PACIFIC AEROSPACE & ELECTRONICS INC, S-1, 1998-10-30

PACIFIC AEROSPACE & ELECTRONICS INC
S-1, 1998-10-30
ELECTRIC LIGHTING & WIRING EQUIPMENT

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As filed with the Securities and Exchange Commission on October 30, 1998.

Registration No. 333-
================================================================================

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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

PACIFIC AEROSPACE & ELECTRONICS, INC.
(Name of Registrant as specified in its charter)

Washington 3728 91-1744587
(State or other (Primary Standard (I.R.S. Employer
jurisdiction Industrial Classification Identification
of incorporation) Code Number) No.)

430 Olds Station Road, Wenatchee, Washington 98801
(509) 667-9600
(Address, including zip code, and telephone
number, including area code, of
Registrant's principal executive offices)

Donald A. Wright
President and Chief Executive Officer
PACIFIC AEROSPACE & ELECTRONICS, INC.
430 Olds Station Road
Wenatchee, Washington 98801
(509) 667-9600
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------
Copies to:
L. John Stevenson, Jr.
Eugenie D. Mansfield
Ivan A. Gaviria
Stoel Rives LLP
600 University Street, Suite 3600
Seattle, Washington 98101-3197
(206) 624-0900
---------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes
effective, but not before February 1, 1998.

If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [X]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

---------

The Company agrees that the Securities and Exchange Commission may consider it
to have filed an amendment to this Registration Statement on the date necessary
to delay this Registration Statement's effective date until either (1) the
Company files an amendment specifically stating that this Registration Statement
shall become effective under Section 8(a) of the Securities Act of 1933, as
amended; or (2) until the date that the Securities and Exchange Commission
declares this Registration Amendment to be effective.

<PAGE>
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<CAPTION>
CALCULATION OF REGISTRATION FEE

====================================================================================================================================
Proposed maximum
Title of each class of Amount to be offering price Proposed maximum Amount of
securities to be registered Registered (1) per share(2) aggregate offering price (2) Registration Fee (2)
- --------------------------- -------------- ------------------ ---------------------------- --------------------
<S> <C> <C> <C> <C>
Common Stock 3,236,109 See Footnote 2 $7,746,875 $2,153.63
====================================================================================================================================

(1) Including:

(a) up to a maximum of 3,000,000 shares of Common Stock (the "Conversion
Shares") issuable on conversion of the Company's Series B Convertible
Preferred Stock (the "Preferred Stock"); and

(b) up to a maximum of 236,109 shares of Common Stock (the "Warrant
Shares") issuable upon the exercise of Common Stock Purchase Warrants
held by the Selling Shareholders (the "Warrants"); and

(c) a presently indeterminable number of shares of Common Stock as may
become issuable upon conversion of the Preferred Stock and exercise of
the Warrants.

(2) Equals the sum of (a) a $1,699,985 aggregate value for the Warrant Shares
based on a $7.20 per share exercise price; plus (b) a $6,046,890 aggregate
value for the Conversion Shares, estimated solely for the purpose of
calculating the registration fee pursuant to Rule 457(c) under the
Securities Act of 1933, as amended, based on an estimated value of $2.0469
per share. This value equals the average of the high and low prices of the
Common Stock on Nasdaq's National Market System on October 26, 1998.
</TABLE>
<PAGE>
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The information contained in this Prospectus is not complete and may be changed.
The Selling Shareholders may not sell the Shares until a Registration Statement
containing this Prospectus is declared effective by the Securities and Exchange
Commission. This Prospectus is not an offer to sell the Shares and is not
soliciting an offer to buy the Shares in any state where offer or sale of the
Shares is not permitted.
- --------------------------------------------------------------------------------

SUBJECT TO COMPLETION RESALE PROSPECTUS
DATED OCTOBER 30, 1998

[PACIFIC AEROSPACE & ELECTRONICS, INC. LOGO]

PACIFIC AEROSPACE & ELECTRONICS, INC.

3,236,109 Shares of Common Stock

PACIFIC AEROSPACE & ELECTRONICS, INC. Pacific Aerospace develops,
430 OLDS STATION ROAD manufactures and markets high-
WENATCHEE, WASHINGTON 98801 performance electronics and metal
(509) 667-9600 components and assemblies for the
aerospace, defense, electronics
and transportation industries in
the United States and Europe.

SELLING SHAREHOLDERS: The Selling Shareholders each hold
SEE PAGE 51 FOR THE NAMES OF THE SELLING shares of Pacific Aerospace's Series
SHAREHOLDERS. B Convertible Preferred Stock and
Warrants to purchase shares of
Pacific Aerospace's Common Stock. In
this Prospectus, the Selling
Shareholders are offering up to
3,236,109 Shares of Common Stock
that they would receive if they
converted their Preferred Stock into
Common shares, and exercised all of
their Warrants.

CLOSING SALE PRICE OF COMMON STOCK: The conversion price of the
$2.0313 PER SHARE ON OCTOBER 20, 1998 Preferred Stock is $7.20 per share
until February 1999. After February
1999, the conversion price of the
Preferred Stock will be equal to the
lower of (a) $7.20 per share, or (b)
the average of the three lowest
closing bid prices per share of the
Common Stock over the 22 trading
days before conversion, except that
a conversion price of less than
$5.67 per share would require
shareholder approval or the
redemption of some of the Preferred
Stock. The exercise price of the
Warrants is $7.20 per Share.

TRADING MARKET AND SYMBOL: NASDAQ The Selling Shareholders may offer
NATIONAL MARKET SYSTEM -- PCTH. the Shares to the public for prices
computed as follows:
- Fixed prices,
- Prevailing market prices,
- Formula prices relating to
prevailing market prices, or
- Negotiated prices.
Pacific Aerospace will not receive
any of the proceeds from sale of the
Shares, but will receive the
proceeds from any exercise of the
Warrants.

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

Potential investors should consider the Risk Factors starting on page 8
before purchasing the Shares.

- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the Shares, or determined if this
Prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
- --------------------------------------------------------------------------------

, 1998
<PAGE>
TABLE OF CONTENTS

Page
Prospectus Summary * ....................................................... 3
Risk Factors * ............................................................. 8
Price Range of Common Stock; Dividends .....................................14
Selected Financial Data of the Company .....................................15
Selected Financial Data of Aeromet .........................................16
Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") * ......................................17
Business * .................................................................28
Management .................................................................42
Certain Transactions .......................................................49
Principal Shareholders .....................................................50
Selling Shareholders .......................................................52
Plan of Distribution .......................................................54
Description of Capital Stock ...............................................55
Shares Eligible for Future Sale ............................................58
Legal Matters ..............................................................60
Experts ....................................................................60
Index to Financial Statements ..............................................F-1
Index to Unaudited Pro Forma Financial Data ................................P-1

* Special Note Regarding Forward-Looking Statements

Many sections in this Prospectus, and the sections marked above by an
asterisk in particular, contain forward-looking statements. These
forward-looking statements are not guarantees of Pacific Aerospace's future
performance. They are subject to risks and uncertainties related to business
operations, some of which are beyond Pacific Aerospace's control. Any of these
risks or uncertainties may cause actual results or future circumstances to
differ materially from the forward-looking statements contained in this
Prospectus.

2
<PAGE>
PROSPECTUS SUMMARY
The Company

Pacific Aerospace & Electronics, Inc. (the "Company") develops,
manufactures and markets high-performance electronics and metal components and
assemblies for the aerospace, defense, electronics and transportation
industries. The Company is an active consolidator of companies, having acquired
nine operating companies since 1990.

Aeromet Acquisition

On July 30, 1998, the Company nearly doubled its size by acquiring Aeromet
International plc, a British limited company. Aeromet is one of the leading
suppliers in the United Kingdom of magnesium and aluminum precision sand and
investment castings, and of titanium and aluminum formed sheet products.
Aeromet's casting and forming technologies and products complement the Company's
U.S. precision metals product lines. The Company sells Aeromet's products
primarily to the aerospace, defense and motorsport industries in Europe.

Business Strengths

Significant Customer Base. The Company counts among its customers many of
the world's leading aerospace, defense, electronics and transportation
companies. The Company believes that one of the key advantages of the Aeromet
acquisition is the opportunity to access Aeromet's significant base of
additional customers. The Company's leading customers are:

U.S. Operations U.K. Operations
================================================================================
Boeing British Aerospace
PACCAR Rolls Royce
Raytheon/Hughes GKN Westland Aerospace
Honeywell Lucas Aerospace
Lockheed Martin Alenia (Aermachhi)
Northrop Grumman
Space Systems/Loral
Westinghouse
TRW

Strong Position in Major Aerospace and Defense Programs. The Company
supplies components and parts to Boeing for each of Boeing's 737, 747, 757, 767
and 777 commercial aircraft construction programs, and participates in the
Airbus A300/310, A320 and A330/340 commercial aircraft construction programs. In
addition, the Company participates in major U.S. and European defense and
military aircraft programs.

Diversity of Product Offerings and Capabilities. The Company manufactures a
broad range of precision cast, machined and formed metal products and assembled
electronics products. The Company collaborates with many of its customers to
develop products that meet specific design or customization requests. In
addition, many of the Company's custom-developed electronics components have
become widely accepted in the industry. The Company believes that its experience
and capabilities in working with the changing needs of its customers will allow
it to continue to respond to changing market trends in its industries.

Strong Technology Position. The Company uses specialized manufacturing
techniques, advanced materials science, process engineering and proprietary
technologies or processes to manufacture its products. In particular, the
Company has a broad base of expertise in the following manufacturing processes:

U.S. Operations U.K. Operations
================================================================================
Cast aluminum products: Cast magnesium and aluminum
- - lost foam products:
- - sand casting - precision die casting
- - permanent mold casting - sand investment casting
- "Sophia Process" licensed
investment casting

Electronics products: Formed metal products:
- - precision machining - super plastic forming of
- - explosive bonding titanium
- - complex assembly - stretch forming of
aluminum alloys

The Company owns 32 U.S. patents used in the manufacture of its electronics
products and maintains an ongoing program of evaluating and protecting its
proprietary rights and processes. The Company has additional patent applications
pending in the U.S., Canada, and Europe.

Strategy

The Company's objective is to generate profitable growth by taking
advantage of available opportunities in its industries. The Company believes
that pursuing the following business strategies will enable the Company to
increase market penetration, create operating efficiencies and enhance its
competitive position in its core markets.

3
<PAGE>
Leverage the Aeromet Platform. The Aeromet acquisition significantly
enhanced the Company's commercial aerospace and defense industry presence.
Aeromet provides the Company with a solid platform from which to access major
European commercial aircraft and aircraft engine programs, as well as markets
within the European defense and transportation industries. These markets would
be difficult for the Company to enter without a physical presence in Europe. The
Company also believes that Aeromet may provide a strategic opportunity for
pursuing acquisitions of other European aerospace, defense and transportation
companies on a model similar to that which the Company has pursued in the United
States.

Increase Margins Through Enhanced Marketing and Vertical Integration. The
Company's strategy is to improve profit margins and revenues by increasing
customer penetration, improving operating efficiencies, and developing new
products and product enhancements. Key components of the Company's strategy are
to:

- - leverage the synergies among its operating companies,
- - continue vertically integrating its manufacturing processes, and
- - identify new products, services and markets by using the Company's
expertise in advanced materials science and in the manufacture and assembly
of precision products.

The Company also intends to capitalize on the current shift of commercial
aircraft manufacturers and defense contractors toward purchasing from a smaller
number of suppliers that can supply more complete systems and pre-assembled
parts. Assembled parts and systems generally are higher margin products than
individual metal parts. By producing products that integrate the Company's
metals casting, forming and machining knowledge with the Company's expertise in
the manufacture of connectors, seals, filters, relays and electronic packages,
the Company expects to improve its profit margins and position itself to capture
a larger share of its customers' total product requirements.

Leverage Product Development through Strategic and Proprietary
Technologies. The Company generally develops new products from existing
technologies in response to specific customer requests. The Company plans to
continue developing new products for its customers and, where appropriate, to
apply for additional patents for those new technologies. The Company may acquire
additional strategic and proprietary technologies from third parties and expects
to continue to develop its research and development capabilities. The Company
does not expect to devote substantial resources to research and development that
is not funded by customers.

Pursue Strategic Acquisitions. The Company's consolidation strategy is to
identify and acquire companies that it believes will:

- - provide the opportunity for increased sales to the Company's existing
customers and for new sales to the Company's potential customers, and
- - extend or vertically integrate the Company's manufacturing capabilities or
product lines.

The Company believes that there are and will continue to be opportunities to
grow the Company and to enhance profitability through acquisitions. The Company
intends to continue to pursue acquisitions of companies and technologies that it
believes will further this acquisition strategy.

Industry Overview

Aerospace Industry

Commercial. The commercial aerospace supply industry is reported to be
currently enjoying favorable trends driven by strong growth in the demand for
aerospace components, delivery and use rates for commercial aircraft, actual and
projected volume of passenger and freight traffic, average aircraft age and
global fleet size. Based on forecasts by Boeing and Airbus, the Company believes
that, through the near term, the world's airlines will continue to add capacity
and order new aircraft in order to meet anticipated demand.

Defense. The U.S. Department of Defense expects defense procurement funding
to grow by 40%, from approximately $43 billion in 1998 to approximately $60
billion in 2001. The Company believes that both its electronics and aerospace
business segments will benefit from this trend.

Increase in Outsourcing. Aircraft manufacturers and defense contractors
have been actively searching for ways to improve the quality and reduce the cost
of their manufactured products. One approach is to outsource component
manufacturing to independent suppliers in order to benefit from an independent
supplier's lower

4
<PAGE>
cost structure and specialized manufacturing knowledge. Suppliers that
demonstrate an ability to deliver a high quality product on the required
delivery schedule at a reasonable cost should benefit from this shift.

Consolidation. Commercial aircraft manufacturers are tending to purchase
from suppliers that can supply more complete systems and pre-assembled parts.
The U.S. Department of Defense is strongly encouraging defense contractors to
take this approach as well. This shift and the increase in outsourcing appear to
be leading to a consolidation in the supply base. The Company believes that this
trend toward consolidation presents an opportunity for suppliers with the
financial and management resources to complete acquisitions and expand their
operations.

Electronics Industry

The electronics industry is enjoying revenue growth in the annual worldwide
market for electronics and components. This growth has been fueled by several
factors, including the rapid pace of technological advancement and development
of new products. The Company expects these favorable trends in the electronics
industry to continue and believes the outlook for the electronics component
supply industry will continue to be strong.

- --------------------------------------------------------------------------------
This Summary is qualified in its entirety by, and should be read in conjunction
with, the more detailed information and financial statements and related notes
appearing elsewhere in this Prospectus. Except as otherwise noted, (1) all
references to a particular fiscal year of the Company refer to the twelve months
ended May 31, and (2) all currency information is denominated in U.S. dollars.
References to the "Company" in this Prospectus include Aeromet, unless otherwise
noted or unless the context indicates otherwise.
- --------------------------------------------------------------------------------

5
<PAGE>
THE OFFERING

Maximum Shares of Common Stock offered by the Selling
Shareholders (the "Shares") (1) ............................ 3,236,109

Total outstanding shares of Common Stock as of
October 20, 1998 (2) ....................................... 15,986,323

Total shares of Common Stock to be outstanding after
the Offering ............................................... 19,222,432

Use of proceeds from the sale of the Shares ................ None to the
Company. See
"Plan of
Distribution."

Risk Factors ............................................... See "Risk
Factors."

Nasdaq Common Stock symbol ..................................PCTH

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

(1) This figure assumes conversion of the Preferred Stock into 3,000,000 shares
of Common Stock (the "Conversion Shares") and the exercise of the Warrants
for 236,109 shares of Common Stock (the "Warrant Shares").

(2) This figure excludes a total of 7,402,500 reserved but unissued shares of
Common Stock. See "Risk Factors Shares Eligible for Future Sale."

6
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<TABLE>
<CAPTION>
Summary Financial Data of the Company
(in thousands, except percentage and per share data)

Years Ended May 31, Three-Month Periods Ended August 31,
------------------------------------------------------------- ------------------------------------
Historical Pro Forma Historical Pro Forma
------------------------------------------------ ------------ --------------------- -------------
1994 1995 1996 1997 1998 1998(2) 1997 1998 1998(3)
------------------------------------------------ ------------ --------------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales(1) $ 2,940 $11,035 $20,725 $34,175 $54,099 $115,505 $11,776 $19,178 $28,760
Gross profit 80 1,943 4,286 8,206 14,612 25,330 2,983 4,674 5,836
Income (loss)from operations (884) (846) (583) 1,947 4,740 9,370 976 898 1,215

Net income (loss) $(1,098) $(1,411) $ (999) $ 1,682 $ 3,614 $ (3,002) $ 811 $(4,411) $(5,469)

Net income (loss) per share:
Basic ........................ (.60) (.41) (.16) .18 .29 (.24) .07 (0.29) (.36)
Diluted ...................... (.60) (.41) (.16) .17 .27 (.24) .07 (0.29) (.36)
Shares used in computation of
income (loss) per share:
Basic 1,826 3,469 6,209 9,500 12,486 12,486 11,718 15,421 15,421
Diluted 1,826 3,469 6,209 10,036 13,606 12,486 11,718 15,421 15,421

Other Financial Data:
EBITDA(4) $ (739) $ (437) $ 288 $ 3,305 $ 6,944 $ 15,692 $ 1,385 $ 2,049 $ 2,997
EBITDA margin -- -- 1.4% 9.7% 12.8% 13.6% 11.8% 10.7% 10.4%
Depreciation and amortization $ 145 $ 409 $ 871 $ 1,358 $ 2,204 $ 6,322 $ 409 $ 1,151 $ 1,782

At May 31, At August 31,
------------------------------------------------ ---------------------
1994 1995 1996 1997 1998 1998
------------------------------------------------ ---------------------
Balance Sheet Data:
Cash and cash equivalents $ 27 $ 1,079 $ 725 $ 3,048 $11,461 $18,998
Working capital (deficit) (1,237) 1,758 952 13,090 25,599 46,686
Total assets 7,894 11,630 27,649 35,752 78,580 171,465
Long-term debt (including
current portion) 3,662 3,902 6,304 4,233 11,233 87,053
Shareholders' equity 1,226 5,454 12,539 25,619 56,142 61,500

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

(1) The increases in net sales are attributable to acquisitions by the Company
and internal growth. See "Business - Corporate History" and "MD&A - Results
of Operations - Pacific Aerospace - Net Sales."

(2) Presents the statement of operations data of the Company as if: (a) the
Aeromet acquisition, (b) the acquisition of Electronic Specialty
Corporation which occurred in the fourth quarter of fiscal 1998, and (c)
the related financing transactions, occurred on June 1, 1997.

(3) Includes Aeromet's June and July 1998 results of operations.

(4) "EBITDA" represents income from operations plus depreciation and
amortization expense. EBITDA should not be construed as an alternative to
(a) net income, as defined by generally accepted accounting principles, as
an indicator of the Company's operating performance or (b) cash flow, as
defined by generally accepted accounting principles, as a measure of
liquidity.
</TABLE>

7
<PAGE>
RISK FACTORS

- --------------------------------------------------------------------------------
An investment in the Shares involves certain risks. Potential investors
should carefully consider all of the information set forth in this Prospectus.
In particular, potential investors should evaluate the following risk factors
before making an investment in the Shares.
- --------------------------------------------------------------------------------

Acquisition Risks. The Company has pursued an aggressive growth strategy
and expects to continue to evaluate and pursue potential strategic acquisitions.
The success of this strategy depends upon the Company's ability to manage the
risks associated with acquisitions. These risks include:

- - the ability of the Company to assess the value, strengths and weaknesses of
acquisition candidates accurately,
- - the Company's effectiveness in implementing necessary changes at newly
acquired subsidiaries,
- - possible diversion of management attention from the Company's operations,
and
- - possible increased borrowings, disruption of product development cycles and
dilution of earnings per share.

The Company has recently incurred substantial losses in connection with its
acquisition of Electronic Specialty Corporation, and its investment in Orca
Technologies, Inc. Aeromet's size will cause it to have a significant impact on
the Company's future financial results. The Company's failure to manage these or
other acquisition risks could have a material adverse effect on the Company and
its financial performance. See "Business Strategy Pursue Other Strategic
Acquisitions," and "MD&A Recent Events - Electronic Specialty Corporation, -
Orca Technologies, Inc., and - Aeromet Acquisition."

Management of Growth. The Company has experienced rapid growth from both
operations and acquisitions. This growth has placed and will continue to place
significant demands on the Company's managerial, administrative, financial and
operational resources. For example, the Company's total number of employees
increased from approximately 748 to over 1,200 upon consummation of the Aeromet
acquisition, the number of the Company's operating sites increased from five in
the United States to a total of ten in the United States and the United Kingdom.
Several of the Company's subsidiaries (including Aeromet) have different
accounting systems that the Company is in the process of integrating. As the
Company's business grows and becomes more complex, an increasing level of
diligence in its business decisions will be necessary to comply with regulatory
and accounting requirements. To manage its growth effectively, the Company must
continue to improve its operational, accounting, financial and other management
processes and systems, and must continue to attract and retain highly skilled
management and technical personnel. See "Business - Strategy."

Significant Debt. The Company incurred substantial debt and payment
obligations in order to finance the Aeromet acquisition and ongoing operations.
This debt could have important consequences, such as:

- - making the Company unable to obtain additional financing in the future,
- - diverting a significant portion of the Company's cash flow to debt and
interest payments and away from operations, acquisitions and capital
expenditures,
- - increasing the Company's interest expense, and decreasing the Company's net
income,
- - putting the Company at a competitive disadvantage in relation to
competitors with less debt, or
- - limiting the Company's flexibility in adjusting to downturns in its
business or market conditions.

Ability to Make Debt Payments. The Company's future financial and operating
performance will affect its ability to make payments on its debt. Since the
Company's performance is affected by many factors, some of which are out of its
control, there is no assurance that the Company will have sufficient cash flow
to make its debt payments when scheduled, or at all. If the Company did not have
sufficient cash flow to make its debt payments, the Company could be forced to:

- - reduce or delay capital expenditures,
- - dispose of material assets or operations,

8
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- - reduce, restructure or refinance its debt at potentially higher rates of
interest, or
- - seek additional equity capital, which could dilute the value of the shares
held by the Company's existing shareholders.

There is no assurance that the Company would be able to achieve any of the above
actions on satisfactory terms or at all.

Possible Need for Additional Capital. The Company believes that its
existing cash and credit facilities will be sufficient to meet the Company's
currently budgeted working capital requirements for at least the next 12 months.
See "MD&A - Liquidity and Capital Resources." The Company's actual capital
needs, however, will depend on many unpredictable factors, including:

- - actual revenue generated from operations,
- - interest due on the Company's variable rate debt,
- - capital expenditures required to remain competitive, and
- - cash required for acquired companies, future acquisitions, and acquisition
and financing transaction costs.

As a result of these factors, the Company is unable to predict accurately the
amount or timing of its future capital needs, if any. The Company's inability to
obtain additional capital if and when needed could have a material adverse
effect on its financial performance.

Foreign Operations. The acquisition of Aeromet subjects the Company to the
risks of foreign operations. These risks include:

- - the Company's ability to manage an operation in the United Kingdom
effectively from its Wenatchee, Washington headquarters,
- - unfavorable changes in foreign government policies, regulations, tariffs,
taxes and other trade barriers,
- - exchange controls and limitations on dividends or other payments, and
- - devaluations and fluctuations in currency exchange rates.

Exchange Rates. With the Aeromet acquisition, the Company may decide to
engage in hedging transactions in order to protect the Company from losses if
the exchange rate between the U.S. dollar and the British pound sterling
changes. However, hedging transactions may not completely offset such losses.
Aeromet has a few contracts that are in European currencies other than British
pounds sterling or in U.S. dollars. The Company believes that the conversion of
such currencies to the Euro will not have a material adverse effect on Aeromet's
business or financial condition.

Restrictive Debt Covenants. Under some of the agreements governing its
debt, the Company is subject to a number of significant covenants. Those
covenants restrict a number of corporate activities, including the ability of
the Company to:

- - dispose of or create liens on assets,
- - incur additional indebtedness,
- - prepay or amend certain debt,
- - pay dividends or repurchase stock,
- - enter into sale and leaseback transactions,
- - make investments, loans or advances,
- - engage in acquisitions, mergers or consolidations,
- - make capital expenditures,
- - change the business conducted by the Company or its subsidiaries, or
- - engage in certain transactions with affiliates.

The breach of any of these covenants could result in a default that would permit
the lenders to declare all amounts owed by the Company to be immediately due and
payable. As a result, the Company's other lenders might terminate their
commitments to extend further credit to the Company. In addition, if there is a
change of control of the Company, the Company may be required to repay its debt.
Any of these events could have a material adverse effect on the Company and to
financial performance. See "MD&A - Aeromet Acquisition Note Offering."

Dependence on Significant Customers. The top five customers Boeing, PACCAR,
Northrop Grumman, Deere & Company and Honeywell, accounted for approximately 60%
of the Company's fiscal 1998 net sales, not including Aeromet. Aeromet's top
five customers, British Aerospace, Rolls Royce, GKN Westland, Lucas Aerospace
and Alenia (Aermacchi), accounted for approximately 41% of Aeromet's net sales
in calendar 1997. Because a small number of customers account for a large
percentage of the Company's annual revenues and order flow, these customers may
be able to exercise significant influence over the Company's prices and other
terms of sale. The loss of these largest customers, or reduced or canceled
orders from these customers, could have a material adverse effect on the

9
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Company and its financial performance. See "Business - Customers."

Aerospace Industry Risks; Cyclicality. The Company operates in historically
cyclical industries. The aerospace, defense and transportation industries are
sensitive to general economic conditions and have been adversely affected by
past recessions. For example, from 1990 to 1994 the aerospace industry
experienced reduced demand for commercial aircraft, a decline in military
spending and the postponement of overhaul and maintenance on existing aircraft.
In past years, the aerospace industry has been adversely affected by a number of
factors, including increased fuel and labor costs and intense price competition.
Although the aerospace supply industry currently is enjoying favorable trends
driven by strong growth in commercial aircraft demand, there is no assurance
that such trends will continue or that general economic conditions will not lead
to a downturn in demand for core components and products of the Company. See
"Business Industry Overview."

Volatility of Asian Markets. As of January 1998, Boeing and Airbus each had
a 10% backlog of aircraft sales to customers in Asia. Current financial
difficulties in Asia, including currency devaluations and volatile financial
markets, are adversely affecting some Asian customers, and orders for new
aircraft from Asia are expected to level off at the 1998 rate. Boeing indicated
that due to the Asian financial crisis, it expects worldwide requirements for
commercial jets will be reduced over the five-year period of 1998 through 2002
from 4,150 to 4,000 aircraft. Any cancellations or delays in aircraft orders
from customers of Boeing or Airbus could reduce demand for the Company's
products and could have a material adverse effect on the Company and its
financial performance. See "Business - Industry Overview."

Dependence on Key Management and Technical Personnel. The Company believes
that its ability to successfully implement its business strategy and to operate
profitably depends significantly on the continued employment of its senior
management team, led by its president, Donald A. Wright, and its significant
technical personnel. The Company has a $3 million key man life insurance policy
on the life of Mr. Wright. The Company's business and financial results could be
materially adversely affected if Mr. Wright, other members of the senior
management team, or significant technical personnel become unable or unwilling
to continue in their present employment. In addition, the Company's growth and
future success will depend in large part on its ability to retain and attract
additional board members, senior managers and highly skilled technical
personnel. Competition for these types of employees is intense, and there is no
assurance that the Company will be successful in attracting and retaining them.
The Company's failure to do so could have a material adverse effect on the
Company's business and financial performance. See "Management."

Backlog. The majority of the Company's sales are made pursuant to
individual purchase orders. The customer may cancel these purchase orders if
they pay the cost of the work in process plus a related profit factor. As of
August 31, 1998, the Company had purchase orders and contractual arrangements
evidencing anticipated future deliveries ("backlog") through fiscal year 2000 of
approximately $100 million. Of this amount, approximately $70 million is
expected to be delivered in fiscal year 1999. There is no assurance that the
Company will complete this backlog and convert it to revenue. Although the
Company historically has not experienced significant order or customer
cancellations, reduction of pending contracts or work in progress could have a
material adverse effect on the Company's operations and financial performance.
See "Business Backlog."

Technological Change; Development of New Products. The market for the
Company's products is characterized by evolving technology and industry
standards, changes in customer needs, adaptation of products to customer needs,
and new product introductions. The Company's competitors from time to time may
announce new products, enhancements or technologies that have the potential to
replace or render the Company's existing products obsolete. The Company's
success will depend on its ability to:

- - enhance its current products and develop new products to meet changing
customer needs, and achieve market acceptance of such products, and
- - anticipate or respond to evolving industry standards and other
technological changes on a timely and cost-effective basis.

The Company's failure to do so, or any significant delay, could have a material
adverse effect on the Company's operations and financial results.

10
<PAGE>
Competition. The Company is subject to substantial competition in many of
the markets that it serves. Many of these competitors represent substantial
long-term competition, as they have greater financial resources, broader
experience, better name recognition and more substantial marketing operations.
The Company believes that its technology and manufacturing processes may give it
a competitive advantage with respect to certain of its products. However, the
Company expects that competitors will continue to develop new products. Products
made by the Company may not be able to compete successfully if customers view
the competing products as more effective or more economic. These competitive
pressures may have a material adverse effect on the Company's operations and
financial performance. See "Business - Competition."

Availability and Cost of Materials. The Company generally has readily
available sources of raw materials and supplies, and, where possible, maintains
alternate sources of supply. However, shortages have occurred in the past and
may occur in the future. The Company does not have fixed price contracts or
arrangements for the raw materials and other supplies that it requires. In
addition, the Company obtains approximately 70% of its titanium from one
supplier and is subject to a lead time of approximately 80 weeks in ordering and
obtaining titanium. Shortages of, or price increases for, titanium and other raw
materials and supplies could have a material adverse effect on the ability of
the Company to manufacture and sell its products in a timely and cost-effective
manner. See "Business Raw Materials."

Proprietary Rights. The Company believes that its 32 U.S. patents, one U.K.
patent and 4 patent applications, its trade secrets and its other proprietary
rights are important to its success and competitive position. Accordingly, the
Company devotes substantial resources to the establishment and protection of its
proprietary technology. However, the rights of the Company and the precautions
it takes may be inadequate to prevent others from:

- - imitating the Company's products,
- - obtaining information that the Company regards as proprietary,
- - developing technology that is the same as or similar to the Company's
technology,
- - asserting rights in the Company's proprietary rights,
- - or claiming that the Company is infringing on the proprietary rights of
others.

In addition, the Company may sell its products in countries whose laws do not
protect intellectual property rights to the same extent as U.S. law. The
occurrence of any of these events may cause the Company to incur substantial
litigation costs to enforce or defend its rights, and may have a material
adverse effect on the Company's operations and financial performance. See
"Business - Proprietary Rights."

Product Liability. The Company is subject to the risk of product liability
claims and lawsuits for harm caused by its products. The Company maintains
product liability insurance with a maximum coverage of $2 million. However,
there is no assurance that this insurance will be sufficient to cover any claims
that may arise. A successful product liability claim in excess of the Company's
insurance coverage could have a material adverse effect on the Company and its
financial performance.

Environmental Matters. Federal, state and local environmental and health
and safety laws apply to the Company's facilities. These laws and regulations
govern such matters as:

- - solid waste disposal,
- - the generation, storage, use and disposal of hazardous materials,
- - air pollutant emissions,
- - permits to operate, and
- - employee health and safety issues.

The Company takes these issues very seriously, partly because a number of
the chemicals and other materials used or generated by the Company are
considered hazardous. If the Company does not comply with these laws or
regulations, it could be fined, face other penalties, or be liable for damages
and cleanup costs. If the Company lost one of its permits, it could be required
to cease operations or limit production at one or more of its facilities. Any of
these consequences could have a material adverse effect on the Company and its
financial performance.

The Company continually monitors and addresses environmental matters. In
the ordinary course of business, minor violations sometimes occur. When the
Company discovers these violations, it works to resolve them.

11
<PAGE>
When the Company acquired Aeromet, it investigated the environmental
conditions of each of the Aeromet facilities. The Company discovered that
certain Aeromet facilities might need additional permits to operate or might
have some remediation issues. The Company intends to investigate whether any
permits or remediation is required under United Kingdom law. The Company
believes that these issues are not material.

Environmental laws could become more stringent over time. This could result
in higher costs to comply with new laws, and increased risks and penalties for
noncompliance. Because the Company is a generator of hazardous materials, it is
subject to financial exposure even if it fully complies with these laws. Also,
many of the Company's facilities are located in well-established industrial
areas and have long operating histories. It is possible that historical
operations (pre-dating the Company's involvement) at each of these facilities or
on neighboring properties have affected properties the Company currently owns or
leases. Thus, it is possible that environmental issues may arise in the future
that the Company is not aware of now and cannot predict at this time. There is
no assurance that any present noncompliance or any discovery of noncompliance in
the future will not have a material adverse effect on the Company, its
operations or financial performance. See "Business Environmental Matters."

Government Regulation. The Company sells many of its products to the United
States government, either directly or indirectly through subcontracts. As a
result, the Company is subject to various federal regulations, such as bidding
rules, pricing restrictions, and federal acquisition requirements. In addition,
the Company must comply with standards established by the Occupational Safety
and Health Administration. These standards govern labor practices and employee
health and safety. The Company is currently updating its written health and
safety policies and training employees in these updated policies. If the Company
violates these rules or regulations, it could incur civil liability, the federal
government might cancel or suspend its existing contracts, or the federal
government might declare the Company ineligible to receive future contracts or
subcontracts. In addition, if any of the Company's major customers in the
defense industry lose their federal government certification, that loss could
have a material adverse effect on the level of their purchases from the Company
and on the Company's business and financial performance. See "Business
Government Regulation."

Year 2000. The Company is developing and carrying out a comprehensive
strategy for updating its information technology ("IT") systems and
manufacturing systems for Year 2000 ("Y2K") compliance. The Company expects its
Y2K assessment to be completed before the end of fiscal 1999, and internal
compliance to be completed early in the next fiscal year.

The Company is also identifying third parties with which it has a
significant relationship that, in the event of a Y2K failure, could have a
material impact on the Company's financial position or conduct certain operating
results. The effect on the Company of such a failure could range from a minor
interruption in production or shipping, to a catastrophic extended loss of
utility service resulting from interruptions at the point of power generation,
long-line transmission, or local distribution to the Company's production
facilities. Such an interruption could result in an inability to provide
products to the Company's customers, resulting in a material adverse effect on
the Company's operating results and financial position. The Company expects this
process to continue throughout the current and next fiscal year. In the event of
a minor interruption in production or shipping due to a Y2K problem, the Company
anticipates that transactions could be processed manually while IT and other
systems are repaired. The Company is in the process of developing a contingency
plan in the event of a catastrophic Y2K problem and expects to have the plan in
place early in the next fiscal year.
See "MD&A Year 2000."

12
<PAGE>
Shares Eligible for Future Sale. Assuming conversion of the Preferred Stock
into 3,000,000 shares, and exercise of the Warrants for 236,109 shares, the
Company will have up to 19,222,432 shares outstanding after the Offering
(subject to certain other assumptions). Of these shares, 16,707,588 shares will
be registered or transferable under Rule 144 and 2,514,844 shares will be
restricted from resale. The Company has reserved another 7,402,500 shares for
issuance under other outstanding warrants and stock options. The Company may
also issue to the Selling Shareholders an indeterminate number of Common shares
(in addition to the 3,000,000 Conversion Shares) if the conversion price of the
Preferred Stock would be below $5.67 per share, and the Company's shareholders
approve such issuance. Significant sales of shares of Common Stock under a
registration statement, pursuant to Rule 144 or otherwise in the future, or the
prospect of such sales, may depress the price of the Common Stock. See "Shares
Eligible for Future Sale," and "Selling Shareholders - Conversion of the
Preferred Stock - Conversion Price."

- --------------------------------------------------------------------------------
A number of these Risk Factors contain forward-looking statements regarding
the Company's business and financial results. Actual results may differ
materially from those forward-looking statements.
- --------------------------------------------------------------------------------

13
<PAGE>
PRICE RANGE OF COMMON STOCK; DIVIDENDS

Market Information

The Company's Common Stock has been traded on Nasdaq's National Market
System since July 1996 under the symbol "PCTH." Nasdaq reported the following
range of high and low sales prices for the Common Stock for each calendar
quarter within the Company's 1996, 1997 and 1998 fiscal years:

Calendar Period High Low
--------------- ---- ---
1995
Second Quarter (June 1 - June 30) $8.00 $5.00
Third Quarter 8.00 5.00
Fourth Quarter 6.00 4.00
1996
First Quarter 4.38 3.75
Second Quarter
5.00 2.75
Third Quarter
5.0625 2.00
Fourth Quarter
3.125 1.9375
1997
First Quarter
4.75 2.75
Second Quarter
4.0625 2.6875
Third Quarter 5.0625 3.7188
Fourth Quarter 6.8750 4.00
1998
First Quarter 7.0313 4.1875
Second Quarter 6.9375 5.3125
Third Quarter 7.00 2.6875
Fourth Quarter (October 1 - October 20) 3.00 1.4375

As of October 20, 1998, (a) the closing sales price on Nasdaq for the
Common Stock was $2.0313 per share, and (b) the Company had 953 common
shareholders of record.

Until March 13, 1995, there was no public market for the Company's Common
Stock. From that date through September 14, 1995, the Common Stock was listed on
the Nasdaq Electronic Bulletin Board. From September 15, 1995 through July 15,
1996, the Common Stock was traded on Nasdaq's Small Cap Market System under the
symbol "PCTH."

Dividend Policy

The Company has never declared or paid cash dividends on the Common Stock.
The Company currently anticipates that it will retain all future earnings to
fund the operation of its business and does not anticipate paying dividends on
the Common Stock in the foreseeable future. The Indenture entered into in
connection with the financing for the Aeromet acquisition restricts the
Company's ability to pay dividends. See "MD&A - Recent Events - Aeromet
Acquisition - Note Offering."

