SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB


[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934
     For the fiscal year ended May 31, 1997

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934
     For the transition period from __________ to __________

                         Commission file number 0-26088

                      PACIFIC AEROSPACE & ELECTRONICS, INC.
                 (Name of small business issuer in its charter)

             Washington                                  91-1744587
    State or other jurisdiction of                    (I.R.S. Employer
    incorporation or organization)                   Identification No.)

        434 Olds Station Road
        Wenatchee, Washington                              98801
(Address of principal executive offices)                 (Zip Code)

                    Issuer's telephone number: (509) 664-8000

           Securities registered pursuant to Section 12(b) of the Act

       Title of each class             Name of each exchange on which registered
              None                                     None

           Securities registered pursuant to Section 12(g) of the Act:
                          Common Stock, $.001 par value
                                (Title of class)

                         Common Stock Purchase Warrants
                                (Title of class)

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

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
<PAGE>
State issuer's revenues for its most recent fiscal year: $34,175,000

State the aggregate market value of the voting stock held by non-affiliates,
based on the closing price for the registrant's Common Stock on the Nasdaq
National Market System, as of June 25, 1997:
approximately $35,083,859.

State the number of shares outstanding of each of the issuer's classes of
common equity, as of June 25, 1997:
             Common Stock, $.001 par value ("Common Stock"): 10,482,430 shares
             Common Stock Purchase Warrants ("Warrants"): 2,250,000 Warrants

Documents Incorporated by Reference: None, except certain Exhibits referred to
on the list of Exhibits, contained in Item 13 of this report.

Transitional small business disclosure format:  Yes     No  X
                                                    ---    ---
<PAGE>
                                TABLE OF CONTENTS

Item of Form 10-KSB                                                         Page
-------------------                                                         ----

PART I

Item 1 -   Description of Business............................................ 1

Item 2 -   Description of Property............................................14

Item 3 -   Legal Proceedings..................................................15

Item 4 -   Submission of Matters to a Vote of Security Holders................15

PART II

Item 5 -   Market for Common Equity and Related
           Shareholder Matters................................................16

Item 6 -   Management's Discussion and Analysis of
           Financial Condition and Results of  Operations.....................18

Item 7 -   Financial Statements...............................................24

Item 8 -   Changes in and Disagreements with Accountants
           on Accounting and Financial Disclosure.............................43

PART III

Item 9 -   Directors, Executive Officers, Promoters and Control Persons;
           Compliance with Section 16(a) of the Exchange Act..................44

Item 10 -  Executive Compensation.............................................47

Item 11 -  Security Ownership of Certain Beneficial
           Owners and Management..............................................54

Item 12 -  Certain Relationships and Related
           Transactions.......................................................57

Item 13 -  Exhibits and Reports on Form 8-K...................................59

SIGNATURES....................................................................64

EXHIBIT INDEX.................................................................65


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                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

Overview

     Pacific Aerospace & Electronics, Inc. (the "Company") is an
acquisition-oriented, technology-driven company that currently develops,
manufactures, markets and sells a broad range of precision components and
electronic assemblies designed to operate with a high degree of reliability in
harsh environments such as the ocean, space and the human body. Markets served
by the Company include the aerospace, space, defense, medical, energy,
transportation, telecommunications and general electronics industries. The
Company's common stock trades on the Nasdaq National Market System under the
symbol "PCTH," and its warrants trade under the symbol "PCTHW."

     The Company currently operates through six wholly owned subsidiaries that
are organized into two operational groups: the Electronics Group and the
Aerospace Group. The Company has also recently announced the formation of an
Information Technology Group. See "The Information Technology Group."

     The Company's Electronics Group is composed of three businesses: Pacific
Coast Technologies, Inc. ("Pacific Coast"), Ceramic Devices, Inc. ("Ceramic
Devices"), and Northwest Technical Industries, Inc. ("NTI"). Pacific Coast
produces a variety of electronics packages and connectors shielded from their
environment by the Company's proprietary ceramic seals, Ceramic Devices produces
devices designed to filter out electromagnetic interference detrimental to other
electronic devices, and NTI produces explosively bonded metals that are used in
the electronic devices produced by Pacific Coast and Ceramic Devices.

     The Company's Aerospace Group is also composed of three businesses:
Cashmere Manufacturing Co., Inc. ("Cashmere"), Morel Industries, Inc. (Morel"),
and Seismic Safety Products, Inc. ("Seismic"). Cashmere and Morel manufacture
machined or cast metal products for many applications, including products that
are incorporated into or complementary with the products of the Company's other
subsidiaries, and Seismic designs and sells automatic natural gas shut-off
valves manufactured by Cashmere.

     The customers of the Company's Electronics Group consist, to a substantial
degree, of large manufacturing companies in the aerospace, defense, energy,
medical and general electronics industries. These include Hughes Aircraft
Company ("Hughes Aircraft"), Honeywell Inc.'s Military Avionics Division,
Lockheed Martin Corporation ("Lockheed Martin"), Northrop Grumman Corporation
("Northrop Grumman"), Space Systems/Loral, Inc., Westinghouse Electric
Corporation, TRW, Inc., Litton, Tri Manufacturing and Maritime Manufacturing.
The Electronics Group also markets and sells its electronic products to a
variety of smaller, specialized electronics companies. The customers of the
Company's Aerospace Group include The Boeing Company ("Boeing"), Kawasaki Heavy
Industries, Ltd., Deere & Company, Northrop Grumman and PACCAR, Inc. ("PACCAR").

     The Company's strategy for its Electronics and Aerospace Groups is to
expand the range of products it offers and to produce a larger portion of the
customer's total product requirement, through internal growth and the
acquisition or development of new technologies. The Company has recently
experienced significant growth in revenues, as a result of both the acquisition
of complementary

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businesses and internal growth within the operating subsidiaries in those
groups. The Company hopes to continue to experience growth and to exploit both
technological and marketing synergies resulting from the integration of the
businesses it has acquired and other businesses or technologies that it may
acquire in the future. See Item 6 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for a discussion of the Company's
business segments.

Formation

     The Holding Company

     Original PCTH. In May 1994, Donald A. Wright, the Company's Chief Executive
Officer and President, formed PCT Holdings, Inc., a Washington corporation
("Original PCTH"), to hold the stock of Pacific Coast, which Mr. Wright had
originally acquired in 1990, and to acquire Cashmere. See "Acquisition of
Subsidiaries" below. The formation of Original PCTH was treated as if a pooling
of interests for accounting purposes.

     Merger into Public Company. In February 1995, Original PCTH merged into a
wholly owned subsidiary of Verazzana Ventures, Ltd. ("Verazzana"), an inactive
public company (the "Verazzana merger"). In that merger, Verazzana changed its
name to PCT Holdings, Inc., a Nevada corporation ("PCTH"). The surviving
subsidiary in the Verazzana merger was dissolved in May 1996, causing Pacific
Coast, Cashmere and Seismic to become direct subsidiaries of PCTH, along with
Ceramic Devices and Morel. The Verazzana Merger was treated as if a pooling for
accounting purposes.

     Reincorporation Merger. In November 1996, PCTH merged into the Company,
with the Company as the surviving entity, in order to reincorporate under the
laws of the State of Washington (the "Reincorporation Merger"). Prior to the
Reincorporation Merger, the Company was a wholly owned subsidiary of PCTH. In
the Reincorporation Merger, each share of PCTH common stock was converted into
one share of the Company's Common Stock, and each of the warrants to purchase
shares of PCTH's common stock were converted into warrants to purchase the same
number of shares of the Company's Common Stock. The Reincorporation Merger was
treated as if a pooling for accounting purposes.

     Acquisition of Subsidiaries

     Pacific Coast. Donald A. Wright purchased Pacific Coast in April 1990,
before the formation of the holding company. Mr. Wright acquired Pacific Coast
in exchange for cash and a promissory note to the sellers. In 1994, Mr. Wright
formed the holding company and initiated a series of strategic acquisitions of
companies whose operations and products the Company believes are complementary
to the products designed, manufactured and marketed by Pacific Coast. Pacific
Coast designs, manufactures and markets hermetically sealed electrical
connectors, electronic sealants and instrument packages, using patented and
proprietary technology.

     Cashmere. The first company acquired by the holding company was Cashmere,
which was acquired in May 1994. The purchase price of the Cashmere acquisition
was the issuance of Original PCTH common stock, which was later exchanged for
791,666 shares of PCTH common stock. The transaction was treated as a purchase
for accounting purposes. Cashmere operates a precision machine shop that
produces diversified components and assemblies for the aerospace, defense,
electronics and

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transportation industries, including products and services provided to the
Company's other subsidiaries.

     Ceramic Devices. The next company acquired was Ceramic Devices, which was
acquired in April 1995 (effective for accounting purposes as of February 28,
1995). The purchase price for the Ceramic Devices acquisition was the issuance
to the sellers of two promissory notes from PCTH totaling $600,000 in principal
amount, and 133,333 shares of PCTH common stock. The transaction was treated as
a purchase for accounting purposes. Ceramic Devices designs and manufactures a
line of specialized filtering devices for use with electronic circuits operating
in hostile environments and has a customer base similar to that of Pacific
Coast.

     Seismic. In November 1995, Seismic was formed to acquired substantially all
of the assets of a Florida corporation of the same name and to acquire certain
patents from affiliates of the Florida corporation. The purchase price for the
Seismic asset and patent acquisition was cash, certain deferred payment
obligations and 128,750 shares of PCTH common stock. The transaction was treated
as a purchase for accounting purposes. Seismic markets an automatic natural gas
shut-off valve activated by earthquakes, which is manufactured by Cashmere.

     Morel. The next company acquired was Morel, which was acquired in December
1995 (effective for accounting purposes as of November 30, 1995). The purchase
price for the Morel acquisition was the issuance of 650,000 shares of PCTH
common stock, after certain post-closing adjustments. The transaction was
treated as a purchase for accounting purposes. Morel manufactures precision cast
aluminum parts used principally in the transportation, heavy trucking and
aerospace industries.

     NTI. Most recently, the Company formed NTI which, on April 30, 1997,
acquired substantially all of the assets of Northwest Technical Industries,
Incorporated. The purchase price for the NTI acquisition was the issuance of
477,540 shares of the Company's Common Stock. The transaction was treated as a
purchase for accounting purposes. NTI manufactures explosively bonded dissimilar
metals and is a supplier to Pacific Coast.

Management of Growth

     The Company intends to continue to evaluate opportunities for growth
through expansion of current operations and through the acquisition of other
entities or lines of business. The Company's ability to manage its current and
future growth will require it to implement and improve its operational,
financial, budgeting, management information and internal control systems. The
future success of the Company will depend in part on the ability of management
to implement effectively these changes and to manage the Company's operations
over the long term.

     Past Acquisitions. The Company's historical acquisitions have been made in
its Electronics and Aerospace Groups on the philosophy that certain synergies
and operating efficiencies can be achieved in the combined operation of
companies with a similar focus. While the Company believes that it has
experienced some of the anticipated benefits from its past acquisitions, there
is no assurance that all of the expected benefits will be achieved.

     Future Acquisitions. As noted above, the Company is in the process of
forming the Information Technology Group and has recently entered into letters
of intent with five companies that

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would be included in this group. See "The Information Technology Group." The
Company believes that the philosophy it applied in its historical acquisitions
will apply to acquisitions by this group. In addition, the Company continues to
evaluate other acquisition opportunities in its Information Technology Group, as
well as in its Aerospace and Electronics Groups.

     Acquisition Risk Factors. Past and future acquisitions may subject the
Company to many risks, including risks relating to integrating and managing the
operations and personnel of acquired companies, and maintaining and implementing
uniform standards, controls, procedures and policies. The success of future
acquisitions will depend, in part, upon the Company's ability to assess and
manage the risks typically associated with acquisitions, including the risks of
assessing the value, strengths, and weaknesses of acquisition candidates or new
products, possible diversion of management attention from the Company's existing
businesses, reduction of cash, disruption of product development cycles,
dilution of earnings per share, or other factors. A failure to achieve or
sustain the anticipated benefits of any acquisition could result in that
acquisition having a detrimental effect on the Company's results of operations,
cash flow and financial condition.

The Electronics Group

     Pacific Coast Technologies, Inc.

     Products. Pacific Coast designs, manufactures and markets hermetically
sealed electrical connectors, electronic sealants and instrument packages, using
patented and proprietary technology. Pacific Coast was founded in 1976 and was
acquired by Mr. Wright in 1990. See "Formation Acquisition of Subsidiaries -
Pacific Coast". Pacific Coast's products are specifically designed for use in
applications that operate in harsh environments, such as the ocean, space and
the human body, which experience extremes in temperature, pressure or
corrosiveness. Pacific Coast distributes its products primarily to the defense,
aerospace, and telecommunications industries, the energy industry, and the
medical industry. In the defense, aerospace, and telecommunications industries,
Pacific Coast's largest customer group, its products are used in radar,
avionics, and telecommunications applications. Pacific Coast participated in the
production of the world's first hermetically sealed fiber optic connector for
use on the international space station Alpha. In the energy industry, Pacific
Coast's products are used in tools for drilling oil wells. In the medical
industry, Pacific Coast's products can be found in pacemakers, bone growth
stimulators and other implantable electronic devices such as audio implants for
the hearing impaired.

     Pacific Coast uses its proprietary hermetic sealant, Kryoflex(R), in many
of its products to provide a high level of hermetic seal protection in harsh
environments. Kryoflex is a multiple-phase derivative of ceramic oxide
crystalline silicate. A Kryoflex seal is mechanically stronger, and withstands
and dissipates more heat, than the glass or brazed ceramic seals used by many of
Pacific Coast's competitors. Unlike many of its competitors, a Kryoflex seal can
bond to a number of different metals and can bond dissimilar metals. The
composition and method of making Kryoflex is a proprietary trade secret of
Pacific Coast.

     Pacific Coast has patented its technology in the field of explosively
bonded metals. This technology allows dissimilar metals to be welded together to
make electronic connectors and packages. The resulting devices are lighter than
those made entirely of stainless steel but have equivalent hermetic seal
protection. This technology makes Pacific Coast products competitive where light
weight is a requirement, such as in space applications.

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     Pacific Coast also has several patented metal matrix composite
technologies. Further development of metal matrix composites will allow Pacific
Coast to make lighter, more durable electronic packages.

     Pacific Coast generally develops new products from its existing
technologies in response to specific customer needs, with such development
almost exclusively funded by its customers. Pacific Coast plans to continue
developing new technologies to meet the changing requirements of its customers
and, where appropriate, to file additional patent applications for those new
technologies. Pacific Coast may also purchase additional strategic proprietary
technology from third-party developers. Pacific Coast does not expect to devote
substantial resources to research and development that is not funded by
customers.

     Customers. Pacific Coast's customer base includes Fortune 1000 companies as
well as smaller, specialized firms. For fiscal 1997, Pacific Coast's major
customers in the defense, aerospace and telecommunications markets included ST
Olektron Corp., Honeywell Inc.'s Military Avionics Division, Amphenol
Corporations, AlliedSignal Inc.'s Aerospace Equipment Systems division, Space
Systems/Loral, Inc., Hughes Aircraft, Litton, Santa Barbara Research Center, and
Lockheed Martin. Pacific Coast's major customers in the energy market during
that period included Schlumberger Industries, Inc. and its French parent
company, Baker Hughes and Western Atlas International, Inc. Pacific Coast's
major customers in the medical market during that year were Advanced Bionics
Corporation and Electro-Biology, Inc. Pacific Coast has a varied customer base,
and no single customer accounted for more than 10% of its net sales for fiscal
1997, except for Amphenol Aerospace at 17.2%.

     Strategy. Pacific Coast's strategy is to increase its sales and market
share by developing increasingly sophisticated electronic packages, modules and
subsystems that integrate its proprietary technology and products made by the
Company's other subsidiaries. Pacific Coast also plans to expand its
cross-marketing with the Company's other subsidiaries. As sales volumes
increase, Pacific Coast intends to increase its automation in order to obtain
additional efficiencies. In addition, Pacific Coast is developing a number of
standard products that it believes can be produced and sold more cost
effectively than custom products. In the aerospace and defense industries, the
Company believes that there is a significant potential for increased use of its
products in satellite and ground-based radar applications. In the communications
industry, Pacific Coast believes that there is similar potential for use of its
products in radio frequency applications. In the energy market, Pacific Coast
plans to continue to develop new devices to be incorporated on oil drilling
tools in order to take advantage of the emerging development of oil fields in
Russia, China, and other areas. In the medical devices market, Pacific Coast
expects to develop standard and custom devices to support more sophisticated
audio implants, bone growth stimulators, pacemakers and other implantable
electronic devices.

     Ceramic Devices, Inc.

     Products. Ceramic Devices designs and manufactures a line of specialized
filtering devices for use with electronic circuits operating in hostile
environments. Ceramic Devices was founded in 1982, and the Company purchased it
as of February 1995 to obtain a source of ceramic filters for Pacific Coast's
connectors and electronic products. Ceramic Devices' products filter out
electromagnetic interference and other electrical signals that pose significant
problems for the manufacturers and users of high-performance, high-reliability
electronic systems. Ceramic Devices is an approved supplier of ceramic filtering
devices to military contractors. Ceramic Devices fabricates

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all components of its multilayer capacitors and filters to military requirements
and individualized customer specifications. Ceramic Devices' product development
is generally funded by its customers.

     Customers. Ceramic Devices' customer base is generally the same as the
customer base of Pacific Coast, including large defense, aerospace and
telecommunications companies. Such customers purchase Ceramic Devices products
for incorporation into sophisticated electronic systems. Ceramic Devices' major
customers include Hughes Aircraft, Lockheed Martin, AlliedSignal Inc.'s
Aerospace Equipment Systems division, and Litton Corp. No one customer accounted
for more than 10% of Ceramic Devices' net sales for fiscal 1997, except for
Hughes Aircraft at 22% and Litton Corp. at 12%. Because the customer base of
Pacific Coast represents potential customers for Ceramic Devices, the companies
use the same direct sales force and manufacturers' representative group.

     Strategy. The Ceramic Devices growth strategy includes increasing its
marketing efforts to existing and potential customers in the defense, aerospace
and telecommunications industries, and targeting customers of Pacific Coast in
the medical industry. In May 1996, Ceramic Devices completed its move from San
Diego, California to the Pacific Coast facility in Wenatchee, Washington. The
Ceramic Devices strategy also includes increasing the efficiency of its
production process through interaction with Pacific Coast, combining its filters
with Pacific Coast products, and marketing Ceramic Devices products together
with products of Pacific Coast.

     Northwest Technical Industries, Inc.

     Products. NTI manufactures explosively bonded dissimilar metals, such as
aluminum and stainless steel, using proprietary technology. This technology is
used in products where light weight is a requirement, such as in space
applications, energy and physics applications where strength at high temperature
and heat dissipation is a requirement, and marine and chemical processing
applications where anti-corrosiveness is a requirement. NTI distributes its
products primarily to the aerospace, defense, energy and marine industries.
NTI's predecessor was founded in 1970, and was acquired by the Company in 1997
in order to assure a source of explosively bonded metals for the other companies
in the Electronics Group.

     Customers. NTI's largest single customer in fiscal 1997 was Pacific Coast,
representing approximately 15.8% of sales. Pacific Coast incorporates NTI's
explosively bonded materials into a variety of its connectors and electronic
packages. Other significant customers of NTI include TRI Manufacturing, Newport
News, Oxford Instruments, Rail Products, Litton Systems and Lockheed Martin.

     Strategy. NTI's strategy is to continue to serve its current customer base,
and to increase its sales and market share by targeting customers of Pacific
Coast and Ceramic Devices who may need permanently bonded, lightweight metal
composites for other uses in their products. NTI also plans to use the direct
sales force and manufacturing representative group used by Pacific Coast and
Ceramic Devices and to participate in cross-marketing to potential customers
with Pacific Coast and Ceramic Devices.

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The Aerospace Group

     Cashmere Manufacturing Co., Inc.

     Products. Cashmere operates a precision machine shop that produces
diversified components and assemblies for the aerospace, defense, electronics
and transportation industries. Cashmere was founded in 1969, and the Company
purchased it in 1994 to provide precision machined products initially for
Pacific Coast. Cashmere now provides products for other subsidiaries of the
Company as well. Cashmere produces principally aluminum products, ranging from
small connectors to very complex assemblies. Cashmere builds to order only, in
conformance with the machining specifications of its customers. Cashmere is ISO
9000 approved, which qualifies it to perform work for most aerospace and general
electronic companies.

     Customers. Prior to its acquisition by the Company, Cashmere's sales were
almost exclusively to Boeing. Through a diversification program, the percentage
of Cashmere's sales to Boeing was decreased to approximately 66% for fiscal
1997, down from 75% for fiscal 1996. Sales to Boeing by Cashmere and other
Company subsidiaries constituted approximately 24% of the Company's consolidated
net sales for fiscal 1997. General economic conditions and events affecting
Boeing, all of which are outside the control of the Company, may have a
significant impact on Cashmere's sales and consequently on the overall results
of operations of the Company. Cashmere has entered into contracts with Boeing
which extend beyond one year to supply parts at fixed prices, and, accordingly,
aluminum or other metal price increases or other cost increases can adversely
affect Cashmere's margins on the sale of those parts. Boeing has considerable
flexibility under its contracts with Cashmere to reduce its level of orders or
to cease ordering products from Cashmere.

     During fiscal 1997, Cashmere's major customers were Boeing, NTK Aviation,
Nissho Iwai American Corporation, Kawasaki Heavy Industries, Ltd. and Northrop
Grumman. Pacific Coast, Morel, and Seismic together accounted for 5% of
Cashmere's sales for fiscal 1997. Cashmere manufactures a variety of aluminum
and stainless steel connector shells and electronic packages for Pacific Coast,
machines cast parts for Morel, and is the sole manufacturer of the natural gas
shut-off valve marketed by Seismic.

