Document:

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

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

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

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

          The Company and the Purchasers hereby agree as follows:

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

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

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

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

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

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

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

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

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

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

                                      -1-
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          "Effectiveness Period" shall have the meaning set forth in Section
           --------------------
2(a).

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                                      -4-
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to the Registration Statement until such Holder receives (i) copies of the
supplemented or amended Prospectus, or until counsel for the Company shall have
determined that such disclosure is not required due to subsequent events, (ii)
notice in writing from the Company that the use of the Prospectus may be resumed
and (iii) copies of any additional or supplemental filings that are incorporated
by reference into the Prospectus.

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

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

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

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

                                      -5-
<PAGE>

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

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

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

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

                                      -6-
<PAGE>

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

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

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

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

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

                                      -7-
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     5.   Indemnification
          ---------------

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

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

                                      -8-
<PAGE>

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

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

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

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

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

                                      -9-
<PAGE>

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

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

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

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

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

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

                                      -10-
<PAGE>

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

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

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

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

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

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

                                      -11-
<PAGE>

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

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

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

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

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

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

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

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

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

                                      -12-
<PAGE>

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

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

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

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

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

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

                                      -13-
<PAGE>

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

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

                                      -14-
<PAGE>

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

                    PACIFIC AEROSPACE & ELECTRONICS, INC.

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

                    STRONG RIVER INVESTMENTS, INC.

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

                    Address for Notice:

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

                    With copies to:

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

                    BAY HARBOR INVESTMENTS, INC.

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

                    Address for Notice:

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

                    With copies to:

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

                                      -15-
<PAGE>

                                                                         Annex A
                                                                         -------

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

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

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

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

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

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

 .         privately negotiated transactions;

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

 .         a combination of any such methods of sale; and

 .         any other method permitted pursuant to applicable law.

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

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

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

                                      -16-
<PAGE>

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

                                      -17-
<PAGE>

            List of Schedules to the Registration Rights Agreement

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

     Schedule 6(b) -  Registration Rights

                                      -18-<PAGE>
                                                                     EXHIBIT 4.2

NEITHER THESE SECURITIES NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE
EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR
THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS THEREUNDER AND IN
COMPLIANCE WITH APPLICABLE STATE SECURITIES OR BLUE SKY LAWS.

                     PACIFIC AEROSPACE & ELECTRONICS, INC.

                                    WARRANT
                                    -------

Warrant No. AW 1  Dated: July 27, 2000

     Pacific Aerospace & Electronics, Inc., a Washington corporation (the
"Company"), hereby certifies that, for value received, Strong River Investments,
Inc., or its registered assigns ("Holder"), is entitled, subject to the terms
set forth below, to purchase from the Company the total number of shares of
common stock, $.001 par value per share (the "Common Stock"), of the Company
(each such share, a "Warrant Share" and all such shares, the "Warrant Shares")
calculated pursuant to Section 3 of this Warrant (subject to adjustment for
certain events as set forth herein) at an exercise price equal to $.001 per
share (as adjusted from time to time as provided in Section 8, the "Exercise
Price"), at the times set forth herein through and including the 15th Trading
Day (as defined in Exhibit A) following the Third Vesting Date (as defined
                   ---------
herein) (the "Expiration Date"), and subject to the following terms and
conditions (certain terms used herein are defined in Exhibit A attached hereto).
                                                     ---------

     1.  Registration of Warrant.  The Company shall register this Warrant, upon
         -----------------------
records to be maintained by the Company for that purpose (the "Warrant
Register"), in the name of the record Holder hereof from time to time.  The
Company may deem and treat the registered Holder of this Warrant as the absolute
owner hereof for the purpose of any exercise hereof or any distribution to the
Holder, and for all other purposes, and the Company shall not be affected by
notice to the contrary.

     2.  Registration of Transfers.  The Company shall register the transfer of
         -------------------------
any portion of this Warrant in the Warrant Register, upon surrender of this
Warrant, with the Form of Assignment

                                      -1-
<PAGE>

attached hereto duly completed and signed to the Company at the address
specified in Section 12. Upon any such registration or transfer, a new warrant
to purchase Common Stock, in substantially the form of this Warrant (any such
new warrant, a "New Warrant"), evidencing the portion of this Warrant so
transferred shall be issued to the transferee and a New Warrant evidencing the
remaining portion of this Warrant not so transferred, if any, shall be issued to
the transferring Holder.

     3.  Duration, Vesting and Exercise.
         ------------------------------

          (a) The vesting of the Warrant Shares which the Holder is permitted to
acquire pursuant to this Warrant shall occur on the dates set forth below.  On
each such date, this Warrant shall vest on a cumulative basis with respect to a
number of Warrant Shares calculated pursuant to Section 3(b) below.  Only the
Warrant Shares that have vested may be acquired upon exercise of this Warrant.

               (i) The "First Vesting Date" shall be the 20th Trading Day
following the date that the Commission first declares effective an Underlying
Shares Registration Statement (the "Effective Date");

               (ii) The "Second Vesting Date" shall be the 20th Trading Day
following the First Vesting Date; and

               (iii)  The "Third Vesting Date" shall be the 20th Trading Day
following the Second Vesting Date.

          Each of the First Vesting Date, Second Vesting Date, and Third Vesting
Date shall be referred to herein as a "Vesting Date."  Within fifteen Trading
Days after each Vesting Date, the Holder shall exercise any vested Warrant
Shares which such Holder may receive on any Vesting Date.

