~~Table~~SECURITIES ofAND ~~Contents~~EXCHANGE COMMISSION

~~SECURITIES~~Washington, ~~AND~~D.C. ~~EXCHANGE COMMISSION~~20549

~~Washington,~~FORM ~~D.C. 20549~~10-Q

FORM 10-Q


[X]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 2003

[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO _____________

[Commission XFile ]Number: ~~QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~0-26088

~~FOR~~PACIFIC ~~THE~~AEROSPACE ~~QUARTERLY~~& ~~PERIOD ENDED NOVEMBER 30~~ELECTRONICS, ~~2002~~INC.

~~[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15~~(d)Exact OFname ~~THE~~of ~~SECURITIES~~registrant ~~EXCHANGE~~as ~~ACT~~specified OFin ~~1934~~its ~~FOR THE TRANSITION PERIOD FROM TO~~charter)

~~Commission~~Washington ~~File~~(State ~~Number:~~or 0other jurisdiction of incorporation or organization) 91-~~26088~~ 1744587 (I.R.S. Employer Identification No.)

~~PACIFIC~~430 ~~AEROSPACE~~Olds &Station ~~ELECTRONICS~~Road, ~~INC.~~Third Floor, Wenatchee, Washington 98801 (Address of Principal Executive Offices; Zip Code)

509-667-9600 (~~Exact~~Registrant’s ~~name~~telephone ofnumber, ~~registrant~~including asarea ~~specified in its charter~~code)

~~Washington~~Indicate by check mark whether the registrant (~~State~~1) has filed all reports required to be filed by Section 13 or ~~other~~15(d) ~~jurisdiction~~of the Securities Exchange Act of 1934 ~~incorporation~~during the preceding 12 months (or ~~organization~~for such shorter period that the registrant was required to file such reports), ~~91-1744587~~and (~~I.R.S.~~2) has ~~Employer~~been ~~Identification~~subject Noto such filing requirements for the past 90 days.) Yes X No

~~430~~Indicate ~~Olds~~by ~~Station~~check ~~Road,~~mark ~~Third~~whether ~~Floor,~~the ~~Wenatchee,~~registrant ~~Washington~~is ~~98801~~ an accelerated filer (~~Address~~as defined ofin ~~Principal~~Rule 12b-2 ~~Executive~~of ~~Offices;~~the ~~Zip~~Exchange ~~Code~~Act). Yes No X

~~509-667-9600 (Registrant’s~~Applicable ~~telephone~~only ~~number,~~to ~~including~~issuers ~~area~~involved ~~code)~~in bankruptcy proceedings during the preceding five years:

Indicate by check mark whether the registrant ~~(1)~~ has filed all ~~reports~~documents and reports required to be filed by ~~Section~~Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 ~~during~~subsequent ~~the preceding 12 months (or for such shorter period that the registrant was required~~ to ~~file~~distribution ~~such~~of ~~reports),~~securities ~~and~~under ~~(2) has~~a ~~been subject to such~~plan ~~filing~~confirmed ~~requirements~~by ~~for the past 90 days~~court. Yes ~~[ X ]~~ No ~~[ ]~~

Applicable only to ~~issuers~~corporate ~~involved in bankruptcy proceedings during the preceding five years~~issuers:

Indicate ~~by check mark whether~~ the ~~registrant~~number ~~has~~of ~~filed~~shares ~~all~~outstanding ~~documents~~of ~~and reports~~each ~~required~~of tothe beissuer’s ~~filed~~classes byof common ~~Sections 12~~stock, 13as ~~or 15(d)~~ of the ~~Securities Exchange~~latest ~~Act~~practicable date: As of ~~1934~~April 4, ~~subsequent~~2003, tothere were ~~distribution~~24,779,209 shares outstanding of ~~securities~~the ~~under~~Company’s aCommon ~~plan confirmed~~Stock, bypar ~~court~~value $0.001 ~~Yes~~per ~~[ ] No [ ]~~share.

~~Applicable~~PART ~~only~~1 FINANCIAL ~~to corporate issuers:~~INFORMATION

~~Indicate~~ITEM ~~the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date~~1: AsFINANCIAL ~~of January 10, 2003, there~~STATEMENTS ~~were 90,734,386 shares outstanding of the Company’s Common Stock, par value~~ ~~$0.001 per share.~~

1Condensed Consolidated Balance Sheets – February 28, 2003 and May 31, 2002

~~TABLE~~Condensed OFConsolidated ~~CONTENTS~~Statements of Operations and Comprehensive Income (Loss) – Third Quarters and Nine Months Ended February 28, 2003 and 2002.

PART 1 FINANCIAL INFORMATION
	ITEM 1: FINANCIAL STATEMENTS
		PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES MANAGEMENT’S STATEMENT AND NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES.
PART II OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
	ITEM 3. DEFAULTS UPON SENIOR SECURITIES
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
CERTIFICATION
EXHIBIT INDEX
EXHIBIT 99.1

Condensed Consolidated Statements of Cash Flows – Nine Months Ended February 28, 2003 and 2002

~~Table~~Management’s ofStatement ~~Contents~~and Notes to Unaudited Condensed Consolidated Financial Statements – Third Quarter and Nine Months Ended February 28, 2003

~~PART 1~~2 ~~FINANCIAL INFORMATION~~

~~ITEM~~PACIFIC 1:AEROSPACE ~~FINANCIAL~~& ~~STATEMENTS~~ELECTRONICS, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets February 28, 2003 and May 31, 2002 (Unaudited)

Condensed Consolidated Balance Sheets – November 30, 2002 and May 31, 2002


			February 28,			May 31,
			2003			2002

Assets
Current assets:
	Cash		$	2,270,000			5,619,000
	Accounts receivable, net			11,302,000			12,226,000
	Inventories			19,107,000			19,606,000
	Deferred income taxes			—			118,000
	Prepaid expense and other current assets			1,458,000			463,000

