<PAGE>

                                                                     EXHIBIT 4.1

THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES
LAWS OF ANY STATE AND ARE BEING OFFERED AND SOLD IN RELIANCE ON EXEMPTIONS FROM
THE REGISTRATION REQUIREMENT OF THE ACT AND SUCH LAWS. THE SECURITIES OFFERED
HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION, ANY STATE SECURITIES COMMISSION OR OTHER REGULATORY AUTHORITY, NOR
HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR ENDORSED THE MERITS OF THIS
OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. THE SECURITIES OFFERED
HEREBY CANNOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF TO ANY PERSON OR
ENTITY UNLESS SUBSEQUENTLY REGISTERED UNDER THE ACT, AND/OR THE LAWS OF CERTAIN
STATES, OR UNLESS AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE AND THE
HOLDER HAS PROVIDED SELLER WITH A LEGAL OPINION ACCEPTABLE TO SELLER TO THAT
EFFECT.

                             ____________________

                           STOCK PURCHASE AGREEMENT

     This STOCK PURCHASE AGREEMENT ("Agreement") is made as of ___________,
2000, by and between PACIFIC AEROSPACE & ELECTRONICS, INC., a Washington
corporation ("Seller"), and _____________________________________________
___________________________________________ (Purchaser").

                                   RECITALS

     A.  Seller desires to sell to Purchaser, and Purchaser desires to purchase
from Seller, shares of the common stock, par value $.001 per share, of Seller
(the "Common Stock"), pursuant to the terms and conditions of this Agreement and
in reliance on Rule 506 under Regulation D ("Regulation D") promulgated under
the United States Securities Act of 1933, as amended (the "Securities Act").

     B.  The shares subject to this Agreement have not been registered under the
Securities Act, or under the state securities laws of any state of the United
States.

                                   AGREEMENT

     NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth in this Agreement and other good and valuable consideration, the receipt
and adequacy of which the parties acknowledge, the parties agree as follows:

                                   Article 1
                               Purchase and Sale
                               -----------------

     1.1  Purchase of Common Stock.  On the terms and subject to the conditions
          ------------------------
contained in this Agreement, Seller shall sell and deliver to Purchaser, and
Purchaser shall purchase from Seller ______________ shares of Common Stock (the
"Purchased Stock").

                                      -1-
<PAGE>

     1.2  Purchase Price. Purchaser shall pay to Seller a per share purchase
          --------------
price of U.S. $3.00 , for a total purchase price of U.S. $__________________ for
               -----
the Purchased Stock (the "Purchase Price").  Purchaser shall pay Seller the
Purchase Price by wire transfer in United States funds at Closing to:

     ACCOUNT NAME:


     BANK:

     BRANCH:





     ABA ROUTING #:

     ACCOUNT #:

     CONTACT:


     1.3  Closing.  The closing of the transaction contemplated by this
          -------
Agreement (the "Closing") shall be held on such date and at such time on or
before March 31, 2000, as the parties may agree, unless such date is extended by
agreement of the parties (the "Closing Date").  On the Closing Date, Seller will
cause its transfer agent to prepare a certificate or certificates representing
the Purchased Stock, which certificate(s) shall be delivered to Purchaser at an
address identified by Purchaser.

     1.4  Registration.  Seller agrees to use its best efforts to file a
          ------------
registration statement with the U.S. Securities and Exchange Commission within
60 days after the Closing Date to register the resale of the Purchased Stock by
Purchaser.  Purchaser agrees to provide Seller in a timely manner any
information required to be provided by Purchaser in connection with the filing
of the registration statement.

                                  Article  2
              Representations, Warranties and Covenants of Seller
              ---------------------------------------------------

     To induce Purchaser's execution of this Agreement and consummation of the
transaction contemplated by this Agreement, Seller represents, warrants and
covenants as follows:

     2.1  Corporate Organization; Authorization.  Seller is duly incorporated,
          -------------------------------------
validly existing and in good standing as a corporation under the laws of the
State of Washington and

                                      -2-
<PAGE>

has full corporate power and corporate authority to enter into this Agreement
and to issue and sell the Purchased Stock. This Agreement has been duly
authorized, executed, and delivered by Seller and constitutes a valid and
binding agreement of Seller, enforceable in accordance with its terms.

     2.2  Capital Stock.  Seller has authorized capital stock consisting of
          -------------
100,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock.  As
of January 31, 2000, Seller had outstanding of record 21,422,511 shares of
Common Stock and 136,647 shares of Series B Convertible Preferred Stock.

     2.3  Reporting Compliance.  Seller's Common Stock is registered pursuant to
          --------------------
Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and Seller has filed all materials required to be filed pursuant to
Section 13(a) or 15(d) of the Exchange Act for a period of at least 12 months
immediately preceding the date of this Agreement.