     Strategy. Through access to the customer base of Pacific Coast, Cashmere is
pursuing strategies intended to continue reducing its dependency on Boeing.
Cashmere has expanded its direct sales effort, and intends to concentrate on
customer service and offer additional value-added services. Most Pacific Coast
products require machining, allowing Cashmere to benefit from the sales and
marketing efforts of Pacific Coast. Morel is also currently a customer of
Cashmere. Cashmere and Morel have joint direct sales coverage in the Pacific
Northwest and Southern California in an effort to expand the market for products
of both companies.

     Morel Industries, Inc.

     Products. Morel manufactures precision cast aluminum parts used principally
in the transportation, heavy trucking and aerospace industries. Morel was
founded in 1909, and the Company purchased Morel in 1995 to provide cast parts
for its other subsidiaries and to expand its presence in the transportation
industry. Morel uses sand castings, lost foam and permanent molds to contain and
shape molten aluminum. These components are often further shaped or patterned on
Morel's machinery to meet a customer's specific needs. Morel also provides
additional services such as

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painting, machining and general assembly work. Morel is currently operating at
less than full capacity and believes that it could use its remaining capacity
without significant additional capital expenditures.

     Customers. Morel is dependent on sales to PACCAR, Inc., including its
Kenworth and Peterbilt divisions (collectively, "PACCAR"). Net sales to PACCAR
constituted 63% of Morel's net sales in fiscal 1997. Net sales to PACCAR
constituted 22% of the Company's consolidated net sales for that year. PACCAR
has no contractual obligation to continue to place orders for products of Morel.
Morel's other major customers include Deere & Company, Western Star Trucks,
Smith Co., Impco Technologies, and Boeing.

     Strategy. Morel's customers are increasingly requesting products that are
cast and machined by a single provider. The Company believes that Morel's
ability to machine its aluminum parts, combined with additional capacity at
Cashmere, will increase its ability to compete for finished cast aluminum
business. The Company plans to diversify Morel's customer base by taking
advantage of its access to the customers and marketing of the Company's other
subsidiaries. The Company also has plans to provide Morel access to proprietary
technology in order to enhance Morel's competitive advantages in its industry.
The Company believes the addition of direct sale representatives in the Pacific
Northwest and Southern California for Morel and Cashmere will allow Morel to
diversify its customer base and reduce its dependence on PACCAR. There is no
assurance, however, that Morel can successfully implement these or other
strategies so as to reduce its reliance on PACCAR to a degree that will protect
the Company in the event of unexpected decreases in sales to PACCAR.

     Seismic Safety Products, Inc.

     Products. Seismic develops and markets natural gas shut-off valves that are
automatically activated by earthquakes. Cashmere manufactures the natural gas
shut-off valve using patented technology that Seismic purchased in November 1995
from the inventors after six years of development. Seismic's valves are designed
to be installed in new and existing natural gas lines and to automatically shut
off the supply of gas in an earthquake. The valve may also be used as a manual
natural gas shut-off valve to avert fires in other emergency situations.
Significant patented features of the valve include a mechanism for manual reset
of the shut-off valve without special tools and a seamless design to prevent
potential leakage. Seismic's natural gas shut-off valve is certified by the
American Gas Association and the State of California. The Seismic patents and
patent applications extend beyond the current product to cover other possible
products, such as an industrial version of the natural gas shut-off valve and an
electrical shut-off product currently under development.

     Customers. Seismic began marketing its residential valve in December 1995
under the brand name "Northridge Valve(TM)". In March 1996, Seismic began
supplying the valve to several large home improvement centers; however, Seismic
has decided not to pursue this market sector for sales of its valves in the
future. Current purchasers of Seismic's valve include Ace Hardware Corporation,
Gensco, Inc., Northwest Water Heater and Western Supplies, with prospective
purchasers including builders, plumbers, security companies and utility
companies.

     Strategy. Unlike the other businesses acquired by the Company, there had
been no sales of the Seismic subsidiary's natural gas shut-off valve before the
Company acquired the technology for that product in November 1995. Since that
time, Seismic's strategy has been to sell its gas shut-off valve through a
variety of sources in earthquake-prone areas. The City of Los Angeles requires
that new construction have an automatic natural gas shut-off valve installed.
The Company believes that

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similar regulations may appear elsewhere on the West Coast due to its relatively
high potential for seismic activity.

     This represents a different type of product and market for the Company.
There is no assurance that this product will achieve market acceptance, or that
the Company will be able to market the product successfully or to compete in
this new market. The Company is evaluating several potential third-party
marketing agreements and strategic partnership proposals with regard to the
marketing of Seismic's natural gas shut-off valve currently marketed by Seismic.
Under these proposals, Cashmere would retain the right to manufacture the valve.

The Information Technology Group

     The Company recently announced that it is forming an Information Technology
Group. In connection with the formation of this group, the Company has entered
into nonbinding letters of intent (together, the "Letters of Intent") with five
companies: Brigadoon.com, Inc. ("Brigadoon"), of Bellevue, Washington; Market
Visibility, Inc. ("Market Visibility"), of New York, New York; Jungle Street,
Inc. ("Jungle Street"), of Everett, Washington, Quantum Interlink Internet, Inc.
("Quantum") of Provo, Utah, and MONITRx, Inc. ("MONITRx") of Larkspur,
California. Brigadoon, Quantum and Jungle Street, through its wholly owned
operating subsidiary, Televar Northwest, Inc., are Internet access providers.
Market Visibility and MONITRx produce products for the Internet. Brigadoon,
Market Visibility, Quantum and MONITRx are privately-held companies, and Jungle
Street is a publicly-held reporting company.

     Under the Brigadoon Letter of Intent, Brigadoon would be merged into a
subsidiary of the Company, with the shareholders of Brigadoon receiving a total
of 1,000,000 newly issued shares of the Company's Common Stock. Under the Market
Visibility Letter of Intent, a subsidiary of the Company would purchase all of
the assets of Market Visibility for a total of 50,000 newly issued shares of the
Company's Common Stock. In addition, the shareholders of Brigadoon and Market
Visibility would be entitled to a declining percentage of any net profits of the
acquiring subsidiary in excess of $2.5 million a year, over a five-year period
after closing of the acquisitions and stock purchase. Under the Jungle Street
Letter of Intent, a subsidiary of the Company would purchase newly issued common
stock of Jungle Street amounting to 60% of the outstanding common stock of
Jungle Street, for $1.5 million in cash. Under the Quantum Letter of Intent, a
subsidiary of the Company would purchase all of Quantum's assets for a total of
100,000 newly issued shares of the Company's Common Stock. Under the MONITRx
Letter of Intent, MONITRx would be merged into a subsidiary of the Company, with
the shareholders of MONITRx receiving approximately 600,000 newly issued shares
of the Company's common stock. The shareholders of MONITRx would be entitled to
a declining percentage of any net profits of the acquiring subsidiary in excess
of $1.2 million a year, over a five-year period after closing of the
acquisition.

     All five transactions are subject to a number of conditions, including
without limitation: the approval of the Boards of Directors of each of the
companies; completion of satisfactory due diligence investigations; and the
execution of definitive agreements between the Company and each of the
companies. Pending the conclusion of due diligence investigations, the Company
has entered into operations consulting and expense reimbursement agreements (the
"Operating Agreements") with Brigadoon, Market Visibility and Jungle Street,
pursuant to which the Company intends to assist in, consult with, and oversee
the operations and management of these companies for an initial period of six
months. Pursuant to the Operating Agreements, the Company has advanced funds to
Brigadoon

                                        9
<PAGE>
and to Jungle Street and its subsidiary. See Item 6 - "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."

     If the five transactions are completed as contemplated in the Letters of
Intent, it is anticipated that the Information Technology Group will provide
Internet services throughout the United States. These services are expected to
include: Internet access; Internet and highly customized web content; intranet
systems; long distance telephony services; proprietary software; and a product
line of multi-protocol computer network bridge/routers.

     The Company is currently considering the possible acquisition of other
companies for inclusion in the Information Technology Group. See "Management of
Growth."

Marketing

     Electronics Group. Pacific Coast and Ceramic Devices market their products
in the United States, Europe and Japan through a network of 22 manufacturer
representatives and resellers as of May 31, 1997, generally established on a
geographic basis. These representatives and resellers are subject to agreements
that prevent them from selling the products of competitors of Pacific Coast and
Ceramic Devices. In addition, Pacific Coast and Ceramic Devices maintain a joint
internal sales and customer service staff and engineering capability to meet
customer requirements for technical support. NTI currently markets its products
through customer referrals and industry meetings and trade shows. In the future,
NTI intends to also participate in the joint marketing efforts of Pacific Coast
and Ceramic Devices to existing and potential customers.

     Aerospace Group. Cashmere and Morel have a similar existing and potential
customer base and use the same direct sales approach and personnel. They
currently have direct regional sales personnel covering the West Coast. The
Company expects to engage additional salespeople for other geographic regions as
business warrants. Seismic currently markets the natural gas shut-off valve in
California, Oregon, Utah, Washington and British Columbia, Canada. In addition,
the Company believes that there is a significant market for Seismic's valves in
other earthquake-prone areas, such as Japan. The Company is assessing whether it
should substantially revise its strategy with respect to Seismic. See "Aerospace
Group - Seismic Safety Products, Inc."

Competition

     The Company operates in highly competitive markets. Most of its competitors
have greater financial resources, broader experience, better name recognition
and more substantial marketing operations than does the Company, and represent
substantial long-term competition. The industries in which the Company competes
are characterized by ongoing product development efforts and evolving
technology, and success depends in part upon the ability to gain a competitive
advantage through proprietary technology. Although the Company believes that its
proprietary technology may give it a competitive advantage with respect to its
technology-based products, new developments by competitors are expected to
continue. The Company's competitors may develop products that are viewed by
customers as more effective or more economic than the Company's product lines.
There is no assurance that the Company will be able to compete successfully
against current and future competitors or that the competitive pressures faced
by the Company will not materially or adversely affect the Company's business
and results of operations.

                                       10
<PAGE>
     Electronics Group. The market for Pacific Coast and Ceramic Devices
products is highly competitive and is composed of numerous competitors, none of
which dominates the market. Competition is based primarily on product quality,
price, custom product development capability, and technical support. Pacific
Coast's principal competitors include Balo Precision Parts, Inc., Amphenol
Corporation, Hermetic Seal Corporation, Kemlon Products and Development Co., ITT
Cannon Inc. and Alberox Corporation. Pacific Coast is not aware of any
competitor that competes with all of its product lines, although competitors do
exist in each market. Ceramic Devices' principal competitors in all of its
markets include AVX Corporation, Spectrum Control, Inc. and Maxwell
Laboratories, Inc.'s Sierra Capacitor/Filter Division. The market for NTI's
products is somewhat competitive and is composed of one domestic and three
foreign competitors. NTI's principal competitors in all of its markets include
OMC (U.S.), Nitro Neobel (Sweden), Northern Energetics (Scotland), and Asahi
(Japan). The Company believes that the products of the Electronics Group are
positioned to be competitive in these markets due to the quality of the
products, the proprietary and patented technology, and their custom product
development capability.

     Aerospace Group. The market for Cashmere and Morel products is very
competitive on a regional basis. The Company expects that access to Pacific
Coast's proprietary technology and customer base will provide Cashmere and Morel
with a competitive advantage in their industries. In addition, the Company
believes that modernization accomplished when Morel purchased its current
facilities in March 1994 enables Morel to produce its products more efficiently.
The Company believes that the ability to offer combined and complementary
products and value-added services with the Company's other subsidiaries will
enhance the ability of Cashmere and Morel to compete in this market. The market
for Seismic's natural gas shut-off valve includes several principal competitors,
such as Safe T Quake Corporation, Engdahl Enterprises and Pacific Seismic
Valves, Inc. The Company believes that its valve's rugged construction, ease of
installation, easy patented reset feature, and pricing should allow it to be
competitive in its market.

Suppliers and Production

     Availability and Cost of Materials. The Company does not have fixed price
contracts or arrangements for all of the raw materials and other supplies it
purchases. The Company generally has readily available sources of raw materials
and other supplies required for the manufacture of its products and, where
possible, the Company maintains alternate sources of supply. However, shortages
of, and price increases for, certain raw materials and supplies used by the
Company have occurred in the past and may occur in the future. Future shortages
or price fluctuations could have a material adverse effect on the Company's
ability to manufacture and sell its products in a timely and cost effective
manner.

     Electronics Group. Pacific Coast, Ceramic Devices and NTI have multiple
competitive sources generally available to supply all of their needs for raw,
processed and machined materials. However, these companies occasionally
experience delivery and quality difficulties with their vendors, and maintain
secondary sources of supply for outside purchases. Pacific Coast and Ceramic
Devices also maintain a quality control program to monitor supplier compliance
with their supply requirements.

     Aerospace Group. Cashmere has a readily available source of supply for the
raw materials it requires through numerous product distributors. Morel has
several suppliers of aluminum for its casting process, including Aluminum
Company of America, Inc. (ALCOA), Morel's largest supplier, which has a supply
facility located within approximately 35 miles of Morel's facility. However,

                                       11
<PAGE>
delivery and quality of supplies may vary or change from time to time. In
addition, the price of aluminum fluctuates with the market, which is generally
absorbed by Cashmere but which Morel can generally pass through to its
customers. All of Seismic's products are supplied by Cashmere.

Proprietary Rights

     The Company relies primarily on a combination of patent, trade secret,
copyright and trademark laws, confidentiality procedures, and other intellectual
property protection methods to protect its proprietary technology. The Company
currently holds 33 United States patents and has three United States patent
applications pending and three international patent applications pending. Of
these, Pacific Coast owns 30 United States patents and has two United States
patent applications pending and two foreign patent applications pending, and
Seismic owns three United States patents, has one United States patent
application pending and has one international patent application pending.

     The Company's issued patents will expire at various times over the next 15
years. Two of these patents, relating to connectors for pacemakers, will expire
in September 1997, and another 16 of the patents will expire over the next five
years. Although the Company believes that the manufacturing processes of its
technology that is currently protected by patents, particularly that of Pacific
Coast, are sufficiently complex that competing products made with the same
technology are unlikely, there is no assurance that the Company's competitors
will not design competing products using the same or similar technology once
these patents have expired.

     There is no assurance that the patent applications by Pacific Coast and
Seismic will result in issued patents, that the existing patents or any future
patents issued to the Company or its subsidiaries will provide any competitive
advantages for their products or technology, or that, if challenged, the patents
issued to the Company or its subsidiaries will be held valid and enforceable.
Despite the precautions taken by the Company, unauthorized parties may attempt
to copy aspects of the Company's products or obtain and use information that the
Company regards as proprietary, and existing intellectual property laws afford
only limited protection. Policing violations of such laws is difficult. The laws
of certain countries in which the Company's products are or may be distributed
do not protect the Company's products and intellectual property rights to the
same extent as do the laws of the United States. There is no assurance that
these protections will be adequate or that the Company's competitors will not
independently develop similar technology, gain access to the Company's trade
secrets or other proprietary information, or design around the Company's
patents.

     The market for the Company's products is characterized by steadily evolving
technology and industry standards, changes in customer needs and new product
introductions. The Company's success has depended, and will continue to depend,
on its ability to enhance its current products, develop new products that meet
changing customer needs, advertise and market its products, and respond to
evolving industry standards and other technological changes on a timely and
cost-effective basis. There is no assurance that the Company will be successful
in developing new products or enhancing its existing products on a timely basis,
or that such new products or enhancements will achieve market acceptance.
Furthermore, from time to time the Company and others may announce new products,
enhancements or technologies that have the potential to replace or render
obsolete one or more of the Company's existing products. The Company will need
to continue to anticipate or respond adequately to changes in technology and
customer preferences, the introduction of new products or enhancements by others
and avoid significant delays in the development or introduction of new products
by the Company.

                                       12
<PAGE>
     The Company may be required to enter into costly litigation to enforce its
intellectual property rights or to defend infringement claims by others. Such
infringement claims could require the Company to license the intellectual
property rights of third parties. There is no assurance that such licenses would
be available on reasonable terms, or at all.

Government Regulation

     Certain of the Company's products are manufactured and sold under United
States government contracts or subcontracts. As with all companies that provide
products or services to the federal government, the Company is directly and
indirectly subject to various federal rules, regulations and orders applicable
to government contractors. Certain of these government regulations relate
specifically to the vendor-vendee relationship with the government, such as the
bidding and pricing rules. Under regulations of this type, the Company must
observe certain pricing restrictions, produce and maintain detailed accounting
data, and meet various other requirements. The Company is also subject to a
number of regulations affecting the conduct of its business generally. For
example, the Company must adhere to federal acquisition requirements and to
standards established by the Occupational Safety and Health Act relating to
labor practices and occupational safety standards. Violation of applicable
government rules and regulations could result in civil liability, in
cancellation or suspension of existing contracts or in ineligibility for future
contracts or subcontracts funded in whole or in part with federal funds.

Environmental Matters

     The Company is subject to federal, state and local laws, regulations and
ordinances concerning solid waste disposal, hazardous materials storage, use and
disposal, air emissions, waste water and storm water disposal, employee health
and other environmental matters (together, "Environmental Laws"). Proper waste
disposal and environmental regulation are major considerations for the Company
because certain metals and chemicals used in its manufacturing processes are
classified as hazardous substances.

     Since the Company's acquisition of Morel in December 1995, the Company has
initiated an environmental compliance program for the Morel facility, which
includes obtaining all permits necessary for that facility to operate in
compliance with applicable Environmental Laws. As part of this program, in
January 1996, Morel obtained a temporary permit to discharge air emissions, and
in May, 1997, Morel obtained a permit to discharge waste water and storm water,
pending the state's further review.

     Since the Company's acquisition of NTI in April 1997, the Company has
initiated an assessment of NTI's environmental conditions, including the
possible need for permits to discharge air emissions and storm water.

     From time to time, the Company's operations may result in noncompliance
with Environmental Laws. If any violations of Environmental Laws occur, the
Company could be liable for damages and for the costs of remedial actions, could
be subject to revocation of permits necessary to conduct its business, or could
be ordered to cease operations until such noncompliance is corrected. Any such
revocation or stop work order could require the Company to cease or limit
production at one or more of its facilities, which could have a material adverse
effect on the Company. As a generator of hazardous materials, the Company is
subject to financial exposure even if it fully complies with these laws.
Environmental Laws could become more stringent over time, imposing

                                       13
<PAGE>
greater compliance costs and increasing risks and penalties associated with any
violations. There is no assurance that any present or future noncompliance with
Environmental Laws will not have a material adverse effect on the Company's
results of operations or financial condition.

Employees

     As of July 1, 1997, the Company and its subsidiaries had a total of 488
full-time employees, of which 387 were in manufacturing and quality assurance,
20 were in customer service, marketing and sales, five were in engineering, 68
were in administration, and eight were in customer-sponsored product
development. None of the Company's employees is covered by an ongoing collective
bargaining agreement, the Company has experienced no work stoppages, and the
Company believes that its relationship with its employees is good.

     The Company anticipates that the Information Technology Group being formed
will have about 100 employees initially, if the Company's proposed acquisitions
are completed as contemplated in the Letters of Intent. See "Formation -
Acquisition of Subsidiaries - Information Technology Group."


ITEM 2.  DESCRIPTION OF PROPERTY

     All of the Company's current subsidiaries, except for NTI, are located in
the greater Wenatchee, Washington area. Pacific Coast, Ceramic Devices, Cashmere
and Seismic operate from adjacent buildings in Wenatchee. Morel is located 15
miles away in Entiat. The close proximity of these subsidiaries is part of the
Company's strategy to enhance the efficiencies between the companies in the
Electronics Group and Aerospace Group. In the opinion of the Company's
management, these properties are adequately covered by insurance.

Existing Properties

     Wenatchee Facilities. Pacific Coast operates from facilities in Wenatchee,
Washington of approximately 31,000 square feet, which it has leased from the
Port of Chelan County since September 1994. Ceramic Devices completed its move
to Wenatchee from San Diego, California in May 1996. An additional 7,500 square
feet were added to the Pacific Coast lease in September 1995 to house Ceramic
Devices' operations. The lease was also amended in June 1997 to add another
11,400 square feet to this lease to allow the construction of an addition to the
Pacific Coast building. See "Future Properties - Facilities Expansion Plan."
Cashmere operates from an adjacent facility of approximately 42,000 square feet.
This facility was built to suit Cashmere by the Port of Chelan, and Cashmere has
leased this facility from the Port of Chelan County since October 1995. The
leases for these facilities expire in the year 2007 and both contain options to
renew for two additional five-year terms. Total lease costs for these facilities
were $382,000 in fiscal 1997. The Company's leasehold interest in these
facilities is encumbered by a security interest in favor of Silicon Valley Bank,
the Company's primary lender in the current principal amount of $125,000. See
Item 7 - "Financial Statements - Notes to Consolidated Financial Statements -
Note 8 - Long-Term Debt."

     Morel Facilities. Morel operates from facilities in Entiat, Washington of
approximately 84,000 square feet. Morel purchased these facilities and relocated
from Seattle in August 1994, at which time the facilities were renovated into a
modern foundry operation. The title to these facilities is encumbered by a deed
of trust in favor of Seattle-First National Bank in the current principal amount

                                       14
<PAGE>
of $1,242,000. See Item 7 - "Financial Statements - Notes to Consolidated
Financial Statements - Note 8 - Long Term Debt."

     NTI Facilities. NTI operates from owned facilities located in Sequim,
Washington of approximately 18,355 square feet. NTI purchased these facilities
in April 1997 when it acquired its assets. The seller of the assets had owned
and operated its business in this location for approximately 20 years. NTI also
leases a former quarry near Sequim, in order to conduct its blasting activities.
The title to these facilities is encumbered by a deed of trust in favor of North
Sound Bank in the current principal amount of $168,000. See Item 7 - "Financial
Statements - Notes to Consolidated Financial Statements - Note 8 - Long Term
Debt."

