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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 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, 2003                                                  
|      |  |                                                                                         
|[   ] |  | 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 |  | (I.R.S. Employer   
|Incorporation or Organization)  |  | Identification No.)

|                                         |  |           
|---------------------------------------- |  | ----------
|430 Olds Station Road, Third Floor       |  |           
|Wenatchee, Washington                    |  | 98801     
|(Address of Principal Executive Offices) |  | (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, $0.001 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 and non-voting common equity held by
non-affiliates of the registrant, computed by reference to the price at which
the common equity was last sold, or the average bid and ask price of such
common equity on the NASD Over-the-Counter Bulletin Board as of November 29,
2002, was approximately $8,537,000.

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [  ]  No [X]

The number of shares outstanding of the Registrants common stock, $0.001 par
value per share, as of August 21, 2003 was 24,779,209 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                                                                 
|Consolidated Balance Sheets                                          
|Consolidated Statements of Operations and Comprehensive Income (Loss)
|Consolidated Statements of Stockholders Equity (Deficit)            
|Consolidated Statements of Cash Flows                                
|                                                                      | ITEM 8A. SELECTED QUARTERLY FINANCIAL DATA                                                   
|                                                                      | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|                                                                      | ITEM 9A. CONTROLS AND PROCEDURES                                                             
|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                                      
|PART IV                                                              
|                                                                      | ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                     
|SIGNATURES                                                           
|EXHIBIT 4.5                                                          
|EXHIBIT 4.39                                                         
|EXHIBIT 10.7                                                         
|EXHIBIT 10.18                                                        
|EXHIBIT 23.1                                                         
|EXHIBIT 31.1                                                         
|EXHIBIT 31.2                                                         
|EXHIBIT 32.1                                                         
|EXHIBIT 32.2                                                         



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TABLE OF CONTENTS

|                  |  |                                                                                       |  |   
|----------------- |  | ------------------------------------------------------------------------------------- |  | --
|Item of Form 10-K |  | Page                                                                                 
|                  |  |                                                                                      
|Part I            |  |                                                                                       |  |   
|Item 1.           |  | Description of Business                                                               |  | 2 
|Item 2.           |  | Description of Property                                                               |  | 22
|Item 3.           |  | Legal Proceedings                                                                     |  | 23
|Item 4.           |  | Submission of Matters To a Vote of Security Holders                                   |  | 23
|Part II           |  |                                                                                       |  |   
|Item 5.           |  | Market for Common Equity and Related Shareholder Matters                              |  | 24
|Item 6.           |  | Selected Financial Data                                                               |  | 28
|Item 7.           |  | Managements Discussion and analysis of Financial Condition and Results of Operations |  | 30
|Item 7a.          |  | Quantitative And Qualitative Disclosures About Market Risk                            |  | 41
|Item 8.           |  | Financial Statements                                                                  |  | 42
|Item 8a.          |  | Selected Quarterly Financial Data                                                     |  | 84
|Item 9.           |  | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure  |  | 85
|Item 9a.          |  | Controls and Procedures                                                               |  | 85
|Part III          |  |                                                                                       |  |   
|Item 10.          |  | Directors And Executive Officers Of The Company                                       |  | 86
|Item 11.          |  | Executive Compensation                                                                |  | 88
|Item 12.          |  | Securities Ownership Of Directors, Executive Officers And Principal Shareholders      |  | 92
|Item 13.          |  | Certain Relationships And Related Transactions                                        |  | 95
|Part IV           |  |                                                                                       |  |   
|Item 14.          |  | Exhibits, Financial Statement Schedules And Reports On Form 8-K                       |  | 97
|Signatures        |  | 103                                                                                  

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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.

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
11 1/4% 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
automatically converted (the Automatic Conversion) into 4,865,820,023 shares
of our common stock following shareholder approval of an increase in the number
of our authorized shares of common stock. Following the conversion of the
Series C Preferred Stock, the Companys shareholders approved an amendment to
the Articles of Incorporation providing for a 200 to 1 reverse split of the
Companys common stock, with a proportionate reduction in the Companys
authorized common stock (the Reverse Split). The Reverse Split did not affect
the par value of the common stock.

As a result of 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
Senior Loan) represented by new senior secured notes (the Senior Notes, and
the holder thereof, the Senior Noteholders). The Senior Notes were issued at a
discount so that the proceeds of that loan totaled approximately $22.0 million.
The Senior Notes will accrete through May 1, 2007 to a principal amount of
$36.0 million and will bear interest on the fully accreted amount at 5% per
annum beginning on the date of the exchange. We used $16.2 million of the
proceeds from the Senior Notes to pay off principal and accrued interest on our
then outstanding 21% senior secured loan. The remaining proceeds were used for
working capital, to pay the fees and costs of the restructuring and for other
general corporate purposes.

References in this Form 10-K to the Company include Pacific Aerospace &
Electronics, Inc., and its subsidiaries. Our headquarters is 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, 2003. The description of the Companys business in
this report focuses on the operations as they were organized as of May 31,
2003. 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.

Our Internet website address is http://www.pcth.com. We make our periodic
reports and other filings available through our website, free of charge, as
soon as practical after they are filed with or furnished to the Securities and
Exchange Commission. Readers should note that the contents of our website are
not

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incorporated into our Securities and Exchange Commission reports, nor should
any part of that website be considered a part of any such report for any
purpose.

Business Strengths

Significant Customer Base

We have a diverse international customer base, which includes many of the
worlds leading companies in their industries. Our customers over the past
year have included 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, 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 23
U.S. patents, 4 non-U.S. patents, and 4 pending patent applications in non-U.S.
jurisdictions, and we 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 assemblies to Boeing for various commercial
aircraft construction programs and to members of the Airbus consortium for
Airbus A318-A321, A330/340, and A380 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 design and manufacturing 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 allow us to

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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 aerospace and electronics component
manufacturer that generates profitable growth by integrating manufacturing
processes, introducing new products and technologies, and developing new
customers in 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.

Offer Complete Solutions

We have continued to vertically consolidate 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
integrated design and assembly capabilities. We believe commercial aircraft
manufacturers, defense contractors, and leading manufacturers in other
industries will continue 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, fiber optic, power supply
and advanced medical products industries. As a result of these efforts, we
have reduced our reliance on the cyclical aerospace industry, allowing us to
become an important part of emerging industries.

Industry Overview

Aerospace

The airline industry is in the middle of the worst downturn in recent aviation
history. The industry experienced negative growth in 2001 and no growth in
2002. For several of the preceding years, the commercial aerospace industry had
been in decline as airlines sought to reduce costs, and the defense industry
had experienced substantial force reductions and corresponding declines in
military spending. The commercial aerospace trend is expected to continue in
2003 due to the current political climate and threat of contagious viruses.
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. The Boeing 2003 Current Market Outlook
forecasts that worldwide economic growth will average 3.2% per year over the
next 20 years, this economic growth will translate into 5.1% per year in
airline passenger traffic growth and 6.4% per year in cargo traffic growth.
Boeing also forecasts that this growth will create a demand that will more than
double the world aircraft fleet over the next 20 years, where one-fourth of the
market for

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new commercial jets can be thought of as replacement for older in-service
airplanes, and the remaining three-quarters for accommodation of both passenger
and cargo traffic growth.

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 gear. 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

Growth in the high reliability electronics industry has historically 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 2003, and the
industry segments in which we operated during fiscal 2003, are summarized
below.

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, 2003.

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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        |  | Design and
manufacture of
electronic
components
Explosive forming
and bonding of
dissimilar metals                                |  | Electronic
connectors,
packages and
assemblies with
ceramic or glass
hermetic seals
Ceramic discoidal
electromagnetic
filters and
capacitors
Explosively bonded
metals for use in
electronic
connectors,
assemblies and
marine products
|                |  |                     |  |                              |  |                                                                                                                                   |  |                                                                                                                                                                                                                                        
|                |  |                     |  | Machining Components         |  | Precision machining
and assembly                                                                                                  |  | 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 Forming

Metal Casting |  | Hot and
superplastic
titanium forming;
cold stretch
aluminum forming

Sand 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.

|                       |  |                       |  |                                    |       |                     |       |      |       |   |       |   |      |   |      |  
|---------------------- |  | --------------------- |  | ---------------------------------- | ----- | ------------------- | ----- | ---- | ----- | - | ----- | - | ---- | - | ---- | -
|                       |  |                       |  |                                    |       | Years Ended May 31,
|                       |  |                       |  |                                    |       |                    
|Segment                |  | Business Unit         |  | 2001                               |       | 2002                |       | 2003
|                       |  |                       |  |                                    |       |                     |       |     
|U.S. Operations        |  | Electronic Components |  |                                    | 20.99 | %                   |       |      | 24.86 | % |       |   | 29.4 | %
|                       |  |                       |  | Machining Components               |       |                     | 11.15 | %    |       |   | 16.64 | % |      |   | *    |  
|European Operations    |  | Metal Forming         |  |                                    | 21.50 | %                   |       |      | 25.13 | % |       |   | 28.5 | %
|                       |  |                       |  | Metal Casting                      |       |                     | 25.70 | %    |       |   | 31.51 | % |      |   | 32.5 | %
|Discontinued Divisions |  | Display Division      |  |                                    | *     |                     |       |      | *     |   |       |   | N/A  |  
|                       |  |                       |  | U.S. Casting Division              |       |                     | *     |      |       |   | N/A   |   |      |   | N/A  |  
|                       |  |                       |  | Engineering & Fabrication Division |       |                     | *     |      |       |   | *     |   |      |   | N/A  |  



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

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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
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 that are used
in 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 that incorporate our products
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 shipboard 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 the worlds smallest multilayer discoidal
(round) ceramic capacitors and EMI (electro-magnetic interference) filters for
the electronics industry. Furthermore, 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 used in 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 and spacecraft uses. One major application for these products is in the
maritime industry, where they provide a solution to the ageless problem of
galvanic corrosion. Utilizing explosive metal forming, we 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.

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Our proprietary and patented technologies 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.
Our zirconia-metal fusion technology has also been applied 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 a number of
composite 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 several years, 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 manufacturing and
machining facilities today due to this in house development program.

The Electronic Components business unit holds a certificate of registration to
the ISO 9001 standard and 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. Our products are machined and assembled either to
customer specifications or according to an engineering and tooling design
developed by us to suit our customers particular needs. All products are
inspected and tested at various stages of production using non-destructive
methods such as X-ray, ultrasound, 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. This unit also supplies key machined components
to our Electronic Components business unit.

Historically, we have supplied nearly all of our products from this business
unit to the commercial aerospace and defense industries. As a result, our
sales and profitability have been significantly, and often adversely, affected
by fluctuations in these industries. As a result, we believe it is important
to diversify our product offerings. With that goal in mind, during fiscal
2003, the Machining Components unit sold its rights and responsibilities for
its Boeing Statement of Work to an independent third party. We also sold
inventory, tooling and certain intangible assets related to the Boeing
Statement of Work. This sale will help us focus our resources on industries
other than commercial aerospace such as the medical and semiconductor equipment
industries. We continue to look for ways to offer our capabilities to leaders
in these and other new markets.

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Our operations are DI-9000A Boeing approved. Our Wenatchee, Washington
operations have also been audited and have received certificates of
registration to the ISO 9002 and AS 9000 standards. We have won numerous
quality and service awards from our customers.

European Operations

Metal
Forming

At our Welwyn Garden City and Birmingham facilities in England, our European
Operations unit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.

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 designers 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, A330/340, and A380
aircraft, the Boeing model 737 aircraft, the Bombardier 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
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, and can apply stretching loads of up to 700
tons. Most tools are machined from oxidation-resistant stainless steel
castings, and forming dies up to four tons can be handled. Using this tooling
together with specialist gripper jaws and rotational platen, the division can
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

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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 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.

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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 2003 were Northrop
Grumman, Boeing, Airbus, Aermacchi, Raytheon, Westland Structures, GKN
Westland, BAE Systems, Alenia and Rolls-Royce. Only the top four customers
individually accounted for 5% or more of our revenues, with Northrop Grumman at
approximately 8.5%, Boeing at approximately 7.8%, Airbus at approximately 6.6%,
and Aermacchi at 6.1%. Together, our top ten customers accounted for
approximately 51.5% of our sales during fiscal 2003. In fiscal 2003, we
produced electronic packaging and connectors for Northrop Grumman, and 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 different customers
in the aerospace market. 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 United Kingdon 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, 2003, we had purchase orders and
contractual arrangements evidencing anticipated future deliveries, which we
treat as backlog, through fiscal year 2005 of approximately $36 million. We
expect to deliver approximately $32 million of this backlog in fiscal year
2004. 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.

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

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 23 U.S. patents, four non-U.S. patents, and four 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
three patents expiring over the next two years. These three 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 2003. 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. For example we are currently engaged in
litigation with former employees to protect certain of our intellectual

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property. 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.

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 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.

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, 2003, the Company had approximately 614 employees, of whom
approximately 559 were engaged in manufacturing functions, 20 in sales and
marketing functions, 30 in administrative functions, and 5 in executive
functions. Of the employees, approximately 177 were employed by the U.S.
Operations, 435 by the European Operations and 2 by our corporate holding
company. As of May 31, 2003, 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 relationship with our employees is strong.

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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 $75,720,000 for our fiscal year ended May 31, 2001,
net income of $4,525,000 for our fiscal year ended May 31, 2002, and a net loss
of $11,742,000 for our fiscal year ended May 31, 2003. We believe that we will
continue to incur net losses during fiscal 2004 and that such losses may be
substantial. We can offer no assurance that we will achieve profitable
operations. Our ability to reach profitability in the future will depend on
many factors, including our ability to finance working capital 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. In protracted or severe instances we may be
unable to meet our obligations as they come due, and any failure to do so would
materially and adversely affect any investment in the Company.

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 and has 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 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 with a carrying value of $25.7
million as of May 31, 2003. These notes do not require us to make cash interest
payments. In addition to the PIK Notes, we have approximately $27.2 million
(net of unamortized discount of $11.7 million) in senior secured debt and
capital leases. We must increase our cash flow from operations if we are to be
able to satisfy our debt obligations in the future. Our debt could make us
unable to obtain additional financing in the future, and most of our secured
debt includes covenants that restrict our ability to borrow additional funds
even if sources for such loans were to be available. Our interest expense also
diverts 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 limits 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 KeyBank, N.A., 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. KeyBank has agreed to forbear from declaring
covenant defaults relating to their loans until December 31, 2004, pursuant to
a forbearance agreement dated June 25, 2003 so long as we maintain timely
payments on the notes. We also have been notified by the Senior

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Noteholders
that we are not in compliance with a covenant relating to the Senior Notes.
The Senior Noteholders have agreed to forbear from declaring covenant default until June
1, 2004, pursuant to a forbearance agreement dated August 8, 2003.

If the holders of our debt obligations were to exercise their remedies, either
because we fail to make timely payments on the loans or after the forbearance
agreements expire, we 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, nor can we provide assurance that additional or extended
forbearance will be granted.

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

The note purchase agreement that relates to the Senior Notes and the Indenture
to our PIK Notes, as well as various agreements ancillary to those securities,
substantially restrict our activities. Unless we obtain consent from our
lenders, we generally cannot sell or borrow against our assets or incur
additional indebtedness. We are not permitted to pay dividends 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 certain types of transactions. In addition, if we experience a
change of control, we will be required to repay our debt early, which creates a
substantial disincentive to any potential acquiror. 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.

Our 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 KeyBank that we are not in compliance with
covenants of loans that are secured a first deed of trust on our headquarters
building and a security interest in leasehold improvements on another building
that we lease. KeyBank has agreed to forbear from declaring covenant defaults
relating to their loans until December 31, 2004, pursuant to a forbearance
agreement dated June 25, 2003 so long as we maintain timely payments on the
notes. We also have been notified by the Senior Noteholders that we are not in
compliance with a covenant relating to the Senior Notes. The Senior
Noteholders have agreed to forbear from declaring covenant default until June
1, 2004, pursuant to a forbearance agreement dated August 8, 2003.

Our ability to meet these ratios and tests and to comply with other provisions
governing the Senior Notes 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 any or all of our debt arrangements.

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.

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Our noteholders own a substantial majority of our outstanding voting stock, and
thus control all matters requiring a shareholder vote, including the election
of directors.

The holders of our PIK Notes and our Senior Notes and their affiliates, in the
aggregate, own approximately 97.5% of our outstanding common stock. As such,
these 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 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 and their affiliates
effectively have the power to hire and fire our management team and otherwise
to control our operations.

Our Company and the noteholders are subject to potential conflicts of interest.

The noteholders and their affiliates, in the aggregate, own approximately 97.5%
of our common stock. The noteholders also hold outstanding PIK Notes in the
aggregate principal amount of $15 million and Senior Notes with an aggregate
principal amount of $24.3 million at May 31, 2003. As a result of their stock
ownership, the noteholders can elect a majority of our Board of Directors. The
Senior Notes contain restrictive covenants and default protections that
effectively allow the holders 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 interest of the
noteholders 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, 2003, approximately 56% of our assets and
approximately 61% of our revenues were associated with our operations in the
United Kingdom. Logistical issues make it more difficult and expensive 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 61% 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, 2003, we
incurred a foreign currency translation gain of $2.9 million. 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.

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
electronics industries are sensitive to general economic conditions, and past
and current recessions have adversely affected these

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industries. In past
years, a number of factors, such as terrorist attacks, viral epidemics, fuel
and labor costs and other matters have adversely affected the aerospace industry. These
factors have led airlines and other aircraft operators to reduce or eliminate
orders for new aircraft, which diminishes the demand for our aerospace
products. Similar patterns have emerged in the electronics industry, where
consistently reduced margins and slowing demand as a result of technology
saturation has impacted, and likely will continue to impact, the demand for our
products. As a result, cyclical factors and general economic conditions have in
the past caused, and likely will continue to cause, periodic downturns in
demand for our core products; if and when those conditions occur or persist, we
will experience decreased 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. 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, and our existing financial condition and debt covenants make
it difficult for us to invest in evolving technologies. If we do not
adequately respond to changes that occur in our markets, 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.

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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, 2003, we had purchase orders and
contractual arrangements evidencing anticipated future deliveries, which we
treat as backlog, of approximately $36 million. We expect to deliver
approximately $32 million of this backlog in fiscal year 2004. 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 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. 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.

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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 23 U.S. patents, four non-U.S. patents, and four 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
three patents expiring over the next two 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, and we are presently in litigation with former employees whom we
contend have misappropriated proprietary information. 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 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.

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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.

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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, 2003 are as follows:

|                    |  |                       |  |                       |        |         |        |       |  |            |         |         |         |          |      |  |      |      |     |  |     |  |  | 
|------------------- |  | --------------------- |  | --------------------- | ------ | ------- | ------ | ----- |  | ---------- | ------- | ------- | ------- | -------- | ---- |  | ---- | ---- | --- |  | --- |  |  | 
|                    |  |                       |  |                       |        | Approx. |        | Own/  |  | Annual     |         | Lease   |         | Mortgage
|Group               |  | Location              |  | Area                  |        | Lease   |        | Rent  |  | Expiration |         | Balance
|                    |  |                       |  |                       |        |         |        |       |  |            |         |        
|U.S. Operations     |  | Wenatchee, Washington |  |                       | 54,000 |         |        | Lease |  | $          | 379,000 |         |         |          | 2010 |  |      |      | N/A | 
|                    |  | Sequim, Washington    |  |                       | 18,355 |         |        | Own   |  |            | N/A     |         |         |          | N/A  |  |      | None
|                    |  |                       |  | Wenatchee, Washington |        |         | 42,000 |       |  | Lease      |         | $       | 212,000 |          |      |  | 2010 |      |     |  | N/A | 
|                    |  |                       |  | Wenatchee, Washington |        |         | 12,000 |       |  | Lease      |         | $       | 76,000  |          |      |  | 2006 |      |     |  | N/A | 
|European Operations |  | Sittingbourne         |  |                       | 54,500 |         |        | Lease |  | £          | 258,000 |         |         |          | 2018 |  |      |      | N/A | 
|                    |  | Sittingbourne         |  |                       | 7,500  |         |        | Lease |  | £          | 50,000  |         |         |          | 2005 |  |      |      | N/A | 
|                    |  |                       |  | Rochester             |        |         | 37,345 |       |  | Lease      |         | £       | 180,000 |          |      |  | 2011 |      |     |  | N/A | 
|                    |  |                       |  | Worcester             |        |         | 40,000 |       |  | Lease      |         | £       | 160,000 |          |      |  | 2018 |      |     |  | N/A | 
|                    |  |                       |  | Worcester             |        |         | 15,000 |       |  | Lease      |         | £       | 56,000  |          |      |  | 2018 |      |     |  | N/A | 
|                    |  |                       |  | Welwyn Garden City    |        |         | 55,000 |       |  | Lease      |         | £       | 333,000 |          |      |  | 2018 |      |     |  | N/A | 
|                    |  |                       |  | Birmingham            |        |         | 59,000 |       |  | Lease      |         | £       | 236,000 |          |      |  | 2005 |      |     |  | N/A | 

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

|                                                 |                                          |                       |  |              |        |              |  |            |     |             |  |        |     |  |                                                                                          |                                             |  |  |  | 
|------------------------------------------------ | ---------------------------------------- | --------------------- |  | ------------ | ------ | ------------ |  | ---------- | --- | ----------- |  | ------ | --- |  | ---------------------------------------------------------------------------------------- | ------------------------------------------- |  |  |  | 
|                                                 |                                          |                       |  |              |        | Approx. Area |  | Annual     |     | Lease       |  |        |     | 
|Group / Division                                 |                                          | Location              |  | Leased       |        | Rent         |  | 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,
WashingtonEverett, WA |                       |  | 10,00011,500 |        |              |  | N/AN/A     |     |             |  | N/AN/A |     |  | PA&E lease
terminated as of January 1, 2003PA&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   

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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. Additionally, on
November 26, 2002, we filed a lawsuit in the U.S. District Court for the
Eastern District of Washington against certain former employees, RAAD
Technologies, Inc., and certain of RAADs control persons and agents, for
misappropriation of trade secrets and breach of contract. That action is
styled Pacific Aerospace & Electronics, Inc., v. RAAD Technologies, Inc., et
all. On February 18, 2003, RAAD Technologies, Inc. filed a lawsuit against us
in the U.S. District Court for Western District of Washington (RAAD
Technologies, Inc., v. Pacific Aerospace & Electronics, Inc.) seeking a ruling
that one of RAADs products does not infringe our patents. The Western
District lawsuit was stayed pending the outcome of the Eastern District action.
On June 20, 2003, the judge in the Eastern District action granted a
preliminary injunction that bars RAAD from certain types of competitive
actions.




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

On May 7, 2003, we held our 2002 annual meeting of shareholders. The
shareholders voted upon the following matters at the meeting:

(a)  Election of the following five individuals to serve as directors of the
Company:

|                     |  |     |            |         |  |         |       |           |  |  |       |  |  |        |   | 
|-------------------- |  | --- | ---------- | ------- |  | ------- | ----- | --------- |  |  | ----- |  |  | ------ | - | 
|                     |  |     |            |         |  |         |       |           |  |  |       |  |  | BROKER
|DIRECTOR             |  | FOR |            | AGAINST |  | ABSTAIN |       | NON-VOTES
|                     |  |     |            |         |  |         |       |          
|Richard W. Detweiler |  |     | 16,244,194 |         |  |         | 202   |           |  |  | 5,664 |  |  |        |  | 
|Carl H. Goldsmith    |  |     | 16,244,384 |         |  |         | 12    |           |  |  | 5,664 |  |  |        |  | 
|Matthew C. Kaufman   |  |     | 16,244,221 |         |  |         | 175   |           |  |  | 5,664 |  |  |        |  | 
|Philip Raygorodetsky |  |     | 16,244,247 |         |  |         | 149   |           |  |  | 5,664 |  |  |        |  | 
|Donald A. Wright     |  |     | 16,242,693 |         |  |         | 1,703 |           |  |  | 5,664 |  |  |        |  | 

(b)  Ratification of the appointment of KPMG LLP as the independent auditors of
the Company for the fiscal year ended May 31, 2003:

|                 |  |  |            | 
|---------------- |  |  | ---------- | 
|For              |  |  | 16,248,186 | 
|Against          |  |  | 1,325      | 
|Abstain          |  |  | 549        | 
|Broker Non-Votes |  |  |           | 
|TOTAL            |  |  | 16,250,060 | 

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PART II




ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

Market Information, Shareholders, and Dividends

Our common stock is listed on the NASD Over-the-Counter Bulletin Board (OTC
Bulletin Board) under the symbol PFAE. 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 2001 through May 31, 2003, which covers all of
the calendar quarters within the Companys 2002 and 2003 fiscal years. The
closing prices for our common stock and public warrants were obtained on the
OTC Bulletin Board.

All prices have been adjusted to reflect the 1-for-200 reverse stock split
effected as of February 17, 2003.

|                                        |  |              |         |                 |  |      |        |     |  |  |        |  |  |  |        | 
|--------------------------------------- |  | ------------ | ------- | --------------- |  | ---- | ------ | --- |  |  | ------ |  |  |  | ------ | 
|                                        |  | Common Stock |         | Public Warrants
|Calendar Period                         |  | High         |         | Low             |  | High |        | Low
|2001                                    |  |              |         |                 |  |      |        |     |  |  |        |  |  |  |        | 
|First Quarter                           |  |              | 181.200 |                 |  |      | 43.800 |     |  |  | 62.600 |  |  |  | 18.800 | 
|Second Quarter                          |  |              | 62.600  |                 |  |      | 36.000 |     |  |  | 32.000 |  |  |  | 16.000 | 
|Third Quarter                           |  |              | 36.000  |                 |  |      | 10.000 |     |  |  | 10.000 |  |  |  | 1.000  | 
|Fourth Quarter                          |  |              | 30.000  |                 |  |      | 9.000  |     |  |  | 5.000  |  |  |  | 0.400  | 
|2002                                    |  |              |         |                 |  |      |        |     |  |  |        |  |  |  |        | 
|First Quarter                           |  |              | 18.000  |                 |  |      | 6.000  |     |  |  | 2.200  |  |  |  | 0.400  | 
|Second Quarter                          |  |              | 21.000  |                 |  |      | 10.000 |     |  |  | 2.000  |  |  |  | 0.400  | 
|Third Quarter                           |  |              | 11.800  |                 |  |      | 4.000  |     |  |  | 0.002  |  |  |  | 0.002  | 
|Fourth Quarter                          |  |              | 8.000   |                 |  |      | 2.000  |     |  |  | 0.002  |  |  |  | 0.0001 | 
|2003                                    |  |              |         |                 |  |      |        |     |  |  |        |  |  |  |        | 
|First Quarter                           |  |              | 3.200   |                 |  |      | 0.010  |     |  |  | 0.0001 |  |  |  | 0.0001 | 
|Second Quarter (April 1  May 31, 2003) |  |              | 0.510   |                 |  |      | 0.110  |     |  |  | 0.0001 |  |  |  | 0.0001 | 

As of August 18, 2003, the closing sales price of our common stock on the OTC
Bulletin Board was $0.31 per share.

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. The Senior Notes and the indenture governing our PIK
Notes restrict our ability to pay dividends.

As of August 15, 2003, there were 1,384 holders of record of 24,779,209 shares
of common stock outstanding, based on the records maintained by our transfer
agent.

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Summary Equity Compensation Plan Information

|                                                           |  |                      |        |                      |  |                       |        |              |  |                      |           | 
|---------------------------------------------------------- |  | -------------------- | ------ | -------------------- |  | --------------------- | ------ | ------------ |  | -------------------- | --------- | 
|                                                           |  |                      |        |                      |  |                       |        |              |  | Number of securities
|                                                           |  |                      |        |                      |  |                       |        |              |  | remaining available 
|                                                           |  |                      |        |                      |  |                       |        |              |  | for future issuance 
|                                                           |  | Number of securities |        |                      |  |                       |        | under equity
|                                                           |  | to be issued upon    |        | Weighted-average     |  | compensation plans   
|                                                           |  | exercise of          |        | exercise price of    |  | (excluding securities
|                                                           |  | outstanding options, |        | outstanding options, |  | reflected in column  
|Plan category                                              |  | warrants and rights  |        | warrants and rights  |  | (a))                 
|                                                           |  |                      |        |                      |  |                      
|Equity compensation
plans approved by
security holders     |  |                      | 17,837 |                      |  | $                     | 492.66 |              |  |                      | 4,390,900 | 
|Equity compensation
plans not approved
by security holders |  |                      |       |                      |  |                       |       |              |  |                      |          | 
|Total                                                      |  |                      | 17,837 |                      |  | $                     | 492.66 |              |  |                      | 4,390,900 | 

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. Unless otherwise noted herein, all share and per-share figures
reflect the Reverse Split.

