Prospectus

This Prospectus relates to 1,352,200 shares of common stock of HEI, Inc., and 47,500 shares of common stock of HEI, Inc., issuable upon the exercise of warrants, which may be offered from time to time by the selling shareholders named in this Prospectus. We will not receive any of the proceeds from the offer and sale of the shares. Rather, the selling shareholders will receive all of the net proceeds from any sale of the common stock. We did, however, receive gross proceeds, excluding transaction costs of approximately $430,200, in the amount of $6,650,000 on August 29, 2001 from the sale of 950,000 shares of common stock of HEI, Inc. in a private placement to some of the selling shareholders named in this Prospectus. After this private placement, an aggregate of 5,956,460 shares of common stock were outstanding.

We have been advised that the selling shareholders may from time to time sell the common stock to or through brokers or dealers in one or more transactions, in the Nasdaq National Market or other over-the-counter market or otherwise, at market prices prevailing at the time of sale, at prices relating to prevailing prices, or at negotiated prices.

Our common stock is listed on the Nasdaq National Market under the symbol HEII. On December 14, 2001, the closing sales price of our common stock as reported by the Nasdaq National Market was $6.70.

Investing in our common stock involves certain risks. See “Risk Factors” beginning on page 4 of this Prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this Prospectus. Any representation to the contrary is a criminal offense.

The following summary is qualified by, and should be read in conjunction with, the more detailed information included in this Prospectus and the documents incorporated by reference into this Prospectus.

HEI, Inc. (Nasdaq: HEII) (“HEI”) is a designer and manufacturer of a variety of ultraminiature microelectronic devices. Examples include hearing-aid circuits and components that make up other types of electronic devices, such as those used in the telecommunications industry. We also design and manufacture the circuit boards upon which these components are assembled and or placed. Examples of circuit board fabricated by us are: the amber-colored flexible circuit boards found in cameras and radios, the thin ceramic circuit boards used in hearing-aids and heart pacemakers, and the stiff, laminate boards found in stereo systems and cellular telephones. We also specialize in the attachment of the bare chips or “die,” resisters, capacitors, battery connectors and micro electronic switches to these circuit boards. Our specialized attachment techniques include “chip-and-wire” and “flip-chip” processes. Chip-and-wire is a process in which very thin gold or aluminum wires are used to connect the chips to the circuit board. Flip-chip is a process in which tiny bumps of gold or solder are attached to the chip, with the chip then being flipped upside down and attached directly to the circuit board.

Our newest technology allows us to manufacture miniature packages that are specially designed to hold and protect high frequency chips for broadband communications. This package with the enclosed chip or IC may then easily and inexpensively be attached to the circuit board without degrading the high-frequency performance of the chip. These packages, and the high-frequency chips that they contain, are specifically designed for applications in high-speed optical communication devices — the individual parts of the fiber-optic telecommunications network that companies and individuals use to transmit data, voice, and video across both short as well as very long distances. They are also used in wireless communication devices similar to home satellite dish systems, or wireless local area networks that allow computers to communicate with each other without having to be connected with wires. Another example of our technology is the way we build the driver amplifiers for 10 and 40 gigabit per second fiber optic transceivers. The fiber-optic telecommunications networks that are used today rely on devices that “pump” the signals down the fiber-optic “pipeline”. The speed that the information can travel is measured in gigabits per second. As our society requires more and more information to pass down these fiber-optic pipelines, it is necessary to have faster and faster transmission speeds. Our 10 and 40 gigabit per second driver modules represent high-speed amplifiers that are both high-performance and can be manufactured at costs we believe are significantly lower than our competitors.

We have three separate facilities at which we design and manufacture our products. Each facility is a registered ISO 9001 quality system. Our facilities are located in the following places:


	•	Corporate headquarters and manufacturing facilities

	•	Microelectronics Design and Assembly Services


	•	Fast turn, medium-to-large production orders of high tech circuit boards

	•	Multilayer flex and rigid flex

	•	Thin core processing

We are incorporated under the laws of the State of Minnesota. Our executive offices are located at 1495 Steiger Lake Lane, Victoria, Minnesota 55386, telephone number (952) 443-2500. Our website address is www.heii.com.

Some of the statements made in this Prospectus and the documents incorporated by reference in this Prospectus under the captions “HEI, Inc.” and “Risk Factors” and elsewhere in this Prospectus constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to the safe harbor provisions of the reform act. Forward-looking statements may be identified by the use of the terminology such as may, will, expect, anticipate, intend, believe, estimate, should, or continue or the negatives of these terms or other variations on these words or comparable terminology. To the extent that this Prospectus contains forward-looking statements regarding the financial condition, operating results, business prospects or any other aspect of HEI, you should be aware that our actual financial condition, operating results and business performance may differ materially from that projected or estimated by us in the forward-looking statements. We have attempted to identify, in context, some of the factors that we currently believe may cause actual future experience and results to differ from their current expectations. These differences may be caused by a variety of factors, including but not limited to adverse economic conditions, intense competition, including entry of new competitors, ability to obtain sufficient financing to support our operations, progress in research and development activities, variations in costs that are beyond our control, adverse federal, state and local government regulation, unexpected costs, lower sales and net income, or higher net losses than forecasted, price increases for equipment, inability to raise prices, failure to obtain new customers, the possible fluctuation and volatility of our operating results and financial condition, inability to carry out marketing and sales plans, loss of key executives, and other specific risks that may be alluded to in this Prospectus.

An investment in shares of our common stock involves a high degree of risk. Prospective investors should carefully consider the following risks and speculative factors set forth below prior to a purchase of shares of common stock.