     Cashmere Storage. Cashmere owns a portion of its previous facility of
approximately 46,000 square feet located in nearby Cashmere, Washington.
Although the Company held this property for sale during a portion of fiscal
1996, it is currently using the property for staging and storage, and is
assessing its long-term plans for the property, including the possibility of
retaining the property. The title to these facilities is encumbered by a deed of
trust in favor of Cashmere Valley Bank. See Item 7 - "Financial Statements -
Notes to Consolidated Financial Statements - Note 8 - Long Term Debt."

Future Properties

     Facilities Expansion Plan. The Company's Board of Directors has recently
authorized a facilities expansion plan that includes construction of an addition
to the Pacific Coast building, the purchase of adjacent property from the Port
of Chelan, and the construction of a corporate headquarters building on that
property. The addition to the Pacific Coast building is currently under
construction and is scheduled for completion in August 1997.

     Information Technology Group Facilities. The Company's new Information
Technology Group is expected to initially be headquartered out of leased
facilities located in or near Bellevue, Washington, if the acquisitions are
completed as contemplated in the Letters of Intent.


ITEM 3.  LEGAL PROCEEDINGS

     Neither the Company nor its property is subject to any pending material
legal proceeding.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.

                                       15
<PAGE>
                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER
         MATTERS.

Market Information, Shareholders, and Dividends

     Until March 13, 1995, there was no public market for the Company's Common
Stock. From that date through September 14, 1995, the Common Stock was listed on
the Nasdaq Electronic Bulletin Board. From September 15, 1995 through July 15,
1996, the Common Stock was traded on the Nasdaq - Small Cap Market System under
the symbol "PCTH." Since July 16, 1996, the Company's Common Stock and Common
Stock Purchase Warrants ("Warrants") have been traded on the Nasdaq National
Market System under the symbols "PCTH" for the Common Stock and "PCTHW" for the
Warrants. Each Warrant entitles the holder to purchase one share of Common Stock
at an exercise price of $4.6875 per share.

     The Nasdaq National Market System reported the following range of high and
low sales prices for the Common Stock and the Warrants for each calendar quarter
within the Company's 1996 and 1997 fiscal years:


<TABLE>
<CAPTION>
                                                            Common Stock                 Warrants
                                                         -----------------          ------------------
Calendar Period                                          High          Low          High           Low
---------------                                          ----          ---          ----           ---
<S>                                                      <C>           <C>          <C>            <C>   
1995
Second Quarter (June 1- June 30)....................    $8.00         $5.00           --            --
Third Quarter.......................................     8.00          5.00           --            --
Fourth Quarter......................................     6.00          4.00           --            --
1996
First Quarter.......................................     4.38          3.75           --            --
Second Quarter......................................     5.00          2.75           --            --
Third Quarter.......................................     5.0625        2.00        $ .75         $ .375
Fourth Quarter .....................................     3.125         1.9375        .6875         .28125
1997
First Quarter.......................................     4.75          2.75         1.40625        .5
Second Quarter (March 1- May 31, 1997)   ...........     4.0625        2.6875       1.1875         .71875
</TABLE>

     As of July 30, 1997, the closing sales price on the Nasdaq National Market
System for the Common Stock was $4.0625 per share and the closing sales price on
the Nasdaq National Market System for the Warrants was $1.90625 per Warrant.

     As of July 30, 1997, there were 900 holders of record of 10,865,292 shares
of Common Stock, and 12 holders of record of 2,250,000 Warrants. In addition,
the two underwriters in the July 1996 public offering hold warrants to purchase
a total of 225,000 units, with each unit comprised of one share of Common Stock
and one Warrant to purchase one share of Common Stock.

     The Company has never declared or paid cash dividends on the Common Stock.
The Company currently anticipates that it will retain all future earnings to
fund the operation of its business and does not anticipate paying dividends on
the Common Stock in the foreseeable future. The Company's agreement with its
principal lender restricts the Company's ability to pay dividends.

                                       16
<PAGE>
Registration of Common Stock Issuable under Series A Convertible Preferred Stock

     Effective as of June 11, 1997, the Company registered 1,948,541 shares of
Common Stock underlying 50,000 shares of the Company's Series A Convertible
Preferred Stock, $.001 par value (the "Preferred Stock") on a Form S-3
Registration Statement (the "Form S-3 Registration"). As of June 25, 1997, 2,138
shares of Preferred Stock had been converted into 75,080 shares of Common Stock,
and 47,862 shares of Preferred Stock remained unconverted. On conversion of a
share of Preferred Stock, the holder will receive a number of shares of
registered Common Stock equal to $100 divided by the "conversion price" of the
Preferred Stock. The conversion price will be the lower of (a) $3.49 or (b) 85%
of the average closing bid price per share of the Common Stock over the five
trading days before conversion. The Company must redeem any Preferred Stock that
it is not permitted to convert under the terms of the Company's Statement of
Rights and Preferences for the Series A Convertible Preferred Stock.

Non-Public Warrants

     The Company has outstanding warrants to purchase a total of 622,500 shares
of Common Stock. Of this amount, 160,000 shares have been registered by the
Company under a Form S-8 registration statement. See Item 10 - "Executive
Compensation - Benefit Plans - Registration of Underlying Shares." The warrants
for the remaining shares contain registration rights provisions.

                                       17
<PAGE>
ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS

Preliminary Note Regarding Forward-Looking Statements

     This report contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and is subject
to the safe harbor created by those sections. Actual results could differ
materially from those projected in the forward-looking statements set forth in
Item 6 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations" under the captions "Overview" and "Liquidity and Capital
Resources" and in Item 1 - "Description of Business" under each of the captions.

Overview

     Effect of Acquisitions and Reincorporation Merger

     The Company's financial condition and results of operations have been
substantially affected by two corporate acquisitions in fiscal 1996 and its most
recent acquisition in fiscal 1997. These acquisitions, as well as internal
growth in the Company's existing businesses and the acquired businesses, have
resulted in substantial increases in net sales, from $3,456,000 in the first
quarter of fiscal 1996 to $10,320,000 in the fourth quarter of fiscal 1997.
Approximately $3,725,000 of this growth in net sales resulted from the
acquisitions and approximately $3,139,000 resulted from internal growth.

     Operating expenses and margins have also been substantially affected by the
expenses directly associated with the acquisitions. Expenses related to the July
1996 public offering (as defined below), the Reincorporation Merger, and various
capital-raising transactions, including transaction-related legal, accounting
and other expenses, and merger and equity capital costs, amounted to
approximately $104,000 in fiscal 1996 and approximately $103,000 in fiscal 1997.
The Company has also experienced substantial increases in all other expense
categories as a result of the increase in operations. A portion of these
expenses can be attributed to the assimilation of acquired operations into the
existing business.

     The Company reported net profits of $1,682,000 in fiscal 1997 and net
losses of $999,000 in fiscal 1996. Although the Company achieved profitability
in each quarter of fiscal 1997, the Company has not yet demonstrated an ability
to achieve consistently profitable operations over a longer period. There is no
assurance that profitable operations will be sustained in fiscal 1998 or at any
time thereafter. The Company's ability to maintain a profitable level of
operations in the future will depend on many factors, including the Company's
ability to assimilate its recent and potential future acquisitions, the degree
of market penetration of its products, its ability to develop new products, the
degree of market acceptance of new products, and the level of competition in
those markets in which the Company operates. The Company is currently
experiencing significant growth in orders and backlog, which will require
additional expenditures to support a higher level of inventory and operations.
These requirements will affect cash flow and results of operations over the
short term.

                                       18
<PAGE>
     Product Margins; Seasonality

     The electronic products business conducted by the Company's Electronics
Group is characterized by relatively low volumes and high margins. In
comparison, volumes have historically been higher and margins lower in the metal
products business conducted by the Company's Aerospace Group, than in the
electronic products business. The Company believes that margins will remain
higher for electronic products than for metal products, although products
incorporating both electronic and metal parts are expected to generate margins
closer to electronic product margins. As a result of margin differences, changes
in product mix between electronic and metal products can be expected to affect
overall margins for the Company. The Company's historical results of operations
are therefore not necessarily indicative of future operating performance. The
Company has not experienced any material seasonality in its operations.

     Working Capital; Financings

     The Company has relied on equity infusions and commercial borrowing
arrangements to supply significant portions of its required working capital. The
Company's working capital requirements have been substantially increased by the
growth in its operations and by the significant transaction-related expenses
associated with its acquisitions.

     In March and May 1996, the Company received aggregate net proceeds of
approximately $1,270,000 from the issuance of short-term debt. The proceeds were
used principally to repay indebtedness to an existing lender and for operating
capital. In May 1996, the Company also closed a Regulation S offering pursuant
to which the Company raised proceeds, net of commissions, of approximately
$1,340,000. The proceeds of that offering were used primarily for working
capital and to retire short-term debt.

     On July 19, 1996, the Company closed an underwritten public offering of
2,250,000 Units, with each Unit consisting of one share of Common Stock and one
Warrant, at a total offering price of $7,031,250 (the "July 1996 public
offering"). The proceeds of the July 1996 public offering have been used, as of
July 1997, primarily to pay off $2,438,000 in short-term debt and certain
interest and fees associated with such debt, and to provide working capital for
operations, and to purchase capital equipment.

     Effective as of February 28, 1997, the Company completed a private
placement of 50,000 shares of Preferred Stock, at a total offering price of
$5,000,000 (the "Preferred Stock offering"). The Company intends to use $1.5
million of the proceeds of the Preferred Stock offering to acquire a majority of
Jungle Street's common stock. See Item 1 - "Description of Business - Formation
Acquisition of Subsidiaries - Information Technology Group." The Company intends
to use the remainder of the proceeds for other strategic acquisitions, purchase
of manufacturing equipment, facilities expansion and working capital. Effective
as of June 11, 1997, the Company registered 1,948,541 shares of Common Stock
underlying the Preferred Stock on a Form S-3 Registration Statement. The Company
will receive no cash as a result of any conversions of the Series A Convertible
Preferred Stock to Common Stock.

     The Company is contemplating an offering of approximately $5,000,000 of
convertible debt to a small group of accredited investors. If such an offering
is consummated, the Company would use the proceeds primarily in connection with
the formation of the Information Technology Group.

                                       19
<PAGE>
     The Company believes that the net proceeds from the securities offerings
described above, together with its existing credit facilities, will be
sufficient to meet the Company's currently budgeted working capital requirements
for at least the next 12 months. The Company may also seek other equity or debt
financing in connection with the operation and funding of the Information
Technology Group. However, there is no assurance that additional financing will
be available to the Company, if and when needed, or that the Company's working
capital requirements will not exceed those currently budgeted.

     Segments

     The Company has determined that it currently operates in two business
segments within the guidelines of SFAS No. 14. These business segments are
"Electronics" (Pacific Coast, Ceramic Devices and NTI) and "Aerospace and
Transportation" (Cashmere, Morel and Seismic). Accordingly, the Company has
included the appropriate disclosure in Note 16, Business Segment Information, in
its audited financial statements. See Item 7 - "Financial Statements."

     Implementation of Accounting Pronouncements

     The Company has evaluated the effect of the recent accounting
pronouncements with future effective dates. SFAS No. 128 "Earnings Per Share,"
SFAS No. 130 "Reporting Comprehensive Income," and SFAS No. 131 "Disclosures
about Segments of an Enterprise and Related Information." Management believes
that provisions of these recent pronouncements will not have a material effect
on its financial condition or reported results of operations.

     Net Operating Loss Carryforwards

     The Company has available net operating loss carryforwards for federal
income tax purposes of approximately $6,279,000, the benefits of which expire
beginning in fiscal 2001 through fiscal 2011. The net operating losses created
by the subsidiaries prior to their acquisition and the net operating losses
created as a consolidated group or groups subsequent to a qualifying tax free
merger or acquisition have limitations related to the amount of usage by each
subsidiary or consolidated group, as described in the Internal Revenue Code. The
following approximate net operating losses are available on an individual
company basis, without taking into account any relevant expirations or
limitations: Pacific Aerospace & Electronics, Inc. $218,000, Pacific Coast
$3,680,000, Ceramic Devices $184,000, Cashmere $532,000, Morel $1,573,000, and
Seismic $92,000. If the subsidiaries achieve profitable operations, the net
operating loss carryforwards available should reduce the federal income taxes
due in future years.

Results of Operations for the Fiscal Years Ended May 31, 1997 and 1996

     The Company acquired Seismic and Morel in fiscal 1996, and NTI in fiscal
1997. Accordingly, the Company's results of operations for fiscal 1996 included
a full year of operations at Pacific Coast, Ceramic Devices and Cashmere and six
months at Morel and Seismic. Fiscal 1997 operations included a full year of
operations at Pacific Coast, Cashmere, Ceramic Devices, Morel and Seismic, and
one month at NTI.

     The Company's net sales increased a total of $13,450,000 in fiscal 1997
from fiscal 1996. Of that increase, $2,270,000 resulted from increased revenue
of Pacific Coast; $3,488,000 resulted from increased revenue of Cashmere;
$429,000 resulted from increased revenue of Ceramic Devices;

                                       20
<PAGE>
($7,000) was from a full year of operations of Seismic; $7,087,000 was from a
full year of operations of Morel, and $183,000 was from one month of operations
of NTI.

     Pacific Coast's net sales in fiscal 1997 were 36% higher than its net sales
in fiscal 1996. The Company believes that this increase is a result of a variety
of factors, including larger order sizes, broader market acceptance of the
Company's proprietary technologies, increased sales of higher priced products,
the addition of new customers, and improved engineering, design and
manufacturing capabilities. Based on these factors and the revenue growth in
fiscal 1996 and 1997, the Company expects that Pacific Coast will experience the
most substantial rates of growth in revenue in the future.

     Cashmere's net sales in fiscal 1997 increased by 50% over net sales in
1996. The Company believes that the increase in Cashmere's net sales is
primarily due to increased production levels of commercial aircraft by Boeing.
Net sales of Ceramic Devices in fiscal 1997 increased by 32% over net sales in
fiscal 1996. The Company believes that the increase in net sales of Ceramic
Devices is due primarily to increasing order sizes from existing customers.
Morel's net sales in fiscal 1997 were 17% higher than its annualized net sales
in the prior year. The Company believes that increase is a result of a variety
of factors, including the addition of new customers, including Boeing. Seismic's
net sales in fiscal 1997 decreased 4% from net sales in 1996.

     Intercompany sales, which were eliminated in consolidation and not included
in the above analysis, totaled $589,000 for fiscal 1997. Intercompany sales for
fiscal 1997 were made by Cashmere to Pacific Coast ($151,000), to Seismic
($82,000), and to Morel ($300,000), by Pacific Coast to Ceramic Devices
($6,000), and by NTI to Pacific Coast ($60,000). In comparison, intercompany
sales in fiscal 1996 were made by Cashmere to Pacific Coast ($375,000), to
Seismic ($124,000) and to Morel ($224,000).

     Gross profit of the Company increased to $8,206,000 in fiscal 1997 from
$4,286,000 in fiscal 1996. This represents an increase to 24% of net sales in
fiscal 1997 from 20% of net sales in fiscal 1996. The increase in gross profit
margin is primarily attributable to the increase in net sales of Pacific Coast,
Cashmere, Ceramic Devices and Morel, and the corresponding production
efficiencies gained with those sales increases. The Company also believes that
its investments in new state-of-the-art equipment contributed to the improvement
in gross profit.

     Interest income increased to $126,000 in fiscal 1997 from $37,000 in fiscal
1996. Interest income in fiscal 1997 resulted primarily from earnings on a
$1,000,000 certificate of deposit held as collateral for Pacific Coast's
Community Development Block Grant loan from Washington State and Chelan County.
Interest expense decreased to $510,000 in fiscal 1997 from $535,000 in fiscal
1996, primarily as a result of the reduction of debt associated with the use of
proceeds from its July 1996 public offering, proceeds from its February 1997
preferred stock sale, and reduction of its bank line of credit balances
throughout the year.

     Merger and equity capital costs of $103,000 in fiscal 1997 primarily
represent expenses related to the NTI acquisition, the Reincorporation Merger,
and of the legal costs associated with pending or abandoned acquisition
opportunities. Since "merger and equity capital costs" are no longer significant
enough to require line item treatment, they have been included in operating
expenses. Merger and equity capital costs of $104,000 in fiscal 1996 primarily
represent expenses related to the Morel and Seismic acquisitions. See Item 1 -
"Description of Business - Formation."

                                       21
<PAGE>
     The federal income tax expense of $50,000 for fiscal 1997 represents the
alternative minimum tax impact of taxable net income, since the Company has net
operating loss carryforwards sufficient to offset fiscal 1997 regular taxable
income. The federal income benefit of $67,000 for fiscal 1996 resulted from
recording deferred tax assets for certain net operating losses generated during
fiscal 1996.

Liquidity and Capital Resources

     At May 31, 1997, the Company had $18,939,000 in current assets and
$5,849,000 in current liabilities, resulting in net working capital of
$13,090,000 and a current ratio of 3.24 to 1.00. At May 31, 1996, the Company
had $13,009,000 in total current assets and $12,057,000 in total current
liabilities, resulting in net working capital of $952,000 and a current ratio of
1.08 to 1.00.

     On July 2, 1997, the Company executed a commitment letter, loan agreement
and promissory note for a new credit facility with Key Bank of Washington that
extends until September 1998. The new facility includes a revolving working
capital line of credit of up to $3,500,000, a capital equipment acquisition
credit facility of up to $2,000,000, and a construction loan of $600,000, or 80%
of the cost, of the addition to the Pacific Coast building. Security documents
for these loans have not yet been executed. In June and July 1997, the Company
advanced approximately $2.9 million under interest-bearing promissory notes to
Brigadoon and Jungle Street and its subsidiary, pursuant to the Operating
Agreements, which was generally used to repay defaulted obligations of those
companies. The Company used a portion of the net proceeds from the July 1996
public offering to pay off obligations to certain lenders to Ceramic Devices and
Morel. The Company believes that the net proceeds from its equity and debt
financing activities, together with its new credit facilities, will be
sufficient to meet its budgeted working capital requirements for at least the
next 12 months. See "Overview - Working Capital; Financings."

     The Company's actual capital needs will depend upon numerous factors,
including the amount of revenue generated from operations, the cost of
increasing the Company's sales and marketing activities, the ability of
third-party suppliers to meet product commitments, and any future acquisitions
(including the proposed acquisitions of Jungle Street, Brigadoon, Market
Visibility, Quantum and MONITRx), and the continuing availability of bank
financing, none of which can be predicted with certainty. The Company may
receive additional funds upon exercise of the Warrants and other outstanding
warrants and stock options, but there is no assurance that any such warrants or
stock options will be exercised. As a result of these and other factors, the
Company is unable to predict accurately the amount or timing of future capital
that it will require. Inability to obtain additional future capital could have a
material adverse effect on the Company's business and results of operations.

     The Company currently has no material purchase commitments for capital
equipment, except with respect to the remaining $876,000 due on certain
equipment recently purchased by Cashmere. Additions and replacements of plant
and equipment are generally funded through working capital, trade-in credits for
the replaced equipment, or capital leases or long-term notes secured by the
equipment purchased.

                                       22
<PAGE>
Recent Developments

     Preferred Stock Offering

     The Company completed the Preferred Stock offering in February 1997, for a
total offering price of $5,000,000 and net proceeds to the Company after
offering costs and expenses of $4,481,000. The Company intends to use the
proceeds of the Preferred Stock Offering primarily in connection with the
acquisitions proposed for the Information Technology Group (See Item 1 -
"Description of Business - Formation - Acquisition of Subsidiaries - Information
Technology Group"), and the remainder of the proceeds for other strategic
acquisitions, purchase of manufacturing equipment, facilities expansion and
working capital.

     Acquisition of NTI

     On April 30, 1997, NTI, Inc., a Washington corporation and wholly owned
subsidiary of the Company, acquired substantially all of the assets of Northwest
Technical Industries, Incorporated (the "Seller"). Immediately after the closing
the Company's subsidiary, changed its name to Northwest Technical Industries,
Inc., and the Seller changed its name to Northwest Explosives Bonding, Inc. In
consideration for the Seller's assets, NTI assumed substantially all of the
Seller's liabilities, and the Company issued 477,540 newly issued and
unregistered shares of the Company's Common Stock to the Seller.

                                       23
<PAGE>
ITEM 7.  FINANCIAL STATEMENTS

                          INDEPENDENT AUDITOR'S REPORT

To the Board of Directors
Pacific Aerospace & Electronics, Inc. and Subsidiaries


We have audited the accompanying consolidated balance sheet of Pacific Aerospace
& Electronics, Inc. (formerly PCT Holdings, Inc.) and Subsidiaries (the Company)
as of May 31, 1997 and 1996, and the related consolidated statements of
operations, changes in stockholders' equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pacific Aerospace &
Electronics, Inc. and Subsidiaries as of May 31, 1997 and 1996, and the results
of their operations and cash flows for the years then ended in conformity with
generally accepted accounting principles.



