<PAGE>

                                                                     Exhibit 4.1
                                                                     -----------

                         REGISTRATION RIGHTS AGREEMENT
                         -----------------------------

          This Registration Rights Agreement (this "Agreement") is made and
                                                    ---------
entered into as of July 27, 2000, among Pacific Aerospace & Electronics, Inc., a
Washington corporation (the "Company"), and the investors signatory hereto (each
                             -------
such investor is a "Purchaser" and all such investors are, collectively, the
                    ---------
"Purchasers").
-----------

          This Agreement is made pursuant to the Securities Purchase Agreement,
dated as of the date hereof among the Company and the Purchasers (the "Purchase
                                                                       --------
Agreement").
---------

          The Company and the Purchasers hereby agree as follows:

     1.   Definitions
          -----------

          Capitalized terms used and not otherwise defined herein that are
defined in the Purchase Agreement shall have the meanings given such terms in
the Purchase Agreement.   As used in this Agreement, the following terms shall
have the following meanings:

          "Adjustable Warrants" shall have the meaning set forth in the Purchase
           -------------------
Agreement.

          "Affiliate" means, with respect to any Person, any other Person that
           ---------
directly or indirectly controls or is controlled by or under common control with
such Person.  For the purposes of this definition, "control," when used with
                                                    -------
respect to any Person, means the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities, by contract or otherwise;
and the terms of "affiliated," "controlling" and "controlled" have meanings
                  ----------    -----------       ----------
correlative to the foregoing.

          "Business Day" means any day except Saturday, Sunday and any day which
           ------------
shall be a legal holiday or a day on which banking institutions in the State of
New York or Washington are authorized or required by law or other government
actions to close.

          "Closing Date" shall have the meaning set forth in the Purchase
           ------------
Agreement.

          "Closing Warrants" shall have the meaning set forth in the Purchase
           ----------------
Agreement.

          "Commission" means the Securities and Exchange Commission.
           ----------

          "Common Stock" means the Company's common stock, $.001 par value, or
           ------------
such securities in to which that such stock shall hereafter be reclassified.

          "Effectiveness Date" means, with respect to the initial Registration
           ------------------
Statement required to be filed hereunder, the 60th day following the Closing
Date and, with respect to any additional Registration Statements which may be
required pursuant to Section 3(c), the 60th day following the date that notice
of the requirement to file such additional Registration Statement is provided.

                                      -1-
<PAGE>

          "Effectiveness Period" shall have the meaning set forth in Section
           --------------------
2(a).

          "Exchange Act" means the Securities Exchange Act of 1934, as amended.
           ------------

          "Filing Date" means the 30th day following the Closing Date and, with
           -----------
respect to any additional Registration Statements which may be required pursuant
to Section 3(c), the 30th day following the date that notice of the requirement
to file such additional Registration Statement is provided.

          "Holder" or "Holders" means the holder or holders, as the case may be,
           ------      -------
from time to time of Registrable Securities.

          "Indemnified Party" shall have the meaning set forth in Section 5(c).
           -----------------

          "Indemnifying Party" shall have the meaning set forth in Section 5(c).
           ------------------

          "Losses" shall have the meaning set forth in Section 5(a).
           ------

          "Person" means an individual or a corporation, partnership, trust,
           ------
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.

          "Proceeding" means an action, claim, suit, investigation or proceeding
           ----------
(including, without limitation, an investigation or partial proceeding, such as
a deposition), whether commenced or threatened.

          "Prospectus" means the prospectus included in the Registration
           ----------
Statement (including, without limitation, a prospectus that includes any
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A promulgated under the
Securities Act), as amended or supplemented by any prospectus supplement, with
respect to the terms of the offering of any portion of the Registrable
Securities covered by the Registration Statement, and all other amendments and
supplements to the Prospectus, including post-effective amendments, and all
material incorporated by reference or deemed to be incorporated by reference in
such Prospectus.

          "Registrable Securities" means (i) the Shares and (ii) the shares of
           ----------------------
Common Stock issuable upon exercise in full of the Warrants.

          "Registration Statement" means the registration statement and any
           ----------------------
additional registration statements contemplated by Section 3(c), including (in
each case) the Prospectus, amendments and supplements to such registration
statement or Prospectus, including pre- and post-effective amendments, all
exhibits thereto, and all material incorporated by reference or deemed to be
incorporated by reference in such registration statement.

          "Rule 144" means Rule 144 promulgated by the Commission pursuant to
           --------
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.

                                      -2-
<PAGE>

          "Rule 415" means Rule 415 promulgated by the Commission pursuant to
           --------
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.

          "Rule 424" means Rule 424 promulgated by the Commission pursuant to
           --------
the Securities Act, as such Rule may be amended from time to time, or any
similar rule or regulation hereafter adopted by the Commission having
substantially the same effect as such Rule.

          "Securities Act" means the Securities Act of 1933, as amended, and the
           --------------
rules and regulations promulgated thereunder.