If we are unable to develop new products and services our revenue could decrease. Our products are subject to rapid obsolescence and our future success will depend upon our ability to develop new products and services that meet changing customer and marketplace requirements. Our products are based upon specifications from our customers. We may not be able to satisfactorily design and manufacture customer products based upon these specifications.

If we fail to properly anticipate the market for new products and service we may lose revenue. Even if we are able to successfully identify, develop and manufacture, as well as introduce new products and services, there is no assurance that a market for these products and services will materialize to the size and extent that we anticipate. If a market does not materialize as we anticipate, our business, operating results and financial condition could be materially adversely affected. The following factors could affect the success of our products and services in the microelectronic and other marketplaces:


	•	the failure to adequately equip our manufacturing plant in anticipation of increasing business;

	•	the failure of our design team to develop products in a timely manner to satisfy our present and potential customers; or;

	•	our limited experience in specific market segments in marketing our products and services specifically in the telecom industry.

We may fail to adequately adjust our expenses to predicted revenue in any given period or we may experience significant fluctuations in quarterly revenue because the sales cycle for our products and services is lengthy and unpredictable. While our sales cycle varies from customer to customer, it typically has ranged from two to 12 months. Our pursuit of sales leads typically involves an analysis of our prospective customer’s needs, preparation of a written proposal, one or more presentations and contract negotiations. Our sales cycle may also be affected by the complexity of the product to be developed and manufactured as well as a prospective customer’s budgetary constraints and internal acceptance reviews, over which we have little or no control. As a result of these things combined with the fact that our expenses are fixed, we may fail to adequately adjust our expenses to predicted revenue in any given period or we may experience significant fluctuations in quarterly revenue.

Our business may suffer and cause our stock price to decline if we are unable to protect our intellectual property rights. Intellectual property rights are important to our success and our competitive position. It is our policy to protect all proprietary information through the use of a combination of nondisclosure agreements and other contractual provisions and patent, trademark, trade secret and copyright law to protect our intellectual property rights. There is no assurance that these agreements, provisions and laws will be adequate to prevent the imitation or unauthorized use of our intellectual property. Policing unauthorized use of proprietary systems and products is difficult and, while we are unable to determine the extent to which infringement of our intellectual property exists, we expect infringement to be a persistent problem. In addition, the laws of some foreign countries do not protect our products to the same extent that the laws of the United States protect our products. If our intellectual property rights are not protected our business may suffer if a competitor uses our technology to capture our business, which could cause our stock price to decline. Furthermore, even if the agreements, provisions and intellectual property laws prove to be adequate to protect our intellectual property rights, our competitors may develop products or technologies that are both non-infringing and substantially equivalent or superior to our products or technologies.

Third-party intellectual property infringement claims may be costly and may prevent the future sale of our products. Substantial litigation and threats of litigation regarding intellectual property rights exist in our industry. Third parties may claim that our products infringe upon their intellectual property rights. In particular, defending against third-party infringement claims may be costly and divert important management

resources. Furthermore, if these claims are successful, we may have to pay substantial royalties or damages, remove the infringing products from the marketplace or expend substantial amounts in order to modify the products so that they no longer infringe on the third party’s rights.

We may pursue future acquisitions and investments that may adversely affect our financial position or cause our earnings per share to decline. In the future we may continue to make acquisitions of and investments in businesses, products and technologies that could complement or expand our business. Such acquisitions, though, involve certain risks:


	•	We may not be able to negotiate or finance the acquisition successfully.

	•	The integration of acquired businesses, products or technologies into our existing business may fail.

	•	We may issue equity securities, incur debt, assume contingent liabilities or have amortization expenses and write-downs of acquired assets, which could cause our earnings per share to decline.

If our customers are unable to gain market acceptance for the products that we develop or manufacture for them we may lose revenue. We design and manufacture components for other companies. We also sell proprietary products that contain components to other companies and end-user customers. For products we manufacture (manufactured for others or those we sell directly), our success is dependent on the acceptance of those products in their markets. We have no control over the products or marketing of products which we sell to our customers. Market acceptance may depend on a variety of factors, including educating the target market regarding the use of a new procedure. Market acceptance and market share are also affected by the timing of market introduction of competitive products. Some of our customers, especially emerging growth companies, have limited or no experience in marketing their products and may be unable to establish effective sales and marketing and distribution channels to rapidly and successfully commercialize their products. If our customers are unable to gain any significant market acceptance for the products we develop or manufacture for them, our business will be adversely affected.

If we fail to comply with environmental laws and regulations we may be fined and prohibited from manufacturing products. As a small generator of hazardous substances, we are subject to local governmental regulations relating to the storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances, such as waste oil, acetone and alcohol, that are used in very small quantities to manufacture our products. While we are currently in compliance with applicable regulations, if we fail to comply with these regulations substantial fines could be imposed on us and we could be required to suspend production, alter manufacturing processes or cease operations.

If the products we design and manufacture are the subject of product recalls or a product liability claim, we may lose revenue, our business reputation may be damaged and we may incur significant legal fees. A number of the components we design or manufacture are for medical devices. The tolerance for error in the design, manufacture or use of these products may be small or nonexistent. If a component we designed or manufactured is found to be defective, whether due to design or manufacturing defects, to improper use of the product or to other reasons, the component or the product in which it is used may need to be recalled, possibly at our expense. Furthermore, the adverse effect of a product recall on our business might not be limited to the cost of the recall. Recalls, especially if accompanied by unfavorable publicity or termination of customer contracts, could result in substantial costs, loss of revenues and damage to our reputation, each of which would have a material adverse effect on our business, operating results and financial condition.