Everett, Washington
July 2, 1997

                               /s/ MOSS ADAMS LLP

                                       24
<PAGE>
                      PACIFIC AEROSPACE & ELECTRONICS, INC.
                                AND SUBSIDIARIES

<TABLE>
<CAPTION>
                           CONSOLIDATED BALANCE SHEET
                           --------------------------

                                     ASSETS

                                                                                   May 31,
                                                                     ----------------------------------
                                                                                1997               1996
                                                                     ---------------    ---------------
<S>                                                                  <C>                <C>            
CURRENT ASSETS
    Cash and cash equivalents                                        $     3,048,000    $       725,000
    Certificates of deposit                                                1,000,000

    Restricted cash                                                                           1,000,000
    Stock subscriptions receivable                                                            1,030,000
    Accounts receivable, net of allowance for doubtful
        accounts of $247,000 and $69,000                                   5,455,000          3,359,000
    Inventory                                                              9,082,000          6,699,000
    Current portion of note receivable from related party                     55,000             52,000
    Prepaid expenses and other                                               299,000            144,000
                                                                     ---------------    ---------------

           Total current assets                                           18,939,000         13,009,000
                                                                     ---------------    ---------------


PROPERTY AND EQUIPMENT                                                    13,190,000         10,656,000
                                                                     ---------------    ---------------


OTHER ASSETS
    Note receivable from related party,
        net of current portion                                               125,000            183,000
    Costs in excess of net book value
        of acquired subsidiaries                                           2,071,000          1,938,000
    Patents                                                                1,331,000          1,387,000
    Other                                                                     96,000            476,000
                                                                     ---------------    ---------------

           Total other assets                                              3,623,000          3,984,000
                                                                     ---------------    ---------------

           Total assets                                              $    35,752,000    $    27,649,000
                                                                     ===============    ===============



              The accompanying notes are an integral part of these
                       consolidated financial statements.
</TABLE>

                                       25

<PAGE>
                      PACIFIC AEROSPACE & ELECTRONICS, INC.
                                AND SUBSIDIARIES

<TABLE>
<CAPTION>
                           CONSOLIDATED BALANCE SHEET
                           --------------------------

                      LIABILITIES AND STOCKHOLDERS' EQUITY

                                                                                   May 31,
                                                                     ----------------------------------
                                                                                1997               1996
                                                                     ---------------    ---------------
<S>                                                                  <C>                <C>            
CURRENT LIABILITIES
    Notes payable                                                                       $     2,438,000
    Bank line of credit                                                                       1,224,000
    Accounts payable                                                 $     3,736,000          3,142,000
    Accrued liabilities                                                    1,116,000            840,000
    Current portion of long-term debt                                        997,000          4,413,000
                                                                     ---------------    ---------------

           Total current liabilities                                       5,849,000         12,057,000

LONG-TERM LIABILITIES
    Long-term debt, net of current portion                                 3,236,000          1,991,000
    Deferred income tax                                                      592,000            592,000
    Deferred rent and other                                                  456,000            470,000
                                                                     ---------------    ---------------

           Total liabilities                                              10,133,000         15,110,000
                                                                     ---------------    ---------------

STOCKHOLDERS' EQUITY
    Convertible preferred stock                                            4,481,000
    Common stock                                                          26,019,000         19,102,000
    Accumulated deficit                                                   (4,881,000)        (6,563,000)
                                                                     ---------------    ---------------

           Total stockholders' equity                                     25,619,000         12,539,000
                                                                     ---------------    ---------------

           Total liabilities and stockholders' equity                $    35,752,000    $    27,649,000
                                                                     ===============    ===============



              The accompanying notes are an integral part of these
                       consolidated financial statements.
</TABLE>

                                       26
<PAGE>
                      PACIFIC AEROSPACE & ELECTRONICS, INC.
                                AND SUBSIDIARIES

<TABLE>
<CAPTION>
                      CONSOLIDATED STATEMENT OF OPERATIONS
                      ------------------------------------


                                                                             Year Ended May 31,
                                                                     ----------------------------------
                                                                                1997               1996
                                                                     ---------------    ---------------
<S>                                                                  <C>                <C>            
NET SALES                                                            $    34,175,000    $    20,725,000

COST OF SALES                                                             25,969,000         16,439,000
                                                                     ---------------    ---------------

GROSS PROFIT                                                               8,206,000          4,286,000

OPERATING EXPENSES                                                         6,259,000          4,869,000
                                                                     ---------------    ---------------

INCOME (LOSS) FROM OPERATIONS                                              1,947,000           (583,000)
                                                                     ---------------    ---------------

OTHER INCOME AND EXPENSE
    Interest income                                                          126,000             37,000
    Interest expense                                                        (510,000)          (535,000)
    Other                                                                    169,000             15,000
                                                                     ---------------    ---------------

                                                                            (215,000)          (483,000)

INCOME (LOSS) BEFORE FEDERAL INCOME TAX                                    1,732,000         (1,066,000)

FEDERAL INCOME TAX BENEFIT (PROVISION)                                       (50,000)            67,000
                                                                     ---------------    ---------------

NET INCOME (LOSS)                                                    $     1,682,000    $      (999,000)
                                                                     ===============    ===============

EARNINGS (LOSS) PER SHARE OF COMMON STOCK                            $          0.17    $         (0.16)
                                                                     ===============    ===============

WEIGHTED AVERAGE SHARES OUTSTANDING
    DURING THE PERIOD                                                      9,989,000          6,209,000
                                                                     ===============    ===============



              The accompanying notes are an integral part of these
                       consolidated financial statements.
</TABLE>

                                       27
<PAGE>
                      PACIFIC AEROSPACE & ELECTRONICS, INC.
                                AND SUBSIDIARIES

<TABLE>
<CAPTION>
            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
            ---------------------------------------------------------

                    FOR THE YEARS ENDED MAY 31, 1997 AND 1996

                                                Convertible
                                              Preferred Stock                Common Stock
                                         --------------------------  -------------------------------       Accumulated
                                             Shares          Amount          Shares           Amount          Deficit
                                         ----------  --------------  --------------  ---------------   --------------
<S>                                          <C>     <C>                  <C>        <C>               <C>
BALANCE, May 31, 1995                                                     5,196,008  $    11,018,000   $   (5,564,000)

    Common stock issued                                                   1,503,551        4,932,000

    Common stock warrants issued                                                              69,000

    Common stock issued in
        connection with acquisitions                                        778,750        3,083,000

    Net loss                                                                                                 (999,000)
                                                                     --------------  ---------------   --------------

BALANCE, May 31, 1996                                                     7,478,309       19,102,000       (6,563,000)

    Common stock issued                                                   2,264,400        5,349,000

    Common stock options and warrants
        issued                                                                                16,000

    Common stock issued in
        connection with an acquisition                                      477,540        1,552,000

    Preferred stock issued                   50,000  $    4,481,000

    Net income                                                                                              1,682,000
                                         ----------  --------------  --------------  ---------------   --------------

BALANCE, May 31, 1997                        50,000  $    4,481,000      10,220,249  $    26,019,000   $   (4,881,000)
                                         ==========  ==============  ==============  ===============   ==============



The Company has authorized 100,000,000 shares of common stock and 5,000,000
shares of preferred stock.



              The accompanying notes are an integral part of these
                       consolidated financial statements.
</TABLE>

                                       28
<PAGE>
                      PACIFIC AEROSPACE & ELECTRONICS, INC.
                                AND SUBSIDIARIES

<TABLE>
<CAPTION>
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                      ------------------------------------

                                                                                             Year Ended May 31,
                                                                                     ----------------------------------
                                                                                                1997               1996
                                                                                     ---------------    ---------------
<S>                                                                                  <C>                <C>            
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH
        FROM OPERATING ACTIVITIES
    Net income (loss)                                                                $     1,682,000    $      (999,000)
        Adjustments to reconcile net income (loss) to net cash
           from operating activities
        Depreciation and amortization                                                      1,358,000            871,000
        Loss on sale of property and equipment                                                                    8,000
        Director compensation paid in common stock                                            44,000             24,000
        Consulting services paid through issuance of stock option                              6,000
        Federal income tax benefit                                                                              (67,000)
        Changes in operating assets and liabilities
           Accounts receivable                                                            (1,774,000)        (1,018,000)
           Inventory                                                                      (1,951,000)        (1,303,000)
           Prepaid expenses and other                                                       (178,000)             8,000
           Accounts payable and accrued liabilities                                          557,000           (216,000)
                                                                                     ---------------    ---------------

           Net cash from operating activities                                               (256,000)        (2,692,000)
                                                                                     ----------------   ---------------

CASH FLOW FROM INVESTING ACTIVITIES
    Transfer between cash and restricted cash                                              1,000,000         (1,000,000)
    Purchase of certificate of deposit                                                    (1,000,000)
    Proceeds from stock subscription receivable                                            1,030,000
    Purchase of property and equipment                                                    (2,100,000)          (754,000)
    Proceeds from sale of property and equipment                                                                  9,000
    Purchase of patents                                                                                        (400,000)
    Payments received on note receivable from related party                                   58,000             44,000
    Increase in other assets, net                                                             44,000            (79,000)
                                                                                     ---------------    ---------------

           Net cash from investing activities                                                (968,000)       (2,180,000)
                                                                                     ----------------   ---------------



              The accompanying notes are an integral part of these
                       consolidated financial statements.
</TABLE>

                                       29
<PAGE>
                      PACIFIC AEROSPACE & ELECTRONICS, INC.
                                AND SUBSIDIARIES

<TABLE>
<CAPTION>
                CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
                ------------------------------------------------

                                                                                             Year Ended May 31,
                                                                                     ----------------------------------
                                                                                                1997               1996
                                                                                     ---------------    ---------------
<S>                                                                                  <C>                <C>            
CASH FLOW FROM FINANCING ACTIVITIES
    Net change in bank line of credit                                                     (1,224,000)           308,000
    Payments on notes payable                                                             (2,438,000)
    Proceeds from long-term debt                                                             237,000            767,000
    Payments on long-term debt                                                            (3,248,000)        (1,457,000)
    Proceeds from notes payable                                                                               1,338,000
    Proceeds from sale of common stock                                                     7,137,000          3,878,000
    Common stock issue costs paid                                                         (1,398,000)          (328,000)
    Proceeds from sale of preferred stock                                                  5,000,000
    Preferred stock issue costs paid                                                        (519,000)
    Proceeds from sale of warrants                                                                               12,000
                                                                                     ---------------    ---------------

           Net cash from financing activities                                              3,547,000          4,518,000
                                                                                     ---------------    ---------------

NET CHANGE IN CASH AND CASH EQUIVALENTS                                                    2,323,000           (354,000)

CASH AND CASH EQUIVALENTS, beginning of year                                                 725,000          1,079,000
                                                                                     ---------------    ---------------

CASH AND CASH EQUIVALENTS, end of year                                               $     3,048,000    $       725,000
                                                                                     ===============    ===============



              The accompanying notes are an integral part of these
                       consolidated financial statements.
</TABLE>

                                       30
<PAGE>
                      PACIFIC AEROSPACE & ELECTRONICS, INC.
                                AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

                              MAY 31, 1997 AND 1996


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     (a) Operations and principles of consolidation - Pacific Aerospace &
Electronics, Inc. (formerly PCT Holdings, Inc.), located in Wenatchee,
Washington, develops, manufactures, markets and sells a broad range of precision
electronic components, designed to operate with a high degree of reliability in
harsh environments, and machine or cast metal products for applications in the
aerospace, defense, telecommunications, energy, transportation, medical and
general electronics industries. The consolidated financial statements of Pacific
Aerospace & Electronics, Inc. and Subsidiaries (the Company) include the
accounts of the Company and its subsidiaries. All significant intercompany
transactions have been eliminated.

     The Company's customers are located throughout the United States and
Europe. Included in accounts receivable at May 31, 1997 are $795,000, on 1997
sales of $8.0 million, and $489,000, on 1997 sales of $7.7 million, which are
due from The Boeing Company and PACCAR, respectively. Included in accounts
receivable at May 31, 1996 are $250,000, on 1996 sales of $5.9 million, and
$569,000, on 1996 sales of $3.1 million, which are due from The Boeing Company
and PACCAR, respectively.

     (b) Cash and cash equivalents - The Company considers all highly-liquid
investments purchased with original maturity of three months or less to be cash
equivalents. The Company places its cash and cash equivalents with high credit
quality institutions. At times, such investments may be in excess of the Federal
Deposit Insurance Corporation insurance limits.

     (c) Inventory - Inventory is generally stated at the lower of cost
(first-in, first-out method) or market.

     (d) Depreciation - Property and equipment is depreciated for financial
reporting purposes using the straight-line method over the estimated useful
lives of the assets. For federal income tax purposes, accelerated methods are
used over statutory lives.

     (e) Patents - Purchased patents are recorded at cost. Developed patents are
recorded at the value of related compensation awarded. Patents are amortized on
the straight-line basis over the estimated useful lives of the patents of 11 to
17 years.

     (f) Federal income tax - Deferred tax assets and liabilities are recognized
for the expected tax consequences of temporary differences between the tax bases
of assets and liabilities and their reported amounts. The Company and its
Subsidiaries file a consolidated federal income tax return.

     (g) Per share information - Earnings (Loss) per share of common stock is
based upon the weighted average number of common stock and dilutive common stock
equivalents outstanding using the treasury stock method. Stock options and
warrants and convertible preferred stock are considered common stock
equivalents. The weighted average number of shares outstanding was 9,989,000 and
6,209,000 during the years ended May 31, 1997 and 1996, respectively.

     (h) Fair value of financial instruments - The estimated fair value amounts
have been determined by the Company, using available market information and
appropriate valuation methodologies. The carrying amounts of cash, accounts
receivable, other noncurrent assets, accounts payable, accrued expenses, and
notes

                                       31
<PAGE>
                      PACIFIC AEROSPACE & ELECTRONICS, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
             ------------------------------------------

                              MAY 31, 1997 AND 1996



payable at May 31, 1997 and 1996, and long-term debt at May 31, 1997, are a
reasonable estimate of their fair value. The carrying value of long-term debt at
May 31, 1996 of $6,099,000 differs from the estimated fair value of $5,999,000.
The estimated fair values may not be representative of actual values of the
financial instruments that could have been realized as of the year end or that
will be realized in the future.

     (i) Use of estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from these
estimates.

     (j) Revenue recognition - Revenue is recognized when products are shipped
to customers.

     (k) Reclassifications - Certain 1996 amounts have been reclassified to
conform with the 1997 presentation.

     (l) New Accounting Standards - In February 1997, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 128. The new standard replaces primary and fully diluted earnings per share
with basic and diluted earnings per share. SFAS No. 128 is required to be
adopted by the Company in the year ending May 31, 1998. Had the Company been
required to adopt SFAS No. 128 for the periods presented, the adoption would not
have impacted diluted or primary earnings per share.

     In June 1997, the FASB issued SFAS No. 130 and 131. SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components. SFAS No. 131 establishes standards for reporting about operating
segments, products and services, geographic areas, and major customers. The
standards becomes effective for fiscal years beginning after December 15, 1997.
Management plans to adopt these standards in the year ending May 31, 1998.
Management believes that provisions of SFAS No. 130 and 131 will not have a
material effect on its financial condition or reported results of operation.

                                       32
<PAGE>
                      PACIFIC AEROSPACE & ELECTRONICS, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
             ------------------------------------------

                              MAY 31, 1997 AND 1996


NOTE 2 - BUSINESS ACQUISITIONS

     In November 1995, the Company acquired all of the assets of Seismic Safety
Products, Inc. (Seismic). The asset purchase price consisted of $70,000 in cash
and 128,750 shares of the Company's common stock valued at $483,000, for a total
of $553,000. In connection with the transaction, the Company acquired certain
patents for a total consideration of $520,000. Costs in excess of net book value
of $535,000 were recorded as a result of this acquisition.

     Effective for accounting purposes on November 30, 1995, a wholly-owned
subsidiary of the Company merged with Morel Industries, Inc. (Morel). The
purchase price consisted of 650,000 shares of the Company's common stock valued
at approximately $2.6 million. Costs in excess of net book value of $939,000
were recorded as a result of this acquisition.

     On April 30, 1997, the Company, acquired all of the assets of Northwest
Technical Industries, Inc. (NTI). The asset purchase price consisted of 477,540
shares of the Company's common stock valued at $1,552,000. Costs in excess of
net book value of $270,000 were recorded as a result of this acquisition.

     The business combinations described above have been accounted for using the
purchase method. Accordingly, assets and liabilities have been reflected at fair
value. The operating results of these acquired companies are included in the
consolidated statements of operations from their respective acquisition dates.
Any costs in excess of net book value as a result of these transactions are
being amortized over 15 years. The Company assesses the recoverability of this
intangible asset on a regular basis by determining whether the amortization of
the balance over its remaining life can be recovered through projected
undiscounted future cash flows.

     The following summary, prepared on a pro forma basis, combines the
consolidated condensed results of operations as if Morel, Seismic and NTI had
been acquired as of the beginning of the year ended May 31, 1996. There are no
material adjustments which impact the summary.

<TABLE>
<CAPTION>
                                                                                 Year Ended May 31,
                                                                           -------------------------------
                                                                                    1997              1996
                                                                           -------------     -------------
                                                                                       (Unaudited)
     <S>                                                                   <C>               <C>          
     Net sales                                                             $  36,158,000     $  26,801,000
     Income (Loss) from operations                                         $   2,084,000     $    (908,000)
     Net income (loss)                                                     $   1,802,000     $  (1,660,000)
     Earnings (Loss) per share of common stock                             $        0.17     $       (0.25)
     Weighted average shares outstanding during the period                    10,426,000         6,687,000
</TABLE>

     The pro forma results are not necessarily indicative of the actual results
of operations that would have occurred had the transactions been consummated as
indicated nor are they intended to indicate results that may occur in the
future.

                                       33
<PAGE>
                      PACIFIC AEROSPACE & ELECTRONICS, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
             ------------------------------------------

                              MAY 31, 1997 AND 1996



<TABLE>
<CAPTION>
NOTE 3 - INVENTORY
                                                                             May 31,
                                                                --------------------------------
                                                                        1997                1996
                                                                ------------        ------------
      <S>                                                       <C>                 <C>         
      Raw materials                                             $  2,685,000        $  1,900,000
      Work in progress                                             3,387,000           2,134,000
      Purchased and manufactured
         components and finished goods                             3,010,000           2,665,000
                                                                ------------        ------------
                                                                $  9,082,000        $  6,699,000
                                                                ============        ============
</TABLE>

NOTE 4 - PROPERTY AND EQUIPMENT

     Property and equipment, including assets under capital lease arrangement,
are as follows:

<TABLE>
<CAPTION>
                                                     Estimated                           May 31,
                                                    Useful Life            ---------------------------------
                                                     in Years                          1997             1996
                                                ------------------         ----------------   --------------
     <S>                                               <C>                 <C>                <C>           
     Land                                                                  $        895,000   $      470,000
     Buildings                                         20-39                      4,300,000        3,915,000
     Machinery and equipment                           5-20                       9,305,000        7,376,000
     Furniture and fixtures                            3-15                       1,215,000          854,000
     Leasehold improvements                            7-31                         401,000          273,000
                                                                           ----------------   --------------
                                                                                 16,116,000       12,888,000
     Less accumulated depreciation
        and amortization                                                          3,309,000        2,232,000
                                                                           ----------------   --------------
     Construction and purchases in progress                                         383,000
                                                                           ----------------
                                                                           $     13,190,000   $   10,656,000
                                                                           ================   ==============
</TABLE>

     Estimated costs to complete the construction and purchases in progress at
May 31, 1997 are approximately $1.8 million.

     The Company recognized depreciation of property and equipment of $1,103,000
and $696,000 during the years ended May 31, 1997 and 1996, respectively.

NOTE 5 - NOTE RECEIVABLE FROM RELATED PARTY

     The Company has a note receivable from a stockholder collectible in monthly
installments of $5,900, with interest at a designee's prime rate (8.5% at May
31, 1997) plus 1%. The remaining outstanding balance matures in March 1999. The
terms of the note receivable mirror the terms of a note payable of the same
amount (Note 8).

                                       34
<PAGE>
                      PACIFIC AEROSPACE & ELECTRONICS, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
             ------------------------------------------

                              MAY 31, 1997 AND 1996

NOTE 6 - BANK LINE OF CREDIT

     The Company has a bank line of credit arrangement which expires on July 27,
1997. On July 2, 1997, the Company entered into a new credit arrangement (the
New Agreement) which expires in September 1998. The New Agreement provides for a
revolving line of credit up to $3,500,000, a non-revolving capital expenditure
facility up to $2,000,000, and a term loan for the lessor of $600,000 or 80% of
the cost of certain building improvements. Borrowings will bear interests at
variable rates, and will be secured by inventory, accounts receivable, and
certain equipment and building improvements. The agreement contains restrictive
covenants related to working capital, net worth and debt service coverage.

NOTE 7 - NOTES PAYABLE

     During the year ended May 31, 1997, the Company repaid notes payable of
$2,438,000, of which $150,000 was to a related party. In connection with the
related party note and another note payable, during the year ended May 31, 1996,
the Company issued the lenders warrants to purchase 337,500 shares of common
stock at an excise price of $4.80 per share. The warrants expire in five years
and were independently valued at approximately $12,000. This amount represents
original issue discount which was charged to operations in the first quarter of
1997.

<TABLE>
<CAPTION>
NOTE 8 - LONG-TERM DEBT
                                                                                                   May 31,
                                                                                        ------------------------------
                                                                                                1997              1996
                                                                                        ------------      ------------
        <S>                                                                             <C>               <C>         
        Bank
           Industrial revenue bond payable in monthly installments of $19,200,
           including interest at 8.12% through November 2009. Collateralized by
           land, building and equipment and
           the personal guarantees of certain stockholders.                             $  1,242,000      $  1,367,000
        City of Entiat
           Note payable in monthly installments of $7,300, including interest at
           8% through May 2001 at which time the balance of $200,100 will be
           due. Collateralized by accounts receivable, inventory, equipment and
           real property. Subordinated to the
           bank industrial revenue bond debt.                                                551,000           600,000
        Individual
           Note payable in monthly installments of $8,300, including interest at
           10.25% until February 1998 at which time the balance of $179,000 will
           be due. Collateralized by patents,
           accounts receivable and inventory.                                                231,000           303,000
        Bank
           Note payable in monthly installments of $5,900, including interest at
           a designee's prime rate plus 1% through March 1999, at which time the
           balance of $82,000 is due. Collateralized by real property and
           personal guarantee of
           a certain stockholder (Note 5).                                                   180,000           235,000
</TABLE>

                                       35
<PAGE>
                      PACIFIC AEROSPACE & ELECTRONICS, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
             ------------------------------------------

                              MAY 31, 1997 AND 1996


<TABLE>
<CAPTION>
                                                                                                   May 31,
                                                                                        ------------------------------
                                                                                                1997              1996
                                                                                        ------------     -------------
        <S>                                                                             <C>              <C>
        Bank
           Note payable in monthly installments of $1,125 plus
           interest at prime plus 2.25% through October 1999.
           Collateralized by the assets of a subsidiary and the
           guarantee of a certain stockholder.                                               168,000
        Corporation
           Note payable in quarterly installments of $12,200, including
           interest at 8% through March 2001. Collateralized by a patent.                    166,000           200,000
        Various
           Notes payable in total monthly installments of $52,000,
           including interest at 9% to 11%. Collateralized by
           equipment of the Company.                                                       1,695,000        1,322,000
        Various notes paid in 1997                                                                          2,377,000
                                                                                        ------------     ------------
                                                                                           4,233,000        6,404,000
        Less current portion                                                                 997,000        4,413,000
                                                                                        ------------     ------------
        Long-term portion                                                               $  3,236,000     $  1,991,000
                                                                                        ============     ============
</TABLE>

     The industrial revenue bond agreements require, among other matters, that
the Company maintain minimum working capital, tangible net worth, and debt to
tangible net worth ratios.