          (b) On each Vesting Date, this Warrant shall vest and become
exercisable with respect to the number of Warrant Shares calculated in
accordance with the following formula:

(Applicable Share Number) x [(Purchase Price/0.92) - (Adjustment Period Price)]
-------------------------------------------------------------------------------
                            Adjustment Period Price

          If the number calculated in accordance with the foregoing formula is
zero or a negative number, no Warrant Shares shall vest hereunder for such
Vesting Date and the Holder shall not be obligated to transfer any shares of
Common Stock to the Company.  In addition, the Holder shall not be obligated to
transfer any shares of Common Stock to the Company and the number of Warrant
Shares exercisable hereunder which shall have previously vested will not
decrease.

          (c) Notwithstanding anything herein to the contrary, if the average of
the Per Share Market Values (as defined in Exhibit A) for 20 consecutive Trading
                                           ---------
Days following the

                                      -2-
<PAGE>

Effective Date is greater than 125% of the Purchase Price (as defined in Exhibit
                                                                         -------
A) (which number shall be subject to equitable adjustment for stock splits and
--
reverse stock splits), this Warrant shall cease to vest for any subsequent
Vesting Dates; provided, however, that such event shall have no effect on
Warrant Shares vested prior thereto.

          (d) Notwithstanding anything herein to the contrary, if on any Vesting
Date the Adjustment Period Price shall be less than 70% of the Purchase Price
(the "Floor Price"), then on such Vesting Date: (i) this Warrant shall vest with
respect to the Warrant Shares that would become vested on such vesting date,
pursuant to Section 3(a) and (b) hereof, provided, that the Adjustment Period
                                         --------
Price pursuant to the formula set forth in Section 3(b) shall, exclusively for
purposes of this Section 3(d)(i), equal the Floor Price (such number of Warrant
Shares, the "Initial Shares") and (ii) with respect to the Warrant Shares whose
vesting would result in a vesting of Warrant Shares in excess of the Initial
Shares, the Company will have the option to elect by written notice (the
"Notice") delivered to the Holder no later than fifteen (15) Trading Days prior
to the applicable Vesting Date to either (x) pay to the Holder, in cash (the
"Cash Payment"), within three (3) Trading Days from the Vesting Date at issue,
an amount equal to the product obtained by multiplying (A) the applicable
Adjustment Period Price and (B) the difference between the number of Warrant
Shares which would have otherwise vested on such Vesting Date pursuant to
Section 3(a) and (b) hereof and the Initial Shares (such number of Warrant
Shares, the "Subsequent Shares") or (y) allow this Warrant to vest with respect
to the Subsequent Shares.  A failure by the Company to deliver the Notice to the
Holder pursuant to the terms of this Section shall constitute an election by the
Company to allow this Warrant to vest as to the Subsequent Shares pursuant to
the terms hereof.  If the Company shall fail to pay the Cash Payment in full to
the Holder by the third (3rd) Trading Day from the Vesting Date at issue, then,
at the election of the Holder, the Company shall either (x) pay to the Holder
$5,000 per day until the Cash Payment and all additional payments due hereunder
are paid in full, or (y) allow this Warrant to vest with respect to the
Subsequent Shares.

          (e) Notwithstanding the foregoing provisions of this Section 3, if any
of the following events (each, an "Event") shall occur, the Holder shall have
the option to elect, by notice to the Company (an "Event Vesting Notice"), to
have this Warrant vest with respect to those Warrant Shares (whether by increase
to 100% of the unused portion of the Applicable Share Number, an acceleration of
the next scheduled Vesting Date or otherwise) that have not yet already vested
(the "Vested Warrant Shares");
      ---------------------

               (i) upon the occurrence of any of (i) an acquisition after the
date hereof by an individual or legal entity or "group" (as described in Rule
13d-5(b)(1) promulgated under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) of in excess of 1/3 of the voting securities of the
Company, (ii) a replacement of more than one-half of the members of the
Company's board of directors which is not approved by those individuals who are
members of the board of directors on the date hereof in one or a series of
related transactions, (iii) the merger of the Company with or into another
entity, consolidation or sale of all or substantially all of the assets of the
Company in one or a series of related transactions, unless following such
transaction or series of transactions, the holders of the Company's securities
prior to the first such transaction continue

                                      -3-
<PAGE>

to hold at least 2/3 of the securities of the surviving entity or acquirer of
such assets or (iv) the execution by the Company of an agreement to which the
Company is a party or by which it is bound, providing for any of the events set
forth above in (i), (ii) or (iii);

          (ii) immediately prior to an assignment by the Company for the benefit
of creditors or commencement of a voluntary case under Title 11 of the United
States Code, or an entering into of an order for relief in an involuntary case
under Title 11 of the United States Code, or adoption by the Company of a plan
of liquidation or dissolution;

          (iii)  five (5) Business Days prior to the proposed consummation with
respect to the Company of a "Rule 13e-3 transaction" as defined in Rule 13e-3
under the Exchange Act (or, if necessary, such earlier date as the Company shall
determine in good faith to be required in order for the Holder to be able to
participate in such transaction), it being agreed that the Holder will receive
actual notice of the 13e-3 Statement filed with the Commission;

          (iv) The Common Stock fails to be listed or quoted for trading on the
Nasdaq or a Subsequent Market or for a period of ten consecutive Trading Days;

          (v) Subject to Section 2(d) of the Registration Rights Agreement,
after the Effective Date, a holder of Registrable Securities (as defined in the
Registration Rights Agreement) is not permitted to sell Registrable Securities
under the Underlying Shares Registration Statement (as defined in Exhibit A) for
                                                                  ---------
any reason for ten or more consecutive Trading Days;

          (vi) The Underlying Shares Registration Statement shall not be
declared effective by the Commission on or prior to the 180th day following the
Closing Date; or

          (vii)  The Company shall fail for any reason to deliver certificates
to a Holder prior to the fifth Trading Day after a Date of Exercise pursuant to
and in accordance with Section 4(a);

          (viii)  The Company shall fail or default in the timely performance of
any material obligation under the Transaction Documents and such failure or
default shall continue uncured for a period of ten (10) Business Days after the
date on which notice of such failure or default is first given to the Company
(it being understood that no prior notice need be provided in the case of
defaults which cannot reasonably be cured within a 10-day period).

