##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

|      |  |                                                                                         
|----- |  | ----------------------------------------------------------------------------------------
|[X]   |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934    
|      |  | For the fiscal year ended May 31, 2002                                                  
|     
|[   ] |  | 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.
(Exact Name of Registrant as Specified in Its Charter)

|                                                                                                  |  |                                     
|------------------------------------------------------------------------------------------------- |  | ------------------------------------
|Washington                                                                                        |  | 91-1744587                          
|(State or Other Jurisdiction of
Incorporation or Organization)                                    |  | (I.R.S. Employer
Identification No.)
|430 Olds Station Road, Third Floor
Wenatchee, Washington
(Address of Principal Executive Offices) |  | 98801
(Zip Code)                    



| | Registrants telephone number, including area code:     (509) 667-9600
| | ----------------------------------------------------------------------

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)

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes   [X]    No  [   ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any amendment to
this Form 10-K.
x





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The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the closing price for the registrants common stock on the
NASD Over-the-Counter Bulletin Board as of August 29, 2002, was approximately
$1,262,000.

The number of shares outstanding of the Registrants common stock, $.001 par
value per share, as of August 29, 2002 was 90,734,410 shares.

DOCUMENTS INCORPORATED BY REFERENCE: None.





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|              |                                                                                               |  |  |  |  |  |  | 
|------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I       
|              | ITEM 1. DESCRIPTION OF BUSINESS                                                              
|              | ITEM 2. DESCRIPTION OF PROPERTY                                                              
|              | ITEM 3. LEGAL PROCEEDINGS                                                                    
|              | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|PART II      
|              | ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS                             
|              | ITEM 6. SELECTED FINANCIAL DATA                                                              
|              | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|              | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                          
|              | ITEM 8. FINANCIAL STATEMENTS                                                                 
|              | ITEM 8A. SELECTED QUARTERLY FINANCIAL DATA                                                   
|              | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|PART III     
|              | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY                                     
|              | ITEM 11. EXECUTIVE COMPENSATION                                                              
|              | ITEM 12: SECURITIES OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL SHAREHOLDERS    
|              | ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|              | ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                     
|SIGNATURES   
|EXHIBIT INDEX
|EXHIBIT 21.1 
|EXHIBIT 23.1 



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TABLE OF CONTENTS

|                  |  |                                                                                       |  |     
|----------------- |  | ------------------------------------------------------------------------------------- |  | ----
|Item of Form 10-K |  |                                                                                       |  | Page
|                  |  |                                                                                       |  |     
|PART I            |  |                                                                                       |  |     
|Item 1 -          |  | Description of Business                                                               |  |     
|Item 2 -          |  | Description of Property                                                               |  |     
|Item 3 -          |  | Legal Proceedings                                                                     |  |     
|Item 4 -          |  | Submission of Matters to a Vote of Security Holders                                   |  |     
|PART II           |  |                                                                                       |  |     
|Item 5 -          |  | Market for Common Equity and Related Shareholder Matters                              |  |     
|Item 6 -          |  | Selected Financial Data                                                               |  |     
|Item 7 -          |  | Managements Discussion and Analysis of
Financial Condition and Results of Operations |  |     
|Item 7A -         |  | Quantitative and Qualitative Disclosures About Market Risk                            |  |     
|Item 8 -          |  | Financial Statements                                                                  |  |     
|Item 8A -         |  | Selected Quarterly Financial Data                                                     |  |     
|Item 9 -          |  | Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure  |  |     
|PART III          |  |                                                                                       |  |     
|Item 10 -         |  | Directors and Executive Officers of the Company                                       |  |     
|Item 11 -         |  | Executive Compensation                                                                |  |     
|Item 12 -         |  | Security Ownership of Certain Beneficial
Owners and Management                        |  |     
|Item 13 -         |  | Certain Relationships and Related Transactions                                        |  |     
|Item 14 -         |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       |  |     
|SIGNATURES        |  |                                                                                       |  |     





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PART I




ITEM 1. DESCRIPTION OF BUSINESS

Overview

We are an engineering and manufacturing company with operations in the United
States and the United Kingdom. We design, manufacture and sell components and
subassemblies used in technically demanding environments. Products that we
produce primarily for the aerospace, defense and transportation industries
include machined, cast and formed metal parts and subassemblies, using
aluminum, titanium, magnesium and other metals. Products that we produce
primarily for the defense, electronics, telecommunications and medical
industries include components such as hermetically sealed electrical
connectors, instrument packages and ceramic capacitors, filters and
feedthroughs. Our customers include global leaders in all of these industries.

Pacific Aerospace has struggled financially since late 1998, when the
commercial airplane industry suffered a downturn at approximately the same time
that we incurred high-cost, high-yield debt to finance the acquisition of our
European Aerospace Group. We reported a net loss before extraordinary items of
$15,793,000 for our fiscal year ended May 31, 2002. This followed net losses
before extraordinary items of $75,720,000 for our fiscal year ended May 31,
2001 and $13,752,000 for our fiscal year ended May 31, 2000.

Over the last year, we have consolidated our U.S. Operations and European
Operations through the sale and/or closure of several of our unprofitable
divisions. Within our former U.S. Aerospace Group we closed an unprofitable
foundry located in Tacoma, Washington and in June 2001, we completed the sale
of substantially all of the assets of our Casting operation located in Entiat,
Washington. Also, within our former U.S. Aerospace Group we completed the sale
of substantially all of the assets related to our Engineering and Fabrication
Division. The fabrication assets were sold during May 2001 and the engineering
assets were sold in December 2001. We have also shut down our former U.S.
Electronics Groups Display Division in November 2001. We believe that these
closures or sales of business units will strengthen and support our core
electronics and machining operations.

Additionally, in March 2002, we completed the exchange portion of a capital
restructuring (the Exchange). In accordance with an exchange agreement (the
Exchange Agreement), holders (the Noteholders) of all of our then
outstanding 111⁄4% senior subordinated notes due 2005 (the Subordinated
Notes) exchanged $63.7 million aggregate principal amount of the Subordinated
Notes, together with accrued interest thereon, for shares of our common stock,
shares of our Series C Convertible Preferred Stock (Series C Preferred Stock)
and approximately $15.0 million in aggregate principal amount of 10%
pay-in-kind senior subordinated notes (the PIK Notes). The Series C
Preferred Stock will automatically convert (the Automatic Conversion) into
common stock following shareholder approval of an increase in the number of our
authorized shares of common stock. We have filed a preliminary proxy with the
Securities and Exchange Commission (the Commission) regarding the vote to
increase our authorized common stock, among other matters, and expect to hold a
meeting for the approval of such increase as soon as possible following receipt
of clearance from the Commission to do so. However, as a result of the
Exchange, the Noteholders now hold a majority of our outstanding common stock
and we expect at least a majority of the Noteholders to approve the Automatic
Conversion. Accordingly, we anticipate that the amendment will be approved and
that all of the Series C Preferred Stock will be converted to common stock. By
virtue of their common stock and Series C Preferred Stock received in the
Exchange, the Noteholders now beneficially own approximately 97.5% of our
outstanding shares of common stock on a fully-diluted basis. In addition to
exchanging our Subordinated Notes as described above, we also entered into a
new five-year senior secured loan (the New Senior Loan) represented by new
senior secured notes (the New Senior Notes). The New Senior Notes were issued
at a discount so that the proceeds of that loan totaled approximately $22.0
million. The New Senior Notes

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will accrete through May 1, 2007 to $36.0 million and will bear interest at 5%
per annum. We used $16.2 million of the proceeds from the New Senior Notes to
pay off principal and accrued interest on our then outstanding 21% senior
secured loan (of which $13.7 million was still outstanding at May 31, 2001).
The remaining proceeds were used for working capital, to pay the fees and costs
of the restructuring and for other general corporate purposes. A more detailed
description of our restructuring, the Exchange and the New Senior Loan has been
included in Significant Events portion of the Item 7, Managements Discussion
and Analysis of Financial Condition and Results of Operations.

References in this Form 10-K to the Company include Pacific Aerospace &
Electronics, Inc., and its subsidiaries. Our headquarters are located at 430
Olds Station Road, Third Floor, Wenatchee, Washington 98801, and our telephone
number is (509) 667-9600. This Annual Report on Form 10-K relates to the
fiscal year ended May 31, 2002. The description of the Companys business in
this report focuses on the operations as they were organized as of May 31,
2002. Pacific Aerospace & Electronics, Inc.s predecessor, PCT Holdings, Inc.,
a Nevada corporation (PCTH) was incorporated in 1995. In 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.

Operating Segment Realignment

In connection with our restructuring, we have consolidated our operations into
two operating segments, U.S. Operations and European Operations. Each of these
new operating segments is further divided into two business units: Electronic
Components and Machining Components within U.S. Operations; and Metal Casting
and Metal Forming within European Operations. The following chart details the
new classification of each of our previously reported operating segments.

|                                       |  |                                        
|-------------------------------------- |  | ---------------------------------------
|Previously reported operating segments |  | New classification                     
|                                       |  |                                        
|U.S. ELECTRONICS GROUP                 |  |                                        
|Interconnect Division                  |  | U.S. Operations  Electronic Components
|Filter Division                        |  | U.S. Operations  Electronic Components
|Bonded Metals Division                 |  | U.S. Operations  Electronic Components
|Applied Technology Division            |  | U.S. Operations  Electronic Components
|Display Division                       |  | Division discontinued November 2001    
|U.S. AEROSPACE GROUP                   |  |                                        
|Machining Division                     |  | U.S. Operations  Machining Components 
|Casting Division                       |  | Division discontinued June 2001        
|Engineering & Fabrication Division     |  | Division discontinued December 2001    
|EUROPEAN AEROSPACE GROUP               |  |                                        
|Casting Division                       |  | European Operations  Metal Casting    
|Forming Division                       |  | European Operations  Metal Forming    

The following chart identifies, as of May 31, 2002, our operating segments, the
business units that comprise those segments, and the locations of our
operations:

|                           |  |                                                                 
|-------------------------- |  | ----------------------------------------------------------------
|                           |  | Location as of                                                  
|Current operating segments |  | May 31, 2002                                                    
|                           |  |                                                                 
|U.S. Operations            |  |                                                                 
|Electronic Components      |  | Wenatchee, Washington and Sequim, Washington                    
|Machining Components       |  | Wenatchee, Washington                                           
|European Operations        |  |                                                                 
|Metal Casting              |  | Sittingbourne, England
Rochester, England and Worcester, England
|Metal Forming              |  | Welwyn Garden City, England and Birmingham, England             

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Business Strengths

Significant Customer Base

We have a strong, diverse international customer base, which includes many of
the worlds leading companies in their industries. Our customers over the past
year have included companies such as: Advanced Bionics Corporation,
Aeronautical Macchi Manufacturing Corporation (Aermacchi), Agilent
Technologies, Inc., BAE SYSTEMS plc (BAE Systems), Goodrich Corporations
Aerostructures Group (Goodrich, formerly known as BFGoodrich Company), The
Boeing Company (Boeing), European Aeronautic Defence and Space Company N.V.
(EADS), GKN Westland Aerospace, Inc. (GKN Westland), Honeywell
International Inc., Lockheed Martin Corporation, Northern Telecom Ltd.
(Northern Telecom), Northrup Grumman Corporation (Northrup), Vought
Aircraft Industries, Inc. (Vought, formerly Northrup Grumman Corporations
commercial aerostructures group), Parker Hannifan Corporation, Raytheon Company
(Raytheon), Rolls-Royce plc (Rolls-Royce), and TRW Inc.

Strong Technology Position

We utilize specialized manufacturing techniques, advanced materials science,
integrated design, process engineering, and proprietary technologies or
processes in the design and manufacture of our products. We currently own 26
U.S. patents and 6 pending patent applications in non-U.S. jurisdictions, and
use a combination of patented technology, trade secrets and other proprietary
technology in the manufacture of our state-of-the-art electronic components and
packages. We also have a broad base of expertise in precision machining. Our
European Operations have specialized expertise in casting aluminum and
magnesium products using sand and investment casting techniques and its
licensed Sophia Process casting technology. We also have expertise in
superplastic forming of titanium sheet and stretch forming of aluminum sheet.
We are continually working to develop new proprietary technologies, and, in
addition to the numerous patents that we own or have pending, we maintain an
ongoing program of evaluating and protecting our proprietary rights and
processes.

Strong Position in Major Aerospace and Defense Programs

We supply components, parts and assembly tooling to Boeing for each of Boeings
737, 747, 757, 767 and 777 commercial aircraft construction programs and to
members of the Airbus consortium for Airbus A300/310, A318-A321 and A330/340
commercial aircraft construction programs. In addition, we participate in major
defense and military aircraft programs in the U.S. and Europe including
components for the U.S. made F-15, F-18, F-22 and Apache Longbow and the
European made Eurofighter.

Diversity of Product Offerings and Capabilities

We design and manufacture a broad range of precision cast, formed, machined,
finished, and fabricated metal products, as well as a broad range of
specialized electronics components and sub-assemblies. We collaborate with
many of our customers to develop products that meet specific design or
customization requests. We believe that one of our key strengths is our ability
to provide integrated solutions to our customers. We also believe that our
experience and capabilities in providing specialty processes and working with
the changing needs of our customers will be beneficial in allowing us to
respond to changing market trends in the industries that we already serve and
responding to the needs of customers in new markets.

Strategies

Our objective is to be a world class manufacturer that generates profitable
growth by integrating manufacturing processes, introducing new products and
technologies, and developing new customers in

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targeted markets. We believe that pursuing the following business strategies
will enable us to increase market penetration, create operating efficiencies,
and enhance our competitive position.

Integrate and Consolidate Operations

We have closed or sold several of our divisions that were unprofitable and have
consolidated our remaining U.S. operations into one operating segment with two
business units primarily located in Wenatchee, Washington. Within our former
U.S. Aerospace Group we closed an unprofitable foundry located in Tacoma,
Washington and in June 2001, we completed the sale of substantially all of the
assets of our Casting operation located in Entiat, Washington. Also, within
our former U.S. Aerospace Group we completed the sale of substantially all of
the assets related to our Engineering and Fabrication Division. The
fabrication assets were sold during May 2001 and the engineering assets were
sold in December 2001. We also shut down our former U.S. Electronics Groups
Display Division in November 2001. We believe that these closures or sales of
business units will strengthen and support our core electronics and machining
operations. We currently plan to focus our growth efforts internally to
integrate manufacturing processes, develop and refine our proprietary
technologies and new products, expand sales and marketing efforts, and enhance
engineering and value-added processes. By doing so, we expect to reduce costs
and increase operating efficiencies, while providing more complete and faster
solutions to our customers.

Offer Complete Solutions

We have continued to vertically integrate our manufacturing processes, with the
goal of improving operating efficiencies and increasing profit margins. A key
component of this strategy is to use our expertise in advanced materials
science and in the manufacture and assembly of precision products to identify
new products, services, technologies and markets and to provide customers with
total solutions, from design to assembly. Commercial aircraft manufacturers,
defense contractors, and leading manufacturers in other industries are
continuing to move toward purchasing from a smaller number of suppliers that
can supply more integrated systems and pre-assembled parts. By producing
products that integrate our various areas of expertise, we hope to improve our
profit margins and position ourselves to capture a larger share of our
customers total product requirements.

Diversify Customer Base

We believe that two keys to our long-term success will be diversification of
our customer base and expansion of our proprietary technologies into new
markets. We have always believed that our proprietary technologies give us
advantages that many of our competitors do not have. We do not just make parts
based on a drawing  we are able to provide design, modeling and prototyping
services to our customers, as well. We are expanding outside of our historical
markets into new industries, such as the fuel cell and advanced medical
products industries. As a result of these efforts, we plan not only to reduce
our reliance on the cyclical aerospace industry, but also to become an
important part of emerging industries.

Industry Overview

Aerospace

Since 1998, previously favorable trends in the commercial aerospace industry
have been tempered by the Asian financial crisis, efforts by airlines and
airplane manufacturers to reduce costs, terrorist attacks, and other events.
Demand for aerospace components is closely related to delivery and use rates
for commercial aircraft. Delivery and use rates are in turn directly related to
the actual and projected volume of passenger and freight traffic, average
aircraft age, and global fleet size. According to the Boeing 1998 Current
Market Outlook, world air traffic grew 6% from 1996 to 1997, following a 7%
increase in the previous year. However, the Boeing 1999 Current Market Outlook
reported that air travel in 1998 varied

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from the trend, particularly because of decreases in Asian air traffic. In
1999, Boeing revised its estimate for the growth rate of world air travel over
the next ten years to a rate of approximately 4.7% per year. In Boeings 2002
Current Market Outlook, Boeing estimated growth rate of world air travel over
the next 20 years will be approximately 2.9% per year. Boeing has also
projected that the world jet fleet will grow to 32,495 passenger and cargo jets
in 2021 and that the total market potential for new commercial airplanes
between 2002 and 2021 would be 23,930 airplanes.

As in other transportation segments, aircraft manufacturers and defense
contractors have been aggressively searching for ways to improve the quality
and reduce the cost of their manufactured products. One major area of focus has
been the manner in which they work with their supply base. Aircraft
manufacturers and defense contractors have increasingly become product
designers and assemblers rather than vertically integrated manufacturers. As a
result, these manufacturers are outsourcing component manufacturing to
independent suppliers, seeking to benefit from an independent suppliers lower
cost structure and specialized manufacturing knowledge. Suppliers that
demonstrate an ability to effectively deliver a high quality product on the
required delivery schedule at a reasonable cost will benefit from this shift.
In addition, commercial aircraft manufacturers are tending, and defense
contractors are being strongly encouraged by the U.S. Department of Defense, to
purchase from suppliers that can supply more integrated systems and
pre-assembled parts. These shifts are leading to a consolidation in the supply
base. Certain segments of the aerospace supply base are already consolidated,
such as engines, avionics and landing gears. Other segments, however, including
structural components and electronics, remain fragmented. We believe that this
trend toward consolidation presents an opportunity for suppliers with the
financial and management resources to meet their customers needs.

Electronics

The electronics industry is enjoying growth in the Companys specific sectors,
and researchers expect the sector to continue to grow through at least 2004.
Growth in the high reliability electronics industry has been fueled by several
factors, including the rapid pace of technological advancement and development
of new defense and satellite products. The growth in demand by these
sophisticated customers has induced manufacturers to create more complex
designs of lighter, more efficient configurations and higher levels of
performance. Additionally, international demand for advanced electronics
components is growing rapidly as these new developments enter the arena of
available solutions.

The electronics industry is experiencing a dynamic period of mergers and
acquisitions, with BAE Systems buying a Lockheed Martin Sanders division,
Raytheon acquiring Hughes divisions, Northrop Grumman purchasing Litton
Guidance & Controls, and DRS purchasing Texas Instruments divisions, to list a
few. Each of these transactions offered the Company new opportunities to
experience expanded positive exposure within our technology niche. Many of
these industry leaders are involved with the Company in multi-year programs.

Products, Processes and Markets

Our products, manufacturing processes and markets in fiscal 2002, and the
industry segments in which we operated during fiscal 2002, are summarized
below. As noted, we have experienced some changes since the latter part of
fiscal 2001. Within our former U.S. Aerospace Group, we closed an unprofitable
foundry located in Tacoma, Washington, and in June 2001, we completed the sale
of substantially all of the assets of our Casting operation located in Entiat,
Washington. Also, within our former U.S. Aerospace Group, we completed the
sale of substantially all of the assets related to our Engineering and
Fabrication Division. The fabrication assets were sold during May 2001 and the
engineering assets were sold in December 2001. We also shut down our former
U.S. Electronics Groups Display Division in November 2001.

For financial information about operational segments and geographic areas, see
Notes to Consolidated Financial Statements  Note 5 in the Companys
consolidated financial statements for May 31, 2002.

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|                |  |                     |  |                                           |  |                                                                                                                                      |  |                                                                                                                                                                                                                                                                                                   
|--------------- |  | ------------------- |  | ----------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                |  |                     |  |                                           |  | Manufacturing                                                                                                                        |  |                                                                                                                                                                                                                                                                                                   
|Segment         |  | Business Unit       |  | Processes                                 |  | Sample Products                                                                                                                     
|                |  |                     |  |                                           |  |                                                                                                                                      |  |                                                                                                                                                                                                                                                                                                   
|U.
S.           |  | O
P
E
R
A
T
I
O
N
S |  | Electronic
Components
MachiningComponents |  | Design and
manufacture of
electronic
components

Explosive forming
and bonding of
dissimilar metals
Precision machining
and assembly |  | Electronic
connectors,
packages and
assemblies with
ceramic or glass
hermetic seals

Ceramic discoidal
electromagnetic
filters and
capacitors
Metallurgically
welded metals for
use in electronic
connectors,
assemblies and
marine products
Aircraft parts;
medical products;
industrial products
|               
|E
U
R
O
P
E
A
N |  | O
P
E
R
A
T
I
O
N
S |  | Metal
FormingMetal Casting                |  | Hot and
superplastic
titanium forming;
cold stretch
aluminum formingSand casting;
investment casting;
Sophia casting;
machining      |  | Jet engine bulkhead
components;
airframe and engine
details; aircraft
skin panels;
leading edges
Aircraft parts;
aircraft engine
parts; high
performance
motorsport engine
and gearbox parts                                                                                                      

The following chart shows the percentage of total revenue from each business
unit for the past three fiscal years.

|                       |  |                                    |  |                     |        |      |  |      |        |  |  |  |       |  
|---------------------- |  | ---------------------------------- |  | ------------------- | ------ | ---- |  | ---- | ------ |  |  |  | ----- | -
|Segment                |  | Business Unit                      |  | Years Ended May 31,
|                       |  |                                    |  |                    
|                       |  |                                    |  | 2000                |        | 2001 |  | 2002
|                       |  |                                    |  |                     |        |      |  |     
|U.S. Operations        |  | Electronic Components              |  |                     | 18.40% |      |  |      | 20.99% |  |  |  | 24.86 | %
|                       |  | Machining Components               |  |                     | *      |      |  |      | 11.15% |  |  |  | 16.64 | %
|European Operations    |  | Metal Forming                      |  |                     | 24.90% |      |  |      | 21.50% |  |  |  | 25.13 | %
|                       |  | Metal Casting                      |  |                     | 25.60% |      |  |      | 25.70% |  |  |  | 31.51 | %
|Discontinued Divisions |  | Display Division                   |  |                     | *      |      |  |      | *      |  |  |  | *     |  
|                       |  | U.S. Casting Division              |  |                     | *      |      |  |      | *      |  |  |  | N/A   |  
|                       |  | Engineering &
Fabrication Division |  |                     | *      |      |  |      | *      |  |  |  | *     |  



---

|* |  | Less than 10%
|- |  | -------------

U.S. Operations

Electronic Components

In Wenatchee, Washington, our Electronic Components business unit designs and
produces lightweight, hermetically sealed electronics housings and components
for the space, medical, energy and military markets. Utilizing proprietary
sealants such as our Kryoflex® ceramic and other patented and proprietary

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technologies, the unit is known as a supplier of some of the most durable
products on the market today. Applications include many high profile projects,
such as the International Space Station, the Javelin Missile, the Longbow
Missile, the F-15, F-18 and F-22 current production military aircraft, the THAD
Missile and the Joint Strike Fighter aircraft.

Utilizing our proprietary and patented ceramic joining technologies, we have
developed and continue to develop innovative solutions for components used in a
number of medical applications. For example, we make components for
implantable neuro-stimulators for the management of such maladies as
incontinence, epilepsy, Hodgkins disease, loss of muscle control, and chronic
pain. Other medical component applications include a zirconia/titanium housing
for a cochlear implant device, implantable defibrillator components, a left
ventricular assist device, and artificial heart components.

The state of the art machining capability within the Wenatchee facility
allows us to comply with the very precise tolerances (up to 1/10,000 inch)
needed for the production of satellite, avionics and missile components. When
combined with the application of our proprietary Kryoflex® ceramic sealant,
this capability allows us to produce extremely rugged electronic connectors for
applications under extreme conditions such as the oil drilling industrys down
hole temperatures in excess of 400 degrees Fahrenheit and pressures in excess
of 30,000 pounds per square inch. Kryoflex® is available in several
formulations that are selected according to the materials to be joined and
conditions to be endured.

With our new composite packaging technology, we have undertaken projects for
the military radar industry, with current projects in both naval and airborne
radar applications. Providing the required features of light weight, thermal
conductivity and hermeticity, these systems are utilized within the latest
Aegis class cruisers, as well as the F-18 and F-22 aircraft, in preference to
the traditional materials, which have both higher weight and significantly
higher cost.

We also design and manufacture very small, specialized multilayer discoidal
(round) ceramic capacitors and EMI (electro-magnetic interference) filters for
the electronics industry. We have released to market a series of high current
EMI filters that represent the smallest 25, 50 and 100 amp EMI filters
available on the market today. This is a significant advantage to power
applications requiring high current and high package density. We also produce
components for the heart pacer industry.

We also produce a wide variety of explosively bonded dissimilar metals, as well
as other complex metal forms and conditions. Applications of this explosively
bonded technology range from components for surgical instruments, such as
endoscopes, to sputtering targets utilized for vapor deposition of exotic
metals onto critical surfaces such as semiconductor devices, to mirrors for
medical or spacecraft uses. One major application for these products is in the
marine field, where they provide a solution to the ageless problem of galvanic
corrosion. We utilize explosive metal forming to produce components for jet
aircraft engines, rocket nozzle components for the Space Shuttle, and complex
aircraft chassis components. We are the only known U.S. source for explosive
metal forming at this time. Shock hardening (a type of work hardening) of
metals is another one of our important processes. Products made by this process
include railroad intersection components that are hardened to extend their
service life and cutting teeth for tunnel boring machines.

We apply our proprietary and patented technologies to provide technical
solutions to difficulties faced by high-tech manufacturers that are challenged
by extreme environmental conditions, such as in the fuel cell and implantable
medical products industries. We focus on providing solutions in the areas of
diffusion bonding, ceramic/metals joining, exotic metals composites,
interconnect stability, and thermal stress distribution with biocompatible
materials. In the fuel cell area, we are developing processes for the assembly
of fuel cells stacks, heat exchangers and fuel reformers for pem and
solid-oxide fuel cells. We have also applied our zirconia-metal fusion
technology to the manufacture of a solid-oxide electrolyzer for use in space
exploration. Additional research is being performed on planar fuel cell
stacks. We have used our zirconia-metal fusion technology to assist a
manufacturer of neurostimulator devices in overcoming technological barriers.
We have produced titanium-copper-molybdenum composite

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electronic enclosures and have U.S. patent protection for this technology.
This technology allows us to produce lighter, more durable electronics packages
with improved thermal conductivity.

During the past year, we have made significant progress in the area of labor
reducing automation. Fully automatic testing stations and computerized
numerical control (CNC) turning stations are in use in our facility today due
to this in house development.

The Electronic Components business unit holds a certificate of registration to
the ISO 9001 standard. It has also received a compliance certificate to the AS
9000 standard. The ISO 9001 and the AS 9000 standards are internationally
recognized certifications of quality. AS 9000 is the more demanding aerospace
quality management system standard. The registration process requires a
company to: (1) document and implement a quality management system that meets
or exceeds all of the requirements of the standards, (2) choose an accredited
registrar (in our case, TUV Essen), (3) have a full quality management system
audit conducted by an accredited registrar, and (4) identify and correct any
issues that arise during the audit. We also have received a number of military
and industry qualification ratings.

Machining Components

Our Machining Components business unit operates a precision machine shop in
Wenatchee, Washington that produces precision machined components, structural
parts and assemblies principally from aluminum, titanium, stainless steel and
explosively bonded metals. We manufacture machined and sheet metal parts and
assemblies that are used for primary and secondary flight components within
aircraft. We use CNC machining cells to manufacture particularly complex
components and assembly housings and also provide value-added services, such as
painting and electroplating. We machine and assemble our products either to
customer specifications or according to an engineering and tooling design
developed by us to suit our customers particular needs. We are directly linked
by computer to Boeing to allow immediate access to the drawings for Boeing
parts. We inspect and test our machined products at various stages of
production using non-destructive methods such as X-ray, ultra-sound, manual and
computerized measuring instruments, eddy current, and dyes before the products
are passed for shipment to the customer. We often supply our precision
machined parts on a just in time to point of use basis.

We have historically supplied nearly all of our products from this business
unit to the commercial aerospace and defense industries. Due to this, our
sales and profitability have been significantly affected by fluctuations in the
aerospace industry. As a result, we believe it is important to diversify our
product offerings. During fiscal 2002, the Machining Components business unit
targeted and received orders from other industries that have a need for high
technology precision machining, such as the medical and semiconductor equipment
industries. We are continuing to look for ways to offer our capabilities to
leaders in these and other new markets.

Our operations are DI-9000A Boeing approved. We have also been audited and
have received a certificate of registration to the ISO 9002 standard and have
received a compliance certificate to the AS 9000 standard. We have won
numerous quality and service awards from customers.

European Operations

Metal Forming

At our Welwyn Garden City and Birmingham facilities in England, our European
Operations Metal Forming business unit uses hot and cold metal forming
technologies to manufacture titanium and aluminum assemblies and details for
the commercial aerospace and defense industries. We also perform finishing,
welding, brazing and riveting processes on our parts. Testing of products is
done using non-destructive techniques and in-house X-ray facilities.
Interactive discussions with customers enable us to closely match component
design to the most suitable forming process. We are approved to the ISO 9002
standard.

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Hot and Superplastic Forming of Titanium. Our Welwyn Garden City facility
specializes in hot and superplastic forming of titanium, and we believe it has
the largest independent capability in the European Union for that process.
Unlike most sheet metal materials, titanium and its alloys are extremely
difficult to form in a cold condition. To overcome this, we have developed a
variety of hot forming processes, including hot die forming, hot brake press
forming, superplastic forming, gas blow forming, and hot circular
stretch-forming. These processes maximize weight savings, maintain structural
integrity, minimize cost, and enable the designer to manipulate the developing
alloys into complex shapes. The forming equipment consists of a range of 21
hot forming and superplastic forming presses with tonnage from 150 to 1,500
tons. Most forming tools are machined from oxidation resistant nickel chrome
steel castings weighing up to four tons. We design the necessary tooling using
our in-house pattern facility. We also have the capability to chemically mill
three-dimensional components in titanium. We market our hot-formed titanium
products primarily to the commercial aircraft, helicopter and military aircraft
markets. Our titanium products include jet engine nacelle bulkhead components,
airframe and engine details, and erosion shields for helicopters. Our titanium
products are included on the Airbus model A318-321 and A330/340 aircraft, the
Boeing model 737 aircraft, the Dash 8-400 aircraft, the Embraer 135 and 145
aircraft, and the Dornier 728 aircraft.

Cold Forming of Aluminum Alloys. At our Birmingham facility, we specialize in
the stretch and cold forming of aluminum alloys used for aircraft skin panels,
leading edges and acoustic panel liners. Stretch forming is a process well
suited to producing aircraft skin panels and leading edges. Specialized
equipment in the Birmingham facility has the capability to form sheets up to 8
feet wide and up to 13 feet long, with stretching loads of up to 700 tons being
applied. Most tools are machined from oxidation-resistant stainless steel
castings, and forming dies up to four tons can be handled. Together with
specialist gripper jaws and rotational platen, this enables the division to
stretch-form aluminum alloys into a wide variety of shapes and sizes. Our
capabilities extend from design to completion, including tooling design and
manufacture, forming, chemical milling, trimming, assembly, and quality
control. We market our formed aluminum alloy products primarily to the
aerospace industry.

Metal Casting

In Rochester, Worcester and Sittingbourne, England, our European Operations
Metal Casting business unit manufactures aluminum investment castings and
aluminum and magnesium precision sand castings. We are approved to the ISO
9002 standard.

Precision Investment Casting.At our Worcester, England facility, we
manufacture aluminum investment casting products, including aircraft and
defense system components such as electronic enclosures, aircraft engine outer
guide vanes, navigation lights, wing tip fences, winglet components, duct
stators, and heads up display units. At our Rochester, England facility, we
manufacture aircraft components such as pressure tight fuel connectors. The
versatility, accuracy and replicability of the investment casting process
provides many advantages over more traditional methods of machining and
fabricating metal products from solid components. The investment casting
process uses a metal die manufactured to required specifications. Our precision
tooling capabilities permit production of metal dies that incorporate a variety
of details and features. A die can be reused to produce the required number of
parts without degradation to the original die. Our production of the die gives
the customer an incentive to order additional units of the part from us.

Sophia Process Investment Casting. The continual pursuit of product
improvement and cost reduction campaigns has led to the installation and
efficient utilization of the licensed Sophia casting process at our Worcester
facility. We are one of only four licensees of the computerized Sophia
Process, which we use to manufacture significantly larger, more complex
castings than can be made as a single part using more traditional investment
casting processes. Using this technology, we can produce components up to 1.3
cubic meters in one piece. This process capability, coupled with the
development of new and patented alloys, creates a significant opportunity to
provide customers with an additional and economic choice when selecting between
a machined, fabricated, composite, or cast structure. Parts made with the
Sophia

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Process have relatively thin wall thickness but have strength and ductility
values comparable to fabricated, forged and machined solid components. The
Sophia Process stringently controls the heat level and process parameters to
make lighter but stronger components that resist fracture and fatigue. The
process reduces machining, fabrication and assembly costs by eliminating both
doublers at material interfaces and the weakness and stress associated with
riveted assemblies. We use high strength alloys with good castability to
ensure that the integrity and enhanced properties from one casting are
identical to the next, and to achieve the desired combination of tensile
strength, ductility and elongation. Parts made with the Sophia Process are used
for the commercial aerospace, defense and transportation industries. Such
applications include civil aircraft, military aircraft, missiles and underwater
weapons applications and applications for the motorsport industry. We use the
Sophia Process to produce components for the Airbus A320, A330 and A340
aircraft, such as navigation light housings and wing tip fences, as a single
part, and to produce slat can wing components for Boeings 737 aircraft.

Sand Casting. At our Sittingbourne, England facility, we manufacture aluminum
and magnesium alloy precision sand castings, including machined and finished
parts for the commercial aerospace, defense and motorsport industries. Sand
casting is suitable for products that are larger than typical investment
casting parts. It is also suitable for products that require heavy wall
sections. These products include aircraft engine heat exchangers and air
intakes, aircraft engine fuel pump housings, aircraft windscreen canopies, and
high performance motorsport engine components and gearboxes. For such customer
requirements, sand casting provides an effective method of producing components
with strength and uniformity. We have made significant advances in both the
process and materials technology for magnesium and aluminum sand castings. Our
engineers develop patterns utilizing computer assisted design technologies to
achieve repeatable high casting integrity and enhanced mechanical properties.
We have complete non-destructive testing and inspection facilities, such as dye
penetrant flaw detection and X-ray testing of components, as required by the
rigorous standards of the aerospace industry.

Machining. We also have a sophisticated machining center that supports the
European Operations casting and forming business units. Our machining facility
has the technical capabilities to provide a full range of machining services
for complete production and finishing of components, including design, pattern
production, casting and final machining of a component. The machining facility
also performs specialized machining of small detail components in steel and
titanium.

Sales and Marketing; Distribution

We market our products using a combination of direct sales and outside sales
representatives. In addition, we maintain internal customer service staff and
engineering capabilities to provide technical support to customers. Our U.S.
Operations market their products in the United States, Europe and Asia through
a network of manufacturer representatives and resellers, generally established
on a geographic basis. We also utilize an inside sales force focused on
particular regions or customers. Our European Operations utilize their own
employee sales force for sales of its products to customers in the United
Kingdom. This internal sales force is organized into two groups, one group
responsible for sales of precision castings and one group responsible for metal
formed products. The European Operations also use independent agents to market
its products to customers in countries other than the United Kingdom, including
the United States. We believe that we have the opportunity to leverage
customer relationships to supply more complete systems by providing products
that combine the technologies and manufacturing abilities of our different
business units. Consequently, we emphasize cross-selling and coordination of
sales and marketing efforts between and among our business units.

Customers

Our top ten customers in terms of revenues during fiscal 2002 were Boeing,
Aermacchi, Airbus, Rolls-Royce, BAE Systems, Northrop Grumman, Raytheon, GKN
Westland, Vought, and Lockheed Martin. Only the top three customers
individually accounted for 5% or more of our revenues, with Boeing at
approximately 13.5%, Aermacchi at approximately 7.5%, and Airbus at
approximately 7.2%. Together,

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our top ten customers accounted for approximately 51% of our sales during
fiscal 2002. In fiscal 2002, we produced machined and cast metal aircraft
components for Boeing, Aermacchi and Airbus. We do not have long-term
contracts with most of our major customers, and where we have long-term
contracts, they generally permit the customer to cancel their orders. We
depend on our customers continuing to place new orders for our products.
Because of the relatively small number of customers for most of our products,
our largest customers can influence product pricing and other terms of trade.
If we were to lose any of our largest customers, or if they reduced or canceled
orders, our business and financial performance could be harmed.

Our U.S. Operations and European Operations currently serve substantially
different customer bases in similar markets. For example, the U.S. Operations
supply components and parts to Boeing for each of Boeings 737, 747, 757, 767
and 777 commercial aircraft construction programs. The European Operations
supply components and parts for each of Airbus A300/310, A320 family, and
A330/340 commercial aircraft construction programs. Our sales have
historically been divided approximately equally between the United States and
Europe. One of our goals has been to take advantage of our position in both
the United States and European markets to provide access for our U.S.
Operations to customers in Europe, and access for our European Operations to
customers in the U.S. Consequently, we have emphasized cross-marketing
efforts. One of the outcomes of these efforts has been the success of our
European Operations in obtaining work in the U.K. from Boeing.

Backlog

We sell the majority of our products through individual purchase orders. Many
of our customers would have the right to terminate orders by paying the cost of
work in process plus a related profit factor. Historically, we have not
experienced a large number of significant order cancellations. However, from
time to time, customers cancel orders as a result of a program being cancelled
or for other reasons. As of May 31, 2002, we had purchase orders and
contractual arrangements evidencing anticipated future deliveries, which we
treat as backlog, through fiscal year 2004 of approximately $48 million. We
expect to deliver approximately $40 million of this backlog in fiscal year
2003. As of May 31, 2001, we had backlog through fiscal year 2003 of
approximately $65 million. We may not be able to complete all of that backlog
and book it as net sales, if we experience cancellations of pending contracts
or terminations or reductions of contracts in progress.

Competition

We have substantial competition in many of the markets that we serve. In the
electronics markets, our competitors include Amphenol Corporation, Hermetic
Seal Corporation, AVX Corporation and Spectrum Control, Inc. In the hot and
superplastic forming market, our primary competitor is Barnes Aerospace. Our
competitors in the European sand casting market include SFU, Stones, Haleys,
Hitchcock and Teledyne. In the investment casting market, our competitors
include the Cercast Group, Tital and Tritech. In the precision machining
market, we compete with a number of regional machine shops. Many of these
competitors have greater financial resources, broader experience, better name
recognition and more substantial marketing operations than we have, and they
represent substantial long-term competition for us. We intend to use our
proprietary technology, our high quality products and our knowledge of the
markets and customers we serve to compete against the companies identified
above.

Our competitors can make components and products similar to those we make using
a number of different manufacturing processes. We believe that our
manufacturing processes, proprietary technologies and experience provide
significant advantages to our customers. These advantages include high
quality, more complete solutions, competitive prices, and physical properties
that meet stringent demands. However, competitors can use alternative forms of
manufacturing to produce many of the components and products that we make.
These competing products could be of the same or better quality and price as
those we produce. We expect our competitors to continue making new
developments, and they could develop products that customers view as more
effective or more economical than our products. In addition, our

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competitors may introduce automation processes and robotics systems that could
lower their costs of production substantially.

Raw Materials

Our European Operations obtain approximately 65% of their titanium from one
supplier and is subject to a lead time of approximately 26 to 33 weeks to order
and obtain titanium. While the European Operations generally have managed the
ordering process to obtain titanium when needed, a labor strike at the supplier
negatively affected the groups ability to obtain timely deliveries of titanium
during fiscal 1999 and into the 2000 fiscal year. Although the shortage of
titanium did not have a material adverse effect on our European Operations or
on our overall financial condition, we did lose some business due to customers
dual sourcing contracts, and some customer orders that were expected to be
delivered in fiscal 1999 were delayed into fiscal 2000 and 2001. The effect of
the strike emphasizes the fact that a failure to obtain titanium or other raw
materials when we need them, or significant cost increases imposed by suppliers
of raw materials such as titanium or aluminum, could damage our business and
financial performance. We generally have readily available sources of all raw
materials and supplies we need to manufacture our products and, where possible,
we maintain alternate sources of supply. However, we do not have fixed price
contracts or arrangements for all of the raw materials and other supplies we
purchase. We have experienced in the past shortages of, or price increases
for, raw materials and supplies, and shortages or price increases may occur
again in the future. Future shortages or price fluctuations could have a
material adverse effect on our ability to manufacture and sell our products in
a timely and cost-effective manner.

Proprietary Rights

Significant aspects of our business depend on proprietary processes, know-how
and other technology that are not subject to patent protection. We rely on a
combination of trade secret, copyright and trademark laws, confidentiality
procedures, and other intellectual property protection to protect our
proprietary technology. However, our competitors may still develop or utilize
technology that is the same as or similar to our proprietary technology.

We have 26 U.S. patents, one Canadian patent, one European patent enforceable
in the U.K., and six patent applications pending in non-U.S. jurisdictions. We
can provide no assurance that the patent applications will result in issued
patents, that existing patents or any future patents will give us any
competitive advantages for our products or technology, or that, if challenged,
these patents will be held valid and enforceable. Most of our issued patents
expire at various times over the next 15 years, with five patents expiring over
the next three years. These five patents, as well as several other patents
that recently expired, relate to products manufactured by our Electronic
Components business unit and constituted a small percentage of our consolidated
revenue in fiscal 2002. Although we believe that the manufacturing processes
of much of our patented technology are sufficiently complex that competing
products made with the same technology are unlikely, our competitors may be
able to design competing products using the same or similar technology after
these patents have expired.

Despite the precautions we have taken, unauthorized parties may attempt to copy
aspects of our products or obtain and use information that we regard as
proprietary. Existing intellectual property laws give only limited protection
with respect to such actions, and policing violations of these laws is
difficult. The laws of other countries in which our products are or may be
distributed do not protect products and intellectual property rights to the
same extent as do the laws of the United States. We could be required to enter
into costly litigation to enforce our intellectual property rights or to defend
infringement claims by others. Infringement claims could require us to license
the intellectual property rights of third parties, but licenses may not be
available on reasonable terms, or at all.

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Environmental Matters

Our facilities are subject to regulations concerning solid waste disposal,
hazardous materials generation, storage, use and disposal, air emissions, waste
water discharge, employee health and other environmental matters. A number of
the metals, chemicals and other materials used in and resulting from our
manufacturing processes are classified as hazardous substances and hazardous
wastes. If we do not meet permitting and other requirements of applicable
environmental laws, we could be liable for damages and for the costs of
remedial actions. We could also be subject to fines or other penalties,
including revocation of permits needed to conduct our business. Any permit
revocation could require us to cease or limit production at one or more of our
facilities, which could damage our business and financial performance. We have
an ongoing program of monitoring and addressing environmental matters, and from
time to time in the ordinary course of business we are required to address
minor issues of noncompliance at our operating sites. From time to time, we
identify operations or processes that lack required permits or otherwise are
not in full compliance with applicable environmental laws. Although we believe
these items have not been material to date, we maintain an environmental
compliance team, and our policy is to take steps promptly to remedy any
noncompliance.

We have a policy of obtaining environmental assessment reports in connection
with the acquisition of properties at which we believe historical operations
could have caused adverse environmental conditions. We are not aware of any
historical contamination on our properties or involving neighboring activities
that we believe could have a material adverse effect on our results of
operations or financial conditions, except that until August 2001, we leased
property in Tacoma, Washington that is located within a Superfund site that has
been the subject of regulatory action for several years. We have not been
named as a potentially liable party for contamination associated with this
Superfund site, and we have no reason to believe that we will be so named.

Environmental laws could become more stringent over time, imposing greater
compliance costs and increasing risks and penalties associated with any
violations. As a generator of hazardous materials, we are subject to financial
exposure with regard to our properties even if we fully comply with these laws.
In addition, we utilize facilities that are located in industrial areas and
have lengthy operating histories. As a consequence, it is possible that
historical or neighboring activities have affected properties we currently own,
and that, as a result, additional environmental issues may arise in the future,
the precise nature of which we cannot now predict. Any present or future
noncompliance with environmental laws or future discovery of contamination
could have a material adverse effect on our results of operations or financial
condition.

Government Regulation

We manufacture some of our products under contracts with the United States
government. We manufacture other products under contracts with private third
parties who utilize our products to satisfy United States government contracts
to which they are a party. Federal acquisition regulations and other federal
regulations govern these relationships. Some of these regulations relate
specifically to the seller-purchaser relationship with the government, such as
the bidding and pricing rules. Under regulations of this type, we must observe
pricing restrictions, produce and maintain detailed accounting data, and meet
various other requirements. Other regulations relate to the conduct of our
business generally, such as regulations and standards established by the
Occupational Safety and Health Act or similar state laws and relating to
employee health and safety. In particular, regulations governing these
contracts require that we comply with federal laws and regulations, in general,
or face civil liability, cancellation or suspension of existing contracts, or
ineligibility for future contracts or subcontracts funded in whole or in part
with federal funds. In addition, loss of governmental certification (that we
are eligible for government contracted work) could cause some of our customers,
including customers in the defense industry, to reduce or curtail their
purchases from us, which could harm our business.

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We have not identified any noncompliance with federal regulations affecting
these government contracts that would be material.

Employees

As of May 31, 2002, the Company had approximately 782 employees, of whom
approximately 702 were engaged in manufacturing functions, 28 in sales and
marketing functions, 47 in administrative functions, and 5 in executive
functions. Of the employees, approximately 274 were employed by the U.S.
Operations, 487 by the European Operations and 21 by our corporate holding
company which includes accounting, information service and human resource
personnel. As of May 31, 2002, none of our workforce in the United States was
unionized. Certain of the European Operations manufacturing and engineering
employees are represented by labor unions, although all negotiations are
carried out through employee work committees. We have not experienced any work
stoppages, and we believe that our relationships with our employees are good.

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Risk Factors

We have reported net losses for recent periods, and we may continue to incur
net losses, which could jeopardize our operations and decrease our stock value.

We reported a net loss of $13,049,000 for our fiscal year ended May 31, 2000, a
net loss of $75,720,000 for our fiscal year ended May 31, 2001, and a net loss
before extraordinary items of $15,793,000 for our fiscal year ended May 31,
2002. We believe that we will continue to incur net losses into fiscal 2003
and that such losses may be substantial. We can offer no assurance that we
will achieve profitable operations or that any profitable operations will be
sustained. Our ability to achieve a profitable level of operations in the
future will depend on many factors, including our ability to finance production
and to realize acceptable gross profits on the products we sell. Future
profitability will also depend on our ability to develop new products, the
degree of market acceptance of our existing and new products, and the level of
competition in the markets in which we operate. If we continue to incur net
losses, our cash flow position could be further damaged, our operations could
be jeopardized and our stock price could decrease.

Our inability to generate cash if and when needed could severely impact our
ability to continue as a going concern.

Our consolidated financial statements have been prepared assuming that we will
continue as a going concern. However, our independent auditors in their most
recent report stated that Pacific Aerospace has suffered recurring losses from
operations which raise substantial doubt about our ability to continue as a
going concern. Our consolidated financial statements do not include any
adjustments that might result from the outcome of that uncertainty. If we are
not sufficiently successful in generating cash from operating activities, we
may need to sell additional common stock or other securities, or we may need to
sell assets outside the ordinary course of business. If we need to dispose of
assets outside of the ordinary course of business to generate cash, we may not
be able to realize the carrying values of those assets upon liquidation. If we
are unable to generate the necessary cash, we could be unable to continue
operations.

We have significant debt that adversely affects our financial condition.

Our long-term debt includes the PIK Notes issued in the Exchange with an
aggregate principal amount as of May 31, 2002 equal to $15.0 million and
accrued interest of $300,000, which notes do not require us to make cash
interest payments. In addition to the PIK Notes, we have approximately $26.2
million in senior secured debt and capital leases. Although this debt is
substantially less than our previous long-term debt totaling approximately
$81.9 million, which consisted of $63.7 million in Subordinated Notes, $13.7
million in senior debt and approximately $4.5 million in other senior secured
debt and capital leases as of February 28, 2002, our debt still poses a
significant financial burden. We must increase our cash flow from operations,
so that we will not have difficulty satisfying our debt obligations in the
future. Our debt could make us unable to obtain additional financing in the
future. It could also divert a significant portion of our cash flow to
principal and interest payments and away from operations and necessary capital
expenditures. Our debt also may put us at a competitive disadvantage in
relation to competitors with less debt and limit our flexibility to adjust to
downturns in our business or market conditions.

Our lenders could accelerate the principal owing on our debt, which we do not
have the funds to pay.

We have been notified by one of our secured lenders that we are not in
compliance with covenants of loans that are secured by a first deed of trust on
our headquarters building and a security interest in leasehold improvements on
another building that we lease. The lender has agreed to forbear from
declaring covenant defaults until May 31, 2003, pursuant to a forbearance
agreement dated March 15, 2002 so long as we maintain timely payments on those
loans. After the completion of the Exchange, we regained compliance with each
of the loan covenants except for those relating to debt service coverage and
our debt to net worth ratio. In the event the holders of our debt chose to
exercise their remedies, we

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may be forced to seek protection from creditors under the bankruptcy laws. To
date, our secured lenders have not exercised any remedies with respect to any
default, but we can provide no assurance that they would not exercise their
remedies prior to their repayment or our compliance with the terms of such
debt.

We do not have revolving lines of credit that would help us fund our
operations.

Due to our continued losses, our revolving line of credit expired on March 5,
2001 and we repaid that line of credit in full on March 2, 2001. Our line of
credit in the U.K. expired in November 2000. That line of credit was extended
through March 7, 2001, and we repaid it in full on that date. We did not
request renewal of that line. Additionally, the New Senior Loan is a term loan
rather than a revolving loan. As a result, if we make payments of principal
before the New Senior Notes mature, additional loan proceeds will not become
available and the New Senior Notes will not provide an additional source of
cash to fund our operations or to meet our obligations as they become due.

We must comply with a number of significant debt covenants that limit our
flexibility.

The loan agreement that relates to our PIK Notes and the New Senior Notes
restrict a number of our activities. Unless we obtain consent from our
lenders, we generally cannot dispose of or create liens on assets or create
additional indebtedness. We are not permitted to pay dividends to shareholders
or repurchase stock. Our debt covenants restrict our ability to acquire new
businesses or make investments or loans to others. We are also subject to
covenants that limit our ability to make capital expenditures, change the
business we conduct, or engage in transactions with related parties. In
addition, if we experience a Change of Control, we will be required to repay
our debt early. If we breach any of these covenants, the lenders may be able
to declare all amounts we owe to be immediately due and payable. If this were
to occur, we would likely not have funds available to us to pay off the debt.

The New Senior Notes and the agreements governing our other senior secured
indebtedness also require us to meet a number of financial ratios and tests.
In fact, we have been notified by one of our secured lenders that we are not in
compliance with covenants of loans that are secured by a first deed of trust on
our headquarters building and a security interest in leasehold improvements on
another building that we lease. The lender has agreed to forbear from
declaring covenant defaults until May 31, 2003, pursuant to a forbearance
agreement dated March 15, 2002 so long as we maintain timely payments on those
loans. Our ability to meet these ratios and tests and to comply with other
provisions governing the New Senior Loan and the loans secured by our real
property may be adversely affected by changes in economic or business
conditions or events beyond our control. Our failure to comply with our
debt-related obligations could result in an event of default under the New
Senior Notes and the loans secured by our real property.

We have experienced asset impairment, and we may experience additional asset
impairment in the future.

We review long-lived assets and intangibles for potential impairment of value
whenever events or changes in circumstances indicate that the carrying amount
of those assets may not be recoverable. An impairment is determined by
totaling the estimated net future cash flows derived from the asset and
comparing that total to the book value of the asset. When the total of the net
future cash flows is lower than the book value, an impairment exists. The
amount of the impairment is the difference between the present value of the net
future cash flows and the book value of the asset. We will continue to analyze
long-lived and identifiable intangible assets in the future to determine
possible impairment charges. Future evaluations could result in impairment
charges, and those charges could be material.

After the Exchange, the Noteholders own approximately 97.5% of the outstanding
voting stock, and thus control all matters requiring a shareholder vote,
including the election of directors.

The Noteholders and their affiliates, in the aggregate, beneficially own
approximately 97.5% of the outstanding shares of voting stock after the
Exchange, calculated on a fully-diluted basis. In addition,

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GSCP Recovery, Inc. and its affiliates own approximately 53% of the Companys
common stock on a fully-diluted basis. As such, GSCP Recovery, Inc. and its
affiliates and the Noteholders can control the outcome of all shareholders
votes, including charter and bylaw amendments, possible mergers, corporate
control contests, and other significant corporate transactions. Furthermore,
they are entitled to nominate and elect all five members of our Board of
Directors. As such, they have absolute control over our Board of Directors and
its policies, and as a result, could prevent or delay any strategic transaction
or other action by us. By virtue of their effective board control, the
Noteholders, GSCP Recovery, Inc. and its affiliates will also be able to hire
and fire our management team.

Our Company and the Noteholders are subject to Potential Conflicts of Interest.

The Noteholders and their affiliates, in the aggregate, beneficially own
approximately 97.5% of our common stock after the Exchange, calculated on a
fully-diluted basis. The Noteholders hold the Companys outstanding PIK Notes
in the aggregate principal amount of $15 million. In addition, GSCP Recovery,
Inc. and GSC Recovery II, L.P. acquired an aggregate of approximately 53% (on a
fully-diluted basis assuming conversion of the Series C Preferred Stock in
full) of the Companys common stock as part of the Companys restructuring and
in exchange for the Subordinated Notes of the Company held by GSCP Recovery,
Inc. and GSC Recovery II, L.P. As a result of their stock ownership, GSCP
Recovery, Inc. and GSC Recovery II, L.P. have the ability to elect at least a
majority of the Board of Directors of the Company. In addition, GSC Recovery
II, L.P. and certain of its affiliates, GSC Recovery IIA, L.P., GSC Partners
CDO Fund, Limited and GSC Partners CDO Fund II, Limited, together own the
Companys New Senior Notes. The New Senior Notes contain restrictive covenants
and default protections that effectively allow GSC Recovery II, L.P. and their
affiliates to influence or restrict the ability of the Company to engage in
various transactions, including mergers, consolidations and the sale of
substantially all of the Companys assets. The interests of a Noteholder may
be inherently different from that of a shareholder.

Our European Operations has had and will continue to have a significant impact
on our business.

The acquisition of our European Operations in 1998 doubled our size. For the
fiscal year ended May 31, 2002, approximately 50% of our assets and
approximately 57% of our revenues were associated with our operations in the
United Kingdom. It is more difficult for us to manage a business in the United
Kingdom than our other businesses, which are located in the State of
Washington. The reasons for the increased difficulty include differences in
time, distance, business practices and cultural variations. Our ownership of a
business in Europe also subjects us to regulatory, tax, and trade restrictions
that we do not face in the United States. If we retain ownership of our
European Operations and do not effectively manage those business units, we may
not be successful.

Changes in foreign currency exchange rates could negatively affect our
financial position.

Since approximately 57% of our transactions are conducted in foreign currency,
exchange rate risk could be material. Additionally, we have not engaged in
hedging transactions to date. For the fiscal year ended May 31, 2002, we
incurred a foreign currency translation gain of $776,000. Because of our
European Operations, we may decide to engage in hedging transactions to protect
against losses caused by changes in the exchange rate between the U.S. dollar
and the British pound sterling. If we decide to engage in hedging
transactions, they will require us to incur transaction expenses and will not
completely protect against any such losses. Our European Operations have a few
contracts that are in European currencies other than British pounds sterling,
or in U.S. dollars. We face similar exchange date fluctuation risks on those
currencies as well and it is unlikely that enough transactions will be done in
those currencies to merit hedging transactions to protect against losses.

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We operate in industries that are subject to cyclical downturns that could
adversely affect our revenues.

We operate in historically cyclical industries. The aerospace, defense and
transportation industries are sensitive to general economic conditions, and
past and current recessions have adversely affected these industries. In past
years, a number of factors have adversely affected the aerospace industry,
including increased fuel and labor costs, and intense price competition.
Recently, the commercial aircraft industry experienced a downturn in the rate
of its growth due to changing economic conditions and as a result of the
ongoing financial crisis in Asia, which caused reductions in production rates
for some commercial airline programs. The major aircraft manufacturers
responded, in part, by significantly decreasing their inventory levels. In
addition, the terrorist attacks of September 11, 2001 and their aftermath
dramatically reduced commercial airline travel, thereby reducing aircraft usage
of major airlines. This is likely to reduce the number of orders of new
aircraft by commercial airlines from our customers. Furthermore, the
unprecedented slowdown in air travel, combined with the costs of additional
security measures have raised questions about the ongoing financial viability
of the airline industry. In the event of bankruptcy or liquidation of one or
more of the major airlines, this could lead to additional cancellations or
delays in aircraft orders from Boeing or Airbus, two of our largest aerospace
customers, which would in turn, reduce demand for our products and would have a
material adverse effect on our business and financial performance. As such,
cyclical factors and general economic conditions could lead to a downturn in
demand for our core products and decrease our revenues.

We may fail to retain our key management and technical personnel, which could
negatively affect our business.

