Document:

<PAGE>
                                                                    Exhibit 10.8

                                                         CUSIP No.: 693758 AD 6

                      PACIFIC AEROSPACE & ELECTRONICS, INC.

                       5.0% SENIOR SECURED NOTES DUE 2007

        FOR VALUE RECEIVED, the undersigned, PACIFIC AEROSPACE & ELECTRONICS,
INC., a corporation organized under the laws of the State of Washington (the
"Company"), hereby unconditionally promises to pay to the order of JEFFERIES &
COMPANY, INC. or its registered assigns, the principal amount of THIRTY-SIX
MILLION UNITED STATES DOLLARS ($36,000,000.00) (the "Principal Amount").

        Interest Payment Dates: May 1 and November 1

        Reference is made to the further provisions of this Note contained
herein, which will for all purposes have the same effect as if set forth at this
place.

THIS NOTE IS BEING ISSUED WITH "ORIGINAL ISSUE DISCOUNT" AS SUCH TERM IS DEFINED
UNDER THE INTERNAL REVENUE CODE OF 1986, AS AMENDED. FOR INFORMATION REGARDING
THE ORIGINAL ISSUE PRICE, THE AMOUNT OF ORIGINAL ISSUE DISCOUNT AND THE YIELD TO
MATURITY WITH RESPECT TO THE NOTES, A HOLDER OF A NOTE MAY CONTACT THE PRESIDENT
OR THE CHIEF FINANCIAL OFFICER OF PACIFIC AEROSPACE & ELECTRONICS, INC., 430
OLDS STATION ROAD, WENATCHEE, WASHINGTON 98801.

THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS
SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD,
ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE
ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT
SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR ANY
APPLICABLE STATE SECURITIES LAWS. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE
HEREOF (1) REPRESENTS THAT IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED
IN RULE 144A UNDER THE SECURITIES ACT), AND (2) AGREES NOT TO OFFER, SELL OR
OTHERWISE TRANSFER THIS SECURITY PRIOR TO THE DATE THAT IS TWO YEARS

                                      A-1
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(OR SUCH OTHER PERIOD THAT MAY HEREAFTER BE PROVIDED UNDER RULE 144(k) AS
PERMITTING RESALES BY NON-AFFILIATES OF RESTRICTED SECURITIES WITHOUT
RESTRICTION OR AS MAY BE REQUIRED BY APPLICABLE LAW) AFTER THE LATER OF THE
ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY
AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF
SUCH SECURITY) (THE "RESALE RESTRICTION TERMINATION DATE") EXCEPT (A) TO THE
COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED
EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE
ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT, TO A PERSON
IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE
144A) THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED
INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN
RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT
OCCUR IN OFFSHORE TRANSACTIONS AND WITHOUT DIRECTED SELLING EFFORTS WITHIN THE
MEANINGS OF SUCH TERMS AS DEFINED IN REGULATION S UNDER THE SECURITIES ACT, (E)
TO AN INSTITUTIONAL ACCREDITED INVESTOR WITHIN THE MEANING OF SUBPARAGRAPH
(A)(1), (2) (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING
THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH INSTITUTIONAL
ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR
OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE
SECURITIES ACT OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S RIGHT
PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER TO REQUIRE THE DELIVERY OF AN OPINION
OF COUNSEL, CERTIFICATIONS AND/OR OTHER INFORMATION REASONABLY SATISFACTORY TO
IT THAT SUCH SALE, ASSIGNMENT OR OTHER TRANSFER IS BEING MADE IN COMPLIANCE WITH
APPLICABLE SECURITIES LAWS OF ANY U.S. STATE OR ANY OTHER APPLICABLE
JURISDICTION. THE HOLDER OF THIS SECURITY AGREES THAT IT WILL DELIVER TO EACH
PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT
OF THIS LEGEND. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER
THE RESALE RESTRICTION TERMINATION DATE.

                                      A-2
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        IN WITNESS WHEREOF, the Company has caused this Note to be signed
manually or by facsimile by its duly authorized officer.

                                     PACIFIC AEROSPACE & ELECTRONICS, INC.

                                     By: /s/ Donald A. Wright
                                        --------------------------------------
                                     Name:   Donald A. Wright
                                     Title:  Chief Executive Officer
                                             and President

Dated: March 25, 2002

                                      A-3
<PAGE>

                              (REVERSE OF SECURITY)

                       5.0% Senior Secured Notes Due 2007

        1. Interest. PACIFIC AEROSPACE & ELECTRONICS, INC., a corporation
organized under the laws of the State of Washington (the "Company"), promises to
pay interest on the Principal Amount of this Note at the rate per annum shown
above.

        Interest on the Notes will accrue from the most recent date on which
interest has been paid or, if no interest has been paid, from March 25, 2002.
Interest will accrue from the date of issuance of the Note at a rate of 5.0% per
annum on the outstanding Principal Amount and will be payable in cash
semi-annually in arrears on each Interest Payment Date, commencing May 1, 2002.
Cash interest will be computed on the basis of a year of 360 days, for the
actual number of days (including the first day but excluding the last day)
occurring in the period for which such interest is payable. The Company shall
pay interest on overdue principal and on overdue installments of interest
(without regard to any applicable grace periods) from time to time on demand at
the rate borne by the Notes plus 3.0% per annum, to the extent lawful.