          In the event the Holder delivers an Event Vesting Notice, this Warrant
shall vest with respect to the number of Warrant Shares calculated in accordance
with the formula set forth in Section 3(b), provided, that for purposes of such
                                            --------
calculation, (A) the Adjustment Period Price shall be deemed to mean the average
of the lowest Per Share Market Values (which need not occur on consecutive
Trading Days) for any 5 Trading Days during the 20 consecutive Trading Days
preceding the date of the Event Vesting Notice, and (B) the Applicable Share
Number shall be deemed to mean (i) prior to the First Vesting Date, 100% of the
number of shares of Common Stock

                                      -4-
<PAGE>
purchased by the Holder pursuant to the Purchase Agreement, (ii) after the First
Vesting Date and prior to the Second Vesting Date, 66 and 2/3% of the number of
shares of Common Stock purchased by the Holder pursuant to the Purchase
Agreement, and (iii) after the Second Vesting Date and prior to the Third
Vesting Date, 33 and 1/3% of the number of shares of Common Stock purchased by
the Holder pursuant to the Purchase Agreement. After the Third Vesting Date the
Applicable Share Number shall equal zero.

          (f) Subject to Sections 3(a) and (b), this Warrant shall be
exercisable by the registered Holder on any Business Day before 6:30 P.M., New
York City time, at any time and from time to time on or after the date hereof to
and including the Expiration Date.  At 6:30 P.M., New York City time on the
Expiration Date, the portion of this Warrant not exercised prior thereto shall
be and become void and of no value.

          (g) Subject to Sections 3(a) and (b), this Warrant shall be
exercisable, either in its entirety or, from time to time, for a portion of the
number of Warrant Shares.  If less than all of the Warrant Shares which may be
purchased under this Warrant are exercised at any time, the Company shall issue
or cause to be issued, at its expense, a New Warrant evidencing the right to
purchase the remaining number of Warrant Shares for which no exercise has been
evidenced by this Warrant.

     4.  Delivery of Warrant Shares.
         --------------------------

          (a) Upon delivery of the Form of Election to Purchase to the Company
(with the attached Warrant Shares Exercise Log) at its address for notice set
forth in Section 12  and upon payment of the Exercise Price multiplied by the
number of Warrant Shares that the Holder intends to purchase hereunder, the
Company shall promptly (but in no event later than three Business Days after the
Date of Exercise (as defined herein)) issue and deliver to the Holder, a
certificate for the Warrant Shares issuable upon such exercise with the
appropriate legend.  Any person so designated by the Holder to receive Warrant
Shares shall be deemed to have become holder of record of such Warrant Shares as
of the Date of Exercise of this Warrant. The Company shall, upon request of the
Holder, if available, use its best efforts to deliver Warrant Shares hereunder
electronically through the Depository Trust Corporation or another established
clearing corporation performing similar functions, provided, that, the Company
                                                   --------
may, but will not be required to change its transfer agent if its current
transfer agent cannot deliver Warrant Shares electronically through the
Depository Trust Corporation.

          A "Date of Exercise" means the date on which the Holders shall have
delivered to the Company (i) the Form of Election to Purchase attached hereto
(with the Warrant Exercise Log attached to it), appropriately completed and duly
signed and (ii) payment of the Exercise Price for the number of Warrant Shares
so indicated by the holder hereof to be purchased.

                                      -5-
<PAGE>

          (b) If the Company fails to deliver to the Holder certificate or
certificates representing the Warrant Shares pursuant to Section 4(a) by the
fifth (5th) Trading Day after the Date of Exercise, then the Holder will have
the right to rescind such exercise.

          (c) In addition to any other rights available to the Holder, if the
Company fails to deliver to the Holder a certificate or certificates
representing the Warrant Shares pursuant to Section 4(a) by the fifth (5th)
Trading Day after the Date of Exercise, and if after such fifth (5th) Trading
Day the Holder purchases (in an open market transaction or otherwise) shares of
Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant
Shares which the Holder anticipated receiving upon such exercise (a "Buy-In"),
then the Company shall, to the extent such a payment is not then prohibited or
restricted under the Indenture, pay (1) in cash to the Holder the amount by
which (x) the Holder's total purchase price (including brokerage commissions, if
any) for the shares of Common Stock so purchased exceeds (y) the amount obtained
by multiplying (A) the number of Warrant Shares that the Company was required to
deliver pursuant to Section 4(b) to deliver to the Holder in connection with the
exercise at issue by (B) the Per Share Market Value at the time of the
obligation giving rise to such purchase obligation and (2) deliver to the Holder
the number of shares of Common Stock that would have been issued had the Company
timely complied with its exercise and delivery obligations under Section 4(b).
For example, if the Holder purchases Common Stock having a total purchase price
of $11,000 to cover a Buy-In with respect to an attempted exercise of shares of
Common Stock with a market price on the date of exercise totaled $10,000, under
clause (A) of the immediately preceding sentence the Company shall be required
to pay the Holder $1,000.  The Holder shall provide the Company written notice
indicating the amounts payable to the Holder in respect of the Buy-In.

          (d) The Company"s obligations to issue and deliver Warrant Shares in
accordance with the terms hereof are absolute and unconditional, irrespective of
any action or inaction by the Holder to enforce the same, any waiver or consent
with respect to any provision hereof, the recovery of any judgment against any
Person or any action to enforce the same, or any setoff, counterclaim,
recoupment, limitation or termination, or any breach or alleged breach by the
Holder or any other Person of any obligation to the Company or any violation or
alleged violation of law by the Holder or any other Person, and irrespective of
any other circumstance which might otherwise limit such obligation of the
Company to the Holder in connection with the issuance of Warrant Shares.  If the
Company breaches its obligations under this Warrant, then, in addition to any
other liabilities the Company may have hereunder and under applicable law, the
Company shall pay or reimburse the Holder on demand for all costs of collection
and enforcement (including reasonable attorneys fees and expenses).