14
<PAGE>
SELECTED FINANCIAL DATA OF THE COMPANY
(in thousands, except percentage and per share data)

The following selected financial data presents selected historical and pro
forma financial data of the Company, but does not include Aeromet except for one
month included in the three-month period ended August 31, 1998, and except for
the pro forma for that period. The selected historical financial data, as of and
for the years ended May 31, 1994, 1995, 1996, 1997 and 1998, is derived from the
Company's audited financial statements. The selected historical financial data
as of August 31, 1998, and for the three-month periods ended August 31, 1997 and
1998, is derived from the unaudited financial statements prepared by the Company
on a basis consistent with the Company's audited financial statements, and, in
the opinion of management, include all adjustments necessary for a fair
presentation of the results for such periods. Operating results for the three
months ended August 31, 1998, are not necessarily indicative of the results that
may be expected for any other interim period or for the year ending May 31,
1999. The selected pro forma financial data for the year ended May 31, 1998, and
for the three months ended August 31, 1998, is derived from the Company's
Unaudited Pro Forma Financial Data. This data should be read in conjunction with
the Company's Financial Statements and Notes thereto, Unaudited Pro Forma
Financial Data, and Management's Discussion and Analysis of Financial Condition
Results of Operations Pacific Aerospace, included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
Years Ended May 31, Three-Month Periods Ended
August 31,
---------------------------------------------------------- ------------------------------
Historical Pro Forma Historical Pro Forma
------------------------------------------------- ------- ----------------- -----------
1994 1995 1996 1997 1998 1998 1997 1998 1998
------- ------- ------- ------- ------- -------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales(1) .................... $ 2,940 $11,035 $20,725 $34,175 $54,099 $115,505 $11,776 $19,178 $28,760
Cost of sales ................... 2,860 9,092 16,439 25,969 39,487 90,175 8,793 14,504 22,924
------- ------- ------- ------- ------- -------- ------- ------- -----------
Gross profit .................... 80 1,943 4,286 8,206 14,612 25,330 2,983 4,674 5,836
Operating expenses .............. 964 2,789 4,869 6,259 9,872 15,960 2,007 3,776 4,021
------- ------- ------- ------- ------- -------- ------- ------- -----------
Income (loss) from operations ... (884) (846) (583) 1,947 4,740 9,370 976 898 1,215
Net interest expense ............ 203 282 498 384 755 10,145 111 843 (2,348)
Other income (expense) .......... (11) (524) 15 169 (853) (910) 8 (6,721) (6,721)
------- ------- ------- ------- ------- -------- ------- ------- -----------
Income (loss) before taxes ...... (1,098) (1,652) (1,066) 1,732 3,132 (1,685) 873 (6,666) (7,854)
Income taxes (benefit) .......... -- (241) (67) 50 (482) 1,317 62 (2,255) (2,385)
------- ------- ------- ------- ------- -------- ------- ------- -----------
Net income (loss) ............... $(1,098) $(1,411) $ (999) $ 1,682 $ 3,614 $ (3,002) $ 811 $(4,411) $(5,469)
======= ======= ======= ======= ======= ======== ======= ======= ===========
Net income (loss) per share:
Basic ........................ $ (.60) $ (.41) $ (.16) $ .18 $ .29 $ (.24) $ .07 $ (.29) $ (.36)
Diluted ...................... (.60) (.41) (.16) .17 .27 (.24) .07 (.29) (.36)
Shares used in computation of income
(loss) per share:
Basic ........................ 1,826 3,469 6,209 9,500 12,486 12,486 11,718 15,421 15,421
Diluted ...................... 1,826 3,469 6,209 10,036 13,606 12,486 11,718 15,421 15,421

Other Financial Data:
EBITDA(4) ....................... $ (739) $ (437) $ 288 $ 3,305 $ 6,944 $ 2,049 $ 1,385 $ 2,049 $ 2,997
EBITDA margin ................... -- -- 1.4% 9.7% 12.8% 10.7% 11.8% 10.7% 10.4%
Depreciation and amortization ... $ 145 $ 409 $ 871 $ 1,358 $ 2,204 $ 1,151 $ 4.09 $ 1,151 $ 1,782
Capital expenditures ............ 81 959 1,293 2,739 10,290 11,728 2,700 2,135 2,135

At May 31, At August 31,
------------------------------------------------------------ -------------
1994 1995 1996 1997 1998 1998
------- ------- ------- ------- ------- -------------
Balance Sheet Data:
Cash and cash equivalents ....... $ 27 $ 1,079 $ 725 $ 3,048 $11,4 61 $18,998
Working capital (deficit) ....... (1,237) 1,758 952 13,090 25,599 46,686
Total assets .................... 7,894 11,630 27,649 35,752 78,580 171,465
Long-term debt (including
current portion) ................ 3,662 3,902 6,304 4,233 11,233 87,053
Shareholders' equity ............ 1,226 5,454 12,539 25,619 56,142 61,500

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

(1) The increases in net sales are attributable to acquisitions by the Company
and internal growth. See "Business" and "MD&A Results of Operations Pacific
Aerospace Net Sales."

(2) Presents the statement of operations data of the Company as if: (a) the
Aeromet acquisition, (b) the acquisition of ESC, which occurred in the
fourth quarter of fiscal 1998, and (c) the related financing transactions
occurred on June 1, 1997.

15
<PAGE>
(3) Includes Aeromet's results of operations for June and July 1998.

SELECTED FINANCIAL DATA OF AEROMET
(in thousands, except percentage data)

The following selected financial data presents selected historical
financial data of Aeromet and should be read in conjunction with Aeromet's
Financial Statements and Notes thereto, which have been conformed to generally
accepted accounting principles in the United States, and with Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Aeromet, included elsewhere in this Prospectus. The selected
historical financial data as of and for the years ended December 31, 1996 and
1997 is derived from Aeromet's audited financial statements. The selected
historical financial data as of and for the five-month periods ended May 31,
1997 and 1998 is derived from unaudited financial statements prepared by Aeromet
on a basis consistent with Aeromet's audited financial statements and, in the
opinion of management, includes all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation of the results for such
periods. Operating results for the five-month period ended May 31, 1998 are not
necessarily indicative of the results that may be expected for any other interim
period or for the period ending May 31, 1999.

<TABLE>
<CAPTION>
Years Ended December 31, Five-month periods ended May 31,
-------------------------------- --------------------------------
1996 1997 1997 1998
---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Net sales .......................... $41,939 $48,697 $19,069 $24,212
Cost of sales ...................... 34,340 40,591 16,560 19,614
Gross profit ....................... 7,599 8,106 2,509 4,598
Operating expenses ................. 7,098 6,482 2,832 2,590
------- ------- ------- -------
Income (loss) from operations ...... 501 1,624 (323) 2,008
Net interest expense ............... 731 754 349 274
------- ------- ------- -------
Income (loss) before taxes ......... (230) 870 (672) 1,734
Income tax expense ................. 570 900 25 798
------- ------- ------- -------
Net income (loss) .................. $ (800) $ (30) $ (697) $ 936
======= ======= ======= =======

Other Data:
EBITDA ............................. $ 3,912 $5,414 $1,217 $ 3,435
EBITDA margin ...................... 9.3% 11.1% 6.4% 14.2%
Depreciation and amortization ...... $ 3,411 $3,790 $1,540 $ 1,427
Capital expenditures ............... 2,803 1,544 309 197

December 31, May 31,
--------------------------- -------------
1996 1997 1998
------------- ------------ -------------
Balance Sheet Data:
Cash and cash equivalents ..................... $ -- $ 388 $ --
Working capital ............................... 2,964 6,516 6,468
Total assets .................................. 58,169 55,508 56,192
Long-term debt (including current portion) .... 12,868 14,516 11,892
Shareholder's equity .......................... 28,709 25,070 25,808
</TABLE>

16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

- --------------------------------------------------------------------------------
This section and the "Business" section of this Prospectus contain
"forward-looking statements." These forward-looking statements are not
guarantees of the Company's future performance. They are subject to risks and
uncertainties related to business operations, some of which are beyond the
Company's control. Any of these risks or uncertainties may cause actual results
or future circumstances to differ materially from the forward-looking statements
set forth in this "Management's Discussion and Analysis of Financial Condition
and Results of Operations" under the captions "Overview" and "Liquidity and
Capital Resources," and in "Business" under each of the captions in that
section.
- --------------------------------------------------------------------------------

Overview

The Company has been an active consolidator of companies, and its results
of operations have been substantially affected by acquisitions. The Company has
acquired and integrated nine companies since 1990. See "Business--Corporate
History." These acquisitions, as well as internal growth in the Company's
existing and acquired businesses, have resulted in substantial increases in net
sales. The Company's operating expenses and margins and other expenses also have
been affected by certain expenses directly associated with the acquisitions and
related capital raising transactions. The Company has experienced substantial
increases in all other expense categories as a result of the increases in its
operations. A portion of these expenses is attributable to the assimilation of
acquired operations into the Company's existing businesses.

In July 1998, the Company acquired Aeromet International plc ("Aeromet"), a
British limited company (the "Aeromet acquisition"). Aeromet is a manufacturer
of magnesium and aluminum precision sand and investment castings, and of
titanium and aluminum formed sheet products, with five locations in England. The
Aeromet acquisition will have a significant effect on the Company's future
operations and on comparisons of income, expense and balance sheet items in
periods after fiscal 1998. The Company's financial results for the first quarter
of fiscal 1999 include only one month of operations of Aeromet. See " Recent
Events Aeromet Acquisition."

Substantially all of the Company's revenues are generated by sales to
customers in the commercial aerospace, defense, electronics and transportation
industries, with commercial aerospace and defense industry sales being the most
significant. The commercial aerospace and defense industries are cyclical in
nature and subject to changes based on general economic conditions and
commercial airline industry, defense and government spending. See "Business
Industry Overview" and "Risk Factors Aerospace Industry Risks; Cyclicality, and
Volatility in Asian Markets."

The Company's operations are focused in development, manufacturing and
marketing of high performance electronics and metal components and assemblies.
The Company's electronics products are characterized by relatively low volumes
and high margins. In comparison, volumes have historically been higher and
margins lower for the Company's metals products. See "--Results of Operations
Pacific Aerospace." The Company believes that margins will remain higher for
electronic and assembled products than for its metals products. Products
incorporating both electronics and metal parts are expected to generate margins
closer to electronics product margins. As a result of margin differences,
changes in product mix among its electronics, assembled and metals products can
be expected to affect overall margins for the Company.

The Company's sales are not subject to significant seasonal fluctuations.
However, production and resulting sales are subject to the number of working
days in any given period. Results for various periods may vary materially due to
the number of working days available in any period.

Management believes that the Company's operations for the periods discussed
have not been adversely affected by inflation. Results of Operations - Pacific
Aerospace

18
<PAGE>
For an understanding of the significant factors that influenced the
Company's performance during the past three fiscal years and in the first
quarter of fiscal 1998 and 1997, the following discussion should be read in
conjunction with the consolidated financial statements of the Company presented
in this Prospectus.

The following table sets forth for the periods indicated certain historical
statement of operations data of the Company expressed in dollars (in thousands)
and as a percentage of net sales.

Year Ended May 31, 1998 Compared to Year Ended May 31, 1997

Net Sales. Net sales increased by $19.9 million, or 58%, to $54.1 million
for fiscal 1998 from $34.2 million in fiscal 1997. The significant increase in
net sales for fiscal 1998 from fiscal 1997 included increases in both commercial
aerospace industry net sales (an $11.3 million increase) and defense industry
net sales (a $3.5 million increase). The commercial aerospace industry net sales
increase was primarily attributable to increases in production at Boeing and the
related increase in demand from that customer for the Company's precision cast
and machined products. The defense industry net sales increase was primarily
attributable to an increase in orders of aerospace, satellite and weapons
systems electronics products.

Commercial aerospace industry net sales comprised 42.6% of total net sales
in fiscal 1998, up from 34.5% of net sales in fiscal 1997. Defense industry
sales comprised 19.9% of total net sales in fiscal 1998, down from 21.3% of net
sales in fiscal 1997.

The Company completed its Balo acquisition in February 1998 and its ESC
acquisition, effective as of March 1998. These acquisitions expanded production
of hermetically sealed product offerings and added relay, solenoid and flat
panel display product lines. See "Business--Corporate History, and --Products,
Processes and Markets--Assembled Electronics Products." Accordingly, net sales
for fiscal 1998 also included approximately four months of operations of Balo
and three months of operations for ESC, contributing approximately $4.3 million
to net sales in fiscal 1998.

Gross Profit. Gross profit increased by $6.4 million, or 78.0%, to $14.6
million for fiscal 1998 from $8.2 million in fiscal 1997. As a percentage of net
sales, gross profit increased to 27.0% in fiscal 1998 from 24.0% in fiscal 1997,
which was primarily attributable to increased efficiencies gained in
manufacturing processes and in-house production of processes that had previously
been purchased from outside vendors. The Company also believes that capital
investments in equipment and production processes contributed to the improvement
in gross profit margins.

Operating Expenses. Operating expenses increased by $3.6 million, or 57.1%,
to $9.9 million for fiscal 1998 from $6.3 million in fiscal 1997, partially due
to the Balo and ESC acquisitions and increased levels of operations in fiscal
1998. As a percentage of net sales, operating expenses remained essentially
unchanged.

19
<PAGE>
EBITDA. EBITDA increased by $3.6 million, or 109.1%, to $6.9 million for
fiscal 1998 from $3.3 million in fiscal 1997. As a percentage of net sales,
EBITDA increased to 12.8% in fiscal 1998 from 9.7% in fiscal 1997. The increase
in EBITDA as a percentage of net sales during this period was primarily
attributable to production efficiencies and improved capacity utilization.

Net Interest Expense. Net interest expense increased $371,000, or 96.6%, to
$755,000 for fiscal 1998 from $384,000 in fiscal 1997. This increase was
primarily due to the Company's financing of capital equipment purchases and the
debt incurred to finance the expansion of its Wenatchee facilities to support
growth in net sales.

Other Income (Expense). Other income (expense) represents non-recurring and
non-operational income and expense for the period. Other expense increased to
$853,000 in fiscal 1998 from income of $169,000 in fiscal 1997. This increase of
$1,022,000 was due principally to a $1.0 million write-off of portions of notes
receivable and associated debt restructuring and related expenses in connection
with the termination of the Company's efforts during the third quarter of fiscal
1998 to form an information technology group. See "Certain Transactions."

Net Income. Net income increased $1.9 million, or 111.8% to $3.6 million
for fiscal 1998 from $1.7 million in 1997, primarily as a result of the factors
discussed above.

Year Ended May 31, 1997 Compared to Year Ended May 31, 1996

Net Sales. Net sales increased by $13.5 million, or 65.2%, to $34.2 million
for fiscal 1997 from $20.7 million in fiscal 1996. This increase was primarily
attributable to larger order sizes for electronics products, due to broader
market acceptance of the Company's electronics products and technologies, which
increased sales of higher priced products and added new customers.

The Company acquired NTI in April 1997, which added capabilities for
explosive bonding of specialty metals. See "Business--Corporate History" and
"--Products, Processes and Markets--Explosive Bonding." Accordingly, net sales
for fiscal 1997 included one month of operations of NTI, which contributed
$183,000 to total net sales for that year.

Gross Profit. Gross profit increased by $3.9 million, or 90.7%, to $8.2
million for fiscal 1997, up from $4.3 million in fiscal 1996. As a percentage of
net sales, gross profit increased to 24.0% in fiscal 1997 from 20.7% in fiscal
1996. The increase in gross profit as a percentage of net sales was primarily
attributable to achieving revenue levels which allowed for production
efficiencies and increased capacity utilization. The Company also believes that
its investments in manufacturing equipment contributed to improvements in gross
profit margins.

Operating Expenses. Operating expenses increased by $1.4 million, or 28.6%,
to $6.3 million for fiscal 1997, from $4.9 million for fiscal 1996. As a
percentage of net sales, operating expenses decreased to 18.3% in fiscal 1997
from 23.5% in fiscal 1996. The substantial decrease in operating expenses as a
percentage of net sales was primarily attributable to the Company's improved
ability to leverage its operating costs and the consolidation of certain
operations to the Company's Wenatchee manufacturing campus. Specifically, both
CDI in the electronics segment and Cashmere in the aerospace segment were
consolidated into the Company's Wenatchee manufacturing campus. See
"Business--Products, Processes and Markets--Assembled Electronics Products" and
"--Precision Machining." EBITDA. EBITDA increased by $3.0 million, or 1,000.0%,
to $3.3 million for fiscal 1997, up from $300,000 for fiscal 1996. As a
percentage of net sales, EBITDA increased to 9.7% in fiscal 1997, from 1.4% in
fiscal 1996. The substantial increase in EBITDA as a percentage of net sales was
primarily attributable to efficiencies gained in manufacturing processes,
consolidation of certain operations to the Company's Wenatchee campus allowing
for overhead efficiencies, and increases in net sales not requiring incremental
increases in operating expenses.

Net Interest Expense. Net interest expense decreased $114,000, or 22.9%, to
$384,000 for fiscal 1997 from $498,000 in fiscal 1996, primarily as a result of
the repayment of debt that was funded by proceeds from a July 1996 public and a
February 1997 private offering of equity securities, and the reduction of bank
line of credit balances throughout the year.

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<PAGE>
Other Income (Expense). Other income increased to $169,000 in fiscal 1997
from income of $15,000 in fiscal 1996 primarily as a result of sale of scrap and
recycling of excess materials in the manufacturing process.

Net Income. Net income increased $2.7 million to $1.7 million for fiscal
1997 from a loss of $999,000 in fiscal 1996 primarily as a result of factors
discussed above.

Results of Operations--Aeromet

The following table sets forth for the periods indicated certain historical
statement of operations data of Aeromet expressed in U.S. dollars (in thousands)
and as a percentage of net sales:

<TABLE>
<CAPTION>
Years Ended December 31, Five Months Ended May 31,
-------------------------------------- --------------------------------------
1996 1997 1997 1998
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales ........................ $ 41,939 100.0% $ 48,697 100.0% $ 19,069 100.0% $ 24,212 100.0%
Cost of sales .................... 34,340 81.9 40,591 83.4 16,560 86.8 19,614 81.0
-------- ----- -------- ----- -------- ----- -------- -----
Gross profit ..................... 7,599 18.1 8,106 16.6 2,509 13.2 4,598 19.0
Operating Expenses ............... 7,098 16.9 6,482 13.3 2,832 14.9 2,590 10.7
-------- ----- -------- ----- -------- ----- -------- -----
Income (loss) from operations .... 501 1.2 1,624 3.3 (323) (1.7) 2,008 8.3
Net interest expense ............. 731 1.7 754 1.6 349 1.8 274 1.1
Income tax benefit (expense) ..... (570) -- (900) -- (25) -- (798) --
-------- ----- -------- ----- -------- ----- -------- -----
Net income (loss) ................ $ (800) --% $ (30) --% $ (697) --% $ 936 3.9%
======== ===== ======== ===== ======== ===== ======== =====
EBITDA ........................... $ 3,912 9.3 $ 5,414 11.1% $ 1,217 6.4% $ 3,435 14.2%
</TABLE>

Five Months Ended May 31, 1998 Compared to Five Months Ended May 31, 1997

Net Sales. Net sales increased by $5.1 million, or 26.7%, to $24.2 million
for the five months ended May 31, 1998 from $19.1 million for the five months
ended May 31, 1997. This increase was primarily attributable to increased sales
of commercial aircraft components (particularly from Airbus related customers)
and motorsports parts for the racing industry. Aeromet was able to capitalize on
the increase in demand by increasing production capacity at its Rochester site,
and retooling its Birmingham site from aircraft engine production to stretch
forming of aluminum alloys.

Gross Profit. Gross profit increased by $2.1 million, or 84.0%, to $4.6
million for the five months ended May 31, 1998 from $2.5 million for the five
months ended May 31, 1997. As a percentage of net sales, gross profit increased
to 19.0% of net sales for the five-month period in 1998 from 13.2% for the
five-month period in 1997. The increase in gross profit as a percentage of net
sales was primarily attributable to increased efficiencies at the Rochester and
Birmingham sites, after completion of construction and retooling at both sites
during the first half of 1997, which enabled Aeromet to increase production. In
addition, at its Worcester site, Aeromet reorganized its manufacturing
management and significantly reduced scrap levels.

Operating Expenses. Operating expenses decreased by $200,000, or 7.1%, to
$2.6 million for the five months ended May 31, 1998 from $2.8 million for the
five months ended May 31, 1997. As a percentage of net sales, operating expenses
decreased to 10.7% for the five-month period in 1998 from 14.9% for the
five-month period in 1997. This decrease in operating expenses as a percentage
of net sales was primarily attributable to a reduction of the sales and
marketing force.

EBITDA. EBITDA increased by $2.2 million, or 183.3%, to $3.4 million for
the five months ended May 31, 1998 from $1.2 million for the five months ended
May 31, 1997. As a percentage of net sales, EBITDA increased to 14.2% for the
five-month period in 1998 from 6.4% for the five-month period in 1997. This
increase in EBITDA as a percentage of net sales was attributable to the
combination of the increased gross margins and decreased operating expenses in
the 1998 period as compared to the 1997 period.

Net Interest Expense. Net interest expense decreased $75,000 or 21.5% to
$274,000 for the five months ended May 31, 1998 from $349,000 for the five
months ended May 31, 1997. Such decrease was due to lower short-term borrowings.

21
<PAGE>
Net Income. Net income increased $1.6 million to $936,000 for the five
months ended May 31, 1998 from a loss of $697,000 for the five months ended May
31, 1997, primarily as a result of the factors discussed above.

Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

Net Sales. Net sales increased by $6.8 million, or 16.2%, to $48.7 million
for the year ended December 31, 1997 from $41.9 million for the year ended
December 31, 1996. This increase in annual net sales was primarily attributable
to production efficiencies and manufacturing improvements achieved at two of
Aeromet's sites, providing for increased operating efficiencies and product
throughput. In addition, sales continued to increase in commercial aircraft
components and motorsports parts businesses.

Gross Profit. Gross profit increased by $500,000, or 6.6% to $8.1 million
for the year ended December 31, 1997 from $7.6 million for the year ended
December 31, 1996. As a percentage of net sales, gross profit decreased slightly
to 16.6% in 1997 from 18.1% in 1996. The decrease in gross profit as a
percentage of net sales was primarily attributable to production delays during
construction and retooling at two of Aeromet's production sites in the first
half of the year. Aeromet estimates that gross profit during the second half of
1997 improved significantly after completion of those projects which enabled
Aeromet to increase production and associated gross profit.

Operating Expenses. Operating expenses decreased by $600,000, or 8.5%, to
$6.5 million for the year ended December 31, 1997 from $7.1 million for the year
ended December 31, 1996. As a percentage of net sales, operating expenses
decreased to 13.3% in 1997 from 16.9% in 1996. This decrease in operating
expenses was a result of reducing sales and marketing staffing within Aeromet,
and managerial staff at one of Aeromet's manufacturing sites.

EBITDA. EBITDA increased by $1.5 million to $5.4 million for the year ended
December 31, 1997 from $3.9 million for the year ended December 31, 1996. As a
percentage of net sales, EBITDA increased to 11.1% in 1997 from 9.3% in 1996.
This increase was primarily attributable to the impact of gross profit changes
described previously. As noted, EBITDA improved significantly in the latter half
of the year.

Net Interest Expense. Net interest expense increased $23,000, or 3.1%, to
$754,000 for the year ended December 31, 1997 from $731,000 for the year ended
December 31, 1996. Such increase was due to slightly higher outstanding credit
facility balances due to increased working capital requirements.

Net Loss. Net loss decreased to $30,000 for the year ended December 31,
1997 from a loss of $800,000 for the year ended December 31, 1996, primarily as
a result of the factors discussed above.

Results of Operations - cific Aerospace after Aeromet Acquisition with
Comparative Prior Year Quarterly Amounts

Quarter Ended August 31, 1998 Compared to Quarter Ended August 31, 1997

Net Sales. Net sales increased by $7.4 million, or 62.9%, to $19.2 million
for the quarter ended August 31, 1998, from $11.8 million for the quarter ended
August 31, 1997. This increase included increases in both its aerospace industry
group net sales (a $5.6 million increase) and its electronics industry group net
sales (a $1.8 million increase). The increase in the Company's net sales to the
aerospace industry was attributable to (a) increases in production at Boeing
which increased its demand for the Company's precision cast and machined
products, and (b) the inclusion of one month of Aeromet sales. The increase in
the Company's net sales to the electronics industry was primarily attributable
to the acquisition in February 1998 of Balo and the ESC acquisition effective as
of March 1998. Net sales contributed by Balo, ESC and Aeromet for the first
quarter of fiscal 1999 were $779,000, $1,113,000, and $4,463,000, respectively.

Gross Profit. Gross profit increased by $1.7 million, or 56.7%, to $4.7
million for the quarter ended August 31, 1998, from $3.0 million for the quarter
ended August 31, 1997. As a percentage of net sales, gross profit decreased to
24.4% for the quarter ended August 31, 1998, from 25.3% for the quarter ended
August 31, 1997. This decrease was primarily attributable to the acquisitions of
ESC and Aeromet, which have comparatively lower average gross profit margins.
Without ESC and Aeromet, gross profit as a percentage of net sales would have
increased to 30.4% for the quarter ended August 31, 1998,

22
<PAGE>
primarily because of improved efficiencies from the development of manufacturing
processes and in-house production capabilities that had previously been
purchased from outside vendors and because of capital investments in equipment
and production capabilities. Gross profit (loss) attributable to Balo, ESC and
Aeromet for the first quarter of fiscal 1999 was $86,000, $(259,000) and
$797,000, respectively.

Operating Expenses. Operating expenses increased by $1.8 million, or 88.1%,
to $3.8 million for the quarter ended August 31, 1998, from $2.0 million for the
quarter ended August 31, 1997. This increase was partially due to costs related
to the Balo, ESC and Aeromet acquisitions and increased levels of operations in
the first quarter of 1999. As a percentage of net sales, operating expenses
increased 2.7%, to 19.7% for the quarter ended August 31, 1998, from 17.0% for
the quarter ended August 31, 1997. This increase is primarily attributable to
the electronics industry group and the acquisitions of Balo and ESC. The
increase in operating expenses as a percentage of net sales was partially offset
by the acquisition of Aeromet, which had lower than average operating expenses
in relation to net sales, in the first quarter of fiscal 1999. Operating
expenses attributable to Balo, ESC and Aeromet for the first quarter of fiscal
1999 were $400,000, $287,000 and $473,000, respectively.

Interest Expense. Interest expense increased by $939,000, or 722.3%, to
$1,069,000 for the quarter ended August 31, 1998, from $130,000 for the quarter
ended August 31, 1997. This increase was primarily due to (a) the debt incurred
by the Company to finance the Aeromet acquisition, (b) the Company's financing
of capital equipment purchases, and (c) the debt incurred to finance the
expansion of the Company's Wenatchee facilities. Interest expense attributable
to Balo, ESC and Aeromet (exclusive of interest related to the acquisition
financing) for the first quarter of fiscal 1999 was $0, $45,000 and $0,
respectively.

Other Income (Expense). Other income (expense) represents non-recurring and
non-operational income and expense for the period. Other income decreased
$6,729,000 to an other expense of $6,721,000 for the quarter ended August 31,
1998, from other income of $8,000 for the quarter ended August 31, 1997. This
decrease in other income was principally due to: (a) a $3,581,000 write-down in
connection with ESC, and (b) a $3,103,000 write-down of the Company's investment
in and guarantees related to Orca Technologies, Inc. The Company is presently
considering its options regarding its investments in ESC and Orca and additional
losses in the future are reasonably possible. See "Recent Events - Electronic
Specialty Corporation, and - Orca Technologies, Inc.," below. Other income
(expense) attributable to Balo, ESC (exclusive of the write-down discussed
above), and Aeromet for the first quarter of fiscal 1999 was $60,000, $50,000,
and $0, respectively.

Net Income (Loss). Net income decreased $5,222,000 or 643.9% to a net loss
of $4,411,000 for the quarter ended August 31, 1998, from net income of $811,000
for the quarter ended August 31, 1997, primarily as a result of unexpected
Aeromet acquisition cost increases and the ESC and Orca write-downs. Before the
ESC and Orca write-downs, the Company's net income for the first quarter of
fiscal 1999 would have decreased $810,000 or 99.9% to $1,000 in the first
quarter of 1999, from $811,000 for the first quarter of fiscal 1998, primarily
as a result of the losses at Balo and ESC for the quarter. Pre-tax net income
(loss) attributable to Balo, ESC and Aeromet for the first quarter of fiscal
1999 was $(254,000), $(642,000) and $326,000 respectively. Aeromet pre-tax net
income includes amortization of goodwill, but does not include interest expense
associated with the acquisition indebtedness.

Deferred Tax Assets. At August 31, 1998, the Company had net deferred tax
assets of $1,677,000 whose realization is dependent on material improvements
over present levels of pre-tax income and the realization of capital gains,
primarily in the United States. The Company expects to achieve this improvement
through (a) continued integration, cross selling, and operational efficiencies
of its businesses, including Aeromet, and (b) future asset sales.

Liquidity and Capital Resources

Year Ended May 31, 1998 Compared to Year Ended May 31, 1997

Cash generated from operating activities was $1.6 million for fiscal 1998
compared to cash used of $212,000 in fiscal 1997. The change in net cash from
operations was primarily a result of 111.8% increase in net income from $1.7
million in fiscal 1997 to $3.6 million in fiscal 1998. The increase in net
income was partially offset by increases in accounts receivable and inventories
to support revenue growth. Increases in accounts payable, accrued liabilities
and other liabilities also contributed to increased cash from operations.

23
<PAGE>
Cash used in investing activities increased from $2.0 million in fiscal
1997 to $16.7 million in fiscal 1998, an increase of $14.7 million. The change
results primarily from the Company's increased investment in property and
equipment of $6.5 million in fiscal 1998 compared to $2.1 million in fiscal 1997
and the issuance of $6.3 million in notes receivable in connection with the
investment in a proposed information technology group. Of the total $6.3
million, a net of $4.6 million is represented by an investment in the common
stock of a third party internet services provider. See "Certain Transactions."

Cash generated from financing activities increased by $19.0 million, to
$23.5 million in fiscal 1998, from $4.5 million in fiscal 1997. During fiscal
1998, the Company completed several financing transactions, receiving net
proceeds from long-term debt financing of $10.1 million (including net proceeds
from convertible notes of $5.4 million); $2.2 million from the sale of Common
Stock; net proceeds of $9.3 million from the sale of Series B Preferred, and
$3.8 million from the proceeds from exercise of stock options and warrants. Cash
generated by the equity financing transactions was offset to a certain degree by
payments on long-term debt and capital leases of $1.5 million during the year.

Capital expenditures were $10.3 million during fiscal 1998, which is higher
than normal due to approximately $4.7 million for expansion of the Company's
Wenatchee manufacturing facilities and acquisition and construction of its
headquarters, with the balance of $5.6 million related primarily to purchases of
machinery and equipment. During fiscal 1998, the Company substantially completed
an addition to its Wenatchee facilities consisting of approximately 12,000
square feet of production space. The cost of this expansion was approximately
$1.3 million. The Company has entered into a term loan with its primary senior
lender for approximately $712,000 of these expansion costs. The Company has also
acquired certain property adjacent to its existing Wenatchee on which it built
an office building to house the Company's executive, administrative and
accounting personnel. This facility was occupied in August 1998. Total project
costs for the office building are estimated at approximately $3.0 million and
have been or will be funded from working capital. The Company is currently
negotiating the purchase of the Balo facility for approximately $1.1 million. As
of May 31, 1998, the Company had no material commitments outstanding for
purchases of additional capital assets.

The Company's working capital, as of May 31, 1998 and 1997 was $25.6
million and $13.1 million, respectively. The increase in working capital in
fiscal 1998 over fiscal 1997 was primarily the result of the equity and
financing activities discussed above and the Company's improved net income from
operations. In July 1998, the Company completed an offering of $75,000,000 of 11
1/4% senior subordinated notes (the "Notes") to qualified institutional buyers
to finance the Aeromet acquisition. The Notes will mature on August 1, 2005,
unless previously redeemed. The Notes will be redeemable at the option of the
Company on or after August 1, 2003. In addition, on or before August 1, 2001,
the Company may redeem up to 20% of the original aggregate principal amount of
the Notes, subject to certain conditions.

At May 31, 1988, the Company had net operating loss (NOLs) carryforwards
for federal income tax purposes of approximately $4.9 million, the benefits of
which expire in the tax year 2001 through the tax year 2011. The NOLs created by
the Company's subsidiaries prior to their acquisition and the NOLs created as a
consolidated group or groups subsequent to a qualifying tax free merger or
acquisition, have limitations related to the amount of usage by each subsidiary
or consolidated group as described in the Internal Revenue Code. As a result of
these limitations, approximately $800,000 of the $4.9 million of NOLs will never
become available. At May 31, 1997, the Company recorded a valuation allowance
because management believed that it was uncertain that some portion or all of
the deferred tax assets would be realized. At May 31, 1998, the Company
eliminated the valuation allowance for deferred taxes due to management's
assessment of improved probability of realization. The Company anticipates that
its effective income tax rate will continue to approach the statutory rate in
the future.

Quarter Ended August 31, 1998 Compared to Quarter Ended August 31, 1997

Financing Activities. Cash generated from financing activities increased by
$71.2 million, to $77.2 million at August 31, 1998, from $6.0 million at August
31, 1997. During the first quarter of fiscal 1999, the Company completed two
financing transactions, including the long-term debt offering of $75 million to
finance the Aeromet acquisition and

24
<PAGE>
the completion of the Company's offering of Series B Convertible Preferred Stock
and related Warrants. See Recent Events -Aeromet Acquisition, and - Preferred
Stock Offering." Cash generated by these financing transactions was offset by
payments on long-term debt and capital leases of $0.4 million during the
quarter, and costs of issuance and financing.

The Company's primary banking relationships include a revolving line of
credit up to $6.3 million for the Company's U.S. operations, a revolving line of
credit up to approximately $7.5 million (4.5 million pounds sterling) for
Aeromet's operations, a term loan of approximately $700,000 for building
improvements, and a term loan of $1.2 million for the construction of the
Company's headquarters building.

Capital Expenditures. The Company made capital expenditures of $2.1 million
during the first quarter of fiscal 1999. This amount is higher than normal due
to (a) $.6 million for the construction of its Wenatchee headquarters building,
and (b) $1.5 million related primarily to purchases of machinery and equipment.
In August 1998, the Company completed and occupied its headquarters building,
which consists of approximately 22,400 square feet of office space to house the
Company's executive, administrative and accounting personnel. The total cost of
this project was approximately $3.5 million. The Company has entered into a term
loan with its primary senior lender for approximately $1.2 million of the
building costs. The Company is currently negotiating the purchase of the Balo
facility for approximately $1.1 million and closing is expected to occur in
November 1998. In connection with the Aeromet acquisition, the Company entered
into an Option Agreement with Charles Baynes plc, which grants the Company a
one-year option to purchase three of the facilities currently leased by Aeromet.
As of August 31, 1998, the Company had no material commitments outstanding for
purchases of additional capital assets.

Working Capital. The Company's working capital, as of August 31, 1998 and
May 31, 1998 was $46.7 million and $25.6 million, respectively. The increase in
working capital at August 31, 1998 over May 31, 1998 was primarily the result of
the Aeromet acquisition and the associated financing, and the sale of the Series
B Convertible Preferred Stock. See "Recent Events - Aeromet Acquisition, and -
Preferred Stock Offering."

Future Capital Requirements. The Company believes that the net proceeds
from the release of funds escrowed in connection with the Company's offering of
Series B Convertible Preferred Stock and the proceeds of the Company's recent
offering of Common Stock, plus cash from operations, will be sufficient to meet
the Company's cash requirements and to fund budgeted capital expenditures for
fiscal 1999. See "Recent Events - Preferred Stock Offering."

Recent Events

Aeromet Acquisition

Acquisition Transaction. On July 30, 1998, Pacific Aerospace & Electronics
(UK) Limited ("PA&E-UK"), a company organized under the laws of the United
Kingdom and an indirect wholly-owned subsidiary of the Company, purchased all of
Aeromet's issued and outstanding capital stock. The Aeromet acquisition was made
pursuant to a Share Acquisition Agreement dated July 1, 1998, between Charles
Baynes plc, Westpark Limited (an affiliate of Charles Baynes plc), PA&E-UK and
the Company. In consideration for PA&E-UK's acquisition of all of Aeromet's
issued and outstanding capital stock, the Company delivered to Westpark Limited
(pound)42 million (or approximately $69 million) in cash. The purchase price was
determined in arms-length negotiations between Charles Baynes plc and the
Company. See Risk Factors - Acquisition Risks."

Note Offering. The Company funded the Aeromet acquisition from the net
proceeds of an offering by the Company of 11 1/4% Senior Subordinated Notes due
2005 (the "Notes"). Subject to the terms and conditions of a Purchase Agreement
(the "Purchase Agreement"), dated July 23, 1998, between the Company, the
Company's United States subsidiaries (the "Subsidiaries"), and Friedman,
Billings, Ramsey & Co., Inc. and BancBoston Securities Inc. (collectively the
"Initial Purchasers"), the Initial Purchasers agreed to purchase, and the
Company agreed to sell, Notes in the aggregate principal amount of $75 million.
The Notes were issued pursuant to an Indenture, dated July 30, 1998 (the
"Indenture") between the Company, the Subsidiaries and IBJ Schroder Bank & Trust
Company, as trustee. The Notes (a) are senior subordinated, unsecured, general
obligations of the Company, (b) will mature on August 1, 2005, unless

25
<PAGE>
previously redeemed pursuant to the Indenture, and (c) are jointly and severally
guaranteed on a senior subordinated basis by each of the Subsidiaries. The
Company is subject to a number of restrictive covenants under the Notes. In
addition, if there is a change of control of the Company's Common Stock, the
Company may be required to repay the Notes. See "Risk Factors - Restrictive Debt
Covenants."

Registration Rights. In connection with the Purchase Agreement, the Company
and the Subsidiaries entered into a registration rights agreement with the
Initial Purchasers, pursuant to which the Company agreed to file with the
Securities and Exchange Commission either (a) an exchange offer registration
statement relating to the exchange of the Notes for fully registered notes with
identical terms as the Notes (the "Exchange Notes") or (b) a shelf registration
statement pursuant to Rule 415 under the Securities Act of 1933 (the "Securities
Act"), for resale of the Notes and of the Exchange Notes that cannot be resold
without delivery of a prospectus. The Company further agreed to use its
reasonable best efforts to cause such registration statements to be declared
effective.

Preferred Stock Offering

In August 1998, the Company completed its offering of the Preferred Stock
and the Warrants to the Selling Shareholders (the "Preferred Stock Offering") by
issuing (a) an additional 70,000 shares of Preferred Stock, and (b) additional
warrants to purchase 97,221 shares of Common Stock, in exchange for a purchase
price of $7,000,000 which had been held in escrow pending completion of the
Aeromet acquisition. When combined with the first Preferred Stock closing in May
1998, the Company issued a total of 170,000 Shares of Preferred Stock and
Warrants to purchase 236,109 shares of Common Stock, for a total purchase price
of $17 million. See "Prospectus Summary - The Offering," and "Description of
Capital Stock - Preferred Stock - Series B Convertible Preferred Stock."

Electronic Specialty Corporation

On April 13, 1998, the Company's subsidiary, ESC Acquisition Corp.,
acquired substantially all of the assets of Electronic Specialty Corporation
(the "Seller"), including the name, and assumed certain of the Seller's
liabilities. The Company engaged the Seller's president to be president of ESC
after the closing. In June 1998, the Company terminated ESC's president. The
Company subsequently became aware of certain differences between ESC's actual
financial condition and the financial condition represented by the Seller in the
closing documents. These differences included a significantly lower backlog and
order flow, and significantly higher operating losses, than represented. As a
result, the Company laid off approximately 30% of ESC's workforce later in June
1998, and another 35 employees in October 1998. A new general manager appointed
by the Company in August has reassessed the business opportunities, including
cash flow and revenue forecasts, which are significantly lower than previously
forecasted.

ESC has incurred significant losses since its acquisition. At August 31,
1998, the Company wrote off its goodwill in ESC in the amount of $3,581,000 due
to these losses, and due to its significantly lower future expectations of
revenues and profits from ESC. In addition, the Company is investigating new
product line opportunities and evaluating the feasibility of continuing older
product lines and the business in general. Should the Company decide not to
continue all or any part of the business, additional losses in the future are
reasonably possible. See "Risk Factors - Acquisition Risks."

Orca Technologies, Inc.

At October 20, 1998, the Company held 2,289,309 shares of Orca's common
stock (the "Orca Shares"), which, to the Company's knowledge, constituted
approximately 17.91% of Orca's issued and outstanding common stock. The Company
acquired 179,600 of the Orca Shares in a market transaction, and the other
2,109,709 of the Orca Shares pursuant to an April 1998 restructuring agreement
between Orca and the Company. In the restructuring agreement, the Company (a)
canceled certain loans owed it by Orca in exchange for the 2,109,709 shares of
Orca's Common Stock, (b) agreed to continue guaranteeing Orca's credit facility
of $1.3 million and an equipment lease of $373,000 for equipment used by Orca's
then-subsidiary, Televar, Inc., and (c) accepted a $950,000 promissory note from
Orca (the "Orca Note") as payment for certain third-party notes then owned by
the Company. The Company also sublet approximately 95% of

26
<PAGE>
the square footage of its Bothell, Washington office space to Orca for an
equivalent amount of the lease payment. See "Certain Transactions Orca
Technologies, Inc."