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 was 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. Until
conversion, the Series C Preferred Stock had 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

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Preferred Stock ranked senior to all other classes of our capital stock as to
liquidation and distributions. In addition, the Series C Preferred Stock was
entitled to vote with the common stock on all matters brought before the common
stock for approval (other than as required by law) and was 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. On January 27, 2003, following
shareholder approval at a Special Meeting of shareholders, we amended our
Articles of Incorporation to increase the number of authorized shares of common
stock. The increase in authorized shares of common stock resulted in the
automatic conversion of all of the outstanding shares of our Series C Preferred
Stock into 4,865,820,023 pre-split shares of our common stock. As a result,
there are no shares of Series C Preferred Stock outstanding. Subsequently we
consummated the Reverse Split to reduce the number of outstanding shares of
common stock.

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, 2003, we had outstanding exercisable warrants to purchase common
stock as follows:



| |  |  | Warrants to purchase 11,475 shares of common stock, with an
exercise price of $937.50 per share. These warrants were formerly
publicly traded, and all such warrants expired unexercised on July 15,
2003.                                                                
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Warrants and options to purchase a total of 22,318 shares of common
stock issued to several employees and consultants of the Company, that
have exercise prices ranging from $44.00 to $937.50 per share, and have
expiration dates that range from July 2003 to May 2011.
|
| |  |  | Warrants to purchase 333,154 shares of common stock that were
issued in connection with a private placement in July 2000. The
warrants had an exercise price of $0.20 per share and expired
unexercised on July 27, 2003.                                                 
|
| |  |  | Warrants to purchase 76,466 shares of common stock that were issued
in connection with a private placement in March 2001. These warrants
have an exercise price of $0.20 per share, and expire in March 2006.                                                             

All common stock amounts and exercise prices listed above have been adjusted to
reflect the 1-for-200 reverse split.

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.

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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, 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.

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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, 1999, 2000, 2001,
2002 and 2003, 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 and net capital deficiency 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 and reclassified gain on
extinguishment of debt recorded I the prior year from extraordinary item to
other income effective for the year ended May 31, 2003. Share and per-share
data are post Reverse Split.

|                              |                                                        |         |   |                                                      |         |      |   |         |         |      |   |         |         |   |   |         |       |  |   |         |       |  
|----------------------------- | ------------------------------------------------------ | ------- | - | ---------------------------------------------------- | ------- | ---- | - | ------- | ------- | ---- | - | ------- | ------- | - | - | ------- | ----- |  | - | ------- | ----- | -
|                              |                                                        |         |   | Years Ended May 31,                                 
|                              |                                                        |         |   |                                                     
|                              |                                                        |         |   | (in thousands, except percentage and per share data)
|                              |                                                        |         |   | 1999                                                 |         | 2000 |   | 2001    |         | 2002 |   | 2003   
|                              |                                                        |         |   |                                                      |         |      |   |         |         |      |   |        
|Statement of Operations Data: |                                                        |         |   |                                                      |         |      |   |         |         |      |   |         |         |   |   |         |       |  |   |        
|                              | Net sales(1)                                           |         | $ | 107,366                                              |         |      | $ | 112,694 |         |      | $ | 109,288 |         |   | $ | 80,191  |       |  | $ | 65,089  |      
|                              | Cost of sales                                          |         |   | 86,302                                               |         |      |   | 92,063  |         |      |   | 101,048 |         |   |   | 67,761  |       |  |   | 59,345  |      
|                              |                                                        |         |   |                                                      |         |      |   |         |         |      |   |         |         |   |   |         |       |  |   |         |      
|                              | Gross profit                                           |         |   | 21,064                                               |         |      |   | 20,631  |         |      |   | 8,240   |         |   |   | 12,430  |       |  |   | 5,744   |      
|                              | Operating expenses(2)                                  |         |   | 22,039                                               |         |      |   | 24,533  |         |      |   | 67,201  |         |   |   | 15,694  |       |  |   | 12,861  |      
|                              |                                                        |         |   |                                                      |         |      |   |         |         |      |   |         |         |   |   |         |       |  |   |         |      
|                              | Income (loss) from operations                          |         |   | (975                                                 | )       |      |   | (3,902  | )       |      |   | (58,961 | )       |   |   | (3,264  | )     |  |   | (7,117  | )    
|                              | Gain on extinguishment of debt(3)                      |         |   |                                                     |         |      |   | 703     |         |      |   |        |         |   |   | 20,318  |       |  |   |        |      
|                              | Net interest (expense)                                 |         |   | (8,140                                               | )       |      |   | (9,862  | )       |      |   | (10,012 | )       |   |   | (12,802 | )     |  |   | (4,504  | )    
|                              | Other income (expense)                                 |         |   | (6,393                                               | )       |      |   | 33      |         |      |   | 201     |         |   |   | 78      |       |  |   | (438    | )    
|                              |                                                        |         |   |                                                      |         |      |   |         |         |      |   |         |         |   |   |         |       |  |   |         |      
|                              | Income (loss) before taxes                             |         |   | (15,508                                              | )       |      |   | (13,028 | )       |      |   | (68,772 | )       |   |   | 4,330   |       |  |   | (12,059 | )    
|                              | Income tax benefit (expense)                           |         |   | 2,639                                                |         |      |   | (21     | )       |      |   | (6,948  | )       |   |   | 195     |       |  |   | 317     |      
|                              |                                                        |         |   |                                                      |         |      |   |         |         |      |   |         |         |   |   |         |       |  |   |         |      
|                              | Net income (loss)(2)                                   |         | $ | (12,869                                              | )       |      | $ | (13,049 | )       |      | $ | (75,720 | )       |   | $ | 4,525   |       |  | $ | (11,742 | )    
|                              |                                                        |         |   |                                                      |         |      |   |         |         |      |   |         |         |   |   |         |       |  |   |        
|                              | Net income (loss) per share(2):                        |         |   |                                                      |         |      |   |         |         |      |   |         |         |   |   |         |       |  |   |         |      
|                              |                                                        | Basic   |   | $                                                    | (148.27 | )    |   | $       | (118.87 | )    |   | $       | (429.21 | ) |   | $       | 18.25 |  |   | $       | (1.35 | )
|                              |                                                        | Diluted |   |                                                      | (148.27 | )    |   |         | (118.87 | )    |   |         | (429.21 | ) |   |         | 18.25 |  |   |         | (1.35 | )
|                              | Shares used in computation of
income (loss) per share: |         |   |                                                      |         |      |   |         |         |      |   |         |         |   |   |         |       |  |   |         |      
|                              |                                                        | Basic   |   |                                                      | 87      |      |   |         | 110     |      |   |         | 176     |   |   |         | 248   |  |   |         | 8,715 |  
|                              |                                                        | Diluted |   |                                                      | 87      |      |   |         | 110     |      |   |         | 176     |   |   |         | 248   |  |   |         | 8,715 |  
|Cash Flow Data:               |                                                        |         |   |                                                      |         |      |   |         |         |      |   |         |         |   |   |         |       |  |   |        
|                              | Cash flow from operating
activities                    |         | $ | (372                                                 | )       |      | $ | (5,207  | )       |      | $ | (1,600  | )       |   | $ | (319    | )     |  | $ | (2,778  | )    
|                              | Cash flow from investing
activities                    |         |   | (79,274                                              | )       |      |   | (7,673  | )       |      |   | (1,476  | )       |   |   | (2,271  | )     |  |   | (1,407  | )    
|                              | Cash flow from financing
activities                    |         |   | 76,425                                               |         |      |   | 6,834   |         |      |   | 5,290   |         |   |   | 3,790   |       |  |   | 42      |      

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|                      |                                            |  |                |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |        |  
|--------------------- | ------------------------------------------ |  | -------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------ | -
|                      |                                            |  | At May 31,    
|                      |                                            |  |               
|                      |                                            |  | (in thousands)
|                      |                                            |  | 1999           |         | 2000 |  | 2001 |         | 2002 |  | 2003
|                      |                                            |  |                |         |      |  |      |         |      |  |     
|Balance Sheet Data:   |                                            |  |                |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |       
|                      | Cash and cash equivalents                  |  | $              | 8,134   |      |  | $    | 2,154   |      |  | $    | 4,095   |   |  | $ | 5,619   |   |  | $ | 1,948  |  
|                      | Working capital                            |  |                | 38,329  |      |  |      | 29,181  |      |  |      | 25,034  |   |  |   | 24,580  |   |  |   | 18,941 |  
|                      | Total assets                               |  |                | 158,727 |      |  |      | 143,582 |      |  |      | 80,816  |   |  |   | 64,669  |   |  |   | 57,093 |  
|                      | Long-term debt (including
current portion) |  |                | 83,410  |      |  |      | 70,528  |      |  |      | 82,932  |   |  |   | 51,920  |   |  |   | 52,925 |  
|                      | Series C Preferred Stock                   |  |                |        |      |  |      |        |      |  |      |        |   |  |   | 18,715  |   |  |   |       |  
|                      | Stockholders equity (deficit)             |  |                | 54,019  |      |  |      | 49,768  |      |  |      | (25,114 | ) |  |   | (19,608 | ) |  |   | (9,759 | )
|Other Financial Data: |                                            |  |                |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |       
|                      | Capital expenditures                       |  |                | 8,281   |      |  |      | 4,867   |      |  |      | 3,710   |   |  |   | 2,703   |   |  |   | 2,069  |  



---

|(1) |  | The decrease in net sales from 2001 to 2003 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) |  | 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.                                                                                   
|   
|(3) |  | The Company reclassified gain on extinguishment of debt recorded in
prior years from extraordinary item to other income effective for the year
ended May 31, 2003. 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 projections and
statements of intent based upon managements current knowledge and
expectations, and as such, 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.
Certain specific risk factors that may affect our business are described above
under Description of Business  Risk Factors. The information presented in
this report is presented only as of the date hereof, and we cannot undertake to
update this information other than as specifically required by the Exchange
Act.

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 of $11,742,000 for our fiscal
year ended May 31, 2003. This followed income of $4,525,000 for our fiscal
year ended May 31, 2002 and a loss of $75,720,000 for our fiscal year ended May 31, 2001.

In March 2002, in accordance with an exchange agreement the holders of our
senior subordinated debt exchanged $63.7 million aggregate principal amount of
debt securities, 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 automatically converted into 4,865,820,023 shares of our common stock
following the January 27, 2003 shareholder approval of an increase in the
number of our authorized shares of common stock. As a result of the exchange
and the related conversion, the noteholders now hold approximately 97.5% of our
outstanding shares of common stock on a fully-diluted basis. Subsequently we
effected the Reverse Split, which reduced the shares of common stock
outstanding but did not affect the percentage of the noteholders ownership.

In addition to exchanging our previously outstanding subordinated debt
securities as described above, we also issued the Senior Notes having an
aggregate face amount of $36 million in exchange for proceeds of $22 million.
The principal amount of the Senior Notes will accrete through May 1, 2007 to
$36.0 million and will bear interest at 5% per annum on the fully accreted
principal amount. We may redeem the Senior Notes in full or in part at any
time prior to their maturity date at a premium over the accreted value of the
Senior Notes, which premium declines over time. We used $16.2 million of the
proceeds from the Senior Notes to pay off principal and accrued interest on our
then outstanding 21% senior secured loan. 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 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 Senior Notes and the repayment of the $36.0 million
principal amount due on May 1, 2007.

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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.

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
net realizable 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 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. Cash flows expected to
be generated by an asset are estimated based upon historical cash flows from
the asset, current and expected market conditions related to products produced
by the asset and the assets disposal value. Those estimates may not be
accurate if actual market conditions or disposal values are different than
expected. 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
exceeds the fair value of the assets. Fair value of an asset is estimated to
be the present value of its expected future cash flows. Present value of
expected future cash flows is dependent upon identifying the appropriate
interest rate to use in the calculation commensurate with the risks involved.
We determine the appropriate interest rate for the calculation based upon the
rate that would be required for a similar investment with like risks for the
assets being evaluated. 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 or 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

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================================================================================

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 two fiscal years, the following discussion should be read in
conjunction with our consolidated financial statements presented in this Form
10-K. Readers are also directed to the factors set forth in Description of
Business  Risk Factors for a discussion of certain factors that may adversely
affect our business, operations and financial condition.

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,
|                                  |  |                    
|                                  |  | 1999                |         | 2000 |  | 2001 |       | 2002 |  | 2003
|                                  |  |                     |         |      |  |      |       |      |  |     
|Net sales                         |  | $                   | 107,366 |      |  |      | 100.0 | %    |  | $    | 112,694 |   |  |  | 100.0 | %  |  | $ | 109,288 |   |  |  | 100.0 | %  |  | $ | 80,191  |   |  |  | 100.0 | % |  | $ | 65,089  |   |  |  | 100.0 | % 
|Cost of sales                     |  |                     | 86,302  |      |  |      | 80.4  |      |  |      | 92,063  |   |  |  | 81.7  |    |  |   | 101,048 |   |  |  | 92.5  |    |  |   | 67,761  |   |  |  | 84.4  |   |  |   | 59,345  |   |  |  | 91.2  |   
|                                  |  |                     |         |      |  |      |       |      |  |      |         |   |  |  |       |    |  |   |         |   |  |  |       |    |  |   |         |   |  |  |       |   |  |   |         |   |  |  |       |   
|Gross profit                      |  |                     | 21,064  |      |  |      | 19.6  |      |  |      | 20,631  |   |  |  | 18.3  |    |  |   | 8,240   |   |  |  | 7.5   |    |  |   | 12,430  |   |  |  | 15.6  |   |  |   | 5,744   |   |  |  | 8.8   |   
|Operating expenses(1)             |  |                     | 22,039  |      |  |      | 20.5  |      |  |      | 24,533  |   |  |  | 21.8  |    |  |   | 67,201  |   |  |  | 61.5  |    |  |   | 15,694  |   |  |  | 19.5  |   |  |   | 12,861  |   |  |  | 19.7  |   
|                                  |  |                     |         |      |  |      |       |      |  |      |         |   |  |  |       |    |  |   |         |   |  |  |       |    |  |   |         |   |  |  |       |   |  |   |         |   |  |  |       |   
|Income (loss) from operations     |  |                     | (975    | )    |  |      | (0.9  | )    |  |      | (3,902  | ) |  |  | (3.5  | )  |  |   | (58,961 | ) |  |  | (54.0 | )  |  |   | (3,264  | ) |  |  | (3.9  | ) |  |   | (7,117  | ) |  |  | (10.9 | ) 
|Gain on extinguishment of
debt(2) |  |                     |        |      |  |      |      |      |  |      | 703     |   |  |  | 0.6   |    |  |   |        |   |  |  |      |    |  |   | 20,318  |   |  |  | 25.3  |   |  |   |        |   |  |  |      |   
|Net interest expense              |  |                     | (8,140  | )    |  |      | (7.6  | )    |  |      | (9,862  | ) |  |  | (8.8  | )  |  |   | (10,012 | ) |  |  | (9.2  | )  |  |   | (12,802 | ) |  |  | (16.0 | ) |  |   | (4,504  | ) |  |  | (6.9  | ) 
|Other income (expense)            |  |                     | (6,393  | )    |  |      | (6.0  | )    |  |      | 33      |   |  |  |      |    |  |   | 201     |   |  |  | 0.2   |    |  |   | 78      |   |  |  |      |   |  |   | (438    | ) |  |  | (0.7  | ) 
|Income tax benefit (expense)      |  |                     | 2,639   |      |  |      | 2.5   |      |  |      | (21     | ) |  |  |      |    |  |   | (6,948  | ) |  |  | (6.3  | )  |  |   | 195     |   |  |  | 0.2   |   |  |   | 317     |   |  |  | 0.5   |   
|                                  |  |                     |         |      |  |      |       |      |  |      |         |   |  |  |       |    |  |   |         |   |  |  |       |    |  |   |         |   |  |  |       |   |  |   |         |   |  |  |       |   
|Net income (loss)(1)              |  | $                   | (12,869 | )    |  |      | (12.0 | )%   |  | $    | (13,049 | ) |  |  | (11.6 | )% |  | $ | (75,720 | ) |  |  | (69.3 | )% |  | $ | 4,525   |   |  |  | 5.6   | % |  | $ | (11,742 | ) |  |  | (18.0 | )%
|                                  |  |                     |         |      |  |      |       |      |  |      |         |   |  |  |       |    |  |   |         |   |  |  |       |    |  |   |         |   |  |  |       |   |  |   |         |   |  |  |       |   

(1)  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.

(2)  The Company reclassified gain on extinguishment of debt recorded in prior
years from extraordinary item to other income effective for the year ended May
31, 2003. See Notes To Consolidated Financial Statements number 2(o) Change
in Accounting Principle.

Year Ended May 31, 2003 Compared to Year Ended May 31, 2002

Net Sales.Net sales decreased by $15.1 million, or 18.8%, to $65.1 million
for fiscal 2003 from $80.2 million in fiscal 2002. 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 $39.7 million to net sales during fiscal 2003, down $5.7 million
from $45.4 million contributed during the year ended May 31, 2002. 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

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decrease in net sales contributed by our European Operations is largely
attributable to reduced, postponed, or cancelled orders from commercial
aircraft manufacturers.

Our U.S. Operations contributed $25.4 million to net sales during the year
ended May 31, 2003, down $7.9 million from the $33.3 million contributed during
the year ended May 31, 2002. This decrease was primarily due to the reduction
in orders from commercial aircraft manufacturers which was caused by the same
market conditions experienced by the European Operations. On January 31, 2003,
in reaction to the downturn in the commercial aerospace market, we sold our
rights and responsibilities for the U.S. Operations Boeing Statement of Work
to an independent third party. The sale of the Boeing Statement of Work
further reduced net sales contributed by the U.S. Operations.

The remaining decrease in our consolidated net sales was due to the sale of our
Engineering and Fabrication Division and the closure of our Display Division.
These discontinued divisions did not contribute any net sales during fiscal
year 2003 but contributed $1.5 million to net sales during fiscal year 2002.

Receivable collection periods, as calculated by dividing ending accounts
receivable balances by sales for the year multiplied by 360 days, increased to
74.6 days for the year ended May 31, 2003 from 54.9 days for the year ended May
31, 2002. This increase was primarily due to slow collections from one large
customer within the European Operations. A large portion of the receivable
from that customer was collected subsequent to May 31, 2003.

Gross Profit.Gross profit decreased by $6.7 million, or 54.0%, to $5.7
million for the year ended May 31, 2003, from $12.4 million for the year ended
May 31, 2002. As a percentage of net sales, gross profit decreased to 8.8% for
the year ended May 31, 2003, from 15.5% for the year ended May 31, 2002. This
decrease was due to the reduction in revenue associated with the commercial
aerospace industry, while many of our costs are fixed. In an effort to
increase our gross profit, we have significantly reduced staffing levels at our
operating facilities in the United States and in the United Kingdom. We are
also in the process of consolidating our manufacturing sites and have sold
excess machinery. We are also outsourcing certain operating functions along
with implementing production processes which we expect to be more efficient.

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 $0.3 million of inventory related to our
European Operations during the year. Without those write-downs our gross
profit would have been $7.4 million, or approximately 11.4% of net sales.

Inventory turnover, as calculated by dividing sales for the year by ending
inventory, remained relatively unchanged at 4.0 turns for the year ended May
31, 2003 from 4.1 turns for the year ended May 31, 2002.

Operating Expenses.Operating expenses decreased by $2.8 million, to $12.9
million for the year ended May 31, 2003 from $15.7 million for the year ended
May 31, 2002. This decrease was primarily due to the 2002 disposition of our
Engineering and Fabrication Division and closure of our Display Division. In
an effort to reduce operating expenses further, we have significantly reduced
our corporate overhead by reducing corporate executive salaries, eliminating
several executive positions, and other headcount reductions.

Net Interest Expense. Net
interest expense decreased $8.3 million to $4.6
million for the year ended May 31, 2003 from $12.9 million for the year ended
May 31, 2002. This decrease was due to our March 2002 debt restructuring.

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Other Income (Expense).Other income (expense) represents non-recurring and
non-operational income and expense for the period. Other expense for the
current year primarily represents the loss associated with our interest rate
swap agreement.

Income Taxes. Income tax benefit for the year ended May 31, 2003 represents
the estimated benefit to be received in the United Kingdom from the carry back
of operational losses. No income tax benefit has been recorded for United
States taxes due to the uncertainty related to the recognition of such benefit.

Net income (loss).Net income decreased to a loss of $11.7 million for the
year ended May 31, 2003 from net income of $4.5 million for the year ended May
31, 2002, primarily as a result of the factors discussed above and excluding
the gain on our debt restructuring that occurred during the year ended May 31,
2002.

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 during the year ended May 31, 2002. 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.

Gain on extinguishment of debt.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 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  |           
|                                                           |                                  |   |             |           

Management determined the value of the equity instruments issued to the
Noteholders to be the midpoint of the total estimated equity value range of the
Company as determined by a valuation analysis performed by management. The
total equity value range, on a post-conversion basis, was approximately $14.2
million to $29.2 million.

The valuation analysis included estimates of equity value based upon market
multiple methodology, comparable transaction methodology and discounted cash
flow methodology. The results were adjusted to reflect current assets,
including certain tax benefit assets and marketability discounts. Some of the
major assumptions used in the valuation analysis included projections of our
future cash flows, appropriate comparable companies in both the electronics and
aerospace industries and applicable discount rates. The results of our
valuation could have been materially different if different assumptions had
been used.

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Net Interest Expense. Net interest expense increased $2.9 million to $12.9
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.

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.

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

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 gain on our
debt restructuring.

Liquidity and Capital Resources

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 May 31, 2003 audited consolidated financial statements stated
that we have suffered recurring losses from operations and have a net capital
deficiency that 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. Current market
conditions, coupled with our current stock price and our financial condition
and historical performance, may pose difficulties in closing a securities
offering on acceptable terms, or at all. Moreover, if we need to dispose of
assets outside 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 in
existence.

Cash used in operating activities was approximately $2.8 million for the year
ended May 31, 2003, compared to cash used in operating activities of
approximately $0.3 million for the year ended May 31, 2002. At May 31, 2003 we
had cash and cash equivalents of $1.9 million and our current assets totaled
$32.5 million, compared with cash and cash equivalents of $5.6 million and
current assets of $38.0 million at May 31, 2002. The increase in cash used in
operating activities was primarily a result of our net loss for the year.

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 $3.8 million during the
year ended May 31, 2002 to $0.04 million during the year ended May 31, 2003.
Cash used in investing activities decreased from $2.3 million for the year
ended May 31, 2002 to $1.4 million during the year ended May 31, 2003. In

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fiscal year 2003 we made cash investments for the acquisition of equipment and
improvement of facilities of $2.1 million offset by $0.7 million of cash from
the sale of assets, primarily assets used to produce commercial aerospace
products. We do not expect to acquire any new businesses during fiscal year
2004.

Our working capital as of May 31, 2003 was approximately $18.9 million, and as
of May 31, 2002 was approximately $24.6 million.

In February 2003, we entered into a revolving invoice funding facility with a
national bank. Under the facility we may borrow up to 80% of acceptable
domestic United States accounts receivable, up to a maximum amount of
$3,000,000. The facility is secured by all domestic United States accounts
receivable and all domestic United States inventories. The facility bears
interest at the banks prime rate plus 5.0% and expires in February 2004.
There was $1.0 million borrowed under this facility at May 31, 2003.

We are not in compliance with certain covenants relating to loans made by
KeyBank in an aggregate principal amount of approximately $1.6 million (at May
31, 2003) that are secured by a deed of trust on our headquarters building and
improvements on another Company building. As of May 31, 2003, approximately
$1.1 million of the principal amount of the loan secured by our headquarters
building remained outstanding and $565,000 of the loan secured by improvements
on the other building remained outstanding. 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, 2003,
our debt service ratio was (11.63) and our debt to worth ratio was 2.49.
Pursuant to a forbearance agreement dated June 25, 2003, KeyBank agreed to
forbear from declaring covenant defaults until we regain compliance (thereby
curing such covenant violations) or December 31, 2004. We anticipate obtaining
compliance with the debt service ratio by May 31, 2004, but do not anticipate
being in compliance with the debt to worth ratio in the foreseeable future.

We are also not in compliance with a covenant of the Senior Notes in an
aggregate principal amount of approximately $24.3 million, net of original
issue discount, at May 31, 2003. Under the loan agreement governing the Senior
Notes, we are required to meet certain minimum EBITDA levels which we have not
achieved. Pursuant to a forbearance agreement dated August 8, 2003, the Senior
Noteholders agreed to forbear from declaring covenant default until we regain
compliance (thereby curing such covenant violation) or June 1, 2004.

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,
2003, the foreign currency translation adjustment was positive $2,883,000. We
have not entered into any hedging activity as of May 31, 2003.

Significant Events

Conversion of Series C Convertible Preferred Stock and Reverse Stock Split

On January 27, 2003, following approval by a majority of our shareholders, we
increased the number of our authorized shares of common stock from 100,000,000
to 20,000,000,000 shares without affecting per share par value. Upon the
increase in authorized shares the holders of all of our Series C Convertible
Preferred Stock converted all of their preferred shares into 4,865,819,000
shares of common stock. As a result, there are no shares of Series C Preferred
Stock outstanding. On the same day, following approval

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by a majority of our shareholders, we completed the Reverse Split. At February
28, 2003, as a result of the Reverse Split, we had 100,000,000 authorized
shares of common stock with 24,779,209 common shares outstanding.

Revolving Invoice Funding Facility

In February 2003, the Company entered into a revolving invoice funding facility
with a national bank. Under the facility the Company may borrow up to 80% of
acceptable domestic United States accounts receivable, up to a maximum amount
of $3,000,000. The facility is secured by all domestic United States accounts
receivable and all domestic United States inventories. The facility bears
interest at the banks prime rate plus 5.0% and expires in February 2004.
There was $1.0 million borrowed under this facility at May 31, 2003.

Sale of U.S. Operations Boeing Statement of Work

On January 31, 2003, the Company sold its rights and responsibilities for the
U.S. Operations Boeing Statement of Work to an independent third party. The
Company also sold inventory, tooling and certain intangible assets related to
the Boeing Statement of Work. The sale price was $400,000 payable as follows:
$181,250 due at closing and seven quarterly payments of $31,250. There was no
significant gain or loss resulting from the transaction.

Disclosures about contractual obligations and commercial commitments

The following table and narrative gives additional disclosure related to our
contractual obligations as of May 31, 2003 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                         |  | $     | 38,566 |        |  |           | 395   |       |  |       | 410   |         |  |  | 36,730 |  |  |  | 1,031  | 
|Subordinated Notes                     |  |       | 25,739 |        |  |           |      |       |  |       |      |         |  |  | 25,739 |  |  |  |       | 
|Capital lease obligations              |  |       | 335    |        |  |           | 174   |       |  |       | 148   |         |  |  | 13     |  |  |  |       | 
|Operating lease obligations            |  |       | 34,281 |        |  |           | 3,498 |       |  |       | 6,326 |         |  |  | 5,298  |  |  |  | 19,159 | 
|                                       |  |       |        |        |  |           |       |       |  |       |       |         |  |  |        |  |  |  |        | 
|Total contractual obligations          |  | $     | 98,921 |        |  |           | 4,067 |       |  |       | 6,884 |         |  |  | 67,780 |  |  |  | 20,190 | 
|                                       |  |       |        |        |  |           |       |       |  |       |       |         |  |  |        |  |  |  |        | 

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, 2003, we had commercial
purchase commitments for raw materials aggregating approximately $4.4 million.
This amount relates to a titanium supply agreement with a fixed price.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (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

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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 consolidated 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 became effective
for the Company on June 1, 2002 for prospective transactions. Additionally,
adoption of the statement requires 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 adopted this statement for exit or disposal activities that were
initiated after December 31, 2002, and the adoption did not have a material
impact on the Companys consolidated results of operations or financial
position.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FAS 123. SFAS No.
148 amends SFAS No. 123 Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In addition,
SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. Finally,
SFAS No. 148 amends APB Opinion No. 28, Interim Financial Reporting, to
require disclosure about those effects in interim financial information. The
Company reflected the effects of the amendment to APB Opinion 28 in its
compiled financial reports containing condensed financial statements for
interim periods beginning after December 15, 2002. The Company has adopted the
disclosure provisions of SFAS No. 148 for the year ending May 31, 2003.