     2.4  Information.  Seller has instructed its placement agent, Marcel Huber,
          -----------
to deliver to Purchaser a copy of Seller's Annual Report on Form 10-K for
Seller's fiscal year ended May 31, 1999, copies of Seller's Quarterly Reports on
Form 10-Q for the periods ended August 31, 1999 and November 30, 1999, and a
copy of the proxy statement for Seller's special meeting of shareholders to be
held on March 6, 2000 (the "Offering Materials").  The information concerning
Seller set forth in this Agreement and the Offering Materials is, as of the date
thereof, complete and accurate in all material respects and, to the best of
Seller's knowledge, does not contain any untrue statement of a material fact or
omit to state a material fact required to make the statements made, in light of
the circumstances under which they were made, not misleading.  Upon request,
Seller shall provide to Purchaser any additional reports filed with the SEC
after the date of this Agreement but prior to the Closing Date.

     2.5  Characteristics of the Shares.  The Purchased Stock, when issued and
          -----------------------------
delivered to Purchaser, will be duly and validly authorized and issued, fully
paid, and nonassessable.  There are no preemptive rights to acquire Common Stock
of Seller.

                                  Article  3
            Representations, Warranties and Covenants of Purchaser
            ------------------------------------------------------

     As an inducement to, and with the intent that Seller rely on the accuracy
thereof, Purchaser represents, warrants and covenants as follows:

     3.1   Organization.  If Purchaser is an entity, it is duly organized and
           ------------
validly existing under the laws of the jurisdiction of its organization.
Purchaser has the requisite power and is duly authorized under all applicable
laws, regulations and ordinances to acquire the Purchased Stock.  The execution
and delivery of this Agreement will not violate any provision of Purchaser's
governing charter or any other contractual or legal obligation of Purchaser.

                                      -3-
<PAGE>

     3.2  Approval of Agreement.  Purchaser has taken all action required by
          ---------------------
applicable law, its governing charter, or otherwise to authorize the execution
and delivery of this Agreement and the consummation of the transactions
contemplated by this Agreement.  This Agreement is the legal, valid, and binding
obligation of Purchaser, enforceable in accordance with its terms.  Purchaser is
not required to obtain the authorization, approval, consent, or order of, or
make a registration or filing, with any court or other regulatory or
governmental body in connection with the execution and delivery by Purchaser of
this Agreement and the consummation by Purchaser of the transactions
contemplated by this Agreement.  The execution of this Agreement and the
consummation of the transactions contemplated by this Agreement, will not result
in the breach of any term or provision of, constitute an event of default under,
or require the consent or approval of any third-party pursuant to any material
contract, agreement, or instrument to which Purchaser is a party or to which any
of its properties or operations are subject.

     3.3  Information. The information concerning Purchaser provided to Seller
          -----------
in connection with this Agreement is complete and accurate in all material
respects and does not contain any untrue statements of a material fact or omit
to state a material fact required to make the statements made, in light of the
circumstances under which they were made, not misleading.

     3.4  Risk Factors.  Purchaser has been informed and fully understands that
          ------------
there are risks associated with purchasing the Purchased Stock, including
without limitation those set forth in Article 4, which factors Purchaser has
considered carefully before executing this Agreement.

     3.5  Purchaser's Financial Condition.  Purchaser is an accredited investor,
          -------------------------------
as that term is defined in Regulation D promulgated under the Securities Act.
Purchaser is capable of bearing the economic risk and the burden of this
investment, including, but not limited to, the possibility of the complete loss
of the Purchase Price.  Purchaser understands that there are substantial
restrictions on the transferability of the Purchased Stock, which may make the
liquidation of the Purchased Stock impossible for the immediate future.

     3.6  Disclosure.  Purchaser has received copies of the Offering Materials.
          ----------
All documents requested by Purchaser have been made available for inspection and
copying.  Purchaser has been supplied with all of the additional information
concerning the Purchased Stock and Seller that Purchaser has requested.

     3.7  No Registration.  Purchaser acknowledges that the Shares are being
          ---------------
issued without being registered under the Securities Act, or under any
applicable securities acts.  The Purchased Shares are being acquired by
Purchaser for its own account, for investment (and not on behalf of, or with a
view toward distribution to, any other person) under exemptions from the
registration provisions of the Securities Act.  Purchaser acknowledges that it
must therefore hold the Purchased Shares indefinitely unless they are
subsequently registered under the Securities Act or an exemption from such
registration is available, and that Seller will place stop transfer instructions
with respect to the Purchased Shares.  Seller is under no obligation to register
the Purchased Shares or take any other action which would make an exemption from

                                      -4-
<PAGE>

registration available, and Seller is under no obligation to cause or permit the
Purchased Shares to be transferred in the absence of such registration or an
opinion satisfactory to Seller's counsel that an exemption is available.

     3.8  Exclusive Reliance on this Agreement; No Oral Representations.  In
          -------------------------------------------------------------
making the decision to purchase the Purchased Stock, Purchaser has relied
exclusively upon information provided by this Agreement, information in any
books, records or documents of Seller provided by Seller to Buyer in connection
with this Agreement, and any investigations made by Purchaser.  Purchaser
confirms that it is not relying upon any oral representations or statements made
by Seller or by any other person in purchasing the Purchased Stock.

