securities and Exchange Commission.

     “Securities Act” means the Securities Act of 1933, as amended.

     “Selling Expenses” means all underwriting discounts and commissions, transfer taxes, filing fees, any and all fees, commission, discounts or similar payments made to any brokers or dealers, and any fees and disbursements of counsel, accountant or any other advisor to the

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Purchasers (other than counsel referred to in the definition of Registration Expenses above) applicable to a sale of Registrable Securities.

ARTICLE 2
REGISTRATION RIGHTS

     2.1 Required Registrations.

     (a) The Company shall, within 45 days of the Closing, use its best efforts to file with the SEC a Registration Statement for an offering to be made on a continuous basis pursuant to Rule 415 covering all of the Registrable Securities. The Company shall use its best efforts to cause such Registration Statement to be declared effective under the Securities Act within 90 days of the Closing (or 150 days of the Closing if the SEC provides any written comments to the Registration Statement).

     (b) The Registration Statement shall be on Form S-1 or another appropriate form permitting registration of such Registrable Securities for resales by holders in the manner or manners designated by them (including, without limitation, one or more underwritten offerings). The Company shall not permit any securities other than the Registrable Securities to be included in any Registration Statement without the consent of the Purchasers. The Company shall use its best efforts to keep the Registration Statement continuously effective under the Securities Act until the date which is two years from the date of filing (the “Effectiveness Period”) or such shorter period ending when (i) all Registrable Securities covered by the Registration Statement have been sold in the manner set forth and as contemplated in the Registration Statement or (ii) may be sold without limitation under Rule 144(k). Notwithstanding the foregoing, if the Company becomes eligible to file a Registration Statement on Form S-3 covering the Registrable Securities, and the Company files such a Registration Statement or converts the Registration Statement on Form S-1 to a Registration Statement on Form S-3, the Company may terminate the Registration Statement on Form 1 when the SEC declares such Registration Statement on Form S-3 to be effective, which Registration Statement on Form S-3 shall be deemed to be the Registration Statement for purposes of this Agreement.

     (c) In the event that the Registration Statement is not declared effective under the Securities Act within 150 days of the date of the Closing, and such holdup is not due to (i) backlog or other delay at or by the SEC, (ii) delay at or by the Company’s current or former independent accountants, or (iii) delay caused by any other matter outside of the control of the Company, the Company shall, on the 150^th day following the Closing, pay 1% of the total Purchase Price paid by such Purchaser and shall, on the 180^th day and each 30^th day thereafter until the Registration Statement is declared effective, pay an additional 2% of the Purchase Price paid by such Purchaser, as liquidated damages. Such liquidated damages payment is the sole and exclusive right and remedy of each Purchaser with respect to any damages arising because of any delay in the Registration Statement being declared effective. No Purchaser will have any other remedy (statutory, equitable,

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common law or otherwise) against the Company with respect to any delay in the Registration Statement being declared effective, and all such other remedies are hereby waived.

     2.2 Expenses of Registration. All Registration Expenses incurred in connection with any registration under Section 2.1 shall be borne by the Company. All Selling Expenses incurred in connection with any such registration shall be borne by the Holder of the securities so registered incurring such expense, unless all Holders have consented to such Selling Expense, in which case, such Selling Expenses shall be borne by the Holders pro rata on the basis of the number of shares so registered.

     2.3 Obligations of the Company. Whenever required to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible:

     (a) Use its best efforts to prepare and file with the SEC a Registration Statement, on such form as is then available to the Company in connection with such registration, with respect to such Registrable Securities and use its best efforts to cause such Registration Statement to become effective and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such Registration Statement effective throughout the Effectiveness Period.

     (b) Use its best efforts to prepare and file with the SEC such amendments and supplements to such Registration Statement and the prospectus used in connection with such Registration Statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such Registration Statement.

     (c) Furnish to the Holders such number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them.

     (d) Use its best efforts to register or qualify the Registrable Securities covered by such Registration Statement under such other securities or blue sky laws of such jurisdictions as shall be reasonably requested by the Holders within 30 days following the original filing of such Registration Statement, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions.

     (e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter(s) of such offering, provided that each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement.

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     (f) Notify each Holder of Registrable Securities covered by such Registration Statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the occurrence of any event as a result of which the prospectus included in such Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements contained therein not misleading in the light of the circumstances then existing.

     (g) Furnish, at the request of a majority of the Holders participating in the registration, on the date that such Registrable Securities are delivered to the underwriters for sale, if such Registrable Securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the Registration Statement with respect to such securities becomes effective, an opinion, dated as of such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given with respect to such registration and reasonably satisfactory to a majority in interest of the Holders requesting registration, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities.

     2.4 Termination of Registration Rights. All registration rights granted under this Article 2 shall terminate and be of no further force and effect after the Effectiveness Period or such shorter period ending when all Registrable Securities covered by the Registration Statement (a) have been sold in the manner set forth and as contemplated in the Registration Statement or (b) may be sold without limitation under Rule 144(k).

     2.5 Delay of Registration. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Article 2.

     2.6 Indemnification. If any Registrable Securities are included in a Registration Statement under Section 2.1:

     (a) The Company will indemnify and hold harmless each Holder, the partners, officers, and directors of each Holder, and each person, if any, who controls such Holder within the meaning of the Securities Act or the Exchange Act, and each underwriter, if any, and each person, if any, who controls any underwriter within the meaning of the Securities Act or the Exchange Act, against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Securities Act, the Exchange Act, or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions, or violations (collectively a “Company Violation”) by the Company: (i) any untrue statement or alleged untrue statement of a material fact contained in such Registration Statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or

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necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act, or any state securities law in connection with the offering covered by such Registration Statement; and the Company will reimburse each such Holder, partner, officer, director, underwriter, and controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action if it is judicially determined that there was such a Company Violation; provided, however, that the indemnity agreement contained in this Section 2.6(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon a Company Violation that occurs in reliance upon and in conformity with information furnished expressly for use in connection with such registration by such Holder, partner, officer, director, or controlling person of such Holder.