		Total current assets		34,137,000			38,032,000

Property, plant and equipment, net				21,343,000			23,315,000

Other assets:
	Goodwill, net			351,000			351,000
	Patents, net			1,505,000			1,598,000
	Deferred financing costs, net			990,000			1,147,000
	Other assets			156,000			226,000

		Total other assets		3,002,000			3,322,000

			$	58,482,000			64,669,000

Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
	Accounts payable		$	8,503,000			8,065,000
	Accrued liabilities			1,723,000			4,254,000
	Accrued interest			846,000			150,000
	Current portion of long-term debt			451,000			799,000
	Current portion of capital lease obligations			156,000			184,000

		Total current liabilities		11,679,000			13,452,000
Long-term liabilities:
	Long-term debt, net of current portion			25,883,000			24,831,000
	Capital lease obligations, net of current portion			172,000			367,000
	Senior subordinated notes payable			25,739,000			25,739,000
	Deferred income taxes			743,000			872,000
	Deferred rent and other			14,000			301,000

		Total liabilities		64,230,000			65,562,000

Series C convertible preferred stock				—			18,715,000

Stockholders’ equity (deficit):
	Common stock			25,000			91,000
	Additional paid-in capital			105,845,000			87,070,000
	Accumulated other comprehensive loss			(6,497,000	)		(8,389,000	)
	Accumulated deficit			(105,121,000	)		(98,380,000	)

		Total stockholders’ equity (deficit)		(5,748,000	)		(19,608,000	)

			$	58,482,000			64,669,000

~~Condensed~~See ~~Consolidated~~accompanying ~~Statements~~notes ofto ~~Operations~~unaudited ~~and~~condensed ~~Comprehensive~~consolidated ~~Income~~financial ~~(Loss) – Second Quarters and Six Months Ended November 30, 2002 and 2001~~statements.

~~Condensed Consolidated Statements of Cash Flow – Six Months Ended November 30,~~3 ~~2002 and 2001~~

~~Management’s~~PACIFIC ~~Statement~~AEROSPACE ~~and~~& ~~Notes~~ELECTRONICS, toINC. ~~Unaudited~~AND SUBSIDIARIES Condensed Consolidated ~~Financial~~ Statements –of ~~Second~~Operations ~~Quarter~~and Comprehensive Income (Loss) Third Quarters and ~~Six~~Nine Months Ended ~~November~~February 3028, 2003 and 2002 (Unaudited)


			Quarters Ended						Nine Months Ended

			February 28,			February 28,			February 28,			February 28,
			2003			2002			2003			2002

Net sales			$	15,663,000			18,322,000			48,172,000			63,330,000
Cost of sales				14,547,000			14,705,000			42,789,000			51,339,000

		Gross profit		1,116,000			3,617,000			5,383,000			11,991,000
Operating expenses				3,304,000			3,569,000			8,922,000			11,483,000

Income (loss) from operations				(2,188,000	)		48,000			(3,539,000	)		508,000

Other income (expense):
	Interest income			24,000			19,000			88,000			60,000
	Interest expense			(1,349,000	)		(3,887,000	)		(3,323,000	)		(11,415,000	)
	Other			(316,000	)		241,000			(244,000	)		160,000

		Total other income (expense)		(1,641,000	)		(3,627,000	)		(3,479,000	)		(11,195,000	)

Net loss before income tax benefit (expense)				(3,829,000	)		(3,579,000	)		(7,018,000	)		(10,687,000	)
Income tax benefit (expense)				—			(23,000	)		277,000			(871,000	)

Net loss				(3,829,000	)		(3,602,000	)		(6,741,000	)		(11,558,000	)
Other comprehensive income (loss):
	Foreign currency translation			293,000			(219,000	)		1,892,000			(81,000	)

Comprehensive loss			$	(3,536,000	)		(3,821,000	)		(4,849,000	)		(11,639,000	)

Net loss per share
	Basic		$	(0.42	)		(18.38	)		(2.05	)		(58.97	)
	Diluted			(0.42	)		(18.38	)		(2.05	)		(58.97	)
Shares used in computation of net loss per share:
	Basic			9,100,000			196,000			3,291,000			196,000
	Diluted			9,100,000			196,000			3,291,000			196,000

~~Table~~See ofaccompanying ~~Contents~~notes to unaudited condensed consolidated financial statements.

~~PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES~~4 ~~Condensed Consolidated Balance Sheets~~ ~~November 30, 2002 and May 31, 2002 (Unaudited)~~

				November 30,			May 31,
Assets				2002			2002
Current assets:
		Cash		$	4,558,000			5,619,000
		Accounts receivable, net			10,559,000			12,226,000
		Inventories			19,936,000			19,606,000
		Deferred income taxes			—			118,000
		Prepaid expense and other current assets			1,909,000			463,000
			Total current assets		36,962,000			38,032,000
Property, plant and equipment, net					22,361,000			23,315,000
Other assets:
		Goodwill, net			351,000			351,000
		Patents, net			1,536,000			1,598,000
		Deferred financing costs, net			1,042,000			1,147,000
		Other assets			180,000			226,000
			Total other assets		3,109,000			3,322,000
				$	62,432,000			64,669,000
	Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
		Accounts payable		$	9,664,000			8,065,000
		Accrued liabilities			1,959,000			4,254,000
		Accrued interest			150,000			150,000
		Current portion of long-term debt			570,000			799,000
		Current portion of capital lease obligations			202,000			184,000
			Total current liabilities		12,545,000			13,452,000
Long-term liabilities:
		Long-term debt, net of current portion			25,346,000			24,831,000
		Capital lease obligations, net of current portion			260,000			367,000
		Senior subordinated notes payable			25,739,000			25,739,000
		Deferred income taxes			734,000			872,000
		Deferred rent and other			14,000			301,000
			Total liabilities		64,638,000			65,562,000
Series C convertible preferred stock					18,715,000			18,715,000
Stockholders’ equity (deficit):
		Common stock			91,000			91,000
		Additional paid-in capital			87,070,000			87,070,000
		Accumulated other comprehensive loss			(6,790,000	)		(8,389,000	)
		Accumulated deficit			(101,292,000	)		(98,380,000	)
			Total stockholders’ equity (deficit)		(20,921,000	)		(19,608,000	)
				$	62,432,000			64,669,000

PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Nine Months Ended February 28, 2003 and 2002
(Unaudited)

See accompanying notes to unaudited condensed consolidated financial statements.