        2. Method of Payment. The Company shall pay interest on the Notes or on
additional interest, if any, in respect of the Notes to the Persons who are the
registered Holders thereof. Holders must surrender Notes to the Company to
collect principal payments. The Company shall pay principal and interest in
Dollars in the times and manner set forth in the Note Purchase Agreement.

        3. Note Purchase Agreement. The Company issued the Notes pursuant to a
Note Purchase Agreement, dated as of March 19, 2002 (the "Note Purchase
Agreement"), among the Company, the Initial Purchaser and First Union National
Bank, as Collateral Agent (the "Collateral Agent"). This Note is one of a duly
authorized issue of Notes of the Company designated as its 5.0% Senior Secured
Notes due 2007. The Notes are limited to $36,000,000 in aggregate principal
amount, except as otherwise provided in the Note Purchase Agreement. The initial
Accreted Principal Amount of the Notes will be $22,000,000; therefore, the
"Original Issue Discount" is $14,000,000. "Accreted Principal Amount" of any
Note, at any date, shall equal the (i) the Original Issue Price of such Note
plus (ii) the accrued amortization of the Original Issue Discount attributable
ratably on a daily basis, using a daily level yield, to the period from and
including the Closing Date to (but excluding) the Maturity Date. The Notes will
mature on May 1, 2007. Capitalized terms used herein and not otherwise defined
shall have the meanings ascribed to such terms in the Note Purchase Agreement.
The terms of the Notes include those stated in the Note Purchase Agreement.
Notwithstanding anything to the contrary herein, the Notes are subject to all
such terms, and Holders of Notes are referred to the Note Purchase Agreement for
a statement of them. The Notes are senior secured obligations of the Company.

                                      A-4
<PAGE>

        4. Optional Prepayment. The Company may prepay, in whole or in part, at
any time and from time to time, the outstanding Accreted Principal Amount of the
Notes at the prices (expressed as percentages of the Accreted Principal Amount
of the Notes on the date of such prepayment) corresponding to the relevant
period set forth in the table below, plus accrued and unpaid interest thereon to
the applicable prepayment date:

<TABLE>
<CAPTION>
                                                       Premium to Accreted
                    Period                              Principal Amount
        --------------------------------               -------------------
<S>                                                         <C>
        Closing Date - November 30, 2002                     104.0%

        December 1, 2002 - November 30, 2003                 103.0%

        December 1, 2003 - November 30, 2004                 102.0%

        December 1, 2004 - Maturity Date                     100.0%
</TABLE>

        5. Notice of Optional Prepayment. Notice of optional prepayment will be
mailed at least 10 days but not more than 30 days before the Business Day fixed
for such prepayment to each Holder of Notes to be redeemed at such Holder's
registered address.

        6. Mandatory Prepayment of the Notes. Section 7.1 of the Note Purchase
Agreement provides that, after certain Asset Dispositions, after certain sales
or issuances of Capital Stock or Stock Equivalents by the Company or any of its
Subsidiaries and upon the receipt of the proceeds of any insurance required to
be maintained pursuant to the Note Purchase Agreement, subject to further
limitations contained therein, the Company will prepay certain amounts of the
Notes in accordance with the procedures set forth in the Note Purchase
Agreement.

        The Notes are not entitled to the benefit of any sinking fund.

        7. Offers to Purchase. Section 7.3 of the Note Purchase Agreement
provides, that upon the occurrence of a Change of Control and with 100% of the
Excess Cash Flow in each year in which the Notes are outstanding, subject to
further limitations contained therein, the Company will make an offer to
purchase certain amounts of the Notes in accordance with the procedures set
forth in the Note Purchase Agreement.

                                      A-5
<PAGE>

        8. Denominations; Transfer; Exchange. The Notes are in registered form.
A Holder shall register the transfer of or exchange Notes in accordance with the
Note Purchase Agreement. The Company may require a Holder, among other things,
to furnish appropriate endorsements and transfer documents and to pay certain
transfer taxes or similar governmental charges payable in connection therewith
as permitted by the Note Purchase Agreement.

        9. Persons Deemed Owners. The registered Holder of a Note shall be
treated as the owner of it for all purposes.

        10. Amendment; Supplement; Waiver. Subject to certain exceptions set
forth in the Note Purchase Agreement, the Note Purchase Agreement or the Notes
may be amended or supplemented with the written consent of the Company and the
Required Holders, and any past Default or Event of Default or noncompliance with
any provision may be waived with the written consent of the Required Holders.

        11. Restrictive Covenants. The Note Purchase Agreement imposes certain
limitations on the ability of the Company and its Subsidiaries to, among other
things, incur additional Debt, make payments in respect of its Capital Stock or
certain Debt, make certain Investments, incur Liens, enter into transactions
with Affiliates, merge or consolidate with any other Person, and complete
certain Asset Dispositions. Such limitations are subject to a number of
important qualifications and exceptions.

