8-K

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):      September 4, 2001

HEI, INC.
(Exact Name of Registrant as Specified in Its Charter)

Minnesota
(State or Other Jurisdiction of Incorporation)

0-10078	41-0944876
(Commission File Number)	(IRS Employer Identification No.)
1495 Steiger Lake Lane, Victoria, Minnesota	55386
(Address of Principal Executive Offices)	(Zip Code)

952-443-2500
(Registrant’s Telephone Number, Including Area Code)

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

Table of Contents

Item 5. OTHER EVENTS.

On August 30, 2001, HEI, Inc announced that it completed a $6.7 million private placement of its shares of common stock. HEI sold 950,000 shares of common stock at $7.00 per share. The purchasers were mutual funds and private funds.

Item 7. FINANCIAL STATEMENTS AND EXHIBITS.

(c) Exhibits:

99.1	Press Release, August 30, 2001
99.2	Stock Purchase Agreement, August 29, 2001
99.3	Registration Rights Agreement, August 29, 2001

2

SIGNATURES

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

Dated: September 4, 2001

HEI, INC
By	/s/ Anthony J. Fant
	Anthony J. Fant
	Chairman and
	Chief Executive Officer

3 EX-99.1 3 c64837ex99-1.txt PRESS RELEASE 1 EXHIBIT 99.1 NEWS RELEASE [HEI INC LOGO] P. O. Box 5000 Victoria, Minnesota 55386 USA 952-443-2500 CONTACTS: FOR IMMEDIATE RELEASE Anthony J. Fant, CEO Donald R. Reynolds, President/COO Steve E. Tondera, CFO HEI RECEIVES $6.7 MILLION EQUITY INVESTMENT 950,000 SHARES OF COMMON STOCK AT $7.00 BOUGHT BY RS INVESTMENTS AND CONSTABLE CAPITAL MINNEAPOLIS, August 30, 2001--HEI, Inc. (Nasdaq: HEII, www.heii.com), a worldwide leader in the design and manufacture of microelectronic products, announced today that it has completed a $6.7 million private placement of its common stock. Under terms of the financing, HEI sold 950,000 shares of common stock at $7.00 per share. The purchasers were mutual funds and private funds managed by RS Investments, a San Francisco-based investment firm, and Constable Capital, LLC, a Deephaven, MN investment fund. Minneapolis-based ThinkEquity Partners, an institutional equity boutique with offices in New York, San Francisco and Chicago, acted as the placement agent for HEI. "We are pleased to welcome RS Investments and Constable Capital as institutional investors in our company," said Donald R. Reynolds, President and Chief Operating Officer of HEI, Inc. "This investment will allow us to accelerate production of products for the broadband communication markets where we now have significant orders. These products incorporate HEI's patented broadband technology," he added. "It is gratifying that tech savvy investors such as RS Investments and Constable Capital share our confidence in HEI's future. This additional capital will enhance our growth plans for new products in emerging markets. This is the first equity investment from outside investors in the past 10 years. The addition of such knowledgeable institutional investors to our shareholder base has been an important goal," said Anthony Fant, Chief Executive Officer, HEI, Inc. About HEI, Inc. HEI, Inc. (Nasdaq: HEII, www.heii.com) specializes in the design, manufacture and test of ultra miniature microelectronic products. In the past three years, HEI has invested in technology, capital, and facilities that have led to significant technology patents and proprietary manufacturing processes placing HEI in a unique position to satisfy the needs of hearing, medical, and broadband communication markets. More information on HEI can be accessed via the Company web site at http://www.heii.com. 2 - -------------------------------------------------------------------------------- HEI, Inc. specializes in the custom design and manufacture of high performance, ultraminiature microelectronic devices and high-technology products incorporating those devices. HEI contributes to its customers' competitiveness in the hearing, medical, communications, wireless smart card, and other RF applications through innovative design solutions and the application of state-of-the art materials, processes and manufacturing capabilities. Headquarters and Microelectronics Division PO Box 5000, 1495 Steiger Lake Lane, Victoria, MN 55386 High Density Interconnect Division 610 South Rockford Drive, Tempe, AZ 85281 Cross Technology, Inc. 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 importance of specific technologies within specific markets, and estimated growth and growth rates are forward looking statements. All of such forward-looking statements involve risks and uncertainties including, without limitation, adverse business or market conditions, the ability of HEI to secure and satisfy customers, the availability and cost of materials from HEI's suppliers, adverse competitive developments, change in or cancellation of customer requirements, and other risks detailed from time to time in HEI's SEC filings. EX-99.2 4 c64837ex99-2.txt STOCK PURCHASE AGREEMENT 1 EXHIBIT 99.2 STOCK PURCHASE AGREEMENT This Stock Purchase Agreement (including the Exhibits hereto, the "Agreement"), dated as of August 29, 2001, 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"). WHEREAS, the Company will at the Closing (as defined below) sell up to 950,000 shares of its Common Stock, par value $0.05 per share (the "Common Stock"), to the Investors and the Investors will purchase the Shares of Common Stock from the Company on the terms and conditions set forth herein; and 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 950,000 shares of its Common Stock (the "Shares"), having the rights, privileges and preferences as set forth in the Company's Restated Articles of Incorporation, as amended to date (the "Articles of Incorporation"). 1.2 SALE OF COMMON STOCK. Subject to the terms and conditions hereof, each Investor agrees, severally and not jointly, to purchase at the Closing (as defined below) and the Company agrees to issue and sell to each Investor, that number of shares of the Company's Common Stock set forth opposite each Investor's name on Exhibit A, at a price of $7.00 per share (the "Purchase Price"). 1.3 CLOSING. The closing (the "Closing") of the purchase and sale of the Shares shall take place at the offices of Lindquist & Vennum P.L.L.P., 4200 IDS Center, Minneapolis, MN 55402, at 10:00 a.m., on August 29, 2001, or at such other time and place 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 Common Stock which such Investor is purchasing (as set forth on Exhibit A hereto) against delivery to the Company by such Investor of a wire transfer in immediately available funds in the amount of the Purchase Price therefor. 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY As a material inducement to the Investors to enter into this Agreement and purchase the Shares, 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, 2 to carry on their businesses as now conducted and as proposed to be conducted through the fiscal year ending August 31, 2002, 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 on the Company's or its subsidiaries' properties or business as now conducted or as proposed to be conducted. 2.2 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 Common Stock hereunder, and to carry out and perform its obligations under the terms of this Agreement. 2.3 CAPITALIZATION. 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 Articles of Incorporation. As of the date hereof, 5,006,460 shares of the Common Stock are issued and outstanding, excluding the Shares, and no shares of preferred stock are issued and outstanding. All issued and outstanding shares of the Company's Common 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. Except as set forth on Schedule 2.3, as of the date hereof, (i) 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. No shareholder of the Company has any rights or preferences not afforded all shareholders of the Company, except (i) to the extent the Company may be obligated to include additional securities pursuant to that certain Registration Rights Agreement, dated as of March 3, 2000, among the Company and the Selling Shareholders identified therein; provided, that, the Company shall use its best efforts to obtain a waiver from such Selling Shareholders with respect to such obligations, and (ii) pursuant to this Agreement. No shareholder of the Company has any options or warrants to purchase Common Stock, except pursuant to options issued under the Company's stock option plan, stock incentive plan or any other equity-based compensation plans. No shareholder has any pre-emptive or approval right pertaining to the sale and purchase of the Common Stock pursuant to this Agreement, whether by statute, contractual obligation or otherwise, except pursuant to Section 6 of this Agreement. 2.4 AUTHORIZATION. All corporate action on the part of the Company, its officers, directors and shareholders necessary for the authorization, execution, delivery and performance by the Company of this Agreement and each of the other agreements contemplated hereby to which the Company is a party; the authorization, issuance, sale and delivery of the Shares; and the performance of all of the Company's obligations hereunder and thereunder has been taken. This Agreement, and each of the other agreements contemplated hereby 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, subject to laws of general application relating to bankruptcy, 2 3 insolvency or creditors' rights and rules of law governing specific performance, injunctive relief or other equitable remedies. 2.5 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. 2.6 SEC DOCUMENTS; FINANCIAL STATEMENTS. Since September 1, 1999, 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 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. 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). No other information provided by or on behalf of the Company to any Investor which 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. 2.7 NO CONFLICTS. The Company is not in violation of any term of the Articles of Incorporation or its Bylaws, and except for noncompliance with the terms of certain agreements that have been executed, as listed on Schedule 2.7, the Company is not in violation of any term of any contract, agreement, mortgage, indebtedness, indenture, instrument, judgment, decree, 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 3 4 have a material adverse effect on the Company's business, properties or prospects, 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 Shares and the fulfillment of and compliance with the respective terms hereof and thereof and the consummation of the transactions contemplated hereby and thereby, do not and shall not (i) conflict with or result in a breach of the terms, conditions or provisions of, (ii) constitute a default under, (iii) result in the creation of any lien, security interest, charge or encumbrance upon the Company's capital stock or assets pursuant to, (iv) give any third party the right to modify, terminate or accelerate any obligation under, (v) result in a violation of, or (vi) require any authorization, consent, approval, exemption or other action by or notice to any court or administrative or governmental body pursuant to, the Articles of Incorporation or Bylaws of the Company, or any law, statute, rule or regulation to which the Company is subject, or any agreement, instrument, order, judgment or decree to which the Company is subject, except with respect to any of the foregoing which would not have a Material Adverse Effect. The Company is not in violation of the listing requirements of The Nasdaq National Market and is unaware of any facts or circumstances that reasonably might cause the Common Stock to be delisted by The Nasdaq National Market in the foreseeable future. 