     5.  Payment of Taxes.  The Company will pay all documentary stamp taxes
         ----------------
attributable to the issuance of Warrant Shares upon the exercise of this
Warrant; provided, however, that the Company shall not be required to pay any
tax which may be payable in respect of any transfer involved in the registration
of any certificates for Warrant Shares or Warrants in a name other than that of
the Holder.  The Holder shall be responsible for all other tax liability that
may arise as a result of holding or transferring this Warrant or receiving
Warrant Shares upon exercise hereof.

                                      -6-
<PAGE>

     6.  Replacement of Warrant.  If this Warrant is mutilated, lost, stolen or
         ----------------------
destroyed, the Company shall issue or cause to be issued in exchange and
substitution for and upon cancellation hereof, or in lieu of and substitution
for this Warrant, a New Warrant, but only upon receipt of evidence reasonably
satisfactory to the Company of such loss, theft or destruction and customary and
reasonable indemnity, if requested.  Applicants for a New Warrant under such
circumstances shall also comply with such other reasonable regulations and
procedures and pay such other reasonable charges as the Company may prescribe.

     7.  Reservation of Warrant Shares.  The Company covenants that it will at
         -----------------------------
all times reserve and keep available out of the aggregate of its authorized but
unissued Common Stock, solely for the purpose of enabling it to issue Warrant
Shares upon exercise of this Warrant as herein provided, the number of Warrant
Shares which are then issuable and deliverable upon the exercise of this entire
Warrant, free from preemptive rights or any other actual contingent purchase
rights of persons other than the Holder (taking into account the adjustments and
restrictions of Section 8).  The Company covenants that all Warrant Shares that
shall be so issuable and deliverable shall, upon issuance and the payment of the
applicable Exercise Price in accordance with the terms hereof, be duly and
validly authorized, issued and fully paid and nonassessable.

     8.  Certain Adjustments.  The Adjustment Period Price and  number of
         -------------------
Warrant Shares vesting on  any Vesting Date and issuable upon exercise of this
Warrant are subject to adjustment from time to time as set forth in this
Section.

     (i) If the Company, at any time while this Warrant is outstanding, (i)
shall pay a stock dividend (except scheduled dividends paid on outstanding
preferred stock as of the date hereof which contain a stated dividend rate) or
otherwise make a distribution or distributions on shares of its Common Stock or
on any other class of capital stock payable in shares of Common Stock, (ii)
subdivide outstanding shares of Common Stock into a larger number of shares, or
(iii) combine outstanding shares of Common Stock into a smaller number of
shares, the Adjustment Period Price shall be multiplied by a fraction of which
the numerator shall be the number of shares of Common Stock (excluding treasury
shares, if any) outstanding before such event and of which the denominator shall
be the number of shares of Common Stock (excluding treasury shares, if any)
outstanding after such event.  Any adjustment made pursuant to this Section
shall become effective immediately after the record date for the determination
of stockholders entitled to receive such dividend or distribution and shall
become effective immediately after the effective date in the case of a
subdivision or combination, and shall apply to successive subdivisions and
combinations.

     (ii) In case of any reclassification of the Common Stock or any compulsory
share exchange pursuant to which the Common Stock is converted into other
securities, cash or property, then the Holder shall have the right thereafter to
exercise this Warrant only into the shares of stock and other securities and
property receivable upon or deemed to be held by holders of Common Stock
following such reclassification, transfer or share exchange, and the Holder
shall be entitled upon such event to receive such amount of securities or
property equal to the amount of Warrant Shares

                                      -7-
<PAGE>

such Holder would have been entitled to had such Holder exercised this Warrant
immediately prior to such reclassification or share exchange. The terms of any
such reclassification or share exchange shall include such terms so as to
continue to give to the Holder the right to receive the securities or property
set forth in this Section 8(b) upon any exercise following any such
reclassification or share exchange.

     (iii)  If the Company, at any time while this Warrant is outstanding, shall
distribute to all holders of Common Stock (and not to the Holder) evidences of
its indebtedness or assets or rights or warrants to subscribe for or purchase
any security (excluding those referred to in Sections 8(i), (ii) and (iv) and
excluding any shareholder rights to subscribe for shares of the Company"s Common
Stock issuable to holders of the Common Stock upon adoption by the Company of a
shareholder rights plan ), then in each such case the Adjustment Period Price
shall be determined by multiplying the Adjustment Period Price in effect
immediately prior to the record date fixed for determination of stockholders
entitled to receive such distribution by a fraction of which the denominator
shall be the Adjustment Period Price determined as of the record date mentioned
above, and of which the numerator shall be such Adjustment Period Price on such
record date less the then fair market value at such record date of the portion
of such assets or evidence of indebtedness so distributed applicable to one
outstanding share of Common Stock as determined by the Company's independent
certified public accountants that regularly examines the financial statements of
the Company (an "Appraiser").