In November 2002, the FASB issued Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others.The initial recognition and initial measurement
provisions of this Interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002, regardless of the
guarantors fiscal year-end. The guarantor may not revise or restate its
previous accounting for guarantees issued before the date of the
Interpretations initial application to reflect the effect of the recognition
and measurement provisions of the Interpretation. The disclosure requirements
in this Interpretation are effective for financial statements of interim or
annual periods ending after December 15, 2002. The guidance on indirect
guarantees of the indebtedness of others, which previously was included in FASB
Interpretation No. 34,

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Disclosure of Indirect Guarantees
of Indebtedness of Others, continues to apply
to financial statements for fiscal years ended after June 15, 1981. The
adoption of this interpretation did not have a material impact on the Companys
results of operations, consolidated financial position or cash flows and has
been considered in formulating disclosures for fiscal year 2003 consolidated
financial statements.

In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on
EITF 00-21, Revenue Arrangements with Multiple Deliverables, with respect to
determining when and how to allocate revenue from sales with multiple
deliverables. The EITF 00-21 consensus provides a framework for determining
when and how to allocate revenue from sales with multiple deliverables based on
a determination of whether the multiple deliverables qualify to be accounted
for as separate units of accounting. The consensus is effective prospectively
for arrangements entered into in fiscal periods beginning after June 15, 2003.
The Company does not expect that the adoption of this consensus will have a
material impact on the Companys consolidated results of operations or
financial position.

In January 2003, the FASB issued Interpretation 46, Consolidation of Variable
Interest Entities. In general, interpretation 46 requires a variable interest
entity (as defined) to be consolidated by a company if that company is subject
to a majority of the risk of loss from the variable interest entitys
activities or entitled to receive a majority of the entitys residual returns
or both. FASB Interpretation 46 applies in the first fiscal year or interim
period beginning after June 15, 2003, to variable interest entities in which an
enterprise obtains an interest after that date. The Company does not expect
that the adoption of this interpretation will have a material impact on the
Companys consolidated financial statements as a whole.

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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. It is not practicable to estimate the fair value of our long-term
debt due to our history of losses and debt defaults, among other factors. In
addition, we have an interest rate swap with a notional value of $1,632,000 and
which has a recorded fair value liability of $322,000 at May 31, 2003. The
interest rate swap does not qualify for hedge accounting. We do not believe a
10% change in interest rates would have a material effect on the fair value of
this instrument.

We are subject to foreign currency exchange rate risk relating to receipts from
and payments to suppliers in currencies other than the functional currencies in
which our business segments operate (the U.S. Dollar and the British Pound
Sterling). Although we have significant foreign operations, transactions in
currencies other than our functional currencies are not significant. We also
do not have significant transactions between our U.S. and European Operations.
Historically, we have not experienced material foreign currency transaction
gains and losses and do not anticipate any material foreign currency
transaction gains or losses in the future. Therefore, we have not entered into
any hedging or other transactions to manage our foreign currency exchange rate
risk as of May 31, 2003. However, 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 between the British Pound Sterling
and the U.S. Dollar. For example, British Pound Sterling was worth $1.4625 on
May 31, 2002 but one British Pound Sterling was worth $1.6393 on May 31, 2003.
As a result, we incurred a positive foreign currency translation adjustment of
$2,883,000 during the year ended May 31, 2003.

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,
2003, we had purchase commitments for raw materials aggregating approximately
$4.4 million. This amount relates to a titanium supply agreement with a fixed
price.

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##### Table of Contents






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. and subsidiaries as of May 31, 2002 and 2003,
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, 2003. 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, 2002 and 2003, and the results
of their operations and their cash flows for each of the years in the
three-year period ended May 31, 2003, 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(o) 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 and reclassified gain on
extinguishment of debt recorded in the prior year from extraordinary item to
other income effective in the year ended May 31, 2003.                                                                                                                                                                                                                                                                                                                    
|
| |  | /s/ KPMG LLP                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Seattle, Washington
August 1, 2003                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
May 31, 2002 and 2003

|                                                                                                                                                                                        |                                                                                                                                                            |                                      |            |             |             |   |            |              |            |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------ | ---------- | ----------- | ----------- | - | ---------- | ------------ | ---------- | -
|Assets                                                                                                                                                                                  |                                                                                                                                                            | 2002                                 |            | 2003       
|                                                                                                                                                                                        |                                                                                                                                                            |                                      |            |            
|Current assets:                                                                                                                                                                         |                                                                                                                                                            |                                      |            |             |             |   |            |             
|                                                                                                                                                                                        | Cash and cash equivalents                                                                                                                                  |                                      | $          | 5,619,000   |             |   |            | 1,948,000    |           
|                                                                                                                                                                                        | Accounts receivable, net of allowance for doubtful accounts, sales
returns and allowances of $476,000 and $559,000 in 2002 and 2003                        |                                      |            | 12,226,000  |             |   |            | 13,492,000   |           
|                                                                                                                                                                                        | Inventories                                                                                                                                                |                                      |            | 19,606,000  |             |   |            | 16,457,000   |           
|                                                                                                                                                                                        | Deferred income taxes                                                                                                                                      |                                      |            | 118,000     |             |   |            |             |           
|                                                                                                                                                                                        | Prepaid expenses and other                                                                                                                                 |                                      |            | 463,000     |             |   |            | 569,000      |           
|                                                                                                                                                                                        |                                                                                                                                                            |                                      |            |             |             |   |            |             
|                                                                                                                                                                                        |                                                                                                                                                            | Total current assets                 |            |             | 38,032,000  |   |            |              | 32,466,000 |  
|                                                                                                                                                                                        |                                                                                                                                                            |                                      |            |             |             |   |            |             
|Property, plant and equipment, net                                                                                                                                                      |                                                                                                                                                            |                                      | 23,315,000 |             |             |   | 21,635,000 |             
|                                                                                                                                                                                        |                                                                                                                                                            |                                      |            |             |             |   |            |             
|Other assets:                                                                                                                                                                           |                                                                                                                                                            |                                      |            |             |             |   |            |             
|                                                                                                                                                                                        | Goodwill net of
accumulated amortization of $202,000 in 2002 and 2003                                                                                      |                                      |            | 351,000     |             |   |            | 351,000      |           
|                                                                                                                                                                                        | Patents, net of accumulated amortization of $517,000 in 2002
and $642,000 in 2003                                                                          |                                      |            | 1,598,000   |             |   |            | 1,473,000    |           
|                                                                                                                                                                                        | Deferred financing costs, net of accumulated amortization of
$40,000 in 2002 and $258,000 in 2003                                                          |                                      |            | 1,147,000   |             |   |            | 960,000      |           
|                                                                                                                                                                                        | Other                                                                                                                                                      |                                      |            | 226,000     |             |   |            | 208,000      |           
|                                                                                                                                                                                        |                                                                                                                                                            |                                      |            |             |             |   |            |             
|                                                                                                                                                                                        |                                                                                                                                                            | Total other assets                   |            |             | 3,322,000   |   |            |              | 2,992,000  |  
|                                                                                                                                                                                        |                                                                                                                                                            |                                      |            |             |             |   |            |             
|                                                                                                                                                                                        |                                                                                                                                                            | $                                    | 64,669,000 |             |             |   | 57,093,000 |             
|                                                                                                                                                                                        |                                                                                                                                                            |                                      |            |             |             |   |            |             
|Liabilities and Stockholders Equity (Deficit)                                                                                                                                          |                                                                                                                                                            |                                      |            |             |             |   |            |             
|Current liabilities:                                                                                                                                                                    |                                                                                                                                                            |                                      |            |             |             |   |            |             
|                                                                                                                                                                                        | Accounts payable                                                                                                                                           |                                      | $          | 8,065,000   |             |   |            | 9,178,000    |           
|                                                                                                                                                                                        | Accrued liabilities                                                                                                                                        |                                      |            | 4,254,000   |             |   |            | 2,381,000    |           
|                                                                                                                                                                                        | Accrued interest                                                                                                                                           |                                      |            | 150,000     |             |   |            | 396,000      |           
|                                                                                                                                                                                        | Line of credit                                                                                                                                             |                                      |            |            |             |   |            | 1,030,000    |           
|                                                                                                                                                                                        | Current portion of long-term debt                                                                                                                          |                                      |            | 799,000     |             |   |            | 395,000      |           
|                                                                                                                                                                                        | Current portion of capital lease obligations                                                                                                               |                                      |            | 184,000     |             |   |            | 145,000      |           
|                                                                                                                                                                                        |                                                                                                                                                            |                                      |            |             |             |   |            |             
|                                                                                                                                                                                        |                                                                                                                                                            | Total current liabilities            |            |             | 13,452,000  |   |            |              | 13,525,000 |  
|Long-term liabilities:                                                                                                                                                                  |                                                                                                                                                            |                                      |            |             |             |   |            |             
|                                                                                                                                                                                        | Long-term debt, net of current portion                                                                                                                     |                                      |            | 24,831,000  |             |   |            | 26,503,000   |           
|                                                                                                                                                                                        | Capital lease obligations, net of current portion                                                                                                          |                                      |            | 367,000     |             |   |            | 143,000      |           
|                                                                                                                                                                                        | Senior subordinated notes payable                                                                                                                          |                                      |            | 25,739,000  |             |   |            | 25,739,000   |           
|                                                                                                                                                                                        | Deferred income taxes                                                                                                                                      |                                      |            | 872,000     |             |   |            | 930,000      |           
|                                                                                                                                                                                        | Deferred rent and other                                                                                                                                    |                                      |            | 301,000     |             |   |            | 12,000       |           
|                                                                                                                                                                                        |                                                                                                                                                            |                                      |            |             |             |   |            |             
|                                                                                                                                                                                        |                                                                                                                                                            | Total liabilities                    |            |             | 65,562,000  |   |            |              | 66,852,000 |  
|                                                                                                                                                                                        |                                                                                                                                                            |                                      |            |             |             |   |            |             
|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,
453,672 and 24,779,209 shares issued and outstanding at
May 31, 2002 and 2003, respectively |                                      |            |            |             |   |            | 25,000       |           
|                                                                                                                                                                                        | Additional paid-in capital                                                                                                                                 |                                      |            | 87,161,000  |             |   |            | 105,844,000  |           
|                                                                                                                                                                                        | Accumulated other comprehensive loss                                                                                                                       |                                      |            | (8,389,000  | )           |   |            | (5,506,000   | )         
|                                                                                                                                                                                        | Accumulated deficit                                                                                                                                        |                                      |            | (98,380,000 | )           |   |            | (110,122,000 | )         
|                                                                                                                                                                                        |                                                                                                                                                            |                                      |            |             |             |   |            |             
|                                                                                                                                                                                        |                                                                                                                                                            | Total stockholders equity (deficit) |            |             | (19,608,000 | ) |            |              | (9,759,000 | )
|Commitments and contingencies                                                                                                                                                           |                                                                                                                                                            |                                      |            |             |             |   |            |             
|                                                                                                                                                                                        |                                                                                                                                                            |                                      |            |             |             |   |            |             
|                                                                                                                                                                                        |                                                                                                                                                            | $                                    | 64,669,000 |             |             |   | 57,093,000 |             
|                                                                                                                                                                                        |                                                                                                                                                            |                                      |            |             |             |   |            |             

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, 2001, 2002 and 2003

|                                                                              |                                |                                                   |             |             |             |      |            |             |            |   |            |            |             |  
|----------------------------------------------------------------------------- | ------------------------------ | ------------------------------------------------- | ----------- | ----------- | ----------- | ---- | ---------- | ----------- | ---------- | - | ---------- | ---------- | ----------- | -
|                                                                              |                                |                                                   |             | 2001        |             | 2002 |            | 2003       
|                                                                              |                                |                                                   |             |             |             |      |            |            
|Net sales                                                                     |                                | $                                                 | 109,288,000 |             |             |      | 80,191,000 |             |            |   | 65,089,000 |           
|Cost of sales                                                                 |                                |                                                   | 101,048,000 |             |             |      | 67,761,000 |             |            |   | 59,345,000 |           
|                                                                              |                                |                                                   |             |             |             |      |            |             |            |   |            |           
|                                                                              |                                | Gross profit                                      |             |             | 8,240,000   |      |            |             | 12,430,000 |   |            |            | 5,744,000   |  
|Operating expenses                                                            |                                |                                                   | 67,201,000  |             |             |      | 15,694,000 |             |            |   | 12,861,000 |           
|                                                                              |                                |                                                   |             |             |             |      |            |             |            |   |            |           
|                                                                              |                                | Loss from operations                              |             |             | (58,961,000 | )    |            |             | (3,264,000 | ) |            |            | (7,117,000  | )
|                                                                              |                                |                                                   |             |             |             |      |            |             |            |   |            |           
|Other income (expense):                                                       |                                |                                                   |             |             |             |      |            |             |            |   |            |           
|                                                                              | Gain on extinguishment of debt |                                                   |             |            |             |      |            | 20,318,000  |            |   |            |           |            
|                                                                              | Interest income                |                                                   |             | 15,000      |             |      |            | 95,000      |            |   |            | 108,000    |            
|                                                                              | Interest expense               |                                                   |             | (10,027,000 | )           |      |            | (12,897,000 | )          |   |            | (4,612,000 | )          
|                                                                              | Other                          |                                                   |             | 201,000     |             |      |            | 78,000      |            |   |            | (438,000   | )          
|                                                                              |                                |                                                   |             |             |             |      |            |             |            |   |            |           
|                                                                              |                                | Total other income (expense)                      |             |             | (9,811,000  | )    |            |             | 7,594,000  |   |            |            | (4,942,000  | )
|                                                                              |                                |                                                   |             |             |             |      |            |             |            |   |            |           
|                                                                              |                                | Income (loss) before income
tax benefit (expense) |             |             | (68,772,000 | )    |            |             | 4,330,000  |   |            |            | (12,059,000 | )
|Income tax benefit (expense)                                                  |                                |                                                   | (6,948,000  | )           |             |      | 195,000    |             |            |   | 317,000    |           
|                                                                              |                                |                                                   |             |             |             |      |            |             |            |   |            |           
|                                                                              |                                | Net income (loss)                                 |             |             | (75,720,000 | )    |            |             | 4,525,000  |   |            |            | (11,742,000 | )
|Other comprehensive income (loss):                                            |                                |                                                   |             |             |             |      |            |             |            |   |            |           
|                                                                              | Foreign currency translation   |                                                   |             | (2,915,000  | )           |      |            | 776,000     |            |   |            | 2,883,000  |            
|                                                                              |                                |                                                   |             |             |             |      |            |             |            |   |            |           
|                                                                              |                                | Comprehensive income (loss)                       |             | $           | (78,635,000 | )    |            |             | 5,301,000  |   |            |            | (8,859,000  | )
|                                                                              |                                |                                                   |             |             |             |      |            |             |            |   |            |           
|Net income (loss) per share  basic and diluted:                              |                                | $                                                 | (429.21     | )           |             |      | 18.25      |             |            |   | (1.35      | )         
|                                                                              |                                |                                                   |             |             |             |      |            |             |            |   |            |           
|Shares used in computation of net income (loss)
per share  basic and diluted |                                |                                                   | 176,417     |             |             |      | 247,925    |             |            |   | 8,715,341  |           

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, 2001, 2002 and 2003

|                                                                                                     |  |                             |         |              |  |            |   |               |  |             |            |        |  |               |        |             |  |  |             |   |  |       |            |   |  |  |              |   |  |  |             |  
|---------------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | ------------ |  | ---------- | - | ------------- |  | ----------- | ---------- | ------ |  | ------------- | ------ | ----------- |  |  | ----------- | - |  | ----- | ---------- | - |  |  | ------------ | - |  |  | ----------- | -
|                                                                                                     |  | Series B                    |         |              |  |            |   |               |  |             |            |        |  |               |        | Accumulated |  |  |             |   |  | Total
|                                                                                                     |  | convertible preferred stock |         | Common stock |  | Additional |   | other         |  |             |            |        |  | stockholders'
|                                                                                                     |  |                             |         |              |  | paid-in    |   | comprehensive |  | Accumulated |            | equity
|                                                                                                     |  | Shares                      |         | Amount       |  | Shares     |   | Amount        |  | capital     |            | loss   |  | deficit       |        | (deficit)  
|                                                                                                     |  |                             |         |              |  |            |   |               |  |             |            |        |  |               |        |            
|Balance at May 31, 2000                                                                              |  |                             | 34,529  |              |  | $          |  |               |  |             | 151,418    |        |  | $             |       |             |  |  | 83,203,000  |   |  |       | (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      |  |                             |        |              |  |            |  |               |  |             | 2,035      |        |  |               |       |             |  |  | 168,000     |   |  |       |           |   |  |  |             |   |  |  | 168,000     |  
|Issuance of common stock on conversion of Series B
preferred stock, net of issuance costs of $18,000 |  |                             | (34,529 | )            |  |            |  |               |  |             | 14,045     |        |  |               |       |             |  |  | (18,000     | ) |  |       |           |   |  |  |             |   |  |  | (18,000     | )
|Sale of common stock and warrents for cash, net of
issuance costs of $173,000                        |  |                             |        |              |  |            |  |               |  |             | 5,714      |        |  |               |       |             |  |  | 1,713,000   |   |  |       |           |   |  |  |             |   |  |  | 1,713,000   |  
|Exercise of warrants for cash, net                                                                   |  |                             |         |              |  |            |   |               |  |             | 20,953     |        |  |               |       |             |  |  |            |   |  |       |           |   |  |  |             |   |  |  |            |  
|Issuance of warrants                                                                                 |  |                             |        |              |  |            |  |               |  |             |           |        |  |               |       |             |  |  | 1,890,000   |   |  |       |           |   |  |  |             |   |  |  | 1,890,000   |  
|Foreign currency translation adjustment                                                              |  |                             |        |              |  |            |  |               |  |             |           |        |  |               |       |             |  |  |            |   |  |       | (2,915,000 | ) |  |  |             |   |  |  | (2,915,000  | )
|Net loss                                                                                             |  |                             |        |              |  |            |  |               |  |             |           |        |  |               |       |             |  |  |            |   |  |       |           |   |  |  | (75,720,000  | ) |  |  | (75,720,000 | )
|                                                                                                     |  |                             |         |              |  |            |   |               |  |             |            |        |  |               |        |             |  |  |             |   |  |       |            |   |  |  |              |   |  |  |             |  
|Balance at May 31, 2001                                                                              |  |                             |        |              |  |            |  |               |  |             | 194,165    |        |  |               |       |             |  |  | 86,956,000  |   |  |       | (9,165,000 | ) |  |  | (102,905,000 | ) |  |  | (25,114,000 | )
|Issuance of common stock to corporate officers
in lieu of salary increases                           |  |                             |        |              |  |            |  |               |  |             | 1,905      |        |  |               |       |             |  |  | 64,000      |   |  |       |           |   |  |  |             |   |  |  | 64,000      |  
|Issuance of common stock under employee stock
purchase plan, net of related expenses of $12,000      |  |                             |        |              |  |            |  |               |  |             | 504        |        |  |               |       |             |  |  | 4,000       |   |  |       |           |   |  |  |             |   |  |  | 4,000       |  
|Issuance of common stock in exchange for long-term
debt, net of issuance costs $77,000               |  |                             |        |              |  |            |  |               |  |             | 257,098    |        |  |               |       |             |  |  | 137,000     |   |  |       |           |   |  |  |             |   |  |  | 137,000     |  
|Foreign currency translation adjustment                                                              |  |                             |        |              |  |            |  |               |  |             |           |        |  |               |       |             |  |  |            |   |  |       | 776,000    |   |  |  |             |   |  |  | 776,000     |  
|Net income                                                                                           |  |                             |        |              |  |            |  |               |  |             |           |        |  |               |       |             |  |  |            |   |  |       |           |   |  |  | 4,525,000    |   |  |  | 4,525,000   |  
|                                                                                                     |  |                             |         |              |  |            |   |               |  |             |            |        |  |               |        |             |  |  |             |   |  |       |            |   |  |  |              |   |  |  |             |  
|Balance at May 31, 2002                                                                              |  |                             |        |              |  |            |  |               |  |             | 453,672    |        |  |               |       |             |  |  | 87,161,000  |   |  |       | (8,389,000 | ) |  |  | (98,380,000  | ) |  |  | (19,608,000 | )
|Issuance of common stock on conversion of Series C
preferred stock                                   |  |                             |        |              |  |            |  |               |  |             | 24,325,537 |        |  |               | 25,000 |             |  |  | 18,690,000  |   |  |       |           |   |  |  |             |   |  |  | 18,715,000  |  
|Repurchase of fractional shares                                                                      |  |                             |        |              |  |            |  |               |  |             |           |        |  |               |       |             |  |  | (7,000      | ) |  |       |           |   |  |  |             |   |  |  | (7,000      | )
|Foreign currency translation adjustment                                                              |  |                             |        |              |  |            |  |               |  |             |           |        |  |               |       |             |  |  |            |   |  |       | 2,883,000  |   |  |  |             |   |  |  | 2,883,000   |  
|Net loss                                                                                             |  |                             |        |              |  |            |  |               |  |             |           |        |  |               |       |             |  |  |            |   |  |       |           |   |  |  | (11,742,000  | ) |  |  | (11,742,000 | )
|                                                                                                     |  |                             |         |              |  |            |   |               |  |             |            |        |  |               |        |             |  |  |             |   |  |       |            |   |  |  |              |   |  |  |             |  
|Balance at May 31, 2003                                                                              |  |                             |        |              |  | $          |  |               |  |             | 24,779,209 |        |  | $             | 25,000 |             |  |  | 105,844,000 |   |  |       | (5,506,000 | ) |  |  | (110,122,000 | ) |  |  | (9,759,000  | )
|                                                                                                     |  |                             |         |              |  |            |   |               |  |             |            |        |  |               |        |             |  |  |             |   |  |       |            |   |  |  |              |   |  |  |             |  

See accompanying notes to consolidated financial statements.

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended May 31, 2001, 2002 and 2003

|                                               |                                                                                      |                                                              |                                                           |                                                             |           |            |            |             |            |             |            |             |           |           |            |  
|---------------------------------------------- | ------------------------------------------------------------------------------------ | ------------------------------------------------------------ | --------------------------------------------------------- | ----------------------------------------------------------- | --------- | ---------- | ---------- | ----------- | ---------- | ----------- | ---------- | ----------- | --------- | --------- | ---------- | -
|                                               |                                                                                      |                                                              |                                                           |                                                             |           | 2001       |            | 2002        |            | 2003       
|                                               |                                                                                      |                                                              |                                                           |                                                             |           |            |            |             |            |            
|Cash flow from operating activities:           |                                                                                      |                                                              |                                                           |                                                             |           |            |            |             |            |             |            |            
|                                               | Net income (loss)                                                                    |                                                              | $                                                         | (75,720,000                                                 | )         |            |            | 4,525,000   |            |             |            | (11,742,000 | )        
|                                               | Adjustments to reconcile net income (loss) to net
cash used in operating activities: |                                                              |                                                           |                                                             |           |            |            |             |            |             |            |             |          
|                                               |                                                                                      |                                                              | Depreciation and amortization                             |                                                             |           | 7,334,000  |            |             |            | 4,389,000   |            |             |           | 3,974,000 |           
|                                               |                                                                                      |                                                              | Amortization of original issue discount on long-term debt |                                                             |           |           |            |             |            | 347,000     |            |             |           | 1,985,000 |           
|                                               |                                                                                      |                                                              | Impairment of certain long lived assets                   |                                                             |           | 48,946,000 |            |             |            | 649,000     |            |             |           |          |           
|                                               |                                                                                      |                                                              | Writedown of inventories                                  |                                                             |           | 1,600,000  |            |             |            |            |            |             |           | 1,700,000 |           
|                                               |                                                                                      |                                                              | Gain on troubled debt restructuring                       |                                                             |           |           |            |             |            | (20,318,000 | )          |             |           |          |           
|                                               |                                                                                      |                                                              | Noncash compensation expense                              |                                                             |           |           |            |             |            | 64,000      |            |             |           |          |           
|                                               |                                                                                      |                                                              | Other nonoperating (income) expenses                      |                                                             |           | (144,000   | )          |             |            |            |            |             |           | 631,000   |           
|                                               |                                                                                      |                                                              | Income tax expense (benefit)                              |                                                             |           | 5,844,000  |            |             |            | (879,000    | )          |             |           | 156,000   |           
|                                               |                                                                                      |                                                              | Changes in operating assets and liabilities:              |                                                             |           |            |            |             |            |             |            |             |           |           |           
|                                               |                                                                                      |                                                              |                                                           | Accounts receivable                                         |           |            | 1,661,000  |             |            |             | 5,910,000  |             |           |           | (229,000   | )
|                                               |                                                                                      |                                                              |                                                           | Inventories                                                 |           |            | 2,445,000  |             |            |             | 2,351,000  |             |           |           | 2,489,000  |  
|                                               |                                                                                      |                                                              |                                                           | Prepaid expenses and other current assets                   |           |            | (347,000   | )           |            |             | 111,000    |             |           |           | (87,000    | )
|                                               |                                                                                      |                                                              |                                                           | Other assets                                                |           |            | (114,000   | )           |            |             | 1,225,000  |             |           |           | 306,000    |  
|                                               |                                                                                      |                                                              |                                                           | Accounts payable, accrued liabilities and other liabilities |           |            | 6,895,000  |             |            |             | 1,307,000  |             |           |           | (1,961,000 | )
|                                               |                                                                                      |                                                              |                                                           |                                                             |           |            |            |             |            |             |            |            
|                                               |                                                                                      |                                                              |                                                           | Net cash used in operating activities                       |           |            | (1,600,000 | )           |            |             | (319,000   | )           |           |           | (2,778,000 | )
|                                               |                                                                                      |                                                              |                                                           |                                                             |           |            |            |             |            |             |            |            
|Cash flow from investing activities:           |                                                                                      |                                                              |                                                           |                                                             |           |            |            |             |            |             |            |            
|                                               | Acquisition of property, plant and equipment                                         |                                                              |                                                           | (3,710,000                                                  | )         |            |            | (2,703,000  | )          |             |            | (2,069,000  | )        
|                                               | Proceeds from sale of property, plant and equipment                                  |                                                              |                                                           | 2,254,000                                                   |           |            |            | 432,000     |            |             |            | 662,000     |          
|                                               | Other changes, net                                                                   |                                                              |                                                           | (20,000                                                     | )         |            |            |            |            |             |            |            |          
|                                               |                                                                                      |                                                              |                                                           |                                                             |           |            |            |             |            |             |            |            
|                                               |                                                                                      |                                                              |                                                           | Net cash used in investing activities                       |           |            | (1,476,000 | )           |            |             | (2,271,000 | )           |           |           | (1,407,000 | )
|                                               |                                                                                      |                                                              |                                                           |                                                             |           |            |            |             |            |             |            |            
|Cash flow from financing activities:           |                                                                                      |                                                              |                                                           |                                                             |           |            |            |             |            |             |            |            
|                                               | Net borrowings under line of credit                                                  |                                                              |                                                           | 319,000                                                     |           |            |            |            |            |             |            | 1,030,000   |          
|                                               | Proceeds from long-term debt                                                         |                                                              |                                                           | 4,802,000                                                   |           |            |            | 20,832,000  |            |             |            | 143,000     |          
|                                               | Payments on long-term debt and capital leases                                        |                                                              |                                                           | (1,698,000                                                  | )         |            |            | (15,098,000 | )          |             |            | (1,124,000  | )        
|                                               | Proceeds from sale of common stock and warrants, net                                 |                                                              |                                                           | 1,863,000                                                   |           |            |            | 4,000       |            |             |            |            |          
|                                               | Redemption of common stock                                                           |                                                              |                                                           |                                                            |           |            |            |            |            |             |            | (7,000      | )        
|                                               | Proceeds from exercise of warrants                                                   |                                                              |                                                           | 4,000                                                       |           |            |            |            |            |             |            |            |          
|                                               | Direct costs of restructuring transaction                                            |                                                              |                                                           |                                                            |           |            |            | (1,948,000  | )          |             |            |            |          
|                                               |                                                                                      |                                                              |                                                           |                                                             |           |            |            |             |            |             |            |            
|                                               |                                                                                      |                                                              |                                                           | Net cash provided by financing activities                   |           |            | 5,290,000  |             |            |             | 3,790,000  |             |           |           | 42,000     |  
|                                               |                                                                                      |                                                              |                                                           |                                                             |           |            |            |             |            |             |            |            
|                                               |                                                                                      |                                                              |                                                           | Net increase (decrease) in cash and cash equivalents        |           |            | 2,214,000  |             |            |             | 1,200,000  |             |           |           | (4,143,000 | )
|Effect of exchange rates on cash               |                                                                                      |                                                              | (273,000                                                  | )                                                           |           |            | 324,000    |             |            |             | 472,000    |            
|Cash and cash equivalents at beginning of year |                                                                                      |                                                              | 2,154,000                                                 |                                                             |           |            | 4,095,000  |             |            |             | 5,619,000  |            
|                                               |                                                                                      |                                                              |                                                           |                                                             |           |            |            |             |            |             |            |            
|Cash and cash equivalents at end of year       |                                                                                      | $                                                            | 4,095,000                                                 |                                                             |           |            | 5,619,000  |             |            |             | 1,948,000  |            
|                                               |                                                                                      |                                                              |                                                           |                                                             |           |            |            |             |            |             |            |            
|Supplemental cash flow information:            |                                                                                      |                                                              |                                                           |                                                             |           |            |            |             |            |             |            |            
|                                               | Cash paid during the year for:                                                       |                                                              |                                                           |                                                             |           |            |            |             |            |             |            |             |          
|                                               |                                                                                      | Interest                                                     |                                                           | $                                                           | 8,524,000 |            |            |             | 3,918,000  |             |            |             | 2,164,000 |          
|                                               |                                                                                      | Income taxes                                                 |                                                           |                                                             | 295,000   |            |            |             | 713,000    |             |            |             | 290,000   |          
|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  |            |             |            |            |          
|                                               | Issuance of common stock on conversion of Series C Preferred Stock                   |                                                              |                                                           |                                                            |           |            |            |            |            |             |            | 18,715,000  |          
|                                               | 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, 2002 and 2003

(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
accounting principles generally accepted in the United States of America
(U.S. GAAP) 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, 2002 and 2003

(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. Costs capitalized
as patents include costs to purchase patents from third parties or external
costs, such as legal fees, to obtain internally developed patents. Costs
related to developing the patent such as salaries, are expensed as incurred
and are classified as operating expenses. During the year ended May 31,
2002, the Company purchased a patent from a third party for $950,000. The
amount was entirely financed by a note payable to the third party. The
patent is being amortized over its 17-year estimated useful life and will
have no residual value.