			Nine Months Ended

			February 28,			February 28,
			2003			2002

Cash flow from operating activities:
		Net cash (used in) provided by operating activities	$	(2,310,000	)		2,727,000

Cash flow from investing activities:
	Acquisition of property, plant and equipment			(1,148,000	)		(2,429,000	)
	Proceeds from sale of property, plant and equipment			492,000			423,000

		Net cash used in investing activities		(656,000	)		(2,006,000	)

Cash flow from financing activities:
	Proceeds from issuance of long-term debt			143,000			57,000
	Payments on long term debt and capital leases			(965,000	)		(778,000	)
	Redemption of common stock			(7,000	)		—
	Sale of common stock, net of issuance costs			—			68,000

		Net cash used in financing activities		(829,000	)		(653,000	)

Net (decrease) increase in cash				(3,795,000	)		68,000
Effect of exchange rates on cash				446,000			55,000
Cash at beginning of period				5,619,000			4,095,000

Cash at end of period			$	2,270,000			4,218,000

3See accompanying notes to unaudited condensed consolidated financial statements.

~~Table of Contents~~5

PACIFIC AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES ~~Condensed~~MANAGEMENT’S ~~Consolidated~~STATEMENT ~~Statements of Operations and Comprehensive Income (Loss)~~AND ~~Second~~NOTES ~~Quarters~~TO ~~and~~UNAUDITED ~~Six~~CONDENSED ~~Months~~CONSOLIDATED ~~Ended~~FINANCIAL ~~November 30, 2002 and 2001~~STATEMENTS ~~(Unaudited)~~

			Quarters Ended						Six Months Ended
			November 30,			November 30,			November 30,			November 30,
			2002			2001			2002			2001
Net sales			$	16,453,000			21,579,000			32,509,000			45,008,000
Cost of sales				14,127,000			18,280,000			28,242,000			36,634,000
		Gross profit		2,326,000			3,299,000			4,267,000			8,374,000
Operating expenses				2,611,000			3,716,000			5,618,000			7,434,000
Income (loss) from operations				(285,000	)		(417,000	)		(1,351,000	)		940,000
Other income (expense):
	Interest Income			38,000			33,000			64,000			41,000
	Interest Expense			(1,002,000	)		(4,423,000	)		(1,974,000	)		(7,528,000	)
	Other			60,000			(619,000	)		72,000			(561,000	)
		Total other income (expense)		(904,000	)		(5,009,000	)		(1,838,000	)		(8,048,000	)
Net loss before income tax benefit (expense)				(1,189,000	)		(5,426,000	)		(3,189,000	)		(7,108,000	)
Income tax benefit (expense)				43,000			(486,000	)		277,000			(848,000	)
Net loss				(1,146,000	)		(5,912,000	)		(2,912,000	)		(7,956,000	)
Other comprehensive income (loss):
	Foreign currency translation			134,000			(444,000	)		1,599,000			138,000
Comprehensive loss			$	(1,012,000	)		(6,356,000	)		(1,313,000	)		(7,818,000	)
Net loss per share
	Basic		$	(0.01	)		(0.15	)		(0.03	)		(0.20	)
	Diluted			(0.01	)		(0.15	)		(0.03	)		(0.20	)
Shares used in computation of net loss per share:
	Basic			90,734,000			39,315,000			90,734,000			39,287,000
	Diluted			90,734,000			39,315,000			90,734,000			39,287,000

Third Quarter and Nine Months Ended February 28, 2003

~~See~~Management’s ~~accompanying notes to unaudited condensed consolidated financial statements.~~Statement

4The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Form 10-Q instructions and, in the opinion of management, contain all adjustments necessary to fairly present the information therein. All significant intercompany transactions have been eliminated in consolidation. These results have been determined on the basis of accounting principles generally accepted in the United States of America applied consistently with those used in the preparation of the Company’s annual financial statements.

~~Table~~Certain ofinformation ~~Contents~~and footnote disclosures normally included in audited annual financial statements presented in accordance with generally accepted accounting principles have been condensed or omitted. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K/A for the year ended May 31, 2002.

~~PACIFIC~~The ~~AEROSPACE~~results &of ~~ELECTRONICS,~~operations ~~INC.~~for ~~AND~~the ~~SUBSIDIARIES~~quarter and nine months ended February 28, ~~Condensed~~2003 ~~Consolidated~~are ~~Statements~~not necessarily indicative of ~~Cash~~the ~~Flows Six~~results ~~Months~~to ~~Ended~~be ~~November 30,~~expected ~~2002~~or anticipated ~~and~~for ~~2001~~the full fiscal year. ~~(Unaudited)~~

			Six Months Ended
			November 30,			November 30,
			2002			2001
Cash flow from operating activities:
		Net cash provided by (used in) operating activities	$	(281,000	)	$	823,000
Cash flow from investing activities:
	Acquisition of property, plant and equipment			(541,000	)		(2,031,000	)
	Proceeds from sale of property, plant and equipment			100,000			73,000
		Net cash used in investing activities		(441,000	)		(1,958,000	)
Cash flow from financing activities:
	Proceeds from long-term debt			—			45,000
	Payments on long term debt and capital leases			(597,000	)		(533,000	)
	Sale of common stock, net of issuance costs			—			68,000
		Net cash used in financing activities		(597,000	)		(420,000	)
Net decrease in cash				(1,319,000	)		(1,555,000	)
Effect of exchange rates on cash				258,000			73,000
Cash at beginning of period				5,619,000			4,095,000
Cash at end of period			$	4,558,000		$	2,613,000

(1)

Net Loss Per Share

~~See~~Basic ~~accompanying~~loss ~~notes~~per toshare ~~unaudited~~is ~~condensed~~computed ~~consolidated~~using ~~financial~~the ~~statements~~weighted average number of common shares outstanding during the period. Diluted net loss per share is computed on the basis of the weighted average number of common shares outstanding, using the “if-converted” method for convertible preferred stock, and for outstanding stock options and warrants, using the “treasury stock” method. As the Company had a net loss for the periods ended February 28, 2003 and 2002, basic and diluted net loss per share are the same.