We believe that our ability to successfully implement our business strategy and
to operate profitably depends significantly on the continued employment of our
senior management team, led by our president, Donald A. Wright, and our ability
to retain and hire engineers and technical personnel with experience in the
aerospace and electronics industries. We have key man life insurance policies
on the life of Mr. Wright totaling $8 million. We also have an employment
agreement with Mr. Wright. However, our business and financial results could
be materially adversely affected if Mr. Wright, other members of the senior
management team, or significant engineers or technical personnel become unable
or unwilling to continue in their present employment. On February 28, 2002,
Sheryl A. Symonds, who served as Vice President and General Counsel, left her
employment with the Company. On May 17, 2002, Werner Halfelfinger who served
as Vice President of Operations and Chief Operating Officer, left his
employment with the Company. Our growth and future success, however, will
depend in large part on our ability to retain and attract board members,
executives, managers and highly skilled technical personnel with experience in
the aerospace and electronics industries. Because our U.S. operations are not
located in a large metropolitan area, we may face more difficulty in acquiring
and retaining key management and technical personnel than our competitors in
major cities. We face similar difficulties in the U.K. Competition for such
individuals is intense, and we may not be successful in attracting and
retaining them, which could interfere with our ability to manage our business
profitably.

If we do not adapt to technological change and develop new products, we could
lose customers and our revenues could decline.

The market for our products in both the aerospace and the electronics
industries is characterized by evolving technology and industry standards,
changes in customer needs, adaptation of products to customer needs, and new
product introductions. Other companies that manufacture components for the
aerospace and electronics industries from time to time may announce new
products, enhancements, or technologies that have the potential to replace or
render our existing products obsolete. Our success will depend on our ability
to enhance our current products and develop new products to meet changing
customer needs, and achieve market acceptance of those products. We view our
proprietary technology and our level of technological development as our
primary strengths. Because most of our research and development efforts are
funded by customers, it will be essential for us to continue to respond
effectively

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to our customers needs. We will also need to anticipate or respond to
evolving industry standards and other technological changes on a timely and
cost-effective basis. If we do not adequately respond to these changes, we
could lose customers and our revenues could decline.

We could be subject to product liability claims and lawsuits for harm caused by
our products.

Many of our customers use our products for applications such as aircraft,
satellites, medical devices and other uses in which failure could have serious
consequences. We maintain product liability insurance with a maximum coverage
of $15 million. However, this insurance may not be sufficient to cover any
claims that may arise. A successful product liability claim in excess of our
insurance coverage could have a material adverse effect on our business and
financial performance.

We may not be able to convert all of our backlog into revenue.

We sell the majority of our products through individual purchase orders. Many
of our customers would have the right to terminate orders by paying the cost of
work in process plus a related profit factor. Historically, we have not
experienced a large number of significant order cancellations. However, from
time to time, customers cancel orders as a result of a program being cancelled
or for other reasons. As of May 31, 2002, we had purchase orders and
contractual arrangements evidencing anticipated future deliveries, which we
treat as backlog, of approximately $48 million. We expect to deliver
approximately $40 million of this backlog in fiscal year 2003. We may not be
able to complete all of that backlog and record it as net sales, if we
experience cancellations of pending contracts or terminations or reductions of
contracts in progress.

Our markets are highly competitive, and our competitors strengths may prevent
us from executing our business strategy.

We have substantial competition in many of the markets that we serve. In the
electronics markets, our competitors are generally larger than we are. In the
aerospace market, we compete with both regional machine shops and forming
business and offshore foundries, which tend to have lower costs. Many of these
competitors have greater financial resources, broader experience, better name
recognition and more substantial marketing operations than we have, and they
represent substantial long-term competition for us. We believe that our
manufacturing processes, proprietary technologies and experience provide
significant advantages to our customers. These advantages include high quality,
more complete solutions, competitive prices, and physical properties that meet
stringent demands. However, competitors can use alternative forms of
manufacturing to produce many of the components and products that we make.
These competing products could be of the same or better quality and price as
those we produce. We expect our competitors to continue making new
developments, and they could develop products that customers view as more
effective or more economical than our products. In addition, our competitors
may introduce automation processes and robotics systems that could lower their
costs of production substantially. If we cannot compete successfully against
current and future competitors, and respond appropriately to changes in
industry standards, our business could be seriously harmed.

If we cannot obtain raw materials when needed and at a reasonable cost, we
could have difficulty producing cost-effective products and delivering them on
time.

Our European Operations obtain approximately 65% of its titanium from one
supplier and are subject to a lead time of approximately 26 to 33 weeks to
order and obtain titanium. While the European Operations generally has managed
the ordering process to obtain titanium when needed, a labor strike at the
supplier negatively affected our ability to obtain timely deliveries of
titanium during fiscal 1999 and into the 2000 fiscal year. Although the
shortage of titanium did not have a material adverse effect on our business or
on our overall financial condition, we did lose some business due to customers
dual sourcing contracts, and some customer orders that were expected to be
delivered in fiscal 1999 were delayed into fiscal 2000 and 2001. The effect of
the strike emphasizes the fact that a failure to obtain titanium or other raw
materials

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when needed, or significant cost increases imposed by suppliers of raw
materials such as titanium or aluminum, could damage our business and financial
performance. We generally have readily available sources of all raw materials
and supplies we need to manufacture our products and, where possible, we
maintain alternate sources of supply. However, we do not have fixed price
contracts or arrangements for all of the raw materials and other supplies we
purchase. We have experienced in the past shortages of, or price increases for,
raw materials and supplies, and shortages or price increases may occur again in
the future. Our current cash shortage has resulted in our deliberate efforts to
reduce inventories. Reduced inventories could result in even greater raw
material shortages in the future. Future shortages or price fluctuations could
have a material adverse effect on our ability to manufacture and sell our
products in a timely and cost-effective manner.

We need to protect our intellectual property and proprietary rights, and
protection may be costly and not always available or effective.

Significant aspects of our business depend on proprietary processes, know-how
and other technology that are not subject to patent protection. We rely on a
combination of trade secret, copyright and trademark laws, confidentiality
procedures, and other intellectual property protection to protect our
proprietary technology. However, our competitors may still develop or utilize
technology that is the same as or similar to our proprietary technology.

We have 26 U.S. patents, one Canadian patent, one European patent enforceable
in the U.K., and six patent applications pending in non-U.S. jurisdictions. We
can provide no assurance that the patent applications will result in issued
patents, that existing patents or any future patents will give us any
competitive advantages for our products or technology, or that, if challenged,
these patents will be held valid and enforceable. Most of our issued patents
expire at various times over the next 15 years, with five patents expiring over
the next three years. Although we believe that the manufacturing processes of
much of our patented technology are sufficiently complex that competing
products made with the same technology are unlikely, our competitors may be
able to design competing products using the same or similar technology after
these patents have expired.

Despite the precautions we have taken, unauthorized parties may attempt to copy
aspects of our products or obtain and use information that we regard as
proprietary. Existing intellectual property laws give only limited protection
with respect to such actions, and policing violations of these laws is
difficult. The laws of other countries in which our products are or may be
distributed do not protect products and intellectual property rights to the
same extent as do the laws of the United States. We could be required to enter
into costly litigation to enforce our intellectual property rights or to defend
infringement claims by others, and we might not prevail in any such actions.
Infringement claims could require us to license the intellectual property
rights of third parties, but licenses may not be available on reasonable terms,
or at all.

We must comply with environmental laws, and any failure to do so could subject
us to claims or regulatory action.

Our facilities are subject to regulations concerning solid waste disposal,
hazardous materials generation, storage, use and disposal, air emissions, waste
water discharge, employee health and other environmental matters. A number of
the metals, chemicals and other materials used in and resulting from our
manufacturing processes are classified as hazardous substances and hazardous
wastes. If we do not meet permitting and other requirements of applicable
environmental laws, we could be liable for damages and for the costs of
remedial actions. We could also be subject to fines or other penalties,
including revocation of permits needed to conduct our business. Any permit
revocation could require us to cease or limit production at one or more of our
facilities, which could damage our business and financial performance. We have
an ongoing program of monitoring and addressing environmental matters, and from
time to time in the ordinary course of business we are required to address
minor issues of noncompliance at our operating sites. From time to time, we
identify operations or processes that lack required permits or otherwise are
not in full compliance with applicable environmental laws. Although

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we believe these items have not been material to date, we maintain an
environmental compliance team, and our policy is to take steps promptly to
remedy any noncompliance.

We have a policy of obtaining environmental assessment reports in connection
with the acquisition of properties at which we believe historical operations
could have caused adverse environmental conditions. We are not aware of any
historical contamination on our current properties or involving neighboring
activities that we believe could have a material adverse effect on our results
of operations or financial condition.

Environmental laws could become more stringent over time, imposing greater
compliance costs and increasing risks and penalties associated with any
violations. As a generator of hazardous materials, we are subject to financial
exposure with regard to our properties even if we fully comply with these laws.
In addition, we utilize facilities that are located in industrial areas and
have lengthy operating histories. As a consequence, it is possible that
historical or neighboring activities have affected properties we currently own,
and that, as a result, additional environmental issues may arise in the future,
the precise nature of which we cannot now predict. Any present or future
noncompliance with environmental laws or future discovery of contamination
could have a material adverse effect on our results of operations or financial
condition.

As a U. S. Government contractor or subcontractor, if we do not comply with
federal laws and regulations we could lose those contracts and incur penalties.

We manufacture some of our products under contracts with the United States
government. We manufacture other products under contracts with private third
parties who utilize our products to satisfy United States government contracts
to which they are a party. Federal acquisition regulations and other federal
regulations govern these relationships. Some of these regulations relate
specifically to the seller-purchaser relationship with the government, such as
the bidding and pricing rules. Under regulations of this type, we must observe
pricing restrictions, produce and maintain detailed accounting data, and meet
various other requirements. Other regulations relate to the conduct of our
business generally, such as regulations and standards established by the
Occupational Safety and Health Act or similar state laws and relating to
employee health and safety. In particular, regulations governing these
contracts require that we comply with federal laws and regulations, in general,
or face civil liability, cancellation or suspension of existing contracts, or
ineligibility for future contracts or subcontracts funded in whole or in part
with federal funds. In addition, loss of governmental certification (that we
are eligible for government contracted work) could cause some of our customers,
including customers in the defense industry, to reduce or curtail their
purchases from us, which could harm our business.

Our past and possible future acquisition strategy could negatively impact our
performance.

We have historically pursued an aggressive acquisition strategy. Although we
are currently focusing substantially all of our attention on existing
operations. In the future, we may again evaluate and pursue potential
strategic acquisitions. We have incurred substantial losses as a result of
some of our acquisitions and investments, including approximately $46.7 million
in fiscal 2001, approximately $4.6 million in fiscal 2000, and approximately
$12.7 million in fiscal 1999. We need to better manage our acquisition
strategy. This includes accurately assessing the value, strengths and
weaknesses of acquisition candidates, as well as successfully implementing
necessary changes at newly acquired subsidiaries. In the past, our aggressive
acquisition strategy has diverted management attention from our operations,
increased borrowings, disrupted product development cycles and diluted earnings
per share. If we do not successfully manage future acquisitions, if any, our
financial performance could continue to be negatively impacted by acquisitions.
We are not considering any acquisitions at this time.

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ITEM 2. DESCRIPTION OF PROPERTY

Our principal executive and administrative offices are located at 430 Olds
Station Road, Wenatchee, Washington. Our headquarters building provides
approximately 18,000 square feet of office space, and is owned by the Company.

The location, use and approximate size of the principal owned and leased
properties where we conduct our operations (other than our headquarters
building) as of May 31, 2002 are as follows:

|                    |  |                                                                                         |  |         |                                                 |       |  |                                           |  |                                                                  |  |                                    |  |                            
|------------------- |  | --------------------------------------------------------------------------------------- |  | ------- | ----------------------------------------------- | ----- |  | ----------------------------------------- |  | ---------------------------------------------------------------- |  | ---------------------------------- |  | ---------------------------
|                    |  |                                                                                         |  | Approx. |                                                 | Own/  |  | Annual                                    |  | Lease                                                            |  | Mortgage                          
|Group               |  | Location                                                                                |  | Area    |                                                 | Lease |  | Rent                                      |  | Expiration                                                       |  | Balance                           
|                    |  |                                                                                         |  |         |                                                 |       |  |                                           |  |                                                                  |  |                                   
|U.S.
Operations     |  | Wenatchee, Washington
Sequim, Washington
Wenatchee, Washington
Wenatchee, Washington    |  |         | 54,000
18,355
42,000
41,400                     |       |  | Lease
Own
Lease
Lease                     |  | $353,000
N/A
$208,000
$166,000                                   |  | 2007
N/A
2005
2006                 |  | N/A
None
N/A
N/A           
|European
Operations |  | Sittingbourne
Sittingbourne
Rochester
Worcester
Worcester
Welwyn Garden City
Birmingham |  |         | 54,500
7,500
37,345
40,000
15,000
55,000
59,000 |       |  | Lease
Lease
Lease
Lease
Lease
Lease
Lease |  | £258,000
£  50,000
£180,000
£160,000
£  50,000
£333,000
£236,000 |  | 2018
2005
2011
2018
2003
2018
2018 |  | N/A
N/A
N/A
N/A
N/A
N/A
N/A

During the 2002 fiscal year, we also leased properties formerly used by
divisions that have been discontinued. These include:

|                                                   |  |                               |  |                     |        |             |  |                  |  |             |  |                                              
|-------------------------------------------------- |  | ----------------------------- |  | ------------------- | ------ | ----------- |  | ---------------- |  | ----------- |  | ---------------------------------------------
|Group / Division                                   |  | Location                      |  | Approx. Area Leased |        | Annual Rent |  | Lease Expiration |  | Disposition
|                                                   |  |                               |  |                     |        |             |  |                  |  |            
|U.S. Aerospace
Casting Division                    |  | Tacoma, WA                    |  |                     | 21,700 |             |  | N/A              |  | N/A         |  | PA&E lease
terminated as of
August 14, 2001  
|U.S. Aerospace
Engineering &
 Fabrication
Division |  | Sedro-Woolley,
WA             |  |                     | 94,600 |             |  | N/A              |  | N/A         |  | PA&E lease
terminated as of
May 1, 2002      
|                                                   |  | Mountlake Terrace,
Washington |  |                     | 10,000 |             |  | $217,000         |  | 2005        |  | Fully subleased
until December 2002          
|                                                   |  | Everett, WA                   |  |                     | 11,500 |             |  | N/A              |  | N/A         |  | PA&E lease
terminated as of
December 19, 2001
|U.S. Electronics
Display Division                  |  | Vancouver,
Washington         |  |                     | 50,000 |             |  | N/A              |  | N/A         |  | PA&E lease
terminated as of
May 31, 2002     

In January 1999, we executed an agreement with the Port of Chelan County,
Washington, giving us an option to purchase three parcels of land at or near
our Wenatchee campus for a total of $5.4 million. We purchased the first
parcel, which was property next to our Wenatchee campus, for $853,000 in cash,
on February 2, 1999. In December 2000, we resold the parcel to the Port of
Chelan County for approximately $930,000. In July 2001, we executed a
Rescission and Termination Agreement with the Port, which provided for the
termination of our option and the return of a $100,000 deposit.

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ITEM 3. LEGAL PROCEEDINGS

From time to time we are involved in legal proceedings relating to claims
arising out of operations in the normal course of business. We are not aware
of any material legal proceedings pending or threatened against the Company or
any of its properties.




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

None.

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PART II




ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

Market Information, Shareholders, and Dividends

Between July 16, 1996 and June 28, 2001, our common stock was traded on the
Nasdaq National Market of The Nasdaq Stock Market, Inc. (Nasdaq) under the
symbol PCTH, and our public warrants were traded on the same system under the
symbol PCTHW. Each public warrant entitles the holder to purchase one share
of common stock at an exercise price of $4.6875 per share. After the delisting
of our common stock and public warrants from Nasdaq on June 28, 2001, our
common stock and public warrants now trade on the NASD Over-the-Counter
Bulletin Board (OTC Bulletin Board).

The following range of high and low sales prices for our common stock and
public warrants for each calendar quarter during the period from January 2000
through May 31, 2002, which covers all of the calendar quarters within the
Companys 2001 and 2002 fiscal years. The prices for our common stock and
public warrants were obtained from Nasdaq from January 2000 through the first
calendar quarter of 2001. Thereafter, prices for our common stock and public
warrants were obtained from the closing price for our common stock and public
warrants on the OTC Bulletin Board.

|                                        |  |              |       |                 |  |      |       |     |  |  |       |  |  |  |       | 
|--------------------------------------- |  | ------------ | ----- | --------------- |  | ---- | ----- | --- |  |  | ----- |  |  |  | ----- | 
|                                        |  | Common Stock |       | Public Warrants
|                                        |  |              |       |                
|Calendar Period                         |  | High         |       | Low             |  | High |       | Low
|                                        |  |              |       |                 |  |      |       |    
|2000                                    |  |              |       |                 |  |      |       |     |  |  |       |  |  |  |       | 
|First Quarter                           |  |              | 7.000 |                 |  |      | 1.125 |     |  |  | 2.438 |  |  |  | 0.250 | 
|Second Quarter                          |  |              | 3.000 |                 |  |      | 1.188 |     |  |  | 1.313 |  |  |  | 0.406 | 
|Third Quarter                           |  |              | 2.656 |                 |  |      | 0.781 |     |  |  | 1.063 |  |  |  | 0.250 | 
|Fourth Quarter                          |  |              | 1.438 |                 |  |      | 0.313 |     |  |  | 0.563 |  |  |  | 0.094 | 
|2001                                    |  |              |       |                 |  |      |       |     |  |  |       |  |  |  |       | 
|First Quarter                           |  |              | 0.906 |                 |  |      | 0.219 |     |  |  | 0.313 |  |  |  | 0.094 | 
|Second Quarter                          |  |              | 0.313 |                 |  |      | 0.180 |     |  |  | 0.160 |  |  |  | 0.080 | 
|Third Quarter                           |  |              | 0.180 |                 |  |      | 0.050 |     |  |  | 0.050 |  |  |  | 0.005 | 
|Fourth Quarter                          |  |              | 0.150 |                 |  |      | 0.045 |     |  |  | 0.025 |  |  |  | 0.002 | 
|2002                                    |  |              |       |                 |  |      |       |     |  |  |       |  |  |  |       | 
|First Quarter                           |  |              | 0.090 |                 |  |      | 0.030 |     |  |  | 0.011 |  |  |  | 0.002 | 
|Second Quarter (April 1 - May 31, 2002) |  |              | 0.105 |                 |  |      | 0.050 |     |  |  | 0.010 |  |  |  | 0.002 | 

As of August 29, 2002, the closing sales price of our common stock on the OTC
Bulletin Board was $0.03 per share, and the closing sales price of our public
warrants was $0.002.

We have never declared or paid cash dividends on our common stock. We
currently anticipate that we will retain any future earnings to fund the
operations, and we do not anticipate paying dividends on our common stock in
the foreseeable future. Our agreements with our senior secured lenders and the
indenture governing our PIK Notes restrict our ability to pay dividends.

As of August 26, 2002, there were 1,384 holders of record of 90,734,410 shares
of common stock outstanding, and 26 holders of record of 2,295,000 public
warrants outstanding, based on the records maintained by our transfer agent.

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Summary Equity Compensation Plan Information

|                                                           |  |                   |           |                   |  |                     |      |                     |  |                     |   | 
|---------------------------------------------------------- |  | ----------------- | --------- | ----------------- |  | ------------------- | ---- | ------------------- |  | ------------------- | - | 
|                                                           |  |                   |           |                   |  |                     |      |                     |  | Number of          
|                                                           |  |                   |           |                   |  |                     |      |                     |  | securities         
|                                                           |  |                   |           |                   |  |                     |      |                     |  | remaining available
|                                                           |  | Number of         |           |                   |  |                     |      | for future issuance
|                                                           |  | securities to be  |           |                   |  |                     |      | under equity       
|                                                           |  | issued upon       |           | Weighted-average  |  | compensation plans 
|                                                           |  | exercise of       |           | exercise price of |  | (excluding         
|                                                           |  | outstanding       |           | outstanding       |  | securities         
|                                                           |  | options, warrants |           | options, warrants |  | reflected in column
|Plan category                                              |  | and rights        |           | and rights        |  | (a))(1)            
|                                                           |  |                   |           |                   |  |                    
|Equity compensation
plans approved by
security holders     |  |                   | 3,695,085 |                   |  | $                   | 2.44 |                     |  |                     | 0 | 
|Equity compensation
plans not approved
by security holders |  |                   |          |                   |  |                     |     |                     |  |                     |  | 
|Total                                                      |  |                   | 3,695,085 |                   |  | $                   | 2.44 |                     |  |                     | 0 | 

(1)  In connection with the Exchange, the Company has agreed to issue no
additional awards under any of the Companys existing equity compensation
plans.

Common Stock

Each share of outstanding common stock is entitled to participate equally in
dividends as and when declared by the Board of Directors, out of funds legally
available therefor, and is entitled to participate equally in any distribution
of net assets made to our common shareholders in the event of liquidation of
the Company after payment to all creditors of the Company, subject to any
preferences that may be granted to any series of preferred stock as to
dividends or liquidation. There are no preemptive rights or rights to convert
common stock into any other securities. The holders of our common stock are
entitled to one vote for each share held of record on all matters voted upon by
our shareholders and may not cumulate votes for the election of directors.
Thus, the owners of a majority of the shares of our common stock outstanding
may elect all of the directors of the Company, and the owners of the balance of
the shares of the common stock would not be able to elect any directors of the
Company.

Preferred Stock

Series C Convertible Preferred Stock

In March 2002, we completed the Exchange portion of our restructuring. In
connection with the Exchange, we issued 1,000 shares of Series C Preferred
Stock of the Company to the Noteholders as partial consideration for the
cancellation of the Subordinated Notes.

The Series C Preferred Stock is automatically convertible into that number of
shares of common stock which, when added to the shares of common stock
previously distributed to the Noteholders in the Exchange, would equal
approximately 97.5% of our common stock on a fully-diluted basis (an aggregate
4,865,820,023 shares of common stock). The Automatic Conversion of the Series
C Preferred Stock into common stock will take place immediately following
shareholder approval of an increase in the number of authorized shares of
common stock to an amount sufficient to effect the conversion of the Series C
Preferred Stock in full. No additional consideration must be paid by the
holders of the Series C Preferred Stock for the Automatic Conversation to
occur. Until the Automatic Conversion occurs, the Series C Preferred Stock has
an aggregate liquidation preference equal to $45 million and a cumulative
dividend

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rate of 10% per annum, which automatically increased to 14% per annum after
June 1, 2002 because the Automatic Conversion did not occur on or before June
1, 2002. The Series C Preferred Stock ranks senior to all other classes of our
capital stock as to liquidation and distributions. In addition, the Series C
Preferred Stock is entitled to vote with the common stock on all matters
brought before the common stock for approval (other than as required by law)
and is entitled to that number of votes equal to the number of shares of common
stock into which the Series C Preferred Stock is then convertible.

Series B Convertible Preferred Stock

In May and August 1998, we issued a total of 170,000 shares of Series B
Convertible Preferred Stock (the Series B Preferred Stock) and issued related
warrants, for a total sale price of $17 million, in a private placement to 17
accredited investors. As of June 26, 2000, all of the shares of Series B
Preferred Stock had been converted into a total of 10,136,548 shares of common
stock. The issuance of the common stock upon conversion of the Series B
Preferred Stock was exempt from registration under Section 3(a)(9) of the
Securities Act because it was an exchange exclusively with the holders of
Series B Preferred Stock where no commission or other remuneration was paid or
given for soliciting the exchange.

The Company also issued warrants to purchase 236,109 shares of common stock at
an exercise price of $7.20 per share in connection with the sale of the Series
B Preferred Stock, which warrants expired on May 15, 2001 unexercised.

Blank Check Preferred Stock

The Companys Board of Directors has the authority to issue additional shares
of preferred stock in one or more series and to fix the powers, designations,
preferences and relative, participating, optional or other rights of any series
of preferred stock, including dividend rights, conversion rights, voting
rights, redemption terms, liquidation preferences, sinking fund terms and the
number of shares constituting any series, without shareholder approval, unless
such approval is required by applicable law or by the rules of any stock
exchange or automated quotation system on which securities of the Company may
be listed or traded, if any. The rights of any new preferred stock could
adversely affect the rights of holders of common stock and the market for the
common stock.

Warrants and Options

As of May 31, 2002, we had outstanding exercisable warrants to purchase common
stock as follows:



| |  |  | publicly traded warrants to purchase 2,295,000 shares of common
stock, that (a) were issued as part of the units sold in the Companys
July 1996 registered public offering (Units), (b) have an exercise
price of $4.6875 per share, and (c) expire in July 2003;              
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | warrants and options to purchase a total of 4,816,309 shares of
common stock issued to several employees and consultants of the
Company, that (a) have exercise prices ranging from $0.22 to $9.50 per
share, and (b) have expiration dates that range from July 2002 to May
2011;
|
| |  |  | warrants to purchase 66,630,984 shares of common stock that (a)
were issued in connection with a private placement in July 2000, (b)
have an exercise price of $0.001 per share, and (c) expire in July
2003. See" Summer 2000 Private Placement below.                         
|
| |  |  | warrants to purchase 15,293,149 shares of common stock that (a)
were issued in connection with a private placement in March 2001, (b)
have an exercise price of $.001 per share, and (c) expire in March
2006. See" March 2001 Private Placement below.                         

The shares of common stock issuable upon exercise of our outstanding warrants
are either registered for issuance or resale, available for resale under Rule
144, or subject to an obligation to register them for

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resale. Exercise of these warrants would increase the number of shares of our
common stock available on the public market and would dilute the interests of
existing shareholders. Notwithstanding the foregoing, holders of warrants
issued in the Summer 2000 Private Placement and the March 2001 Private
Placement have agreed, in connection with the Exchange, not to exercise their
warrants until such time as we again have enough authorized common stock to
effect such conversions. We have filed a preliminary proxy with the Commission
regarding the vote to increase our authorized common stock, among other
matters, and expect to hold a meeting for the approval of such increase as soon
as possible following receipt of clearance from the Commission to do so.

Summer 2000 Private Placement

On July 27, 2000, we issued 1,142,860 shares of common stock and warrants to
purchase additional shares of common stock to two accredited investors, Strong
River Investments, Inc. (Strong River) and Bay Harbor Investments, Inc. (Bay
Harbor), for gross proceeds of $2.0 million (the Summer 2000 Private
Placement). We paid a commission to Rochon Capital Group, Ltd. (Rochon)
which comprised of $80,000 in cash and warrants to purchase 79,150 shares of
common stock, at an exercise price of $1.7688 per share, exercisable through
July 27, 2003, for representing the Company in this transaction. After taking
into consideration other expenses related to the transaction, we received net
proceeds at closing of $1,713,000, which we used to pay down our U.S. credit
line. The terms of the transaction, including the terms of the warrants, were
determined by arms length negotiations between the Company and the investors.
The private placement was made pursuant to the exemption from registration
contained in Rule 506 of Regulation D under the Securities Act. Neither the
warrants issued to Rochon nor the common stock issuable upon exercise of those
warrants may be resold unless registered or exempt from registration under the
securities laws. The resale of the common stock and warrants sold to Strong
River and Bay Harbor in the Summer 2000 Private Placement is described below.

Adjustable Warrants.In connection with the Summer 2000 Private Placement, we
issued to the investors adjustable warrants, which permitted the investors to
acquire additional shares of common stock at an exercise price of $.001 per
share if the market price of our common stock did not achieve and maintain a
specific price during each of three vesting periods. On February 15, 2001, the
Company and the investors agreed to amend the adjustable warrants to provide
that each of the two investors, upon exercise in full of its adjustable
warrant, would be entitled to purchase 2,095,243 shares of common stock. On
February 15, 2001, the investors exercised the adjustable warrants in full, as
so amended, for the exercise price of $.001 per share. As a result of the
exercise, we delivered to the investors a total of 4,190,486 shares of common
stock. The resale of these shares was covered by a registration statement on
Form S-3 (File No. 333-56884) filed on March 12, 2001.

Vesting Warrants.In connection with the Summer 2000 Private Placement, we
also issued vesting warrants to the investors. The vesting warrants expired
unexercised on February 28, 2001 in accordance with their terms.

Closing Warrants.On July 27, 2000, we also issued the investors in the Summer
2000 Private Placement closing warrants (the Closing Warrants) to purchase
originally an aggregate of 385,000 shares of common stock at an exercise price
of $2.01 per share. The Closing Warrants were exercisable in full on the date
of issuance and remain exercisable until their expiration on July 27, 2003.
The Closing Warrants contain weighted-average anti-dilution protection in the
event we issue equity securities at a price less than the exercise price of the
Closing Warrants then in effect. Our Exchange transaction in March 2002
triggered the anti-dilution provisions of the Closing Warrants, resulting in a
significant increase in the number of shares issuable upon exercise of these
warrants. Specifically, warrants in favor of Strong River initially
exercisable for 192,500 shares of common stock are now exercisable for
33,315,492 shares; and warrants in favor of Bay Harbor initially exercisable
for 192,500 shares of common stock are now exercisable for 33,315,492 shares.
The exercise price of the Strong River and Bay Harbor warrants was reduced from
$2.01 to the per share par value of the common stock by virtue of the
anti-dilution adjustment. The resale of the shares issuable upon exercise of
the common stock sold and the common

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stock issuable upon exercise of the Closing Warrants issued in the Summer 2000
Private Placement was registered on a registration statement on Form S-3 (File
No. 333-44686), filed on August 28, 2000. Holders of the Closing Warrants have
agreed in connection with the Exchange, not to exercise their Closing Warrants
until such time as we again have enough authorized common stock to effect such
conversions.

March 2001 Private Placement

On March 1, 2001, we borrowed approximately $13.8 million from four lenders for
which DDJ Capital Management, LLC served as investment advisor: B III Capital
Partners, L.P., B III-A Capital Partners, L.P., DDJ Canadian High Yield Fund
and State Street Bank & Trust, as Custodian for General Motors Employees Global
Group Pension Trust (the March 2001 Private Placement). In connection with
this secured loan, we issued warrants to purchase an aggregate of 4,036,978
shares of common stock with an exercise price of $.001 per share to the lenders
as an incentive for them to make the loan. The warrants are exercisable
through March 1, 2006 and contain weighted average anti-dilution protection in
the event we issue equity securities at a price less than market price
determined in the manner set forth in the Warrant Agreement. The terms of the
transaction, including the terms of the warrants, were determined by arms
length negotiations between the Company and the lenders. We used approximately
$9.5 million of the loan to repay our revolving line of credit in the U.S. and
to pay the interest payment on our 111/4% senior subordinated notes that was
due on February 1, 2001. The remainder of the proceeds were used to replace
our line of credit in the United Kingdom, to pay costs of the secured loan
transaction and to provide working capital. We filed a registration statement
on Form S-3 for the shares of common stock underlying the warrants (File No.
333-58148) on April 2, 2001.

In March 2002, the Exchange transaction triggered the anti-dilution provisions
of the warrants issued in connection with the March 2001 Private Placement,
resulting in a significant increase in the number of shares issuable upon
exercise of those warrants. Specifically, warrants which were initially
exercisable for 4,036,978 shares of common stock are now exercisable for
15,293,149 shares of common stock. The holders of these warrants have agreed,
in connection with the Exchange, not to exercise their warrants until such time
as we again have enough authorized common stock to effect such conversions.

We also paid a commission of approximately $415,000 to First Albany Corporation
(First Albany), the placement agent that represented us in the transaction,
and issued warrants to purchase up to 692,074 shares of our common stock to
First Albany, at an exercise price of $.4062 per share (the Placement
Warrants). The Placement Warrants are exercisable at any time through April
9, 2006.

The warrants issued in the March 2001 Private Placement were issued pursuant to
the exemption from registration contained in Rule 506 of Regulation D under the
Securities Act. Neither the Placement Warrants nor the shares of common stock
issuable upon exercise of the Placement Warrants may be resold unless
registered or exempt from registration under the securities laws. First Albany
has piggy-back registration rights with respect to the shares issuable upon
exercise of the warrants.

The Exchange

In March 2002, we completed the Exchange portion of our restructuring. In
connection with the Exchange, we issued 1,000 shares of Series C Preferred
Stock of the Company to the Noteholders as partial consideration for the
cancellation of the Subordinated Notes.

The Series C Preferred Stock is automatically convertible into that number of
shares of common stock which, when added to the shares of common stock
previously distributed to the Noteholders in the Exchange, would equal
approximately 97.5% of our common stock on a fully-diluted basis (an aggregate
4,865,820,023 shares of common stock). The Automatic Conversion of the Series
C Preferred Stock into common stock will take place immediately following
shareholder approval of an increase in the number of authorized shares of
common stock to an amount sufficient to effect the conversion of the Series C

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Preferred Stock in full. No additional consideration must be paid by the
holders of the Series C Preferred Stock for the Automatic Conversation to
occur. Until the Automatic Conversion occurs, the Series C Preferred Stock has
an aggregate liquidation preference equal to $45 million and a cumulative
dividend rate of 10% per annum, which automatically increased to 14% per annum
after June 1, 2002 because the Automatic Conversion did not occur on or before
June 1, 2002. The Series C Preferred Stock ranks senior to all other classes
of our capital stock as to liquidation and distributions. In addition, the
Series C Preferred Stock is entitled to vote with the common stock on all
matters brought before the common stock for approval (other than as required by
law) and is entitled to that number of votes equal to the number of shares of
common stock into which the Series C Preferred Stock is then convertible
(convertible into 4,865,820,023 shares of common stock). The Series C
Preferred Stock will convert into common stock automatically immediately
following shareholder approval of an increase in the number of shares of
authorized common stock to an amount sufficient to effect the conversion in
full.

In addition, in March 2002, we also issued 51,419,604 shares of common stock to
the Noteholders as additional consideration for the cancellation of the
Subordinated Notes. We did not receive cash proceeds from the issuance of the
Series C Preferred Stock or the common stock issued in the Exchange. The
Series C Preferred Stock and the common stock issued in the Exchange was exempt
from the registration under Section 3(a)(9) of the Securities Act because it
was an exchange exclusively with the holders of Subordinated Notes where no
commission or other renumeration was paid or given for soliciting the exchange.
We have agreed to register for resale such shares of common stock, including
those receivable upon conversion of the Series C Preferred Stock, on demand of
the Noteholders.

Registration Rights

We are obligated to register the resale of the following shares:

Continental Capital & Equity Corporation has the right, through April 17, 2003,
to require us to file a resale registration statement with respect to up to
200,000 shares issuable upon exercise by Continental of warrants held by them.

We are obligated to register for resale up to 79,150 shares issuable upon
exercise of warrants held by Rochon in the Summer 2000 Private Placement.

We are obligated to register for resale up to 692,074 shares issuable upon
exercise of warrants held by First Albany in our March 2001 Private Placement.

We are obligated to register for resale on demand the 51,419,604 common shares
issued in connection with the Exchange and up to 4,865,820,023 shares issuable
upon the conversion of the Series C Preferred Stock.

Nasdaq Market Delisting

Until June 28, 2001, our common stock and public warrants were quoted on
Nasdaq. In order to remain listed on that market, we were required to meet
Nasdaqs listing maintenance standards. On March 22, 2001, we received a
determination letter from Nasdaq staff indicating that, absent a successful
appeal by the Company, our securities would be delisted for failure to comply
with Marketplace Rule 4450(a)(5), which requires listed stock to maintain a
minimum bid price of $1.00. Our common stock had traded below $1.00 since
November 7, 2000. Subsequent to the notice, we notified Nasdaq that we also
failed to comply with Marketplace Rule 4450(a)(3), which requires an issuer of
listed securities to maintain net tangible assets of at least $4 million. We
appealed the Nasdaq staff determination before a Nasdaq qualification hearings
panel on May 11, 2001, but we were notified on June 27, 2001 that our
securities would be delisted on June 28, 2001. The delisting of our securities
occurred on that date. Our common stock and public warrants are currently
traded on the OTC Bulletin Board.

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Indemnification

The Company agreed to indemnify the holders of the Series C Preferred Stock,
the Series B Preferred Stock, the investors in the Summer 2000 Private
Placement, and the holders of the warrants issued in the March 2001 Private
Placement, and those holders and investors agreed to indemnify the Company,
against certain liabilities under the Securities Act. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted directors, officers and controlling persons of the Company pursuant
to the foregoing provisions, or otherwise, we have been advised that, in the
opinion of the Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.

Anti-Takeover Considerations

The Company, as a Washington corporation, is subject to certain provisions of
Washington law regarding significant business transactions and fair price
restrictions in addition to those provisions of the Companys articles of
incorporation and bylaws that may have anti-takeover effects. These provisions
may have the effect of delaying or deterring a hostile takeover of the Company.

Washington Law.Washingtons Significant Business Transactions statute
(Chapter 23B.19 of the Washington Business Corporation Act) applies to public
companies that are incorporated under Washington law. The statute prohibits,
subject to certain exceptions, a corporation from entering into any
significant business transactions with an Acquiring Person (defined
generally as a person who or an affiliated group that beneficially owns 10% or
more of the outstanding voting securities of a corporation) for a period of
five years after such person or affiliated group becomes an Acquiring Person
unless the transaction or share acquisition made by the Acquiring Person is
approved prior to the share acquisition by a majority of the target
corporations directors. In addition, this statute prohibits a corporation
subject thereto from entering into a significant business transaction with an
Acquiring Person unless the consideration to be received by the corporations
shareholders in connection with the proposed transaction satisfies the fair
price provisions set forth in the statute.

Articles of Incorporation and Bylaws. A number of provisions in the Companys
articles of incorporation and bylaws concern matters of corporate governance
and rights of shareholders. Provisions such as those that grant the Board of
Directors the ability to issue shares of preferred stock and to set the voting
rights, preferences and other terms thereof may have an anti-takeover effect by
discouraging takeover attempts not first approved by the Board of Directors,
including takeovers which may be considered by some shareholders to be in their
best interests. To the extent takeover attempts are discouraged, temporary
fluctuations in the market price of the Companys common stock, which may
result from actual or rumored takeover attempts, may be inhibited, particularly
those that might otherwise tend to increase the Companys stock price. Such
provisions also could delay or frustrate the removal of incumbent directors or
the assumption of control by shareholders, even if such removal or assumption
would be beneficial to the Companys shareholders. These provisions also could
discourage or make more difficult a merger, tender offer or proxy contest, even
if they could be favorable to the interests the shareholders, and could
potentially depress the market price of the Companys common stock. The Board
of Directors believes that these provisions are appropriate to protect the
Companys interests and the interests of the Companys shareholders.

The Companys bylaws provide that annual meetings of shareholders may take
place at the time and place established by the Board of Directors. A special
meeting of the Companys shareholders may be called by the Chairman of the
Board of Directors, the president, a majority of the Board of Directors or a
shareholder or shareholders holding at least 10% of the voting power of the
Company. Thus, until a shareholder holds at least 10% of the voting power of
the Company he or she may not call a special meeting to take corporate actions
that would be required to remove directors or change Company management. In
addition, the Companys bylaws provide that any action required or permitted to
be taken at a shareholders meeting may be taken without a meeting, without
prior notice and without a vote,

Sarbanes-Oxley Act Certifications

Certifications pursuant to Sections 302
and 906 of the Sarbanes-Oxley Act of 2002 accompanied this
report. These certifications were filed as correspondence addressed
to the Commission. The Company intends to file publicly these
certifications as exhibits to a Form 8-K immediately following
the filing of this Form 10-K.

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if one or more written consents setting forth the action so taken are signed by
a number of shareholders entitled to vote thereon equal to the number of shares
that must be voted in favor of such an action. The Companys bylaws may be
altered, amended, or repealed by the Board of Directors, subject to the power
of the Companys shareholders to change or repeal the bylaws.

Transfer Agent and Registrar

The Transfer Agent and Registrar for our common stock and publicly traded
warrants is Interwest Transfer Company, Inc.

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ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data presents selected historical financial
data of the Company as of and for the years ended May 31, 1998, 1999, 2000,
2001 and 2002, and is derived from our audited financial statements. This data
should be read in conjunction with our Financial Statements and Notes thereto,
the independent auditors report, and Managements Discussion and Analysis of
Financial Condition and Results of Operations. The independent auditors
report contains an explanatory paragraph that states that our recurring losses
from operations raise substantial doubt about our ability to continue as a
going concern. Our consolidated financial statements and the following
selected financial data do not include any adjustments that might result from
the outcome of that uncertainty. The report also states that the Company
changed its method of accounting for goodwill and certain intangible assets
during the year ended May 31, 2002.

|                              |                                                                 |         |   |                                                      |        |      |   |         |        |      |   |         |        |   |   |         |        |   |   |         |        |  
|----------------------------- | --------------------------------------------------------------- | ------- | - | ---------------------------------------------------- | ------ | ---- | - | ------- | ------ | ---- | - | ------- | ------ | - | - | ------- | ------ | - | - | ------- | ------ | -
|                              |                                                                 |         |   | Years Ended May 31,                                 
|                              |                                                                 |         |   |                                                     
|                              |                                                                 |         |   | (in thousands, except percentage and per share data)
|                              |                                                                 |         |   | 1998                                                 |        | 1999 |   | 2000    |        | 2001 |   | 2002   
|                              |                                                                 |         |   |                                                      |        |      |   |         |        |      |   |        
|Statement of Operations Data: |                                                                 |         |   |                                                      |        |      |   |         |        |      |   |         |        |   |   |         |        |   |   |        
|                              | Net sales(1)                                                    |         | $ | 54,099                                               |        |      | $ | 107,366 |        |      | $ | 112,694 |        |   | $ | 109,288 |        |   | $ | 80,191  |       
|                              | Cost of sales                                                   |         |   | 39,487                                               |        |      |   | 86,302  |        |      |   | 92,063  |        |   |   | 101,048 |        |   |   | 67,761  |       
|                              |                                                                 |         |   |                                                      |        |      |   |         |        |      |   |         |        |   |   |         |        |   |   |         |       
|                              | Gross profit                                                    |         |   | 14,612                                               |        |      |   | 21,064  |        |      |   | 20,631  |        |   |   | 8,240   |        |   |   | 12,430  |       
|                              | Operating expenses(4)                                           |         |   | 9,872                                                |        |      |   | 22,039  |        |      |   | 24,533  |        |   |   | 67,201  |        |   |   | 15,694  |       
|                              |                                                                 |         |   |                                                      |        |      |   |         |        |      |   |         |        |   |   |         |        |   |   |         |       
|                              | Income (loss) from operations                                   |         |   | 4,740                                                |        |      |   | (975    | )      |      |   | (3,902  | )      |   |   | (58,961 | )      |   |   | (3,264  | )     
|                              | Net interest (expense)                                          |         |   | (755                                                 | )      |      |   | (8,140  | )      |      |   | (9,862  | )      |   |   | (10,012 | )      |   |   | (12,802 | )     
|                              | Other income (expense)                                          |         |   | (853                                                 | )      |      |   | (6,393  | )      |      |   | 33      |        |   |   | 201     |        |   |   | 78      |       
|                              |                                                                 |         |   |                                                      |        |      |   |         |        |      |   |         |        |   |   |         |        |   |   |         |       
|                              | Income (loss) before taxes and
extraordinary item               |         |   | 3,132                                                |        |      |   | (15,508 | )      |      |   | (13,731 | )      |   |   | (68,772 | )      |   |   | (15,988 | )     
|                              | Income tax benefit (expense)                                    |         |   | 482                                                  |        |      |   | 2,639   |        |      |   | (21     | )      |   |   | (6,948  | )      |   |   | 195     |       
|                              |                                                                 |         |   |                                                      |        |      |   |         |        |      |   |         |        |   |   |         |        |   |   |         |       
|                              | Net
income (loss) before
extraordinary item                     |         |   | 3,614                                                |        |      |   | 12,869  |        |      |   | (13,752 | )      |   |   | (75,720 | )      |   |   | (15,793 | )     
|                              | Extraordinary item, net of tax                                  |         |   |                                                     |        |      |   |        |        |      |   | 703     |        |   |   |        |        |   |   | 20,318  |       
|                              |                                                                 |         |   |                                                      |        |      |   |         |        |      |   |         |        |   |   |         |        |   |   |         |       
|                              | Net income (loss)(4)                                            |         | $ | 3,614                                                |        |      | $ | (12,869 | )      |      | $ | (13,049 | )      |   | $ | (75,720 | )      |   | $ | 4,525   |       
|                              |                                                                 |         |   |                                                      |        |      |   |         |        |      |   |         |        |   |   |         |        |   |   |        
|                              | Income (loss) before
extraordinary
item per share:              |         |   |                                                      |        |      |   |         |        |      |   |         |        |   |   |         |        |   |   |         |       
|                              |                                                                 | Basic   |   |                                                      | .29    |      |   |         | (.74   | )    |   |         | (.63   | ) |   |         | (2.15  | ) |   |         | (0.32  | )
|                              |                                                                 | Diluted |   |                                                      | .27    |      |   |         | (.74   | )    |   |         | (.63   | ) |   |         | (2.15  | ) |   |         | (0.32  | )
|                              | Net income (loss) per share(4):                                 |         |   |                                                      |        |      |   |         |        |      |   |         |        |   |   |         |        |   |   |         |       
|                              |                                                                 | Basic   |   |                                                      | .29    |      |   |         | (.74   | )    |   |         | (.59   | ) |   |         | (2.15  | ) |   |         | 0.09   |  
|                              |                                                                 | Diluted |   |                                                      | .27    |      |   |         | (.74   | )    |   |         | (.59   | ) |   |         | (2.15  | ) |   |         | 0.09   |  
|                              | Shares used in computation of
income (loss) per share:          |         |   |                                                      |        |      |   |         |        |      |   |         |        |   |   |         |        |   |   |         |       
|                              |                                                                 | Basic   |   |                                                      | 12,486 |      |   |         | 17,359 |      |   |         | 21,955 |   |   |         | 35,283 |   |   |         | 49,585 |  
|                              |                                                                 | Diluted |   |                                                      | 13,606 |      |   |         | 17,359 |      |   |         | 21,955 |   |   |         | 35,283 |   |   |         | 49,585 |  
|Other Financial Data:         |                                                                 |         |   |                                                      |        |      |   |         |        |      |   |         |        |   |   |         |        |   |   |        
|                              | Adjusted EBITDA(2)                                              |         | $ | 6,944                                                |        |      | $ | 10,669  |        |      | $ | 9,004   |        |   | $ | (2,681  | )      |   | $ | 1,777   |       
|                              | Adjusted EBITDA margin(3)                                       |         |   | 12.8                                                 | %      |      |   | 9.9     | %      |      |   | 8.0     | %      |   |   | (2.5    | )%     |   |   | 2.2     | %     
|                              | Depreciation, amortization,
and impairment of long-lived
assets |         | $ | 2,204                                                |        |      | $ | 11,644  |        |      | $ | 12,906  |        |   | $ | 56,280  |        |   | $ | 5,041   |       
|                              | Capital expenditures                                            |         |   | 10,290                                               |        |      |   | 8,281   |        |      |   | 4,867   |        |   |   | 3,710   |        |   |   | 2,703   |       

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|                    |                                            |  |            |        |      |  |                |         |      |  |      |         |  |  |   |         |   |  |   |         |  
|------------------- | ------------------------------------------ |  | ---------- | ------ | ---- |  | -------------- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | - |  | - | ------- | -
|                    |                                            |  | At May 31,
|                    |                                            |  |           
|                    |                                            |  |            |        |      |  | (in thousands) |         |      |  |     
|                    |                                            |  | 1998       |        | 1999 |  | 2000           |         | 2001 |  | 2002
|                    |                                            |  |            |        |      |  |                |         |      |  |     
|Balance Sheet Data: |                                            |  |            |        |      |  |                |         |      |  |      |         |  |  |   |         |   |  |   |        
|                    | Cash and cash equivalents                  |  | $          | 11,461 |      |  | $              | 8,134   |      |  | $    | 2,154   |  |  | $ | 4,095   |   |  | $ | 5,619   |  
|                    | Working capital                            |  |            | 25,599 |      |  |                | 38,329  |      |  |      | 29,181  |  |  |   | 25,034  |   |  |   | 24,580  |  
|                    | Total assets                               |  |            | 78,580 |      |  |                | 158,727 |      |  |      | 143,582 |  |  |   | 80,816  |   |  |   | 64,669  |  
|                    | Long-term debt (including
current portion) |  |            | 11,233 |      |  |                | 83,410  |      |  |      | 70,528  |  |  |   | 82,932  |   |  |   | 51,920  |  
|                    | Series C Preferred Stock                   |  |            |       |      |  |                |        |      |  |      |        |  |  |   |        |   |  |   | 18,715  |  
|                    | Shareholders equity (deficit)             |  |            | 56,142 |      |  |                | 54,019  |      |  |      | 49,768  |  |  |   | (25,114 | ) |  |   | (19,608 | )



---

|(1) |  | The increases in net sales from 1998 to 1999 are attributable to
acquisitions by the Company and internal growth. The decrease from 2001
to 2002 is primarily attributable to the sale of unprofitable
subsidiaries. See Item 1  Description of
Business and Item 7 
Managements Discussion and Analysis of Financial Condition and Results of
Operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Adjusted EBITDA represents income (loss) from operations plus
depreciation, amortization, and non-cash asset impairment expense.
Adjusted EBITDA should not be construed as an alternative to (i) net
income (loss), as defined by generally accepted accounting principles, as
an indicator of our operating performance or (ii) cash flow, as defined by
generally accepted accounting principles, as a measure of liquidity. We
report Adjusted EBITDA because it is a cash flow capacity measure commonly
used by financial institutions, including holders of our senior
subordinated notes. Generally, we consider Adjusted EBITDA as a measure
of cash flow capacity to fund interest expense, principal payments on
debt, working capital needs and capital expenditures. This measure may
not be comparable to similarly titled measures reported by other
companies. The adequacy and historical trend of Adjusted EBITDA to
support funding requirements is an indication to our management whether
cash sources in addition to Adjusted EBITDA may be required to support
ongoing operations.
|   
|   
|   
|   
|(3) |  | Adjusted EBITDA margin represents Adjusted EBITDA as a percent of net
sales. We use Adjusted EBITDA margin as a measure to better evaluate our
Adjusted EBITDA capacity trends.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|   
|   
|   
|(4) |  | The Company stopped amortizing goodwill during fiscal year ended May 31,
2002. See Notes to Consolidated Financial Statements number 2 (o) Change
in Accounting Principle.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
                OPERATIONS

This section and the Description of Business section of this Form 10-K
contain forward-looking statements. These forward-looking statements are not
guarantees of the Companys future performance. They are subject to risks and
uncertainties related to business operations, some of which are beyond the
Companys control. Any of these risks or uncertainties may cause actual
results or future circumstances to differ materially from the forward-looking
statements set forth in this section under the captions Overview and
Liquidity and Capital Resources, and in Description of Business under each
of the captions in that section.

Overview

Pacific Aerospace & Electronics, Inc. is an engineering and manufacturing
company with operations in the United States and the United Kingdom. We
design, manufacture and sell components and subassemblies used in technically
demanding environments. Products that we produce primarily for the aerospace
and transportation industries include machined, cast, and formed metal parts
and subassemblies, using aluminum, titanium, magnesium, and other metals.
Products that we produce primarily for the defense, electronics,
telecommunications and medical industries include components such as
hermetically sealed electrical connectors and instrument packages, and ceramic
capacitors, filters and feedthroughs. Our customers include global leaders in
all of these industries.

Pacific Aerospace has struggled financially since late 1998, when the
commercial airplane industry suffered a downturn at approximately the same time
that we incurred high-cost, high-yield debt to finance the acquisition of our
European Aerospace Group. We reported a net loss before extraordinary items of
$15,793,000 for our fiscal year ended May 31, 2002. This followed net losses
before extraordinary items of $75,720,000 for our fiscal year ended May 31,
2001 and $13,752,000 for our fiscal year ended May 31, 2000.

Over the last year, we have consolidated our U.S. Operations and European
Operations through the sale and/or closure of several of our unprofitable
divisions. Within our former U.S. Aerospace Group we closed an unprofitable
foundry located in Tacoma, Washington and in June 2001, we completed the sale
of substantially all of the assets of our Casting operation located in Entiat,
Washington. Also, within our former U.S. Aerospace Group we completed the sale
of substantially all of the assets related to our Engineering and Fabrication
Division. The fabrication assets were sold during May 2001 and the engineering
assets were sold in December 2001. We have also shut down our former U.S.
Electronics Groups Display Division in November 2001. We believe that these
closures or sales of business units will strengthen and support our core
electronics and machining operations.

Additionally, in March 2002, we completed the Exchange. In accordance with the
Exchange Agreement, the Noteholders exchanged $63.7 million aggregate principal
amount of the Subordinated Notes, together with accrued interest thereon, for
shares of our common stock, shares of our Series C Preferred Stock and
approximately $15.0 million in aggregate principal amount of PIK Notes. The
Series C Preferred Stock will automatically convert into common stock following
shareholder approval of an increase in the number of our authorized shares of
common stock. We have filed a preliminary proxy with the Commission regarding
the vote to increase our authorized common stock, among other matters, and
expect to hold a meeting for the approval of such increase as soon as possible
following receipt of clearance from the Commission to do so. However, as a
result of the Exchange, the Noteholders now hold a majority of our outstanding
common stock. By virtue of their common stock and Series C Preferred Stock
received in the Exchange, the Noteholders now beneficially own approximately
97.5% of our outstanding shares of common stock on a fully-diluted basis and
control 97.5% of our the voting shares.

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In addition to exchanging our Subordinated Notes as described above, we also
entered into the New Senior Loan represented by the New Senior Notes. The New
Senior Notes were issued at a discount so that the proceeds of that loan
totaled approximately $22.0 million. The principal amount of the New Senior
Notes will accrete through May 1, 2007 to $36.0 million and will bear interest
at 5% per annum. We may redeem the New Senior Notes in full or in part at any
time prior to their maturity date at a premium over the accreted value of the
New Senior Notes, which premium declines over time. We used $16.2 million of
the proceeds from the New Senior Notes to pay off principal and accrued
interest on our then outstanding 21% senior secured loan (of which $13.7
million in principal was outstanding at May 31, 2001). The remaining proceeds
were used for working capital, to pay the fees and costs of the restructuring
and for other general corporate purposes. Assuming the New Senior Notes are not
redeemed prior to their maturity date, cash payments will be limited to the 5%
interest rate on the face value of the New Senior Notes and the repayment of
the $36.0 million principal amount due on May 1, 2007.

Critical Accounting Estimates and Policies

The discussion and analysis of financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenue and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates including revenue recognition, the
allowance for doubtful accounts, sales returns and allowances, the salability
and recoverability of inventory, impairment of long-lived assets, income taxes
and contingencies. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the
circumstances, the results of which form our basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ materially from these estimates
under different assumptions and conditions, and such variations may be adverse.

We recognize revenue primarily when products are shipped to customers and when
services are performed. In certain instances we recognize revenues from
long-term, fixed-price contracts on the percentage of completion method
measured by cost. Contract costs for long-term contracts include all direct
material and labor costs related to contract performance. Provisions for
estimated losses on uncompleted contracts are made in the period in which
losses are determined. Changes in job performance, job conditions, and
estimated profitability, including those arising from contract penalty
provisions, and final contract settlements may result in revisions to costs and
income and are recognized in the period in which the revisions are determined.
Profit incentives are included in revenue when their realization is reasonably
assured. When formal customer approval is necessary, we defer revenue
recognition until such approval is received. Differences could result in
changes to the amount and timing of the recorded revenues if we make different
judgments or use different estimates.

We must make estimates of the collectability of accounts receivable. We
analyze historical sales returns, allowances, write-offs, changes in our
internal credit policies and customer concentrations when evaluating the
adequacy of our allowance for doubtful accounts, sales returns and allowances.
Differences may result in the amount and timing of expenses for any period if
we make different judgments or use different estimates.

We value inventories at the lower of cost, primarily determined by the
first-in, first-out method, or market (replacement cost for raw materials and
fair value for work in progress and finished goods). We regularly review
inventory detail to determine whether a write-down is necessary. We consider
various factors in making this determination, including recent sales history
and predicted trends, industry market conditions

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and general economic conditions. Differences could result in the amount of
timing of write-downs for any period if we make different judgments or use
different estimates.

We review long-lived assets and certain identifiable intangibles for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to future
net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceed the fair value of the
assets. We report assets to be disposed of at the lower of the carrying amount
or fair value less costs to sell. Differences could result in the amount of
timing of write-downs for any period if we make different judgments or use
different estimates.

We follow the asset and liability method of accounting for income taxes. Under
the asset and liability method of accounting for income taxes, deferred tax
assets and liabilities are recognized based on the estimated future tax
consequences attributable to differences between the consolidated financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carry forwards.
Deferred tax assets and liabilities are measured using enacted tax rates in
effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the period that includes the enactment
date. Differences could result in the amount of timing our provision for
income taxes for any period if we make different judgments or use different
estimates.

The Company operates in two segments, US Operations and European Operations.
This is based on the fact that the Companys chief operating decision maker,
the Companys chief executive officer, regularly reviews operating results,
assesses performance and makes decisions about resources to be allocated at
this level (US Operations and European Operations) and not on any of the
underlying divisions or business units that comprise these two segments.

Results of Operations

For an understanding of the significant factors that influenced our performance
during the past three fiscal years, the following discussion should be read in
conjunction with our consolidated financial statements presented in this Form
10-K.