The Company originally valued the Orca Shares on its balance sheet at
$5,014,000. Due to decreases in the trading price of Orca's common stock on the
Over the Counter Bulletin Board, the Company recorded unrealized losses on the
Orca Shares, included in shareholders' equity, of $436,000 as of May 31, 1998.
On August 31, 1998, the Company recorded a charge of approximately $2.3 million
to reduce the value of its investment in Orca Common Stock to $2.7 million, due
to an other-than-temporary decrease in the traded market price of Orca Common
stock and to record a liability related to certain guaranties by the Company of
Orca liabilities. The Company had also reserved $250,000 of the Orca Note in the
fourth quarter of fiscal 1998, and during August, the Company reserved the
remaining balance of $700,000.

Orca has sold its Televar subsidiary to a third party and the Company is
currently negotiating for release of its guaranty of the equipment lease. As of
October 20, 1998, Orca was three months past due on the interest payments due on
the Orca Note and on its lease payments to the Company. The Company has demanded
full payment of the past due amounts from Orca. If the Company is unable to
obtain release of its guarantees, collect the payments due on the Orca Note and
sublease, or if the traded market price of Orca Common Stock decreases, the
Company may incur additional significant losses as a result of its investment in
Orca. See "Risk Factors - Acquisition Risks."

Issuance of Common Stock to Liviakis

In February 1998, the Company entered into a financial services agreement
with Liviakis Financial Communications, Inc. ("Liviakis") to provide financial
and public relations services to the Company. In connection with that consulting
agreement, the Company issued to Liviakis and Robert B. Prag, one of its
principals, warrants to purchase an aggregate of 1,290,000 shares of Common
Stock for $4.62 per share. In August 1998, the Company, Liviakis and Mr. Prag
entered into an agreement ("Liviakis Agreement") in which (a) a finder's fee
claim by Liviakis against the Company was resolved in exchange for the Company's
issuance of an aggregate of 590,000 shares of Common Stock to Liviakis and Mr.
Prag under the exemption from registration provided in Section 4(2) of the
Securities Act, and (b) Liviakis and Mr. Prag transferred the warrants
previously issued to them to the Company for cancellation. No commissions were
paid in connection with issuance of the shares to Liviakis and Mr. Prag. Under
the Liviakis Agreement, Liviakis and Mr. Prag cannot transfer their shares of
Common Stock until after February 1, 1999.

Fall 1998 Common Stock Offering

The Company is currently negotiating the issuance of an aggregate of
3,175,000 shares of Common Stock to accredited investors under Rule 506 of
Regulation D, in exchange for aggregate cash consideration of approximately
$7,500,000. The Company will pay 6% in commissions to the placement agent,
Marcel Huber, in connection with the offering. The Company expects to agree to
file a registration statement registering these shares for resale 180 days from
the closing date.

Year 2000

The Company is developing and carrying out a comprehensive strategy for
updating its information management and manufacturing systems for Year 2000
compliance. The Company's information technology systems include customized and
standard software purchased from outside vendors. All software has been
identified and is being assessed to determine the extent of renovations required
in order to be Y2K compliant. The Company believes that all software will be
made Y2K compliant before the end of the Company's current fiscal year through
vendor-provided updates or replacement with other Y2K compliant hardware and
software. The Company is in the process of identifying significant non-IT
systems which may be impacted by the Y2K problem, including those relating to
production, processing and communication equipment and is in the process of
determining through inquiries of equipment suppliers, as well as testing of such
equipment, the extent of renovations required, if any. The Company believes its
Y2K assessment will be completed before the end of the Company's current fiscal
year, and that renovation, validation and implementation will be completed early
in the next fiscal year.

27
<PAGE>
The Company is in the process of identifying third parties with which it
has a significant relationship that, in the event of a Y2K failure, could have a
material impact on the Company's financial position or operating results. The
third parties include energy and utility suppliers, creditors, material and
product suppliers, communication vendors and the Company's significant
customers. These relationships, especially those associated with certain
suppliers and customers, are material to the Company and a Y2K failure by one or
more of these parties could result in a material adverse effect on the Company's
operating results and financial position. The Company is making inquiries of
these third parties to assess their Y2K readiness. The Company expects that this
process will continue throughout the current and subsequent fiscal year.

The Company expects that costs to address Y2K issues will total
approximately $250,000, of which approximately $125,000 will be spent in fiscal
1999, with the remainder being spent during fiscal 2000. Costs include salary
and fringe benefits for personnel, hardware and software costs, and consulting
and travel expenses associated, directly or indirectly, with addressing Y2K
issues. Y2K issues have received a high priority within the Company and, as a
result, certain other IT projects have been delayed. While such non-Y2K projects
are expected to enhance operational efficiencies and improve the quality of
information available to management, the delay of such projects is not expected
to have a material adverse impact on the Company's operations. Worst case Y2K
scenarios could be as insignificant as a minor interruption in production or
shipping resulting from unanticipated problems encountered in the IT systems of
the Company or any of the significant third parties with whom the Company does
business. The pervasiveness of the Y2K issue makes it likely that previously
unidentified issues will require remediation during the normal course of
business. In such a case, the Company anticipates that transactions could be
processed manually while IT and other systems are repaired and that such
interruptions would have a minor effect on the Company's operations. On the
other hand, a worst case Y2K scenario could be as catastrophic as an extended
loss of utility service resulting from interruptions at the point of power
generation, long-line transmission, or local distribution to the Company's
production facilities. Such an interruption could result in an inability to
provide products to the Company's customers, resulting in a material adverse
effect on the Company's operating results and financial position.

New Accounting Pronouncements

In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for reporting and
disclosure of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. SFAS No. 130,
which is effective for fiscal years beginning after December 15, 1997, requires
restatement of financial statements for earlier periods to be provided for
comparative purposes. The Company has not determined the manner in which it will
present the information required by SFAS No. 130 in its annual financial
statements.

In June 1998, the FASB issued SFAS No. 131, Disclosure About Segments of an
Enterprise and Related Information. SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating
segments. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. SFAS No. 131 is effective
for fiscal years beginning after December 15, 1997. In the initial year of
application, comparative information for earlier years must be restated. The
Company anticipates that implementing the provisions of SFAS No. 131 will not
have a significant impact on the Company's existing disclosures. The Company has
not determined the manner in which it will present the information required by
SFAS No. 131 in its annual financial statements.

28
<PAGE>
BUSINESS

The Company develops, manufactures and markets high-performance electronics
and metal components and assemblies for the aerospace, defense, electronics and
transportation industries. The Company has acquired and integrated nine
operating companies since 1990. The Company's consolidation strategy is to
identify and acquire companies that it believes will (1) provide the opportunity
for increased sales to the Company's existing customers and for new sales to the
Company's potential customers, and (2) extend or vertically integrate the
Company's manufacturing capabilities or product lines.

Most recently, the Company acquired Aeromet on July 30, 1998. The Aeromet
acquisition nearly doubled the Company's size, and significantly expanded its
customer base and product offerings. Aeromet is one of the leading suppliers in
the United Kingdom of magnesium and aluminum precision sand and investment
castings, and titanium and aluminum formed sheet products, for the aerospace,
defense and motorsport industries in Europe. Aeromet's casting and forming
technologies and products are complementary extensions of the Company's existing
precision metals product lines.

The Company's headquarters are located at 430 Olds Station Road, Wenatchee,
Washington 98801, and its telephone number is (509) 667-9600.

Corporate History

The Company has integrated nine operating companies since 1990. These
acquisitions were each accounted for as purchases. The following chart
identifies each of these acquisitions, the year in which each acquisition was
completed and the current location of the acquired company's facilities, assets
or processes:

<TABLE>
<CAPTION>
Acquired Company Year of Acquisition Current Location
- ---------------------------------------------------------------------------- ------------------- ------------------------
<S> <C> <C>
Pacific Coast Technologies, Inc. ("Pacific Coast") 1990 Wenatchee, Washington
Cashmere Manufacturing Co., Inc. ("Cashmere") 1994 Wenatchee, Washington
Ceramic Devices, Inc. ("Ceramic Devices") 1995 Wenatchee, Washington
Aeromet America, Inc. (previously known as Morel Industries, Inc.) ("Aeromet 1996 Entiat, Washington
(America)")
Seismic Safety Products, Inc. 1996 Wenatchee, Washington
Northwest Technical Industries, Inc. ("NTI") 1997 Sequim, Washington
Balo Precision Parts, Inc. ("Balo") 1998 Butler, New Jersey
Electronic Specialty Corporation and Displays & Technologies, Inc. ("ESC") 1998 Vancouver, Washington
Aeromet International plc ("Aeromet") 1998 England (five locations)
</TABLE>

Business Strengths

Significant Customer Base

The Company counts among its customers many of the world's leading
aerospace, defense, electronics and transportation companies, including those on
the following chart. The Company believes that one of the key advantages of the
Aeromet acquisition is the opportunity it creates for the Company to access a
significant base of additional customers.

29
<PAGE>
U.S. Operations U.K. Operations
================================== ========================
The Boeing Company British Aerospace plc
PACCAR Rolls Royce plc
Raytheon/Hughes Aircraft GKN Westland Aerospace,
Company a division of GKN plc
Honeywell, Inc. Lucas Aerospace plc
Lockheed Martin Corporation Alenia (Aermacchi)
Northrop Grumman Corporation
Space Systems/Loral, Inc.
Westinghouse Electric Corporation
TRW, Inc.
Litton Industries

Strong Position in Major Aerospace and Defense Programs

The Company supplies components and parts to Boeing for each of Boeing's
737, 747, 757, 767 and 777 commercial aircraft construction programs. Aeromet
participates in the Airbus A300/310, A320 and A330/340 commercial aircraft
construction programs. In addition, both the Company and Aeromet participate in
major defense and military aircraft programs.

Diversity of Product Offerings and Capabilities

The Company manufactures a broad range of precision cast, machined and
assembled electronics products. The Company collaborates with many of its
customers to develop products that meet specific design or customization
requests. In addition, many of the Company's custom-developed electronics
components have become widely accepted in the industry. The Company believes
that its experience and capabilities in working with the changing needs of its
customers will allow it to continue to respond to changing market trends in its
industries.

Strong Technology Position

The Company utilizes specialized manufacturing techniques, advanced
materials science, process engineering and proprietary technologies or processes
in the manufacture of their metals and assembled products. In particular, the
Company's U.S. operations have a broad base of expertise in the manufacture of
cast aluminum products using lost foam, sand and permanent mold casting
technologies, and in its precision machined, explosively bonded and assembled
electronics products. Aeromet possesses specialized expertise in casting
magnesium and aluminum products using lost wax and sand casting techniques and
its licensed "Sophia Process" technology, and in super plastic forming of
titanium and stretch forming of aluminum alloys. The Company owns 32 U.S.
patents used in the manufacture of its electronics products and maintains an
ongoing program of evaluating and protecting its proprietary rights and
processes. The Company has three patent applications pending in the U.S. and
Europe.

Strategy

Leverage the Aeromet Platform

The Aeromet acquisition significantly enhanced the Company's commercial
aerospace and defense industry presence and provides the Company with a solid
platform from which to access major European commercial aircraft and aircraft
engine programs as well as markets within the European defense and
transportation industries. These markets would be difficult for the Company to
enter without a physical presence in Europe. The Company also believes that
Aeromet may

30
<PAGE>
provide a strategic opportunity for pursuing acquisitions of other European
aerospace, defense and transportation companies on a model similar to that which
the Company has pursued successfully in the United States.

Increase Margins Through Enhanced Marketing and Vertical Integration

The Company's strategy is to improve profit margins and revenues by (1)
consolidating the marketing of companies that share similar product lines or
customer bases and by leveraging the synergies among its consolidated companies
in order to increase customer penetration and (2) continuing to vertically
integrate its manufacturing processes in order to improve operating efficiencies
and to develop new products and product enhancements. A key component of this
strategy is to use the Company's expertise in advanced materials science and in
the manufacture and assembly of precision products to identify new products,
services and markets. The Company also intends to capitalize on the current
shift of commercial aircraft manufacturers and defense contractors toward
purchasing from a smaller number of suppliers that can supply more complete
systems and pre-assembled parts. Assembled parts and systems generally are
higher margin products than individual metal parts. By producing products that
integrate the Company's metals casting, forming and machining expertise with its
expertise in the manufacture of connectors, seals, filters, relays and
electronic packages, the Company expects to improve its profit margins and
position itself to capture a larger share of its customers' total product
requirements.

Leverage Product Development through Strategic and Proprietary Technologies

The Company develops new products from existing technologies in response to
specific customer requests. The Company plans to continue development of new
products for its customers and, where appropriate, to apply for additional
patents for those new technologies. The Company may acquire additional strategic
and proprietary technologies from third parties and expects to continue to
develop its research and development capabilities. The Company does not expect
to devote substantial resources to research and development that is not funded
by customers.

Pursue Other Strategic Acquisitions

The Company believes that there are and will continue to be opportunities
to grow the Company and enhance its profitability through acquisitions. The
Company intends to continue to pursue acquisitions of companies and technologies
that it believes will provide the opportunity for increased sales penetration
with existing customers and new sales to potential customers, and that will
extend and vertically integrate the Company's products and technologies.

Industry Overview

The aerospace supply industry is currently enjoying favorable trends driven
by strong growth in commercial aircraft fundamentals. Industry sources estimate
that the worldwide market for aircraft, including components, will be
approximately $520 billion over the ten-year period of 1997 through 2007.

Demand for aerospace components is closely related to delivery and use
rates for commercial aircraft. Delivery and use rates are in turn directly
related to the actual and projected volume of passenger and freight traffic,
average aircraft age and global fleet size. According to the Boeing 1998 Current
Market Outlook, world air traffic grew 6% from 1996 to 1997, following a 7%
increase in the previous year. Boeing and Airbus forecast that world air traffic
will grow by more than 5% each year over the next ten years. Boeing also
projects that during this same period domestic and international airlines will
lease or purchase over 7,600 new aircraft, thereby increasing the worldwide
commercial fleet from approximately 12,300 aircraft at the end of 1997 to
approximately 17,700 aircraft (net of retirements) at the end of 2007.

In 1997, Boeing delivered over 320 new aircraft compared to 220 new
aircraft it delivered in the prior year. In 1997, Airbus delivered 182 new
aircraft compared to 126 in the prior year. Boeing predicts that in 1998,
approximately 550 airplanes will be delivered. The Company believes that through
the near term the world's airlines will continue to add capacity and order new
aircraft in order to meet anticipated demand.

31
<PAGE>
Additionally, according to the U.S. Department of Defense, defense
procurement funding is expected to grow by 40%, from approximately $43 billion
in 1998 to approximately $60 billion in 2001. The Company believes that both its
electronics and aerospace business segments will benefit from this trend.

As in other transportation segments, aircraft manufacturers and defense
contractors have been actively searching for ways to improve the quality and
reduce the cost of their manufactured products. One major area of focus has been
the manner in which they work with their supply base. Similar to automotive
manufacturers, aircraft manufacturers and defense contractors have increasingly
become product designers and assemblers rather than vertically integrated
manufacturers. As a result, these manufacturers are outsourcing component
manufacturing to independent suppliers, seeking to benefit from an independent
supplier's lower cost structure and specialized manufacturing knowledge.
Suppliers that demonstrate an ability to effectively deliver a high quality
product on the required delivery schedule at a reasonable cost will benefit from
this shift. In addition, commercial aircraft manufacturers are tending, and
defense contractors are being strongly encouraged by the U.S. Department of
Defense to purchase from suppliers that can supply more complete systems and
pre-assembled parts. These shifts are leading to a consolidation in the supply
base. Certain segments of the aerospace supply base are already consolidated,
such as engines, avionics and landing gear. Other segments, however, including
structural components and electronics, remain fragmented. The Company believes
that this trend toward consolidation presents an opportunity for suppliers with
the financial and management resources to complete acquisitions and expand their
operations.

The electronics industry is similarly enjoying revenue growth in several
product sectors. According to the Economic Industries Alliance, the annual
worldwide market for electronics and components produced in the United States
totaled approximately $460 billion in 1997, representing an 11% increase over
1996 figures. Electronics components comprise the largest portion of the
worldwide electronics market, accounting for $148 billion in sales in 1997. The
Company estimates the current size of the electronics connector market to be
approximately $1 billion in annual sales. The Company believes that both defense
industry sales and sales of hermetically sealed components accounted for
significant portions of that market. Additionally, the Company estimates the
size of the electronics packaging market to be over $50 million in annual sales.

The growth in the electronics industry has been fueled by several factors,
including the rapid pace of technological advancement and development of new
products. The growth in demand by consumers and businesses for technologically
advanced electronics products has prompted manufacturers to create more
elaborate designs, which frequently require more components per unit.
Additionally, international demand for advanced electronics components is
growing rapidly as an increasing array of more complex products becomes
available in developing regions. The Company expects these favorable trends in
the electronics industry to continue and believes the outlook for the
electronics component supply industry will continue to be strong.

32
<PAGE>
- --------------------------------------------------------------------------------
References to the "Company" in the following sub-sections of this "Business"
section do not include Aeromet, which is discussed separately.
- --------------------------------------------------------------------------------

Products, Processes and Markets

The products, manufacturing processes and markets of the Company in fiscal
1998 and of Aeromet, and the industry segments in which they operate, are
summarized separately below. See "Notes to Consolidated Financial Statements
Note 3" of the Company for segment analysis.

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Segments Manufacturing Processes Sample Products Company/Facility
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Aerospace Metals Forming Hot and superplastic Jet engine bulkhead components, airframe Aeromet: Welwyn
titanium forming and engine details, helicopter erosion Garden City, England
shields
-----------------------------------------------------------------------------------------------------
Cold stretch Aircraft skin panels, leading edges and Aeromet:
aluminum forming acoustic panels Birmingham, England
- ------------------------------------------------------------------------------------------------------------------------------------
Precision Casting Sand, lost foam and Aircraft and truck parts Pacific Aerospace:
permanent mold casting Entiat, Washington
-----------------------------------------------------------------------------------------------------
Investment casting Aircraft parts Aeromet: Worcester
and Rochester, England
-----------------------------------------------------------------------------------------------------
Sand casting Aircraft engine parts and windscreen Aeromet:
canopies; motorsport engine parts Sittingbourne, England
-------------------------------------------------------------------------------------------------------------------------
Precision Precision machining Aircraft parts Pacific Aerospace:
Machining of bonded and cast metals Wenatchee, Washington
-------------------------------------------------------------------------
Aircraft parts Aeromet:
Sittingbourne, England
- ------------------------------------------------------------------------------------------------------------------------------------
Electronics Explosive Bonding Explosive bonding Bonded stainless steel and aluminum for Pacific Aerospace:
of dissimilar metals use in electronic connectors and Sequim, Washington
assemblies
-------------------------------------------------------------------------------------------------------------------------
Assembled Design and Electronic connectors and assemblies with Pacific Aerospace:
Electronic Products manufacture ceramic and glass hermetic seals Wenatchee, Washington
Butler, New Jersey
-------------------------------------------------------------------------
Ceramic discoidal electromagnetic filters Pacific Aerospace:
and capacitors Wenatchee, Washington
-------------------------------------------------------------------------
Relays and solenoids; ruggedized flat Pacific Aerospace:
panel displays Vancouver, Washington
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Metals Forming

At its Welwyn Garden City and Birmingham facilities, Aeromet uses hot and
cold metal forming technologies to manufacture titanium and aluminum assemblies
and details for the commercial aerospace and defense industry. Aeromet also
performs finishing, welding, brazing and riveting processes on these parts.
Testing of these products is done using non-destructive techniques and in-house
X-ray facilities. Interactive discussions with customers enable Aeromet to match
component design closely to the most suitable forming process.

Hot Forming of Titanium. Aeromet's Welwyn Garden City facility specializes
in hot and super-plastic forming of titanium, and the Company believes it has
the largest independent capability in the European Union for that process.
Unlike most sheet metal materials, titanium and its alloys are extremely
difficult to form in a cold condition. To overcome this, Aeromet has developed
at its Welwyn Garden City site a variety of hot forming processes, including hot
die forming, hot brake press forming, superplastic forming, gas blow forming and
hot stretch-forming. These processes maximize weight savings, maintain
structural integrity, minimize cost and enable the designer to manipulate the
developing alloys into complex shapes. The components have no spring back,
little or no residual stress and are repeatable in form and thickness. Aeromet
undertakes responsibility for the design and manufactures the necessary tooling
using its in-house pattern facility, coupled with a tool bedding, fettling and
surface dressing capability. The forming equipment consists of air circulating,
low thermal mass heat treatment furnaces for temperatures up to 1,100 degrees
centigrade and related quenching facilities. The Welwyn Garden City site also
has the capability to chemically mill three-dimensional components in titanium.
Aeromet markets its hot-formed titanium products primarily to the commercial
aircraft, helicopter and

33
<PAGE>
and military aircraft markets. Aeromet's titanium products include jet engine
Nacelle bulkhead components, airframe and engine details and erosion shields for
helicopters. Aeromet's titanium products are included on the Airbus model 320,
321, 330 and 340 aircraft, the Boeing model 717 and 737 aircraft and the Dash
8-400 aircraft.

Cold Forming of Aluminum Alloys. At its Birmingham facility, Aeromet
specializes in the pressing and cold forming of aluminum alloys used for
aircraft skin panels, leading edges and acoustic panel liners. Stretch forming
is a process well suited to producing aircraft skin panels and leading edges.
Specialized equipment in the Birmingham facility has the capability to form
sheets up to 8 feet wide and up to 13 feet long with stretching loads of up to
700 tons being applied. Most tools are machined from oxidation-resistant
stainless steel castings, and forming dies up to four tons can be handled.
Together with specialist gripper jaws and rotational platen, this enables
Aeromet to stretch-form aluminum alloys into a wide variety of shapes and sizes.
Aeromet's capabilities extend from design to completion, including tooling
design and manufacture, forming, chemical milling, trimming, assembly and
quality control. The cold formed aluminum alloy products are marketed primarily
to the aerospace market.

Precision Casting

Pacific Aerospace. At its Aeromet America facility in Entiat, Washington,
the Company designs and manufactures precision cast aluminum parts using
permanent mold, sand and lost foam casting technologies. The cast parts produced
at the Aeromet America facility are sold principally to the transportation and
aerospace industries.

Permanent Mold Casting. The permanent mold process is well-suited for
high strength, long production life parts that do not require frequent changes
in design and can be made in high volume. The Company uses this process
primarily to produce components used in diesel engines and other structural
parts for the transportation industry. The permanent mold process uses a cast
iron mold to shape the part to be cast. Molten aluminum is ladled into the
heated mold and, once cooled, the casting is removed from the mold. As the mold
is not destroyed in the production process, it can be reused.

Sand Casting. The sand casting process is more appropriate for lower
volume parts. This process uses a wooden pattern of the part to be cast, with
complex geometry and high metalicized quality. The Company uses this process to
produce parts for the aerospace industry such as housings. An automatic molding
machine hydraulically squeezes molding sand to accurately reproduce the pattern.
After molten aluminum is poured into the mold, the sand is removed, leaving the
casting. The sand mold is destroyed in the process but the sand may be recycled
for future moldings.

Lost Foam Casting. The lost foam process is well-suited for producing
parts with complex patterns, which reduces the amount of machining that would be
required if the parts had been made with sand or permanent mold castings. The
Company uses this process to produce support brackets and housings for the
transportation and aerospace industries. In the lost foam process, the pattern
is created from expanded polystyrene beads. The foam pattern is then suspended
in a large metal flask and surrounded with dry sand. Molten aluminum is poured
directly on the pattern, which vaporizes as the aluminum replaces every detail
of the pattern. The lost foam process allows for complex details of a part to be
cast with little or no touch-up, and the tooling used to create the polystyrene
patterns has an unlimited life as the tooling only comes in contact with the
polystyrene beads.

Aeromet. At its Rochester, Worcester and Sittingbourne, England facilities,
Aeromet manufactures aluminum investment castings and aluminum and magnesium
precision sand castings. Aeromet is a European leader in the production of light
alloy sand and investment castings for the commercial aerospace and defense
sectors.

Precision Investment Casting. At its Worcester, England facility,
Aeromet manufactures aluminum investment casting products, including aircraft
and defense system components such as electronic enclosures, aircraft engine
outer guide vanes, navigation lights, wing tip fences, winglet components, duct
stators and heads up display units. At its Rochester, England facility, Aeromet
manufactures aircraft components such as pressure tight fuel connectors. The
versatility, accuracy and replicability of the investment casting process
provides many advantages over more

34
<PAGE>
traditional methods of machining and fabricating metal products from solid
components. The investment casting process uses a metal die manufactured to
required specifications. Aeromet's precision tooling capabilities permit
production of metal dies that incorporate a variety of details and features. A
die can be reused to produce the required number of parts without degradation to
the original die. Aeromet's production of the die gives the customer an
incentive to order additional units of the part from Aeromet.

Sophia Process Investment Casting. At its Worcester, England facility,
Aeromet uses the computerized "Sophia Process" to manufacture significantly
larger, more complex castings than can be made as a single part using more
traditional investment casting processes. Aeromet is one of only four licensees
of the Sophia Process, and is licensed to make and sell metal castings in the
United Kingdom, Ireland, Australia, New Zealand and certain African and Asian
countries. Parts made with the Sophia Process have relatively thin wall
thickness but have strength and ductility values comparable to fabricated,
forged and machined solid components. The Sophia Process stringently controls
the heat level and process parameters to make lighter but stronger components
that resist fracture and fatigue, and reduces machining, fabrication and
assembly costs, by eliminating both doublers at material interfaces and the
weakness and stress associated with riveted assemblies. Aeromet uses high
strength alloys with good castability to ensure that the integrity and enhanced
properties from one casting are identical to the next, and to achieve the
desired combination of tensile strength, ductility and elongation. Parts made
with the Sophia Process are used for the commercial aerospace, defense and
transportation industries. Such applications include civil aircraft, military
aircraft, missiles and underwater weapons applications and applications for the
motorsport industry. Aeromet is using the Sophia Process to produce components
for the Airbus A320, A330 and A340 aircraft, such as navigation light housings
and wing tip fences, as a single part. Parts manufactured with the Sophia
Process constituted 2% of Aeromet's 1997 net revenues. The Company believes that
the advantages of the Sophia Process and the increasing customer awareness of
those advantages will result in increased demand for parts fabricated using the
Sophia Process.

Sand Casting. At its Sittingbourne, England facility, Aeromet
manufactures aluminum and magnesium alloy precision sand castings, including
machined and finished parts for the commercial aerospace, defense and motorsport
industries. Sand casting is suitable for products that are larger than the
typical investment casting parts or products that require heavy wall sections.
These products include aircraft engine heat exchangers and air intakes, aircraft
engine fuel pump housings, aircraft windscreen canopies and high performance
motorsport engine components and gearboxes. The aluminum and magnesium alloys
have high strength and long freezing ranges and are resistant to elevated
temperatures. For such customer requirements, sand casting provides an effective
method of producing components with strength and uniformity. Aeromet has made
significant advances in both the process and materials technology for magnesium
and aluminum sand castings. Aeromet uses engineered patterns utilizing computer
assisted design technologies in order to achieve repeatable high casting
integrity and enhanced mechanical properties. Aeromet has complete
non-destructive testing and inspection facilities, such as dye penetrant flaw
detection and X-ray testing of components, as required by the rigorous standards
of the aerospace industry.

Precision Machining

Pacific Aerospace. At its Cashmere facility in Wenatchee, Washington, the
Company operates a precision machine shop that produces precision machined
components, structural parts and assemblies principally from aluminum and
explosively bonded metals for the commercial aerospace and defense industries.
These products range from small connectors to complex assemblies for use in
commercial and military aircraft, heavy trucks and seismic safety gas shutoff
valves. The Company uses computerized numerical control ("CNC") machining cells
to manufacture particularly complex components and assembly housings. The
Company builds its machined products either to customer specifications or
according to an engineering and tooling design developed by the Company to suit
a customer's particular need. The Company has a direct computer link to Boeing
that allows immediate access to the drawings for Boeing parts. The Company
inspects and tests its machined products at various stages of production using
non-destructive methods such as X-ray, ultra-sound and dyes before being passed
for shipment to the customer. The Company's machining operations are ISO 9002
compliant, qualifying it to perform work for most aerospace, medical equipment
and general electronic companies, and are also DI-9000A approved by Boeing.

35
<PAGE>
In response to changes in its customers' manufacturing processes, the
Company often supplies its precision machined parts on a "just in time to point
of use" basis. As a result of these processes and the high quality of its
machined parts, the Company has won numerous awards for supplier excellence from
Boeing, Northrop Grumman and Kawasaki.

Aeromet. At its Sittingbourne, England facility, Aeromet operates a
precision machine shop that provides machinery and assembling capabilities for
Aeromet's casting and forming operations. This machining facility has the
technical capabilities to provide the range of machining services for complete
production and finishing of components, including design, pattern production,
casting and final machining of a component. Aeromet also performs specialized
machining of small detail components in steel and titanium.

Explosive Bonding

At its NTI facility in Sequim, Washington, the Company manufactures over 30
specialty metals using explosive metallurgical technology. Using this
technology, an explosive charge combines, at the molecular level, the surfaces
of metals such as aluminum and stainless steel, that will not normally bond to
each other using adhesives or welding. The result is a strong but lightweight
metal that can be machined and welded into complex assemblies. The Company
finishes the metals to the customer's specifications using milling, welding,
lathe and rolling techniques, and tests the finished products in its
metallurgical lab using non-destructive testing such as dye penetration and
ultrasonic scanning. The Company also uses its explosive technology to
shock-harden metals for use in applications where extremely high tensile
strength is required, such as rail track intersections and switch components and
to pressure form complex metal parts under water.

The Company's explosively bonded metals are used by customers in the
aerospace, defense, energy and marine industries. Explosively bonded metals are
used to fabricate products for highly specialized applications such as
satellites, aircraft and missiles where weight minimization is a critical
factor; oil drill heads, aircraft engine exchange tubes, and flanges and
feed-throughs for nuclear particle accelerators where strength at high
temperature and heat dissipation are critical; and naval interfaces and galvanic
structures where corrosion resistance is a requirement.

Assembled Electronics Products

The Company develops, manufactures and markets a wide array of complex
hermetically-sealed electronic connectors and assemblies, ceramic capacitors and
filters, relays and solenoids and flat panel display units. These products are
used for specialized applications in the aerospace, defense, telecommunications,
energy, medical and electronics industries. Many of the Company's assembled
electronics products are specifically engineered to withstand degradation or
destruction in harsh environments, such as the ocean, space and the human body.
These environments experience extremes in temperature, pressure, corrosiveness
and impact that can make product repair or replacement difficult or impossible.
To meet the demands of these challenging applications, the Company has developed
or acquired 32 patents and many proprietary processes. The types of assembled
electronics products manufactured by the Company, and their respective
manufacturing processes are as follows:

Hermetically Sealed Products. At its Pacific Coast facility in Wenatchee,
Washington, and at its Balo facility in Butler, New Jersey, the Company designs
and manufactures two lines of hermetically sealed electronic connectors,
feed-throughs, assemblies and instrument packages. Electronics must be
hermetically sealed when used in locations where the external environment can
penetrate the unit. The product line manufactured at the Balo facility is sealed
with a cost-effective, traditional glass-based sealant, which provides an
effective seal in less demanding environments. The product line manufactured at
the Pacific Coast facility is sealed with the Company's more expensive,
proprietary Kryoflex ceramic sealant for use in products that must withstand
extremely invasive environments, such as pacemakers, down-hole drilling tools,
the fiber optic termini used on the international Space Station and radar
arrays. Both lines of the Company's hermetically sealed products are
manufactured to customer specifications using the Company's engineering and
design expertise, metallurgical and ceramic analysis capabilities and ceramics
formulation and production processes. Raw materials for the connectors' packages
and assemblies are formed on the Company's machining centers, CNC lathes,

36
<PAGE>
Swiss screw machines and CNC-controlled laser welding machines. The Company also
has the capacity to electroplate and chemically film its products.

The Company's Pacific Coast facility also manufactures hermetically bonded
products using the Company's proprietary ceramic adhesive. This ceramic adhesive
bonds metals that will not normally bond, such as aluminum and stainless steel.
The resulting component is nearly as light as aluminum but has the superior
bonding and sealing capacity of stainless steel, making it the preferred product
where weight minimization is important, such as in space applications. The
Company also holds patents in metal matrix composite technology, which the
Company believes will allow it to produce even lighter, more durable electronics
packages in the future.

Ceramic Filters. At its Ceramic Devices facility in Wenatchee, Washington,
the Company designs and manufactures very small, specialized multilayer
discoidal (round) ceramic capacitors and filters. These products are advanced
electronic circuit filtering devices designed to filter out electromagnetic
interference ("EMI") and other undesirable electrical signals that pose
significant problems for the manufacturers and users of high-performance,
high-reliability electronic systems operating in harsh environments. The
Company's products include mini screw-in filters for telecommunications,
aerospace and defense applications; ring laser gyros; commercial eyelets for
identification friend or foe systems and satellite amplifiers; high reliability
bolts for the space shuttle's main engine controllers; filter pins and custom
filter assemblies and broad bands for military display systems. The Company is
an approved supplier of EMI devices to most aerospace and defense contractors,
and uses these filters in its own hermetically sealed electronic products. The
Company's Ceramic Devices operation has a self contained facility with plating,
Swiss turning, assembly, and product testing capabilities, and has received a
number of military and industry qualification ratings.

Relays and Solenoids. At its ESC facility in Vancouver, Washington, the
Company designs, manufactures and markets electromechanical devices, such as
relays, solenoids, sensors, electronic assemblies, actuators, time delays and
flat panel display units used in a wide variety of satellite, aircraft and
military hardware applications. The Company's relay and solenoid products
function as automatic electrical switches, designed to military specifications,
for use in demanding environments. These high reliability but low power switches
use only one to ten amperes, making them suitable for applications such as
satellite power bus controllers and aircraft fuel control valves, and have been
used in many space vehicles launched by the United States and European
countries. The Company has specialized equipment for CNC milling, turning and
welding which is used for producing these products.

Flat Panel Displays and Optical Filters. At its Displays & Technologies
unit at the ESC facility, the Company designs and manufactures ruggedized and
optically enhanced flat panel displays and optical filters. The flat panel
display unit is used for commercial applications that range from GPS displays
and light control filters used on private and commercial aircraft to ground
vehicle displays and automatic teller machine displays. Military uses include
military aircraft cockpit instrumentation and high impact displays on M1A2
tanks. These displays allow users to view the image at a much higher resolution
than standard commercial resolutions. The Company's flat panel display product
is a commercial liquid crystal display ("LCD") sandwiched between layers of
glass and optical filter in the front, and heating and cooling units, and a
computerized optical enhancer, in the back. The entire unit is mounted in a
heavy duty housing.

Sales and Marketing; Distribution

The Company markets its precision cast and precision machined products
using its direct sales force. The Company currently has direct regional sales
personnel covering the west coast of the United States and intends to expand
this sales force to cover other geographic regions as the Company's business
expands. The Company markets its assembled electronics products in the United
States, Europe and Japan through a network of manufacturer representatives and
resellers, generally established on a geographic basis. In addition, the Company
maintains an internal sales and customer service staff and engineering
capability for its assembled electronics products to meet customer requirements
for technical support. Aeromet utilizes its own employee sales force for sales
of its products to customers in England and Wales. This internal sales force is
organized into two groups, one group responsible for sales of precision castings
and one group responsible for metal formed products. Aeromet uses independent
agents to market its products to customers in Scotland and in countries other
than the United Kingdom.

37
<PAGE>
Customers

The Company's top five customers are Boeing, PACCAR, Northrop Grumman,
Deere & Company and Honeywell. Aeromet's top five customers are British
Aerospace, Rolls Royce, GKN Westland, Lucas Aerospace and Alenia (Aermacchi). Of
these, only Boeing accounted for more than 10% of the Company's net sales for
fiscal 1998 on a pro forma basis including Aeromet. Because of the relatively
small number of customers for most of the products made by both the Company and
Aeromet, the Company's largest customers can influence product pricing and other
terms of trade. The loss of any of the Company's or Aeromet's largest customers
or reduced or canceled orders from any of those customers could have a material
adverse effect on the Company and its financial performance.

The Company and Aeromet currently serve substantially different customer
bases in similar markets. For example, the Company currently supplies components
and parts to Boeing (not currently a significant Aeromet customer) for each of
Boeing's 737, 747, 757, 767 and 777 commercial aircraft construction programs.
Aeromet currently supplies components and parts for each of Airbus' A300/310,
A320 and A330/340 commercial aircraft construction programs, for which Pacific
Aerospace is not currently a supplier. As a result, the Company expects that the
Aeromet acquisition will provide substantial opportunities to cross market to
the Company's and Aeromet's respective customer bases.

Backlog

The majority of the Company's sales are made pursuant to individual
purchase orders and are subject to termination by the customer upon payment of
the cost of work in process plus a related profit factor. Historically, the
Company has experienced no significant order cancellations. As of May 31, 1998,
the Company had purchase orders and contractual arrangements evidencing
anticipated future deliveries ("backlog") through fiscal year 2000 of
approximately $70.0 million. After giving pro forma effect to the Aeromet
acquisition as if it had occurred on June 1, 1997, the Company would have had
pro forma revenue backlog of approximately $110.0 million through fiscal year
2000, of which approximately $80.0 million is expected to be delivered in fiscal
year 1999. There is no assurance that backlog will be completed and booked as
net sales. Cancellations of pending contracts or terminations or reductions of
contracts in progress could have a material adverse effect on the Company and
its financial performance. See "Risk Factors Backlog."

Competition

The Company is subject to substantial competition in many of the markets it
serves. In the hot forming market, the Company's competitors include Die Barnes
Group Inc. and GKN Westland Aerospace (North America). In the cold forming
market, the Company competes with companies such as AHF and Pendle as well as
the in-house cold forming capabilities of certain of its customers, including
British Aerospace. In the sand casting market, the Company competes with a
number of regional foundries in its U.S. operations, and its U.K. competitors
include SFU Naley, Hitchcock, and Teledyne Ryan Aeronautical. In the investment
casting market, the Company's competitors include the Cercast Group, Tital and
Tritech. In the precision machining market, the Company competes with a number
of regional machine shops. In the assembled electronics markets, the Company's
competitors include Amphenol Corporation, Hermetiz Seal Corporation, AVX
Corporation, Spectrum Control, Inc. and Electronics Design and Communications
Instruments. Many of these competitors have greater financial resources, broader
experience, better name recognition and more substantial marketing operations
than the Company, and represent substantial long-term competition for the
Company.

Components and products similar to those made by the Company can be made by
competitors using a number of different manufacturing processes. Although the
Company believes that its manufacturing processes, technology and experience
provide advantages to the Company's customers, such as high quality, competitive
prices and physical properties that often meet stringent demands, alternative
forms of manufacturing can be used to produce many of the components and
products made by the Company. Although the Company believes that its proprietary
technology may give it a competitive advantage with respect to certain of its
products, new developments by competitors are expected to continue. The
Company's competitors may develop products that are viewed by customers as more
effective or more economic than the Company's product lines. The Company may not
be able to compete successfully against current and

38
<PAGE>
future competitors, and the competitive pressures faced by the Company may have
a material adverse effect on the Company and its financial performance. See
"Risk Factors Competition."

Raw Materials

Aeromet obtains approximately 70% of its titanium from one supplier and is
subject to a lead time of approximately 80 weeks in ordering and obtaining
titanium. While Aeromet generally has managed the ordering process to obtain
titanium when needed, any failure of Aeromet to obtain titanium when needed or
any titanium cost increases imposed by that supplier could have a material
adverse effect on the Company and its financial performance. The Company
generally has readily available sources of all raw materials and supplies it
needs to manufacture its products and, where possible, the Company maintains
alternate sources of supply. However, the Company does not have fixed price
contracts or arrangements for all of the raw materials and other supplies it
purchases. Shortages of, or price increases for, certain raw materials and
supplies used by the Company have occurred in the past and may occur in the
future. Future shortages or price fluctuations could have a material adverse
effect on the Company's and Aeromet's ability to manufacture and sell their
products in a timely and cost-effective manner. See "Risk Factors Availability
and Cost of Materials".