        12. Defaults and Remedies. If an Event of Default occurs and is
continuing, the Required Holders may declare all the Notes to be due and payable
in the manner, at the time and with the effect provided in the Note Purchase
Agreement. Holders of Notes may not enforce the Note Purchase Agreement or the
Notes except as provided in the Note Purchase Agreement.

        13. Collateral Agent Dealings with Company. The Collateral Agent under
the Note Purchase Agreement, in its individual or any other capacity, may become
the owner or pledgee of Notes and may otherwise deal with the Company, its
Subsidiaries or their respective Affiliates as if it were not the Collateral
Agent.

        14. Governing Law. This Note and the Note Purchase Agreement shall be
governed by and construed in accordance with the laws of the State of New York,
without regard to principles of conflict of laws (other than Section 5-1401 of
the New York General Obligations Law).

        15. CUSIP Numbers. Pursuant to a recommendation promulgated by the
Committee on Uniform Security Identification Procedures, the Company has caused
CUSIP numbers to be printed on the Notes as a convenience to the Holders of the
Notes. No representation is made as to the accuracy of such numbers as printed
on the Notes and reliance may be placed only on the other identification numbers
printed hereon.

                                      A-6
<PAGE>

        16. Note Purchase Agreement. Each Holder, by accepting a Note, agrees to
be bound by all of the terms and provisions of the Note Purchase Agreement, as
the same may be amended, restated, supplemented or otherwise modified from time
to time.

        The Company will furnish to any Holder of a Note upon written request
and without charge a copy of the Note Purchase Agreement. Requests may be made
to: Pacific Aerospace & Electronics, Inc., 430 Olds Station Road, Wenatchee,
Washington 98801, Attention: President or Chief Financial Officer.

                                      A-7
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                                 ASSIGNMENT FORM

        If you the Holder want to assign this Note, fill in and sign the form
below:

I or we assign and transfer this Note to:

________________________________________________________________________________

________________________________________________________________________________

________________________________________________________________________________
                  (Print or type name, address and zip code and
                  social security or tax ID number of assignee)

and irrevocably appoint ___________________________ , agent to transfer this
Note on the books of the Company. The agent may substitute another to act for
him.

Dated: __________________                Signed:________________________________

                                         NOTICE: The signature to any
                                         endorsement hereon must correspond with
                                         the name as written upon the face of
                                         the Note in every particular, without
                                         alteration or enlargement or any change
                                         whatever.

                                         If the endorsement be executed by an
                                         attorney, executor, administrator,
                                         trustee or guardian, the person
                                         executing the endorsement must give his
                                         full title in such capacity and proper
                                         evidence of authority to act in such
                                         capacity, if not on file with the Note,
                                         must be forwarded with this Note.

                                         (Sign exactly as your name appears on
                                         the other side of this Note)

                                      A-8
<PAGE>

                      [OPTION OF HOLDER TO ELECT PURCHASE]

        If you want to elect to have this Note purchased by the Company pursuant
to Section 7.3(a) or 7.3(b) of the Note Purchase Agreement, check the
appropriate box:

        Section 7.3(a) [    ]

        Section 7.3(b) [    ]

        If you want to elect to have only part of this Note purchased by the
Company pursuant to Section 7.3(a) or 7.3(b) of the Note Purchase Agreement,
state the amount you elect to have purchased:

        $_____________________

        Dated:________________               _____________________

        NOTICE: The signature to any endorsement hereon must correspond with the
name as written upon the face of the Note in every particular, without
alteration or enlargement or any change whatever.

                                         If the endorsement be executed by an
                                         attorney, executor, administrator,
                                         trustee or guardian, the person
                                         executing the endorsement must give his
                                         full title in such capacity and proper
                                         evidence of authority to act in such
                                         capacity, if not on file with the Note,
                                         must be forwarded with this Note.

                                      A-9<PAGE>
                                                                    Exhibit 10.9

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

                          SUBSIDIARY GUARANTY AGREEMENT

                              Dated March 25, 2002

                                      From

                             AEROMET AMERICA, INC.,
                           BALO PRECISION PARTS, INC.,
                        CASHMERE MANUFACTURING CO., INC.,
                             CERAMIC DEVICES, INC.,
                        ELECTRONIC SPECIALTY CORPORATION,
                      NORTHWEST TECHNICAL INDUSTRIES, INC.,
                        PACIFIC COAST TECHNOLOGIES, INC.,
                            PA&E INTERNATIONAL, INC.,
                         SEISMIC SAFETY PRODUCTS, INC.,
                                       and

                    SKAGIT ENGINEERING & MANUFACTURING, INC.,
                         each, as a Subsidiary Guarantor

                                   in favor of

             THE HOLDERS (AS DEFINED IN THE NOTE PURCHASE AGREEMENT
                               REFERRED TO HEREIN)