The following table sets forth certain of our historical statement of
operations data for the periods indicated, expressed in dollars (in thousands)
and as a percentage of net sales.

|                              |                    |   |                     |       |      |  |       |       |      |   |         |        |  |  |       |     |   |   |         |       |  |  |       |     |   |   |         |        |   |  |       |      |    |   |         |       |  |  |       |     |  
|----------------------------- | ------------------ | - | ------------------- | ----- | ---- |  | ----- | ----- | ---- | - | ------- | ------ |  |  | ----- | --- | - | - | ------- | ----- |  |  | ----- | --- | - | - | ------- | ------ | - |  | ----- | ---- | -- | - | ------- | ----- |  |  | ----- | --- | -
|                              |                    |   | Years Ended May 31,
|                              |                    |   |                    
|                              |                    |   | 1998                |       | 1999 |  | 2000  |       | 2001 |   | 2002   
|                              |                    |   |                     |       |      |  |       |       |      |   |        
|Net sales                     |                    | $ | 54,099              |       |      |  | 100.0 | %     |      | $ | 107,366 |        |  |  | 100.0 | %   |   | $ | 112,694 |       |  |  | 100.0 | %   |   | $ | 109,288 |        |   |  | 100.0 | %    |    | $ | 80,191  |       |  |  | 100.0 | %  
|Cost of sales                 |                    |   | 39,487              |       |      |  | 73.0  |       |      |   | 86,302  |        |  |  | 80.4  |     |   |   | 92,063  |       |  |  | 81.7  |     |   |   | 101,048 |        |   |  | 92.5  |      |    |   | 67,761  |       |  |  | 84.4  |    
|                              |                    |   |                     |       |      |  |       |       |      |   |         |        |  |  |       |     |   |   |         |       |  |  |       |     |   |   |         |        |   |  |       |      |    |   |         |       |  |  |       |    
|Gross profit                  |                    |   | 14,612              |       |      |  | 27.0  |       |      |   | 21,064  |        |  |  | 19.6  |     |   |   | 20,631  |       |  |  | 18.3  |     |   |   | 8,240   |        |   |  | 7.5   |      |    |   | 12,430  |       |  |  | 15.6  |    
|Operating expenses(2)         |                    |   | 9,872               |       |      |  | 18.2  |       |      |   | 22,039  |        |  |  | 20.5  |     |   |   | 24,533  |       |  |  | 21.8  |     |   |   | 67,201  |        |   |  | 61.5  |      |    |   | 15,694  |       |  |  | 19.5  |    
|                              |                    |   |                     |       |      |  |       |       |      |   |         |        |  |  |       |     |   |   |         |       |  |  |       |     |   |   |         |        |   |  |       |      |    |   |         |       |  |  |       |    
|Income (loss) from operations |                    |   | 4,740               |       |      |  | 8.8   |       |      |   | (975    | )      |  |  | (0.9  | )   |   |   | (3,902  | )     |  |  | (3.5  | )   |   |   | (58,961 | )      |   |  | (54.0 | )    |    |   | (3,264  | )     |  |  | (3.9  | )  
|Net interest expense          |                    |   | (755                | )     |      |  | (1.4  | )     |      |   | (8,140  | )      |  |  | (7.6  | )   |   |   | (9,862  | )     |  |  | (8.8  | )   |   |   | (10,012 | )      |   |  | (9.2  | )    |    |   | (12,802 | )     |  |  | (16.0 | )  
|Other income (expense)        |                    |   | (853                | )     |      |  | (1.6  | )     |      |   | (6,393  | )      |  |  | (6.0  | )   |   |   | 33      |       |  |  |      |     |   |   | 201     |        |   |  | 0.2   |      |    |   | 78      |       |  |  |      |    
|Extraordinary item            |                    |   |                    |       |      |  |      |       |      |   |        |        |  |  |      |     |   |   | 703     |       |  |  | 0.6   |     |   |   |        |        |   |  |      |      |    |   | 20,318  |       |  |  | 25.3  |    
|Income tax benefit (expense)  |                    |   | 482                 |       |      |  | 0.9   |       |      |   | 2,639   |        |  |  | 2.5   |     |   |   | (21     | )     |  |  |      |     |   |   | (6,948  | )      |   |  | (6.3  | )    |    |   | 195     |       |  |  | 0.2   |    
|                              |                    |   |                     |       |      |  |       |       |      |   |         |        |  |  |       |     |   |   |         |       |  |  |       |     |   |   |         |        |   |  |       |      |    |   |         |       |  |  |       |    
|Net income (loss)(2)          |                    | $ | 3,614               |       |      |  | 6.7   | %     |      | $ | (12,869 | )      |  |  | 12.0  | %   |   | $ | (13,049 | )     |  |  | (11.6 | )%  |   | $ | (75,720 | )      |   |  | (69.3 | )%   |    | $ | 4,525   |       |  |  | 5.6   | %  
|                              |                    |   |                     |       |      |  |       |       |      |   |         |        |  |  |       |     |   |   |         |       |  |  |       |     |   |   |         |        |   |  |       |      |    |   |         |       |  |  |       |    
|                              | Adjusted EBITDA(1) |   | $                   | 6,944 |      |  |       | 12.8% | %    |   | $       | 10,669 |  |  |       | 9.9 | % |   | $       | 9,004 |  |  |       | 8.0 | % |   | $       | (2,681 | ) |  |       | (2.5 | )% |   | $       | 1,777 |  |  |       | 2.2 | %
|                              |                    |   |                     |       |      |  |       |       |      |   |         |        |  |  |       |     |   |   |         |       |  |  |       |     |   |   |         |        |   |  |       |      |    |   |         |       |  |  |       |    

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---

|(1) |  | Adjusted EBITDA represents income (loss) from operations plus
depreciation, amortization, and non-cash asset impairment expense. Adjusted
EBITDA should not be construed as an alternative to (i) net income (loss), as
defined by generally accepted accounting principles, as an indicator of our
operating performance or (ii) cash flow, as defined by generally accepted
accounting principles, as a measure of liquidity. We report Adjusted EBITDA
because it is a cash flow capacity measure commonly used by financial
institutions, including holders of our senior subordinated notes. Generally,
we consider Adjusted EBITDA as a measure of cash flow capacity to fund interest
expense, principal payments on debt, working capital needs and capital
expenditures. This measure may not be comparable to similarly titled measures
reported by other companies. The adequacy and historical trend of Adjusted
EBITDA to support funding requirements is an indication to our management
whether cash sources in addition to Adjusted EBITDA may be required to support
ongoing operations.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | The Company stopped amortizing goodwill during fiscal year ended May 31,
2002. See Notes to Consolidated Financial Statements number 2 (o) Change in
Accounting Principle.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

Year Ended May 31, 2002 Compared to Year Ended May 31, 2001

Net Sales.Net sales decreased by $29.1 million, or 26.6%, to $80.2 million
for fiscal 2002 from $109.3 million in fiscal 2001. This decrease was due to a
number of factors including the effects of our operational restructuring plan
and various events that affected our markets. Our European Operations
contributed $45.4 million to net sales during fiscal 2002, down $6.2 million
from $51.6 million contributed during the year ended May 31, 2001. Following
the tragic events of September 11, the commercial aerospace market both in the
U.S. and in Europe saw a significant decline. Boeing and Airbus both announced
substantial delays and cuts in their planned commercial aircraft build rates.
The decrease in net sales contributed by our European Operations is largely
attributable to reduced, postponed, or cancelled orders form commercial
aircraft manufacturers.

Our U.S. Operations contributed $33.3 million to net sales during the year
ended May 31, 2002, down $1.8 million from the $35.1 million contributed during
the year ended May 31, 2001. This decrease was primarily due to fewer ceramic
filter sales to the telecommunications market.

The remaining decrease in our consolidated net sales was due to the sale of our
Casting Division, Engineering and Fabrication Division and the closure of our
Display Division. These discontinued divisions contributed $1.5 million to net
sales during the year ended May 31, 2002 but contributed $22.6 million to net
sales during the year ended May 31, 2001.

Receivable collection periods, as calculated by dividing ending accounts
receivable balances by sales for the year multiplied by 360 days, decreased to
54.9 days for the year ended May 31, 2002 from 62.9 days for the year ended May
31, 2001. This decrease was due to a concerted effort by operations management
to increase collection efforts.

Gross Profit.Gross profit increased by $4.2 million, or 51.2%, to $12.4
million for the year ended May 31, 2002, from $8.2 million for the year ended
May 31, 2001. As a percentage of net sales, gross profit increased to 15.5%
for the year ended May 31, 2002, from 7.5% for the year ended May 31, 2001. The
increase in gross margin was primarily related to the disposal of our Casting
Division, Engineering and Fabrication Division and Display Division. Each of
those Divisions produced substantial negative gross margins during the year
ended May 31, 2001.

Due to the downturn in the commercial aerospace industry, in specific, and the
economy, in general, we wrote down approximately $1.4 million of inventory
related to our U.S. Operations and $0.2 million of inventory related to our
European Operations. These write-downs approximate the amount of our inventory
that has not been used in more than one year. Without those write-downs our
gross profit would have been $14.0 million, or approximately 17.5% of net
sales.

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Inventory turnover, as calculated by dividing sales for the year by ending
inventory, decreased to 4.1 turns for the year ended May 31, 2002 from 4.8
turns for the year ended May 31, 2001. The decrease was due to lower net sales
without a corresponding decrease in inventory levels.

Operating Expenses.Operating expenses decreased by $51.5 million, to $15.7
million for the year ended May 31, 2002 from $67.2 million for the year ended
May 31, 2001. During the year ended May 31, 2001 we recognized approximately
$48.9 million in non-cash impairment charges. Without those charges our
operating expenses would have decreased $2.6 million during the year ended May
31, 2002. Operating expenses for the year ended May 31, 2002 included
approximately $0.6 million of non-cash impairment charges related to equipment
used by our Display Division and Engineering & Fabrication Division. The
remaining net decrease in operating expenses was due primarily to the disposal
of our Casting Division, Engineering and Fabrication Division and Display
Division.

Net Interest Expense. Net interest expense increased $2.8 million to $12.8
million for the year ended May 31, 2002 from $10.0 million for the year ended
May 31, 2001. This increase was primarily due to our 21% senior secured notes
and accelerated amortization of the related loan costs during the year. Due to
the restructuring of our Subordinated Notes and refinancing of our 21% senior
secured notes, interest expense will be substantially reduced to approximately
$4.0 million for fiscal 2003.

Other Income (Expense).Other income (expense) represents non-recurring and
non-operational income and expense for the period. Other income decreased to
$78,000 for the year ended May 31, 2002 from income of $201,000 for the year
ended May 31, 2001. Other income in the current year primarily represents the
gain on the sale of certain assets.

Provision for Income Taxes. Income tax benefit for the year ended May 31, 2002
represents a change in estimated taxes payable in the U.K.

Extraordinary item.In March 2002, the Company completed the Exchange. In
accordance with the Exchange Agreement, the Noteholders exchanged $63.7 million
aggregate principal amount of the Subordinated Notes, together with accrued
interest thereon, for shares of our common stock, shares of our Series C
Preferred Stock and approximately $15.0 million in aggregate principal amount
of PIK Notes. The Series C Preferred Stock will automatically convert into
common stock following shareholder approval of an increase in the number of our
authorized shares of common stock.

The Company has followed the provisions of SFAS No. 15, Accounting by Debtors
and Creditors for Troubled Debt Restructurings, in recording the Exchange.
These provisions require that the carrying value of the PIK Notes be recorded
at the total future cash payments (principal and interest) specified by the PIK
notes, therefore the PIK notes have been classified on our balance sheet as
long-term liabilities and valued at $25.7 million. As a result, no interest
expense related to the PIK Notes will be recognized in future periods. The
following table presents the aggregate gain recognized in the Exchange
transaction:

|                                                           |                                  |   |             |            | 
|---------------------------------------------------------- | -------------------------------- | - | ----------- | ---------- | 
|Principal amount of Subordinated Notes outstanding         |                                  | $ | 63,700,000  |           
|Unamortized deferred financing costs                       |                                  |   | (2,417,000  | )         
|Accrued interest                                           |                                  |   | 8,115,000   |           
|                                                           |                                  |   |             |           
|                                                           | Carrying value of debt exchanged |   |             | 69,398,000 | 
|Fair value of equity instruments issued to the Noteholders |                                  |   | (21,200,000 | )         
|Maximum future cash payments under the PIK Notes           |                                  |   | (25,739,000 | )         
|Direct expenses of the Exchange transaction                |                                  |   | (2,141,000  | )         
|                                                           |                                  |   |             |           
|Aggregate gain from Exchange transaction                   |                                  | $ | 20,318,000  |           
|                                                           |                                  |   |             |           

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Net income (loss).Net income increased to $4.5 million for the year ended
May 31, 2002 from a net loss of $75.7 million for the year ended May 31, 2001,
primarily as a result of the factors discussed above including the
extraordinary gain on our debt restructuring.

Adjusted EBITDA. Adjusted EBITDA increased by $4.5 million to $1.8 million
for the year ended May 31, 2002 from negative $2.7 million for the year ended
May 31, 2001. The increase in adjusted EBITDA was due primarily due to the
disposal of the Casting Division, Engineering and Fabrication Division and the
closure of the Display Division. We expect adjusted EBITDA to increase during
fiscal year 2003 as a result of cost cutting measures, productivity and lean
manufacturing initiatives, and investment in new manufacturing equipment and
manufacturing facility upgrades.

Year Ended May 31, 2001 Compared to Year Ended May 31, 2000

Net Sales.Net sales decreased by $3.4 million, or 3.0%, to $109.3 million for
fiscal 2001 from $112.7 million in fiscal 2000. Our European Operations
contributed $51.6 million, down $5.3 million from the $56.9 million contributed
during the year ended May 31, 2000. Our customers in the European aerospace
market had been initiating lean manufacturing methods and just-in-time
inventory delivery requirements similar to those previously initiated by our
customers in the U.S. aerospace market. These initiatives resulted in
decreased orders for our European Operations. The lowering of the exchange
rate of the British pound sterling versus the U.S. dollar also contributed to
lower net sales volumes from our European Operations during fiscal 2001. Had
the average exchange rate for fiscal 2001 been equal to the average exchange
rate for fiscal 2000, reported net sales for our European Operations would have
been approximately $56.0 million, or $4.4 million higher than actual.

Our U.S. Operations contributed $35.1 million during the year ended May 31,
2001, up $3.8 million from the $31.3 million contributed during the year ended
May 31, 2000. This increase was due to increased sales ($1.8 million) into the
telecommunications market of our ceramic filters and machined components during
the year. We also saw increased net sales ($1.6 million) related to our core
sealing and materials technologies applied to electronic packaging.

The remaining decrease in our consolidated net sales was related to our Casting
Division, Engineering and Fabrication Division and the Display Division. These
divisions contributed $22.6 million to net sales during the year ended May 31,
2001, down $1.9 million from the $24.5 million contributed during the year
ended May 31, 2000. This decrease was due to lower net sales from the Casting
Division related to the slumping transportation market.

Receivable collection periods, as calculated by dividing ending accounts
receivable balances by sales for the year multiplied by 360 days, decreased to
62.9 days for the year ended May 31, 2001 from 67.8 days for the year ended May
31, 2000. This decrease was due to a concerted effort by operations
management to increase collection efforts.

Gross Profit.Gross profit decreased by $12.4 million, or 60.0%, to $8.2
million for the year ended May 31, 2001, from $20.6 million for the year ended
May 31, 2000. As a percentage of net sales, gross profit decreased to 7.5% for
the year ended May 31, 2001, from 18.3% for the year ended May 31, 2000. The
most significant gross margin decrease occurred in our Casting Division and
Engineering and Fabrication Division due to the downturn in the transportation
market and commercial aerospace markets. We also had a $1.6 million inventory
charge during the year related to the termination of a contract in our Display
Division.

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Gross margins decreased in our European Operations from 13.5% for the year
ended May 31, 2000 to 11.1% for year ended May 31, 2001. This decrease was
primarily due to pricing pressure from customers.

Inventory turnover, as calculated by dividing sales for the year by ending
inventory, increased to 4.7 turns for the year ended May 31, 2001 from 4.0
turns for the year ended May 31, 2000. The increase was due to lower inventory
levels.

Operating Expenses.Operating expenses increased by $42.7 million, to $67.2
million for the year ended May 31, 2001 from $24.5 million for the year ended
May 31, 2000. The increase in operating expenses is primarily attributable to
non-cash impairment charges totaling approximately $48.9 million. We review
long-lived assets and identifiable intangibles for potential impairment of
value whenever events or circumstances indicate that the carrying amount of
those assets may not be recoverable. Based upon preliminary and final offers
to purchase our European Operations, we recognized a $37.0 million charge to
reduce the $33.0 million carrying value of goodwill and the $13.6 million
carrying value of equipment associated with our European Operations, to
estimated fair value, approximately $9.6 million. We also recognized an
impairment charge of $5.5 million to reduce the $6.4 million carrying value of
property and equipment used at the Entiat, Washington location of our Casting
Division to estimated fair value, approximately $0.9 million. During the year
ended May 31, 2001, we closed a facility located in Tacoma, Washington that was
used by our Casting Division. We recognized a $0.8 million impairment charge
to reduce the carrying value of the equipment located at the Tacoma location to
zero, the estimated fair value. Also, included in operating expenses are
non-cash charges of approximately $3.3 million to reduce the $3.5 million
carrying value of goodwill and equipment used in the Engineering & Fabrication
Division to estimated fair value, approximately $0.2 million. We completed the
sale of substantially all of the assets used in the fabrication portion of the
Engineering & Fabrication Division during the fourth quarter of fiscal year
2001. We sold the Engineering portion of the Engineering & Fabrication
Division in December 2001. Within the Display Division, we recognized a
non-cash charge of approximately $0.6 million to reduce the $1.0 million of
equipment used to produce low power relays to its estimated fair value,
approximately $0.4 million. The equipment, inventory, and intellectual
property used to produce low power relays were sold during the fourth quarter
of fiscal year 2001. Gross proceeds from the sale were $400,000 compared to a
carrying amount of approximately $1.0 million. Operating expenses also include
an approximately $320,000 non-cash charge for the loss on the sale of an unused
building in Butler, New Jersey that was sold during December 2000. Net
proceeds from the sale of the building were approximately $660,000, versus a
carrying amount of approximately $980,000. During the fourth quarter of fiscal
2001 we completed our analysis of the value of certain other long-lived assets,
including goodwill and patents. Based upon this analysis, we recognized
additional impairment charges of approximately $1.0 million to reduce goodwill
to estimated fair value, and approximately $0.3 million to reduce patents to
estimated fair value.

Without impairment charges during the respective years, operating expenses
decreased by $0.9 million to $18.3 million for the year ended May 31, 2001 from
$19.2 million for the year ended May 31, 2000. This decrease in operating
expenses relates primarily to our cost reduction efforts.

Net Interest Expense. Net interest expense increased $0.1 million to $10.0
million for the year ended May 31, 2001 from $9.9 million for the year ended
May 31, 2000. This increase was primarily due to higher average line of credit
balances for the first three quarters of the year plus the addition of our 21%
senior secured notes and related loan costs during the fourth quarter of the
year. The increase in interest from the above items was offset by lower
average outstanding balance on our Subordinated Notes during the year.

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Other Income (Expense).Other income (expense) represents non-recurring and
non-operational income and expense for the period. Other income increased to
$201,000 for the year ended May 31, 2001 from $33,000 for the year ended May
31, 2000. Other income in the current year primarily represents rental income
and gain on the sale of certain assets.

Provision for Income Taxes. Income taxes for the year ended May 31, 2001
primarily represent charges to write off deferred tax assets, $4.9 million, to
adjust deferred income tax assets to amounts determined more likely than not to
be realizable in accordance with the guidelines set forth in FAS 109,
Accounting for Income Taxes. In addition, due to a tax assessment in the U.K.
related to interest remitted to Pacific Aerospace, a foreign parent, tax
expense also includes an accrual of approximately $1.7 million.

Net loss.Net loss increased $62.7 million, to a net loss of $75.7 million
for the year ended May 31, 2001 from a net loss of $13.0 million for the year
ended May 31, 2000, primarily as a result of the factors discussed above.

Adjusted EBITDA. Adjusted EBITDA decreased by $11.7 million to negative $2.7
million for the year ended May 31, 2001 from $9.0 million for the year ended
May 31, 2000. The decrease in adjusted EBITDA was due primarily to negative
adjusted EBITDA generated by the Engineering and Fabrication Division and the
Casting Division. Those two Divisions were sold during fiscal year 2002.

Liquidity and Capital Resources

Cash used in operating activities was approximately $319,000 for the year ended
May 31, 2002, compared to cash used in operating activities of approximately
$1.6 million for the year ended May 31, 2001. The decrease in cash used in
operating activities was primarily a result of decreasing inventory levels
throughout the year and the sale of our Casting Division, Engineering and
Fabrication Division and the closure of the Display Division. Our success as a
company will depend heavily on our ability to generate cash from operating
activities in the future. We can offer no assurance that we will achieve
profitable operations or that any profitable operations will be sustained. We
are continuing to focus on initiatives that specifically address the need to
increase cash provided by operating activities. Some of these initiatives
include, but are not limited to, staff reductions, selling of excess inventory,
and general and administrative cost controls. We continue to reduce staffing
at our operating units to better match revenue levels, and we have
significantly reduced staff at our corporate headquarters to reduce indirect
overhead costs. We have also subleased portions of unused facility space.

Cash generated from financing activities decreased from $5.3 million during the
year ended May 31, 2001 to $3.8 million during the year ended May 31, 2002.
Cash used in investing activities increased from $1.5 million for the year
ended May 31, 2001 to $2.3 million during the year ended May 31, 2002. In
fiscal year 2002 we made cash investments for the acquisition of equipment and
improvement of facilities of $2.7 million offset by $0.4 million of cash from
the sale of assets, primarily the assets used by the Engineering and
Fabrication Division. Notwithstanding the foregoing, we do not expect to
acquire any new businesses during fiscal year 2003.

In March 2002, we completed the Exchange (which is described in detail under
the subheading Significant Events below. In accordance with the Exchange
Agreement, the Noteholders exchanged all of our then outstanding Subordinated
Notes, together with accrued interest thereon, for shares of our common stock,
shares of our Series C Preferred Stock and approximately $15.0 million in
aggregate principal amount of PIK Notes. The Series C Preferred Stock will
automatically convert into common stock following shareholder approval of an
increase in the number of our authorized shares of common stock.

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In addition to exchanging our Subordinated Notes as described above, we also
issued the New Senior Notes. The New Senior Notes were issued at a discount so
that the proceeds of the New Senior Notes totaled approximately $22.0 million.
The principal amount of the New Senior Notes will accrete through May 1, 2007
to $36.0 million and will bear interest at 5% per annum. We may redeem the new
Senior Notes in full or in part at any time prior to their maturity date at a
premium over the accreted value of the New Senior Notes, which premium declines
over time. We used $16.2 million of the proceeds from the New Senior Notes to
pay off principal and accrued interest on our then outstanding 21% senior
secured loan (of which $13.7 million in principal was outstanding at May 31,
2001). The remaining proceeds were used for working capital, to pay the fees
and costs of the restructuring and for other general corporate purposes.
Assuming the New Senior Notes are not redeemed prior to their maturity date,
cash payments will be limited to the 5% interest rate on the face value of the
New Senior Notes and the repayment of the $36.0 million principal amount due on
May 1, 2007.

Prior to the Exchange, our annual interest expense relating to the Subordinated
Notes was approximately $7.2 million. Following the Exchange, we had no
interest expense and no annual cash outlay with respect to the PIK Notes that
were issued in the Exchange due to the accounting treatment of the PIK Notes
under the provisions of SFAS No. 15, Accounting by Debtors and Creditors for
Troubled Debt Restructurings. Our annual interest expense on its senior
secured debt prior to the issuance of the New Senior Notes was approximately
$2.5 million. Following the issuance of the New Senior Notes, our annual
interest expense with respect to the New Senior Notes will consist of $1.8
million payable annually in cash and approximately $1.9 million related to the
accretion rate of the New Senior Notes, which is not payable prior to the
maturity of those notes. Thus, our total cash interest savings following the
Exchange and the senior debt refinancing will be approximately $7.9 million per
year, and the total interest savings including accretion of the New Senior
Notes will be approximately $6.0 million per year. We believe that we will be
able to make future payments on our debt and to fund our operations through
2007, until the maturity of the PIK Notes and the New Senior Notes. We
anticipate that we will need to raise additional cash in order to repay the PIK
Notes and the New Senior Notes at their maturity.

Notwithstanding the foregoing, if we are not successful in increasing cash
provided by operating activities, we may need to sell additional common stock
or other securities, or we may need to sell assets outside of the ordinary
course of business in order to meet our obligations. There is no assurance
that we will be able to sell additional equity securities or that we will be
able to sell assets outside the ordinary course of business. In that
situation, our inability to obtain sufficient cash if and when needed could
have a material adverse effect on our financial position, the results of our
operations, and our ability to continue as a going concern.

The New Senior Notes, as described above, are secured by our assets, the assets
of our United States subsidiaries, and other intangibles. The New Senior Loan
is a term loan rather than a revolving loan. As a result, if we make payments
of principal before the New Senior Notes mature, additional proceeds will not
become available, and the New Senior Loan will not provide an additional source
of cash to fund our operations or to meet our obligations as they become due.
We do not currently have a revolving line of credit available to compensate for
any short-term cash flow problems we may experience. Our cash and cash
equivalents as of May 31, 2002 was approximately $5.6 million, and as of May
31, 2001 was approximately $4.1 million.

Our working capital as of May 31, 2002 was approximately $24.6 million, and as
of May 31, 2001 was approximately $25.0 million.

We are not in compliance with certain covenants of loans made by KeyBank in an
aggregate principal amount of approximately $1.7 million (at May 31, 2002) that
are secured by a deed of trust our headquarters building and improvements on
another Company building. As of May 31, 2002,

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approximately $1.1 million of the principal amount of the loan secured by our
headquarters building remained outstanding and $596,000 of the loan secured by
improvements on the other building remained outstanding. Pursuant to a
forbearance agreement dated March 15, 2002, KeyBank agreed to forbear from
declaring covenant defaults until we regain compliance (thereby curing such
covenant violations) or May 31, 2003. Under the agreements governing the
KeyBank loans, we are required to maintain a minimum debt service coverage
ratio of 1.50 and a maximum debt to worth ratio of 0.75. As of May 31, 2002,
our debt service ratio was (8.87) and our debt to worth ratio was 1.60. We
anticipate obtaining compliance with the debt service ratio by May 31, 2003,
but do not anticipate being in compliance with the debt to worth ratio in the
foreseeable future.

Our consolidated financial statements have been prepared assuming that we will
continue as a going concern. However, our independent auditors in their report
accompanying our audited consolidated financial statements stated that we have
suffered recurring losses from operations and have a net capital deficiency
which raise substantial doubt about our ability to continue as a going concern.
Our consolidated financial statements do not include any adjustments that
might result from the outcome of that uncertainty. If we are not sufficiently
successful in generating cash from operating activities, we may need to sell
additional common stock or other securities, or we may need to sell assets
outside the ordinary course of business. If we need to dispose of assets
outside of the ordinary course of business to generate cash, we may not be able
to realize the carrying value of those assets upon liquidation. If we are
unable to generate the necessary cash, we could be unable to continue
operations.

The functional currency of our European Operations is the British pound
sterling. We translate the activity of our European Operations into U.S.
dollars on a monthly basis. The balance sheet of the European Operations is
translated using the exchange rate as of the date of the balance sheet, and for
purposes of the statement of operations and statement of cash flows we use the
average exchange rate for the period. The value of our assets, liabilities,
revenue, and expenses may vary materially from one reporting period to the next
solely as a result of varying exchange rates. During the year ended May 31,
2002, the foreign currency translation adjustment was positive $776,000. We
have not entered into any hedging activity as of May 31, 2002.

Significant Events

The Restructuring Transaction

Events Leading up the Restructuring

In July 1998, we issued $75 million of our Subordinated Notes. We used the
proceeds of the Subordinated Notes to purchase our European Operations, Aeromet
International plc (Aeromet). On the day that we closed the Aeromet
high-yield debt financing, Boeing announced the first of several record losses
and shortly thereafter announced the first of a series of layoffs due to the
decrease in commercial airplane orders resulting from the Asian financial
crisis. At that time, Boeing accounted for approximately 15% of our revenue,
largely generated through our U.S. Machining Division. Additionally, although
Aeromet in the United Kingdom continued to provide strong results after its
acquisition, Airbus announced similar cutbacks and layoffs approximately eight
months following Boeings original announcement. Thus, in early to mid 1999,
the U.K. aerospace market also began to decline and Aeromets gross profit
margins began to decrease as well. By mid-1999, our former U.S. Aerospace
Group was losing money (and thus using cash to continue operations). At that
time, our European Operations was continuing to produce cash, but at a much
lower rate than had been projected. In addition to the foregoing revenue
declines, we acquired our Engineering & Fabrication Division in June of 1999.
That division did not perform well largely due to a reduction in and the
cancellation of tooling orders from the commercial aerospace industry.

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In early 2000, the commercial aerospace industry remained depressed and fuel
costs continued to rise. The transportation industry as a whole also began to
decline in early 2000 which also contributed to reduced revenues from our
Casting Division. Our Casting Divisions primary customers, John Deere and
PACCAR, placed fewer orders than had been projected and that division also
began using much of our remaining cash to continue operations.

In March of 2000, we entered into four privately-negotiated exchange
transactions in order to reduce the total outstanding principal amount of our
Subordinated Notes. Altogether, we repurchased an aggregate principal amount
of $11.3 million of Subordinated Notes in exchange for 2,902,806 shares of
newly issued common stock. However, even after this repurchase, our cash
reserves had become so depleted by the end of calendar year 2000 that it became
clear to us that we would not be able to make our February 2001 interest
payment on the Subordinated Notes. Thus, we began to explore alternatives to
restructure our debt. We first explored the sale of Aeromet as a means to
generate cash to repurchase the then outstanding Subordinated Notes and reduce
our overall debt obligations. However, we were unable to sell Aeromet prior to
the February 1, 2001 interest payment due date for the Subordinated Notes.

At that time, our then existing senior secured lender was requesting that we
repay and terminate our revolving line of credit (the outstanding balance under
the line of credit was approximately $6.3 million at that time). We initially
attempted to obtain new senior financing from traditional lending sources to
repay our revolving line of credit and to make the February 1, 2001 interest
payment on our Notes. When these attempts proved unsuccessful, we turned to
DDJ Capital Management, LLC (DDJ) to provide the needed financing. On March
1, 2001, prior to expiration of the interest payment cure period under the
Notes, we obtained new senior secured financing from DDJ in the principal
amount of $13.7 million (the DDJ Loan). We used the proceeds from the DDJ
Loan to make the February 1, 2001 Subordinated Note interest payment, to repay
in full our then existing senior secured loan, and for fees and expenses of the
DDJ Loan.

Though we remained focused on the sale of Aeromet, it became apparent in July
2001 that Aeromet would not be sold before the August 1, 2001 Subordinated Note
interest payment was due. We ultimately failed to make our August 1, 2001
Subordinated Note interest payment prior to the expiration of the cure period
for such payment (a payment default under the Subordinated Note indenture) and,
as a result, also defaulted under our DDJ Loan.

During late August 2001, a strategic buyer was identified to purchase Aeromet
and we entered into a non-binding letter of intent with that prospective buyer
regarding the sale of Aeromet. At that time, we anticipated using the proceeds
from the sale of Aeromet to pay down a significant portion of the Subordinated
Notes, and then convert the remaining Subordinated Notes into equity and new
notes with a longer term.

On September 7, 2001, we entered into a lock-up agreement with the holders of
approximately 97.5% of the Subordinated Notes pursuant to which the holders of
the Subordinated Notes agreed to restructure our debt and equity. The lock-up
agreement, in addition to providing for the restructuring of our debt and
equity, contemplated that we would complete the sale of Aeromet and use the
proceeds to pay off both the DDJ Loan and other indebtedness to be issued in
the exchange, thereby extinguishing a substantial portion of our debt
obligations.

However, the terrorist attacks of September 11, 2001 had a significant impact
on the marketability of an aerospace company and the prospective buyer of
Aeromet ultimately declined to finalize the purchase of Aeromet. We decided to
discontinue our efforts to sell Aeromet in early October and instead focused on
obtaining alternative senior financing to payoff the DDJ Loan and to
restructure the Subordinated Notes. On October 5, 2001, DDJ agreed to forbear
defaults on the DDJ Loan through December 31, 2001, in

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exchange for a cash payment (rolled into the principal of the DDJ Loan) and the
acceleration of the DDJ Loan maturity date to December 31, 2001.

In December 2001, a prospective senior lender completed its due diligence and
made a financing proposal. However, the proposed amount of funds was
insufficient to meet our liquidity needs at that time and negotiations with the
prospective lender ended. In the last week of December 2001, GSC Partners (an
affiliate of GSCP Recovery, Inc. and GSC Recovery II, L.P.) proposed terms of a
new senior secured financing to us in a sufficient amount to meet our liquidity
needs. We accepted such terms and proceeded to move forward with the
completion of our restructuring.

On January 11, 2002, we entered into an amended lock-up agreement (the Amended
Lock-Up Agreement) with the holders of approximately 98% of the Subordinated
Notes pursuant to which we agreed to undertake a revised transaction to
restructure our outstanding debt and equity. The Amended Lock-Up Agreement
replaced in full the lock-up agreements that were originally entered into by us
and the holders of approximately 97.5% of the Subordinated Notes. The Amended
Lock-Up Agreement provided that as part of the restructuring transaction, the
holders of the Subordinated Notes would exchange all of their outstanding
Subordinated Notes, including accrued interest thereon, for a combination of
common stock, newly issued convertible preferred stock and new subordinated
pay-in-kind notes, as more fully described in the following section. As of
March 19, 2002, the holders of all of the Subordinated Notes tendered their
notes in the Exchange and received approximately 97.5% of our common stock on a
fully-diluted basis (consisting of common stock and Series C Preferred Stock)
and $15 million in PIK Notes. In connection with the Exchange, the board of
directors was reconstituted to consist of five directors, each of whom were
designated by the holders of the Subordinated Notes.

The Exchange

The Exchange was consummated as of March 19, 2002. The Noteholders exchanged
$63.7 million aggregate principal amount of Subordinated Notes, and accrued
interest thereon, for: (i) shares of common stock in an amount sufficient to
give the Noteholders a majority of our outstanding common stock (equal to
51,419,604 shares of common stock); (ii) 1000 shares of our Series C Preferred
Stock (convertible into 4,865,820,023 shares of common stock), which will be
automatically converted into common stock upon an increase in our authorized
amount of common stock, and (iii) $15 million in aggregate principal amount of
PIK Notes. Upon conversion of the Series C Preferred Stock, the Noteholders
will beneficially own approximately 97.5% of our common stock on a
fully-diluted basis, as well as the PIK Notes. The terms of the Exchange are
set forth in the Exchange Agreement between us and the holders of approximately
98% of our Subordinated Notes.

The Series C Preferred Stock will be automatically converted into that number
of shares of common stock which, when added to the shares of common stock
previously distributed to the Noteholders in the Exchange, will equal
approximately 97.5% of our common stock on a fully-diluted basis. The
Automatic Conversion of the Series C Preferred Stock into common stock will
take place immediately following shareholder approval of an increase in the
number of authorized shares of common stock to an amount sufficient to effect
the conversion of the Series C Preferred Stock in full. Until the Automatic
Conversion occurs, the Series C Preferred Stock has an aggregate liquidation
preference equal to $45 million and a cumulative dividend rate of 10% per
annum, which automatically increased to 14% per annum because the Automatic
Conversion did not occur on or before June 1, 2002. The Series C Preferred
Stock ranks senior to all other classes of our capital stock as to liquidation
and distributions. In addition, the Series C Preferred Stock is entitled to
vote with the common stock on all matters brought before the common stock for
approval (other than as required by law) and is entitled to that number of
votes equal to the number of shares of common stock into which the Series C
Preferred Stock is then convertible.

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The Series C Preferred Stock also entitles the holders thereof to appoint all
five members of the Companys Board of Directors. The Noteholders have agreed
that one member of the Board of Directors will continue to be the Companys
Chief Executive Officer.

The PIK Notes bear interest at a rate of 10% per annum, which increased to 14%
because the Automatic Conversion did not occur on or before June 1, 2002 (as
soon as the Automatic Conversion occurs, however, the interest rate on PIK
Notes will decrease back to 10% for the remaining term of the PIK Notes).
Interest on the PIK Notes is payable semi-annually only in additional PIK
Notes. The PIK Notes will mature in November 2007, but we may pay off or
otherwise redeem the PIK Notes in full or in part at any time prior to the
maturity date without penalty. The PIK Notes are unsecured senior subordinated
obligations and rank junior to all of our senior debt.

In addition to exchanging our Subordinated Notes as described above, the
Company also issued the New Senior Notes. The New Senior Notes were issued at
a discount so that the proceeds of the New Senior Notes totaled approximately
$22.0 million. The principal amount of the New Senior Notes will accrete
through May 1, 2007 to $36.0 million and will bear interest at 5% per annum.
The Company may redeem the New Senior Notes in full or in part at any time
prior to their maturity date at a premium over the accreted value of the New
Senior Notes, which premium declines over time. The Company used $16.2
million of the proceeds from the New Senior Notes to pay off principal and
accrued interest on the Companys then outstanding 21% senior secured loan (of
which $13.7 million in principal was outstanding at May 31, 2001). The
remaining proceeds were used for working capital, to pay the fees and costs of
the restructuring and for other general corporate purposes. Assuming the New
Senior Notes are not redeemed prior to their maturity date, cash payments will
be limited to the 5% interest rate on the face value of the New Senior Notes
and the repayment of the $36.0 million principal amount due on May 1, 2007.

Discontinuance of Efforts to Sell our European Operations

On October 31, 2000, we announced our intention to sell our European Operations
in order to reduce our outstanding Subordinated Notes. We entertained several
bids for the group. However, on October 5, 2001, after discussions with the
majority of the Noteholders, we announced that we would discontinue our efforts
to sell our European Operations. We may resume efforts to sell these
operations at some point in the future, but we have no current plans to do so.

Sale of Casting Division

Effective as of June 1, 2001, we sold substantially all of the assets of the
former U.S. Aerospace Groups Casting Division location in Entiat, Washington
to two newly formed limited liability companies owned by a private company.
The purchase price was approximately $4.5 million, which consisted of
approximately $1.4 million cash (a portion of the cash amounting to $160,000
was paid into escrow by the purchaser), a $1.0 million long-term note payable
to the Company, units in the newly created limited liability companies valued
at $1.0 million and the assumption of $1.1 million in liabilities. We used the
cash proceeds to retire certain long-term debt related to the Entiat assets and
to pay closing costs related to the transaction. The long-term note bears
interest at 7% and is payable in quarterly installments, interest only for the
first year and then principal and interest for 5 additional years. Due to the
uncertainties of payment under this note we have fully reserved against it as
of the closing date. The units in the newly created limited liability
companies have certain preferential rights including an accumulating preferred
return equal to 5% of the par value of then outstanding units and put rights
subject to certain restrictions and limitations. We have recorded the
value of the units at $0 which we estimate to be their fair market
value. In the purchase agreement
relating to the sale of the Casting Division, the parties agreed to adjust the
purchase price after closing

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based on the actual value of accounts receivable and inventory transferred at
closing. In December 2001, we agreed with the purchaser to settle differences
relating to the post-closing adjustment by returning the escrowed cash to the
purchaser, thereby reducing the purchase price by $160,000.

Sale of Engineering Assets

In December 2001, we completed the sale of substantially all of the engineering
assets of our Engineering & Fabrication Division. Gross proceeds of the sale
were $350,000. We had previously sold substantially all of the fabrication
assets of the division in May 2001. The sale of the engineering assets
completed the downsizing and closure of the former U.S. Aerospace Groups
Engineering & Fabrication Division.

Disclosures about contractual obligations and commercial commitments

The following table and narrative gives additional disclosure related to our
contractual obligations as of May 31, 2002 and how far in the future such
payments are due.

|                                       |  |       |        |        |  |           |       |       |  |       |       |         |  |  |        |  |  |  |        | 
|-------------------------------------- |  | ----- | ------ | ------ |  | --------- | ----- | ----- |  | ----- | ----- | ------- |  |  | ------ |  |  |  | ------ | 
|                                       |  |       |        |        |  | Less than |       | 1-3   |  | 4-5   |       | After 5
|Contractual obligations (in thousands) |  | Total |        | 1 year |  | years     |       | years |  | years
|                                       |  |       |        |        |  |           |       |       |  |      
|Long-term debt                         |  | $     | 39,283 |        |  |           | 799   |       |  |       | 603   |         |  |  | 36,380 |  |  |  | 1,501  | 
|Subordinated Notes                     |  |       | 25,739 |        |  |           |      |       |  |       |      |         |  |  |       |  |  |  | 25,739 | 
|Capital lease obligations              |  |       | 623    |        |  |           | 236   |       |  |       | 343   |         |  |  | 44     |  |  |  |       | 
|Operating lease obligations            |  |       | 33,674 |        |  |           | 3,574 |       |  |       | 6,184 |         |  |  | 4,649  |  |  |  | 19,267 | 
|                                       |  |       |        |        |  |           |       |       |  |       |       |         |  |  |        |  |  |  |        | 
|Total contractual obligations          |  | $     | 99,319 |        |  |           | 4,609 |       |  |       | 7,130 |         |  |  | 41,073 |  |  |  | 46,507 | 
|                                       |  |       |        |        |  |           |       |       |  |       |       |         |  |  |        |  |  |  |        | 

We also enter into certain supplier agreements that guarantee quantity and
price of the applicable commodity to limit the exposure to commodity price
fluctuations and availability concerns. At May 31, 2002, we had commercial
purchase commitments for raw materials aggregating approximately $733,000.
This amount relates to a titanium supply agreement with a fixed price.

Recent Accounting Pronouncements

In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No.
142, Goodwill and Other Intangible Assets.SFAS No. 141 requires that all
business combinations be accounted for under a single method, the purchase
method. Use of the pooling-of-interests method is no longer permitted,
although poolings initiated prior to June 30, 2001 are grandfathered. The
Company adopted the provisions of SFAS No. 141 during the first quarter of
fiscal 2002 without a material impact on the Companys financial position or
results of operations.

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The standard applies to legal obligations associated
with the retirement of long-lived assets that result from the acquisition,
construction, development and normal use of the asset. SFAS No. 143 requires
that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The fair value of the liability is added to the
carrying amount of the associated asset, and this additional carrying amount is
depreciated over the life of the asset. The liability is accreted at the end
of each period through charges to operating expense. If the obligation is
settled for other than the carrying amount of the liability, the Company will
recognize a gain or loss on settlement. The

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Company is required to adopt the
provisions of SFAS No. 143 in the first quarter of fiscal year 2004. To accomplish this, the Company must identify all legal obligations for asset
retirement obligations, if any, and determine the fair value of these
obligations on the date of adoption. The determination of fair value is
complex and will require the Company to gather market information and develop
cash flow models. Additionally, the Company will be required to develop
processes to track and monitor these obligations. The adoption of this
statement is not expected to have a material impact on the Companys financial
position or results of operations.

In August, 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This Statement
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized by the amount
by which the carrying amount of the asset exceeds the fair value of the asset.
SFAS No. 144 requires companies to separately report discontinued operations
and extends that reporting to a component of an entity that either has been
disposed of (by sale, abandonment, or in a distribution to owners) or is
classified as held for sale. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell. The Company is
required to adopt SFAS No. 144 on June 1, 2002. The adoption of this statement
is not expected to have a material impact on the Companys financial position
or results of operations.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
Among other things, this statement rescinds FASB Statement No. 4, Reporting
Gains and Losses from Extinguishment of Debt,which required all gains and
losses from early extinguishment of debt to be aggregated and, if material,
classified as an extraordinary item, net of the related income tax effect. As
a result, the criteria in APB Opinion No. 30,Reporting the Results of
Operations  Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions,will
now be used to classify those gains and losses. The statement becomes
effective in the first quarter of fiscal 2003 for prospective transactions.
Additionally, adoption of the statement will require that the Company
reclassify gains previously reported for the years ended May 31, 2000 and 2002
related to debt extinguishments from extraordinary items to income from
continuing operations.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities.This statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring).This
statement requires that a liability for a cost associated with an exit or
disposal activity be recognized at fair value when the liability is incurred.
The Company will be required to adopt this statement no later than June 1,
2003. The Company is currently assessing the impact of this statement on our
results of operations, financial position and cash flows.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have financial instruments that are subject to interest rate risk, primarily
debt obligations issued at a fixed rate. Our fixed-rate debt obligations are
generally not callable until maturity and therefore market fluctuations in
interest rates will not affect our earnings for the period. Based upon this
fact, we do not consider the market risk exposure for interest rates to be
material. The fair value of such instruments approximates their face
value.

We are subject to foreign currency exchange rate risk relating to receipts from
and payments to suppliers in foreign currencies. Since approximately 57% of
our transactions are conducted in foreign currency, the exchange rate risk
could be material. During fiscal years 2000 and 2001, the foreign currency
translation adjustments were losses of $5.1 million and $2.9 million, net of
tax, respectively. During fiscal year 2002 the foreign currency translation
adjustment was a gain of $776,000. We have not entered into any hedging
activity as of May 31, 2002.

We are exposed to commodity price fluctuations through purchases of aluminum,
titanium, and other raw materials. We enter into certain supplier agreements
that guarantee quantity and price of the applicable commodity to limit the
exposure to commodity price fluctuations and availability concerns. At May 31,
2002, we had purchase commitments for raw materials aggregating approximately
$733,000. This amount relates to a titanium supply agreement with a fixed
price. This commitment at May 31, 2002 represented less than 2% of our
consolidated cost of goods sold for fiscal 2002.

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ITEM 8.   FINANCIAL STATEMENTS

Independent Auditors Report

The Board of Directors
Pacific Aerospace & Electronics, Inc.:

We have audited the accompanying consolidated balance sheets of Pacific
Aerospace & Electronics, Inc. as of May 31, 2001 and 2002, and the related
consolidated statements of operations and comprehensive income (loss),
stockholders equity (deficit) and cash flows for each of the years in the
three-year period ended May 31, 2002. These consolidated financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
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. as of May 31, 2001 and 2002, and the results
of their operations and their cash flows for each of the years in the
three-year period ended May 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
note 3 to the consolidated financial statements, the Company has suffered
recurring losses from operations and has a net capital deficiency that raise
substantial doubt about its ability to continue as a going concern.
Managements plans in regard to these matters are also described in note 3.
The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.

As discussed in note 2 to the consolidated financial statements, the Company
changed its method of accounting for goodwill and other intangible assets in
the year ended May 31, 2002.

/s/ KPMG LLP

Seattle, Washington
August 23, 2002

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Consolidated Balance Sheets
May 31, 2001 and 2002

|                                                                                                                                                                                        |                                                                                                                                                               |   |                                      |              |   |             |            |             |   |             |   | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------------------------------------ | ------------ | - | ----------- | ---------- | ----------- | - | ----------- | - | 
|                                                                                                                                                                                        |                                                                                                                                                               |   |                                      |              |   | 2001        |            | 2002       
|                                                                                                                                                                                        |                                                                                                                                                               |   |                                      |              |   |             |            |            
|Assets                                                                                                                                                                                  |                                                                                                                                                               |   |                                      |              |   |             |            |            
|Current assets:                                                                                                                                                                         |                                                                                                                                                               |   |                                      |              |   |             |            |            
|                                                                                                                                                                                        | Cash and cash equivalents                                                                                                                                     |   | $                                    | 4,095,000    |   |             |            | 5,619,000   |  
|                                                                                                                                                                                        | Accounts receivable, net of allowance for doubtful accounts, sales
returns and allowances of $451,000 and $476,000 in 2001 and 2002                           |   |                                      | 19,101,000   |   |             |            | 12,226,000  |  
|                                                                                                                                                                                        | Inventories                                                                                                                                                   |   |                                      | 22,994,000   |   |             |            | 19,606,000  |  
|                                                                                                                                                                                        | Deferred income taxes                                                                                                                                         |   |                                      | 115,000      |   |             |            | 118,000     |  
|                                                                                                                                                                                        | Prepaid expenses and other                                                                                                                                    |   |                                      | 666,000      |   |             |            | 463,000     |  
|                                                                                                                                                                                        |                                                                                                                                                               |   |                                      |              |   |             |            |            
|                                                                                                                                                                                        |                                                                                                                                                               |   | Total current assets                 |              |   | 46,971,000  |            |             |   | 38,032,000  |  
|                                                                                                                                                                                        |                                                                                                                                                               |   |                                      |              |   |             |            |            
|Property, plant and equipment, net                                                                                                                                                      |                                                                                                                                                               |   | 26,754,000                           |              |   |             | 23,315,000 |            
|                                                                                                                                                                                        |                                                                                                                                                               |   |                                      |              |   |             |            |            
|Other assets:                                                                                                                                                                           |                                                                                                                                                               |   |                                      |              |   |             |            |            
|                                                                                                                                                                                        | Goodwill net of
accumulated amortization of $202,000 in 2001 and 2002                                                                                         |   |                                      | 351,000      |   |             |            | 351,000     |  
|                                                                                                                                                                                        | Patents, net of accumulated amortization of $428,000 in 2001
and $517,000 in 2002                                                                             |   |                                      | 735,000      |   |             |            | 1,598,000   |  
|                                                                                                                                                                                        | Deferred financing costs, net of accumulated amortization of
$2,477,000 in 2001 and $40,000 in 2002                                                           |   |                                      | 5,597,000    |   |             |            | 1,147,000   |  
|                                                                                                                                                                                        | Other                                                                                                                                                         |   |                                      | 408,000      |   |             |            | 226,000     |  
|                                                                                                                                                                                        |                                                                                                                                                               |   |                                      |              |   |             |            |            
|                                                                                                                                                                                        |                                                                                                                                                               |   | Total other assets                   |              |   | 7,091,000   |            |             |   | 3,322,000   |  
|                                                                                                                                                                                        |                                                                                                                                                               |   |                                      |              |   |             |            |            
|                                                                                                                                                                                        |                                                                                                                                                               | $ | 80,816,000                           |              |   |             | 64,669,000 |            
|                                                                                                                                                                                        |                                                                                                                                                               |   |                                      |              |   |             |            |            
|Liabilities and Stockholders Equity (Deficit)                                                                                                                                          |                                                                                                                                                               |   |                                      |              |   |             |            |            
|Current liabilities:                                                                                                                                                                    |                                                                                                                                                               |   |                                      |              |   |             |            |            
|                                                                                                                                                                                        | Accounts payable                                                                                                                                              |   | $                                    | 12,639,000   |   |             |            | 8,065,000   |  
|                                                                                                                                                                                        | Accrued liabilities                                                                                                                                           |   |                                      | 5,209,000    |   |             |            | 4,254,000   |  
|                                                                                                                                                                                        | Accrued interest                                                                                                                                              |   |                                      | 2,831,000    |   |             |            | 150,000     |  
|                                                                                                                                                                                        | Current portion of long-term debt                                                                                                                             |   |                                      | 929,000      |   |             |            | 799,000     |  
|                                                                                                                                                                                        | Current portion of capital lease obligations                                                                                                                  |   |                                      | 329,000      |   |             |            | 184,000     |  
|                                                                                                                                                                                        |                                                                                                                                                               |   |                                      |              |   |             |            |            
|                                                                                                                                                                                        |                                                                                                                                                               |   | Total current liabilities            |              |   | 21,937,000  |            |             |   | 13,452,000  |  
|Long-term liabilities:                                                                                                                                                                  |                                                                                                                                                               |   |                                      |              |   |             |            |            
|                                                                                                                                                                                        | Long-term debt, net of current portion                                                                                                                        |   |                                      | 16,969,000   |   |             |            | 24,831,000  |  
|                                                                                                                                                                                        | Capital lease obligations, net of current portion                                                                                                             |   |                                      | 1,005,000    |   |             |            | 367,000     |  
|                                                                                                                                                                                        | Senior subordinated notes payable                                                                                                                             |   |                                      | 63,700,000   |   |             |            | 25,739,000  |  
|                                                                                                                                                                                        | Deferred income taxes                                                                                                                                         |   |                                      | 2,077,000    |   |             |            | 872,000     |  
|                                                                                                                                                                                        | Deferred rent and other                                                                                                                                       |   |                                      | 242,000      |   |             |            | 301,000     |  
|                                                                                                                                                                                        |                                                                                                                                                               |   |                                      |              |   |             |            |            
|                                                                                                                                                                                        |                                                                                                                                                               |   | Total liabilities                    |              |   | 105,930,000 |            |             |   | 65,562,000  |  
|                                                                                                                                                                                        |                                                                                                                                                               |   |                                      |              |   |             |            |            
|Series C convertible preferred stock, $0.001 par value, liquidation preference
equal to $45.0 million, 5,000,000 shares authorized, 1,000 shares issued
and outstanding at May 31, 2002 |                                                                                                                                                               |   |                                     |              |   |             | 18,715,000 |            
|                                                                                                                                                                                        |                                                                                                                                                               |   |                                      |              |   |             |            |            
|Stockholders equity (deficit):                                                                                                                                                         |                                                                                                                                                               |   |                                      |              |   |             |            |            
|                                                                                                                                                                                        | Common stock, $0.001 par value, 100,000,000 shares authorized,
38,833,151 and 90,734,386 shares issued and outstanding at
May 31, 2001 and 2002, respectively |   |                                      | 39,000       |   |             |            | 91,000      |  
|                                                                                                                                                                                        | Additional paid-in capital                                                                                                                                    |   |                                      | 86,917,000   |   |             |            | 87,070,000  |  
|                                                                                                                                                                                        | Accumulated other comprehensive loss                                                                                                                          |   |                                      | (9,165,000   | ) |             |            | (8,389,000  | )
|                                                                                                                                                                                        | Accumulated deficit                                                                                                                                           |   |                                      | (102,905,000 | ) |             |            | (98,380,000 | )
|                                                                                                                                                                                        |                                                                                                                                                               |   |                                      |              |   |             |            |            
|                                                                                                                                                                                        |                                                                                                                                                               |   | Total stockholders equity (deficit) |              |   | (25,114,000 | )          |             |   | (19,608,000 | )
|Commitments and contingencies                                                                                                                                                           |                                                                                                                                                               |   |                                     |              |   |             |           |            
|                                                                                                                                                                                        |                                                                                                                                                               |   |                                      |              |   |             |            |            
|                                                                                                                                                                                        |                                                                                                                                                               | $ | 80,816,000                           |              |   |             | 64,669,000 |            
|                                                                                                                                                                                        |                                                                                                                                                               |   |                                      |              |   |             |            |            

See accompanying notes to consolidated financial statements.

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Consolidated Statements of Operations and Comprehensive Income (Loss)

Years ended May 31, 2000, 2001 and 2002

|                                                                              |                                                     |                                                                 |             |            |             |      |             |             |             |   |            |             |             |  
|----------------------------------------------------------------------------- | --------------------------------------------------- | --------------------------------------------------------------- | ----------- | ---------- | ----------- | ---- | ----------- | ----------- | ----------- | - | ---------- | ----------- | ----------- | -
|                                                                              |                                                     |                                                                 |             | 2000       |             | 2001 |             | 2002       
|                                                                              |                                                     |                                                                 |             |            |             |      |             |            
|Net sales                                                                     |                                                     | $                                                               | 112,694,000 |            |             |      | 109,288,000 |             |             |   | 80,191,000 |            
|Cost of sales                                                                 |                                                     |                                                                 | 92,063,000  |            |             |      | 101,048,000 |             |             |   | 67,761,000 |            
|                                                                              |                                                     |                                                                 |             |            |             |      |             |             |             |   |            |            
|                                                                              |                                                     | Gross profit                                                    |             |            | 20,631,000  |      |             |             | 8,240,000   |   |            |             | 12,430,000  |  
|Operating expenses                                                            |                                                     |                                                                 | 24,533,000  |            |             |      | 67,201,000  |             |             |   | 15,694,000 |            
|                                                                              |                                                     |                                                                 |             |            |             |      |             |             |             |   |            |            
|                                                                              |                                                     | Loss from operations                                            |             |            | (3,902,000  | )    |             |             | (58,961,000 | ) |            |             | (3,264,000  | )
|                                                                              |                                                     |                                                                 |             |            |             |      |             |             |             |   |            |            
|Other income (expense):                                                       |                                                     |                                                                 |             |            |             |      |             |             |             |   |            |            
|                                                                              | Interest income                                     |                                                                 |             | 97,000     |             |      |             | 15,000      |             |   |            | 95,000      |            
|                                                                              | Interest expense                                    |                                                                 |             | (9,959,000 | )           |      |             | (10,027,000 | )           |   |            | (12,897,000 | )          
|                                                                              | Other                                               |                                                                 |             | 33,000     |             |      |             | 201,000     |             |   |            | 78,000      |            
|                                                                              |                                                     |                                                                 |             |            |             |      |             |             |             |   |            |            
|                                                                              |                                                     | Total other expense                                             |             |            | (9,829,000  | )    |             |             | (9,811,000  | ) |            |             | (12,724,000 | )
|                                                                              |                                                     |                                                                 |             |            |             |      |             |             |             |   |            |            
|                                                                              |                                                     | Loss before income tax benefit (expense)
and extraordinary item |             |            | (13,731,000 | )    |             |             | (68,772,000 | ) |            |             | (15,988,000 | )
|Income tax benefit (expense)                                                  |                                                     |                                                                 | (21,000     | )          |             |      | (6,948,000  | )           |             |   | 195,000    |            
|                                                                              |                                                     |                                                                 |             |            |             |      |             |             |             |   |            |            
|                                                                              |                                                     | Loss before extraordinary item                                  |             |            | (13,752,000 | )    |             |             | (75,720,000 | ) |            |             | (15,793,000 | )
|Extraordinary item, net of tax of $362,000 in 2000 and
$0 in 2002             |                                                     |                                                                 | 703,000     |            |             |      |            |             |             |   | 20,318,000 |            
|                                                                              |                                                     |                                                                 |             |            |             |      |             |             |             |   |            |            
|                                                                              |                                                     | Net income (loss)                                               |             |            | (13,049,000 | )    |             |             | (75,720,000 | ) |            |             | 4,525,000   |  
|Other comprehensive income (loss):                                            |                                                     |                                                                 |             |            |             |      |             |             |             |   |            |            
|                                                                              | Foreign currency translation                        |                                                                 |             | (4,523,000 | )           |      |             | (2,915,000  | )           |   |            | 776,000     |            
|                                                                              | Income tax benefit (expense)                        |                                                                 |             | (587,000   | )           |      |             |            |             |   |            |            |            
|                                                                              |                                                     |                                                                 |             |            |             |      |             |             |             |   |            |            
|                                                                              |                                                     | Total other comprehensive income (loss)                         |             |            | (5,110,000  | )    |             |             | (2,915,000  | ) |            |             | 776,000     |  
|                                                                              |                                                     |                                                                 |             |            |             |      |             |             |             |   |            |            
|                                                                              |                                                     | Comprehensive income (loss)                                     |             | $          | (18,159,000 | )    |             |             | (78,635,000 | ) |            |             | 5,301,000   |  
|                                                                              |                                                     |                                                                 |             |            |             |      |             |             |             |   |            |            
|Net income (loss) per share  basic and diluted:                              |                                                     |                                                                 |             |            |             |      |             |             |             |   |            |            
|                                                                              | Net loss before extraordinary item                  |                                                                 | $           | (0.63      | )           |      |             | (2.15       | )           |   |            | (0.32       | )          
|                                                                              | Extraordinary item  gain on extinguishment of debt |                                                                 |             | 0.04       |             |      |             |            |             |   |            | 0.41        |            
|                                                                              |                                                     |                                                                 |             |            |             |      |             |             |             |   |            |            
|                                                                              | Net income (loss) per share                         |                                                                 | $           | (0.59      | )           |      |             | (2.15       | )           |   |            | 0.09        |            
|                                                                              |                                                     |                                                                 |             |            |             |      |             |             |             |   |            |            
|Shares used in computation of net income (loss)
per share  basic and diluted |                                                     |                                                                 | 21,955,473  |            |             |      | 35,283,347  |             |             |   | 49,584,968 |            

See accompanying notes to consolidated financial statements.