Deferred financing costs were incurred in connection with certain debt
instruments and are being amortized using the straight-line method, which
approximates the effective interest method, over the original life of the
related debt instruments, currently ranging from 1 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 the
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 and title passes to
customers and when services are performed (when the revenue cycle is
completed). The parts that are shipped by the Company are made to customer
specifications or to specifications approved by the customer and tested prior
to shipment. In certain instances, if the Company unintentionally ships
parts that do not conform to the specifications or that contain a defect,
these parts may be returned to the Company by the customer. Product
warranties extended by the Company relate to customer acceptance that parts
produced meet customer specifications, however, no product performance
warranty is offered. As no product performance warranties are offered, no
warranty liability has been recorded.

(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, 2001, 2002 and 2003 were $382,000, $248,000 and $268,000, 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

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2002 and 2003

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. No provision for additional taxes,
which might result from eventual distributions from the UK subsidiaries, has
been made since it is managements 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,as amended
by SFAS No. 148. 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. The Company uses the
intrinsic value method of accounting. Had compensation costs for the stock
option and stock purchase plan been determined using the fair value method of
accounting, the results of the Company would have been adjusted to the pro
forma amounts indicated below:

|                                                                                                                             |  |      |             |      |  |      |           |  |  |  |             |  
|---------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | ---- |  | ---- | --------- |  |  |  | ----------- | -
|                                                                                                                             |  | 2001 |             | 2002 |  | 2003
|                                                                                                                             |  |      |             |      |  |     
|Net income (loss) as reported:                                                                                               |  | $    | (75,720,000 | )    |  |      | 4,525,000 |  |  |  | (11,742,000 | )
|Deduct: Total stock-based
employee compensation expense
determined under fair value
based method, net of related
tax effects |  |      | (128,000    | )    |  |      |          |  |  |  |            |  
|                                                                                                                             |  |      |             |      |  |      |           |  |  |  |             |  
|Pro forma                                                                                                                    |  |      | (75,848,000 | )    |  |      | 4,525,000 |  |  |  | (11,742,000 | )
|Net income (loss) per share:                                                                                                 |  |      |             |      |  |      |           |  |  |  |             |  
|As reported:                                                                                                                 |  |      |             |      |  |      |           |  |  |  |             |  
|Basic                                                                                                                        |  |      | (429.21     | )    |  |      | 18.25     |  |  |  | (1.35       | )
|Diluted                                                                                                                      |  |      | (429.21     | )    |  |      | 18.25     |  |  |  | (1.35       | )
|Pro forma:                                                                                                                   |  |      |             |      |  |      |           |  |  |  |             |  
|Basic                                                                                                                        |  |      | (429.94     | )    |  |      | 18.25     |  |  |  | (1.35       | )
|Diluted                                                                                                                      |  |      | (429.94     | )    |  |      | 18.25     |  |  |  | (1.35       | )
|Shares used in computation of
net income (loss) per share:                                                                   |  |      |             |      |  |      |           |  |  |  |             |  
|Basic                                                                                                                        |  |      | 176,417     |      |  |      | 247,925   |  |  |  | 8,715,341   |  
|Diluted                                                                                                                      |  |      | 176,417     |      |  |      | 247,925   |  |  |  | 8,715,341   |  

The fair value per share of the options granted during the year ended may 31,
2001 is estimated at $54.00, 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 fiscal year ended May 31, 2002 or 2003.

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2002 and 2003

(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. Options, warrants and convertible stock were not
included in the calculation of net income (loss) per share as they are
anti-dilutive. The total number of anti-dilutive common stock equivalents
related to options, warrants and convertible stock as of May 31, 2001, 2002
and 2003 were 58,039, 24,774,265, and 443,413, respectively.

(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, 2001, 2002 and 2003.

(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 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 recoverability of long-lived assets, the salability and
recovery of inventory, 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 June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2002 and 2003

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 consolidated financial position or results
of 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 adopted this statement for exit
or disposal activities that were initiated after December 31, 2002, and the
adoption did not have a material impact on the Companys consolidated
results of operations or financial position.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FAS 123. SFAS No.
148 amends SFAS No. 123 Accounting for Stock-Based
Compensation, to provide
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
Finally, SFAS No. 148 amends APB Opinion No. 28, Interim Financial
Reporting, to require disclosure about those effects in interim financial
information. The Company reflected the effects of the amendment to APB
Opinion 28 in its compiled financial reports containing condensed financial
statements for interim periods beginning after December 15, 2002. The
Company has adopted the annual report impacting disclosure provisions of
SFAS No. 148 for the year ending May 31, 2003.

In November 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others.The initial recognition and initial
measurement provisions of this Interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002,
regardless of the guarantors fiscal year-end. The guarantor may not revise
or restate its previous accounting for guarantees issued before the date of
the Interpretations initial application to reflect the effect of the
recognition and measurement provisions of the Interpretation. The disclosure
requirements in this Interpretation are effective for financial statements
of interim or annual periods ending after December 15, 2002. The guidance on
indirect guarantees of the indebtedness of others, which previously was
included in FASB Interpretation No. 34, Disclosure of Indirect Guarantees of
Indebtedness of Others, continues to apply to financial statements for
fiscal years ended after June 15, 1981. The adoption of this interpretation
did not have a material impact on the Companys results of operations,
consolidated financial position or cash flows and has been considered in
formulating disclosures for fiscal year 2003 consolidated financial
statements.

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2002 and 2003

In November 2002, the Emerging Issues Task Force (EITF) reached a consensus
on EITF 00-21, Revenue Arrangements with Multiple Deliverables, with respect
to determining when and how to allocate revenue from sales with multiple
deliverables. The EITF 00-21 consensus provides a framework for determining
when and how to allocate revenue from sales with multiple deliverables based
on a determination of whether the multiple deliverables qualify to be
accounted for as separate units of accounting. The consensus is effective
prospectively for arrangements entered into in fiscal periods beginning
after June 15, 2003. The Company does not expect that the adoption of this
consensus will have a material impact on the Companys consolidated results
of operations or financial position.

In January 2003, the FASB issued Interpretation 46, Consolidation of
Variable Interest Entities. In general, interpretation 46 requires a
variable interest entity (as defined) to be consolidated by a company if
that company is subject to a majority of the risk of loss from the variable
interest entitys activities or entitled to receive a majority of the
entitys residual returns or both. FASB Interpretation 46 applies in the
first fiscal year or interim period beginning after June 15, 2003, to
variable interest entities in which an enterprise obtains an interest after
that date. The Company does not expect that the adoption of this
interpretation will have a material impact on the Companys consolidated
financial statements as a whole.

(o)  Change in Accounting Principle

Goodwill and other intangible assets.

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 goodwill and intangible assets with
indefinite lives 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 impairment test for goodwill is performed in two steps: (1) potential
impairment is identified by comparing the fair value of the Companys
reporting units with their carrying value (including goodwill); and (2) if
fair value is less than the carrying amount, an impairment loss is estimated
as the excess of the carrying amount of the goodwill over its implied fair
value. The Companys reporting units are Electronic Components and Machining
Components within the U.S. Operations segment and Metal Forming and Metal
Casting within the European Operations.

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 net 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, since
the estimated fair value of the Electronic Components reporting unit was more
than the carrying value of its related assets including goodwill. The fair
value of the Electronic Components unit was determined by estimating the
purchase price that an unrelated third party may be willing to pay for the
Electronic Components reporting unit as determined by Company management
based upon prevailing market conditions.

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2002 and 2003

The impact on net loss for the year ended May 31, 2001, if goodwill had not
been amortized, is as follows:

|                                |  |      |             |  
|------------------------------- |  | ---- | ----------- | -
|                                |  | 2001
|                                |  |     
|Reported net loss               |  | $    | (75,720,000 | )
|Add back: Goodwill amortization |  |      | 973,000     |  
|                                |  |      |             |  
|Adjusted net loss               |  | $    | (74,747,000 | )
|                                |  |      |             |  
|Basic earnings per share        |  |      |             |  
|Reported net loss               |  | $    | (429.21     | )
|Goodwill amortization           |  |      | 5.52        |  
|                                |  |      |             |  
|Adjusted net loss               |  | $    | (423.69     | )
|                                |  |      |             |  

A summary of intangibles subject to amortization is as follows:

|                                     |                                                             |                          |   |                                 |           |            |  |              |   |       |  |   |   |  |  |        |           | 
|------------------------------------ | ----------------------------------------------------------- | ------------------------ | - | ------------------------------- | --------- | ---------- |  | ------------ | - | ----- |  | - | - |  |  | ------ | --------- | 
|                                     |                                                             |                          |   | For the year ended May 31, 2002
|                                     |                                                             |                          |   |                                
|                                     |                                                             |                          |   | U.S.                            |           | European   |  | Discontinued |   |       |  |  
|                                     |                                                             |                          |   | Operations                      |           | Operations |  | Divisions    |   | Total
|                                     |                                                             |                          |   |                                 |           |            |  |              |   |      
|Intangibles subject to amortization: |                                                             |                          |   |                                 |           |            |  |              |   |       |  |   |   |  |  |       
|                                     | Patents:                                                    |                          |   |                                 |           |            |  |              |   |       |  |   |   |  |  |        |          
|                                     |                                                             | Gross carrying amount    |   | $                               | 2,115,000 |            |  |              |  |       |  |   |  |  |  |        | 2,115,000 | 
|                                     |                                                             | Accumulated amortization |   |                                 | 517,000   |            |  |              |  |       |  |   |  |  |  |        | 517,000   | 
|                                     |                                                             |                          |   |                                 |           |            |  |              |   |       |  |   |   |  |  |        |           | 
|                                     |                                                             | Net carrying amount      |   | $                               | 1,598,000 |            |  |              |  |       |  |   |  |  |  |        | 1,598,000 | 
|                                     |                                                             |                          |   |                                 |           |            |  |              |   |       |  |   |   |  |  |       
|                                     | Actual amortization expense for the
year ended May 31, 2002 |                          | $ | 89,000                          |           |            |  |             |   |       |  |  |   |  |  | 89,000 |          
|                                     |                                                             |                          |   |                                 |           |            |  |              |   |       |  |   |   |  |  |       

|                                                            |                          |   |                                 |           |            |  |              |   |       |  |   |   |  |  |         |           | 
|----------------------------------------------------------- | ------------------------ | - | ------------------------------- | --------- | ---------- |  | ------------ | - | ----- |  | - | - |  |  | ------- | --------- | 
|                                                            |                          |   | For the year ended May 31, 2003
|                                                            |                          |   |                                
|                                                            |                          |   | U.S.                            |           | European   |  | Discontinued |   |       |  |  
|                                                            |                          |   | Operations                      |           | Operations |  | Divisions    |   | Total
|                                                            |                          |   |                                 |           |            |  |              |   |      
|Patents:                                                    |                          |   |                                 |           |            |  |              |   |       |  |   |   |  |  |         |          
|                                                            | Gross carrying amount    |   | $                               | 2,115,000 |            |  |              |  |       |  |   |  |  |  |         | 2,115,000 | 
|                                                            | Accumulated amortization |   |                                 | 642,000   |            |  |              |  |       |  |   |  |  |  |         | 642,000   | 
|                                                            |                          |   |                                 |           |            |  |              |   |       |  |   |   |  |  |         |           | 
|                                                            | Net carrying amount      |   | $                               | 1,473,000 |            |  |              |  |       |  |   |  |  |  |         | 1,473,000 | 
|                                                            |                          |   |                                 |           |            |  |              |   |       |  |   |   |  |  |         |           | 
|Actual amortization expense for the
year ended May 31, 2003 |                          | $ | 125,000                         |           |            |  |             |   |       |  |  |   |  |  | 125,000 |          
|                                                            |                          |   |                                 |           |            |  |              |   |       |  |   |   |  |  |         |           | 

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2002 and 2003

Estimated amortization expense for each of the next five years is as follows:

|     |  |   |         |  |  |  |  |  |  |  |  |  |  |  |  | 
|---- |  | - | ------- |  |  |  |  |  |  |  |  |  |  |  |  | 
|2004 |  | $ | 125,000 | 
|2005 |  |   | 125,000 | 
|2006 |  |   | 125,000 | 
|2007 |  |   | 125,000 | 
|2008 |  |   | 116,000 | 

A summary of intangibles not subject to amortization is as follows:

|          |                                                        |  |                                 |         |            |  |              |   |       |  |  |   |  |  |  |         | 
|--------- | ------------------------------------------------------ |  | ------------------------------- | ------- | ---------- |  | ------------ | - | ----- |  |  | - |  |  |  | ------- | 
|          |                                                        |  | For the year ended May 31, 2002
|          |                                                        |  |                                
|          |                                                        |  | U.S.                            |         | European   |  | Discontinued |   |       |  | 
|          |                                                        |  | Operations                      |         | Operations |  | Divisions    |   | Total
|          |                                                        |  |                                 |         |            |  |              |   |      
|Goodwill: |                                                        |  |                                 |         |            |  |              |   |       |  |  |   |  |  |  |        
|          | Carrying value - beginning of year                     |  | $                               | 351,000 |            |  |              |  |       |  |  |  |  |  |  | 351,000 | 
|          | Goodwill amortization and impairment
losses recognized |  |                                 |        |            |  |              |  |       |  |  |  |  |  |  |        | 
|          |                                                        |  |                                 |         |            |  |              |   |       |  |  |   |  |  |  |         | 
|          | Carrying value - end of year                           |  | $                               | 351,000 |            |  |              |  |       |  |  |  |  |  |  | 351,000 | 
|          |                                                        |  |                                 |         |            |  |              |   |       |  |  |   |  |  |  |         | 

|          |                                      |  |                                 |         |            |  |              |   |       |  |  |   |  |  |  |         | 
|--------- | ------------------------------------ |  | ------------------------------- | ------- | ---------- |  | ------------ | - | ----- |  |  | - |  |  |  | ------- | 
|          |                                      |  | For the year ended May 31, 2003
|          |                                      |  |                                
|          |                                      |  | U.S.                            |         | European   |  | Discontinued |   |       |  | 
|          |                                      |  | Operations                      |         | Operations |  | Divisions    |   | Total
|          |                                      |  |                                 |         |            |  |              |   |      
|Goodwill: |                                      |  |                                 |         |            |  |              |   |       |  |  |   |  |  |  |        
|          | Carrying value - beginning of year   |  | $                               | 351,000 |            |  |              |  |       |  |  |  |  |  |  | 351,000 | 
|          | Goodwill amortization and impairment |  |                                 |        |            |  |              |  |       |  |  |  |  |  |  |        | 
|          |                                      |  |                                 |         |            |  |              |   |       |  |  |   |  |  |  |         | 
|          | Carrying value - end of year         |  | $                               | 351,000 |            |  |              |  |       |  |  |  |  |  |  | 351,000 | 
|          |                                      |  |                                 |         |            |  |              |   |       |  |  |   |  |  |  |         | 

Extraordinary items

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

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2002 and 2003

Company adopted SFAS No. 145 on June 1, 2002, and reclassified gains
previously reported for the years ended May 31, 2000 and 2002 related to debt
extinguishments from extraordinary items to other income.

(p)  Segments

The Company operates in two segments, US Operations and European Operations.
The determination of these segments 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.

(q)  Related Party

At May 31, 2003, the Company had a receivable from an executive officer
totaling $35,000.

(r)  Reclassifications

Certain reclassifications have been made to the 2001 and 2002 financial
statements to conform with the 2003 financial statement presentation.

(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 which
raises substantial doubt about its ability to continue as a going concern.

Cash used in operating activities was $2,778,000 for fiscal year 2003
compared to $319,000 and $1,600,000 in fiscal years 2002 and 2001,
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.

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

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2002 and 2003

Included in operating expenses in the years ended May 31, 2001, 2002 and 2003
are $48.9 million, $0.6 million, and $0, 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.

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 estimated fair value of the
goodwill and manufacturing equipment were based upon preliminary and
final offers from unrelated third parties to purchase the European
Operations on a held for use basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 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. Fair value of assets related to
the Casting Division and Engineering & Fabrication Divisions were based
upon offers to purchase the assets from unrelated third parties on a
held for use basis. The Casting Division was sold in June 2001, the
Fabrication portion of the Engineering & Fabrication Division was sold
in May 2001 and the Engineering portion of the Engineering and
Fabrication Division was sold in December 2001.
|
| |  |  | 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. Fair value
of the equipment used to produce low power relays and the unused
manufacturing facility were based upon offers to purchase the assets
from unrelated third parties on a held for use basis. The equipment
used to produce low power relays was sold in February 2001 and the
unused manufacturing facility was sold in December 2000.                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

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 fair value of these assets was based upon the
present value of the estimated future cash flows of those assets on a held
for use basis.

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2002 and 2003

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, 2003, the carrying value of long-lived assets,
including property, plant and equipment, goodwill, and patents, was $23.5
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 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 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.

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2002 and 2003

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, 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   |  
|Asset impairments             |  |            | 1,665,000  |            |  |              | 37,000,000  |              |  |       | 10,281,000  |   |  |            |           |   |  |  | 48,946,000  |  
|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  |  

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  |  
|Asset impairments             |  |            |           |            |  |              |           |              |  |       | 649,000    |   |  |            |           |   |  |  | 649,000    |  
|Depreciation and
amortization |  |            | 1,739,000  |            |  |              | 1,967,000  |              |  |       | 99,000     |   |  |            | 584,000    |   |  |  | 4,389,000  |  
|Interest income               |  |            |           |            |  |              | 38,000     |              |  |       |           |   |  |            | 57,000     |   |  |  | 95,000     |  
|Interest expense              |  |            | 319,000    |            |  |              | 1,228,000  |              |  |       | 48,000     |   |  |            | 11,302,000 |   |  |  | 12,897,000 |  

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2002 and 2003

Year ended May 31, 2003:

|                              |  |            |            |            |  |              |            |              |  |       |   |  |  |            |            |   |  |  |            |  
|----------------------------- |  | ---------- | ---------- | ---------- |  | ------------ | ---------- | ------------ |  | ----- | - |  |  | ---------- | ---------- | - |  |  | ---------- | -
|                              |  |            |            |            |  |              |            |              |  |       |   |  |  | Corporate, |            |   |  | 
|                              |  | U.S.       |            | European   |  | Discontinued |            | other and    |  |       |   | 
|                              |  | Operations |            | Operations |  | Divisions    |            | eliminations |  | Total
|                              |  |            |            |            |  |              |            |              |  |      
|Net sales to customers        |  | $          | 25,368,000 |            |  |              | 39,721,000 |              |  |       |  |  |  |            |           |   |  |  | 65,089,000 |  
|Income (loss) from
operations |  |            | 1,821,000  |            |  |              | (3,057,000 | )            |  |       |  |  |  |            | (5,881,000 | ) |  |  | (7,117,000 | )
|Identifiable assets           |  |            | 18,984,000 |            |  |              | 31,719,000 |              |  |       |  |  |  |            | 6,390,000  |   |  |  | 57,093,000 |  
|Capital expenditures          |  |            | 804,000    |            |  |              | 1,184,000  |              |  |       |  |  |  |            | 81,000     |   |  |  | 2,069,000  |  
|Depreciation and
amortization |  |            | 1,536,000  |            |  |              | 1,995,000  |              |  |       |  |  |  |            | 443,000    |   |  |  | 3,974,000  |  
|Interest income               |  |            |           |            |  |              | 29,000     |              |  |       |  |  |  |            | 79,000     |   |  |  | 108,000    |  
|Interest expense              |  |            | 175,000    |            |  |              | 1,200,000  |              |  |       |  |  |  |            | 3,237,000  |   |  |  | 4,612,000  |  

We do not disclose foreign net sales by country as it not practicable to do
so. The Company did not have net sales to one customer comprising greater
than 10% of the years net sales during the year ended May 31, 2003. The
Company had net sales to one customer comprising greater than 10% of each
years net sales, aggregating 12.5% and 13.5% in the years ended May 31,
2001, 2002, respectively.

The Company had accounts receivable from one customer comprising greater than
10% of accounts receivable as of May 31, 2001, 2002, and 2003, aggregating
10.6%, 11.7%, and 11.6%, respectively.

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 $4,623,000, $3,613,000 and $2,580,000 from one supplier during the
years ended May 31, 2001, 2002 and 2003, respectively.

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

At May 31, 2003, the Company had purchase commitments for raw materials
aggregating $4,400,000.

(6)  Business Dispositions

Effective as of June 1, 2001, the Company 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

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2002 and 2003

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 based upon the Companys
knowledge of the industry and internal financial projections prepared by
Company management, the Company has fully reserved against the note 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 units at $0,
which we estimate to be their fair market value due to lack of marketability,
the Companys knowledge of the industry and internal financial projections
prepared by Company management. 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, 2000            |  | $ | 619,000  |  
|Charged to operating expenses      |  |   | 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  |  
|Charged to operating expense       |  |   | 286,000  |  
|Specific account balance write-off |  |   | (194,000 | )
|Effect of exchange rates           |  |   | (9,000   | )
|                                   |  |   |          |  
|Balance at May 31, 2003            |  | $ | 559,000  |  
|                                   |  |   |          |  

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2002 and 2003

(8)  Inventories

Inventories at May 31 consist of the following:

|                 |  |      |            |      |  |  |            | 
|---------------- |  | ---- | ---------- | ---- |  |  | ---------- | 
|                 |  | 2002 |            | 2003
|                 |  |      |            |     
|Raw materials    |  | $    | 3,927,000  |      |  |  | 3,206,000  | 
|Work in progress |  |      | 10,085,000 |      |  |  | 8,389,000  | 
|Finished goods   |  |      | 5,594,000  |      |  |  | 4,862,000  | 
|                 |  |      |            |      |  |  |            | 
|                 |  | $    | 19,606,000 |      |  |  | 16,457,000 | 
|                 |  |      |            |      |  |  |            | 

(9)  Property, Plant and Equipment

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

|                                               |  |                |  |      |            |      |            |  |            |  |            | 
|---------------------------------------------- |  | -------------- |  | ---- | ---------- | ---- | ---------- |  | ---------- |  | ---------- | 
|                                               |  | Depreciable    |  |      |            |      |            |  |            | 
|                                               |  | Lives          |  | 2002 |            | 2003
|                                               |  |                |  |      |            |     
|Land                                           |  |                |  |      |            | $    | 700,000    |  |            |  | 700,000    | 
|Buildings                                      |  | 20 to 40 years |  |      | 4,343,000  |      |            |  | 4,356,000  | 
|Leasehold improvements                         |  | 5 to 15 years  |  |      | 3,678,000  |      |            |  | 3,677,000  | 
|Machinery and equipment                        |  | 7 to 10 years  |  |      | 31,460,000 |      |            |  | 33,477,000 | 
|Office equipment, furniture and fixtures       |  | 3 to 10 years  |  |      | 3,202,000  |      |            |  | 3,207,000  | 
|                                               |  |                |  |      |            |      |            |  |            |  |            | 
|                                               |  |                |  |      |            |      | 43,383,000 |  |            |  | 45,417,000 | 
|Less accumulated depreciation and
amortization |  |                |  |      |            |      | 20,153,000 |  |            |  | 23,782,000 | 
|                                               |  |                |  |      |            |      |            |  |            |  |            | 
|                                               |  |                |  |      |            |      | 23,230,000 |  |            |  | 21,635,000 | 
|Construction in progress                       |  |                |  |      |            |      | 85,000     |  |            |  |           | 
|                                               |  |                |  |      |            |      |            |  |            |  |            | 
|                                               |  |                |  |      |            | $    | 23,315,000 |  |            |  | 21,635,000 | 
|                                               |  |                |  |      |            |      |            |  |            |  |            | 

The Company recognized depreciation of property, plant and equipment of
$6,243,000, $4,302,000 and $3,850,000 during the years ended May 31, 2001,
2002 and 2003, 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 $1,191,000 and
$936,000 and related accumulated amortization of $611,000 and $648,000
recorded under capital leases at May 31, 2002 and 2003, respectively.

(10)  Line of Credit



|In February 2003, the Company entered into a revolving invoice funding
facility with a national bank. Under the facility the Company may borrow
up to 80% of acceptable domestic United States accounts receivable, up to a
maximum amount of $3,000,000. The facility is secured by all domestic
United States accounts receivable and all domestic United States
inventories. The facility bears interest at the banks
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2002 and 2003



| |                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------
| | prime rate plus 5.0% and expires in February 2004. There was $1.0 million
borrowed under this facility at May 31, 2003.

(11)  Long-Term Debt

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

|                                                                                                                                                                                                                                                                                                                        |  |      |             |      |  |  |            | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | ---- |  |  | ---------- | 
|                                                                                                                                                                                                                                                                                                                        |  | 2002 |             | 2003
|                                                                                                                                                                                                                                                                                                                        |  |      |             |     
|Note payable to a related party, GSC Partners
and affiliates, net of original issue discount
of $13,653,000 and $11,668,000 at May 31, 2002
and 2003, respectively. 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 |      |  |  | 24,332,000 | 
|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     |      |  |  | 544,000    | 
|Note payable to a bank, due in monthly
installments of $4,728, including interest at
LIBOR plus 2% (3.31% at May 31, 2003), with
the remaining principal balance due in full in
March 2008.                                                                                                                             |  |      | 596,000     |      |  |  | 565,000    | 
|Notes payable to a financing company for
certain equipment in aggregate monthly
installments of $31,929, including interest at
9% to 9.75%, with maturity dates through 2004.                                                                                                                                           |  |      | 712,000     |      |  |  | 184,000    | 
|Other notes payable for vehicles and certain
equipment in aggregate monthly installments of
$4,164, including interest at 0% to 7.9% with
maturity dates through 2006.                                                                                                                                                  |  |      | 121,000     |      |  |  | 106,000    | 
|Note payable to a bank in monthly installments
of $5,902, including interest at LIBOR plus
2.25% (3.32% at May 31, 2003) through June
2008.                                                                                                                                                                             |  |      | 1,103,000   |      |  |  | 1,071,000  | 
|Note payable to an individual, secured by
certain equipment, due in monthly installments
of $2,019, including interest at 6.0%, through
December 2008.                                                                                                                                                                  |  |      |            |      |  |  | 96,000     | 
|                                                                                                                                                                                                                                                                                                                        |  |      |             |      |  |  |            | 
|                                                                                                                                                                                                                                                                                                                        |  |      | 25,630,000  |      |  |  | 26,898,000 | 
|Less current portion                                                                                                                                                                                                                                                                                                    |  |      | 799,000     |      |  |  | 395,000    | 
|                                                                                                                                                                                                                                                                                                                        |  |      |             |      |  |  |            | 
|Long-term debt, net of current portion                                                                                                                                                                                                                                                                                  |  |      | $24,831,000 |      |  |  | 26,503,000 | 
|                                                                                                                                                                                                                                                                                                                        |  |      |             |      |  |  |            | 

Certain notes payable contain financial covenants that require, among other
items, that the Company maintain minimum working capital, tangible net worth
and debt to tangible net worth ratios. At May 31, 2003, the Company was not
in compliance with these covenants. The Company has received a forbearance
letter from

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AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2002 and 2003

the lender waiving the violations until December 31, 2004. There can be no
assurance that the lender will not require the amounts immediately due and
payable if violations of the covenants continue. The amount outstanding
under these agreements was approximately $1,636,000 as of May 31, 2003.