                                       and

                           FIRST UNION NATIONAL BANK,
                               as Collateral Agent

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

<PAGE>

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                            Page
                                                                                             No.
                                                                                            ----
<S>               <C>                                                                       <C>
    SECTION 1.    Definitions................................................................2
    SECTION 2.    Guaranty...................................................................2
    SECTION 3.    Guaranty Absolute..........................................................2
    SECTION 4.    Waivers....................................................................4
    SECTION 5.    Subrogation................................................................4
    SECTION 6.    Payments Free and Clear of Taxes, Etc......................................5
    SECTION 7.    Representations and Warranties.............................................6
    SECTION 8.    Covenants..................................................................7
    SECTION 9.    Amendments, Etc............................................................8
    SECTION 10.    Notices, Etc..............................................................8
    SECTION 11.    Set-off...................................................................8
    SECTION 12.    No Waiver.................................................................8
    SECTION 13.    Continuing Guaranty; Assignments under the Note Purchase
                    Agreement................................................................9
    SECTION 14.    Governing Law; Jurisdiction; Waiver of Jury Trial.........................9
    SECTION 15.    Counterparts.............................................................10
    SECTION 16.    Applicability of Note Purchase Agreement.................................10

    ANNEX I        --     ADDRESSES
</TABLE>

                                       i
<PAGE>

               THIS SUBSIDIARY GUARANTY AGREEMENT (this "Agreement"), dated as
of March 25, 2002, is made by Aeromet America, Inc., Balo Precision Parts, Inc.,
Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty
Corporation, Northwest Technical Industries, Inc., Pacific Coast Technologies,
Inc., PA&E International, Inc., Seismic Safety Products, Inc. and Skagit
Engineering & Manufacturing, Inc. (each, a "Subsidiary Guarantor" and,
collectively, the "Subsidiary Guarantors"), in favor of the Holders (as
hereinafter defined) party to the Note Purchase Agreement (as hereinafter
defined) and First Union National Bank, as collateral agent for the Holders (in
such capacity, the "Collateral Agent").

               WHEREAS, Pacific Aerospace & Electronics, Inc., a Washington
corporation (the "Company"), the Initial Purchaser (as hereinafter defined) and
the Collateral Agent have entered into that certain Note Purchase Agreement (the
"Note Purchase Agreement"), dated as of March 19, 2002, pursuant to which, among
other things, the Company has agreed to issue and sell, and the Holders have
agreed to purchase the Company's 5% Senior Secured Notes due May 1, 2007 (the
"Notes");

               WHEREAS, the Subsidiary Guarantors will derive substantial direct
and indirect benefit from the transactions contemplated by the Note Purchase
Agreement; and

               WHEREAS, it is a condition to closing the transactions
contemplated by the Note Purchase Agreement that the Subsidiary Guarantors
execute and deliver this Agreement;

               NOW, THEREFORE, in consideration of the premises and in order to
induce the Holders to enter into the Note Purchase Agreement, the Subsidiary
Guarantors hereby agree as follows:

               SECTION 1. Definitions.

               Capitalized terms used herein and not otherwise defined shall
have the meaning ascribed to such terms in the Note Purchase Agreement.

               SECTION 2. Guaranty.

               Each Subsidiary Guarantor, jointly and severally, hereby
unconditionally and irrevocably guarantees the punctual payment when due,
whether at stated maturity, by acceleration or otherwise, of all of the
Obligations now or hereafter existing under the Operative Agreements, whether
for principal, interest, fees, expenses or otherwise (such Obligations being the
"Guaranteed Obligations"), and agrees to pay any and all expenses (including
reasonable counsel fees and expenses) incurred by the Collateral Agent or the
Holders in enforcing any rights under this Agreement. Without limiting the
generality of the foregoing, the Subsidiary Guarantors' liability shall extend
to all amounts that constitute part of the Guaranteed Obligations and would be
owed by the Company to the Collateral Agent or the Holders under the Operative
Agreements but for the fact that they are unenforceable or not allowable due to
the existence of a bankruptcy, reorganization or similar proceeding involving
the Company. This guaranty is an absolute guaranty of payment and performance
and not a guaranty of collection.

               SECTION 3. Guaranty Absolute.

<PAGE>

               The obligations of the Subsidiary Guarantors under this Agreement
are independent of the Obligations, and a separate action or actions may be
brought and prosecuted against the Subsidiary Guarantors to enforce this
Agreement, irrespective of whether any action is brought against the Company or
whether the Company is joined in any such action or actions. The liability of
the Subsidiary Guarantors under this Agreement shall be absolute and
unconditional irrespective of:

               (a) any lack of validity or enforceability of any Operative
Agreement or any agreement or instrument relating thereto;

               (b) any change in the time, manner or place of payment of, or in
any other term of, all or any of the Guaranteed Obligations, or any other
amendment or waiver of or any consent to departure from any Operative Agreement,
including without limitation any increase in the Guaranteed Obligations
resulting from the extension of additional credit to the Company or otherwise;

               (c) any taking, release or amendment or waiver of or consent to
departure from any other guaranty, for all or any of the Guaranteed Obligations;

               (d) any manner of sale or other disposition of any assets of the
Company or any of its Subsidiaries for all or any of the Guaranteed Obligations;

               (e) any change, restructuring or termination of the corporate
structure or existence of the Company or any of its Subsidiaries;

               (f) any exchange, release or non-perfection of any Lien on any
collateral for, or any release or amendment or waiver of any term of any other
guaranty of, or any consent to departure from any requirement of any other
guaranty of, all or any of the Obligations;

               (g) the absence of any attempt to collect any of the Obligations
from the Company or any other guarantor or any other action to enforce the same
or the election of any remedy by the Holders or the Collateral Agent;

               (h) the election by the Holders or the Collateral Agent in any
proceeding under chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") of the application of section 1111(b)(2) of the Bankruptcy
Code;

               (i) any borrowing or grant of a security interest by the Company,
as debtor-in-possession, under section 364 of the Bankruptcy Code;

               (j) the disallowance, under section 502 of the Bankruptcy Code,
of all or any portion of the claims of any of the Holders or the Collateral
Agent for payment of any of the Obligations; or

               (k) any other circumstance (including without limitation any
statute of limitations) that might otherwise constitute a defense available to,
or a discharge of, a borrower or a guarantor, other than the indefeasible
payment in full of the Obligations.