     3.9  Rule 144.  Purchaser acknowledges that the Purchased Shares are
          --------
restricted securities, as defined in Rule 144 under the Securities Act, that the
Purchased Shares may not be resold in reliance on Rule 144 for at least one year
after issuance, and that once the Purchased Shares are eligible for resale under
Rule 144, they will be subject to certain resale restrictions contained in Rule
144, including volume limitations and restrictions on the manner of resale,
until they have been held for two years as provided in Rule 144.  If Purchaser
is an affiliate of Seller for purposes of Rule 144, Purchaser understands that
certain restrictions on resale would continue to apply under Rule 144 for so
long as Purchaser is an affiliate.

     3.10  Legend.  Purchaser acknowledges that the certificates representing
           ------
the Purchased Shares will bear substantially the following legend until such
legend can be removed under applicable securities laws:

THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY STATE AND WERE
OFFERED AND SOLD IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENT OF
THE ACT AND SUCH LAWS.  THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR
OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED
UPON OR ENDORSED THE MERITS OF THESE SECURITIES.  ANY REPRESENTATION TO THE
CONTRARY IS UNLAWFUL.  THESE SECURITIES CANNOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF TO ANY PERSON OR ENTITY UNLESS SUBSEQUENTLY REGISTERED UNDER THE
ACT, AND/OR THE LAWS OF CERTAIN STATES, OR UNLESS AN EXEMPTION FROM SUCH
REGISTRATION IS AVAILABLE AND THE HOLDER HAS PROVIDED SELLER WITH A LEGAL
OPINION ACCEPTABLE TO SELLER TO THAT EFFECT.

     3.11  Further Actions.  Purchaser shall execute and deliver to Seller, at
           ---------------
or prior to the Closing, such further letters of representation, acknowledgment,
suitability or the like, as Seller and its counsel may reasonably request in
connection with Seller's reliance on exemptions from registration under
Regulation D or any other securities laws.

                                      -5-
<PAGE>

     3.12  No Other Assurances.  Seller and Purchaser acknowledge that the basis
           -------------------
for relying on exemptions from registration or qualifications are factual,
depending on the conduct of the various parties, and that no legal opinion or
other assurance will be required or given to the effect that the transactions
contemplated hereby are in fact exempt from registration or qualification.

                                   Article  4
                                  Risk Factors
                                  ------------

     Purchaser acknowledges that there are risks associated with purchasing the
Purchased Stock, including without limitation, the following:

     4.1  Risk of Dilution.  Certain events, such as the issuance by Seller of
          ----------------
its equity securities, including Common Stock or other securities convertible
into or exercisable for Common Stock, in connection with any financing, as part
of the purchase price for any future acquisition of companies or technologies,
as part of any employee compensation, stock purchase, or incentive program,
pursuant to the exercise of warrants or stock options, or for any other
corporate purpose, may result in immediate and substantial book value dilution.

     4.2  Effect of Preferred Stock.  As of January 31, 2000, Seller had
          -------------------------
outstanding 136,647 shares of Series B Convertible Preferred Stock ("Preferred
Stock").  Upon conversion of a share of Preferred Stock, the holder will receive
a number of shares of Common Stock equal to $100 divided by the then-applicable
conversion price of the Preferred Stock.  The conversion price of the Preferred
Stock is the lower of (a) $7.20 per share, or (b) the average of the three
lowest closing bid prices per share of Common Stock over the 22 trading days
before conversion.  As of January 31, 2000, the conversion price was $1.2083 per
share.  Seller cannot issue more than 3,000,000 shares of Common Stock pursuant
to conversion unless Seller's shareholders approve the issuance of additional
shares of Common Stock over the 3,000,000 shares already reserved for issuance
(the "Additional Shares").  Alternatively, Seller would be entitled to redeem
any Preferred Stock whose conversion would cause the issuance of Additional
Shares, at $115 per share, except that the indenture governing the Company's
outstanding 11 1/4% senior subordinated notes (the "Indenture") restricts the
Company's ability to do so.  As of January 31, 2000, 33,353 shares of Preferred
Stock had been converted into 2,959,773 shares of Common Stock, and 136,647
shares of Preferred Stock remained outstanding.  Seller has called a special
meeting of its shareholders for March 6, 2000, to consider a proposal to approve
issuance of a sufficient number of shares of Common Stock to permit conversion
of the outstanding Preferred Stock.  If Seller's shareholders approve the
proposal, the number of Additional Shares actually issued will depend on the
market price of Seller's Common Stock at the times when Preferred Stock is
converted by the holders and could result in the issuance of a substantial
number of Additional Shares.  If Seller's shareholders do not approve the
proposal, and Seller is therefore unable to convert any of the Preferred Stock,
and if Seller cannot redeem the Preferred Stock which upon conversion would
cause the issuance of the Additional Shares, then Seller will incur a monthly
penalty of 2% of the Preferred Stock's liquidation preference until the Seller
redeems the Preferred Stock or obtains shareholder approval to issue the
Additional Shares.  As of

                                      -6-
<PAGE>

January 31, 2000, the Company estimates that the penalty would be approximately
$273,000 per month.