5The total number of anti-dilutive common stock equivalents related to options, warrants and convertible preferred stock as of February 28, 2003 and 2002 were 445,165 and 54,002, respectively.

~~Table~~All share and per share information has been retroactively adjusted for the effect of ~~Contents~~the reverse stock split described in note 5 to these unaudited condensed consolidated financial statements.

~~PACIFIC~~(2) ~~AEROSPACE & ELECTRONICS, INC. AND SUBSIDIARIES MANAGEMENT’S STATEMENT AND NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~ Inventories

~~Second~~Components ~~Quarter~~of ~~and~~inventories ~~Six~~are ~~Months~~as ~~Ended November 30, 2002~~follows:

Management’s Statement


				May 31,
		February 28, 2003		2002

Raw materials		$	3,358,000	$	3,927,000
Work in progress			10,998,000		10,085,000
Finished goods			4,751,000		5,594,000

	Total	$	19,107,000	$	19,606,000

~~The accompanying unaudited condensed consolidated financial statements have~~6 ~~been prepared in accordance with Form 10-Q instructions and, in the opinion of~~ management, contain all adjustments necessary to fairly present information therein. All significant intercompany transactions have been eliminated in consolidation. These results have been determined on the basis of accounting principles generally accepted in the United States of America applied consistently with those used in the preparation of the Company’s annual financial statements.

~~Certain~~(3) ~~information~~Going and footnote disclosures normally included in audited annual financial statements presented in accordance with generally accepted accounting principles have been condensed or omitted. The condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K/A for the year ended May 31, 2002. Concern

The ~~results~~Company’s ofcondensed ~~operations~~consolidated ~~for~~financial ~~the~~statements ~~quarter~~have ~~and~~been ~~six months ended November 30,~~prepared ~~2002~~assuming ~~are not necessarily indicative of~~ the ~~results~~Company towill becontinue ~~expected~~as ~~or anticipated~~a ~~for~~going ~~the full fiscal year~~concern.

~~(1) Net~~During ~~Loss~~the ~~Per~~nine ~~Share~~months ended February 28, 2003, cash used by operating activities was $2,310,000, and at February 28, 2003, the Company’s cash on hand totaled $2,270,000. The Company’s future success will depend heavily on its ability to generate cash from operating activities and to meet its obligations as they become due. The Company is focusing on initiatives that specifically address the need to increase cash provided by operating activities. These initiatives include, but are not limited to, staff reductions, reductions in product line offerings, sale of excess inventory, and general and administrative cost controls. In previous periods, the Company has also downsized, closed, or sold certain of its operations that had consistently produced negative cash flow. If the Company is not sufficiently successful in increasing cash provided by operating activities, it may need to sell additional common stock or other securities, or sell assets outside of the ordinary course of business in order to meet its obligations. There is no assurance that the Company will be able to achieve sufficient cash from operations, to sell additional common stock or other securities, or to sell its assets for amounts in excess of book value.

~~Basic~~We ~~loss~~were ~~per~~notified ~~share~~by iscertain ~~computed using the weighted average number~~ of ~~common shares~~our ~~outstanding~~secured ~~during~~lenders ~~the~~that ~~period.~~we ~~Diluted~~are ~~net~~not ~~loss~~in compliance ~~per~~with ~~share~~certain iscovenants ~~computed on~~of ~~the~~loans ~~basis~~that ofare ~~the~~secured ~~weighted~~by ~~average~~a ~~number~~deed of ~~common shares outstanding, using~~trust ~~the~~on ~~“if-converted”~~our ~~method~~headquarters ~~for~~building ~~convertible~~and ~~preferred~~substantially ~~stock,~~all ~~and~~of ~~for~~our ~~outstanding~~other assets. ~~stock~~Pursuant ~~options~~to ~~and~~forbearance ~~warrants~~agreements, ~~using~~our ~~the~~secured ~~“treasury~~lenders ~~stock”~~have ~~method.~~agreed Asto ~~the Company~~forbear ~~had~~from adeclaring ~~net~~covenant ~~loss~~defaults ~~for~~until the ~~periods~~earlier ~~ended~~of ~~November 30,~~the ~~2002~~date ~~and~~on ~~2001,~~which ~~basic and~~we ~~diluted~~regain ~~net~~compliance ~~loss~~(thereby ~~per~~curing ~~share~~such ~~are~~covenant ~~the~~violations) ~~same~~or March 1, 2004.

The ~~total~~Company’s ~~number~~ability ofto ~~anti-dilutive~~obtain ~~common~~additional ~~stock~~cash ~~equivalents~~if ~~related to options, warrants~~ and ~~convertible~~when ~~preferred~~needed ~~stock~~could ashave ofa material ~~November 30,~~adverse ~~2002~~effect ~~and~~on ~~2001~~its ~~were 4,954,852,965~~financial ~~and 10~~position,~~800,391,~~ ~~respectively.~~results ~~The~~of ~~Company,~~operations ~~however, does not~~and ~~have~~its ~~enough~~ability ~~common~~to ~~shares~~continue ~~reserved~~in ~~for~~existence. ~~issuance~~The toconsolidated ~~accommodate~~financial ~~the~~statements ~~full~~do ~~exercise~~not ofinclude ~~all~~any ofadjustments ~~its~~that ~~outstanding~~might ~~options,~~result ~~warrants,~~from ~~and~~the ~~convertible~~outcome ~~stock~~of at this ~~time~~ uncertainty.