                                       3
<PAGE>

This Agreement shall continue to be effective or be reinstated, as the case may
be, if at any time any payment of any of the Guaranteed Obligations is rescinded
or must otherwise be returned by the Collateral Agent or any Holder upon the
insolvency, bankruptcy or reorganization of the Company or otherwise, all as
though such payment had not been made.

               SECTION 4. Waivers.

               (a) Each Subsidiary Guarantor hereby waives promptness,
diligence, notice of acceptance and any other notice with respect to any of the
Guaranteed Obligations and this Agreement and any requirement that the
Collateral Agent, any Holder or any other Person protect, secure, perfect or
insure any Lien or any property subject thereto or exhaust any right or take any
action against the Company or any other Person.

               (b) Each Subsidiary Guarantor hereby waives any right to revoke
this Agreement and acknowledges that this Agreement is continuing in nature and
applies to all Guaranteed Obligations, whether existing now or in the future.

               (c) Each Subsidiary Guarantor acknowledges that it will receive
substantial direct and indirect benefits from the financing arrangements
contemplated by the Operative Agreements and that the waivers set forth in this
Section 4 are knowingly made in contemplation of such benefits.

               (d) Each Subsidiary Guarantor agrees that if, after the
occurrence and during the continuance of an Event of Default, the Holders or the
Collateral Agent are prevented by applicable law from exercising their
respective rights to accelerate the maturity of the Obligations, to collect
interest on the Obligations, or to enforce or exercise any other right or remedy
with respect to the Obligations, the Subsidiary Guarantors agree to pay to the
Collateral Agent for the account of the Holders, upon demand therefor, the
amount that would otherwise have been due and payable had such rights and
remedies been permitted to be exercised by the Holders or the Collateral Agent.

               SECTION 5. Subrogation.

               Until all amounts owed to the Holders with respect to the
Guaranteed Obligations are paid in full, none of the Subsidiary Guarantors will
exercise any rights that any of them may now or hereafter acquire against the
Company that arise from the existence, payment, performance or enforcement of
the Subsidiary Guarantors' obligations under this Agreement or any other
Operative Agreement, including without limitation any right of subrogation,
reimbursement, exoneration, contribution or indemnification and any right to
participate in any claim or remedy of the Collateral Agent or any Holder against
the Company, whether or not such claim, remedy or right arises at equity or
under contract, statute or common law, including without limitation the right to
take or receive from the Company, directly or indirectly, in cash or other
property or by set-off or in any other manner, payment or security on account of
such claim, remedy or right except as specifically otherwise provided in the
Operative Agreements. If any amount shall be paid to any Subsidiary Guarantor in
violation of the preceding sentence at any time prior to the payment in full in
cash of the Guaranteed Obligations and all other amounts payable under this
Agreement, such amount shall be held in trust for the benefit of the Collateral

                                       4
<PAGE>

Agent and the Holders and shall forthwith be paid to the Collateral Agent to be
credited and applied to any unsatisfied Guaranteed Obligations and all other
amounts payable under this Agreement, whether matured or unmatured, in
accordance with the terms of the Operative Agreements, or to be held as
collateral for any unsatisfied Guaranteed Obligations or other amounts payable
under this Agreement thereafter arising. If (i) the Subsidiary Guarantors shall
make payment to the Collateral Agent or any other Holder of all or any part of
the Guaranteed Obligations and (ii) all of the Guaranteed Obligations and all
other amounts payable under this Agreement shall be paid in full in cash, the
Collateral Agent and the Holders will, at the Subsidiary Guarantors' request and
expense, execute and deliver to the Subsidiary Guarantors appropriate documents,
without recourse and without representation or warranty, necessary to evidence
the transfer by subrogation to the Subsidiary Guarantors of an interest in the
Guaranteed Obligations resulting from such payment by the Subsidiary Guarantors.

               SECTION 6. Payments Free and Clear of Taxes, Etc.

               (a) Any and all payments made by the Subsidiary Guarantors
hereunder shall be made in accordance with Section 2.4 of the Note Purchase
Agreement, free and clear of and without deduction for any and all present or
future Taxes, excluding Taxes measured by a Holder's net income and franchise
taxes imposed on it by the jurisdiction under the laws of which such Holder is
organized or is required to be qualified to do business or any political
subdivision of either of the foregoing. If any of the Subsidiary Guarantors
shall be required by law to deduct any Taxes from or in respect of any sum
payable hereunder to any Holder or the Collateral Agent, (i) the sum payable
shall be increased as may be necessary so that after making all required
deductions, such Holder or the Collateral Agent (as the case may be) receives an
amount equal to the sum it would have received had no such deductions been made,
(ii) such Subsidiary Guarantor shall make such deductions and (iii) such
Subsidiary Guarantor shall pay the full amount deducted to the relevant taxation
authority or other authority in accordance with applicable law.