2.8 LITIGATION. Except as described on Schedule 2.8 or as disclosed in the SEC Documents, there are no actions, suits, proceedings orders, investigations or claims pending or, to the best of the Company's knowledge, threatened against or affecting the Company (or to the best of the Company's knowledge, pending or threatened against or affecting any of the officers, directors or employees of the Company with respect to the Company's 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); and the Company is not a party to any arbitration proceedings under collective bargaining agreements or otherwise or, to the best of the Company's knowledge, any governmental investigations or inquiries (including inquiries as to the qualification to hold or receive any license or permit). The Company is not subject to any judgment, order or decree of any court or other governmental agency. 2.9 TAX RETURNS. The Company has filed all tax returns which it is required to file under applicable foreign, federal, state and local laws and regulations; all such returns are complete and correct in all material respects; and the Company has paid all taxes which have become due and payable. The Company has not been advised that any of its returns, federal, state or other, have been or are being audited as of the date thereof. The Company has not waived any statute of limitations with respect to taxes or agreed to any extension of time with respect to a tax assessment or deficiency, and there are no agreements, waivers or other arrangements providing for an extension of time with respect to the assessment of any tax or deficiency. There are no actions, suits, proceedings or claims now pending against the Company in respect of any tax or assessment. There is no pending or, to the Company's knowledge, threatened investigation of the Company by any federal, state, foreign or local authority relating to any taxes or assessments, or any claims for additional taxes or assessments asserted by any such authority. 4 5 2.10 GOVERNMENTAL CONSENTS. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any governmental authority 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 Shares, or the consummation of any other transaction contemplated hereby, except under applicable state securities laws, which filings and qualifications, if required, will be accomplished within the required statutory period, 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, and for the filing of the NASDAQ National Market Additional Listing Application, which filing has been made. 2.11 EMPLOYMENT MATTERS; ERISA MATTERS. The Company and its subsidiaries are in compliance with all federal, state, local and foreign laws and regulations respecting employment and employment practices, terms and conditions of employment and wages and hours, except where failure to be in compliance would not have a Material Adverse Effect. There are no pending investigations involving the Company or any of its subsidiaries by the U.S. Department of Labor or any other governmental agency responsible for the enforcement of such federal, state, local or foreign laws and regulations. There is no unfair labor practice charge or complaint against the Company or any of its subsidiaries pending before the National Labor Relations Board or any strike, picketing, boycott, dispute, slowdown or stoppage pending or threatened against or involving the Company or any of its subsidiaries. No representation question exists respecting the employees of the Company or any of its subsidiaries, and no collective bargaining agreement or modification thereof is currently being negotiated by the Company or any of its subsidiaries. No grievance or arbitration proceeding is pending under any expired or existing collective bargaining agreements of the Company or any of its subsidiaries. No material labor dispute with the employees of the Company or any of its subsidiaries exists or, to the knowledge of the Company, is imminent. Except for such failures that would not result in a Material Adverse Effect, every employee benefit plan (whether or not subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) maintained or contributed to by the Company has been maintained and administered in accordance with their terms, ERISA, the Internal Revenue Code of 1986, as amended (the "Code"), and other applicable laws. None of the plans is subject to Title IV of ERISA and no plan is a multi-employer plan (within the meaning of Section 3(37) of ERISA). Each plan intended to qualify under Section 401(a) or 501(c)(9) of the Code has received a favorable determination or approval letter from the Internal Revenue Service regarding its qualification under such section and no event has occurred which cause any such plan to lose its qualification.] 2.12 INTELLECTUAL PROPERTY RIGHTS. The Company and its subsidiaries own or possess the requisite rights or licenses to use all trademarks, trade names, service marks, service mark registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals, governmental authorizations, trade secrets and rights (collectively "Intellectual Property Rights") necessary to conduct their respective businesses as now conducted and as proposed to be conducted through the fiscal year ending August 31, 2002. Except as set forth on Schedule 2.12, none of the Intellectual Property Rights or other intellectual property rights have expired or terminated, or are expected to expire or terminate on or before August 31, 2002. The Company and its subsidiaries do not have any knowledge of any event, fact or circumstance relating to (i) any infringement by the Company or its subsidiaries of any trademarks, trade names, service 5 6 marks, service mark registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals, governmental authorizations, trade secrets or other similar rights of others, or (ii) any person or entity now infringing any Intellectual Property Rights or other similar rights, or (iii) any person or entity now infringing any Intellectual Property Rights or other similar rights, except for such infringements that would not result in a Material Adverse Effect. There is no claim, action or proceeding being made or brought against, or to the Company's knowledge, being threatened against, the Company or its subsidiaries regarding any trademarks, trade names, service marks, service mark registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals, governmental authorizations, trade secrets or other similar rights of others. The Company and its subsidiaries have taken reasonable security measures to protect the secrecy, confidentiality and value of all of their Intellectual Property Rights. 2.13 ENVIRONMENTAL LAWS. (a) To the knowledge of the Company, it and its subsidiaries (1) are in compliance with any and all Environmental Laws, (2) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses, and (3) are in compliance with all terms and conditions of any such permit, license or approval, except in each case where the failure would not have a Material Adverse Effect. To the knowledge of the Company, with respect to the Company (A) there are no past or present releases of any Hazardous Materials into the environment, actions, activities, circumstances, conditions, events, incidents, or contractual obligations which may give rise to any common law environmental liability or any liability under any Environmental Law in any material respect and (B) 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 in each case 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 knowledge of the Company, 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 6 7 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 knowledge of the Company, 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 law. 2.14 REGULATORY PERMITS; COMPLIANCE. The Company possesses 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 "Company Permits"), except where the failure to obtain a Company Permit will not have a Material Adverse Effect. There is no action pending, or to the knowledge of the Company, threatened regarding the suspension or cancellation of any of the Company Permits. The Company is not in conflict with, or in default or violation of, any of the Company Permits except where such violation would not have a Material Adverse Effect. The Company has not received any notification with respect to possible conflicts, defaults, or violations of applicable laws. 2.15 INVESTMENT COMPANY STATUS. The Company is not and upon consummation of the sale of the Common Stock 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. 2.16 ACCURACY OF INFORMATION. The information that has been furnished to the Investors is true and correct and accurate in all material respects as of the date hereof except for financial data that is accurate as of the date shown therein, and the Company has not omitted to state any material fact necessary in order to make the statements made herein or therein, in light of the circumstances under which they were made, not misleading. 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 2.17 LABOR DISTURBANCES. No labor disturbance by the employees of the Company exists, or to the knowledge of the Company, is imminent which could reasonably be expected to have a material adverse effect on the conduct of the business, operations, financial condition, or income of the Company. 2.18 INTERNAL ACCOUNTING CONTROLS. The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that: (i) 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; (ii) transactions are executed in accordance with management's general or specific authorization; (iii) access to assets is available only if permitted in accordance with management's general or specific authorization; and (iv) the recorded accountability for amounts is compared with 7 8 existing assets at reasonable intervals and appropriate action is taken with respect to any differences. 2.19 S-3 REGISTRATION. The Company is currently eligible to register secondary offerings of securities, including the resale of the Shares, on a registration statement on Form S-3 under the 1933 Act. 2.20 USE OF PROCEEDS. The proceeds received from the sale of the Shares shall be used for general business purposes of the Company. Except as set forth in Schedule 2.20, no compensation is payable in connection with the sale of the Shares. 