Future quarterly and annual operating results may fluctuate substantially due to a number of factors, many of which are beyond our control, which may cause our stock price to decline. We have experienced substantial fluctuations in our annual and quarterly operating results, and such fluctuations may continue in future periods. Our operating results are affected by a number of factors, many of which are beyond our control, including the following:


	•	we may manufacture products that are custom designed and assembled for a specific customer’s requirement in anticipation of the receipt of volume production orders from that customer, which may not always materialize to the degree anticipated, if at all;


	•	we may incur significant start-up costs in the production of a particular product, which costs are expensed as incurred and for which we attempt to seek reimbursement from the customer;

	•	we may experience fluctuations and inefficiencies in managing inventories, fixed assets, components and labor, in the degree of automation used in the assembly process, in the costs of materials and the mix of materials, labor, manufacturing, and overhead costs;

	•	we may experience unforeseen design or manufacturing problems, price competition or functional competition (other means of accomplishing the same or similar packaging end result);

	•	we may be unable to pass on cost overruns;

	•	we may not have control over the timing of expenditures in anticipation of increased sales, customer product delivery requirements and the range of services provided; and

	•	we may experience variance in the amount and timing of orders placed by a customer due to a number of factors, including inventory balancing, changes in manufacturing strategy, and variation in product demand attributable to, among other things, product life cycles, competitive factors, and general economic conditions.

Any one of these factors, or a combination of one or more factors, could adversely affect the Company’s annual and quarterly operating results, which in turn may cause our stock price to decline.

We are dependent on a single industry, and adverse trends in that industry may reduce our revenues. During the past several years, we have been significantly dependent on a single market. In fiscal 2001, 61% of our revenues came from sales to hearing instrument and medical manufacturers. These industries are characterized by intense competition, relatively short product life cycles, rapid technological change, significant fluctuations in product demand and significant pressure on vendors to reduce or minimize cost. Accordingly, we may be adversely affected by these industry trends to the extent that they reduce our revenues. In particular, if the hearing instrument manufacturers develop new technologies that do not incorporate our products, or if our competitors offer similar products at a lower cost to such manufacturers, our revenues may decrease and our business would be adversely affected.

Although we are attempting to reduce our dependence on a single industry, we do not expect this historic dependence to change dramatically or quickly. Moreover, a significant amount of our non-hearing instrument industry sales are made in the medical products industry, which is characterized by trends similar to those in the hearing instrument manufacturer industry.

Our customer base is highly concentrated and the loss of a key customer may reduce our operating results and financial condition. Our customer base is highly concentrated. In fiscal 2001, 2000 and 1999, our two largest customers, Siemens AG and Sonic Innovations, Inc., in the aggregate accounted for 51%, 57% and 65%, respectively, of net sales. Each of these customers has multiple programs in production with us. Although we are reducing this concentration, we expect that sales to a relatively small number of original equipment manufacturers will continue to account for a substantial portion of net revenues for the foreseeable future. The loss of, or a decline in orders from, any one of our key customers would materially adversely affect our operating results and financial condition. We are working for diversification such that no one market would account for 40% or more in revenue, no one customer at 10% or greater revenue and no one program at 25% or greater.

We may lose business and revenues if we fail to successfully compete with our customers for business. We face competition from the internal operations of our current and potential original equipment manufacturer customers and from offshore contract manufacturers, which, because of their lower labor rates and other related factors, may enjoy a comparative advantage over us with respect to high-volume production. We expect to continue to encounter competition from other electronics manufacturers that currently provide or may begin to provide contract design and manufacturing services.

A number of our competitors may have substantially greater manufacturing, financial, technical, marketing, and other resources than we have, and may offer a broader scope and presence of operations on a

worldwide basis. Significant competitive factors in the microelectronics market include price, quality, design capabilities, responsiveness, testing capabilities, the ability to manufacture in very high volumes and proximity to the customers final assembly facilities. While we have competed favorably in the past with respect to these factors, this is a particularly fast changing market, and there can be no assurance that we will continue to do so in the future.

We are often one of two or more suppliers on any particular customer requirement and are, therefore, subject to continuing competition on existing programs. In order to remain competitive in any of our markets, we must continually provide timely and technologically advanced design capabilities and manufacturing services, ensure the quality of our products, and compete favorably with respect to turnaround and price. If we fail to compete favorably with respect to the principal competitive factors in the markets we serve, we may lose business and our operating results may be reduced.

Fluctuations in the price and supply of components used to manufacture our products may reduce our profits. Substantially all of the our manufacturing services are provided on a turnkey basis in which we, in addition to providing design, assembly and testing services, are responsible for the procurement of the components that are assembled by us for our customers. Although we attempt to minimize margin erosion as a result of component price increases, in certain circumstances we are required to bear some or all of the risk of such price fluctuations, which could adversely affect our profits. To date, we have generally been able to negotiate contracts that allow us to shift much of the impact of price fluctuations to the customer; however, there can be no assurance that we will be able to do so in all cases.

In order to assure an adequate supply of certain key components that have long procurement lead times, such as integrated circuits, we occasionally must order such components prior to receiving formal customer purchase orders for the assemblies that require such components. Failure to accurately anticipate the volume or timing of customer orders can result in component shortages or excess component inventory, which in either case could adversely affect our operating results and financial condition.