(24) ~~Inventories~~ Segment Information and Concentration of Risk

~~Components~~The Company operates in two segments, U.S. Operations and European Operations. The Company’s chief operating decision maker, the Company’s chief executive officer, regularly reviews operating results, assesses performance and makes decisions about resources to be allocated at this level (U.S. Operations and European Operations) and not on any of ~~inventories~~the underlying divisions or business units that comprise these two segments. Presented below is the Company’s operational segment information. All operational segments identified as “U.S. Operations” and “Corporate” are located within the U.S. while the operations and assets of the “European Operations” segment are located within the United Kingdom. Identifiable assets are those assets used in the Company’s operations in each 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 segments. For ease of comparison, discontinued or sold business units within the operational segments have been separated and identified as ~~follows:~~“Discontinued Divisions.” There are no significant inter-segment sales.

				May 31,
		November 30, 2002		2002
Raw materials		$	3,902,000	$	3,927,000
Work in progress			10,236,000		10,085,000
Finished goods			5,798,000		5,594,000
	Total	$	19,936,000	$	19,606,000

6Third quarter ended February 28, 2003


								Corporate,
	U.S.		European			Discontinued		other and
	Operations		Operations			Divisions		eliminations			Total

Net sales to customers	$	6,380,000		9,283,000			—		—			15,663,000
Income (loss) from operations		455,000		(1,167,000	)		—		(1,476,000	)		(2,188,000	)
Identifiable assets		21,484,000		30,365,000			—		6,633,000			58,482,000
Capital expenditures		217,000		390,000			—		—			607,000
Depreciation and amortization		390,000		505,000			—		106,000			1,001,000
Interest income		—		7,000			—		17,000			24,000
Interest expense		49,000		300,000			—		1,000,000			1,349,000

~~(3) Going~~Third ~~Concern~~quarter ended February 28, 2002

The Company’s consolidated financial statements have been prepared assuming the Company will continue as a going concern.


								Corporate,
	U.S.		European		Discontinued			other and
	Operations		Operations		Divisions			eliminations			Total

Net sales to customers	$	8,132,000		9,953,000		237,000			—			18,322,000
Income (loss) from operations		1,999,000		29,000		(296,000	)		(1,684,000	)		48,000
Identifiable assets		29,920,000		33,092,000		39,000			9,001,000			72,052,000
Capital expenditures		131,000		184,000		—			83,000			398,000
Depreciation and amortization		426,000		491,000		—			152,000			1,069,000
Interest income		—		—		—			19,000			19,000
Interest expense		51,000		960,000		43,000			2,833,000			3,887,000

~~During~~Nine ~~the six~~ months ended ~~November~~February 3028, ~~2002, cash used by operating~~2003 ~~activities was $281,000. The Company’s future success will depend heavily on~~ ~~its ability to generate cash from operating activities and to meet its~~ obligations as they become due. The Company is focusing on initiatives that specifically address the need to increase cash provided by operating activities. These initiatives include, but are not limited to, staff reductions, reduced product line offerings, selling of excess inventory, and general and administrative cost controls. In previous periods, the Company has also downsized, closed, or sold certain of its operations that had consistently produced negative cash flow. If the Company is not sufficiently successful in increasing cash provided by operating activities, it may need to sell additional common stock or other securities, or sell assets outside of the ordinary course of business in order to meet its obligations. There is no assurance that the Company will be able to achieve sufficient cash from operations, to sell additional common stock or other securities, or to sell its assets for amounts in excess of book value.

We were notified by one of our secured lenders that we are not in compliance with certain covenants of loans that are secured by a deed of trust on our headquarters building and other assets. Pursuant to a forbearance agreement dated December 19, 2002, our secured lender will forbear from declaring covenant defaults until the earlier of the date on which we regain compliance (thereby curing such covenant violations) or December 31, 2003.


								Corporate,
	U.S.		European			Discontinued		other and
	Operations		Operations			Divisions		eliminations			Total

Net sales to customers	$	19,889,000		28,283,000			—		—			48,172,000
Income (loss) from operations		2,450,000		(2,236,000	)		—		(3,753,000	)		(3,539,000	)
Identifiable assets		21,484,000		30,365,000			—		6,633,000			58,482,000
Capital expenditures		323,000		757,000			—		68,000			1,148,000
Depreciation and amortization		1,190,000		1,485,000			—		345,000			3,020,000
Interest income		—		27,000			—		61,000			88,000
Interest expense		150,000		900,000			—		2,273,000			3,323,000

~~The Company’s ability to obtain additional cash if and when needed could have a~~8 ~~material adverse effect on its financial position, results of operations and~~ ~~its ability to continue in existence. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.~~

~~(4) Segment~~Nine ~~Information~~months ~~and~~ended ~~Concentration~~February 28, ~~of Risk~~2002

The Company operates in two segments, U.S. Operations and European Operations. The Company’s chief operating decision maker, the Company’s chief executive officer, regularly reviews operating results, assesses performance and makes decisions about resources to be allocated at this level (U.S. Operations and European Operations) and not on any of the underlying divisions or business units that comprise these two segments. Presented below is the Company’s operational segment information. All operational segments identified as “U.S. Operations” and “Corporate” are located within the U.S. while the operations and assets of the “European Operations” segment are located within the United Kingdom. Identifiable assets are those assets used in the Company’s operations in each 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 segments. For ease of comparison, discontinued or sold business units within the operational segments have been separated and identified as “Discontinued Divisions.”