     Long-term debt matures for fiscal years ending May 31 as follows: $997,000
for 1998; $744,000 for 1999; $787,000 for 2000; $534,000 for 2001; $445,000 for
2002; and the balance of $726,000 in years thereafter.

NOTE 9 - LEASING ARRANGEMENTS

     The Company leases the manufacturing facilities in which Pacific Coast,
Cashmere, Ceramic Devices, and Seismic are located through November 2005 from
the Port of Chelan County. Rent payments through September 2000 are based on a
percentage of the base rent, resulting in a deferred rent liability. Rental
expense is recorded ratably over the term of the lease. Beginning in October
1998, the base rent is subject to annual adjustments for increases in the
Consumer Price Index.

     The Company has several vehicle and equipment leases with minimum monthly
lease payments in the aggregate of approximately $3,000. The lease terms range
from three to six years.

     Total rental expense was $475,000 and $516,000 for the years ended May 31,
1997 and 1996, respectively.

     Minimum lease payments under these leases for fiscal years ending May 31
are as follows: $377,000 for 1998; $386,000 for 1999; $357,000 for 2000;
$339,000 for 2001; $326,000 for 2002; and $1,131,000 in years thereafter.

                                       36
<PAGE>
                      PACIFIC AEROSPACE & ELECTRONICS, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
             ------------------------------------------

                              MAY 31, 1997 AND 1996



NOTE 10 - FEDERAL INCOME TAX

     The current federal income tax provision of $50,000 in 1997, represents the
tax on alternative minimum taxable income. The deferred federal income tax
benefit of $67,000 in 1996 represents the expected utilization of net operating
loss (NOL) carryforwards available to offset deferred tax liabilities. Loss
carryforwards generated by the Company prior to certain acquisitions may,
subject to certain limitations, reduce tax liabilities on future earnings, or in
part, reduce remaining deferred tax liabilities by reduction of the costs in
excess of net book value of acquired assets in the Morel acquisition (Note 2).

     Reconciliation of the Federal statutory tax rate of 34% and the Company
effective tax rates of 3% and 6% in 1997 and 1996, respectively, is as follows:

<TABLE>
<CAPTION>
                                                                       Year Ended May 31,
                                                                 -------------------------------
                                                                           1997             1996
                                                                 --------------   --------------
      <S>                                                        <C>              <C>            
      Tax provision (benefit) at statutory rate                  $      588,000   $     (362,000)
      Utilization of NOL carryforwards                                 (558,000)

      NOLs with no current tax benefit                                                   241,000
      Other                                                               20,000          54,000
                                                                 ---------------  --------------
                                                                 $        50,000  $      (67,000)
                                                                 ===============  ==============
</TABLE>

     The Company has NOL carryforwards for federal income tax purposes of
approximately $7,079,000, the benefits of which expire in the tax year 2001
through the tax year 2011. The Company also has AMT credits of $50,000 available
for carryforward with no expiration date, which may be used to offset future
regular tax liabilities. The NOLs created by the Company's subsidiaries prior to
their acquisition and the NOLs created as a consolidated group or groups
subsequent to a qualifying tax free merger or acquisition, have limitations
related to the amount of usage by each subsidiary or consolidated group as
described in the Internal Revenue Code. As a result of these limitations,
approximately $800,000 of the $7,079,000 of NOLs will never become available.

     Significant components of the Company's deferred tax assets and liabilities
are as follows:

<TABLE>
<CAPTION>
                                                                           May 31,
                                                                 ----------------------------
                                                                          1997           1996
                                                                 -------------    -----------
     <S>                                                         <C>              <C>        
     Deferred tax assets
        NOL carryforward                                         $   2,135,000    $ 3,002,000
        Other                                                          290,000        274,000
        Valuation allowances                                        (1,717,000)    (2,429,000)
                                                                 --------------   -----------
                                                                       708,000        847,000
     Deferred tax liabilities
        Depreciation                                                 1,300,000      1,439,000
                                                                 -------------    -----------
     Net deferred tax liability                                  $     592,000    $   592,000
                                                                 =============    ===========
</TABLE>

                                       37
<PAGE>
                      PACIFIC AEROSPACE & ELECTRONICS, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
             ------------------------------------------

                              MAY 31, 1997 AND 1996



     SFAS No. 109 requires the Company to record a valuation allowance when it
is "more likely than not that some portion or all of the deferred tax assets
will not be realized." Management believes that some of the excess of NOL
carryforwards over temporary differences may be utilized in future periods.
However, due to the uncertainty of future federal taxable income, a valuation
allowance for the full amount of the net deferred tax asset has been recorded at
May 31, 1997 and 1996. Due to limitations on the availability of certain of the
NOLs referred to above, deferred tax liabilities associated with fixed assets
acquired in the Morel merger have not been fully offset.

NOTE 11 - COMPENSATION PLANS AND COMMITMENTS

     Long-term investment and incentive plan - The Company has a long-term stock
investment and incentive plan (the Option Plan) under which directors, officers,
key employees, and other key individuals may be awarded stock options, stock
appreciation rights, stock bonuses, and cash bonuses. Under the plan, the option
exercise price is generally no less than fair-market value at the date of grant.
Options expire no later than ten years from the grant date.

     SFAS No. 123, "Accounting for Stock-Based Compensation," allows companies
to record compensation cost for stock-based compensation plans at fair value or
provide pro forma disclosures. The Company has chosen to continue to account for
stock based compensation using the method whereby compensation cost for stock
options is measured as the excess, if any, of the quoted market price of the
Company's common stock at the date of grant over the exercise price of the
option.

     If the estimated fair value of the options at the grant dates had been
recognized as compensation expense over the vesting periods of the options, the
Company's pro forma net income in the year ended May 31, 1997 would have been
approximately $342,000, or $0.03 per share, and the pro forma net loss in the
year ended May 31, 1996 would have been approximately $(1,079,000), or $(0.17)
per share. Recognition of compensation expense for options granted would create
a deferred tax asset of $483,000 and $27,000 at May 31, 1997 and 1996,
respectively. However, no benefit for the deferred tax assets has been included
in the pro forma net income (loss) for 1997 and 1996, as a valuation allowance
would be recognized for the full amount of the deferred tax asset, consistent
with other deferred tax assets (Note 10). The fair value of the options granted
during 1997 and 1996 is estimated as $1,298,000 and $247,000, respectively, on
the date of grant using the Black-Scholes, option-pricing model with the
following assumptions: dividend none, expected volatility of 38.06%, risk-free
interest rate of 6.49%, and expected life of 7 years.

     Stock option and long-term performance award and warrant transactions,
excluding warrants sold in the public offering (Note 13) were:

                                       38
<PAGE>
                      PACIFIC AEROSPACE & ELECTRONICS, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
             ------------------------------------------

                              MAY 31, 1997 AND 1996


<TABLE>
<CAPTION>
                                                  Shares of Common Stock
                                    ---------------------------------------------------
                                    Available For                                                 Weighted
                                      Exercise of      Options Under                         Average Price
                                     Option/Award               Plan           Warrants          of Shares
                                    -------------      -------------        -----------      -------------
     <S>                                <C>               <C>                   <C>              <C>      
     Balance, June 1, 1995              1,000,000                               160,000          $    2.00
        Granted                          (145,283)           145,283            337,500               4.89
                                    -------------      -------------        -----------
     Balance, May 31, 1996                854,717            145,283            497,500               4.17
        Authorized                      1,000,000
        Granted                          (998,333)           998,333                                  4.34
                                    -------------      -------------        -----------
     Balance, May 31, 1997                856,384          1,143,616            497,500          $    4.27
                                    =============      =============        ===========
</TABLE>


     No options were exercised or lapsed during 1997 and 1996.

     The following table summarizes information concerning currently outstanding
and exercisable options and warrants, excluding warrants sold in the public
offering (Note 13):

<TABLE>
<CAPTION>
                                                                                            Options and
                                  Options and Warrants Outstanding                 Warrants Exercisable
                       --------------------------------------------------    --------------------------
                                               Weighted
                                                Average          Weighted                     Weighted
            Range of                          Remaining           Average                      Average
            Exercise           Number       Contractual          Exercise          Number     Exercise
              Prices      Outstanding              Life            Prices     Exercisable        Price
     ---------------   --------------     -------------   ---------------    ------------    ---------
       <S>                  <C>                    <C>           <C>           <C>           <C>      
       $2.00 - $3.00          313,333              8.00          $   2.22         258,333    $    2.20
       $4.50 - $5.50        1,327,783              7.77          $   4.76       1,230,223    $    4.73
                       --------------                                        -----------
                            1,641,116                                          1,488,556
                       ==============                                        ===========
</TABLE>

     Of the 152,560 options unexercisable at May 31, 1997, 10,000 are
performance-based options.

     Independent Director Stock Plan - The Company has an Independent Director
Stock Plan under which non-employee directors of the Company are awarded stock
for service on the Company's board of directors. In 1997 and 1996, 14,400 and
9,000 shares of the Company's common stock, respectively, were issued under the
plan. Included in compensation expense is $44,000 and $24,000 in 1997 and 1996,
respectively, resulting from the shares issued.

     Retirement plan - The Company maintains a 401(k) plan covering all eligible
employees who meet service requirements as provided in the plan. Company
contributions to the profit sharing plan are determined annually by the Board of
Directors. No contributions were made by the Company to the plan during the
years ended May 31, 1997 and 1996.

                                       39
<PAGE>
                      PACIFIC AEROSPACE & ELECTRONICS, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
             ------------------------------------------

                              MAY 31, 1997 AND 1996


NOTE 12 - CONVERTIBLE PREFERRED STOCK

     In February 1997, the Company sold 50,000 shares of Series A Convertible
Preferred Stock through a private placement for $5,000,000, incurred related
offering costs of $519,000, with net proceeds of $4,481,000. Conversion
provisions include conversion any time after June 12, 1997; conversion to common
shares equal to $100 divided by the lower of $3.49 or 85% of the average closing
common per share bid price over the 5 days before conversion; and total shares
converted cannot exceed 20% of total common shares outstanding or approximately
1,950,000 shares. If converted on May 31, 1997, 1,920,000 shares of common stock
would be issued.

NOTE 13 - COMMON STOCK

     During the fiscal year ended May 31, 1996, the Company sold 1,429,470
shares of its common stock at an average of $3.43 per share, in an offering
exempt from registration under Regulation S of the Securities Act of 1933, as
amended (Regulation S). The Company incurred approximately $375,000 of costs
related to the offering, which were charged against the proceeds of the offering
in 1996. At May 31, 1996, the Company had stock subscriptions receivable of
$1,030,000 related to the offering. The Company received the stock subscription
funds in June 1996.

     In July 1996, the Company sold 2,250,000 units composed of one share of the
Company's common stock and a warrant to purchase one share of the Company's
common stock at a price of $3.125 per unit in a public offering. The warrants
entitle the holder to purchase one share of common stock at $4.6875 per share,
exercisable anytime through July 2001. In addition, the Company issued warrants
to two underwriters for the purchase of an additional 225,000 units at $3.75 per
unit. All of these warrants are outstanding at May 31, 1997. During 1997 and
1996, the Company incurred $1,398,000 and $328,000, respectively, of costs
related to the offering. The costs incurred during 1996 were deferred and at May
31, 1996, are included in other assets. These costs were charged against the
proceeds of the stock offering in 1997.

<TABLE>
<CAPTION>
NOTE 14 - SUPPLEMENTAL CASH FLOW INFORMATION

                                                                             Year Ended May 31,
                                                                        ---------------------------
                                                                                1997           1996
                                                                        ------------    -----------
     <S>                                                                <C>             <C>        
     Cash paid during the year for:
         Interest                                                       $    613,000    $   658,000
         Federal income taxes                                           $     18,000

     Acquisition of Subsidiaries:
         Fair value of assets acquired, other than cash                 $  1,928,000    $10,286,000
         Liabilities assumed                                                (482,000)   (7,203,000)
                                                                        ------------   -----------

         Common stock issued                                            $  1,446,000    $ 3,083,000
                                                                        ============    ===========
</TABLE>

                                       40
<PAGE>
                      PACIFIC AEROSPACE & ELECTRONICS, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
             ------------------------------------------

                              MAY 31, 1997 AND 1996


<TABLE>
<CAPTION>
    <S>                                                                              <C>            <C>        
    Non-cash investing and financing activities:
        Seller financed purchase of property and equipment                           $   639,000    $   539,000
        Seller financed purchase of patents                                          $    35,000    $   520,000
        Patent acquired through issuance of warrant                                  $    10,000    $    57,000
        Stock subscriptions receivable for issuance of common stock                                 $ 1,030,000
</TABLE>

NOTE 15 - CONTINGENCIES

     The Company is currently party to various legal actions arising out of the
normal course of business, none of which is expected to have a material effect
on the Company's financial position or results of operations.

     In the normal course of business, the Company disposes of potentially
hazardous material which could result in claims related to environmental
cleanup. The Company has not been notified of any related claims. The Company is
subject to various other environmental and governmental regulations, however,
the extent of any non-compliance with those regulations is not ascertainable.

NOTE 16 - SUBSEQUENT EVENT

     In June 1997, the Company entered into nonbinding letters of intent for a
merger between a wholly owned subsidiary of the Company and Brigadoon.com, Inc.
(Brigadoon), for 1.0 million shares of the Company's common stock; the purchase
of a 60% ownership interest of Jungle Street, Inc. (Jungle Street) through newly
issued shares of Jungle Street common stock for $1.5 million in cash; and for
the purchase of the assets of Market Visibility, Inc. (Market Visibility) for
50,000 shares of the Company's common stock. In addition, the Company has
entered into six-month operating agreements with these companies to assist in,
consult with and oversee their operations and management. Subsequent to May 31,
1997, pursuant to terms of the operating agreements, the Company has advanced
funds in return for interest bearing notes payable, generally used to repay past
due or defaulted obligations, $1,390,000 to Brigadoon, $1,487,000 to Jungle
Street and its subsidiary. Certain officers and directors of the Company own
approximately 23% of the outstanding common stock of Jungle Street after giving
effect for the purchase of the Company, and have personally guaranteed certain
obligations of Jungle Street totaling $650,000. All these transactions are
subject to a number of conditions, including without limitation, the approval of
the Boards of Directors of each of the companies, completion of due diligence,
execution of definitive agreements, and closing.

NOTE 17 - BUSINESS SEGMENT INFORMATION

     The Company operates through six subsidiaries and operates in two general
business segments, "Electronics" and "Aerospace and Transportation". In
computing income (loss) from continuing operations for each segment, all costs
have been allocated to segments. Identifiable assets are those assets used in
the Company's operations in each business segment, and the identifiable assets
do not include advances or loans between the business segments. The corporate
assets are identified below, and no allocations were necessary for assets used
jointly by the business segments.

                                       41
<PAGE>
                      PACIFIC AEROSPACE & ELECTRONICS, INC.
                                AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
             ------------------------------------------

                              MAY 31, 1997 AND 1996


<TABLE>
<CAPTION>
                                                                       Aerospace
                                                                             and
Year Ended May 31, 1997                       Electronics         Transportation       Elimination              Total
-----------------------                   ---------------        ---------------     -------------     --------------
<S>                                       <C>                    <C>                 <C>               <C>           
Net sales to customers                    $    11,226,000        $    22,949,000                       $   34,175,000
Net sales between segments                                               151,000     $    (151,000)
                                          ---------------        ---------------     -------------
Net sales                                 $    11,226,000        $    23,100,000     $    (151,000)    $   34,175,000
                                          ===============        ===============     =============     ==============
Profit from operations                    $     1,595,000        $       137,000                       $    1,732,000
                                          ===============        ===============                       ==============
Identifiable assets                       $    11,419,000        $    21,011,000                       $   32,430,000
                                          ===============        ===============
Corporate assets                                                                                       $    3,322,000
                                                                                                       --------------
                                                                                                       $   35,752,000
Capital Expenditures                      $       778,000        $     1,961,000                       $    2,739,000
                                          ===============        ===============                       ==============
Depreciation and amortization             $       338,000        $       765,000                       $    1,103,000
                                          ===============        ===============                       ==============


                                                                       Aerospace
                                                                             and
Year Ended May 31, 1996                       Electronics         Transportation       Elimination              Total
-----------------------                   ---------------        ---------------     -------------     --------------
Net sales                                 $     8,343,000        $    12,382,000                       $   20,725,000
Net sales between segments                                       $       376,000     $    (376,000)
                                          ----------------       ---------------     -------------     --------------
Net sales                                 $     8,343,000        $    12,758,000     $    (376,000)    $   20,725,000
                                          ===============        ===============     =============     ==============
Loss from operations                      $      (312,000)       $      (754,000)                      $   (1,066,000)
                                          ===============        ===============                       ==============
Identifiable assets                       $     7,527,000        $    17,429,000                       $   24,956,000
                                          ===============        ===============
Corporate assets                                                                                       $    2,693,000
                                                                                                       --------------
                                                                                                       $   27,649,000
Capital Expenditures                      $       469,000        $     1,424,000                       $    1,893,000
                                          ===============        ===============                       ==============
Depreciation and amortization             $       263,000        $       433,000                       $      696,000
                                          ===============        ===============                       ==============
</TABLE>

                                       42
<PAGE>
ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
         ON ACCOUNTING AND FINANCIAL DISCLOSURE

         None

                                       43
<PAGE>
                                    PART III

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

Directors and Executive Officers

     The following table sets forth information as of July 18, 1997 (unless
otherwise noted) regarding the directors and executive officers of the Company.

<TABLE>
<CAPTION>
                                                   Director or
Name                                     Age       Officer Since           Position with Company
----                                     ---       -------------           ---------------------
<S>                                      <C>       <C>                     <C>
Donald A. Wright(1)                      45        02/95                   Chairman of the Board, Chief
                                                                           Executive Officer and President
Nick A. Gerde                            52        02/95                   Vice President Finance, Chief
                                                                           Financial Officer, Treasurer and
                                                                           Assistant Secretary
Donald B. Cotton(2)(4)                   59        02/95                   Director
Allen W. Dahl, M.D.(1)(2)(3)(4)          69        02/95                   Director
Dr. Urs Diebold                          46        07/97                   Director
Herman L. "Jack" Jones                   66        02/95                   Director
Dale L. Rasmussen(4)                     47        06/97                   Director
Roger P. Vallo(1)(2)(3)(4)               62        02/95                   Director
William A. Wheeler (2)                   62        06/97                   Director

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

(1)  Member of the Nominating Committee
(2)  Member of the Compensation Committee
(3)  Member of the Option Committee
(4)  Member of the Finance and Audit Committee
</TABLE>

     Donald A. Wright has been the Chairman of the Board, Chief Executive
Officer and President of the Company and PCTH since February 1995, and held
those same positions with Original PCTH and its successor from May 1994 until
the successor was dissolved in May 1996. Mr. Wright has been an officer and
director of Pacific Coast and its predecessor, Kyle Technology Corporation,
since 1990. Mr. Wright also has been an officer and director of each of the
Company's other operating subsidiaries since their respective acquisitions by
the Company. In addition, Mr. Wright was a director of Jungle Street from
January 1996 to June 1997.

     Nick A. Gerde has been the Vice President Finance and Chief Financial
Officer of the Company and PCTH since February 1995, and held those same
positions with Original PCTH since August 1994. He has been the Treasurer of the
Company and PCTH since August 9, 1996. Mr. Gerde is also an officer and director
of each of the Company's operating subsidiaries. Mr. Gerde served as
Controller/CFO of Hydraulic Repair & Design, Inc., a regional hydraulic
component repair and wholesale distribution company, from March 1990 through
April 1993; Business Development Specialist with the Economic Development
Council

                                       44
<PAGE>
of North Central Washington from July 1993 to June 1994; and vice president of
Televar Northwest, Inc. (now a wholly owned subsidiary of Jungle Street), from
July 1994 to February 1995. In addition, Mr. Gerde was a director of Jungle
Street, Inc. from January 1996 to June 1997. Mr. Gerde is a certified public
accountant.

     Donald B. Cotton has been a director of the Company and PCTH since February
1995, and was a director of Original PCTH and its successor from May 1994 until
the successor was dissolved. He was a director of Pacific Coast from October
1993 to October 1994. Mr. Cotton retired from GTE in 1993, where he served most
recently as a vice president. He is currently self-employed as a software
consultant. Mr. Cotton is also a director of Jungle Street.

     Allen W. Dahl, M.D. has been a director of the Company and PCTH since
February 1995, and was a director of Original PCTH and its successor from
October 1994 until the successor was dissolved. Dr. Dahl is retired from
practice as a physician in the Puget Sound region of Washington.

     Dr. Urs Diebold has been a director of the Company since July 1997. Dr.
Diebold has been a managing partner of Lysys AGREEMENT ("Lysys"), a Swiss
financing and investment management company, since September 1990. Prior to
joining Lysys in 1990, Dr. Diebold was an investment advisor at the Zurich
office of Credit Suisse. Dr. Diebold is also a director of several Swiss
companies, including Hottinger Zurich Valore, a Swiss company listed on the
Zurich Stock Exchange, and of one of the Company's shareholders, Capital
International Fund Limited.