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, 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 an Investor is a party, when executed and delivered by the Investor and the Company, will constitute valid and legally binding obligations of the Investor, enforceable against the Investor in accordance with their 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 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 is a 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 8 9 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 Investor understands that nothing in this Agreement or any other materials presented to Investor in connection with the purchase and sale of the Shares constitutes legal, tax or investment advice. The Investor has consulted such legal, tax and investment advisors as such Investor, in its sole discretion, has deemed necessary or appropriate. 3.4 INVESTMENT PURPOSE. The Investor is acquiring the 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 have not been registered under the Securities Act of 1933, as amended (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 such Investor's representations as expressed herein. The Investor understands that the 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 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 except in compliance with the 1933 Act, applicable state securities laws and the respective rules and regulations thereunder. 3.5 ACCESS TO DATA. The Investor and its representatives have been afforded access to corporate books, financial statements, records, contracts, documents and other information concerning the Company (to the extent such exists), and to its offices and facilities, have been afforded an opportunity to ask such questions of the Company's officers, employees, agents, accountants and representatives concerning the Company's existing and proposed business, operations, financial condition, assets, liabilities and other relevant matters as they have deemed necessary or desirable, and have been given all such information as has been requested, 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 in Section 2 hereof. 3.6 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. 3.7 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. 9 10 3.8 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 under Section 13(d)(3) of the Securities Exchange act of 1934. 3.9 RESTRICTIVE LEGENDS. The Investors agree that, so long as the Shares remain restricted securities, the Company shall place a restrictive legend on the certificate(s) representing the 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." 3.10 TRANSACTIONS IN COMMON STOCK. Investor has not, during the 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. 3.11 NO GENERAL SOLICITATION. Investor did not learn of the investment in the Common Stock as a result of any public advertising or general solicitation. 4. REGISTRATION RIGHTS AND TERMINATION EVENTS 4.1 REGISTRATION RIGHTS. The Shares shall have the registration rights set forth in the Registration Rights Agreement, substantially in the form as set forth in Exhibit B attached hereto. 4.2 TERMINATION EVENTS. Upon the declaration of a Termination Event (as defined the Registration Rights Agreement, Investors will have the right for 30 days, to put the Shares acquired pursuant to this Agreement back to the Company at 125% of the aggregate Purchase Price. If the Investors exercise such right, the Company will make payment to the Investors within ten days, upon delivery of the Shares. 5. CLOSING CONDITIONS. 5.1 CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. The Company's obligation to sell and deliver the Shares to the Investors shall, unless waived by the 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. 10 11 (b) Each Investor shall have delivered to the Company the 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 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 and each other Investor shall have executed this Agreement and the Registration Rights Agreement and any other transaction document (to the extent a party thereto) 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 C attached hereto, which shall be addressed to Investors and dated as of the Closing Date. (d) The Shares shall have been listed and authorized for trading on The Nasdaq Stock Market. (e) The Company shall have delivered to the Investors all of the following documents, which shall be satisfactory in form and substance to the Investors: (1) An Officer's Certificate, executed by the Company's Chairman and 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; 11 12 (2) Certified copies of the resolutions duly adopted by the Company's Board of Directors authorizing the execution, delivery and performance of this Agreement, the Common Stock and each of the other agreements contemplated hereby, the issuance and sale of the Common Stock, and all other transactions contemplated by this Agreement; (3) Copies of all third party and governmental consents, approvals and filings required in connection with the consummation of the transactions hereunder (including, without limitation, all blue sky law filings and waivers of all preemptive rights and rights of first refusal, if any); (4) The legal opinion referred to in Section 5.2(c) hereof; (5) Certificates representing the Shares as described in Section 1 hereof; and (6) Such other documents relating to the transactions contemplated by this Agreement as the Investors may reasonably request not less than two (2) business days before the Closing. Any condition specified in this Section 5.2 may be waived with respect to the Investors only if consented to in writing by the Investors granting such waiver. In furtherance of the foregoing, if the Company does not satisfy all of the conditions set forth in this Section 5.2, the Investors will nevertheless have the option to purchase the Shares at the Closing. 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 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 Shares held by such Investor 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 said shares of capital stock, and securities of any type whatsoever that are, or may become, convertible into said shares of capital stock. Notwithstanding the foregoing, "New Securities" does not include (i) securities offered in an underwritten public offering pursuant to a registration statement under the 1933 Act, (ii) 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 (x) provided bona fide 12 13 services to the Company not in connection with the offer or sale of securities in a capital raising transaction and (y) 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, (iii) 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, (vi) stock issued pursuant to any private placement completed on substantially similar terms or within 45 days of the Closing Date, or (vii) stock issued in connection with any merger or acquisition by the Company. 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 said 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 said 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. The Company and each of the Investors shall bear its own expenses in connection with the transactions contemplated by this Agreement, except that the Company shall reimburse the Investors for out-of-pocket expenses, including legal fees and due diligence expenses, not to exceed $50,000 in the aggregate. 13 14 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. 7.5 ENTIRE AGREEMENT. This Agreement, including the Exhibits hereto, 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, 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. 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 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. 14 15 with copy to: Thomas G. Lovett, IV, Esq. Lindquist & Vennum P.L.L.P. 4200 IDS Center 80 South 8th Street Minneapolis, MN 55402 Fax: 612-371-3207 and a copy to: Patricia Bartholomew, Esq. ThinkEquity Partners, LLC 222 South Ninth Street, Suite 2800 Minneapolis, Minnesota 55402 Fax: 612-692-8250 if to the Company: HEI, Inc. P.O. Box 5000 1495 Steiger Lake Lane Victoria, MN 55386 Attention: Patrick Cockrell, Esq. Fax: 952-443-2668 with copy to: Mark D. Williamson, Esq. Gray, Plant, Mooty, Mooty & Bennett, P.A. 3400 City Center 33 South Sixth Street Minneapolis, MN 55402 Fax: 612-333-0066 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. 15 16 IN WITNESS WHEREOF, the Company and the Investors have executed this Agreement as of the date first written above. HEI, INC. By: -------------------------------------- Name: Title: INVESTOR EXECUTION PAGE INVESTOR SIGNATURE ----------------------------------------- Investor (Signature) ----------------------------------------- Print Name ----------------------------------------- Print Name (If more than one investor) ----------------------------------------- ----------------------------------------- Address Dollar Amount of Investment: $ ----------- Number of Shares Subscribed: ------------- State of Residence/Domicile: ------------- TIN/SSN: --------------------------------- 17 Status as an "Accredited Investor". The Investor is an "accredited investor" as defined in the regulations of the U.S. Securities and Exchange Commission by virtue of meeting the criteria which have been checked below (check all that apply): ____ (i) A natural person whose individual net worth (assets less liabilities), or joint net worth with his or her spouse, exceeds $1,000,000. ____ (ii) A natural person whose individual income was in excess of $200,000, or whose joint income with his or her spouse was in excess of $300,000, each of the two most recent years, and who has a reasonable expectation of reaching the same income level for the current year. ____ (iii) A bank, insurance company, registered investment company, business development company, small business investment company or employee benefit plan. ____ (iv) A savings and loan association, credit union, or similar financial institution, or a registered broker or dealer. ____ (v) A private business development company. ____ (vi) An organization described in Section 501(c)(3) of the Internal Revenue Code with assets in excess of $5,000,000. ____ (vii) A corporation, Massachusetts or similar business trust, or partnership with assets in excess of $5,000,000. ____ (viii) A trust with assets in excess of $5,000,000. ____ (ix) A director or an executive officer of the Company. ____ (x) An entity in which all of the equity owners are accredited investors. ____ (xi) A self-directed IRA, Keogh, or similar plan of which the individual directing the investments qualifies as an "accredited investor" under one or more of items (i)-(x) above. Also check the item(s) (i)-(x) above that applies. 2 18