     4.3  No Agency Approval.  No federal or state agency has made any finding
          ------------------
or determination as to the fairness for investment or made any recommendation or
endorsement of the Purchased Stock.

     4.4  Acquisition Risks.  Seller has pursued an aggressive growth strategy
          -----------------
and expects to continue to evaluate and pursue potential strategic acquisitions.
The success of this strategy depends upon Seller's ability to manage the risks
associated with acquisitions.  These risks include:  (i) the ability of Seller
to assess the value, strengths and weaknesses of acquisition candidates
accurately; (ii) Seller's effectiveness in implementing necessary changes at
newly acquired subsidiaries; (iii) possible diversion of management attention
from Seller's operations; and (iv) possible increased borrowings, disruption of
product development cycles and dilution of earnings per share.  Seller has
incurred substantial losses in connection with its acquisition of Electronic
Specialty Corporation, and its investment in Orca Technologies, Inc.  The size
of Seller's European Aerospace Group, which was acquired in July 1998,  will
cause it to have a significant impact on Seller's future financial results.  If
Seller fails to manage these or other acquisition risks, or if Seller fails to
dispose of unsuccessful businesses on satisfactory terms, there could be a
material adverse effect on Seller and its financial performance.

     4.5  Management of Growth.  Seller has experienced rapid growth from both
          --------------------
operations and acquisitions.  This growth has placed and will continue to place
significant demands on Seller's managerial, administrative, financial and
operational resources.   For example, both Seller's total number of employees
and the number of its operating sites nearly doubled as a result of the
acquisition of Seller's European Aerospace Group.  Seller's operating divisions
have had different accounting systems, which Seller has integrated or has plans
to integrate.  As Seller grows and becomes more complex, an increasing level of
diligence in its business decisions will be necessary to comply with regulatory
and accounting requirements. To manage its growth effectively, Seller must
continue to improve its operational, accounting, financial and other management
processes and systems, and must continue to attract and retain highly skilled
management and technical personnel.

     4.6  Significant Debt.   Seller incurred substantial debt and payment
          ----------------
obligations in order to finance the acquisition of the European Aerospace Group
and ongoing operations.  This debt could have important consequences, such as:
(i) making Seller unable to obtain additional financing in the future; (ii)
diverting a significant portion of Seller's cash flow to principal and interest
payments and away from operations, acquisitions and capital expenditures; (iii)
increasing Seller's interest expense and decreasing Seller's net income; (iv)
putting Seller at a competitive disadvantage in relation to competitors with
less debt; or (v) limiting Seller's flexibility in adjusting to downturns in its
business or market conditions.

     4.7  Ability to Make Debt Payments.  Seller's future financial and
          -----------------------------
operating performance will affect its ability to make payments on its debt.
Since Seller's performance is affected by many factors, some of which are beyond
its control, there is no assurance that

                                      -7-
<PAGE>

Seller will have sufficient cash flow to make its debt payments when scheduled,
or at all. If Seller did not have sufficient cash flow to make its debt
payments, Seller could be forced to: (i) reduce or delay capital expenditures;
(ii) dispose of material assets or operations, potentially at a loss; (iii)
restructure or refinance its debt at potentially higher rates of interest; or
(iv) seek additional equity capital, which could dilute the value of the shares
held by Seller's existing shareholders. There is no assurance that Seller would
be able to achieve any of these actions on satisfactory terms or at all. In
addition, if Seller were unable to repay its secured debt, Seller's secured
lenders could proceed against any collateral securing that debt.

     4.8  Restrictive Debt Covenants.  Seller is subject to a number of
          --------------------------
significant covenants under some of the agreements governing its debt.  Those
covenants restrict a number of corporate activities, including the ability of
Seller to:  (i) dispose of or create liens on assets; (ii) incur additional
indebtedness; (iii) prepay or amend certain debt; (iv) pay dividends or
repurchase stock; (v) enter into sale and leaseback transactions; (vi) make
investments, loans or advances; (vii) engage in acquisitions, mergers or
consolidations; (viii) make capital expenditures; (ix) change the business
conducted by Seller or its subsidiaries; or (x) engage in certain transactions
with affiliates.  The breach of any of these covenants could result in a default
that would permit the lenders to declare all amounts owed by Seller to be
immediately due and payable.  As a result, Seller's lenders might terminate
their commitments to extend further credit to Seller.  In addition, if there is
a change of control of Seller, Seller may be required to repay its debt. Any of
these events could have a material adverse effect on Seller and its financial
performance.