     (b) Each selling Holder (an “Indemnifying Holder”), severally and not jointly, will indemnify and hold harmless the Company, each of its officers and directors, each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act, and each underwriter, if any, and each person, if any, who controls any underwriter within the meaning of the Securities Act or the Exchange Act, and any other Holder selling securities under such Registration Statement or any of such other Holder’s partners, directors, or officers or any person who controls such Holder, against any losses, claims, damages, or liabilities (joint or several) to which the Company or any such director, officer, underwriter, controlling person, or other such Holder, or partner, director, officer, or controlling person of such other Holder may become subject under the Securities Act, the Exchange Act, or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereto) arise out of or are based upon any of the following statements, omissions, or violations (collectively a “Holder Violation”) by the Indemnifying Holder: (i) any untrue statement or alleged untrue statement of a material fact contained in such Registration Statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statement therein not misleading, or (iii) any violation or alleged violation by the Holder of the Securities Act, the Exchange Act, any state securities laws or any rule or regulation promulgated under the Securities Act, the Exchange Act, or any state securities law in connection with the offering covered by such Registration Statement, in each case to the extent (and only to the extent) that such Holder Violation occurs in reliance upon and in conformity with information furnished by the Indemnifying Holder; and each Indemnifying Holder will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, underwriter, controlling person, or other Holder, or partner, officer, director, or controlling person of such other Holder in connection with investigating or defending any such loss, claim, damage, liability, or action if it is judicially determined

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that there was such a Holder Violation; provided, however, that the indemnity agreement contained in this Section 2.6(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Indemnifying Holder, which consent shall not be unreasonably withheld; provided, further, that in no event shall any indemnity under this Section 2.6(b) exceed the proceeds from the offering received from such Indemnifying Holder unless the Holder Violation is the result of fraud on the part of such Indemnifying Holder.

     (c) Promptly after receipt by an indemnified party under this Section 2.6 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 2.6, deliver to the indemnifying party a written notice of the commencement thereof, and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party (or, if there is more than one indemnified party, the indemnifying party shall pay the fees and expenses of one counsel for any and all indemnified parties, to be mutually agreed upon by such indemnified parties), if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if materially prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 2.6, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 2.6.

     (d) If the indemnification provided for in this Section 2.6 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any losses, claims, damages, or liabilities referred to herein, the indemnifying party, in lieu of indemnifying such indemnified party thereunder, shall to the extent permitted by applicable law contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage, or liability in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the Company Violation(s) or the Holder Violation(s), as the case may be, that resulted in such loss, claim, damage, or liability, as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by a court of law by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties’ relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission.

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     (e) The foregoing indemnity agreements of the Company and Holders are subject to the condition that, insofar as they relate to any Company Violation(s) or Holder Violation(s), as the case may be, made in a preliminary prospectus but eliminated or remedied in the amended prospectus on file with the SEC at the time the Registration Statement in question becomes effective or the final prospectus is filed with the SEC pursuant to SEC Rule 424(b), such indemnity agreement shall not inure to the benefit of any person if a copy of such final prospectus was furnished to the indemnified party and was not furnished to the person asserting the loss, liability, claim, or damage at or prior to the time such action is required by the Securities Act.

     (f) The obligations of the Company and Holders under this Section 2.6 shall terminate and be of no further force and effect after the Effectiveness Period or such shorter period ending when all Registrable Securities covered by the shelf registration (i) have been sold in the manner set forth and as contemplated in the Registration Statement or (ii) may be sold without limitation under Rule 144(k).

ARTICLE 3
OTHER PROVISIONS

     3.1 Complete Agreement. This Agreement and the documents referenced herein constitutes the entire agreement between the Parties hereto with respect to the subject matter hereof

     3.2 Waiver, Discharge, Amendment, Etc. The failure of any Party hereto to enforce at any time any of the provisions of this Agreement shall not, absent an express written waiver signed by the Party making such waiver specifying the provision being waived, be construed to be a waiver of any such provision, nor in any way to affect the validity of this Agreement or any part hereof or the right of the Party thereafter to enforce each and every such provision. No waiver of any breach of this Agreement shall be held to be a waiver of any other or subsequent breach.

     3.3 Notices. All notices or other communications to a Party required or permitted hereunder shall be in writing and shall be delivered personally or by telecopy (receipt confirmed) to such Party (or, in the case of an entity, to an executive officer of such party) or shall be sent by a reputable express delivery service or by certified mail, postage prepaid with return receipt requested, addressed as follows:

     If to a Purchaser:

To the address set forth on Schedule 1 or such other address as may be designated in writing hereafter, in the same manner, by such Purchaser.

     If to the Company to:

HEI, Inc.

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1495 Steiger Lake Lane
Victoria, MN 55386
Attention: Mack V. Traynor, III
Fax: 952-443-2668

with copy to:

Mark D. Williamson, Esq.
Gray, Plant, Mooty, Mooty & Bennett, P.A.
500 IDS Center
80 South Eighth Street
Minneapolis, MN 55402
Fax: 612-632-4379

Any Party may change the above-specified recipient and/or mailing address by notice to all other Parties given in the manner herein prescribed. All notices shall be deemed given on the day when actually delivered as provided above (if delivered personally or by telecopy) or on the day shown on the return receipt (if delivered by mail or delivery service).

     3.4 Governing Law. This Agreement shall be governed by and interpreted in accordance with the laws of the State of Minnesota, including all matters of construction, validity, performance, and enforcement, without giving effect to principles of conflict of laws.