          "Shares" means the shares of Common Stock issued and sold to the
           ------
Purchasers pursuant to the Purchase Agreement.

          "Special Counsel" means one special counsel to the Holders, for which
           ---------------
the Holders will be reimbursed by the Company pursuant to Section 4.

          "Warrants" shall have the meaning set forth in the Purchase Agreement.
           --------

     2.   Shelf Registration
          ------------------

          (a) On or prior to each Filing Date, the Company shall prepare and
file with the Commission a "Shelf" Registration Statement covering the resale of
all Registrable Securities for an offering to be made on a continuous basis
pursuant to Rule 415.  The Registration Statement shall be on Form S-3 (except
if the Company is not then eligible to register for resale the Registrable
Securities on Form S-3, in which case such registration shall be on another
appropriate form) and shall contain (except if otherwise directed by the
Holders) the "Plan of Distribution" attached hereto as Annex A.  The Company
                                                       -------
shall use its best efforts to cause the Registration Statement to be declared
effective under the Securities Act as promptly as possible after the filing
thereof, but in any event prior to the Effectiveness Date, and shall use its
best efforts to keep such Registration Statement continuously effective under
the Securities Act until the date which is two years after the date that such
Registration Statement is declared effective by the Commission or such earlier
date when all Registrable Securities covered by such Registration Statement have
been sold or may be sold without volume restrictions pursuant to Rule 144(k)
(the "Effectiveness Period").
      --------------------

          (b) The initial Registration Statement to be filed hereunder shall
include (but not be limited to) a number of shares of Common Stock equal to no
less than the sum of (i) the number of shares issuable upon exercise of the
Adjustable Warrants on the First Vesting Date (as defined in the Adjustable
Warrants) assuming, for the purposes of this subsection that: (A)  the First
Vesting Date occurs on the Closing Date, (B) the Adjustment Price (as defined in
the Adjustable Warrants) is 50% of the Per Share Market Value (as defined in the
Adjustable Warrant) for the Trading Day immediately preceding the Closing Date
and (C) the Applicable Share Number (as defined in the Adjustable Warrants)
equals the entire number of Shares purchased under the Purchase Agreement, (ii)
the number of shares issuable upon exercise in full of the Closing Warrants and
(iii) the Shares.

                                      -3-
<PAGE>

          (c) If (a) a Registration Statement is not filed on or prior to its
Filing Date (if the Company files such Registration Statement without affording
the Holder the opportunity to review and comment on the same as required by
Section 3(a) hereof, the Company shall not be deemed to have satisfied this
clause (a)), or (b) the Company fails to file with the Commission a request for
acceleration in accordance with Rule 461 promulgated under the Securities Act,
within five days of the date that the Company is notified (orally or in writing,
whichever is earlier) by the Commission that a Registration Statement will not
be "reviewed," or not subject to further review, or (c) a Registration Statement
filed hereunder is not declared effective by the Commission on or prior to its
Effectiveness Date, or (d) subject to Section 2(d), after a  Registration
Statement is filed with and declared effective by the Commission, such
Registration Statement ceases to be effective as to all Registrable Securities
to which it is required to relate at any time prior to the expiration of the
Effectiveness Period without being succeeded within ten Business Days by an
amendment to such Registration Statement or by a subsequent  Registration
Statement filed with and declared effective by the Commission, or (e) the Common
Stock shall be delisted or suspended from trading on the Nasdaq National Market
("NASDAQ") or on the New York Stock Exchange, the American Stock Exchange or
  ------
Nasdaq Smallcap Market (each, a "Subsequent Market") for more than ten
                                 -----------------
consecutive Trading Days, or (f) an amendment to a Registration Statement is not
filed by the Company with the Commission within ten Business Days of the
Commission's notifying the Company that such amendment is required in order for
such Registration Statement to be declared effective (any such failure or breach
being referred to as an "Event," and for purposes of clauses (a) and (c) the
                         -----
date on which such Event occurs, or for purposes of clause (b) the date on which
such five day period is exceeded, or for purposes of clauses (d) and (g) the
date which such ten Business Day-period is exceeded, or for purposes of clause
(e) the date on which such ten Trading Day-period is exceeded, being referred to
as "Event Date"), then, on each such Event Date and every monthly anniversary
    ----------
thereof until the applicable Event is cured, a number of Warrant Shares (as
defined in the Vesting Warrant), calculated in accordance with the terms of
Section 3(b) of the Vesting Warrant, shall vest and become exercisable.