The notes payable to GSC Partners require, among other items, that the
Company maintain minimum EBITDA amounts. At May 31, 2003, the Company was
not in compliance with these covenants. The Company has received a
forbearance letter from the lender waiving the violations until June 1, 2004.
There can be no assurance that the lender will not require the amounts
immediately due and payable if violations of the covenants continue. The
amount outstanding under these agreements was approximately $24,332,000 as of
May 31, 2003.

The above debt instruments also include subjective acceleration clauses.

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

|                                          |  |   |            | 
|----------------------------------------- |  | - | ---------- | 
|2004                                      |  | $ | 395,000    | 
|2005                                      |  |   | 206,000    | 
|2006                                      |  |   | 204,000    | 
|2007                                      |  |   | 36,229,000 | 
|2008                                      |  |   | 501,000    | 
|Thereafter                                |  |   | 1,031,000  | 
|                                          |  |   |            | 
|                                          |  |   | 38,566,000 | 
|Less unamortized original issued discount |  |   | 11,668,000 | 
|                                          |  |   |            | 
|Net long-term debt                        |  | $ | 26,898,000 | 
|                                          |  |   |            | 

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

(12)  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

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2002 and 2003

early extinguishment of debt, and as such, a gain of $703,000 was recorded in
the consolidated financial statements as extinguishment of debt.

In March 2002, 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
automatically converted into common stock following shareholder approval of
an increase in the number of authorized shares of common stock. By virtue of
their common stock, the Noteholders now beneficially own approximately 97.5%
of our outstanding shares of common stock on a fully-diluted, as-converted
basis.

The PIK Notes bear interest at a rate of 10% per annum. 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 followed the provisions of SFAS No. 15, Accounting by Debtors and
Creditors for Troubled Debt Restructurings, in recording the exchange
transaction. Those provisions required 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 No. 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 gain on
extinguishment of debt:

|                                                           |  |   |             |  
|---------------------------------------------------------- |  | - | ----------- | -
|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  |  
|                                                           |  |   |             |  

Management determined the value of the equity instruments issued to the
Noteholders to be the midpoint of the total estimated equity value range of
the Company as determined by a valuation analysis performed by management.
The total equity value range, on a post-conversion basis, was approximately
$14.2 million to $29.2 million.

The valuation analysis included estimates of equity value based upon market
multiple methodology, comparable transaction methodology and discounted cash
flow methodology. The results were adjusted to reflect current assets,
including certain tax benefit assets and marketability discounts. Some of
the major assumptions used in the valuation analysis included projections of
our future cash flows, appropriate

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2002 and 2003

comparable companies in both the electronics and aerospace industries and
applicable discount rates. The results of our valuation could have been
materially different if different assumptions had been used.

(13)  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, 2003 are as follows for
each of the following fiscal years:

|                                                          |  |   |         | 
|--------------------------------------------------------- |  | - | ------- | 
|2004                                                      |  | $ | 174,000 | 
|2005                                                      |  |   | 106,000 | 
|2006                                                      |  |   | 42,000  | 
|2007                                                      |  |   | 13,000  | 
|2008                                                      |  |   |        | 
|Thereafter                                                |  |   |        | 
|                                                          |  |   |         | 
|                                                          |  |   | 335,000 | 
|Less amounts representing interest ranging from 6% to 16% |  |   | 47,000  | 
|                                                          |  |   |         | 
|Present value of net minimum capital lease obligations    |  |   | 288,000 | 
|Less current portion                                      |  |   | 145,000 | 
|                                                          |  |   |         | 
|Capital lease obligations, less current portion           |  | $ | 143,000 | 
|                                                          |  |   |         | 

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2002 and 2003

(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, 2003 are
as follows for each of the following fiscal years:

|           |  |   |            | 
|---------- |  | - | ---------- | 
|2004       |  | $ | 3,498,000  | 
|2005       |  |   | 3,359,000  | 
|2006       |  |   | 2,967,000  | 
|2007       |  |   | 2,726,000  | 
|2008       |  |   | 2,572,000  | 
|Thereafter |  |   | 19,159,000 | 
|           |  |   |            | 
|           |  | $ | 34,281,000 | 
|           |  |   |            | 

Total rent expense during the years ended May 31, 2001, 2002 and 2003
amounted to $5,917,000, $5,079,000 and $3,780,000, respectively. Included in
rent expense for the year ended May 31, 2002 is an accrual of approximately
$646,000, related to the abandonment of certain manufacturing facility
operating leases.

(14)  Common Stock

In February 2003, the Company effected a 1-for-200 reverse split of its
outstanding shares of common stock, as well as a proportionate reduction in
its shares of authorized but unissued common stock. Fractional shares that
resulted from the reverse split were repurchased by the Company. Except as
disclosed all share and per share amounts have been adjusted for the reverse
split.

In July 1996, the Company conducted a public offering of 2,250,000 units,
each unit composed of one share of the Companys pre-reverse split common
stock and a warrant to purchase one share of the Companys pre-reverse split
common stock, at a price of $3.125 per unit. At May 31, 2002 and 2003, 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 pre-reverse split common stock and a warrant to
purchase one share of the Companys pre-reverse split common stock. The
warrants entitled the holder to purchase one share of pre-reverse split
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, 2001, 2002 or 2003 and the remaining original
warrants have expired.

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2002 and 2003

In March 2000, the Company sold 1,598,000 shares of its pre-reverse split
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 pre-reverse split 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 pre-reverse split 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
pre-reverse split common stock. The adjustable warrants permitted the
investors to acquire additional shares of pre-reverse split common stock at
an exercise price of $0.001 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 $0.001 per share. As a result
of the exercise, the Company delivered to the investors a total of 4,190,486 shares
of pre-reverse split 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 pre-reverse split 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
pre-reverse split shares issuable upon exercise of these warrants.
Specifically, warrants in favor of Strong River initially exercisable for
192,500 shares of pre-reverse split common stock are now exercisable for
33,315,492 pre-reverse split shares; and warrants in favor of Bay Harbor
initially exercisable for 192,500 shares of pre-reverse split common stock
are now exercisable for 33,315,492 pre-reverse split shares. The exercise
price of the Strong River and Bay Harbor warrants was reduced from $2.01 to
$0.001 per pre-reverse split share by virtue of the anti-dilution adjustment.
The closing warrants expired in July 2003.

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

In January 2003, the Companys Series C Preferred Stock was fully converted
into 4,865,820,023 shares of pre-reverse split common stock.

(15)  Convertible Preferred
Stock - Series C Preferred Stock

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2002 and 2003

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 was converted
in full on January 27, 2003 into 4,865,820,023 shares of pre-reverse split
common stock.

The Series C Preferred Stock 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, equaled
approximately 97.5% of the Companys common stock on a fully-diluted basis.
The Automatic Conversion of the Series C Preferred Stock into common stock
took place immediately following shareholder approval of an increase in the
number of authorized shares of pre-reverse split common stock to an amount
sufficient to effect the conversion of the Series C Preferred Stock in full.
Except as disclosed, all share and per share amounts have been adjusted for
the reverse split. The Series C Preferred Stock had 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 ranked senior to all other classes of the Companys capital stock as to
liquidation and distributions. In addition, the Series C Preferred Stock was
entitled to vote with the common stock on all matters brought before the
common stock for approval (other than as required by law) and was entitled to
that number of votes equal to the number of shares of Common into which the
Series C Preferred Stock was then convertible.

(16) 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 valuation model or
the fair value of the services received, whichever resultant value is more
reasonably determinable. A summary of the Companys warrants to purchase shares of common stock, 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, 2000                |  |          | 3,293   |        |  | $        | 920.6000   | 
|Granted                                |  |          | 46,918  |        |  |          | 21.4000    | 
|Exercised                              |  |          | (20,952 | )      |  |          | 0.2000     | 
|Canceled                               |  |          | (1,368  | )      |  |          | 1,374.0000 | 
|                                       |  |          |         |        |  |          |            | 
|Balance at May 31, 2001                |  |          | 27,891  |        |  |          | 77.2000    | 
|Canceled                               |  |          | (175    | )      |  |          | 400.0000   | 
|Granted under anti-dilution provisions |  |          | 387,511 |        |  |          | 0.2000     | 
|                                       |  |          |         |        |  |          |            | 
|Balance at May 31, 2002                |  |          | 415,227 |        |  |          | 5.2000     | 
|Canceled                               |  |          | (1,126  | )      |  |          | 1,232.2222 | 
|                                       |  |          |         |        |  |          |            | 
|Balance at May 31, 2003                |  |          | 414,101 |        |  | $        | 1.8186     | 
|                                       |  |          |         |        |  |          |            | 

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2002 and 2003

The following summarizes outstanding warrants to purchase shares of common
stock, excluding warrants issued in connection with the public offering in
July 1996, at May 31, 2003:

|                |               |                    |         |                                      |         |             |      |          |      |          |          |         |        | 
|--------------- | ------------- | ------------------ | ------- | ------------------------------------ | ------- | ----------- | ---- | -------- | ---- | -------- | -------- | ------- | ------ | 
|                |               |                    |         | Warrants outstanding and exercisable
|                |               |                    |         |                                     
|                |               |                    |         |                                      |         |             |      | Weighted |      |          |          |        
|                |               |                    |         |                                      |         |             |      | average  |      | Weighted
|Range of        |               |                    |         |                                      |         | remaining   |      | average 
|Exercise        |               |                    |         |                                      |         | contractual |      | exercise
|prices          |               | Number outstanding |         | life                                 |         | price      
|                |               |                    |         |                                      |         |            
|                |               | $0.0010.99        |         |                                      | 409,620 |             |      |          | 0.67 |          |          | $       | 0.2000 | 
|                | 1.00  299.99 |                    |         | 3,460                                |         |             |      | 2.92     |      |          |          | 81.2400 |       
|300.00  400.00 |               |                    | 1,021   |                                      |         |             | 1.44 |          |      |          | 382.0656 |        
|                |               |                    |         |                                      |         |             |      |          |      |          |          |        
|                |               |                    | 414,101 |                                      |         |             |      |          |      |          |          |        
|                |               |                    |         |                                      |         |             |      |          |      |          |          |        

In July 2000, the Company issued 23,273 warrants to purchase common stock in
connection with a private placement of its common stock. The value of the
warrants was included in the purchase price of the common stock and was
recorded as equity. In March 2001, the Company issued 23,645 warrants to
purchase common stock in connection with a private placement of notes. The
warrants were valued at $1,886,000 using the Black Scholes valuation model to
estimate fair value and were classified on the balance sheet as deferred
financing costs. The assumptions used under the Black Scholes model were
volatility 135.71%, risk free rate of return 6%, dividend yield 0% and life
of 5 years.

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 20,185 shares of common stock are
now exercisable for 76,466 shares; warrants in favor of Strong River
initially exercisable for 962 shares of common stock are now exercisable for
166,577 shares; and warrants in favor of Bay Harbor initially exercisable for
962 shares of common stock are now exercisable for 166,577 shares. The
exercise price of the Strong River and Bay Harbor and DDJ warrants was
changed to $0.200 per share.

(17) Compensation Plans

(a) Long-Term Investment and Incentive Plan

The Company has three 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 20,000 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

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2002 and 2003

subsequently terminated. Options expire ten years from the grant date under
both the 1996 and 1999 plans. In January 2003, the Company adopted the 2002
Plan which effectively reserved an additional 4,373,430 shares of common
stock for issuance. The 2002 Plan is substantially identical to the 1996 and
1999 plans in form with exception to the expiration date of the options
granted which is fixed by the Compensation Committee at the time of grant.

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 1,905 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 2,500 common shares. In connection with
the Exchange, the Company agreed to issue no additional shares under the
Independent Director Stock Plan. For each of the years ended May 31, 2001,
2002 and 2003, 646 options were outstanding.

(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 $70,000, $41,000 and $22,000 to the plan during the
years ended May 31, 2001, 2002 and 2003, 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, 2001, 2002 and 2003, 2,035,
and 504, and 0 shares respectively, were purchased by employees under the
plan. The plan was terminated in August 2001.

The fair value per share of the options granted during the year ended May 31,
2001 is estimated as $54.00, 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 years ended May 31, 2002 or 2003.

Pro forma compensation under the employee stock purchase plan during the
years ended May 31, 2001, 2002, and 2003 is $30,000, $0, and $0,
respectively.

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2002 and 2003

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, 2000        |  |                        | 19,901    |             |  |                        | 17,311 |   |  | $ | 528.00 | 
|Options granted                |  |                        | (1,832    | )           |  |                        | 1,832  |   |  |   | 76.00  | 
|Options expired                |  |                        | 300       |             |  |                        | (300   | ) |  |   | 506.00 | 
|Options terminated             |  |                        | 153       |             |  |                        | (153   | ) |  |   | 428.00 | 
|                               |  |                        |           |             |  |                        |        |   |  |   |        | 
|Balance at May 31, 2001        |  |                        | 18,522    |             |  |                        | 18,690 |   |  |   | 520.00 | 
|Options granted                |  |                        |          |             |  |                        |       |   |  |   |       | 
|Restricted stock issued        |  |                        | (1,905    | )           |  |                        |       |   |  |   |       | 
|Options expired                |  |                        | 198       |             |  |                        | (198   | ) |  |   | 180.00 | 
|                               |  |                        |           |             |  |                        |        |   |  |   |        | 
|Balance at May 31, 2002        |  |                        | 16,815    |             |  |                        | 18,492 |   |  |   | 488.00 | 
|Options authorized by
new plan |  |                        | 4,373,430 |             |  |                        |       |   |  |   |       | 
|Options granted                |  |                        |          |             |  |                        |       |   |  |   |       | 
|Options expired                |  |                        | 655       |             |  |                        | (655   | ) |  |   | 331.75 | 
|                               |  |                        |           |             |  |                        |        |   |  |   |        | 
|Balance at May 31, 2003        |  |                        | 4,390,900 |             |  |                        | 17,837 |   |  |   | 492.66 | 
|                               |  |                        |           |             |  |                        |        |   |  |   |        | 

The following summarizes options from both Long-Term Investment and Incentive
plans and the Independent Director Stock plan outstanding at May 31, 2003:

|                  |                 |              |        |                     |       |                     |      |             |      |          |        |        |       |  |        |          |       |  |        |        |       | 
|----------------- | --------------- | ------------ | ------ | ------------------- | ----- | ------------------- | ---- | ----------- | ---- | -------- | ------ | ------ | ----- |  | ------ | -------- | ----- |  | ------ | ------ | ----- | 
|                  |                 |              |        | Options outstanding |       | Options exercisable
|                  |                 |              |        |                     |       |                    
|                  |                 |              |        |                     |       |                     |      | Weighted    |      |          |        |        |       |  |        |          |       |  |        |       
|                  |                 |              |        |                     |       |                     |      | average     |      | Weighted |        |        |       |  |        | Weighted
|                  |                 |              |        |                     |       |                     |      | remaining   |      | average  |        |        |       |  |        | average 
|Range of exercise |                 | Number       |        | contractual         |       | exercise            |      | Number      |      | exercise
|prices            |                 | outstanding  |        | life                |       | price               |      | exercisable |      | price   
|                  |                 |              |        |                     |       |                     |      |             |      |         
|                  |                 | $0.01100.00 |        |                     | 1,135 |                     |      |             | 8.00 |          |        | $      | 44.80 |  |        |          | 1,135 |  |        | $      | 44.80 | 
|                  | 100.01  200.00 |              |        | 438                 |       |                     |      | 7.41        |      |          |        | 147.03 |       |  |        | 438      |       |  |        | 147.03 |      
|                  | 200.01  500.00 |              |        | 5,202               |       |                     |      | 6.16        |      |          |        | 337.71 |       |  |        | 5,202    |       |  |        | 337.71 |      
|                  | 500.01  700.00 |              |        | 8,024               |       |                     |      | 3.96        |      |          |        | 506.90 |       |  |        | 8,024    |       |  |        | 506.90 |      
|700.01  1000.00  |                 |              | 3,038  |                     |       |                     | 3.17 |             |      |          | 937.50 |        |       |  | 3,038  |          |       |  | 937.50 |       
|                  |                 |              |        |                     |       |                     |      |             |      |          |        |        |       |  |        |          |       |  |        |       
|                  |                 |              | 17,837 |                     |       |                     | 4.81 |             |      |          | 492.66 |        |       |  | 17,837 |          |       |  | 492.66 |       
|                  |                 |              |        |                     |       |                     |      |             |      |          |        |        |       |  |        |          |       |  |        |       

At May 31, 2001 and 2002, 18,188 and 18,463 options were exercisable with
weighted average exercise prices of $488.60 and $487.40, respectively.

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2002 and 2003

The Company has approved a grant to Mr. Wright of an option to purchase
1,238,960 shares of Common Stock, however the options have not yet been
granted.

(18) Income Taxes

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

|          |         |   |            |            |      |  |         |         |   |  |         |          |  
|--------- | ------- | - | ---------- | ---------- | ---- |  | ------- | ------- | - |  | ------- | -------- | -
|          |         |   | 2001       |            | 2002 |  | 2003   
|          |         |   |            |            |      |  |        
|Current:  |         |   |            |            |      |  |         |         |   |  |         |         
|          | Federal |   | $          |           |      |  |         |        |   |  |         |         |  
|          | Foreign |   |            | (1,796,000 | )    |  |         | 250,000 |   |  |         | 473,000  |  
|Deferred: |         |   |            |            |      |  |         |         |   |  |         |         
|          | Federal |   |            | (4,966,000 | )    |  |         |        |   |  |         |         |  
|          | Foreign |   |            | (186,000   | )    |  |         | (55,000 | ) |  |         | (156,000 | )
|          |         |   |            |            |      |  |         |         |   |  |         |         
|Total     |         | $ | (6,948,000 | )          |      |  | 195,000 |         |   |  | 317,000 |         
|          |         |   |            |            |      |  |         |         |   |  |         |         

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

|                                                  |  |      |             |      |  |      |           |  |  |  |             |  
|------------------------------------------------- |  | ---- | ----------- | ---- |  | ---- | --------- |  |  |  | ----------- | -
|                                                  |  | 2001 |             | 2002 |  | 2003
|                                                  |  |      |             |      |  |     
|Domestic                                          |  | $    | (29,564,000 | )    |  |      | 3,474,000 |  |  |  | (7,831,000  | )
|Foreign                                           |  |      | (39,208,000 | )    |  |      | 856,000   |  |  |  | (4,228,000  | )
|                                                  |  |      |             |      |  |      |           |  |  |  |             |  
|Income (loss) before income tax benefit (expense) |  | $    | (68,772,000 | )    |  |      | 4,330,000 |  |  |  | (12,059,000 | )
|                                                  |  |      |             |      |  |      |           |  |  |  |             |  

There are no undistributed earnings of the Companys foreign subsidiaries for
which U.S. income taxes have not been provided at May 31, 2002 and 2003.

A reconciliation of the U.S. federal statutory tax rate of 34% and the
Companys effective tax rates of 10%, 5% and (3)% during the years ended May
31, 2001, 2002 and 2003, respectively, is as follows:

|                                      |  |      |             |      |  |      |            |   |  |  |            |  
|------------------------------------- |  | ---- | ----------- | ---- |  | ---- | ---------- | - |  |  | ---------- | -
|                                      |  | 2001 |             | 2002 |  | 2003
|                                      |  |      |             |      |  |     
|Computed expected income tax benefit  |  | $    | 23,382,000  |      |  |      | (1,472,000 | ) |  |  | 4,100,000  |  
|Difference in foreign income tax rate |  |      | (1,568,000  | )    |  |      | (34,000    | ) |  |  | (170,000   | )
|Foreign permanent differences         |  |      | (12,353,000 | )    |  |      | (148,000   | ) |  |  | (1,026,000 | )
|Change in valuation allowance         |  |      | (15,750,000 | )    |  |      | 1,849,000  |   |  |  | (2,587,000 | )
|Other                                 |  |      | (659,000    | )    |  |      |           |   |  |  |           |  
|                                      |  |      |             |      |  |      |            |   |  |  |            |  
|Actual income tax benefit (expense)   |  | $    | (6,948,000  | )    |  |      | 195,000    |   |  |  | 317,000    |  
|                                      |  |      |             |      |  |      |            |   |  |  |            |  

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2002 and 2003

Foreign permanent differences are primarily comprised of the tax effect of
nondeductible goodwill impairment losses recognized during the year ended May
31, 2001, and the deductibility of foreign interest expense during the years
ended May 31, 2002 and 2003.

Deferred tax assets and liabilities are recognized based on the estimated
future tax consequences 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, 2001, 2002 and 2003,
was $15,750,000, $(1,849,000) and $2,587,000, respectively. Significant
components of the Companys deferred tax assets (liabilities) at May 31 are
as follows:

|                           |                                         |                                |                     |           |            |             |          |            |            |             |  
|-------------------------- | --------------------------------------- | ------------------------------ | ------------------- | --------- | ---------- | ----------- | -------- | ---------- | ---------- | ----------- | -
|                           |                                         |                                |                     |           | 2002       |             | 2003    
|                           |                                         |                                |                     |           |            |             |         
|Deferred tax assets:       |                                         |                                |                     |           |            |             |          |           
|                           | Net operating loss carryforwards        |                                | $                   | 8,510,000 |            |             |          | 11,047,000 |           
|                           | Capital loss carryforwards              |                                |                     | 2,728,000 |            |             |          | 2,728,000  |           
|                           | Goodwill                                |                                |                     | 2,111,000 |            |             |          | 2,064,000  |           
|                           | Property, plant and equipment and Other |                                |                     | 710,000   |            |             |          | 743,000    |           
|                           | Inventory valuation                     |                                |                     | 1,081,000 |            |             |          | 1,027,000  |           
|                           | Debt restructuring                      |                                |                     | 5,201,000 |            |             |          | 5,201,000  |           
|                           |                                         |                                |                     |           |            |             |          |           
|                           |                                         | Total deferred tax assets      |                     |           | 20,341,000 |             |          |            | 22,810,000 |            
|                           |                                         |                                | Valuation allowance |           |            | (20,223,000 | )        |            |            | (22,810,000 | )
|                           |                                         |                                |                     |           |            |             |          |           
|                           |                                         | Net deferred tax assets        |                     |           | 118,000    |             |          |            |           |            
|                           |                                         |                                |                     |           |            |             |          |           
|Deferred tax liabilities:  |                                         |                                |                     |           |            |             |          |           
|                           | European Operations                     |                                |                     | 872,000   |            |             |          | 930,000    |           
|                           |                                         |                                |                     |           |            |             |          |           
|                           |                                         | Total deferred tax liabilities |                     |           | 872,000    |             |          |            | 930,000    |            
|                           |                                         |                                |                     |           |            |             |          |           
|Net deferred tax liability |                                         | $                              | (754,000            | )         |            |             | (930,000 | )         
|                           |                                         |                                |                     |           |            |             |          |           

At May 31, 2003, the Company has net operating loss (NOLs) carryforwards for
U.S. federal income tax purposes of approximately $32.5 million, the benefits
of which expire in the tax year 2012 through the tax year 2023.

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 $32.5 million total NOLs at May 31, 2003 will never
become available.

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2002 and 2003

(19) 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:

|                                                    |  |      |             |      |  |      |           |  |  |  |             |  
|--------------------------------------------------- |  | ---- | ----------- | ---- |  | ---- | --------- |  |  |  | ----------- | -
|                                                    |  | 2001 |             | 2002 |  | 2003
|                                                    |  |      |             |      |  |     
|Net income (loss) available for common
stockholders |  | $    | (75,720,000 | )    |  |      | 4,525,000 |  |  |  | (11,742,000 | )
|                                                    |  |      |             |      |  |      |           |  |  |  |             |  
|Weighted average outstanding shares of common
stock |  |      | 176,417     |      |  |      | 247,925   |  |  |  | 8,715,341   |  
|Dilutive effect of:                                 |  |      |             |      |  |      |           |  |  |  |             |  
|Warrants                                            |  |      |            |      |  |      |          |  |  |  |            |  
|Stock options                                       |  |      |            |      |  |      |          |  |  |  |            |  
|Convertible preferred stock                         |  |      |            |      |  |      |          |  |  |  |            |  
|                                                    |  |      |             |      |  |      |           |  |  |  |             |  
|Common stock and common stock equivalents           |  |      | 176,417     |      |  |      | 247,925   |  |  |  | 8,715,341   |  
|                                                    |  |      |             |      |  |      |           |  |  |  |             |  
|Net income (loss) per share  basic and diluted     |  | $    | (429.21     | )    |  |      | 18.25     |  |  |  | (1.35       | )
|                                                    |  |      |             |      |  |      |           |  |  |  |             |  

Options, warrants and convertible stock were not included in the calculation
of net income (loss) per share as they are anti-dilutive. The total number
of anti-dilutive common stock equivalents related to options, warrants and
convertible stock as of May 31, 2001, 2002 and 2003 were 58,039, 24,774,265,
and 443,413, respectively.

(20) 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 in
most instances their carrying amounts. However, it is not practicable to
estimate the fair value of the Companys long-term borrowings due to our
history of losses and debt defaults, among other factors. The Company has
an interest rate swap agreement which is recorded at fair value and was a
liability of $322,000 at May 31, 2003.

(21) Contingencies

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,
financial condition or cash flow.

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

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2002 and 2003

ultimate liability is not likely to have a material adverse effect on the
Companys results of operations or financial condition.

(22) 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.