Proprietary Rights

Significant aspects of the business of the Company and of Aeromet depend on
proprietary processes, know-how and other technology that is not subject to
patent protection. The Company and Aeromet each rely on a combination of trade
secret, copyright and trademark laws, confidentiality procedures and other
intellectual property protection to protect their proprietary technology.
However, there is no assurance that the Company's competitors may not develop or
utilize technology that is the same as or similar to such technology of the
Company.

The Company has 32 U.S. patents, three U.S. patent applications pending,
one Canadian patent application pending and one European patent enforceable in
the U.K., almost all of which apply to certain aspects of the Company's
electronics business and not to its aerospace business. Aeromet currently holds
no patents, but has [one] patent application pending in the U.K. and before the
European Patent Office. There is no assurance that any of these patent
applications will result in issued patents, that existing patents or any future
patents will give the Company any competitive advantages for its products or
technology, or that, if challenged, these patents will be held valid and
enforceable. The Company's issued patents expire at various times over the next
17 years, with 15 patents expiring over the next five years. Although the
Company believes that the manufacturing processes of much of its patented
technology are sufficiently complex that competing products made with the same
technology are unlikely, there is no assurance that the Company's competitors
will not design competing products using the same or similar technology after
these patents have expired.

Despite the precautions taken by the Company, unauthorized parties may
attempt to copy aspects of the Company's products or obtain and use information
that the Company regards as proprietary. Existing intellectual property laws
give only limited protection with respect to such actions and policing
violations of such laws is difficult. The laws of certain countries in which the
Company's products are or may be distributed do not protect products and
intellectual property rights to the same extent as do the laws of the United
States. The Company may be required to enter into costly litigation to enforce
its intellectual property rights or to defend infringement claims by others.
Such infringement claims could require the Company to license the intellectual
property rights of third parties. There is no assurance that such licenses would
be available on reasonable terms, or at all. See "Risk Factors Proprietary
Rights."

Environmental Matters

The Company's and Aeromet's facilities are subject to federal, state and
local laws and regulations concerning solid waste disposal, hazardous materials
generation, storage, use and disposal, air emissions, waste water discharge,
employee health and other environmental matters (together, "Environmental
Laws"). Proper waste disposal and environmental regulation are major
considerations for the Company because a number of the metals, chemicals and
other

39
<PAGE>
materials used in and resulting from its manufacturing processes are classified
as hazardous substances and hazardous wastes. If permitting and other
requirements of applicable Environmental Laws are not met, the Company could be
liable for damages and for the costs of remedial actions and could also be
subject to fines or other penalties, including revocation of permits needed to
conduct its business. Any permit revocation could require the Company to cease
or limit production at one or more of its facilities, which could have a
material adverse effect on the Company and its financial performance. The
Company has an ongoing program of monitoring and addressing environmental
matters and from time to time in the ordinary course of business is required to
address minor issues of noncompliance at its operating sites. Recently the
Company identified certain operations or processes that need additional permits
or otherwise are not in full compliance with applicable Environmental Laws that
the Company believes are not material. The Company is taking steps to remedy
this noncompliance. In connection with its evaluation of the Aeromet
acquisition, the Company obtained an environmental investigation of each of
Aeromet's facilities. These environmental investigations identified certain
issues related to potential permitting and remediation matters that the Company
believes are not material. The Company intends to investigate further to
determine whether any actions are required under applicable United Kingdom law.

Environmental Laws could become more stringent over time, imposing greater
compliance costs and increasing risks and penalties associated with any
violations. As a generator of hazardous materials, the Company is subject to
financial exposure with regard to its properties even if it fully complies with
these laws. In addition, certain of the Company's facilities are located in
industrial areas and have lengthy operating histories. As a consequence, it is
possible that historical or neighboring activities have affected properties
currently owned by the Company and that, as a result, additional environmental
issues may arise in the future, the precise nature of which the Company cannot
now predict. There is no assurance that any present or future noncompliance with
Environmental Laws or future discovery of contamination will not have a material
adverse effect on the Company's results of operations or financial condition.
See "Risk Factors Environmental Matters."

Government Regulation

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

Employees

The Aeromet acquisition nearly doubled the Company's workforce. As of
October 20, 1998, the Company had a total of 748 employees, of whom
approximately 679 were engaged in manufacturing functions, 19 in sales and
marketing, 38 in administrative functions and 12 in executive functions. As of
October 20, 1998, Aeromet had a total of 580 employees, of whom approximately
543 were engaged in manufacturing functions, 13 in sales and marketing, 16 in
administrative functions and eight in executive functions. None of the Company's
workforce is unionized. Certain of Aeromet's manufacturing and engineering
employees are represented by labor unions, although all negotiations are carried
out through employee work committees. Neither the Company nor Aeromet have
experienced any work stoppages and both believe that their relationships with
their employees are good.

40
<PAGE>
Additional Information

The Company files annual, quarterly and current reports, proxy statements
and other information with the Securities and Exchange Commission (the
"Commission"). You may read and copy any reports, statements or other
information on file at the Commission's public reference room in Washington,
D.C. You can request copies of these documents, upon payment of a duplicating
fee, by writing to the Commission.

The Company has filed a Registration Statement on Form S-1 with the
Commission. This Prospectus, which forms part of the Registration Statement,
does not contain all of the information included in the Registration Statement.
Certain information is omitted and you should refer to the Registration
Statement and its exhibits. With respect to references made in this Prospectus
to any contract or other document of the Company, such references are not
necessarily complete and you should refer to the exhibits attached to the
Registration Statement for copies of the actual contract or document. You may
review a copy of the Registration Statement at the Commission's public reference
room in Washington, D.C., and at the Commission's regional offices in Chicago,
Illinois and New York, New York. Please call the Commission at 1-800-SEC-0330
for further information on the operation of the public reference rooms. The
Company's Commission filings and the Registration Statement can also be reviewed
by accessing the Commission's Internet site at http:\\www.sec.gov.

Information regarding the Company may also be obtained by accessing the
Company's web page at http:\\www.pcth.com. Such information is not part of this
Prospectus or of the Registration Statement.

41
<PAGE>
MANAGEMENT

Directors and Executive Officers

The following table sets forth information as of October 20, 1998 (unless
otherwise noted), regarding the directors and executive officers of the Company.

Name Age Position with Company
---- --- ---------------------

Donald A. Wright............... 46 Chairman of the Board, Chief
Executive Officer and President
Nick A. Gerde.................. 53 Chief Financial Officer, Vice
President Finance, Treasurer and
Assistant Secretary
Sheryl A. Symonds.............. 43 Vice President Administration,
General Counsel and Secretary
Allen W. Dahl, M.D............. 70 Director
Dr. Urs Diebold................ 47 Director
Werner Hafelfinger............. 52 Director
Dale L. Rasmussen.............. 48 Director
William A. Wheeler............. 64 Director

Donald A. Wright. Donald A. Wright has been the Chairman of the Board,
Chief Executive Officer and President of the Company since February 1995, and of
its predecessors since 1990. Mr. Wright is also an officer and director of each
of the Company's operating subsidiaries.

Nick A. Gerde. Nick A. Gerde has been the Vice President Finance and Chief
Financial Officer of the Company since February 1995. He has been the Treasurer
of the Company since August 1996, and Assistant Secretary since November 1996.
Mr. Gerde is also an officer and director of each of the Company's operating
subsidiaries. Mr. Gerde served as Controller/CFO of Hydraulic Repair & Design,
Inc., a regional hydraulic component repair and wholesale distribution company,
from March 1990 through April 1993, as a Business Development Specialist with
the Economic Development Council of North Central Washington from July 1993 to
June 1994, and as Vice President of Televar Northwest, Inc. (a subsidiary of
Orca Technologies, Inc.) from July 1994 to February 1995. See "Certain
Transactions." Mr. Gerde is a Certified Public Accountant.

Sheryl A. Symonds. Sheryl A. Symonds has been the Vice President
Administration and General Counsel of the Company since September 1997. Prior to
joining the Company, Ms. Symonds was a partner at Stoel Rives LLP, currently the
Company's primary outside legal counsel. Ms. Symonds joined Stoel Rives LLP in
1985 and became a partner in 1992. Ms. Symonds has been Secretary of the Company
since August 1996 and is also Secretary of each of the Company's operating
subsidiaries.

Allen W. Dahl. Dr. Allen W. Dahl has been a director of the Company since
February 1995, and of its predecessors since September 1994. Dr. Dahl is retired
from practice as a physician in the Puget Sound region of Washington.

Urs Diebold. Dr. Urs Diebold has been a director of the Company since July
1997. Dr. Diebold has been a director of Lysys AG ("Lysys"), a Swiss financing
and investment management company, since September 1990. Prior to joining Lysys
in 1990, Dr. Diebold was an investment advisor at the Zurich office of Credit
Suisse. Dr. Diebold is also a director of one of the Company's shareholders,
Capital International Fund Limited. See "Certain Transactions."

Werner Hafelfinger. Werner Hafelfinger has been a director of the Company
since August 17, 1998. Mr. Hafelfinger has been Vice President of Global
Manufacturing of St. Jude Medical (Cardiac Rhythm Management Division), a
manufacturer of implantable medical devices, since 1984.

42
<PAGE>
Dale L. Rasmussen. Dale L. Rasmussen has been a director of the Company
since June 1997. Mr. Rasmussen has been employed as the Senior Vice President
and Secretary of AirSensors, Inc., now IMPCO Technologies, Inc. since 1989.

William A. Wheeler. William A. Wheeler has been a director of the Company
since June 1997. Mr. Wheeler retired from Dowty Aerospace Yakima in May 1997,
where he served as President, Chief Executive Officer and Chairman of the Board
of Directors since 1979.

Significant Employees

Lewis L. Wear. Lewis L. Wear, 56, has been the Electronics Group President
since August 1996, President of Pacific Coast since February 1996, and a
director of Pacific Coast since November 1995. He also has been a director of
Ceramic Devices since November 1995, President and a director of NTI since April
1997 and a director of Balo since February 1998. Prior to November 1995, Mr.
Wear was Vice President of Operations for Vacuum Atmospheres, a division of
WEMS, Inc.

Garry R. Vandekieft. Garry R. Vandekieft, 55, has been the Aerospace Group
President since October 1996, President of Cashmere since August 1996, a
director of Cashmere since October 1996, and was General Manager of Cashmere
from June 1996 to August 1996. Prior to being employed by Cashmere, Mr.
Vandekieft served as Manufacturing Operations Manager of Advanced Wind Turbines
during 1995 and 1996, and as Director of Manufacturing of Master-Halco from 1990
through 1994.

Duncan Crighton. Duncan Crighton, 62, has been Chief Executive Officer of
Aeromet since March 1997 and became President of the Company's Aerospace (U.K.)
Group upon closing of the Aeromet acquisition. Mr. Crighton served as Managing
Director of Aeromet's predecessor, Kent Aerospace Castings plc, from 1990
through 1995, and as a management consultant to Aeromet from 1995 to February
1997.

Board of Directors

Committees. The Board of Directors has a number of committees, as follows:

<TABLE>
<CAPTION>
Committee Function Current Members
- --------- -------- ---------------
<S> <C> <C>
Option Committee Administers the Company's Amended and Restated Stock Dr. Dahl
Incentive Plan. Dr. Diebold
Mr. Hafelfinger
- --------------------------------------------------------------------------------------------------------------
Finance and Audit Committee Reviews the Company's accounting policies, practices, Dr. Diebold
internal accounting controls and financial reporting. Also Mr. Rasmussen
oversees engagement of the Company's independent auditors Mr. Wheeler
and monitors management implementation of the Mr. Hafelfinger
recommendations and findings of the Company's independent
auditors.
- --------------------------------------------------------------------------------------------------------------
Compensation Committee Establishes salaries, incentives and other compensation for Dr. Dahl
the chief executive officer, chief financial officer, Mr. Rasmussen
general counsel, subsidiary presidents and other key Mr. Wheeler
employees of the Company and its subsidiaries. Also
administers policies relating to compensation and benefits
including the Director Plan and Employee Stock Purchase
Plan.
- --------------------------------------------------------------------------------------------------------------
Nominating Committee Recommends individuals to be presented to the shareholders Mr. Wright
for election or reelection to the Board of Directors. Dr. Diebold
Mr. Rasmussen
- --------------------------------------------------------------------------------------------------------------
</TABLE>

43
<PAGE>
Tenure. Directors of the Company hold office until the next annual meeting
of the Company's shareholders and until their successors have been elected and
duly qualified. The Board of Directors appoints the Company's executive officers
at the first Board of Directors meeting after each annual meeting of
shareholders. Executive officers hold office at the pleasure of the Board of
Directors.

Compensation. Under the Company's Independent Director Stock Plan, each
non-employee director of the Company receives an initial and annual award of
stock options , $1,000 in cash per year for each committee on which the director
serves, and an additional $500 in cash per year for serving as chairperson of a
committee. The Board may elect to pay any of the cash fees in shares of Common
Stock. See "Summary Compensation--Benefit Plans--Independent Director Stock
Plan." All directors are reimbursed for reasonable travel and other
out-of-pocket expenses incurred in attending meetings of the Board of Directors.

Summary Compensation

The following table sets forth in summary form the compensation paid by the
Company to the Chief Executive Officer and to the Company's three most highly
compensated executive officers (the "Named Executives") for services in all
capacities to the Company for the last three fiscal years:

<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation
------------ --------------------- Other Annual
Fiscal Securities Underlying Compensation
Name and Principal Position Year Salary($) Options/SARs(#)(1) ($) (2)
- -------------------------------------------------------- ------ ------------ --------------------- -------------
<S> <C> <C> <C> <C>
Donald A. Wright ....................................... 1998 192,000 275,000 4,800
CEO and President 1997 160,000 920,000 400
1996 110,577 15,000 400

Nick A. Gerde .......................................... 1998 100,000 40,000 2,400
CFO, VP Finance, Treasurer and Assistant Secretary 1997 84,160 38,333 --
1996 62,500 8,333 --

Sheryl A. Symonds(3) ................................... 1998 105,000 125,000 --
VP Administration, General Counsel and Secretary

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

(1) Represents exercisable warrants and options to purchase shares of Common
Stock. See "Aggregated Options and Fiscal Year-End Option Values."

(2) Represents estimated value of the personal use of a company car and other
miscellaneous benefits.

(3) Represents the compensation received by Ms. Symonds during the nine months
since she joined the Company. Under her employment agreement, Ms. Symonds
received salary at an annual rate of $140,000 for fiscal year 1998.
</TABLE>

Option Grants

The following table sets forth information on grants of stock options by
the Company during the year ended May 31, 1998 to the Named Executives:

<TABLE>
<CAPTION>
Securities % of Total Options
Underlying Granted to Exercise or Market Price
Options Granted Employees Base Price on Grant Date
Name (#) in Fiscal Year ($/Share) ($/Share) Expiration Date
- ------------------ ------------------- --------------------- --------------- --------------- -----------------------
<S> <C> <C> <C> <C> <C>
Donald A. Wright 650,000 58.4% 4.72 to 6.13 4.72 to 6.13 2/9/08 to 5/28/08
Nick A. Gerde 75,000 6.7% 3.00 to 6.13 3.00 to 6.13 6/2/07 to 5/28/08
Sheryl A. Symonds 160,000 14.4% 4.00 to 6.13 4.00 to 6.13 7/18/07 to 5/28/08
</TABLE>

44
<PAGE>
Aggregated Options and Fiscal Year-End Option Values

The following table summarizes the aggregate stock options and warrants,
and their market values at May 31, 1998, held by the Named Executives:

<TABLE>
<CAPTION>
Securities Underlying Unexercised Value of Unexercised In-the-Money
Options at FY-end(#) Options at FY-end($)
--------------------------------- --------------------------------
Name Exercisable Unexercisable Exercisable(1) Unexercisable
- ---------------- ------------- --------------- -------------- -------------
<S> <C> <C> <C> <C>
Donald A. Wright ....................... 1,349,024 433,536 2,345,101 58,536
Nick A. Gerde .......................... 121,422 49,634 344,880 14,634
Sheryl A. Symonds ...................... 125,000 35,000 229,625 --

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

(1) Value of exercisable options and warrants having exercise prices of less
than $6.125 per share, the closing price of the Common Stock on May 29,
1998.
</TABLE>

Employment Agreements

The Company has entered into employment agreements with each of the Named
Executives. The employment agreements employ Mr. Wright through fiscal 2003, Mr.
Gerde through fiscal 2000 and Ms. Symonds through fiscal 2002. The employment
agreements provide for an annual salary in fiscal 1999 of $253,920, $130,000 and
$163,300, for Mr. Wright, Mr. Gerde and Ms. Symonds, respectively. The
employment agreements also provide for the annual grant to each of the Named
Executives of options to purchase up to 275,000, 25,000 and 50,000 shares of
Common Stock, respectively. The exercise price of such options shall be equal to
the fair market value of the Common Stock on the date of grant. Each option will
contain vesting and other terms as are approved by the Board of Directors, and
will expire ten years after the date of grant. If a Named Executive's employment
with the Company is terminated without cause, or if there is a change of
control, as those terms are defined in their employment agreements, the Company
will be required to make severance payments equal to, in the case of Mr. Wright,
twice Mr. Wright's then-current annual base salary, in the case of Mr. Gerde,
six months of Mr. Gerde's then-current annual base salary and, in the case of
Ms. Symonds, eighteen months of Ms. Symonds' then-current annual base salary.
Under these employment agreements, Mr. Wright and Mr. Gerde agree not to compete
with the Company for two years following termination of employment.

Certain Tax Considerations Related to Executive Compensation

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

Benefit Plans

Amended and Restated Stock Incentive Plan

The Company's shareholders adopted the Company's Amended and Restated Stock
Incentive Plan (the "Option Plan") in October 1996. The Company has reserved for
issuance under the Option Plan a maximum of 3,000,000 shares of Common Stock,
subject to certain adjustments. Under the Option Plan, the plan administrator
may award incentive stock options ("ISOs") to key employees, and may award
non-qualified stock options ("NSOs"), stock appreciation rights ("SARs"), stock
and cash bonus awards, restricted stock, and performance units to employees and
certain non-employees (other than non-employee directors) who have important
relationships with the Company or its subsidiaries. However, no person may
receive options to purchase more than 1,000,000 shares in any one year. As of
October 20, 1998, options to purchase an aggregate of 2,256,116 shares of Common
Stock had been granted under the Option Plan, of which options for 25,000 shares
have been exercised, leaving 743,884 shares available for future grant under the
Option Plan. No SARs, stock or cash bonus awards, restricted stock or
performance units have been granted under the Option Plan.

45
<PAGE>
The Option Plan is administered by the Option Committee of the Board of
Directors, which is comprised of disinterested directors in accordance with Rule
16b-3 under the Exchange Act of 1934 (the "Exchange Act"), and of outside
directors under Section 162(m) of the Internal Revenue Code of 1986, as amended
(the "Internal Revenue Code"). However, only the Board of Directors may amend or
terminate the Option Plan. Unless terminated sooner by the Board of Directors,
the Option Plan expires in October 2006. In general, vested options and any
related rights may only be exercised when (a) the recipient is employed by or in
the service of the Company, (b) within 12 months following termination of
employment by reason of death or disability, or (c) within three months
following termination for any other reason except for cause. Options, SARs, cash
and stock bonus awards and performance units are nonassignable and
nontransferable except by will or by the laws of descent and distribution at the
time of the recipient's death. On the date an ISO is granted, the aggregate fair
market value of the Common Stock issuable under ISOs available for exercise
during any calendar year, may not exceed $100,000. ISOs must expire ten years
from the date of grant, and the exercise price must equal the fair market value
of the underlying shares of Common Stock at the date of grant. ISOs may not be
granted to employees holding more than 10% of the Company's total voting power
unless (a) the exercise price is at least 110% of the Common Stock's fair market
value on the date of grant, and (b) the option is not exercisable until five
years after the date of grant.

Independent Director Stock Plan

The Company's Amended and Restated Independent Director Stock Plan (the
"Director Plan") was approved at the Company's 1998 annual meeting of
shareholders. The Director Plan provides for the award of options to purchase
shares of Common Stock to non-employee directors of the Company ("Director
Options"). The purpose of the Director Plan is to attract, reward, and retain
the best available personnel to serve as directors and to provide added
incentive to such persons by increasing their interest in the Company's success.

Prior to the amendment and restatement approved at the Company's 1998
annual meeting of shareholders, the Director Plan provided for the issuance of
Common Stock instead of options to Independent Directors. As of October 20,
1998, the Company has issued 31,959 shares of Common Stock and has outstanding
Director Options to purchase 50,000 shares, issued under the Director Plan,
leaving 418,041 shares available for future issuance under the plan.

The principal provisions of the Director Plan are summarized below:

Administration. The Director Plan may be administered by the Board of
Directors or by a committee of directors of the Company. The Board has delegated
to the Compensation Committee the responsibility of administering the Director
Plan. Subject to the requirements of the Director Plan, the Compensation
Committee will have the authority among other things, (a) to determine the terms
of the Director Options and the fair market value of the Common Stock, (b) to
interpret the Director Plan and prescribe, amend, and rescind rules and
regulations relating thereto, and (c) to make all determinations deemed
necessary or advisable to administer the Director Plan. However, only the Board
of Directors may suspend, amend or terminate the Director Plan. No director may
vote on any action by the Board with respect to any matter relating to an award
to or held by such director. The Director Plan will be administered in
accordance with Rule 16b-3 adopted under the Exchange Act, and Section 162(m) of
the Internal Revenue Code and the regulations thereto.

Eligibility. Awards may be made under the Director Plan only to Independent
Directors. The term "Independent Director" means a director who is not an
employee of the Company or any of its subsidiaries.

Amendment. The Director Plan may not be amended without the approval or
ratification of the shareholders of the Company if such amendment would (a)
increase the number of shares that are reserved for issuance under the Plan, (b)
permit awards to persons other than Independent Directors, or (c) require
shareholder approval under any applicable law.

46
<PAGE>
Shares Available. A maximum of 500,000 shares of common stock are reserved
for issuance upon exercise of options granted under the Director Plan. If a
Director Option is forfeited to the Company, the number of Shares reserved for
issuance under such option will again become available for issuance under the
Director Plan. Upon the exercise of an option, the number of common shares
reserved for issuance under the Director Plan will be reduced by the number of
Shares issued upon exercise of the option.

Determination of Fair Market Value. Under the Director Plan, the exercise
price of a Director Option is the fair market value of a share of Common Stock
as determined by the closing price for the Common Stock (as listed on any
established stock exchange or national market system or as quoted by a
recognized securities dealer) on the trading day preceding the day of
determination. The Fair Market Value of a share of Common Stock will be
determined by the average closing price for the Common Stock (as listed or
quoted) for the five trading days immediately preceding the day of
determination.

Term. Unless earlier suspended or terminated by the Board, the Director
Plan will continue in effect until the earlier of: (a) ten years from the date
on which the Director Plan was first adopted by the Board, and (b) the date on
which all shares of Common Stock available for issuance under the Director Plan
have been issued.

Initial Award. The Director Plan provides that each Independent Director
will receive an option to purchase 2,500 shares at an exercise price equal to
the Fair Market Value on the date of grant, and which will be exercisable for a
period of ten years from the date of grant, upon such Independent Director's
first appointment or election to the Board of Directors ("Initial Award"),
whether by the shareholders of the Company or by the Board to fill a vacancy.

Annual Award. Each Independent Director also receives an additional award
on an annual basis (the "Annual Award"), each time he or she is elected to the
Board (or, if directors are elected to serve terms longer than one year, as of
the date of each annual shareholders' meeting during that term). The Annual
Award consists of an option to purchase 10,000 shares of Common Stock at an
exercise price equal to the Fair Market Value on the date of grant. The Director
Options are exercisable for a period of ten years from the date of grant. If an
Independent Director is elected or appointed to the Board at any time other than
at the annual meeting of shareholders, the Annual Award will be a pro rata
fraction of 10,000, rounded to the nearest 100 shares.

Vesting and Forfeiture. Director Options are subject to vesting and
forfeiture provisions under the Director Plan. Initial Awards will be fully
vested upon the date of grant. Annual Awards will vest in full on the first
anniversary following the date of the grant if the Independent Director has
attended at least 75% of the regularly scheduled meetings of the Board during
that year (the "Vesting Period"). If an Independent Director does not attend at
least 75% of the regularly scheduled meetings of the Board during the Vesting
Period, the Director Options granted pursuant to that Annual Award will expire
and be forfeited without having vested. If a director ceases to be an
Independent Director for any reason other than death or disability before his or
her last Annual Award vests, the Director Options granted pursuant to that
Annual Award will be forfeited. However, the Board may waive or modify the
application of these expiration provisions before the end of the Vesting Period,
by unanimous vote. If an Independent Director is unable to continue his or her
service as a director as a result of his or her disability or death, unvested
Director Options of such Independent Director will immediately become vested as
of the date of disability or death. In the event of a merger, consolidation or
plan of exchange to which the Company is a party and in which the Company is not
the survivor, or a sale of all or substantially all of the Company's assets, any
unvested Director Options will vest automatically upon the closing of such
transaction.

Shareholder Rights. The holder of any Director Options will not have any
rights as a shareholder of the Company with respect to any shares issuable under
such options until the holder exercises such option and the underlying shares
are issued.

47
<PAGE>
Employee Stock Purchase Plan

The Company's shareholders adopted the Company's 1997 Employee Stock
Purchase Plan in October 1997 (the "Employee Stock Plan"). The Company has
reserved for issuance under the Employee Stock Plan a maximum of 1,000,000
shares of Common Stock, subject to certain adjustments, for issuance to eligible
employees of the Company and its subsidiaries. In October 1998, the Company
registered the shares of Common Stock reserved under the Employee Stock Purchase
Plan on a Form S-8 registration statement.

The Company pays all expenses relating to the Employee Stock Plan except
expenses related to the resale of shares acquired by employees under the plan.
The Employee Stock Plan is administered by the Compensation Committee of the
Board of Directors. The plan administrator will designate a financial firm as
the plan's custodian to vote the shares pursuant to the participants'
instructions, keep the plan records, and provide periodic statements to
participants. Under the Employee Stock Plan, eligible employees may purchase
shares of the Company's Common Stock through payroll deductions ranging from a
minimum of $20 bi-weekly, to a maximum of 15% of the employee's annual gross pay
or $25,000. The purchase price per share will be the lower of (a) 85% of fair
market value on the first day of the offering period, or (b) 100% of fair market
value on the last day of the offering period. The Company currently anticipates
that the first offering period will begin approximately November 1, 1998 and
that offering periods will be one month long. After certain holding period, plan
participants may sell their shares through the plan custodian for a discounted
brokage fee. If a participant's employment terminates before the end of any
offering period, no shares will be purchased for the participant during that
period and the payroll deductions will be returned to the participant.

48
<PAGE>
CERTAIN TRANSACTIONS

Employment Agreements. The Company has entered into employment agreements
with Donald A. Wright, Nick A. Gerde and Sheryl A. Symonds. See "Management -
Summary Compensation - Employment Agreements."

Lysys. Dr. Urs Diebold, a director of the Company, is also a director of
Lysys AG ("Lysys") and a director of Capital International Fund Limited (the "CI
Fund"), a shareholder of the Company. Lysys has provided placement agency
services in connection with the following capital raising transactions in the
last three fiscal years:

- - In November 1995, the Company issued an aggregate of 838,470 shares of
Common Stock to private investors for gross proceeds of $3,353,880, of
which $234,772 was paid to Lysys as commissions. An aggregate of 30,000
shares of Common Stock was also issued to a designee of Lysys in connection
with that offering.
- - In May 1996, the Company issued an aggregate of 490,000 shares of Common
Stock to private investors for gross proceeds of $1,456,125, of which
$116,490 was paid to Lysys as commissions.
- - In November 1997, the Company issued 524,000 shares of Common Stock and
$4,050,000 in promissory notes to private investors, one of which was the
CI Fund. Lysys received a $320,000 fee for its services in that
transaction, of which $142,000 was paid directly to Dr. Diebold.
- - In May 1998, the Company conducted the Preferred Stock Offering for gross
proceeds of $17,000,000, of which $425,000 was paid to Lysys. See
"Description of Capital Stock - Preferred Stock - Series B Convertible
Preferred Stock."

Orca Technologies, Inc. Roger Vallo and Donald Cotton, who were directors
of the Company until January 1998, are directors, and Mr. Vallo is CEO, of Orca
Technologies, Inc. Donald A. Wright, the Company's Chief Executive Officer and
President, and Nick A. Gerde, the Company's Chief Financial Officer, Vice
President Finance and Treasurer, were directors of Orca until June 1997 and
shareholders of Orca until May 1998, and personally guaranteed or indemnified
certain obligations of Orca. In May 1998, Mr. Wright and Mr. Gerde sold their
shares in private transactions. Dr. Allen Dahl, a director of the Company,
continues to be a shareholder of Orca but has never been an officer or director
of Orca. See "MD&A Recent Events - Orca Technologies, Inc."

49
<PAGE>
PRINCIPAL SHAREHOLDERS

The following table shows, to the best of the Company's knowledge, the
Common Stock owned as of October 20, 1998(1) by (1) each person known by the
Company to own beneficially more than 5% of the outstanding Common Stock (each a
"Principal Shareholder"); (2) each of the Company's directors; (3) the Named
Executives and (4) all executive officers and directors of the Company as a
group. Except as otherwise noted, the Company believes the persons listed below
have sole investment and voting power with respect to the Common Stock owned by
them. This table is based on the records of the Company's transfer agent and the
Company's records on issuances of shares, as adjusted to reflect changes in
ownership documented in filings with the Securities and Exchange Commission made
by certain shareholders and provided to the Company pursuant to Section 16 of
the Exchange Act, and statements provided to the Company by certain
shareholders.

<TABLE>
<CAPTION>
Amount and Nature of Percentage of
Name and Address of Beneficial Owner: Beneficial Ownership (2) Common Stock
- --------------------------------------------- ------------------------ ---------------
<S> <C> <C>
Donald A. Wright 2,086,486(3) 11.77%
c/o Pacific Aerospace & Electronics, Inc.
430 Olds Station Road
Wenatchee, WA 98801

Allen W. Dahl, M.D. 42,401(4) *
7300 Madrona Drive NE
Bainbridge Island, WA 98110

Dr. Urs Diebold 11,900(4) *
c/o Lysys AG, Gessnerallee 38
PO Box CH-8023
Zurich, Switzerland

Werner Hafelfinger 15,220(4) *
15900 Valley View Court
Sylmar, CA 91342

William A. Wheeler 16,092(4) *
2011 Lombard Lane
Yakima, WA 98902

Dale L. Rasmussen 12,092(4) *
c/o IMPCO Technologies, Inc.
708 Industrial Dr.
Tukwila, WA 98188

Nick A. Gerde 181,550(5) 1.12%
c/o Pacific Aerospace & Electronics, Inc.
430 Olds Station Road
Wenatchee, WA 98801

Sheryl A. Symonds 162,700(6) 1.01%
c/o Pacific Aerospace & Electronics, Inc.
430 Olds Station Road
Wenatchee, WA 98801

Deltec Holdings, Inc. 901,187 5.34%
14511 NE 13th Avenue
Vancouver, Washington 98668-3501

All executive officers and directors as a 2,454,441(7) 13.59%
group (8 persons)

50
<PAGE>
- --------------

* Less than 1%.

(1) This table does not include the 3,175,000 shares of Common Stock to be
issued in the Company's pending Fall 1998 Common Stock Offering.

(2) Shares that a person has the right to acquire within 60 days are treated as
outstanding for determining the amount and percentage of Common Stock owned
by such person but are not deemed to be outstanding as to any other person
or group.

(3) Includes (a) 32,666 shares held by Ragen MacKenzie, Incorporated, custodian
for Donald A. Wright, in two IRA accounts, (b) 1,500 shares issuable upon
exercise of the Company's publicly traded warrants, (c) 100,000 shares
issuable upon exercise of another warrant and (d) 1,643,536 shares issuable
upon exercise of vested stock options. Does not include 39,024 unvested
stock options.

(4) Includes unvested options to purchase 10,000 shares of Common Stock issued
pursuant to the Director Plan on October 13, 1998 which will vest at the
next annual Board of Directors meeting if certain conditions have been
satisfied.

(5) Includes (a) 4,000 shares issuable upon exercise of the Company's publicly
traded warrants, (b) 25,000 shares issuable upon exercise of another
warrant, and (c) 136,300 shares issuable upon exercise of vested stock
options. Does not include 9,756 unvested stock options.

(6) Includes (a) 500 shares issuable upon exercise of the Company's publicly
traded warrants, and (b) 160,000 shares issuable upon exercise of vested
stock options.

(7) Includes currently exercisable warrants and options to purchase up to
2,073,336 shares of Common Stock.
</TABLE>

51
<PAGE>
SELLING SHAREHOLDERS

The Selling Shareholders are offering up to a maximum of 3,236,109 Shares
of Common Stock under this Prospectus. Of these, (a) 3,000,000 Shares are
issuable upon the conversion of the Preferred Stock (the "Conversion Shares"),
and (b) 236,109 Shares are issuable upon the exercise of the Warrants (the
"Warrant Shares"). Together, the Conversion Shares and the Warrant Shares are
referred to as the "Shares." The Company sold the Preferred Stock and the
Warrants to the Selling Shareholders in a private placement which closed in May
1998 and August 1998 pursuant to the exemption from registration contained in
Rule 506 of Regulation D under the Securities Act (the "Preferred Stock
Offering"). See "MD&A Recent Events - Preferred Stock Offering." As of the date
of this Prospectus, the Selling Shareholders have not converted any of the
Preferred Stock or exercised any of the Warrants.

In connection with the Preferred Stock Offering, the Company and the
Selling Shareholders entered into a Registration Rights Agreement in which the
Company agreed to file the Registration Statement by November 1, 1998, and to
use its best efforts to cause the SEC to declare the Registration Statement
effective by January 1, 1999. Upon the effectiveness of the Registration
Statement, the Selling Shareholders may resell the Conversion Shares after
February 1, 1999, and the Warrant Shares after May 15, 1999, to third parties
according to the plan of distribution described in this Prospectus. See "Plan of
Distribution."

No Selling Shareholder has held any position or office or has had any other
material relationship with the Company or any of its affiliates within the past
three years, except that Angelo Gordon participated in the Company's offering of
Series A Convertible Preferred Stock in June 1997. The purchasers in that
offering have since converted all of the shares of Series A Convertible
Preferred Stock and resold all of the shares of Common Stock issued upon that
conversion.

The following chart shows the maximum Shares that each Shareholder may sell
in the Offering after conversion of the Preferred Stock and exercise of the
Warrants. As of October 20, 1998, to the best of the Company's knowledge, the
Selling Shareholders owned no shares of Common Stock. If the Selling
Shareholders do not buy any shares of Common Stock after the date of this
Prospectus, and sell all of the Shares in this Offering, then they will not own
any shares of Common Stock after this Offering.

<TABLE>
<CAPTION>
Maximum Maximum
Conversion Warrant Maximum
Shares Shares Shares
Name and Address(1) of Selling Shareholders Offered Offered Offered (2 ) % (3)
==========================================================================================================
<S> <C> <C> <C> <C>
AGR Halifax Fund, Ltd. 794,118 62,500 856,618 4.46%
AG Arb Partners, L.P. 105,882 8,333 114,215 0.59%
AG Super Fund, L.P. 132,353 10,417 142,770 0.74%
AG Long Term Super Fund, L.P. 158,824 12,500 171,324 0.89%
Nutmeg Partners, L.P. 105,882 8,333 114,215 0.59%
Northern Trust Company 35,294 2,778 38,072 0.20%
PHS Bay Colony Fund, L.P. 26,471 2,083 28,554 0.15%
PHS Patriot Fund, L.P. 17,647 1,389 19,036 0.10%
AG MM, L.P. 35,294 2,778 38,072 0.20%
Medici Partners, L.P. 123,529 9,722 133,251 0.69%
Triarc Companies, Inc. 70,588 5,556 76,144 0.40%
Ramius, L.P. 247,059 19,444 266,503 1.39%
Baldwin Enterprises, Inc. 123,529 9,722 133,251 0.69%
GAM Arbitrage Investments, Inc. 88,235 6,944 95,179 0.50%
AG Super Fund International Partners L.P. 88,235 6,944 95,179 0.50%
Ramius Fund, Ltd. 441,176 34,722 475,898 2.48%
Leonardo, L.P. 405,882 31,944 437,826 2.28%
--------------------------------------------------------
TOTAL 3,000,000 236,109 3,236,109 16.84%

52
<PAGE>
- --------------

(1) The address for all Selling Shareholders is c/o Angelo Gordon & Co., L.P.,
245 Park Avenue, 26th Floor, New York, NY 10167.

(2) Assumes conversion of all of the Preferred Stock at a conversion price of
$5.67 per share into the 3,000,000 Conversion Shares. Under certain
circumstances, conversion of the Preferred Stock could result in the
issuance of shares of Common Stock in addition to the Conversion Shares.
See "- Conversion of the Preferred Stock," below.

(3) Based on the 19,222,432 shares of Common Stock to be outstanding after this
Offering. See "Prospectus Summary - The Offering."
</TABLE>

Conversion of the Preferred Stock

A description of the Preferred Stock is located in "Description of Capital
Stock - Preferred Stock Series B Convertible Preferred Stock."

Conversion Shares. Upon conversion of a share of Preferred Stock, the
holder will receive the number of shares of Common Stock equal to $100 divided
by the then-applicable conversion price of the Preferred Stock. See " -
Conversion Price", below. However, no holder of Preferred Stock is entitled to
voluntarily convert Preferred Stock that would cause the holder to own more than
9.9% of the Company's outstanding Common Stock at any time.

Conversion Price. The conversion price of the Preferred Stock is $7.20 per
share until February 1999. After February 1999, the conversion price of the
Preferred Stock will be equal to the lower of (a) $7.20 per share, or (b) the
average of the three lowest closing bid prices per share of the Common Stock
over the 22 trading days before conversion. However, the Company cannot issue
shares of Common Stock at a conversion price less than $5.67 per share unless
(1) the Company's shareholders approve the issuance of shares at a lower
conversion price, or (2) the Company redeems any Preferred Stock whose
conversion would cause the issuance of more than the 3,000,000 Conversion Shares
(the "Additional Shares"). The Indenture restricts the Company's ability to
redeem its capital stock unless it meets certain conditions.

If the Shareholders approve a conversion price lower than $5.67 per share,
the number of Additional Shares issued would depend on the market price of the
Company's Common Stock at the time Preferred Stock is converted, and could
result in the issuance of a substantial number of Additional Shares. See "Price
Range of Common Stock; Dividends." The Company would register any such
Additional Shares for resale on a separate registration statement. See "Shares
Eligible for Future Sale" and "Description of Capital Stock - Registration
Rights."

If (a) the Company does not redeem the Preferred Stock whose conversion
would cause the issuance of the Additional Shares, or (b) the Company's
shareholders do not approve a conversion price below $5.67 and the Company is
therefore unable to issue the Additional Shares, then the Company will incur a
monthly penalty of 2% of the Preferred Stock's liquidation preference until the
Company redeems such Preferred Stock or obtains shareholder approval to issue
the Additional Shares. See "Description of Capital Stock - Preferred Stock -
Series B Preferred Stock - Redemption."

Sale of Shares Issued Upon Conversion. The Selling Shareholders may not
sell the shares issued upon conversion of the Preferred Stock until February
1999. At that time the shares so issued may be sold upon the effectiveness of a
registration statement, or under any applicable exemption from registration. The
Selling Shareholders may sell up to 12.5% of such shares per month, which
percentage cumulates (a) beginning November 1998 if such shares are registered
under a registration statement, or (b) beginning February 1, 1998, if such
shares are sold under an applicable exemption. Any Preferred Stock outstanding
on May 2003 will automatically convert into Common Stock at the then-applicable
conversion price.

53
<PAGE>
Exercise of the Warrants

The Selling Shareholders may exercise the Warrants after May 15, 1999 and
before the expiration on May 15, 2001. The exercise price of the Warrants is
$7.20 per Warrant Share. The Company intends to use the proceeds from exercise
of the Warrants, when and if they are exercised, primarily for working capital
or other corporate purposes. See "Description of Capital Stock Warrants."