Exhibits - -------- Exhibit A List of Investors Exhibit B Form of Registration Rights Agreement Exhibit C Form of Opinion of Gray, Plant, Mooty, Mooty & Bennett

Disclosure Schedules - -------------------- 2.3 Capitalization 2.7 No Conflicts 2.8 Litigation 2.11 Employee Benefit Plans 2.12 Intellectual Property Rights 2.20 Compensation Payable in Connection with Sale of Shares

19 EXHIBIT A LIST OF INVESTORS

Investor Name and Address Closing ($) Shares (#) State of Domicile - ------------------------- ----------- ---------- ----------------- RS Diversified Growth Fund $3,500,000 500,000 California 388 Market Street, Suite 200 San Francisco, California 94111 RS Smaller Company Growth Fund $700,000 100,000 California 388 Market Street, Suite 200 San Francisco, California 94111 The Paisley Fund, L.P. $490,000 70,000 California 388 Market Street, Suite 200 San Francisco, California 94111 RS Paisley Pacific Master Fund Unit Trust $980,000 140,000 California 388 Market Street, Suite 200 San Francisco, California 94111 Constable Capital LLC $980,000 140,000 Minnesota 19455 Cedarhurst Deephaven, Minnesota 55391

INVESTOR REPRESENTATION WITH RESPECT TO SECTION 3.7 Each Investor hereby represent 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 under Section 13(d)(3) of the Securities Exchange Act of 1934, except as follows: RS Diversified Growth Fund, RS Smaller Company Growth Fund, The Paisley Fund, L.P. and RS Paisley Pacific Master Fund Unit Trust are under common control. 20 IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed as of the date first written above. HEI, INC. By: /s/ Anthony J. Fant ------------------------------------- Name: Anthony J. Fant Title: CEO 21 ACCEPTANCE The undersigned hereby accepts the terms and conditions set forth in the Stock Purchase Agreement, dated August 29, 2001, among HEI, Inc., a Minnesota corporation (the "Company") and certain Purchasers listed on Schedule 1 thereto. By execution of this Acceptance, the undersigned hereby acknowledges the indemnification obligations contained in Section 2.6 of the Stock Purchase Agreement. PURCHASER: The Paisley Fund By: /s/ John L. Wallace -------------------------------------- Name: John L. Wallace Title: Portfolio Manager PURCHASER: RS Paisley Pacific Master Fund Unit Trust By: /s/ John L. Wallace -------------------------------------- Name: John L. Wallace Title: Portfolio Manager PURCHASER: RS Diversified Growth By: /s/ John L. Wallace -------------------------------------- Name: John L. Wallace Title: Portfolio Manager PURCHASER: Constable, LLC By: /s/ Donald W. Constable -------------------------------------- Name: Donald W. Constable Title: CEO PURCHASER: RS Smaller Company Growth Fund By: /s/ William Wolfenden III -------------------------------------- Name: William Wolfenden III Title: Principal 22 ACCEPTANCE The undersigned hereby accepts the terms and conditions set forth in the Stock Purchase Agreement, dated August 29, 2001, among HEI, Inc., a Minnesota corporation (the "Company") and certain Purchasers listed on Schedule 1 thereto. By execution of this Acceptance, the undersigned hereby acknowledges the indemnification obligations contained in Section 2.6 of the Stock Purchase Agreement. AGENT: THINKEQUITY PARTNERS, LLC /s/ Patricia Bartholomew ----------------------------------------- By: Patricia Bartholomew Title: General Counsel 23 EXHIBIT C [FORM OF OPINION] 24 SCHEDULES TO STOCK PURCHASE AGREEMENT EX-99.3 5 c64837ex99-3.txt REGISTRATION RIGHTS AGREEMENT 1 EXHIBIT 99.3 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (the "Agreement") is made and entered into as of August 29, 2001, among HEI, Inc., a Minnesota corporation (the "Company"), the individuals and entities listed on Schedule 1 hereto (each a "Purchaser" and, collectively, the "Purchasers"), and ThinkEquity Partners, LLC, a Delaware limited liability company (the "Agent"). RECITALS: 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 of the Company's Common Stock (defined below) (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 Common Stock; 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's Warrant" means the warrant issued to the Agent in connection with the closing of the transactions contemplated by the Stock 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-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 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. 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 Common Stock issued pursuant to the Purchase Agreement 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 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 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, and the rules and regulations promulgated thereunder. "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 Purchasers (other than counsel referred to in the definition of Registration Expenses above) applicable to a sale of Registrable Securities. "Termination Event" means that (a) prior to the Registration Statement being declared effective, either (i) the Common Stock is suspended from trading for 5 or more consecutive trading days, or (ii) the Common Stock is no longer listed on Nasdaq, AMEX, or NYSE, or (b) the Registration Statement has not been declared effective within 180 days of Closing, and such 2 3 holdup is not due to backlog or other delay at or by the SEC unrelated to any action or inaction by the Company. ARTICLE 2 REGISTRATION RIGHTS 2.1 REQUIRED REGISTRATIONS. (a) The Company shall, within 30 days of the Closing Date 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. In the event that the Registration Statement is not declared effective within 90 days of the date of the Closing, and such holdup is not due to backlog or other delay at or by the SEC unrelated to any action or inaction by the Company, the Company shall, on the 120th day following the Closing and each 30th day thereafter, pay to each of the Purchasers, in cash or Common Stock (at the option of the Company), their ratable portion of 1% of the aggregate Purchase Price paid for the Common Stock, until the Common Stock is either registered or there has occurred a Termination Event. (b) The Registration Statement shall be on Form S-3 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, except to the extent the Company may be obligated to include additional securities pursuant to that certain Registration Rights Agreement, dated as of March 3, 2000, among the Company and the Selling Shareholders identified therein. The Company shall use its best efforts to keep the Registration Statement continuously effective under the Securities Act until the date which is five (5) 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). 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 the 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: 3 4 (a) 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) 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 twenty (20) 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. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. (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, 4 5 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 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), other than as it relates to Section 2.6 herein. 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 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; 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 written information furnished expressly for use in connection with such registration by such Holder, partner, officer, director, or controlling person of such Holder. 5 6 (b) Each selling Holder 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"): (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 statements therein not misleading, or (iii) any violation or alleged violation by the Holder 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, in each case to the extent (and only to the extent) that such Holder Violation occurs in reliance upon and in conformity with written information furnished by such Holder and stated to be specifically for use in connection with such registration; and each such 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; 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 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 by such Holder unless the Holder Violation is the result of fraud on the part of such 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, 6 7 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. (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 the 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 survive the termination of any offering in a Registration Statement, and otherwise. 7 8 ARTICLE 3 OTHER PROVISIONS 3.1 COMPLETE AGREEMENT. This Agreement 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 Agent to: Patricia Bartholomew, Esq. ThinkEquity Partners 222 South Ninth Street, Suite 2800 Minneapolis, Minnesota 55402 Fax: 612-692-8250 with copy to: Thomas G. Lovett, IV, Esq. Lindquist & Vennum P.L.L.P. 4200 IDS Center 80 South 8th Street Minneapolis, MN 55402 Fax: 612-371-3207 if to the Company to: HEI, Inc. P.O. Box 5000 1495 Steiger Lake Lane Victoria, MN 55386 Attention: Patrick Cockrell, Esq. Fax: 952-443-2668 8 9 with copy to: Mark D. Williamson, Esq. Gray, Plant, Mooty, Mooty & Bennett, P.A. 3400 City Center 33 South Sixth Street Minneapolis, MN 55402 Fax: 612-333-0066 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 ASSIGNMENT AND TRANSFER. The rights to have the Company register Registrable Securities pursuant to this Agreement shall be automatically assignable by the Purchasers to any Person (a "Transferee") of all or any portion of Registrable Securities if: (i) the Purchaser agrees in writing with the Transferee to assign such rights, and a copy of such agreement is furnished to the Company within a reasonable time after such assignment; (ii) the Company is, within a reasonable time after such transfer or assignment, furnished with written notice of (a) the name and address of such Transferee, and (b) the securities with respect to which such registration rights are being transferred or assigned; (iii) immediately following such transfer or assignment the further disposition of such securities by the Transferee is restricted under the 1933 Act and applicable state securities laws; (iv) at or before the time the Company receives the written notice contemplated by clause (ii) of this sentence the Transferee agrees in writing with the Company to be bound by all of the provisions contained herein; and (v) such Transferee shall be an "accredited investor" as that term is defined in Rule 501 of Regulation D promulgated under the 1933 Act. 3.5 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. 3.6 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. 3.7 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. 9 10 3.8 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. 10 11 IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed as of the date first written above. HEI, INC. By: /s/ Anthony J. Fant ------------------------------------- Name: Anthony J. Fant Title: CEO 12 ACCEPTANCE The undersigned hereby accepts the terms and conditions set forth in the Registration Rights Agreement, dated August 29, 2001, among HEI, Inc., a Minnesota corporation (the "Company") and certain Purchasers listed on Schedule 1 thereto. By execution of this Acceptance, the undersigned hereby acknowledges the indemnification obligations contained in Section 2.6 of the Registration Rights Agreement. PURCHASER: The Paisley Fund By: /s/ John L. Wallace -------------------------------------- Name: John L. Wallace Title: Portfolio Manager PURCHASER: RS Paisley Pacific Master Fund Unit Trust By: /s/ John L. Wallace -------------------------------------- Name: John L. Wallace Title: Portfolio Manager PURCHASER: RS Diversified Growth By: /s/ John L. Wallace -------------------------------------- Name: John L. Wallace Title: Portfolio Manager PURCHASER: Constable, LLC By: /s/ Donald W. Constable -------------------------------------- Name: Donald W. Constable Title: CEO PURCHASER: RS Smaller Company Growth Fund By: /s/ William Wolfenden III -------------------------------------- Name: William Wolfenden III Title: Principal 13 ACCEPTANCE The undersigned hereby accepts the terms and conditions set forth in the Registration Rights Agreement, dated August 29, 2001, among HEI, Inc., a Minnesota corporation (the "Company") and certain Purchasers listed on Schedule 1 thereto. By execution of this Acceptance, the undersigned hereby acknowledges the indemnification obligations contained in Section 2.6 of the Registration Rights Agreement. AGENT: THINKEQUITY PARTNERS, LLC /s/ Patricia Bartholomew ----------------------------------------- By: Patricia Bartholomew Title: General Counsel 14 SCHEDULE 1 SCHEDULE OF PURCHASERS

PURCHASER ADDRESS AND PURCHASER NAME FACSIMILE NUMBER -------------- --------------------- RS Diversified Growth Fund 388 Market Street, Suite 200 San Francisco, CA 94111 RS Smaller Company 388 Market Street, Suite 200 Growth Fund San Francisco, CA 94111 The Paisley Fund, L.P. 388 Market Street, Suite 200 San Francisco, CA 94111 RS Paisley Pacific Master 388 Market Street, Suite 200 Fund Unit Trust San Francisco, CA 94111 Constable Capital LLC 19455 Cedarhurst Deephaven, MN 55391

-----END PRIVACY-ENHANCED MESSAGE-----

EX-99.1

   1
                                                                    EXHIBIT 99.1

                                                                    NEWS RELEASE

[HEI INC LOGO]
P. O. Box 5000
Victoria, Minnesota 55386 USA
952-443-2500


CONTACTS:                                            FOR IMMEDIATE RELEASE
         Anthony J. Fant, CEO
         Donald R. Reynolds, President/COO
         Steve E. Tondera, CFO


                   HEI RECEIVES $6.7 MILLION EQUITY INVESTMENT
        950,000 SHARES OF COMMON STOCK AT $7.00 BOUGHT BY RS INVESTMENTS
                             AND CONSTABLE CAPITAL

MINNEAPOLIS, August 30, 2001--HEI, Inc. (Nasdaq: HEII, www.heii.com), a
worldwide leader in the design and manufacture of microelectronic products,
announced today that it has completed a $6.7 million private placement of its
common stock. Under terms of the financing, HEI sold 950,000 shares of common
stock at $7.00 per share. The purchasers were mutual funds and private funds
managed by RS Investments, a San Francisco-based investment firm, and Constable
Capital, LLC, a Deephaven, MN investment fund. Minneapolis-based ThinkEquity
Partners, an institutional equity boutique with offices in New York, San
Francisco and Chicago, acted as the placement agent for HEI.