          (d) Notwithstanding anything to the contrary contained herein, at any
time after the initial Registration Statement has been effective for ten Trading
Days, the Company may suspend the ability of the Holders to make dispositions
under the Registration Statement or Prospectus for a period not exceeding either
(i) 30 consecutive Trading Days or (ii) an aggregate of 50 Trading Days during
any consecutive 12 month period, by providing the Holders with written
notification (a "Blackout Notice") if the Company's board of directors
                 ---------------
determines in its good faith judgment that the Company's obligation to ensure
that such Registration Statement and Prospectus contain current and complete
information would require the Company to make a public disclosure regarding
either (A) a merger of the Company with or into another entity that is not
wholly-owned by the Company, which requires the approval of the shareholders of
the Company or (B) a transaction reportable under item 2 of Current Report on
Form 8-K, provided, that the Company shall not be entitled to deliver a Blackout
          --------
Notice within 20 Trading Days of the expiration of any Blackout Notice
previously delivered.  Each Blackout Notice shall contain a general statement of
the reasons for such postponement and an approximation of the anticipated delay.
Each Holder agrees by acquisition of the Registrable Securities that, upon
receipt of a Blackout Notice from the Company, such Holder shall not dispose of,
sell or offer for sale the Registrable Securities pursuant

                                      -4-
<PAGE>

to the Registration Statement until such Holder receives (i) copies of the
supplemented or amended Prospectus, or until counsel for the Company shall have
determined that such disclosure is not required due to subsequent events, (ii)
notice in writing from the Company that the use of the Prospectus may be resumed
and (iii) copies of any additional or supplemental filings that are incorporated
by reference into the Prospectus.

     3.   Registration Procedures
          -----------------------

          In connection with the Company's registration obligations hereunder,
the Company shall:

          (a) Not less than five Business Days prior to the filing of each
Registration Statement or any related Prospectus or any amendment or supplement
thereto (including any document that would be incorporated or deemed to be
incorporated therein by reference), the Company shall, (i) furnish to the
Holders and their Special Counsel copies of all such documents proposed to be
filed, which documents (other than those incorporated or deemed to be
incorporated by reference) will be subject to the review of such Holders and
their Special Counsel, and (ii) cause its officers and directors, counsel and
independent certified public accountants to respond to such inquiries as shall
be necessary, in the reasonable opinion of respective counsel to conduct a
reasonable investigation within the meaning of the Securities Act. The Company
shall not file the Registration Statement or any such Prospectus or any
amendments or supplements thereto to which the Holders of a majority of the
Registrable Securities and their Special Counsel shall reasonably object,
provided, the Company is notified of such objection no later than 3 Business
--------
Days after the Holders have been so furnished copies of such documents.
Notwithstanding anything to the contrary contained herein, the parties agree
that if (1) the Holders or their Special Counsel shall fail to provide comments
to the Company or their counsel to a proposed Registration Statement by the
expiration of the fifth Business Day following the date on which they received
the same for review, or (2) the Holders or their Special Counsel shall fail to
provide comments to the Company or its counsel to a proposed amendment or
supplement to a Registration Statement hereunder by the expiration of the second
Business Day following the date on which they receive the same for review, then
a number of days equal to the number of Business Days in excess of such periods
shall be added to the definitions of Filing Date and Effectiveness Date for
purposes of Section 2(a) and Section 2(c) hereof.

          (b) (i)  Prepare and file with the Commission such amendments,
including post-effective amendments, to the Registration Statement and the
Prospectus used in connection therewith as may be necessary to keep the
Registration Statement continuously effective as to the applicable Registrable
Securities for the Effectiveness Period and prepare and file with the Commission
such additional Registration Statements in order to register for resale under
the Securities Act all of the Registrable Securities; (ii) cause the related
Prospectus to be amended or supplemented by any required Prospectus supplement,
and as so supplemented or amended to be filed pursuant to Rule 424; (iii)
respond as promptly as reasonably possible, and in any event within ten Business
Days,  to any comments received from the Commission with respect to the
Registration Statement or any amendment thereto and as promptly as reasonably
possible provide the Holders

                                      -5-
<PAGE>

true and complete copies of all correspondence from and to the Commission
relating to the Registration Statement; and (iv) comply in all material respects
with the provisions of the Securities Act and the Exchange Act with respect to
the disposition of all Registrable Securities covered by the Registration
Statement during the applicable period in accordance with the intended methods
of disposition by the Holders thereof set forth in the Registration Statement as
so amended or in such Prospectus as so supplemented.

          (c) File additional Registration Statements if the number of
Registrable Securities determinable at any time exceeds 85% of the number of
shares of Common Stock then registered in all their existing Registration
Statements hereunder.