     3.5 Titles and Headings; Construction. The titles and headings to the Articles and Sections herein are inserted for the convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. This Agreement shall be construed without regard to any presumption or other rule requiring construction hereof against the party causing this Agreement to be drafted.

     3.6 Benefit. Nothing in this Agreement, expressed or implied, is intended to confer on any person other than the Parties hereto or their respective successors or assigns, any rights, remedies, obligations, or liabilities under or by reason of this Agreement.

     3.7 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed as original and all of which together shall constitute one instrument, and may be delivered in person or by facsimile transmission.

     IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be executed as of the date first written above.

HEI, INC.
/S/ Mack V. Traynor, III
Name:	Mack V. Traynor, III
Title:	Chief Executive Officer and President

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SCHEDULE 1

Schedule of Purchasers

	Purchaser Address and Facsimile
Purchaser Name	Number
Thomas Leahy	16411 Ringer Rd. Wayzata, MN 55391
Thomas A. Harenburg, IRA	6360 E. Decorah Lane Oshkosh, WI 54902
Harenburg Limited Family Partnership	Thomas A. Harenburg, Trustee 6360 E. Decorah Lane Oshkosh, WI 54902
Hennig Employees Profit Share Plan	Thomas A. Harenburg, Trustee P.O. Box 1069 Oshkosh, WI 54903-1069
Jack R. Swenson, IRA	Piper Jaffery, Inc. 319 Barry Ave. South Wayzata, MN 55391
Dave Schultz	5559 N. Santa Monica Blvd. Whitefish Bay, WI 53217
Gale F. Weishalla	16600 Flourine St. NW Ramsey, MN 55303
Donna L. Weishalla	16600 Flourine St. NW Ramsey, MN 55303
Cranshire Capital, LP	C/O Lawrence A. Prosber CFO Downsview Capital, Inc. General Partner 666 Dundee Road Suite 1901 Northbrook, IL 60062
Nite Capital	C/O Keith Goodman Manager of the General Partner 100 East Cook Ave. Suite 201 Libertyville, IL 60048

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EX-2.3

Exhibit 2.3

FORM OF WARRANT

This Warrant and any securities acquired upon exercise of this Warrant have not been registered under the Securities Act of 1933, as amended, or any state securities laws. The securities may not be offered for sale, sold, transferred or assigned in the absence of an effective registration statement for the securities under such Act or applicable state securities laws or pursuant to an applicable exemption to the registration requirements of such Act and such laws.

HEI, INC.

COMMON STOCK PURCHASE WARRANT

_________Common Shares No.____________
May ___, 2005

     HEI, Inc., a Minnesota corporation (the “Company”), hereby agrees that, for value received, ___, or its assigns (the “Holder”), is entitled, subject to the terms set forth below, to purchase from the Company, in whole or in part, at any time after May ___, 2005 and until ___, 2010 at 5:00 p.m., Minneapolis, Minnesota time (the “Expiration Date”), [40% of shares purchased (as converted)] shares of Common Stock, par value $.05 per share, of the Company (the “Common Stock”), at an exercise price of $[110% of Market Value] per share of Common Stock (subject to adjustment as provided herein, the “Exercise Price”).

1. Exercise of Warrant. This Common Stock Purchase Warrant (this “Warrant”) may be exercised by the Holder, in whole or in part (but in minimum quantities of 10,000 shares), at any time on and after the date hereof and prior to the Expiration Date (the “Warrant Exercise”), by surrendering this Warrant with the form of exercise attached hereto duly executed by the Holder, to the Company at its principal office, accompanied by payment, in cash or by cashier’s check payable to the order of the Company, of the Exercise Price payable in respect of the Common Stock being purchased. If less than all of the Common Stock purchasable hereunder is purchased, the Company will, upon the Warrant Exercise, execute and deliver to the Holder a new warrant (dated as of the date hereof) evidencing the number of shares of Common Stock not so purchased. As soon as practicable after the Warrant Exercise and payment of the Exercise Price, the Company will use its best efforts to issue in the name of and deliver to the Holder, or as the Holder may direct, a certificate or certificates representing the shares of Common Stock purchased pursuant to the Warrant Exercise. The Company may require that such certificate or certificates contain on the face thereof a legend substantially as follows:

“The transfer of the shares represented by this certificate is restricted pursuant to the terms of a Common Stock Purchase Warrant dated May ___, 2005, issued by HEI, Inc., a copy of which is available for inspection at the principal office of HEI, Inc. Transfer may not be made except in accordance with the terms of the

1

Common Stock Purchase Warrant. In addition, no sale, offer to sell or transfer of the shares represented by this certificate shall be made unless a registration statement under the Securities Act of 1933, as amended (the “1933 Act”), with respect to such shares is then in effect or an exemption from the registration requirements of the 1933 Act is then in fact applicable to such shares.”

2. Negotiability and Transfer. This Warrant is issued upon the following terms, to which the Holder consents and agrees:

     2.1 Absolute Owner. Until this Warrant is duly transferred on the books of the Company, the Company may treat the registered Holder as absolute owner hereof for all purposes without being affected by any notice to the contrary.

     2.2 Successive Holder. Each successive holder of this Warrant, or of any portion of the rights represented thereby, shall be bound by the terms and conditions set forth herein.

3. Antidilution Adjustments.

     3.1 Exercise Price Adjustment. If the Company shall at any time hereafter effect a subdivision or combination of its outstanding shares of Common Stock, or declare a dividend payable in Common Stock, the Exercise Price in effect immediately prior to the subdivision, combination or record date for such dividend payable in Common Stock shall be proportionately increased, in the case of combination, or proportionately decreased, in the case of subdivision or declaration of a dividend payable in Common Stock, and each share of Common Stock purchasable upon the Warrant Exercise, immediately preceding such event, shall be changed to the number determined by dividing the then current Exercise Price by the exercise price as adjusted after such subdivision, combination or dividend payable in Common Stock.