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Consolidated Statements of Stockholders Equity (Deficit)

Years ended May 31, 2000, 2001 and 2002



|                                                                                                     |  |                             |          |              |  |        |   |        |  |  |            |  |  |   |        | 
|---------------------------------------------------------------------------------------------------- |  | --------------------------- | -------- | ------------ |  | ------ | - | ------ |  |  | ---------- |  |  | - | ------ | 
|                                                                                                     |  | Series B                    |          |              |  |        |   |        |  | 
|                                                                                                     |  | convertible preferred stock |          | Common stock
|                                                                                                     |  |                             |          |             
|                                                                                                     |  | Shares                      |          | Amount       |  | Shares |   | Amount
|                                                                                                     |  |                             |          |              |  |        |   |       
|Balance at May 31, 1999                                                                              |  |                             | 161,035  |              |  | $      |  |        |  |  | 18,932,779 |  |  | $ | 19,000 | 
|Issuance of common stock under employee stock
purchase plan, net of related expenses of $12,000      |  |                             |         |              |  |        |  |        |  |  | 142,696    |  |  |   |       | 
|Sale of common stock for cash, net of issuance
costs of $788,000                                     |  |                             |         |              |  |        |  |        |  |  | 1,598,000  |  |  |   | 1,000  | 
|Issuance of warrants                                                                                 |  |                             |         |              |  |        |  |        |  |  |           |  |  |   |       | 
|Exercise of warrants for cash, net                                                                   |  |                             |         |              |  |        |  |        |  |  | 25,000     |  |  |   |       | 
|Issuance of common stock in exchange for senior
subordinated notes                                   |  |                             |         |              |  |        |  |        |  |  | 2,902,806  |  |  |   | 3,000  | 
|Issuance of common stock on conversion of Series B
preferred stock, net of issuance costs of $60,000 |  |                             | (126,506 | )            |  |        |  |        |  |  | 6,682,340  |  |  |   | 7,000  | 
|Foreign currency translation adjustment, including
tax effect of $587,000                            |  |                             |         |              |  |        |  |        |  |  |           |  |  |   |       | 
|Net loss                                                                                             |  |                             |         |              |  |        |  |        |  |  |           |  |  |   |       | 
|                                                                                                     |  |                             |          |              |  |        |   |        |  |  |            |  |  |   |        | 
|Balance at May 31, 2000                                                                              |  |                             | 34,529   |              |  |        |  |        |  |  | 30,283,621 |  |  |   | 30,000 | 
|Issuance of common stock under employee stock
purchase plan, net of related expenses of $10,000      |  |                             |         |              |  |        |  |        |  |  | 407,090    |  |  |   | 1,000  | 
|Issuance of common stock on conversion of Series B
preferred stock, net of issuance costs of $18,000 |  |                             | (34,529  | )            |  |        |  |        |  |  | 2,809,094  |  |  |   | 3,000  | 
|Sale of common stock and warrants for cash, net of
issuance costs of $173,000                        |  |                             |         |              |  |        |  |        |  |  | 1,142,860  |  |  |   | 1,000  | 
|Exercise of warrants for cash, net                                                                   |  |                             |         |              |  |        |  |        |  |  | 4,190,486  |  |  |   | 4,000  | 
|Issuance of warrants                                                                                 |  |                             |         |              |  |        |  |        |  |  |           |  |  |   |       | 
|Foreign currency translation adjustment                                                              |  |                             |         |              |  |        |  |        |  |  |           |  |  |   |       | 
|Net loss                                                                                             |  |                             |         |              |  |        |  |        |  |  |           |  |  |   |       | 
|                                                                                                     |  |                             |          |              |  |        |   |        |  |  |            |  |  |   |        | 
|Balance at May 31, 2001                                                                              |  |                             |         |              |  |        |  |        |  |  | 38,833,151 |  |  |   | 39,000 | 
|Issuance of common stock to corporate officers
in lieu of salary increases                           |  |                             |         |              |  |        |  |        |  |  | 380,952    |  |  |   |       | 
|Issuance of common stock under employee stock
purchase plan, net of related expenses of $12,000      |  |                             |         |              |  |        |  |        |  |  | 100,679    |  |  |   |       | 
|Issuance of common stock in exchange for long-term
debt, net of issuance costs $77,000               |  |                             |         |              |  |        |  |        |  |  | 51,419,604 |  |  |   | 52,000 | 
|Foreign currency translation adjustment                                                              |  |                             |         |              |  |        |  |        |  |  |           |  |  |   |       | 
|Net income                                                                                           |  |                             |         |              |  |        |  |        |  |  |           |  |  |   |       | 
|                                                                                                     |  |                             |          |              |  |        |   |        |  |  |            |  |  |   |        | 
|Balance at May 31, 2002                                                                              |  |                             |         |              |  | $      |  |        |  |  | 90,734,386 |  |  | $ | 91,000 | 
|                                                                                                     |  |                             |          |              |  |        |   |        |  |  |            |  |  |   |        | 

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                                                     |  |            |            |               |  |             |            |           |  |               |              |       |  |  |             |  
|---------------------------------------------------------------------------------------------------- |  | ---------- | ---------- | ------------- |  | ----------- | ---------- | --------- |  | ------------- | ------------ | ----- |  |  | ----------- | -
|                                                                                                     |  |            |            |               |  | Accumulated |            |           |  |               |              | Total
|                                                                                                     |  | Additional |            | other         |  |             |            |           |  | stockholders'
|                                                                                                     |  | paid-in    |            | comprehensive |  | Accumulated |            | equity   
|                                                                                                     |  | capital    |            | loss          |  | deficit     |            | (deficit)
|                                                                                                     |  |            |            |               |  |             |            |          
|Balance at May 31, 1999                                                                              |  |            | 69,276,000 |               |  |             | (1,140,000 | )         |  |               | (14,136,000  | )     |  |  | 54,019,000  |  
|Issuance of common stock under employee stock
purchase plan, net of related expenses of $12,000      |  |            | 163,000    |               |  |             |           |           |  |               |             |       |  |  | 163,000     |  
|Sale of common stock for cash, net of issuance
costs of $788,000                                     |  |            | 4,005,000  |               |  |             |           |           |  |               |             |       |  |  | 4,006,000   |  
|Issuance of warrants                                                                                 |  |            | 60,000     |               |  |             |           |           |  |               |             |       |  |  | 60,000      |  
|Exercise of warrants for cash, net                                                                   |  |            | 86,000     |               |  |             |           |           |  |               |             |       |  |  | 86,000      |  
|Issuance of common stock in exchange for senior
subordinated notes                                   |  |            | 9,650,000  |               |  |             |           |           |  |               |             |       |  |  | 9,653,000   |  
|Issuance of common stock on conversion of Series B
preferred stock, net of issuance costs of $60,000 |  |            | (67,000    | )             |  |             |           |           |  |               |             |       |  |  | (60,000     | )
|Foreign currency translation adjustment, including
tax effect of $587,000                            |  |            |           |               |  |             | (5,110,000 | )         |  |               |             |       |  |  | (5,110,000  | )
|Net loss                                                                                             |  |            |           |               |  |             |           |           |  |               | (13,049,000  | )     |  |  | (13,049,000 | )
|                                                                                                     |  |            |            |               |  |             |            |           |  |               |              |       |  |  |             |  
|Balance at May 31, 2000                                                                              |  |            | 83,173,000 |               |  |             | (6,250,000 | )         |  |               | (27,185,000  | )     |  |  | 49,768,000  |  
|Issuance of common stock under employee stock
purchase plan, net of related expenses of $10,000      |  |            | 167,000    |               |  |             |           |           |  |               |             |       |  |  | 168,000     |  
|Issuance of common stock on conversion of Series B
preferred stock, net of issuance costs of $18,000 |  |            | (21,000    | )             |  |             |           |           |  |               |             |       |  |  | (18,000     | )
|Sale of common stock and warrants for cash, net of
issuance costs of $173,000                        |  |            | 1,712,000  |               |  |             |           |           |  |               |             |       |  |  | 1,713,000   |  
|Exercise of warrants for cash, net                                                                   |  |            |           |               |  |             |           |           |  |               |             |       |  |  | 4,000       |  
|Issuance of warrants                                                                                 |  |            | 1,886,000  |               |  |             |           |           |  |               |             |       |  |  | 1,886,000   |  
|Foreign currency translation adjustment                                                              |  |            |           |               |  |             | (2,915,000 | )         |  |               |             |       |  |  | (2,915,000  | )
|Net loss                                                                                             |  |            |           |               |  |             |           |           |  |               | (75,720,000  | )     |  |  | (75,720,000 | )
|                                                                                                     |  |            |            |               |  |             |            |           |  |               |              |       |  |  |             |  
|Balance at May 31, 2001                                                                              |  |            | 86,917,000 |               |  |             | (9,165,000 | )         |  |               | (102,905,000 | )     |  |  | (25,114,000 | )
|Issuance of common stock to corporate officers
in lieu of salary increases                           |  |            | 64,000     |               |  |             |           |           |  |               |             |       |  |  | 64,000      |  
|Issuance of common stock under employee stock
purchase plan, net of related expenses of $12,000      |  |            | 4,000      |               |  |             |           |           |  |               |             |       |  |  | 4,000       |  
|Issuance of common stock in exchange for long-term
debt, net of issuance costs $77,000               |  |            | 85,000     |               |  |             |           |           |  |               |             |       |  |  | 137,000     |  
|Foreign currency translation adjustment                                                              |  |            |           |               |  |             | 776,000    |           |  |               |             |       |  |  | 776,000     |  
|Net income                                                                                           |  |            |           |               |  |             |           |           |  |               | 4,525,000    |       |  |  | 4,525,000   |  
|                                                                                                     |  |            |            |               |  |             |            |           |  |               |              |       |  |  |             |  
|Balance at May 31, 2002                                                                              |  |            | 87,070,000 |               |  |             | (8,389,000 | )         |  |               | (98,380,000  | )     |  |  | (19,608,000 | )
|                                                                                                     |  |            |            |               |  |             |            |           |  |               |              |       |  |  |             |  

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Years ended May 31, 2000, 2001 and 2002

|                                               |                                                                                      |                                                              |                                                           |                                                             |           |           |            |             |           |            |            |             |            |             |            |  
|---------------------------------------------- | ------------------------------------------------------------------------------------ | ------------------------------------------------------------ | --------------------------------------------------------- | ----------------------------------------------------------- | --------- | --------- | ---------- | ----------- | --------- | ---------- | ---------- | ----------- | ---------- | ----------- | ---------- | -
|                                               |                                                                                      |                                                              |                                                           |                                                             |           | 2000      |            | 2001        |           | 2002      
|                                               |                                                                                      |                                                              |                                                           |                                                             |           |           |            |             |           |           
|Cash flow from operating activities:           |                                                                                      |                                                              |                                                           |                                                             |           |           |            |             |           |            |            |            
|                                               | Net income (loss)                                                                    |                                                              | $                                                         | (13,049,000                                                 | )         |           |            | (75,720,000 | )         |            |            | 4,525,000   |           
|                                               | Adjustments to reconcile net income (loss) to net
cash used in operating activities: |                                                              |                                                           |                                                             |           |           |            |             |           |            |            |             |           
|                                               |                                                                                      |                                                              | Depreciation and amortization                             |                                                             |           | 7,741,000 |            |             |           | 7,334,000  |            |             |            | 4,389,000   |           
|                                               |                                                                                      |                                                              | Amortization of original issue discount on long-term debt |                                                             |           |          |            |             |           |           |            |             |            | 347,000     |           
|                                               |                                                                                      |                                                              | Impairment of certain long lived assets                   |                                                             |           | 5,304,000 |            |             |           | 48,946,000 |            |             |            | 649,000     |           
|                                               |                                                                                      |                                                              | Writedown of inventories                                  |                                                             |           |          |            |             |           | 1,600,000  |            |             |            |            |           
|                                               |                                                                                      |                                                              | Realized loss on investment                               |                                                             |           | 19,000    |            |             |           |           |            |             |            |            |           
|                                               |                                                                                      |                                                              | Gain on troubled debt restructuring                       |                                                             |           |          |            |             |           |           |            |             |            | (20,318,000 | )         
|                                               |                                                                                      |                                                              | Gain on early extinguishment of debt                      |                                                             |           | (703,000  | )          |             |           |           |            |             |            |            |           
|                                               |                                                                                      |                                                              | Noncash compensation expense                              |                                                             |           |          |            |             |           |           |            |             |            | 64,000      |           
|                                               |                                                                                      |                                                              | Other nonoperating (income) expenses                      |                                                             |           | (8,000    | )          |             |           | (144,000   | )          |             |            |            |           
|                                               |                                                                                      |                                                              | Income tax expense (benefit)                              |                                                             |           | 151,000   |            |             |           | 5,844,000  |            |             |            | (879,000    | )         
|                                               |                                                                                      |                                                              | Changes in operating assets and liabilities:              |                                                             |           |           |            |             |           |            |            |             |            |             |           
|                                               |                                                                                      |                                                              |                                                           | Accounts receivable                                         |           |           | 3,250,000  |             |           |            | 1,661,000  |             |            |             | 5,910,000  |  
|                                               |                                                                                      |                                                              |                                                           | Inventories                                                 |           |           | (3,072,000 | )           |           |            | 2,445,000  |             |            |             | 2,351,000  |  
|                                               |                                                                                      |                                                              |                                                           | Prepaid expenses and other current assets                   |           |           | (137,000   | )           |           |            | (347,000   | )           |            |             | 111,000    |  
|                                               |                                                                                      |                                                              |                                                           | Other assets                                                |           |           | (2,307,000 | )           |           |            | (114,000   | )           |            |             | 1,225,000  |  
|                                               |                                                                                      |                                                              |                                                           | Accounts payable, accrued liabilities and other liabilities |           |           | (2,396,000 | )           |           |            | 6,895,000  |             |            |             | 1,307,000  |  
|                                               |                                                                                      |                                                              |                                                           |                                                             |           |           |            |             |           |            |            |            
|                                               |                                                                                      |                                                              |                                                           | Net cash used in operating activities                       |           |           | (5,207,000 | )           |           |            | (1,600,000 | )           |            |             | (319,000   | )
|                                               |                                                                                      |                                                              |                                                           |                                                             |           |           |            |             |           |            |            |            
|Cash flow from investing activities:           |                                                                                      |                                                              |                                                           |                                                             |           |           |            |             |           |            |            |            
|                                               | Acquisition of property, plant and equipment                                         |                                                              |                                                           | (4,867,000                                                  | )         |           |            | (3,710,000  | )         |            |            | (2,703,000  | )         
|                                               | Acquisition of subsidiaries                                                          |                                                              |                                                           | (1,350,000                                                  | )         |           |            |            |           |            |            |            |           
|                                               | Proceeds from sale of property, plant and equipment                                  |                                                              |                                                           |                                                            |           |           |            | 2,254,000   |           |            |            | 432,000     |           
|                                               | Issuance of notes receivable                                                         |                                                              |                                                           | (1,505,000                                                  | )         |           |            |            |           |            |            |            |           
|                                               | Other changes, net                                                                   |                                                              |                                                           | 49,000                                                      |           |           |            | (20,000     | )         |            |            |            |           
|                                               |                                                                                      |                                                              |                                                           |                                                             |           |           |            |             |           |            |            |            
|                                               |                                                                                      |                                                              |                                                           | Net cash used in investing activities                       |           |           | (7,673,000 | )           |           |            | (1,476,000 | )           |            |             | (2,271,000 | )
|                                               |                                                                                      |                                                              |                                                           |                                                             |           |           |            |             |           |            |            |            
|Cash flow from financing activities:           |                                                                                      |                                                              |                                                           |                                                             |           |           |            |             |           |            |            |            
|                                               | Net borrowings (repayments) under line of credit                                     |                                                              |                                                           | 5,218,000                                                   |           |           |            | 319,000     |           |            |            |            |           
|                                               | Proceeds from long-term debt                                                         |                                                              |                                                           |                                                            |           |           |            | 4,802,000   |           |            |            | 20,832,000  |           
|                                               | Payments on long-term debt and capital leases                                        |                                                              |                                                           | (2,603,000                                                  | )         |           |            | (1,698,000  | )         |            |            | (15,098,000 | )         
|                                               | Proceeds from sale of common stock and warrants, net                                 |                                                              |                                                           | 4,169,000                                                   |           |           |            | 1,863,000   |           |            |            | 4,000       |           
|                                               | Proceeds from sale of preferred stock, net                                           |                                                              |                                                           | (60,000                                                     | )         |           |            |            |           |            |            |            |           
|                                               | Proceeds from exercise of warrants                                                   |                                                              |                                                           | 86,000                                                      |           |           |            | 4,000       |           |            |            |            |           
|                                               | Direct costs of restructuring transaction                                            |                                                              |                                                           |                                                            |           |           |            |            |           |            |            | (1,948,000  | )         
|                                               | Other changes, net                                                                   |                                                              |                                                           | 24,000                                                      |           |           |            |            |           |            |            |            |           
|                                               |                                                                                      |                                                              |                                                           |                                                             |           |           |            |             |           |            |            |            
|                                               |                                                                                      |                                                              |                                                           | Net cash provided by financing activities                   |           |           | 6,834,000  |             |           |            | 5,290,000  |             |            |             | 3,790,000  |  
|                                               |                                                                                      |                                                              |                                                           |                                                             |           |           |            |             |           |            |            |            
|                                               |                                                                                      |                                                              |                                                           | Net increase (decrease) in cash and cash equivalents        |           |           | (6,046,000 | )           |           |            | 2,214,000  |             |            |             | 1,200,000  |  
|Effect of exchange rates on cash               |                                                                                      |                                                              | 66,000                                                    |                                                             |           |           | (273,000   | )           |           |            | 324,000    |            
|Cash and cash equivalents at beginning of year |                                                                                      |                                                              | 8,134,000                                                 |                                                             |           |           | 2,154,000  |             |           |            | 4,095,000  |            
|                                               |                                                                                      |                                                              |                                                           |                                                             |           |           |            |             |           |            |            |            
|Cash and cash equivalents at end of year       |                                                                                      | $                                                            | 2,154,000                                                 |                                                             |           |           | 4,095,000  |             |           |            | 5,619,000  |            
|                                               |                                                                                      |                                                              |                                                           |                                                             |           |           |            |             |           |            |            |            
|Supplemental cash flow information:            |                                                                                      |                                                              |                                                           |                                                             |           |           |            |             |           |            |            |            
|                                               | Cash paid during the year for:                                                       |                                                              |                                                           |                                                             |           |           |            |             |           |            |            |             |           
|                                               |                                                                                      | Interest                                                     |                                                           | $                                                           | 9,563,000 |           |            |             | 8,524,000 |            |            |             | 3,918,000  |            
|                                               |                                                                                      | Income taxes                                                 |                                                           |                                                             | 2,232,000 |           |            |             | 295,000   |            |            |             | 713,000    |            
|Acquisition of subsidiaries:                   |                                                                                      |                                                              |                                                           |                                                             |           |           |            |             |           |            |            |            
|                                               | Fair value of assets acquired and resulting goodwill, excluding cash                 |                                                              |                                                           | 9,801,000                                                   |           |           |            |            |           |            |            |            |           
|                                               | Liabilities assumed                                                                  |                                                              |                                                           | 5,814,000                                                   |           |           |            |            |           |            |            |            |           
|Noncash investing and financing activities:    |                                                                                      |                                                              |                                                           |                                                             |           |           |            |             |           |            |            |            
|                                               | Sale of subsidiaries:                                                                |                                                              |                                                           |                                                             |           |           |            |             |           |            |            |             |           
|                                               |                                                                                      | Fair value of assets sold                                    |                                                           |                                                             |          |           |            |             |          |            |            |             | 4,297,000  |            
|                                               |                                                                                      | Liabilities relieved                                         |                                                           |                                                             |          |           |            |             |          |            |            |             | (1,100,000 | )          
|                                               |                                                                                      | Satisfaction of long-term debt and related transaction costs |                                                           |                                                             |          |           |            |             |          |            |            |             | (1,197,000 | )          
|                                               | Issuance of common stock in connection with troubled debt restructuring              |                                                              |                                                           |                                                            |           |           |            |            |           |            |            | 137,000     |           
|                                               | Issuance of preferred stock in connection with troubled debt restructuring           |                                                              |                                                           |                                                            |           |           |            |            |           |            |            | 18,715,000  |           
|                                               | Conversion of notes and accrued interest to common stock                             |                                                              |                                                           | 11,457,000                                                  |           |           |            |            |           |            |            |            |           
|                                               | Short-term obligations refinanced with long-term debt                                |                                                              |                                                           |                                                            |           |           |            | 9,306,000   |           |            |            |            |           
|                                               | Issuance of warrants in connection with debt                                         |                                                              |                                                           |                                                            |           |           |            | 1,886,000   |           |            |            |            |           
|                                               | Purchase of patent                                                                   |                                                              |                                                           |                                                            |           |           |            |            |           |            |            | 950,000     |           

See accompanying notes to consolidated financial statements.

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2001 and 2002

(1)   Description of Business and Basis of Presentation

(a)   Description of Business

Pacific Aerospace & Electronics, Inc., headquartered in Wenatchee,
Washington, is an international engineering and manufacturing company which
develops, manufactures and markets high performance electronic and metal
components and assemblies for the aerospace, defense, electronics, medical,
energy, telecommunications, and transportation industries. The consolidated
financial statements include the accounts of Pacific Aerospace & Electronics,
Inc. and its wholly owned subsidiaries (collectively, the Company).

(b)   Basis of Presentation

These consolidated financial statements are prepared in accordance with
generally accepted accounting principles (GAAP) in the United States of
America (U.S.) and present the financial position, results of operations and
changes in financial position of the Company. All material intercompany
balances and transactions have been eliminated in consolidation.

(2)   Summary of Significant Accounting Principles

(a)   Cash and Cash Equivalents

Cash and cash equivalents consist of cash, demand deposits with banks and
highly liquid investments with maturity dates at purchase of three months or
less.

(b)   Inventories

Inventories are stated at the lower of cost, primarily determined by the
first-in, first-out method, or market (replacement cost for raw materials and
net realizable value for work in progress and finished goods).

(c)   Property, Plant and Equipment

Property, plant and equipment are stated at cost. Property, plant and
equipment under capital leases are stated at the lower of the fair market
value of the assets or the present value of minimum lease payments at the
inception of the leases.

Depreciation and amortization are calculated using the straight-line method
over the estimated useful lives of the owned assets ranging from 3 years for
certain machinery and equipment to 40 years for certain buildings. Property,
plant and equipment held under capital leases are amortized using the
straight-line method over the shorter of the estimated useful lives of the
assets or the lease terms, ranging from 7 to 10 years.

Expenditures for maintenance and repairs are charged to expense as incurred.
Upon sale or retirement, the cost and related accumulated depreciation or
amortization is removed from the accounts and any resulting gain or loss is
reflected in other income or expense.

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2001 and 2002

(d)   Intangible Assets

Patents are amortized using the straight-line method over the estimated
useful lives of the patents ranging from 10 to 17 years.

Deferred financing costs were incurred in connection with certain debt
instruments and are being amortized using the straight-line method over the
original life of the related debt instruments, currently ranging from 5 to 15
years.

(e)   Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an
asset to future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell.

(f)   Revenue Recognition

Revenue is primarily recognized when products are shipped to customers and
when services are performed. In certain instances the Company recognizes
revenues from long-term, fixed-price contracts on the percentage of
completion method measured by cost. Contract costs for long-term contracts
include all direct material and labor costs related to contract performance.
Provisions for estimated losses on uncompleted contracts are made in the
period in which losses are determined. Changes in job performance, job
conditions, and estimated profitability, including those arising from
contract penalty provisions, and final contract settlements may result in
revisions to costs and income and are recognized in the period in which the
revisions are determined. Profit incentives are included in revenue when
their realization is reasonably assured. When formal customer approval is
necessary, the Company defers revenue recognition until such approval is
received.

(g)   Research and Development

Research and development costs are expensed as incurred and are included in
operating expenses. Research and development costs for the years ended May
31, 2000, 2001 and 2002 were $405,000, $382,000 and $248,000, respectively.

(h)   Income Taxes

The Company follows the asset and liability method of accounting for income
taxes. Under the asset and liability method of accounting for income taxes,
deferred tax assets and liabilities are recognized based on the estimated
future tax consequences attributable to differences between the consolidated
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carry forwards.
Deferred tax assets and liabilities are measured using enacted tax rates in
effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2001 and 2002

assets and liabilities of a
change in tax rates is recognized in the period that includes the enactment
date. No provision for additional taxes, which might result form eventual
distributions from the UK subsidiaries, has been made since it is managements
intention to reinvest earnings or distribute them in a manner in which no
significant amount of additional taxes would be incurred.

(i)   Stock-Based Compensation

The Company follows the provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. This
statement permits a company to choose either the fair-value method or the
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees, intrinsic-value based method of accounting for stock-based
compensation arrangements. SFAS No. 123 requires pro forma disclosure of net
income (loss) and earnings (loss) per share computed as if the fair-value
based method had been applied in financial statements of companies that
continue to account for such arrangements under APB Opinion No. 25.

(j)   Net Income (Loss) Per Share

Basic net income (loss) per share is computed using the weighted average
number of common shares outstanding during the period. Diluted net income
(loss) per share is computed using the weighted average number of common and
dilutive common equivalent shares outstanding during the period using the
treasury stock method. As the Company had a net loss before extraordinary
item for the years ended May 31, 2000, 2001, and 2002, basic and diluted net
income (loss) per share are the same for each year.

(k)   Foreign Currency

The functional currency of the Companys foreign subsidiaries is the local
currency of the country in which the subsidiary operates. Assets and
liabilities of foreign operations are translated into U.S. dollars using
rates of exchange in effect at the end of the reporting period. Income and
expense accounts are translated into U.S. dollars using average rates of
exchange during the reporting period. The net gain or loss resulting from
translation is shown as a foreign currency translation adjustment and is
included in accumulated other comprehensive income (loss) in stockholders
equity. Gains and losses from foreign currency transactions are included in
other income or expense in the consolidated statements of operations. There
were no significant foreign currency transaction gains or losses for the
years ended May 31, 2000, 2001 and 2002.

(l)   Comprehensive Income (Loss)

The Company follows the provisions of SFAS No. 130, Reporting Comprehensive
Income, which establishes standards for the reporting and disclosure of
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of consolidated financial statements. The Companys
other comprehensive income (loss) primarily consists of foreign currency
translation adjustments.

(m)   Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2001 and 2002

contingent
assets and liabilities at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting
period. These estimates include assessing the collectibility of accounts
receivable, the saleability and recovery of inventory, the adequacy of
warranty obligations, the realization of deferred tax assets and useful lives
of tangible and intangible assets. Actual results could differ from those
estimates.

(n)   Recent Accounting Pronouncements

In July 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets.SFAS No. 141 requires that
all business combinations be accounted for under a single method, the
purchase method. Use of the pooling-of-interests method is no longer
permitted, although poolings initiated prior to June 30, 2001 are
grandfathered. The Company adopted the provisions of SFAS No. 141 during the
first quarter of fiscal 2002 without a material impact on the Companys
financial position or results of operations.

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. The standard applies to legal
obligations associated with the retirement of long-lived assets that result
from the acquisition, construction, development and normal use of the asset.
SFAS No. 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if
a reasonable estimate of fair value can be made. The fair value of the
liability is added to the carrying amount of the associated asset, and this
additional carrying amount is depreciated over the life of the asset. The
liability is accreted at the end of each period through
charges to operating expense. If the obligation is settled for other than
the carrying amount of the liability, the Company will recognize a gain or
loss on settlement. The Company is required to adopt the provisions of SFAS
No. 143 in the first quarter of fiscal year 2004. To accomplish this, the
Company must identify all legal obligations for asset retirement obligations,
if any, and determine the fair value of these obligations on the date of
adoption. The determination of fair value is complex and will require the
Company to gather market information and develop cash flow models.
Additionally, the Company will be required to develop processes to track and
monitor these obligations. The adoption of this statement is not expected to
have a material impact on the Companys financial position or results of
operations.

In August, 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This Statement requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to future
net cash flows expected to be generated by the asset. If the carrying amount
of an asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds
the fair value of the asset. SFAS No. 144 requires companies to separately
report discontinued operations and extends that reporting to a component of
an entity that either has been disposed of (by sale, abandonment, or in a
distribution to owners) or is classified as held for sale. Assets to be
disposed of are reported at the lower of the carrying amount or fair value
less costs to sell. The Company is required to adopt SFAS No. 144 on June 1,
2002. The adoption of this statement is not expected to have a material
impact on the Companys financial position or results of operations.

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2001 and 2002

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections.Among other things, this statement rescinds FASB Statement No.
4, Reporting Gains and Losses from Extinguishment of Debt,which required all
gains and losses from early extinguishment of debt to be aggregated and, if
material, classified as an extraordinary item, net of the related income tax
effect. As a result, the criteria in APB Opinion No. 30, Reporting the
Results of Operations  Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions,will now be used to classify those gains and losses. The
statement becomes effective in the first quarter of fiscal 2003 for
prospective transactions. Additionally, adoption of the statement will
require that the Company reclassify gains previously reported for the years
ended May 31, 2000 and 2002 related to debt extinguishments from
extraordinary items to income from continuing operations.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities.This statement addresses financial
accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring).This statement requires that a liability for a cost
associated with an exit or disposal activity be recognized at fair value when
the liability is incurred. The Company will be required to adopt this
statement no later than June 1, 2003. The Company is currently assessing the
impact of this statement on our results of operations, financial position and
cash flows.

(o)   Change in Accounting Principle

In July 2001 the FASB issued SFAS No. 142 Goodwill and Other Intangible
Assets. SFAS No. 142 requires that all intangible assets with indefinite
lives and goodwill no longer be amortized to earnings, but instead reviewed
for impairment. The amortization of intangible assets with indefinite lives
and goodwill ceases upon the adoption of the Statement. SFAS No. 142 also
requires an evaluation of intangible assets and their useful lives and a
transitional impairment test for certain intangible assets and goodwill.
After transition, the
impairment tests are to be performed annually. The Company adopted SFAS No.
142 during the first quarter of fiscal year 2002. The effect of adoption by
the Company was limited to the cessation of amortization of the $351,000 of
goodwill recorded on the Companys books at June 1, 2001. Additionally, the
Company completed the transitional impairment test required by SFAS No. 142
without any adjustment necessary to the carrying value of its goodwill or any
adjustment to useful lives.

For the years ended May 31, 2000 and 2001, the Company recorded goodwill
amortization expense of $1,343,000 and $973,000, respectively. Had the
Company adopted the provisions of SFAS No. 142 at the beginning of those
periods and ceased amortizing goodwill, it would have reported net loss of
$11,706,000, or $0.53 per share, for the year ended May 31, 2000 and a net
loss of $74,747,000, or $2.12 per share for the year ended May 31, 2001.

Additionally, during the years ended May 31, 2000 and 2001, the Company
recorded goodwill impairment charges of $4,677,000 and $35,635,000,
respectively. Had the Company been following the accounting guidance
proscribed by SFAS No. 142, the amount and timing of any impairment charges
could have been different than the amount actually recorded.

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2001 and 2002

(p)   Segments

The Company operates in two segments, US Operations and European Operations.
This is based on the fact that the Companys chief operating decision maker,
the Companys chief executive officer, regularly reviews operating results,
assesses performance and makes decisions about resources to be allocated at
this level (US Operations and European Operations) and not on any of the
underlying divisions or business units that comprise these two segments.

(3)   Going Concern

The Companys consolidated financial statements have been prepared assuming
the Company will continue as a going concern. The Company has suffered
recurring losses from operations and has a net capital deficiency.

Cash used in operating activities was $319,000 for fiscal year 2002 compared
to $1,600,000 and $5,207,000 in fiscal years 2001 and 2000, respectively.
The Companys future success will depend heavily on its ability to generate
cash from operating activities and to meet its obligations as they become
due. The Company is focusing on initiatives that specifically address the
need to increase cash provided by operating activities. Some of these
initiatives include, but are not limited to possible staff reductions,
reduced product line offerings, selling of excess inventory, and general and
administrative cost controls. The Company has also downsized, closed, or
sold certain of its divisions that produced negative cash flow from
operations. If the Company is not sufficiently successful in increasing
cash provided by operating activities, it may need to sell additional common
stock or sell assets outside of the ordinary course of business in order to
meet its obligations. There is no assurance that the Company will be able to
achieve sufficient cash flows from operations, to sell additional common
stock, or to sell its assets for amounts at or in excess of book value

In March 2002, the Company completed the Exchange. In accordance with the
Exchange Agreement, the Noteholders of all of the Companys then outstanding
Subordinated Notes exchanged $63.7 million aggregate principal amount of the
Subordinated Notes, together with accrued interest thereon, for shares of
common stock, shares of Series C Preferred Stock and approximately $15.0
million in aggregate principal amount of PIK Notes. No cash payments on the
PIK Notes are required until November 1, 2007, when $25.7 million is due.
The Series C Preferred Stock will automatically convert into common stock
following shareholder approval of an increase in the number of our authorized shares of common stock.

In addition to exchanging the Subordinated Notes as described above, the
Company also issued the New Senior Notes, secured by substantially all of the
Companys domestic assets, having an aggregate principal amount of $36.0
million. The New Senior Notes were issued at a discount so that the proceeds
totaled approximately $22.0 million. The New Senior Notes will accrete over
the next five years to the $36.0 million aggregate principal amount and will
bear interest at 5% per annum. The Company may redeem the New Senior Notes
in full or in part at any time prior to their maturity date at a premium over
the accreted value of the New Senior Notes, which premium declines over time.
Assuming the New Senior Notes are not redeemed prior to their maturity date,
cash payments will be limited to the 5% interest rate on the face value of
the New Senior Notes and the repayment of the $36.0 million principal amount
due on May 1, 2007.

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2001 and 2002

The Companys ability to obtain additional cash if and when needed could have
a material adverse effect on its financial position, results of operations
and its ability to continue in existence. The consolidated financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.

(4)   Impairment of Long-Lived Assets

Included in operating expenses in the years ended May 31, 2000, 2001 and 2002
are $5.3 million, $48.9 million, and $0.6 million, respectively, in non-cash
charges related to the impairment of long-lived assets, primarily goodwill
and equipment. The Company reviews long-lived assets and identifiable
intangibles for potential impairment of value whenever events or changes in
circumstances indicate that the carrying amount of those assets may not be
recoverable.

During the year ended May 31, 2000, due to continuing losses, weakness in the
commercial aerospace and transportation industries and cancellation and
postponement of projects by major customers in our Engineering & Fabrication
Division, the Companys evaluation of long-lived assets resulted in the
recognition of a $4.6 million impairment of goodwill and a $600,000 property
impairment related to the Companys former U.S. Aerospace Group. The
carrying amount of the goodwill was $6.6 million prior to the impairment
charge and $2.0 million after the impairment charge. The carrying amount of
the personal property, which consisted of manufacturing equipment, was
$600,000 prior to the impairment charge and $0 after the impairment charge.

Based upon estimated fair value of certain assets, the Company recognized the
following impairment charges for the year ended May 31, 2001:

| |                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Within the European Operations the Company recognized a $37.0 million
charge to reduce the $33.0 million carrying value of goodwill and the
$13.6 million carrying value of manufacturing equipment associated with
the European Operations, to the estimated fair value of the manufacturing
equipment, $9.6 million.

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company recognized an impairment charge of $5.5 million to reduce the
$6.4 million carrying value of property and manufacturing equipment used
at the Companys U.S. Casting Divisions Entiat, Washington location to
fair value, approximately $0.9 million. The Company recognized a $0.8
million impairment charge to reduce the carrying value of the
manufacturing equipment located at its Tacoma casting location to $0, the
estimated fair value. The Company also recognized charges of $3.3 million
to reduce the $3.5 million carrying value of goodwill and manufacturing
equipment used in the Engineering & Fabrication Division to estimated fair
value, $0.2 million.

| |                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company also recognized a charge of $0.6 million to reduce the $1.0
million of manufacturing equipment used to produce low power relays at
its Display Division to its fair value, $0.4 million. The Company
recognized a $320,000 charge to reduce the carrying value of an unused
manufacturing facility of $980,000 to fair value, $660,000.

| |                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company also completed an analysis of the estimated future cash flows
of certain other long-lived assets including goodwill and patents. Based
upon this analysis the Company recognized additional impairment charges of
$1.0 million within the U.S. Operations to reduce goodwill to fair value,
and $0.3 million to reduce patents to fair value.

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2001 and 2002

During the fiscal year ended May 31, 2002, the Company recognized a non-cash
charge of approximately $0.6 million to reduce the carrying value of certain
assets related to our Display Division and Engineering & Fabrication Division
to estimated fair value.

The Company will continue to analyze long-lived and identifiable intangible
assets in the future to determine possible impairment charges. Future
evaluations could result in additional impairment charges and those charges
could be material. At May 31, 2002, the carrying value of long-lived assets,
including property, plant and equipment, goodwill, and patents, was $25.3
million.

(5)   Segment Information and Concentration of Risk

Prior to the Companys restructuring in March 2002, it was organized into
three operational segments U.S. Aerospace Group, U.S. Electronics Group
and European Aerospace Group. As a result of its, restructuring, it has
consolidated its three groups into two operating segments, U.S. Operations
and European Operations. Each of these new operating segments is further
divided into two business units, Electronic Components and Machining
Components within U.S. Operations and Metal Casting and Metal Forming within
European Operations.

The following chart details the new classification of each of the divisions
within the Companys previously reported operating segments.

|                                   |  |                                        
|---------------------------------- |  | ---------------------------------------
|Previously reported operating      |  |                                        
|segments and related divisions     |  | New classification                     
|                                   |  |                                        
|U.S. ELECTRONICS GROUP             |  |                                        
|Interconnect Division              |  | U.S. Operations  Electronic Components
|Filter Division                    |  | U.S. Operations  Electronic Components
|Bonded Metals Division             |  | U.S. Operations  Electronic Components
|Applied Technology Division        |  | U.S. Operations  Electronic Components
|Display Division                   |  | Division discontinued November 2001    
|                                   |  |                                        
|U.S. AEROSPACE GROUP               |  |                                        
|Machining Division                 |  | U.S. Operations  Machining Components 
|Casting Division                   |  | Division discontinued June 2001        
|Engineering & Fabrication Division |  | Division discontinued December 2001    
|                                   |  |                                        
|EUROPEAN AEROSPACE GROUP           |  |                                        
|Casting Division                   |  | European Operations  Metal Casting    
|Forming Division                   |  | European Operations  Metal Forming    

Net sales of the U.S. Operations include sales to customers primarily in the
aerospace, defense, medical, and telecommunications industries. Net sales of
the European Operations include sales to customers primarily in the
aerospace, defense, and transportation industries. Historically, these
segments have been cyclical and sensitive to general economic and industry
specific conditions. In particular, the aerospace industry, in recent

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2001 and 2002

years,
has been adversely affected by a number of factors, including reduced demand
for commercial aircraft, a decline in military spending, postponement of
overhaul and maintenance of aircraft, increased fuel and labor
costs, increased regulations, intense price competition and terrorist attacks
of September 11, among other factors. In addition, there is no assurance
that general economic conditions will not lead to a downturn in demand for
core components and products of the Company, in each of its operational
segments.

Presented below is the Companys operational segment information. All
operational segments identified as U.S. Operations and Corporate are
located within the U.S. while the operations and assets of the European
Operations segment are located within the United Kingdom. Identifiable
assets are those assets used in the Companys operations in each segment, and
do not include advances or loans between the business segments. Corporate
assets are identified below, and no allocations were necessary for assets
used jointly by the segments. For ease of comparison, discontinued or sold
business units within the operational segments have been separated and
identified as Discontinued Divisions.

Year ended May 31, 2000:

|                              |  |            |            |            |  |              |            |              |  |       |            |   |  |            |            |   |  |  |             |  
|----------------------------- |  | ---------- | ---------- | ---------- |  | ------------ | ---------- | ------------ |  | ----- | ---------- | - |  | ---------- | ---------- | - |  |  | ----------- | -
|                              |  |            |            |            |  |              |            |              |  |       |            |   |  | Corporate, |            |   |  | 
|                              |  | U.S.       |            | European   |  | Discontinued |            | other and    |  |       |            |  
|                              |  | Operations |            | Operations |  | Divisions    |            | eliminations |  | Total
|                              |  |            |            |            |  |              |            |              |  |      
|Net sales to customers        |  | $          | 31,324,000 |            |  |              | 56,913,000 |              |  |       | 24,457,000 |   |  |            |           |   |  |  | 112,694,000 |  
|Income (loss) from
operations |  |            | 1,770,000  |            |  |              | 2,628,000  |              |  |       | (1,345,000 | ) |  |            | (6,955,000 | ) |  |  | (3,902,000  | )
|Identifiable assets           |  |            | 31,137,000 |            |  |              | 75,585,000 |              |  |       | 24,434,000 |   |  |            | 12,426,000 |   |  |  | 143,582,000 |  
|Capital expenditures          |  |            | 1,888,000  |            |  |              | 1,254,000  |              |  |       | 930,000    |   |  |            | 795,000    |   |  |  | 4,867,000   |  
|Depreciation and
amortization |  |            | 1,919,000  |            |  |              | 3,702,000  |              |  |       | 1,683,000  |   |  |            | 437,000    |   |  |  | 7,741,000   |  
|Interest income               |  |            |           |            |  |              | 35,000     |              |  |       |           |   |  |            | 62,000     |   |  |  | 97,000      |  
|Interest expense              |  |            | 315,000    |            |  |              | 4,349,000  |              |  |       | 167,000    |   |  |            | 5,128,000  |   |  |  | 9,959,000   |  

Year ended May 31, 2001:

|                              |  |            |            |            |  |              |             |              |  |       |             |   |  |            |            |   |  |  |             |  
|----------------------------- |  | ---------- | ---------- | ---------- |  | ------------ | ----------- | ------------ |  | ----- | ----------- | - |  | ---------- | ---------- | - |  |  | ----------- | -
|                              |  |            |            |            |  |              |             |              |  |       |             |   |  | Corporate, |            |   |  | 
|                              |  | U.S.       |            | European   |  | Discontinued |             | other and    |  |       |             |  
|                              |  | Operations |            | Operations |  | Divisions    |             | eliminations |  | Total
|                              |  |            |            |            |  |              |             |              |  |      
|Net sales to customers        |  | $          | 35,122,000 |            |  |              | 51,597,000  |              |  |       | 22,569,000  |   |  |            |           |   |  |  | 109,288,000 |  
|Income (loss) from
operations |  |            | 3,860,000  |            |  |              | (35,010,000 | )            |  |       | (20,502,000 | ) |  |            | (7,309,000 | ) |  |  | (58,961,000 | )
|Identifiable assets           |  |            | 27,676,000 |            |  |              | 34,419,000  |              |  |       | 6,603,000   |   |  |            | 12,118,000 |   |  |  | 80,816,000  |  
|Capital expenditures          |  |            | 881,000    |            |  |              | 2,111,000   |              |  |       | 403,000     |   |  |            | 315,000    |   |  |  | 3,710,000   |  
|Depreciation and
amortization |  |            | 2,012,000  |            |  |              | 3,180,000   |              |  |       | 1,586,000   |   |  |            | 556,000    |   |  |  | 7,334,000   |  
|Interest income               |  |            |           |            |  |              | 8,000       |              |  |       |            |   |  |            | 7,000      |   |  |  | 15,000      |  
|Interest expense              |  |            | 319,000    |            |  |              | 3,976,000   |              |  |       | 204,000     |   |  |            | 5,528,000  |   |  |  | 10,027,000  |  

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2001 and 2002

Year ended May 31, 2002:

|                              |  |            |            |            |  |              |            |              |  |       |            |   |  |            |            |   |  |  |            |  
|----------------------------- |  | ---------- | ---------- | ---------- |  | ------------ | ---------- | ------------ |  | ----- | ---------- | - |  | ---------- | ---------- | - |  |  | ---------- | -
|                              |  |            |            |            |  |              |            |              |  |       |            |   |  | Corporate, |            |   |  | 
|                              |  | U.S.       |            | European   |  | Discontinued |            | other and    |  |       |            |  
|                              |  | Operations |            | Operations |  | Divisions    |            | eliminations |  | Total
|                              |  |            |            |            |  |              |            |              |  |      
|Net sales to customers        |  | $          | 33,286,000 |            |  |              | 45,413,000 |              |  |       | 1,492,000  |   |  |            |           |   |  |  | 80,191,000 |  
|Income (loss) from
operations |  |            | 4,114,000  |            |  |              | 2,046,000  |              |  |       | (3,361,000 | ) |  |            | (6,063,000 | ) |  |  | (3,264,000 | )
|Identifiable assets           |  |            | 25,419,000 |            |  |              | 32,352,000 |              |  |       | 8,000      |   |  |            | 6,890,000  |   |  |  | 64,669,000 |  
|Capital expenditures          |  |            | 382,000    |            |  |              | 2,072,000  |              |  |       |           |   |  |            | 249,000    |   |  |  | 2,703,000  |  
|Depreciation and
amortization |  |            | 1,739,000  |            |  |              | 1,967,000  |              |  |       | 99,000     |   |  |            | 587,000    |   |  |  | 4,392,000  |  
|Interest income               |  |            |           |            |  |              | 38,000     |              |  |       |           |   |  |            | 57,000     |   |  |  | 95,000     |  
|Interest expense              |  |            | 319,000    |            |  |              | 1,228,000  |              |  |       | 48,000     |   |  |            | 11,302,000 |   |  |  | 12,897,000 |  

We do not disclose foreign net sales by country as it not practicable to do
so. The Company had net sales to one customer comprising greater than 10% of
each years net sales, aggregating 10%, 12.5% and 13.5% in the years ended
May 31, 2000, 2001 and 2002, respectively.

The Company had accounts receivable from one customer comprising greater than
10% of accounts receivable, aggregating 11% as of May 31, 2000. The Company
had accounts receivable from one customer comprising greater than 10% of
accounts receivable, aggregating 10.6% as of May 31, 2001. The Company had
accounts receivable from one customer comprising greater than 10% of accounts
receivable, aggregating 11.7% as of May 31, 2002.

Credit is extended to customers based on an evaluation of their financial
condition and collateral is generally not required.

The Company currently purchases aluminum and other raw materials from a
limited number of suppliers. Although there are a limited number of
potential suppliers of such raw materials, management believes that other
suppliers could provide these raw materials on comparable terms. A change in
suppliers, however, could cause a delay in manufacturing, increased costs,
and a possible loss of sales, which could have a material adverse effect on
the manufacturing and delivery of the Companys products. The Company
purchased $2,656,000, $4,623,000 and $3,613,000 from one supplier during the
years ended May 31, 2000, 2001 and 2002, respectively.

The Company purchases other raw materials, of lesser significance, which are
available from a limited number of suppliers.

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2001 and 2002

At May 31, 2002, the Company had purchase commitments for raw materials
aggregating $733,000.

(6)   Business Acquisitions And Dispositions

Effective for accounting purposes in June 1999, the Company acquired all of
the outstanding stock of Skagit Engineering & Manufacturing, Inc. (Skagit)
for $1,300,000 in cash.

The purchase price was allocated as follows:

|                                 |  |   |            |  
|-------------------------------- |  | - | ---------- | -
|Current assets                   |  | $ | 1,551,000  |  
|Property, plant and equipment    |  |   | 1,369,000  |  
|Cost in excess of net book value |  |   | 1,683,000  |  
|Liabilities assumed              |  |   | (3,303,000 | )
|                                 |  |   |            |  
|Total                            |  | $ | 1,300,000  |  
|                                 |  |   |            |  

Effective for accounting purposes in May 2000, the Company acquired
substantially all of the assets and assumed certain liabilities of Nova-Tech
Engineering, Inc. (Nova-Tech). The purchase price consisted of $2,500,000
in the forgiveness of a note receivable, intercompany accounts receivable of
$137,000, and $50,000 cash for a total of $2,687,000

The purchase price was allocated as follows:

|                                 |  |   |            |  
|-------------------------------- |  | - | ---------- | -
|Current assets                   |  | $ | 873,000    |  
|Furniture and equipment          |  |   | 387,000    |  
|Cost in excess of net book value |  |   | 3,938,000  |  
|Liabilities assumed              |  |   | (2,511,000 | )
|                                 |  |   |            |  
|Total                            |  | $ | 2,687,000  |  
|                                 |  |   |            |  

The business combinations described above have been accounted for using the
purchase method. Accordingly, assets and liabilities have been recorded at
their fair value at acquisition date. Operating results of these acquired
companies are included in the Companys consolidated statements of operations
from the respective acquisition dates. In fiscal year 2001, costs in excess
of net book value of acquired subsidiaries in the amount of $1.8 million
relating to Skagit, were written off due to impairment. In fiscal year 2000,
subsequent to the business combinations, costs in excess of net book value of
acquired subsidiaries in the amounts of $1,000,000 relating to Skagit and
$2,400,000 relating to Nova-Tech, were written off due to impairment.
Amounts written off are included in operating expense.

Effective as of June 1, 2001, we sold substantially all of the assets of the
U.S. Aerospace Groups Casting Division location in Entiat, Washington to two
newly formed limited liability companies owned by a private company. The
purchase price was approximately $4.5 million, which consisted of
approximately $1.4 million cash (a portion of the cash amounting to $160,000
was paid into escrow by the purchaser), a $1.0 million long-term note payable
to the Company, units in the newly created limited liability companies valued
at $1.0 million and the assumption of $1.1 million in liabilities. We used
the cash proceeds to retire certain long-term

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2001 and 2002

debt related to the Entiat
assets and to pay closing costs related to the transaction. The long-term
note bears interest at 7% and is payable in quarterly installments, interest
only for the first year and then principal and interest for 5 additional
years. Due to the uncertainties of payment under this note we have fully
reserved against it as of the closing date. The units in the newly created
limited liability companies have certain preferential rights including an
accumulating preferred return equal to 5% of the par value of then
outstanding units and put rights subject to certain restrictions and
limitations. The Company has recorded the units at $0, which it
estimates to be their
fair market value. In the purchase agreement relating to the sale of the
Casting Division, the parties agreed to adjust the purchase price after
closing based on the actual value of accounts receivable and inventory
transferred at closing. In December 2001, we agreed with the purchaser to
settle differences relating to the post-closing adjustment by returning the
escrowed cash to the purchaser, thereby reducing the purchase price by
$160,000.

(7)   Allowance for Doubtful Accounts, Sales Returns and Allowances

The Company records a provision for accounts receivable that the Company
believes may not be collectible and for products that may be returned in the
future. Accounts receivable are reported net of an allowance for doubtful
accounts, sales returns and allowances in the consolidated balance sheets.
The provision for bad debt expense is included in operating expenses on the
consolidated statements of operations and comprehensive income (loss), while
net sales are shown net of sales returns and allowances. When specific
accounts are determined to be uncollectible and when inventories are
returned, the Company eliminates the balance from accounts receivable and
reduces the allowance by a corresponding amount. A reconciliation of the
allowance for doubtful accounts, sales returns and allowances is as follows:

|                                   |  |   |          |  
|---------------------------------- |  | - | -------- | -
|Balance at May 31, 1999            |  | $ | 553,000  |  
|Charged to operating expenses      |  |   | 305,500  |  
|Charged to net sales               |  |   | 2,500    |  
|Specific account balance write-off |  |   | (234,000 | )
|Effect of exchange rates           |  |   | (8,000   | )
|                                   |  |   |          |  
|Balance at May 31, 2000            |  |   | 619,000  |  
|Charged to operating expense       |  |   | 3,000    |  
|Specific account balance write-off |  |   | (163,000 | )
|Effect of exchange rates           |  |   | (8,000   | )
|                                   |  |   |          |  
|Balance at May 31, 2001            |  |   | 451,000  |  
|Charged to operating expense       |  |   | 141,000  |  
|Specific account balance write-off |  |   | (120,000 | )
|Effect of exchange rates           |  |   | 4,000    |  
|                                   |  |   |          |  
|Balance at May 31, 2002            |  | $ | 476,000  |  
|                                   |  |   |          |  

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2001 and 2002

(8)   Inventories

Inventories at May 31 consist of the following:

|                 |  |      |            |      |  |  |            | 
|---------------- |  | ---- | ---------- | ---- |  |  | ---------- | 
|                 |  | 2001 |            | 2002
|                 |  |      |            |     
|Raw materials    |  | $    | 5,032,000  |      |  |  | 3,927,000  | 
|Work in progress |  |      | 10,990,000 |      |  |  | 10,085,000 | 
|Finished goods   |  |      | 6,972,000  |      |  |  | 5,594,000  | 
|                 |  |      |            |      |  |  |            | 
|                 |  | $    | 22,994,000 |      |  |  | 19,606,000 | 
|                 |  |      |            |      |  |  |            | 

(9)  Property, Plant and Equipment

Property, plant and equipment, including assets under capital lease
arrangements, at May 31 consist of the following:

|                                               |  |                |  |      |            |      |            |  |            |  |            | 
|---------------------------------------------- |  | -------------- |  | ---- | ---------- | ---- | ---------- |  | ---------- |  | ---------- | 
|                                               |  | Depreciable    |  |      |            |      |            |  |            | 
|                                               |  | Lives          |  | 2001 |            | 2002
|                                               |  |                |  |      |            |     
|Land                                           |  |                |  |      |            | $    | 1,081,000  |  |            |  | 700,000    | 
|Buildings                                      |  | 20 to 40 years |  |      | 5,687,000  |      |            |  | 4,343,000  | 
|Leasehold improvements                         |  | 5 to 15 years  |  |      | 3,693,000  |      |            |  | 3,678,000  | 
|Machinery and equipment                        |  | 7 to 10 years  |  |      | 28,190,000 |      |            |  | 31,460,000 | 
|Office equipment, furniture and fixtures       |  | 3 to 10 years  |  |      | 4,134,000  |      |            |  | 3,202,000  | 
|                                               |  |                |  |      |            |      |            |  |            |  |            | 
|                                               |  |                |  |      |            | $    | 42,785,000 |  |            |  | 43,383,000 | 
|Less accumulated depreciation and
amortization |  |                |  |      |            |      | 16,071,000 |  |            |  | 20,153,000 | 
|                                               |  |                |  |      |            |      |            |  |            |  |            | 
|                                               |  |                |  |      |            |      | 26,714,000 |  |            |  | 23,230,000 | 
|Construction in progress                       |  |                |  |      |            |      | 40,000     |  |            |  | 85,000     | 
|                                               |  |                |  |      |            |      |            |  |            |  |            | 
|                                               |  |                |  |      |            | $    | 26,754,000 |  |            |  | 23,315,000 | 
|                                               |  |                |  |      |            |      |            |  |            |  |            | 

The Company recognized depreciation of property, plant and equipment of
$5,942,000, $6,243,000 and $4,302,000 during the years ended May 31, 2000,
2001 and 2002, respectively.

The Company includes computer software and hardware within office equipment,
furniture and fixtures. Software is amortized over its estimated useful
life, usually three years.

Included in property, plant and equipment are costs of $2,412,000 and
$1,191,000 and related accumulated amortization of $1,138,000 and $611,000
recorded under capital leases at May 31, 2001 and 2002, respectively.