     (iv) If (a) during the ten (10) Trading Days immediately preceding a
Vesting Date, (b) during the ten (10) Trading Days immediately after a Vesting
Date and (c) while this Warrant is outstanding the Company or any subsidiary
thereof, as applicable with respect to Common Stock Equivalents (as defined
below) shall issue or announce publicly (not including any announcements
regarding stock issuances outside of the periods specified in (a) and (b)
above), the issuance of shares of Common Stock or rights, warrants, options or
other securities or debt that is convertible into or exchangeable for shares of
Common Stock (such Common Stock or other securities, "Common Stock
                                                      ------------
Equivalents"), entitling any person to acquire shares of Common Stock at a price
per share less than either the Adjustment Period Price or the Purchase Price (if
the holder of the Common Stock or Common Stock Equivalent so issued shall at any
time, whether by operation of purchase price adjustments, reset provisions,
floating conversion, exercise or exchange prices or otherwise, or due to
warrants, options or rights issued in connection with such issuance, be entitled
to receive shares of Common Stock at a price less than such price, such issuance
shall be deemed to have occurred for less than such price), then, at the option
of the Holder by notice to the Company, the Adjustment  Period Price shall be
adjusted to become the sales or issue price, purchase price, conversion price,
exchange price or reset or other pricing applicable to the Common Stock
Equivalent at issue.  The Company shall notify the Holder in writing of its
issuance of any such Common Stock Equivalents by the end of the day on which the
Common Stock or derivative instrument is first issued.  The adjustment set forth
in this Section shall, at the option of the Holder, occur on the date (during
the applicable ten Trading Day period) of the issuance of the Common Stock
Equivalent at issue, and the Holder shall not have to wait the conversion,
exchange or other adjustment or resetting provision applicable to such Common
Stock Equivalent.  Such adjustment

                                      -8-
<PAGE>

shall be made whenever such Common Stock or Common Stock Equivalents are issued
at the times specified in items (a)-(c) above. Notwithstanding anything herein
to the contrary, the following shall not be subject to the provisions of this
Section: (1) issuances of any stock or stock options under any Company stock and
option plans of the Company whether now existing or approved by the Company and
its stockholders in the future, (2) the rights, options and warrants outstanding
prior to the date hereof and specified in Schedule 2.1(c) to the Purchase
Agreement of even date herewith between the original Holder and the Company, but
not any modifications thereof.

     (v) In case of any (1) merger or consolidation of the Company with or into
another Person, or (2) sale by the Company of more than one-half of the assets
of the Company (on a book value basis) in one or a series of related
transactions, the Holder shall have the right thereafter to (A) exercise this
Warrant for the shares of stock and other securities, cash and property
receivable upon or deemed to be held by holders of Common Stock following such
merger, consolidation or sale, and the Holder shall be entitled upon such event
or series of related events to receive such amount of securities, cash and
property as the Common Stock for which this Warrant could have been exercised
immediately prior to such merger, consolidation or sales would have been
entitled or (B) in the case of a merger or consolidation, (x) require the
surviving entity to issue common stock purchase warrants equal to the number
Warrant Shares to which this Warrant then permits, which newly warrant shall be
identical  to this Warrant, and (y) simultaneously with the issuance of such
warrant, the holder of such new warrant shall have the right to exercise such
warrant only into shares of stock and other securities, cash and property
receivable upon or deemed to be held by holders of Common Stock  following such
merger or consolidation.   In the case of clause (B), the exercise price for
such new warrant shall be based upon the amount of securities, cash and property
that each share of Common Stock would receive in such transaction and the
Exercise Price of this Warrant immediately prior to the effectiveness or closing
date for such transaction. The terms of any such merger, sale or consolidation
shall include such terms so as continue to give the Holder the right to receive
the securities, cash and property set forth in this Section upon any conversion
or redemption following such event. This provision shall similarly apply to
successive such events.

     (vi) For the purposes of this Section 8, the following clauses shall also
be applicable:

          (i)  Record Date.  In case the Company shall take a record of the
               -----------
holders of its Common Stock for the purpose of entitling them (A) to receive a
dividend or other distribution payable in Common Stock or in securities
convertible or exchangeable into shares of Common Stock, or (B) to subscribe for
or purchase Common Stock or securities convertible or exchangeable into shares
of Common Stock, then such record date shall be deemed to be the date of the
issue or sale of the shares of Common Stock deemed to have been issued or sold
upon the declaration of such dividend or the making of such other distribution
or the date of the granting of such right of subscription or purchase, as the
case may be.

          (ii)  Treasury Shares.  The number of shares of Common Stock
                ---------------
outstanding at any given time shall not include shares owned or held by or for
the account of the Company, and the disposition of any such shares shall be
considered an issue or sale of Common Stock.

                                      -9-
<PAGE>

     (vii)  All calculations under this Section 8 shall be made to the nearest
cent or the nearest 1/100th of a share, as the case may be.

     (viii)  Whenever the Adjustment  Period Price is adjusted pursuant to
Section 8(iii) above, the Holder, after receipt of the determination by the
Appraiser, shall have the right to select an additional appraiser (which shall
be a nationally recognized accounting firm), in which case the adjustment shall
be equal to the average of the adjustments recommended by each of the Appraiser
and such appraiser.  The Holder shall promptly mail or cause to be mailed to the
Company, a notice setting forth the Adjustment Period Price after such
adjustment and setting forth a brief statement of the facts requiring such
adjustment.  Such adjustment shall become effective immediately after the record
date mentioned above.

     (ix) If  (i) the Company shall declare a dividend (or any other
distribution) on its Common Stock; (ii) the Company shall declare a special
nonrecurring cash dividend on or a redemption of its Common Stock; (iii) the
Company shall authorize the granting to all holders of the Common Stock rights
or warrants to subscribe for or purchase any shares of capital stock of any
class or of any rights; (iv) the approval of any stockholders of the Company
shall be required in connection with any reclassification of the Common Stock,
any consolidation or merger to which the Company is a party, any sale or
transfer of all or substantially all of the assets of the Company, or any
compulsory share exchange whereby the Common Stock is converted into other
securities, cash or property; or (v) the Company shall authorize the voluntary
dissolution, liquidation or winding up of the affairs of the Company, then the
Company shall cause to be mailed to each Holder at their last addresses as they
shall appear upon the Warrant Register, at least 20 calendar days prior to the
applicable record or effective date hereinafter specified, a notice stating (x)
the date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be taken,
the date as of which the holders of Common Stock of record to be entitled to
such dividend, distributions, redemption, rights or warrants are to be
determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of Common Stock of
record shall be entitled to exchange their shares of Common Stock for
securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, share exchange, dissolution, liquidation
or winding up; provided, that the failure to mail such notice or any defect
               --------
therein or in the mailing thereof shall not affect the validity of the corporate
action required to be specified in such notice.