     Herman L. "Jack" Jones has been a director of the Company and PCTH since
February 1995 and was a director of Original PCTH and its successor from May
1994 until the successor was dissolved. Mr. Jones has served as a director of
Cashmere since 1969. Mr. Jones founded Cashmere, and served as President of
Cashmere from 1969 until August 1996. Mr. Jones was also Executive Vice
President and Chief Operating Officer of each of the Company, PCTH, Original
PCTH and its successor, from May 1994 to June 1997, and served as a director of
Pacific Coast from April 1994 to October 1996, of Morel from December 1995 to
October 1996, and of Seismic from October 1995 to October 1996.

     Dale L. Rasmussen has been a director of the Company since June 1997. Mr.
Rasmussen has been employed as the Senior Vice President and Secretary of
AirSensors, Inc. since 1989.

     Roger P. Vallo has been a director of the Company and PCTH since February
1995 and was the Secretary of the Company and PCTH from that date until August
1996. Mr. Vallo held those same positions with Original PCTH and its successor
from May 1994 until the successor was dissolved. Mr. Vallo served as a director
of Pacific Coast from February 1991 to November 1995 and as Secretary from July
1993 to October 1994. From 1990, he served as a director of the predecessor of
Pacific Coast and subsequently as a director of Pacific Coast. Mr. Vallo is a
retired Group President of GTE, and until recently was the President and Chief
Executive Officer of Prudential Preferred Properties in Everett, Washington. Mr.
Vallo is currently the President, Chief Executive Officer and a director of
Jungle Street. The Company intends that Mr. Vallo will become the Group
President of the Information Technology Group if the Company consummates the
transactions contemplated in the Letters of Intent. See Item 1 - "Description of
Business - Formation Acquisition of Subsidiaries - Information Technology
Group."

     William A. Wheeler has been a director of the Company since June 1997. Mr.
Wheeler retired from Dowty Aerospace Yakima in May 1997, where he served as
President, Chief Executive Officer and Chairman of the Board of Directors since
1979.

                                       45
<PAGE>
     Directors of the Company hold office until the next annual meeting of the
Company's shareholders and until their successors have been elected and duly
qualified. Under the terms of an agreement between Lysys and the Company, dated
January 3, 1995, Lysys has the right to nominate one of the Company's Board
members, until July 1998. Dr. Diebold is the current designee of Lysys to the
Board of Directors. See Item 12 - "Certain Relationships and Related
Transactions." Executive officers are elected by the Board of Directors of the
Company at the first Board meeting after each annual meeting of shareholders and
hold office until their successors are elected and duly qualified.

Significant Employees

     Lewis L. Wear, 56, has been the Group President of the Electronics Group
since August 1996, President of Pacific Coast since February 1996, and a
director of Pacific Coast since November 1995. He also has been a director of
Ceramic Devices since November 1995 and President of NTI since April 1997. Prior
to November 1995, Mr. Wear was Vice President of Operations for Vacuum
Atmospheres, a division of WEMS, Inc.

     Garry R. Vandekieft, 55, has been Group President of the Aerospace Group
since October 1996, President of Cashmere since August 1996, a director of
Cashmere since October 1996, and was General Manager of Cashmere from June 1996
to August 1996. Prior to being employed by Cashmere, Mr. Vandekieft served as
Manufacturing Operations Manager of Advanced Wind Turbines during 1995 and 1996,
and as Director of Manufacturing of Master-Halco from 1990 through 1994.

Director Compensation

     The Company's Independent Director Stock Plan provides for an initial award
of 500 shares of Common Stock and an annual award of $5,000 worth of Common
Stock to each non-employee director. See Item 10 - "Executive Compensation -
Benefit Plans - Independent Director Stock Plan." Each non-employee director who
serves on a committee of the Board of Directors is entitled to receive a fee of
$1,000 per year for each committee on which that director serves, and the
chairperson of each committee is entitled to receive an additional $500 fee per
year. In addition, each non-employee director of a subsidiary of the Company,
who is not a director of the Company, will receive a fee of up to $1,000 per
year. At the Board's option, persons who serve as directors of a subsidiary of
the Company may be eligible for additional fees. Each of the cash fees may be
paid, at the Board's option, in shares of Common Stock. Non-employee directors
receive no salary for their services and receive no fee from the Company for
their participation in meetings, although all directors are reimbursed for
reasonable travel and other out-of-pocket expenses incurred in attending
meetings of the Board. As of May 31, 1997, 23,400 shares had been issued to
directors under the Independent Director Stock Plan and an additional 3,609
shares have been issued to new directors since that date.

Section 16(a) Beneficial Ownership Reporting Compliance

     Based solely on a review of Forms 3 and 4 and amendments thereto furnished
to the Company pursuant to Rule 16a-3(e) during its most recent fiscal year, and
on written representations that none of the Company's officers, directors, or
principal shareholders ("Reporting Persons") were required to report any
transactions on Form 5, the Company believes that, during the fiscal year ended
May 31, 1997, the Reporting Persons complied in all material respects with all
applicable filing requirements under Section 16(a) of the Securities Exchange
Act, as amended. Donald A. Wright and Nick A. Gerde each filed an amended report
to reflect an increase in an option exercise price related to certain previously
reported option grants. Allen W. Dahl filed an amended report to include shares
that had been acquired by his wife prior to their marriage, with respect to
which he disclaims any beneficial interest.

                                       46
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION

Summary Compensation

     The following table sets forth the annual and long-term compensation of
Donald A. Wright ("Named Executive") for services in all capacities to the
Company for the last three fiscal years. No other officer of the Company
received annual salary and bonuses exceeding $100,000 in the fiscal year ended
May 31, 1997.

<TABLE>
<CAPTION>
                                                                        Long-Term Compensation
                                                                 -------------------------------------
                              Annual Compensation                            Awards            Payouts
                          ------------------------------------   ---------------------------   -------
                                                      Other      Restricted       Securities
 Name and                                             Annual          Stock       Underlying      LTIP        All Other
Principal        Fiscal      Salary      Bonus    Compensation       Awards     Options/SARs    Payouts    Compensation
 Position       Year(1)         ($)        ($)             ($)          ($)              (#)        ($)             ($)
---------       -------   ---------      -----    ------------   ----------     ------------    -------    ------------
<S>               <C>      <C>               <C>          <C>           <C>       <C>               <C>          <C>
Donald A.
Wright            1997    160,000(3)         0            0             0         920,000           0          400(5)
CEO(2) and        1996    110,577            0            0             0         112,560           0          400(5)
President         1995     83,654(3)         0            0             0         100,000(4)        0            0

-----------

(1)  Information is shown for the May 31 fiscal years of the Company after
     November 1996, of PCTH prior to November 1996, and of Original PCTH prior
     to February 1995, which employed Mr. Wright during the relevant periods.

(2)  Mr. Wright became the Chief Executive Officer of the Company in November
     1996 upon the Reincorporation Merger, and of PCTH in February 1995, upon
     effectiveness of the Verazzana merger. See Item 1 - "Description of
     Business - Formation - Holding Company."

(3)  A portion of the compensation shown for Mr. Wright for the fiscal year
     ended May 31, 1997 was paid by PCTH, and the remainder was paid by the
     Company. A portion of his compensation for fiscal year ended May 31, 1995
     was paid by Original PCTH, and the remainder was paid by PCTH.

(4)  Represents unexercised, but exercisable, warrants to purchase 100,000
     shares of Common Stock. See "Aggregated Option/SAR Exercises and Fiscal
     Year-End Option/SAR Values," below.

(5)  Represents estimated value of the personal use of a company car.
</TABLE>

Option Grants

     The following table sets forth information on grants of stock options or
other similar rights by the Company during the last fiscal year to the Named
Executive.

                                       47
<PAGE>
<TABLE>
<CAPTION>
                                                       Percent of Total                       Market Price
                            Number of Securities         Options/SARs         Exercise or      on Date of
                             Underlying Options/     Granted to Employees      Base Price         Grant        Expiration
Name                          SARs Granted (#)          in Fiscal Year         ($/Share)        ($/Share)         Date
----                        --------------------     --------------------     -----------     ------------     -----------
<S>                               <C>                       <C>                  <C>             <C>                <C>  
Donald A. Wright                  920,000                   94.52%               2.375-          2.365-        July 2006-
                                                                                 4.6875          4.6875         May 2007
</TABLE>

     Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Values. The
following table sets forth information concerning exercise of stock options and
warrants during the last fiscal year by the Named Executive and the fiscal year
end value of unexercised options:

<TABLE>
<CAPTION>
                                                           Number of Securities             Value of Unexercised
                                                          Underlying Unexercised           In-the-Money Options/
                                                        Options/SARs at FY-end (#)           SARs at FY-end ($)
                                                        --------------------------          -------------------
                         Shares Acquired     Value
Name                     on Exercise (#)    Realized    Exercisable    Unexercisable  Exercisable(2)   Unexercisable
----                     ---------------    --------    -----------    -------------  --------------   -------------
<S>                              <C>            <C>     <C>                <C>            <C>               <C>
Donald A. Wright                 0              0       1,074,024(1)       58,536         $167,375          N/A

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

(1)  Includes warrants that were granted by Original PCTH on December 24, 1994,
     and converted by the Company, as of November 30, 1996, into warrants to
     purchase 100,000 shares of Common Stock at $2.00 per share, which are
     currently exercisable in full.

(2)  Exercisable options and warrants to purchase 229,024 shares have exercise
     prices of less than $3.16 per share, the closing price of the Common Stock
     on May 31, 1997.
</TABLE>

Employment Agreements

     Donald A. Wright

     Recent Employment Agreement. Mr. Wright was employed by the Company during
fiscal 1997 pursuant to an Employment Agreement dated June 1, 1996 (the "Recent
Employment Agreement"). Under the Recent Employment Agreement, Mr. Wright
received an annual base salary of $160,000 for fiscal year 1997.

     New Employment Agreement. The Recent Employment Agreement was superseded by
an Employment Agreement dated as of June 1, 1997 (the "New Employment
Agreement"). The New Employment Agreement has a term of five years, ending on
May 31, 2002, unless terminated earlier. Under the New Employment Agreement, Mr.
Wright will receive an annual base salary of $192,000 for fiscal year 1998, a
15% increase for each of fiscal years 1999 and 2000, and such increases as are
determined by the Board of Directors for fiscal years 2001 and 2002. The New
Employment Agreement prohibits Mr. Wright from competing with the Company for
two years following termination.

     Option Grant. Pursuant to the Recent Employment Agreement, the Board of
Directors awarded Mr. Wright options to purchase up to 15,000 shares of Common
Stock at $2.875 per share for his performance during fiscal year 1997, all of
which are currently exercisable. Under the New Employment Agreement, Mr. Wright
will be entitled to an award of fully-vested options to purchase 25,000 shares
of

                                       48
<PAGE>
Common Stock at the end of each fiscal year during the term of the New
Employment Agreement, and options to purchase up to another 250,000 shares per
year based on a specified formula.

     Severance Provisions. Under the New Employment Agreement, if a "change of
control" of the Company occurs and within six months thereafter Mr. Wright is
terminated without "cause" or terminates his employment for "good reason" (as
such terms are defined in the New Employment Agreement), Mr. Wright would be
entitled to receive a severance payment equal to twice his annual base salary
then in effect, subject to certain exceptions provided in the New Employment
Agreement. The term "change of control" includes the following events: (1) a
change in composition of the Board of Directors over any two-year period such
that the directors at the beginning of the period, together with directors
subsequently approved by the continuing directors, no longer constituted a
majority of the Board, (2) any person becoming the beneficial owner of
securities having 30% or more of the voting power of the Company's outstanding
voting securities, subject to certain exceptions in the New Employment
Agreement, or (3) a change of control of beneficial ownership of the Company's
voting securities that triggers reporting under Item 16(e) of Schedule 14A of
Regulation 14 under the Exchange Act. Any such severance payment under the New
Employment Agreement would be reduced to the extent necessary to avoid
subjecting the payment to penalty taxes on parachute payments. In addition to
such severance payment, Mr. Wright and his family would be entitled to continue
to participate for one year after such termination in employee health and
medical benefits plans and programs in which they were participants when
employment terminated, to the extent permitted by such plans and programs.

Benefit Plans

     Registration of Underlying Shares

     In June 1997, the Company filed a Form S-8 Registration Statement with the
Commission registering the 2,260,000 shares issuable under the Company's Amended
and Restated Stock Incentive Plan, Independent Director Stock Plan, and three
stand-alone common stock purchase warrants issued to Donald A. Wright, Nick A.
Gerde, and an employee of Pacific Coast, in connection with their employment.
See "Summary Compensation - Option Grants."

     Amended and Restated Stock Incentive Plan

     The Company's Amended and Restated Stock Incentive Plan (the "Plan")
provides for the award of incentive stock options ("ISOs") to key employees and
the award of non-qualified stock options ("NSOs"), stock appreciation rights
("SARs"), bonus rights, and other incentive grants to employees and certain
non-employees (other than non-employee directors) who have important
relationships with the Company or its subsidiaries.

     Administration. The Plan may be administered by the Board of Directors or
by a committee of directors or officers of the Company. The Board of Directors
has designated an Option Committee to administer the Plan. The Option Committee
determines and designates the individuals to whom awards under the Plan should
be made and the amount and terms and conditions of the awards, except that if
officers of the Company serve on the Option Committee it may not grant options
to such officers. The Option Committee may adopt and amend rules relating to the
administration of the Plan, but only the Board of Directors may amend or
terminate the Plan. The Plan is administered in accordance with Rule 16b-3
adopted under the Exchange Act.

     Eligibility. Awards under the Plan may be made to employees, including
employee directors, of the Company and its subsidiaries, and to nonemployee
agents, consultants, advisors, and other persons (but not

                                       49
<PAGE>
including nonemployee directors) that the Option Committee believes have made or
will make an important contribution to the Company or any subsidiary thereof.

     Shares Available. Subject to adjustment as provided in the Plan, a maximum
of 2,000,000 shares of Common Stock are reserved for issuance thereunder. The
maximum number of shares with respect to which options may be granted to any
person during any fiscal year is 1,000,000. If an option, SAR or performance
unit granted under the Plan expires or is terminated or canceled, the unissued
shares subject to such option, SAR or performance unit are again available under
the Plan. In addition, if shares sold or awarded as a bonus under the Plan are
forfeited to the Company or repurchased thereby, the number of shares forfeited
or repurchased are again available under the Plan.

     Term. Unless earlier terminated by the Board, the Plan will continue in
effect until the earlier of: (i) ten years from the date on which the Plan is
adopted by the Board, and (ii) the date on which all shares available for
issuance under the Plan have been issued and all restrictions on such shares
have lapsed. The Board may suspend or terminate the Plan at any time except with
respect to options, performance units, and shares subject to restrictions then
outstanding under the Plan.

     Stock Option Grants. The Option Committee may grant ISOs and NSOs under the
Plan. With respect to each option grant, the Option Committee determines the
number of shares subject to the option, the option price, the period of the
option, the time or times at which the option may be exercised (including
whether the option will be subject to any vesting requirements and whether there
will be any conditions precedent to exercise of the option), and the other terms
and conditions of the option. As of the end of fiscal 1997, options to purchase
an aggregate of 1,143,616 shares of Common Stock had been granted under the
Plan. See "Description of Securities - Stock Options."

     ISOs are subject to special terms and conditions. The aggregate fair market
value, on the date of the grant, of the Common Stock for which an ISO is
exercisable for the first time by the optionee during any calendar year, may not
exceed $100,000. An ISO may not be granted to an employee who possesses more
than 10% of the total voting power of the Company's stock unless the option
price is at least 110% of the fair market value of the Common Stock subject to
the option on the date it is granted and the option is not exercisable five
years after the date of grant. No ISO may be exercisable after ten years from
the date of grant. The option price may not be less than 100% of the fair market
value of the Common Stock covered by the option at the date of grant.

     In general, no vested option may be exercised unless at the time of such
exercise the optionee is employed by or in the service of the Company or any
subsidiary thereof, within 12 months following termination of employment by
reason of death or disability, or within three months following termination for
any other reason except for cause. Options are nonassignable and nontransferable
by the optionee except by will or by the laws of descent and distribution at the
time of the optionee's death. No shares may be issued pursuant to the exercise
of an option until full payment therefor has been made. Upon the exercise of an
option, the number of shares reserved for issuance under the Plan will be
reduced by the number of shares issued upon exercise of the option.

     Stock Appreciation Rights. The Option Committee may grant SARs under the
Plan. Each SAR entitles the holder, upon exercise, to receive from the Company
an amount equal to the excess of the fair market value on the date of exercise
of one share of Common Stock of the Company over its fair market value on the
date of grant (or, in the case of a SAR granted in connection with an option,
the excess of the fair market value of one share of Common Stock of the Company
over the option price per share under the option to which the SAR relates),
multiplied by the number of shares covered by the SAR or the option. Payment by
the Company

                                       50
<PAGE>
upon exercise of a SAR may be made in Common Stock, in cash, or by a combination
of Common Stock and cash.

     If a SAR is granted in connection with an option, the following rules shall
apply: (i) the SAR shall be exercisable only to the extent and on the same
conditions that the related option could be exercised; (ii) the SAR shall be
exercisable only when the fair market value of the stock exceeds the option
price of the related option; (iii) the SAR shall be for no more than 100% of the
excess of the fair market value of the stock at the time of exercise over the
option price; (iv) upon exercise of the SAR, the option or portion thereof to
which the SAR relates terminates; and (v) upon exercise of the option, the
related SAR or portion thereof terminates.

     Each SAR is nonassignable and nontransferable by the holder except by will
or by the laws of descent and distribution at the time of the holder's death.
Upon the exercise of a SAR for shares, the number of shares reserved for
issuance under the Plan will be reduced by the number of shares issued. Cash
payments of SARs will not reduce the number of shares of Common Stock reserved
for issuance under the Plan. No SARs have been granted under the Plan.

     Restricted Stock. The Option Committee may issue shares of Common Stock
under the Plan subject to the terms, conditions, and restrictions determined
thereby. Upon the issuance of restricted stock, the number of shares reserved
for issuance under the Plan shall be reduced by the number of shares issued. No
restricted shares have been granted under the Plan.

     Stock Bonus Awards. The Option Committee may award shares of Common Stock
as a stock bonus under the Plan. The Option Committee may determine the
recipients of the awards, the number of shares to be awarded, and the time of
the award. Stock received as a stock bonus is subject to the terms, conditions,
and restrictions determined by the Option Committee at the time the stock is
awarded. No stock bonus awards have been granted under the Plan.

     Cash Bonus Rights. The Option Committee may grant cash bonus rights under
the Plan in connection with (i) options granted or previously granted, (ii) SARs
granted or previously granted, (iii) stock bonuses awarded or previously
awarded, and (iv) shares issued under the Plan. Bonus rights granted in
connection with options entitle the optionee to a cash bonus if and when the
related option is exercised. The amount of the bonus is determined by
multiplying the excess of the total fair market value of the shares acquired
upon the exercise over the total option price for the shares by the applicable
bonus percentage. The bonus rights granted in connection with a SAR entitle the
holder to a cash bonus when the SAR is exercised. The amount of the bonus is
determined by multiplying the total fair market value of the shares or cash
received pursuant to the exercise of the SAR by the applicable percentage. The
bonus percentage applicable to any bonus right is determined by the Option
Committee but may in no event exceed 75%. Bonus rights granted in connection
with stock bonuses entitle the recipient to a cash bonus, in an amount
determined by the Option Committee, when the stock is awarded or purchased or
any restrictions to which the stock is subject lapse. No bonus rights have been
granted under the Plan.

     Performance Units. The Option Committee may grant performance units
consisting of monetary units which may be earned if the Company achieves certain
goals established by the Committee over a designated period of time. The goals
established by the Option Committee may include earnings per share, return on
shareholders' equity, return on invested capital, and similar benchmarks.
Payment of an award earned may be in cash or in Common Stock or partly in both,
and may be made when earned, or vested and deferred, as the Option Committee
determines. Each performance unit will be nonassignable and nontransferable by
the holder except by will or by the laws of descent and distribution at the time
of the holder's death. The number of shares reserved for issuance under the Plan
shall be reduced by the number of shares issued upon payment of an award. No
performance units have been granted under the Plan.

                                       51
<PAGE>
     Changes in Capital Structure. The Plan provides that if the outstanding
Common Stock of the Company is increased or decreased or changed into or
exchanged for a different number or kind of shares or other securities of the
Company or of another corporation by reason of any recapitalization, stock split
or certain other transactions, appropriate adjustment will be made by the Option
Committee in the number and kind of shares available for grants under the Plan.
In addition, the Option Committee will make appropriate adjustments in the
number and kind of shares as to which outstanding options will be exercisable.
In the event of a merger, consolidation or other fundamental corporate
transformation, the Board may, in its sole discretion, permit outstanding
options to remain in effect in accordance with their terms; to be converted into
options to purchase stock in the surviving or acquiring corporation in the
transaction; or to be exercised, to the extent then exercisable, during a 30-day
period prior to the consummation of the transaction.

Independent Director Stock Plan

     The Company's Independent Director Stock Plan (the "Director Plan")
provides for the award of shares of Common Stock to non-employee directors of
the Company to attract, reward, and retain qualified individuals to serve as
directors and to provide added incentive to such persons by increasing their
ownership interest in the Company.

     Administration. The Director Plan may be administered by the Board of
Directors or by a committee of directors and officers of the Company. The Board
has delegated to the Compensation Committee the responsibility of administering
the Director Plan. Subject to the requirements of the Director Plan, the
Compensation Committee has the authority to, among other things, determine the
fair market value of the Common Stock, interpret the Director Plan and
prescribe, amend, and rescind rules and regulations relating thereto, and make
all determinations deemed necessary or advisable to administer the Director
Plan, except that only the Board of Directors may suspend, amend or terminate
the Director Plan. No director may vote on any action by the Board of Directors
with respect to any matter relating to an award held by such director. The
Director Plan is administered in accordance with Rule 16b-3 adopted under the
Exchange Act.