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

Our costs may increase significantly if we are unable to forecast customer orders and production schedules. The level and timing of orders placed by customers vary due to the customers’ attempts to balance their inventory, changes in customers’ manufacturing strategies, and variations in demand for the customers’ products. Due in part to these factors, most of our customers do not commit to firm production schedules more than several weeks in advance of requirements. Our inability to forecast the level of customers’ orders with certainty makes it difficult to schedule production and optimize utilization of manufacturing capacity. This uncertainty could also significantly increase our costs related to manufacturing product. In the past, we have been required to increase staffing and incur other expenses in order to meet the anticipated demands of our customers. From time to time, anticipated orders from some of our customers have failed to materialize and delivery schedules have been deferred as a result of changes in a customer’s business needs, both of which have adversely affected our operating results. On other occasions, customers have required rapid increases in production that have placed an excessive burden on our resources. There can be no assurance that we will not experience similar fluctuations in customer demand in the future.

We may have a significant accounts receivable write-off and well as an increase in inventory reserve due to the inability of our customers to pay their accounts. We may carry significant accounts receivable and inventory in connection with providing manufacturing services to our customers. If one or more of our

principal customers were to become insolvent, or otherwise fail to pay for the services and materials provided by us, our operating results and financial condition would be adversely affected.

Our business success may be adversely affected by our ability to hire and retain employees. Our continued growth and success depend to a significant extent on the continued service of senior management and other key employees and the hiring of new qualified employees. We rely upon the acquisition and retention of employees with extensive technological experience. Competition for skilled business, product development, technical and other personnel is intense. There can be no assurance that we will be successful in recruiting new personnel and retaining existing personnel. None of our employees are subject to a long-term employment agreement, although several key employees are subject to non-competition agreements. The loss of one or more key employees may materially adversely affect our growth. We do not currently have employment contracts with any of our employees.

The price of our common stock may be adversely affected by significant price fluctuations due to a number of factors, many of which are beyond our control. The market price of our common stock has experienced significant fluctuations and may continue to fluctuate in the future. The market price of the common stock may be significantly affected by many factors, including:


	•	changes in requirements or demands for our services;

	•	the announcement of new products or product enhancements by us or our competitors;

	•	technological innovations by us or our competitors;

	•	quarterly variations in our or our competitors’ operating results;

	•	changes in prices of our or our competitors’ products and services;

	•	changes in our revenue and revenue growth rates;

	•	changes in earnings estimates by market analysts, speculation in the press or analyst community; and

	•	general market conditions or market conditions specific to particular industries.

The stock prices for many companies in the technology sector have experienced wide fluctuations that often have been unrelated to their operating performance. Such fluctuations may adversely affect the market price of our common stock.

Our articles of incorporation and bylaws may discourage lawsuits and other claims against our directors. Our articles of incorporation provide, to the fullest extent permitted by Minnesota law, that our directors shall have no personal liability for breaches of their fiduciary duties to us. In addition, our bylaws provide for mandatory indemnification of directors and officers to the fullest extent permitted by Minnesota law. These provisions may reduce the likelihood of derivative litigation against directors and may discourage shareholders from bringing a lawsuit against directors for a breach of their duty.

Our operating results may be reduced if we are unable to utilize our net operating loss carryforwards. We have net operating loss carryforwards for federal income tax purposes. We have not, however, provided a valuation allowance for any deferred tax assets because we believe that it is more likely than not that they will be realized. Realization of these assets is dependent on our achieving profitability levels sufficient to utilize our net operating loss carryforwards. The write-off of this asset may be required if we determine that we are unable to utilize the net operating loss carryforwards. A write-off of this asset could materially adversely affect our operating results and financial condition.

If we are unable to register certain shares of our common stock with the SEC within a specified period of time from the closing on the private placement of such stock or our stock is no longer listed on Nasdaq or is otherwise suspended from trading, we may have to pay out amounts in excess of 125% of the purchase price of such stock. On August 29, 2001, in connection with the private placement of 950,000 shares of our common stock to certain of the selling shareholders named in this Prospectus, we entered into a stock purchase agreement and a registration rights agreement. Such agreements provide that, in the event that our common stock is suspended from trading for 5 or more consecutive trading days, our common stock is no longer listed

on a national exchange or Nasdaq or such shares of common stock are not registered with the SEC pursuant to an effective registration statement within 180 days of August 29, 2001, such selling shareholders will have the right, for a 30-day period, to put the shares of common stock purchased under such agreement back to us at 125% of the aggregate purchase price paid for such shares (an aggregate amount of $8,312,500). We are unable to offer assurances that such events will not occur and the put rights will not be triggered. The occurrence of any one of these events and the triggering of the put rights may require us to pay amounts in excess of the amounts received for such shares, which may have a material adverse effect on our working capital and financial condition.

We have issued numerous options to acquire our common stock that could have a dilutive effect on our common stock. As of October 31, 2001, we had options outstanding to acquire 1,037,238 shares of our common stock, exercisable at prices ranging from $5.125 to $20.375 per share, with a weighted average exercise price of approximately $10.64 per share. During the terms of these options, the holders will have the opportunity to profit from either an increase in the market price of our common stock with resulting dilution to the holders of shares who purchased shares for a price higher than the respective exercise or conversion price. In addition, the increase in the outstanding shares of our common stock as a result of the exercise or conversion of these options could result in a significant decrease in the percentage ownership of our common stock by the purchasers of our common stock.

The market price of our common stock may be reduced by future sales of our common stock in the public market. Sales of substantial amounts of common stock in the public market that are not currently freely tradable, or even the potential for such sales, could have an adverse effect on the market price for shares of our common stock and could impair the ability of purchasers of our common stock to recoup their investment or make a profit. As of October 31, 2001, these shares consist of:


	•	approximately 1,264,631 shares owned by our executive officers and directors of our outstanding common stock; and

	•	approximately 1,037,238 shares issuable to option holders.