     9.  Payment of Exercise Price.  The Holder shall pay the Exercise Price in
         -------------------------
one of the following manners:

          (a) Cash Exercise.  The Holder may deliver immediately available
              -------------
funds; or

                                      -10-
<PAGE>

          (b) Cashless Exercise.  The Holder may surrender this Warrant to the
              -----------------
Company together with a notice of cashless exercise, in which event the Company
shall issue to the Holder the number of Warrant Shares determined as follows:

                    X = Y [(A-B)/A]
     where:
                    X = the number of Warrant Shares to be issued to the Holder.

                    Y = the number of Warrant Shares with respect to which this
                    Warrant is being exercised.

                    A = the average of the closing sale prices of the Common
                    Stock for the five (5) trading days immediately prior to
                    (but not including) the Date of Exercise as reported by
                    Bloomberg Information Systems, Inc. (or any successor to its
                    function of reporting stock prices).

                    B = the Exercise Price.

For purposes of Rule 144 promulgated under the Securities Act, it is intended,
understood and acknowledged, subject to changes in applicable regulations or
Commission (as defined in Exhibit A) interpretations thereof,  that the Warrant
Shares issued in a cashless exercise transaction shall be deemed to have been
acquired by the Holder, and the holding period for the Warrant Shares shall be
deemed to have been commenced, on the issue date.

     10.  Certain Exercise Restrictions.
          -----------------------------

          (a) A Holder may not exercise this Warrant to the extent such exercise
would result in the Holder, together with any affiliate thereof, beneficially
owning (as determined in accordance with Section 13(d) of the Exchange Act and
the rules promulgated thereunder) in excess of 9.999% of the then issued and
outstanding shares of Common Stock, including shares issuable upon such exercise
and held by such Holder after application of this Section.  Since the Holder
will not be obligated to report to the Company the number of shares of Common
Stock it may hold at the time of an exercise  hereunder, unless the exercise at
issue would result in the issuance of shares of Common Stock in excess of 9.999%
of the then outstanding shares of Common Stock without regard to any other
shares which may be beneficially owned by the Holder or an affiliate thereof,
the Holder shall have the authority and obligation to determine whether the
restriction contained in this Section will limit any particular exercise
hereunder and to the extent that the Holder determines that the limitation
contained in this Section applies, the determination of which portion of this
Warrant is exercisable shall be the responsibility and obligation of the Holder.
If the Holder has delivered a Form of Election to Purchase for a number of
Warrant Shares that, without regard to any other shares that the Holder or its
affiliates may beneficially own,  would result in the issuance in excess of the
permitted amount hereunder, the Company shall notify the Holder of this fact and
shall honor the

                                     -11-
<PAGE>

exercise for the maximum portion of this Warrant permitted to be exercised on
such Date of Exercise in accordance with the periods described herein and, at
the option of the Holder, either keep the portion of the Warrant tendered for
exercise in excess of the permitted amount hereunder for future exercises or
return such excess portion of the Warrant to the Holder. The provisions of this
Section may be waived by a Holder (but only as to itself and not to any other
Holder) upon not less than 61 days prior notice to the Company. Other Holders
shall be unaffected by any such waiver.

          (b) If the Company Stock is then listed for trading on the Nasdaq or
the Nasdaq SmallCap Market and the Company has not obtained the Shareholder
Approval (as defined below), then the Company may not, upon exercise of this
Warrant, issue in excess of the product of (i) 6,621,712 Warrant Shares (which
equals 19.999% of the number of shares of Common Stock outstanding on the
Closing Date) or such lesser number of Warrant Shares as the Company and the
Holder may agree is required pursuant to an interpretation by Nasdaq of its
applicable rules and (ii) the quotient obtained by dividing (x) the number of
shares of Common Stock issued and sold to the original Holder on the Closing
Date by (y) the number of shares of Common Stock issued and sold by the Company
on the Closing Date (such number of shares, the "Issuable Maximum").  If any
Holder shall no longer hold Warrants then such Holder"s remaining portion of the
Issuable Maximum shall be allocated pro-rata among the remaining Holders.  If on
any Date of Exercise (A) the Company Stock is listed for trading on the Nasdaq
or the Nasdaq SmallCap Market, (B)  the Exercise Price then in effect is such
that the aggregate number of shares of Common Stock that would then be issuable
upon exercise in full of this Warrant, together with any shares of Common Stock
previously issued upon exercise of this Warrant, would equal or exceed the
Issuable Maximum, and (C) the Company shall not have previously obtained the
vote of shareholders, if any, as may be required by the applicable rules and
regulations of the Nasdaq Stock Market to approve the issuance of shares of
Common Stock in excess of the Issuable Maximum pursuant to the terms hereof (the
"Shareholder Approval"), then the Company shall issue to the Holder a number of
shares of Common Stock equal to the Issuable Maximum and, with respect to the
shares whose issuance would result in an issuance of shares of Common Stock in
excess of the Issuable Maximum, (the "Excess Warrant Shares"), the Company shall
have the option to  either (1) use its best efforts to obtain the Shareholder
Approval applicable to such issuance as soon as possible, but in any event no
later than 60 days after such request (such 60th day, the "Target Date") or (2)
pay to the Holder, within ten (10) Trading Days from the request therefor, an
amount in cash equal to the product of (x) the Excess Warrant Shares multiplied
by (y) the closing sales price of the Common Stock on (a) the Target Date or (b)
the Date of Exercise giving rise to the obligation to seek Shareholder Approval,
whichever is greater (the "Cash Payment").  In the event the Company elects to
seek the Shareholder Approval pursuant to clause (1) of the immediately
preceding sentence and the Company does not obtain the Shareholder Approval on
or prior to the Target Date, then, on the Target Date, the Company shall, to the
extent such a payment is not then prohibited or restricted under the Indenture,
pay the Cash Payment to the Holder.  If the Company fails to pay the Cash
Payment in full pursuant to this Section within twenty (20) days after the date
payable, the Company will, to the extent such a payment is not then prohibited
or restricted under the Indenture, pay interest on such amount at a rate of 18%
per annum, or such lesser maximum amount that is permitted to be paid by
applicable law, to the Holder, accruing daily from the date payable until such
amount, plus