               (b) Each Subsidiary Guarantor will indemnify each Holder and the
Collateral Agent for the full amount of Taxes (including without limitation any
Taxes imposed by any jurisdiction on amounts payable under Section 2.4 of the
Note Purchase Agreement) paid by such Holder or the Collateral Agent (as the
case may be) in connection with any amounts received by such Person hereunder
and any liability (including penalties, interest and expenses) arising therefrom
or with respect thereto. This indemnification shall be made within 30 days from
the date such Holder or the Collateral Agent (as the case may be) makes written
demand therefor. A certificate as to the amount of such payment or liability
delivered to the Company by a Holder, or by the Collateral Agent on behalf of a
Holder, shall be conclusive absent manifest error.

               (c) Within 45 days after the date of any payment of Taxes, the
applicable Subsidiary Guarantor will furnish to the Collateral Agent, at its
address referred to in the Note Purchase Agreement, appropriate evidence of
payment thereof. If no Taxes are payable in respect of any payment hereunder by
any Subsidiary Guarantor through an account or branch outside the United States
or on behalf of any Subsidiary Guarantor by a payor that is not a United States
person, such Subsidiary Guarantor will furnish, or will cause such payor to
furnish, to the Collateral Agent a certificate from each appropriate taxing
authority or authorities, or an opinion

                                       5
<PAGE>

of counsel reasonably acceptable to the Collateral Agent, in either case stating
that such payment is exempt from or not subject to Taxes.

               (d) Without prejudice to the survival of any other agreement of
the Subsidiary Guarantors hereunder, the agreements and obligations of the
Subsidiary Guarantors contained in this Section 6 shall survive the payment in
full of the Guaranteed Obligations and all other amounts payable under this
Agreement.

               SECTION 7. Representations and Warranties.

               Each Subsidiary Guarantor hereby represents and warrants as
follows:

               (a) Corporate Existence. It: (i) is a corporation duly formed,
validly existing and in good standing under the laws of the state of its
incorporation; (ii) has all requisite power, and has all material governmental
licenses, authorizations, consents and approvals necessary, to own its assets
and carry on its business as now being or as proposed to be conducted; (iii) is
qualified to do or transact business in all jurisdictions in which the nature of
the business conducted by it makes such qualification necessary and where
failure so to qualify would reasonably be expected to have a Material Adverse
Effect.

               (b) Authority; Execution; Contravention. The execution and
delivery of this Agreement, the consummation of the transactions herein
contemplated and compliance with the terms and provisions hereof (i) are within
its powers, (ii) have been duly authorized by all necessary action, (iii)
require no action by or in respect of, or filing with, and Governmental
Authority, (iv) and do not contravene, or constitute a default under, any
provision of any applicable law, statute, ordinance, regulation, rule, order or
other governmental restriction or the charter or bylaws or equivalent documents
of such Subsidiary Guarantor (collectively, the "Charter Documents"), and (v) do
not contravene, or constitute a default under, any agreement, judgment,
injunction, order, decree, indenture, contract, lease, instrument or other
commitment to which it is a party or by which its assets are bound which could
reasonably be expected to have a Material Adverse Effect other than the Old
Notes Indenture and the Old Notes.

               (c) Approvals. No authorization or approval or other action by,
and no notice to or filing with, any Governmental Authority or regulatory body
is required for the due execution, delivery and performance by such Subsidiary
Guarantor of this Agreement.

               (d) Enforceability. This Agreement is the legal, valid and
binding obligation of such Subsidiary Guarantor enforceable against such
Subsidiary Guarantor in accordance with its terms, except as such enforceability
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
and similar laws of general application relating to or affecting the rights and
remedies of creditors and by general equitable principles, regardless of whether
such enforceability is considered in a proceeding in equity or law.

               (e) Litigation. There is no pending or, to the best of its
knowledge, threatened action or proceeding affecting such Subsidiary Guarantor
before any court, governmental agency or arbitrator which may materially
adversely affect the financial condition or operations of such Subsidiary
Guarantor or which purports to affect the legality, validity or enforceability
of this

                                       6
<PAGE>

Agreement, except for the litigation matters described on Schedule 5.5 of the
Note Purchase Agreement.

               (f) Reliance. Such Subsidiary Guarantor has, independently and
without reliance upon the Collateral Agent or any Holder and based on such
documents and information as it has deemed appropriate, made its own credit
analysis and decision to enter into this Agreement.

               SECTION 8. Covenants.