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2001 and 2002

(10)   Long-Term Debt

Long-term debt at May 31 consists of the following:

|                                                                                                                                                                                                                                                                |  |      |            |      |  |  |            | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- | ---- |  |  | ---------- | 
|                                                                                                                                                                                                                                                                |  | 2001 |            | 2002
|                                                                                                                                                                                                                                                                |  |      |            |     
|Note payable to a related party, GSC Partners and affiliates, net of
original issue discount of $13,653,000. Note bears interest of 5% on
the face amount of $36,000,000 (16.6% nominal interest rate), payable
semi-annually. Principal amount due May 1, 2007 |  | $    |           |      |  |  | 22,347,000 | 
|Note payable to an individual, secured by a patent, due in monthly
installments of $8,023, including interest at 6.0%, through May 2010                                                                                                                         |  |      |           |      |  |  | 751,000    | 
|Note payable to a bank, due in monthly installments of $7,000, including
interest at LIBOR plus 2% (3.84% at May 31, 2002), with the remaining
principal balance due in full in March 2008                                                                      |  |      | 628,000    |      |  |  | 596,000    | 
|Notes payable to a financing company for certain equipment in aggregate
monthly installments of $48,278, including interest at 9% to 9.75%, with
maturity dates through 2004                                                                                    |  |      | 1,232,000  |      |  |  | 712,000    | 
|Other notes payable for vehicles and certain equipment in aggregate
monthly installments of $3,619, including interest at 1.9% to 7.9% with
maturity dates through 2006                                                                                         |  |      | 200,000    |      |  |  | 121,000    | 
|Note payable to a bank in monthly installments of $10,127, including
interest at LIBOR plus 2.25% (3.84% at May 31, 2002) through June 2008                                                                                                                     |  |      | 1,131,000  |      |  |  | 1,103,000  | 
|Industrial revenue bond payable to a bank, paid in full June, 2001                                                                                                                                                                                              |  |      | 613,000    |      |  |  |           | 
|Subordinated note payable to the City of Entiat, paid in full June, 2001                                                                                                                                                                                        |  |      | 363,000    |      |  |  |           | 
|Note payable to four institutional lenders, paid in full March, 2002                                                                                                                                                                                            |  |      | 13,731,000 |      |  |  |           | 
|                                                                                                                                                                                                                                                                |  |      |            |      |  |  |            | 
|                                                                                                                                                                                                                                                                |  |      | 17,898,000 |      |  |  | 25,630,000 | 
|Less current portion                                                                                                                                                                                                                                            |  |      | 929,000    |      |  |  | 799,000    | 
|                                                                                                                                                                                                                                                                |  |      |            |      |  |  |            | 
|Long-term debt, net of current portion                                                                                                                                                                                                                          |  | $    | 16,969,000 |      |  |  | 24,831,000 | 
|                                                                                                                                                                                                                                                                |  |      |            |      |  |  |            | 

Certain notes payable require, among other items, that the Company maintain
minimum working capital, tangible net worth and debt to tangible net worth
ratios. At May 31, 2002, the Company was not in compliance with these
covenants. The Company has received a forbearance letter from the lender
waiving the violations until May 31, 2003. There can be no assurance that
the lender will not require the amounts

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2001 and 2002

immediately due and payable if
violations of the covenants continue. The amount outstanding under these
agreements was approximately $1,700,000 as of May 31, 2002.

Scheduled principal maturities of long-term debt during the next five fiscal
years ending May 31, and thereafter, are as follows:

|                                         |  |   |            | 
|---------------------------------------- |  | - | ---------- | 
|2003                                     |  | $ | 799,000    | 
|2004                                     |  |   | 423,000    | 
|2005                                     |  |   | 180,000    | 
|2006                                     |  |   | 175,000    | 
|2007                                     |  |   | 36,205,000 | 
|Thereafter                               |  |   | 1,501,000  | 
|                                         |  |   |            | 
|                                         |  |   | 39,283,000 | 
|Less unamortized original issue discount |  |   | 13,653,000 | 
|                                         |  |   |            | 
|Net long-term debt                       |  | $ | 25,630,000 | 
|                                         |  |   |            | 

Long-term debt is secured by substantially all assets of the Company.

(11)   Subordinated Notes Payable

In July 1998, the Company completed a $75 million debt offering of the
Subordinated Notes due in August 2005. The Subordinated Notes were
unconditionally guaranteed on a senior subordinated basis by the Companys
U.S. subsidiaries.

In March 2000, the Company exchanged an aggregate of $11.3 million in
original principal amount of the Subordinated Notes for a total of 2,902,806 shares of common stock. This exchange was accounted for as an early
extinguishment of debt, and as such, a net of tax gain of $703,000 was
recorded in the consolidated financial statements as an extraordinary item.

In March 2002, the Company completed the Exchange. In accordance with the
Exchange Agreement, the Noteholders exchanged $63.7 million aggregate
principal amount of the Subordinated Notes, together with accrued interest
thereon, for shares of the Companys common stock, shares of the Companys
Series C Preferred Stock and $15.0 million in aggregate principal amount of
PIK Notes. The Series C Preferred Stock will automatically convert into
common stock following shareholder approval of an increase in the number of
our authorized shares of common stock. By virtue of their common stock and
Series C Preferred Stock received in the Exchange, the Noteholders now
beneficially own approximately 97.5% of our outstanding shares of common
stock on a fully-diluted, as-converted basis.

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2001 and 2002

The PIK Notes bear interest at a rate of 10% per annum which increased to 14%
because the Automatic Conversion did not occur on or before June 1, 2002 (as
soon as the Automatic Conversion occurs, however, the interest rate on PIK
Notes will decrease back to 10% for the remaining term of the PIK Notes).
Interest is payable semi-annually in the form of additional PIK Notes. The
PIK Notes mature in November 2007, but the Company may pay off or otherwise
redeem them in full or in part at any time prior to the maturity date without
penalty. The PIK Notes are unsecured senior subordinated obligations of the
Company.

The Company has followed the provisions of SFAS No. 15, Accounting by Debtors
and Creditors for Troubled Debt Restructurings, in recording the exchange
transaction. These provisions require that the carrying value of the PIK
Notes be recorded at the total future cash payments (principal and interest)
specified by the PIK notes. In accordance with SFAS 15, the PIK notes are
classified on the Companys balance sheet as long-term liabilities valued at
$25.7 million, which represents the total future cash payments. As a result,
no interest expense related to the PIK Notes will be recognized in future
periods.

The following table presents the aggregate gain recognized in the year ended
May 31, 2002 as a result of the exchange transaction, shown as an
extraordinary item:

|                                                           |  |   |             |  
|---------------------------------------------------------- |  | - | ----------- | -
|Principal amount of Subordinated Notes outstanding         |  | $ | 63,700,000  |  
|Unamortized deferred financing costs                       |  |   | (2,417,000  | )
|Accrued interest                                           |  |   | 8,115,000   |  
|                                                           |  |   |             |  
|Carrying value of debt exchanged                           |  |   | 69,398,000  |  
|Fair value of equity instruments issued to the Noteholders |  |   | (21,200,000 | )
|Maximum future cash payments under the PIK Notes           |  |   | (25,739,000 | )
|Direct expenses of the Exchange                            |  |   | (2,141,000  | )
|                                                           |  |   |             |  
|Aggregate gain from Exchange                               |  | $ | 20,318,000  |  
|                                                           |  |   |             |  
|Aggregate gain per share                                   |  | $ | 0.41        |  
|                                                           |  |   |             |  

No related income tax effect is reflected on the gain from the Exchange, as
the Company expects to utilize a portion of its net operating loss
carry-forwards to offset any resulting taxable income. Prior to the
Exchange, the net operating loss carry-forwards expected to be utilized had a
corresponding valuation allowance applied to reduce their carrying value to
zero.

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2001 and 2002

(12)   Leasing Arrangements

(a)   Capital Leases

The Company leases certain property, plant and equipment under capital lease
agreements that expire at various dates through 2007. Capital lease
obligations are secured by the underlying leased assets. Aggregate minimum
payments to be made under these agreements at May 31, 2002 are as follows for
each of the following fiscal year-ends:

|                                                          |  |   |         | 
|--------------------------------------------------------- |  | - | ------- | 
|2003                                                      |  | $ | 236,000 | 
|2004                                                      |  |   | 215,000 | 
|2005                                                      |  |   | 128,000 | 
|2006                                                      |  |   | 31,000  | 
|2007                                                      |  |   | 13,000  | 
|Thereafter                                                |  |   |        | 
|                                                          |  |   |         | 
|                                                          |  |   | 623,000 | 
|Less amounts representing interest ranging from 6% to 16% |  |   | 72,000  | 
|                                                          |  |   |         | 
|Present value of net minimum capital lease obligations    |  |   | 551,000 | 
|Less current portion                                      |  |   | 184,000 | 
|                                                          |  |   |         | 
|Capital lease obligations, less current portion           |  | $ | 367,000 | 
|                                                          |  |   |         | 

(b) Operating Leases

The Company leases certain property, plant and equipment under operating
lease agreements that expire at various dates through 2018. Aggregate
minimum rental payments to be made under these agreements at May 31, 2002 are
as follows for each of the following fiscal year-ends:

|           |  |   |            | 
|---------- |  | - | ---------- | 
|2003       |  | $ | 3,574,000  | 
|2004       |  |   | 3,181,000  | 
|2005       |  |   | 3,003,000  | 
|2006       |  |   | 2,443,000  | 
|2007       |  |   | 2,206,000  | 
|Thereafter |  |   | 19,267,000 | 
|           |  |   |            | 
|           |  | $ | 33,674,000 | 
|           |  |   |            | 

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2001 and 2002

Total rent expense during the years ended May 31, 2000, 2001 and 2002
amounted to $4,191,000, $5,917,000 and $5,079,000, respectively. Included in
rent expense for the years ended May 31, 2001 and 2002 are accruals of
approximately $500,000 and $646,000 respectively, related to the abandonment
of certain manufacturing facility operating leases.

(13)   Common Stock

In July 1996, the Company conducted a public offering of 2,250,000 units,
each unit composed of one share of the Companys common stock and a warrant
to purchase a share of the Companys common stock, at a price of $3.125 per
unit. At May 31, 2001 and 2002, all of these public warrants were
outstanding. In May 2000, the Company extended the expiration date of the
public warrants to July 15, 2003. In addition, the Company issued warrants
to two underwriters for the purchase of an additional 225,000 units at $3.75
per unit. Each unit is composed of one share of the Companys common stock
and a warrant to purchase one share of the Companys common stock. The
warrants entitled the holder to purchase one share of common stock at $4.6875
per share, exercisable any time through July 2001. During the year ended May
31, 1998, 45,000 of the underwriters warrants were exercised for 45,000
units. No underwriter warrants were exercised during the years ended May 31,
2000, 2001 or 2002 and the remaining original warrants have expired.

In March 2000, the Company sold 1,598,000 shares of its common stock to 26
accredited investors for $4,794,000 before expenses of $788,000. The Company
subsequently filed a registration statement, which was declared effective,
registering for resale the 1,598,000 shares of common stock sold in the
offering.

In July 2000 the Company closed the first of two proposed installments of a
$3.5 million private placement of common stock to two accredited investors.
On that date, the Company issued 1,142,860 shares of common stock and
warrants to purchase additional shares to the investors for a gross amount of
approximately $2.0 million. The Company filed a registration statement on
Form S-3 with the Commission to register the resale of the shares of common
stock issued or issuable as a result of the transaction (the Registration
Statement). If the Registration Statement had become effective within 60
days after the first closing a second closing would have occurred and the
investors would have paid an additional $1.5 million and received 857,140
additional shares of common stock. However, the Registration Statement did
not become effective within 60 days of the first closing and consequently the
second installment did not close. In addition the Company also issued to the
investors certain adjustable, vesting, and closing warrants to purchase
additional shares of the Companys common stock. The adjustable warrants
permitted the investors to acquire additional shares of common stock at an
exercise price of $.001 per share if the market price of the Companys common
stock did not achieve and maintain a specific price during each of the three
vesting periods. Subsequent to issuance of the adjustable warrants the
Company negotiated an amendment to the adjustable warrants, which replaced
the variable calculation of shares to be acquired with a fixed number of shares. In February 2001, the investors exercised the adjustable warrants in
full, as so amended, for the exercise price of $.001 per share. As a result
of the exercise, the Company delivered to the investors a total of 4,190,486 shares of common stock. The vesting warrants issued under the transaction
expired unexercised during February 2001. The closing warrants entitled the
investors to purchase an additional 385,000 shares of our common stock at an
exercise price of $2.01 per share subject to certain anti-dilution rights.
In March 2002, the Company completed the Exchange. The Exchange triggered
the anti-dilution provisions of the closing warrants, resulting in a
significant increase in the number of shares issuable upon exercise of these
warrants. Specifically, warrants

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2001 and 2002

in favor of Strong River initially
exercisable for 192,500 shares of common stock are now exercisable for
33,315,492 shares; and warrants in favor of Bay Harbor initially exercisable
for 192,500 shares of common stock are now exercisable for 33,315,492 shares.
The exercise price of the Strong River and Bay Harbor warrants was reduced
from $2.01 to the per share par value of the common stock of $.001 per share
by virtue of the anti-dilution adjustment. The closing warrants expire in
July 2003.

Also in connection with the Exchange the Company issued 51,419,604 shares of
common stock, an amount sufficient to give the Noteholders a majority of the
then outstanding common stock of the Company.

(14)   Convertible Preferred Stock  Series C Preferred Stock

In March 2002, the Company completed the Exchange. In connection with the
Exchange, the Company issued 1,000 shares of Series C Preferred Stock of the
Company to the Noteholders.

The Series C Preferred Stock will be automatically converted into that number
of shares of common stock which, when added to the shares of common stock
previously distributed to the Noteholders in the Exchange, will equal
approximately 97.5% of the Companys common stock on a fully-diluted basis
(4,865,820,023 shares of common stock). The Automatic Conversion of the
Series C Preferred Stock into common stock will take place immediately
following shareholder approval of an increase in the number of authorized shares of common stock to an amount sufficient to effect the conversion of
the Series C Preferred Stock in full. Until the Automatic Conversion occurs,
the Series C Preferred Stock has an aggregate liquidation preference equal to
$45 million and a cumulative dividend rate of 10% per annum, which
automatically increased to 14% per annum because the Automatic Conversion did
not occur on or before June 1, 2002. As of May 31, 2002, the potential
cumulative dividend for the Series C Preferred Stock was approximately
$900,000. The Series C Preferred Stock ranks senior to all other classes of
the Companys capital stock as to liquidation and distributions. In
addition, the Series C Preferred Stock is entitled to vote with the common
stock on all matters brought before the common stock for approval (other than
as required by law) and is entitled to that number of votes equal to the
number of shares of Common into which the Series C Preferred Stock is then
convertible.

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2001 and 2002

(15)   Warrants

The Company periodically issues warrants to purchase common shares in
connection with common stock, preferred stock, debt and certain consulting
services. When warrants are issued in exchange for consulting or other
services, the warrants are valued using the Black Scholes method or the fair
value of the services received, whichever is more reasonably determinable. A
summary of the Companys warrants, excluding warrants issued in connection
with the public offering in July 1996, is as follows:

|                                       |  |          |            |        |  |          |       | 
|-------------------------------------- |  | -------- | ---------- | ------ |  | -------- | ----- | 
|                                       |  |          |            |        |  | Weighted
|                                       |  |          |            |        |  | average 
|                                       |  |          |            |        |  | exercise
|                                       |  |          |            |        |  | price of
|                                       |  | Warrants |            | shares
|                                       |  |          |            |       
|Balance at May 31, 1999                |  |          | 483,609    |        |  | $        | 4.240 | 
|Granted                                |  |          | 200,000    |        |  |          | 6.500 | 
|Exercised                              |  |          | (25,000    | )      |  |          | 3.450 | 
|                                       |  |          |            |        |  |          |       | 
|Balance at May 31, 2000                |  |          | 658,609    |        |  |          | 4.603 | 
|Granted                                |  |          | 9,383,688  |        |  |          | 0.107 | 
|Exercised                              |  |          | (4,190,486 | )      |  |          | 0.001 | 
|Canceled                               |  |          | (273,609   | )      |  |          | 6.870 | 
|                                       |  |          |            |        |  |          |       | 
|Balance at May 31, 2001                |  |          | 5,578,202  |        |  |          | 0.386 | 
|Canceled                               |  |          | (35,000    | )      |  |          | 2.000 | 
|Granted under anti-dilution provisions |  |          | 77,502,155 |        |  |          | 0.001 | 
|                                       |  |          |            |        |  |          |       | 
|Balance at May 31, 2002                |  |          | 83,045,357 |        |  | $        | 0.026 | 
|                                       |  |          |            |        |  |          |       | 

The following summarizes warrants outstanding, excluding warrants issued in
connection with the public offering in July 1996, at May 31, 2002:

|            |           |             |                                      |             |  |           |          |         |          |   |       |       | 
|----------- | --------- | ----------- | ------------------------------------ | ----------- |  | --------- | -------- | ------- | -------- | - | ----- | ----- | 
|            |           |             | Warrants outstanding and exercisable
|            |           |             |                                     
|            |           |             |                                      |             |  |           | Weighted |         |          |   |      
|            |           |             |                                      |             |  |           | average  |         | Weighted
|Range of    |           |             |                                      |             |  | remaining |          | average
|Exercise    |           | Number      |                                      | contractual |  | exercise 
|prices      |           | outstanding |                                      | life        |  | price    
|            |           |             |                                      |             |  |          
|$0.001-1.99 |           |             | 82,695,357                           |             |  |           | 1.69     |         |          | $ | 0.006 |      
|            | 2.00-3.99 |             |                                      | 200,000     |  |           |          | 1.86    |          |   |       | 2.556 | 
|            | 4.00-5.99 |             |                                      | 50,000      |  |           |          | 0.92    |          |   |       | 5.500 | 
|            | 6.00-7.99 |             |                                      | 50,000      |  |           |          | 0.92    |          |   |       | 7.500 | 
|            | 8.00-9.99 |             |                                      | 50,000      |  |           |          | 0.92    |          |   |       | 9.500 | 
|            |           |             |                                      |             |  |           |          |         |          |   |       |      
|            |           |             | 83,045,357                           |             |  |           |          |         |          |   |       |      
|            |           |             |                                      |             |  |           |          |         |          |   |       |      

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2001 and 2002

In March 2002, the Company completed the Exchange. The Exchange triggered
the anti-dilution provisions of certain of the Companys outstanding
warrants, resulting in a significant increase in the number of shares
issuable upon exercise of these warrants. Specifically, warrants in favor of
DDJ which were initially exercisable for 4,036,978 shares of common stock are
now exercisable for 15,293,149 shares; warrants in favor of Strong River
initially exercisable for 192,500 shares of common stock are now exercisable
for 33,315,492 shares; and warrants in favor of Bay Harbor initially
exercisable for 192,500 shares of common stock are now exercisable for
33,315,492 shares. The exercise price of the Strong River and Bay Harbor
warrants was reduced from $2.01 to the per share par value of the common
stock by virtue of the anti-dilution adjustment, and the exercise price of
the DDJ warrants remained unchanged at the per share par value, equal to
$.001. Due to these significant increases, the Company does not have enough shares reserved for issuance to accommodate the full exercise of all of its
outstanding options and warrants at this time. However, DDJ, Strong River
and Bay Harbor have each agreed not to exercise their warrants until the
number of authorized shares of common stock of the Company has been increased
to an amount sufficient to effect the exercise of their warrants in full.

(16)   Compensation Plans

(a)   Long-Term Investment and Incentive Plan

The Company has two long-term stock investment and incentive plans. The
1996 Plan awards directors, officers, key employees and other key
individuals with stock options, stock appreciation rights, stock and cash
bonuses, restricted stock, or performance units. Under the 1996 Plan, the
exercise price of options issued is not less than fair-market value at the
date of grant. Stock options granted under the plan generally vested upon
grant. In October 1999, the Company adopted the 1999 Plan which effectively
reserved an additional 4,000,000 shares of common stock for issuance. The
1999 Plan is identical to the 1996 Plan in form with exception to certain
provisions stipulating the expiration of options granted to employees who are
subsequently terminated. Options expire ten years from the grant date under
both plans.

As of May 31, 2001, the Company had not issued any stock appreciation rights,
stock and cash bonuses, restricted stock, or performance units under either
plan. In June 2001, the Company issued 380,952 restricted shares of common
stock under the 1999 Plan to certain executives in lieu of contractually
required increases in their base cash compensation for the fiscal year ended
May 31, 2002.

(b)   Independent Director Stock Plan

The Company has an Independent Director Stock Plan under which non-employee
directors of the Company are awarded common stock and stock options of the
Company for serving on its board of directors. The plan authorizes and
reserves for issuance a maximum of 500,000 common shares. At May 31, 2001,
338,304 shares were available for future issuance. At May 31, 2002, no
additional shares were available for issuance because the Company agreed, in
connection with the Exchange, to issue no additional shares under the
Independent Director Stock Plan. During the year ended May 31, 2000, 40,000
options were issued and 10,000 options were canceled under the plan. During
the year ended May 31, 2001 and 2002, 42,500 and no options respectively,
were issued under the plan. Options issued under the plan during the year
ended May 31, 2000 and 2001 vested immediately upon issuance. For the years
ended May 31, 2000, 2001 and 2002, 86,637, 129,137 and 129,137, options were
outstanding.

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2001 and 2002

(c)   Retirement Plan

The Company maintains a 401(k) plan covering all eligible employees who meet
service requirements as provided in the plan. The Companys contribution to
the profit-sharing plan is determined annually by the Board of Directors.
The Company contributed $59,000, $70,000 and $41,000 to the plan during the
years ended May 31, 2000, 2001 and 2002, respectively.

(d)   Employee Stock Purchase Plan

The Company implemented an Employee Stock Purchase Plan in 1999 under which
employees are eligible to purchase shares of the Companys common stock,
through payroll deductions, at the lower of 85% of the Companys stock price
on the first day of an offering period or 100% of the Companys stock price
on the last day of an offering period. The first offering period began in
November 1998. During the years ended May
31, 2000, 2001 and 2002, 142,696, 407,090 and 100,679 shares respectively,
were purchased by employees under the plan. The plan was terminated in
August 2001.

As the Company applies APB Opinion No. 25 and related interpretations in
accounting for its option plans and employee stock purchase plans, no
compensation costs have been recognized for stock options issued to employees
since the option exercise prices were equal to the fair value prices of the
underlying stock at the time of grant. Had compensation costs for the stock
option and stock purchase plan been determined consistent with SFAS No. 123,
the results of the Company would have been adjusted to the pro forma amounts
indicated below:

|                                                           |  |      |             |      |  |      |             |   |  |  |            | 
|---------------------------------------------------------- |  | ---- | ----------- | ---- |  | ---- | ----------- | - |  |  | ---------- | 
|                                                           |  | 2000 |             | 2001 |  | 2002
|                                                           |  |      |             |      |  |     
|Net income (loss):                                         |  |      |             |      |  |      |             |   |  |  |            | 
|As reported                                                |  | $    | (13,049,000 | )    |  |      | (75,720,000 | ) |  |  | 4,525,000  | 
|Pro forma                                                  |  |      | (14,555,000 | )    |  |      | (75,848,000 | ) |  |  | 4,525,000  | 
|Net income (loss) per share:                               |  |      |             |      |  |      |             |   |  |  |            | 
|As reported:                                               |  |      |             |      |  |      |             |   |  |  |            | 
|Basic                                                      |  |      | (0.59       | )    |  |      | (2.15       | ) |  |  | 0.09       | 
|Diluted                                                    |  |      | (0.59       | )    |  |      | (2.15       | ) |  |  | 0.09       | 
|Pro forma:                                                 |  |      |             |      |  |      |             |   |  |  |            | 
|Basic                                                      |  |      | (0.66       | )    |  |      | (2.15       | ) |  |  | 0.09       | 
|Diluted                                                    |  |      | (0.66       | )    |  |      | (2.15       | ) |  |  | 0.09       | 
|Shares used in computation of net
income (loss) per share: |  |      |             |      |  |      |             |   |  |  |            | 
|Basic                                                      |  |      | 21,955,473  |      |  |      | 35,283,347  |   |  |  | 49,584,968 | 
|Diluted                                                    |  |      | 21,955,473  |      |  |      | 35,283,347  |   |  |  | 49,584,968 | 

The fair value per share of the options granted during the years ended May
31, 2000, 2001 is estimated as $1.32, and $0.27, respectively, using the
Black-Scholes option-pricing model with the following assumptions on the date
of grant: zero percent dividend yield, expected volatility from 24% to 148%,
risk-free interest rate from 5.5% to 6.6%, and expected lives ranging from 5
to 10 years. No options were granted during the year ended May 31, 2002.

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2001 and 2002

Pro forma compensation under the employee stock purchase plan during the
years ended May 31, 2000, 2001, and 2002 is $78,000, $30,000, and $0,
respectively.

A summary of the activity under the Companys Long-Term Investment and
Incentive Plans and Independent Director Stock Plan is as follows:

|                               |  |                        |           |             |  |                        |           |   |  |   |      | 
|------------------------------ |  | ---------------------- | --------- | ----------- |  | ---------------------- | --------- | - |  | - | ---- | 
|                               |  | Shares of common stock |           |             |  |                       
|                               |  |                        |           | Weighted   
|                               |  | Available              |           | Options     |  | average exercise price
|                               |  | options                |           | under plans |  | of shares             
|                               |  |                        |           |             |  |                       
|Balance at May 31, 1999        |  |                        | 928,856   |             |  |                        | 2,513,585 |   |  | $ | 3.02 | 
|Options authorized by new
plan |  |                        | 4,000,000 |             |  |                        |          |   |  |   |     | 
|Options granted                |  |                        | (950,000  | )           |  |                        | 950,000   |   |  |   | 1.62 | 
|Options terminated             |  |                        | 5,000     |             |  |                        | (5,000    | ) |  |   | 2.53 | 
|                               |  |                        |           |             |  |                        |           |   |  |   |      | 
|Balance at May 31, 2000        |  |                        | 3,983,856 |             |  |                        | 3,458,585 |   |  |   | 2.64 | 
|Options granted                |  |                        | (366,500  | )           |  |                        | 366,500   |   |  |   | .38  | 
|Options expired                |  |                        | 60,000    |             |  |                        | (60,000   | ) |  |   | 2.53 | 
|Options terminated             |  |                        | 30,500    |             |  |                        | (30,500   | ) |  |   | 2.14 | 
|                               |  |                        |           |             |  |                        |           |   |  |   |      | 
|Balance at May 31, 2001        |  |                        | 3,707,856 |             |  |                        | 3,734,585 |   |  |   | 2.60 | 
|Options granted                |  |                        |          |             |  |                        |          |   |  |   |     | 
|Restricted stock issued        |  |                        | (380,952  | )           |  |                        |          |   |  |   |     | 
|Options expired                |  |                        | 39,500    |             |  |                        | (39,500   | ) |  |   | .90  | 
|Options terminated             |  |                        |          |             |  |                        |          |   |  |   |     | 
|                               |  |                        |           |             |  |                        |           |   |  |   |      | 
|Balance at May 31, 2002        |  |                        | 3,366,404 |             |  |                        | 3,695,085 |   |  | $ | 2.44 | 
|                               |  |                        |           |             |  |                        |           |   |  |   |      | 

The Company has agreed not to grant any additional shares under the plans.

The following summarizes options from both Long-Term Investment and Incentive
plans and the Independent Director Stock plan outstanding at May 31, 2002:

|           |           |             |           |             |  |           |                     |             |                     |          |      |      |  |         |           |           |  |   |      |      | 
|---------- | --------- | ----------- | --------- | ----------- |  | --------- | ------------------- | ----------- | ------------------- | -------- | ---- | ---- |  | ------- | --------- | --------- |  | - | ---- | ---- | 
|           |           |             |           |             |  |           | Options outstanding |             | Options exercisable
|           |           |             |           |             |  |           |                     |             |                    
|           |           |             |           |             |  |           | Weighted            |             |                     |          |      |      |  |         |           |           |  |   |     
|           |           |             |           |             |  |           | average             |             | Weighted            |          |      |      |  |         | Weighted 
|Range of   |           |             |           |             |  | remaining |                     | average     |                     |          |      |      |  | average
|exercise   |           | Number      |           | contractual |  | exercise  |                     | Number      |                     | exercise
|prices     |           | outstanding |           | life        |  | price     |                     | exercisable |                     | price   
|           |           |             |           |             |  |           |                     |             |                     |         
|$0.01-1.99 |           |             | 1,296,137 |             |  |           | 7.65                |             |                     | $        | 1.28 |      |  |         | 1,293,637 |           |  | $ | 1.28 |     
|           | 2.00-3.99 |             |           | 1,791,388   |  |           |                     | 4.94        |                     |          |      | 2.51 |  |         |           | 1,791,388 |  |   |      | 2.51 | 
|           | 4.00-6.00 |             |           | 607,560     |  |           |                     | 4.17        |                     |          |      | 4.69 |  |         |           | 607,560   |  |   |      | 4.69 | 
|           |           |             |           |             |  |           |                     |             |                     |          |      |      |  |         |           |           |  |   |      |     
|           |           |             | 3,695,085 |             |  |           |                     |             |                     |          |      |      |  |         | 3,692,585 |           |  |   |      |     
|           |           |             |           |             |  |           |                     |             |                     |          |      |      |  |         |           |           |  |   |      |     

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2001 and 2002

(17)   Income Taxes

Total income tax benefit (expense) is as follows for the years ended May 31,

|          |         |   |         |         |      |  |            |            |   |  |          |         |  
|--------- | ------- | - | ------- | ------- | ---- |  | ---------- | ---------- | - |  | -------- | ------- | -
|          |         |   | 2000    |         | 2001 |  | 2002      
|          |         |   |         |         |      |  |           
|Current:  |         |   |         |         |      |  |            |            |   |  |          |        
|          | Federal |   | $       |        |      |  |            |           |   |  |          |        |  
|          | Foreign |   |         | (41,800 | )    |  |            | (1,796,000 | ) |  |          | 250,000 |  
|Deferred: |         |   |         |         |      |  |            |            |   |  |          |        
|          | Federal |   |         | (8,000  | )    |  |            | (4,966,000 | ) |  |          |        |  
|          | Foreign |   |         | 28,800  |      |  |            | (186,000   | ) |  |          | (55,000 | )
|          |         |   |         |         |      |  |            |            |   |  |          |        
|Total     |         | $ | (21,000 | )       |      |  | (6,948,000 | )          |   |  | (195,000 | )      
|          |         |   |         |         |      |  |            |            |   |  |          |        

The domestic and foreign components of income (loss) before income tax
benefit (expense) and extraordinary item were as follows for the years ended
May 31,

|                                                                |  |      |             |      |  |      |             |   |  |  |             |  
|--------------------------------------------------------------- |  | ---- | ----------- | ---- |  | ---- | ----------- | - |  |  | ----------- | -
|                                                                |  | 2000 |             | 2001 |  | 2002
|                                                                |  |      |             |      |  |     
|Domestic                                                        |  | $    | (11,421,000 | )    |  |      | (29,564,000 | ) |  |  | (16,844,000 | )
|Foreign                                                         |  |      | (2,310,000  | )    |  |      | (39,208,000 | ) |  |  | 856,000     |  
|                                                                |  |      |             |      |  |      |             |   |  |  |             |  
|Loss before income tax benefit (expense) and extraordinary item |  | $    | (13,731,000 | )    |  |      | (68,772,000 | ) |  |  | (15,988,000 | )
|                                                                |  |      |             |      |  |      |             |   |  |  |             |  

There are no undistributed earnings of the Companys foreign subsidiaries for
which no U.S. income taxes have been provided at May 31, 2001 and 2002.

A reconciliation of the U.S. federal statutory tax rate of 34% and the
Companys effective tax rates of 0%, (10)% and 1% during the years ended May
31, 2000, 2001 and 2002, respectively, is as follows:

|                                                                                |  |      |            |      |  |      |             |   |  |  |            |  
|------------------------------------------------------------------------------- |  | ---- | ---------- | ---- |  | ---- | ----------- | - |  |  | ---------- | -
|                                                                                |  | 2000 |            | 2001 |  | 2002
|                                                                                |  |      |            |      |  |     
|Computed expected income tax benefit                                            |  | $    | 4,669,000  |      |  |      | 23,382,000  |   |  |  | 5,436,000  |  
|Difference in foreign income tax rate                                           |  |      |           |      |  |      | (1,568,000  | ) |  |  | (514,000   | )
|Foreign permanent differences                                                   |  |      |           |      |  |      | (12,353,000 | ) |  |  | 1,000,000  |  
|Change in valuation allowance
attributable to income from
continuing operations |  |      | (4,119,000 | )    |  |      | (15,750,000 | ) |  |  | (5,727,000 | )
|Other                                                                           |  |      | (571,000   | )    |  |      | (659,000    | ) |  |  |           |  
|                                                                                |  |      |            |      |  |      |             |   |  |  |            |  
|                                                                                |  | $    | (21,000    | )    |  |      | (6,948,000  | ) |  |  | 195,000    |  
|                                                                                |  |      |            |      |  |      |             |   |  |  |            |  

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2001 and 2002

Deferred tax assets and liabilities are recognized based on the estimated
future tax consequences attributable to differences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Based upon the weight of available evidence, the
Company establishes a valuation allowance to reduce the amount of deferred
tax assets to the amount it believes will more likely than not be realized in
future periods. The change in the valuation allowance for the years ended
May 31, 2000, 2001 and 2002, were $4,122,000, $15,750,000 and $(1,849,000),
respectively. Significant components of the Companys deferred tax assets
(liabilities) at May 31 are as follows:

|                           |                                         |                                |                     |            |            |             |          |           |            |             |  
|-------------------------- | --------------------------------------- | ------------------------------ | ------------------- | ---------- | ---------- | ----------- | -------- | --------- | ---------- | ----------- | -
|                           |                                         |                                |                     |            | 2001       |             | 2002    
|                           |                                         |                                |                     |            |            |             |         
|Deferred tax assets:       |                                         |                                |                     |            |            |             |          |          
|                           | Net operating loss carryforwards        |                                | $                   | 11,931,000 |            |             |          | 8,510,000 |           
|                           | Capital loss carryforwards              |                                |                     | 1,557,000  |            |             |          | 2,728,000 |           
|                           | Goodwill                                |                                |                     | 3,229,000  |            |             |          | 2,111,000 |           
|                           | Property, plant and equipment and Other |                                |                     | 4,073,000  |            |             |          | 710,000   |           
|                           | Inventory valuation                     |                                |                     | 1,397,000  |            |             |          | 1,081,000 |           
|                           | Debt restructuring                      |                                |                     |           |            |             |          | 5,201,000 |           
|                           |                                         |                                |                     |            |            |             |          |          
|                           |                                         | Total deferred tax assets      |                     |            | 22,187,000 |             |          |           | 20,341,000 |            
|                           |                                         |                                | Valuation allowance |            |            | (22,072,000 | )        |           |            | (20,223,000 | )
|                           |                                         |                                |                     |            |            |             |          |          
|                           |                                         | Net deferred tax assets        |                     |            | 115,000    |             |          |           | 118,000    |            
|                           |                                         |                                |                     |            |            |             |          |          
|Deferred tax liabilities:  |                                         |                                |                     |            |            |             |          |          
|                           | Casting Division                        |                                |                     | 1,227,000  |            |             |          |          |           
|                           | International                           |                                |                     | 850,000    |            |             |          | 872,000   |           
|                           |                                         |                                |                     |            |            |             |          |          
|                           |                                         | Total deferred tax liabilities |                     |            | 2,077,000  |             |          |           | 872,000    |            
|                           |                                         |                                |                     |            |            |             |          |          
|Net deferred tax liability |                                         | $                              | (1,962,000          | )          |            |             | (754,000 | )        
|                           |                                         |                                |                     |            |            |             |          |          

The Company has net operating loss (NOLs) carryforwards for U.S. federal
income tax purposes of approximately $25.0 million, the benefits of which
expire in the tax year 2012 through the tax year 2022.

As a result of the Exchange transaction and resulting change in ownership of
the Company completed in March 2002, pursuant to Section 382 of the Internal
Revenue Code, the Companys ability to utilize NOLs to off-set future
taxable income is limited. As a result of these limitations, approximately
$21.3 million of the $25.0 million total NOLs at May 31, 2002 will never
become available.

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2001 and 2002

(18)   Net Income (Loss) Per Share

Basic net income (loss) per share is computed on the basis of the weighted
average number of common shares outstanding. Diluted net income (loss) per
share is computed on the basis of the weighted average number of common
shares outstanding, using the if-converted method, and outstanding stock
options and warrants, using the treasury stock method.

The components of basic and diluted net loss per share at May 31 were as
follows:

|                                                    |  |      |             |      |  |      |             |   |  |  |             |  
|--------------------------------------------------- |  | ---- | ----------- | ---- |  | ---- | ----------- | - |  |  | ----------- | -
|                                                    |  | 2000 |             | 2001 |  | 2002
|                                                    |  |      |             |      |  |     
|Loss before extraordinary item                      |  | $    | (13,752,000 | )    |  |      | (75,720,000 | ) |  |  | (15,793,000 | )
|Extraordinary item  gain on extinguishment of
debt |  |      | 703,000     |      |  |      |            |   |  |  | 20,318,000  |  
|                                                    |  |      |             |      |  |      |             |   |  |  |             |  
|Net income (loss) available for common
stockholders |  | $    | (13,049,000 | )    |  |      | (75,720,000 | ) |  |  | 4,525,000   |  
|                                                    |  |      |             |      |  |      |             |   |  |  |             |  
|Weighted average outstanding shares of common
stock |  |      | 21,955,473  |      |  |      | 35,283,347  |   |  |  | 49,584,968  |  
|Dilutive effect of:                                 |  |      |             |      |  |      |             |   |  |  |             |  
|Warrants                                            |  |      |            |      |  |      |            |   |  |  |            |  
|Stock options                                       |  |      |            |      |  |      |            |   |  |  |            |  
|Convertible preferred stock                         |  |      |            |      |  |      |            |   |  |  |            |  
|                                                    |  |      |             |      |  |      |             |   |  |  |             |  
|Common stock and common stock equivalents           |  |      | 21,955,473  |      |  |      | 35,283,347  |   |  |  | 49,584,968  |  
|                                                    |  |      |             |      |  |      |             |   |  |  |             |  
|Net income (loss) per share  basic and diluted:    |  |      |             |      |  |      |             |   |  |  |             |  
|Net loss before extraordinary item                  |  | $    | (0.63       | )    |  |      | (2.15       | ) |  |  | (0.32       | )
|Extraordinary item  gain on extinguishment of
debt |  |      | 0.04        |      |  |      |            |   |  |  | 0.41        |  
|                                                    |  |      |             |      |  |      |             |   |  |  |             |  
|Net income (loss) per share                         |  | $    | (0.59       | )    |  |      | (2.15       | ) |  |  | 0.09        |  
|                                                    |  |      |             |      |  |      |             |   |  |  |             |  

Options, warrants and convertible stock were not included in the calculation
of net income (loss) per share as they are anti-dilutive or in the case of
May 31, 2002, dilution is determined in relation to loss before extraordinary
item and not net income. The total number of anti-dilutive common stock
equivalents related to options, warrants and convertible stock as of May 31,
2000, 2001 and 2002 were 9,581,288, 11,607,787, and 4,954,852,965,
respectively. The Company however, does not have enough common shares
reserved for issuance to accommodate the full exercise of all of its
outstanding options, warrants, and convertible stock at this time.

(19)   Fair Value of Financial Instruments

The Companys financial instruments include cash and cash equivalents,
receivables, accounts payable, accrued liabilities, and short and long-term
borrowings. The fair value of these financial instruments
approximates their carrying amounts, other than the Companys PIK Notes which
have an estimated fair value of approximately $15.0 million based on current
market indicators, such as prevailing interest rates.

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2001 and 2002

(20)   Legal

The Company is currently subject and party to various legal actions arising
in the normal course of business. Management believes the ultimate
liability, if any, arising from such claims or contingencies is not likely to
have a material adverse effect on the Companys results of operations or
financial condition.

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. Although the extent of any noncompliance with those
regulations, if any, is not completely ascertainable, management believes the
ultimate liability is not likely to have a material adverse effect on the
Companys results of operations or financial condition.

(21)   Consolidating Condensed Financial Statements

The following statements present consolidating condensed financial
information of the Company for the indicated periods. The Companys senior
subordinated notes have been guaranteed by all of the Companys U.S. wholly
owned subsidiaries. The guarantor subsidiaries have fully and
unconditionally guaranteed this debt on a joint and several basis. This debt
is not guaranteed by the Companys foreign subsidiaries, which consist of
Aeromet and two related holding companies. There are no significant
contractual restrictions on the distribution of funds from the guarantor
subsidiaries to the parent corporation. The consolidating condensed
financial information is presented in lieu of separate financial statements
and other disclosures of the guarantor subsidiaries, as management has
determined that such information is not material to investors.

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

May 31, 2001 and 2002

(a)Consolidating condensed balance sheet information at May 31, 2001 is as follows:

|                                               |                                         |                                                      |           |              |             |              |            |              |             |               |           |              |             |   |   |              |              |   |            |              |             |  
|---------------------------------------------- | --------------------------------------- | ---------------------------------------------------- | --------- | ------------ | ----------- | ------------ | ---------- | ------------ | ----------- | ------------- | --------- | ------------ | ----------- | - | - | ------------ | ------------ | - | ---------- | ------------ | ----------- | -
|                                               |                                         |                                                      |           |              |             |              |            | Guarantor    |             | Non-guarantor |           |              |             |   |   |              |              |  
|                                               |                                         |                                                      |           | Parent       |             | subsidiaries |            | subsidiaries |             | Eliminations  |           | Consolidated
|                                               |                                         |                                                      |           |              |             |              |            |              |             |               |           |             
|Assets                                         |                                         |                                                      |           |              |             |              |            |              |             |               |           |              |             |   |   |              |              |   |            |             
|Current assets:                                |                                         |                                                      |           |              |             |              |            |              |             |               |           |              |             |   |   |              |              |   |            |             
|                                               | Cash and cash equivalents               |                                                      | $         | 1,134,000    |             |              |            | 3,000        |             |               |           | 2,958,000    |             |   |   |             |              |   |            | 4,095,000    |            
|                                               | Accounts receivable, net                |                                                      |           |             |             |              |            | 6,423,000    |             |               |           | 12,839,000   |             |   |   | (161,000     | )            |   |            | 19,101,000   |            
|                                               | Inventories                             |                                                      |           |             |             |              |            | 14,326,000   |             |               |           | 8,668,000    |             |   |   |             |              |   |            | 22,994,000   |            
|                                               | Other                                   |                                                      |           | 3,975,000    |             |              |            | 299,000      |             |               |           | 401,000      |             |   |   | (3,894,000   | )            |   |            | 781,000      |            
|                                               |                                         |                                                      |           |              |             |              |            |              |             |               |           |              |             |   |   |              |              |   |            |             
|                                               |                                         | Total current assets                                 |           |              | 5,109,000   |              |            |              | 21,051,000  |               |           |              | 24,866,000  |   |   |              | (4,055,000   | ) |            |              | 46,971,000  |  
|                                               |                                         |                                                      |           |              |             |              |            |              |             |               |           |              |             |   |   |              |              |   |            |             
|Property, plant and equipment, net             |                                         |                                                      | 5,319,000 |              |             |              | 11,882,000 |              |             |               | 9,553,000 |              |             |   |  |              |              |   | 26,754,000 |             
|                                               |                                         |                                                      |           |              |             |              |            |              |             |               |           |              |             |   |   |              |              |   |            |             
|Other assets:                                  |                                         |                                                      |           |              |             |              |            |              |             |               |           |              |             |   |   |              |              |   |            |             
|                                               | Goodwill                                |                                                      |           |             |             |              |            | 351,000      |             |               |           |             |             |   |   |             |              |   |            | 351,000      |            
|                                               | Investment in and loans to subsidiaries |                                                      |           | 41,943,000   |             |              |            | 72,618,000   |             |               |           |             |             |   |   | (114,561,000 | )            |   |            |             |            
|                                               | Other                                   |                                                      |           | 5,699,000    |             |              |            | 1,041,000    |             |               |           |             |             |   |   |             |              |   |            | 6,740,000    |            
|                                               |                                         |                                                      |           |              |             |              |            |              |             |               |           |              |             |   |   |              |              |   |            |             
|                                               |                                         | Total other assets                                   |           |              | 47,642,000  |              |            |              | 74,010,000  |               |           |              |            |   |   |              | (114,561,000 | ) |            |              | 7,091,000   |  
|                                               |                                         |                                                      |           |              |             |              |            |              |             |               |           |              |             |   |   |              |              |   |            |             
|                                               |                                         | Total assets                                         |           | $            | 58,070,000  |              |            |              | 106,943,000 |               |           |              | 34,419,000  |   |   |              | (118,616,000 | ) |            |              | 80,816,000  |  
|                                               |                                         |                                                      |           |              |             |              |            |              |             |               |           |              |             |   |   |              |              |   |            |             
|Liabilities and Stockholders Equity (Deficit) |                                         |                                                      |           |              |             |              |            |              |             |               |           |              |             |   |   |              |              |   |            |             
|Current liabilities:                           |                                         |                                                      |           |              |             |              |            |              |             |               |           |              |             |   |   |              |              |   |            |             
|                                               | Accounts payable                        |                                                      | $         | 921,000      |             |              |            | 5,328,000    |             |               |           | 6,551,000    |             |   |   | (161,000     | )            |   |            | 12,639,000   |            
|                                               | Current portion of long-term debt       |                                                      |           | 90,000       |             |              |            | 839,000      |             |               |           |             |             |   |   |             |              |   |            | 929,000      |            
|                                               | Other                                   |                                                      |           | 3,413,000    |             |              |            | 2,351,000    |             |               |           | 6,499,000    |             |   |   | (3,894,000   | )            |   |            | 8,369,000    |            
|                                               |                                         |                                                      |           |              |             |              |            |              |             |               |           |              |             |   |   |              |              |   |            |             
|                                               |                                         | Total current liabilities                            |           |              | 4,424,000   |              |            |              | 8,518,000   |               |           |              | 13,050,000  |   |   |              | (4,055,000   | ) |            |              | 21,937,000  |  
|                                               |                                         |                                                      |           |              |             |              |            |              |             |               |           |              |             |   |   |              |              |   |            |             
|Long-term liabilities:                         |                                         |                                                      |           |              |             |              |            |              |             |               |           |              |             |   |   |              |              |   |            |             
|                                               | Long-term debt, net of current portion  |                                                      |           | 78,635,000   |             |              |            | 2,034,000    |             |               |           |             |             |   |   |             |              |   |            | 80,669,000   |            
|                                               | Intercompany loan payable               |                                                      |           |             |             |              |            | 71,723,000   |             |               |           | 36,957,000   |             |   |   | (108,680,000 | )            |   |            |             |            
|                                               | Other                                   |                                                      |           | 125,000      |             |              |            | 1,880,000    |             |               |           | 1,319,000    |             |   |   |             |              |   |            | 3,324,000    |            
|                                               |                                         |                                                      |           |              |             |              |            |              |             |               |           |              |             |   |   |              |              |   |            |             
|                                               |                                         | Total long-term liabilities                          |           |              | 78,760,000  |              |            |              | 75,637,000  |               |           |              | 38,276,000  |   |   |              | (108,680,000 | ) |            |              | 83,993,000  |  
|                                               |                                         |                                                      |           |              |             |              |            |              |             |               |           |              |             |   |   |              |              |   |            |             
|Stockholders equity (deficit):                |                                         |                                                      |           |              |             |              |            |              |             |               |           |              |             |   |   |              |              |   |            |             
|                                               | Common stock                            |                                                      |           | 39,000       |             |              |            | 56,139,000   |             |               |           | 33,709,000   |             |   |   | (89,848,000  | )            |   |            | 39,000       |            
|                                               | Additional paid-in capital              |                                                      |           | 86,917,000   |             |              |            |             |             |               |           |             |             |   |   |             |              |   |            | 86,917,000   |            
|                                               | Accumulated other comprehensive loss    |                                                      |           | (9,165,000   | )           |              |            |             |             |               |           | (9,165,000   | )           |   |   | 9,165,000    |              |   |            | (9,165,000   | )          
|                                               | Accumulated deficit                     |                                                      |           | (102,905,000 | )           |              |            | (33,351,000  | )           |               |           | (41,451,000  | )           |   |   | 74,802,000   |              |   |            | (102,905,000 | )          
|                                               |                                         |                                                      |           |              |             |              |            |              |             |               |           |              |             |   |   |              |              |   |            |             
|                                               |                                         | Total stockholders equity (deficit)                 |           |              | (25,114,000 | )            |            |              | 22,788,000  |               |           |              | (16,907,000 | ) |   |              | (5,881,000   | ) |            |              | (25,114,000 | )
|                                               |                                         |                                                      |           |              |             |              |            |              |             |               |           |              |             |   |   |              |              |   |            |             
|                                               |                                         | Total liabilities and stockholders equity (deficit) |           | $            | 58,070,000  |              |            |              | 106,943,000 |               |           |              | 34,419,000  |   |   |              | (118,616,000 | ) |            |              | 80,816,000  |  
|                                               |                                         |                                                      |           |              |             |              |            |              |             |               |           |              |             |   |   |              |              |   |            |             

(Continued)

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

May 31, 2001 and 2002

(b)Consolidating condensed balance sheet information at May 31, 2002 is as follows:

|                                     |                                         |                                      |                                                      |             |        |             |              |             |              |            |               |             |              |             |   |              |   |              |            |             |   |             |  
|------------------------------------ | --------------------------------------- | ------------------------------------ | ---------------------------------------------------- | ----------- | ------ | ----------- | ------------ | ----------- | ------------ | ---------- | ------------- | ----------- | ------------ | ----------- | - | ------------ | - | ------------ | ---------- | ----------- | - | ----------- | -
|                                     |                                         |                                      |                                                      |             |        |             |              |             | Guarantor    |            | Non-guarantor |             |              |             |   |              |   |              |           
|                                     |                                         |                                      |                                                      |             | Parent |             | subsidiaries |             | subsidiaries |            | Eliminations  |             | Consolidated
|                                     |                                         |                                      |                                                      |             |        |             |              |             |              |            |               |             |             
|Assets                               |                                         |                                      |                                                      |             |        |             |              |             |              |            |               |             |              |             |   |              |   |              |            |            
|Current assets:                      |                                         |                                      |                                                      |             |        |             |              |             |              |            |               |             |              |             |   |              |   |              |            |            
|                                     | Cash and cash equivalents               |                                      | $                                                    | 803,000     |        |             |              | 3,000       |              |            |               | 4,813,000   |              |             |   |             |   |              |            | 5,619,000   |  
|                                     | Accounts receivable, net                |                                      |                                                      |            |        |             |              | 3,298,000   |              |            |               | 9,022,000   |              |             |   | (94,000      | ) |              |            | 12,226,000  |  
|                                     | Inventories                             |                                      |                                                      |            |        |             |              | 11,249,000  |              |            |               | 8,357,000   |              |             |   |             |   |              |            | 19,606,000  |  
|                                     | Other                                   |                                      |                                                      | 3,717,000   |        |             |              | 159,000     |              |            |               | 298,000     |              |             |   | (3,593,000   | ) |              |            | 581,000     |  
|                                     |                                         |                                      |                                                      |             |        |             |              |             |              |            |               |             |              |             |   |              |   |              |            |            
|                                     |                                         |                                      | Total current assets                                 |             |        | 4,520,000   |              |             |              | 14,709,000 |               |             |              | 22,490,000  |   |              |   | (3,687,000   | )          |             |   | 38,032,000  |  
|                                     |                                         |                                      |                                                      |             |        |             |              |             |              |            |               |             |              |             |   |              |   |              |            |            
|Property, plant and equipment, net   |                                         |                                      | 4,899,000                                            |             |        |             | 8,554,000    |             |              |            | 9,862,000     |             |              |             |  |              |   |              | 23,315,000 |            
|                                     |                                         |                                      |                                                      |             |        |             |              |             |              |            |               |             |              |             |   |              |   |              |            |            
|Other assets:                        |                                         |                                      |                                                      |             |        |             |              |             |              |            |               |             |              |             |   |              |   |              |            |            
|                                     | Goodwill                                |                                      |                                                      |            |        |             |              | 351,000     |              |            |               |            |              |             |   |             |   |              |            | 351,000     |  
|                                     | Investment in and loans to subsidiaries |                                      |                                                      | 40,907,000  |        |             |              | 72,618,000  |              |            |               |            |              |             |   | (113,525,000 | ) |              |            |            |  
|                                     | Other                                   |                                      |                                                      | 1,147,000   |        |             |              | 1,824,000   |              |            |               |            |              |             |   |             |   |              |            | 2,971,000   |  
|                                     |                                         |                                      |                                                      |             |        |             |              |             |              |            |               |             |              |             |   |              |   |              |            |            
|                                     |                                         |                                      | Total other assets                                   |             |        | 42,054,000  |              |             |              | 74,793,000 |               |             |              |            |   |              |   | (113,525,000 | )          |             |   | 3,322,000   |  
|                                     |                                         |                                      |                                                      |             |        |             |              |             |              |            |               |             |              |             |   |              |   |              |            |            
|                                     |                                         |                                      | Total assets                                         |             | $      | 51,473,000  |              |             |              | 98,056,000 |               |             |              | 32,352,000  |   |              |   | (117,212,000 | )          |             |   | 64,669,000  |  
|                                     |                                         |                                      |                                                      |             |        |             |              |             |              |            |               |             |              |             |   |              |   |              |            |            
|                                     |                                         | Liabilities and Stockholders Equity |                                                      |             |        |             |              |             |              |            |               |             |              |             |   |              |   |              |            |             |   |            
|Current liabilities:                 |                                         |                                      |                                                      |             |        |             |              |             |              |            |               |             |              |             |   |              |   |              |            |            
|                                     | Accounts payable                        |                                      | $                                                    | 1,849,000   |        |             |              | 1,844,000   |              |            |               | 4,466,000   |              |             |   | (94,000      | ) |              |            | 8,065,000   |  
|                                     | Current portion of long-term debt       |                                      |                                                      | 65,000      |        |             |              | 734,000     |              |            |               |            |              |             |   |             |   |              |            | 799,000     |  
|                                     | Other                                   |                                      |                                                      | 941,000     |        |             |              | 2,105,000   |              |            |               | 5,135,000   |              |             |   | (3,593,000   | ) |              |            | 4,588,000   |  
|                                     |                                         |                                      |                                                      |             |        |             |              |             |              |            |               |             |              |             |   |              |   |              |            |            
|                                     |                                         |                                      | Total current liabilities                            |             |        | 2,855,000   |              |             |              | 4,683,000  |               |             |              | 9,601,000   |   |              |   | (3,687,000   | )          |             |   | 13,452,000  |  
|                                     |                                         |                                      |                                                      |             |        |             |              |             |              |            |               |             |              |             |   |              |   |              |            |            
|Long-term liabilities:               |                                         |                                      |                                                      |             |        |             |              |             |              |            |               |             |              |             |   |              |   |              |            |            
|                                     | Long-term debt, net of current portion  |                                      |                                                      | 49,223,000  |        |             |              | 1,347,000   |              |            |               |            |              |             |   |             |   |              |            | 50,570,000  |  
|                                     | Intercompany loan payable               |                                      |                                                      |            |        |             |              | 72,223,000  |              |            |               | 36,957,000  |              |             |   | (109,180,000 | ) |              |            |            |  
|                                     | Other                                   |                                      |                                                      | 288,000     |        |             |              | 380,000     |              |            |               | 872,000     |              |             |   |             |   |              |            | 1,540,000   |  
|                                     |                                         |                                      |                                                      |             |        |             |              |             |              |            |               |             |              |             |   |              |   |              |            |            
|                                     |                                         |                                      | Total long-term liabilities                          |             |        | 49,511,000  |              |             |              | 73,950,000 |               |             |              | 37,829,000  |   |              |   | (109,180,000 | )          |             |   | 52,110,000  |  
|                                     |                                         |                                      |                                                      |             |        |             |              |             |              |            |               |             |              |             |   |              |   |              |            |            
|Series C convertible preferred stock |                                         |                                      | 18,715,000                                           |             |        |             |             |             |              |            |              |             |              |             |  |              |   |              | 18,715,000 |            
|                                     |                                         |                                      |                                                      |             |        |             |              |             |              |            |               |             |              |             |   |              |   |              |            |            
|Stockholders equity (deficit):      |                                         |                                      |                                                      |             |        |             |              |             |              |            |               |             |              |             |   |              |   |              |            |            
|                                     | Common stock                            |                                      |                                                      | 91,000      |        |             |              | 56,139,000  |              |            |               | 33,709,000  |              |             |   | (89,848,000  | ) |              |            | 91,000      |  
|                                     | Additional paid-in capital              |                                      |                                                      | 87,070,000  |        |             |              |            |              |            |               |            |              |             |   |             |   |              |            | 87,070,000  |  
|                                     | Accumulated other comprehensive loss    |                                      |                                                      | (8,389,000  | )      |             |              |            |              |            |               | (8,389,000  | )            |             |   | 8,389,000    |   |              |            | (8,389,000  | )
|                                     | Accumulated deficit                     |                                      |                                                      | (98,380,000 | )      |             |              | (36,716,000 | )            |            |               | (40,398,000 | )            |             |   | 77,114,000   |   |              |            | (98,380,000 | )
|                                     |                                         |                                      |                                                      |             |        |             |              |             |              |            |               |             |              |             |   |              |   |              |            |            
|                                     |                                         |                                      | Total stockholders equity (deficit)                 |             |        | (19,608,000 | )            |             |              | 19,423,000 |               |             |              | (15,078,000 | ) |              |   | (4,345,000   | )          |             |   | (19,608,000 | )
|                                     |                                         |                                      |                                                      |             |        |             |              |             |              |            |               |             |              |             |   |              |   |              |            |            
|                                     |                                         |                                      | Total liabilities and stockholders
equity (deficit) |             | $      | 51,473,000  |              |             |              | 98,056,000 |               |             |              | 32,352,000  |   |              |   | (117,212,000 | )          |             |   | 64,669,000  |  
|                                     |                                         |                                      |                                                      |             |        |             |              |             |              |            |               |             |              |             |   |              |   |              |            |            

(Continued)