                                      -12-
<PAGE>

all such interest thereon, is paid in full.  The Company and the
Holder understand and agree that shares of Common Stock issued upon exercise of
this Warrant and then held by the Holder or an affiliate thereof may not cast
votes or be deemed outstanding for purposes of any vote to obtain the
Shareholder Approval.

     11.  Fractional Shares.  The Company shall not be required to issue or
          -----------------
cause to be issued fractional Warrant Shares on the exercise of this Warrant.
The number of full Warrant Shares which shall be issuable upon the exercise of
this Warrant shall be computed on the basis of the aggregate number of Warrant
Shares purchasable on exercise of this Warrant so presented.  If any fraction of
a Warrant Share would, except for the provisions of this Section 12, be issuable
on the exercise of this Warrant, the Company shall pay an amount in cash equal
to the Exercise Price multiplied by such fraction.

     12.  Notices.  Any and all notices or other communications or deliveries
          -------
hereunder shall be in writing and shall be deemed given and effective on the
earliest of (i) the date of transmission, if such notice or communication is
delivered via facsimile at the facsimile telephone number specified in this
Section prior to 6:30 P.M. (New York City time) on a Business Day (with
confirmation of transmission), (ii) the Business Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section later than 6:30 P.M. (New
York City time) on any date and earlier than 11:59 P.M. (New York City time) on
such date (with confirmation of transmission), (iii) the Business Day following
the date of mailing, if sent by nationally recognized overnight courier service,
or (iv) upon actual receipt by the party to whom such notice is required to be
given.  The addresses for such communications shall be: (i) if to the Company,
to 430 Olds Station Road, Third Floor, Wenatchee, Washington 98801, facsimile:
(509) 667-9696, attention Donald A. Wright, Chief Executive Officer, with a copy
to Sheryl A. Symonds, General Counsel, 110 Main Street, Suite 100, Edmonds, WA
98020, facsimile: (425) 774-0103 or (ii) if to the Holder, to the Holder at the
address or facsimile number appearing on the Warrant Register or such other
address or facsimile number as the Holder may provide to the Company in
accordance with this Section.

     13.  Warrant Agent.
          -------------

          (a) The Company shall serve as warrant agent under this Warrant.  Upon
thirty days' notice to the Holder, the Company may appoint a new warrant agent.

          (b) Any corporation into which the Company or any new warrant agent
may be merged or any corporation resulting from any consolidation to which the
Company or any new warrant agent shall be a party or any corporation to which
the Company or any new warrant agent transfers substantially all of its
corporate trust or shareholders services business shall be a successor warrant
agent under this Warrant without any further act.  Any such successor warrant
agent shall promptly cause notice of its succession as warrant agent to be
mailed (by first class mail, postage prepaid) to the Holder at the Holder's last
address as shown on the Warrant Register.

                                      -13-
<PAGE>

     14.  Miscellaneous.
          -------------

          (a) This Warrant shall be binding on and inure to the benefit of the
parties hereto and their respective successors and assigns.  This Warrant may be
amended only in writing signed by the Company and the Holder and their
successors and assigns.

          (b) Subject to Section 14(a), above, nothing in this Warrant shall be
construed to give to any person or corporation other than the Company and the
Holder any legal or equitable right, remedy or cause under this Warrant.  This
Warrant shall inure to the sole and exclusive benefit of the Company and the
Holder.

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

          (d) The headings herein are for convenience only, do not constitute a
part of this Warrant and shall not be deemed to limit or affect any of the
provisions hereof.

          (e) In case any one or more of the provisions of this Warrant shall be
invalid or unenforceable in any respect, the validity and enforceability of the
remaining terms and provisions of this Warrant shall not in any way be affected
or impaired thereby and the parties will attempt in good faith to agree upon a
valid and enforceable provision which shall be a commercially reasonable
substitute therefor, and upon so agreeing, shall incorporate such substitute
provision in this Warrant.

                                      -14-
<PAGE>

          IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its authorized officer as of the date first indicated above.

                    PACIFIC AEROSPACE & ELECTRONICS, INC.

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

                                      -15-
<PAGE>

                         FORM OF ELECTION TO PURCHASE

(To be executed by the Holder to exercise the right to purchase shares of Common
Stock under the foregoing Warrant)

To Pacific Aerospace & Electronics, Inc.

     In accordance with the Warrant enclosed with this Form of Election to
Purchase, the undersigned hereby irrevocably elects to purchase  _____________
shares of common stock ("Common Stock"), $.001 par value per share, of Pacific
Aerospace & Electronics, Inc. and, if such Holder is not utilizing the cashless
exercise provisions set forth in this Warrant, encloses herewith $________ in
cash, certified or official bank check or checks, which sum represents the
aggregate Exercise Price (as defined in the Warrant) for the number of shares of
Common Stock to which this Form of Election to Purchase relates, together with
any applicable taxes payable by the undersigned pursuant to the Warrant.