"We are pleased to welcome RS Investments and Constable Capital as institutional
investors in our company," said Donald R. Reynolds, President and Chief
Operating Officer of HEI, Inc. "This investment will allow us to accelerate
production of products for the broadband communication markets where we now have
significant orders. These products incorporate HEI's patented broadband
technology," he added.

"It is gratifying that tech savvy investors such as RS Investments and
Constable Capital share our confidence in HEI's future. This additional capital
will enhance our growth plans for new products in emerging markets. This is the
first equity investment from outside investors in the past 10 years. The
addition of such knowledgeable institutional investors to our shareholder base
has been an important goal," said Anthony Fant, Chief Executive Officer, HEI,
Inc.

About HEI, Inc.

HEI, Inc. (Nasdaq: HEII, www.heii.com) specializes in the design, manufacture
and test of ultra miniature microelectronic products. In the past three years,
HEI has invested in technology, capital, and facilities that have led to
significant technology patents and proprietary manufacturing processes placing
HEI in a unique position to satisfy the needs of hearing, medical, and broadband
communication markets.

More information on HEI can be accessed via the Company web site at
http://www.heii.com.

   2


- --------------------------------------------------------------------------------
HEI, Inc. specializes in the custom design and manufacture of high performance,
ultraminiature microelectronic devices and high-technology products
incorporating those devices. HEI contributes to its customers' competitiveness
in the hearing, medical, communications, wireless smart card, and other RF
applications through innovative design solutions and the application of
state-of-the art materials, processes and manufacturing capabilities.

                                                           
Headquarters and Microelectronics Division                    PO Box 5000, 1495 Steiger Lake Lane, Victoria, MN 55386
High Density Interconnect Division                            610 South Rockford Drive, Tempe, AZ 85281
Cross Technology, Inc.                                        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 importance of specific technologies within specific
markets, and estimated growth and growth rates are forward looking statements.
All of such forward-looking statements involve risks and uncertainties
including, without limitation, adverse business or market conditions, the
ability of HEI to secure and satisfy customers, the availability and cost of
materials from HEI's suppliers, adverse competitive developments, change in or
cancellation of customer requirements, and other risks detailed from time to
time in HEI's SEC filings.

EX-99.2

   1
                                                                    EXHIBIT 99.2

                            STOCK PURCHASE AGREEMENT

         This Stock Purchase Agreement (including the Exhibits hereto, the
"Agreement"), dated as of August 29, 2001, 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").

         WHEREAS, the Company will at the Closing (as defined below) sell up to
950,000 shares of its Common Stock, par value $0.05 per share (the "Common
Stock"), to the Investors and the Investors will purchase the Shares of Common
Stock from the Company on the terms and conditions set forth herein; and

         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 950,000 shares of its Common Stock (the "Shares"), having the rights,
privileges and preferences as set forth in the Company's Restated Articles of
Incorporation, as amended to date (the "Articles of Incorporation").

         1.2 SALE OF COMMON STOCK. Subject to the terms and conditions hereof,
each Investor agrees, severally and not jointly, to purchase at the Closing (as
defined below) and the Company agrees to issue and sell to each Investor, that
number of shares of the Company's Common Stock set forth opposite each
Investor's name on Exhibit A, at a price of $7.00 per share (the "Purchase
Price").

         1.3 CLOSING. The closing (the "Closing") of the purchase and sale of
the Shares shall take place at the offices of Lindquist & Vennum P.L.L.P., 4200
IDS Center, Minneapolis, MN 55402, at 10:00 a.m., on August 29, 2001, or at such
other time and place 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 Common Stock which such Investor is
purchasing (as set forth on Exhibit A hereto) against delivery to the Company by
such Investor of a wire transfer in immediately available funds in the amount of
the Purchase Price therefor.

2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY

         As a material inducement to the Investors to enter into this Agreement
and purchase the Shares, 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,





   2


to carry on their businesses as now conducted and as proposed to be conducted
through the fiscal year ending August 31, 2002, 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 on the Company's or its subsidiaries' properties or business as
now conducted or as proposed to be conducted.

         2.2 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 Common Stock hereunder, and to carry out and
perform its obligations under the terms of this Agreement.

         2.3 CAPITALIZATION. 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 Articles of Incorporation. As of the date
hereof, 5,006,460 shares of the Common Stock are issued and outstanding,
excluding the Shares, and no shares of preferred stock are issued and
outstanding. All issued and outstanding shares of the Company's Common 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. Except as set forth on Schedule 2.3, as of the date
hereof, (i) 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. No shareholder of the Company has any rights or preferences not
afforded all shareholders of the Company, except (i) to the extent the Company
may be obligated to include additional securities pursuant to that certain
Registration Rights Agreement, dated as of March 3, 2000, among the Company and
the Selling Shareholders identified therein; provided, that, the Company shall
use its best efforts to obtain a waiver from such Selling Shareholders with
respect to such obligations, and (ii) pursuant to this Agreement. No shareholder
of the Company has any options or warrants to purchase Common Stock, except
pursuant to options issued under the Company's stock option plan, stock
incentive plan or any other equity-based compensation plans. No shareholder has
any pre-emptive or approval right pertaining to the sale and purchase of the
Common Stock pursuant to this Agreement, whether by statute, contractual
obligation or otherwise, except pursuant to Section 6 of this Agreement.

         2.4 AUTHORIZATION. All corporate action on the part of the Company, its
officers, directors and shareholders necessary for the authorization, execution,
delivery and performance by the Company of this Agreement and each of the other
agreements contemplated hereby to which the Company is a party; the
authorization, issuance, sale and delivery of the Shares; and the performance of
all of the Company's obligations hereunder and thereunder has been taken. This
Agreement, and each of the other agreements contemplated hereby 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, subject
to laws of general application relating to bankruptcy,




                                       2
   3


insolvency or creditors' rights and rules of law governing specific performance,
injunctive relief or other equitable remedies.

         2.5 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.

         2.6 SEC DOCUMENTS; FINANCIAL STATEMENTS. Since September 1, 1999, 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 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. 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). No other information provided by or on behalf of the Company to
any Investor which 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.

         2.7 NO CONFLICTS. The Company is not in violation of any term of the
Articles of Incorporation or its Bylaws, and except for noncompliance with the
terms of certain agreements that have been executed, as listed on Schedule 2.7,
the Company is not in violation of any term of any contract, agreement,
mortgage, indebtedness, indenture, instrument, judgment, decree, 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



                                       3
   4


have a material adverse effect on the Company's business, properties or
prospects, 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 Shares and the fulfillment of and compliance with the respective
terms hereof and thereof and the consummation of the transactions contemplated
hereby and thereby, do not and shall not (i) conflict with or result in a breach
of the terms, conditions or provisions of, (ii) constitute a default under,
(iii) result in the creation of any lien, security interest, charge or
encumbrance upon the Company's capital stock or assets pursuant to, (iv) give
any third party the right to modify, terminate or accelerate any obligation
under, (v) result in a violation of, or (vi) require any authorization, consent,
approval, exemption or other action by or notice to any court or administrative
or governmental body pursuant to, the Articles of Incorporation or Bylaws of the
Company, or any law, statute, rule or regulation to which the Company is
subject, or any agreement, instrument, order, judgment or decree to which the
Company is subject, except with respect to any of the foregoing which would not
have a Material Adverse Effect. The Company is not in violation of the listing
requirements of The Nasdaq National Market and is unaware of any facts or
circumstances that reasonably might cause the Common Stock to be delisted by The
Nasdaq National Market in the foreseeable future.

         2.8 LITIGATION. Except as described on Schedule 2.8 or as disclosed in
the SEC Documents, there are no actions, suits, proceedings orders,
investigations or claims pending or, to the best of the Company's knowledge,
threatened against or affecting the Company (or to the best of the Company's
knowledge, pending or threatened against or affecting any of the officers,
directors or employees of the Company with respect to the Company's 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); and the
Company is not a party to any arbitration proceedings under collective
bargaining agreements or otherwise or, to the best of the Company's knowledge,
any governmental investigations or inquiries (including inquiries as to the
qualification to hold or receive any license or permit). The Company is not
subject to any judgment, order or decree of any court or other governmental
agency.

         2.9 TAX RETURNS. The Company has filed all tax returns which it is
required to file under applicable foreign, federal, state and local laws and
regulations; all such returns are complete and correct in all material respects;
and the Company has paid all taxes which have become due and payable. The
Company has not been advised that any of its returns, federal, state or other,
have been or are being audited as of the date thereof. The Company has not
waived any statute of limitations with respect to taxes or agreed to any
extension of time with respect to a tax assessment or deficiency, and there are
no agreements, waivers or other arrangements providing for an extension of time
with respect to the assessment of any tax or deficiency. There are no actions,
suits, proceedings or claims now pending against the Company in respect of any
tax or assessment. There is no pending or, to the Company's knowledge,
threatened investigation of the Company by any federal, state, foreign or local
authority relating to any taxes or assessments, or any claims for additional
taxes or assessments asserted by any such authority.