Unless the shares of our outstanding common stock owned by our executive officers and directors are further registered under the securities laws, they may not be resold except in compliance with Rule 144 promulgated by the SEC, or some other exemption from registration. Rule 144 does not prohibit the sale of these shares but does place conditions on their resale which must be complied with before they can be resold.

Provisions in our articles of incorporation allow us, without obtaining shareholder approval, to issue additional shares of stock that may reduce the value of the common stock or inhibit a third-party acquisition. Our articles of incorporation authorize our Board of Directors to issue up to 10,000,000 shares of common stock and 5,000,000 shares of undesignated stock, the terms of which may be determined at the time of issuance by the Board of Directors, without further action by our shareholders. Undesignated stock authorized by the Board of Directors may include voting rights, preferences as to dividends and liquidation, conversion and redemptive rights and sinking fund provisions. If the Board of Directors authorizes the issuance of preferred stock in the future, this authorization could affect the rights of the holders of our common stock, thereby reducing the value of our common stock, and could make it more difficult for a third party to acquire us, even if a majority of the holders of our common stock approved of an acquisition.

Future quarterly and annual operating results may fluctuate substantially due to a number of factors, many of which are beyond our control, which may cause us to be out of compliance with our debt covenants. We have experienced substantial fluctuations in our annual and quarterly operating results and such fluctuations may continue in future periods. Adverse operating results could result in an event of default with our bank agreement for not meeting certain financial and other restrictive covenants, such as, tangible net worth, interest coverage ratio, debt service coverage ratio and year to date net loss. Failure to meet these covenants could require us to:


	•	Immediately repay our outstanding balances;

	•	Find a new lender, which may cause us to incur costs in connection with such new lending relationship;


	•	Incur increased borrowing rates and amendment fees;

	•	Incur additional restrictions on our ability to borrow additional funds.

Any one of these factors, or a combination of one or more factors, could adversely affect our ability to borrow funds or adversely affect future operating results.

The selling shareholders are offering all of the shares to be sold under this Prospectus. We will not receive any of the proceeds from the offer and sale of the shares.

Mart Diana, Glen Zirbes and Leonard D. Hadden acquired their shares being offered under this Prospectus from us in connection with our acquisition of Cross Technology, effective as of March 6, 2000. The remaining selling shareholders acquired their shares offered under this Prospectus from us in connection with a private investment in HEI on August 29, 2001.

The selling shareholders have indicated that the shares offered by this Prospectus may be sold from time to time by them or by their pledgees, donees, transferees or other successors in interest. The following table shows as of November 9, 2001:


	•	The name of each of the selling shareholders,

	•	The number of shares of our common stock beneficially owned by each of the selling shareholders, and

	•	The number of securities offered by this Prospectus that may be sold from time to time by each of the selling shareholders.

There is no assurance that the selling shareholders will sell the shares offered by this Prospectus.


*	Represents beneficial ownership of less than 1% of the outstanding shares of our common stock.

(1)	The number of shares owned after the offering assumes the sale of all the shares of common stock offered hereby.

(2)	Includes 38,000 shares of common stock that the selling shareholder may acquire under outstanding stock options.


(3)	Includes the following shares that the selling shareholder, as part of a group formed for the purpose of acquiring, holding or disposing of securities, is a beneficial owner of: 500,000 shares of common stock held by Barnett & Co. FAO RS Diversified Growth; 100,000 shares of common stock held by Barnett & Co. FAO RS Smaller Company Growth; 140,000 shares of common stock held by RS Paisley Pacific Master Fund Unit Trust; 35,000 shares of common stock held by Nvest Star Small Cap Growth; 30,000 shares of common stock held by The Paisley Fund Common; and 8,900 shares of common stock held by London Pacific Trust Diversified Growth. The Paisley Fund, L.P., the RS Paisley Pacific Master Fund Unit Trust and The Paisley Fund Common are private investment funds managed by RS Growth Group LLC, an investment advisor registered under the Investment Advisors Act of 1940. The Barnett & Co. FAO RS Smaller Company Growth, the Barnett & Co. FAO RS Diversified Growth, the Nvest Star Small Cap Growth and London Pacific Trust Diversified Growth are publicly held investment funds registered under the Investment Company Act of 1940, that are managed by RS Investment Management, L.P., an investment advisor registered under the Investment Advisors Act of 1940.

(4)	Includes the following shares that the selling shareholder, as part of a group formed for the purpose of acquiring, holding or disposing of securities, is a beneficial owner of: 500,000 shares of common stock held by Barnett & Co. FAO RS Diversified Growth; 100,000 shares of common stock held by Barnett & Co. FAO RS Smaller Company Growth; 70,000 shares of common stock held by The Paisley Fund, L.P.; 35,000 shares of common stock held by Nvest Star Small Cap Growth; 30,000 shares of common stock held by The Paisley Fund Common; and 8,900 shares of common stock held by London Pacific Trust Diversified Growth. The Paisley Fund, L.P., the RS Paisley Pacific Master Fund Unit Trust and The Paisley Fund Common are private investment funds managed by RS Growth Group LLC, an investment advisor registered under the Investment Advisors Act of 1940. The Barnett & Co. FAO RS Smaller Company Growth, the Barnett & Co. FAO RS Diversified Growth, the Nvest Star Small Cap Growth and London Pacific Trust Diversified Growth are publicly held investment funds registered under the Investment Company Act of 1940, that are managed by RS Investment Management, L.P., an investment advisor registered under the Investment Advisors Act of 1940.