75



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##### Table of Contents



PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2002 and 2003

(a)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 (Deficit) |                                         |                                                      |            |             |             |              |           |              |            |               |           |              |             |   |   |              |              |   |            |            
|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                            |                                                      |            |            |             |              |           | 56,139,000   |            |               |           | 33,709,000   |             |   |   | (89,848,000  | )            |   |            |            |            
|                                               | Additional paid-in capital              |                                                      |            | 87,161,000  |             |              |           |             |            |               |           |             |             |   |   |             |              |   |            | 87,161,000  |            
|                                               | 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)

76



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##### Table of Contents



PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial
StatementsMay 31, 2002 and 2003

(b)Consolidating condensed balance sheet information at May 31, 2003 is as follows:

|                                               |                                         |                                                      |           |              |            |              |           |              |            |               |            |              |             |   |   |              |              |   |            |              |            |  
|---------------------------------------------- | --------------------------------------- | ---------------------------------------------------- | --------- | ------------ | ---------- | ------------ | --------- | ------------ | ---------- | ------------- | ---------- | ------------ | ----------- | - | - | ------------ | ------------ | - | ---------- | ------------ | ---------- | -
|                                               |                                         |                                                      |           |              |            |              |           | Guarantor    |            | Non-guarantor |            |              |             |   |   |              |              |  
|                                               |                                         |                                                      |           | Parent       |            | subsidiaries |           | subsidiaries |            | Eliminations  |            | Consolidated
|                                               |                                         |                                                      |           |              |            |              |           |              |            |               |            |             
|Assets                                         |                                         |                                                      |           |              |            |              |           |              |            |               |            |              |             |   |   |              |              |   |            |             
|Current assets:                                |                                         |                                                      |           |              |            |              |           |              |            |               |            |              |             |   |   |              |              |   |            |             
|                                               | Cash and cash equivalents               |                                                      | $         | 817,000      |            |              |           | 2,000        |            |               |            | 1,129,000    |             |   |   |             |              |   |            | 1,948,000    |           
|                                               | Accounts receivable, net                |                                                      |           |             |            |              |           | 3,063,000    |            |               |            | 10,429,000   |             |   |   |             |              |   |            | 13,492,000   |           
|                                               | Inventories                             |                                                      |           |             |            |              |           | 6,916,000    |            |               |            | 9,541,000    |             |   |   |             |              |   |            | 16,457,000   |           
|                                               | Other                                   |                                                      |           | 3,374,000    |            |              |           | 30,000       |            |               |            | 456,000      |             |   |   | (3,291,000   | )            |   |            | 569,000      |           
|                                               |                                         |                                                      |           |              |            |              |           |              |            |               |            |              |             |   |   |              |              |   |            |             
|                                               |                                         | Total current assets                                 |           |              | 4,191,000  |              |           |              | 10,011,000 |               |            |              | 21,555,000  |   |   |              | (3,291,000   | ) |            |              | 32,466,000 |  
|                                               |                                         |                                                      |           |              |            |              |           |              |            |               |            |              |             |   |   |              |              |   |            |             
|Property, plant and equipment, net             |                                         |                                                      | 4,530,000 |              |            |              | 6,941,000 |              |            |               | 10,164,000 |              |             |   |  |              |              |   | 21,635,000 |             
|                                               |                                         |                                                      |           |              |            |              |           |              |            |               |            |              |             |   |   |              |              |   |            |             
|Other assets:                                  |                                         |                                                      |           |              |            |              |           |              |            |               |            |              |             |   |   |              |              |   |            |             
|                                               | Goodwill                                |                                                      |           |             |            |              |           | 351,000      |            |               |            |             |             |   |   |             |              |   |            | 351,000      |           
|                                               | Investment in and loans to subsidiaries |                                                      |           | 36,620,000   |            |              |           | 72,618,000   |            |               |            |             |             |   |   | (109,238,000 | )            |   |            |             |           
|                                               | Other                                   |                                                      |           | 960,000      |            |              |           | 1,681,000    |            |               |            |             |             |   |   |             |              |   |            | 2,641,000    |           
|                                               |                                         |                                                      |           |              |            |              |           |              |            |               |            |              |             |   |   |              |              |   |            |             
|                                               |                                         | Total other assets                                   |           |              | 37,580,000 |              |           |              | 74,650,000 |               |            |              |            |   |   |              | (109,238,000 | ) |            |              | 2,992,000  |  
|                                               |                                         |                                                      |           |              |            |              |           |              |            |               |            |              |             |   |   |              |              |   |            |             
|                                               |                                         | Total assets                                         |           | $            | 46,301,000 |              |           |              | 91,602,000 |               |            |              | 31,719,000  |   |   |              | (112,529,000 | ) |            |              | 57,093,000 |  
|                                               |                                         |                                                      |           |              |            |              |           |              |            |               |            |              |             |   |   |              |              |   |            |             
|Liabilities and Stockholders Equity (Deficit) |                                         |                                                      |           |              |            |              |           |              |            |               |            |              |             |   |   |              |              |   |            |             
|Current liabilities:                           |                                         |                                                      |           |              |            |              |           |              |            |               |            |              |             |   |   |              |              |   |            |             
|                                               | Accounts payable                        |                                                      | $         | 2,594,000    |            |              |           | 691,000      |            |               |            | 5,893,000    |             |   |   |             |              |   |            | 9,178,000    |           
|                                               | Line of credit                          |                                                      |           | 1,030,000    |            |              |           |             |            |               |            |             |             |   |   |             |              |   |            | 1,030,000    |           
|                                               | Current portion of long-term debt       |                                                      |           | 74,000       |            |              |           | 321,000      |            |               |            |             |             |   |   |             |              |   |            | 395,000      |           
|                                               | Other                                   |                                                      |           | 1,222,000    |            |              |           | 946,000      |            |               |            | 4,045,000    |             |   |   | (3,291,000   | )            |   |            | 2,922,000    |           
|                                               |                                         |                                                      |           |              |            |              |           |              |            |               |            |              |             |   |   |              |              |   |            |             
|                                               |                                         | Total current liabilities                            |           |              | 4,920,000  |              |           |              | 1,958,000  |               |            |              | 9,938,000   |   |   |              | (3,291,000   | ) |            |              | 13,525,000 |  
|                                               |                                         |                                                      |           |              |            |              |           |              |            |               |            |              |             |   |   |              |              |   |            |             
|Long-term liabilities:                         |                                         |                                                      |           |              |            |              |           |              |            |               |            |              |             |   |   |              |              |   |            |             
|                                               | Long-term debt, net of current portion  |                                                      |           | 51,140,000   |            |              |           | 1,102,000    |            |               |            |             |             |   |   |             |              |   |            | 52,242,000   |           
|                                               | Intercompany loan payable               |                                                      |           |             |            |              |           | 74,835,000   |            |               |            | 36,957,000   |             |   |   | (111,792,000 | )            |   |            |             |           
|                                               | Other                                   |                                                      |           |             |            |              |           | 155,000      |            |               |            | 930,000      |             |   |   |             |              |   |            | 1,085,000    |           
|                                               |                                         |                                                      |           |              |            |              |           |              |            |               |            |              |             |   |   |              |              |   |            |             
|                                               |                                         | Total long-term liabilities                          |           |              | 51,140,000 |              |           |              | 76,092,000 |               |            |              | 37,887,000  |   |   |              | (111,792,000 | ) |            |              | 53,327,000 |  
|                                               |                                         |                                                      |           |              |            |              |           |              |            |               |            |              |             |   |   |              |              |   |            |             
|Stockholders equity (deficit):                |                                         |                                                      |           |              |            |              |           |              |            |               |            |              |             |   |   |              |              |   |            |             
|                                               | Common stock                            |                                                      |           | 25,000       |            |              |           | 56,139,000   |            |               |            | 33,709,000   |             |   |   | (89,848,000  | )            |   |            | 25,000       |           
|                                               | Additional paid-in capital              |                                                      |           | 105,844,000  |            |              |           |             |            |               |            |             |             |   |   |             |              |   |            | 105,844,000  |           
|                                               | Accumulated other comprehensive loss    |                                                      |           | (5,506,000   | )          |              |           |             |            |               |            | (5,506,000   | )           |   |   | 5,506,000    |              |   |            | (5,506,000   | )         
|                                               | Accumulated deficit                     |                                                      |           | (110,122,000 | )          |              |           | (42,587,000  | )          |               |            | (44,309,000  | )           |   |   | 86,896,000   |              |   |            | (110,122,000 | )         
|                                               |                                         |                                                      |           |              |            |              |           |              |            |               |            |              |             |   |   |              |              |   |            |             
|                                               |                                         | Total stockholders equity (deficit)                 |           |              | (9,759,000 | )            |           |              | 13,552,000 |               |            |              | (16,106,000 | ) |   |              | 2,554,000    |   |            |              | (9,759,000 | )
|                                               |                                         |                                                      |           |              |            |              |           |              |            |               |            |              |             |   |   |              |              |   |            |             
|                                               |                                         | Total liabilities and stockholders
equity (deficit) |           | $            | 46,301,000 |              |           |              | 91,602,000 |               |            |              | 31,719,000  |   |   |              | (112,529,000 | ) |            |              | 57,093,000 |  
|                                               |                                         |                                                      |           |              |            |              |           |              |            |               |            |              |             |   |   |              |              |   |            |             

(Continued)

77



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##### Table of Contents



PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial
StatementsMay 31, 2002 and 2003

(c)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  | )
|                                   |                                         |                                   |            |             |             |              |            |              |             |               |            |              |             |   |            |             |            |  |             |            
|                                   |                                         | Income (loss) before income taxes |            |             | (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  | )          
|                                   |                                         |                                   |            |             |             |              |            |              |             |               |            |              |             |   |            |             |            |  |             |            
|                                   |                                         | Net income (loss)                 |            |             | (75,720,000 | )            |            |              | (23,982,000 | )             |            |              | (41,190,000 | ) |            |             | 65,172,000 |  |             |             | (75,720,000 | )
|Other comprehensive income (loss): |                                         |                                   |            |             |             |              |            |              |             |               |            |              |             |   |            |             |            |  |             |            
|                                   | Foreign currency translation            |                                   |            | (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 | )
|                                   |                                         |                                   |            |             |             |              |            |              |             |               |            |              |             |   |            |             |            |  |             |            

(d)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 income (loss) |                                   |           | (2,314,000  | )          |              |            |             |            |               |            |             |            |   |            | 2,314,000  |            |   |            |            |           
|                                                        | Gain on extinguishment of debt                   |                                   |           | 20,318,000  |            |              |            |             |            |               |            |             |            |   |            |           |            |   |            | 20,318,000  |           
|                                                        | 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 income (expense)      |           |             | 10,898,000 |              |            |              | (91,000    | )             |            |              | (1,190,000 | ) |            |            | (2,023,000 | ) |            |             | 7,594,000  |  
|                                                        |                                                  |                                   |           |             |            |              |            |              |            |               |            |              |            |   |            |            |            |   |            |            
|                                                        |                                                  | Income (loss) before income taxes |           |             | 4,525,000  |              |            |              | (3,365,000 | )             |            |              | 856,000    |   |            |            | 2,314,000  |   |            |             | 4,330,000  |  
|Income tax benefit                                      |                                                  |                                   |          |             |            |              |           |              |            |               | 195,000    |              |            |   |           |            |            |   | 195,000    |            
|                                                        |                                                  |                                   |           |             |            |              |            |              |            |               |            |              |            |   |            |            |            |   |            |            
|                                                        |                                                  | Net income (loss)                 |           |             | 4,525,000  |              |            |              | (3,365,000 | )             |            |              | 1,051,000  |   |            |            | 2,314,000  |   |            |             | 4,525,000  |  
|Other comprehensive loss - foreign currency
translation |                                                  |                                   | 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)

78



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##### Table of Contents



PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial
StatementsMay 31, 2002 and 2003

(e)Consolidating condensed statement of operations and comprehensive income (loss) information for the year ended May 31, 2003 is as follows:

|                            |                                         |                          |           |            |             |              |            |              |            |               |            |              |            |   |            |            |           |  |            |            |             |  
|--------------------------- | --------------------------------------- | ------------------------ | --------- | ---------- | ----------- | ------------ | ---------- | ------------ | ---------- | ------------- | ---------- | ------------ | ---------- | - | ---------- | ---------- | --------- |  | ---------- | ---------- | ----------- | -
|                            |                                         |                          |           |            |             |              |            | Guarantor    |            | Non-guarantor |            |              |            |   |            |            |           | 
|                            |                                         |                          |           | Parent     |             | subsidiaries |            | subsidiaries |            | Eliminations  |            | Consolidated
|                            |                                         |                          |           |            |             |              |            |              |            |               |            |             
|Net sales                   |                                         | $                        |          |            |             |              | 25,811,000 |              |            |               | 39,721,000 |              |            |   | (443,000   | )          |           |  | 65,089,000 |           
|Cost of sales               |                                         |                          |          |            |             |              | 21,358,000 |              |            |               | 38,430,000 |              |            |   | (443,000   | )          |           |  | 59,345,000 |           
|                            |                                         |                          |           |            |             |              |            |              |            |               |            |              |            |   |            |            |           |  |            |           
|                            |                                         | Gross profit             |           |            |            |              |            |              | 4,453,000  |               |            |              | 1,291,000  |   |            |            |          |  |            |            | 5,744,000   |  
|Operating expenses          |                                         |                          | 2,258,000 |            |             |              | 9,878,000  |              |            |               | 4,348,000  |              |            |   | (3,623,000 | )          |           |  | 12,861,000 |           
|                            |                                         |                          |           |            |             |              |            |              |            |               |            |              |            |   |            |            |           |  |            |           
|                            |                                         | Loss from operations     |           |            | (2,258,000  | )            |            |              | (5,425,000 | )             |            |              | (3,057,000 | ) |            |            | 3,623,000 |  |            |            | (7,117,000  | )
|                            |                                         |                          |           |            |             |              |            |              |            |               |            |              |            |   |            |            |           |  |            |           
|Other income (expense):     |                                         |                          |           |            |             |              |            |              |            |               |            |              |            |   |            |            |           |  |            |           
|                            | Parents share of subsidiaries net loss |                          |           | (9,782,000 | )           |              |            |             |            |               |            |             |            |   |            | 9,782,000  |           |  |            |           |            
|                            | Interest expense                        |                          |           | (4,437,000 | )           |              |            | (1,375,000   | )          |               |            | (1,200,000   | )          |   |            | 2,400,000  |           |  |            | (4,612,000 | )          
|                            | Other                                   |                          |           | 4,735,000  |             |              |            | 929,000      |            |               |            | 29,000       |            |   |            | (6,023,000 | )         |  |            | (330,000   | )          
|                            |                                         |                          |           |            |             |              |            |              |            |               |            |              |            |   |            |            |           |  |            |           
|                            |                                         | Total other expense      |           |            | (9,484,000  | )            |            |              | (446,000   | )             |            |              | (1,171,000 | ) |            |            | 6,159,000 |  |            |            | (4,942,000  | )
|                            |                                         |                          |           |            |             |              |            |              |            |               |            |              |            |   |            |            |           |  |            |           
|                            |                                         | Loss before income taxes |           |            | (11,742,000 | )            |            |              | (5,871,000 | )             |            |              | (4,228,000 | ) |            |            | 9,782,000 |  |            |            | (12,059,000 | )
|Income tax benefit          |                                         |                          |          |            |             |              |           |              |            |               | 317,000    |              |            |   |           |            |           |  | 317,000    |           
|                            |                                         |                          |           |            |             |              |            |              |            |               |            |              |            |   |            |            |           |  |            |           
|                            |                                         | Net income (loss)        |           |            | (11,742,000 | )            |            |              | (5,871,000 | )             |            |              | (3,911,000 | ) |            |            | 9,782,000 |  |            |            | (11,742,000 | )
|Other comprehensive income: |                                         |                          |           |            |             |              |            |              |            |               |            |              |            |   |            |            |           |  |            |           
|                            | Foreign currency translation            |                          |           | 2,883,000  |             |              |            |             |            |               |            | 2,883,000    |            |   |            | (2,883,000 | )         |  |            | 2,883,000  |            
|                            |                                         |                          |           |            |             |              |            |              |            |               |            |              |            |   |            |            |           |  |            |           
|                            |                                         | Comprehensive loss       |           | $          | (8,859,000  | )            |            |              | (5,871,000 | )             |            |              | (1,028,000 | ) |            |            | 6,899,000 |  |            |            | (8,859,000  | )
|                            |                                         |                          |           |            |             |              |            |              |            |               |            |              |            |   |            |            |           |  |            |           

(Continued)

79



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##### Table of Contents



PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial
StatementsMay 31, 2002 and 2003

(f)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)

80



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##### Table of Contents



PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial
StatementsMay 31, 2002 and 2003

(g)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 | )         
|                                                                                          |                                               |                                                                            | Repayment 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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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial
StatementsMay 31, 2002 and 2003

(h)Consolidating condensed statement of cash flows information for the year ended May 31, 2003 is as follows:

|                                                                                          |                                                                    |              |                                                     |            |           |           |              |            |              |            |               |            |              |            |   |   |          |   |            |            |           |            |  
|----------------------------------------------------------------------------------------- | ------------------------------------------------------------------ | ------------ | --------------------------------------------------- | ---------- | --------- | --------- | ------------ | ---------- | ------------ | ---------- | ------------- | ---------- | ------------ | ---------- | - | - | -------- | - | ---------- | ---------- | --------- | ---------- | -
|                                                                                          |                                                                    |              |                                                     |            |           |           |              |            | Guarantor    |            | Non-guarantor |            |              |            |   |   |          |   |           
|                                                                                          |                                                                    |              |                                                     |            | Parent    |           | subsidiaries |            | subsidiaries |            | Eliminations  |            | Consolidated
|                                                                                          |                                                                    |              |                                                     |            |           |           |              |            |              |            |               |            |             
|Cash flow from operating activities - net cash
provided by (used in) operating activities |                                                                    | $            | (1,948,000                                          | )          |           |           | 2,142,000    |            |              |            | (2,972,000    | )          |              |            |  |   |          |   | (2,778,000 | )         
|                                                                                          |                                                                    |              |                                                     |            |           |           |              |            |              |            |               |            |              |            |   |   |          |   |            |           
|Cash flow from investing activities:                                                      |                                                                    |              |                                                     |            |           |           |              |            |              |            |               |            |              |            |   |   |          |   |            |           
|                                                                                          | Acquisition of property, plant and equipment                       |              |                                                     | (81,000    | )         |           |              | (804,000   | )            |            |               | (1,184,000 | )            |            |   |  |          |   |            | (2,069,000 | )        
|                                                                                          | Investment in and loans to subsidiaries                            |              |                                                     | 1,072,000  |           |           |              | (1,072,000 | )            |            |               |           |              |            |   |  |          |   |            |           |          
|                                                                                          | Other changes, net                                                 |              |                                                     | 25,000     |           |           |              | 637,000    |              |            |               |           |              |            |   |   |          |   |            | 662,000    |          
|                                                                                          |                                                                    |              |                                                     |            |           |           |              |            |              |            |               |            |              |            |   |   |          |   |            |           
|                                                                                          |                                                                    |              | Net cash provided by (used in)
investing activities |            |           | 1,016,000 |              |            |              | (1,239,000 | )             |            |              | (1,184,000 | ) |   |          |  |            |            |           | (1,407,000 | )
|                                                                                          |                                                                    |              |                                                     |            |           |           |              |            |              |            |               |            |              |            |   |   |          |   |            |           
|Cash flow from financing activities:                                                      |                                                                    |              |                                                     |            |           |           |              |            |              |            |               |            |              |            |   |   |          |   |            |           
|                                                                                          | Net borrowings (repayments) under line of credit                   |              |                                                     | 1,030,000  |           |           |              |           |              |            |               |           |              |            |   |  |          |   |            | 1,030,000  |          
|                                                                                          | Proceeds from long-term debt                                       |              |                                                     |           |           |           |              | 143,000    |              |            |               |           |              |            |   |  |          |   |            | 143,000    |          
|                                                                                          | Payments on long-term debt and capital leases                      |              |                                                     | (77,000    | )         |           |              | (1,047,000 | )            |            |               |           |              |            |   |  |          |   |            | (1,124,000 | )        
|                                                                                          | Redemption of common stock                                         |              |                                                     | (7,000     | )         |           |              |           |              |            |               |           |              |            |   |  |          |   |            | (7,000     | )        
|                                                                                          | Other changes, net                                                 |              |                                                     |           |           |           |              |           |              |            |               |           |              |            |   |   |          |   |            |           |          
|                                                                                          |                                                                    |              |                                                     |            |           |           |              |            |              |            |               |            |              |            |   |   |          |   |            |           
|                                                                                          |                                                                    |              | Net cash provided by (used in) financing activities |            |           | 946,000   |              |            |              | (904,000   | )             |            |              |           |   |   |          |  |            |            |           | 42,000     |  
|                                                                                          |                                                                    |              |                                                     |            |           |           |              |            |              |            |               |            |              |            |   |   |          |   |            |           
|                                                                                          |                                                                    |              | Net change in cash and cash equivalents             |            |           | 14,000    |              |            |              | (1,000     | )             |            |              | (4,156,000 | ) |   |          |  |            |            |           | (4,143,000 | )
|Cash and cash equivalents at beginning of year                                            |                                                                    |              | 803,000                                             |            |           |           | 3,000        |            |              |            | 4,813,000     |            |              |            |  |   |          |   | 5,619,000  |           
|Effect of exchange rates on cash                                                          |                                                                    |              |                                                    |            |           |           |             |            |              |            | 472,000       |            |              |            |  |   |          |   | 472,000    |           
|                                                                                          |                                                                    |              |                                                     |            |           |           |              |            |              |            |               |            |              |            |   |   |          |   |            |           
|Cash and cash equivalents at end of year                                                  |                                                                    | $            | 817,000                                             |            |           |           | 2,000        |            |              |            | 1,129,000     |            |              |            |  |   |          |   | 1,948,000  |           
|                                                                                          |                                                                    |              |                                                     |            |           |           |              |            |              |            |               |            |              |            |   |   |          |   |            |           
|Supplemental cash flow:                                                                   |                                                                    |              |                                                     |            |           |           |              |            |              |            |               |            |              |            |   |   |          |   |            |           
|                                                                                          | Noncash operating expenses related to:                             |              |                                                     |            |           |           |              |            |              |            |               |            |              |            |   |   |          |   |            |            |          
|                                                                                          |                                                                    | Depreciation |                                                     | $          | 442,000   |           |              |            | 1,412,000    |            |               |            | 1,995,000    |            |   |   |         |   |            |            | 3,849,000 |           
|                                                                                          |                                                                    | Amortization |                                                     |            |          |           |              |            | 125,000      |            |               |            |             |            |   |   |         |   |            |            | 125,000   |           
|                                                                                          | Cash paid during the year for:                                     |              |                                                     |            |           |           |              |            |              |            |               |            |              |            |   |   |          |   |            |            |          
|                                                                                          |                                                                    | Interest     |                                                     |            | 1,989,000 |           |              |            | 175,000      |            |               |            | 700,000      |            |   |   | (700,000 | ) |            |            | 2,164,000 |           
|                                                                                          |                                                                    | Income taxes |                                                     |            |          |           |              |            |             |            |               |            | 290,000      |            |   |   |         |   |            |            | 290,000   |           
|Noncash investing and financing activities:                                               |                                                                    |              |                                                     |            |           |           |              |            |              |            |               |            |              |            |   |   |          |   |            |           
|                                                                                          | Issuance of common stock on conversion
of Series C Preferred Stock |              |                                                     | 18,715,000 |           |           |              |           |              |            |               |           |              |            |   |  |          |   |            | 18,715,000 |          

(Continued)

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PACIFIC AEROSPACE & ELECTRONICS, INC.
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
May 31, 2002 and 2003



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

|                            |                  |                   |            |           |            |      |           |           |            | 
|--------------------------- | ---------------- | ----------------- | ---------- | --------- | ---------- | ---- | --------- | --------- | ---------- | 
|                            |                  |                   |            | 2002      |            | 2003
|                            |                  |                   |            |           |            |     
|Guarantor subsidiaries      |                  |                   |            |           |            |      |           |          
|                            | Raw materials    |                   | $          | 2,796,000 |            |      |           | 1,686,000 |           
|                            | Work in progress |                   |            | 3,122,000 |            |      |           | 1,760,000 |           
|                            | Finished goods   |                   |            | 5,331,000 |            |      |           | 3,470,000 |           
|                            |                  |                   |            |           |            |      |           |          
|                            |                  |                   | 11,249,000 |           |            |      | 6,916,000 |          
|                            |                  |                   |            |           |            |      |           |          
|Non-guarantor subsidiaries: |                  |                   |            |           |            |      |           |          
|                            | Raw materials    |                   |            | 1,131,000 |            |      |           | 1,520,000 |           
|                            | Work in progress |                   |            | 6,963,000 |            |      |           | 6,629,000 |           
|                            | Finished goods   |                   |            | 263,000   |            |      |           | 1,392,000 |           
|                            |                  |                   |            |           |            |      |           |          
|                            |                  |                   | 8,357,000  |           |            |      | 9,541,000 |          
|                            |                  |                   |            |           |            |      |           |          
|                            |                  | Total inventories |            | $         | 19,606,000 |      |           |           | 16,457,000 | 
|                            |                  |                   |            |           |            |      |           |          

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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 and
reclassified gain on extinguishment of debt recorded in the prior year from
extraordinary item to other income effective for the year ended May 31, 2003.

(in thousands, except per share data)

|                                                       |         |   |            |         |              |  |              |         |         |  |            |         |              |  |              |         |         |  |            |         |   |  |            |         |   |  |            |           |   |  |            |            |  
|------------------------------------------------------ | ------- | - | ---------- | ------- | ------------ |  | ------------ | ------- | ------- |  | ---------- | ------- | ------------ |  | ------------ | ------- | ------- |  | ---------- | ------- | - |  | ---------- | ------- | - |  | ---------- | --------- | - |  | ---------- | ---------- | -
|                                                       |         |   | August 31, |         | November 30, |  | February 28, |         | May 31, |  | August 31, |         | November 30, |  | February 28, |         | May 31,
|                                                       |         |   | 2001       |         | 2001         |  | 2002         |         | 2002    |  | 2002       |         | 2002         |  | 2003         |         | 2003   
|                                                       |         |   |            |         |              |  |              |         |         |  |            |         |              |  |              |         |        
|Net Sales                                              |         | $ | 23,429,000 |         |              |  | 21,579,000   |         |         |  | 18,322,000 |         |              |  | 16,861,000   |         |         |  | 16,056,000 |         |   |  | 16,453,000 |         |   |  | 15,663,000 |           |   |  | 16,917,000 |           
|Gross profit                                           |         |   | 5,075,000  |         |              |  | 3,299,000    |         |         |  | 3,617,000  |         |              |  | 439,000      |         |         |  | 1,941,000  |         |   |  | 2,326,000  |         |   |  | 1,116,000  |           |   |  | 361,000    |           
|Net income (loss)                                      |         |   | (2,044,000 | )       |              |  | (5,912,000   | )       |         |  | (3,602,000 | )       |              |  | 16,083,000   |         |         |  | (1,766,000 | )       |   |  | (1,146,000 | )       |   |  | (3,829,000 | )         |   |  | (5,001,000 | )         
|Net income (loss) per share:                           |         |   |            |         |              |  |              |         |         |  |            |         |              |  |              |         |         |  |            |         |   |  |            |         |   |  |            |           |   |  |            |           
|                                                       | Basic   |   |            | (10.43  | )            |  |              | (30.01  | )       |  |            | (18.28  | )            |  |              | 40.21   |         |  |            | (3.92   | ) |  |            | (2.55   | ) |  |            | (0.42     | ) |  |            | (0.20      | )
|                                                       | Diluted |   |            | (10.43  | )            |  |              | (30.01  | )       |  |            | (18.28  | )            |  |              | 40.21   |         |  |            | (3.92   | ) |  |            | (2.55   | ) |  |            | (0.42     | ) |  |            | (0.20      | )
|Shares used in computation of
income (loss) per share: |         |   |            |         |              |  |              |         |         |  |            |         |              |  |              |         |         |  |            |         |   |  |            |         |   |  |            |           |   |  |            |           
|                                                       | Basic   |   |            | 196,000 |              |  |              | 197,000 |         |  |            | 197,000 |              |  |              | 400,000 |         |  |            | 450,000 |   |  |            | 450,000 |   |  |            | 9,100,000 |   |  |            | 24,779,000 |  
|                                                       | Diluted |   |            | 196,000 |              |  |              | 197,000 |         |  |            | 197,000 |              |  |              | 400,000 |         |  |            | 450,000 |   |  |            | 450,000 |   |  |            | 9,100,000 |   |  |            | 24,779,000 |  

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.

Net sales decreased during fiscal year 2002 due to the sale of our Casting
Division and Engineering & Fabrication Division, and the shut down of our
Displays Division. Net sales decreased considerably during the third and
fourth quarters of fiscal 2002 due to the downturn in the commercial aerospace
industry following the terrorist attacks of September 11, 2001.

Gross profit fell significantly during the quarter ended May 31, 2002, due to
reduced net sales and due to a $1.6 million write down of inventory. Inventory
was written down because of the effects of the downturn in the commercial
aerospace industry and the economy in general on the net realizable value of
our inventories.

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

Net sales decreased during the quarter ended February 28, 2003 due to
reductions in commercial aerospace sales, primarily in the United Kingdom.

Gross profit and net income decreased during the quarter ended February 28,
2003 due to reduced revenue from the commercial aerospace industry while many
of our costs are fixed. We also recognized a $400,000 inventory write-down
during the quarter. Inventory was written down because of the effects of the
downturn in the commercial aerospace industry and the economy in general to the
net realizable value of our inventories.

Gross profit and net income fell significantly during the quarter ended May 31,
2003, due to a $1.3 million write down of inventory. Inventory was written
down because of the effects of the downturn in the commercial aerospace
industry and the economy in general on the net realizable value of our
inventories.




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

None.




|        |  |                        
|------- |  | -----------------------
|ITEM 9A |  | CONTROLS AND PROCEDURES

Our executive officers, including our Chief Executive Officer and Chief
Financial Officer, are responsible for establishing and maintaining disclosure
controls and procedures for Pacific Aerospace & Electronics, Inc and its
subsidiaries. Those executives have designed such controls to ensure that all
material information relating to Pacific Aerospace & Electronics, Inc. and
its subsidiaries is made known to them by others within the organization.