								Corporate,
	U.S.		European		Discontinued			other and
	Operations		Operations		Divisions			eliminations			Total

Net sales to customers	$	26,131,000		35,707,000		1,492,000			—			63,330,000
Income (loss) from operations		5,675,000		2,740,000		(3,361,000	)		(4,546,000	)		508,000
Identifiable assets		29,920,000		33,092,000		39,000			9,001,000			72,052,000
Capital expenditures		339,000		1,840,000		—			250,000			2,429,000
Depreciation and amortization		1,313,000		1,487,000		99,000			446,000			3,345,000
Interest income		—		21,000		—			39,000			60,000
Interest expense		257,000		2,890,000		48,000			8,220,000			11,415,000

7 (5) Conversion of Series C Convertible Preferred Stock and Reverse Stock Split

~~Table~~On January 27, 2003, following approval by a majority of ~~Contents~~our shareholders, we increased the number of our authorized shares of common stock from 100,000,000 to 20,000,000,000 shares without affecting per share par value. Upon the increase in authorized shares the holders of all of our Series C Convertible Preferred Stock converted their preferred shares into 4,865,819,000 shares of common stock. On the same day, following approval by a majority of our shareholders, we completed a 1 for 200 reverse split of our outstanding shares of common stock, as well as a proportionate reduction in our shares of authorized but un-issued common stock. At February 28, 2003, as a result of the reverse split, we had 100,000,000 authorized shares of common stock with 24,779,209 common shares outstanding.

~~Second~~(6) ~~quarter~~Revolving ~~ended~~Invoice ~~November 30,~~Funding ~~2002~~ Facility

								Corporate,
	U.S.		European			Discontinued		other and
	Operations		Operations			Divisions		eliminations			Total
Net sales to customers	$	6,755,000		9,698,000			—		—			16,453,000
Income (loss) from operations		1,010,000		(222,000	)		—		(1,073,000	)		(285,000	)
Identifiable assets		23,322,000		32,169,000			—		6,941,000			62,432,000
Capital expenditures		18,000		207,000			—		68,000			293,000
Depreciation and amortization		400,000		490,000			—		113,000			1,003,000
Interest income		—		13,000			—		25,000			38,000
Interest expense		44,000		300,000			—		658,000			1,002,000

In February 2003, the Company entered into a revolving invoice funding facility with a national bank. Under the facility the Company may borrow up to 80% of acceptable domestic United States accounts receivable, up to a maximum amount of $3,000,000. The facility is secured by all domestic United States accounts receivable and all domestic United States inventories. The facility bears interest at the bank’s prime rate plus 5.5% and expires in February 2004. There were no amounts borrowed under this facility at February 28, 2003.

~~Second~~(7) ~~quarter~~Consolidating ~~ended~~Condensed ~~November 30,~~Financial ~~2001~~ Statements

								Corporate,
	U.S.		European		Discontinued			other and
	Operations		Operations		Divisions			eliminations			Total
Net sales to customers	$	8,338,000		12,954,000		287,000			—			21,579,000
Income (loss) from operations		1,063,000		1,560,000		(1,895,000	)		(1,145,000	)		(417,000	)
Identifiable assets		28,354,000		35,298,000		353,000			10,062,000			74,067,000
Capital expenditures		136,000		943,000		—			74,000			1,153,000
Depreciation and amortization		431,000		506,000		44,000			148,000			1,129,000
Interest income		—		13,000		—			20,000			33,000
Interest expense		114,000		976,000		(13,000	)		3,346,000			4,423,000

The following financial statements present consolidating condensed financial information of the Company for the indicated periods. The Company’s senior subordinated notes have been guaranteed by all of the Company’s wholly owned U.S. subsidiaries. The guarantor subsidiaries have fully and unconditionally guaranteed this debt on a joint and several basis. This debt is not guaranteed by the Company’s foreign subsidiaries, which consist of Aeromet and two related holding companies. There are no significant contractual restrictions on the distribution of funds from the guarantor subsidiaries to the parent corporation. The consolidating condensed financial information is presented in lieu of separate financial statements and other disclosures of the guarantor subsidiaries, as management has determined that such information is not material to investors.

~~Six months ended November 30, 2002~~9

								Corporate,
	U.S.		European			Discontinued		other and
	Operations		Operations			Divisions		eliminations			Total
Net sales to customers	$	13,509,000		19,000,000			—		—			32,509,000
Income (loss) from operations		1,995,000		(1,069,000	)		—		(2,277,000	)		(1,351,000	)
Identifiable assets		23,322,000		32,169,000			—		6,941,000			62,432,000
Capital expenditures		106,000		367,000			—		68,000			541,000
Depreciation and amortization		800,000		980,000			—		239,000			2,019,000
Interest income		—		20,000			—		44,000			64,000
Interest expense		101,000		600,000			—		1,273,000			1,974,000

Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Balance Sheet
February 28, 2003


						GUARANTOR			NON-GUARANTOR
			PARENT			SUBSIDIARIES			SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED

Assets
Current assets:
	Cash		$	790,000		$	1,000		$	1,479,000		$	—		$	2,270,000
	Accounts receivable, net			—			3,278,000			8,053,000			(29,000	)		11,302,000
	Inventories			—			9,279,000			9,828,000			—			19,107,000
	Other			3,232,000			84,000			1,133,000			(2,991,000	)		1,458,000

		Total current assets		4,022,000			12,642,000			20,493,000			(3,020,000	)		34,137,000
Property, plant and equipment, net				4,614,000			6,857,000			9,872,000			—			21,343,000
Other assets:
	Goodwill			—			351,000			—			—			351,000
	Investment in and loans to subsidiaries			38,879,000			72,618,000			—			(111,497,000	)		—
	Other			990,000			1,661,000			—			—			2,651,000

		Total other assets		39,869,000			74,630,000			—			(111,497,000	)		3,002,000

		Total assets	$	48,505,000		$	94,129,000		$	30,365,000		$	(114,517,000	)	$	58,482,000

Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
	Accounts payable		$	2,566,000		$	1,082,000		$	4,884,000		$	(29,000	)	$	8,503,000
	Current portion of long-term debt			72,000			379,000			—			—			451,000
	Other			1,138,000			779,000			3,799,000			(2,991,000	)		2,725,000