(5)	Includes the following shares that the selling shareholder, as part of a group formed for the purpose of acquiring, holding or disposing of securities, is a beneficial owner of: 500,000 shares of common stock held by Barnett & Co. FAO RS Diversified Growth; 70,000 shares of common stock held by The Paisley Fund, L.P.; 140,000 shares of common stock held by RS Paisley Pacific Master Fund Unit Trust; 35,000 shares of common stock held by Nvest Star Small Cap Growth; 30,000 shares of common stock held by The Paisley Fund Common; and 8,900 shares of common stock held by London Pacific Trust Diversified Growth. The Paisley Fund, L.P., the RS Paisley Pacific Master Fund Unit Trust and The Paisley Fund Common are private investment funds managed by RS Growth Group LLC, an investment advisor registered under the Investment Advisors Act of 1940. The Barnett & Co. FAO RS Smaller Company Growth, the Barnett & Co. FAO RS Diversified Growth, the Nvest Star Small Cap Growth and London Pacific Trust Diversified Growth are publicly held investment funds registered under the Investment Company Act of 1940, that are managed by RS Investment Management, L.P., an investment advisor registered under the Investment Advisors Act of 1940.

(6)	Includes the following shares that the selling shareholder, as part of a group formed for the purpose of acquiring, holding or disposing of securities, is a beneficial owner of: 100,000 shares of common stock held by Barnett & Co. FAO RS Smaller Company Growth; 70,000 shares of common stock held by The Paisley Fund, L.P.; 140,000 shares of common stock held by RS Paisley Pacific Master Fund Unit Trust; 35,000 shares of common stock held by Nvest Star Small Cap Growth; 8,900 shares of common stock held by London Pacific Trust Diversified Growth; and 30,000 shares of common stock held by The Paisley Fund Common. The Paisley Fund, L.P., the RS Paisley Pacific Master Fund Unit Trust and The Paisley Fund Common are private investment funds managed by RS Growth Group LLC, an investment advisor registered under the Investment Advisors Act of 1940. The Barnett & Co. FAO RS Smaller Company Growth, the Barnett & Co. FAO RS Diversified Growth, the Nvest Star Small Cap Growth and London Pacific Trust Diversified Growth are publicly held investment funds registered under the Investment Company Act of 1940, that are managed by RS Investment Management, L.P., an investment advisor registered under the Investment Advisors Act of 1940.


(7)	Constable Capital, LLC’s shares are beneficially owned by Mr. Donald M. Constable, the principal interest holder and manager of Constable Capital, LLC. The general partner of Constable Capital, LLC is Constable Advisors, which is wholly owned by Mr. Constable. Mr. Constable, through Constable Advisors, has sole power to direct investments in Constable Capital, LLC.

(8)	Includes 47,500 shares of common stock that the selling shareholder, ThinkEquity Partners, LLC (“ThinkEquity”), may acquire under outstanding warrants. ThinkEquity is a registered broker-dealer whose ownership is set forth on its Form BD filed with the Securities and Exchange Commission. ThinkEquity has informed the Company that it will acquire the common stock issuable upon exercise of the outstanding warrants in the ordinary course of business and, at the time of the exercise of the option, will have no agreements or understandings, directly or indirectly, with any person to distribute such shares.

The sale of the shares offered by this Prospectus may be made in the Nasdaq National Market or other over-the-counter markets at prices and at terms then prevailing or at prices related to the then current market price or in negotiated transactions. These shares may be sold by one or more of the following:


	•	A block trade in which the broker or dealer will attempt to sell shares as agent but may position and resell a portion of the block as principal to facilitate the transaction.

	•	Purchases by a broker or dealer as principal and resale by a broker or dealer for its account using this Prospectus.

	•	Ordinary brokerage transactions and transactions in which the broker solicits purchasers.

	•	In privately negotiated transactions not involving a broker or dealer.

	•	In any method permitted pursuant to applicable law.

Each sale may be made either at market prices prevailing at the time of such sale, at negotiated prices, at fixed prices which may be changed, or at prices related to prevailing market prices.

In effecting sales, brokers or dealers engaged to sell the shares may arrange for other brokers or dealers to participate. Brokers or dealers engaged to sell the shares will receive compensation in the form of commissions or discounts in amounts to be negotiated immediately prior to each sale. These brokers or dealers and any other participating brokers or dealers may be deemed to be underwriters within the meaning of the Securities Act of 1933 in connection with these sales. We will receive no proceeds from any resales of the shares offered by this Prospectus, and we anticipate that the brokers or dealers, if any, participating in the sales of the shares will receive the usual and customary selling commissions.

In connection with distributions of the shares or otherwise, the selling shareholders may enter into hedging transactions with broker-dealers. In connection with such transactions, broker-dealers may engage in short sales of the shares registered hereunder in the course of hedging the positions they assume with the selling shareholders. The selling shareholders may also sell shares short and deliver the shares to close out such short positions. The selling shareholders may also enter into option, swaps, derivatives or other transactions with broker-dealers that require the delivery to the broker-dealer of the shares covered by this Prospectus, which the broker-dealer may resell pursuant to this Prospectus. The selling shareholders may also pledge the shares registered hereunder to a broker or dealer and upon a default, the broker or dealer may effect sales of the pledged shares pursuant to this Prospectus.