As of May 31, 2003, our executive officers completed an evaluation of our
disclosure controls and procedures and have determined them to be functioning
properly and effectively. They did not discover any significant deficiencies
or material weaknesses within the controls and procedures that required
modification.

There were no changes in our internal control over financial reporting
identified in connection with our evaluation that occurred during our fourth
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.

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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
nominated by the former holders of our Series C Preferred Stock (all such
shares of Series C Preferred Stock have been converted into Common Stock in the
Automatic Conversion), and each director will serve until the earlier of
resignation or his successor is elected at the next annual meeting of
shareholders. They are:

|                     |  |     |    |                       |  |                                                
|-------------------- |  | --- | -- | --------------------- |  | -----------------------------------------------
|Name                 |  | Age |    | Position with Company
|                     |  |     |    |                      
|Richard W. Detweiler |  |     | 60 |                       |  | Director                                       
|Carl H. Goldsmith(1) |  |     | 36 |                       |  | Director                                       
|Matthew C. Kaufman   |  |     | 32 |                       |  | Director and Chairman                          
|Philip Raygorodetsky |  |     | 29 |                       |  | Director                                       
|Donald A. Wright     |  |     | 50 |                       |  | Director, Chief Executive Officer and
President

(1)  Resigned as a direct as of August 1, 2003.

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 was a director of the Company from March 19,
2002 until he resigned on August 1, 2003. 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.
At the time of Mr. Goldsmiths resignation and until the date of this report he
did not notify the Company of any matter pursuant to which a report would have
been required under the Exchange Act.

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 Burke Industries, Inc., Check
Printers, Inc., Day International Group, Inc., Waddington North America, Inc.,
and Worldtex, Inc.

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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 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 Day International Group, Inc. and 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 earlier of their resignation, or
the next annual meeting of the Companys shareholders and until their
successors elected at such meeting 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.
Upon resignation, a nominee for the vacancy resulting therefrom is designated
by the Noteholder that nominated such resigned director.

EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES

The following table sets forth
information as of August 21, 2002, regarding the
executive officers of the Company.

Executive Officers

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

Mr. Miraclehas 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.

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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.

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, 2003, 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 executive officers
whose total annual salary and bonus exceeds $100,000 (the Named Executives)
for services in all capacities to the Company for the last three fiscal years:

|                              |  |        |      |            |  |                     |         |                       |  |            |     |            |  |              |       |        |  |          |        |              |  |  |        |    
|----------------------------- |  | ------ | ---- | ---------- |  | ------------------- | ------- | --------------------- |  | ---------- | --- | ---------- |  | ------------ | ----- | ------ |  | -------- | ------ | ------------ |  |  | ------ | ---
|                              |  |        |      |            |  | Annual              |         | Long-Term             |  |            |     |            |  |              |       |        |  |          |        |             
|                              |  |        |      |            |  | Compensation        |         | Compensation          |  |            |     |            |  |              |       |        |  |          |        |             
|                              |  |        |      |            |  |                     |         |                       |  |            |     |            |  |              |       |        |  |          |        |             
|                              |  |        |      |            |  |                     |         |                       |  |            |     |            |  |              |       |        |  | Value of |        | Other Annual
|Name and Principal            |  | Fiscal |      |            |  |                     |         | Securities Underlying |  | Restricted |     | Restricted |  | Compensation
|Position                      |  | Year   |      | Salary ($) |  | Options/SARs(#) (1) |         | Stock Awards          |  | Stock      |     | ($)       
|                              |  |        |      |            |  |                     |         |                       |  |            |     |           
|Donald A. Wright              |  |        | 2003 |            |  |                     | 282,956 |                       |  |            |    |            |  |              |      |        |  |          |       |              |  |  | 3,973  | (2)
|CEO and President             |  |        | 2002 |            |  |                     | 325,015 |                       |  |            |    |            |  |              | 1,190 | (6)(9) |  | $        | 50,000 | (10)         |  |  | 43,178 | (2)
|                              |  |        | 2001 |            |  |                     | 335,809 |                       |  |            | 375 |            |  |              |      |        |  |          |       |              |  |  | 7,316  | (2)
|Werner Hafelfinger(4)         |  |        | 2003 |            |  |                     | 202 308 |                       |  |            |    |            |  |              |      |        |  |          |       |              |  |  |       |    
|Former COO, V.P.              |  |        | 2002 |            |  |                     | 219,231 |                       |  |            |    |            |  |              | 238   | (7)(9) |  | $        | 10,000 | (11)         |  |  |       |    
|Operations                    |  |        | 2001 |            |  |                     | 200,000 |                       |  |            | 187 |            |  |              |      |        |  |          |       |              |  |  | 2,438  | (3)
|Sheryl A. Symonds(5)          |  |        | 2003 |            |  |                     | 157 447 |                       |  |            |    |            |  |              |      |        |  |          |       |              |  |  |       |    
|Former V.P.                   |  |        | 2002 |            |  |                     | 231,519 |                       |  |            |    |            |  |              | 238   | (8)(9) |  | $        | 10,000 | (12)         |  |  |       |    
|Administration,               |  |        | 2001 |            |  |                     | 190,473 |                       |  |            | 187 |            |  |              |      |        |  |          |       |              |  |  |       |    
|General Counsel and
Secretary |  |        |      |            |  |                     |         |                       |  |            |     |            |  |              |       |        |  |          |        |              |  |  |        |    



---

|(1) |  | Represents options to purchase shares of Common Stock.                                                                                                                           
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | 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.            
|   
|(3) |  | Represents estimated value of the personal use of a Company vehicle.                                                                                                             
|   
|(4) |  | Mr. Hafelfingers employment with the Company terminated on May 17, 2002,
however, he continued to receive severance payments on regular payroll
days through May 17, 2003.      
|   
|(5) |  | Mrs. Symonds employment with the Company terminated on February 28, 2002,
however, she continued to receive severance payments on regular payroll
days through February 28, 2003.
|   
|(6) |  | Represents the issuance of 1,190 shares of Common Stock in lieu of a
portion of Mr. Wrights annual salary valued at $50,000 at the time of
issuance.                            
|   
|(7) |  | Represents the issuance of 238 shares of Common Stock in lieu of a
portion of Mr. Hafelfingers annual salary valued at $10,000 at the time
of issuance.                         

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|(8)  |  | Represents the issuance of 238 shares of Common Stock in lieu of a
portion of Ms. Symonds annual salary valued at $10,000 at the time of
issuance.                                                                                                          
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(9)  |  | The value of the Common Stock was valued using the average closing price
of the stock for the five days immediately preceding June 1, 2001.                                                                                                                  
|    
|(10) |  | At the end of the last fiscal year, Mr. Wright held 1,190 shares of
restricted stock valued at $536, based on the last reported trading price
of the Common Stock as of May 31, 2003. The restricted stock is fully
vested and does not pay any dividends.   
|    
|(11) |  | At the end of the last fiscal year, Mr. Hafelfinger held 238 shares of
restricted stock valued at $107, based on the last reported trading price
of the Common Stock as of May 31, 2003. The restricted stock is fully
vested and does not pay any dividends.
|    
|(12) |  | At the end of the last fiscal year, Ms. Symonds held 238 shares of
restricted stock valued at $107, based on the last reported trading price
of the Common Stock as of May 31, 2003. The restricted stock is fully
vested and does not pay any dividends.    

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, 2003, 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(3)   |  |                        | 11,537 |                      |  |             |  |               |  |  |  |  |  |  |  | 
|Werner Hafelfinger(2) |  |                        | 987    |                      |  |             |  |               |  |  |  |  |  |  |  | 
|Sheryl A. Symonds     |  |                        | 1,487  |                      |  |             |  |               |  |  |  |  |  |  |  | 



|(1) |  | No options or warrants held by the Named Executives had exercise prices
of less than $0.40 per share (after giving effect to the Reverse Split),
the closing price of the Common Stock on August 1, 2003.         
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Includes options to purchase 50 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.
|   
|(3) |  | Does not include option to purchase 1,238,960 shares approved for grant
in February 2003 but which have not been issued at May 31, 2003.                                                                          

Employment Agreements

On March 19, 2002, the Company entered into an employment agreement with Donald
A. Wright. The 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. The severance payments consist of either 12 or 24
months of Mr. Wrights base salary, depending on the date of his termination,
as well as 12 months of health and medical benefits. In addition, in February
2003 the Board of Directors approved the grant to Mr. Wright of an option to
purchase 1,238,960 shares of Common Stock under the 2002 Stock Option Plan,
however the options have not yet been granted.

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 received severance pay of
$210,000, equivalent to one year of his salary, payable on regular payroll days
over a 12-month period. Mr. Hafelfinger also received 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 received severance pay of

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$205,710, equivalent to one year of her salary, payable on regular payroll days
over a 12-month period. Ms. Symonds also received medical benefits for one
year.

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 Companys restructuring, which was completed
on January 27, 2003, the Company agreed to issue no new awards under any of the
Stock Incentive Plans. However, the Company has adopted a new stock option
plan (the 2002 Stock Option Plan) which was approved by the Company
shareholders on January 27, 2003. 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 was 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.

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 an employment agreement. Annual salary under the employment agreement
is subject to increase on an annual basis in accordance with the terms of that
agreement. The 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 and Ms. Symonds each agreed to forego
$10,000 in salary and each received 47,619 shares of restricted Common Stock.

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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 2003
because of the Companys financial performance in fiscal 2003.

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 and the 2002 Stock Option Plan
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 March 19, 2002. The Committee administers the
Stock Incentive Plans and the 2002 Stock Option Plan, 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 and the 2002 Stock Option Plan may
contain vesting provisions. No stock options were granted during fiscal year
2002. In February 2003, the Board of Directors approved the grant to Mr.
Wright of an option to purchase 1,238,960 shares of Common Stock, under the
2002 Stock Option Plan, however the options have not yet been granted. The
options are to vest over three years and will be outstanding for ten years.

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 or the 2002 Stock Option Plan would meet the
requirement of being performance-based and would therefore not be subject to
the $1 million limit on deductibility.

Certain Tax Considerations Related to Executive Compensation

As a result of Section 162(m) of the Internal Revenue Code of 1986, as amended
(the Code), if the Company pays more that $1,000,000 in compensation to a
covered employee (the chief executive officer and the next four highest paid
employees) in a single year, then the Companys deduction for such compensation
could be limited to $1,000,000.

Compensation Committee and Insider Participation

The Compensation 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, together with certain
of its affiliates, approximately 52% of the Companys Common Stock on a
fully-diluted basis.

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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, 1998 and ending May 31, 2003. The graph assumes
that $100 was invested on May 31, 1998, 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                                 |  | 5/31/98 |        | 5/31/99 |  | 5/31/00 |        | 5/31/01 |  | 5/31/02 |        | 5/31/03
|                                                    |  |         |        |         |  |         |        |         |  |         |        |        
|Pacific Aerospace &
Electronics,
Inc.               |  |         | 100.00 |         |  |         | 27.57  |         |  |         | 20.39  |         |  |  | 3.43   |  |  |  | 0.98   |  |  |  | 0.04  | 
|S&P 500                                             |  |         | 100.00 |         |  |         | 119.35 |         |  |         | 130.23 |         |  |  | 115.13 |  |  |  | 97.83  |  |  |  | 88.34 | 
|S&P 500 GICS
Aerospace & Defense
Sub-industry Index |  |         | 100.00 |         |  |         | 105.45 |         |  |         | 86.68  |         |  |  | 110.44 |  |  |  | 104.80 |  |  |  | 79.20 | 




|         |  |                                                                                 
|-------- |  | --------------------------------------------------------------------------------
|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 (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
owned as of July 22, 2003, 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 and those nominated to become directors; (3) the

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Named Executives; 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 Common Stock owned by
them.

|                                                                                                                                                        |  |                       |  |                   |       |     
|------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------- |  | ----------------- | ----- | ----
|                                                                                                                                                        |  | Number of shares      |  | Percent of Voting
|                                                                                                                                                        |  | beneficially owned() |  | Stock            
|                                                                                                                                                        |  |                       |  |                  
|Matthew C. Kaufman(1)
GSCP Recovery, Inc.
GSC Recovery II, L.P.
500 Campus Drive,
Suite 220
Florham Park, NJ 07932                                      |  | 16,124,706(2)         |  |                   | 65.07 | %   
|                                                                                                                                                        |  |                       |  |                   |       |     
|Philip Raygorodetsky(1)
GSCP Recovery, Inc.
GSC Recovery II, L.P.
500 Campus Drive, Suite 220
Florham Park, NJ 07932                                    |  | 16,124,706(2)         |  |                   | 65.07 | %   
|                                                                                                                                                        |  |                       |  |                   |       |     
|Richard W. Detweiler
Carlisle Enterprises, L.L.C.
7777 Fay Avenue, Suite 200
La Jolla, CA 92037                                                         |  | 0                     |  |                   | *     |     
|                                                                                                                                                        |  |                       |  |                   |       |     
|GSCP Recovery, Inc.(3)
GSC Recovery II, L.P.
500 Campus Drive, Suite 220
Florham Park, NJ 07932                                                         |  | 16,124,706(2)         |  |                   | 65.07 | %   
|                                                                                                                                                        |  |                       |  |                   |       |     
|Carl H. Goldsmith(4) (12)
M.W. Post Advisory Group L.L.C.
11766 Wilshire Blvd.
Suite 1660
Los Angeles, CA 70025                                         |  | 6,617,430(5)          |  |                   | 26.71 | %(5)
|                                                                                                                                                        |  |                       |  |                   |       |     
|M.W. Post Advisory Group L.L.C.(6)
11766 Wilshire Blvd.
Suite 1660
Los Angeles, CA 70025                                                                |  | 6,617,430(5)          |  |                   | 26.71 | %(5)
|                                                                                                                                                        |  |                       |  |                   |       |     
|Donald A. Wright
President and Chief Executive Officer
c/o Pacific Aerospace & Electronics,
Inc.
430 Olds Station Road, Third Floor
Wenatchee, WA 98801 |  | 14,927(7)             |  |                   | *     |     
|                                                                                                                                                        |  |                       |  |                   |       |     
|Charles Miracle
Chief Financial Officer
c/o Pacific Aerospace & Electronics,
Inc.
430 Olds Station Road, Third Floor
Wenatchee, WA 98801                |  | 55(8)                 |  |                   | *     |     
|                                                                                                                                                        |  |                       |  |                   |       |     
|Werner Hafelfinger
Former Chief Operating Officer
c/o Pacific Aerospace & Electronics,
Inc.
430 Olds Station Road, Third Floor
Wenatchee, WA 98801      |  | 2,048(9)              |  |                   | *     |     
|                                                                                                                                                        |  |                       |  |                   |       |     
|Sheryl A. Symonds
Former Secretary and General Counsel
c/o Pacific Aerospace & Electronics,
Inc.
430 Olds Station Road, Third Floor
Wenatchee, WA 98801 |  | 1,761(10)             |  |                   | *     |     
|                                                                                                                                                        |  |                       |  |                   |       |     
|All executive officers and current
directors as a group (6 persons)                                                                                     |  | 22,757,118(11)        |  |                   | 91.84 | %   



|* |  | Less than 1%.
|- |  | -------------

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|()  |  | Shares that a person has the right to acquire by exercise or conversion
within 60 days of the date of this Report 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(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)  |  | As set forth in the Schedule 13D/A filed with the Commission on July 3,
2003, GSC Recovery II, L.P. directly owned 3,859,685 shares and GSCP
Recovery, Inc. directly owned 12,265,021 shares. In addition, each entity
reports (i) shared dispositive power with respect to 16,124,706 shares and
(ii) shared voting power with respect to 22,742,136 shares of the Company
in connection with its association with a voting group including M.W. Post
Advisory Group L.L.C.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    
|(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, Christine K. Vanden Beukel and Andrew
Wagner, 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, Christine K. Vanden Beukel and Andrew
Wagner, disclaims beneficial ownership with respect to the shares held 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)  |  | As set forth in the Schedule 13D filed with the Commission on May 31,
2002, M.W. Post reports (i) shared dispositive power with respect to
6,617,430 shares and (ii) shared voting power with respect to 20,805,634
shares of the Company in connection with its association with a voting
group including the GSC entities listed above and William E. Simon & Sons
Special Situation Partners II, L.P. (including certain of its affiliates).
However, M.W. Post claims beneficial ownership only with respect to
19,840,712 shares over which it and the GSC entities listed above have
shared voting power.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    
|(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. Mr. Goldsmith disclaims beneficial ownership with respect
to the shares of the Company held by M.W. Post. As set forth in the
Schedule 13D filed with the Commission on May 31, 2002, M.W. Post reports
(i) shared voting power with respect to 20,805,634 shares of the Company
in connection with its association with the GSC entities listed above and
William E. Simon & Sons Special Situation Partners II, L.P. (including
certain of its affiliates), and (ii) shared dispositive power with respect
to 6,617,430 shares. However, M.W. Post claims beneficial ownership only
with respect to 19,840,712 shares over which it and the GSC entities
listed above have shared voting power.                                                                                                                                                                                                                                                                                                                 
|    
|(7)  |  | Includes (a) 3,370 shares of Common Stock, (b) 20 shares issuable upon
exercise of public warrants, (c) 500 shares issuable upon exercise of a
private warrant and (d) 11,037 shares issuable upon exercise of vested
stock options. Does not include 1,238,900 shares issuable upon exercise
of options approved in February 2003 for grant to Mr. Wright but which
have not been issued at May 31, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    
|(8)  |  | Includes (a) 18 shares of Common Stock and (b) 37 shares issuable upon
exercise of vested stock options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    
|(9)  |  | Includes (a) 1,061 shares of Common Stock and (b) 987 shares issuable
upon exercise of vested stock options, as reported on such former
officers Form 4 filed July 19, 2001 and stock option records of the
Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    
|(10) |  | Includes (a) 274 shares of Common Stock and (b) 1,487 shares issuable on
exercise of vested stock options, as reported on such officers Form 4
filed June 7, 2001 and stock option records of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    
|(11) |  | Includes (a) 22,745,524 shares of Common Stock, (b) 20 shares issuable
upon exercise of public warrants, (c) 500 shares issuable upon exercise of
a private warrant and (d) 11,074 shares issuable upon exercise of vested
stock options. Does not include 1,238,900 shares issuable upon exercise
of options approved in February 2003 for grant to Mr. Wright but which
have not been issued at May 31, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    
|(12) |  | Mr. Goldsmith resigned as a director effective August 1, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Condominium.In November 1998, the Company entered into a Condominium Purchase
and Sale Agreement (the Condominium Agreement) with Donald A. Wright, the
Companys 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 the Companys
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, which amount
the Company believes represents the fair market rental value of such
condominium unit. In addition, the Board of Directors approved an option to
purchase, which grants to Mr. Wright the right to purchase the condominium unit
for $250,000, the fair market value of the condominium unit on the date of
option grant. The option became exercisable February 1, 2000. 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, the Company 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.

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 (as defined below). In addition,
GSCP Recovery, Inc. and GSC Recovery II, L.P. acquired an aggregate of
approximately 52% of the Companys Common Stock as part of the Companys
restructuring and in exchange for the 111⁄4% senior subordinated notes due
2005 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 5% senior secured notes due 2007. Such
notes contain restrictive covenants and default protections that effectively
allow GSCP Recovery, Inc., 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.

Anti-Takeover Considerations

Washington Law.The Company and its U.S. subsidiaries, as Washington
corporations, are subject to certain provisions of Washington law regarding
significant business transactions and fair price restrictions. These
provisions may have the effect of delaying or deterring a hostile takeover
involving the Company or its U.S. subsidiaries.

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

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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, 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.

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PART IV




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 1, 2003                                          
|                                                                                    | Consolidated Balance Sheets as of May 31, 2002 and 2003                                    
|                                                                                    | Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended  
|                                                                                    |                                                                                             | May 31, 2001, 2002 and 2003
|                                                                                    | Consolidated Statements of Stockholders Equity (Deficit) for the years ended May 31, 2001,
|                                                                                    |                                                                                             | 2002 and 2003              
|                                                                                    | Consolidated Statements of Cash Flows for the years ended May 31, 2001, 2002 and 2003      
|                                                                                    | 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                                                                                                                                                                                                           
|3.1     |  | Articles of Incorporation of Pacific Aerospace & Electronics, Inc.(4)                                                                                                                                                 
|        |  |                                                                                                                                                                                                                       
|3.2     |  | Amendment to Articles of Incorporation containing Designation of Rights and Preferences of Series A Convertible Preferred Stock, as corrected.
(5)                                                                    
|        |  |                                                                                                                                                                                                                       
|3.3     |  | Amendment to Articles of Incorporation containing Designation of Rights and Preferences of Series B Convertible Preferred Stock.(11)                                                                                  
|        |  |                                                                                                                                                                                                                       
|3.4     |  | Articles of Amendment of Pacific Aerospace & Electronics, Inc. filed March 19, 2002.(26)                                                                                                                              
|        |  |                                                                                                                                                                                                                       
|3.5     |  | Designation of Rights and Preferences for Series C Voting Convertible Preferred Stock of Pacific Aerospace and Electronics, Inc.(26)                                                                                  
|        |  |                                                                                                                                                                                                                       
|3.6     |  | Bylaws of Pacific Aerospace & Electronics, Inc., as amended.(20)                                                                                                                                                      
|        |  |                                                                                                                                                                                                                       
|4.1     |  | Form of specimen certificate for common stock.(4)                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                       
|4.2     |  | Form of specimen certificate for public warrants.(4)                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                       
|4.3     |  | Form of specimen certificate for the Series A Convertible Preferred Stock.(5)                                                                                                                                         
|        |  |                                                                                                                                                                                                                       
|4.4     |  | Form of specimen certificate for the Series B Convertible Preferred Stock.(11)                                                                                                                                        
|        |  |                                                                                                                                                                                                                       
|4.5     |  | Form of specimen certificate for the Series C Voting Convertible Preferred Stock.(*)                                                                                                                                  
|        |  |                                                                                                                                                                                                                       
|4.6     |  | Form of common stock Purchase Warrant issued to holders of the Series B Convertible Preferred Stock on May 15, 1998.(11)                                                                                              
|        |  |                                                                                                                                                                                                                       
|4.7     |  | Warrant Agreement between Interwest Transfer Co., Inc. and PCT Holdings, Inc. dated July 1, 1996.(2)                                                                                                                  
|        |  |                                                                                                                                                                                                                       
|4.8     |  | 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.(17)
|        |  |                                                                                                                                                                                                                       
|4.9     |  | Common Stock Purchase Warrant No. 001 from Pacific Aerospace & Electronics, Inc. to Donald A. Wright dated as of November 30, 1996.(7)                                                                                
|        |  |                                                                                                                                                                                                                       
|4.10    |  | Common Stock Purchase Warrant No. 002 from Pacific Aerospace & Electronics, Inc. to Nick A. Gerde dated as of November 30, 1996.(7)                                                                                   
|        |  |                                                                                                                                                                                                                       
|4.11    |  | Common Stock Purchase Warrant No. 003 from Pacific Aerospace & Electronics, Inc. to Edward A. Taylor dated as of November 30, 1996.(7)                                                                                

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|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|4.12    |  | Common Stock Purchase Warrant from Pacific Aerospace & Electronics, Inc. to Gregory K. Smith dated June 3, 1997.(6)                                                                                                                                                                                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4.13    |  | Common Stock Purchase Warrant from Pacific Aerospace & Electronics, Inc. to Nestor Wiegand dated June 3, 1997.(6)                                                                                                                                                                                                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4.14    |  | Registration Rights Agreement between Pacific Aerospace & Electronics, Inc., Strong River Investments, Inc., and Bay Harbor Investments, Inc.,
dated as of July 27, 2000.(18)                                                                                                                                                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4.15    |  | Warrant between Pacific Aerospace & Electronics, Inc. and Strong River Investments, Inc., dated as of July 27, 2000.(18)                                                                                                                                                                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4.16    |  | Warrant between Pacific Aerospace & Electronics, Inc. and Bay Harbor Investments, Inc., dated as of July 27, 2000.(18)                                                                                                                                                                                                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4.17    |  | Warrant between Pacific Aerospace & Electronics, Inc. and Strong River Investments, Inc., dated as of July 27, 2000.(18)                                                                                                                                                                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4.18    |  | Warrant between Pacific Aerospace & Electronics, Inc. and Bay Harbor Investments, Inc., dated as of July 27, 2000.(18)                                                                                                                                                                                                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4.19    |  | Vesting Warrant between Pacific Aerospace & Electronics, Inc. and Strong River Investments, Inc., dated as of July 27, 2000.(18)                                                                                                                                                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4.20    |  | Vesting Warrant between Pacific Aerospace & Electronics, Inc. and Bay Harbor Investments, Inc., dated as of July 27, 2000.(18)                                                                                                                                                                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4.21    |  | Letter agreement among Pacific Aerospace & Electronics, Inc., Strong River Investments, Inc. and Bay Harbor Investments, Inc., dated as of
February 15, 2001.(21)                                                                                                                                                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4.22    |  | Placement Agent Warrant between Pacific Aerospace & Electronics, Inc. and Rochon Capital Group, Ltd., dated as of July 27, 2000. (19)                                                                                                                                                                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4.23    |  | Common Stock Purchase Warrant between Pacific Aerospace & Electronics, Inc. and Continental Capital & Equity Corporation, dated April 17,
2000.(19)                                                                                                                                                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4.24    |  | Common Stock Purchase Warrant between Pacific Aerospace & Electronics, Inc. and Continental Capital & Equity Corporation, dated April 17,
2000.(19)                                                                                                                                                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4.25    |  | Common Stock Purchase Warrant between Pacific Aerospace & Electronics, Inc. and Continental Capital & Equity Corporation, dated April 17,
2000.(19)                                                                                                                                                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4.26    |  | Common Stock Purchase Warrant between Pacific Aerospace & Electronics, Inc. and Continental Capital & Equity Corporation, dated April 17,
2000.(19)                                                                                                                                                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4.27    |  | Warrant Agreement, by and among Pacific Aerospace & Electronics, Inc. and Holders, dated March 1, 2001. (22)                                                                                                                                                                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4.28    |  | Warrant Certificate, dated March 1, 2001, issued to B III Capital Partners, L.P., exercisable for 1,883,923 shares of common stock. (22)                                                                                                                                                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4.29    |  | Warrant Certificate, dated March 1, 2001, issued to B III-A Capital Partners, L.P., exercisable for 807,396 shares of common stock.(22)                                                                                                                                                                                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4.30    |  | Warrant Certificate, dated March 1, 2001, issued to DDJ Canadian High Yield Fund, exercisable for 538,263 shares of common stock.(22)                                                                                                                                                                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4.31    |  | 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.(22)                                                                                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4.32    |  | Equity Registration Rights Agreement, by and among Pacific Aerospace & Electronics, Inc. and Holders, dated March 1, 2001.(22)                                                                                                                                                                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4.33    |  | Warrant Agreement by and among Pacific Aerospace & Electronics, Inc. and First Albany Corporation, dated April 9, 2001.(24)                                                                                                                                                                                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4.34    |  | Warrant Certificate, dated April 9, 2001, issued to First Albany Corporation, exercisable for 692,074 shares of common stock.(24)                                                                                                                                                                                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4.35    |  | 5.0% Senior Secured Note due May 1, 2007. (26)                                                                                                                                                                                                                                                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|4.36    |  | 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

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|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        |  | National Bank, as Collateral Agent.(26)                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|4.37    |  | 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.(26)                            
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|4.38    |  | 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.(26)                                                                                                                                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|4.39    |  | Waiver Agreement dated as of August 8, 2003, between Pacific Aerospace & Electronics, Inc. and the Senior Noteholders.(*)                                                                                                                                                                                                                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|4.40    |  | Exchange 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., 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.(26)
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|4.41    |  | 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.(26)               
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|4.42    |  | Global 10% Senior Subordinated Pay-In-Kind Note due 2007.(26)                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|4.43    |  | 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. (26)                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|4.44    |  | 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.(26)                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|4.45    |  | 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).(26)                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|4.46    |  | 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).(26)                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|4.47    |  | 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).(26)                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|4.48    |  | Note Purchase Agreement by and among Pacific Aerospace & Electronics, Inc., the Initial Purchaser and First Union National Bank dated as of
March 19, 2002. (26)                                                                                                                                                                                                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.1    |  | Amended and Restated Stock Incentive Plan.(3)                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.2    |  | Amendment No. 1 to the Amended and Restated Stock Incentive Plan.(10)                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.3    |  | Amended and Restated Independent Director Stock Plan.(12)                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.4    |  | 1999 Stock Incentive Plan(15)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10.5    |  | 1997 Employee Stock Purchase Plan.(8)                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