                                       4
   5


         2.10 GOVERNMENTAL CONSENTS. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any governmental authority 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 Shares, or the consummation of any other
transaction contemplated hereby, except under applicable state securities laws,
which filings and qualifications, if required, will be accomplished within the
required statutory period, 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, and for the filing of the NASDAQ
National Market Additional Listing Application, which filing has been made.

         2.11 EMPLOYMENT MATTERS; ERISA MATTERS. The Company and its
subsidiaries are in compliance with all federal, state, local and foreign laws
and regulations respecting employment and employment practices, terms and
conditions of employment and wages and hours, except where failure to be in
compliance would not have a Material Adverse Effect. There are no pending
investigations involving the Company or any of its subsidiaries by the U.S.
Department of Labor or any other governmental agency responsible for the
enforcement of such federal, state, local or foreign laws and regulations. There
is no unfair labor practice charge or complaint against the Company or any of
its subsidiaries pending before the National Labor Relations Board or any
strike, picketing, boycott, dispute, slowdown or stoppage pending or threatened
against or involving the Company or any of its subsidiaries. No representation
question exists respecting the employees of the Company or any of its
subsidiaries, and no collective bargaining agreement or modification thereof is
currently being negotiated by the Company or any of its subsidiaries. No
grievance or arbitration proceeding is pending under any expired or existing
collective bargaining agreements of the Company or any of its subsidiaries. No
material labor dispute with the employees of the Company or any of its
subsidiaries exists or, to the knowledge of the Company, is imminent. Except for
such failures that would not result in a Material Adverse Effect, every employee
benefit plan (whether or not subject to the Employee Retirement Income Security
Act of 1974, as amended ("ERISA")) maintained or contributed to by the Company
has been maintained and administered in accordance with their terms, ERISA, the
Internal Revenue Code of 1986, as amended (the "Code"), and other applicable
laws. None of the plans is subject to Title IV of ERISA and no plan is a
multi-employer plan (within the meaning of Section 3(37) of ERISA). Each plan
intended to qualify under Section 401(a) or 501(c)(9) of the Code has received a
favorable determination or approval letter from the Internal Revenue Service
regarding its qualification under such section and no event has occurred which
cause any such plan to lose its qualification.]

         2.12 INTELLECTUAL PROPERTY RIGHTS. The Company and its subsidiaries own
or possess the requisite rights or licenses to use all trademarks, trade names,
service marks, service mark registrations, service names, patents, patent
rights, copyrights, inventions, licenses, approvals, governmental
authorizations, trade secrets and rights (collectively "Intellectual Property
Rights") necessary to conduct their respective businesses as now conducted and
as proposed to be conducted through the fiscal year ending August 31, 2002.
Except as set forth on Schedule 2.12, none of the Intellectual Property Rights
or other intellectual property rights have expired or terminated, or are
expected to expire or terminate on or before August 31, 2002. The Company and
its subsidiaries do not have any knowledge of any event, fact or circumstance
relating to (i) any infringement by the Company or its subsidiaries of any
trademarks, trade names, service



                                       5
   6


marks, service mark registrations, service names, patents, patent rights,
copyrights, inventions, licenses, approvals, governmental authorizations, trade
secrets or other similar rights of others, or (ii) any person or entity now
infringing any Intellectual Property Rights or other similar rights, or (iii)
any person or entity now infringing any Intellectual Property Rights or other
similar rights, except for such infringements that would not result in a
Material Adverse Effect. There is no claim, action or proceeding being made or
brought against, or to the Company's knowledge, being threatened against, the
Company or its subsidiaries regarding any trademarks, trade names, service
marks, service mark registrations, service names, patents, patent rights,
copyrights, inventions, licenses, approvals, governmental authorizations, trade
secrets or other similar rights of others. The Company and its subsidiaries have
taken reasonable security measures to protect the secrecy, confidentiality and
value of all of their Intellectual Property Rights.

         2.13 ENVIRONMENTAL LAWS.

         (a)      To the knowledge of the Company, it and its subsidiaries (1)
                  are in compliance with any and all Environmental Laws, (2)
                  have received all permits, licenses or other approvals
                  required of them under applicable Environmental Laws to
                  conduct their respective businesses, and (3) are in compliance
                  with all terms and conditions of any such permit, license or
                  approval, except in each case where the failure would not have
                  a Material Adverse Effect. To the knowledge of the Company,
                  with respect to the Company (A) there are no past or present
                  releases of any Hazardous Materials into the environment,
                  actions, activities, circumstances, conditions, events,
                  incidents, or contractual obligations which may give rise to
                  any common law environmental liability or any liability under
                  any Environmental Law in any material respect and (B) 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
                  in each case 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 knowledge of the
                  Company, 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




                                       6
   7


                  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 knowledge of the Company, 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 law.

         2.14 REGULATORY PERMITS; COMPLIANCE. The Company possesses 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 "Company Permits"), except where the failure to obtain a
Company Permit will not have a Material Adverse Effect. There is no action
pending, or to the knowledge of the Company, threatened regarding the suspension
or cancellation of any of the Company Permits. The Company is not in conflict
with, or in default or violation of, any of the Company Permits except where
such violation would not have a Material Adverse Effect. The Company has not
received any notification with respect to possible conflicts, defaults, or
violations of applicable laws.

         2.15 INVESTMENT COMPANY STATUS. The Company is not and upon
consummation of the sale of the Common Stock 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.

         2.16 ACCURACY OF INFORMATION. The information that has been furnished
to the Investors is true and correct and accurate in all material respects as of
the date hereof except for financial data that is accurate as of the date shown
therein, and the Company has not omitted to state any material fact necessary in
order to make the statements made herein or therein, in light of the
circumstances under which they were made, not misleading. 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

         2.17 LABOR DISTURBANCES. No labor disturbance by the employees of the
Company exists, or to the knowledge of the Company, is imminent which could
reasonably be expected to have a material adverse effect on the conduct of the
business, operations, financial condition, or income of the Company.

         2.18 INTERNAL ACCOUNTING CONTROLS. The Company maintains a system of
internal accounting controls sufficient to provide reasonable assurances that:
(i) 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; (ii) transactions are
executed in accordance with management's general or specific authorization;
(iii) access to assets is available only if permitted in accordance with
management's general or specific authorization; and (iv) the recorded
accountability for amounts is compared with



                                       7
   8


existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.

         2.19 S-3 REGISTRATION. The Company is currently eligible to register
secondary offerings of securities, including the resale of the Shares, on a
registration statement on Form S-3 under the 1933 Act.

         2.20 USE OF PROCEEDS. The proceeds received from the sale of the Shares
shall be used for general business purposes of the Company. Except as set forth
in Schedule 2.20, no compensation is payable in connection with the sale of the
Shares.

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, 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 an Investor is a party, when executed and delivered
by the Investor and the Company, will constitute valid and legally binding
obligations of the Investor, enforceable against the Investor in accordance with
their 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 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 is a
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



                                       8
   9


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 Investor understands that nothing in this Agreement or any
other materials presented to Investor in connection with the purchase and sale
of the Shares constitutes legal, tax or investment advice. The Investor has
consulted such legal, tax and investment advisors as such Investor, in its sole
discretion, has deemed necessary or appropriate.

         3.4 INVESTMENT PURPOSE. The Investor is acquiring the 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 have not been registered under the Securities Act of
1933, as amended (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 such Investor's representations as expressed herein. The Investor
understands that the 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 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 except in compliance with the 1933 Act, applicable state securities laws
and the respective rules and regulations thereunder.

         3.5 ACCESS TO DATA. The Investor and its representatives have been
afforded access to corporate books, financial statements, records, contracts,
documents and other information concerning the Company (to the extent such
exists), and to its offices and facilities, have been afforded an opportunity to
ask such questions of the Company's officers, employees, agents, accountants and
representatives concerning the Company's existing and proposed business,
operations, financial condition, assets, liabilities and other relevant matters
as they have deemed necessary or desirable, and have been given all such
information as has been requested, 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 in Section 2 hereof.

         3.6 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.

         3.7 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.




                                       9
   10


         3.8 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 under
Section 13(d)(3) of the Securities Exchange act of 1934.

         3.9 RESTRICTIVE LEGENDS. The Investors agree that, so long as the
Shares remain restricted securities, the Company shall place a restrictive
legend on the certificate(s) representing the 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."

         3.10 TRANSACTIONS IN COMMON STOCK. Investor has not, during the 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.

         3.11 NO GENERAL SOLICITATION. Investor did not learn of the investment
in the Common Stock as a result of any public advertising or general
solicitation.

4. REGISTRATION RIGHTS AND TERMINATION EVENTS

         4.1 REGISTRATION RIGHTS. The Shares shall have the registration rights
set forth in the Registration Rights Agreement, substantially in the form as set
forth in Exhibit B attached hereto.

         4.2 TERMINATION EVENTS. Upon the declaration of a Termination Event (as
defined the Registration Rights Agreement, Investors will have the right for 30
days, to put the Shares acquired pursuant to this Agreement back to the Company
at 125% of the aggregate Purchase Price. If the Investors exercise such right,
the Company will make payment to the Investors within ten days, upon delivery of
the Shares.

5. CLOSING CONDITIONS.

         5.1 CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. The Company's
obligation to sell and deliver the Shares to the Investors shall, unless waived
by the 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.