     4.9  Possible Need for Additional Capital.  Seller believes that its
          ------------------------------------
working capital and unused lines of credit will be sufficient to meet Seller's
obligations as they become due during fiscal 2000.  However, the Company may
need to obtain additional cash during or after fiscal 2000.  Seller's actual
capital needs will depend on many unpredictable factors, such as:  (i) actual
revenue generated from operations; (ii) interest due on Seller's variable rate
debt; (iii) capital expenditures required to remain competitive; and (iv) cash
required for acquired companies, future acquisitions, and financing transaction
costs.  As a result of these factors, Seller is unable to predict accurately the
amount or timing of its future capital needs, if any.  Should Seller need to
dispose of assets to generate cash, there is no assurance that the carrying
values will be realizable upon liquidation outside of the ordinary course of
business.  Seller's inability to obtain additional cash if and when needed could
have a material adverse effect on Seller's financial position and results of
operations.

     4.10  Foreign Operations.  Maintaining its European Aerospace Group
           ------------------
subjects Seller to the risks of foreign operations.  These risks include:  (i)
Seller's ability to manage operations in the United Kingdom effectively from its
Wenatchee, Washington headquarters; (ii) unfavorable changes in foreign
government policies, regulations, tariffs, taxes and other trade barriers; (iii)
exchange controls and limitations on dividends or other payments; and (iv)
devaluations and fluctuations in currency exchange rates.

     4.11  Exchange Rates.  Because of its European Aerospace Group, Seller may
           --------------
decide to engage in hedging transactions in order to protect Seller from losses
if the exchange rate between the U.S. dollar and the British pound sterling
changes.  However, hedging

                                      -8-
<PAGE>

transactions may not completely offset such losses. The European Aerospace Group
has a few contracts that are in European currencies other than British pounds
sterling, or in U.S. dollars. Seller believes that the conversion of such
currencies to the Euro will not have a material adverse effect on the European
Aerospace Group's business or financial condition.

     4.12  Aerospace Industry Risks; Cyclicality. Seller operates in
           -------------------------------------
historically cyclical industries. The aerospace, defense and transportation
industries are sensitive to general economic conditions and have been adversely
affected by past recessions.  In past years, the aerospace industry has been
adversely affected by a number of factors, including increased fuel and labor
costs, and intense price competition. Recently, the commercial aircraft industry
has experienced a downturn in the rate of its growth due to changing economic
conditions and as a result of the ongoing financial crisis in Asia, which has
caused reduction in production rates for some commercial airline programs.
Additional cancellations or delays in aircraft orders from Asian customers of
Boeing or Airbus could reduce demand for Seller's products and could have a
material adverse effect on Seller's business and financial performance.  There
is no assurance that this trend will not continue or that general economic
conditions will not lead to a downturn in demand for core products of Seller.

     4.13  Dependence on Key Management and Technical Personnel.   Seller
           ----------------------------------------------------
believes that its ability to successfully implement its business strategy and to
operate profitably depends significantly on the continued employment of its
senior management team, led by its president, Donald A. Wright, and its
significant technical personnel.  Seller has key man life insurance policies on
the life of Mr. Wright totaling $8 million.  Seller's business and financial
results could be materially adversely affected if Mr. Wright, other members of
the senior management team, or significant technical personnel become unable or
unwilling to continue in their present employment.  In addition, Seller's growth
and future success will depend in large part on its ability to retain and
attract additional board members, senior managers and highly skilled technical
personnel. Competition for such individuals is intense, and there is no
assurance that Seller will be successful in attracting and retaining them.
Seller's failure to do so could have a material adverse effect on Seller's
business and financial performance.

     4.14  Technological Change; Development of New Products.  The market for
           -------------------------------------------------
Seller's products is characterized by evolving technology and industry
standards, changes in customer needs, adaptation of products to customer needs,
and new product introductions.  Seller's competitors from time to time may
announce new products, enhancements, or technologies that have the potential to
replace or render Seller's existing products obsolete.  Seller's success will
depend on its ability to:  (i) enhance its current products and develop new
products to meet changing customer needs, and achieve market acceptance of such
products; and (ii) anticipate or respond to evolving industry standards and
other technological changes on a timely and cost-effective basis.  Seller's
failure to do so, or any significant delay, could have a material adverse effect
on Seller's business and financial performance.

     4.15  Product Liability.  Seller is subject to the risk of product
           -----------------
liability claims and lawsuits for harm caused by its products. Seller maintains
product liability insurance with a maximum coverage of $2 million. However,
there is no assurance that this insurance will be

                                      -9-
<PAGE>

sufficient to cover any claims that may arise. A successful product liability
claim in excess of Seller's insurance coverage could have a material adverse
effect on Seller's business and financial performance.