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

May 31, 2001 and 2002

(c)Consolidating condensed statement of operations and comprehensive income
(loss) information for the year ended May 31, 2000 is as follows:

|                                   |                                          |                                                          |           |            |             |              |            |              |            |               |            |              |            |   |            |             |            |  |             |            |             |  
|---------------------------------- | ---------------------------------------- | -------------------------------------------------------- | --------- | ---------- | ----------- | ------------ | ---------- | ------------ | ---------- | ------------- | ---------- | ------------ | ---------- | - | ---------- | ----------- | ---------- |  | ----------- | ---------- | ----------- | -
|                                   |                                          |                                                          |           |            |             |              |            | Guarantor    |            | Non-guarantor |            |              |            |   |            |             |            | 
|                                   |                                          |                                                          |           | Parent     |             | subsidiaries |            | subsidiaries |            | Eliminations  |            | Consolidated
|                                   |                                          |                                                          |           |            |             |              |            |              |            |               |            |             
|Net sales                          |                                          | $                                                        |          |            |             |              | 58,408,000 |              |            |               | 56,913,000 |              |            |   | (2,627,000 | )           |            |  | 112,694,000 |           
|Cost of sales                      |                                          |                                                          |          |            |             |              | 45,433,000 |              |            |               | 49,257,000 |              |            |   | (2,627,000 | )           |            |  | 92,063,000  |           
|                                   |                                          |                                                          |           |            |             |              |            |              |            |               |            |              |            |   |            |             |            |  |             |           
|                                   |                                          | Gross profit                                             |           |            |            |              |            |              | 12,975,000 |               |            |              | 7,656,000  |   |            |             |           |  |             |            | 20,631,000  |  
|Operating expenses                 |                                          |                                                          | 6,896,000 |            |             |              | 18,036,000 |              |            |               | 5,652,000  |              |            |   | (6,051,000 | )           |            |  | 24,533,000  |           
|                                   |                                          |                                                          |           |            |             |              |            |              |            |               |            |              |            |   |            |             |            |  |             |           
|                                   |                                          | Income (loss) from operations                            |           |            | (6,896,000  | )            |            |              | (5,061,000 | )             |            |              | 2,004,000  |   |            |             | 6,051,000  |  |             |            | (3,902,000  | )
|                                   |                                          |                                                          |           |            |             |              |            |              |            |               |            |              |            |   |            |             |            |  |             |           
|Other income (expense):            |                                          |                                                          |           |            |             |              |            |              |            |               |            |              |            |   |            |             |            |  |             |           
|                                   | Parents share of subsidiaries net loss  |                                                          |           | (7,738,000 | )           |              |            |             |            |               |            |             |            |   |            | 7,738,000   |            |  |             |           |            
|                                   | Interest expense                         |                                                          |           | (9,394,000 | )           |              |            | (4,748,000   | )          |               |            | (4,349,000   | )          |   |            | 8,532,000   |            |  |             | (9,959,000 | )          
|                                   | Other                                    |                                                          |           | 10,284,000 |             |              |            | 4,394,000    |            |               |            | 35,000       |            |   |            | (14,583,000 | )          |  |             | 130,000    |            
|                                   |                                          |                                                          |           |            |             |              |            |              |            |               |            |              |            |   |            |             |            |  |             |           
|                                   |                                          | Total other expense                                      |           |            | (6,848,000  | )            |            |              | (354,000   | )             |            |              | (4,314,000 | ) |            |             | 1,687,000  |  |             |            | (9,829,000  | )
|                                   |                                          |                                                          |           |            |             |              |            |              |            |               |            |              |            |   |            |             |            |  |             |           
|                                   |                                          | Income (loss) before income taxes and
extraordinary item |           |            | (13,744,000 | )            |            |              | (5,415,000 | )             |            |              | (2,310,000 | ) |            |             | 7,738,000  |  |             |            | (13,731,000 | )
|Income tax benefit (expense)       |                                          |                                                          | (8,000    | )          |             |              |           |              |            |               | (13,000    | )            |            |   |           |             |            |  | (21,000     | )         
|Extraordinary item, net of tax     |                                          |                                                          | 703,000   |            |             |              |           |              |            |               |           |              |            |   |           |             |            |  | 703,000     |           
|                                   |                                          |                                                          |           |            |             |              |            |              |            |               |            |              |            |   |            |             |            |  |             |           
|                                   |                                          | Net income (loss)                                        |           |            | (13,049,000 | )            |            |              | (5,415,000 | )             |            |              | (2,323,000 | ) |            |             | 7,738,000  |  |             |            | (13,049,000 | )
|Other comprehensive income (loss): |                                          |                                                          |           |            |             |              |            |              |            |               |            |              |            |   |            |             |            |  |             |           
|                                   | Foreign currency translation, net of tax |                                                          |           | (5,110,000 | )           |              |            |             |            |               |            | (5,110,000   | )          |   |            | 5,110,000   |            |  |             | (5,110,000 | )          
|                                   |                                          |                                                          |           |            |             |              |            |              |            |               |            |              |            |   |            |             |            |  |             |           
|                                   |                                          | Comprehensive income (loss)                              |           | $          | (18,159,000 | )            |            |              | (5,415,000 | )             |            |              | (7,433,000 | ) |            |             | 12,848,000 |  |             |            | (18,159,000 | )
|                                   |                                          |                                                          |           |            |             |              |            |              |            |               |            |              |            |   |            |             |            |  |             |           

(d)Consolidating condensed statement of operations and comprehensive income
(loss) information for the year ended May 31, 2001 is as follows:

|                                                                    |                                         |                                                 |            |             |             |              |            |              |             |               |            |              |             |   |            |             |            |  |             |             |             |  
|------------------------------------------------------------------- | --------------------------------------- | ----------------------------------------------- | ---------- | ----------- | ----------- | ------------ | ---------- | ------------ | ----------- | ------------- | ---------- | ------------ | ----------- | - | ---------- | ----------- | ---------- |  | ----------- | ----------- | ----------- | -
|                                                                    |                                         |                                                 |            |             |             |              |            | Guarantor    |             | Non-guarantor |            |              |             |   |            |             |            | 
|                                                                    |                                         |                                                 |            | Parent      |             | subsidiaries |            | subsidiaries |             | Eliminations  |            | Consolidated
|                                                                    |                                         |                                                 |            |             |             |              |            |              |             |               |            |             
|Net sales                                                           |                                         | $                                               |           |             |             |              | 59,943,000 |              |             |               | 51,597,000 |              |             |   | (2,252,000 | )           |            |  | 109,288,000 |            
|Cost of sales                                                       |                                         |                                                 |           |             |             |              | 57,428,000 |              |             |               | 45,872,000 |              |             |   | (2,252,000 | )           |            |  | 101,048,000 |            
|                                                                    |                                         |                                                 |            |             |             |              |            |              |             |               |            |              |             |   |            |             |            |  |             |            
|                                                                    |                                         | Gross profit                                    |            |             |            |              |            |              | 2,515,000   |               |            |              | 5,725,000   |   |            |             |           |  |             |             | 8,240,000   |  
|Operating expenses                                                  |                                         |                                                 | 7,336,000  |             |             |              | 25,687,000 |              |             |               | 40,965,000 |              |             |   | (6,787,000 | )           |            |  | 67,201,000  |            
|                                                                    |                                         |                                                 |            |             |             |              |            |              |             |               |            |              |             |   |            |             |            |  |             |            
|                                                                    |                                         | Income (loss) from operations                   |            |             | (7,336,000  | )            |            |              | (23,172,000 | )             |            |              | (35,240,000 | ) |            |             | 6,787,000  |  |             |             | (58,961,000 | )
|                                                                    |                                         |                                                 |            |             |             |              |            |              |             |               |            |              |             |   |            |             |            |  |             |            
|Other income (expense):                                             |                                         |                                                 |            |             |             |              |            |              |             |               |            |              |             |   |            |             |            |  |             |            
|                                                                    | Parents share of subsidiaries net loss |                                                 |            | (65,172,000 | )           |              |            |             |             |               |            |             |             |   |            | 65,172,000  |            |  |             |            |            
|                                                                    | Interest expense                        |                                                 |            | (9,423,000  | )           |              |            | (4,416,000   | )           |               |            | (3,976,000   | )           |   |            | 7,788,000   |            |  |             | (10,027,000 | )          
|                                                                    | Other                                   |                                                 |            | 10,536,000  |             |              |            | 4,247,000    |             |               |            | 8,000        |             |   |            | (14,575,000 | )          |  |             | 216,000     |            
|                                                                    |                                         |                                                 |            |             |             |              |            |              |             |               |            |              |             |   |            |             |            |  |             |            
|                                                                    |                                         | Total other expense                             |            |             | (64,059,000 | )            |            |              | (169,000    | )             |            |              | (3,968,000  | ) |            |             | 58,385,000 |  |             |             | (9,811,000  | )
|                                                                    |                                         |                                                 |            |             |             |              |            |              |             |               |            |              |             |   |            |             |            |  |             |            
|                                                                    |                                         | Loss before income taxes and
extraordinary item |            |             | (71,395,000 | )            |            |              | (23,341,000 | )             |            |              | (39,208,000 | ) |            |             | 65,172,000 |  |             |             | (68,772,000 | )
|Income tax expense                                                  |                                         |                                                 | (4,325,000 | )           |             |              | (641,000   | )            |             |               | (1,982,000 | )            |             |   |           |             |            |  | (6,948,000  | )          
|Extraordinary item, net of tax                                      |                                         |                                                 |           |             |             |              |           |              |             |               |           |              |             |   |           |             |            |  |            |            
|                                                                    |                                         |                                                 |            |             |             |              |            |              |             |               |            |              |             |   |            |             |            |  |             |            
|                                                                    |                                         | Net loss                                        |            |             | (75,720,000 | )            |            |              | (23,982,000 | )             |            |              | (41,190,000 | ) |            |             | 65,172,000 |  |             |             | (75,720,000 | )
|Other comprehensive loss  foreign currency
translation, net of tax |                                         |                                                 | (2,915,000 | )           |             |              |           |              |             |               | (2,915,000 | )            |             |   | 2,915,000  |             |            |  | (2,915,000  | )          
|                                                                    |                                         |                                                 |            |             |             |              |            |              |             |               |            |              |             |   |            |             |            |  |             |            
|                                                                    |                                         | Comprehensive loss                              |            | $           | (78,635,000 | )            |            |              | (23,982,000 | )             |            |              | (44,105,000 | ) |            |             | 68,087,000 |  |             |             | (78,635,000 | )
|                                                                    |                                         |                                                 |            |             |             |              |            |              |             |               |            |              |             |   |            |             |            |  |             |            

(Continued)

84



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##### Table of Contents



PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

May 31, 2001 and 2002

(e)Consolidating condensed statement of operations and comprehensive income
(loss) information for the year ended May 31, 2002 is as follows:

|                                   |                                          |                                                          |            |             |             |              |            |              |            |               |            |              |            |   |            |            |            |   |            |             |             |  
|---------------------------------- | ---------------------------------------- | -------------------------------------------------------- | ---------- | ----------- | ----------- | ------------ | ---------- | ------------ | ---------- | ------------- | ---------- | ------------ | ---------- | - | ---------- | ---------- | ---------- | - | ---------- | ----------- | ----------- | -
|                                   |                                          |                                                          |            |             |             |              |            | Guarantor    |            | Non-guarantor |            |              |            |   |            |            |            |  
|                                   |                                          |                                                          |            | Parent      |             | subsidiaries |            | subsidiaries |            | Eliminations  |            | Consolidated
|                                   |                                          |                                                          |            |             |             |              |            |              |            |               |            |             
|Net sales                          |                                          | $                                                        |           |             |             |              | 35,689,000 |              |            |               | 45,413,000 |              |            |   | (911,000   | )          |            |   | 80,191,000 |            
|Cost of sales                      |                                          |                                                          |           |             |             |              | 28,942,000 |              |            |               | 39,730,000 |              |            |   | (911,000   | )          |            |   | 67,761,000 |            
|                                   |                                          |                                                          |            |             |             |              |            |              |            |               |            |              |            |   |            |            |            |   |            |            
|                                   |                                          | Gross profit                                             |            |             |            |              |            |              | 6,747,000  |               |            |              | 5,683,000  |   |            |            |           |   |            |             | 12,430,000  |  
|Operating expenses                 |                                          |                                                          | 6,373,000  |             |             |              | 10,021,000 |              |            |               | 3,637,000  |              |            |   | (4,337,000 | )          |            |   | 15,694,000 |            
|                                   |                                          |                                                          |            |             |             |              |            |              |            |               |            |              |            |   |            |            |            |   |            |            
|                                   |                                          | Income (loss) from operations                            |            |             | (6,373,000  | )            |            |              | (3,274,000 | )             |            |              | 2,046,000  |   |            |            | 4,337,000  |   |            |             | (3,264,000  | )
|                                   |                                          |                                                          |            |             |             |              |            |              |            |               |            |              |            |   |            |            |            |   |            |            
|Other income (expense):            |                                          |                                                          |            |             |             |              |            |              |            |               |            |              |            |   |            |            |            |   |            |            
|                                   | Parents share of subsidiaries net loss  |                                                          |            | (2,314,000  | )           |              |            |             |            |               |            |             |            |   |            | 2,314,000  |            |   |            |            |            
|                                   | Interest expense                         |                                                          |            | (12,502,000 | )           |              |            | (1,567,000   | )          |               |            | (1,228,000   | )          |   |            | 2,400,000  |            |   |            | (12,897,000 | )          
|                                   | Other                                    |                                                          |            | 5,396,000   |             |              |            | 1,476,000    |            |               |            | 38,000       |            |   |            | (6,737,000 | )          |   |            | 173,000     |            
|                                   |                                          |                                                          |            |             |             |              |            |              |            |               |            |              |            |   |            |            |            |   |            |            
|                                   |                                          | Total other expense                                      |            |             | (9,420,000  | )            |            |              | (91,000    | )             |            |              | (1,190,000 | ) |            |            | (2,023,000 | ) |            |             | (12,724,000 | )
|                                   |                                          |                                                          |            |             |             |              |            |              |            |               |            |              |            |   |            |            |            |   |            |            
|                                   |                                          | Income (loss) before income taxes and
extraordinary item |            |             | (15,793,000 | )            |            |              | (3,365,000 | )             |            |              | 856,000    |   |            |            | 2,314,000  |   |            |             | (15,988,000 | )
|Income tax benefit (expense)       |                                          |                                                          |           |             |             |              |           |              |            |               | 195,000    |              |            |   |           |            |            |   | 195,000    |            
|Extraordinary item, net of tax     |                                          |                                                          | 20,318,000 |             |             |              |           |              |            |               |           |              |            |   |           |            |            |   | 20,318,000 |            
|                                   |                                          |                                                          |            |             |             |              |            |              |            |               |            |              |            |   |            |            |            |   |            |            
|                                   |                                          | Net income (loss)                                        |            |             | 4,525,000   |              |            |              | (3,365,000 | )             |            |              | 1,051,000  |   |            |            | 2,314,000  |   |            |             | 4,525,000   |  
|Other comprehensive income (loss): |                                          |                                                          |            |             |             |              |            |              |            |               |            |              |            |   |            |            |            |   |            |            
|                                   | Foreign currency translation, net of tax |                                                          |            | 776,000     |             |              |            |             |            |               |            | 776,000      |            |   |            | (776,000   | )          |   |            | 776,000     |            
|                                   |                                          |                                                          |            |             |             |              |            |              |            |               |            |              |            |   |            |            |            |   |            |            
|                                   |                                          | Comprehensive income (loss)                              |            | $           | 5,301,000   |              |            |              | (3,365,000 | )             |            |              | 1,827,000  |   |            |            | 1,538,000  |   |            |             | 5,301,000   |  
|                                   |                                          |                                                          |            |             |             |              |            |              |            |               |            |              |            |   |            |            |            |   |            |            

(Continued)

85



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##### Table of Contents



PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

May 31, 2001 and 2002

(f)Consolidating condensed statement of cash flows information for the year
ended May 31, 2000 is as follows:

|                                                                                          |                                                                                                       |                     |                                                     |            |           |            |              |            |              |            |               |            |              |            |           |            |             |            |            |            |           |            |  
|----------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------- | ------------------- | --------------------------------------------------- | ---------- | --------- | ---------- | ------------ | ---------- | ------------ | ---------- | ------------- | ---------- | ------------ | ---------- | --------- | ---------- | ----------- | ---------- | ---------- | ---------- | --------- | ---------- | -
|                                                                                          |                                                                                                       |                     |                                                     |            |           |            |              |            | Guarantor    |            | Non-guarantor |            |              |            |           |            |             |            |           
|                                                                                          |                                                                                                       |                     |                                                     |            | Parent    |            | subsidiaries |            | subsidiaries |            | Eliminations  |            | Consolidated
|                                                                                          |                                                                                                       |                     |                                                     |            |           |            |              |            |              |            |               |            |             
|Cash flow from operating activities  net cash
provided by (used in) operating activities |                                                                                                       | $                   | (11,649,000                                         | )          |           |            | 1,510,000    |            |              |            | (2,806,000    | )          |              |            | 7,738,000 |            |             |            | (5,207,000 | )         
|                                                                                          |                                                                                                       |                     |                                                     |            |           |            |              |            |              |            |               |            |              |            |           |            |             |            |            |           
|Cash flow from investing activities:                                                      |                                                                                                       |                     |                                                     |            |           |            |              |            |              |            |               |            |              |            |           |            |             |            |            |           
|                                                                                          | Acquisition of property, plant and equipment                                                          |                     |                                                     | (767,000   | )         |            |              | (2,846,000 | )            |            |               | (1,254,000 | )            |            |           |           |             |            |            | (4,867,000 | )        
|                                                                                          | Investment in and loans to subsidiaries                                                               |                     |                                                     | (1,311,000 | )         |            |              | (39,000    | )            |            |               |           |              |            |           |           |             |            |            | (1,350,000 | )        
|                                                                                          | Other changes, net                                                                                    |                     |                                                     | 2,263,000  |           |            |              | 21,000     |              |            |               | 85,000     |              |            |           | (3,825,000 | )           |            |            | (1,456,000 | )        
|                                                                                          |                                                                                                       |                     |                                                     |            |           |            |              |            |              |            |               |            |              |            |           |            |             |            |            |           
|                                                                                          |                                                                                                       |                     | Net cash provided by (used in)
investing activities |            |           | 185,000    |              |            |              | (2,864,000 | )             |            |              | (1,169,000 | )         |            |             | (3,825,000 | )          |            |           | (7,673,000 | )
|                                                                                          |                                                                                                       |                     |                                                     |            |           |            |              |            |              |            |               |            |              |            |           |            |             |            |            |           
|Cash flow from financing activities:                                                      |                                                                                                       |                     |                                                     |            |           |            |              |            |              |            |               |            |              |            |           |            |             |            |            |           
|                                                                                          | Net borrowings (repayments) under line of credit                                                      |                     |                                                     | 5,379,000  |           |            |              | (161,000   | )            |            |               |           |              |            |           |           |             |            |            | 5,218,000  |          
|                                                                                          | Payments on long-term debt and capital leases                                                         |                     |                                                     | (116,000   | )         |            |              | (2,328,000 | )            |            |               | (159,000   | )            |            |           |           |             |            |            | (2,603,000 | )        
|                                                                                          | Proceeds from sale of common stock, net                                                               |                     |                                                     | 4,169,000  |           |            |              |           |              |            |               |           |              |            |           |           |             |            |            | 4,169,000  |          
|                                                                                          | Other changes, net                                                                                    |                     |                                                     | 50,000     |           |            |              | 3,863,000  |              |            |               | 50,000     |              |            |           | (3,913,000 | )           |            |            | 50,000     |          
|                                                                                          |                                                                                                       |                     |                                                     |            |           |            |              |            |              |            |               |            |              |            |           |            |             |            |            |           
|                                                                                          |                                                                                                       |                     | Net cash provided by (used in)
financing activities |            |           | 9,482,000  |              |            |              | 1,374,000  |               |            |              | (109,000   | )         |            |             | (3,913,000 | )          |            |           | 6,834,000  |  
|                                                                                          |                                                                                                       |                     |                                                     |            |           |            |              |            |              |            |               |            |              |            |           |            |             |            |            |           
|                                                                                          |                                                                                                       |                     | Net change in cash and cash equivalents             |            |           | (1,982,000 | )            |            |              | 20,000     |               |            |              | (4,084,000 | )         |            |             |           |            |            |           | (6,046,000 | )
|Cash and cash equivalents at beginning of year                                            |                                                                                                       |                     | 1,798,000                                           |            |           |            | 38,000       |            |              |            | 6,298,000     |            |              |            |          |            |             |            | 8,134,000  |           
|Effect of exchange rates on cash                                                          |                                                                                                       |                     |                                                    |            |           |            |             |            |              |            | 66,000        |            |              |            |          |            |             |            | 66,000     |           
|                                                                                          |                                                                                                       |                     |                                                     |            |           |            |              |            |              |            |               |            |              |            |           |            |             |            |            |           
|Cash and cash equivalents at end of year                                                  |                                                                                                       | $                   | (184,000                                            | )          |           |            | 58,000       |            |              |            | 2,280,000     |            |              |            |          |            |             |            | 2,154,000  |           
|                                                                                          |                                                                                                       |                     |                                                     |            |           |            |              |            |              |            |               |            |              |            |           |            |             |            |            |           
|Supplemental cash flow:                                                                   |                                                                                                       |                     |                                                     |            |           |            |              |            |              |            |               |            |              |            |           |            |             |            |            |           
|                                                                                          | Noncash operating expenses related to:                                                                |                     |                                                     |            |           |            |              |            |              |            |               |            |              |            |           |            |             |            |            |            |          
|                                                                                          |                                                                                                       | Depreciation        |                                                     | $          | 436,000   |            |              |            | 3,128,000    |            |               |            | 2,721,000    |            |           |            |            |            |            |            | 6,285,000 |           
|                                                                                          |                                                                                                       | Amortization        |                                                     |            |          |            |              |            | 475,000      |            |               |            | 981,000      |            |           |            |            |            |            |            | 1,456,000 |           
|                                                                                          | Cash paid during the year for:                                                                        |                     |                                                     |            |           |            |              |            |              |            |               |            |              |            |           |            |             |            |            |            |          
|                                                                                          |                                                                                                       | Interest            |                                                     |            | 8,997,000 |            |              |            | 3,719,000    |            |               |            | 7,900,000    |            |           |            | (11,053,000 | )          |            |            | 9,563,000 |           
|                                                                                          |                                                                                                       | Income taxes        |                                                     |            |          |            |              |            |             |            |               |            | 2,232,000    |            |           |            |            |            |            |            | 2,232,000 |           
|                                                                                          | Noncash investing and financing activities  conversion
of notes and accrued interest to common stock |                     |                                                     | 11,457,000 |           |            |              |           |              |            |               |           |              |            |           |           |             |            |            | 11,457,000 |          
|                                                                                          | Acquisition of subsidiaries
Fair value of assets acquired and resulting
goodwill, excluding cash      |                     |                                                     |           |           |            |              | 9,801,000  |              |            |               |           |              |            |           |           |             |            |            | 9,801,000  |          
|                                                                                          |                                                                                                       | Liabilities assumed |                                                     |            |          |            |              |            | 5,814,000    |            |               |            |             |            |           |            |            |            |            |            | 5,814,000 |           

(Continued)

86



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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

May 31, 2001 and 2002

(g)Consolidating condensed statement of cash flows information for the year
ended May 31, 2001 is as follows:

|                                                                                          |                                                                                                    |              |                                                     |           |           |           |              |            |              |            |               |            |              |            |   |         |   |         |            |            |           |            |  
|----------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------- | ------------ | --------------------------------------------------- | --------- | --------- | --------- | ------------ | ---------- | ------------ | ---------- | ------------- | ---------- | ------------ | ---------- | - | ------- | - | ------- | ---------- | ---------- | --------- | ---------- | -
|                                                                                          |                                                                                                    |              |                                                     |           |           |           |              |            | Guarantor    |            | Non-guarantor |            |              |            |   |         |   |         |           
|                                                                                          |                                                                                                    |              |                                                     |           | Parent    |           | subsidiaries |            | subsidiaries |            | Eliminations  |            | Consolidated
|                                                                                          |                                                                                                    |              |                                                     |           |           |           |              |            |              |            |               |            |             
|Cash flow from operating activities  net cash provided
by (used in) operating activities |                                                                                                    | $            | (5,824,000                                          | )         |           |           | 2,011,000    |            |              |            | 2,213,000     |            |              |            |  |         |   |         | (1,600,000 | )         
|                                                                                          |                                                                                                    |              |                                                     |           |           |           |              |            |              |            |               |            |              |            |   |         |   |         |            |           
|Cash flow from investing activities:                                                      |                                                                                                    |              |                                                     |           |           |           |              |            |              |            |               |            |              |            |   |         |   |         |            |           
|                                                                                          | Acquisition of property, plant and equipment                                                       |              |                                                     | (458,000  | )         |           |              | (1,141,000 | )            |            |               | (2,111,000 | )            |            |   |        |   |         |            | (3,710,000 | )        
|                                                                                          | Proceeds from sale of property, plant and equipment                                                |              |                                                     | 913,000   |           |           |              | 1,341,000  |              |            |               |           |              |            |   |        |   |         |            | 2,254,000  |          
|                                                                                          | Investment in and loans to subsidiaries                                                            |              |                                                     | (12,000   | )         |           |              |           |              |            |               |           |              |            |   | 12,000  |   |         |            |           |          
|                                                                                          | Other changes, net                                                                                 |              |                                                     |          |           |           |              | (20,000    | )            |            |               |           |              |            |   |        |   |         |            | (20,000    | )        
|                                                                                          |                                                                                                    |              |                                                     |           |           |           |              |            |              |            |               |            |              |            |   |         |   |         |            |           
|                                                                                          |                                                                                                    |              | Net cash provided by (used in)
investing activities |           |           | 443,000   |              |            |              | 180,000    |               |            |              | (2,111,000 | ) |         |   | 12,000  |            |            |           | (1,476,000 | )
|                                                                                          |                                                                                                    |              |                                                     |           |           |           |              |            |              |            |               |            |              |            |   |         |   |         |            |           
|Cash flow from financing activities:                                                      |                                                                                                    |              |                                                     |           |           |           |              |            |              |            |               |            |              |            |   |         |   |         |            |           
|                                                                                          | Net borrowings under line of credit                                                                |              |                                                     | 307,000   |           |           |              |           |              |            |               | 12,000     |              |            |   |        |   |         |            | 319,000    |          
|                                                                                          | Payments on long-term debt and capital leases                                                      |              |                                                     | (277,000  | )         |           |              | (1,284,000 | )            |            |               | (137,000   | )            |            |   |        |   |         |            | (1,698,000 | )        
|                                                                                          | Proceeds from long-term debt                                                                       |              |                                                     | 4,802,000 |           |           |              |           |              |            |               |           |              |            |   |        |   |         |            | 4,802,000  |          
|                                                                                          | Proceeds from sale of common stock and warrants, net                                               |              |                                                     | 1,863,000 |           |           |              |           |              |            |               |           |              |            |   |        |   |         |            | 1,863,000  |          
|                                                                                          | Other changes, net                                                                                 |              |                                                     | 4,000     |           |           |              | (962,000   | )            |            |               | 974,000    |              |            |   | (12,000 | ) |         |            | 4,000      |          
|                                                                                          |                                                                                                    |              |                                                     |           |           |           |              |            |              |            |               |            |              |            |   |         |   |         |            |           
|                                                                                          |                                                                                                    |              | Net cash provided by (used in)
financing activities |           |           | 6,699,000 |              |            |              | (2,246,000 | )             |            |              | 849,000    |   |         |   | (12,000 | )          |            |           | 5,290,000  |  
|                                                                                          |                                                                                                    |              |                                                     |           |           |           |              |            |              |            |               |            |              |            |   |         |   |         |            |           
|                                                                                          |                                                                                                    |              | Net change in cash and cash equivalents             |           |           | 1,318,000 |              |            |              | (55,000    | )             |            |              | 951,000    |   |         |   |        |            |            |           | 2,214,000  |  
|Cash and cash equivalents at beginning of year                                            |                                                                                                    |              | (184,000                                            | )         |           |           | 58,000       |            |              |            | 2,280,000     |            |              |            |  |         |   |         | 2,154,000  |           
|Effect of exchange rates on cash                                                          |                                                                                                    |              |                                                    |           |           |           |             |            |              |            | (273,000      | )          |              |            |  |         |   |         | (273,000   | )         
|                                                                                          |                                                                                                    |              |                                                     |           |           |           |              |            |              |            |               |            |              |            |   |         |   |         |            |           
|Cash and cash equivalents at end of year                                                  |                                                                                                    | $            | 1,134,000                                           |           |           |           | 3,000        |            |              |            | 2,958,000     |            |              |            |  |         |   |         | 4,095,000  |           
|                                                                                          |                                                                                                    |              |                                                     |           |           |           |              |            |              |            |               |            |              |            |   |         |   |         |            |           
|Supplemental cash flow:                                                                   |                                                                                                    |              |                                                     |           |           |           |              |            |              |            |               |            |              |            |   |         |   |         |            |           
|                                                                                          | Noncash operating expenses related to:                                                             |              |                                                     |           |           |           |              |            |              |            |               |            |              |            |   |         |   |         |            |            |          
|                                                                                          |                                                                                                    | Depreciation |                                                     | $         | 557,000   |           |              |            | 3,236,000    |            |               |            | 2,450,000    |            |   |         |  |         |            |            | 6,243,000 |           
|                                                                                          |                                                                                                    | Amortization |                                                     |           |          |           |              |            | 361,000      |            |               |            | 730,000      |            |   |         |  |         |            |            | 1,091,000 |           
|                                                                                          | Cash paid during the year for:                                                                     |              |                                                     |           |           |           |              |            |              |            |               |            |              |            |   |         |   |         |            |            |          
|                                                                                          |                                                                                                    | Interest     |                                                     |           | 7,920,000 |           |              |            | 522,000      |            |               |            | 82,000       |            |   |         |  |         |            |            | 8,524,000 |           
|                                                                                          |                                                                                                    | Income taxes |                                                     |           |          |           |              |            |             |            |               |            | 295,000      |            |   |         |  |         |            |            | 295,000   |           
|                                                                                          | Noncash investing and financing activities  short-term
obligations refinanced with long-term debt |              |                                                     | 9,306,000 |           |           |              |           |              |            |               |           |              |            |   |        |   |         |            | 9,306,000  |          
|                                                                                          | Issuance of warrants in connection with debt                                                       |              |                                                     | 1,886,000 |           |           |              |           |              |            |               |           |              |            |   |        |   |         |            | 1,886,000  |          

(Continued)

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements

May 31, 2001 and 2002

(h)Consolidating condensed statement of cash flows information for the year
ended May 31, 2002 is as follows:

|                                                                                          |                                               |                                                                            |                                                              |                                                     |            |        |           |              |           |              |           |               |           |              |            |   |            |   |           |             |            |            |            |  
|----------------------------------------------------------------------------------------- | --------------------------------------------- | -------------------------------------------------------------------------- | ------------------------------------------------------------ | --------------------------------------------------- | ---------- | ------ | --------- | ------------ | --------- | ------------ | --------- | ------------- | --------- | ------------ | ---------- | - | ---------- | - | --------- | ----------- | ---------- | ---------- | ---------- | -
|                                                                                          |                                               |                                                                            |                                                              |                                                     |            |        |           |              |           | Guarantor    |           | Non-guarantor |           |              |            |   |            |   |           |            
|                                                                                          |                                               |                                                                            |                                                              |                                                     |            | Parent |           | subsidiaries |           | subsidiaries |           | Eliminations  |           | Consolidated
|                                                                                          |                                               |                                                                            |                                                              |                                                     |            |        |           |              |           |              |           |               |           |             
|Cash flow from operating activities  net cash
provided by (used in) operating activities |                                               | $                                                                          | (5,037,000                                                   | )                                                   |            |        | 520,000   |              |           |              | 4,198,000 |               |           |              |           |   |            |   | (319,000  | )          
|                                                                                          |                                               |                                                                            |                                                              |                                                     |            |        |           |              |           |              |           |               |           |              |            |   |            |   |           |            
|Cash flow from investing activities:                                                      |                                               |                                                                            |                                                              |                                                     |            |        |           |              |           |              |           |               |           |              |            |   |            |   |           |            
|                                                                                          | Acquisition of property, plant and equipment  |                                                                            |                                                              | (249,000                                            | )          |        |           | (382,000     | )         |              |           | (2,072,000    | )         |              |            |  |            |   |           | (2,703,000  | )         
|                                                                                          | Investment in and loans to subsidiaries       |                                                                            |                                                              | (100,000                                            | )          |        |           | 532,000      |           |              |           |              |           |              |            |  |            |   |           | 432,000     |           
|                                                                                          | Other changes, net                            |                                                                            |                                                              |                                                    |            |        |           |             |           |              |           |              |           |              |            |  |            |   |           |            |           
|                                                                                          |                                               |                                                                            |                                                              |                                                     |            |        |           |              |           |              |           |               |           |              |            |   |            |   |           |            
|                                                                                          |                                               |                                                                            |                                                              | Net cash provided by (used in)
investing activities |            |        | (349,000  | )            |           |              | 150,000   |               |           |              | (2,072,000 | ) |            |   |          |             |            |            | (2,271,000 | )
|                                                                                          |                                               |                                                                            |                                                              |                                                     |            |        |           |              |           |              |           |               |           |              |            |   |            |   |           |            
|Cash flow from financing activities:                                                      |                                               |                                                                            |                                                              |                                                     |            |        |           |              |           |              |           |               |           |              |            |   |            |   |           |            
|                                                                                          | Payments on long-term debt and capital leases |                                                                            |                                                              | (13,833,000                                         | )          |        |           | (670,000     | )         |              |           | (595,000      | )         |              |            |  |            |   |           | (15,098,000 | )         
|                                                                                          | Proceeds from long-term debt                  |                                                                            |                                                              | 20,832,000                                          |            |        |           |             |           |              |           |              |           |              |            |  |            |   |           | 20,832,000  |           
|                                                                                          | Proceeds from sale of common stock, net       |                                                                            |                                                              | 4,000                                               |            |        |           |             |           |              |           |              |           |              |            |  |            |   |           | 4,000       |           
|                                                                                          | Direct costs of restructuring transaction     |                                                                            |                                                              | (1,948,000                                          | )          |        |           |             |           |              |           |              |           |              |            |  |            |   |           | (1,948,000  | )         
|                                                                                          |                                               |                                                                            |                                                              |                                                     |            |        |           |              |           |              |           |               |           |              |            |   |            |   |           |            
|                                                                                          |                                               |                                                                            |                                                              | Net cash provided by (used in)
financing activities |            |        | 5,055,000 |              |           |              | (670,000  | )             |           |              | (595,000   | ) |            |   |          |             |            |            | 3,790,000  |  
|                                                                                          |                                               |                                                                            |                                                              |                                                     |            |        |           |              |           |              |           |               |           |              |            |   |            |   |           |            
|                                                                                          |                                               |                                                                            |                                                              | Net change in cash and cash equivalents             |            |        | (331,000  | )            |           |              |          |               |           |              | 1,531,000  |   |            |   |          |             |            |            | 1,200,000  |  
|Cash and cash equivalents at beginning of year                                            |                                               |                                                                            | 1,134,000                                                    |                                                     |            |        | 3,000     |              |           |              | 2,958,000 |               |           |              |           |   |            |   | 4,095,000 |            
|Effect of exchange rates on cash                                                          |                                               |                                                                            |                                                             |                                                     |            |        |          |              |           |              | 324,000   |               |           |              |           |   |            |   | 324,000   |            
|                                                                                          |                                               |                                                                            |                                                              |                                                     |            |        |           |              |           |              |           |               |           |              |            |   |            |   |           |            
|Cash and cash equivalents at end of year                                                  |                                               | $                                                                          | 803,000                                                      |                                                     |            |        | 3,000     |              |           |              | 4,813,000 |               |           |              |           |   |            |   | 5,619,000 |            
|                                                                                          |                                               |                                                                            |                                                              |                                                     |            |        |           |              |           |              |           |               |           |              |            |   |            |   |           |            
|Supplemental cash flow:                                                                   |                                               |                                                                            |                                                              |                                                     |            |        |           |              |           |              |           |               |           |              |            |   |            |   |           |            
|                                                                                          | Noncash operating expenses related to:        |                                                                            |                                                              |                                                     |            |        |           |              |           |              |           |               |           |              |            |   |            |   |           |             |           
|                                                                                          |                                               | Depreciation                                                               |                                                              | $                                                   | 587,000    |        |           |              | 1,748,000 |              |           |               | 1,967,000 |              |            |   |           |   |           |             | 4,302,000  |           
|                                                                                          |                                               | Amortization                                                               |                                                              |                                                     |           |        |           |              | 87,000    |              |           |               |          |              |            |   |           |   |           |             | 87,000     |           
|                                                                                          | Cash paid during the year for:                |                                                                            |                                                              |                                                     |            |        |           |              |           |              |           |               |           |              |            |   |            |   |           |             |           
|                                                                                          |                                               | Interest                                                                   |                                                              |                                                     | 3,521,000  |        |           |              | 1,868,000 |              |           |               | 1,529,000 |              |            |   | (3,000,000 | ) |           |             | 3,918,000  |           
|                                                                                          |                                               | Income taxes                                                               |                                                              |                                                     |           |        |           |              |          |              |           |               | 713,000   |              |            |   |           |   |           |             | 713,000    |           
|                                                                                          | Noncash investing and financing activities:   |                                                                            |                                                              |                                                     |            |        |           |              |           |              |           |               |           |              |            |   |            |   |           |             |           
|                                                                                          |                                               | Sale of subsidiaries:                                                      |                                                              |                                                     |            |        |           |              |           |              |           |               |           |              |            |   |            |   |           |             |            |           
|                                                                                          |                                               |                                                                            | Fair value of assets sold                                    |                                                     |            |       |           |              |           | 4,297,000    |           |               |           |             |            |   |            |  |           |             |            | 4,297,000  |           
|                                                                                          |                                               |                                                                            | Liabilities relieved                                         |                                                     |            |       |           |              |           | (1,100,000   | )         |               |           |             |            |   |            |  |           |             |            | (1,100,000 | )         
|                                                                                          |                                               |                                                                            | Satisfaction of related long-term debt
and transaction costs |                                                     |            |       |           |              |           | (1,197,000   | )         |               |           |             |            |   |            |  |           |             |            | (1,197,000 | )         
|                                                                                          |                                               | Issuance of common stock in connection with
troubled debt restructuring    |                                                              |                                                     | 137,000    |        |           |              |          |              |           |               |          |              |            |   |           |   |           |             | 137,000    |           
|                                                                                          |                                               | Issuance of preferred stock in connection with
troubled debt restructuring |                                                              |                                                     | 18,715,000 |        |           |              |          |              |           |               |          |              |            |   |           |   |           |             | 18,715,000 |           
|                                                                                          |                                               | Purchase of patent                                                         |                                                              |                                                     |           |        |           |              | 950,000   |              |           |               |          |              |            |   |           |   |           |             | 950,000    |           

(Continued)

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##### Table of Contents



PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2001 and 2002

(i)Inventory information at May 31 is as follows:

|                            |                  |                   |            |           |            |      |            |           |            | 
|--------------------------- | ---------------- | ----------------- | ---------- | --------- | ---------- | ---- | ---------- | --------- | ---------- | 
|                            |                  |                   |            | 2001      |            | 2002
|                            |                  |                   |            |           |            |     
|Guarantor subsidiaries:     |                  |                   |            |           |            |      |            |          
|                            | Raw materials    |                   | $          | 3,594,000 |            |      |            | 2,796,000 |           
|                            | Work in progress |                   |            | 4,045,000 |            |      |            | 3,122,000 |           
|                            | Finished goods   |                   |            | 6,687,000 |            |      |            | 5,331,000 |           
|                            |                  |                   |            |           |            |      |            |          
|                            |                  |                   | 14,326,000 |           |            |      | 11,249,000 |          
|                            |                  |                   |            |           |            |      |            |          
|Non-guarantor subsidiaries: |                  |                   |            |           |            |      |            |          
|                            | Raw materials    |                   |            | 1,438,000 |            |      |            | 1,131,000 |           
|                            | Work in progress |                   |            | 6,945,000 |            |      |            | 6,963,000 |           
|                            | Finished goods   |                   |            | 285,000   |            |      |            | 263,000   |           
|                            |                  |                   |            |           |            |      |            |          
|                            |                  |                   | 8,668,000  |           |            |      | 8,357,000  |          
|                            |                  |                   |            |           |            |      |            |          
|                            |                  | Total inventories |            | $         | 22,994,000 |      |            |           | 19,606,000 | 
|                            |                  |                   |            |           |            |      |            |          

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ITEM 8A. SELECTED QUARTERLY FINANCIAL DATA

The following selected quarterly financial data presents selected historical
financial data of the Company as of the quarterly periods ended, as indicated,
and is derived from our unaudited consolidated quarterly financial statements.
This data should be read in conjunction with our Consolidated Financial
Statements and Notes thereto, the Independent Auditors Report, and
Managements Discussion and Analysis of Financial Condition and Results of
Operations. The Independent Auditors Report contains an explanatory paragraph
that states that our recurring losses from operations raise substantial doubt
about our ability to continue as a going concern. Our Consolidated Financial
Statements and the following selected quarterly financial data do not include
any adjustments that might result from the outcome of that
uncertainty. The report also states that the Company changed its
method of accounting for goodwill and certain intangible assets
during the year ended May 31, 2002.

|                                                       |         |   |                                       |            |              |  |              |            |         |  |             |            |              |  |              |            |         |  |            |            |   |  |            |            |   |  |            |            |   |  |            |            |  
|------------------------------------------------------ | ------- | - | ------------------------------------- | ---------- | ------------ |  | ------------ | ---------- | ------- |  | ----------- | ---------- | ------------ |  | ------------ | ---------- | ------- |  | ---------- | ---------- | - |  | ---------- | ---------- | - |  | ---------- | ---------- | - |  | ---------- | ---------- | -
|                                                       |         |   | August 31,                            |            | November 30, |  | February 28, |            | May 31, |  | August 31,  |            | November 30, |  | February 28, |            | May 31,
|                                                       |         |   | 2000                                  |            | 2000         |  | 2001         |            | 2001    |  | 2001        |            | 2001         |  | 2002         |            | 2002   
|                                                       |         |   |                                       |            |              |  |              |            |         |  |             |            |              |  |              |            |        
|                                                       |         |   | (in thousands, except per share data)
|Net Sales                                              |         | $ | 27,643,000                            |            |              |  | 27,437,000   |            |         |  | 27,068,000  |            |              |  | 27,140,000   |            |         |  | 23,429,000 |            |   |  | 21,579,000 |            |   |  | 18,322,000 |            |   |  | 16,861,000 |           
|Gross profit                                           |         |   | 4,922,000                             |            |              |  | 3,086,000    |            |         |  | (925,000    | )          |              |  | 1,157,000    |            |         |  | 5,075,000  |            |   |  | 3,299,000  |            |   |  | 3,617,000  |            |   |  | 439,000    |           
|Loss before extraordinary item                         |         |   | (2,252,000                            | )          |              |  | (4,943,000   | )          |         |  | (40,341,000 | )          |              |  | (28,184,000  | )          |         |  | (2,044,000 | )          |   |  | (5,912,000 | )          |   |  | (3,602,000 | )          |   |  | (4,235,000 | )         
|Net income (loss)                                      |         |   | (2,252,000                            | )          |              |  | (4,943,000   | )          |         |  | (40,341,000 | )          |              |  | (28,184,000  | )          |         |  | (2,044,000 | )          |   |  | (5,912,000 | )          |   |  | (3,602,000 | )          |   |  | 16,083,000 |           
|Loss before extraordinary item
per share:              |         |   |                                       |            |              |  |              |            |         |  |             |            |              |  |              |            |         |  |            |            |   |  |            |            |   |  |            |            |   |  |            |           
|                                                       | Basic   |   |                                       | (0.07      | )            |  |              | (0.14      | )       |  |             | (1.32      | )            |  |              | (0.73      | )       |  |            | (0.05      | ) |  |            | (0.15      | ) |  |            | (0.09      | ) |  |            | (0.05      | )
|                                                       | Diluted |   |                                       | (0.07      | )            |  |              | (0.14      | )       |  |             | (1.32      | )            |  |              | (0.73      | )       |  |            | (0.05      | ) |  |            | (0.15      | ) |  |            | (0.09      | ) |  |            | (0.05      | )
|Net income (loss) per share:                           |         |   |                                       |            |              |  |              |            |         |  |             |            |              |  |              |            |         |  |            |            |   |  |            |            |   |  |            |            |   |  |            |           
|                                                       | Basic   |   |                                       | (0.07      | )            |  |              | (0.14      | )       |  |             | (1.32      | )            |  |              | (0.73      | )       |  |            | (0.05      | ) |  |            | (0.15      | ) |  |            | (0.09      | ) |  |            | 0.20       |  
|                                                       | Diluted |   |                                       | (0.07      | )            |  |              | (0.14      | )       |  |             | (1.32      | )            |  |              | (0.73      | )       |  |            | (0.05      | ) |  |            | (0.15      | ) |  |            | (0.09      | ) |  |            | 0.20       |  
|Shares used in computation of
income (loss) per share: |         |   |                                       |            |              |  |              |            |         |  |             |            |              |  |              |            |         |  |            |            |   |  |            |            |   |  |            |            |   |  |            |           
|                                                       | Basic   |   |                                       | 33,114,000 |              |  |              | 34,292,000 |         |  |             | 35,020,000 |              |  |              | 38,692,000 |         |  |            | 39,260,000 |   |  |            | 39,315,000 |   |  |            | 39,315,000 |   |  |            | 80,115,000 |  
|                                                       | Diluted |   |                                       | 33,114,000 |              |  |              | 34,292,000 |         |  |             | 35,020,000 |              |  |              | 38,692,000 |         |  |            | 39,260,000 |   |  |            | 39,315,000 |   |  |            | 39,315,000 |   |  |            | 80,115,000 |  

During the quarter ended November 30, 2000, we recognized a $0.7 million
impairment charge to reduce the carrying value of the equipment located at the
Tacoma, Washington location of our former U.S. Aerospace Groups Casting
Division to its net estimated fair value. We also recognized a $320,000
non-cash charge for the loss on the sale of an unused building in Butler, New
Jersey. Net proceeds from the sale of the building were approximately
$660,000, versus a carrying amount of approximately $980,000.

During the quarter ended February 28, 2001, based upon preliminary and final
offers to purchase Aeromet, we recognized a $25.0 million charge to reduce the
$33.0 million carrying value of goodwill associated with Aeromet to estimated
fair value. We also recognized an impairment charge of $3.5 million to reduce
the value of property and equipment used at the Entiat, Washington location of
our former U.S. Aerospace Groups Casting Division to fair value. We recognized
a non-cash charge of approximately $3.3 million to reduce the carrying value of
goodwill and equipment used in the former U.S. Aerospace Groups Engineering &
Fabrication Division to estimated fair value. Finally, within the
former

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U.S. Electronics Groups Display Division, we recognized a non-cash
charge of approximately $0.6 million to reduce the carrying value of equipment
used to produce low power relays to its fair value.

During the quarter ended May 31, 2001, based upon preliminary and final offers
to purchase Aeromet, we recognized a additional $12.0 million charge to reduce
the carrying value of goodwill and equipment associated with Aeromet to fair
value. We also recognized an additional impairment charge of $2.0 million to
reduce the value of property and equipment used at the Entiat, Washington
location of our former U.S. Aerospace Groups Casting Division to its estimated
fair value and an additional impairment charge of $0.1 million to reduce the
carrying value of the equipment located at the divisions Tacoma location to
its estimated fair value. During the fourth quarter of fiscal 2001, we also
completed our analysis of the value of certain other long-lived assets,
including goodwill and patents. Based upon this analysis, we recognized
additional impairment charges of approximately $1.0 million to reduce goodwill
to estimated fair value, and approximately $0.3 million to reduce patents to
estimated fair value.

During the quarter ended November 30, 2001, we recognized a $0.6 million charge
to reduce the $0.6 million carrying value of certain equipment used in our
Display Division and Engineering & Fabrication Division to its fair value.

During the quarter ended May 31, 2002, we realized an extraordinary gain on our
troubled debt restructuring in the amount of $20.3 million.




ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

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PART III




ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

DIRECTORS

The Board of Directors of the Company consists of five directors, who were
appointed by the holders of our Series C Preferred Stock (assuming the Series C
Preferred Stock has been converted into common stock in the Automatic
Conversion prior to the next annual meeting of shareholders) serve until their
successors are elected at the next annual meeting of shareholders. They are:

|                     |  |     |    |                       |  |                                                
|-------------------- |  | --- | -- | --------------------- |  | -----------------------------------------------
|Name                 |  | Age |    | Position with Company
|                     |  |     |    |                      
|Richard W. Detweiler |  |     | 60 |                       |  | Director                                       
|Carl H. Goldsmith    |  |     | 36 |                       |  | Director                                       
|Matthew C. Kaufman   |  |     | 31 |                       |  | Director and Chairman                          
|Philip Raygorodetsky |  |     | 28 |                       |  | Director                                       
|Donald A. Wright     |  |     | 50 |                       |  | Director, Chief Executive Officer and President

Richard W. Detweiler. Mr. Detweiler has been a director of the Company since
March 19, 2002. Mr. Detweiler has been, since 1996, Managing Director and part
owner of Carlisle Enterprises, LLC, a private equity investment firm. Prior to
that, Mr. Detweiler was Chairman and CEO of Precision Aerotech, Inc., a
publicly traded diversified manufacturing firm, and had general management
responsibilities for subsidiaries of Caterpillar Inc., Sundstrand Corporation,
and Navistar International Corporation. Mr. Detweiler started his career in
finance and served as Chief Financial Officer for Caterpillars Solar Turbines
subsidiary. He is currently a director of Treesource Industries, Inc. and RBX
Corporation.

Carl H. Goldsmith. Mr. Goldsmith has been a director of the Company since
March 19, 2002. Mr. Goldsmith is a Managing Director of M.W. Post Advisory
Group, LLC (M.W. Post), which he joined in 1994. M.W. Post owns
approximately 27% of the Companys common stock on a fully-diluted basis.
Prior to 1994, Mr. Goldsmith was an employee of PricewaterhouseCoopers LLP,
where he worked on a wide range of assignments in the Valuation and Corporate
Recovery departments. He is a director of Imperial Technology, Inc.

Matthew C. Kaufman. Mr. Kaufman has been a director and Chairman of the Board
of the Company since March 19, 2002. Mr. Kaufman is a Managing Director with
GSC Partners, which he joined in 1997. GSC Partners is an affiliate of GSCP
Recovery, Inc. and GSC Recovery II, L.P., which together own approximately 53%
of the Companys common stock on a fully-diluted basis. From 1996 to 1997, Mr.
Kaufman was Director of Corporate Finance with NextWave Telecom, Inc. Prior to
that, he was with The Blackstone Group, in the Merchant Banking and Mergers &
Acquisitions departments. He is a director of Day International Group, Inc.,
Waddington North America, Inc., Globecom Interactive, Inc., and Woods Equipment
Company.

Philip Raygorodetsky. Mr. Raygorodetsky has been a director of the Company
since June 1, 2002. Mr. Raygorodetsky is a Vice President with GSC Partners,
which he joined in 1997. GSC Partners is an affiliate of GSCP Recovery, Inc.
and GSC Recovery II, L.P., which together own approximately 53% of

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the Companys common stock on a fully-diluted basis. Mr. Raygorodetsky was
previously with Salomon Smith Barney Inc. in the Health Care Group. Prior to
joining Salomon Smith Barney Inc., Mr. Raygorodetsky worked at Andersen
Consulting. He is a director of Worldtex, Inc.

Donald A. Wright. Mr. Wright has been the Chief Executive Officer and
President of the Company since February 1995 and of its predecessors since
1990. Mr. Wright was the Chairman of the Board from 1995 to March 2002. Mr.
Wright is also an officer and director of each of the Companys operating
subsidiaries.

Tenure

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. Pursuant to the terms of the Companys restructuring, at each
meeting of shareholders at which the term of office of any director nominated
by a Noteholder expires, each such director will be nominated for election to
another term as a director of the Company; provided, however, that if the
Noteholder that nominated that director so specifies, or if such director
declines or is unable to accept the nomination, another individual designated
by that Noteholder will be nominated for election as a director of the Company.

EXECUTIVE OFFICERS

The following table sets forth information as of August 29, 2002, regarding the
executive officers of the Company.

|                      |  |     |    |                       |  |                                                                                    
|--------------------- |  | --- | -- | --------------------- |  | -----------------------------------------------------------------------------------
|Name                  |  | Age |    | Position with Company
|                      |  |     |    |                      
|Donald A. Wright      |  |     | 50 |                       |  | Chief Executive Officer and President                                              
|Charles A. Miracle(1) |  |     | 33 |                       |  | Vice
PresidentFinance, Treasurer, Assistant
Secretary, and Chief Financial Officer

(1)  Charles A. Miracle has been the Vice President Finance and Chief Financial
Officer of the Company since January 2002. He has been Treasurer since August
2001 and was appointed Interim Chief Financial Officer of the Company in August
2001. Mr. Miracle was appointed as the Companys Assistant Secretary in March
2002. Prior to his appointment as Treasurer and Interim Chief Financial
Officer he was employed as Corporate Controller for the Company since April
1998. Mr. Miracle was previously employed with Cordell, Neher & Company,
P.L.L.C, CPAs from 1992 until 1998. Mr. Miracle is a certified public
accountant.

Other Significant Employees

Lewis L. Wear, 61, has been President of Pacific Coast Technologies, Inc. since
February 1996. He also has been Vice President of Ceramic Devices, Inc. since
October 1997, President of Northwest Technical Industries, Inc. since April 8,
1997, President of Balo Precision Parts, Inc. since February 1998, and
President of Electronic Specialty Corporation since October 1998. Prior to
joining the Company, Mr. Wear was Vice President of Operations for Vacuum
Atmospheres, a division of WEMS, Inc.

John B. Merritt, 50, has been Chief Executive Officer of Aeromet International
PLC (Aeromet) since February 2002. Prior to his appointment as Chief
Executive Officer, he served as Operations Director and Business Development
Director of Aeromet since September 1999. Prior to joining Aeromet, Mr.
Merritt served as Sales & Marketing Director for Hamble Group.

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Tenure

The Board of Directors appoints the Companys executive officers at the first
meeting after each annual meeting of shareholders. Executive officers hold
office at the pleasure of the Board of Directors.

Section 16(a) Beneficial Ownership Reporting Compliance

Based solely on a review of Forms 3, 4, and 5 and any amendments thereto
furnished to the Company pursuant to Rule 16a-3(e) during its most recent
fiscal year, and on written representations of the Companys officers,
directors, and principal shareholders (Reporting Persons) that no other
reports were required, the Company believes that, during the fiscal year ended
May 31, 2002, the Reporting Persons complied in all material respects with all
applicable filing requirements under Section 16(a) of the Exchange Act.




ITEM 11. EXECUTIVE COMPENSATION

Summary Compensation Table

The following table sets forth in summary form the compensation paid by the
Company to the Chief Executive Officer and to the Companys three most highly
compensated executive officers (the Named Executives) for services in all
capacities to the Company for the last three fiscal years:

|                              |  |        |      |           |  |                    |         |                 |  |              |         |     |  |  |        |     
|----------------------------- |  | ------ | ---- | --------- |  | ------------------ | ------- | --------------- |  | ------------ | ------- | --- |  |  | ------ | ----
|                              |  |        |      |           |  | Annual             |         | Long-Term       |  |              |         |    
|                              |  |        |      |           |  | Compensation       |         | Compensation    |  |              |         |    
|                              |  |        |      |           |  |                    |         |                 |  |              |         |    
|                              |  |        |      |           |  |                    |         |                 |  | Securities   |         |     |  | 
|Name and Principal            |  | Fiscal |      |           |  |                    |         | Underlying      |  | Other Annual
|Position                      |  | Year   |      | Salary($) |  | Options/SARs(#)(1) |         | Compensation($)
|                              |  |        |      |           |  |                    |         |                
|Donald A. Wright              |  |        | 2002 |           |  |                    | 325,015 |                 |  |              |        |     |  |  | 43,178 | (8) 
|CEO and President             |  |        | 2001 |           |  |                    | 335,809 |                 |  |              | 75,000  |     |  |  | 7,316  | (3) 
|                              |  |        | 2000 |           |  |                    | 292,008 |                 |  |              | 450,000 | (2) |  |  | 5,800  | (3) 
|Werner Hafelfinger(5)         |  |        | 2002 |           |  |                    | 219,231 |                 |  |              |        |     |  |  | 8,000  | (9) 
|Former COO, V.P               |  |        | 2001 |           |  |                    | 200,000 |                 |  |              | 37,500  |     |  |  | 2,438  | (4) 
|Operations                    |  |        | 2000 |           |  |                    | 175,000 |                 |  |              | 100,000 | (2) |  |  | 2,500  | (4) 
|Nick A. Gerde(6)              |  |        | 2002 |           |  |                    | 155,714 |                 |  |              |        |     |  |  | 8,000  | (10)
|Former CFO, V.P.Finance,      |  |        | 2001 |           |  |                    | 150,000 |                 |  |              | 37,500  |     |  |  | 2,438  | (4) 
|Treasurer and Assistant       |  |        | 2000 |           |  |                    | 140,000 |                 |  |              | 100,000 | (2) |  |  | 2,500  | (4) 
|Secretary                     |  |        |      |           |  |                    |         |                 |  |              |         |     |  |  |        |     
|Sheryl A. Symonds(7)          |  |        | 2002 |           |  |                    | 231,519 |                 |  |              |        |     |  |  | 8,000  | (11)
|Former V.P                    |  |        | 2001 |           |  |                    | 190,473 |                 |  |              | 37,500  |     |  |  |       |     
|Administration,               |  |        | 2000 |           |  |                    | 176,364 |                 |  |              | 100,000 | (2) |  |  |       |     
|General Counsel and
Secretary |  |        |      |           |  |                    |         |                 |  |              |         |     |  |  |        |     



---

|(1) |  | Represents options to purchase shares of common stock.                                                                                                               
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | One-half of these options were granted in June 1999 with respect to
fiscal 1999, and one-half were granted in May 2000 with respect to fiscal
2000.                  
|   
|   
|   
|   
|(3) |  | Represents estimated value of the personal use of a Company vehicle and
premiums on $2 million of key-man life insurance denoting Mr. Wrights
spouse as beneficiary.
|   
|   
|   
|   
|(4) |  | Represents estimated value of the personal use of a Company vehicle.                                                                                                 

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|(5)  |  | Mr. Hafelfingers employment with the Company terminated on May 17, 2002.                                                                                                                                                                                        
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|(6)  |  | Mr. Gerdes employment with the Company terminated on August 15, 2001.                                                                                                                                                                                           
|    
|    
|    
|    
|(7)  |  | Mrs. Symonds employment with the Company terminated on February 28, 2002.                                                                                                                                                                                        
|    
|    
|    
|    
|(8)  |  | Represents (i) premiums on $2 million of key-man life insurance denoting
Mr. Wrights spouse as beneficiary and (ii) the issuance of 238,095 shares
of common stock in lieu of a portion of Mr. Wrights annual salary valued
at $40,000 at the time of issuance.
|    
|    
|    
|    
|(9)  |  | Represents the issuance of 47,619 shares of common stock in lieu of a
portion of Mr. Hafelfingers annual salary valued at $8,000 at the time of
issuance.                                                                                                       
|    
|    
|    
|    
|(10) |  | Represents the issuance of 47,619 shares of common stock in lieu of a
portion of Mr. Gerdes annual salary valued at $8,000 at the time of
issuance.                                                                                                             
|    
|    
|    
|    
|(11) |  | Represents the issuance of 47,619 shares of common stock in lieu of a
portion of Ms. Symonds annual salary valued at $8,000 at the time of
issuance.                                                                                                            

Director Compensation

The Company has agreed to pay the reasonable expenses incurred by each of the
members of the Board of Directors for participating in Board or committee
meetings. In addition, the Company intends to pay Mr. Detweiler $25,000 for
his services as a director during fiscal 2003. The Company also expects to
grant Mr. Detweiler options to purchase shares of the Companys common stock as
compensation for serving on the Board of Directors after the Companys proposed
2002 Stock Option Plan has been adopted. No other director receives
compensation for serving as a member of the Companys Board of Directors.