                                       10
   11


         (b)      Each Investor shall have delivered to the Company the 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 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 and each other Investor shall have executed this
                  Agreement and the Registration Rights Agreement and any other
                  transaction document (to the extent a party thereto) 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 C attached hereto, which
                  shall be addressed to Investors and dated as of the Closing
                  Date.

         (d)      The Shares shall have been listed and authorized for trading
                  on The Nasdaq Stock Market.

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

                  (1)      An Officer's Certificate, executed by the Company's
                           Chairman and 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;




                                       11
   12


                  (2)      Certified copies of the resolutions duly adopted by
                           the Company's Board of Directors authorizing the
                           execution, delivery and performance of this
                           Agreement, the Common Stock and each of the other
                           agreements contemplated hereby, the issuance and sale
                           of the Common Stock, and all other transactions
                           contemplated by this Agreement;

                  (3)      Copies of all third party and governmental consents,
                           approvals and filings required in connection with the
                           consummation of the transactions hereunder
                           (including, without limitation, all blue sky law
                           filings and waivers of all preemptive rights and
                           rights of first refusal, if any);

                  (4)      The legal opinion referred to in Section 5.2(c)
                           hereof;

                  (5)      Certificates representing the Shares as described in
                           Section 1 hereof; and

                  (6)      Such other documents relating to the transactions
                           contemplated by this Agreement as the Investors may
                           reasonably request not less than two (2) business
                           days before the Closing.

         Any condition specified in this Section 5.2 may be waived with respect
to the Investors only if consented to in writing by the Investors granting such
waiver. In furtherance of the foregoing, if the Company does not satisfy all of
the conditions set forth in this Section 5.2, the Investors will nevertheless
have the option to purchase the Shares at the Closing.

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 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 Shares held by such Investor 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 said shares of capital stock, and securities of
any type whatsoever that are, or may become, convertible into said shares of
capital stock. Notwithstanding the foregoing, "New Securities" does not include
(i) securities offered in an underwritten public offering pursuant to a
registration statement under the 1933 Act, (ii) 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 (x) provided bona fide



                                       12
   13


services to the Company not in connection with the offer or sale of securities
in a capital raising transaction and (y) 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, (iii) 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, (vi) stock issued pursuant to any private
placement completed on substantially similar terms or within 45 days of the
Closing Date, or (vii) stock issued in connection with any merger or acquisition
by the Company.

         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 said 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 said 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. The Company and each of the Investors shall bear its own
expenses in connection with the transactions contemplated by this Agreement,
except that the Company shall reimburse the Investors for out-of-pocket
expenses, including legal fees and due diligence expenses, not to exceed $50,000
in the aggregate.




                                       13
   14


         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.

         7.5 ENTIRE AGREEMENT. This Agreement, including the Exhibits hereto,
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, 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. 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 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.




                                       14
   15


         with copy to:

                  Thomas G. Lovett, IV, Esq.
                  Lindquist & Vennum P.L.L.P.
                  4200 IDS Center
                  80 South 8th Street
                  Minneapolis, MN  55402
                  Fax:  612-371-3207

         and a copy to:

                  Patricia Bartholomew, Esq.
                  ThinkEquity Partners, LLC
                  222 South Ninth Street, Suite 2800
                  Minneapolis, Minnesota  55402
                  Fax:  612-692-8250

         if to the Company:

                  HEI, Inc.
                  P.O. Box 5000
                  1495 Steiger Lake Lane
                  Victoria, MN  55386
                  Attention:  Patrick Cockrell, Esq.
                  Fax:  952-443-2668

         with copy to:

                  Mark D. Williamson, Esq.
                  Gray, Plant, Mooty, Mooty & Bennett, P.A.
                  3400 City Center
                  33 South Sixth Street
                  Minneapolis, MN 55402
                  Fax: 612-333-0066

         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.




                                       15
   16


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


                                       HEI, INC.


                                       By:
                                          --------------------------------------
                                          Name:
                                          Title:



                             INVESTOR EXECUTION PAGE


                                       INVESTOR SIGNATURE


                                       -----------------------------------------
                                       Investor (Signature)


                                       -----------------------------------------
                                       Print Name


                                       -----------------------------------------
                                       Print Name (If more than one investor)


                                       -----------------------------------------

                                       -----------------------------------------
                                       Address


                                       Dollar Amount of Investment: $
                                                                     -----------


                                       Number of Shares Subscribed:
                                                                   -------------


                                       State of Residence/Domicile:
                                                                   -------------


                                       TIN/SSN:
                                               ---------------------------------


   17


         Status as an "Accredited Investor". The Investor is an "accredited
investor" as defined in the regulations of the U.S. Securities and Exchange
Commission by virtue of meeting the criteria which have been checked below
(check all that apply):

                  ____ (i) A natural person whose individual net worth (assets
less liabilities), or joint net worth with his or her spouse, exceeds
$1,000,000.

                  ____ (ii) A natural person whose individual income was in
excess of $200,000, or whose joint income with his or her spouse was in excess
of $300,000, each of the two most recent years, and who has a reasonable
expectation of reaching the same income level for the current year.

                  ____ (iii) A bank, insurance company, registered investment
company, business development company, small business investment company or
employee benefit plan.

                  ____ (iv) A savings and loan association, credit union, or
similar financial institution, or a registered broker or dealer.

                  ____ (v) A private business development company.

                  ____ (vi) An organization described in Section 501(c)(3) of
the Internal Revenue Code with assets in excess of $5,000,000.

                  ____ (vii) A corporation, Massachusetts or similar business
trust, or partnership with assets in excess of $5,000,000.

                  ____ (viii) A trust with assets in excess of $5,000,000.

                  ____ (ix) A director or an executive officer of the Company.

                  ____ (x) An entity in which all of the equity owners are
accredited investors.

                  ____ (xi) A self-directed IRA, Keogh, or similar plan of which
the individual directing the investments qualifies as an "accredited investor"
under one or more of items (i)-(x) above. Also check the item(s) (i)-(x) above
that applies.




                                       2

   18





Exhibits
- --------
                        
Exhibit A                  List of Investors
Exhibit B                  Form of Registration Rights Agreement
Exhibit C                  Form of Opinion of Gray, Plant, Mooty, Mooty & Bennett





Disclosure Schedules
- --------------------
                        
2.3                        Capitalization
2.7                        No Conflicts
2.8                        Litigation
2.11                       Employee Benefit Plans
2.12                       Intellectual Property Rights
2.20                       Compensation Payable in Connection with Sale of Shares





   19


                                    EXHIBIT A
                                LIST OF INVESTORS




Investor Name and Address                       Closing ($)           Shares (#)           State of Domicile
- -------------------------                       -----------           ----------           -----------------
                                                                                  
RS Diversified Growth Fund                       $3,500,000              500,000              California
388 Market Street, Suite 200
San Francisco, California  94111

RS Smaller Company Growth Fund                     $700,000              100,000              California
388 Market Street, Suite 200
San Francisco, California  94111

The Paisley Fund, L.P.                             $490,000               70,000              California
388 Market Street, Suite 200
San Francisco, California  94111

RS Paisley Pacific Master
Fund Unit Trust                                    $980,000              140,000              California
388 Market Street, Suite 200
San Francisco, California  94111

Constable Capital LLC                              $980,000              140,000               Minnesota
19455 Cedarhurst
Deephaven, Minnesota  55391


INVESTOR REPRESENTATION WITH RESPECT TO SECTION 3.7

         Each Investor hereby represent 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 under Section 13(d)(3) of the Securities Exchange Act of 1934, except
as follows: RS Diversified Growth Fund, RS Smaller Company Growth Fund, The
Paisley Fund, L.P. and RS Paisley Pacific Master Fund Unit Trust are under
common control.



   20


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


                                       HEI, INC.


                                       By:  /s/ Anthony J. Fant
                                           -------------------------------------
                                           Name:  Anthony J. Fant
                                           Title: CEO

   21


                                   ACCEPTANCE

         The undersigned hereby accepts the terms and conditions set forth in
the Stock Purchase Agreement, dated August 29, 2001, among HEI, Inc., a
Minnesota corporation (the "Company") and certain Purchasers listed on Schedule
1 thereto. By execution of this Acceptance, the undersigned hereby acknowledges
the indemnification obligations contained in Section 2.6 of the Stock Purchase
Agreement.


                                       PURCHASER:


                                       The Paisley Fund

                                       By: /s/ John L. Wallace
                                          --------------------------------------
                                          Name:  John L. Wallace
                                          Title: Portfolio Manager


                                       PURCHASER:


                                       RS Paisley Pacific Master Fund Unit Trust

                                       By: /s/ John L. Wallace
                                          --------------------------------------
                                          Name:  John L. Wallace
                                          Title: Portfolio Manager


                                       PURCHASER:


                                       RS Diversified Growth

                                       By: /s/ John L. Wallace
                                          --------------------------------------
                                          Name:  John L. Wallace
                                          Title: Portfolio Manager


                                       PURCHASER:


                                       Constable, LLC

                                       By: /s/ Donald W. Constable
                                          --------------------------------------
                                          Name:  Donald W. Constable
                                          Title: CEO


                                       PURCHASER:


                                       RS Smaller Company Growth Fund

                                       By: /s/ William Wolfenden III
                                          --------------------------------------
                                          Name:  William Wolfenden III
                                          Title: Principal

   22


                                   ACCEPTANCE

         The undersigned hereby accepts the terms and conditions set forth in
the Stock Purchase Agreement, dated August 29, 2001, among HEI, Inc., a
Minnesota corporation (the "Company") and certain Purchasers listed on Schedule
1 thereto. By execution of this Acceptance, the undersigned hereby acknowledges
the indemnification obligations contained in Section 2.6 of the Stock Purchase
Agreement.