     3.2 Fractional Shares. No fractional shares of Common Stock are to be issued upon the Warrant Exercise, but the Company shall pay a cash adjustment in respect of any fraction of a share which would otherwise be issuable in an amount equal to the same fraction of the market price per share of Common Stock on the date of exercise as determined in good faith by the Company.

     3.3 Reorganization, Sale of Assets and Merger. In case of any capital reorganization or any reclassification of the Common Stock, or in the case of any consolidation with or merger of the Company into or with another corporation, or the sale of all or substantially all of its assets to another corporation, which is effected in such a manner that the holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then, as a part of such reorganization, reclassification, consolidation, merger or sale, as the case may be, lawful provision shall be made so that the Holder shall have the right thereafter to receive, upon the Warrant Exercise, the kind and amount of shares of stock or other securities or property which the Holder would have been entitled to receive if, immediately prior to such reorganization, reclassification, consolidation, merger or sale, the Holder had held the number of shares of Common Stock which were then purchasable upon the Warrant Exercise had this Warrant been exercised. In any such case, appropriate

2

adjustment (as determined in good faith by the Board of Directors of the Company) shall be made in the application of the provisions set forth herein with respect to the rights and interest thereafter of the Holder, to the end that the provisions set forth herein (including provisions with respect to adjustments of the Exercise Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the Warrant Exercise.

     3.4 Method and Notice of Adjustment. When any adjustment is required to be made in the Exercise Price, initial or adjusted, the Company shall forthwith determine the new Exercise Price, and

(a)	Prepare and retain on file, a statement describing in reasonable detail the method used in arriving at the new Exercise Price; and
(b)	Cause a copy of such statement to be mailed to the Holder within ten (10) days after the date of the circumstances giving rise to the adjustment occurs.

4. Transferability; Registration Rights.

     4.1 Transferability. Prior to making any disposition of this Warrant or of any Common Stock purchased upon the Warrant Exercise, the Holder will give written notice (the “Transfer Notice”) to the Company describing briefly the manner of any such proposed disposition. The Holder will not make any such disposition until: (a) the Company has notified the Holder that, in the opinion of its counsel, registration under the 1933 Act, is not required with respect to such disposition, or (b) a registration statement covering the proposed distribution has been filed by the Company and has become effective. The Holder then will make such disposition only pursuant to the conditions of such opinion or registration. The Company agrees that, upon receipt of the Transfer Notice, it will use its best efforts, in consultation with the Holder’s counsel, to ascertain as promptly as possible whether or not registration is required, and will advise the Holder promptly with respect thereto, and the Holder will cooperate in providing the Company with information necessary to make such determination.

     4.2 Registration Rights. The Holder shall have the registration rights and obligations set forth in the Registration Rights Agreement dated May ___, 2005, among the Company and the Investors (as defined therein).

5. Notices.

     5.1 Shareholder Notices. The Company shall mail to the Holder, at the Holder’s last known post office address appearing on the books of the Company, not less than fifteen (l5) days prior to the date on which (a) a record will be taken for the purpose of determining the holders of Common Stock entitled to dividends (other than cash dividends) or subscription rights, or (b) a record will be taken (or in lieu thereof, the transfer books will be closed) for the purpose of determining the holders of Common Stock entitled to notice of and to vote at a meeting of stockholders at which any capital reorganization, reclassification of shares of Common Stock,

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consolidation, merger, dissolution, liquidation, winding up or sale of substantially all of the Company’s assets shall be considered and acted upon.

     5.2 Notice Hereunder. All notices or other communications to a party required or permitted hereunder shall be in writing and shall be delivered personally or by telecopy (receipt confirmed) to such party (or, in the case of an entity, to an executive officer of such party) or shall be sent by a reputable express delivery service or by certified mail, postage prepaid with return receipt requested, addressed as follows:

     If to Holder:

To such address as may be designated in writing to the Company by Holder.

     If to the Company:

HEI, Inc.
1495 Steiger Lake Lane
Victoria, MN 55386
Attention: Mack V. Traynor, III
Fax: 952-443-2668

     with copy to:

Mark D. Williamson, Esq.
Gray, Plant, Mooty, Mooty & Bennett, P.A.
500 IDS Center
80 South Eighth Street
Minneapolis, MN 55402
Fax: 612-632-4379

Any party may change the above-specified recipient and/or mailing address by notice to all other parties given in the manner herein prescribed. All notices shall be deemed given on the day when actually delivered as provided above (if delivered personally or by telecopy) or on the day shown on the return receipt (if delivered by mail or delivery service).

6. Reservation of Common Stock. A number of shares of Common Stock sufficient to provide for the exercise of this Warrant upon the basis herein set forth shall at all times be reserved for the exercise thereof.

7. Replacement. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement, or bond reasonably satisfactory in form and amount to the Company or, in the case of mutilation, on surrender and cancellation of this Warrant, the Company, at its expense, will execute and deliver, in lieu of this Warrant, a new Warrant of like tenor.

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8. Miscellaneous.

     8.1 Common Stock. Whenever reference is made herein to the issue or sale of shares of Common Stock, the term “Common Stock” shall include any stock of any class of the Company other than preferred stock with a fixed limit on dividends and a fixed amount payable in the event of voluntary or involuntary liquidation, dissolution or winding up of the Company.

     8.2 Survival. The representations, warranties and agreements herein contained shall survive the exercise of this Warrant. References to the “holder of” include the immediate holder of shares purchased upon exercise of this Warrant, and the word “holder” shall include the plural thereof. This Warrant shall be interpreted under the laws of the State of Minnesota without regard to its choice of law principles.

     8.3 Validly Issued, Fully Paid. All shares of Common Stock or other securities issued upon the exercise of this Warrant shall be validly issued, fully paid and non-assessable, and the Company will pay all taxes in respect of the issuer thereof.