     Eligibility. Shares may be awarded under the Director Plan only to
Independent Directors. The term "Independent Director" means a director who is
not an employee of the Company or any of its subsidiaries.

     Shares Available. The total number of shares of Common Stock that may be
awarded as bonuses under the Director Plan may not exceed 100,000 shares. If any
share awarded under the Director Plan is forfeited, such share will again be
available for purposes of the Director Plan.

     Term. Unless earlier suspended or terminated by the Board, the Director
Plan will continue in effect until the earlier of: (a) ten years from the date
on which it is adopted by the Board, and (b) the date on which all shares
available for issuance under the Director Plan have been issued.

     Initial Award. Each of the Independent Directors elected at and since the
shareholders' meeting at which the Director Plan was adopted received 500 shares
of Common Stock (the "Initial Award"), for a total of 3,500 shares as of May 31,
1997. Since May 31, 1997, three new directors have joined the Board, and a total
of 1,500 shares of Common Stock have been issued to them pursuant to Annual
Awards. Any new Independent Director will receive an Initial Award upon such
Independent Director's first election or appointment to the Board.

     Annual Award. Each Independent Director also will be awarded additional
shares (the "Annual Award") in an amount determined in accordance with the
formula set forth below, on an annual basis, each time he or she is elected to
the Board (or, if directors are elected to serve terms longer than one year, as
of the date of each annual shareholders' meeting during that term). The number
of shares awarded in the Annual

                                       52
<PAGE>
Award will be equivalent to the result of $5,000 divided by the fair market
value of a share on the date of the award, rounded to the nearest 100 shares (or
a fraction thereof if the Independent Director is elected or appointed to the
Board at any time other than at the annual meeting of shareholders). At May 31,
1997, a total of 19,900 shares of Common Stock had been issued to Independent
Directors as Annual Awards, and an additional 2,109 shares have been issued to
new directors since that date.

     Vesting and Forfeiture. Shares issued pursuant to an Initial Award are
fully vested upon the date of the award. Shares issued pursuant to an Annual
Award vest in full on the first anniversary following the date of the Annual
Award if the Independent Director has attended at least 75% of the regularly
scheduled meetings of the Board during that year (the "Vesting Period"). If an
Independent Director does not attend at least 75% of the regularly scheduled
meetings of the Board during the Vesting Period, the shares issued pursuant to
that Annual Award will expire and be forfeited without having vested. If a
Director ceases to be an Independent Director for any reason other than death or
disability before his or her last Annual Award vests, the shares issued pursuant
to that Annual Award will be forfeited. However, the Board of Directors may
waived or modify the vesting requirement prior to the first anniversary date of
any Annual Award by unanimous vote. If an Independent Director is unable to
continue his or her service as a director as a result of his or her disability
or death, unvested shares of such Independent Director will immediately become
vested as of the date of disability or death. In the event of a merger,
consolidation or plan of exchange to which the Company is a party and in which
the Company is not the survivor, or a sale of all or substantially all of the
Company's assets, any unvested shares will vest automatically upon the closing
of such transaction.

     Status Before Vesting. Each Independent Director will be a shareholder of
record with respect to all shares awarded under the Director Plan, whether or
not vested. No Independent Director may transfer any interest in unvested shares
to any person other than to the Company.

Certain Tax Considerations Related to Executive Compensation

     As a result of Section 162(m) of the Internal Revenue Code of 1986, as
amended, in the event that compensation paid by the Company to a "covered
employee" (the chief executive officer and the next four highest paid employees)
in a year were to exceed an aggregate of $1,000,000, the Company's deduction for
such compensation could be limited to $1,000,000.

                                       53
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
         AND MANAGEMENT

     The following table shows, to the best of the Company's knowledge based on
the records of the Company's transfer agent and the Company's records on
issuances of shares, as adjusted to reflect changes in ownership documented in
filings with the Securities and Exchange Commission made by certain shareholders
and provided to the Company pursuant to Section 16 of the Exchange Act and
statements provided to the Company by certain shareholders, Common Stock
ownership as of June 25, 1997 (except as otherwise noted), by (1) each person
known by the Company to own beneficially more than 5% of the Company's
outstanding Common Stock ("Principal Shareholder"), (2) each of the Company's
directors, (3) the Named Executive in the Summary Compensation Table, and (4)
all executive officers and directors of the Company as a group.

<TABLE>
<CAPTION>
                                                          Amount and Nature of Beneficial Ownership of:
                                                          --------------------------------------------
                                                              % of                                                  % of
                                              Common        Common                      % of     Preferred     Preferred
Name and Address of Beneficial Owner        Stock(1)      Stock(2)      Warrants    Warrants     Stock          Stock(2)
------------------------------------        --------      --------      --------    --------     ---------     ---------

<S>                                        <C>              <C>           <C>           <C>           <C>           <C>
Donald A. Wright
c/o Pacific Aerospace & Electronics,
Inc.
434 Olds Station Road
Wenatchee, WA 98801                        1,387,474(3)     12.01%        1,500           *           ---           ---


Herman L. "Jack" Jones
3761 School Street
Wenatchee, WA 98801                          701,437         7.18%          ---         ---           ---           ---

Roger Vallo
2707 Colby Avenue
Suite 1101
Everett, WA 98201                            221,326(4)      2.27%          ---         ---           ---           ---

Donald B. Cotton
538 Timber Ridge Drive
Trophy Club, TX 76262                        105,909(5)      1.08%          ---         ---           ---           ---

Allen W. Dahl
7300 Madrona Drive N.E.
Bainbridge Island, WA 98110                   62,825(6)        *            ---         ---           ---           ---

Dr. Urs Diebold
c/o Lysys AGREEMENT
Gessnerallee 38
P.O. Box CH-8023
Zurich, Switzerland                            6,300(7)        *            ---           *           ---           ---

William A. Wheeler
2011 Lombard Lane
Yakima, WA 98902                               4,267           *            ---           *           ---           ---

                                       54
<PAGE>
Dale L. Rasmussen
c/o AirSensors, Inc.
708 Industra Dr.
Tukwila, WA 98188                              1,267           *            ---           *           ---           ---

Leonard, L.P.
c/o Angelo, Gordon & Co., L.P.
245 Park Avenue, 26th Floor
New York, NY 10167                               ---          ---           ---         ---        15,500           32%

Paresco, Inc.
101 Hudson Street, 37th Floor
Jersey City, NJ 07302                        130,718         1.25%          ---         ---        10,000           20%

Strome Partners, L.P.
100 Wilshire Blvd., 15th Floor
Santa Monica, CA 90401                        35,118           *            ---         ---         4,145            9%

Strome Offshore, Ltd.
100 Wilshire Blvd., 15th Floor
Santa Monica, CA 90401                        34,069           *            ---         ---         4,430            9%

Strome Hedgecap, L.P.
100 Wilshire Blvd., 15th Floor
Santa Monica, CA 90401                        32,557           *            ---         ---         4,215            9%

GAM Arbitrage Investments, Inc.
c/o Angelo, Gordon & Co., L.P.
245 Park Avenue, 26th Floor
New York, NY 10167                                ---         ---           ---         ---         2,500            5%

All Executive Officers and Directors as
a group (nine persons)                     2,598,977(8)      22.3%        5,500           *           ---           ---

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

*    Less than 1%.

(1)  Shares not outstanding but deemed beneficially owned by virtue of the right
     of an individual to acquire them within 60 days are treated as outstanding
     for determining the amount and percentage of Common or Preferred Stock
     owned by such individual. Shares for which beneficial ownership is
     disclaimed by an individual also are included for purposes of determining
     the amount and percentage of Common or Preferred Stock owned by such
     individual. To the Company's knowledge, each person has sole voting and
     sole investment power with respect to the shares shown except as noted,
     subject to community property laws, where applicable.

(2)  Rounded to the nearest 1/10th of one percent, based on 10,482,430 shares of
     Common Stock outstanding on June 25, 1997, and 47,862 shares of Preferred
     Stock outstanding on June 25, 1997.

(3)  Includes 34,266 shares held by Ragen MacKenzie, Incorporated, custodian for
     Donald A. Wright, in two IRA accounts. Also includes currently exercisable
     warrants to purchase 100,000 shares of Common Stock, and currently
     exercisable options to purchase 974,024 shares of Common Stock.

                                       55

<PAGE>
(4)  Includes 216,666 shares held by PACO on behalf of Seattle-First National
     Bank, custodian for Roger P. Vallo IRA.

(5)  Includes 69,443 shares held by Lincoln Trust Company, custodian for Donald
     B. Cotton IRA.

(6)  Includes 31,249 shares issued to Evablanche Armson Dahl. Dr. Dahl disclaims
     beneficial ownership of these securities.

(7)  Does not include 1,075 shares issued pursuant to the Company's Independent
     Director Stock Plan upon Dr. Diebold's appointment to the Board as of July
     18, 1977.

(8)  Includes currently exercisable warrants to purchase up to 125,000 shares of
     Common Stock, and currently exercisable options to purchase up to 1,045,446
     shares of Common Stock. Does not include the shares described in note (7),
     above.
</TABLE>

                                       56
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     In connection with the Company's acquisition of Cashmere in May 1994,
Cashmere sold the land and buildings, located in Cashmere, Washington, where its
manufacturing facilities were then located, to Herman L. "Jack" Jones, a
Principal Shareholder and director of the Company, and to John M. Eder, a former
director of the Company and presently President of Seismic and an Executive Vice
President of Cashmere, for $975,207. Cashmere received a note from Mr. Jones for
the sales price, payable in monthly installments of $7,600 through May 2014,
including interest at 7% per annum. The note was collateralized by the land and
the buildings that then housed Cashmere's operations. No significant gain or
loss to the Company resulted from this transaction. Cashmere leased these
premises from Mr. Jones for a term of three years with monthly lease payments of
$9,000. In May 1995, the Company and Messrs. Jones and Eder reached an agreement
for Cashmere to reacquire a portion of the land and buildings. Under that
agreement, Cashmere canceled $673,990 of the outstanding note from Mr. Jones,
Mr. Jones agreed to assume the payment obligation of Cashmere under certain bank
debt related to the property, although Cashmere remains an obligor under that
bank debt, and Cashmere renewed the $278,795 balance of the note from Mr. Jones
under the same terms as the bank debt. Although Mr. Jones has agreed to
negotiate to refinance the bank debt in his name and remove Cashmere as an
obligor, there is no assurance that Cashmere will be removed as an obligor on
the bank debt. The Company paid Mr. Jones $108,000 in May 1995 for the
cancellation of the lease, which was terminated upon completion of Cashmere's
new facility in Wenatchee, Washington.

     In fiscal 1995, Original PCTH entered into a funding agreement (the
"Funding Agreement") with Lysys Ltd. ("Lysys"). Under the Funding Agreement,
Lysys has the right to nominate one of the Company's Board members until July
1998. Dr. Diebold was nominated by Lysys and was appointed as a director of the
Company by the Board of Directors on July 18, 1997, upon the resignation of
Lysys' previous nominee. Dr. Diebold is a general partner of Lysys. Roger D.
Dudley, one of the Company's directors from February 1995 to November 1995, was
associated with Lysys, although he was not a director, executive officer or
equity owner of Lysys.

     The Company entered into another agreement with Lysys in fiscal 1996, as
amended (the "Placement Agreement"), pursuant to which Lysys facilitated the
sale by the Company of 838,470 shares of Common Stock in an offering exempt from
registration under Regulation S of the Securities Act. The Company raised
approximately $3.4 million from the offering, from which Lysys was paid a
commission of $234,772. Pursuant to the Placement Agreement, the Company issued
30,000 shares of Common Stock to a designee of Lysys as additional compensation
in connection with the offering.

     In fiscal 1996, Allen W. Dahl, a director of the Company, loaned Morel
$100,000 pursuant to the terms of a promissory note, for working capital until
consummation of the Morel merger, as defined in the following paragraph. All
amounts due under this note were paid in full by Morel in December 1995.

     On December 1, 1995 (effective for accounting purposes on November 30,
1995), the Company effected a merger between a subsidiary of the Company that
was formed for such purpose and Morel (the "Morel merger"). See Item 1 -
"Description of Business - Formation - Acquisition of Subsidiaries." As
consideration for the Morel merger, the Company, after certain post-closing
adjustments, issued 650,000 shares of Common Stock to Stephen L. Morel and Mark
Morel (the "Morel Shareholders"). Also in connection with the Morel merger, the
Company entered into a registration rights agreement with the Morel
Shareholders, pursuant to which the Morel Shareholders were granted the right,
under certain circumstances, to have up to 50% of their shares registered, at
the Company's expense, on an equal basis with other shareholders of the Company
within two years after the date of closing. These registration rights were
waived as to the July 1996 public offering and as to the Form S-3 Registration.
Prior to the Morel merger, no material relationship existed between Morel and
the Company or any of its affiliates, directors, officers, or

                                       57
<PAGE>
their associates, except that Morel and certain subsidiaries of the Company
transacted business from time to time in the ordinary course of business.

     In fiscal 1996, Robert L. Smith, then a director of the Company, loaned the
Company $150,000 pursuant to a promissory note from the Company to Mr. Smith
that accrued interest at 18% per annum and was due in full on September 27,
1996. This loan, plus accrued interest and a loan fee that together amounted to
$15,000, was paid in full on August 9, 1996. The Company also issued Mr. Smith a
warrant to purchase 37,500 shares of Common Stock at $4.80 per share that is now
immediately exercisable. In addition, the warrant grants Mr. Smith certain
rights to register the shares issuable upon exercise of the warrant. Mr. Smith
waived his rights to register those shares in the July 1996 public offering and
the Preferred Stock offering. The warrant is currently held by Mr. Smith's
estate.

     In June 1997, the Company entered into a letter of intent with Jungle
Street in connection with the Company's formation of its Information Technology
Group. See Item 1 - "Description of Business - The Information Technology
Group." Under the Jungle Street letter of intent, the Company would purchase
newly issued shares of common stock of Jungle Street amounting to 60% of the
outstanding common stock of Jungle Street. In addition, the Company has entered
into an Operating Agreement with Jungle Street, and has advanced funds to Jungle
Street and its subsidiary pursuant to that Operating Agreement. See Item 2
"Business - Information Technology Group" and Item 7 - "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources." Roger Vallo and Donald Cotton, directors of the Company, are
directors and shareholders, and Mr. Vallo is CEO, of Jungle Street. In addition,
Donald A. Wright, the Company's Chief Executive Officer and President, and Nick
A. Gerde, the Company's Chief Financial Officer, Vice President, Finance and
Treasurer, are shareholders of Jungle Street and were directors until June 1997.
Allen Dahl, a director of the Company, is a shareholder, but not a director, of
Jungle Street. Messrs. Vallo, Cotton, Dahl, Wright, and Gerde have each
personally guaranteed, or indemnified guarantors of, certain obligations of
Jungle Street or its subsidiary.

                                       58
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits


Exhibit
 Number    Description
 ------    -----------

  3.1      Articles of Incorporation of Pacific Aerospace & Electronics, Inc. as
           filed on September 20, 1996, with the Secretary of State of the State
           of Washington.(12)
  3.2      Articles of Merger of PCT Holdings, Inc. into Pacific Aerospace &
           Electronics, Inc., filed with the Nevada Secretary of State on
           November 30, 1996.(12)
  3.3      Articles of Merger of PCT Holdings, Inc. with and into Pacific
           Aerospace & Electronics, Inc., filed with the Washington Secretary of
           State on November 30, 1996.(12)
  3.4      Amendment to Articles of Incorporation of the Company Containing
           Designation of Rights and Preferences of Series A Convertible
           Preferred Stock, as corrected. (13)
  3.5      Bylaws of Pacific Aerospace & Electronics, Inc.(12)
  4.1      Form of specimen certificate for Common Stock.(12)
  4.2      Form of specimen certificate for Warrants.(12)
  4.3      Form of specimen certificate for the Preferred Stock.(13)
  4.4      Warrant Agreement between Interwest Transfer Co., Inc. and PCT
           Holdings, Inc. dated July 1, 1996.(11)
  4.5      Registration Rights Agreement, dated December 1, 1995, between PCT
           Holdings, Inc. and Stephen L. Morel and Mark Morel.(6)
  4.6      Registration Rights Agreement, dated November 30, 1995, between PCT
           Holdings, Inc., Seismic Safety Products, Inc., a Florida corporation,
           and certain of its shareholders.(6)
  4.7      Registration Rights Agreement between the Company and the Selling
           Shareholders in the Preferred Stock offering. (13)
  4.8      Common Stock Purchase Warrant from PCT Holdings, Inc. to UTCO
           Associates, Ltd. dated May 22, 1996.(2)
  4.9      Purchase Warrant from PCT Holdings, Inc. to Paulson Investment
           Company, Inc. dated July 15, 1996.(11)
  4.10     Purchase Warrant from PCT Holdings, Inc. to Cohig & Associates, Inc.
           dated July 15, 1996.(11)
  4.11     Common Stock Purchase Warrant from Pacific Aerospace & Electronics,
           Inc. to Donald A. Wright dated as of November 30, 1996.(15)
  4.12     Common Stock Purchase Warrant from Pacific Aerospace & Electronics,
           Inc. to Nick A. Gerde dated as of November 30, 1996.(15)
  4.13     Common Stock Purchase Warrant from PCT Holdings, Inc. to Robert L.
           Smith dated as of May 22, 1996.(7)
  4.14     Common Stock Purchase Warrant from Pacific Aerospace & Electronics,
           Inc. to David A. Noyes & Company dated June 3, 1997 (18)
  4.15     Common Stock Purchase Warrant from Pacific Aerospace & Electronics,
           Inc. to Gregory K. Smith dated June 3, 1997 (18)
  4.16     Common Stock Purchase Warrant from Pacific Aerospace & Electronics,
           Inc. to Richard Cross dated June 3, 1997 (18)
  4.17     Common Stock Purchase Warrant from Pacific Aerospace & Electronics,
           Inc. to Nestor Wiegand dated June 3, 1997 (18)
  10.1     Letter Agreement, dated January 3, 1995, between PCT Holdings, Inc.
           and Lysys Ltd.(4)
  10.2     Amended and Restated Stock Incentive Plan.(17)
  10.3     Independent Director Stock Plan.(16)

                                       59
<PAGE>
  10.4     Amendment to Employment Agreement, dated March 1, 1996, between PCT
           Holdings, Inc. and Donald A. Wright.(7)
  10.5     Employment Agreement, dated June 1, 1997, between Pacific Aerospace &
           Electronics, Inc. and Donald A. Wright. (18)
  10.6     Amended Employment Agreement, dated March 1, 1996, between PCT
           Holdings, Inc. and Nick A. Gerde.(7)
  10.7     Employment Agreement, dated June 1, 1997, between Pacific Aerospace &
           Electronics, Inc. and Nick A. Gerde.(18)
  10.8     Commitment Letter, dated May 29, 1997, from Key Bank of Washington to
           Pacific Aerospace & Electronics, Inc.(18)
  10.9     Loan Agreement, dated June 30, 1997, between Keybank National
           Association and Pacific Aerospace & Electronics, Inc.(18)
  10.10    Revolving Note, dated June 30, 1997, from Pacific Aerospace &
           Electronics, Inc. to Keybank National Association.(18)
  10.11    Loan and Security Agreement, dated April 24, 1995, between Silicon
           Valley Bank and Pacific Aerospace & Electronics, Inc., Ceramic
           Devices, Inc., Cashmere Manufacturing Co., Inc., Pacific Coast
           Technologies, Inc.(4)
  10.12    Loan Modification Agreement, dated July 26, 1996, between Silicon
           Valley Bank and PCT Holdings, Inc., Ceramic Devices, Inc., Cashmere
           Manufacturing Co., Inc., Pacific Coast Technologies, Inc. and Seismic
           Safety Products, Inc.(11)
  10.13    Loan Modification Agreement, dated January 31, 1997, between Silicon
           Valley Bank and Pacific Aerospace & Electronics, Inc., Ceramic
           Devices, Inc., Cashmere Manufacturing Co., Inc., Pacific Coast
           Technologies, Inc. and Seismic Safety Products, Inc.(18)
  10.14    Promissory Note, dated June 1, 1994, in the principal amount of
           $400,000, from Pacific Coast Technologies, Inc. to James C. Kyle and
           Carol A. Kyle.(4)
  10.15    Promissory Note Extension, dated January 1, 1995, in the principal
           amount of $387,800, from Pacific Coast Technologies, Inc. to James C.
           Kyle and Carol A. Kyle.(4)
  10.16    Revised and Restated Promissory Note, dated May 17, 1996, from Morel
           Industries, Inc. to Richard and Jacquelyn Doane.(8)
  10.17    Guaranty, dated January 24, 1996, from PCT Holdings, Inc. to Richard
           and Jacquelyn Doane.(7)
  10.18    Confirmation of Guaranty, dated May 17, 1996, from PCT Holdings, Inc.
           to Richard and Jacquelyn Doane.(8)
  10.19    Promissory Note, dated March 15, 1996, from Cashmere Manufacturing
           Co., Inc. to Cashmere Valley Bank, Inc.(8)
  10.20    Commercial Guaranty, dated March 3, 1993, from Herman L. "Jack" Jones
           to Cashmere Valley Bank.(8)
  10.21    Amended and Restated Promissory Note from PCT Holdings, Inc. to
           Robert L. Smith dated as of May 22, 1996.(7)
  10.22    Promissory Note from PCT Holdings, Inc. to UTCO Associates, Ltd.
           dated as of May 22, 1996.(7)
  10.23    Security Agreement between PCT Holdings, Inc. and UTCO Associates,
           Ltd. dated as of May 22, 1996.(8)
  10.24    Asset Purchase Agreement, dated October 27, 1995, between PCT
           Holdings, Inc., a Nevada corporation, Seismic Safety Products, Inc.,
           a Washington corporation, PCT Holdings, Inc., a Washington
           corporation, Seismic Safety Products, Inc., a Florida corporation,
           and certain of its affiliates.(5)
  10.25    Patent Purchase Agreement, dated October 27, 1995, between PCT
           Holdings, Inc., a Washington corporation, Seismic Safety Products,
           Inc., a Washington corporation, and James C. McGill.(5)