Aggregated Options and Fiscal Year-End Option Values

The following table summarizes the aggregate employee stock options and
non-public warrants, and their market values at May 31, 2002, held by the Named
Executives:

|                      |  |                        |           |                      |  |             |   |               |  |  |   |  |  |  |   | 
|--------------------- |  | ---------------------- | --------- | -------------------- |  | ----------- | - | ------------- |  |  | - |  |  |  | - | 
|                      |  | Number of Securities   |           | Value of Unexercised
|                      |  | Underlying Unexercised |           | In-the-Money Options
|                      |  | Options at FY-end(#)   |           | at FY-end($)(1)     
|                      |  |                        |           |                     
|Name                  |  | Exercisable            |           | Unexercisable        |  | Exercisable |   | Unexercisable
|                      |  |                        |           |                      |  |             |   |              
|Donald A. Wright      |  |                        | 2,307,560 |                      |  |             |  |               |  |  |  |  |  |  |  | 
|Werner Hafelfinger(2) |  |                        | 197,500   |                      |  |             |  |               |  |  |  |  |  |  |  | 
|Nick A. Gerde         |  |                        | 308,556   |                      |  |             |  |               |  |  |  |  |  |  |  | 
|Sheryl A. Symonds     |  |                        | 297,500   |                      |  |             |  |               |  |  |  |  |  |  |  | 



---

|(1) |  | No options or warrants held by the Named Executives had exercise prices
of less than $0.07 per share, the closing price of the common stock on May
31, 2002.                                                          
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Includes options to purchase 10,000 shares granted to Mr. Hafelfinger in
October 1998 under the Amended and Restated Independent Director Stock
Plan, when Mr. Hafelfinger was a non-employee director of the Company.

Employment Agreements

Donald A. Wrights employment agreement provides for an annual base salary of
$265,000, with annual increases of 5% of his base annual salary. If Mr. Wright
is terminated without cause, or if he resigns with good reason, as those terms
are defined in his employment agreement, the Company will be required to make
severance payments to him. In addition, the Company and Mr. Wright have agreed
that Mr. Wright will be granted new stock options under the 2002 Stock Option
Plan once it has been adopted.

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On May 17, 2002, Werner Hafelfinger, who had served as Vice
President-Operations and Chief Operating Officer, left his employment with the
Company. In accordance with the severance and termination letter executed by
Mr. Hafelfinger and the Company, Mr. Hafelfinger is receiving severance pay of
$210,000, equivalent to one year of his salary, payable on regular payroll days
over a 12-month period. Mr. Hafelfinger is also receiving medical benefits for
one year.

On February 28, 2002, Sheryl A. Symonds, who had served as Vice
President-Administration and General Counsel of the Company, left her
employment with the Company. In accordance with a separation letter executed by
Ms. Symonds and the Company, Ms. Symonds is receiving severance pay of
$205,710, equivalent to one year of her salary, payable on regular payroll days
over a 12-month period. Ms. Symonds is also receiving medical benefits for one
year.

On August 15, 2001, Nick Gerde, who had served as Vice President  Finance of
the Company, as well as Treasurer and Assistant Secretary, left his employment
with the Company. In accordance with a separation letter executed by Mr. Gerde
and the Company, Mr. Gerde received severance pay of $150,000, equivalent to
one year of his salary, payable on regular payroll days over a 12-month period.
Mr. Gerde also received medical benefits through August 2002.

Compensation Committee Interlocks and Insider Participation

The Compensation Committee (the Committee) is composed of Messrs. Kaufman and
Raygorodetsky, neither of whom are or have been employees of the Company.
Messrs. Kaufman and Raygorodetsky are employees of GSC Partners, which owns,
through certain of its affiliates, approximately 53% of the Companys common
stock on a fully-diluted basis.

Board Compensation Committee Report on Executive Compensation

The Committee.No member of the Committee has a relationship that would
constitute an interlocking relationship with executive officers or directors of
another entity. From time to time officers of the Company attend meetings of
the Committee. However, no officer participates in discussions or deliberations
regarding his or her own compensation.

Responsibilities of the Committee.The Committees purpose is to provide a
compensation environment that will support and assist in fulfilling the
corporate mission and purpose. The Committee is responsible for developing and
making recommendations to the Board with respect to the Companys compensation
policies, reviewing the performance of the Companys Chief Executive Officer,
and determining the level of compensation to be paid to executive officers and
certain other key employees of the Company. The Committee also administers the
Companys Amended and Restated Independent Director Stock Plan, the Restated
Stock Incentive Plan and the 1999 Stock Incentive Plan (the Stock Incentive
Plans). In connection with the Exchange, the Company agreed to issue no new
awards under any of the Stock Incentive Plans. However, the Company currently
intends to adopt a new stock option plan (the 2002 Stock Option Plan) at the
next meeting of the Board. The Committee will determine stock option grants to
executive officers and key employees under the Companys proposed 2002 Stock
Option Plan.

Executive Compensation.The Companys executive compensation program is
designed to support the achievement of Company goals and to ensure that the
interests of executive officers and key employees are aligned with the success
of the Company. Consequently, a significant portion of the compensation of
executive officers and key employees has been through the grant of options
under the Stock Incentive Plans. The Committee believes that tying a
significant portion of executive compensation to the growth of the Companys
stock price helps align the interests of management with those of the Companys
shareholders.

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Compensation of the Chief Executive Officer.Based on a number of criteria,
including relevant data from a third party compensation survey, the Committee
believes that Mr. Wrights contractual salary is at approximately the median in
terms of base salary for chief executive officers of similarly situated
Northwest manufacturing companies.

Annual Salaries.The annual salary for Mr. Wright is set pursuant to the terms
of a new employment agreement with Mr. Wright entered into in connection with
the Exchange. Annual salary under the new employment agreement is subject to
increase on an annual basis in accordance with the terms of that agreement. The
new employment agreement was approved by the full Board (including all members
of the Committee) when it was first signed. From time to time, the Committee
may elect to review the contract.

Adjustment to Annual Salaries for Fiscal 2002.During May 2001, after reviewing
the Companys financial performance and cash position, the Committee determined
that the Named Executives should be requested to accept restricted common stock
of the Company in lieu of some or all of their contractual salary increases for
fiscal 2002. The amount of common stock granted in lieu of salary increases was
calculated by dividing the cash compensation not received by the market value
of a share of the Companys common stock. The market value of the Companys
common stock was deemed to be the average of the closing price of the Companys
common stock on Nasdaq for the five trading days prior to issuance. Mr. Wright
agreed to forego $50,000 in salary and received 238,095 shares of restricted
common stock. Mr. Hafelfinger, Mr. Gerde, and Ms. Symonds each agreed to forego
$8,000 in salary and each received 47,619 shares of restricted common stock.

Incentive Compensation Program.The Company has a management incentive
compensation program that provides for the payment of cash bonuses to the
executive officers and certain other senior managers upon attainment of certain
goals. The purpose of the plan is to provide a direct financial incentive to
achieve predetermined levels of Company performance. Under this program, the
participants can earn a cash bonus of 10% of their annual salary upon achieving
budgeted revenue and operating income levels for the year and an additional 5%
upon exceeding budgeted revenue and operating income by 10%. The Committee did
not consider any of the Named Executives for cash bonuses for fiscal 2002
because of the Companys financial performance in fiscal 2002.

Long-Term Incentive Compensation.The Stock Incentive Plans are long-term
incentive plans for executives, managers, and other employees of the Company.
The objective of each of the plans is to align employee and shareholder
long-term interests by creating a strong and direct link between compensation
and shareholder value. The Stock Incentive Plans authorize the Board of
Directors, or a committee of the Board, to award stock options to officers and
other employees of the Company, as well as to directors and consultants,
although the Company has agreed to issue no new awards under the Stock
Incentive Plans after the date of the Exchange. The Committee will administer
the Stock Incentive Plans and the 2002 Stock Option Plan (after its approval),
and the grant of options to executive officers and key employees under the new
2002 Stock Option Plan. Stock options generally are granted at an exercise
price not less than 100% of the fair market value of the Companys common stock
on the date of grant. The amount of stock option grants to an individual
depends on the persons level of responsibility in the Company and the persons
job performance. Stock options granted under the Stock Incentive Plans may
contain vesting provisions. No stock options were granted during fiscal year
2002, although the Company has a commitment to issue to Donald A. Wright, the
Companys Chief Executive Officer, new stock options which will be exercisable
for five percent (5%) of the Companys common stock on a fully-diluted basis.
The exercise price and other terms of Mr. Wrights new options will be
determined by the Committee at the time of the grant and will be designed to
incentivize Mr. Wrights performance as President and Chief Executive Officer.
The new options are to vest over three years (1/3 on each anniversary from the
date of the Exchange) and will be outstanding for ten years.

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Deductibility.Section 162(m) of the Internal Revenue Code of 1986, as amended,
limits to $1 million per person the amount that the Company may deduct for
compensation paid to any of its most highly compensated officers unless the
compensation is performance based. The levels of compensation paid by the
Company have not exceeded this limit. Although it may be possible in any given
year for option exercises to cause an officers total compensation for that
year to exceed $1 million, the Committee believes that any options granted
under the Stock Incentive Plan would meet the requirement of being
performance-based and would therefore not be subject to the $1 million limit on
deductibility.

PERFORMANCE GRAPH

The following graph shows a comparison of the cumulative total return on the
Companys common stock, the Standard & Poors (S&P) 500 Index and the S&P 500
GICS Aerospace & Defense Sub-industry Index, a published industry index, for
the period beginning May 31, 1997 and ending May 31, 2002. The graph assumes
that $100 was invested on May 31, 1997, in the Companys common stock, the S&P
500 Index and the industry index, and that all dividends were reinvested. The
stock price information shown on the graph below is not necessarily indicative
of future price performance. The Company had previously compared its
performance to the S&P Aerospace & Defense Index. The change from the S&P
Aerospace & Defense Index to the S&P Aerospace & Defense Sub-industry Index was
a result of S&P restructuring their indices into the Global Industry
Classification Standard.

(PERFORMANCE GRAPH)

|                                                    |  |         |        |         |  |         |        |         |  |         |        |         |  |  |        |  |  |  |        |  |  |  |        | 
|--------------------------------------------------- |  | ------- | ------ | ------- |  | ------- | ------ | ------- |  | ------- | ------ | ------- |  |  | ------ |  |  |  | ------ |  |  |  | ------ | 
|Company /Index Name                                 |  | 5/31/97 |        | 5/31/98 |  | 5/31/99 |        | 5/31/00 |  | 5/31/01 |        | 5/31/02
|Pacific Aerospace &
Electronics, Inc.               |  |         | 100.00 |         |  |         | 200.33 |         |  |         | 55.23  |         |  |  | 40.85  |  |  |  | 6.86   |  |  |  | 1.96   | 
|S&P 500                                             |  |         | 100.00 |         |  |         | 128.59 |         |  |         | 153.47 |         |  |  | 167.47 |  |  |  | 148.04 |  |  |  | 125.80 | 
|S&P 500 GICS Aerospace &
Defense Sub-industry Index |  |         | 100.00 |         |  |         | 106.42 |         |  |         | 112.22 |         |  |  | 92.24  |  |  |  | 117.53 |  |  |  | 111.53 | 

98



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1999 Stock Incentive Plan

The Companys shareholders adopted the Companys 1999 Stock Incentive Plan (the
1999 Plan) in October 1999. The Company had reserved for issuance under the
1999 Plan a maximum of 4,000,000 shares of common stock, subject to certain
adjustments. The 1999 Plan provided that the plan administrator could award
incentive stock options (ISOs) to key employees, and non-qualified stock
options (NSOs), stock appreciation rights (SARs), stock and cash bonus
awards, restricted stock, and performance units to employees and certain
non-employees (other than non-employee directors) who had important
relationships with the Company or its subsidiaries. The 1999 Plan specified
that no person could receive options to purchase more than 1,000,000 shares in
any one year. As of May 31, 2002, options to purchase an aggregate of 719,500
shares of common stock were outstanding under the 1999 Plan, 380,952 shares of
restricted stock had been issued under the 1999 Plan. The Company has agreed,
in connection with the Exchange, to issue no new awards under the 1999 Plan
after March 19, 2002. Thus, no shares remain reserved for issuance of future
grants under the 1999 Plan.

The 1999 Plan is administered by the Committee of the Board of Directors. At
the times all awards were granted under the 1999 Plan, the plan was
administered by the Companys former Option Committee that was comprised of
disinterested directors in accordance with Rule 16b-3 under the Exchange Act,
and of outside directors under Section 162(m) of the Internal Revenue Code.
Notwithstanding the foregoing, only the Board of Directors may amend or
terminate the 1999 Plan. Unless terminated sooner by the Board of Directors,
the 1999 Plan expires in July 2009. The 1999 Plan provides that, in general, a
vested option would have to be exercised within three months after the
optionees employment or service with the Company or a subsidiary terminates.
However, options would be exercisable within 24 months following termination of
employment because of retirement, disability, or death, and options would
terminate automatically if an optionee were terminated for cause. Options,
SARs, cash and stock bonus awards and performance units are nonassignable and
nontransferable except by will or by the laws of descent and distribution at
the time of the recipients death. On the date an ISO is granted, the aggregate
fair market value of the common stock issuable under ISOs available for
exercise during any calendar year, may not exceed $100,000. ISOs must expire
ten years from the date of grant, and the exercise price must equal the fair
market value of the underlying shares of common stock at the date of grant.
ISOs may not be granted to employees holding more than 10% of the Companys
total voting power unless (a) the exercise price is at least 110% of the common
stocks fair market value on the date of grant, and (b) the option is not
exercisable until five years after the date of grant.

Amended and Restated Stock Incentive Plan

The Companys shareholders adopted the Companys Amended and Restated Stock
Incentive Plan (the 1996 Plan) in October 1996. The Company had reserved for
issuance under the 1996 Plan a maximum of 3,000,000 shares of common stock,
subject to certain adjustments. As of May 31, 2002, options to purchase an
aggregate of 3,144,448 shares of common stock had been granted under the 1996
Plan, of which options for 25,000 shares had been exercised, and options for
273,000 shares had been forfeited. The Company has agreed, in connection with
the Exchange, to issue no new awards under the 1996 Plan after March 19, 2002.
Thus, no shares remain reserved for issuance of future grants under the 1996
Plan. The terms and administration of the 1996 Plan are substantially similar
to those of the 1999 Plan. The primary differences between the 1999 Plan and
the 1996 Plan relate to the termination provisions for options. Under the 1996
Plan, options would expire 12 months after the termination of employment by
reason of death or disability or within three months after termination for any
other reason except for cause.

99



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Independent Director Stock Plan

The Companys shareholders adopted the Companys original Independent Director
Stock Plan in November 1995. Following approval by the shareholders at the
Companys 1998 Annual Meeting, the plan was amended and restated. The Company
has reserved for issuance under the Amended and Restated Independent Director
Stock Plan (the Director Plan) a maximum of 500,000 shares of common stock,
subject to adjustments, issuable to directors who are not employees of the
Company or any of its subsidiaries.

The Director Plan is administered by the Compensation Committee of the Board of
Directors in accordance with Rule 16b-3 adopted under the Exchange Act. No
director may vote on any matter relating to an award held by such director.
Only the Board of Directors may suspend, amend or terminate the Director Plan.
Unless terminated sooner by the Board of Directors, the Director Plan expires
on October 2005.

Under the Director Plan, as amended in 1998, each Independent Director was
entitled to receive fully-vested, non-qualified options to purchase up to 2,500
shares of common stock upon election to the Board (the Initial Award). Each
time an Independent Director was elected to the Board (or on the date of each
annual shareholders meeting during terms longer than one year), each
Independent Director received an option to purchase up to 10,000 shares of
common stock (the Annual Award). However, the Company has agreed, in
connection with the Exchange, to issue no awards under the Director Plan after
March 19, 2002. Annual Awards vest in full on the first anniversary of grant
(the Vesting Period) if the Independent Director has attended at least 75% of
the regularly scheduled Board meetings during the Vesting Period. Otherwise the
Annual Award is forfeited, unless the Board of Directors votes unanimously to
waive or modify the vesting requirement.

An unvested Annual Award will also be forfeited if the director ceases to be an
Independent Director during the Vesting Period for any reason other than death
or disability unless the Board votes unanimously to waive that requirement.
However, unvested Annual Awards automatically vest (a) if the director is
unable to continue due to disability or death, (b) upon the closing of any
merger, consolidation or plan of exchange in which the Company does not
survive, or (c) upon sale of all or substantially all of the Companys assets.
The exercise price of options granted under the Director Plan is based on the
fair market value of the Companys common stock for the five trading days prior
to the date of determination. No Independent Director may transfer any interest
in unvested Annual Awards to any person other than to the Company.

At May 31, 2002, 32,559 shares of common stock had been issued under the
Director Plan, and options to purchase an additional 139,137 shares of common
stock had been granted, 10,000 of which were forfeited. No shares remain
reserved for issuance of future grants under the Director Plan.

Employee Stock Purchase Plan

The Companys shareholders adopted the Companys 1997 Employee Stock Purchase
Plan in October 1997 (the Employee Stock Plan). The Company has reserved for
issuance under the Employee Stock Plan a maximum of 1,000,000 shares of common
stock, subject to certain adjustments, for issuance to eligible employees of
the Company and its subsidiaries. The Company pays all expenses relating to the
Employee Stock Plan except expenses related to the resale of shares acquired by
employees under the plan. The Employee Stock Plan is administered by the
Compensation Committee of the Board of Directors. The plan administrator
designated Salomon Smith Barney Inc. as the plans custodian to vote the shares
pursuant to the participants instructions, keep the plan records, and provide
periodic statements to participants.

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The Companys Board of Directors terminated the Employee Stock Plan on August
24, 2001. Between June 1, 2001 and August 24, 2001, approximately 83 employees
participated in the Employee Stock Plan each month, purchasing stock at prices
ranging between $0.1445 per share and $0.1800 per share. During fiscal 2002, a
total of 100,679 shares of common stock were issued under the Employee Stock
Plan, and a total of 692,409 shares had been issued since inception of the
plan.




ITEM 12: SECURITIES OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL
SHAREHOLDERS

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 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, the common stock and Series C Preferred Stock
owned as of August 15, 2002, by (1) each person known by the Company to own
beneficially more than 5% of the outstanding common stock; (2) each of the
Companys current directors; (3) the Named Executives currently employed by the
Company; and (4) all executive officers and the current directors of the
Company as a group. Except as otherwise noted, the Company believes the
persons listed below have sole investment and voting power with respect to the
equity securities owned by them.

|                                                                                                                                     |  |                       |                  |                                  |  |                       |        |            |  |                                                                                                  |  |  |        |  |  |  |        | 
|------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------- | ---------------- | -------------------------------- |  | --------------------- | ------ | ---------- |  | ------------------------------------------------------------------------------------------------ |  |  | ------ |  |  |  | ------ | 
|                                                                                                                                     |  | Common Stock          |                  | Series C Preferred
        Stock |  |                       |        |           
|                                                                                                                                     |  |                       |                  |                                  |  |                       |        |           
|                                                                                                                                     |  | Number of shares      |                  | Percent of                       |  | Number of shares      |        | Percent of |  | Percent of                                                                                      
|                                                                                                                                     |  | beneficially owned() |                  | Class()                        |  | beneficially owned() |        | Class      |  | Voting Stock()                                                                               
|                                                                                                                                     |  |                       |                  |                                  |  |                       |        |            |  |                                                                                                 
|Matthew C. Kaufman(1)
        GSCP Recovery, Inc.
        500 Campus Drive,
        Suite 220
        Florham Park, NJ 07932         |  |                       | 2,644,656,383(2) |                                  |  |                       | 97.67% |            |  | 541 shares
          (convertible into
          2,617,001,472 shares
          of common stock) |  |  | 53.78% |  |  |  | 53.36%
|                                                                                                                                     |  |                       |                  |                                  |  |                       |        |            |  |                                                                                                  |  |  |        |  |  |  |        | 
|Philip Raygorodetsky(1)
        GSCP Recovery, Inc.
        500 Campus Drive, Suite 220
        Florham Park, NJ 07932               |  |                       | 2,644,656,383(2) |                                  |  |                       | 97.67% |            |  | 541 shares
          (convertible into
          2,617,001,472 shares
          of common stock) |  |  | 53.78% |  |  |  | 53.36%
|                                                                                                                                     |  |                       |                  |                                  |  |                       |        |            |  |                                                                                                  |  |  |        |  |  |  |        | 
|Richard W. Detweiler
        Carlisle Enterprises, L.L.C.
        7777 Fay Avenue, Suite 200
        La Jolla, CA 92037              |  |                       | 0                |                                  |  |                       | *      |            |  | 0                                                                                                |  |  | *      |  |  |  | *     
|                                                                                                                                     |  |                       |                  |                                  |  |                       |        |            |  |                                                                                                  |  |  |        |  |  |  |        | 
|GSC Recovery II, L.P.(3)
        500 Campus Drive, Suite 220
        Florham Park, NJ 07932                                          |  |                       | 2,644,656,383(2) |                                  |  |                       | 97.67% |            |  | 541 shares
          (convertible into
          2,617,001,472 shares
          of common stock) |  |  | 53.78% |  |  |  | 53.36%
|                                                                                                                                     |  |                       |                  |                                  |  |                       |        |            |  |                                                                                                  |  |  |        |  |  |  |        | 
|GSCP Recovery, Inc.(3)
        500 Campus Drive, Suite 220
        Florham Park, NJ 07932                                            |  |                       | 2,644,656,383(2) |                                  |  |                       | 97.67% |            |  | 541 shares
          (convertible into
          2,617,001,472 shares
          of common stock) |  |  | 53.78% |  |  |  | 53.36%
|                                                                                                                                     |  |                       |                  |                                  |  |                       |        |            |  |                                                                                                  |  |  |        |  |  |  |        | 
|Carl H. Goldsmith(4)
        M.W. Post Advisory Group L.L.C.
        1880 Century Park East, Suite 820
        Los Angeles, CA 90067 |  |                       | 1,323,486,097(5) |                                  |  |                       | 94.51% |            |  | 270 shares
          (convertible into
          1,309,646,538 shares
          of common stock) |  |  | 26.92% |  |  |  | 26.70%
|                                                                                                                                     |  |                       |                  |                                  |  |                       |        |            |  |                                                                                                  |  |  |        |  |  |  |        | 
|M.W. Post Advisory Group L.L.C.(6)
        1880 Century Park East, Suite 820
        Los Angeles, CA 90067                           |  |                       | 1,323,486,097(5) |                                  |  |                       | 94.51% |            |  | 270 shares
          (convertible into
          1,309,646,538 shares
          of common stock) |  |  | 26.92% |  |  |  | 26.70%

101



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|                                                                                                                                                                                            |  |                       |                 |                                  |  |                       |        |            |  |                                                                                                  |  |  |        |  |  |  |        | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------- | --------------- | -------------------------------- |  | --------------------- | ------ | ---------- |  | ------------------------------------------------------------------------------------------------ |  |  | ------ |  |  |  | ------ | 
|                                                                                                                                                                                            |  | Common Stock          |                 | Series C Preferred
        Stock |  |                       |        |           
|                                                                                                                                                                                            |  |                       |                 |                                  |  |                       |        |           
|                                                                                                                                                                                            |  | Number of shares      |                 | Percent of                       |  | Number of shares      |        | Percent of |  | Percent of                                                                                      
|                                                                                                                                                                                            |  | beneficially owned() |                 | Class()                        |  | beneficially owned() |        | Class      |  | Voting Stock()                                                                               
|                                                                                                                                                                                            |  |                       |                 |                                  |  |                       |        |            |  |                                                                                                 
|Alliance Capital Management, L.P.(7)
        1345 Avenue of the Americas,
        39th Floor
        New York, NY 10105                                                                     |  |                       | 621,343,397(8)  |                                  |  |                       | 88.67% |            |  | 125 shares
          (convertible into
          614,853,455 shares
          of common stock)   |  |  | 13.34% |  |  |  | 13.24%
|                                                                                                                                                                                            |  |                       |                 |                                  |  |                       |        |            |  |                                                                                                  |  |  |        |  |  |  |        | 
|William E. Simon & Sons Special
        Situation Partners II, L.P.(9)
        10990 Wilshire Blvd., Suite 500
        Los Angeles, CA 90024                                                |  |                       | 192,984,266(10) |                                  |  |                       | 68.51% |            |  | 39 shares
          (convertible into
          190,966,249 shares
          of common stock)    |  |  | 3.92%  |  |  |  | 3.89% 
|                                                                                                                                                                                            |  |                       |                 |                                  |  |                       |        |            |  |                                                                                                  |  |  |        |  |  |  |        | 
|HBK Investments, L.P.(11)
        300 Crescent Court, Suite 700
        Dallas, TX 75201                                                                                                    |  |                       | 56,087,635(12)  |                                  |  |                       | 38.26% |            |  | 4 shares
          (convertible into
          22,534,017 shares
          of common stock)      |  |  | *      |  |  |  | *     
|                                                                                                                                                                                            |  |                       |                 |                                  |  |                       |        |            |  |                                                                                                  |  |  |        |  |  |  |        | 
|DDJ Capital Management, LLC (13)
        141 Linden St., #S-4
        Wellesley, MA 02482                                                                                                   |  |                       | 15,293,149(14)  |                                  |  |                       | *      |            |  | 0                                                                                                |  |  | *      |  |  |  | *     
|                                                                                                                                                                                            |  |                       |                 |                                  |  |                       |        |            |  |                                                                                                  |  |  |        |  |  |  |        | 
|Strong River Investments, Inc.(15)
        c/o Gonzales-Ruiz & Aleman
        (BVI) Limited
        Wickhams Cay 1, Vanterpool Plaza
        P.O. Box 873
        Road Town, Tortolla  BVI |  |                       | 33,315,492(16)  |                                  |  |                       | *      |            |  | 0                                                                                                |  |  | *      |  |  |  | *     
|                                                                                                                                                                                            |  |                       |                 |                                  |  |                       |        |            |  |                                                                                                  |  |  |        |  |  |  |        | 
|Bay Harbor Investments Inc.(18)
        c/o Gonzales-Ruiz & Aleman
        (BVI) Limited
        Wickhams Cay 1, Vanterpool Plaza
        P.O. Box 873
        Road Town, Tortolla  BVI    |  |                       | 33,315,492(17)  |                                  |  |                       | *      |            |  | 0                                                                                                |  |  | *      |  |  |  | *     
|                                                                                                                                                                                            |  |                       |                 |                                  |  |                       |        |            |  |                                                                                                  |  |  |        |  |  |  |        | 
|Donald A. Wright
        c/o Pacific Aerospace &
        Electronics, Inc.
        430 Olds Station Road, Third Floor
        Wenatchee, WA 98801                                           |  |                       | 2,985,705(19)   |                                  |  |                       | *      |            |  | 0                                                                                                |  |  | *      |  |  |  | *     
|                                                                                                                                                                                            |  |                       |                 |                                  |  |                       |        |            |  |                                                                                                  |  |  |        |  |  |  |        | 
|Charles Miracle
        c/o Pacific Aerospace &
        Electronics, Inc.
        430 Olds Station Road, Third Floor
        Wenatchee, WA 98801                                            |  |                       | 11,121(20)      |                                  |  |                       | *      |            |  | 0                                                                                                |  |  | *      |  |  |  | *     
|                                                                                                                                                                                            |  |                       |                 |                                  |  |                       |        |            |  |                                                                                                  |  |  |        |  |  |  |        | 
|All executive officers and current
        directors as a group (6 persons)                                                                                                                 |  |                       | 44,491,295(21)  |                                  |  |                       | 99.04% |            |  | 807 shares
          (convertible into
          3,926,648,010 shares
          of common stock) |  |  | 80.70% |  |  |  | 80.12%



---

|*     |  | Less than 1%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     
|()   |  | Shares that a person has the right to acquire by exercise or conversion
within 60 days of the date as shown above are treated as outstanding for
determining the amount and percentage of common stock owned by such
person, but are not deemed to be outstanding as to any other person or
group.                                                                                                                                                                                                                                                                                                                                                 
|     
|()  |  | This figure represents the beneficial ownership percentage of each party
assuming that no other party converts its convertible securities of the
Company, as required by the Commission. However, the percentages
presented under this heading overstate actual ownership significantly
because the terms of the Series C Preferred Stock require that all shares
thereof be converted at the same time. The actual beneficial ownership
percentage of each party owning Series C Preferred Stock (assuming
conversion of the entirety of Series C Preferred Stock at the same time)
is set forth in the column entitled Percent of Voting Stock.
|     
|() |  | Because the terms of the Series C Preferred Stock require that all of
such shares be converted at the same time, this column represents the
beneficial ownership percentage of each entity assuming (i) that the
Series C Preferred Stock converts in full at the same time, and (ii) that
no other exercisable or convertible securities are exercised or converted.                                                                                                                                                                                                                                                                              

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|(1)  |  | Mr. Kaufman is an officer and Mr. Raygorodetsky is an employee of GSCP
Recovery, Inc. and GSC Recovery II, L.P. and each may be deemed to share
voting and investment power with respect to the shares held by GSCP
Recovery, Inc. and GSC Recovery II, L.P. Messrs. Kaufman and
Raygorodetsky disclaim beneficial ownership with respect to the shares
held by GSCP Recovery, Inc. and GSC Recovery II, L.P.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(2)  |  | Includes (a) 27,654,911 shares of common stock of which 8,072,070 shares
are owned of record by GSC Recovery II, L.P. and 19,582,841 shares are
owned of record by GSCP Recovery, Inc.; and (b) 541 shares of Series C
Preferred Stock convertible into 2,617,001,472 shares of common stock, of
which 158 shares of Series C Preferred Stock are owned of record by GSC
Recovery II, L.P. and 583 shares of Series C Preferred Stock are owned of
record by GSCP Recovery, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    
|(3)  |  | Each of GSC Recovery II GP, L.P., GSC RII, L.L.C., GSCP (NJ) Holdings,
L.P., GSCP (NJ), Inc., Greenwich Street Capital Partners II, L.P., GSCP
Offshore Fund, L.P., Greenwich Street Employees Fund, L.P., Greenwich
Fund, L.P., TRV Executive Fund, L.P., Greenwich Street Investments II,
L.L.C. and GSCP (NJ), L.P., as affiliated entities, may be deemed to have
shared voting and investment power with respect to the shares held by GSCP
Recovery, Inc. and GSC Recovery II, L.P. Each of Keith W. Abell, Alfred
C. Eckert III, Robert A. Hamwee, Richard M. Hayden, Thomas V. Inglesby,
Matthew C. Kaufman, Sanjay H. Patel and Christine K. Vanden Beukel, as
managing members of GSCP (NJ), Inc., may be deemed to have shared voting
and investment power with respect to the shares held by GSCP Recovery,
Inc. and GSC Recovery II, L.P. Each of Keith W. Abell, Alfred C. Eckert
III, Robert A. Hamwee, Richard M. Hayden, Thomas V. Inglesby, Matthew C.
Kaufman, Sanjay H. Patel and Christine K. Vanden Beukel, disclaims
beneficial ownership with respect to the shares hold by GSCP Recovery,
Inc. and GSC Recovery II, L.P.
|    
|(4)  |  | Mr. Goldsmith is a managing director of M.W. Post Advisory Group, L.L.C.
(M.W. Post) and may be deemed to share voting and investment power with
respect to the shares held by M.W. Post. Mr. Goldsmith disclaims
beneficial ownership with respect to the shares of the Company held by
M.W. Post.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    
|(5)  |  | Includes (a) 13,839,559 shares of common stock and (b) 270 shares of
Series C Preferred Stock convertible into 1,309,646,538 shares of common
stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    
|(6)  |  | Carl H. Goldsmith may be deemed to have shared voting and investment
power with respect to the shares held by M.W. Post as a managing director
of M.W. Post.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    
|(7)  |  | Alliance Capital Management, L.P. may be deemed to have investment power
over the shares held on behalf of Nikko Alliance Compass Fund A, Alliance
Capital Management Global Investments  U.S. High Yield Fund, The Alliance
High Yield Fund, CGCM High Yield Investments and The Equitable Life
Assurance Society of the United States. Alliance Capital Management, L.P.
may be deemed to have voting power with respect to the shares held on
behalf of Alliance Capital Management Global Investments  U.S. High Yield
Fund, The Alliance High Yield Fund and CGCM High Yield Investments. Each
of Nikko Alliance Compass Fund A and The Equitable Life Assurance Society
of the United State may be deemed to have voting power with respect to the
shares held on their behalf by Alliance Capital Management, L.P.                                                                                                                                                                                                                                                                                                                      
|    
|(8)  |  | Includes (a) 6,489,942 shares of common stock and (b) 125 shares of
Series C Preferred Stock convertible into 614,853,455 shares of common
stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    
|(9)  |  | Each of William E. Simon & Sons Special Situations II, L.L.C. and WESKIDS
III, LLC, as affiliated entities, may be deemed to have shared voting and
investment power with respect to the shares held by William E. Simon &
Sons Special Situation Partners II, L.P.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    
|(10) |  | Includes (a) 2,018,017 shares of common stock and (b) 39 shares of Series
C Preferred Stock convertible into 190,966,249 shares of common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    
|(11) |  | Each of Harlan B. Korenvaes, Kenneth M. Hirsh, Laurence H. Lebowitz,
William E. Rose, Richard L. Booth, David C. Haley and Jamiel A. Akhtar may
be deemed to have voting and investment control over such securities as
the members of HBK Management LLC, the general partner of HBK Partners II
L.P., which is the general partner of HBK Investments L.P.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    
|(12) |  | Includes (a) 238,126 shares of common stock, (b) 4 shares of Series C
Preferred Stock convertible into 22,534,017 shares of common stock, and
(c) warrants issued to Bay Harbor Investments Inc. which are exercisable
for 33,315,492 shares of common stock (HBK Investments L.P. has voting and
investment control over the securities of Bay Harbor Investments Inc.
pursuant to a management agreement).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    
|(13) |  | Each of B III Capital Partners, L.P., DDJ Capital III, LLC, B II-A
Capital Partners, L.P. and GP III-A, LLC, as affiliates of DDJ Capital
Management, LLC, may be deemed to have shared voting and investment power
over the shares held by DDJ Capital Management, LLC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    
|(14) |  | This figure represents warrants that originally provided for the purchase
of 4,036,978 shares of common stock at an exercise price of $0.001 per
share are held by affiliates of DDJ Capital Management, LLC, as follows: B
III Capital Partners, L.P.  1,883,923 shares;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

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|     |  | DDJ Canadian High Yield Fund  538,263 shares; B III-A Capital Partners,
L.P.  807,396 shares; State Street Bank & Trust, Custodian  807,396
shares. The Exchange, however, triggered an anti-dilution adjustment
under each of the warrants listed above in this footnote, increasing the
number of shares of common stock receivable upon exercise of these
warrants to an aggregate of 15,293,149 shares. The exercise price of
each of the warrants remains at $0.001 per share, the par value of the
common stock.                                                       
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(15) |  | Cavallo Capital Corp., may be deemed to have shared voting and investment
power over the shares held by Strong River Investments, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    
|(16) |  | Represents shares issuable upon exercise of a warrant issued to Strong
River Investments, Inc. that originally provided for the purchase of
192,500 shares of common stock at an exercise price of $2.01 per share.
The Exchange, however, triggered an anti-dilution adjustment under the
warrant, increasing the number of shares of common stock receivable upon
exercise of the warrant to an aggregate amount of 33,315,492. The
exercise price of the warrant was adjusted downward to equal the per share
purchase price of the equity securities issued in the Exchange.
|    
|(17) |  | Represents shares issuable upon exercise of a warrant issued to Bay
Harbor Investments, Inc. that originally provided for the purchase of
192,500 shares of common stock at an exercise price of $2.01 per share.
The Exchange, however, triggered an anti-dilution adjustment under the
warrant, increasing the number of shares of common stock receivable upon
exercise of the warrant to an aggregate amount of 33,315,492. The
exercise price of the warrant was adjusted downward to equal the per share
purchase price of the equity securities issued in the Exchange.  
|    
|(18) |  | HBK Investments L.P. has voting and investment control over the
securities of Bay Harbor Investments Inc. pursuant to a management
agreement. Each of Harlan B. Korenvaes, Kenneth M. Hirsh, Laurence H.
Lebowitz, William E. Rose, Richard L. Booth, David C. Haley and Jamiel A.
Akhtar may be deemed to have voting and investment control over such
securities as the members of HBK Management LLC, the general partner of
HBK Partners II L.P., which is the general partner of HBK Investments L.P.                                                                      
|    
|(19) |  | Includes (a) 674,145 shares of common stock, (b) 4,000 shares issuable
upon exercise of public warrants, (c) 100,000 shares issuable upon
exercise of a private warrant and (d) 2,207,560 shares issuable upon
exercise of vested stock options.                                                                                                                                                                                                                                                                                                                                
|    
|(20) |  | Includes (a) 3,621 shares of common stock and (b) 7,500 shares issuable
upon exercise of vested stock options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    
|(21) |  | Includes (a) 42,172,235 shares of common stock, (b) 4,000 shares issuable
upon exercise of public warrants, (c) 100,000 shares issuable upon
exercise of a private warrant and (d) 2,215,060 shares issuable upon
exercise of vested stock options.                                                                                                                                                                                                                                                                                                                             




ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Condominium.In November 1998, we entered into a Condominium Purchase and Sale
Agreement (the Condominium Agreement) with Donald A. Wright, our Chief
Executive Officer, President, and, at the time, Chairman of the Board.
Pursuant to the Condominium Agreement, Mr. Wright agreed to purchase from the
Company a residential condominium unit within our headquarters building for a
total purchase price of $175,000. At the time the Condominium Agreement was
executed, the condominium had not been completed. Upon completion, the
condominium had a value higher than Mr. Wrights purchase price. As a result,
Mr. Wright requested that the purchase be rescinded. The Board of Directors
agreed to rescind the purchase, but amended Mr. Wrights employment agreement
to require Mr. Wright to reside in the condominium unit. Mr. Wright pays rent
on the condominium unit of $750.00 per month. In addition, the Board of
Directors approved an option to purchase, which grants to Mr. Wright the right
to purchase the condominium unit. The option became exercisable February 1,
2000. The purchase price to exercise the option to purchase is $250,000. The
option terminates ten business days after Mr. Wrights employment relationship
with the Company ceases for any reason other than death.

NCESD Lease. In August 2001, we entered into a lease agreement with North
Central Educational Services District (the NCESD), pursuant to which the
NCESD leased the second floor of our Wenatchee headquarters building from the
Company for $6,183 per month for a term of 24 months. In authorizing the
lease, the Board of Directors determined that the lease was made for fair
market value. Gene C. Sharratt, a director of the Company at the time the
lease was negotiated, was Superintendent of the NCESD.

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Potential Conflict of Interest. On March 25, 2002, certain affiliates of GSCP
Recovery, Inc. and GSC Recovery II, L.P. purchased all of the New Senior Notes
for approximately $22.0 million in gross proceeds. In addition, GSCP Recovery,
Inc. and GSC Recovery II, L.P. acquired an aggregate of approximately 53% of
the Companys common stock on a fully-diluted basis in exchange for the
Subordinated Notes as part of the Companys restructuring. As a result of
their stock ownership, GSCP Recovery, Inc. and GSC Recovery II, L.P. have the
ability to elect a majority of the Board of Directors of the Company. In
addition, GSC Recovery II, L.P. and certain of its affiliates, GSC Recovery
IIA, L.P., GSC Partners CDO Fund, Limited and GSC Partners CDO Fund II,
Limited, together own the Companys New Senior Notes. The New Senior Notes
contain restrictive covenants and default protections that effectively allow
GSC Recovery II, L.P. and their affiliates to influence or restrict the ability
of the Company to engage in various transactions, including mergers,
consolidations, and the sale of substantially all of the Companys assets.

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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)(1) Financial Statements

The following financial statements are included in this Annual Report on Form
10-K:

Independent Auditors Report dated August 23, 2002

Consolidated Balance Sheets as of May 31, 2001 and 2002

Consolidated
Statements of Operations and Comprehensive Income (Loss) for the
years ended May 31, 2000, 2001 and 2002

Consolidated Statements of Stockholders Equity (Deficit) for the years
ended May 31, 2000, 2001 and 2002

Consolidated Statements of Cash Flows for the years ended May 31, 2000, 2001 and 2002

Notes to Consolidated Financial Statements

(a)(2) Financial Schedules

All financial schedules are omitted because the required information is
inapplicable or the information is presented in the consolidated financial
statements or related notes.

(a)(3) Exhibits

|        |  |                                                                                                                                                                                               
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                               
|Number  |  | Description                                                                                                                                                                                   
|        |  |                                                                                                                                                                                               
|2.1     |  | Asset Purchase Agreement between Aeromet America, Inc.,
Pacific Aerospace & Electronics, Inc., U.S. Castings, LLC,
USCRE Properties, LLC, and Advanced Aluminum, LLC, dated June
14, 2001.(42)
|2.2     |  | Closing Agreement between Aeromet America, Inc., Pacific
Aerospace & Electronics, Inc., U.S. Castings, LLC, USCRE
Properties, LLC, and Advanced Aluminum, LLC, dated June 14,
2001.(42)       
|2.3     |  | Asset Purchase Agreement between MCE Technologies Incorporated
and Skagit Engineering & Manufacturing, Inc., dated May 4,
2001.(43)                                                           
|2.4     |  | Agreement for Purchase and Sale of Assets between Teledyne
Technologies Incorporated and Electronic Specialty
Corporation, dated February 21, 2001.(43)                                       
|3.1     |  | Articles of Incorporation of Pacific Aerospace & Electronics,
Inc.(6)                                                                                                                         
|3.2     |  | Amendment to Articles of Incorporation containing Designation
of Rights and Preferences of Series A Convertible Preferred
Stock, as corrected.(8)                                             
|3.3     |  | Amendment to Articles of Incorporation containing Designation
of Rights and Preferences of Series B Convertible Preferred
Stock.(20)                                                          
|3.4     |  | Bylaws of Pacific Aerospace & Electronics, Inc., as
amended.(35)                                                                                                                              
|3.5     |  | Articles of Amendment of Pacific Aerospace & Electronics, Inc.
filed March 19, 2002.(44)                                                                                                      
|3.6     |  | Designation of Rights and Preferences for Series C Voting
Convertible Preferred Stock of Pacific Aerospace and
Electronics, Inc.(44)                                                          
|4.1     |  | Form of specimen certificate for common stock.(6)                                                                                                                                             
|4.2     |  | Form of specimen certificate for public warrants.(6)                                                                                                                                          
|4.3     |  | Form of specimen certificate for the Series A Convertible
Preferred Stock.(8)                                                                                                                 
|4.4     |  | Form of specimen certificate for the Series B Convertible
Preferred Stock.(20)                                                                                                                
|4.5     |  | Form of common stock Purchase Warrant issued to holders of the
Series B Convertible Preferred Stock on May 15, 1998.(20)                                                                      
|4.6     |  | Warrant Agreement between Interwest Transfer Co., Inc. and PCT
Holdings, Inc. dated July 1,                                                                                                   

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|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        |  | 1996.(4)                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|4.7     |  | Amendment No. 1, dated as of May 26, 2000, to the Warrant
Agreement, dated as of July 1, 1996, between Pacific Aerospace
& Electronics, Inc., as successor to PCT Holdings, Inc., and
Interwest Transfer Co., Inc.(32)                                                                                                                                                                                                                                               
|4.8     |  | Common Stock Purchase Warrant No. 001 from Pacific Aerospace &
Electronics, Inc. to Donald A. Wright dated as of November 30,
1996.(10)                                                                                                                                                                                                                                                                                                                              
|4.9     |  | Common Stock Purchase Warrant No. 002 from Pacific Aerospace &
Electronics, Inc. to Nick A. Gerde dated as of November 30,
1996.(10)                                                                                                                                                                                                                                                                                                                                 
|4.10    |  | Common Stock Purchase Warrant No. 003 from Pacific Aerospace &
Electronics, Inc. to Edward A. Taylor dated as of November 30,
1996.(10)                                                                                                                                                                                                                                                                                                                              
|4.11    |  | Common Stock Purchase Warrant from Pacific Aerospace &
Electronics, Inc. to Gregory K. Smith dated June 3, 1997.(9)                                                                                                                                                                                                                                                                                                                                                  
|4.12    |  | Common Stock Purchase Warrant from Pacific Aerospace &
Electronics, Inc. to Nestor Wiegand dated June 3, 1997.(9)                                                                                                                                                                                                                                                                                                                                                    
|4.13    |  | Securities Purchase Agreement, dated May 15, 1998, between
Pacific Aerospace & Electronics, Inc. and the purchasers of
the Companys Series B Convertible Preferred Stock.(20)                                                                                                                                                                                                                                                                                       
|4.14    |  | Purchase Agreement dated as of July 23, 1998, between Pacific
Aerospace & Electronics, Inc., Balo Precision Parts, Inc.,
Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc.,
Electronic Specialty Corporation, Morel Industries, Inc.,
Northwest Technical Industries, Inc., Pacific Coast
Technologies, Inc., Seismic Safety Products, Inc., PA&E
International, Inc. and Friedman, Billings, Ramsey & Co., Inc.
and BancBoston Securities Inc.(18)            
|4.15    |  | Indenture dated as of July 30, 1998, between Pacific Aerospace
& Electronics, Inc., Balo Precision Parts, Inc., Cashmere
Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic
Specialty Corporation, Morel Industries, Inc., Northwest
Technical Industries, Inc., Pacific Coast Technologies, Inc.,
Seismic Safety Products, Inc., PA&E International, Inc. and
IBJ Schroder Bank & Trust Company.(18)                                                        
|4.16    |  | Registration Rights Agreement, dated as of July 30, 1998,
between Pacific Aerospace & Electronics, Inc., Balo Precision
Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic
Devices, Inc., Electronic Specialty Corporation, Morel
Industries, Inc., Northwest Technical Industries, Inc.,
Pacific Coast Technologies, Inc., Seismic Safety Products,
Inc., PA&E International, Inc. and Friedman, Billings, Ramsey
& Co., Inc. and BancBoston Securities Inc.(18)
|4.17    |  | Form of Global Note by Pacific Aerospace & Electronics,
Inc.(18)                                                                                                                                                                                                                                                                                                                                                                                                     
|4.18    |  | Form of Subsidiary Guaranty from the U.S. subsidiaries of
Pacific Aerospace & Electronics, Inc.(25)                                                                                                                                                                                                                                                                                                                                                                  
|4.19    |  | Securities Purchase Agreement among Pacific Aerospace &
Electronics, Inc., Strong River Investments, Inc., and Bay
Harbor Investments, Inc., dated as of July 27, 2000.(33)                                                                                                                                                                                                                                                                                          
|4.20    |  | Registration Rights Agreement between Pacific Aerospace &
Electronics, Inc., Strong River Investments, Inc., and Bay
Harbor Investments, Inc., dated as of July 27, 2000.(33)                                                                                                                                                                                                                                                                                        
|4.21    |  | Warrant between Pacific Aerospace & Electronics, Inc. and
Strong River Investments, Inc., dated as of July 27, 2000.(33)                                                                                                                                                                                                                                                                                                                                             
|4.22    |  | Warrant between Pacific Aerospace & Electronics, Inc. and Bay
Harbor Investments, Inc., dated as of July 27, 2000.(33)                                                                                                                                                                                                                                                                                                                                               
|4.23    |  | Warrant between Pacific Aerospace & Electronics, Inc. and
Strong River Investments, Inc., dated as of July 27, 2000.(33)                                                                                                                                                                                                                                                                                                                                             
|4.24    |  | Warrant between Pacific Aerospace & Electronics, Inc. and Bay
Harbor Investments, Inc., dated as of July 27, 2000.(33)                                                                                                                                                                                                                                                                                                                                               
|4.25    |  | Vesting Warrant between Pacific Aerospace & Electronics, Inc.
and Strong River Investments, Inc., dated as of July 27, 2000.(33)                                                                                                                                                                                                                                                                                                                                     
|4.26    |  | Vesting Warrant between Pacific Aerospace & Electronics, Inc.
and Bay Harbor Investments, Inc., dated as of July 27, 2000.(33)                                                                                                                                                                                                                                                                                                                                       
|4.27    |  | Letter agreement among Pacific Aerospace & Electronics, Inc.,
Strong River Investments, Inc.                                                                                                                                                                                                                                                                                                                                                                         

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|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        |  | and Bay Harbor Investments,
Inc., dated as of February 15, 2001.(40)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|4.28    |  | Placement Agent Warrant between Pacific Aerospace &
Electronics, Inc. and Rochon Capital Group, Ltd., dated as of
July 27, 2000.(34)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|4.29    |  | Common Stock Purchase Warrant between Pacific Aerospace &
Electronics, Inc. and Continental Capital & Equity
Corporation, dated April 17, 2000.(34)                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|4.30    |  | Common Stock Purchase Warrant between Pacific Aerospace &
Electronics, Inc. and Continental Capital & Equity
Corporation, dated April 17, 2000.(34)                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|4.31    |  | Common Stock Purchase Warrant between Pacific Aerospace &
Electronics, Inc. and Continental Capital & Equity
Corporation, dated April 17, 2000.(34)                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|4.32    |  | Common Stock Purchase Warrant between Pacific Aerospace &
Electronics, Inc. and Continental Capital & Equity
Corporation, dated April 17, 2000.(34)                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|4.33    |  | Loan Agreement, by and among Pacific Aerospace & Electronics,
Inc., Aeromet America, Inc., Balo Precision Parts, Inc.,
Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc.,
Electronic Specialty Corporation, Northwest Technical
Industries, Inc., Pacific Coast Technologies, Inc., Seismic
Safety Products, Inc., Skagit Engineering & Manufacturing,
Inc. and PA&E International, Inc., as Borrowers, Pacific A&E
Limited, Pacific Aerospace & Electronics (UK) Limited, Aeromet
International PLC, the Foreign Subsidiaries, and DDJ Capital
Management, LLC, as Agent for the Lenders, dated March 1,
2001.(41)
|4.34    |  | Term Loan Note, executed by Pacific Aerospace & Electronics,
Inc., Aeromet America, Inc., Balo Precision Parts, Inc.,
Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc.,
Electronic Specialty Corporation, Northwest Technical
Industries, Inc., Pacific Coast Technologies, Inc., Seismic
Safety Products, Inc., Skagit Engineering & Manufacturing,
Inc. and PA&E International, Inc. in favor of B III Capital
Partners, L.P., dated March 1, 2001, in the amount of
$6,459,361.00.(41)                                                                                                                         
|4.35    |  | Term Loan Note, executed by Pacific Aerospace & Electronics,
Inc., Aeromet America, Inc., Balo Precision Parts, Inc.,
Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc.,
Electronic Specialty Corporation, Northwest Technical
Industries, Inc., Pacific Coast Technologies, Inc., Seismic
Safety Products, Inc., Skagit Engineering & Manufacturing,
Inc. and PA&E International, Inc. in favor of B III-A Capital
Partners, L.P., dated March 1, 2001, in the amount of
$2,768,298.00.(41)                                                                                                                       
|4.36    |  | Term Loan Note, executed by Pacific Aerospace & Electronics,
Inc., Aeromet America, Inc., Balo Precision Parts, Inc.,
Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc.,
Electronic Specialty Corporation, Northwest Technical
Industries, Inc., Pacific Coast Technologies, Inc., Seismic
Safety Products, Inc., Skagit Engineering & Manufacturing,
Inc. and PA&E International, Inc. in favor of DDJ Canadian
High Yield Fund, dated March 1, 2001, in the amount of
$1,845,531.00.(41)                                                                                                                         
|4.37    |  | Term Loan Note, executed by Pacific Aerospace & Electronics,
Inc., Aeromet America, Inc., Balo Precision Parts, Inc.,
Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc.,
Electronic Specialty Corporation, Northwest Technical
Industries, Inc., Pacific Coast Technologies, Inc., Seismic
Safety Products, Inc., Skagit Engineering & Manufacturing,
Inc. and PA&E International, Inc. in favor of State Street
Bank & Trust, as Custodian for General Motors Employees Global
Group Pension Trust, dated March 1, 2001, in the amount of
$2,768,298.00.(41)                                                      
|4.38    |  | Security Agreement, by and among Pacific Aerospace &
Electronics, Inc., Aeromet America, Inc., Balo Precision
Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic
Devices, Inc., Electronic Specialty Corporation, Northwest
Technical Industries, Inc., Pacific Coast Technologies, Inc.,
Seismic Safety Products, Inc., Skagit Engineering &
Manufacturing, Inc. and PA&E International, Inc. and DDJ
Capital Management, LLC, as Agent for the Lenders, dated March
1, 2001.(41)                                                                                                                                   
|4.39    |  | Intellectual Property Security Agreement, by and among Pacific
Aerospace & Electronics, Inc.,                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

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|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        |  | Aeromet America, Inc., Balo
Precision Parts, Inc., Cashmere Manufacturing Co., Inc.,
Ceramic Devices, Inc., Electronic Specialty Corporation,
Northwest Technical Industries, Inc., Pacific Coast
Technologies, Inc., Seismic Safety Products, Inc., Skagit
Engineering & Manufacturing, Inc. and PA&E International, Inc.
and DDJ Capital Management, LLC, as Agent for the Lenders,
dated March 1, 2001.(41)                                                                                                                                                                  
|4.40    |  | Pledge Agreement, by and among Pacific Aerospace &
Electronics, Inc., Aeromet America, Inc., Balo Precision
Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic
Devices, Inc., Electronic Specialty Corporation, Northwest
Technical Industries, Inc., Pacific Coast Technologies, Inc.,
Seismic Safety Products, Inc., Skagit Engineering &
Manufacturing, Inc., PA&E International, Inc., Pacific A&E
Limited, Pacific Aerospace & Electronics (UK) Limited, Aeromet
International PLC, and DDJ Capital Management, LLC, as Agent
for the Lenders, dated March 1, 2001.(41)
|4.41    |  | Warrant Agreement, by and among Pacific Aerospace &
Electronics, Inc. and Holders, dated March 1, 2001.(41)                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|4.42    |  | Warrant Certificate, dated March 1, 2001, issued to B III
Capital Partners, L.P., exercisable for 1,883,923 shares of
common stock.(41)                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4.43    |  | Warrant Certificate, dated March 1, 2001, issued to B III-A
Capital Partners, L.P., exercisable for 807,396 shares of
common stock.(41)                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4.44    |  | Warrant Certificate, dated March 1, 2001, issued to DDJ
Canadian High Yield Fund, exercisable for 538,263 shares of
common stock.(41)                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.45    |  | Warrant Certificate, dated March 1, 2001, issued to State
Street Bank & Trust, as Custodian for General Motors Employees
Global Group Pension Trust, exercisable for 807,396 shares of
common stock.(41)                                                                                                                                                                                                                                                                                                                                                                        
|4.46    |  | Equity Registration Rights Agreement, by and among Pacific
Aerospace & Electronics, Inc. and Holders, dated March 1,
2001.(41)                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|4.47    |  | Warrant Agreement by and among Pacific Aerospace &
Electronics, Inc. and First Albany Corporation, dated April 9,
2001.(43)                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|4.48    |  | Warrant Certificate, dated April 9, 2001, issued to First
Albany Corporation, exercisable for 692,074 shares of common
stock.(43)                                                                                                                                                                                                                                                                                                                                                                                                                                               
|4.49    |  | Indenture dated as of March 19, 2002 among Pacific Aerospace &
Electronics, Inc., as issuer, Aeromet America, Inc., Balo
Precision Parts, Inc., Cashmere Manufacturing Co., Inc.,
Ceramic Devices, Inc., Electronic Specialty Corporation,
Northwest Technical Industries, Inc., Pacific Coast
Technologies, Inc., PA&E International Inc., Seismic Safety
Products, Inc. and Skagit Engineering and Manufacturing, Inc.,
each as guarantors, and U.S. Bank National Association as
Trustee.(44)                                                                                
|4.50    |  | 5.0% Senior Secured Note due May 1, 2007.(44)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|4.51    |  | Subsidiary Guaranty Agreement dated March 25, 2002, executed
by Aeromet America, Inc., Balo Precision Parts, Inc., Cashmere
Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic
Specialty Corporation, Northwest Technical Industries, Inc.,
Pacific Coast Technologies, Inc., PA&E International, Inc.,
Seismic Safety Products, Inc., and Skagit Engineering &
Manufacturing, Inc., in favor of the holders of 5% senior
secured notes due 2007 and First Union National Bank, as
Collateral Agent.(44)                                                                
|4.52    |  | Security Agreement dated as of March 25, 2002, by and among
Pacific Aerospace & Electronics, Inc., Aeromet America, Inc.,
Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc.,
Ceramic Devices, Inc., Electronic Specialty Corporation,
Northwest Technical Industries, Inc., Pacific Coast
Technologies, Inc., PA&E International, Inc., Seismic Safety
Products, Inc., Skagit Engineering & Manufacturing, Inc., and
First Union National Bank, as Collateral Agent.(44)                                                                                             
|4.53    |  | Stock Pledge Agreement dated as of March 25, 2002, by and
among Pacific Aerospace & Electronics, Inc., PA&E
International, Inc. and First Union National Bank, as
collateral agent.(44)                                                                                                                                                                                                                                                                                                                                                                                         
|4.54    |  | Exchange Agreement by and among Pacific Aerospace &
Electronics, Inc., Aeromet America, Inc., Balo Precision
Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic
Devices, Inc.,                                                                                                                                                                                                                                                                                                                                                                                              