99



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|        |  |                                                                                                                                                                                                  
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                  
|Number  |  | Description                                                                                                                                                                                      
|10.6    |  | Employment Agreement between Pacific Aerospace & Electronics, Inc. and Donald A. Wright dated March 19, 2002. (26)                                                                               
|        |  |                                                                                                                                                                                                  
|10.7    |  | Employment Agreement dated as of November 4, 2002 with Charles A. Miracle.(*)                                                                                                                    
|        |  |                                                                                                                                                                                                  
|10.8    |  | Termination and Severance Agreement of Werner Hafelfinger.(25)                                                                                                                                   
|        |  |                                                                                                                                                                                                  
|10.9    |  | Termination and Severance Agreement of Sheryl A. Symonds.(25)                                                                                                                                    
|        |  |                                                                                                                                                                                                  
|10.10   |  | Incentive Compensation Program.(20)                                                                                                                                                              
|        |  |                                                                                                                                                                                                  
|10.11   |  | Promissory Note, dated March 18, 1998, from Pacific Aerospace & Electronics, Inc. to KeyBank National Association.(9)                                                                            
|        |  |                                                                                                                                                                                                  
|10.12   |  | Security Agreement, dated March 18, 1998, from Pacific Aerospace & Electronics, Inc. to KeyBank National Association.(9)                                                                         
|        |  |                                                                                                                                                                                                  
|10.13   |  | Promissory Note, dated September 30, 1998, from Pacific Aerospace & Electronics, Inc. to KeyBank National Association.(13)                                                                       
|        |  |                                                                                                                                                                                                  
|10.14   |  | Deed of Trust, dated September 30, 1998, between Pacific Aerospace & Electronics, Inc., KeyBank National Association and Land Title Company,
Chelan-Douglas County, Inc.(13)                     
|        |  |                                                                                                                                                                                                  
|10.15   |  | Consent executed by KeyBank National Association in favor of the Company and Pacific Coast Technologies, Inc. dated as of March 18, 2002. (26)                                                   
|        |  |                                                                                                                                                                                                  
|10.16   |  | Forbearance Agreement executed by KeyBank National Association in favor of the Company dated as of March 15, 2002.(26)                                                                           
|        |  |                                                                                                                                                                                                  
|10.17   |  | Letter dated April 11, 2001 to Pacific Aerospace & Electronics, Inc. from Special Assets
Group of Key Bank Washington.(24)                                                                       
|        |  |                                                                                                                                                                                                  
|10.18   |  | Letter dated June 25, 2003 to Pacific Aerospace & Electronics, Inc. from Special Assets
Department of Key Bank Washington.(*)                                                                    
|        |  |                                                                                                                                                                                                  
|10.19   |  | Facility Letter, dated July 30, 1998, from Barclays Bank plc to Aeromet International plc.(11)                                                                                                   
|        |  |                                                                                                                                                                                                  
|10.20   |  | 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. (23)                    
|        |  |                                                                                                                                                                                                  
|10.21   |  | Guarantee by USCRE Properties, LLC to Pacific Aerospace & Electronics, Inc., dated June 14, 2001.(23)                                                                                            
|        |  |                                                                                                                                                                                                  
|10.22   |  | U.S. Castings, LLC Limited Liability Company Agreement, dated June 13, 2001. (23)                                                                                                                
|        |  |                                                                                                                                                                                                  
|10.23   |  | First Amendment to U.S. Castings, LLC Limited Liability Company Agreement, dated June 14, 2001.(23)                                                                                              
|        |  |                                                                                                                                                                                                  
|10.24   |  | USCRE Properties, LLC Limited Liability Company Agreement, dated June 13, 2001.(23)                                                                                                              
|        |  |                                                                                                                                                                                                  
|10.25   |  | First Amendment to USCRE Properties, LLC Limited Liability Company Agreement, dated June 14, 2001.(23)                                                                                           
|        |  |                                                                                                                                                                                                  
|10.26   |  | 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).(16) 
|        |  |                                                                                                                                                                                                  
|        |  |                                                                                                                                                                                                  
|10.27   |  | 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)(16)
|        |  |                                                                                                                                                                                                  
|10.28   |  | Option to Purchase, dated January 29, 1999, between Pacific Aerospace & Electronics, Inc. and Donald A. Wright. (14)                                                                             
|        |  |                                                                                                                                                                                                  
|21.1    |  | List of Subsidiaries(27)                                                                                                                                                                         
|        |  |                                                                                                                                                                                                  
|23.1    |  | Consent of KPMG LLP (*)                                                                                                                                                                          
|        |  |                                                                                                                                                                                                  
|31.1    |  | Certification of Donald A. Wright pursuant to Exchange Act Rule 13a-14(a)(*)                                                                                                                     
|        |  |                                                                                                                                                                                                  
|31.2    |  | Certification of Charles A. Miracle pursuant to Exchange Act Rule 13a-14(a)(*)                                                                                                                   
|        |  |                                                                                                                                                                                                  
|32.1    |  | Certification of Donald A. Wright pursuant to 18 U.S.C. Section 1350(*)                                                                                                                          
|        |  |                                                                                                                                                                                                  
|32.2    |  | Certification of Charles A. Miracle pursuant to 18 U.S.C. Section 1350(*)                                                                                                                        



---

|(*) |  | Filed herewith.
|--- |  | ---------------

100



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|(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, 1996.                                       
|    
|(3)  |  | Incorporated by reference to the Companys Current Report on Form 10-QSB
for the quarterly period ended November 30, 1996.                     
|    
|(4)  |  | Incorporated by reference to the Companys Current Report on Form 8-K
filed on December 12, 1996, reporting the reincorporation merger.        
|    
|(5)  |  | 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.
|    
|(6)  |  | Incorporated by reference to the Companys Annual Report on Form 10-KSB
for the fiscal year ending May 31, 1997.                               
|    
|(7)  |  | Incorporated by reference to the Companys Registration Statement on Form
S-8 filed on June 11, 1997.                                          
|    
|(8)  |  | Incorporated by reference to the Companys Definitive Proxy Statement for
its 1997 Annual Shareholders Meeting, filed on August 28, 1997.      
|    
|(9)  |  | Incorporated by reference to the Companys Quarterly Report on Form
10-QSB for the quarterly period ending February 28, 1998.                  
|    
|(10) |  | Incorporated by reference to the Companys Registration Statement on Form
S-8 filed on November 7, 1997.                                       
|    
|(11) |  | Incorporated by reference to the Companys Annual Report on Form 10-K for
the fiscal year ending May 31, 1998.                                 
|    
|(12) |  | Incorporated by reference to the Companys Definitive Proxy Statement
filed on September 1, 1998.                                              
|    
|(13) |  | 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.    
|    
|(14) |  | Incorporated by reference to the Companys Quarterly Report on Form 10-Q
for the quarterly period ending February 28, 1999.                    
|    
|(15) |  | Incorporated by reference to the Companys Definitive Proxy Statement
filed on September 1, 1999.                                              
|    
|(16) |  | Incorporated by reference to the Companys Quarterly Report on Form 10-Q
for the quarterly period ending February 29, 2000.                    
|    
|(17) |  | Incorporated by reference to the Companys Current Report on Form 8-K
filed on May 31, 2000.                                                   
|    
|(18) |  | Incorporated by reference to the Companys Current Report on Form 8-K
filed on August 8, 2000.                                                 
|    
|(19) |  | Incorporated by reference to the Companys Annual Report on Form 10-K
filed on August 28, 2000.                                                
|    
|(20) |  | Incorporated by reference to the Companys Quarterly Report on Form 10-Q
for the quarterly period ending August 31, 2000.                      
|    
|(21) |  | Incorporated by reference to the Companys Current Report on Form 8-K
filed on February 21, 2001.                                              
|    
|(22) |  | Incorporated by reference to the Companys Current Report on Form 8-K
filed on March 7, 2001.                                                  
|    
|(23) |  | Incorporated by reference to the Companys Current Report on Form 8-K
filed on June 27, 2001.                                                  
|    
|(24) |  | 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.     
|    
|(25) |  | Incorporated by reference to the Companys Quarterly Report on Form
10-Q for the quarterly period ending February 28, 2002.                    
|    
|(26) |  | Incorporated by reference to the Companys Current Report on Form 8-K
filed on April 3, 2002.                                                  
|    
|(27) |  | Incorporated by reference to the Companys Annual Report on Form 10-K for
the fiscal year ended May 31, 2002, as filed on September 10, 2002.  

101



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##### Table of Contents





|(b) |  | Reports on Form 8-K.Current reports filed during the last quarter of
fiscal 2003 were as follows: None.
|--- |  | -------------------------------------------------------------------------------------------------------

102



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##### Table of Contents






SIGNATURES

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

Date: August 21, 2003

| |  |                                                    |  |                         
| |  | -------------------------------------------------- |  | ------------------------
| |  | PACIFIC AEROSPACE & ELECTRONICS, INC.             
| |  |                                                    |  |                         
| |  | By                                                 |  | /s/ DONALD A. WRIGHT    
| |  |                                                    |  |                         
| |  | DONALD A. WRIGHT                                  
| |  | Director, President and Chief Executive Officer   
| |  |                                                    |  |                         
| |  | By                                                 |  | /s/ Matthew C. Kaufman  
| |  |                                                    |  |                         
| |  | Matthew C. Kaufman                                
| |  | Director and Chairman                             
| |  |                                                    |  |                         
| |  | By                                                 |  | /s/ Philip Raygorodetsky
| |  |                                                    |  |                         
| |  | Philip Raygorodetsky                              
| |  | Director                                          
| |  |                                                    |  |                         
| |  | By                                                 |  | /s/ Richard W. Detweiler
| |  |                                                    |  |                         
| |  | Richard W. Detweiler                              
| |  | Director                                          
| |  |                                                    |  |                         
| |  | By                                                 |  | /s/ Charles A. Miracle  
| |  |                                                    |  |                         
| |  | Charles A. Miracle                                
| |  | Vice President Finance and Chief Financial Officer

103



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##### Table of Contents



(a)(3) Exhibits

|        |  |                                                                                                                                                                                                                       
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                       
|Number  |  | Description                                                                                                                                                                                                           
|        |  |                                                                                                                                                                                                                       
|3.1     |  | Articles of Incorporation of Pacific Aerospace & Electronics, Inc.(4)                                                                                                                                                 
|        |  |                                                                                                                                                                                                                       
|3.2     |  | Amendment to Articles of Incorporation containing Designation of Rights and Preferences of Series A Convertible Preferred Stock, as corrected.
(5)                                                                    
|        |  |                                                                                                                                                                                                                       
|3.3     |  | Amendment to Articles of Incorporation containing Designation of Rights and Preferences of Series B Convertible Preferred Stock.(11)                                                                                  
|        |  |                                                                                                                                                                                                                       
|3.4     |  | Articles of Amendment of Pacific Aerospace & Electronics, Inc. filed March 19, 2002.(26)                                                                                                                              
|        |  |                                                                                                                                                                                                                       
|3.5     |  | Designation of Rights and Preferences for Series C Voting Convertible Preferred Stock of Pacific Aerospace and Electronics, Inc.(26)                                                                                  
|        |  |                                                                                                                                                                                                                       
|3.6     |  | Bylaws of Pacific Aerospace & Electronics, Inc., as amended.(20)                                                                                                                                                      
|        |  |                                                                                                                                                                                                                       
|4.1     |  | Form of specimen certificate for common stock.(4)                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                       
|4.2     |  | Form of specimen certificate for public warrants.(4)                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                       
|4.3     |  | Form of specimen certificate for the Series A Convertible Preferred Stock.(5)                                                                                                                                         
|        |  |                                                                                                                                                                                                                       
|4.4     |  | Form of specimen certificate for the Series B Convertible Preferred Stock.(11)                                                                                                                                        
|        |  |                                                                                                                                                                                                                       
|4.5     |  | Form of specimen certificate for the Series C Voting Convertible Preferred Stock.(*)                                                                                                                                  
|        |  |                                                                                                                                                                                                                       
|4.6     |  | Form of common stock Purchase Warrant issued to holders of the Series B Convertible Preferred Stock on May 15, 1998.(11)                                                                                              
|        |  |                                                                                                                                                                                                                       
|4.7     |  | Warrant Agreement between Interwest Transfer Co., Inc. and PCT Holdings, Inc. dated July 1, 1996.(2)                                                                                                                  
|        |  |                                                                                                                                                                                                                       
|4.8     |  | 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.(17)
|        |  |                                                                                                                                                                                                                       
|4.9     |  | Common Stock Purchase Warrant No. 001 from Pacific Aerospace & Electronics, Inc. to Donald A. Wright dated as of November 30, 1996.(7)                                                                                
|        |  |                                                                                                                                                                                                                       
|4.10    |  | Common Stock Purchase Warrant No. 002 from Pacific Aerospace & Electronics, Inc. to Nick A. Gerde dated as of November 30, 1996.(7)                                                                                   
|        |  |                                                                                                                                                                                                                       
|4.11    |  | Common Stock Purchase Warrant No. 003 from Pacific Aerospace & Electronics, Inc. to Edward A. Taylor dated as of November 30, 1996.(7)                                                                                
|        |  |                                                                                                                                                                                                                       
|4.12    |  | Common Stock Purchase Warrant from Pacific Aerospace & Electronics, Inc. to Gregory K. Smith dated June 3, 1997. (6)                                                                                                  
|        |  |                                                                                                                                                                                                                       
|4.13    |  | Common Stock Purchase Warrant from Pacific Aerospace & Electronics, Inc. to Nestor Wiegand dated June 3, 1997. (6)                                                                                                    
|        |  |                                                                                                                                                                                                                       
|4.14    |  | Registration Rights Agreement between Pacific Aerospace & Electronics, Inc., Strong River Investments, Inc., and Bay Harbor Investments, Inc.,
dated as of July 27, 2000.(18)                                         
|        |  |                                                                                                                                                                                                                       
|4.15    |  | Warrant between Pacific Aerospace & Electronics, Inc. and Strong River Investments, Inc., dated as of July 27, 2000. (18)                                                                                             
|        |  |                                                                                                                                                                                                                       
|4.16    |  | Warrant between Pacific Aerospace & Electronics, Inc. and Bay Harbor Investments, Inc., dated as of July 27, 2000. (18)                                                                                               
|        |  |                                                                                                                                                                                                                       
|4.17    |  | Warrant between Pacific Aerospace & Electronics, Inc. and Strong River Investments, Inc., dated as of July 27, 2000. (18)                                                                                             
|        |  |                                                                                                                                                                                                                       
|4.18    |  | Warrant between Pacific Aerospace & Electronics, Inc. and Bay Harbor Investments, Inc., dated as of July 27, 2000. (18)                                                                                               
|        |  |                                                                                                                                                                                                                       
|4.19    |  | Vesting Warrant between Pacific Aerospace & Electronics, Inc. and Strong River Investments, Inc., dated as of July 27, 2000. (18)                                                                                     
|        |  |                                                                                                                                                                                                                       
|4.20    |  | Vesting Warrant between Pacific Aerospace & Electronics, Inc. and Bay Harbor Investments, Inc., dated as of July 27, 2000. (18)                                                                                       
|        |  |                                                                                                                                                                                                                       
|4.21    |  | Letter agreement among Pacific Aerospace & Electronics, Inc., Strong River Investments, Inc.                                                                                                                          





---



##### Table of Contents



|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |  | and Bay Harbor Investments, Inc., dated as of February 15, 2001.(21)                                                                                                                                                                                                                                                                                                                                                                                                                                             
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|4.22 |  | Placement Agent Warrant between Pacific Aerospace & Electronics, Inc. and Rochon Capital Group, Ltd., dated as of July 27, 2000. (19)                                                                                                                                                                                                                                                                                                                                                                            
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|4.23 |  | Common Stock Purchase Warrant between Pacific Aerospace & Electronics, Inc. and Continental Capital & Equity Corporation, dated April 17,
2000.(19)                                                                                                                                                                                                                                                                                                                                                              
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|4.24 |  | Common Stock Purchase Warrant between Pacific Aerospace & Electronics, Inc. and Continental Capital & Equity Corporation, dated April 17,
2000.(19)                                                                                                                                                                                                                                                                                                                                                              
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|4.25 |  | Common Stock Purchase Warrant between Pacific Aerospace & Electronics, Inc. and Continental Capital & Equity Corporation, dated April 17,
2000.(19)                                                                                                                                                                                                                                                                                                                                                              
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|4.26 |  | Common Stock Purchase Warrant between Pacific Aerospace & Electronics, Inc. and Continental Capital & Equity Corporation, dated April 17,
2000.(19)                                                                                                                                                                                                                                                                                                                                                              
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|4.27 |  | Warrant Agreement, by and among Pacific Aerospace & Electronics, Inc. and Holders, dated March 1, 2001. (22)                                                                                                                                                                                                                                                                                                                                                                                                     
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|4.28 |  | Warrant Certificate, dated March 1, 2001, issued to B III Capital Partners, L.P., exercisable for 1,883,923 shares of common stock. (22)                                                                                                                                                                                                                                                                                                                                                                         
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|4.29 |  | Warrant Certificate, dated March 1, 2001, issued to B III-A Capital Partners, L.P., exercisable for 807,396 shares of common stock. (22)                                                                                                                                                                                                                                                                                                                                                                         
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|4.30 |  | Warrant Certificate, dated March 1, 2001, issued to DDJ Canadian High Yield Fund, exercisable for 538,263 shares of common stock. (22)                                                                                                                                                                                                                                                                                                                                                                           
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|4.31 |  | 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. (22)                                                                                                                                                                                                                                                                                                        
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|4.32 |  | Equity Registration Rights Agreement, by and among Pacific Aerospace & Electronics, Inc. and Holders, dated March 1, 2001. (22)                                                                                                                                                                                                                                                                                                                                                                                  
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|4.33 |  | Warrant Agreement by and among Pacific Aerospace & Electronics, Inc. and First Albany Corporation, dated April 9, 2001. (24)                                                                                                                                                                                                                                                                                                                                                                                     
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|4.34 |  | Warrant Certificate, dated April 9, 2001, issued to First Albany Corporation, exercisable for 692,074 shares of common stock. (24)                                                                                                                                                                                                                                                                                                                                                                               
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|4.35 |  | 5.0% Senior Secured Note due May 1, 2007. (26)                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|4.36 |  | 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. (26)
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|4.37 |  | 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. (26)                             
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|4.38 |  | 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. (26)                                                                                                                                                                                                                                                                                                                         
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|4.39 |  | Waiver Agreement dated as of August 8, 2003, between Pacific Aerospace & Electronics, Inc. and the Senior Noteholders.(*)                                                                                                                                                                                                                                                                                                                                                                                        
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|4.40 |  | Exchange 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., 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. (26) 
|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|4.41 |  | Indenture dated as of March 19, 2002 among Pacific Aerospace & Electronics, Inc., as issuer,                                                                                                                                                                                                                                                                                                                                                                                                                     

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##### Table of Contents



|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                              
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |  | 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. (26)                                         
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                              
|4.42  |  | Global 10% Senior Subordinated Pay-In-Kind Note due 2007.(26)                                                                                                                                                                                                                                                                                                                                                                                
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                              
|4.43  |  | 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. (26)
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                              
|4.44  |  | 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. (26)                                                                                                                     
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                              
|4.45  |  | 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). (26)                                                                                  
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                              
|4.46  |  | 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).(26)                                                                     
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                              
|4.47  |  | 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). (26)                                                                          
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                              
|4.48  |  | Note Purchase Agreement by and among Pacific Aerospace & Electronics, Inc., the Initial Purchaser and First Union National Bank dated as of
March 19, 2002. (26)                                                                                                                                                                                                                                                                             
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.1  |  | Amended and Restated Stock Incentive Plan.(3)                                                                                                                                                                                                                                                                                                                                                                                                
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.2  |  | Amendment No. 1 to the Amended and Restated Stock Incentive Plan. (10)                                                                                                                                                                                                                                                                                                                                                                       
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.3  |  | Amended and Restated Independent Director Stock Plan.(12)                                                                                                                                                                                                                                                                                                                                                                                    
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.4  |  | 1999 Stock Incentive Plan (15)                                                                                                                                                                                                                                                                                                                                                                                                               
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.5  |  | 1997 Employee Stock Purchase Plan.(8)                                                                                                                                                                                                                                                                                                                                                                                                        
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.6  |  | Employment Agreement between Pacific Aerospace & Electronics, Inc. and Donald A. Wright dated March 19, 2002. (26)                                                                                                                                                                                                                                                                                                                           
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.7  |  | Employment Agreement dated as of November 4, 2002 with Charles A. Miracle. (*)                                                                                                                                                                                                                                                                                                                                                               
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.8  |  | Termination and Severance Agreement of Werner Hafelfinger. (25)                                                                                                                                                                                                                                                                                                                                                                              
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.9  |  | Termination and Severance Agreement of Sheryl A. Symonds. (25)                                                                                                                                                                                                                                                                                                                                                                               
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.10 |  | Incentive Compensation Program.(20)                                                                                                                                                                                                                                                                                                                                                                                                          
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.11 |  | Promissory Note, dated March 18, 1998, from Pacific Aerospace & Electronics, Inc. to KeyBank National Association.(9)                                                                                                                                                                                                                                                                                                                        
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.12 |  | Security Agreement, dated March 18, 1998, from Pacific Aerospace & Electronics, Inc. to KeyBank National Association.(9)                                                                                                                                                                                                                                                                                                                     
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.13 |  | Promissory Note, dated September 30, 1998, from Pacific Aerospace & Electronics, Inc. to KeyBank National Association.(13)                                                                                                                                                                                                                                                                                                                   
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.14 |  | Deed of Trust, dated September 30, 1998, between Pacific Aerospace & Electronics, Inc., KeyBank National Association and Land Title Company,
Chelan-Douglas County, Inc.(13)                                                                                                                                                                                                                                                                 
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.15 |  | Consent executed by KeyBank National Association in favor of the Company and Pacific Coast                                                                                                                                                                                                                                                                                                                                                   

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##### Table of Contents



|      |  |                                                                                                                                                                                                   
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |  | Technologies, Inc. dated as of March 18, 2002. (26)                                                                                                                                               
|      |  |                                                                                                                                                                                                   
|10.16 |  | Forbearance Agreement executed by KeyBank National Association in favor of the Company dated as of March 15, 2002. (26)                                                                           
|      |  |                                                                                                                                                                                                   
|10.17 |  | Letter dated April 11, 2001 to Pacific Aerospace & Electronics, Inc. from Special Assets Group of Key Bank Washington. (24)                                                                       
|      |  |                                                                                                                                                                                                   
|10.18 |  | Letter dated June 25, 2003 to Pacific Aerospace & Electronics, Inc. from Special Assets Department of Key Bank Washington. (*)                                                                    
|      |  |                                                                                                                                                                                                   
|10.19 |  | Facility Letter, dated July 30, 1998, from Barclays Bank plc to Aeromet International plc.(11)                                                                                                    
|      |  |                                                                                                                                                                                                   
|10.20 |  | 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. (23)                     
|      |  |                                                                                                                                                                                                   
|10.21 |  | Guarantee by USCRE Properties, LLC to Pacific Aerospace & Electronics, Inc., dated June 14, 2001. (23)                                                                                            
|      |  |                                                                                                                                                                                                   
|10.22 |  | U.S. Castings, LLC Limited Liability Company Agreement, dated June 13, 2001. (23)                                                                                                                 
|      |  |                                                                                                                                                                                                   
|10.23 |  | First Amendment to U.S. Castings, LLC Limited Liability Company Agreement, dated June 14, 2001. (23)                                                                                              
|      |  |                                                                                                                                                                                                   
|10.24 |  | USCRE Properties, LLC Limited Liability Company Agreement, dated June 13, 2001. (23)                                                                                                              
|      |  |                                                                                                                                                                                                   
|10.25 |  | First Amendment to USCRE Properties, LLC Limited Liability Company Agreement, dated June 14, 2001. (23)                                                                                           
|      |  |                                                                                                                                                                                                   
|10.26 |  | 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). (16) 
|      |  |                                                                                                                                                                                                   
|10.27 |  | 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) (16)
|      |  |                                                                                                                                                                                                   
|10.28 |  | Option to Purchase, dated January 29, 1999, between Pacific Aerospace & Electronics, Inc. and Donald A. Wright. (14)                                                                              
|      |  |                                                                                                                                                                                                   
|21.1  |  | List of Subsidiaries(27)                                                                                                                                                                          
|      |  |                                                                                                                                                                                                   
|23.1  |  | Consent of KPMG LLP (*)                                                                                                                                                                           
|      |  |                                                                                                                                                                                                   
|31.1  |  | Certification of Donald A. Wright pursuant to Exchange Act Rule 13a-14(a) (*)                                                                                                                     
|      |  |                                                                                                                                                                                                   
|31.2  |  | Certification of Charles A. Miracle pursuant to Exchange Act Rule 13a-14(a) (*)                                                                                                                   
|      |  |                                                                                                                                                                                                   
|32.1  |  | Certification of Donald A. Wright pursuant to 18 U.S.C. Section 1350 (*)                                                                                                                          
|      |  |                                                                                                                                                                                                   
|32.2  |  | Certification of Charles A. Miracle pursuant to 18 U.S.C. Section 1350 (*)                                                                                                                        



---

|(*) |  | Filed herewith.                                                                                                                                
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|   
|(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, 1996.                                       
|   
|(3) |  | Incorporated by reference to the Companys Current Report on Form 10-QSB
for the quarterly period ended November 30, 1996.                     
|   
|(4) |  | Incorporated by reference to the Companys Current Report on Form 8-K
filed on December 12, 1996, reporting the reincorporation merger.        
|   
|(5) |  | 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.
|   
|(6) |  | Incorporated by reference to the Companys Annual Report on Form 10-KSB
for the fiscal year ending May 31, 1997.                               
|   
|(7) |  | Incorporated by reference to the Companys Registration Statement on Form
S-8 filed on June 11, 1997.                                          
|   
|(8) |  | 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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##### Table of Contents



|(9)  |  | Incorporated by reference to the Companys Quarterly Report on Form
10-QSB for the quarterly period ending February 28, 1998.                
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|    
|(10) |  | Incorporated by reference to the Companys Registration Statement on Form
S-8 filed on November 7, 1997.                                     
|    
|(11) |  | Incorporated by reference to the Companys Annual Report on Form 10-K for
the fiscal year ending May 31, 1998.                               
|    
|(12) |  | Incorporated by reference to the Companys Definitive Proxy Statement
filed on September 1, 1998.                                            
|    
|(13) |  | 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.  
|    
|(14) |  | Incorporated by reference to the Companys Quarterly Report on Form 10-Q
for the quarterly period ending February 28, 1999.                  
|    
|(15) |  | Incorporated by reference to the Companys Definitive Proxy Statement
filed on September 1, 1999.                                            
|    
|(16) |  | Incorporated by reference to the Companys Quarterly Report on Form 10-Q
for the quarterly period ending February 29, 2000.                  
|    
|(17) |  | Incorporated by reference to the Companys Current Report on Form 8-K
filed on May 31, 2000.                                                 
|    
|(18) |  | Incorporated by reference to the Companys Current Report on Form 8-K
filed on August 8, 2000.                                               
|    
|(19) |  | Incorporated by reference to the Companys Annual Report on Form 10-K
filed on August 28, 2000.                                              
|    
|(20) |  | Incorporated by reference to the Companys Quarterly Report on Form 10-Q
for the quarterly period ending August 31, 2000.                    
|    
|(21) |  | Incorporated by reference to the Companys Current Report on Form 8-K
filed on February 21, 2001.                                            
|    
|(22) |  | Incorporated by reference to the Companys Current Report on Form 8-K
filed on March 7, 2001.                                                
|    
|(23) |  | Incorporated by reference to the Companys Current Report on Form 8-K
filed on June 27, 2001.                                                
|    
|(24) |  | 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.   
|    
|(25) |  | Incorporated by reference to the Companys Quarterly Report on Form
10-Q for the quarterly period ending February 28, 2002.                  
|    
|(26) |  | Incorporated by reference to the Companys Current Report on Form 8-K
filed on April 3, 2002.                                                
|    
|(27) |  | Incorporated by reference to the Companys Annual Report on Form 10-K for
the fiscal year ended May 31, 2002, as filed on September 10, 2002.

5