From time to time the selling shareholders may be engaged in short sales, short sales against the box, puts and calls and other hedging transactions in our securities, and may sell and deliver the shares covered by this Prospectus in connection with such transactions or in settlement of securities loans. These transactions may be entered into with broker-dealers or other financial institutions. In addition, from time to time, a selling shareholder may pledge its shares pursuant to the margin provisions of its customer agreements with its broker-dealer. Upon delivery of the shares or a default by a selling shareholder, the broker-dealer or financial institution may offer and sell the pledged shares from time to time.

To comply with the securities laws of some states, if applicable, the shares will be sold in those states only through brokers or dealers. In addition, in some states, the shares may not be sold in those states unless they have been registered or qualified for sale in those states or an exemption from registration or qualification is available and is satisfied.

If necessary, the specific shares of our common stock to be sold, the names of the selling shareholders, the respective purchase prices and public offering prices, the names of any agent, dealer or underwriter, and any applicable commissions or discounts with respect to a particular offer will be set forth in an accompanying prospectus supplement or, if appropriate, a post-effective amendment to the registration statement of which this Prospectus is a part.

Under applicable rules and regulations under Regulation M under the Securities Exchange Act of 1934, any person engaged in the distribution of the common stock generally may not simultaneously engage in market making activities with respect to the common stock for a specified period set forth in Regulation M prior to the commencement of such distribution and until its completion. In addition, the selling shareholders will be subject to the applicable provisions of the Securities Act of 1933 and Securities Exchange Act of 1934 and the rules and regulations thereunder, which may limit the timing of purchases and sales of shares of the common stock by the selling shareholders. The foregoing may affect the marketability of the common stock.

The selling shareholders will pay any applicable underwriting commissions and expenses, brokerage fees and transfer taxes, and three selling shareholders (Mart Diana, Glen Zirbes and Leonard D. Hadden) are responsible for payment of the fees and disbursements of their counsel, accountants and advisors in connection with the registration of their shares. We will bear all other expenses in connection with the offering and sale of the shares. We have agreed to indemnify and hold harmless the selling shareholders from certain liabilities under the Securities Act of 1933. The selling shareholders also have agreed to indemnify us against certain liabilities in connection with the registration and the offering and sale of the shares.

Our articles of incorporation authorize our Board of Directors to issue 15,000,000 shares of capital stock, including 10,000,000 shares of common stock, $0.05 par value, and 5,000,000 shares of undesignated stock, with rights, preferences and privileges as are determined by our board of directors.

As of November 8, 2001, we had 5,985,710 shares of common stock outstanding. All outstanding shares of our common stock are fully paid and nonassessable. The following is a summary of the material rights and privileges of our common stock.

Voting. Holders of our common stock are entitled to cast one vote for each share held at all shareholder meetings for all purposes, including the election of Directors. The holders of more than 50% of the voting power of our common stock issued and outstanding and entitled to vote and present in person or by proxy, together with any preferred stock issued and outstanding and entitled to vote and present in person or by proxy, constitute a quorum at all meetings of our shareholders. The vote of the holders of a majority of our common stock present and entitled to vote at a meeting, together with any preferred stock present and entitled to vote at a meeting, will decide any question brought before the meeting, except when Minnesota law, our articles of incorporation or our bylaws require a greater vote and except when Minnesota law requires a vote of any preferred stock issued and outstanding, voting as a separate class, to approve a matter brought before the meeting. Holders of our common stock do not have cumulative voting for the election of directors.

Dividends. Holders of our common stock are entitled to dividends when, as and if declared by the board of directors out of funds available for distribution. The payment of any dividends may be limited or prohibited by loan agreement provisions or priority dividends for preferred stock that may be outstanding.

Preemptive Rights. The holders of our common stock have no preemptive rights to subscribe for any additional shares of any class of our capital stock or for any issue of bonds, notes or other securities convertible into any class of our capital stock.

Liquidation. If we liquidate or dissolve, the holders of each outstanding share of our common stock will be entitled to share equally in our assets legally available for distribution to our shareholders after payment of all liabilities and after distributions to holders of preferred stock legally entitled to be paid distributions prior to the payment of distributions to holders of our common stock.

This Prospectus includes 47,500 shares of common stock issuable pursuant to the exercise of warrants. The warrants are exercisable at any time, at an exercise price of $8.05 per share, in whole or in part, from August 29, 2001, to August 29, 2006. The exercise price and the amount of securities issuable pursuant to this warrant are subject to adjustment as may be required to prevent dilution resulting from stock splits, stock dividends or similar events. The warrant holder has the right to receive upon exercise the kind and amount of securities distributed prior to exercise pursuant to a consolidation, sale or merger of HEI. These warrants were issued to the agent of our private placement of common stock that was executed on August 29, 2001 as partial compensation for its services.

We have opted out of the application control share acquisition provisions of the Minnesota Business Corporation Act. The control share acquisition provisions generally prohibits any business combination by us or our subsidiary with any shareholder that purchases ten percent or more of our voting shares within four years following such interested shareholder’s share acquisition date, unless the business combination is approved by a committee of all the disinterested members of our Board of Directors before the interested shareholder’s share acquisition date.

Gray, Plant, Mooty, Mooty & Bennett, P.A., Minneapolis, Minnesota, has issued an opinion about the legality of the shares registered by this Prospectus.

The consolidated financial statements and schedule of HEI, Inc. and subsidiaries as of August 31, 2001 and 2000 and for each of the years in the three-year period ended August 31, 2001, have been incorporated by reference herein and in the registration statement in reliance upon the report of KPMG LLP, independent certified public accountants, incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing.