          (d) Notify the Holders of Registrable Securities to be sold and their
Special Counsel as promptly as reasonably possible (and, in the case of (i)(A)
below, not less than five Business Days prior to such filing) and (if requested
by any such Person) confirm such notice in writing no later than one Business
Day following the day (i)(A) when a Prospectus or any Prospectus supplement or
post-effective amendment to the Registration Statement is proposed to be filed;
(B) when the Commission notifies the Company whether there will be a "review" of
such Registration Statement and whenever the Commission comments in writing on
such Registration Statement (the Company shall provide true and complete copies
thereof and all written responses thereto to each of the Holders); and (C) with
respect to the Registration Statement or any post-effective amendment, when the
same has become effective; (ii) of any request by the Commission or any other
Federal or state governmental authority for amendments or supplements to the
Registration Statement or Prospectus or for additional information; (iii) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement covering any or all of the Registrable Securities or the
initiation of any Proceedings for that purpose; (iv) if at any time any of the
representations and warranties of the Company contained in any agreement
contemplated hereby ceases to be true and correct in all material respects; (v)
of the receipt by the Company of any notification with respect to the suspension
of the qualification or exemption from qualification of any of the Registrable
Securities for sale in any jurisdiction, or the initiation or threatening of any
Proceeding for such purpose; and (vi) of the occurrence of any event or passage
of time that makes the financial statements included in the Registration
Statement ineligible for inclusion therein or any statement made in the
Registration Statement or Prospectus or any document incorporated or deemed to
be incorporated therein by reference untrue in any material respect or that
requires any revisions to the Registration Statement, Prospectus or other
documents so that, in the case of the Registration Statement or the Prospectus,
as the case may be, it will not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.

          (e) Promptly deliver to each Holder and their Special Counsel, without
charge, as many copies of the Prospectus or Prospectuses (including each form of
prospectus) and each amendment or supplement thereto as such Persons may
reasonably request.  The Company hereby consents to the use of such Prospectus
and each amendment or supplement thereto by each of the selling Holders in
connection with the offering and sale of the Registrable Securities covered by
such Prospectus and any amendment or supplement thereto.

                                      -6-
<PAGE>

          (f) Prior to any public offering of Registrable Securities, use its
best efforts to register or qualify or cooperate with the selling Holders and
their Special Counsel in connection with the registration or qualification (or
exemption from such registration or qualification) of such Registrable
Securities for offer and sale under the securities or Blue Sky laws of such
jurisdictions within the United States as any Holder requests in writing, to
keep each such registration or qualification (or exemption therefrom) effective
during the Effectiveness Period and to do any and all other acts or things
necessary or advisable to enable the disposition in such jurisdictions of the
Registrable Securities covered by a Registration Statement; provided, that the
                                                            --------
Company shall not be required to qualify generally to do business in any
jurisdiction where it is not then so qualified or subject the Company to any
material tax in any such jurisdiction where it is not then so subject.

          (g) Cooperate with the Holders to facilitate the timely preparation
and delivery of certificates representing Registrable Securities to be delivered
to a transferee pursuant to a Registration Statement, which certificates shall
be free, to the extent permitted by the Purchase Agreement, of all restrictive
legends, and to enable such Registrable Securities to be in such denominations
and registered in such names as any such Holders may request.

          (h) Upon the occurrence of any event contemplated by Section 3(d)(vi),
as promptly as reasonably possible, prepare a supplement or amendment, including
a post-effective amendment, to the Registration Statement or a supplement to the
related Prospectus or any document incorporated or deemed to be incorporated
therein by reference, and file any other required document so that, as
thereafter delivered, neither the Registration Statement nor such Prospectus
will contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.

          (i) Comply with all applicable rules and regulations of the
Commission.

     4.   Registration Expenses.   All fees and expenses incident to the
          ---------------------
performance of or compliance with this Agreement by the Company shall be borne
by the Company whether or not any Registrable Securities are sold pursuant to
the Registration Statement.  The fees and expenses referred to in the foregoing
sentence shall include, without limitation, (i) all registration and filing fees
(including, without limitation, fees and expenses (A) with respect to filings
required to be made with the NASDAQ and any Subsequent Market on which the
Common Stock is then listed for trading, and (B) in compliance with applicable
state securities or Blue Sky laws (including, without limitation, fees and
disbursements of counsel for the Company in connection with Blue Sky
qualifications or exemptions of the Registrable Securities and determination of
the eligibility of the Registrable Securities for investment under the laws of
such jurisdictions as requested by the Holders )), (ii) printing expenses
(including, without limitation, expenses of printing certificates for
Registrable Securities and of printing prospectuses requested by the Holders),
(iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of
counsel for the Company  and Special Counsel for the Holders up to $5,000, and
(v) fees and expenses of all other Persons retained by the Company in connection
with the consummation of the transactions contemplated by this Agreement.