     8.4 No Shareholder. Notwithstanding anything contained herein to the contrary, the Holder of this Warrant shall not be deemed a stockholder (including, no right to vote on any matters coming before the shareholders) of the Company for any purpose whatsoever unless and until this Warrant is duly exercised.

     IN WITNESS WHEREOF, this Warrant has been duly executed this ___day of May, 2005.

HEI, INC.

EXHIBIT ONLY–NOT FOR SIGNATURE

By:

Its:

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WARRANT EXERCISE FORM

To be signed only upon exercise of Warrant No. _____ dated _______.

     The undersigned, the Holder of the attached Warrant No. ___dated ___, hereby irrevocably elects to exercise the purchase right represented by such Warrant for, and to purchase thereunder, ___shares of Common Stock of HEI, Inc. to which such Warrant relates and herewith makes payment of $___therefor in cash or by certified check, and requests that such shares be issued and be delivered to, ___, the address for which is set forth below the signature of the undersigned.

Dated:                                                           

	EXHIBIT ONLY-NOT FOR SIGNATURE
(Taxpayer’s I.D. Number)	(Signature)
	(Address)

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ASSIGNMENT FORM

To be signed only upon authorized transfer of Warrant No. _____ dated _______..

     FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers unto ___the right to purchase shares of Common Stock of HEI, Inc. to which the attached Warrant relates and appoints ___, attorney, to transfer said right on the books of HEI, Inc. with full power of substitution in the premises.

Dated:                                                          

EXHIBIT ONLY–NOT FOR SIGNATURE

(Signature)

(Address)

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EX-3.1

Exhibit 3.1

SECOND CERTIFICATE OF DESIGNATION OF
COMMON STOCK

HEI, INC.

STATEMENT OF DESIGNATION OF RIGHTS AND PREFERENCES

     The undersigned, Mack Traynor, Chief Executive Officer and President of HEI, Inc., a Minnesota corporation (the “Company”), does hereby file with the office of the Minnesota Secretary of State a Second Certificate of Designation of Common Stock of HEI, Inc. pursuant to Minnesota Statutes, Section 302A.401, Subd. 3. In connection therewith, the following statement is made:

1. The name of the corporation is HEI, Inc.

2. Pursuant to the provisions of Minnesota Statutes, Section 302A.401, Subd. 3 and Article III of the Amended and Restated Articles of Incorporation of HEI, Inc., the resolution attached as Annex A hereto authorizing the establishment of additional shares of Common Stock and fixing the relative rights and preferences thereof was approved by the unanimous voice vote of the members of the Board of Directors of HEI, Inc. present at a duly called meeting thereof held on May 4, 2005.

     I swear that the foregoing is true and accurate and that I have authority to sign this document on behalf of HEI, Inc.

Dated: May 9, 2005	HEI, INC.
	/S/ Mack Traynor
	By Mack Traynor
	Its Chief Executive Officer and President

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ANNEX A TO
SECOND CERTIFICATE OF DESIGNATION OF
COMMON STOCK

HEI, INC.

RESOLVED, that pursuant to Minnesota Statutes, Section 302A.401, subject to the filing of the Second Certificate of Designation of Common Stock, 2,000,000 shares of the Company’s undesignated shares that are authorized by Article III of this Company’s Amended and Restated Articles of Incorporation are hereby designated Common Stock, par value $.05 per share, which shares shall have the identical rights and preferences as all other shares of the Company’s Common Stock.

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EX-3.2

Exhibit 3.2

CERTIFICATE OF DESIGNATION OF
SERIES A CONVERTIBLE PREFERRED STOCK

HEI, INC.

STATEMENT OF DESIGNATION OF RIGHTS AND PREFERENCES

     The undersigned, Mack V. Traynor, III, Chief Executive Officer and President of HEI, Inc., a Minnesota corporation, does hereby file with the office of the Minnesota Secretary of State a Certificate of Designation fixing rights and privileges of Series A Convertible Preferred Stock of HEI, Inc. pursuant to Minnesota Statutes, Section 302A.401, Subd. 3.

     In connection therewith, the following statements are made:

     1. The name of the corporation is HEI, Inc.

     2. Pursuant to the provisions of Minnesota Statutes, Section 302A.401, Subd. 3, and Article III of the Amended and Restated Articles of Incorporation of HEI, Inc., the resolution attached as Annex A hereto authorizing the establishment of Series A Convertible Preferred Stock, par value $0.05 per share, of HEI, Inc. and fixing the relative rights and preferences thereof was unanimously approved by the Board of Directors of HEI, Inc. at a duly called meeting thereof held on May 4, 2005.

     I swear that the foregoing is true and accurate and that I have authority to sign this document on behalf of HEI, Inc.

Dated: May 9, 2005	HEI, INC.
	/S/ Mack Traynor
	By Mack V. Traynor, III
	Its Chief Executive Officer and President

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ANNEX A
TO
CERTIFICATE OF DESIGNATION OF
SERIES A CONVERTIBLE PREFERRED STOCK

HEI, INC.

     RESOLVED, that the following designations with respect to the Company’s previously undesignated shares are hereby made:

Section 1. Shares and Classes Authorized. 167,000 of the Company’s undesignated shares that are authorized by Article III of this Company’s Amended and Restated Articles of Incorporation are hereby designated Series A Convertible Preferred Stock, par value $0.05 per share (hereinafter referred to as “Series A Preferred Shares” or “Series A Preferred”), and the rights and preferences of such Series A Preferred Shares shall be as set forth in Section 2. The term “Common Stock” as used herein shall refer to the shares of this Company’s common stock authorized under Article III of this Company’s Amended and Restated Articles of Incorporation. Common Stock, Series A Preferred Shares and any other capital stock issued by the Company are herein sometimes referred to collectively as “Capital Stock.”