                                       60
<PAGE>
  10.26    Patent Purchase Agreement, dated October 24, 1995, between PCT
           Holdings, Inc., a Washington corporation, Seismic Safety Products,
           Inc., a Washington corporation, and James C. McGill and Antonio F.
           Fernandez.(5)
  10.27    Agreement and Plan of Merger, dated November 30, 1995, between PCT
           Holdings, Inc., a Nevada corporation, Morel Acquisition Corporation,
           Morel Industries, Inc., Stephen L. Morel, and Mark Morel.(6)
  10.28    Asset Purchase Agreement, dated April 30, 1997, between Pacific
           Aerospace & Electronics, Inc., NTI, Inc. and Northwest Technical
           Industries, Incorporated.(14)
  10.29    Intellectual Property Acquisition and License Agreement, dated June
           1, 1994, between Pacific Coast Technologies, Inc. and James C.
           Kyle.(4)
  10.30    Amended and Restated Agreement, dated May 30, 1996, between Herman L.
           "Jack" Jones, John Eder and Cashmere Manufacturing Co., Inc.(9)
  10.31    Renewal Promissory Note from Herman L. "Jack" Jones to PCT Holdings,
           Inc. dated March 15, 1996.(9)
  10.32    Lease Agreement, dated February 1, 1993, between the Port of Chelan
           County and Pacific Coast Technologies, Inc.(4)
  10.33    Addendum to Lease Agreement with Pacific Coast Technologies, Inc.,
           dated April 22, 1993, between the Port of Chelan County and Pacific
           Coast Technologies, Inc.(4)
  10.34    1994 Addendum to Lease Agreement with Pacific Coast Technologies,
           Inc., executed May 11, 1995 between the Port of Chelan County and
           Pacific Coast Technologies, Inc.(18)
  10.35    1995 Addendum to Lease Agreement with Pacific Coast Technologies,
           Inc., dated September 19, 1995 between the Port of Chelan County and
           Pacific Coast Technologies, Inc.(18)
  10.36    1997 Addendum to Lease Agreement with Pacific Coast Technologies,
           Inc., last executed as of June 19, 1997 between the Port of Chelan
           County and Pacific Coast Technologies, Inc.(18)
  10.37    Lease Agreement between the Port of Chelan County and Cashmere
           Manufacturing Co., Inc. dated November 4, 1994.(8)
  10.38    Building Construction Agreement between the Port of Chelan County and
           Cashmere Manufacturing Co., Inc. dated November 4, 1994.(8)
  10.39    General Terms Agreement No. PLR-950 Relating to Boeing Model Aircraft
           between Cashmere Manufacturing Co., Inc. and Boeing Commercial
           Airplane Group, effective as of February 5, 1990, as amended.(8)
  10.40    Special Business Provisions No. L-890821-8140N between The Boeing
           Company and Cashmere Manufacturing Co., Inc. effective as of December
           18, 1992.(8)(10)
  10.41    Special Business Provisions No. L-500660-8134N between The Boeing
           Company and Cashmere Manufacturing Co., Inc. effective as of December
           31, 1991.(8)(10)
  10.42    Special Business Provisions No. L-435579-8180N between The Boeing
           Company and Cashmere Manufacturing Co., Inc. effective as of August
           11, 1994.(8)(10)
  10.43    Special Business Provisions No. PLR-950A between The Boeing Company
           and Cashmere Manufacturing Co., Inc. effective as of February 5,
           1990.(8)(10)
  10.44    Administrative Agreement No. L-435579-8180N between Cashmere
           Manufacturing Co., Inc. and Boeing Commercial Airplane Group
           effective as of August 11, 1994.(8)
  10.45    Special Business Provisions No. POP-65311-0047 between The Boeing
           Company and Cashmere Manufacturing Co., Inc. effective as of February
           26, 1996.(8)(10)
  10.46    General Terms Agreement No. BCA-65311-0044 between The Boeing Company
           and Cashmere Manufacturing Co., Inc. effective as of February 26,
           1996.(8)
  16.1     Letter from accountant regarding a change of accountants.(3)
  21.      List of Subsidiaries.(18)
  23.      Consent of Moss Adams LLP.(18)

                                       61
<PAGE>
  27.      Financial Data Schedule.(18)

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

(1)  Purposely Omitted.

(2)  Incorporated by reference to the Company's Registration Statement on Form
     8-A filed on May 16, 1995.

(3)  Incorporated by reference to the Company's Current Report on Form 8-K/A
     filed on June 22, 1995.

(4)  Incorporated by reference to the Company's Annual Report on Form 10-KSB of
     the year ended May 31, 1995.

(5)  Incorporated by reference to the Company's Current Report on Form 10-QSB
     for the quarterly period ended November 30, 1995.

(6)  Incorporated by reference to the Company's Current Report on Form 8-K filed
     on December 18, 1995.

(7)  Incorporated by reference to the Company's Registration Statement on Form
     SB-2 filed on May 31, 1996.

(8)  Incorporated by reference to Amendment No. 1 to the Company's Registration
     Statement on Form SB-2 filed on June 19, 1996.

(9)  Incorporated by reference to Amendment No. 2 to the Company's Registration
     Statement on Form SB-2 filed on July 12, 1996.

(10) Subject to confidential treatment. Omitted confidential information was
     filed separately with the Securities and Exchange Commission.

(11) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
     the year ended May 31, 1996.

(12) Incorporated by reference to the Company's Current Report on Form 8-K filed
     on December 12, 1996, reporting the Reincorporation Merger.

(13) Incorporated by reference to the Company's Current Report on Form 8-K filed
     on March 12, 1997, reporting the Preferred Stock offering.

(14) Incorporated by reference to the Company's Current Report on Form 8-K filed
     on May 15, 1997. reporting the NTI acquisition.

(15) Incorporated by reference to the Company's Registration Statement on Form
     S-8 filed on June 11, 1997.

(16) Incorporated by reference to the Company's Registration Statement of
     Certain Successor Issuers on Form 8-B filed on February 6, 1997.

(17) Incorporated by reference to the Company's Current Report on Form 10-QSB
     for the quarterly period ended November 30, 1996.

                                       62
<PAGE>
(18) Filed with this Form 10-KSB.


     (b) Reports on Form 8-K.

          (i) The Company filed a Current Report on Form 8-K, dated February 10,
1997, reporting the Preferred Stock offering and the NTI letter of intent.

          (ii) The Company filed a Current Report on Form 8-K, dated April 30,
1997, reporting the acquisition of NTI.

                                       63
<PAGE>
                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

Date:  July 31, 1997

                                       PACIFIC AEROSPACE & ELECTRONICS, INC.


                                       By  /s/ DONALD A. WRIGHT
                                           -------------------------------------
                                           DONALD A. WRIGHT
                                           President and Chief Executive Officer

     Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the following capacities on July 31, 1997.

Signatures                              Title
----------                              -----

/s/ DONALD A. WRIGHT                    President, Chief Executive Officer, and
----------------------------------      Chairman of the Board
DONALD A. WRIGHT                        (Principal Executive Officer)


/s/ NICK A. GERDE                       Vice President, Finance, Chief Financial
----------------------------------      Officer, Treasurer and Assistant
NICK A. GERDE                           Secretary (Principal Financial and
                                        Accounting Officer)


/s/   DONALD B. COTTON
----------------------------------      Director
DONALD B. COTTON                  


/s/  ALLEN W. DAHL                      Director
----------------------------------
ALLEN W. DAHL


/s/ HERMAN L. "JACK" JONES              Director
----------------------------------
HERMAN L. "JACK" JONES


/s/  DALE L. RASMUSSEN                  Director
----------------------------------
DALE L. RASMUSSEN


/s/ URS DIEBOLD                         Director
----------------------------------
URS DIEBOLD


/s/  ROGER P. VALLO                     Director
----------------------------------
ROGER P. VALLO


/s/ WILLIAM A. WHEELER                  Director
----------------------------------
WILLIAM A. WHEELER

                                       64
<PAGE>
                                  EXHIBIT INDEX

     The following documents are filed herewith or have been included as
exhibits to previous filings with the Securities and Exchange Commission and are
incorporated by reference as indicated below.

Exhibit
 Number    Description
 ------    -----------

  3.1      Articles of Incorporation of Pacific Aerospace & Electronics, Inc. as
           filed on September 20, 1996, with the Secretary of State of the State
           of Washington.(12)
  3.2      Articles of Merger of PCT Holdings, Inc. into Pacific Aerospace &
           Electronics, Inc., filed with the Nevada Secretary of State on
           November 30, 1996.(12)
  3.3      Articles of Merger of PCT Holdings, Inc. with and into Pacific
           Aerospace & Electronics, Inc., filed with the Washington Secretary of
           State on November 30, 1996.(12)
  3.4      Amendment to Articles of Incorporation of the Company Containing
           Designation of Rights and Preferences of Series A Convertible
           Preferred Stock, as corrected. (13)
  3.5      Bylaws of Pacific Aerospace & Electronics, Inc.(12)
  4.1      Form of specimen certificate for Common Stock.(12)
  4.2      Form of specimen certificate for Warrants.(12)
  4.3      Form of specimen certificate for the Preferred Stock.(13)
  4.4      Warrant Agreement between Interwest Transfer Co., Inc. and PCT
           Holdings, Inc. dated July 1, 1996.(11)
  4.5      Registration Rights Agreement, dated December 1, 1995, between PCT
           Holdings, Inc. and Stephen L. Morel and Mark Morel.(6)
  4.6      Registration Rights Agreement, dated November 30, 1995, between PCT
           Holdings, Inc., Seismic Safety Products, Inc., a Florida corporation,
           and certain of its shareholders.(6)
  4.7      Registration Rights Agreement between the Company and the Selling
           Shareholders in the Preferred Stock offering. (13)
  4.8      Common Stock Purchase Warrant from PCT Holdings, Inc. to UTCO
           Associates, Ltd. dated May 22, 1996.(2)
  4.9      Purchase Warrant from PCT Holdings, Inc. to Paulson Investment
           Company, Inc. dated July 15, 1996.(11)
  4.10     Purchase Warrant from PCT Holdings, Inc. to Cohig & Associates, Inc.
           dated July 15, 1996.(11)
  4.11     Common Stock Purchase Warrant from Pacific Aerospace & Electronics,
           Inc. to Donald A. Wright dated as of November 30, 1996.(15)
  4.12     Common Stock Purchase Warrant from Pacific Aerospace & Electronics,
           Inc. to Nick A. Gerde dated as of November 30, 1996.(15)
  4.13     Common Stock Purchase Warrant from PCT Holdings, Inc. to Robert L.
           Smith dated as of May 22, 1996.(7)
  4.14     Common Stock Purchase Warrant from Pacific Aerospace & Electronics,
           Inc. to David A. Noyes & Company dated June 3, 1997 (18)
  4.15     Common Stock Purchase Warrant from Pacific Aerospace & Electronics,
           Inc. to Gregory K. Smith dated June 3, 1997 (18)
  4.16     Common Stock Purchase Warrant from Pacific Aerospace & Electronics,
           Inc. to Richard Cross dated June 3, 1997 (18)
  4.17     Common Stock Purchase Warrant from Pacific Aerospace & Electronics,
           Inc. to Nestor Wiegand dated June 3, 1997 (18)
  10.1     Letter Agreement, dated January 3, 1995, between PCT Holdings, Inc.
           and Lysys Ltd.(4)
  10.2     Amended and Restated Stock Incentive Plan.(17)
  10.3     Independent Director Stock Plan.(16)
  10.4     Amendment to Employment Agreement, dated March 1, 1996, between PCT
           Holdings, Inc. and Donald A. Wright.(7)
  10.5     Employment Agreement, dated June 1, 1997, between Pacific Aerospace &
           Electronics, Inc. and Donald A. Wright. (18)

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<PAGE>
  10.6     Amended Employment Agreement, dated March 1, 1996, between PCT
           Holdings, Inc. and Nick A. Gerde.(7)
  10.7     Employment Agreement, dated June 1, 1997, between Pacific Aerospace &
           Electronics, Inc. and Nick A. Gerde.(18)
  10.8     Commitment Letter, dated May 29, 1997, from Key Bank of Washington to
           Pacific Aerospace & Electronics, Inc.(18)
  10.9     Loan Agreement, dated June 30, 1997, between Keybank National
           Association and Pacific Aerospace & Electronics, Inc.(18)
  10.10    Revolving Note, dated June 30, 1997, from Pacific Aerospace &
           Electronics, Inc. to Keybank National Association.(18)
  10.11    Loan and Security Agreement, dated April 24, 1995, between Silicon
           Valley Bank and Pacific Aerospace & Electronics, Inc., Ceramic
           Devices, Inc., Cashmere Manufacturing Co., Inc., Pacific Coast
           Technologies, Inc.(4)
  10.12    Loan Modification Agreement, dated July 26, 1996, between Silicon
           Valley Bank and PCT Holdings, Inc., Ceramic Devices, Inc., Cashmere
           Manufacturing Co., Inc., Pacific Coast Technologies, Inc. and Seismic
           Safety Products, Inc.(11)
  10.13    Loan Modification Agreement, dated January 31, 1997, between Silicon
           Valley Bank and Pacific Aerospace & Electronics, Inc., Ceramic
           Devices, Inc., Cashmere Manufacturing Co., Inc., Pacific Coast
           Technologies, Inc. and Seismic Safety Products, Inc.(18)
  10.14    Promissory Note, dated June 1, 1994, in the principal amount of
           $400,000, from Pacific Coast Technologies, Inc. to James C. Kyle and
           Carol A. Kyle.(4)
  10.15    Promissory Note Extension, dated January 1, 1995, in the principal
           amount of $387,800, from Pacific Coast Technologies, Inc. to James C.
           Kyle and Carol A. Kyle.(4)
  10.16    Revised and Restated Promissory Note, dated May 17, 1996, from Morel
           Industries, Inc. to Richard and Jacquelyn Doane.(8)
  10.17    Guaranty, dated January 24, 1996, from PCT Holdings, Inc. to Richard
           and Jacquelyn Doane.(7)
  10.18    Confirmation of Guaranty, dated May 17, 1996, from PCT Holdings, Inc.
           to Richard and Jacquelyn Doane.(8)
  10.19    Promissory Note, dated March 15, 1996, from Cashmere Manufacturing
           Co., Inc. to Cashmere Valley Bank, Inc.(8)
  10.20    Commercial Guaranty, dated March 3, 1993, from Herman L. "Jack" Jones
           to Cashmere Valley Bank.(8)
  10.21    Amended and Restated Promissory Note from PCT Holdings, Inc. to
           Robert L. Smith dated as of May 22, 1996.(7)
  10.22    Promissory Note from PCT Holdings, Inc. to UTCO Associates, Ltd.
           dated as of May 22, 1996.(7)
  10.23    Security Agreement between PCT Holdings, Inc. and UTCO Associates,
           Ltd. dated as of May 22, 1996.(8)
  10.24    Asset Purchase Agreement, dated October 27, 1995, between PCT
           Holdings, Inc., a Nevada corporation, Seismic Safety Products, Inc.,
           a Washington corporation, PCT Holdings, Inc., a Washington
           corporation, Seismic Safety Products, Inc., a Florida corporation,
           and certain of its affiliates.(5)
  10.25    Patent Purchase Agreement, dated October 27, 1995, between PCT
           Holdings, Inc., a Washington corporation, Seismic Safety Products,
           Inc., a Washington corporation, and James C. McGill.(5)
  10.26    Patent Purchase Agreement, dated October 24, 1995, between PCT
           Holdings, Inc., a Washington corporation, Seismic Safety Products,
           Inc., a Washington corporation, and James C. McGill and Antonio F.
           Fernandez.(5)
  10.27    Agreement and Plan of Merger, dated November 30, 1995, between PCT
           Holdings, Inc., a Nevada corporation, Morel Acquisition Corporation,
           Morel Industries, Inc., Stephen L. Morel, and Mark Morel.(6)
  10.28    Asset Purchase Agreement, dated April 30, 1997, between Pacific
           Aerospace & Electronics, Inc., NTI, Inc. and Northwest Technical
           Industries, Incorporated.(14)

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<PAGE>
  10.29    Intellectual Property Acquisition and License Agreement, dated June
           1, 1994, between Pacific Coast Technologies, Inc. and James C.
           Kyle.(4)
  10.30    Amended and Restated Agreement, dated May 30, 1996, between Herman L.
           "Jack" Jones, John Eder and Cashmere Manufacturing Co., Inc.(9)
  10.31    Renewal Promissory Note from Herman L. "Jack" Jones to PCT Holdings,
           Inc. dated March 15, 1996.(9)
  10.32    Lease Agreement, dated February 1, 1993, between the Port of Chelan
           County and Pacific Coast Technologies, Inc.(4)
  10.33    Addendum to Lease Agreement with Pacific Coast Technologies, Inc.,
           dated April 22, 1993, between the Port of Chelan County and Pacific
           Coast Technologies, Inc.(4)
  10.34    1994 Addendum to Lease Agreement with Pacific Coast Technologies,
           Inc., executed May 11, 1995 between the Port of Chelan County and
           Pacific Coast Technologies, Inc.(18)
  10.35    1995 Addendum to Lease Agreement with Pacific Coast Technologies,
           Inc., dated September 19, 1995 between the Port of Chelan County and
           Pacific Coast Technologies, Inc.(18)
  10.36    1997 Addendum to Lease Agreement with Pacific Coast Technologies,
           Inc., last executed as of June 19, 1997 between the Port of Chelan
           County and Pacific Coast Technologies, Inc.(18)
  10.37    Lease Agreement between the Port of Chelan County and Cashmere
           Manufacturing Co., Inc. dated November 4, 1994.(8)
  10.38    Building Construction Agreement between the Port of Chelan County and
           Cashmere Manufacturing Co., Inc. dated November 4, 1994.(8)
  10.39    General Terms Agreement No. PLR-950 Relating to Boeing Model Aircraft
           between Cashmere Manufacturing Co., Inc. and Boeing Commercial
           Airplane Group, effective as of February 5, 1990, as amended.(8)
  10.40    Special Business Provisions No. L-890821-8140N between The Boeing
           Company and Cashmere Manufacturing Co., Inc. effective as of December
           18, 1992.(8)(10)
  10.41    Special Business Provisions No. L-500660-8134N between The Boeing
           Company and Cashmere Manufacturing Co., Inc. effective as of December
           31, 1991.(8)(10)
  10.42    Special Business Provisions No. L-435579-8180N between The Boeing
           Company and Cashmere Manufacturing Co., Inc. effective as of August
           11, 1994.(8)(10)
  10.43    Special Business Provisions No. PLR-950A between The Boeing Company
           and Cashmere Manufacturing Co., Inc. effective as of February 5,
           1990.(8)(10)
  10.44    Administrative Agreement No. L-435579-8180N between Cashmere
           Manufacturing Co., Inc. and Boeing Commercial Airplane Group
           effective as of August 11, 1994.(8)
  10.45    Special Business Provisions No. POP-65311-0047 between The Boeing
           Company and Cashmere Manufacturing Co., Inc. effective as of February
           26, 1996.(8)(10)
  10.46    General Terms Agreement No. BCA-65311-0044 between The Boeing Company
           and Cashmere Manufacturing Co., Inc. effective as of February 26,
           1996.(8)
  16.1     Letter from accountant regarding a change of accountants.(3)
  21.      List of Subsidiaries.(18)
  23.      Consent of Moss Adams LLP.(18)
  27.      Financial Data Schedule.(18)

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

(1)  Purposely Omitted.

(2)  Incorporated by reference to the Company's Registration Statement on Form
     8-A filed on May 16, 1995.

(3)  Incorporated by reference to the Company's Current Report on Form 8-K/A
     filed on June 22, 1995.

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<PAGE>
(4)  Incorporated by reference to the Company's Annual Report on Form 10-KSB of
     the year ended May 31, 1995.

(5)  Incorporated by reference to the Company's Current Report on Form 10-QSB
     for the quarterly period ended November 30, 1995.

(6)  Incorporated by reference to the Company's Current Report on Form 8-K filed
     on December 18, 1995.

(7)  Incorporated by reference to the Company's Registration Statement on Form
     SB-2 filed on May 31, 1996.

(8)  Incorporated by reference to Amendment No. 1 to the Company's Registration
     Statement on Form SB-2 filed on June 19, 1996.

(9)  Incorporated by reference to Amendment No. 2 to the Company's Registration
     Statement on Form SB-2 filed on July 12, 1996.

(10) Subject to confidential treatment. Omitted confidential information was
     filed separately with the Securities and Exchange Commission.

(11) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
     the year ended May 31, 1996.

(12) Incorporated by reference to the Company's Current Report on Form 8-K filed
     on December 12, 1996, reporting the Reincorporation Merger.

(13) Incorporated by reference to the Company's Current Report on Form 8-K filed
     on March 12, 1997, reporting the Preferred Stock offering.

(14) Incorporated by reference to the Company's Current Report on Form 8-K filed
     on May 15, 1997. reporting the NTI acquisition.

(15) Incorporated by reference to the Company's Registration Statement on Form
     S-8 filed on June 11, 1997.

(16) Incorporated by reference to the Company's Registration Statement of
     Certain Successor Issuers on Form 8-B filed on February 6, 1997.

(17) Incorporated by reference to the Company's Current Report on Form 10-QSB
     for the quarterly period ended November 30, 1996.

(18) Filed with this Form 10-KSB.

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