          4.16 Competition.  Seller is subject to substantial competition in
               -----------
many of the markets that it serves.  Many of these competitors represent
substantial long-term competition, as they have greater financial resources,
broader experience, better name recognition and more substantial marketing
operations.  Components and products similar to those made by Seller can be made
by competitors using a number of different manufacturing processes.  Seller
believes that its manufacturing processes, proprietary technologies, and
experience provide significant advantages to Seller's customers, such as high
quality, more complete solutions, competitive prices, and physical properties
that must meet stringent demands.  However, alternative forms of manufacturing
can be used to produce many of the components and products made by Seller.  In
addition, new developments by competitors are expected to continue, and Seller's
competitors could develop products that are viewed by customers as more
effective or more economical than Seller's product lines.  Seller may not be
able to compete successfully against current and future competitors, and the
competitive pressures faced by Seller could have a material adverse effect on
Seller and its financial performance.

          4.17 Availability and Cost of Materials.  The European Aerospace Group
               ----------------------------------
obtains approximately 70% of its titanium from one supplier and is subject to a
lead time of approximately 65 weeks in ordering and obtaining titanium.  While
the European Aerospace Group generally has managed the ordering process to
obtain titanium when needed, a labor strike at the supplier negatively affected
the group's ability to obtain timely deliveries of titanium during fiscal 1999.
Although the shortage of titanium did not have a material adverse effect on the
European Aerospace Group's business or on the financial condition of Seller,
some business was lost due to customers' dual sourcing contracts, and some
customer orders that were expected to be delivered in fiscal 1999 were delayed
into fiscal 2000.  The effect of the strike emphasizes the fact that a failure
of Seller 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 have a material adverse effect on Seller and its financial
performance.  Seller generally has readily available sources of all raw
materials and supplies it needs to manufacture its products and, where possible,
Seller maintains alternate sources of supply.  However, Seller does not have
fixed price contracts or arrangements for all of the raw materials and other
supplies it purchases.  Shortages of, or price increases for, certain raw
materials and supplies used by Seller have occurred in the past and may occur in
the future.  Future shortages or price fluctuations could have a material
adverse effect on Seller's ability to manufacture and sell its products in a
timely and cost-effective manner.

          4.18 Proprietary Rights.  Significant aspects of Seller's business
               ------------------
depend on proprietary processes, know-how and other technology that are not
subject to patent protection.  Seller relies on a combination of trade secret,
copyright and trademark laws, confidentiality procedures, and other intellectual
property protection to protect its proprietary technology.  However, there is no
assurance that Seller's competitors may not develop or utilize technology that
is the same as or similar to such technology of Seller.  Seller has 32 U.S.
patents, one European patent enforceable in the U.K., and several patent
applications in the U.S. and in

                                      -10-
<PAGE>

other jurisdictions, most of which pertain to the U.S. Electronics Group. There
is no assurance that any of the patent applications will result in issued
patents, that existing patents or any future patents will give Seller any
competitive advantages for its products or technology, or that, if challenged,
these patents will be held valid and enforceable. Most of Seller's issued
patents expire at various times over the next 15 years, with 16 patents expiring
over the next five years. Although Seller believes that the manufacturing
processes of much of its patented technology are sufficiently complex that
competing products made with the same technology are unlikely, there is no
assurance that Seller's competitors will not design competing products using the
same or similar technology after these patents have expired. Despite the
precautions taken by Seller, unauthorized parties may attempt to copy aspects of
Seller's products or obtain and use information that Seller regards as
proprietary. Existing intellectual property laws give only limited protection
with respect to such actions, and policing violations of such laws is difficult.
The laws of certain countries in which Seller's 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. Seller could be required to enter
into costly litigation to enforce its intellectual property rights or to defend
infringement claims by others. Such infringement claims could require Seller to
license the intellectual property rights of third parties. There is no assurance
that such licenses would be available on reasonable terms, or at all.

          4.19 Environmental Matters.  Seller's facilities are subject to
               ---------------------
governmental laws and regulations concerning solid waste disposal, hazardous
materials generation, storage, use and disposal, air emissions, waste water
discharge, employee health and other environmental matters (together,
"Environmental Laws").  Proper waste disposal and environmental regulation are
major considerations for Seller because a number of the metals, chemicals and
other materials used in and resulting from its manufacturing processes are
classified as hazardous substances and hazardous wastes.  If permitting and
other requirements of applicable Environmental Laws are not met, Seller could be
liable for damages and for the costs of remedial actions and could also be
subject to fines or other penalties, including revocation of permits needed to
conduct its business.  Any permit revocation could require Seller to cease or
limit production at one or more of its facilities, which could have a material
adverse effect on Seller and its financial performance.  Seller has an ongoing
program of monitoring and addressing environmental matters, and from time to
time in the ordinary course of business is required to address minor issues of
noncompliance at its operating sites.  Recently, Seller identified certain
operations or processes that lacked required permits or otherwise are not in
full compliance with applicable Environmental Laws.  Although Seller believes
these items are not material, Seller is taking steps to remedy any
noncompliance.  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, Seller is subject
to financial exposure with regard to its properties even if it fully complies
with these laws.  In addition, certain of Seller's facilities are located in
industrial areas and have lengthy operating histories.  As a consequence, it is
possible that historical or neighboring activities have affected properties
currently owned by Seller and that, as a result, additional environmental issues
may arise in the future, the precise nature of which Seller cannot now predict.
There is no assurance that any present or future noncompliance with
Environmental

                                      -11-
<PAGE>

Laws or future discovery of contamination will not have a material adverse
effect on Seller's results of operations or financial condition.