Section 2. Description of Series A Preferred Shares. The rights, preferences, privileges and restrictions granted to or imposed upon the Series A Preferred Shares or the holders thereof are as follows:

     2.1 Ranking. Series A Preferred Shares shall, with respect to rights on liquidation, dissolution or winding up only, rank senior to shares of Common Stock and any other class or series of Capital Stock issued hereafter. Series A Preferred Shares shall, with respect to all other matters, rank on parity with shares of Common Stock.

     2.2 Voting Rights.

     2.2.1 General Rights. Except as otherwise provided herein or as required by law, each share of Series A Preferred shall entitle the holder thereof to vote on all matters submitted to the shareholders of the Company, voting together as a single class with the holders of shares of Common Stock. In any such vote, each holder of Series A Preferred Shares shall be entitled to a number of votes with respect to each share of Series A Preferred held by such holder equal to the number of shares of Common Stock into which a share of Series A Preferred is then convertible as provided in Section 2.6.

     2.2.2 Separate Vote of Series A Preferred on Changes to Series A Preferred. In addition to any other vote or consent required herein or by law, for so long as at least 41,750 shares of Series A Preferred are outstanding, the affirmative vote or written consent of the holders of a majority of the then outstanding Series A Preferred Shares,

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voting separately as a single class, shall be necessary for effecting or validating the following actions:

     (a) any amendment or change of the rights, preferences, privileges or powers of the Series A Preferred Shares or any issuance of a class or series of capital stock senior to the Series A Preferred Shares;

     (b) increases or decreases in the authorized number of Series A Preferred Shares;

     (c) declaration or payment of any dividend (other than a dividend payable solely in shares of Common Stock); or

     (d) any amendment of the Company’s Amended and Restated Articles of Incorporation, as may be amended, or Second Amended and Restated Bylaws, as may be amended, that adversely affects the rights of the Series A Preferred Shares.

     2.2.3 No Cumulative Voting. The holders of Series A Preferred Stock shall not be entitled to cumulate their votes in any election of directors in which they are entitled to vote.

     2.3 Preemptive Rights. The holders of Series A Preferred Stock shall not be entitled to any preemptive rights to acquire shares of any class or series of Capital Stock of the Company.

     2.4 Distributions and Dividends. The holders of Series A Preferred Shares are entitled to dividends from sources legally available when, as and if declared by the Board of Directors. In the event the Company shall, on the Common Stock, declare a dividend or distribution (other than a distribution described in Section 2.5) payable in Common Stock, cash or in any other form, then, in each such case, the holders of Series A Preferred Shares shall be entitled to a proportionate share of any such dividend or distribution as though the holders of the Series A Preferred Shares were the holders of the number of shares of Common Stock into which their Series A Preferred Shares are then convertible as provided in Section 2.6 as of the record date fixed for determination of the holders of Common Stock entitled to receive such dividends or distributions.

     2.5 Liquidation Right and Preference. In the event of the liquidation, dissolution or winding up of this Company, whether voluntary or involuntary, the holders of Series A Preferred Shares shall be entitled to receive out of the assets of this Company an amount equal to $26.00 per share for each outstanding share of Series A Preferred, plus all declared but unpaid dividends thereon to the date of distribution, as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to the Series A Preferred Shares, payable in cash or other property of the Company. The holders of Series A Preferred Shares shall be entitled to receive out of the assets of this Company the amounts to which they are entitled upon liquidation, dissolution or winding up of this Company pursuant to this Section 2.5, before any payment shall

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be made or any assets distributed to the holders of Common Stock or any other class of shares of this Company ranking junior to Series A Preferred Shares. If, upon any liquidation, dissolution or winding up of this Company, and after provision or payment for the debts and other liabilities of the Company, the assets of this Company are insufficient to pay the holders of Series A Preferred Shares the full amount to which they shall be entitled, the entire remaining assets of the Company shall be distributed ratably to the holders of Series A Preferred Shares in proportion to the full amounts to which they are entitled upon liquidation, dissolution or winding up, and the holders of Common Stock shall in no event be entitled to participate in the distribution of such assets. If, after paying the holders of Series A Preferred Shares the full amount to which they shall be entitled pursuant to this Section 2.5, any assets of the Company remain, then the remaining assets of the Company shall be distributed ratably to the holders of Common Stock only, and the holders of Series A Preferred Shares shall not be entitled to participate in such distribution.

     2.6 Conversion Rights.

     2.6.1 Optional Conversion. The holders of Series A Preferred Shares shall have conversion rights as follows (the “Conversion Rights”):

     (a) Right to Convert. Each share of Series A Preferred shall be convertible, at the option of the holder thereof, at any time and from time to time, and without the payment of additional consideration by the holder thereof, into 10 shares of Common Stock (the “Conversion Amount”), subject to adjustment as provided herein.

     (b) Mechanics of Conversion. In order for a holder of Series A Preferred Shares to convert shares of Series A Preferred into shares of Common Stock, such holder shall surrender the certificate or certificates for such shares of Series A Preferred, at the office of the Company’s transfer agent (or at the principal office of the Company if the Company serves as its own transfer agent), together with written notice that such holder elects to convert all or any number of shares of Series A Preferred represented by such certificate or certificates. Such notice shall state such holder’s name or the names of the nominees in which such holder wishes the certificate or certificates for Common Stock to be issued. If required by the Company, certificates surrendered for conversion shall be endorsed or accompanied by written instruments of transfer, in form satisfactory to the Company, duly executed by the registered holder or his, her or its duly authorized attorney-in-fact in writing. The date of receipt of such certificates and notice by the transfer agent (or by the Company if the Company serves as its own transfer agent) shall be the conversion date (“Conversion Date”). The Company shall, as soon as practicable after the Conversion Date, issue and deliver to such holder of Series A Preferred Shares, or to his, her or its nominees, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled, together with (i) cash in lieu of any fraction of a share in accordance with the terms of Section 2.6.4(a) and (ii) cash in the amount of any declared but

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unpaid cash dividends on the Series A Preferred Shares surrendered for conversion, if any.