                                      -7-
<PAGE>

     5.   Indemnification
          ---------------

          (a) Indemnification by the Company.  The Company shall,
              ------------------------------
notwithstanding any termination of this Agreement, indemnify and hold harmless
each Holder, the officers, directors, agents, brokers (including brokers who
offer and sell Registrable Securities as principal as a result of a pledge or
any failure to perform under a margin call of Common Stock), investment advisors
and employees of each of them, each Person who controls any such Holder (within
the meaning of Section 15 of the Securities Act or Section 20 of the Exchange
Act) and the officers, directors, agents and employees of each such controlling
Person, to the fullest extent permitted by applicable law, from and against any
and all losses, claims, damages, liabilities, costs (including, without
limitation, costs of preparation and attorneys' fees) and expenses
(collectively, "Losses"), as incurred, arising out of or relating to any untrue
                ------
or alleged untrue statement of a material fact contained in the Registration
Statement, any Prospectus or any form of prospectus or in any amendment or
supplement thereto or in any preliminary prospectus, or arising out of or
relating to any omission or alleged omission of a material fact required to be
stated therein or necessary to make the statements therein (in the case of any
Prospectus or form of prospectus or supplement thereto, in light of the
circumstances under which they were made) not misleading, except to the extent,
but only to the extent, that (1) such untrue statements or omissions are based
solely upon information regarding such Holder furnished in writing to the
Company by such Holder expressly for use therein, or to the extent that such
information relates to such Holder or such Holder's proposed method of
distribution of Registrable Securities and was reviewed and expressly approved
in writing by such Holder expressly for use in the Registration Statement, such
Prospectus or such form of Prospectus or in any amendment or supplement thereto
or (2) in the case of an occurrence of an event of the type specified in Section
3(d)(ii)-(vi), the use by such Holder of an outdated or defective Prospectus
after the Company has notified such Holder in writing that the Prospectus is
outdated or defective and prior to the receipt by such Holder of the Advice
contemplated in Section 6(e).  The Company shall notify the Holders promptly of
the institution, threat or assertion of any Proceeding of which the Company is
aware in connection with the transactions contemplated by this Agreement.

          (b) Indemnification by Holders. Each Holder shall, severally and not
              --------------------------
jointly, indemnify and hold harmless the Company, its directors, officers,
agents and employees, each Person who controls the Company (within the meaning
of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the
directors, officers, agents or employees of such controlling Persons, to the
fullest extent permitted by applicable law, from and against all Losses (as
determined by a court of competent jurisdiction in a final judgment not subject
to appeal or review) arising solely out of or based solely upon any untrue
statement of a material fact contained in any Registration Statement, any
Prospectus, or any form of prospectus, or in any amendment or supplement
thereto, or arising solely out of or based solely upon any omission of a
material fact required to be stated therein or necessary to make the statements
therein not misleading to the extent, but only to the extent, that such untrue
statement or omission is contained in any information so furnished in writing by
such Holder to the Company specifically for inclusion in such Registration
Statement or such Prospectus or to the extent that (1) such untrue statements or
omissions are based solely upon information regarding such Holder furnished in
writing to the Company by such Holder expressly

                                      -8-
<PAGE>

for use therein, or to the extent that such information relates to such Holder
or such Holder's proposed method of distribution of Registrable Securities and
was reviewed and expressly approved in writing by such Holder expressly for use
in the Registration Statement, such Prospectus or such form of Prospectus or in
any amendment or supplement thereto or (2) in the case of an occurrence of an
event of the type specified in Section 3(d)(ii)-(vi), the use by such Holder of
an outdated or defective Prospectus after the Company has notified such Holder
in writing that the Prospectus is outdated or defective and prior to the receipt
by such Holder of the Advice contemplated in Section 6(e). In no event shall the
liability of any selling Holder hereunder be greater in amount than the dollar
amount of the net proceeds received by such Holder upon the sale of the
Registrable Securities giving rise to such indemnification obligation.

          (c) Conduct of Indemnification Proceedings. If any Proceeding shall be
              --------------------------------------
brought or asserted against any Person entitled to indemnity hereunder (an

"Indemnified Party"), such Indemnified Party shall promptly notify the Person
 -----------------
from whom indemnity is sought (the "Indemnifying Party") in writing, and the
                                    ------------------
Indemnifying Party shall assume the defense thereof, including the employment of
counsel reasonably satisfactory to the Indemnified Party and the payment of all
fees and expenses incurred in connection with defense thereof; provided, that
the failure of any Indemnified Party to give such notice shall not relieve the
Indemnifying Party of its obligations or liabilities pursuant to this Agreement,
except (and only) to the extent that it shall be finally determined by a court
of competent jurisdiction (which determination is not subject to appeal or
further review) that such failure shall have proximately and materially
adversely prejudiced the Indemnifying Party.

          An Indemnified Party shall have the right to employ separate counsel
in any such Proceeding and to participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of such Indemnified Party
or Parties unless:  (1) the Indemnifying Party has agreed in writing to pay such
fees and expenses; or (2) the Indemnifying Party shall have failed promptly to
assume the defense of such Proceeding and to employ counsel reasonably
satisfactory to such Indemnified Party in any such Proceeding; or (3) the named
parties to any such Proceeding (including any impleaded parties) include both
such Indemnified Party and the Indemnifying Party, and such Indemnified Party
shall have been advised by counsel that a conflict of interest is likely to
exist if the same counsel were to represent such Indemnified Party and the
Indemnifying Party (in which case, if such Indemnified Party notifies the
Indemnifying Party in writing that it elects to employ separate counsel at the
expense of the Indemnifying Party, the Indemnifying Party shall not have the
right to assume the defense thereof and such counsel shall be at the expense of
the Indemnifying Party).  The Indemnifying Party shall not be liable for any
settlement of any such Proceeding effected without its written consent, which
consent shall not be unreasonably withheld.  No Indemnifying Party shall,
without the prior written consent of the Indemnified Party, effect any
settlement of any pending Proceeding in respect of which any Indemnified Party
is a party, unless such settlement includes an unconditional release of such
Indemnified Party from all liability on claims that are the subject matter of
such Proceeding.