          4.20 Government Regulation.  Certain of Seller's products are
               ---------------------
manufactured and sold under United States government contracts or subcontracts.
As with all companies that provide products or services to the United States
government, Seller is directly and indirectly subject to various federal rules,
regulations and orders applicable to government contractors.  Some of these
regulations relate specifically to the vendor-vendee relationship with the
government, such as the bidding and pricing rules.  Under regulations of this
type, Seller must observe certain pricing restrictions, produce and maintain
detailed accounting data, and meet various other requirements.  Seller is also
subject to many regulations affecting the conduct of its business generally.
For example, in the United States Seller must adhere to federal acquisition
requirements and standards established by the Occupational Safety and Health Act
relating to labor practices and occupational safety standards.  Seller is
currently updating and implementing written policies and training programs
relating to employee health and safety matters at several of its facilities.
Violation of applicable government rules and regulations could result in civil
liability, in cancellation or suspension of existing contracts, or in
ineligibility for future contracts or subcontracts funded in whole or in part
with federal funds.  In addition, some of Seller's customers are in the defense
industry, and loss of governmental certification by such customers could have a
material adverse effect on their purchases from Seller and Seller's business and
financial performance.

                                   Article 5
                                Indemnification
                                ---------------

     5.1  Indemnification by Purchaser.  Purchaser will indemnify and hold
          ----------------------------
harmless Seller and its directors, officers, agents and employees, and each
person, if any, who controls Seller within the meaning of the Securities Act
("Affiliates"), from and against any and all claims, damages, expenses,
liabilities, or actions ("Claims") to which any of them may become subject under
applicable law (including the Securities Act and the Exchange Act) and will
reimburse them for any legal or other expenses reasonably incurred by them in
connection with the investigation or defense of any Claims arising out of or
based upon a misrepresentation or alleged misrepresentation of material fact
contained in any application or statement filed with a governmental body by
Seller or the omission or alleged omission of a material fact required to be
stated therein, or necessary in order to make the statements made therein not
misleading, but only insofar as any such misrepresentation or omission was made
in reliance upon and in conformity with information furnished in writing by
Purchaser. Purchaser agrees at any time upon the request of Seller to furnish a
written letter or statement confirming the accuracy of any information provided
to Seller by Purchaser.  This Section 5.1 shall remain operative and in full
force and effect, regardless of any investigation, made by or on behalf of
Seller and shall survive the consummation of the transactions contemplated by
this Agreement.

     5.2  Indemnification by Seller.  Seller will indemnify and hold harmless
          -------------------------
Purchaser and its Affiliates from and against any Claims to which any of them
may become subject under

                                      -12-
<PAGE>

applicable law (including the Securities Act and the Exchange Act) and will
reimburse them for any legal or other expenses reasonably incurred by them in
connection with the investigation or defense of any Claims arising out of or are
based upon any untrue statement or alleged untrue statement of a material fact
contained in any proxy statement, report, application or statement filed with a
governmental body by Purchaser, or arising out of or are based upon the omission
or alleged omission of a material fact required to be stated therein, or
necessary in order to make the statements therein not misleading, but only
insofar as any such statement or omission was made in reliance upon and in
conformity with information furnished in writing by Seller expressly for use
therein. Seller agrees at any time upon the request of Purchaser to furnish to
it a written letter or statement confirming the accuracy of the information with
respect to Seller contained in any document referred to in this Section 5.2.

                                   Article 6
                      Conditions Precedent to Obligations
                      -----------------------------------

     The obligations of each party to this Agreement are subject to the
satisfaction, at or before the Closing Date, of the following conditions:

     6.1  Accuracy of Representations.  The representations and warranties made
          ---------------------------
by each party in this Agreement were true when made and shall be true at the
Closing Date with the same force and effect as if such representations and
warranties were made at and as of the Closing Date (except for changes therein
permitted by this Agreement), and such party shall have performed or complied
with all covenants and conditions required by this Agreement to be performed or
complied with by such party prior to or at the Closing.

     6.2  Other Items.  Each party shall have received such further documents,
          -----------
certificates or instruments relating to the transactions contemplated hereby as
the other party may reasonably request.

                                   Article 7
                               General Provisions
                               ------------------

     7.1  Amendment or Waiver.  Every right and remedy provided in this
          -------------------
Agreement shall be cumulative with every other right and remedy, whether
conferred in this Agreement, at law, or in equity, and may be enforced
concurrently with any right conferred by this Agreement, and no waiver by any
party of the performance of any obligation by the other shall be construed as a
waiver of the same or any other default then, theretofore, or thereafter
occurring or existing.  At any time prior to the Closing Date, this Agreement
may be amended by a writing signed by the parties, with respect to any of the
terms contained in this Agreement, and any term or condition of this Agreement
may be waived or the time for performance thereof may be extended by a writing
signed by the party or parties for whose benefit the provision is intended.