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|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                             
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                             
|        |  | Electronic Specialty Corporation, Northwest
Technical Industries, Inc., Pacific Coast Technologies, Inc.,
PA&E International, Inc., Seismic Safety Products, Inc. and
Skagit Engineering & Manufacturing, Inc. and certain holders
of the Companys 111/4% Senior Subordinated Notes due 2005,
dated as of March 19, 2002.(44)                                                                                                              
|4.55    |  | Global 10% Senior Subordinated Pay-In-Kind Note due 2007.(44)                                                                                                                                                                                                                                                                                                                                                                               
|4.56    |  | Subsidiary Guarantee dated March 19, 2002 executed by Balo
Precision Parts, Inc., Cashmere Manufacturing Co., Inc.,
Ceramic Devices, Inc., Electronic Specialty Corporation,
Northwest Technical Industries, Inc., Pacific Coast
Technologies, Inc., PA&E International, Inc., Seismic Safety
Products, Inc. and Skagit Engineering & Manufacturing, Inc. in
favor of the holders of 10% Senior Subordinated Pay-In-Kind
Notes due 2007.(44)
|4.57    |  | Conversion Adjustment Agreement dated as of March 19, 2002, by
and among Pacific Aerospace & Electronics, Inc., GSCP
Recovery, Inc., GSC Recovery II, L.P., Alliance Capital
Management L.P., M.W. Post Advisory Group L.L.C., William E.
Simon & Sons Special Situation Partners II, L.P. and HBK
Master Fund L.P.(44)                                                                                                                     
|10.1    |  | Amended and Restated Stock Incentive Plan.(5)                                                                                                                                                                                                                                                                                                                                                                                               
|10.2    |  | Amendment No. 1 to the Amended and Restated Stock Incentive
Plan.(19)                                                                                                                                                                                                                                                                                                                                                                       
|10.3    |  | Amended and Restated Independent Director Stock Plan.(21)                                                                                                                                                                                                                                                                                                                                                                                   
|10.4    |  | 1999 Stock Incentive Plan(30)                                                                                                                                                                                                                                                                                                                                                                                                               
|10.5    |  | 1997 Employee Stock Purchase Plan.(11)                                                                                                                                                                                                                                                                                                                                                                                                      
|10.6    |  | Employment Agreement, dated June 1, 1997, between Pacific
Aerospace & Electronics, Inc. and Donald A. Wright.(9)                                                                                                                                                                                                                                                                                                                            
|10.7    |  | Amendment No. 1 to Employment Agreement, dated January 29,
1999, between Pacific Aerospace & Electronics, Inc. and Donald
A. Wright.(27)                                                                                                                                                                                                                                                                                                    
|10.8    |  | Amendment No. 2 to Employment Agreement, dated June 1, 2001,
between Pacific Aerospace & Electronics, Inc. and Donald A.
Wright.(43)                                                                                                                                                                                                                                                                                                        
|10.9    |  | Employment Agreement between Pacific Aerospace & Electronics,
Inc. and Donald A. Wright dated March 19, 2002.(44)                                                                                                                                                                                                                                                                                                                           
|10.10   |  | Employment Agreement, dated March 1, 1999, between Pacific
Aerospace & Electronics, Inc. and Werner Hafelfinger.(27)                                                                                                                                                                                                                                                                                                                        
|10.11   |  | Amendment No. 1 to Employment Agreement dated June 1, 2001,
between Pacific Aerospace & Electronics, Inc. and Werner
Hafelfinger(43)                                                                                                                                                                                                                                                                                                        
|10.12   |  | Employment Agreement, dated June 1, 1997, between Pacific
Aerospace & Electronics, Inc. and Nick A. Gerde.(9)                                                                                                                                                                                                                                                                                                                               
|10.13   |  | Amendment No. 1 to Employment Agreement dated June 1, 2001,
between Pacific Aerospace & Electronics, Inc. and Nick A.
Gerde.(43)                                                                                                                                                                                                                                                                                                            
|10.14   |  | Separation Letter dated August 15, 2001 from Pacific Aerospace
& Electronics, Inc. to Nick A. Gerde.(43)                                                                                                                                                                                                                                                                                                                                    
|10.15   |  | Waiver and Release dated August 17, 2001 from Nick A. Gerde to
Pacific Aerospace & Electronics, Inc.(43)                                                                                                                                                                                                                                                                                                                                    
|10.16   |  | Employment Agreement, dated September 1, 1997, between Pacific
Aerospace & Electronics, Inc. and Sheryl A. Symonds.(12)                                                                                                                                                                                                                                                                                                                     
|10.17   |  | Amendment No. 1 to Employment Agreement dated June 1, 2001,
between Pacific Aerospace & Electronics, Inc. and Sheryl A.
Symonds.(43)                                                                                                                                                                                                                                                                                                        
|10.18   |  | Incentive Compensation Program.(35)                                                                                                                                                                                                                                                                                                                                                                                                         
|10.19   |  | Promissory Note, dated March 18, 1998, from Pacific Aerospace
& Electronics, Inc. to KeyBank National Association.(15)                                                                                                                                                                                                                                                                                                                      
|10.20   |  | Security Agreement, dated March 18, 1998, from Pacific
Aerospace & Electronics, Inc. to KeyBank National
Association.(15)                                                                                                                                                                                                                                                                                                                   
|10.21   |  | Loan Agreement, dated September 7, 1999, between Pacific
Aerospace & Electronics, Inc. and KeyBank National
Association.(29)                                                                                                                                                                                                                                                                                                                

110



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|        |  |                                                                                                                                                                                                  
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                  
|Number  |  | Description                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                  
|10.22   |  | Promissory Note, dated September 22, 1998, from Pacific
Aerospace & Electronics, Inc. to KeyBank National
Association.(22)                                                                       
|10.23   |  | Commercial Security Agreement, dated September 7, 1999,
between Pacific Aerospace & Electronics, Inc. and KeyBank
National Association.(29)                                                      
|10.24   |  | Promissory Note, dated September 30, 1998, from Pacific
Aerospace & Electronics, Inc. to KeyBank National
Association.(22)                                                                       
|10.25   |  | Deed of Trust, dated September 30, 1998, between Pacific
Aerospace & Electronics, Inc., KeyBank National Association
and Land Title Company, Chelan-Douglas County, Inc.(22)                     
|10.26   |  | Modification and/or Extension Agreement, dated October 6,
1999, between Pacific Aerospace & Electronics, Inc. and
KeyBank National Association(29)                                               
|10.27   |  | Modification and/or Extension Agreement, dated September 6,
2000, between Pacific Aerospace & Electronics, Inc. and
KeyBank National Association.(35)                                            
|10.28   |  | Modification and/or Extension Agreement, dated November 13,
2000, between Pacific Aerospace & Electronics, Inc. and
KeyBank National Association.(37)                                            
|10.29   |  | Modification and/or Extension Agreement dated November 28,
2000, between Pacific Aerospace & Electronics, Inc. and
KeyBank National Association.(37)                                             
|10.30   |  | Modification and/or Extension Agreement dated January 5, 2001,
between Pacific Aerospace & Electronics, Inc. and KeyBank
National Association.(37)                                               
|10.31   |  | Modification and/or Extension Agreement dated February 7,
2001, between Pacific Aerospace & Electronics, Inc. and
KeyBank National Association.(39)                                              
|10.32   |  | Letter dated April 11, 2001 to Pacific Aerospace &
Electronics, Inc. from Special Assets Group of Key Bank
Washington.(43)                                                                       
|10.33   |  | Facility Letter, dated July 30, 1998, from Barclays Bank plc
to Aeromet International plc.(20)                                                                                                   
|10.34   |  | Non-Negotiable Promissory Note in the original principal
amount of $1,000,000.00, from U.S. Castings, LLC to Pacific
Aerospace & Electronics, Inc., dated June 14, 2001.(42)                     
|10.35   |  | Guarantee by USCRE Properties, LLC to Pacific Aerospace &
Electronics, Inc., dated June 14, 2001.(42)                                                                                            
|10.36   |  | Escrow Note in the original principal amount of $160,000.00,
from U.S. Castings, LLC and USCRE Properties, LLC to Pacific
Aerospace & Electronics, Inc., dated June 14, 2001.(42)                
|10.37   |  | U.S. Castings, LLC Limited Liability Company Agreement, dated
June 13, 2001.(42)                                                                                                                 
|10.38   |  | First Amendment to U.S. Castings, LLC Limited Liability
Company Agreement, dated June 14, 2001.(42)                                                                                              
|10.39   |  | USCRE Properties, LLC Limited Liability Company Agreement,
dated June 13, 2001.(42)                                                                                                              
|10.40   |  | First Amendment to USCRE Properties, LLC Limited Liability
Company Agreement, dated June 14, 2001.(42)                                                                                           
|10.41   |  | General Terms Agreement No. BCA-65323-0458 dated December 20,
1999 between The Boeing Company and Pacific Aerospace &
Electronics, Inc. (U.S. Aerospace Group and European Aerospace
Group).(31) 
|10.42   |  | Special Business Provisions No. POP-65323-0519 December 20,
1999 between The Boeing Company and Pacific Aerospace &
Electronics, Inc. (U.S. Aerospace Group and European Aerospace
Group).(1)(31)
|10.43   |  | Option to Purchase, dated January 29, 1999, between Pacific
Aerospace & Electronics, Inc. and Donald A. Wright.(27)                                                                              
|10.44   |  | Real Estate Agreement, dated January 15, 1999, between Pacific
Aerospace & Electronics, Inc. and the Port of Chelan County.(27)                                                                  
|10.45   |  | Real Estate Purchase and Sale Agreement dated December 29,
2000, between Pacific Aerospace & Electronics, Inc. and the
Port of Chelan County.(37)                                                
|10.46   |  | Rescission and Termination Agreement, dated July 31, 2001,
between Pacific Aerospace & Electronics, Inc. and the Port of
Chelan County.(43)                                                      
|10.47   |  | Agreement of Sale, dated October 23, 2000 between Balo
Precision Parts, Inc. and D&G Group II, LLC, Louis E. and Mary
E. Giresi Grandchildrens Education Trust.(37)                             

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|        |  |                                                                                                                                                                                                                                                                                                                                                                          
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                          
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                                                                                                          
|10.48   |  | Consent executed by KeyBank National Association in favor of
the Company and Pacific Coast Technologies, Inc. dated as of
March 18, 2002.(44)                                                                                                                                                                                                                            
|10.49   |  | Forbearance Agreement executed by KeyBank National Association
in favor of the Company dated as of March 15, 2002.(44)                                                                                                                                                                                                                                                   
|10.50   |  | Deed of Trust, Security Agreement And Fixture Filing With
Assignment Of Leases And Rents by and among Pacific Aerospace
& Electronics, Inc., Cashmere Manufacturing Co., Inc.,
Northwest Technical Industries, Inc., Land Title Company Of
Chelan  Douglas County, Inc., and First Union National Bank
(Headquarters building 430 Olds Station Road).(44)              
|10.51   |  | Deed of Trust, Security Agreement And Fixture Filing With
Assignment Of Leases And Rents by and among Pacific Aerospace
& Electronics, Inc., Cashmere Manufacturing Co., Inc.,
Northwest Technical Industries, Inc., Land Title Company Of
Chelan  Douglas County, Inc., and First Union National Bank
(Bonded Metals Division 2249 Diamond Point Road, Sequim WA).(44)
|10.52   |  | Deed of Trust, Security Agreement And Fixture Filing With
Assignment Of Leases And Rents by and among Pacific Aerospace
& Electronics, Inc., Cashmere Manufacturing Co., Inc.,
Northwest Technical Industries, Inc., Land Title Company Of
Chelan  Douglas County, Inc., and First Union National Bank
(Cashmere Warehouse 209 Mission Street, Cashmere, WA).(44)      
|10.53   |  | Note Purchase Agreement by and among Pacific Aerospace &
Electronics, Inc., the Initial Purchaser and First Union
National Bank dated as of March 19, 2002.(44)                                                                                                                                                                                                          
|21.1    |  | List of Subsidiaries(45)                                                                                                                                                                                                                                                                                                                                                 
|23.1    |  | Consent of KPMG LLP(45)                                                                                                                                                                                                                                                                                                                                                  



---

|(1)  |  | Subject to confidential treatment. Omitted confidential information was
filed separately with the Securities and Exchange Commission.          
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|(2)  |  | Incorporated by reference to the Companys Annual Report on Form 10-KSB
for the year ended May 31, 1995.                                       
|    
|    
|    
|    
|(3)  |  | Incorporated by reference to Amendment No. 1 to the Companys
Registration Statement on Form SB-2 filed on June 19, 1996.                      
|    
|    
|    
|    
|(4)  |  | Incorporated by reference to the Companys Annual Report on Form 10-KSB
for the year ended May 31, 1996.                                       
|    
|    
|    
|    
|(5)  |  | Incorporated by reference to the Companys Current Report on Form 10-QSB
for the quarterly period ended November 30, 1996.                     
|    
|    
|    
|    
|(6)  |  | Incorporated by reference to the Companys Current Report on Form 8-K
filed on December 12, 1996, reporting the reincorporation merger.        
|    
|    
|    
|    
|(7)  |  | Incorporated by reference to the Companys Registration Statement of
Certain Successor Issuers on Form 8-B filed on February 6, 1997.          
|    
|    
|    
|    
|(8)  |  | Incorporated by reference to the Companys Current Report on Form 8-K
filed on March 12, 1997, reporting the Series A Preferred Stock offering.
|    
|    
|    
|    
|(9)  |  | Incorporated by reference to the Companys Annual Report on Form 10-KSB
for the fiscal year ending May 31, 1997.                               
|    
|    
|    
|    
|(10) |  | Incorporated by reference to the Companys Registration Statement on Form
S-8 filed on June 11, 1997.                                          
|    
|    
|    
|    
|(11) |  | Incorporated by reference to the Companys Definitive Proxy Statement for
its 1997 Annual Shareholders Meeting, filed on August 28, 1997.      
|    
|    
|    
|    
|(12) |  | Incorporated by reference to the Post-Effective Amendment No. 1 to Form
SB-2, filed on November 3, 1997.                                       
|    
|    
|    
|    
|(13) |  | Incorporated by reference to the Companys Quarterly Report on Form
10-QSB for the quarterly period ending November 30, 1997.                  
|    
|    
|    
|    
|(14) |  | Incorporated by reference to the Companys Registration Statement on Form
S-3 filed on December 3, 1997.                                       

112



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##### Table of Contents



|(15) |  | Incorporated by reference to the Companys Quarterly Report on Form
10-QSB for the quarterly period ending February 28, 1998.                                        
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|(16) |  | Incorporated by reference to the Companys Current Report on Form 8-K/A,
filed on May 1, 1998.                                                                       
|    
|    
|    
|    
|(17) |  | Incorporated by reference to the Companys Current Report on Form 8-K
filed on July 10, 1998.                                                                        
|    
|    
|    
|    
|(18) |  | Incorporated by reference to the Companys Current Report on Form 8-K
filed on August 14, 1998.                                                                      
|    
|    
|    
|    
|(19) |  | Incorporated by reference to the Companys Registration Statement on Form
S-8 filed on November 7, 1997.                                                             
|    
|    
|    
|    
|(20) |  | Incorporated by reference to the Companys Annual Report on Form 10-K for
the fiscal year ending May 31, 1998.                                                       
|    
|    
|    
|    
|(21) |  | Incorporated by reference to the Companys Definitive Proxy Statement
filed on September 1, 1998.                                                                    
|    
|    
|    
|    
|(22) |  | Incorporated by reference to the Companys Quarterly Report on Form 10-Q,
and Form 10-Q/A, for the quarterly period ending August 31, 1998.                          
|    
|    
|    
|    
|(23) |  | Incorporated by reference to the Companys Registration Statement on Form
S-1 filed on October 30, 1998.                                                             
|    
|    
|    
|    
|(24) |  | Incorporated by reference to the Companys Quarterly Report on Form 10-Q
for the quarterly period ending November 30, 1998.                                          
|    
|    
|    
|    
|(25) |  | Incorporated by reference to Registration Statement on Form S-4 filed on
November 25, 1998.                                                                          
|    
|    
|    
|    
|(26) |  | Incorporated by reference to Amendment No. 1 to Registration Statement on
Form S-4 filed on January 20, 1999.                                                        
|    
|    
|    
|    
|(27) |  | Incorporated by reference to the Companys Quarterly Report on Form 10-Q
for the quarterly period ending February 28, 1999.                                          
|    
|    
|    
|    
|(28) |  | Incorporated by reference to the Companys Annual Report on Form 10-K
filed on August 30, 1999.                                                                      
|    
|    
|    
|    
|(29) |  | Incorporated by reference to the Companys Quarterly Report on Form 10-Q
for the quarterly period ending August 31, 1999.                                            
|    
|    
|    
|    
|(30) |  | Incorporated by reference to the Companys Definitive Proxy Statement
filed on September 1, 1999.                                                                    
|    
|    
|    
|    
|(31) |  | Incorporated by reference to the Companys Quarterly Report on Form 10-Q
for the quarterly period ending February 29, 2000.                                          
|    
|    
|    
|    
|(32) |  | Incorporated by reference to the Companys Current Report on Form 8-K
filed on May 31, 2000.                                                                         
|    
|    
|    
|    
|(33) |  | Incorporated by reference to the Companys Current Report on Form 8-K
filed on August 8, 2000.                                                                       
|    
|    
|    
|    
|(34) |  | Incorporated by reference to the Companys Annual Report on Form 10-K
filed on August 28, 2000.                                                                      
|    
|    
|    
|    
|(35) |  | Incorporated by reference to the Companys Quarterly Report on Form 10-Q
for the quarterly period ending August 31, 2000.                                            
|    
|    
|    
|    
|(36) |  | Incorporated by reference to the first amendment on Form 10-K/A to the
Companys Annual Report for the fiscal year ended May 31, 2000, as filed
on October 13, 2000. 
|    
|    
|    
|    
|(37) |  | Incorporated by reference to the Companys Quarterly Report on Form 10-Q
for the quarterly period ending November 30, 2000.                                          
|    
|    
|    
|    
|(38) |  | Incorporated by reference to the second amendment on Form 10-K/A to the
Companys Annual Report for the fiscal year ended May 31, 2000, as filed
on January 18, 2001.
|    
|    
|    
|    
|(39) |  | Incorporated by reference to the Companys Current Report on Form 8-K
filed on February 9, 2001.                                                                     
|    
|    
|    
|    
|(40) |  | Incorporated by reference to the Companys Current Report on Form 8-K
filed on February 21, 2001.                                                                    
|    
|    
|    
|    
|(41) |  | Incorporated by reference to the Companys Current Report on Form 8-K
filed on March 7, 2001.                                                                        
|    
|    
|    
|    
|(42) |  | Incorporated by reference to the Companys Current Report on Form 8-K
filed on June 27, 2001.                                                                        
|    
|    
|    
|    
|(43) |  | Incorporated by reference to the Companys Annual Report on Form 10-K for
the fiscal year ended May 31, 2001, as filed on August 27, 2001.                           
|    
|    
|    
|    
|(44) |  | Incorporated by reference to the Companys Current Report on Form 8-K
filed on April 3, 2002.                                                                        
|    
|    
|    
|    
|(45) |  | Filed with this report.                                                                                                                                              

113



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(b)  Reports on Form 8-K.Current reports filed during the last quarter of
fiscal 2002 were as follows:

(i)  The Company filed a Current Report on Form 8-K on March 27, 2002,
reporting the issuance of a press release relating to the completion of the
exchange transaction whereby 100% of the holders of the Companys 11 1/4%
senior subordinated notes exchanged their notes for common stock, preferred
stock and new 10% senior subordinated pay-in-kind notes of the Company and the
entering by the Company into a new five-year senior secured loan in the
principal amount of $36 million which provided proceeds to the Company of $22
million on March 26, 2002.

(ii)  The Company filed a Current Report on Form 8-K on April 3, 2002,
reporting the a change of control event in the Company pursuant to the
completion of the exchange transaction on March 19, 2002.

(iii)  The Company filed a Current Report on Form 8-K on April 24, 2002,
reporting a change in the Companys certifying accountant.

114



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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: September 10, 2002



| | PACIFIC AEROSPACE & ELECTRONICS, INC.
| | -------------------------------------



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

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, this report has been signed below by the following persons on
behalf of the registrant in the capacities indicated on
September 10, 2002.

|                                                      |  |                                                                                                                                                    
|----------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|Signatures                                            |  | Title                                                                                                                                              
|                                                      |  |                                                                                                                                                    
|                                                      |  |                                                                                                                                                    
|/s/ DONALD A. WRIGHT
        DONALD A. WRIGHT         |  | Director, President and Chief Executive
          Officer
          (Principal Executive Officer)                                                  
|                                                      |  |                                                                                                                                                    
|/s/ CHARLES A. MIRACLE
        CHARLES A. MIRACLE     |  | Vice President Finance, Treasurer,
          Chief Financial Officer and Assistant Secretary
          (Principal Financial and Accounting Officer)
|                                                      |  |                                                                                                                                                    
|/s/ MATTHEW C. KAUFMAN
        MATTHEW C. KAUFMAN     |  | Director and Chairman of the Board                                                                                                                 
|                                                      |  |                                                                                                                                                    
|/s/ RICHARD W. DETWEILER
        RICHARD W. DETWEILER |  | Director                                                                                                                                           
|                                                      |  |                                                                                                                                                    
|CARL H. GOLDSMITH                                     |  | Director                                                                                                                                           
|                                                      |  |                                                                                                                                                    
|/s/ PHILIP RAYGORODETSKY
        PHILIP RAYGORODETSKY |  | Director                                                                                                                                           

115



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EXHIBIT INDEX

|        |  |                                                                                                                                                                                               
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                               
|Number  |  | Description                                                                                                                                                                                   
|        |  |                                                                                                                                                                                               
|2.1     |  | Asset Purchase Agreement between Aeromet America, Inc.,
Pacific Aerospace & Electronics, Inc., U.S. Castings, LLC,
USCRE Properties, LLC, and Advanced Aluminum, LLC, dated June
14, 2001.(42)
|2.2     |  | Closing Agreement between Aeromet America, Inc., Pacific
Aerospace & Electronics, Inc., U.S. Castings, LLC, USCRE
Properties, LLC, and Advanced Aluminum, LLC, dated June 14,
2001.(42)       
|2.3     |  | Asset Purchase Agreement between MCE Technologies Incorporated
and Skagit Engineering & Manufacturing, Inc., dated May 4,
2001.(43)                                                           
|2.4     |  | Agreement for Purchase and Sale of Assets between Teledyne
Technologies Incorporated and Electronic Specialty
Corporation, dated February 21, 2001.(43)                                       
|3.1     |  | Articles of Incorporation of Pacific Aerospace & Electronics,
Inc.(6)                                                                                                                         
|3.2     |  | Amendment to Articles of Incorporation containing Designation
of Rights and Preferences of Series A Convertible Preferred
Stock, as corrected.(8)                                             
|3.3     |  | Amendment to Articles of Incorporation containing Designation
of Rights and Preferences of Series B Convertible Preferred
Stock.(20)                                                          
|3.4     |  | Bylaws of Pacific Aerospace & Electronics, Inc., as
amended.(35)                                                                                                                              
|3.5     |  | Articles of Amendment of Pacific Aerospace & Electronics, Inc.
filed March 19, 2002.(44)                                                                                                      
|3.6     |  | Designation of Rights and Preferences for Series C Voting
Convertible Preferred Stock of Pacific Aerospace and
Electronics, Inc.(44)                                                          
|4.1     |  | Form of specimen certificate for common stock.(6)                                                                                                                                             
|4.2     |  | Form of specimen certificate for public warrants.(6)                                                                                                                                          
|4.3     |  | Form of specimen certificate for the Series A Convertible
Preferred Stock.(8)                                                                                                                 
|4.4     |  | Form of specimen certificate for the Series B Convertible
Preferred Stock.(20)                                                                                                                
|4.5     |  | Form of common stock Purchase Warrant issued to holders of the
Series B Convertible Preferred Stock on May 15, 1998.(20)                                                                      
|4.6     |  | Warrant Agreement between Interwest Transfer Co., Inc. and PCT
Holdings, Inc. dated July 1,                                                                                                   

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|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        |  | 1996.(4)                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|4.7     |  | Amendment No. 1, dated as of May 26, 2000, to the Warrant
Agreement, dated as of July 1, 1996, between Pacific Aerospace
& Electronics, Inc., as successor to PCT Holdings, Inc., and
Interwest Transfer Co., Inc.(32)                                                                                                                                                                                                                                               
|4.8     |  | Common Stock Purchase Warrant No. 001 from Pacific Aerospace &
Electronics, Inc. to Donald A. Wright dated as of November 30,
1996.(10)                                                                                                                                                                                                                                                                                                                              
|4.9     |  | Common Stock Purchase Warrant No. 002 from Pacific Aerospace &
Electronics, Inc. to Nick A. Gerde dated as of November 30,
1996.(10)                                                                                                                                                                                                                                                                                                                                 
|4.10    |  | Common Stock Purchase Warrant No. 003 from Pacific Aerospace &
Electronics, Inc. to Edward A. Taylor dated as of November 30,
1996.(10)                                                                                                                                                                                                                                                                                                                              
|4.11    |  | Common Stock Purchase Warrant from Pacific Aerospace &
Electronics, Inc. to Gregory K. Smith dated June 3, 1997.(9)                                                                                                                                                                                                                                                                                                                                                  
|4.12    |  | Common Stock Purchase Warrant from Pacific Aerospace &
Electronics, Inc. to Nestor Wiegand dated June 3, 1997.(9)                                                                                                                                                                                                                                                                                                                                                    
|4.13    |  | Securities Purchase Agreement, dated May 15, 1998, between
Pacific Aerospace & Electronics, Inc. and the purchasers of
the Companys Series B Convertible Preferred Stock.(20)                                                                                                                                                                                                                                                                                       
|4.14    |  | Purchase Agreement dated as of July 23, 1998, between Pacific
Aerospace & Electronics, Inc., Balo Precision Parts, Inc.,
Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc.,
Electronic Specialty Corporation, Morel Industries, Inc.,
Northwest Technical Industries, Inc., Pacific Coast
Technologies, Inc., Seismic Safety Products, Inc., PA&E
International, Inc. and Friedman, Billings, Ramsey & Co., Inc.
and BancBoston Securities Inc.(18)            
|4.15    |  | Indenture dated as of July 30, 1998, between Pacific Aerospace
& Electronics, Inc., Balo Precision Parts, Inc., Cashmere
Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic
Specialty Corporation, Morel Industries, Inc., Northwest
Technical Industries, Inc., Pacific Coast Technologies, Inc.,
Seismic Safety Products, Inc., PA&E International, Inc. and
IBJ Schroder Bank & Trust Company.(18)                                                        
|4.16    |  | Registration Rights Agreement, dated as of July 30, 1998,
between Pacific Aerospace & Electronics, Inc., Balo Precision
Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic
Devices, Inc., Electronic Specialty Corporation, Morel
Industries, Inc., Northwest Technical Industries, Inc.,
Pacific Coast Technologies, Inc., Seismic Safety Products,
Inc., PA&E International, Inc. and Friedman, Billings, Ramsey
& Co., Inc. and BancBoston Securities Inc.(18)
|4.17    |  | Form of Global Note by Pacific Aerospace & Electronics,
Inc.(18)                                                                                                                                                                                                                                                                                                                                                                                                     
|4.18    |  | Form of Subsidiary Guaranty from the U.S. subsidiaries of
Pacific Aerospace & Electronics, Inc.(25)                                                                                                                                                                                                                                                                                                                                                                  
|4.19    |  | Securities Purchase Agreement among Pacific Aerospace &
Electronics, Inc., Strong River Investments, Inc., and Bay
Harbor Investments, Inc., dated as of July 27, 2000.(33)                                                                                                                                                                                                                                                                                          
|4.20    |  | Registration Rights Agreement between Pacific Aerospace &
Electronics, Inc., Strong River Investments, Inc., and Bay
Harbor Investments, Inc., dated as of July 27, 2000.(33)                                                                                                                                                                                                                                                                                        
|4.21    |  | Warrant between Pacific Aerospace & Electronics, Inc. and
Strong River Investments, Inc., dated as of July 27, 2000.(33)                                                                                                                                                                                                                                                                                                                                             
|4.22    |  | Warrant between Pacific Aerospace & Electronics, Inc. and Bay
Harbor Investments, Inc., dated as of July 27, 2000.(33)                                                                                                                                                                                                                                                                                                                                               
|4.23    |  | Warrant between Pacific Aerospace & Electronics, Inc. and
Strong River Investments, Inc., dated as of July 27, 2000.(33)                                                                                                                                                                                                                                                                                                                                             
|4.24    |  | Warrant between Pacific Aerospace & Electronics, Inc. and Bay
Harbor Investments, Inc., dated as of July 27, 2000.(33)                                                                                                                                                                                                                                                                                                                                               
|4.25    |  | Vesting Warrant between Pacific Aerospace & Electronics, Inc.
and Strong River Investments, Inc., dated as of July 27, 2000.(33)                                                                                                                                                                                                                                                                                                                                     
|4.26    |  | Vesting Warrant between Pacific Aerospace & Electronics, Inc.
and Bay Harbor Investments, Inc., dated as of July 27, 2000.(33)                                                                                                                                                                                                                                                                                                                                       
|4.27    |  | Letter agreement among Pacific Aerospace & Electronics, Inc.,
Strong River Investments, Inc.                                                                                                                                                                                                                                                                                                                                                                         

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|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        |  | and Bay Harbor Investments,
Inc., dated as of February 15, 2001.(40)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|4.28    |  | Placement Agent Warrant between Pacific Aerospace &
Electronics, Inc. and Rochon Capital Group, Ltd., dated as of
July 27, 2000.(34)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|4.29    |  | Common Stock Purchase Warrant between Pacific Aerospace &
Electronics, Inc. and Continental Capital & Equity
Corporation, dated April 17, 2000.(34)                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|4.30    |  | Common Stock Purchase Warrant between Pacific Aerospace &
Electronics, Inc. and Continental Capital & Equity
Corporation, dated April 17, 2000.(34)                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|4.31    |  | Common Stock Purchase Warrant between Pacific Aerospace &
Electronics, Inc. and Continental Capital & Equity
Corporation, dated April 17, 2000.(34)                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|4.32    |  | Common Stock Purchase Warrant between Pacific Aerospace &
Electronics, Inc. and Continental Capital & Equity
Corporation, dated April 17, 2000.(34)                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|4.33    |  | Loan Agreement, by and among Pacific Aerospace & Electronics,
Inc., Aeromet America, Inc., Balo Precision Parts, Inc.,
Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc.,
Electronic Specialty Corporation, Northwest Technical
Industries, Inc., Pacific Coast Technologies, Inc., Seismic
Safety Products, Inc., Skagit Engineering & Manufacturing,
Inc. and PA&E International, Inc., as Borrowers, Pacific A&E
Limited, Pacific Aerospace & Electronics (UK) Limited, Aeromet
International PLC, the Foreign Subsidiaries, and DDJ Capital
Management, LLC, as Agent for the Lenders, dated March 1,
2001.(41)
|4.34    |  | Term Loan Note, executed by Pacific Aerospace & Electronics,
Inc., Aeromet America, Inc., Balo Precision Parts, Inc.,
Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc.,
Electronic Specialty Corporation, Northwest Technical
Industries, Inc., Pacific Coast Technologies, Inc., Seismic
Safety Products, Inc., Skagit Engineering & Manufacturing,
Inc. and PA&E International, Inc. in favor of B III Capital
Partners, L.P., dated March 1, 2001, in the amount of
$6,459,361.00.(41)                                                                                                                         
|4.35    |  | Term Loan Note, executed by Pacific Aerospace & Electronics,
Inc., Aeromet America, Inc., Balo Precision Parts, Inc.,
Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc.,
Electronic Specialty Corporation, Northwest Technical
Industries, Inc., Pacific Coast Technologies, Inc., Seismic
Safety Products, Inc., Skagit Engineering & Manufacturing,
Inc. and PA&E International, Inc. in favor of B III-A Capital
Partners, L.P., dated March 1, 2001, in the amount of
$2,768,298.00.(41)                                                                                                                       
|4.36    |  | Term Loan Note, executed by Pacific Aerospace & Electronics,
Inc., Aeromet America, Inc., Balo Precision Parts, Inc.,
Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc.,
Electronic Specialty Corporation, Northwest Technical
Industries, Inc., Pacific Coast Technologies, Inc., Seismic
Safety Products, Inc., Skagit Engineering & Manufacturing,
Inc. and PA&E International, Inc. in favor of DDJ Canadian
High Yield Fund, dated March 1, 2001, in the amount of
$1,845,531.00.(41)                                                                                                                         
|4.37    |  | Term Loan Note, executed by Pacific Aerospace & Electronics,
Inc., Aeromet America, Inc., Balo Precision Parts, Inc.,
Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc.,
Electronic Specialty Corporation, Northwest Technical
Industries, Inc., Pacific Coast Technologies, Inc., Seismic
Safety Products, Inc., Skagit Engineering & Manufacturing,
Inc. and PA&E International, Inc. in favor of State Street
Bank & Trust, as Custodian for General Motors Employees Global
Group Pension Trust, dated March 1, 2001, in the amount of
$2,768,298.00.(41)                                                      
|4.38    |  | Security Agreement, by and among Pacific Aerospace &
Electronics, Inc., Aeromet America, Inc., Balo Precision
Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic
Devices, Inc., Electronic Specialty Corporation, Northwest
Technical Industries, Inc., Pacific Coast Technologies, Inc.,
Seismic Safety Products, Inc., Skagit Engineering &
Manufacturing, Inc. and PA&E International, Inc. and DDJ
Capital Management, LLC, as Agent for the Lenders, dated March
1, 2001.(41)                                                                                                                                   
|4.39    |  | Intellectual Property Security Agreement, by and among Pacific
Aerospace & Electronics, Inc.,                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

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|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        |  | Aeromet America, Inc., Balo
Precision Parts, Inc., Cashmere Manufacturing Co., Inc.,
Ceramic Devices, Inc., Electronic Specialty Corporation,
Northwest Technical Industries, Inc., Pacific Coast
Technologies, Inc., Seismic Safety Products, Inc., Skagit
Engineering & Manufacturing, Inc. and PA&E International, Inc.
and DDJ Capital Management, LLC, as Agent for the Lenders,
dated March 1, 2001.(41)                                                                                                                                                                  
|4.40    |  | Pledge Agreement, by and among Pacific Aerospace &
Electronics, Inc., Aeromet America, Inc., Balo Precision
Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic
Devices, Inc., Electronic Specialty Corporation, Northwest
Technical Industries, Inc., Pacific Coast Technologies, Inc.,
Seismic Safety Products, Inc., Skagit Engineering &
Manufacturing, Inc., PA&E International, Inc., Pacific A&E
Limited, Pacific Aerospace & Electronics (UK) Limited, Aeromet
International PLC, and DDJ Capital Management, LLC, as Agent
for the Lenders, dated March 1, 2001.(41)
|4.41    |  | Warrant Agreement, by and among Pacific Aerospace &
Electronics, Inc. and Holders, dated March 1, 2001.(41)                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|4.42    |  | Warrant Certificate, dated March 1, 2001, issued to B III
Capital Partners, L.P., exercisable for 1,883,923 shares of
common stock.(41)                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4.43    |  | Warrant Certificate, dated March 1, 2001, issued to B III-A
Capital Partners, L.P., exercisable for 807,396 shares of
common stock.(41)                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4.44    |  | Warrant Certificate, dated March 1, 2001, issued to DDJ
Canadian High Yield Fund, exercisable for 538,263 shares of
common stock.(41)                                                                                                                                                                                                                                                                                                                                                                                                                                           
|4.45    |  | Warrant Certificate, dated March 1, 2001, issued to State
Street Bank & Trust, as Custodian for General Motors Employees
Global Group Pension Trust, exercisable for 807,396 shares of
common stock.(41)                                                                                                                                                                                                                                                                                                                                                                        
|4.46    |  | Equity Registration Rights Agreement, by and among Pacific
Aerospace & Electronics, Inc. and Holders, dated March 1,
2001.(41)                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|4.47    |  | Warrant Agreement by and among Pacific Aerospace &
Electronics, Inc. and First Albany Corporation, dated April 9,
2001.(43)                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|4.48    |  | Warrant Certificate, dated April 9, 2001, issued to First
Albany Corporation, exercisable for 692,074 shares of common
stock.(43)                                                                                                                                                                                                                                                                                                                                                                                                                                               
|4.49    |  | Indenture dated as of March 19, 2002 among Pacific Aerospace &
Electronics, Inc., as issuer, Aeromet America, Inc., Balo
Precision Parts, Inc., Cashmere Manufacturing Co., Inc.,
Ceramic Devices, Inc., Electronic Specialty Corporation,
Northwest Technical Industries, Inc., Pacific Coast
Technologies, Inc., PA&E International Inc., Seismic Safety
Products, Inc. and Skagit Engineering and Manufacturing, Inc.,
each as guarantors, and U.S. Bank National Association as
Trustee.(44)                                                                                
|4.50    |  | 5.0% Senior Secured Note due May 1, 2007.(44)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|4.51    |  | Subsidiary Guaranty Agreement dated March 25, 2002, executed
by Aeromet America, Inc., Balo Precision Parts, Inc., Cashmere
Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic
Specialty Corporation, Northwest Technical Industries, Inc.,
Pacific Coast Technologies, Inc., PA&E International, Inc.,
Seismic Safety Products, Inc., and Skagit Engineering &
Manufacturing, Inc., in favor of the holders of 5% senior
secured notes due 2007 and First Union National Bank, as
Collateral Agent.(44)                                                                
|4.52    |  | Security Agreement dated as of March 25, 2002, by and among
Pacific Aerospace & Electronics, Inc., Aeromet America, Inc.,
Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc.,
Ceramic Devices, Inc., Electronic Specialty Corporation,
Northwest Technical Industries, Inc., Pacific Coast
Technologies, Inc., PA&E International, Inc., Seismic Safety
Products, Inc., Skagit Engineering & Manufacturing, Inc., and
First Union National Bank, as Collateral Agent.(44)                                                                                             
|4.53    |  | Stock Pledge Agreement dated as of March 25, 2002, by and
among Pacific Aerospace & Electronics, Inc., PA&E
International, Inc. and First Union National Bank, as
collateral agent.(44)                                                                                                                                                                                                                                                                                                                                                                                         
|4.54    |  | Exchange Agreement by and among Pacific Aerospace &
Electronics, Inc., Aeromet America, Inc., Balo Precision
Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic
Devices, Inc.,                                                                                                                                                                                                                                                                                                                                                                                              

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|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                             
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                                                             
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                             
|        |  | Electronic Specialty Corporation, Northwest
Technical Industries, Inc., Pacific Coast Technologies, Inc.,
PA&E International, Inc., Seismic Safety Products, Inc. and
Skagit Engineering & Manufacturing, Inc. and certain holders
of the Companys 11 1/4% Senior Subordinated Notes due 2005,
dated as of March 19, 2002.(44)                                                                                                             
|4.55    |  | Global 10% Senior Subordinated Pay-In-Kind Note due 2007.(44)                                                                                                                                                                                                                                                                                                                                                                               
|4.56    |  | Subsidiary Guarantee dated March 19, 2002 executed by Balo
Precision Parts, Inc., Cashmere Manufacturing Co., Inc.,
Ceramic Devices, Inc., Electronic Specialty Corporation,
Northwest Technical Industries, Inc., Pacific Coast
Technologies, Inc., PA&E International, Inc., Seismic Safety
Products, Inc. and Skagit Engineering & Manufacturing, Inc. in
favor of the holders of 10% Senior Subordinated Pay-In-Kind
Notes due 2007.(44)
|4.57    |  | Conversion Adjustment Agreement dated as of March 19, 2002, by
and among Pacific Aerospace & Electronics, Inc., GSCP
Recovery, Inc., GSC Recovery II, L.P., Alliance Capital
Management L.P., M.W. Post Advisory Group L.L.C., William E.
Simon & Sons Special Situation Partners II, L.P. and HBK
Master Fund L.P.(44)                                                                                                                     
|10.1    |  | Amended and Restated Stock Incentive Plan.(5)                                                                                                                                                                                                                                                                                                                                                                                               
|10.2    |  | Amendment No. 1 to the Amended and Restated Stock Incentive
Plan.(19)                                                                                                                                                                                                                                                                                                                                                                       
|10.3    |  | Amended and Restated Independent Director Stock Plan.(21)                                                                                                                                                                                                                                                                                                                                                                                   
|10.4    |  | 1999 Stock Incentive Plan(30)                                                                                                                                                                                                                                                                                                                                                                                                               
|10.5    |  | 1997 Employee Stock Purchase Plan.(11)                                                                                                                                                                                                                                                                                                                                                                                                      
|10.6    |  | Employment Agreement, dated June 1, 1997, between Pacific
Aerospace & Electronics, Inc. and Donald A. Wright.(9)                                                                                                                                                                                                                                                                                                                            
|10.7    |  | Amendment No. 1 to Employment Agreement, dated January 29,
1999, between Pacific Aerospace & Electronics, Inc. and Donald
A. Wright.(27)                                                                                                                                                                                                                                                                                                    
|10.8    |  | Amendment No. 2 to Employment Agreement, dated June 1, 2001,
between Pacific Aerospace & Electronics, Inc. and Donald A.
Wright.(43)                                                                                                                                                                                                                                                                                                        
|10.9    |  | Employment Agreement between Pacific Aerospace & Electronics,
Inc. and Donald A. Wright dated March 19, 2002.(44)                                                                                                                                                                                                                                                                                                                           
|10.10   |  | Employment Agreement, dated March 1, 1999, between Pacific
Aerospace & Electronics, Inc. and Werner Hafelfinger.(27)                                                                                                                                                                                                                                                                                                                        
|10.11   |  | Amendment No. 1 to Employment Agreement dated June 1, 2001,
between Pacific Aerospace & Electronics, Inc. and Werner
Hafelfinger(43)                                                                                                                                                                                                                                                                                                        
|10.12   |  | Employment Agreement, dated June 1, 1997, between Pacific
Aerospace & Electronics, Inc. and Nick A. Gerde.(9)                                                                                                                                                                                                                                                                                                                               
|10.13   |  | Amendment No. 1 to Employment Agreement dated June 1, 2001,
between Pacific Aerospace & Electronics, Inc. and Nick A.
Gerde.(43)                                                                                                                                                                                                                                                                                                            
|10.14   |  | Separation Letter dated August 15, 2001 from Pacific Aerospace
& Electronics, Inc. to Nick A. Gerde.(43)                                                                                                                                                                                                                                                                                                                                    
|10.15   |  | Waiver and Release dated August 17, 2001 from Nick A. Gerde to
Pacific Aerospace & Electronics, Inc.(43)                                                                                                                                                                                                                                                                                                                                    
|10.16   |  | Employment Agreement, dated September 1, 1997, between Pacific
Aerospace & Electronics, Inc. and Sheryl A. Symonds.(12)                                                                                                                                                                                                                                                                                                                     
|10.17   |  | Amendment No. 1 to Employment Agreement dated June 1, 2001,
between Pacific Aerospace & Electronics, Inc. and Sheryl A.
Symonds.(43)                                                                                                                                                                                                                                                                                                        
|10.18   |  | Incentive Compensation Program.(35)                                                                                                                                                                                                                                                                                                                                                                                                         
|10.19   |  | Promissory Note, dated March 18, 1998, from Pacific Aerospace
& Electronics, Inc. to KeyBank National Association.(15)                                                                                                                                                                                                                                                                                                                      
|10.20   |  | Security Agreement, dated March 18, 1998, from Pacific
Aerospace & Electronics, Inc. to KeyBank National
Association.(15)                                                                                                                                                                                                                                                                                                                   
|10.21   |  | Loan Agreement, dated September 7, 1999, between Pacific
Aerospace & Electronics, Inc. and KeyBank National
Association.(29)                                                                                                                                                                                                                                                                                                                

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|        |  |                                                                                                                                                                                                  
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                  
|Number  |  | Description                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                  
|10.22   |  | Promissory Note, dated September 22, 1998, from Pacific
Aerospace & Electronics, Inc. to KeyBank National
Association.(22)                                                                       
|10.23   |  | Commercial Security Agreement, dated September 7, 1999,
between Pacific Aerospace & Electronics, Inc. and KeyBank
National Association.(29)                                                      
|10.24   |  | Promissory Note, dated September 30, 1998, from Pacific
Aerospace & Electronics, Inc. to KeyBank National
Association.(22)                                                                       
|10.25   |  | Deed of Trust, dated September 30, 1998, between Pacific
Aerospace & Electronics, Inc., KeyBank National Association
and Land Title Company, Chelan-Douglas County, Inc.(22)                     
|10.26   |  | Modification and/or Extension Agreement, dated October 6,
1999, between Pacific Aerospace & Electronics, Inc. and
KeyBank National Association(29)                                               
|10.27   |  | Modification and/or Extension Agreement, dated September 6,
2000, between Pacific Aerospace & Electronics, Inc. and
KeyBank National Association.(35)                                            
|10.28   |  | Modification and/or Extension Agreement, dated November 13,
2000, between Pacific Aerospace & Electronics, Inc. and
KeyBank National Association.(37)                                            
|10.29   |  | Modification and/or Extension Agreement dated November 28,
2000, between Pacific Aerospace & Electronics, Inc. and
KeyBank National Association.(37)                                             
|10.30   |  | Modification and/or Extension Agreement dated January 5, 2001,
between Pacific Aerospace & Electronics, Inc. and KeyBank
National Association.(37)                                               
|10.31   |  | Modification and/or Extension Agreement dated February 7,
2001, between Pacific Aerospace & Electronics, Inc. and
KeyBank National Association.(39)                                              
|10.32   |  | Letter dated April 11, 2001 to Pacific Aerospace &
Electronics, Inc. from Special Assets Group of Key Bank
Washington.(43)                                                                       
|10.33   |  | Facility Letter, dated July 30, 1998, from Barclays Bank plc
to Aeromet International plc.(20)                                                                                                   
|10.34   |  | Non-Negotiable Promissory Note in the original principal
amount of $1,000,000.00, from U.S. Castings, LLC to Pacific
Aerospace & Electronics, Inc., dated June 14, 2001.(42)                     
|10.35   |  | Guarantee by USCRE Properties, LLC to Pacific Aerospace &
Electronics, Inc., dated June 14, 2001.(42)                                                                                            
|10.36   |  | Escrow Note in the original principal amount of $160,000.00,
from U.S. Castings, LLC and USCRE Properties, LLC to Pacific
Aerospace & Electronics, Inc., dated June 14, 2001.(42)                
|10.37   |  | U.S. Castings, LLC Limited Liability Company Agreement, dated
June 13, 2001.(42)                                                                                                                 
|10.38   |  | First Amendment to U.S. Castings, LLC Limited Liability
Company Agreement, dated June 14, 2001.(42)                                                                                              
|10.39   |  | USCRE Properties, LLC Limited Liability Company Agreement,
dated June 13, 2001.(42)                                                                                                              
|10.40   |  | First Amendment to USCRE Properties, LLC Limited Liability
Company Agreement, dated June 14, 2001.(42)                                                                                           
|10.41   |  | General Terms Agreement No. BCA-65323-0458 dated December 20,
1999 between The Boeing Company and Pacific Aerospace &
Electronics, Inc. (U.S. Aerospace Group and European Aerospace
Group).(31) 
|10.42   |  | Special Business Provisions No. POP-65323-0519 December 20,
1999 between The Boeing Company and Pacific Aerospace &
Electronics, Inc. (U.S. Aerospace Group and European Aerospace
Group).(1)(31)
|10.43   |  | Option to Purchase, dated January 29, 1999, between Pacific
Aerospace & Electronics, Inc. and Donald A. Wright.(27)                                                                              
|10.44   |  | Real Estate Agreement, dated January 15, 1999, between Pacific
Aerospace & Electronics, Inc. and the Port of Chelan County.(27)                                                                  
|10.45   |  | Real Estate Purchase and Sale Agreement dated December 29,
2000, between Pacific Aerospace & Electronics, Inc. and the
Port of Chelan County.(37)                                                
|10.46   |  | Rescission and Termination Agreement, dated July 31, 2001,
between Pacific Aerospace & Electronics, Inc. and the Port of
Chelan County.(43)                                                      
|10.47   |  | Agreement of Sale, dated October 23, 2000 between Balo
Precision Parts, Inc. and D&G Group II, LLC, Louis E. and Mary
E. Giresi Grandchildrens Education Trust.(37)                             

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|        |  |                                                                                                                                                                                                                                                                                                                                                                          
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                          
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                                                                                                          
|10.48   |  | Consent executed by KeyBank National Association in favor of
the Company and Pacific Coast Technologies, Inc. dated as of
March 18, 2002.(44)                                                                                                                                                                                                                            
|10.49   |  | Forbearance Agreement executed by KeyBank National Association
in favor of the Company dated as of March 15, 2002.(44)                                                                                                                                                                                                                                                   
|10.50   |  | Deed of Trust, Security Agreement And Fixture Filing With
Assignment Of Leases And Rents by and among Pacific Aerospace
& Electronics, Inc., Cashmere Manufacturing Co., Inc.,
Northwest Technical Industries, Inc., Land Title Company Of
Chelan  Douglas County, Inc., and First Union National Bank
(Headquarters building 430 Olds Station Road).(44)              
|10.51   |  | Deed of Trust, Security Agreement And Fixture Filing With
Assignment Of Leases And Rents by and among Pacific Aerospace
& Electronics, Inc., Cashmere Manufacturing Co., Inc.,
Northwest Technical Industries, Inc., Land Title Company Of
Chelan  Douglas County, Inc., and First Union National Bank
(Bonded Metals Division 2249 Diamond Point Road, Sequim WA).(44)
|10.52   |  | Deed of Trust, Security Agreement And Fixture Filing With
Assignment Of Leases And Rents by and among Pacific Aerospace
& Electronics, Inc., Cashmere Manufacturing Co., Inc.,
Northwest Technical Industries, Inc., Land Title Company Of
Chelan  Douglas County, Inc., and First Union National Bank
(Cashmere Warehouse 209 Mission Street, Cashmere, WA).(44)      
|10.53   |  | Note Purchase Agreement by and among Pacific Aerospace &
Electronics, Inc., the Initial Purchaser and First Union
National Bank dated as of March 19, 2002.(44)                                                                                                                                                                                                          
|21.1    |  | List of Subsidiaries(45)                                                                                                                                                                                                                                                                                                                                                 
|23.1    |  | Consent of KPMG LLP(45)                                                                                                                                                                                                                                                                                                                                                  



---

|(1)  |  | Subject to confidential treatment. Omitted confidential information was
filed separately with the Securities and Exchange Commission.          
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|(2)  |  | Incorporated by reference to the Companys Annual Report on Form 10-KSB
for the year ended May 31, 1995.                                       
|    
|    
|    
|    
|(3)  |  | Incorporated by reference to Amendment No. 1 to the Companys
Registration Statement on Form SB-2 filed on June 19, 1996.                      
|    
|    
|    
|    
|(4)  |  | Incorporated by reference to the Companys Annual Report on Form 10-KSB
for the year ended May 31, 1996.                                       
|    
|    
|    
|    
|(5)  |  | Incorporated by reference to the Companys Current Report on Form 10-QSB
for the quarterly period ended November 30, 1996.                     
|    
|    
|    
|    
|(6)  |  | Incorporated by reference to the Companys Current Report on Form 8-K
filed on December 12, 1996, reporting the reincorporation merger.        
|    
|    
|    
|    
|(7)  |  | Incorporated by reference to the Companys Registration Statement of
Certain Successor Issuers on Form 8-B filed on February 6, 1997.          
|    
|    
|    
|    
|(8)  |  | Incorporated by reference to the Companys Current Report on Form 8-K
filed on March 12, 1997, reporting the Series A Preferred Stock offering.
|    
|    
|    
|    
|(9)  |  | Incorporated by reference to the Companys Annual Report on Form 10-KSB
for the fiscal year ending May 31, 1997.                               
|    
|    
|    
|    
|(10) |  | Incorporated by reference to the Companys Registration Statement on Form
S-8 filed on June 11, 1997.                                          
|    
|    
|    
|    
|(11) |  | Incorporated by reference to the Companys Definitive Proxy Statement for
its 1997 Annual Shareholders Meeting, filed on August 28, 1997.      
|    
|    
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|(12) |  | Incorporated by reference to the Post-Effective Amendment No. 1 to Form
SB-2, filed on November 3, 1997.                                       
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|    
|(13) |  | Incorporated by reference to the Companys Quarterly Report on Form
10-QSB for the quarterly period ending November 30, 1997.                  
|    
|    
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|    
|(14) |  | Incorporated by reference to the Companys Registration Statement on Form
S-3 filed on December 3, 1997.                                       

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##### Table of Contents



|(15) |  | Incorporated by reference to the Companys Quarterly Report on Form
10-QSB for the quarterly period ending February 28, 1998.                                        
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
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|(16) |  | Incorporated by reference to the Companys Current Report on Form 8-K/A,
filed on May 1, 1998.                                                                       
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|(17) |  | Incorporated by reference to the Companys Current Report on Form 8-K
filed on July 10, 1998.                                                                        
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|    
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|(18) |  | Incorporated by reference to the Companys Current Report on Form 8-K
filed on August 14, 1998.                                                                      
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|(19) |  | Incorporated by reference to the Companys Registration Statement on Form
S-8 filed on November 7, 1997.                                                             
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|(20) |  | Incorporated by reference to the Companys Annual Report on Form 10-K for
the fiscal year ending May 31, 1998.                                                       
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|(21) |  | Incorporated by reference to the Companys Definitive Proxy Statement
filed on September 1, 1998.                                                                    
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|    
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|    
|(22) |  | Incorporated by reference to the Companys Quarterly Report on Form 10-Q,
and Form 10-Q/A, for the quarterly period ending August 31, 1998.                          
|    
|    
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|    
|(23) |  | Incorporated by reference to the Companys Registration Statement on Form
S-1 filed on October 30, 1998.                                                             
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|    
|(24) |  | Incorporated by reference to the Companys Quarterly Report on Form 10-Q
for the quarterly period ending November 30, 1998.                                          
|    
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|(25) |  | Incorporated by reference to Registration Statement on Form S-4 filed on
November 25, 1998.                                                                          
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|(26) |  | Incorporated by reference to Amendment No. 1 to Registration Statement on
Form S-4 filed on January 20, 1999.                                                        
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|(27) |  | Incorporated by reference to the Companys Quarterly Report on Form 10-Q
for the quarterly period ending February 28, 1999.                                          
|    
|    
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|    
|(28) |  | Incorporated by reference to the Companys Annual Report on Form 10-K
filed on August 30, 1999.                                                                      
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|    
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|    
|(29) |  | Incorporated by reference to the Companys Quarterly Report on Form 10-Q
for the quarterly period ending August 31, 1999.                                            
|    
|    
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|    
|(30) |  | Incorporated by reference to the Companys Definitive Proxy Statement
filed on September 1, 1999.                                                                    
|    
|    
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|    
|(31) |  | Incorporated by reference to the Companys Quarterly Report on Form 10-Q
for the quarterly period ending February 29, 2000.                                          
|    
|    
|    
|    
|(32) |  | Incorporated by reference to the Companys Current Report on Form 8-K
filed on May 31, 2000.                                                                         
|    
|    
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|    
|(33) |  | Incorporated by reference to the Companys Current Report on Form 8-K
filed on August 8, 2000.                                                                       
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|    
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|    
|(34) |  | Incorporated by reference to the Companys Annual Report on Form 10-K
filed on August 28, 2000.                                                                      
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|    
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|    
|(35) |  | Incorporated by reference to the Companys Quarterly Report on Form 10-Q
for the quarterly period ending August 31, 2000.                                            
|    
|    
|    
|    
|(36) |  | Incorporated by reference to the first amendment on Form 10-K/A to the
Companys Annual Report for the fiscal year ended May 31, 2000, as filed
on October 13, 2000. 
|    
|    
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|    
|(37) |  | Incorporated by reference to the Companys Quarterly Report on Form 10-Q
for the quarterly period ending November 30, 2000.                                          
|    
|    
|    
|    
|(38) |  | Incorporated by reference to the second amendment on Form 10-K/A to the
Companys Annual Report for the fiscal year ended May 31, 2000, as filed
on January 18, 2001.
|    
|    
|    
|    
|(39) |  | Incorporated by reference to the Companys Current Report on Form 8-K
filed on February 9, 2001.                                                                     
|    
|    
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|    
|(40) |  | Incorporated by reference to the Companys Current Report on Form 8-K
filed on February 21, 2001.                                                                    
|    
|    
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|    
|(41) |  | Incorporated by reference to the Companys Current Report on Form 8-K
filed on March 7, 2001.                                                                        
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|    
|    
|    
|(42) |  | Incorporated by reference to the Companys Current Report on Form 8-K
filed on June 27, 2001.                                                                        
|    
|    
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|    
|(43) |  | Incorporated by reference to the Companys Annual Report on Form 10-K for
the fiscal year ended May 31, 2001, as filed on August 27, 2001.                           
|    
|    
|    
|    
|(44) |  | Incorporated by reference to the Companys Current Report on Form 8-K
filed on April 3, 2002.                                                                        
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|    
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|    
|(45) |  | Filed with this report.                                                                                                                                              

123