               Each Subsidiary Guarantor shall, so long as any Guaranteed
Obligation is outstanding:

               (a) Provide to the Collateral Agent notice in writing of any
event, act or condition which has, or, upon the passing of time, the giving of
notice or both, could reasonably be expected to have, a Material Adverse Effect
promptly upon, and in any event within 5 Business Days after, such Subsidiary
Guarantor becoming aware of any such event, act or condition;

               (b) Keep proper books of record and account in which full, true
and correct entries in conformity with GAAP and all requirements of applicable
law shall be made of all dealings and transactions in relation to its business
and activities. Such Subsidiary Guarantor shall permit officers and designated
representatives of the Collateral Agent and each of the Holders to examine the
books and records of such Subsidiary Guarantor, and discuss the affairs,
finances and accounts of such Subsidiary Guarantor with, and be advised as to
the same by, its and their officers, all upon reasonable notice and at such
reasonable times as the Collateral Agent and the Holders may desire;

               (c) Do or cause to be done, all things necessary to preserve and
keep in full force and effect its existence as a corporation in good standing in
the state of its corporation and its qualification to do business as a foreign
corporation in each other jurisdiction where such qualification is necessary
except where the failure to be so qualified could not reasonably be expected to
have a Material Adverse Effect; provided that each such Subsidiary Guarantor may
dissolve or liquidate and complete Asset Dispositions in accordance with the
terms and conditions of the Note Purchase Agreement.

               (d) Submit or cause to be submitted when due all returns and
declarations required to be filed in respect of, and pay when required by any
applicable Governmental Authority, all Taxes and all charges, betterments, or
other assessments relating to its business, and all other lawful governmental
and non-governmental claims, except to the extent any of the same are subject to
a contest, or the failure to submit or pay the same could not reasonably be
expected to have a Material Adverse Effect;

               (e) Execute, deliver, and perform its obligations under this
Agreement in compliance with all applicable laws; and

               (f) Perform all of its obligations under the terms of each
agreement or instrument by which it or any of its properties is bound or to
which it is a party, where any

                                       7
<PAGE>

failure to perform such obligations could reasonably be expected to result in a
Material Adverse Effect.

               SECTION 9. Amendments, Etc.

               No amendment or waiver of any provision of this Agreement and no
consent to any departure by the Subsidiary Guarantors therefrom shall in any
event be effective unless the same shall be in writing and signed by the
Collateral Agent and the Required Holders and, with respect to any amendment of
this Agreement, the Subsidiary Guarantors, and then such waiver or consent shall
be effective only in the specific instance and for the specific purpose for
which given; provided that no amendment, waiver or consent shall, unless in
writing and signed by all the Holders, (a) limit, assign or transfer the
liability of the Subsidiary Guarantors hereunder, (b) postpone any date fixed
for payment hereunder or (c) change the number of Holders required to take any
action hereunder.

               SECTION 10. Notices, Etc.

               All notices and other communications hereunder shall be given (in
the manner specified in the Note Purchase Agreement) to the parties hereto at
their respective addresses specified in the Note Purchase Agreement (or, if any
party hereto is not a party to the Note Purchase Agreement, at its address set
forth on Annex I hereto.

               SECTION 11. Set-off.

               Upon the occurrence and during the continuance of any Event of
Default, each of the Holders and the Collateral Agent is hereby authorized at
any time and from time to time, to the fullest extent permitted by law, to set
off and apply any and all deposits (general or special, time or demand,
provisional or final) at any time held and other indebtedness at any time owing
by such Holder or Collateral Agent to or for the credit or the account of any of
the Subsidiary Guarantors against any and all of the obligations of any such
Subsidiary Guarantor now or hereafter existing under this Agreement,
irrespective of whether or not such Holder or the Collateral Agent shall have
made any demand under this Agreement and although such obligations may be
contingent and unmatured. Each of the Holders and the Collateral Agent agrees
promptly to notify the applicable Subsidiary Guarantor after any such set-off
and application made by it; provided, however, that the failure to give such
notice shall not affect the validity of such set-off and application. The rights
of each Holder and the Collateral Agent under this Section are in addition to
other rights and remedies (including, without limitation, other rights of
set-off) which such Holder or Collateral Agent may have.

               SECTION 12. No Waiver.

               No failure on the part of the Collateral Agent or any Holder to
exercise, and no delay in exercising, any right hereunder shall operate as a
waiver thereof; nor shall any single or partial exercise of any right hereunder
preclude any other or further exercise thereof or the exercise of any other
right.

                                       8
<PAGE>

               SECTION 13. Continuing Guaranty; Assignments under the Note
Purchase Agreement.

               This Agreement is a continuing guaranty and shall (a) remain in
full force and effect until the indefeasible cash payment in full of the
Guaranteed Obligations and all other amounts payable under this Agreement, (b)
be binding upon such Subsidiary Guarantor, its successors and assigns and (c)
inure to the benefit of and be enforceable by the Holders, the Collateral Agent
and their respective successors, transferees and assigns. Without limiting the
generality of the foregoing clause (c), any Holder may assign or otherwise
transfer all or any portion of its rights and obligations under the Note
Purchase Agreement and the other Operative Agreements in accordance with the
terms thereof to any other Person, and such other Person shall thereupon become
vested with all the benefits in respect thereof granted to such Holder herein or
otherwise, in each case as provided in Section 13 of the Note Purchase Agreement
and in compliance with applicable law.