Indemnification

The Company has agreed to indemnify the Selling Shareholders who hold the
Shares, and those Selling Shareholders have agreed to indemnify the Company,
against certain liabilities under the Securities Act. Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to directors,
officers and controlling persons of the Company pursuant to the foregoing
provisions, or otherwise, the Company has been advised that, in the opinion of
the Commission, such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable.

PLAN OF DISTRIBUTION

The Selling Shareholders may resell the Conversion Shares after February 1,
1999, and the Warrant Shares after May 15, 1999. After February 1, 1999, the
Selling Shareholder may sell up to 12.5% of the Conversion Shares each month,
which percentage shall cumulate each month beginning with November 1998. The
Conversion Shares may be sold to third parties in transactions (a) on Nasdaq,
(b) in privately negotiated transactions, (c) by writing options on the Shares,
or (d) by a combination of such methods, at fixed prices that may be changed, at
market prices prevailing at the time of sale, at prices relating to such
prevailing market prices, or at negotiated prices. In addition, any of the
Shares that qualify for sale pursuant to Rule 144 under the Securities Act may
be sold in transactions complying with that Rule, rather than pursuant to this
Prospectus. However, there is no assurance that the Selling Shareholders will
(a) convert any or all of the Preferred Stock or sell any or all of the
Conversion Shares, or (b) exercise any or all of the Warrants, or sell any or
all of the Warrant Shares.

The Selling Shareholders may sell the Shares to or through broker-dealers,
and such broker-dealers may receive compensation in the form of discounts,
concessions or commissions from the Selling Shareholders or the buyers of the
Shares for whom such broker-dealers may act as agents or to whom they may sell
as principals, or both (which compensation as to a particular broker-dealer may
be in excess of customary commissions). Any broker-dealer may act as a
broker-dealer on behalf of the Selling Shareholders in connection with the
offering of certain of the Shares by the Selling Shareholders. The Selling
Shareholders and any broker-dealers who act in connection with the sale of the
Shares under this Prospectus may be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act, and any commissions received by
them and profit on any resale of the Shares as principals may be deemed to be
underwriting discounts and commissions under the Securities Act.

The Company will not receive any proceeds from sales of the Shares by the
Selling Shareholders, although it will receive the proceeds from the exercise of
the Warrants, when and if they are exercised. The Company has agreed to pay all
expenses (other than any underwriting costs, selling commission and fees and
certain expenses of counsel and other advisors to the Selling Shareholders) in
connection with the registration of the Shares in an amount not to exceed
$20,000.

54
<PAGE>
DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 100,000,000 shares
of Common Stock and 5,000,000 shares of Preferred Stock.

Common Stock

As of October 20, 1998, there were 940 holders of record of 15,986,323
shares of fully paid and nonassessable Common Stock outstanding. Each share of
outstanding Common Stock is entitled to participate equally in dividends as and
when declared by the Board of Directors of the Company, out of funds legally
available therefor, and is entitled to participate equally in any distribution
of net assets made to the Company's shareholders in the event of liquidation of
the Company after payment to all creditors thereof. There are no preemptive
rights or rights to convert Common Stock into any other securities. The holders
of the Common Stock are entitled to one vote for each share held of record on
all matters voted upon by the Company's shareholders and may not cumulate votes
for the election of directors. Thus, the owners of a majority of the shares of
the Common Stock outstanding may elect all of the directors of the Company and
the owners of the balance of the shares of the Common Stock would not be able to
elect any directors of the Company.

Preferred Stock

The Company's Board of Directors has the authority to issue shares of
preferred stock in one or more series and to fix the powers, designations,
preferences and relative, participating, optional or other rights of any series
of preferred stock, including dividend rights, conversion rights, voting rights,
redemption terms, liquidation preferences, sinking fund terms and the number of
shares constituting any series, without shareholder approval, unless such
approval is required by applicable law or by the rules of any stock exchange or
automated quotation system on which securities of the Company may be listed or
traded.

Series A Convertible Preferred Stock.

In February 1997, the Board of Directors authorized the issuance of 50,000
shares of the Company's Series A Convertible Preferred Stock ("Series A
Preferred"), which were sold to a limited number of institutional investors
under Rule 506 of the Securities Act. Effective as of June 11, 1997, the Company
registered for resale up to 1,948,541 shares of Common Stock underlying the
Series A Preferred on a Form S-3 registration statement. As of May 14, 1998, the
Series A Preferred had been fully converted into 1,494,593 shares of Common
Stock.

Series B Convertible Preferred Stock.

Preferred Stock Offering. In May and August 1998, the Company issued to the
Selling Shareholders a total of 170,000 shares of Preferred Stock and Warrants
to purchase 236,109 shares of Common Stock, for a total purchase price of $17
million. See "MD&A - Recent Events - Preferred Stock Offering."

Conversion. See "Selling Shareholders - Conversion of the Preferred Stock -
Conversion Shares, and - Conversion Price."

Redemption. The Company may redeem the Preferred Stock at a redemption
price of $115 per share upon 20-days notice to the holder if the holder does not
elect to convert within 15 days of receiving a redemption notice. The Company
must either redeem any Preferred Stock that it is not permitted to convert
without shareholder approval under Nasdaq requirements or obtain shareholder
approval for such conversion. So long as the Company's senior lender requires,
any redemption price, or other cash payments due to the holders, shall be
converted into promissory notes in favor of the holder until conversion or
redemption is allowed to occur. In addition, the Indenture restricts the ability
of the Company to repurchase its capital stock.

Warrants

As of October 20, 1998, the Company had outstanding warrants to purchase
Common Stock as follows:

55
<PAGE>
- - Warrants to purchase the 236,109 Warrant Shares included in this Offering,
for an exercise price of $7.20 per Warrant Share;

- - publicly traded Warrants to purchase 2,295,000 shares of Common Stock that
were issued as part of the units sold in a July 1996 registered public
offering, which have an exercise price of $4.6875 per share and expire in
July 2001 ("Units");

- - warrants to purchase Units consisting of 180,000 shares of registered
Common Stock and 180,000 Warrants, which were issued to underwriters in the
July 1996 public offering, and which have an exercise price of $3.75 per
Unit and expire in July 2001; and

- - warrants to purchase a total of 247,500 shares of Common Stock issued to
several employees and consultants of the Company, which have exercise
prices ranging from $2.00 to $4.80 per share, and expiration dates that
range from December 2000 to February 2005.

No holder of warrants possesses any rights as a shareholder under such warrants
until exercise of such warrants. Of the shares issuable upon exercise of the
employee and consultant warrants, 160,000 shares are registered under a Form S-8
registration statement (see "Management Summary Compensation") and 87,500 shares
are registered for resale under a Form S-3 registration statement.

Registration Rights

As of October 20, 1998, the 590,000 shares of restricted Common Stock held
by Liviakis and Mr. Prag had certain piggyback registration rights that take
effect in February 1999 after expiration of their lock-up period (see "MD&A -
Recent Events - Liviakis"). These piggyback registration rights are subject to
certain conditions, including the right of the Company's underwriters to limit
the number of such shares included in the registration.

Up to $7,000,000 of Conversion Shares were subject to certain piggyback
registration rights that expired on November 1, 1998. Also, the Company would be
obligated to register for resale any shares of Common Stock issuable upon
conversion of Preferred Stock that would exceed the 3,000,000 Conversion Shares
covered by this Prospectus, if the Company's shareholders approve such issuance.
See "Selling Shareholders - Conversion of Preferred Stock - Conversion Price."

The Company may agree to register for resale the 3,175,000 shares of Common
Stock to be sold in the Company's pending Fall 1998 Common Stock Offering. See
"MD&A - Recent Events - Fall 1998 Common Stock Offering."

Anti-Takeover Laws

The Company, as a Washington corporation, is subject to certain provisions
of Washington law regarding significant business transactions and fair price
restrictions. These provisions may have the effect of delaying or deterring a
hostile takeover of the Company.

Washington's "Significant Business Transactions" statute (Chapter 23B.19 of
the Washington Business Corporation Act) applies to public companies that are
incorporated under Washington law. The statute prohibits, subject to certain
exceptions, a corporation from entering into any "significant business
transactions" with an "Acquiring Person" (defined generally as a person who or
an affiliated group that beneficially owns 10% or more of the outstanding voting
securities of a corporation) for a period of five years after such person or
affiliated group becomes an Acquiring Person unless the transaction or share
acquisition made by the Acquiring Person is approved prior to the share
acquisition by a majority of the target corporation's directors. In addition,
this statute prohibits a corporation subject thereto from entering into a
significant business transaction with an Acquiring Person unless the
consideration to be received by the corporation's shareholders in connection
with the proposed transaction satisfies the "fair price" provisions set forth in
the statute.

56
<PAGE>
Transfer Agent and Registrar

The Transfer Agent and Registrar for the Company's Common Stock and
publicly traded warrants is Interwest Transfer Co., Inc.

57
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

As of October 20, 1998, the Company had outstanding 15,986,323 shares of
Common Stock, and 170,000 shares of Preferred Stock. On completion of this
Offering, the Company will have a total of 19,222,432 outstanding shares of
Common Stock, subject to certain assumptions. See "Summary - The Offering."
Significant sales of shares of Common Stock under a registration statement,
pursuant to Rule 144 or otherwise in the future, or the prospect of such sales,
may depress the price of the shares of Common Stock or any market that may
develop.

Outstanding Shares

Unrestricted Shares. The Company has 13,471,479 outstanding shares of
Common Stock that was either registered or transferable under Rule 144.

Restricted Shares Available for Resale. The Company had 2,514,844 shares of
Common Stock available for resale by persons other than those who may be deemed
"affiliates" of the Company (as defined in Rule 144 under the Securities Act).
However, these shares will remain "restricted securities" (as defined in the
Securities Act) until their transfer to a third-party.

- - 524,000 restricted shares that were issued in the Company's Fall 1997
Common Stock and Notes Offering and registered for resale under a Form S-3
registration statement.

Restricted Shares Not Yet Available for Resale. The Company has 1,990,844
outstanding shares of Common Stock that were shares issued in private
transactions which have not been registered for resale:

- - 477,540 restricted shares issued in connection with the NTI
acquisition. These shares became eligible for resale
under Rule 144(d) in April 1998 and will be eligible for
resale under Rule 144(k) in April 1999.

- - 923,304 restricted shares issued in connection with the ESC
acquisition. These shares become eligible for resale
under Rule 144(d) in April 1999 and for resale under Rule
144(k) in April 2000.

- - 590,000 restricted shares issued to a financial services
consultant that become eligible for resale under Rule
144(d) in August, 1999 and that are subject to piggyback
registration rights.

Reserved but Unissued Shares

Employee Benefit Plans. The Company has 4,660,000 shares of Common Stock
reserved under employee benefit plans. See "Management - Summary Compensation -
Benefit Plans." All of these shares are registered under Form S-8 registration
statements:

- - 3,000,000 registered shares reserved for issuance under the Option
Plan, of which (a) 2,273,616 shares are issuable under
unexercised options, and (b) 25,000 shares have been issued
upon an exercised option,

- - 500,000 registered shares reserved for issuance under the Director
Plan of which (a) 31,959 shares have been issued, and (b)
50,000 shares are issuable under options that vest in
October 1999, under certain conditions,

- - 1,000,000 registered shares reserved for issuance under the Employee
Stock Purchase Plan, none of which have been issued, and

- - 160,000 registered shares reserved for issuance under warrants to
several management and technical employees, none of which
have been exercised.

58
<PAGE>
Other Registered But Unissued Shares of Common Stock. The Company had
2,655,000 shares of Common Stock reserved for issuance:

- - 2,295,000 registered shares reserved for issuance under the Company's
publicly traded warrants, none of which have been
exercised, and

- - 360,000 registered shares reserved for issuance under (a) unregistered
warrants held by certain underwriters in the Company's July
1996 public unit offering, and (b) the publicly traded
warrants issuable upon exercise of the underwriters' warrants.

Unissued Restricted Shares which have been Registered for Resale. The
Company had registered 3,323,609 shares of unissued Common Stock for resale to
third parties:

- - 3,236,109 restricted Shares issuable upon conversion of the
Preferred Stock and exercise of the Warrants which are
being offered for resale under this Prospectus, and

- - 87,500 restricted shares reserved for issuance upon exercise of
outstanding non-employees warrants, which are registered
for resale under a Form S-3 registration statement.

Potentially Issuable Shares of Common Stock

- - An indeterminate number of shares of Common Stock, in excess of the
3,000,000 Conversion Shares, that may become issuable upon conversion of
the Preferred Stock if the Company's shareholders approve the issuance of
such shares. See "Selling Shareholders Conversion of the Preferred Stock
Conversion Price."

- - 3,175,000 restricted shares to be issued in the Company's pending Fall 1998
Common Stock Offering which may be subject to resale registration rights.

59
<PAGE>
LEGAL MATTERS

The validity of the issuance of the Conversion Shares upon conversion of
the Preferred Stock, the validity of the issuance of the Warrant Shares when and
if the Warrants are exercised, and certain other related legal matters, have
been passed upon for the Company by Stoel Rives LLP of Seattle, Washington.

EXPERTS

The consolidated financial statements contained in this Prospectus were
audited by the following independent public accountants, as indicated in their
attached reports:

- - KPMG Peat Marwick LLP for the Company's fiscal year ended May 31, 1998.
- - Moss Adams LLP for the Company's fiscal years ended May 31, 1997 and 1996;
- - KPMG Audit plc for Aeromet's years ended December 31, 1997 and 1996;
- - PricewaterhouseCoopers LLP for ESC's fiscal year ended March 31, 1997 and
1996.

These financial statements are included in this Prospectus and the Registration
Statement in reliance upon the authority of the above firms as experts in
accounting and auditing.

60
<PAGE>
No person is authorized to give any information or to make any
representation regarding this Offering other than those contained in this
Prospectus. Any further information or representation has not been authorized by
Pacific Aerospace. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy the Shares:

- - in any jurisdiction in which such offer to sell or solicitation is not
unauthorized;

- - in any jurisdiction in which the person making such offer or solicitation
is not qualified to do so; or

- -o to any person to whom it is unlawful to make such offer or solicitation.

The delivery of this Prospectus and any sale under this Prospectus shall not
create any implication that the affairs of the Company are unchanged, or that
the information contained in this Prospectus is correct, at any time after the
date of this Prospectus.

61a
<PAGE>
[LOGO]

PACIFIC AEROSPACE &
ELECTRONICS, INC.

3,236,109 SHARES

COMMON STOCK

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

PROSPECTUS
------------------------

, 1998

61b
<PAGE>
INDEX TO FINANCIAL STATEMENTS

Page
PACIFIC AEROSPACE & ELECTRONICS, INC. and Subsidiaries

Audited Consolidated Annual Financial Statements
- ------------------------------------------------
Independent Auditors' Reports.......................................... F-3
Consolidated Balance Sheets as of May 31, 1997 and 1998................ F-5
Consolidated Statements of Operations for the years ended
May 31, 1996, 1997 and 1998.......................................... F-6
Consolidated Statements of Shareholders' Equity for the
years ended May 31, 1996, 1997 and 1998.............................. F-7
Consolidated Statements of Cash Flows for the years ended
May 31, 1996, 1997 and 1998.......................................... F-8
Notes to Consolidated Financial Statements............................. F-10

Unaudited Consolidated First Quarter Financial Statements
- ---------------------------------------------------------
Consolidated Balance Sheet as of August 31, 1998 ...................... F-25
Consolidated Statements of Operations for the three-month
periods ended August 31, 1997 and 1998............................... F-26
Consolidated Statements of Cash Flow for the three-month
periods ended August 31, 1997 and 1998............................... F-27
Management's Statement and Notes to Unaudited Consolidated
Financial Statements for the three-month period ended
August 31, 1998...................................................... F-28

AEROMET INTERNATIONAL PLC and Subsidiaries
Independent Auditors' Report .......................................... F-30
Balance Sheets as of December 31, 1996 and 1997, and
as of May 31, 1998 (unaudited)....................................... F-31
Statements of Operations for the years ended December 31,
1996 and 1997 and the five months ended May 31, 1997
and 1998 (Unaudited)................................................. F-32
Statements of Shareholder's Equity for the years ended
December 31, 1996 and 1997 and the five months ended
May 31, 1997 and 1998 (unaudited).................................... F-33
Statements of Cash Flows for the years ended December 31,
1996 and 1997 and the five months ended May 31, 1997
and 1998 (unaudited)................................................. F-34
Notes to Financial Statements.......................................... F-35

ELECTRONIC SPECIALTY CORPORATION and Subsidiaries
Audited Consolidated Annual Financial Statements
- ------------------------------------------------
Report of Independent Accountants ..................................... F-45

F-1
<PAGE>
Consolidated Balance Sheet as of March 31, 1997........................ F-46
Consolidated Statement of Operations for the year ended
March 31, 1997....................................................... F-47
Consolidated Statement of Non-Redeemable Shareholders'
Equity for the year ended March 31, 1997............................. F-48
Consolidated Statement of Cash Flows for the year ended
March 31, 1997....................................................... F-49
Notes to Consolidated Financial Statements............................. F-50

Unaudited Consolidated Financial Statements
- -------------------------------------------
Consolidated Statements of Operations for the Nine-Month
Periods Ended December 31, 1997 and 1996 ............................ F-56
Consolidated Statements of Cash Flows for the Nine-Month
Periods Ended December 31, 1997 and 1996............................. F-57
Notes to Unaudited Consolidated Financial Statements
for the Nine-Month Periods Ending December 31, 1997 and 1996......... F-58

F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Board of Directors
Pacific Aerospace & Electronics, Inc.:

We have audited the accompanying consolidated balance sheet of Pacific
Aerospace & Electronics, Inc. and subsidiaries as of May 31, 1998, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Pacific
Aerospace & Electronics, Inc. and subsidiaries as of May 31, 1998, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.

/s/ KPMG PEAT MARWICK LLP

Seattle, Washington
June 30, 1998

F-3
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Board of Directors
Pacific Aerospace & Electronics, Inc.:

We have audited the accompanying consolidated balance sheet of Pacific
Aerospace & Electronics, Inc. and subsidiaries as of May 31, 1997, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the two-year period ended May 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Pacific
Aerospace & Electronics, Inc. and subsidiaries as of May 31, 1997, and the
results of their operations and their cash flows for each of the years in the
two-year period ended May 31, 1997 in conformity with generally accepted
accounting principles.

/s/ MOSS ADAMS LLP

Everett, Washington
July 2, 1997

F-4
<PAGE>
<TABLE>
<CAPTION>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
May 31, 1997 and 1998

1997 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................................ $ 3,048,000 $ 11,461,000
Certificate of deposit................................................................... 1,000,000 --
Accounts receivable, net of allowance for doubtful accounts of $247,000 in
1997 and $130,000 in 1998............................................................. 5,455,000 9,375,000
Inventories.............................................................................. 9,082,000 16,184,000
Deferred income taxes.................................................................... -- 386,000
Prepaid expenses and other............................................................... 354,000 272,000
------------ ------------
Total current assets............................................................... 18,939,000 37,678,000
------------ ------------
Property, plant and equipment, net............................................................. 13,190,000 26,335,000
------------ ------------
Other assets:
Note receivable from related party....................................................... 125,000 700,000
Investment............................................................................... -- 4,579,000
Costs in excess of net book value of acquired subsidiaries, net of accumulated
amortization of $223,000 in 1997 and $439,000 in 1998................................. 2,071,000 6,515,000
Patents, net of accumulated amortization of $205,000 in 1997 and $307,000
in 1998............................................................................... 1,331,000 1,229,000
Deferred income taxes.................................................................... -- 222,000
Other.................................................................................... 96,000 1,322,000
------------ ------------
Total other assets................................................................. 3,623,000 14,567,000
------------ ------------
$ 35,752,000 $ 78,580,000
============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................................... $ 3,736,000 $ 6,748,000
Accrued liabilities...................................................................... 1,116,000 2,587,000
Current portion of long-term debt........................................................ 855,000 1,027,000
Current portion of capital lease obligations............................................. 142,000 206,000
Line of credit........................................................................... -- 1,511,000
------------ ------------
Total current liabilities.......................................................... 5,849,000 12,079,000
Long-term liabilities:
Long-term debt, net of current portion................................................... 2,899,000 9,059,000
Capital lease obligations, net of current portion........................................ 337,000 941,000
Deferred income taxes.................................................................... 592,000 --
Deferred rent and other.................................................................. 456,000 359,000
------------ ------------
Total liabilities.................................................................. 10,133,000 22,438,000
------------ ------------
Shareholders' equity:
Convertible preferred stock, $0.001 par value, 5,000,000 shares authorized:
Series A, 50,000 shares issued and outstanding at May 31,
1997 and none issued and outstanding at May 31, 1998................................. -- --
Series B, none issued and outstanding at May 31, 1997 and
100,000 shares issued and outstanding at May 31, 1998................................ -- --
Common stock, $0.001 par value. 100,000,000 shares authorized,
10,220,249 and 15,395,723 issued and outstanding at May 31, 1997
and 1998, respectively................................................................ 10,000 15,000
Additional paid-in capital............................................................... 30,490,000 57,830,000
Cumulative unrealized loss on investment................................................. -- (436,000)
Accumulated deficit...................................................................... (4,881,000) (1,267,000)
------------ ------------
Total shareholders' equity......................................................... 25,619,000 56,142,000
Commitments, contingencies, and subsequent events.............................................. -- --

$ 35,752,000 $ 78,580,000
============ ============

See accompanying notes to consolidated financial statements.
</TABLE>

F-5
<PAGE>
<TABLE>
<CAPTION>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

Years ended May 31, 1996, 1997 and 1998

1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net sales.................................................................. $ 20,725,000 $ 34,175,000 $ 54,099,000
Cost of sales.............................................................. 16,439,000 25,969,000 39,487,000
------------ ------------ ------------
Gross profit................................................... 4,286,000 8,206,000 14,612,000
Operating expenses......................................................... 4,869,000 6,259,000 9,872,000
------------ ------------ ------------
Income (loss) from operations.................................. (583,000) 1,947,000 4,740,000
------------ ------------ ------------
Other income (expense):
Interest income...................................................... 37,000 126,000 110,000
Interest expense..................................................... (535,000) (510,000) (865,000)
Other................................................................ 15,000 169,000 (853,000)
------------ ------------ ------------
(483,000) (215,000) (1,608,000)
------------ ------------ ------------
Income (loss) before income taxes.............................. (1,066,000) 1,732,000 3,132,000
Income tax benefit (expense)............................................... 67,000 (50,000) 482,000
------------ ------------ ------------
Net income (loss).............................................. $ (999,000) 1,682,000 3,614,000
============ ============ ============
Net income (loss) per share:
Basic................................................................ $ (0.16) 0.18 0.29
Diluted.............................................................. (0.16) 0.17 0.27
Shares used in computation of net income (loss) per share:
Basic................................................................ 6,209,000 9,499,980 12,486,077
Diluted.............................................................. 6,209,000 10,035,846 13,606,061

See accompanying notes to consolidated financial statements.
</TABLE>

F-6
<PAGE>
<TABLE>
<CAPTION>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

Years ended May 31, 1996, 1997 and 1998

Series A Series B
convertible convertible
preferred stock preferred stock Common stock Additional Cumulative Total
--------------- --------------- ------------------- paid-in unrealized Accumulated shareholders'
Shares Amount Shares Amount Shares Amount capital losses deficit equity
------- ------ ------- ------ ---------- ------- ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at May 31, 1995 -- $ -- -- $ -- 5,196,008 $ 5,000 11,013,000 -- (5,564,000) 5,454,000
Sale of common stock -- -- -- -- 1,503,551 2,000 4,930,000 -- -- 4,932,000
Issuance of warrant -- -- -- -- -- -- 69,000 -- -- 69,000
Issuance of common stock
in connection with
acquisitions -- -- -- -- 778,750 1,000 3,082,000 -- -- 3,083,000
Net loss -- -- -- -- -- -- -- -- (999,000) (999,000)
------- ------ ------- ------ ---------- ------- ---------- ---------- ----------- -------------
Balance at May 31, 1996 -- -- -- -- 7,478,309 8,000 19,094,000 -- (6,563,000) 12,539,000
Sale of common stock -- -- -- -- 2,264,400 2,000 5,347,000 -- -- 5,349,000
Issuance of warrants -- -- -- -- -- -- 16,000 -- -- 16,000
Issuance of common stock
in connection with an
acquisition -- -- -- -- 477,540 -- 1,552,000 -- -- 1,552,000
Sale of preferred stock
for cash 50,000 -- -- -- -- -- 4,481,000 -- -- 4,481,000
Net income -- -- -- -- -- -- -- -- 1,682,000 1,682,000
------- ------ ------- ------ ---------- ------- ---------- ---------- ----------- -------------
Balance at May 31, 1997 50,000 -- -- -- 10,220,249 10,000 30,490,000 -- (4,881,000) 25,619,000
Issuance of common stock -- -- -- -- 8,559 -- 13,000 -- -- 13,000
Sale of common stock for
cash -- -- -- -- 524,000 1,000 2,222,000 -- -- 2,223,000
Increase in preferred
stock, net of issuance
costs -- -- 100,000 -- -- -- 9,260,000 -- -- 9,260,000
Issuance of warrants -- -- -- -- -- -- 444,000 -- -- 444,000
Exercise of warrants for
cash, net of tax effects
of $99,000 -- -- -- -- 795,000 1,000 3,723,000 -- -- 3,724,000
Issuance of common stock
on conversion of
convertible notes and
accrued interest of
$154,000 -- -- -- -- 1,405,018 1,000 5,518,000 -- -- 5,519,000
Exercise of options for
cash -- -- -- -- 25,000 -- 53,000 -- -- 53,000
Issuance of common stock
on conversion of
preferred stock (50,000) -- -- -- 1,494,593 1,000 (1,000) -- -- --
Unrealized losses on
available for sale
securities -- -- -- -- -- -- -- (436,000) -- (436,000)
Issuance of common stock
in connection with
acquisition -- -- -- -- 923,304 1,000 6,108,000 -- -- 6,109,000
Net income -- -- -- -- -- -- -- -- 3,614,000 3,614,000
------- ------ ------- ------ ---------- ------- ---------- ---------- ----------- -------------
Balance at May 31, 1998 -- $ -- 100,000 $ -- 15,395,723 $15,000 57,830,000 (436,000) (1,267,000) 56,142,000
======= ====== ======= ====== ========== ======= ========== ========== =========== =============

See accompanying notes to consolidated financial statements.
</TABLE>

F-7
<PAGE>
<TABLE>
<CAPTION>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended May 31, 1996, 1997 and 1998

1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income (loss) .......................................................... $ (999,000) $ 1,682,000 $ 3,614,000
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization........................................... 871,000 1,358,000 2,204,000
Allowance on note receivable............................................ -- -- 250,000
Loss on restructuring of note receivable................................ -- -- 1,038,000
Loss on sale of property, plant and equipment........................... 8,000 -- --
Director compensation paid in common stock.............................. 24,000 44,000 13,000
Consulting services paid through issuance of stock options and warrants. -- 6,000 139,000
Federal income tax benefit.............................................. (67,000) -- (1,200,000)
Changes in operating assets and liabilities:
Accounts receivable............................................... (1,018,000) (1,774,000) (2,286,000)
Inventories....................................................... (1,303,000) (1,951,000) (3,387,000)
Prepaid expenses and other current assets......................... 8,000 (178,000) 474,000
Other assets...................................................... (79,000) 44,000 (1,176,000)
Accounts payable, accrued liabilities and other liabilities....... (216,000) 557,000 1,911,000
----------- ----------- -----------
Net cash provided by (used in) operating activities.......... (2,771,000) (212,000) 1,594,000
----------- ----------- -----------
Cash flow from investing activities:
Sale (purchase) of certificate of deposit..................................... -- (1,000,000) 1,000,000
Proceeds from stock subscription receivable................................... -- 1,030,000 --
Acquisition of property, plant and equipment.................................. (754,000) (2,100,000) (6,509,000)
Proceeds from sale of property, plant and equipment........................... 9,000 -- --
Acquisition of subsidiaries................................................... -- -- (3,289,000)
Acquisition of patents........................................................ (400,000) -- --
Acquisition of investment..................................................... -- -- (742,000)
Issuance of notes receivable.................................................. -- -- (6,261,000)
Payments received on note receivable from related party....................... 44,000 58,000 125,000
Purchase of goodwill.......................................................... -- -- (1,029,000)
----------- ----------- -----------
Net cash used in investing activities........................ (1,101,000) (2,012,000) (16,705,000)
----------- ----------- -----------
Cash flow from financing activities:
Net borrowings (repayments) under line of credit.............................. 308,000 (1,224,000) (358,000)
Decrease (increase) in restricted cash........................................ (1,000,000) 1,000,000 --
Proceeds from long-term debt and convertible notes............................ 2,105,000 237,000 10,125,000
Payments on long-term debt and capital leases................................. (1,457,000) (5,686,000) (1,503,000)
Proceeds from sale of common stock, net....................................... 3,550,000 5,739,000 2,223,000
Proceeds from sale of preferred stock, net.................................... -- 4,481,000 9,260,000
Proceeds from exercise of stock options and warrants.......................... -- -- 3,777,000
Proceeds from sale of warrants................................................ 12,000 -- --
----------- ----------- -----------
Net cash provided by financing activities.................... 3,518,000 4,547,000 23,524,000
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents......... (354,000) 2,323,000 8,413,000
----------- ----------- -----------
Cash and cash equivalents at beginning of year...................................... 1,079,000 725,000 3,048,000
----------- ----------- -----------
Cash and cash equivalents at end of year............................................ $ 725,000 $ 3,048,000 11,461,000
=========== =========== ===========

See accompanying notes to consolidated financial statements.
</TABLE>

F-8
<PAGE>
<TABLE>
<CAPTION>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)

Years ended May 31, 1996, 1997 and 1998

1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Supplemental cash flow:
Cash paid during the year for:
Interest................................................................... $ 658,000 $ 613,000 $ 712,000
Federal income taxes....................................................... -- 18,000 521,000
Acquisition of subsidiaries:
Fair value of assets acquired and resulting goodwill, excluding cash....... 10,286,000 1,928,000 10,034,000
Liabilities assumed........................................................ (7,203,000) (482,000) 3,925,000
Common stock issued........................................................ 3,083,000 1,446,000 6,109,000
Noncash investing and financing activities:
Seller financed acquisition of property, plant and equipment............... 539,000 639,000 3,336,000
Seller financed acquisition of patents..................................... 520,000 35,000 --
Stock subscriptions receivable for issuance of common stock ............... 1,030,000 -- --
Conversion of notes and accrued interest to common stock................... -- -- 5,519,000
Restructuring of certain notes receivable for an investment
in common stock.......................................................... -- -- 6,053,000
Property, plant and equipment included in accounts payable ................ -- -- 445,000
Deferred portion of common stock issued for consulting services............ -- -- 305,000
Long-term debt retired through acquisition of subsidiary .................. -- -- 139,000

See accompanying notes to consolidated financial statements.
</TABLE>

F-9
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended May 31, 1996, 1997 and 1998

(1) Description of Business and Basis of Presentation

Description of Business

Pacific Aerospace & Electronics, Inc., with headquarters in Wenatchee,
Washington, develops, manufactures and markets high performance electronics and
metal components and assemblies for the aerospace, defense, electronics and
transportation industries. The consolidated financial statements include the
accounts of Pacific Aerospace & Electronics, Inc. and its wholly-owned
subsidiaries (collectively, the "Company").

Basis of Presentation

These consolidated financial statements are prepared in accordance with
generally accepted accounting principles (GAAP) in the United States (U.S.) and
present the financial position, results of operations and changes in financial
position of the Company. All material intercompany balances and transactions
have been eliminated in consolidation.

Certain 1996 and 1997 amounts have been reclassified to conform with the
1998 presentation.

(2) Summary of Significant Accounting Principles

Cash and Cash Equivalents

Cash and cash equivalents consist of cash, demand deposits with banks and
highly liquid investments with maturity dates at purchase of three months or
less.

Inventories

Inventories are stated at the lower of cost, primarily determined by the
first-in, first-out method, or market (replacement cost for raw materials and
net realizable value for work in progress and finished goods).

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Property, plant and
equipment under capital leases are stated at the lower of the fair market value
of the assets or the present value of minimum lease payments at the inception of
the leases.

Depreciation is calculated using the straight-line method over the
estimated useful lives of the owned assets ranging from 5 years for certain
machinery and equipment to 40 years for certain buildings. Property, plant and
equipment held under capital leases are amortized using the straight-line method
over the shorter of the estimated useful lives of the assets or the lease terms,
ranging from 7 to 10 years from the inception of the leases.

Expenditures for maintenance and repairs are charged to expense as
incurred. Upon sale or retirement, the cost and related accumulated depreciation
or amortization are removed from the accounts and any resulting gain or loss is
reflected in other income or expense.

F-10
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Investments

At May 31, 1998, the Company had an investment in the common stock,
registered and unregistered shares, of a public company of approximately 19.5%.
The investment is classified as an available-for-sale security in accordance
with Statements of Financial Accounting Standards (SFAS) No. 115, Accounting for
Certain Investments in Debt and Equity Securities, and is reported at fair
value, with unrealized gains and losses excluded from the statements of
operations and reported as a separate component of shareholders' equity.
Unrealized losses which are determined to be other-than-temporary are included
in the statements of operations. Fair value of the common stock is determined as
the quoted value of the stock in the over-the-counter market, without any
discounts for large blocks or unregistered shares. There is no assurance that
such values will be realizable upon liquidation or sale.

Intangible Assets

Costs in excess of net book value of acquired subsidiaries is amortized
using the straight-line method over 15 years from the date of acquisition.

Purchased patents are recorded at cost. Developed patents are recorded at
the value of related compensation awarded. Patents are amortized using the
straight-line method over the estimated useful lives of the patents ranging from
10 to 17 years.

Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.

Revenue Recognition

Revenue is recognized when products are shipped to customers.

Research and Development

Research and development costs are expensed as incurred and are included in
operating expenses.

Income Taxes

The Company follows the asset and liability method of accounting for income
taxes. Under the asset and liability method of accounting for income taxes,
deferred tax assets and liabilities are recognized based on the estimated future
tax consequences attributable to differences between the consolidated financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.

Stock-Based Compensation

The Company follows the provisions of SFAS No. 123, Accounting for
Stock-Based Compensation. This statement permits a company to choose either a
new fair-value method or the Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, intrinsic-value based method of
accounting for stock-based compensation arrangements. SFAS No. 123 requires pro
forma disclosure of net income and earnings per share computed as if the
fair-value based method had been applied in financial statements of companies
that continue to account for such arrangements under APB Opinion No. 25. The
Company has elected to continue to record stock-based compensation using the APB
Opinion No. 25 intrinsic-value-based method and, therefore, the adoption of SFAS
No. 123 has not impacted the Company's financial positions, results of
operations, or liquidity.

F-11
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Net Income (Loss) Per Share

In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, Earnings Per Share. SFAS No. 128 requires the presentation of
basic earnings per share, and for companies with complex capital structures,
diluted earnings per share. Basic earnings per share is computed using the
weighted average number of common shares outstanding during the period. Diluted
earnings per share is computed using the weighted average number of common and
dilutive common equivalent shares outstanding during the period using the
treasury stock method. The Company has presented historical basic and diluted
income (loss) per share in accordance with SFAS No. 128. As the Company had a
net loss in the year ended May 31, 1996, basic and diluted net loss per share is
the same.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

New Accounting Pronouncements

In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 establishes standards for reporting and disclosure of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. SFAS No. 130, which is effective for
fiscal years beginning after December 15, 1997, requires restatement of
financial statements for earlier periods to be provided for comparative
purposes. The Company anticipates that implementing the provisions of SFAS No.
130 will not have a significant impact on the Company's existing disclosures.
The Company has not determined the manner in which it will present the
information required by SFAS No. 130.

In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments of an
Enterprise and Related Information. SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating
segments. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. SFAS No. 131 is effective
for fiscal years beginning after December 15, 1997. In the initial year of
application, comparative information for earlier years must be restated. The
Company anticipates that implementing the provisions of SFAS No. 131 will not
have a significant impact on the Company's existing disclosures. The Company has
not determined the manner in which it will present the information required by
SFAS No. 131.

In February 1998, the FASB issued SFAS No. 132, Employers' Disclosures
About Pensions and Other Postretirement Benefits. SFAS No. 132 revises
employers' disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans. It standardizes
the disclosure requirements for pensions and other postretirement benefits to
the extent practicable, requires additional information on changes in the
benefit obligations and fair values of plan assets that will facilitate
financial analysis, and eliminates certain disclosures. SFAS No. 132 is
effective for fiscal years beginning after December 15, 1997. The Company has
not determined the manner in which it will present the information required by
SFAS No. 132.

(3) Segment Information and Concentration of Risk

The Company conducts its business in two business segments, "Aerospace"
and "Electronics." The Aerospace business segment primarily comprises machined
and cast metal products operations. Net sales of the Aerospace business segment
include sales to customers in the aerospace, defense and transportation
industries. Net sales of the Electronics business segment also include sales to
customers in the aerospace and defense industries. Historically, these segments
have been cyclical and sensitive to general economic and industry specific
conditions. In particular, the aerospace industry, in past years, has been
adversely affected by a number of factors, including reduced demand for
commercial aircraft, a decline in military spending, postponement of overhaul
and maintenance of aircraft, increased fuel and labor costs, increased
regulations, and intense price competition, among other factors. Although the
aerospace supply industry currently is enjoying favorable trends, there is no
assurance that such trends will continue. There is also no assurance that
general economic conditions will not lead to a downturn in demand for core
components and products of the Company, in each of its business segments.

F-12
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Presented below is the Company's business segment information. Identifiable
assets are those assets used in the Company's operations in each business
segment, and do not include advances or loans between the business segments.
Corporate assets are identified below, and no allocations were necessary for
assets used jointly by the business segments.

<TABLE>
<CAPTION>
Year ended May 31, 1996:

Corporate,
other and
Aerospace Electronics elimination Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales to customers................................ $12,382,000 8,343,000 -- 20,725,000
Net sales between segments............................ 376,000 -- (376,000) --
Income (loss) from operations......................... (278,000) 405,000 (710,000) (583,000)
Identifiable assets................................... 17,429,000 7,527,000 2,693,000 27,649,000
Capital expenditures.................................. 824,000 469,000 -- 1,293,000
Depreciation and amortization......................... 541,000 330,000 -- 871,000

Year ended May 31, 1997:

Corporate,
other and
Aerospace Electronics elimination Total
----------- ----------- ----------- -----------
Net sales to customers................................ $22,949,000 11,226,000 -- 34,175,000
Net sales between segments............................ 151,000 -- (151,000) --
Income (loss) from operations......................... 1,043,000 2,203,000 (1,299,000) 1,947,000
Identifiable assets................................... 21,011,000 11,419,000 3,322,000 35,752,000
Capital expenditures.................................. 1,961,000 778,000 -- 2,739,000
Depreciation and amortization......................... 897,000 461,000 -- 1,358,000

Year ended May 31, 1998:

Corporate,
other and
Aerospace Electronics elimination Total
----------- ----------- ----------- -----------
Net sales to customers................................ $34,146,000 19,953,000 -- 54,099,000
Net sales between segments............................ 162,000 5,000 (167,000) --
Income (loss) from operations......................... 4,665,000 2,454,000 (2,379,000) 4,740,000
Identifiable assets................................... 29,761,000 28,943,000 19,876,000 78,580,000
Capital expenditures.................................. 4,212,000 1,333,000 4,745,000 10,290,000
Depreciation and amortization......................... 1,301,000 855,000 48,000 2,204,000
</TABLE>

The Company had two customers, each comprising greater than 10% of net
sales, aggregating 65%, 43%, and 45% for the fiscal years ended May 31, 1996,
1997, and 1998, respectively.

At May 31, 1997, the Company had one customer which represented 14% of
accounts receivable. At May 31, 1998, the Company had two customers, aggregating
25%, each of which comprised greater than 10% of accounts receivable.