     2.6.2. Automatic Conversion.

     (a) Conversion. Each share of Series A Preferred shall be automatically convertible into shares of Common Stock at the then-effective Conversion Amount on the date on which both (i) (A) the average closing price of the Common Stock, as reported on the exchange or national quotation system on which the Common Stock is then listed, for the immediately preceding 20 consecutive trading days, is equal to or greater than $3.25 per share (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to the Common Stock), and (B) the average daily trading volume of the Common Stock, as reported on the exchange or national quotation system on which the Common Stock is then listed, for such 20 consecutive trading-day period, is equal to or greater than 40,000 shares (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to the Common Stock), and (ii) there is an effective registration statement under the Securities Act of 1933, as amended (the “Securities Act”), covering the resale by the holder of the shares of Common Stock issuable upon conversion, or such shares are eligible for resale pursuant to Rule 144 promulgated under the Securities Act (the “Automatic Conversion Date”).

     (b) Mechanics of Conversion. The Company shall provide notice to the holders of Series A Preferred Shares of the occurrence of an automatic conversion pursuant to Section 2.6.2(a). Upon receipt of such notice, each holder of Series A Preferred Shares shall surrender his, her or its certificate or certificates for all such shares to the Company at the place designated in such notice, and shall thereafter receive certificates for the number of shares of Common Stock to which such holder is entitled pursuant to this Section 2.6.2. If required by the Company, certificates surrendered for conversion shall be endorsed or accompanied by written instruments of transfer, in form satisfactory to the Company, duly executed by the registered holder or his, her or its duly authorized attorney-in-fact in writing. The Company shall, as soon as practicable after receipt of any certificate or certificates for Series A Preferred Shares, issue and deliver to such holder of Series A Preferred Shares, or to his, her or its nominees, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled, together with (i) cash in lieu of any fraction of a share in accordance with the terms of Section 2.6.4(a) and (ii) cash in the amount of any declared but unpaid cash dividends on the Series A Preferred surrendered for conversion, if any.

     2.6.3 Certain Adjustments .

     (a) Adjustment for Stock Subdivisions and Combinations. If the Company shall at any time or from time to time after the date on which shares of

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the Series A Preferred were first issued (the “Original Issue Date”) effect a subdivision of the outstanding Common Stock without a corresponding subdivision of the Series A Preferred, the Conversion Amount then in effect immediately before that subdivision shall be proportionately increased. If the Company shall at any time or from time to time after the Original Issue Date combine the outstanding Common Stock without a corresponding combination of the Series A Preferred, the Conversion Amount then in effect immediately before the combination shall be proportionately decreased. Any adjustment under this Section 2.6.3(a) shall become effective at the close of business on the date the subdivision or combination becomes effective.

     (b) Adjustment for Reclassification, Exchange, or Substitution. If the Common Stock issuable upon the conversion of the Series A Preferred shall be changed into the same or a different number of shares of any class or classes of stock, whether by capital reorganization, reclassification, or otherwise (other than a subdivision or combination of shares provided for above, or a reorganization, merger, consolidation, or sale of assets provided for below), then and in each such event the holder of each such share of Series A Preferred shall have the right thereafter to convert such share into the kind and amount of shares of stock and other securities and property receivable upon such reorganization, reclassification, or other change, by a holder of the number of shares of Common Stock into which such             shares of Series A Preferred might have been converted immediately prior to such reorganization, reclassification, or change, all subject to further adjustment as provided herein.

     (c) Adjustment for Merger or Reorganization, etc. In case of any consolidation or merger of the Company with or into another company or the sale of all or substantially all of the assets of the Company to another corporation, each share of Series A Preferred shall thereafter be convertible (or shall be converted into a security which shall be convertible) into the kind and amount of shares of stock or other securities or property to which a holder of the number of shares of Common Stock of the Company deliverable upon conversion of such Series A Preferred would have been entitled upon such consolidation, merger or sale; and, in such case, appropriate adjustment (as determined in good faith by the Board of Directors) shall be made in the application of the provisions in this Section 2.6 set forth with respect to the rights and interest thereafter of the holders of the Series A Preferred, to the end that the provisions set forth in this Section 2.6 (including provisions with respect to changes in and other adjustments of the Conversion Amount) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the conversion of the Series A Preferred.

     (d) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Amount pursuant to this Section 2.6.3, the Company at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of

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Series A Preferred a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Company shall, upon the written request at any time of any holder of Series A Preferred, furnish or cause to be furnished to such holder a similar certificate setting forth (i) such adjustments and readjustments, (ii) the Conversion Amount then in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which then would be received upon the conversion of Series A Preferred.

     (e) Notice of Record Date. In the event:

     (i) that the Company declares a dividend (or any other distribution) on its Common Stock payable in shares of Common Stock or other securities of the Company;

     (ii) that the Company subdivides or combines its outstanding Common Stock;

     (iii) of any reclassification of the Common Stock of the Company (other than a subdivision or combination of its outstanding Common Stock or a stock dividend or stock distribution thereon), or of any consolidation or merger of the Company into or with another corporation, or of the sale of all or substantially all of the assets of the Company; or

     (iv) of the involuntary or voluntary dissolution, liquidation or winding up of the Company;

then the Company shall cause to be filed at its principal office or at the office of the transfer agent of the Series A Preferred, and shall cause to be mailed to the holders of the Series A Preferred at their last addresses as shown on the records of the Company or such transfer agent, at least ten days prior to the date specified in (A) below or twenty days before the date specified in (B) below, a notice stating (A) the record date of such dividend, distribution, subdivision or combination, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, subdivision or combination are to be determined, or (B) the date on which such reclassification, consolidation, merger, sale, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reclassification, consolidation, merger, sale, dissolution or winding up.