               SECTION 14. Governing Law; Jurisdiction; Waiver of Jury Trial.

               (a) This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York.

               (b) Each Subsidiary Guarantor hereby irrevocably and
unconditionally submits, for itself and its property, to the nonexclusive
jurisdiction of any New York State court or federal court of the United States
of America sitting in New York City, and any appellate court from any such
court, in any action or proceeding arising out of or relating to this Agreement
or any of the other Operative Agreements to which it is or is to be a party, or
for recognition or enforcement of any judgment, and each Subsidiary Guarantor
hereby irrevocably and unconditionally agrees that all claims in respect of any
such action or proceeding may be heard and determined in any such New York State
court or, to the extent permitted by law, in such federal court. Each Subsidiary
Guarantor agrees that a final judgment in any such action or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on the judgment or
in any other manner provided by law. Nothing in this Agreement shall affect any
right that any party may otherwise have to bring any action or proceeding
relating to this Agreement or any of the other Operative Agreements to which it
is or is to be a party in the courts of any jurisdiction.

               (c) Each Subsidiary Guarantor irrevocably and unconditionally
waives, to the fullest extent it may legally do so, any objection that it may
now or hereafter have to the laying of venue of any suit, action or proceeding
arising out of or relating to this Agreement or any of the other Operative
Agreements to which it is or is to be a party in any New York State or federal
court. Each Subsidiary Guarantor hereby irrevocably waives, to the fullest
extent permitted by law, the defense of an inconvenient forum to the maintenance
of such action or proceeding in any such court.

               (d) Each Subsidiary Guarantor hereby irrevocably waives all right
to trial by jury in any action, proceeding or counterclaim (whether based on
contract, tort or otherwise) arising our of or relating to any of the Operative
Agreements, the transactions contemplated thereby or the actions of the
Collateral Agent or any Holder in the negotiation, administration, performance
or enforcement thereof.

                                       9
<PAGE>

               SECTION 15. Counterparts.

               This Agreement may be executed in counterparts, each of which
will be deemed an original, but all of which together will constitute one and
the same instrument.

               SECTION 16. Applicability of Note Purchase Agreement.

               In amplification of, and notwithstanding any other provisions of
this Agreement, in connection with its obligations hereunder, the Collateral
Agent has all of the rights, powers, privileges, exculpations, protections and
indemnities as are provided for or referred to in the Note Purchase Agreement.

                               [SIGNATURE PAGE FOLLOWS]

                                       10
<PAGE>

               IN WITNESS WHEREOF, each Subsidiary Guarantor has caused this
Agreement to be duly executed and delivered by its officer thereunto duly
authorized as of the date first above written.

                                            AEROMET AMERICA, INC.

                                            By: /s/ Donald A. Wright
                                               ---------------------------------
                                            Name: Donald A. Wright
                                            Title: Executive Vice President

                                            BALO PRECISION PARTS, INC.

                                            By: /s/ Donald A. Wright
                                               ---------------------------------
                                            Name: Donald A. Wright
                                            Title: Executive Vice President

                                            CASHMERE MANUFACTURING CO., INC.

                                            By: /s/ Donald A. Wright
                                               ---------------------------------
                                            Name: Donald A. Wright
                                            Title: Executive Vice President

                                            CERAMIC DEVICES, INC.

                                            By: /s/ Donald A. Wright
                                               ---------------------------------
                                            Name: Donald A. Wright
                                            Title: Executive Vice President

                                            ELECTRONIC SPECIALTY CORPORATION

                                            By: /s/ Donald A. Wright
                                               ---------------------------------
                                            Name: Donald A. Wright
                                            Title: Executive Vice President

<PAGE>

                                            NORTHWEST TECHNICAL INDUSTRIES, INC.

                                            By:  /s/ Donald A. Wright
                                               ---------------------------------
                                            Name: Donald A. Wright
                                            Title: Executive Vice President

                                            PACIFIC COAST TECHNOLOGIES, INC.

                                            By:  /s/ Donald A. Wright
                                               ---------------------------------
                                            Name: Donald A. Wright
                                            Title: Executive Vice President

                                            SEISMIC SAFETY PRODUCTS, INC.

                                            By:  /s/ Donald A. Wright
                                               ---------------------------------
                                            Name: Donald A. Wright
                                            Title: Executive Vice President

                                            PA&E INTERNATIONAL, INC.

                                            By:  /s/ Donald A. Wright
                                               ---------------------------------
                                            Name: Donald A. Wright
                                            Title: President

<PAGE>

                                            FIRST UNION NATIONAL BANK,
                                            in its capacity as Collateral Agent
                                            for the Holders

                                            By:  /s/ Paul Thompson
                                               ---------------------------------
                                            Name: Paul Thompson
                                            Title: Vice President
<PAGE>

                                                                         ANNEX I

                     ADDRESSES OF THE SUBSIDIARY GUARANTORS

Notices to each of the Subsidiary Guarantors may be sent c/o Pacific Aerospace &
Electronics, Inc., 430 Olds Station Road, Wenatchee, Washington  98801, to the
attention of the President or the Chief Financial Officer, Telephone No.:  (509)
667-9600, Facsimile No.:  (509) 667-9696.

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