Credit is extended to customers based on an evaluation of their financial
condition and collateral is generally not required.

The Company currently purchases aluminum and other raw materials from a
limited number of suppliers. Although there are a limited number of potential
suppliers of such raw materials, management believes that other suppliers could
provide these raw materials on comparable terms. A change in suppliers, however,
could cause a delay in manufacturing, increased costs, and a possible loss of
sales, which could have a material adverse effect on the manufacturing and
delivery of the Company's products. The Company purchased $1,762,000,
$2,570,000, and $2,723,000 from one supplier during the years ended May 31,
1996, 1997, and 1998, respectively.

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

F-13
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

At May 31, 1998, the Company had purchase commitments for raw materials
aggregating $4,064,000.

(4) Business Acquisitions

In November 1995, a wholly-owned subsidiary of the Company acquired all of
the assets and assumed certain liabilities of Seismic Safety Products, Inc. The
asset purchase price consisted of $70,000 in cash and 128,750 shares of the
Company's common stock valued at $483,000, for a total of $553,000. In
connection with the transaction, the Company acquired certain patents for total
consideration of $520,000. Costs in excess of net book value of $535,000 were
recorded as a result of this acquisition.

Effective for accounting purposes in November 1995, a wholly-owned
subsidiary of the Company merged with Morel Industries, Inc. The purchase price
consisted of 650,000 shares of the Company's common stock valued at
approximately $2.6 million. Costs in excess of net book value of $939,000 were
recorded as a result of this acquisition.

In April 1997, a wholly-owned subsidiary of the Company acquired all of the
assets and assumed certain liabilities of Northwest Technical Industries, Inc.
The asset purchase price consisted of 477,540 shares of the Company's common
stock valued at $1,552,000. Costs in excess of net book value of $270,000 were
recorded as a result of this acquisition.

Effective for accounting purposes in February 1998, a wholly-owned
subsidiary of the Company acquired substantially all of the assets and assumed
certain liabilities of PCC Composites, Inc.'s operating unit, Balo Precision
Parts. The purchase price consisted of $2.25 million in cash and resulted in
costs in excess of net book value of $1,029,000.

Effective for accounting purposes in March 1998, a wholly-owned subsidiary
of the Company acquired substantially all assets and certain liabilities of
Electronic Specialty Corporation and its wholly-owned subsidiary, Displays &
Technologies, Inc. (collectively `'ESC'`). The purchase price consisted of $2.0
million in cash, 923,304 shares of the Company's common stock valued at
$6,109,000, and acquisition costs of $77,000 for a total of $8,186,000. Costs in
excess of net book value of $3,631,000 were recorded as a result of this
acquisition.

The business combinations described above have been accounted for using the
purchase method. Accordingly, assets and liabilities have been recorded at their
fair value at acquisition date. Operating results of these acquired companies
are included in the Company's consolidated statements of operations from the
respective acquisition dates.

The following summary, prepared on a pro forma basis, presents the
unaudited consolidated condensed results of operations of the Company, as if the
aforementioned business acquisitions were made as of the first day of the
immediately preceding fiscal year in which the entity was acquired. There are no
material adjustments which impact the summary.

<TABLE>
<CAPTION>
Year ended May 31 (unaudited)
----------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net sales.......................................................... $ 26,801,000 $ 49,117,000 $ 64,968,000
Income (loss) from operations...................................... (908,000) 444,000 4,384,000
Net income (loss).................................................. (1,660,000) 249,000 3,003,000
Net income (loss) per share:
Basic........................................................ (0.25) 0.03 0.23
Diluted...................................................... (0.25) 0.02 0.21
Shares used in computation of net income (loss) per share:
Basic........................................................ 6,687,000 9,936,962 13,287,961
Diluted...................................................... 6,687,000 10,027,762 14,407,945
</TABLE>

The pro forma results are not necessarily indicative of the actual results
of operations that would have occurred had the transactions been consummated as
of the date indicated nor are they intended to indicate results that may occur
in the future.

F-14
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(5) Inventories

Inventories at May 31 consist of the following:

1997 1998
----------- -----------
Raw materials............................. $ 2,685,000 $ 5,789,000
Work in progress.......................... 3,387,000 5,683,000
Finished goods............................ 3,010,000 4,712,000
----------- -----------
$ 9,082,000 $16,184,000

(6) Property, Plant and Equipment

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

<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Land.................................................... $ 895,000 $ 1,171,000
Buildings............................................... 4,300,000 4,380,000
Leasehold improvements.................................. 401,000 1,738,000
Machinery and equipment................................. 9,305,000 18,331,000
Furniture and fixtures.................................. 1,215,000 2,494,000
----------- -----------
16,116,000 28,114,000
Less accumulated depreciation and amortization ... 3,309,000 5,108,000
----------- -----------

12,807,000 23,006,000
Construction and purchases in progress.................. 383,000 3,329,000
----------- -----------
$13,190,000 26,335,000
</TABLE>

The Company recognized depreciation of property, plant and equipment of
$696,000, $1,103,000 and $1,851,000 during the years ended May 31, 1996, 1997
and 1998, respectively.

(7) Note Receivable From Related Party

At May 31, 1997, the Company had a note receivable from a shareholder
collectible in monthly principal and interest installments of $5,900, with the
final principal balance due in March 1999. During the year ended May 31, 1998,
the note receivable was repaid in full. Also see Note 8.

(8) Investment

At May 31, 1998, the Company held an interest in the common stock,
registered and unregistered shares, of a public company of approximately 19.5%.
The investment consists of shares which were purchased on the open market and
shares which were obtained in conjunction with the settlement of certain
outstanding notes receivable from the public company under a restructuring
agreement, amounting to approximately $359,000 and $4,220,000, respectively, at
May 31, 1998. The Company recorded an unrealized loss, included in shareholders'
equity, on the shares of $436,000 as of May 31, 1998. Under the restructuring
agreement, the public company converted notes, previously issued by the Company
to the public company and its subsidiaries, into shares of the public company
stock at $2.00 per share. In addition, the public company agreed to grant the
Company demand registration rights for those shares and, in the event of an
underwritten public offering, piggyback registration rights, which will be
effective after the earliest of (a) the closing of the public company's third
round of financing, or (b) the first anniversary of the closing of the
restructuring agreement. The Company also agreed to continue guaranteeing the
public company credit facility of $1.3 million and an equipment lease of
$373,000.

At May 31, 1998, the Company had a note receivable from the public company.
The note accrues interest at 8% per annum, requires interest-only payments for
the first year, and requires fully amortizing monthly payments of principal plus
interest for the final four years of the note. In the restructuring agreement,
the public company also agreed to purchase certain other notes and interests of
the Company (including warrants and interests in a lawsuit and bankruptcy

F-15
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

action) for a $950,000 promissory note from the public company. The note accrues
interest at 8% per annum, requires interest-only payments for the first year,
and requires fully-amortizing monthly payments of principal plus interest for
the final four years of the note.

In conjunction with the restructuring agreement, the Company recorded a
nonrecurring charge during the year ended May 31, 1998 of $1,038,000 to reflect
the restructuring of the debt and the difference between the Company's carrying
amounts of the other notes and the interest in the lawsuit and bankruptcy and
the public company promissory note. The amount has been included in other
expense for the year ending May 31, 1998.

Certain of the Company's directors were also directors of the public
company through January 1998. In addition, certain officers of the Company were
individual shareholders of the public company until such shares were sold in May
1998. The Company also subleases approximately 95% of the square footage of its
Bothell, Washington office space to the public company for an amount equivalent
to the percentage of the lease payment for that space. Certain directors and
officers of the Company personally guarantee certain debt of the public company.

(9) Credit Facility

In May 1997, the Company executed a commitment letter with a bank for a
credit facility consisting of (a) a revolving working capital line of credit of
up to $3,500,000 that extends from June 1997 to September 1998 (the `'Line of
Credit'`), (b) a seven-year capital equipment acquisition credit facility of up
to $2,000,000 (the `'Equipment Line'`), and (c) a 10-year term loan of
approximately $700,000, or approximately 80% of the cost of a recent addition to
a subsidiary's building (the `'Construction Loan'`). The Company has executed
the documents for the Line of Credit and the Construction Loan, but has not yet
elected to close the Equipment Line. As of May 31, 1998, the Line of Credit had
no outstanding balance and the Company had not yet requested funding of the
Equipment Line. Borrowings will bear interest at variable rates, and will be
secured by inventories, accounts receivable, and certain equipment and building
improvements. The agreement contains restrictive covenants related to working
capital, net worth and debt service coverage. Management believes the Company is
in compliance with these covenants at May 31, 1998.

In connection with the acquisition of ESC, the Company assumed a revolving
working capital line of credit. Interest accrues at the 30-day commercial paper
rate plus 3.25% (8.75% at May 31, 1998) and the outstanding balance was
$1,511,000 at May 31, 1998. There are certain restrictive covenants related to
tangible net worth and debt to tangible net worth ratios. Management believes
the Company is in compliance with these covenants at May 31, 1998. Subsequent to
May 31, 1998, the line of credit was reduced to $1,200,000.

F-16
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(10) Long-Term Debt

<TABLE>
<CAPTION>
Long-term debt at May 31 consists of the following:

1997 1998
----------- -----------
<S> <C> <C>
Industrial revenue bond payable to a bank in monthly installments of
$19,200, including interest at 8.12%, through November 2009............................ $ 1,242,000 $ 1,108,000
Note payable to a bank in monthly installments of $7,000, including
interest at 8.39% with the principal balance due in full in March 2008................. -- 712,000
Subordinated note payable to the City of Entiat in monthly installments of
$7,300, including interest at 8%, with the principal balance due in full
in May 2001............................................................................ 551,000 505,000
Note payable to bank in monthly principal installments of $5,000 plus
interest at the 30-day commercial paper rate plus 3.25% (8.75% at May
31, 1998) through October 2002......................................................... -- 265,000
Notes payable to a pension fund and others, with interest only payments at
6.75% due quarterly commencing January 1998 through October 2001,
with the principal balance due in full in October 2001................................. -- 4,050,000
Notes payable to a financing company for certain equipment in aggregate
monthly installments of $58,000, including interest at 9% to 10.7%,
with maturity dates ranging from April 2000 to May 2004................................ -- 2,685,000
Other notes payable for vehicles and certain equipment in aggregate
monthly installments of $52,000, including interest at 5.9% to 10.9%
with maturity dates ranging from November 1998 to July 2006............................ 1,216,000 761,000
Notes payable with interest ranging from 8% to 10.25%, repaid in full
during the year ended May 31, 1998..................................................... 745,000 --
----------- -----------
3,754,000 10,086,000
Less current portion...................................................................... 855,000 1,027,000
----------- -----------
Long-term portion................................................................... $ 2,899,000 $ 9,059,000
=========== ===========
</TABLE>

The industrial revenue bond agreement requires, among other items, that
the Company maintain minimum working capital, tangible net worth and debt to
tangible net worth ratios. Management believes the Company is in compliance with
these covenants at May 31, 1998.

Scheduled principal maturities of long-term debt at May 31, 1998 are as
follows for each of the following fiscal year-ends:

1999.............................................. $ 1,027,000
2000.............................................. 1,038,000
2001.............................................. 984,000
2002.............................................. 4,957,000
2003.............................................. 812,000
Thereafter........................................ 1,268,000
------------
$ 10,086,000

Long-term debt is secured by substantially all assets of the Company and,
in certain circumstances, through personal guarantees of certain shareholders.

F-17
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(11) Leasing Arrangements

Capital Leases

The Company leases certain property, plant and equipment under capital
lease agreements that expire through September 2004. Aggregate minimum principal
payments to be made under these agreements at May 31, 1998 are as follows for
each of the following fiscal year-ends:

1999.............................................. $ 206,000
2000 ............................................. 218,000
2001 ............................................. 216,000
2002 ............................................. 186,000
2003 ............................................. 151,000
Thereafter ....................................... 170,000
----------
$1,147,000

Included in property, plant and equipment are costs of $551,000 and
$1,402,000 and related accumulated amortization of $58,000 and $208,000 recorded
under capital leases at May 31, 1997 and 1998, respectively.

Operating Leases

The Company leases certain property, plant and equipment under operating
lease agreements that expire through June 2026. Aggregate minimum rental
payments to be made under these agreements at May 31, 1998 are as follows for
each of the following fiscal year-ends:

1999 ............................................ $ 1,252,000
2000 ............................................ 1,206,000
2001 ............................................ 1,194,000
2002 ............................................ 1,192,000
2003 ............................................ 1,090,000
Thereafter ...................................... 4,400,000
------------
$ 10,334,000

Total rent expense during the years ended May 31, 1996, 1997 and 1998
amounted to $516,000, $475,000 and $788,000, respectively.

(12) Convertible Notes

In August 1997, the Company closed a private offering of $5,800,000, before
expenses of $435,000, in convertible promissory notes (the `'Convertible
Notes'`) to two accredited investors. The Company intends to use the proceeds of
this offering primarily in connection with proposed and future acquisitions. The
Company subsequently filed a registration statement, which was declared
effective, registering for resale up to 1,720,690 shares of common stock
issuable upon conversion of the Convertible Notes. As of May 31, 1998, all of
the Convertible Notes had been converted into 1,405,018 shares of common stock.

(13) Common Stock

During the year ended May 31, 1996, the Company sold 1,429,470 shares of
its common stock at an average of $3.43 per share, in a private offering to
institutional investors. The Company incurred approximately $375,000 of costs
related to the offering, which were charged against the proceeds of the offering
in 1996.

In July 1996, the Company conducted a public offering of 2,250,000 units,
each unit composed of one share of the Company's common stock and a warrant to
purchase one share of the Company's common stock at a price of $3.125 per unit
in a public offering. The warrants entitled the holder to purchase one share of
common stock at $4.6875 per share, exercisable any time through July 2001. In
addition, the Company issued warrants to two underwriters for the purchase of an
additional 225,000 units at $3.75 per unit. All of these warrants were
outstanding at May 31, 1997 and 1998.

F-18
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

During the years ended May 31, 1996 and 1997, the Company incurred $328,000 and
$1,398,000, respectively, of costs related to the offering. The costs incurred
during the year ended May 31, 1996 were deferred and were charged against the
proceeds of the stock offering in the year ended May 31, 1997. During the year
ended May 31, 1998, 45,000 of the underwriter's warrants were exercised for
45,000 units.

In November 1997, the Company closed a private offering of $6,408,000,
before expenses of $320,000, in common stock and notes payable to three
accredited investors. The Company subsequently filed a registration statement,
which was declared effective, registering for resale the 524,000 shares of
common stock sold in the offering. The outstanding balance of the notes payable
of $4,050,000 is included in long-term debt at May 31, 1998. In conjunction with
the private offering, consulting fees of $320,000 were paid to a director and
shareholder of the Company.

(14) Convertible Preferred Stock

Series A Convertible Preferred Stock

In February 1997, the Company sold 50,000 shares of Series A convertible
preferred stock (Series A) in a private placement for $5,000,000, and incurred
related offering costs of $519,000, resulting in net proceeds of $4,481,000.
Conversion provisions include conversion any time after June 12, 1997;
conversion to common stock at a rate equal to $100 divided by the lower of $3.49
or 85% of the average closing common per share bid price over the five days
before conversion; and total shares converted cannot exceed 20% of total common
stock outstanding, or approximately 1,950,000 shares. At May 31, 1998, all of
the shares of Series A were converted into 1,494,593 shares of common stock.

Series B Convertible Preferred Stock

In May 1998, the Company sold 100,000 shares of Series B convertible
preferred stock (Series B) for $100 per share, and issued warrants to purchase
138,888 shares of Common Stock, in a private offering which resulted in gross
proceeds of $10,000,000, less related offering costs of $740,000, for net
proceeds of $9,260,000. In addition, the purchasers deposited $7,000,000 into
escrow, and, upon the closing of the acquisition of Aeromet International plc
(Aeromet), the Company will issue the purchasers 70,000 additional shares of
Series B, and warrants to purchase an additional 97,221 shares of Common Stock,
in exchange for the escrowed funds. If the Aeromet Acquisition fails to close,
the purchasers may elect not to purchase the additional shares of Series B and
related warrants, and to have the escrowed funds returned to them.

The Common Stock issuable upon conversion of the Series B and upon exercise
of the related warrants are subject to a registration rights agreement that
requires the Company to file a registration statement covering those shares by
November 1998, and to use its best efforts to make that registration statement
effective by January 1999. The registration rights agreement also grants certain
piggyback registration rights with regard to the shares of Common Stock
underlying the Series B and the related warrants.

Upon conversion of a share of Series B, the holder will receive the number
of shares of Common Stock equal to $100 divided by the then applicable
conversion price of the Series B. Up to $7,000,000 in value of the Common Stock
underlying the Series B Preferred may be converted and sold at any time, if that
Common Stock is included in an effective piggyback registration. Shares of
Series B whose underlying shares of Common Stock are not included in a piggyback
registration are not convertible until August 1998, and may not be sold until
February 1999. At that time, the underlying Common Stock may be sold upon the
effectiveness of a registration statement, or under any applicable exemption
from registration. From August 1998 until February 1999, the conversion price of
the Series B is $7.20 per share. After February 1999, the conversion price of
the Series B is equal to the lower of (a) $7.20 per share, or (b) the average of
the three lowest closing bid prices per share of the Common Stock over the 22
trading days before conversion, but not less than $5.67, except in certain
limited circumstances. No holder of Series B is entitled to voluntarily convert
Series B that would cause the holder to own more than 9.9% of the Company's
total outstanding Common Stock at any one time. Any Series B outstanding on May
2003 will be automatically converted into Common Stock at the then-applicable
conversion price.

The Series B has no voting rights and certain preferences relating to
dividends, liquidation, and in specific situations, redemption.

F-19
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(15) Warrants

In connection with certain notes payable, in May 1996, the Company issued
the lenders warrants to purchase 337,500 shares of common stock at an exercise
price of $4.80 per share. The warrants expire in May 2001 and were valued at
approximately $12,000. During the year ended May 31, 1997, there were no
warrants exercised for shares of common stock. During the year ended May 31,
1998, there were 300,000 warrants exercised for shares of common stock.

In June 1997, the Company issued warrants to purchase 125,000 shares of
common stock for $3.45 per share in consideration for certain financial
consulting services. The warrants, which expire in June 2002, were valued at
$24,000. During the year ended May 31, 1998, 75,000 of the warrants were
exercised for shares of common stock.

In December 1997, the Company issued warrants to purchase 375,000 shares of
common stock for $4.6875 per share in consideration for a financial consulting
and services agreement. The warrants, which expire in June 1998, were valued at
$60,000. During the year ended May 31, 1998, all of the warrants were exercised
for shares of common stock.

In February 1998, the Company issued warrants to purchase 1,290,000 shares
of common stock at an exercise price of $4.62 per share in consideration for a
financial consulting and services agreement. The warrants, which expire in
February 2002, were valued at $360,000. During the year ended May 31, 1998,
there were no warrants exercised for shares of common stock.

In May 1998, the Company issued warrants to purchase 138,888 shares of
common stock at an exercise price of $7.20 per share in conjunction with the
Series B offering. The warrants, which expire in May 2003, were valued at
$220,589 and included in additional paid in capital at May 31, 1998.

A summary of the Company's warrants, excluding warrants issued in
connection with the public offering in July 1996, is as follows:

<TABLE>
<CAPTION>
Weighted
average
price
Warrants of shares
--------- ---------
<S> <C> <C>
Balance at June 1, 1995................................ 160,000 $ 2.00
Granted................................................ 337,500 4.80
--------- ---------
Balance at May 31, 1996 and 1997....................... 497,500 4.34
Granted................................................ 1,928,888 4.74
Exercised.............................................. (750,000) 4.61
---------
Balance at May 31, 1998................................ 1,676,388 $ 4.36
========= =========
</TABLE>

The following summarizes warrants outstanding, excluding warrants issued in
connection with the public offering in July 1996, at May 31, 1998:

<TABLE>
<CAPTION>
Weighted
average Weighted
Range of remaining average
exercise Number contractual exercise Number
prices outstanding life price exercisable
------------ ----------- ----------- -------- -----------
<S> <C> <C> <C> <C>
$2.00 - 4.00 210,000 4.69 years $ 2.35 210,000
4.01 - 6.00 1,327,500 3.97 years 4.63 1,327,500
6.01 - 8.00 138,888 5.00 years 7.20 --
----------- -----------
1,676,388 1,537,500
=========== ===========
</TABLE>

The 138,888 warrants issued in connection with the Series B are exercisable
beginning in May 1999. All other warrants are fully exercisable at May 31, 1998.

F-20
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(16) Compensation Plans

Long-Term Investment and Incentive Plan

The Company has a long-term stock investment and incentive plan (Option
Plan) under which directors, officers, key employees and other key individuals
may be awarded stock options, stock appreciation rights, stock and cash bonuses,
restricted stock, or performance units. Under the Option Plan, the exercise
price of options issued is not less than fair-market value at the date of grant.
Options expire ten years from the grant date.

For the year ended May 31, 1998, the Company had not issued any stock
appreciation rights, stock or cash bonuses, restricted stock, or performance
units under the Option Plan.

As the Company applies APB Opinion No. 25 and related interpretations in
accounting for its Option Plan, no compensation costs have been recognized for
stock options issued to employees. Had compensation costs for stock options been
determined consistent with SFAS No. 123, the results of the Company would have
been adjusted to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Net income (loss):
As reported................................................... $ (999,000) 1,682,000 3,614,000
Pro forma..................................................... (1,043,000) 75,000 2,478,000
Net income (loss) per share:
As reported:
Basic................................................... (0.16) 0.18 0.29
Diluted................................................. (0.16) 0.17 0.27
Pro forma:
Basic................................................... (0.17) 0.01 0.20
Diluted................................................. (0.17) 0.01 0.18
Shares used in computation of net income (loss) per share:
Basic ...................................................... 6,209,000 9,499,980 12,486,077
Diluted ...................................................... 6,209,000 10,035,846 13,606,061
</TABLE>

The fair value of the options granted during 1996, 1997 and 1998 is
estimated as $248,000, $1,853,000 and $3,007,000, respectively, using the
Black-Scholes option-pricing model with the following assumptions on the date of
grant: zero percent dividend yield, expected volatility from 24% to 73%,
risk-free interest rate from 5.55% to 6.59%, and expected lives ranging from 5
to 10 years.

A summary of the Company's Stock Option Plan is as follows:

<TABLE>
<CAPTION>
Shares of common stock
-------------------------- Weighted
Available Options average price
options under plan of shares
---------- ---------- -------------
<S> <C> <C> <C>
Balance at June 1, 1995....................................... 1,000,000 -- $ --
Granted....................................................... (145,283) 145,283 5.09
---------- ---------- ----------
Balance at May 31, 1996....................................... 854,717 145,283 5.09
Authorized.................................................... 1,000,000 -- --
Granted....................................................... (998,333) 998,333 4.53
---------- ---------- ----------
Balance at May 31, 1997....................................... 856,384 1,143,616 4.61
Authorized.................................................... 1,000,000 -- --
Granted....................................................... (1,112,500) 1,112,500 5.49
Exercised..................................................... -- (25,000) 2.11
---------- ---------- ----------
Balance at May 31, 1998....................................... 743,884 2,231,116 $ 5.09
========== ========== ==========
</TABLE>

F-21
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

No options were exercised or lapsed during the years ended May 31, 1996 and
1997.

The following summarizes options outstanding at May 31, 1998:

<TABLE>
<CAPTION>
Options outstanding Options exercisable
--------------------------------------------------- ------------------------------
Weighted average Weighted Weighted
Range of Number remaining average Number average
exercise prices outstanding contractual life exercise price exercisable exercise price
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$2.00--4.00 248,333 8.68 years $ 3.05 248,333 $ 3.05
4.01--6.00 1,400,283 8.56 years 4.74 1,327,113 4.72
6.01--8.00 580,500 9.97 years 6.13 97,500 6.13
----------- ----------
2,229,116 1,672,946
=========== ==========
</TABLE>

Independent Director Stock Plan

The Company has an Independent Director Stock Plan under which nonemployee
directors of the Company are awarded common stock of the Company for serving on
its board of directors. The plan authorizes and reserves for issuance a maximum
of 100,000 common shares. At May 31, 1998, 68,041 shares were available for
future issuance. During the years ended May 31, 1996, 1997 and 1998, 9,000,
14,400 and 8,559 shares of the Company's common stock, respectively, were issued
under the plan of which 27,009 were vested at May 31, 1998. Included in
compensation expense is $24,000, $44,000 and $13,000 for the years ended May 31,
1996, 1997 and 1998, respectively, resulting from the shares issued.

Retirement Plan

The Company maintains a 401(k) plan covering all eligible employees who
meet service requirements as provided in the plan. Company contributions to the
profit-sharing plan are determined annually by the board of directors. No
contributions were made by the Company to the plan during the years ended May
31, 1996 and 1997. The Company contributed $27,000 to the plan in the year ended
May 31, 1998.

Employee Stock Purchase Plan

The Company has an Employee Stock Purchase Plan under which employees are
eligible to purchase shares of the Company's common stock, through payroll
deductions, at the lower of 85% of the Company's stock price on the first day of
an offering period or 100% of the Company's stock price on the last day of an
offering period. The first offering period is expected to begin in September
1998 and end approximately one year later.

(17) Income Taxes

<TABLE>
<CAPTION>
Total income tax benefit (expense) is as follows:

1996 1997 1998
-------- -------- ---------
<S> <C> <C> <C>
Current Federal.................................. $ -- (50,000) (593,000)
Deferred Federal................................. 67,000 -- 1,075,000
-------- -------- ---------
Total...................................... $ 67,000 (50,000) 482,000
======== ======== =========
</TABLE>

F-22
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

A reconciliation of the Federal statutory tax rate of 34% and the Company's
effective tax rates of 6%, 3% and 15% in the years ended May 31, 1996, 1997 and
1998, respectively, is as follows:

<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Computed expected income tax benefit (expense).................. $ 362,000 (588,000) (1,065,000)
Change in valuation allowance................................... (241,000) 558,000 1,717,000
Other........................................................... (54,000) (20,000) (170,000)
---------- ---------- ----------
$ 67,000 (50,000) 482,000
========== ========== ==========
</TABLE>

Significant components of the Company's deferred tax assets (liabilities)
are as follows:

<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
NOL carryforward.......................................... $ 2,135,000 1,387,000
Other . 290,000 641,000
Valuation allowances...................................... (1,717,000) --
----------- -----------
708,000 2,028,000
Deferred tax liabilities--depreciation.................... (1,300,000) (1,420,000)
----------- -----------
Net deferred tax asset (liability).................. $ (592,000) 608,000
=========== ===========
</TABLE>

The Company has net operating loss (NOLs) carryforwards for Federal income
tax purposes of approximately $4,880,000, the benefits of which expire in the
tax year 2001 through the tax year 2011. The NOLs created by the Company's
subsidiaries prior to their acquisition and the NOLs created as a consolidated
group or groups subsequent to a qualifying tax free merger or acquisition, have
limitations related to the amount of usage by each subsidiary or consolidated
group as described in the Internal Revenue Code. As a result of these
limitations, approximately $800,000 of the $4,880,000 of NOLs will never become
available.

At May 31, 1997, the Company recorded a valuation allowance because
management believed that it was uncertain that some portion or all of the
deferred tax assets would not be realized. At May 31, 1998, the Company
eliminated the valuation allowance for deferred taxes due to management's
assessment of improved probability of realization.

(18) Fair Value of Financial Instruments

The Company's financial instruments include cash, receivables, an
investment, accounts payable and short- and long-term borrowings. The fair value
of these financial instruments approximates their carrying amounts based on
current market indicators, such as prevailing interest rates.

(19) Contingencies

Legal

The Company is currently subject and party to various legal actions arising
out of the normal course of business. Management believes the ultimate
liability, if any, arising from such claims or contingencies is not likely to
have a material adverse effect on the Company's results of operations or
financial condition.

In the normal course of business, the Company disposes of potentially
hazardous material which could result in claims related to environmental
cleanup. The Company has not been notified of any related claims. The Company is
subject to various other environmental and governmental regulations. Although
the extent of any noncompliance with those regulations, if any, is not
completely ascertainable, management believes the ultimate liability is not
likely to have a material adverse effect on the Company's results of operations
or financial condition.

F-23
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Year 2000

The Company is in process of developing a plan to address the Year 2000
computer problem and to begin converting its computer systems to be Year 2000
compliant. The Year 2000 problem is the result of computer programs being
written using two digits rather than four to define the applicable year. The
Company presently believes that with upgrades to existing software and possibly
some replacement, the Year 2000 problem will not pose significant operational
problems for the Company's computer systems. However, if such upgrades and
replacements are not completed timely or effectively, the Year 2000 problem may
have a material impact on the operations of the Company. The Company expects to
incur internal staffing costs, as well as the cost of software upgrades and
replacement as part of this effort. However, until the Company's plan is
finalized, management is unable to reasonably estimate the costs of achieving
Year 2000 compliance.

(20) Subsequent Events

In July 1998, the Company expects to complete the issuance of $75 million
of notes and, subsequently, consummate the acquisition of Aeromet, a company
headquartered in the United Kingdom. Aeromet is one of the leading suppliers of
magnesium and aluminum precision sand and investment castings, and titanium and
aluminum formed sheet products for the aerospace, defense, and transportation
industries in the United Kingdom. For the year ended December 31, 1997, Aeromet
had net sales of $48.7 million, income from operations of $1.6 million, and a
net loss of approximately $30,000. The acquisition is expected to be accounted
for using the purchase method. There is no assurance that the aforementioned
transactions will be completed or that the aforementioned financial results will
be indicative of future results.

F-24
<PAGE>
<TABLE>
<CAPTION>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
August 31, 1998
(Unaudited)

August 31,
1998
------------
<S> <C>
ASSETS
CURRENT ASSETS
Cash $ 18,998,000
Accounts receivable 21,364,000
Inventories 28,611,000
Deferred income taxes 522,000
Prepaid expenses and other 1,275,000
------------
Total current assets 70,770,000
------------

PROPERTY AND EQUIPMENT, NET OF DEPRECIATION 46,149,000
------------

OTHER ASSETS
Note receivable, net --
Investment, net 2,719,000
Costs in excess of net book value of acquired subsidiaries, net 43,761,000
Patents, net 1,203,000
Deferred income taxes 1,155,000
Deferred financing costs, net 5,271,000
Other assets 437,000
------------
Total other assets 54,546,000
------------

TOTAL ASSETS $171,465,000
============

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable $ 13,776,000
Accrued liabilities 7,895,000
Current portion - long-term debt 1,199,000
Current portion - capital lease obligations 311,000
Line of credit 903,000
------------
Total current liabilities 24,084,000
------------

LONG-TERM LIABILITIES
Long-term debt, net of current portion 83,683,000
Capital leases, net of current portion 1,860,000
Deferred rent and other 338,000
------------
Total long-term liabilities 85,881,000
------------

TOTAL LIABILITIES 109,965,000
------------

SHAREHOLDERS' EQUITY
Convertible preferred stock --
Common stock 16,000
Additional paid in capital 66,030,000
Accumulated other comprehensive income (loss) 1,131,000
Accumulated deficit (5,677,000)
------------
Total shareholders' equity 61,500,000
------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $171,465,000
============

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

F-25
<PAGE>
<TABLE>
<CAPTION>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three-month periods ended August 31, 1997 and 1998
(Unaudited)

August 31, August 31,
1997 1998
------------ ------------
<S> <C> <C>
NET SALES $ 11,776,000 $ 19,178,000
COST OF SALES 8,793,000 14,504,000
------------ ------------
GROSS PROFIT 2,983,000 4,674,000
OPERATING EXPENSES 2,007,000 3,776,000
------------ ------------
INCOME FROM OPERATIONS 976,000 898,000
------------ ------------
OTHER INCOME AND EXPENSE
Interest income 19,000 226,000
Interest expense (130,000) (1,069,000)
Other 8,000 (6,721,000)
------------ ------------
(103,000) (7,564,000)
------------ ------------
NET INCOME (LOSS) BEFORE FEDERAL INCOME TAX 873,000 (6,666,000)
PROVISION FOR FEDERAL INCOME TAXES (BENEFIT) (62,000) 2,255,000
------------ ------------
NET INCOME (LOSS) $ 811,000 $ (4,411,000)
============ ============

NET INCOME (LOSS) PER SHARE:
BASIC $ 0.07 $ (0.29)
DILUTED $ 0.07 $ (0.29)
SHARES USED IN COMPUTATION OF NET INCOME (LOSS)
PER SHARE:
BASIC 11,718,000 15,421,375
DILUTED 11,718,000 15,421,375

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

F-26
<PAGE>
<TABLE>
<CAPTION>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Three-month Periods Ended August 31, 1997 and 1998
(Unaudited)

August 31, August 31,
1997 1998
------------ ------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net cash provided by operating activities $ 1,612,000 $ 1,001,000
------------ ------------

CASH FLOW FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (2,700,000) (1,635,000)
Payments received on notes receivable 17,000 --
Acquisition of subsidiary -- (29,012,000)
Purchase of goodwill -- (40,080,000)
Sale of certificate of deposit 1,000,000 --
Purchase of short-term investments (836,000) --
Increase in notes receivable (3,692,000) --
------------ ------------
Net cash used in investing activities (6,211,000) (70,727,000)
------------ ------------

CASH FLOW FROM FINANCING ACTIVITIES:
Net repayments under line of credit -- (608,000)
Proceeds from long-term debt, net of financing costs 1,191,000 71,363,000
Payments on long-term debt and capital leases (570,000) (374,000)
Sale of preferred stock, net of issuance costs -- 6,792,000
Sale of convertible debentures, net of issuance costs 5,439,000 --
Other changes, net (32,000) --
------------ ------------
Net cash provided by financing activities 6,028,000 77,173,000
------------ ------------

NET INCREASE IN CASH 1,429,000 7,447,000

CASH AT BEGINNING OF PERIOD 3,048,000 11,461,000
EFFECT OF EXCHANGE RATES ON CASH -- 90,000

CASH AT END OF PERIOD $ 4,477,000 $ 18,998,000
============ ============

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
Property, plant and equipment included in accounts payable $ -- $ 500,000

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

F-27
<PAGE>
PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
MANAGEMENT'S STATEMENT AND
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
For the Three-Month Period Ended August 31, 1998

Management's Statement

The unaudited consolidated balance sheet as of August 31, 1998 and the unaudited
consolidated statements of operations and cash flows for the three month periods
ended August 31, 1997 and 1998 include all adjustments which the Company
considers necessary for a fair presentation of its consolidated financial
position, results of operations and cash flows for
these periods.

Certain information and footnote disclosures normally included in audited
consolidated financial statements presented in accordance with generally
accepted accounting principles have been condensed or omitted from the data
disclosed in these unaudited notes. The financial statements should be read in
conjunction with the audited consolidated financial statements
and notes thereto for the years ended May 31, 1997 and 1998.

The results of operations for the three-month periods ended August 31, 1997 and
1998 are not necessarily indicative of the results to be expected or anticipated
for a full fiscal year.

See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."

Note 1: Comprehensive Income

In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
which establishes standards for reporting and disclosure of comprehensive income
and its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997 and requires reclassification of financial
statements for earlier periods to be provided for comparative purposes. The
Company has not determined the manner in which it will present the information
required by SFAS No. 130 in its annual consolidated financial statements for the
year ending May 31, 1999. The Company's total comprehensive income (loss) for
the three month periods ended August 31, 1997 and 1998 was $811,000 and
($2,844,000), respectively. Components of comprehensive income are as follows:

<TABLE>
<CAPTION>
August 31, 1997 August 31, 1998
--------------- ---------------
<S> <C> <C>
Net income (loss) $ 811,000 $(4,411,000)

Other comprehensive income (expense)
Foreign currency translation -- 1,714,000
Income tax expense -- (583,000)
Adjustment for unrealized loss on investment -- 436,000
----------- -----------
Total other comprehensive income -- 1,567,000
----------- -----------

Comprehensive income (loss) $ 811,000 $(2,844,000)
=========== ===========
</TABLE>

Note 2: Computations of Earnings per Share

The Company has adopted SFAS No. 128, Earnings Per Share. In accordance with
SFAS No. 128 basic earnings per share is computed using the weighted average
number of common shares outstanding. Diluted earnings per share is computed
using the weighted average number of common shares plus dilutive common share
equivalents outstanding during the period using the treasury stock method. Due
to the net loss during the period ended August 31, 1998, the same number of
shares were used to compute both basic and diluted earnings per share.

F-28
<PAGE>
Note 3: Aeromet Acquisition

On July 30, 1998, the Company's wholly-owned subsidiary, Pacific Aerospace &
Electronics (UK) Limited, closed the purchase of Aeromet International plc
("Aeromet") pursuant to a Share Acquisition Agreement. In consideration for the
purchase, the Company paid the sellers 42 million pounds sterling (or
approximately $69 million) in cash. Aeromet is
located in the United Kingdom.

At the purchase date, the total purchase price of Aeromet including capitalized
costs of the acquisition was $72.7 million, including $32.6 million in net
assets (current assets of $30.6 million; property plant and equipment of $18.1
million; current liabilities of $14.5 million; long term liabilities of $1.7
million) and resultant goodwill of $40.1 million. Accounting policies at Aeromet
have been conformed to generally accepted accounting principles consistent with
the Company. Goodwill is being amortized over 40 years. Step-up in the valuation
of property, plant and equipment to fair market value is being amortized over
the estimated useful lives of the assets, generally 7 to 10 years. For balance
sheet purposes, the Company has translated UK valuations to US dollars for
Aeromet using the translation at the balance sheet date. For income statement
purposes, revenues and expenses have been reported at average transaction rates
for the period being reported. Income tax rates have been estimated at the
prevailing rates in the UK. The Company has also filed a Form 8-K with
corresponding disclosures on August 14, 1998.

The Company has included accounts of Aeromet in the consolidated financial
statements at August 31, 1998. See "Significant Events - Aeromet Acquisition" in
Management's Discussion and Analysis of Financial Condition and Results of
Operations for additional information.

The following summary, prepared on a pro forma basis, presents the unaudited
consolidated condensed results of operations of the Company, as if the Aeromet
acquisition was made as of the first day of three month period ended August 31,
1998 and the comparable period in the previous year.

<TABLE>
<CAPTION>
1998 1997
------------ ------------
(in thousands)
<S> <C> <C>
Net sales .......................................... $ 28,760 $ 23,916
Net loss ........................................... $ (5,469) $ (1,049)
Net loss per share:
Basic...................................... $ (0.36) $ (0.09)
Diluted ................................... $ (0.36) $ (0.09)
</TABLE>

The pro forma results are not necessarily indicative of the actual results of
operations that would have occurred had the transactions been consummated as of
the date indicated nor are they intended to indicate results that may occur in
the future.

Note 4: Inventories

Components of inventories at August 31, 1998 are as follows:

Raw materials........................................ $ 9,478,000
Work in progress..................................... 13,275,000
Finished goods....................................... 5,856,000
Total........................... $ 28,611,000

Note 5: Investment

At August 31, 1998, the Company's investment in the common stock of a public
company, determined in accordance with SFAS No. 115, is shown net of a reserve
for additional loss exposure related to the Company's guarantee of certain debt
of the public company and other related matters.

F-29
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholder
Aeromet International PLC:

We have audited the accompanying balance sheets of Aeromet International
PLC, a wholly-owned subsidiary of Charles Baynes plc, as of December 31, 1997
and 1996, and the related statements of operations, shareholder's equity and
comprehensive income/loss, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examination, on a test basis of evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Aeromet International PLC as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.