     2.6.4 Other Conversion Matters.

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     (a) Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion of the Series A Preferred Shares. In lieu of any fractional shares to which the holder would otherwise be entitled, the Company shall pay cash equal to such fraction multiplied by the then effective Conversion Price.

     (b) Reservation of Shares. The Company shall at all times when the Series A Preferred Shares shall be outstanding, reserve and keep available out of its authorized but unissued Common Stock, for the purpose of effecting the conversion of the Series A Preferred, such number of its duly authorized Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding Series A Preferred Shares.

     (c) Treatment of Converted Shares. All shares of Series A Preferred which shall have been surrendered for conversion as herein provided shall no longer be deemed to be outstanding and all rights with respect to such shares, including the rights, if any, to receive notices and to vote, shall immediately cease and terminate on the Conversion Date or Automatic Conversion Date, as applicable, except only the right of the holders thereof to receive shares of Common Stock in exchange therefor and payment of any accrued but unpaid dividends and for fractional shares, if any. Any shares of Series A Preferred so converted shall be retired and cancelled and shall not be reissued, and the Company (without the need for shareholder action) may from time to time take such appropriate action as may be necessary to reduce the authorized Series A Preferred Shares accordingly.

     (d) Payment of Certain Taxes. The Company shall pay any and all issue and other taxes that may be payable in respect of any issuance or delivery of shares of Common Stock upon conversion of shares of Series A Preferred pursuant to this Section 2.6. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of shares of Common Stock in a name other than that in which the shares of Series A Preferred so converted were registered, and no such issuance or delivery shall be made unless and until the person or entity requesting such issuance has paid to the Company the amount of any such tax or has established, to the satisfaction of the Company, that such tax has been paid.

     (d) Liquidation. In the event of a liquidation of the Company, the Conversion Rights shall terminate at the close of business on the first full day preceding the date fixed for the payment of any amounts distributable on liquidation to the holders of Series A Preferred Shares.

RESOLVED FURTHER, that the President of the Company is hereby authorized and directed to make, execute and file for record with the office of the Minnesota Secretary of State a proper Certificate Fixing the Rights and Privileges of the Preferred Shares setting forth the foregoing resolutions as required by law, and to pay or cause to be paid all fees in connection therewith.

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EX-99.1

Exhibit 99.1

     NEWS RELEASE

1495 Steiger Lake Lane
Victoria, Minnesota 55386 USA
952-443-2500

CONTACTS:		For Immediate Release
	Mack V. Traynor III, CEO
	Timothy Clayton, CFO

HEI, INC. ANNOUNCES $3.4 MILLION EQUITY FINANCING

MINNEAPOLIS, May 10, 2005 — HEI, Inc. (Nasdaq: HEII, www.heii.com) today announced that it has raised $3.4 million in gross proceeds through the sale of 130,538 shares of convertible preferred stock in a private placement to a group of institutional and accredited investors. Each share of preferred stock is convertible into ten shares of HEI common stock, which in the aggregate would represent an additional 1,305,380 shares of common stock. The purchase price of the preferred stock was $26.00 per share. Think Equity served as the financial advisor to the Company in this offering.

In connection with the financing, HEI also issued to the investors five-year warrants to purchase up to 522,152 shares of common stock at an exercise price of $3.05 per share. If the warrant holders exercise the warrants in full the Company would receive an additional approximately $1.6 million in cash proceeds. There are no dividend, coupon or redemption rights associated with the preferred stock; however the preferred stock includes a liquidation preference. The Company has agreed to register for resale by the investors the common stock issuable upon conversion of the preferred stock. The preferred stock will not be separately registered or listed on NASDAQ.

“This equity infusion represents an opportunity to strengthen our cash position and provide working capital to continue the aggressive pursuit of our sales and profit goals,” said Mack V. Traynor, president and chief executive officer of HEI. “This additional growth capital will enable us to attract new customers, expand relationships with existing customers and invest in capital equipment to enhance our manufacturing capabilities.”

     ABOUT HEI

     HEI, Inc. designs, develops and manufactures microelectronics, subsystems, systems, connectivity and software solutions for original equipment manufacturers engaged in the medical equipment and medical device, hearing, communications and industrial markets. HEI provides its customers with a single point of contact that can take an idea from inception to a fully functional, cost effective and manufacturable product utilizing innovative design solutions and by the application of state-of-the-art materials, processes and manufacturing capabilities.

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Headquarters & Microelectronics Operations	PO Box 5000, 1495 Steiger Lake Lane, Victoria, MN 55386
Advanced Medical Operations	4801 North 63rd Street, Boulder, CO 80301
High Density Interconnect Operations	610 South Rockford Drive, Tempe, AZ 85281
RF Identification and Smart Card Operations	1546 Lake Drive West, Chanhassen, MN 55317

FORWARD LOOKING INFORMATION

Information in this news release, which is not historical, includes forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements contained in this press release, including the use of proceeds from the offering; the amount of additional cash that would be paid upon exercise of the warrants; implementation of business strategies; HEI’s ability to attract new customers and expand relationships with existing customers; and HEI’s objectives, are forward looking statements. All of such forward-looking statements involve risks and uncertainties including, without limitation, continuing adverse business and market conditions, the ability of HEI to secure and satisfy customers, the availability and cost of materials from HEI’s suppliers, HEI’s ability to satisfy financial or other obligations or covenants set forth in its banking agreements, adverse competitive developments, change in or cancellation of customer requirements, the integration of the Advanced Medical Operations, collection of outstanding debt, HEI’s ability to succeed on the merits and defend against litigation, and other risks detailed from time to time in HEI’s SEC filings. HEI undertakes no obligation to update these statements to reflect ensuing events or circumstances or subsequent actual results.

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