          All fees and expenses of the Indemnified Party (including reasonable
fees and expenses to the extent incurred in connection with investigating or
preparing to defend such

                                      -9-
<PAGE>

Proceeding in a manner not inconsistent with this Section) shall be paid to the
Indemnified Party, as incurred, within ten Business Days of written notice
thereof to the Indemnifying Party (regardless of whether it is ultimately
determined that an Indemnified Party is not entitled to indemnification
hereunder; provided, that the Indemnifying Party may require such Indemnified
           --------
Party to undertake to reimburse all such fees and expenses to the extent it is
finally judicially determined that such Indemnified Party is not entitled to
indemnification hereunder).

          (d) Contribution.  If a claim for indemnification under Section 5(a)
              ------------
or 5(b) is unavailable to an Indemnified Party (by reason of public policy or
otherwise), then each Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party and
Indemnified Party in connection with the actions, statements or omissions that
resulted in such Losses as well as any other relevant equitable considerations.
The relative fault of such Indemnifying Party and Indemnified Party shall be
determined by reference to, among other things, whether any action in question,
including any untrue or alleged untrue statement of a material fact or omission
or alleged omission of a material fact, has been taken or made by, or relates to
information supplied by, such Indemnifying Party or Indemnified Party, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such action, statement or omission.  The amount paid or
payable by a party as a result of any Losses shall be deemed to include, subject
to the limitations set forth in Section 5(c), any reasonable attorneys' or other
reasonable fees or expenses incurred by such party in connection with any
Proceeding to the extent such party would have been indemnified for such fees or
expenses if the indemnification provided for in this Section was available to
such party in accordance with its terms.

          The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 5(d) were determined by pro rata
                                                              --- ----
allocation or by any other method of allocation that does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 5(d), no Holder shall be required
to contribute, in the aggregate, any amount in excess of the amount by which the
proceeds actually received by such Holder from the sale of the Registrable
Securities subject to the Proceeding exceeds the amount of any damages that such
Holder has otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission.

          The indemnity and contribution agreements contained in this Section
are in addition to any liability that the Indemnifying Parties may have to the
Indemnified Parties.

     6.   Miscellaneous
          -------------

          (a) Amendments and Waivers.  The provisions of this Agreement,
              ----------------------
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the same shall be in writing and signed by the Company
and the Holders of at least two-thirds of the then outstanding Registrable
Securities.  Notwithstanding the foregoing, a waiver or consent to depart from
the provisions hereof

                                      -10-
<PAGE>

with respect to a matter that relates exclusively to the rights of Holders and
that does not directly or indirectly affect the rights of other Holders may be
given by Holders of at least a majority of the Registrable Securities to which
such waiver or consent relates; provided, however, that the provisions of this
                                --------  -------
sentence may not be amended, modified, or supplemented except in accordance with
the provisions of the immediately preceding sentence.

          (b) No Inconsistent Agreements.  Neither the Company nor any of its
              --------------------------
subsidiaries has entered, as of the date hereof, nor shall the Company or any of
its subsidiaries, on or after the date of this Agreement, enter into any
agreement with respect to its securities that would have the effect of impairing
the rights granted to the Holders in this Agreement or otherwise conflicts with
the provisions hereof.  Except as and to the extent specified in Schedule 6(b)
                                                                 -------------
hereto, neither the Company nor any of its subsidiaries has previously entered
into any agreement granting any registration rights with respect to any of its
securities to any Person.

          (c) No Piggyback on Registrations.  Except as and to the extent
              -----------------------------
specified in Schedule 6(b) hereto, neither the Company nor any of its security
             -------------
holders (other than the Holders in such capacity pursuant hereto) may include
securities of the Company in the Registration Statement other than the
Registrable Securities, and the Company shall not after the date hereof enter
into any agreement providing any such right to any of its security holders.

          (d) Compliance.  Each Holder covenants and agrees that it will comply
              ----------
with the prospectus delivery requirements of the Securities Act as applicable to
it in connection with sales of Registrable Securities pursuant to the
Registration Statement.

          (e) Discontinued Disposition.  Each Holder agrees by its acquisition
              ------------------------
of such Registrable Securities that, upon receipt of a notice from the Company
of the occurrence of any event of the kind described in Sections 3(d)(ii),
3(d)(iii), 3(d)(iv), 3(d)(v) or 3(d)(vi), such Holder will forthwith discontinue
disposition of such Registrable Securities under the Registration Statement
until such Holder's receipt of the copies of the supplemented Prospectus and/or
amended Registration Statement contemplated by Section 3(j), or until it is
advised in writing (the "Advice") by the Company that the use of the applicable
                         ------
Prospectus may be resumed, and, in either case, has received copies of any
additional or supplemental filings that are incorporated or deemed to be
incorporated by reference in such Prospectus or Registration Statement.  The
Company may provide appropriate stop orders to enforce the provisions of this
paragraph.