		Total current liabilities		3,776,000			2,240,000			8,683,000			(3,020,000	)		11,679,000
Long-term liabilities:
	Long-term debt, net of current portion			50,477,000			1,145,000			—			—			51,622,000
	Intercompany note and loan payable			—			71,903,000			36,957,000			(108,860,000	)		—
	Other			—			186,000			743,000			—			929,000

		Total long-term liabilities		50,477,000			73,234,000			37,700,000			(108,860,000	)		52,551,000
Series C convertible preferred stock				—			—			—			—			—
Stockholders’ equity (deficit):
	Common stock			25,000			56,139,000			33,709,000			(89,848,000	)		25,000
	Additional paid-in capital			105,845,000			—			—			—			105,845,000
	Accumulated other comprehensive loss			(6,497,000	)		—			(6,497,000	)		6,497,000			(6,497,000	)
	Accumulated deficit			(105,121,000	)		(37,484,000	)		(43,230,000	)		80,714,000			(105,121,000	)

		Total stockholders’ equity (deficit)		(5,748,000	)		18,655,000			(16,018,000	)		(2,637,000	)		(5,748,000	)

		Total liabilities and stockholders’ equity (deficit)	$	48,505,000		$	94,129,000		$	30,365,000		$	(114,517,000	)	$	58,482,000

~~Table of Contents~~10

~~Six~~Pacific ~~months~~Aerospace ~~ended~~& ~~November~~Electronics, Inc. Consolidating Condensed Balance Sheet May 3031, ~~2001~~2002

														Corporate,
								GUARANTOR				NON-GUARANTOR
		U.S.				European				Discontinued				other and
				PARENT				SUBSIDIARIES				SUBSIDIARIES				ELIMINATIONS				CONSOLIDATED
		Operations				Operations				Divisions				eliminations				Total
Assets
Net sales to customers		$	17,999,000				25,754,000				1,255,000				—				45,008,000
Current assets:
Income (loss) from operations			3,676,000				2,711,000				(2,585,000	)			(2,862,000	)			940,000
	Cash			$	803,000			$	3,000			$	4,813,000			$	—			$	5,619,000
Identifiable assets			28,354,000				35,298,000				353,000				10,062,000				74,067,000
	Accounts receivable, net				—				3,298,000				9,022,000				(94,000	)			12,226,000
Capital expenditures			208,000				1,656,000				—				167,000				2,031,000
	Inventories				—				11,249,000				8,357,000				—				19,606,000
Depreciation and amortization			887,000				996,000				99,000				294,000				2,276,000
	Other				3,717,000				159,000				298,000				(3,593,000	)			581,000
Interest income			—				21,000				—				20,000				41,000
		Total current assets			4,520,000				14,709,000				22,490,000				(3,687,000	)			38,032,000
Interest expense			206,000				1,930,000				5,000				5,387,000				7,528,000
Property, plant and equipment, net					4,899,000				8,554,000				9,862,000				—				23,315,000
Other assets:
	Goodwill				—				351,000				—				—				351,000
	Investment in and loans to subsidiaries				40,907,000				72,618,000				—				(113,525,000	)			—
	Other				1,147,000				1,824,000				—				—				2,971,000
		Total other assets			42,054,000				74,793,000				—				(113,525,000	)			3,322,000
		Total assets		$	51,473,000			$	98,056,000			$	32,352,000			$	(117,212,000	)		$	64,669,000
Liabilities and Stockholders’ Equity (Deficit)
Current liabilities:
	Accounts payable			$	1,849,000			$	1,844,000			$	4,466,000			$	(94,000	)		$	8,065,000
	Current portion of long-term debt				65,000				734,000				—				—				799,000
	Other				941,000				2,105,000				5,135,000				(3,593,000	)			4,588,000
		Total current liabilities			2,855,000				4,683,000				9,601,000				(3,687,000	)			13,452,000
Long-term liabilities:
	Long-term debt, net of current portion				49,223,000				1,347,000				—				—				50,570,000
	Intercompany note and loan payable				—				72,223,000				36,957,000				(109,180,000	)			—
	Other				288,000				380,000				872,000				—				1,540,000
		Total long-term liabilities			49,511,000				73,950,000				37,829,000				(109,180,000	)			52,110,000
Series C convertible preferred stock					18,715,000				—				—				—				18,715,000
Stockholders’ equity (deficit):
	Common stock				91,000				56,139,000				33,709,000				(89,848,000	)			91,000
	Additional paid-in capital				87,070,000				—				—				—				87,070,000
	Accumulated other comprehensive loss				(8,389,000	)			—				(8,389,000	)			8,389,000				(8,389,000	)
	Accumulated deficit				(98,380,000	)			(36,716,000	)			(40,398,000	)			77,114,000				(98,380,000	)
		Total stockholders’ equity (deficit)			(19,608,000	)			19,423,000				(15,078,000	)			(4,345,000	)			(19,608,000	)
		Total liabilities and stockholders’ equity (deficit)		$	51,473,000			$	98,056,000			$	32,352,000			$	(117,212,000	)		$	64,669,000

~~(5) Consolidating Condensed Financial Statements~~11

~~The~~Pacific ~~following~~Aerospace ~~financial~~& ~~statements~~Electronics, ~~present consolidating condensed financial information of the Company for the indicated periods~~Inc. ~~The Company’s senior~~ ~~subordinated~~Consolidating ~~notes~~Condensed ~~have~~Statement ~~been guaranteed by all~~ of ~~the~~Operations ~~Company’s wholly owned U.S. subsidiaries. The guarantor subsidiaries have fully~~ and ~~unconditionally guaranteed~~Comprehensive ~~this~~Income ~~debt on a joint and several basis. This debt is not guaranteed~~(Loss) byFor the ~~Company’s~~Quarter ~~foreign~~Ended ~~subsidiaries~~February 28, ~~which consist of Aeromet and two related~~2003 ~~holding companies. There are no significant contractual restrictions on the~~ ~~distribution of funds from the guarantor subsidiaries to the parent~~ corporation. The consolidating condensed financial information is presented in lieu of separate financial statements and other disclosures of the guarantor subsidiaries, as management has determined that such information is not material to investors.