     7.2  Attorneys' Fees.  In the event any party institutes and prevails in
          ---------------
any action or suit to enforce this Agreement or to secure relief from any
default under or breach of this

                                      -13-
<PAGE>

Agreement, the defaulting or breaching party or parties shall reimburse the
nonbreaching party or parties for all costs, including without limitation
reasonable attorneys' fees incurred in connection with such dispute and in
enforcing or collecting any judgment rendered pursuant to such dispute.

     7.3  Governing Law.  This Agreement shall in all respects, including all
          -------------
matters of construction, validity, and performance, be governed by, and
construed and enforced in accordance with, the laws of the State of Washington,
without reference to any rules governing conflicts of laws.

     7.4  No Brokers.  Purchaser and Seller agree that no third person, except
          ----------
for Marcel Huber, has in any way brought the parties together or been
instrumental in the negotiation, execution, or consummation of this Agreement.
Purchaser and Seller each agree to indemnify the other against any claim by any
third person, other than Marcel Huber, for any commission, brokerage, finders
fee, or other payment with respect to this Agreement or the transactions
contemplated hereby based upon any alleged agreement or understanding between
such party and such third person, whether expressed or implied, arising from the
actions of such party. The covenants set forth in this Section 7.4 shall survive
the Closing Date and the consummation of the transactions contemplated by this
Agreement.

     7.5  No Public Announcement.  Neither of the parties to this Agreement
          ----------------------
shall, without the approval of the other party, make any press release or other
public announcement concerning the transactions contemplated by this Agreement
(a) in the United States, or (b) outside the United States, unless that party
has first provided a copy of such press release or public announcement to the
other party at least five days prior to release. However, nothing contained in
this Agreement shall prohibit any party from making any public disclosure or
announcement which is required by law or shall prohibit Seller from making a
public announcement on or after the Closing Date with respect to the completion
of the offering.

     7.6  Notices.  All notices, demands, requests, or other communications
          -------
required or authorized under this Agreement shall be deemed given sufficiently
if in writing and if personally delivered; if sent by facsimile transmission,
confirmed with a written copy thereof sent by overnight express delivery; if
sent by registered mail or certified mail, return receipt requested and postage
prepaid; or if sent by overnight express delivery:

          If to Seller, to:  PACIFIC AEROSPACE & ELECTRONICS, INC.
                             Attention:  Donald A. Wright
                             President and Chief Executive Officer
                             430 Olds Station Road, Third Floor
                             Wenatchee, Washington 98801
                             Facsimile Transmission: (509) 667-9696
                             Telephone: (509) 667-9600


                                      -14-
<PAGE>

          If to Purchaser:   To the address, telephone or facsimile numbers set
                             forth on the signature page or such other addresses
                             and facsimile numbers as shall be furnished in
                             writing by any party in the manner for giving
                             notices hereunder.

     Any such notice, demand, request, or other communication shall be deemed to
have been given as of the date personally delivered or on the first business day
after a legible copy sent by facsimile transmission is received, three days
after the date mailed by registered or certified mail, or on the first business
day after the date sent by overnight delivery.

     7.7  Survival; Liability.  The representations, warranties, and covenants
          -------------------
of the respective parties as set forth in this Agreement shall survive the
Closing and consummation of the transactions contemplated by this Agreement for
a period of two years from the date of this Agreement.  Seller's cumulative
liability to Purchaser for breaches of this Agreement shall not exceed the
Purchase Price.

     7.8  Third-Party Beneficiaries.  This Agreement is solely between Seller
          -------------------------
and Purchaser, and no director, officer, stockholder, employee, agent,
independent contractor or any other person or entity shall be deemed to be a
third-party beneficiary of this Agreement.

     7.9  Counterparts.  This Agreement may be executed in multiple
          ------------
counterparts, each of which shall be deemed an original and all of which taken
together shall be but a single instrument.

     7.10  Entire Agreement.  This Agreement, together with the documents to be
           ----------------
delivered pursuant to this Agreement, represents the entire agreement between
the parties relating to the subject matter of this Agreement.  There are no
other courses of dealing, understanding, agreements, representations, or
warranties, written or oral, except as set forth in this Agreement.

Executed as of the date first set forth above.


                           SELLER:

                           PACIFIC AEROSPACE & ELECTRONICS, INC.



                            By:   /s/ Donald A. Wright
                                ----------------------
                               Donald A. Wright
                               President and CEO

                                      -15-
<PAGE>

                               PURCHASER:

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


                               By: /s/
                                  ---------------------------------------

                                  Its:
                                      -----------------------------------

                               Purchaser's Address:

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

                               Attention:
                                         --------------------------------
                               Facsimile Transmission:
                                                      -------------------
                               Telephone:
                                          -------------------------------

                               Exact Name(s) for Certificate:

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

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

                               Address for Certificate Delivery:

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

                                      -16-