          (f) Piggy-Back Registrations.  If at any time during the Effectiveness
              ------------------------
Period  there is not an effective Registration Statement covering all of the
Registrable Securities and the Company shall determine to prepare and file with
the Commission a registration statement relating to an offering for its own
account or the account of others under the Securities Act of any of its equity
securities, other than on Form S-4 or Form S-8 (each as promulgated under the
Securities Act) or their then equivalents relating to equity securities to be
issued solely in connection with any acquisition of any entity or business or
equity securities issuable in connection with stock option or other employee
benefit plans, then the Company shall send to each Holder written notice of such
determination and, if within fifteen days after receipt of such notice, any such
Holder shall so request

                                      -11-
<PAGE>

in writing, the Company shall include in such registration statement all or any
part of such Registrable Securities such holder requests to be registered.

          (g) Notices.  Any and all notices or other communications or
              -------
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 6:30 p.m. (New
York City time) on a Business Day (with confirmation of transmission), (ii) the
Business Day after the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in this
Agreement later than 6:30 p.m. (New York City time) on any date and earlier than
11:59 p.m. (New York City time) on such date (with confirmation of
transmission), (iii) the Business Day following the date of mailing, if sent by
nationally recognized overnight courier service, or (iv) upon actual receipt by
the party to whom such notice is required to be given.  The address for such
notices and communications shall be as follows:

     If to the Company:    Pacific Aerospace & Electronics, Inc.
                           430 Olds Station Road, Third Floor
                           Wenatchee, Washington  98801
                           Facsimile No.: (509) 667-9696
                           Attn: Donald A. Wright

     With copies to:       Sheryl A. Symonds
                           Pacific Aerospace & Electronics, Inc.
                           110 Main Street, Suite 100
                           Edmonds, WA 98020
                           Facsimile No.: (425) 774-0103

     If to a Purchaser:    To the address set forth under such Purchaser's name
                           on the signature pages hereto.

     If to any other Person who is then the registered Holder:

                           To the address of such Holder as it appears in the
                           stock transfer books of the Company

or such other address as may be designated in writing hereafter, in the same
manner, by such Person.

          (h) Successors and Assigns.  This Agreement shall inure to the benefit
              ----------------------
of and be binding upon the successors and permitted assigns of each of the
parties and shall inure to the benefit of each Holder.  The Company may not
assign its rights or obligations hereunder without the prior written consent of
each Holder.  Each Holder may assign their respective rights hereunder in the
manner and to the Persons as permitted under the Purchase Agreement.

                                      -12-
<PAGE>

          (i) Counterparts.  This Agreement may be executed in any number of
              ------------
counterparts, each of which when so executed shall be deemed to be an original
and, all of which taken together shall constitute one and the same Agreement.
In the event that any signature is delivered by facsimile transmission, such
signature shall create a valid binding obligation of the party executing (or on
whose behalf such signature is executed) the same with the same force and effect
as if such facsimile signature were the original thereof.

          (j) Governing Law.   All questions concerning the construction,
              -------------
validity, enforcement and interpretation of this Agreement shall be governed by
and construed and enforced in accordance with the internal laws of the State of
New York, without regard to the principles of conflicts of law thereof.  Each
party hereby irrevocably submits to the exclusive jurisdiction of the state and
federal courts sitting in the City of New York, borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is improper.  The Purchasers hereby irrevocably
waive personal service of process and consent to process being served  in any
such suit, action or proceeding by mailing a copy thereof via registered or
certified mail or overnight delivery (with evidence of delivery) to such
Purchaser at the address in effect for notices to such Purchaser under this
Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof.  The Company consents to being served in
any such suit, action or proceeding by mailing a copy thereof via registered or
certified mail or overnight delivery (with evidence of delivery) to JGB Service
Corporation, 600 University Street, Suite 3600, Seattle, WA 98101 and agrees
that such service shall constitute good and sufficient service of process and
notice thereof Nothing contained herein shall be deemed to limit in any way any
right to serve process in any manner permitted by law.

          (k) Cumulative Remedies.  The remedies provided herein are cumulative
              -------------------
and not exclusive of any remedies provided by law.

          (l) Severability. If any term, provision, covenant or restriction of
              ------------
this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their reasonable efforts to find and employ an alternative
means to achieve the same or substantially the same result as that contemplated
by such term, provision, covenant or restriction.  It is hereby stipulated and
declared to be the intention of the parties that they would have executed the
remaining terms, provisions, covenants and restrictions without including any of
such that may be hereafter declared invalid, illegal, void or unenforceable.

          (m) Headings.  The headings in this Agreement are for convenience of
              --------
reference only and shall not limit or otherwise affect the meaning hereof.