     The undersigned requests that certificates for the shares of Common Stock
issuable upon this exercise be issued in the name of

                                              PLEASE INSERT SOCIAL SECURITY OR
                                              TAX IDENTIFICATION NUMBER
                                            __________________________________
 _____________________________________________________________________________

                                  (Please print name and address)

                                      -16-
<PAGE>

                          Warrant Shares Exercise Log
                          ---------------------------

<TABLE>
<CAPTION>

          Date               Number of Warrant         Number of Warrant Shares     Number of Warrant
                          Shares Available to be             Exercised              Shares Remaining
                                Exercised                                           to be Exercised
-----------------------------------------------------------------------------------------------------
         <S>                 <C>                        <C>                         <C>

-----------------------------------------------------------------------------------------------------
</TABLE>

                                      -17-
<PAGE>

                               FORM OF ASSIGNMENT

          [To be completed and signed only upon transfer of Warrant]

     FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ________________________________ the right represented by the within
Warrant to purchase  ____________ shares of Common Stock of Pacific Aerospace &
Electronics, Inc. to which the within Warrant relates and appoints
________________ attorney to transfer said right on the books of Pacific
Aerospace & Electronics, Inc. with full power of substitution in the premises.

Dated:

_______________, ____

                         _______________________________________
                         (Signature must conform in all respects to name of
                         holder as specified on the face of the Warrant)

                         _______________________________________
                         Address of Transferee

                         _______________________________________

                         _______________________________________

In the presence of:

__________________________

                                      -18-
<PAGE>

                                   Exhibit A
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     (i) "Adjustment Period Price" means the average of the lowest 5 Per Share
Market Values (which need not occur on consecutive Trading Days) during the 20
consecutive Trading Days preceding a Vesting Date (which may include Trading
Days prior to the Effective Date) as selected by the Holder.  The Adjustment
Period Price shall be subject to adjustment in accordance with Section 8.

     (ii) "Applicable Share Number" means 1/3 of the number of shares of Common
Stock purchased by the Holder pursuant to the Purchase Agreement.

     (iii)  "Business Day" shall have the meaning set forth in the Purchase
Agreement.

     (iv) "Closing Date" shall have the meaning set forth in the Purchase
Agreement.

     (v) "Commission" means the Securities and Exchange Commission.

     (vi) "Effective Date" the date on which the Underlying Shares Registration
Statement is first declared effective by the Commission.

     (vii)  "Indenture" means the Indenture dated as of July 30,1998, among the
Company and Balo Precision Parts, Inc., Cashmere Manufacturing Co. Inc., Ceramic
Devices, Inc., Electronic Specialty Corporation, Morel Industries, Inc.
Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., PA&E
International, Inc. and Seismic Safety Products, Inc.

     (viii)  "Nasdaq" means the Nasdaq National Market.

     (ix) "Per Share Market Value"  means on any particular date (a) the closing
price per share of the Common Stock on such date on the Nasdaq or on any
Subsequent Market on which the Common Stock is then listed or quoted, as
reported by Bloomberg Information Services, Inc. (or any successor entity
succeeding to its function of reporting prices), or if there is no such price on
such date, then the closing price on the Nasdaq or on such Subsequent Market on
the date nearest preceding such date, as reported by Bloomberg Information
Services, Inc. (or any successor entity succeeding to its function of reporting
prices), or (b) if the Common Stock is not then listed or quoted on the Nasdaq
or a Subsequent Market, the closing price for a share of Common Stock in the
over-the-counter market, as reported by the National Quotation Bureau
Incorporated or similar organization or agency succeeding to its functions of
reporting prices) at the close of business on such date, or (c) if the Common
Stock is not then reported by the National Quotation Bureau Incorporated (or
similar organization or agency succeeding to its functions of reporting prices),
then the average of the "Pink Sheet" quotes for the relevant conversion period,
as determined in good faith by the Holder, or (d) if the Common Stock is not
then publicly traded the fair market value of a share of Common Stock as
determined by an Appraiser selected in good faith by the Holders of a majority
of the applicable Warrant Shares.

     (x) "Purchase Agreement" means the Securities Purchase Agreement, dated the
date hereof to which the Company and the original Holder are parties and
pursuant to which this Warrant was issued.

     (xi) "Purchase Price" means $1.75 (which number shall be subject to
equitable adjustment for stock splits, recombinations and similar events).

                                      -19-
<PAGE>

     (xii)  "Registration Rights Agreement" means the Registration Rights
Agreement, dated the date hereof to which the Company and the original Holder
are parties.

     (xiii)  "Subsequent Market" shall mean any of the New York Stock Exchange,
American Stock Exchange, or Nasdaq SmallCap Market.

     (xiv)  "Trading Day" means (a) a day on which the Common Stock is traded on
the Nasdaq or on the Subsequent Market on which the Common Stock is then listed
or quoted, as the case may be, or (b) if the Common Stock is not listed on the
Nasdaq or a Subsequent Market, a day on which the Common Stock is traded in the
over-the-counter market, as reported by the OTC Bulletin Board , or (c) if the
Common Stock is not quoted on the OTC Bulletin Board, a day on which the Common
Stock is quoted in the over-the-counter market as reported by the National
Quotation Bureau Incorporated (or any similar organization or agency succeeding
its functions of reporting prices); provided, that in the event that the Common
                                    --------
Stock is not listed or quoted as set forth in (a), (b) and (c) hereof, then
Trading Day shall mean a Business Day.

     (xv) "Transaction Documents""shall have the meaning set forth in the
Purchase Agreement.

     (xvi)  "Underlying Shares Registration Statement" shall have the meaning
ascribed to it in the Purchase Agreement.

                                      -20-

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