/s/ KPMG AUDIT PLC

Birmingham, England
March 19, 1998

F-30
<PAGE>
<TABLE>
<CAPTION>
AEROMET INTERNATIONAL PLC

BALANCE SHEETS

December 31, 1996 and 1997, and May 31, 1998 (unaudited)
(In thousands, except share data)

December 31, May 31,
1996 1997 1998
-------- -------- --------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ -- $ 388 $ --
Accounts receivable, net of allowance for doubtful accounts of $205 in
1996, $148 in 1997 and $147 in 1998.......................................... 12,561 12,062 13,885
Due from Affiliates............................................................. -- 163 26
Inventories..................................................................... 7,607 8,805 10,050
Deferred income taxes........................................................... 122 138 137
Prepaid expenses and other...................................................... 515 377 218
-------- -------- --------
Total current assets...................................................... 20,805 21,933 24,316
-------- -------- --------
Property, plant and equipment, net.................................................... 9,977 9,485 9,073
-------- -------- --------
Other assets:
Costs in excess of net book value of acquired subsidiaries, net of
accumulated amortization of $17,142 in 1996, $18,600 in 1997 and
$19,320 in 1998.............................................................. 27,056 23,893 22,791
Other........................................................................... 331 197 12
-------- -------- --------
Total other assets........................................................ 27,387 24,090 22,803
-------- -------- --------
$ 58,169 $ 55,508 $ 56,192
======== ======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Short-term borrowings........................................................... $ 7,908 4,661 5,108
Accounts payable................................................................ 5,979 7,935 8,625
Accrued liabilities............................................................. 1,563 1,715 2,380
Taxes payable................................................................... 406 813 1,616
Due to Affiliates............................................................... 1,882 178 --
Current portion of capital lease obligations.................................... 103 115 119
-------- -------- --------
Total current liabilities................................................. 17,841 15,417 17,848

Long-term liabilities:
Due to Affiliates............................................................... 9,825 13,279 10,849
Capital lease obligations, net of current portion............................... 1,058 944 924
Deferred income taxes........................................................... 736 798 763
-------- -------- --------
Total liabilities......................................................... 29,460 30,438 30,384
-------- -------- --------
Shareholder's equity:
Common stock, $0.155 par value. 5,000,000 shares authorized,
1,000,000 issued and outstanding at December 31, 1996 and 1997
and May 31, 1998............................................................. 155 155 155
Additional capital.............................................................. 43,180 43,246 43,286
Accumulated other comprehensive income.......................................... 2,677 1,558 1,320
Accumulated deficit............................................................. (17,303) (19,889) (18,953)
-------- -------- --------
Total shareholder's equity................................................ 28,709 25,070 25,808
-------- -------- --------
Commitments and contingencies......................................................... $ 58,169 $ 55,508 $ 56,192
======== ======== ========

See accompanying notes to financial statements.
</TABLE>

F-31
<PAGE>
<TABLE>
<CAPTION>
AEROMET INTERNATIONAL PLC

STATEMENTS OF OPERATIONS

For the years ended December 31, 1996 and 1997
and the five months ended May 31, 1997 and 1998 (unaudited)
(In thousands)

Year ended Five months ended
December 31, May 31
---------------------- ----------------------
1996 1997 1997 1998
--------- --------- --------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales ..................................................... $ 41,939 $ 48,697 $ 19,069 $ 24,212
Cost of sales.................................................... 34,340 40,591 16,560 19,614
--------- --------- --------- ---------
Gross profit......................................... 7,599 8,106 2,509 4,598
Operating expenses............................................... 7,098 6,482 2,832 2,590
--------- --------- --------- ---------
Income (loss) from operations........................ 501 1,624 (323) 2,008
--------- --------- --------- ---------
Other income (expense):
Interest expense........................................... (731) (754) (349) (274)
Income (loss) before income taxes.................... (230) 870 (672) 1,734
--------- --------- --------- ---------
Income tax benefit (expense)..................................... (570) (900) (25) (798)
--------- --------- --------- ---------
Net income (loss).................................... $ (800) $ (30) $ (697) $ 936
========= ========= ========= =========

See accompanying notes to financial statements.
</TABLE>

F-32
<PAGE>
<TABLE>
<CAPTION>
AEROMET INTERNATIONAL PLC

STATEMENTS OF SHAREHOLDER'S EQUITY AND COMPREHENSIVE INCOME/LOSS

For the years ended December 31, 1996 and 1997
and the five month period ended May 31, 1998 (unaudited)
(In thousands, except share data)

Accumulated
Common stock Other Total
-------------------- Additional Comprehensive Accumulated Comprehensive Shareholder's
Shares Amount Capital Income (loss) Deficit Income (loss) Equity
--------- --------- ---------- ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995...... 1,000,000 $ 155 43,137 -- (16,409) -- 26,883
Capital contribution from parent.. -- -- 43 -- -- -- 43
Translation adjustment............ -- -- -- 2,677 -- 2,677 2,677
Dividends paid to parent.......... -- -- -- -- (94) -- (94)
Net loss ......................... -- -- -- (800) (800) -- (800)
Comprehensive income.............. 1,877
--------- --------- ---------- ------------- ----------- ------------- -------------
Balance at December 31, 1996...... 1,000,000 155 43,180 (17,303) 2,677 28,709
Capital contribution from parent.. -- -- 66 -- -- 66
Translation adjustment............ -- -- -- (1,119) -- (1,119) (1,119)
Dividends declared to parent...... -- -- -- (2,556) -- (2,556)
Net loss ......................... -- -- -- (30) (30) -- (30)
-------------
Comprehensive loss................ (1,149)
--------- --------- ---------- ------------- ----------- ------------- -------------
Balance at December 31, 1997...... 1,000,000 155 43,246 (19,889) 1,558 25,070
Capital contribution from parent.. -- -- 40 -- -- 40
Translation adjustment............ -- -- -- (238) -- (238) (238)
Net income........................ -- -- -- 936 936 -- 936
Comprehensive income.............. 698
-------------
Balance at May 31, 1998
(unaudited).................... 1,000,000 $ 155 43,286 (18,953) 1,320 25,808
========= ========= ========== =========== ============= =============

See accompanying notes to financial statements.
</TABLE>

F-33
<PAGE>
<TABLE>
<CAPTION>
AEROMET INTERNATIONAL PLC

STATEMENTS OF CASH FLOWS

For the years ended December 31, 1996 and 1997
and the five months May 31, 1997 and 1998 (unaudited)
(In thousands)

Year ended Five months ended
December 31 May 31
--------------------- ---------------------
1996 1997 1997 1998
-------- -------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cash flow from operating activities:
Net income (loss)......................................................... $ (800) $ (30) (697) 936
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization....................................... 3,411 3,790 1,540 1,427
Allowance for doubtful accounts..................................... 133 (49) (49) --
Loss on sale of property, plant and equipment....................... -- (7) (2) --
Deferred taxes...................................................... 201 69 5 (23)
Changes in operating assets and liabilities:
Accounts receivable........................................... (586) 64 85 (1,957)
Inventories................................................... 483 (1,486) (995) (1,341)
Prepaid expenses and other.................................... (73) 67 263 922
Accounts payable and accrued liabilities...................... (823) 2,178 1,563 771
Other ........................................................ (3,010) 343 687 (1,417)
-------- -------- -------- --------
Net cash provided by (used in) operating
activities............................................ (1,064) 4,939 2,400 (682)
-------- -------- -------- --------
Cash flow from investing activities:
Acquisition of property, plant and equipment................................. (1,484) (1,526) (285) (197)
Proceeds from sale of property, plant and equipment.......................... 8 28 11 --
-------- -------- -------- --------
Net cash used in investing activities.................... (1,476) (1,498) (274) (197)
-------- -------- -------- --------
Cash flow from financing activities:
Net borrowings (repayments) under line of credit............................. 2,683 (2,930) (2,119) 496
Payments on capital leases................................................... (145) (124) (7) (7)
-------- -------- -------- --------
Net cash provided by (used in) financing activities...... 2,538 (3,054) (2,126) 489
-------- -------- -------- --------
Net increase (decrease) in cash and cashequivalents...... (2) 387 -- (390)
Cash and cash equivalents at beginning of year.................................. 2 -- -- 388
Effect of exchange rates on cash................................................ -- 1 -- 2
-------- -------- -------- --------
Cash and cash equivalents at end of year........................................ $ -- 388 -- --
======== ======== ======== ========

Supplemental cash flow information: Cash paid during the year for:
Interest ................................................................. $ 436 744 228 264
Income taxes ......................................................... 308 192 -- --

Non-cash investing and financing activities:
Seller financed acquisition of property, plant and equipment.............. 1,319 18 24 --

See accompanying notes to financial statements.
</TABLE>

F-34
<PAGE>
AEROMET INTERNATIONAL PLC

NOTES TO FINANCIAL STATEMENTS
(All amounts in thousands, except share data)

1. Description of Business and Basis of Presentation

Description of Business

Aeromet International PLC ("Aeromet"), a wholly-owned subsidiary of Charles
Baynes plc ("the Parent"), operates five sites in the United Kingdom ("UK")
engaged in the manufacture of precision metal components and products. Most of
Aeromet's customers are located in the UK and Europe and operate in the
aerospace, defence, and motorsport industries.

Basis of Preparation

The company maintains its accounting records in accordance with UK tax and
Companies Act regulations. Certain adjustments have been made to these records
to present the accompanying financial statements in accordance with United
States generally accepted accounting principles (US GAAP).

On August 16, 1996, Aeromet changed its name from Kent Aerospace PLC to
Aeromet International PLC.

In October of 1996, the assets and liabilities of TKR International Limited
("TKR"), were transferred to Aeromet. Prior to October 1996, TKR was also a
wholly-owned subsidiary of the Parent. The merger is a combination of entities
under common control. Accordingly, all prior period financial statements
presented have been restated to include combined results of operations,
financial position and cash flows of TKR as though it had always been part of
Aeromet. The financial statements are unaffected by the subsidiaries of Aeromet
since the subsidiaries have no assets, liabilities or operations.

The accompanying interim financial statements have been prepared by
Aeromet, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission applicable to interim reporting and reflect, in the
opinion of the management, all adjustments necessary to present fairly the
financial information of Aeromet. All such adjustments are of a normal recurring
nature. Certain information and footnote disclosures normally included in
financial statements, prepared in accordance with generally accepted accounting
principles, have been omitted as permitted by such rules and regulations. These
interim financial statements should be read in conjunction with the financial
statements and related notes, included in the Aeromet International PLC
Financial Statements as of December 31, 1996 and 1997, included herein.

The statements of operations for the years ended December 31, 1996 and
1997, and the five month periods ended May 31, 1997 and 1998 include the actual
net sales, cost of sales, selling and administration costs as incurred by
Aeromet. Other amounts such as rent and administrative services included in
total operating expenses are allocated to Aeromet by the Parent. The amount of
allocated expenses was $1,479, $1,596 and $938 in 1996, 1997 and 1998.
Management believes the allocations to be reasonable under the circumstances;
however, there can be no assurances that such allocations will be indicative of
future results of operations or what the financial position and results of
operations of Aeromet would have been had it been a separate, stand-alone entity
during the periods covered.

Aeromet's functional currency is Pounds Sterling. All asset and liabilities
are translated into US dollars at year-end exchange rates. Income and expense
items are translated at average exchange rates prevailing during the fiscal
period. The resulting translation adjustments are recorded as a separate
component of shareholder's equity.

2. Summary of Significant Accounting Principles

Cash and Cash Equivalents

Cash and cash equivalents consist of cash and demand deposits with banks.

F-35
<PAGE>
AEROMET INTERNATIONAL PLC

NOTES TO FINANCIAL STATEMENTS--(Continued)

Inventories

Inventories are stated at the lower of cost, determined by the first-in,
first-out method, or market value.

Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated
depreciation. Plant and equipment under capital leases are stated at the lower
of the fair market value of the assets or the present value of minimum lease
payments at the inception of the leases.

Depreciation is calculated using the straight-line method over the
estimated useful lives of the owned assets ranging from 4 to 20 years. Property,
plant and equipment held under capital leases are amortized using the
straight-line method over the shorter of the estimated useful lives of the
assets or the lease terms, ranging from 4 to 10 years.

Expenditures for maintenance and repairs are charged to expense as
incurred.

Goodwill

Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited, generally 20 years. Aeromet assesses the recoverability
of this intangible asset by determining whether the amortization of the goodwill
balance over its remaining life can be recovered through undiscounted future
operating cash flows of the acquired operation. The amount of goodwill
impairment, if any, is measured based on projected discounted future operating
cash flows using a discount rate reflecting Aeromet's average cost of funds. The
assessment of the recoverability of goodwill will be impacted if estimated
future operating cash flows are not achieved.

Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.

Financial Instruments

Aeromet enters into foreign currency contracts with the Parent in order to
reduce the impact of certain foreign currency fluctuations. Firmly committed
transactions are hedged with forward exchange contracts. Gains and losses
related to hedges of firmly committed transactions are deferred and are
recognized in income or as adjustments of carrying amounts when the hedged
transaction occurs.

Revenue Recognition

Revenue is recognized when products are shipped to customers.

Restrictions on Capital

Aeromet is subject to UK Companies Act regulations, and as such may only
distribute its accumulated net realised profits as defined by reference to UK
generally accepted accounting principles (UK GAAP). Net realised profits under
UK GAAP were $656 and $2,506 at December 31, 1996 and 1997, respectively.

F-36
<PAGE>
AEROMET INTERNATIONAL PLC

NOTES TO FINANCIAL STATEMENTS--(Continued)

Research and Development and Advertising

Research and development costs and advertising costs are expensed as
incurred and are included in operating expenses. Research and development costs
in 1996 and 1997 were $11 and $19, respectively. Advertising costs in 1996 and
1997 were $97 and $169, respectively.

Income Taxes

Aeromet follows the asset and liability method of accounting for income
taxes. Under the asset and liability method of accounting for income taxes,
deferred tax assets and liabilities are recognized based on the estimated future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

Stock-Based Compensation

Aeromet follows the provisions of Statements of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. This
statement permits a company to choose either a fair-value method or the
Accounting Principles Board (APB) Opinion No.25, Accounting for Stock Issued to
Employees, intrinsic-value based method of accounting for stock-based
compensation arrangements. SFAS No. 123 requires pro forma disclosure of net
income and earnings per share computed as if the fair-value based method had
been applied in financial statements of companies that account for such
arrangements under APB Opinion No. 25. Aeromet records stock-based compensation
using the APB Opinion No. 25 intrinsic-value-based method.

Pensions

Aeromet participates in the defined contribution pension scheme of the
Parent. Contributions made to the scheme were $255 in 1996 and $323 in 1997.

Comprehensive Income

In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, Reporting Comprehensive Income. SFAS No. 130 is effective for the
periods ending after December 15, 1997. This statement provides reporting
standards of comprehensive income and its components and requires that all
components of comprehensive income be reported in the financial statements in
the period in which they are recognized. Aeromet has adopted the provisions of
SFAS No. 130 in its financial statements.

Use of Estimates

The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

New Accounting Pronouncements

In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments of an
Enterprise and Related Information. SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating
segments. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. SFAS No. 131 is effective
for fiscal years beginning after December 15, 1997. In the initial year of
application, comparative information for earlier years must be restated. Aeromet
has not yet determined the impact of implementing the provisions of SFAS No. 131
on Aeromet's existing disclosures.

F-37
<PAGE>
AEROMET INTERNATIONAL PLC

NOTES TO FINANCIAL STATEMENTS--(Continued)

In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-1, Accounting for the Cost of Computer
Software Developed For or Obtained For Internal Use (SOP 98-1). This Statement
establishes standards regarding capitalization of certain costs incurred in
connection with developing or obtaining software for internal use. Under current
practice, Aeromet generally expenses such costs as incurred. SOP 98-1 is
effective for accounting periods beginning after December 15, 1998 and is to be
applied prospectively. Early adoption of SOP 98-1 is permitted. Aeromet has not
yet determined the impact of adopting SOP 98-1 on its future result of
operations and financial position.

3. Concentration of Risk

Aeromet's individual customers comprising more than 10% of net sales are
presented below for the year ended December 31, 1997. There were no individual
customers comprising more than 10% of net sales for the year ended December 31,
1996.

Year ended
Customer December 31, 1997
-------- -----------------
A....................................................... $5,981
B....................................................... 5,317

Aeromet's individual customers comprising more than 10% of accounts
receivable are presented below at December 31, 1997. There were no individual
customers comprising more than 10% of accounts receivable at December 31, 1996.

Customer December 31, 1997
-------- -----------------
B....................................................... $1,589

Credit is extended to customers based on an evaluation of their financial
condition and collateral is generally not required.

Aeromet currently purchases titanium and other raw materials from a limited
number of suppliers. Suppliers of titanium are limited and a change of supplies
could cause a delay in manufacturing and increased costs, and a possible loss of
sales, which could have a material adverse effect on the manufacturing and
delivery of Aeromet's products. Purchases from the principal suppliers of
titanium are as follows:

<TABLE>
<CAPTION>
Year ended Year ended Five month
December 31, December 31, period ended
Supplier 1996 1997 May 31, 1998
-------- ----------- ----------- ------------
(unaudited)
<S> <C> <C> <C>
A.................................................... $ 1,923 $ 3,470 $ 2,145
</TABLE>

4. Inventories

<TABLE>
<CAPTION>
Inventories consist of the following:

December 31,
----------------------------
1996 1997 May 31, 1998
----------- ----------- ------------
(unaudited)
<S> <C> <C> <C>
Raw materials....................................... $ 2,100 $ 1,938 $ 2,131
Work in progress.................................... 4,554 6,076 7,443
Finished goods...................................... 953 791 476
----------- ----------- ------------
$ 7,607 $ 8,805 $ 10,050
=========== =========== ============
</TABLE>

F-38
<PAGE>
AEROMET INTERNATIONAL PLC

NOTES TO FINANCIAL STATEMENTS--(Continued)

5. Property, Plant and Equipment

Property, plant and equipment, including assets under capital lease
arrangements consists of the following:

<TABLE>
<CAPTION>
December 31,
----------------------------
1996 1997 May 31, 1998
----------- ----------- ------------
(unaudited)
<S> <C> <C> <C>
Leasehold improvements.............................. $ 532 $ 512 $ 507
Machinery and equipment............................. 19,052 19,766 19,896
----------- ----------- ------------
19,584 20,278 20,403
Less accumulated depreciation and amortization...... (9,607) (10,793) (11,330)
----------- ----------- ------------
$ 9,977 $ 9,485 9,073
=========== =========== ============
</TABLE>

Aeromet recognized depreciation of property, plant and equipment of $881
and $1,680 during the years ended December 31, 1996 and 1997, respectively.

6. Short-term Borrowings

At December 31, 1996 and 1997, there was $7,908 and $4,661 outstanding
under a committed bank overdraft facility, respectively, which is unsecured
under a Composite Accounting Agreement between the bank and the Parent. The
current credit agreement provides borrowings of up to (pound)3,000 (equivalent
to $4,936 at December 31, 1997) for general corporate purposes. Weighted-average
interest rates of 7.1% and 7.6% were charged on this overdraft facility in 1996
and 1997, respectively. Aeromet's borrowings under this agreement are guaranteed
by its Parent. Aeromet also guarantees certain of its Parent's borrowings.

7. Transactions with Affiliates

Net short term balances due to affiliates were $1,882 and $15 at December
31, 1996 and 1997, respectively. The balance at December 31, 1996 related to a
short term loan from the Parent. Interest was charged on this loan at weighted
average rates of 12% and 10% in 1996 and 1997, respectively. The balance at
December 31, 1997 related to sundry trading with affiliated companies. No
interest is charged on the trading balances.

Long term loans from related companies are as follows:

Long-term
loans
---------
Balance at December 31, 1995.................................. $ 9,561
Allocation of central costs............................. 375
Parent company recharges................................ 422
Cash transfers.......................................... (1,448)
Translation adjustment.................................. 915
---------
Balance at December 31, 1996.................................. 9,825
Allocation of central costs............................. 459
Parent company recharges................................ 567
Dividends declared...................................... 2,458
Cash transfers.......................................... 334
Translation adjustment.................................. (364)
---------
Balance at December 31, 1997.................................. $ 13,279
=========

The average balance of long term loans from related companies was $10,127
and $10,714 in 1996 and 1997, respectively.

F-39
<PAGE>
AEROMET INTERNATIONAL PLC

NOTES TO FINANCIAL STATEMENTS--(Continued)

No interest is charged on the long term loan.

Other transactions with related companies for 1996 and 1997 are analysed as
follows:

Purchases from related parties:

<TABLE>
<CAPTION>
Year ended Year ended
December, 31 1996 December 31, 1997
----------------- -----------------
<S> <C> <C>
Buck and Hickman.......................... $130 462
National Packaging........................ 28 56
</TABLE>

These companies are both subsidiary undertakings of the Parent.

8. Leasing Arrangements

Capital Leases

Aeromet leases certain property, plant and equipment under capital lease
agreements that expire through 2018. Aggregate minimum payments to be made under
these agreements at December 31, 1997 are as follows for each of the following
fiscal year-ends:

<TABLE>
<CAPTION>
<S> <C>
1998.............................................................................. $ 186
1999.............................................................................. 191
2000.............................................................................. 185
2001.............................................................................. 172
2002.............................................................................. 155
Thereafter........................................................................ 501
-------
1,390
Less amounts representing interest at rates ranging from 6.57% to 7.82%........... (331)
-------
Present value of net minimum capital lease payments............................... 1,059
Less current portion of capital lease obligations................................. (115)
-------
Capital lease obligations, net of current portion........................... $ 944
=======
</TABLE>

Included in property, plant and equipment are costs of $1,319 and $1,330
and related accumulated amortization of $14 and $149 recorded under capital
leases at December 31, 1996 and 1997, respectively.

Operating Leases

Aeromet leases certain property, plant and equipment under operating lease
agreements that expire through 2005. Aggregate minimum rental payments to be
made under these agreements at December 31, 1997 are as follows for each of the
following fiscal year-ends:

Minimum
Rentals
--------
1998.................................................... $ 2,097
1999.................................................... 2,047
2000.................................................... 2,032
2001.................................................... 2,002
2002.................................................... 1,700
Thereafter ............................................. 21,270
--------
$ 31,148

F-40
<PAGE>
AEROMET INTERNATIONAL PLC

NOTES TO FINANCIAL STATEMENTS--(Continued)

Total rent expense for operating leases during the years ended December 31,
1996 and 1997 amounted to $1,548 and $1,614, respectively.

9. Compensation Plans

The Parent has three stock-based compensation plans, which are described
below. Aeromet applies the APB Opinion No. 25 intrinsic-value based method of
accounting for stock-based compensation arrangements. Had compensation cost been
determined on the fair value at the grant dates for awards under those plans
consistent with the method of SFAS No. 123, Aeromet's net loss would have been
reduced to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
December, 31 1996 December 31, 1997
----------------- -----------------
<S> <C> <C>
Net loss
As reported.......................... $ 30 800
Pro forma............................ 56 850
</TABLE>

Fixed Price Share Option Plan

Under the Saving Related Share Option Scheme, the Parent is authorized to
issue shares of the Parent's common stock to all full-time employees with six
months' service. Under the terms of the scheme, employees can choose each year
to have up to (pound)3,000 (equivalent to $4,936 at December 31, 1997) of their
annual base earnings withheld to purchase the Parent's common stock. The
purchase price of the stock is 80% of the market price at the date of grant.
Compensation cost is recognized for the fair value of the employee's purchase
rights, which was estimated using the Black-Scholes model with the following
assumptions for 1997 and 1996, respectively: dividend yield of 3.02% and 2.27%;
an expected life of 2.75 years for both years; expected volatility of 2.5%; and
risk-free interest rates of 6.33% and 7.78%.

Performance-Based Share Option Plans

Under its Executive Share Option Scheme, the Parent may grant to selected
executives stock option awards in the Parent's common stock to a maximum total
of outstanding options for any participant of four times annual earnings.
Options are granted, normally twice each year, at the market price of the common
stock at the date of grant. Since 1991, all options have been granted in three
equal parts which, in normal circumstances, are first exercisable three, four,
and five years respectively after the date of grant. Exercise of options issued
since 1996 is dependent on certain performance criteria based on the Parent's
share growth. No options were granted during 1997. The fair value of each option
grant was estimated on the date of the grant using the Black-Scholes model with
the following assumptions for 1996: dividend yield of 2.27%; an expected life of
three years; expected volatility of 25%; and risk-free interest rate of 7.78%.

The Parent may issue up to 10% of its issued share capital for all schemes
operated by it. This is in accordance with the London Stock Exchange
regulations.

F-41
<PAGE>
AEROMET INTERNATIONAL PLC

NOTES TO FINANCIAL STATEMENTS--(Continued)

Information with respect to options granted under the stock option plans in
respect of the employees of Aeromet is as follows:

<TABLE>
<CAPTION>
Fixed price Performance-based
-------------------------------------- --------------------------------------
Weighted-average Weighted-average
----------------------- -----------------------
Fair Fair
value of value of
Number Exercise options Number Exercise options
of options price granted of options price granted
---------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at December 31, 1995............. 742,839 $ 0.88 653,834 $ 0.81
Granted................................ 344,353 1.56 0.59 72,500 2.15 0.47
Expired or cancelled................... (91,837) 0.98 (7,500) 1.96
Exercised.............................. (28,087) 0.86 (203,832) 0.71
---------- ----------
Outstanding at December 31, 1996............. 967,268 1.11 515,002 1.04
---------- --------- ----------
Granted................................ 300,271 1.50 0.54 -- -- --
Expired or cancelled................... (197,665) 1.21 (47,000) 1.65
Exercised.............................. (240,498) 0.72 (170,000) 0.75
---------- ----------
Outstanding at December 31, 1997............. 829,376 $ 1.34 298,002 $ 0.93
========== ==========
Exercisable at:
December 31, 1997...................... -- -- 189,167 $ 0.85
</TABLE>

Summarized information about fixed price stock options outstanding in
respect of the employees of Aeromet at December 31, 1997 is as follows:

<TABLE>
<CAPTION>
Options outstanding
---------------------------------------------------- Options exercisable
Weighted- --------------------------------
average Weighted- Weighted-
Range of Number remaining average exercise Number average exercise
exercise prices outstanding contractual life price exercisable price
--------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.93 100,715 1.3 years $ 0.93 -- --
1.08 211,914 2.3 years 1.08 -- --
1.50-1.56 516,747 3.8 years 1.53 -- --
0.93-1.56 829,376 3.4 years 1.34 -- --
</TABLE>

Summarized information about performance-based stock options outstanding in
respect of the employees of Aeromet at December 31, 1997 is as follows:

<TABLE>
<CAPTION>
Options outstanding
---------------------------------------------------- Options exercisable
Weighted- --------------------------------
average Weighted- Weighted-
Range of Number remaining average exercise Number average exercise
exercise prices outstanding contractual life price exercisable price
--------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.46 37,500 0.50 years $0.46 37,500 $0.46
0.55-0.98 125,302 5.00 years 0.80 94,500 0.81
1.11-1.35 90,200 7.25 years 1.20 57,167 1.17
1.98 15,000 8.50 years 1.96 -- --
2.32 30,000 8.50 years 2.32 -- --
------- -------
0.46-2.32 298,002 5.10 years 1.09 189,167 0.85
======= =======
</TABLE>

F-42
<PAGE>
AEROMET INTERNATIONAL PLC

NOTES TO FINANCIAL STATEMENTS--(Continued)

Share Bonus Scheme

Under the terms of the Share Bonus Scheme, the Parent is authorised to
grant shares of the Parent's common stock to the executive directors of Aeromet
in lieu of any annual cash bonus. Participation in this plan is obligatory for
bonuses above a certain threshold. Under the scheme, Parent common stock, having
an initial market value of up to four times the amount excluded from the cash
bonus scheme, are notionally allocated to the executive. Over a five year period
the trustees of the scheme will, when called upon to do so by the executive,
transfer an increasing proportion of such shares to the executive, at which time
the remaining shares which have not "vested" will be forfeited by the executive.
No shares were granted under this Scheme in 1996 and 1997.

10. Income Taxes

Aeromet computes income tax expense based on the UK Statutory Rates. Income
tax expense for the year ended December 31, 1996 was computed at the UK
Statutory Rate of 33%. During the year ended December 31, 1997, the UK Statutory
Rate was reduced from 33% to 31%. For the year ended December 31, 1997, Aeromet
computed income tax expense at a rate of 33% for 3 months and 31% for 9 months
resulting in a blended rate of 31.5% for the year. Aeromet computed income tax
expense for the 5 month period ending May 31, 1998 at the UK Statutory Rate of
31%.

The provision for income taxes (benefit) is as follows:

Year ended
December 31,
------------
1996 1997
------ ------
Current..................................... $ 369 $ 831
Deferred.................................... 201 69
------ ------
$ 570 $ 900
====== ======

Income tax expense for the years ended December 31, 1996 and 1997 differ
from the amounts computed by applying the UK statutory tax rate to pre-tax
income (loss) as a result of the following:

Year ended
December 31,
------------
1996 1997
------ ------
Tax provision (benefit) at Statutory Rate... $ (76) $ 275
Amortization of goodwill.................... 651 653
Effect of change in UK Statutory Rate....... -- (36)
Non-deductible items and other.............. (5) 8
------ ------
$ 570 $ 900
====== ======

Significant components of Aeromet's deferred tax assets and liabilities are
as follows:

<TABLE>
<CAPTION>
Year ended
December 31,
------------
1996 1997
------ ------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts and other........ $ 122 $ 138
Deferred tax liabilities:
Fixed assets..................................... 623 698
Intangible assets................................ 113 100
------ ------
736 798
------ ------
$ 614 $ 660
====== ======
</TABLE>

F-43
<PAGE>
AEROMET INTERNATIONAL PLC

NOTES TO FINANCIAL STATEMENTS--(Continued)

11. Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, receivables and accounts
payable, approximate fair value due to the short maturity of such instruments.
The carrying value and related fair value for Aeromet's remaining financial
instruments, foreign currency contracts, are as follows:

<TABLE>
<CAPTION>
December 31, 1996 December 31, 1997
--------------------------------------- ---------------------------------------
Carrying amount Estimated fair value Carrying amount Estimated fair value
--------------- -------------------- --------------- --------------------
<S> <C> <C> <C> <C>
Foreign exchange forward contracts......... $-- (207) -- 121
</TABLE>

The fair value of short term foreign exchange contracts is based on
exchange rates at December 31, 1996 and 1997. The fair value of long term
foreign contracts is based on various quoted spot forward exchange rates.

12. Contingencies

Legal

Aeromet is currently subject and party to various legal actions arising in
the normal course of business. Management believes the ultimate liability, if
any, arising from such claims or contingencies is not likely to have a material
adverse effect on Aeromet's results of operations or financial condition.

In the normal course of business, Aeromet disposes of potentially hazardous
material which could result in claims related to environmental cleanup. Aeromet
has not been notified of any related claims. Aeromet is subject to various other
environmental and governmental regulations, however, the extent of any
non-compliance with those regulations, if any, is not ascertainable.

13. Subsequent Event

In May 1998, the Parent signed a letter of intent with Pacific Aerospace &
Electronics, Inc., a public company headquartered in the United States, to sell
Aeromet for approximately (pound)45.0 million. The transaction is expected to
close in July 1998; however, there is no assurance that the transaction will be
completed.

F-44
<PAGE>
Report of Independent Accountants

To the Board of Directors and
Shareholders of Electronic Specialty Corporation

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of nonredeemable shareholders' equity and
of cash flows present fairly, in all material respects, the financial position
of Electronic Specialty Corporation and its subsidiaries at March 31, 1997, and
the results of their operations and their cash flows for the year in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.

/s/ PRICE WATERHOUSE LLP
Portland, Oregon
June 27, 1997

F-45
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC SPECIALTY CORPORATION

Consolidated Balance Sheet
March 31, 1997

<S> <C>
ASSETS
Current assets:
Cash........................................................................................... $ 89,375
Accounts receivable, net (Note 1).............................................................. 1,338,014
Inventories (Notes 1 and 2).................................................................... 2,975,533
Prepaid expenses and other current assets ..................................................... 168,227
Deferred income taxes.......................................................................... 79,650
------------
Total current assets..................................................................... 4,650,799
Equipment, net (Notes 1 and 3)....................................................................... 3,854,827
Intangibles, net (Note 12)........................................................................... 258,122
Other long-term assets............................................................................... 67,152
------------
$ 8,830,900
============

LIABILITIES AND REDEEMABLE, CUMULATIVE PREFERED STOCK AND
NON-REDEEMABLE SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit (Note 4)........................................................................ $ 988,194
Accounts payable............................................................................... 688,547
Delinquent taxes............................................................................... 485,671
Accrued payroll.............................................................................. 157,977
Accrued vacation............................................................................. 184,125
Other accrued liabilities.................................................................... 213,960
Note payable to parent (Note 5)................................................................ 32,682
Current portion of notes payable (Note 6)...................................................... 99,462
Current portion of deferred gain (Note 7)...................................................... 50,137
------------
Total current liabilities................................................................ 2,900,755

Notes payable, net of current portion (Note 6)....................................................... 267,711
Deferred gain, net of current portion (Note 7)....................................................... 539,502
Deferred income taxes................................................................................ 201,792
Other long-term liabilities.......................................................................... 57,298
------------
3,967,058
------------

Commitments and contingencies (Notes 8 and 11) --

Redeemable, cumulative preferred stock, no par value; 1,000,000 shares authorized, 1,700
shares issued and outstanding (Note 11) 2,652,000

Non-redeemable shareholders' equity: (Note 9)

Common stock, no par value; 6,000,000 shares authorized, 5,986,201 shares issued and
outstanding at stated value................................................................. 48,000
Paid-in capital................................................................................ 1,942,951
Retained earnings.............................................................................. 220,891
------------
Total non-redeemable shareholders' equity................................................ 2,211,842
$ 8,830,900
============

The accompanying notes are an integral part of this financial statement.
</TABLE>

F-46
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC SPECIALTY CORPORATION

Consolidated Statement of Operations
Year ended March 31, 1997

<S> <C>
Sales:
Relays and solenoids................................... $ 4,836,022
Displays............................................... 2,632,187
-----------
Net sales...................................... 7,468,209
Cost of goods sold.............................................. 5,584,492
-----------
Gross profit.............................................. 1,883,717
Operating expenses.............................................. 1,224,535
Research and development expenses (Note 1)...................... 103,343
-----------
Income from operations.................................... 555,839
-----------
Other expenses:
Interest expense.......................................... (185,089)
Other expense............................................. (14,026)
-----------
(199,115)
Income before income taxes...................................... 356,724
Income tax expense (Note 9)..................................... (121,549)
Net income...................................................... $ 235,175
===========

The accompanying notes are an integral part of this financial statement.
</TABLE>

F-47
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC SPECIALTY CORPORATION

Consolidated Statement of Non-Redeemable Shareholders' Equity
Year ended March 31, 1997

Common
shares Retained
outstanding Amount Paid-in capital earnings Total
----------- ----------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balances at March 31, 1996............. 5,986,201 $ 48,000 $ 1,942,951 $ 121,716 $ 2,112,667
Net income............................. -- -- -- 235,175 235,175
Accretion of dividends not
declared............................ -- -- -- (136,000) (136,000)
----------- ----------- --------------- ----------- -----------
Balances at March 31, 1997............. 5,986,201 $ 48,000 $ 1,942,951 $ 220,891 $ 2,211,842
=========== =========== =============== =========== ===========

The accompanying notes are an integral part of this financial statement.
</TABLE>

F-48
<PAGE>
<TABLE>
<CAPTION>
ELECTRONIC SPECIALTY CORPORATION

Consolidated Statement of Cash Flows
Year ended March 31, 1997

<S> <C>
Cash flows from operating activities:
Net income.......................................................................................... $ 235,175
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation..................................................................................... 652,160
Amortization of deferred gain.................................................................... (50,834)
Amortization of intangibles...................................................................... 32,270
Deferred income taxes............................................................................ 121,549
Changes in assets and liabilities:
Accounts receivable.............................................................................. (644,355)
Inventories...................................................................................... (807,783)
Prepaid expenses and other current assets........................................................ (15,199)
Other long-term assets........................................................................... 54,288
Accounts payable................................................................................. 485,644
Accrued liabilities.............................................................................. 637,241
-----------
Net cash provided by operating activities..................................................... 700,156
-----------
Cash flows used in investing activities:
Capital expenditures................................................................................ (1,719,494)
-----------
Cash flows from financing activities:
Proceeds from the line of credit, net............................................................... 988,194
Payments on notes payable........................................................................... (200,990)
-----------
Net cash provided by financing activities..................................................... 787,204
-----------
Net decrease in cash...................................................................................... (232,134)
Cash at beginning of year................................................................................. 321,509
-----------
Cash at end of year....................................................................................... $ 89,375
===========
Supplemental disclosure of cash flow information:
Cash paid for interest.............................................................................. $ 65,431
===========

The accompanying notes are an integral part of this financial statement.
</TABLE>

F-49
<PAGE>
ELECTRONIC SPECIALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Significant Accounting Policies

Organization

Electronic Specialty Corporation, an 82% owned subsidiary of Deltec
International, Inc. ("Deltec"), is primarily engaged in the manufacturing and
distribution of electromechanical relays and solenoids to large,
high-reliability aerospace and military prime contractors, and specialized
anti-glare displays for use on laptop computers and military/commercial airplane
view screens. All production operations are performed at the Electronic
Specialty Corporation's manufacturing plant and offices in Clark County,
Washington. During 1996, Electronic Specialty Corporation acquired all the
assets and certain liabilities of Displays and Technologies, Inc. (D&T). The
accompanying financial statements include all of the costs of doing business of
Electronic Specialty Corporation. The accounts of Electronic Specialty
Corporation do not include any charges for services from its parent, Deltec, as
no services were provided to Electronic Specialty Corporation by Deltec.

Principles of Consolidation

The consolidated financial statements include the accounts of Electronic
Specialty Corporation and its wholly owned subsidiaries: ESN Corporation (a
leasing company) and D&T (collectively, "ESC"). Significant intercompany
accounts and transactions have been eliminated in consolidation.

Management Estimates

The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Revenue Recognition and Accounts Receivable

ESC recognizes sales when the related products are shipped. Sales are
recorded net of applicable cash discounts and allowances for returns.

Inventories

Inventories are stated at the lower of cost or market. ESC uses the
first-in, first-out (FIFO) method to determine cost.

Equipment

Equipment is stated at cost. Depreciation has been provided for financial
reporting purposes over the estimated useful lives of the assets, which range
from five to ten years based on the straight-line method. Repair and maintenance
costs are charged to expense as incurred. Upon disposal, the cost and related
accumulated depreciation are removed from the accounts, and any resulting gain
or loss is included in the results of operations.

Research and Development Expenses

Research and development expenses are related to the design, prototyping
and development of new products. These expenditures are charged to expense as
incurred.

Income Taxes

ESC accounts for income taxes under the liability method as set forth in
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," (SFAS No. 109).

F-50
<PAGE>
ELECTRONIC SPECIALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Fair Value of Financial Instruments

There are no significant differences between the carrying values and fair
market values of ESC's financial instruments. ESC estimates fair value based
upon existing interest rates related to such assets and liabilities compared to
the current market rates of interest for instruments of similar nature and
degree of risk.

Concentrations of Credit Risk

Approximately 19% of ESC's fiscal year 1997 sales and 23% of March 31, 1997
accounts receivable were from an aerospace manufacturer.

Earnings per share

Earnings per share has not been presented because it is not considered
meaningful.

(2) Inventories

Inventories at March 31, 1997 consist of the following:

Raw materials............................. $ 725,123
Work-in-process........................... 2,059,619
Finished goods............................ 190,791
-----------
$ 2,975,533

(3) Equipment

Equipment at March 31, 1997 consists of the following:

Machinery and equipment................... $ 7,345,776
Furniture and fixtures.................... 455,572
-----------
7,801,348
Less accumulated depreciation............. (3,946,521)
-----------
$ 3,854,827

(4) Line of Credit

ESC has an operating line of credit with a bank. The line provides for
borrowings of up to $1,000,000 at the interest rate of 3.25% plus the 30-day
commercial paper rate (5.69% at March 31, 1997). Borrowings of $988,194 were
outstanding under the line at March 31, 1997. Borrowings are collateralized by
ESC's inventories and accounts receivable. The line of credit agreement expires
on December 31, 1997 and requires ESC to comply with certain financial ratios
and requirements. ESC was in compliance as of March 31, 1997.