                                       AGENT:


                                       THINKEQUITY PARTNERS, LLC


                                       /s/ Patricia Bartholomew
                                       -----------------------------------------
                                       By: Patricia Bartholomew
                                       Title: General Counsel

   23


                                    EXHIBIT C

                                [FORM OF OPINION]



   24


                      SCHEDULES TO STOCK PURCHASE AGREEMENT

EX-99.3

   1
                                                                    EXHIBIT 99.3

                          REGISTRATION RIGHTS AGREEMENT


         This Registration Rights Agreement (the "Agreement") is made and
entered into as of August 29, 2001, among HEI, Inc., a Minnesota corporation
(the "Company"), the individuals and entities listed on Schedule 1 hereto (each
a "Purchaser" and, collectively, the "Purchasers"), and ThinkEquity Partners,
LLC, a Delaware limited liability company (the "Agent").

                                    RECITALS:

         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 of the Company's Common Stock (defined below)
(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 Common
Stock;

         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's Warrant" means the warrant issued to the Agent in connection
with the closing of the transactions contemplated by the Stock 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-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 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.




   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 Common Stock issued pursuant to the
Purchase Agreement 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 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 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, and the
rules and regulations promulgated thereunder.

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

         "Termination Event" means that (a) prior to the Registration Statement
being declared effective, either (i) the Common Stock is suspended from trading
for 5 or more consecutive trading days, or (ii) the Common Stock is no longer
listed on Nasdaq, AMEX, or NYSE, or (b) the Registration Statement has not been
declared effective within 180 days of Closing, and such



                                       2
   3


holdup is not due to backlog or other delay at or by the SEC unrelated to any
action or inaction by the Company.

                                    ARTICLE 2
                               REGISTRATION RIGHTS

         2.1 REQUIRED REGISTRATIONS.

                  (a) The Company shall, within 30 days of the Closing Date 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. In the event that the Registration
         Statement is not declared effective within 90 days of the date of the
         Closing, and such holdup is not due to backlog or other delay at or by
         the SEC unrelated to any action or inaction by the Company, the Company
         shall, on the 120th day following the Closing and each 30th day
         thereafter, pay to each of the Purchasers, in cash or Common Stock (at
         the option of the Company), their ratable portion of 1% of the
         aggregate Purchase Price paid for the Common Stock, until the Common
         Stock is either registered or there has occurred a Termination Event.

                  (b) The Registration Statement shall be on Form S-3 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, except to the extent the Company may be
         obligated to include additional securities pursuant to that certain
         Registration Rights Agreement, dated as of March 3, 2000, among the
         Company and the Selling Shareholders identified therein. The Company
         shall use its best efforts to keep the Registration Statement
         continuously effective under the Securities Act until the date which is
         five (5) 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).

         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 the 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:




                                       3
   4


                  (a) 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) 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 twenty (20) 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. Each Holder participating in such underwriting shall also
         enter into and perform its obligations under such an agreement.

                  (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,



                                       4
   5


         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 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), other than as it relates to Section 2.6
herein.

         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 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; 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 written information furnished expressly for use in
         connection with such registration by such Holder, partner, officer,
         director, or controlling person of such Holder.




                                       5
   6


                  (b) Each selling Holder 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"): (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 statements therein not misleading, or
         (iii) any violation or alleged violation by the Holder 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, in each case to the extent (and only to
         the extent) that such Holder Violation occurs in reliance upon and in
         conformity with written information furnished by such Holder and stated
         to be specifically for use in connection with such registration; and
         each such 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; 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 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 by such Holder unless the Holder Violation is the
         result of fraud on the part of such 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,



                                       6
   7


         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.

                  (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 the 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 survive the termination of any offering in a
         Registration Statement, and otherwise.




                                       7
   8


                                    ARTICLE 3
                                OTHER PROVISIONS

         3.1 COMPLETE AGREEMENT. This Agreement 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 Agent to:

                  Patricia Bartholomew, Esq.
                  ThinkEquity Partners
                  222 South Ninth Street, Suite 2800
                  Minneapolis, Minnesota  55402
                  Fax:  612-692-8250

         with copy to:

                  Thomas G. Lovett, IV, Esq.
                  Lindquist & Vennum P.L.L.P.
                  4200 IDS Center
                  80 South 8th Street
                  Minneapolis, MN  55402
                  Fax:  612-371-3207

         if to the Company to:

                  HEI, Inc.
                  P.O. Box 5000
                  1495 Steiger Lake Lane
                  Victoria, MN  55386
                  Attention: Patrick Cockrell, Esq.
                  Fax:  952-443-2668




                                       8
   9


         with copy to:

                  Mark D. Williamson, Esq.
                  Gray, Plant, Mooty, Mooty & Bennett, P.A.
                  3400 City Center
                  33 South Sixth Street
                  Minneapolis, MN 55402
                  Fax: 612-333-0066

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 ASSIGNMENT AND TRANSFER. The rights to have the Company register
Registrable Securities pursuant to this Agreement shall be automatically
assignable by the Purchasers to any Person (a "Transferee") of all or any
portion of Registrable Securities if: (i) the Purchaser agrees in writing with
the Transferee to assign such rights, and a copy of such agreement is furnished
to the Company within a reasonable time after such assignment; (ii) the Company
is, within a reasonable time after such transfer or assignment, furnished with
written notice of (a) the name and address of such Transferee, and (b) the
securities with respect to which such registration rights are being transferred
or assigned; (iii) immediately following such transfer or assignment the further
disposition of such securities by the Transferee is restricted under the 1933
Act and applicable state securities laws; (iv) at or before the time the Company
receives the written notice contemplated by clause (ii) of this sentence the
Transferee agrees in writing with the Company to be bound by all of the
provisions contained herein; and (v) such Transferee shall be an "accredited
investor" as that term is defined in Rule 501 of Regulation D promulgated under
the 1933 Act.

         3.5 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.

         3.6 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.

         3.7 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.




                                       9
   10


         3.8 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.




                                       10
   11


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


                                       HEI, INC.


                                       By:  /s/ Anthony J. Fant
                                           -------------------------------------
                                           Name:  Anthony J. Fant
                                           Title: CEO
   12


                                   ACCEPTANCE

         The undersigned hereby accepts the terms and conditions set forth in
the Registration Rights Agreement, dated August 29, 2001, among HEI, Inc., a
Minnesota corporation (the "Company") and certain Purchasers listed on Schedule
1 thereto. By execution of this Acceptance, the undersigned hereby acknowledges
the indemnification obligations contained in Section 2.6 of the Registration
Rights Agreement.


                                       PURCHASER:


                                       The Paisley Fund

                                       By: /s/ John L. Wallace
                                          --------------------------------------
                                          Name:  John L. Wallace
                                          Title: Portfolio Manager


                                       PURCHASER:


                                       RS Paisley Pacific Master Fund Unit Trust

                                       By: /s/ John L. Wallace
                                          --------------------------------------
                                          Name:  John L. Wallace
                                          Title: Portfolio Manager


                                       PURCHASER:


                                       RS Diversified Growth

                                       By: /s/ John L. Wallace
                                          --------------------------------------
                                          Name:  John L. Wallace
                                          Title: Portfolio Manager


                                       PURCHASER:


                                       Constable, LLC

                                       By: /s/ Donald W. Constable
                                          --------------------------------------
                                          Name:  Donald W. Constable
                                          Title: CEO


                                       PURCHASER:


                                       RS Smaller Company Growth Fund

                                       By: /s/ William Wolfenden III
                                          --------------------------------------
                                          Name:  William Wolfenden III
                                          Title: Principal
   13


                                   ACCEPTANCE

         The undersigned hereby accepts the terms and conditions set forth in
the Registration Rights Agreement, dated August 29, 2001, among HEI, Inc., a
Minnesota corporation (the "Company") and certain Purchasers listed on Schedule
1 thereto. By execution of this Acceptance, the undersigned hereby acknowledges
the indemnification obligations contained in Section 2.6 of the Registration
Rights Agreement.


                                       AGENT:


                                       THINKEQUITY PARTNERS, LLC

                                       /s/ Patricia Bartholomew
                                       -----------------------------------------
                                       By: Patricia Bartholomew
                                       Title: General Counsel

   14


                                   SCHEDULE 1

                             SCHEDULE OF PURCHASERS






                                            PURCHASER ADDRESS AND
       PURCHASER NAME                          FACSIMILE NUMBER
       --------------                       ---------------------
                                     
RS Diversified Growth Fund              388 Market Street, Suite 200
                                        San Francisco, CA  94111

RS Smaller Company                      388 Market Street, Suite 200
Growth Fund                             San Francisco, CA  94111

The Paisley Fund, L.P.                  388 Market Street, Suite 200
                                        San Francisco, CA  94111

RS Paisley Pacific Master               388 Market Street, Suite 200
Fund Unit Trust                         San Francisco, CA  94111

Constable Capital LLC                   19455 Cedarhurst
                                        Deephaven, MN  55391