We file annual, quarterly and special reports, proxy statements and other information with the SEC. You may read and copy any document we file with the SEC at the SEC’s public reference room located at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC’s public reference rooms located at its regional offices in New York, New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the operation of public reference rooms. You can also obtain copies of these materials from the SEC’s Internet web site located at http://www.sec.gov.

The SEC allows us to “incorporate by reference” the information we file with them, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be a part of this Prospectus, and information that we file later with the SEC will automatically update and supersede this information. We incorporate by reference the documents listed below and any future filings we will make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934.


	•	Our Annual Report on Form 10-K for the year ended August 31, 2001, filed November 9, 2001.

	•	Amendment No. 1 to our Annual Report on Form 10-K for the year ended August 31, 2001, filed December 4, 2001.

	•	Amendment No. 2 to our Annual Report on Form 10-K for the year ended August 31, 2001, filed December 11, 2001.

	•	Our report filed on Form 8-K, filed September 4, 2001.

	•	Our report filed on Form 8-K, filed September 5, 2001.

	•	Our report filed on Form 8-K, filed October 11, 2001.

	•	Our report filed on Form 8-K, filed November 29, 2001.

	•	The description of our common stock is contained in our Registration Statement on Form 10, filed on December 29, 1981, and Amendment No. 1 to such Registration Statement, filed on December 24, 1984.

You may request a copy of these filings, at no cost, by writing, telephoning or sending an electronic message to us at the following:


	HEI, Inc.
	Shareholder Relations
	1495 Steiger Lake Lane
	Victoria, Minnesota 55386
	(952) 443-2500
	www.heii.com

This Prospectus is part of a registration statement we filed with the SEC. You should rely only on the information or representations provided in this Prospectus. We have authorized no one to provide you with different information. The selling shareholders will not make an offer of these shares in any state where the offer is not permitted. You should not assume that the information in this Prospectus is accurate as of any date other than the date on the front page of this Prospectus.

Our articles of incorporation provide that our directors shall not be personally liable to us or our shareholders for breach of fiduciary duty, except for:


	•	Any breach of the director’s duty of loyalty;

	•	Acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law;

	•	Liability resulting from the authorization of an improper distribution;

	•	Any transaction from which the director received an improper personal benefit; or

	•	Any act or omission occurring prior to December 31, 1987.

Our articles of incorporation also provide that we shall indemnify our directors to the fullest extent permitted under Minnesota law. Although indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our directors, officers and controlling persons under these provisions, we have been advised that, in the opinion of the SEC, indemnification for liabilities arising under the Securities Act of 1933 is against public policy as expressed in the Securities Act and is, therefore, unenforceable.

No dealer, salesperson or any other person has been authorized to give any information or to make any representations other than those contained in this Prospectus in connection with the offer made by this Prospectus and, if given or made, the information or representations must not be relied upon as having been authorized by us. This Prospectus does not constitute an offer to sell or the solicitation of any offer to buy any security other than the securities offered by this Prospectus, nor does it constitute an offer to sell or a solicitation of any offer to buy the securities offered by this Prospectus by anyone in any jurisdiction in which the offer or solicitation is not authorized, or in which the person making the offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make an offer or solicitation. Neither the delivery of this Prospectus nor any sale made under this Prospectus shall, under any circumstances, create any implication that information contained in this Prospectus is correct as of any time subsequent to the date of this Prospectus.


SUMMARY
RISK FACTORS
USE OF PROCEEDS
SELLING SHAREHOLDERS
PLAN OF DISTRIBUTION
DESCRIPTION OF SECURITIES
LEGAL MATTERS
EXPERTS
WHERE YOU CAN FIND MORE INFORMATION
INDEMNIFICATION


Securities:		1,399,700 shares of common stock offered by the selling shareholders identified in this Prospectus.
Use of Proceeds:		We will not receive any proceeds from the sale of common stock by the selling shareholders.


									Percentage of
	Shares of					Shares of			Shares of
	Common Stock					Common Stock			Common Stock
	Owned			Shares of Common		Owned			Owned
	Beneficially Before			Stock Offered By		Beneficially After			Beneficially After
Name of Selling Shareholder	Offering			This Prospectus		Offering(1)			Offering(1)

Mart Diana		238,000	(2)		125,000		113,000	(2)		1.9	%
Glen Zirbes		115,200	(2)		77,200		38,000	(2)		*
Leonard D. Hadden		200,000			200,000		0			*
The Paisley Fund, L.P.		883,900	(3)		70,000		73,900	(3)		1.2	%(3)
RS Paisley Pacific Master Fund Unit Trust		883,900	(4)		140,000		73,900	(4)		1.2	%(4)
Barnett & Co. FAO RS Smaller Company Growth		883,900	(5)		100,000		73,900	(5)		1.2	%(5)
Barnett & Co. FAO RS Diversified Growth		883,900	(6)		500,000		73,900	(6)		1.2	%(6)
Constable Capital, LLC		140,000	(7)		140,000		0			*
ThinkEquity Partners, LLC		47,500	(8)		47,500		0			*


	Page

SUMMARY		1
RISK FACTORS		3
USE OF PROCEEDS		9
SELLING SHAREHOLDERS		9
PLAN OF DISTRIBUTION		12
DESCRIPTION OF SECURITIES		14
LEGAL MATTERS		15
EXPERTS		15
WHERE YOU CAN FIND MORE INFORMATION		15
INDEMNIFICATION		17

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	•	Minneapolis, Minnesota — HEI, Micro-Electronics Division


	•	Ultra-miniature radio frequency (RF) applications

	•	Wireless smartcards


	•	Phoenix, Arizona — High Density Interconnect Division