(5) Note Payable to Deltec

ESC has a note to Deltec with an outstanding balance of $32,682 payable at
March 31, 1997. The note is payable on demand with interest due monthly at the
rate of 12% per annum. Interest on the note aggregated $4,090 for fiscal year
1997.

F-51
<PAGE>
ELECTRONIC SPECIALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(6) Notes Payable

ESC has unsecured notes payable to third parties in connection with a
non-competition agreement. At March 31, 1997, the notes payable aggregated
$36,724, and are classified as a current liability. The notes were due on May 1,
1995 and bear no interest. The notes are in default at March 31, 1997; however,
the note holders have notified ESC that they will continue to accept monthly
payments of $1,750 until the notes are paid in full. On March 20, 1996, ESC
obtained a bank note which was secured by ESC's inventories and equipment. The
note was paid in full on August 27, 1996. On June 10, 1996, ESC obtained a
five-year note secured by certain equipment. The note bears interest at 9.5% and
is due in monthly payments of principal and interest of $3,026. On September 30,
1996, ESC obtained a five-year note secured by certain equipment. The note bears
interest at 9.5% and is due in monthly payments of principal and interest of
$4,603. Future principal maturities on these notes are as follows:

Fiscal Year
1998........................ $ 62,738
1999........................ 68,996
2000........................ 75,881
2001........................ 83,452
2002........................ 39,382
--------
330,449
Less current portion (62,738)

$267,711

(7) Deferred Gain

During March 1994, ESC entered into an agreement to sell and lease back its
principal place of business. The agreement provided for the sale of the property
(consisting of land and a building) in the net amount of $2,522,030, resulting
in a gain of $752,050. The gain was deferred and is being amortized ratably as
other income over the lease term of fifteen years. Such other income aggregated
$50,834 for fiscal year 1997.

(8) Commitments

Operating Leases

ESC leases its office space and certain equipment under noncancelable
leases expiring in various years through fiscal year 2009. Future minimum lease
payments under noncancelable operating leases for the next five years are
summarized as follows:

Fiscal Year
1998 $ 440,347
1999 327,443
2000 319,739
2001 318,233
2002 304,412
Thereafter 2,100,000
-----------
$ 3,810,174

Total rental expense under operating leases for the year ended March 31,
1997 aggregated $535,922.

F-52
<PAGE>
ELECTRONIC SPECIALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(9) Income Taxes

ESC's taxable income is included in the consolidated income tax returns of
Deltec. No income tax expense is allocated or charged by Deltec to ESC. ESC has
adopted the provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," (SFAS No. 109).

SFAS No. 109 requires ESC to account for income taxes as though it were a
separate entity for tax reporting purposes, and transactions with Deltec
relating to ESC's tax attributes are recorded as adjustments to paid-in capital.

The provision for income taxes for the year ended March 31, 1997 consists
of non-current deferred tax expense of $121,549.

The components of the net deferred tax assets and liabilities as of March
31, 1997 are as follows:

<TABLE>
<CAPTION>
<S> <C>
Net current deferred tax asset:
Assets:
Deferred gain....................................... $ 17,048
Vacation accrual.................................... 62,602
----------
Current deferred tax asset................................... $ 79,650
==========
Noncurrent deferred tax assets and liability:
Assets:
Intangibles......................................... $ 7,314
Deferred gain....................................... 183,431

190,745
Liability:
Equipment........................................... 392,537
---------

Net noncurrent deferred tax liability........................ $(201,792)
=========
</TABLE>

F-53
<PAGE>
ELECTRONIC SPECIALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(10) Benefit Plans

ESC's bargaining unit employees were covered by a multi-employer pension
plan through March 31, 1995. Effective December 1, 1994, the plan was replaced
by a multi-employer pension 401(k) savings plan for bargaining employees. Both
plans are administered by the Western Conference of Teamsters. The plans, which
are not considered ESC pension plans, are defined contribution benefit plans to
which ESC makes voluntary contributions based on a fixed amount per hour for
each employee, as specified in the labor agreement. Information as to ESC's
portion of accumulated plan benefits, plan net assets and unfunded vested
benefits is not available. Contributions to these plans for the year ended March
31, 1997 aggregated $85,206.

ESC has a salary reduction plan (IRS Code section 401(k)) covering its
nonbargaining unit employees. The plan provides for tax-exempt salary reduction
payments to be made by participants to a trust, with a limited matching payment
to be made by ESC. No matching payments were made during the year ended March
31, 1997.

(11) Redeemable Preferred Stock

The holders of ESC's redeemable preferred stock have the following
privileges and rights:

Dividends. A cumulative dividend on the redeemable preferred stock
will accrue at the rate of $80 (i.e. 8%) per share per annum. The dividend
will be payable only (a) if, as and when determined by the board of
directors of ESC or (b) upon the liquidation or winding up of ESC or
redemption of the redeemable preferred stock. For the year ended March 31,
1997, no dividends were declared by the board of directors.

Liquidation Preference. In the event of the liquidation or winding up
of ESC, the holders of the redeemable preferred stock will be entitled to
receive, in preference to the holders of the common stock, an amount (the
"liquidation amount") equal to the original purchase price ($1,000 per
share) plus any dividends accrued but not paid.

Redemption. At any time after the date of original issuance of the
redeemable preferred stock, ESC may redeem the whole or any part of the
redeemable preferred stock by paying in cash the liquidation amount. At any
time after the date which is ten years after the date of original issuance
of the redeemable preferred stock, at the written request of a holder of
any shares of the redeemable preferred stock, ESC will redeem the shares by
paying in cash the liquidation amount.

Conversion. The redeemable preferred stock shall not be convertible
into shares of common stock or any other securities of ESC.

Voting rights. Except as may be otherwise provided by law, the
redeemable preferred stock shall be nonvoting and shall not participate in
any actions to be taken by the shareholders of ESC.

Because ESC may be required to redeem all of the outstanding shares of
redeemable preferred stock at liquidating values, the accompanying consolidated
balance sheet reflects total redeemable preferred stock at its original purchase
price plus accrued dividends. As a result, the amount of $2,652,000 represents
the liquidation value of redeemable preferred stock at March 31, 1997.

F-54
<PAGE>
ELECTRONIC SPECIALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(12) Acquisition of Displays and Technologies, Inc.

In connection with the Company's purchase of D & T the purchase price
includes contingent consideration to be calculated based on D&T's future
earnings, and is to be paid with ESC's series B nonvoting preferred stock for 70
percent of the purchase price and a promissory note for the remaining 30
percent. On June 26, 1997, the purchase option agreement was amended extending
the earnings period by two years. As amended, the calculation provides that the
former owners of D&T will receive 60% of net income, as defined, calculated over
the period from fiscal 1996 through fiscal 2000. Due to the contingent nature of
the purchase price, no purchase adjustment has been recorded as of March 31,
1997.

ESC has accounted for this acquisition using the purchase method.
Accordingly, the cost of the acquisition was allocated to the assets acquired
and liabilities assumed on the basis of their fair values at the date of
acquisition. Goodwill of $322,658 was recorded as an intangible asset equal to
the difference between the acquisition cost and the fair values of the assets
acquired and liabilities assumed. ESC is amortizing goodwill over ten years
using the straight-line method. Accumulated amortization was $64,536 at March
31, 1997.

(13) Subsequent Event - Unaudited

Effective March 1, 1998, substantially all of the Company's assets were
purchased and certain liabilities were assumed by Pacific Aerospace &
Electronics, Inc. The purchase price consisted of $2.0 million in cash and
923,304 shares of Pacific Aerospace & Electronics, Inc.

F-55
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Nine-Month Periods Ended December 31, 1997 and 1996
(Unaudited)

1997 1996
------------ ------------
<S> <C> <C>
Sales:
Relays and solenoids $ 4,120,442 $ 2,506,008
Displays 3,884,058 2,441,391
------------ ------------
Net sales 8,004,500 4,947,399
Cost of goods sold 6,173,081 3,711,233
------------ ------------

Gross profit................................................ 1,831,419 1,236,166

Operating expenses 1,054,367 897,297
Research and development expenses (Note 1) 177,777 70,436
------------ ------------

Income from operations...................................... 599,275 268,439

Other expenses:
Interest expense............................................ (113,470) (87,485)
Other expense............................................... (54,870) 1,486
------------ ------------

Income before income taxes 430,935 182,440
Income tax expense (Note 9) (146,518) (62,030)
------------ ------------

Net income $ 284,417 $ 120,410
============ ============

The accompanying notes are an integral part of this financial statement
</TABLE>

F-56
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine-Month Periods Ended December 31, 1997 and 1996
(Unaudited)

1997 1996
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................................... $ 284,417 $ 120,410
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation............................................................................... 550,524 487,363
Amortization of deferred gain.............................................................. (38,126) (38,125)
Amortization of intangibles................................................................ 24,201 26,324
Deferred income taxes...................................................................... 146,518 62,030
Changes in assets and liabilities:
Accounts receivable........................................................................ (35,632) (558,481)
Inventories................................................................................ (480,507) (838,411)
Prepaid expenses and other current assets.................................................. 67,775 (55,417)
Other long-term assets..................................................................... 357 --
Accounts payable........................................................................... 14,602 482,914
Accrued liabilities........................................................................ (400,248) 394,718
---------- ----------
Net cash provided by operating activities............................................... 133,881 83,325

CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures.......................................................................... (552,013) (1,120,424)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the line of credit, net......................................................... 163,583 949,865
Payments on notes payable..................................................................... 174,993 345,766
Proceeds from note payable -- (524,862)
---------- ----------
Net cash flow from financing activities................................................. 338,576 770,769
---------- ----------
NET CHANGE IN CASH................................................................................. (79,556) (266,330)

Cash at beginning of period......................................................................... 89,375 321,509
---------- ----------

Cash at end of period............................................................................... $ 9,819 $ 55,179
========== ==========

The accompanying notes are an integral part of this financial statement
</TABLE>

F-57
<PAGE>
ELECTRONIC SPECIALTY CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Nine-Month Periods Ending December 31, 1997 and 1996

Note 1: Basis of Presentation

The accompanying unaudited consolidated financial statements of Electronic
Specialty Corporation ("ESC") have been prepared in accordance with Form S-1
instructions and, in the opinion of management, contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
ESC's consolidated financial position as of December 31, 1997 and 1996, the
consolidated results of operations for the nine-month periods ended December 31,
1997 and 1996, and the consolidated statements of cash flow for the nine-month
periods ended December 31, 1997 and 1996. All significant intercompany
transactions have been eliminated in the consolidation process. These results
have been determined on the basis of generally accepted accounting principles
and practices applied consistently with those used in the preparation of ESC's
annual financial statements for the year ended March 31, 1997.

Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting principles
have been condensed or omitted. The financial statements should be read in
conjunction with the audited financial statement and notes thereto for the year
ended March 31, 1997.

The results of operations for the nine-month periods ended December 31, 1997 and
1996 are not necessarily indicative of the results to be expected or anticipated
for the full fiscal year.

Note 2: Inventories

Inventories consist of the following:

December 31, March 31,
1997 1997
Raw materials $ 825,936 $ 725,123
Work in progress 2,415,976 2,059,619
Finished goods 214,128 190,791

$ 3,456,040 $ 2,975,533
============= =============

Note 3: Nonredeemable Shareholders' Equity

Changes in nonredeemable shareholders' equity during the nine-month period ended
December 31, 1997, included net income of $287,417, and the accretion of
dividends not declared to the redeemable, cumulative preferred stock of $102,000
in each period.

Note 4: Subsequent Event

F-58
<PAGE>
INDEX TO UNAUDITED PRO FORMA DATA

Page

Unaudited Pro Forma Financial Data.......................................... P-2
Unaudited Pro Forma Statements of Operations Data for year
ended May 31, 1998 and the three months ended August 31, 1998............. P-3
Notes to Unaudited Pro Forma Statement of Operations Data................... P-4

P-1
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA

The following Unaudited Pro Forma Financial Data for the year ended May 31,
1998, and for the three-month period ended August 31, 1998, gives effect to the
Company's acquisitions of ESC in the fourth quarter of fiscal 1998, and Aeromet
in the first quarter of fiscal 1999, including related financing transactions,
as if such transactions had occurred on June 1, 1997. The historical statement
of operations data of the Company for the year ended May 31, 1998, already
reflects the results of operations of Balo and ESC since the time of their
respective acquisitions by the Company.

This Unaudited Pro Forma Financial Data is based on the assumptions and
adjustments described in the accompanying notes which the Company believes are
reasonable. The Unaudited Pro Forma Statement of Operations Data does not
purport to represent what the Company's results of operations actually would
have been if the events described above had occurred as of the dates indicated
or what such results will be for any future periods. The financial data is based
upon assumptions and adjustments that the Company believes are reasonable. This
Unaudited Pro Forma Financial Data and the accompanying notes should be read in
conjunction with the historical financial statements of the Company, ESC and
Aeromet, including the notes thereto, included elsewhere in this Prospectus.

Each of the acquisitions referred to in this Unaudited Pro Forma Financial
Data has been accounted for using the purchase method of accounting.
Accordingly, the assets acquired and liabilities assumed have been recorded at
their fair values as of the dates of their respective acquisitions. These
amounts have been recorded based upon preliminary estimates as of the dates of
the acquisitions. The Company does not believe that any changes to these
estimates that may occur will have a material impact on the Unaudited Pro Forma
Financial Data.

P-2
<PAGE>
<TABLE>
<CAPTION>
Unaudited Pro Forma
Statement of Operations Data For the year
ended May 31, 1998 and for the three
months ended August 31, 1998
(in thousands)

Three-month period
For the year ended May 31, 1998 ended
------------------------------------------------------------ August 31, 1998
Historical ----------------------
--------------------------------- Pro forma Historical
Pro forma as ----------------------
Company(1) ESC(2) Aeromet(3) adjustments adjusted(4) Company Proforma(9)
---------- -------- ---------- ----------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales............................ $ 54,099 $ 7,566 53,840 -- 115,505 19,178 28,760
Cost of sales........................ 39,487 6,143 43,645 900(5) 90,175 14,504 22,924
---------- -------- ---------- ----------- ---------- --------- ----------
Gross profit......................... 14,612 1,423 10,195 (900) 25,330 4,674 5,836
Operating expenses................... 9,872 1,325 6,240 (1,477)(6) 15,960 3,776 4,621
---------- -------- ---------- ----------- ---------- --------- ----------
Income from operations............... 4,740 98 3,955 577 9,370 898 1,215
Net interest expense................. (755) (181) (679) (8,530)(7) (10,145) (843) (2,348)
Other income (expense)............... (853) (57) -- -- (910) (6,721) (6,721)
---------- -------- ---------- ----------- ---------- --------- ----------
Income (loss) before income taxes.... 3,132 (140) 3,276 (7,953) (1,685) (6,666) (7,854)
Income taxes (benefit)............... (482) -- 1,673 126(8) 1,317 2,255 2,385
---------- -------- ---------- ----------- ---------- --------- ----------
Net income (loss).................... $ 3,614 (140) 1,603 (8,079) (3,002) (4,411) (5,469)
========== ======== ========== =========== ========== ========= ==========
</TABLE>

P-3
<PAGE>
Notes to Unaudited Pro Forma Statement of Operations Data

(1) Represents the results of operations of the Company for the year ended May
31, 1998, and the results of operations of Balo and ESC from the effective
dates of their respective acquisitions.

(2) Represents the results of operations for ESC from June 1, 1997, through the
effective date of its acquisition (March 1, 1998), including incremental
amortization of cost in excess of net book value of acquired subsidiaries
arising from the acquisition of ESC of $181,000, net of amortization
previously recorded which was eliminated. Cost in excess of net book value
of acquired subsidiaries is being amortized over 15 years.

(3) Represents the results of operations for Aeromet for the year ended May 31,
1998.

(4) Presents the statement of operations data of the Company as if the
acquisition of Aeromet and ESC and related financing transactions had
occurred on June 1, 1997.

(5) Represents depreciation on fair value adjustment to property, plant and
equipment upon the Aeromet Acquisition. The $9.0 million fair value
adjustment is being amortized over 10 years.

(6) Represents the incremental amortization of cost in excess of net book value
of acquired subsidiaries arising from the acquisition of Aeromet of $1.1
million, net of amortization previously recorded by Aeromet of $2.1
million, which has been eliminated. Cost in excess of net book value of
acquired subsidiaries is being amortized over 40 years for Aeromet. Also
represents the elimination of $474,000 of management fees paid to Aeromet's
previous parent.

(7) Represents incremental interest expected to be incurred from indebtedness
in connection with the acquisition of Aeromet ($75.0 million). Interest
expense was calculated at the annual rate of 11.25%, representing the rate
on the indebtedness expected to be incurred in the acquisition. Interest
expense on debt not assumed in the Aeromet Acquisition ($479,000) has been
eliminated. Deferred financing costs ($4.0 million) are amortized over 7
years.

(8) Tax provision to reflect the Company's estimated taxes on certain pro forma
adjustments.

(9) Adds Aeromet's results of operations for June and July 1998 to the
Company's August 31, 1998 historical data.

P-4
<PAGE>
PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

The following table sets forth the expenses incurred in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All of the amounts shown are estimated
except the Securities and Exchange Commission registration fee and the NASD
filing fee.

SEC registration fee.......................... $ 2,154
Nasdaq National Market Listing Fee............ 17,500
Legal fees and expenses ...................... 75,000
Accounting fees and expenses ................. 75,000
Miscellaneous................................. 500
---------
TOTAL.................................... $ 170,154
=========

Item 14. Indemnification of Directors and Officers

Article 8 of the Company's Articles of Incorporation authorizes the Company
to indemnify its directors to the fullest extent permitted by the Washington
Business Corporation Act through the adoption of Bylaws, approval of agreements,
or by any other manner approved by the Board of Directors.

In accordance with such authorization, Section 10 of the Company's Bylaws
("Bylaws") requires indemnification, to the fullest extent permitted by
applicable law, of any person who is or has served as a director or officer of
the Company, as well as any person who, while serving as a director or officer
of the Company, served at the request of the Company as a director, officer,
employee or agent of another entity, against expenses reasonably incurred
because such person was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether formal or
informal, civil, criminal, administrative or investigative.

Notwithstanding these indemnification obligations, Section 10 of the Bylaws
states that no indemnification will be provided (a) to the extent that such
indemnification would be prohibited by the Washington Business Corporation Act
or other applicable law as then in effect, or (b) except with respect to
proceedings seeking to enforce rights to indemnification, to any director or
officer seeking indemnification in connection with a proceeding initiated by
such person unless such proceeding was authorized by the Board of Directors.

Section 10 of the Bylaws also provides that expenses incurred in defending
any proceeding in advance of its final disposition shall be advanced by the
Company to the director or officer upon receipt of an undertaking by or on
behalf of such person to repay such amount if it is ultimately determined that
such person is not entitled to be indemnified by the Company, except where the
Board of Directors adopts a resolution expressly disapproving such advancement.

Section 10 of the Bylaws also authorizes the Board to indemnify and advance
expenses to employees and agents of the Company on the same terms and with the
same scope and effect as the provisions thereof with respect to the
indemnification and advancement of expenses to directors and officers.

<PAGE>
Item 15. Recent Sales of Unregistered Securities

Since October 20, 1995, the Company has sold the following securities
pursuant to exemptions from the registration requirements of the Securities Act.
Appropriate legends about the restricted nature of such securities were affixed
to the stock certificates issued in such transactions. All purchasers either
received adequate information about the Company or had adequate access, through
employment or other relationships, to such information. The purchasers in those
sales described as being made under an exemption from registration under Section
4(2) of the Securities Act thereof, or in reliance on Regulation D promulgated
thereunder, represented to the Company their intention to acquire the securities
for investment only and not with a view to distribution thereof. Some of these
securities or underlying shares have been registered for resale and sold as
indicated below.

1. Fall 1995 Common Stock Offering. In November 1995, the Company issued an
aggregate of 838,470 shares of Common Stock to Swiss investors under
Regulation S of the Securities Act, in exchange for aggregate cash
consideration of $3,353,880. In connection with the offering, the Company
issued 30,000 shares of Common Stock under Regulation S in January 1996 to
a designee of Lysys, and paid $234,772 cash to Lysys as commissions. See
"Certain Transactions - Lysys."

2. Acquisition of Seismic. In November 1995, the Company issued an aggregate
of 128,750 shares of Common Stock to Seismic Safety Products, Inc., a
Florida corporation, as partial consideration for the purchase of
substantially all of the assets of that entity by a wholly owned subsidiary
of the Company. This offering was made under the exemption from
registration set forth in Rule 506 of Regulation D of the Securities Act.

3. Acquisition of Aeromet America. In December 1995, the Company issued an
aggregate of 650,000 shares of Common Stock, after post-closing
adjustments, to Stephen L. Morel and Mark Morel as consideration for the
merger of Morel Industries, Inc. (now known as Aeromet America, Inc.) with
a wholly owned subsidiary of the Company. This issuance was made under the
exemption from registration set forth in Section 4(2) of the Securities
Act.

4. Smith and UTCO Warrants. In May 1996, the Company issued promissory notes
aggregating $1,350,000 in principal amount, and warrants to purchase an
aggregate of 337,500 shares of Common Stock, in exchange for $1,350,000 in
funds advanced to the Company in March and May 1996, by Robert L. Smith and
UTCO Associates, Ltd. This issuance was made under the exemption from
registration set forth in Section 4(2) of the Securities Act. In February
1998, the warrant issued to Mr. Smith was reissued to his estate. The
Company has paid both promissory notes in full. UTCO Associates, Ltd. has
fully exercised its warrant for shares of Common Stock, which have been
resold pursuant to the Company's July 1996 Form SB-2 registration
statement. The shares of Common Stock underlying the Smith warrant have
been registered for resale on a Form S-3 registration statement.

5. Spring 1996 Common Stock Offering. In May 1996, the Company issued an
aggregate of 490,000 shares of Common Stock to Swiss investors under
Regulation S, in exchange for aggregate cash consideration of $1,456,125.
The Company paid $116,490 to Lysys as commissions in connection with the
offering. See "Certain Transactions -Lysys."

6. Series A Convertible Preferred Stock. In February 1997, the Company issued
an aggregate of 50,000 shares of Series A Convertible Preferred Stock to a
small number of accredited investors, in a private placement under Rule 506
of Regulation D, in exchange for aggregate cash consideration of
$5,000,000. The Company paid commissions of $375,000 to Pacific Continental
Securities Corporation in connection with this offering. Effective June
1997, the Company registered for resale the shares of Common Stock issuable
upon conversion of the Series A Convertible Preferred Stock on a Form S-3
registration statement. All of the Series A Convertible Preferred Stock has
now been converted into 1,494,593 shares of Common Stock, all of which have
been resold pursuant to that registration statement.

7. NTI Acquisition. In April 1997, the Company issued an aggregate of 447,540
shares of Common Stock to Northwest Technical Industries, Incorporated, as
consideration for the purchase of substantially all of the assets of that
entity by a wholly owned subsidiary of the Company. This offering was made
under the exemption from registration set forth in Section 4(2) of the
Securities Act.

<PAGE>
8. Convertible Note Offering. In August 1997, the Company sold $5,800,000 in
convertible notes, to a small group of accredited investors, in a
transaction exempt from registration under Rule 506 of Regulation D.
Commissions of $290,000 were paid to Pacific Continental Securities
Corporation in connection with that offering. Effective November 1998, the
Company registered for resale the shares of Common Stock issuable upon
conversion of these convertible notes on a Form S-3 registration statement.
All of the Convertible Notes have now been converted into 1,405,018 shares
of Common Stock, all of which have been fully resold pursuant to that
registration statement.

9. Noyes Warrants. In June 1997, the Company issued non-public warrants to
purchase an aggregate of 125,000 shares of Common Stock to David A. Noyes &
Company, Gregory K. Smith (a former director of the Company), Nestor
Wiegand and Richard Cross, in connection with an agreement for the
provision of financial services by David A. Noyes & Company. These warrants
were issued under the exemption from registration set forth in Section 4(2)
of the Securities Act. Warrants to purchase 70,000 of these shares have
been exercised into the shares of Common Stock, all of which have been
resold pursuant to a Form S-3 registration statement.

10. Benefit Plans. The Company has filed registration statements on Form S-8
under the Securities Act registering the 4,260,000 shares of Common Stock
issuable under (a) the Option Plan, (b) the Director Plan, (c) Employee
Stock Purchase Plan, and (d) warrants held by three employees of the
Company. Prior to filing of Form S-8 registration statements, some of these
options, shares and warrants had been issued under the exemptions from
registration set forth in Section 3(b) of the Securities Act and Rule 701
promulgated thereunder.

11. Fall 1997 Common Stock and Note Offering. In November 1997, the Company
issued an aggregate of 524,000 shares of Common Stock and $4,050,000 in
promissory notes to accredited investors under Rule 506 of Regulation D, in
exchange for gross proceeds of $6,408,000. In connection with the
offering, the Company paid a commission of $142,000 to Dr. Diebold, and
$178,400 to another designee of Lysys. See "Certain Transactions - Lysys."

12. Dominick & Dominick Warrant. In December 1997, the Company issued a warrant
to purchase an aggregate of 375,000 shares of Common Stock in connection
with a financial services agreement. This warrant was issued under the
exemption from registration set forth in Section 4(2) of the Securities
Act. This warrant has been fully exercised and the underlying shares of
Common Stock have been sold pursuant to a Form S-3 registration statement.

13. ESC Acquisition. The Company issued an aggregate of 923,304 shares of
Common Stock in March 1998 to Electronic Specialty Corporation and its
wholly owned subsidiary Displays & Technologies, Inc., as consideration for
the purchase of substantially all of the assets of ESC by a wholly owned
subsidiary of the Company. This offering was made under the exemption from
registration set forth in Section 4(2) of the Securities Act.

14. Series B Convertible Preferred Stock. See "Description of Capital Stock -
Preferred Stock - Series B Convertible Preferred Stock," and "Certain
Transactions - Lysys," which are incorporated into this Item by reference.

15. Senior Subordinated Notes. On July 30, 1998, the Company sold $75 million
in aggregate principal amount of 11 1/4% Senior Subordinated Notes due 2005
(the "Notes") to Friedman, Billings, Ramsey & Co., Inc. and BancBoston
Securities Inc. (collectively the "Initial Purchasers") pursuant to the
exemption from registration set forth in Rule 506 under the Securities Act,
and the Initial Purchasers resold the Notes to qualified institutional
buyers pursuant to Rule 144A under the Securities Act. The Notes were sold
by the Company for $75 million in cash, of which a discount of $2,812,500
was paid by the Company to the Initial Purchasers.

16. Liviakis. See "MD&A - Recent Events - Liviakis" which is incorporated into
this Item by reference.

<PAGE>
Item 16. Exhibits and Financial Statement Schedules

Exhibit
Number Description
------- -----------

2.1 Share Acquisition Agreement dated July 1, 1998, by and between
Charles Baynes plc, Westpark Limited, Pacific Aerospace and
Electronics (U.K.) Limited, and Pacific Aerospace & Electronics,
Inc.(18)

3.1 Articles of Incorporation of Pacific Aerospace & Electronics,
Inc. as filed on September 20, 1996, with the Secretary of State
of the State of Washington.(6)

3.2 Amendment to Articles of Incorporation containing Designation of
Rights and Preferences of Series A Preferred, as corrected. (8)

3.3 Amendment to Articles of Incorporation containing Designation of
Rights and Preferences of Series B Preferred. (20)

3.4 Bylaws of Pacific Aerospace & Electronics, Inc.(6)

4.1 Form of specimen certificate for Common Stock.(6)

4.2 Form of specimen certificate for Warrants.(6)

4.3 Form of specimen certificate for the Series A Convertible
Preferred Stock.(8)

4.4 Form of specimen certificate for the Series B Convertible
Preferred Stock.(20)

4.5 Form of Common Stock Purchase Warrant issued to holders of the
Series B Convertible Preferred Stock on May 15, 1998.(20)

4.6 Registration Rights Agreement, dated May 15, 1998 between Pacific
Aerospace & Electronics, Inc. and the holders of the Series B
Convertible Preferred Stock.(20)

4.7 Warrant Agreement between Interwest Transfer Co., Inc. and PCT
Holdings, Inc. dated July 1, 1996.(4)

4.8 Form of Stock Purchase Agreement used in Fall 1997 Common Stock
and Note Offering (14)

4.9 Purchase Warrant from Pacific Aerospace & Electronics, Inc. to
Paulson Investment Company, Inc., dated September 30, 1997.(20)

4.10 Purchase Warrant from Pacific Aerospace & Electronics, Inc. to
Chester L. Paulson, dated September 30, 1997.(20)

4.11 Purchase Warrant from Pacific Aerospace & Electronics, Inc. to M.
Lorraine Maxfield dated September 30, 1997.(20)

4.12 Common Stock Purchase Warrant No. 001 from Pacific Aerospace &
Electronics, Inc. to Donald A. Wright dated as of November 30,
1996.(10)

4.13 Common Stock Purchase Warrant No. 002 from Pacific Aerospace &
Electronics, Inc. to Nick A. Gerde dated as of November 30,
1996.(10)

4.14 Common Stock Purchase Warrant No. 003 from Pacific Aerospace &
Electronics, Inc. to Edward A. Taylor dated as of November 30,
1996.(10)

4.15 Common Stock Purchase Warrant from PCT Holdings, Inc. to Robert
L. Smith Unified Credit Trust dated as of February 5, 1998.(20)

4.16 Common Stock Purchase Warrant from Pacific Aerospace &
Electronics, Inc. to David A. Noyes & Company dated June 3, 1997.
(9)

4.17 Common Stock Purchase Warrant from Pacific Aerospace &
Electronics, Inc. to Gregory K. Smith dated June 3, 1997. (9)

4.18 Common Stock Purchase Warrant from Pacific Aerospace &
Electronics, Inc. to Nestor Wiegand dated June 3, 1997. (9)

4.19 Securities Purchase Agreement, dated May 15, 1998, between
Pacific Aerospace & Electronics, Inc. and the purchasers of the
Company's Series B Preferred. (20)

<PAGE>
Exhibit
Number Description
------- -----------

4.20 Purchase Agreement dated as of July 23, 1998, between Pacific
Aerospace & Electronics, Inc., 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., Seismic Safety Products, Inc., PA&E International, Inc. and
Friedman, Billings, Ramsey & Co., Inc. and BancBoston Securities
Inc.(18)

4.21 Indenture dated as of July 30, 1998, between Pacific Aerospace &
Electronics, Inc., 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.,
Seismic Safety Products, Inc., PA&E International, Inc. and IBJ
Schroder Bank & Trust Company.(18)

4.22 Form of Global Note from Pacific Aerospace & Electronics,
Inc.(18)

4.23 Registration Rights Agreement, dated as of July 30, 1998, between
Pacific Aerospace & Electronics, Inc., 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., Seismic Safety Products, Inc., PA&E International, Inc. and
Friedman, Billings, Ramsey & Co., Inc. and BancBoston Securities
Inc.(18)

5.1 Opinion of Stoel Rives LLP dated October 30, 1998. (23)

10.1 Placement Agreement, dated October 21, 1997, between Pacific
Aerospace & Electronics, Inc. and Lysys Ltd. (12)

10.2 Placement Agreement, dated March 25, 1998, as amended May 15,
1998, between Pacific Aerospace & Electronics, Inc. and Lysys
Ltd. (20)

10.3 Amended and Restated Stock Incentive Plan.(5)

10.4 Amendment No. 1 to the Amended and Restated Stock Incentive Plan.
(19)

10.5 Amended and Restated Independent Director Stock Plan.(21)

10.7 1997 Employee Stock Purchase Plan (11)

10.8 Employment Agreement, dated June 1, 1997, between Pacific
Aerospace & Electronics, Inc. and Donald A. Wright.(9)

10.9 Employment Agreement, dated June 1, 1997, between Pacific
Aerospace & Electronics, Inc. and Nick A. Gerde.(9)

10.10 Employment Agreement, dated September 1, 1997, between Pacific
Aerospace & Electronics, Inc. and Sheryl A. Symonds.(12)

10.11 Debt Restructuring Agreement, dated April 6, 1998, between
Pacific Aerospace & Electronics, Inc., Orca Technologies, Inc.,
Televar, Inc. and MONITRx, Inc.(15)

10.12 Commercial Guaranty, dated July 16, 1997, from Pacific Aerospace
& Electronics, Inc. to KeyBank National Association.(13)

10.13 Promissory Note, dated March 18, 1998, from Pacific Aerospace &
Electronics, Inc. to KeyBank National Association.(15)

10.14 Security Agreement, dated March 18, 1998, from Pacific Aerospace
& Electronics Inc. to KeyBank National Association.(15)

10.15 Facility Letter, dated July 30, 1998, from Barclays Bank plc to
Aeromet International plc.(20)

10.16 Loan Agreement, dated September 22, 1998, between Pacific
Aerospace & Electronics, Inc. and KeyBank National Association.
(22)

10.17 Promissory Note, dated September 22, 1998, from Pacific Aerospace
& Electronics, Inc. to KeyBank National Association.(22)

<PAGE>
Exhibit
Number Description
------- -----------

10.18 Security Agreement, dated September 22, 1998, between Pacific
Aerospace & Electronics, Inc. and KeyBank National
Association.(22)

10.19 Promissory Note, dated September 30, 1998, from Pacific Aerospace
& Electronics, Inc. to KeyBank National Association.(22)

10.20 Deed of Trust, dated September 30, 1998, between Pacific
Aerospace & Electronics, Inc., KeyBank National Association and
Land Title Company, Chelan-Douglas County, Inc.(22)

10.21 Agreement, dated as of August 27, 1998, between Pacific Aerospace
& Electronics, Inc., Liviakis Financial Communications, Inc. and
Robert B. Prag.(22)

10.22 Asset Purchase Agreement, dated April 13, 1998, between Pacific
Aerospace & Electronics, Inc. and Electronic Specialty, Inc.(17)

10.23 Sublease between Pacific Aerospace & Electronics, Inc. and Orca
Technologies, Inc. dated April 27, 1998.(20)

10.24 General Terms Agreement No. PLR-950 Relating to Boeing Model
Aircraft between Cashmere Manufacturing Co., Inc. and Boeing
Commercial Airplane Group, effective as of February 5, 1990, as
amended.(2)

10.25 Special Business Provisions No. L-890821-8140N between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of
December 18, 1992.(2)(3)

10.26 Special Business Provisions No. L-500660-8134N between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of
December 31, 1991.(2)(3)

10.27 Special Business Provisions No. L-435579-8180N between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of
August 11, 1994.(2)(3)

10.28 Special Business Provisions No. PLR-950A between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of
February 5, 1990.(2)(3)

10.29 Administrative Agreement No. L-435579-8180N between Cashmere
Manufacturing Co., Inc. and Boeing Commercial Airplane Group
effective as of August 11, 1994.(2)

10.30 Special Business Provisions No. POP-65311-0047 between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of
February 26, 1996.(2)(3)

10.31 General Terms Agreement No. BCA-65311-0044 between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of
February 26, 1996.(2)

10.32 General Terms Agreement No. BCA-65311-0140 between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of June
11, 1997.(20)

10.33 Special Business Provisions No. POP-65311-0143 between The Boeing
Company and Cashmere Manufacturing Co., Inc. effective as of June
11, 1997.(20)(3)

10.34 Long Term Agreement No. 0108098 between Northrop Grumman
Corporation and Cashmere Manufacturing Co., Inc. effective as of
April 6, 1998.(20)(3)

16.1 Letter from accountant regarding a change of accountants.(16)

21.1 List of Subsidiaries.(23)

23.1 Consent of Moss Adams LLP. (23)

23.2 Consent of KPMG Peat Marwick LLP. (23)

23.3 Consent of KPMG Audit plc. (23)

23.4 Consent of PricewaterhouseCoopers LLP. (23)

23.5 Consent of Stoel Rives LLP. (included in Exhibit 5.1)

24 Power of Attorney.(23)

<PAGE>
- --------------

(1) Incorporated by reference to the Company's Annual Report on Form 10-KSB of
the year ended May 31, 1995.
(2) Incorporated by reference to Amendment No. 1 to the Company's Registration
Statement on Form SB-2 filed on June 19, 1996.
(3) Subject to confidential treatment. Omitted confidential information was
filed separately with the Securities and Exchange Commission.
(4) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the year ended May 31, 1996.
(5) Incorporated by reference to the Company's Current Report on Form 10-QSB
for the quarterly period ended November 30, 1996.
(6) Incorporated by reference to the Company's Current Report on Form 8-K filed
on December 12, 1996, reporting the Reincorporation Merger.
(7) Incorporated by reference to the Company's Registration Statement of
Certain Successor Issuers on Form 8-B filed on February 6, 1997.
(8) Incorporated by reference to the Company's Current Report on Form 8-K filed
on March 12, 1997, reporting the Series A Preferred Stock offering.
(9) Filed with the Company's Annual Report on Form 10-KSB for the fiscal year
ending May 31, 1997.
(10) Incorporated by reference to the Company's Registration Statement on Form
S-8 filed on June 11, 1997.
(11) Filed with the Company's Definitive Proxy Statement for its 1997 Annual
Shareholders Meeting, on August 28, 1997.
(12) Submitted with the Post-Effective Amendment No. 1 to Form SB-2, filed on
October 31, 1997.
(13) Filed with the Company's Quarterly Report on Form 10-QSB for the quarterly
period ending November 30, 1997.
(14) Incorporated by reference to the Company's Registration Statement on Form
S-3 filed on December 3, 1997.
(15) Filed with the Company's Quarterly Report on Form 10-QSB for the quarterly
period ending February 28, 1998.
(16) Filed with the Company's Current Report on Form 8-K, dated April 22, 1998.
(17) Incorporated by reference to the Company's Current Report on Form 8-K filed
on July 10, 1998.
(18) Incorporated by reference to the Company's Current Report on Form 8-K filed
on August 14, 1998.
(19) Incorporated by reference to the Company's Registration Statement on Form
S-8 filed on November 7, 1997.
(20) Incorporated by reference to the Company's Annual Report on Form 10-K filed
on August 28, 1998.
(21) Incorporated by reference to the Company's Definitive Proxy Statement filed
on September 1, 1998.
(22) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
filed on October 13, 1998, and Form 10- Q/A filed on October 15, 1998.
(23) Filed with this Registration Statement.

(b) Financial Statement Schedules

The financial statement schedules required by Item 16(d) are omitted
because the information called for is not required or is shown either in the
financial statements included in the Prospectus or in their attached notes.

Item 17. Undertakings

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions described in Item 14, or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.

The Company hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of

<PAGE>
Prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.

<PAGE>
SIGNATURES

In accordance with the requirements of the Securities Act of 1933, as
amended, PACIFIC AEROSPACE & ELECTRONICS, INC., certifies that it has reasonable
grounds to believe that it meets all of the requirements for filing on Form S-1
and authorized this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Wenatchee, Washington, on October 30,
1998.

PACIFIC AEROSPACE & ELECTRONICS, INC.

By /s/ DONALD A. WRIGHT
-------------------------------------
Donald A. Wright, President

In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement on Form S-1 has been signed by the
following persons in the capacities indicated on October 30, 1998.

Signature Title
--------- -----

/s/ DONALD A. WRIGHT Chief Executive Officer, President and
- ---------------------------------- Director
Donald A. Wright (Principal Executive Officer)

/s/ NICK A. GERDE Chief Financial Officer, Vice President
- ---------------------------------- Finance, and Treasurer
Nick A. Gerde (Principal Financial and Accounting Officer)

/s/ ALLEN W. DAHL, M.D. Director
- ----------------------------------
Allen W. Dahl, M.D.

/s/ URS DIEBOLD Director
- ----------------------------------
Urs Diebold

/s/ WERNER HAFELFINGER Director
- ----------------------------------
Werner Hafelfinger

/s/ DALE RASSMUSSEN Director
- ----------------------------------
Dale Rassmussen

/s/ WILLIAM A. WHEELER Director
- ----------------------------------
William A. Wheeler

<PAGE>
INDEX TO EXHIBITS