          (n) Independent Nature of Purchasers' Obligations and Rights.  The
              --------------------------------------------------------
obligations of each Purchaser hereunder are several and not joint with the
obligations of any other Purchaser

                                      -13-
<PAGE>

hereunder, and no Purchaser shall be responsible in any way for the performance
of the obligations of any other Purchaser hereunder. Nothing contained herein or
in any other agreement or document delivered at any closing, and no action taken
by any Purchaser pursuant hereto or thereto, shall be deemed to constitute the
Purchasers as a partnership, an association, a joint venture or any other kind
of entity, or create a presumption that the Purchasers are in any way acting in
concert with respect to such obligations or the transactions contemplated by
this Agreement. Each Purchaser shall be entitled to protect and enforce its
rights, including without limitation the rights arising out of this Agreement,
and it shall not be necessary for any other Purchaser to be joined as an
additional party in any proceeding for such purpose.


                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
                          SIGNATURE PAGES TO FOLLOW]

                                      -14-
<PAGE>

          IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement as of the date first written above.

                    PACIFIC AEROSPACE & ELECTRONICS, INC.

                    By:  /s/ Sheryl A. Symonds
                         --------------------------
                      Name:  Sheryl A. Symonds
                      Title:  Vice President Administration and General Counsel

                    STRONG RIVER INVESTMENTS, INC.

                    By:  /s/ Kenneth L. Henderson
                         --------------------------
                         Kenneth L. Henderson Attorney-in-Fact

                    Address for Notice:

                    Strong River Investments, Inc.
                    c/o Gonzalez-Ruiz Aleman (BVI) Limited
                    Wickhams Cay I, Vanterpool Plaza
                    P.O. Box 873
                    Road Town, Tortolla, B.V.I.

                    With copies to:

                    Robinson Silverman Pearce Aronsohn & Berman LLP
                    1290 Avenue of the Americas
                    New York, NY  10104
                    Facsimile No.:  (212) 541-4630 and (212) 541-1432
                    Attn: Kenneth L. Henderson, Esq. and Eric L. Cohen, Esq.

                    BAY HARBOR INVESTMENTS, INC.

                    By:  /s/ Kenneth L. Henderson
                         --------------------------
                         Kenneth L. Henderson Attorney-in-Fact

                    Address for Notice:

                    Bay Harbor Investments, Inc.
                    c/o Gonzalez-Ruiz & Aleman (BVI) Limited
                    Wickhams Cay I, Vanterpool Plaza
                    P.O. Box 873
                    Road Town, Tortola, BVI

                    With copies to:

                    Robinson Silverman Pearce Aronsohn & Berman LLP
                    1290 Avenue of the Americas
                    New York, NY  10104
                    Facsimile No.:  (212) 541-4630 and (212) 541-1432
                    Attn: Kenneth L. Henderson, Esq. and Eric L. Cohen, Esq.

                                      -15-
<PAGE>

                                                                         Annex A
                                                                         -------

                              Plan of Distribution
                              --------------------


     The Selling Stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of Common Stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions.  These sales may be at fixed or
negotiated prices.  The Selling Stockholders may use any one or more of the
following methods when selling shares:

 .         ordinary brokerage transactions and transactions in which the broker-
          dealer solicits purchasers;

 .         block trades in which the broker-dealer will attempt to sell the
          shares as agent but may position and resell a portion of the block as
          principal to facilitate the transaction;

 .         purchases by a broker-dealer as principal and resale by the broker-
          dealer for its account;

 .         an exchange distribution in accordance with the rules of the
          applicable exchange;

 .         privately negotiated transactions;

 .         broker-dealers may agree with the Selling Stockholders to sell a
          specified number of such shares at a stipulated price per share;

 .         a combination of any such methods of sale; and

 .         any other method permitted pursuant to applicable law.

     The Selling Stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.

     Broker-dealers engaged by the Selling Stockholders may arrange for other
brokers-dealers to participate in sales.  Broker-dealers may receive commissions
or discounts from the Selling Stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated.  The Selling Stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.

     The Selling Stockholders and any broker-dealers or agents that are involved
in selling the shares may be deemed to be .underwriters. within the meaning of
the Securities Act in connection with such sales.  In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.

                                      -16-
<PAGE>

     The Company is required to pay all fees and expenses incident to the
registration of the shares, including  fees and disbursements of counsel to the
Selling Stockholders.  The Company has agreed to indemnify the Selling
Stockholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.

                                      -17-
<PAGE>

            List of Schedules to the Registration Rights Agreement

The following list briefly identifies the contents of the schedule to the
Registration Rights Agreement, dated as of July 27, 2000, between Pacific
Aerospace & Electronics, Inc., Strong River Investments, Inc. and Bay Harbor
Investments, Inc. (the "Agreement").  The schedule listed below is omitted from
the Agreement, filed as Exhibit 4.1 to the foregoing report on Form 8-K,
pursuant to Regulation S-K, item 601(b)(2).  The Company agrees to furnish
supplementally a copy of the omitted schedule to the Securities and Exchange
Commission upon request.

     Schedule 6(b) -  Registration Rights

                                      -18-