						GUARANTOR			NON-GUARANTOR
			PARENT			SUBSIDIARIES			SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED

Net Sales			$	—		$	6,460,000		$	9,283,000		$	(80,000	)	$	15,663,000
Cost of Sales				—			5,361,000			9,266,000			(80,000	)		14,547,000

	Gross profit			—			1,099,000			17,000			—			1,116,000
Operating expenses				1,476,000			1,550,000			1,184,000			(906,000	)		3,304,000

	Loss from operations			(1,476,000	)		(451,000	)		(1,167,000	)		906,000			(2,188,000	)
Other income (expense):
	Parent’s share of subsidiaries net loss			(2,337,000	)		—			—			2,337,000			—
	Interest expense			(1,300,000	)		(349,000	)		(300,000	)		600,000			(1,349,000	)
	Other			1,284,000			(77,000	)		7,000			(1,506,000	)		(292,000	)

		Total other income (expense)		(2,353,000	)		(426,000	)		(293,000	)		1,431,000			(1,641,000	)

	Loss before income taxes			(3,829,000	)		(877,000	)		(1,460,000	)		2,337,000			(3,829,000	)
Income tax benefit (expense)				—			—			—			—			—

	Net loss			(3,829,000	)		(877,000	)		(1,460,000	)		2,337,000			(3,829,000	)
Other comprehensive income (loss)
	Foreign currency translation			293,000			—			293,000			(293,000	)		293,000

	Comprehensive income (loss)		$	(3,536,000	)	$	(877,000	)	$	(1,167,000	)	$	2,044,000		$	(3,536,000	)

~~Table of Contents~~12

Pacific Aerospace & Electronics, Inc. Consolidating Condensed ~~Balance~~Statement ~~Sheet~~of Operations and Comprehensive Income (Loss) ~~November~~For the Quarter Ended February 3028, 2002

							GUARANTOR			~~GUARANTOR~~	NON-GUARANTOR			~~NON-GUARANTOR~~
			PARENT			~~PARENT~~	SUBSIDIARIES			~~SUBSIDIARIES~~	SUBSIDIARIES			~~SUBSIDIARIES~~	ELIMINATIONS			~~ELIMINATIONS~~	CONSOLIDATED			~~CONSOLIDATED~~
				Assets
Net Sales			$	—			$	8,710,000			$	9,953,000			$	(341,000	)		$	18,322,000
Current assets:
Cost of Sales				—				5,938,000				9,108,000				(341,000	)			14,705,000
	Cash					$	662,000			$	3,000			$	3,893,000			$	—			$	4,558,000
	Gross profit			—				2,772,000				845,000				—				3,617,000
	Accounts receivable, net						—				2,924,000				7,669,000				(34,000	)			10,559,000
Operating expenses				1,629,000				2,124,000				816,000				(1,000,000	)			3,569,000
	Inventories										10,553,000				9,383,000				—				19,936,000
	Income (loss) from operations			(1,629,000	)			648,000				29,000				1,000,000				48,000
	Other						3,221,000				104,000				1,359,000				(2,775,000	)			1,909,000
Other income (expense)
			Total current assets				3,883,000				13,584,000				22,304,000				(2,809,000	)			36,962,000
	Parent’s share of subsidiaries net loss			(169,000	)			—				—				169,000				—
Property, plant and equipment, net							4,699,000				7,797,000				9,865,000				—				22,361,000
	Interest expense			(3,786,000	)			(1,049,000	)			(960,000	)			1,908,000				(3,887,000	)
Other assets:
	Other			1,985,000				1,183,000				—				(2,908,000	)			260,000
	Goodwill						—				351,000				—				—				351,000
	Total other income (expense)			(1,970,000	)			134,000				(960,000	)			(831,000	)			(3,627,000	)
	Investment in and loans to subsidiaries						41,830,000				72,618,000				—				(114,448,000	)			—
	Income (loss) before income taxes			(3,599,000	)			782,000				(931,000	)			169,000				(3,579,000	)
	Other						1,042,000				1,716,000				—				—				2,758,000
Provision for income taxes				—				—				(23,000	)			—				(23,000	)
			Total other assets				42,872,000				74,685,000				—				(114,448,000	)			3,109,000
	Net income (loss)			(3,599,000	)			782,000				(954,000	)			169,000				(3,602,000	)
			Total assets			$	51,454,000			$	96,066,000			$	32,169,000			$	(117,257,000	)		$	62,432,000
Other comprehensive income (loss)
		Liabilities and Stockholders’ Equity
	Foreign currency translation			(219,000	)			—				(219,000	)			219,000				(219,000	)
Current liabilities:
	Comprehensive income (loss)		$	(3,818,000	)		$	782,000			$	(1,173,000	)		$	388,000			$	(3,821,000	)
	Accounts payable					$	3,102,000			$	1,075,000			$	5,521,000			$	(34,000	)		$	9,664,000
	Current portion of long-term debt						61,000				509,000				—				—				570,000
	Other						520,000				758,000				3,808,000				(2,775,000	)			2,311,000
			Total current liabilities				3,683,000				2,342,000				9,329,000				(2,809,000	)			12,545,000
Long-term liabilities:
	Long-term debt, net of current portion						49,977,000				1,108,000				—				—				51,085,000
	Intercompany note and loan payable						—				72,810,000				36,957,000				(109,767,000	)			—
	Other						—				274,000				734,000				—				1,008,000
			Total long-term liabilities				49,977,000				74,192,000				37,691,000				(109,767,000	)			52,093,000
Series C convertible preferred stock							18,715,000				—				—				—				18,715,000
Stockholders’ equity (deficit):
	Common stock						91,000				56,139,000				33,709,000				(89,848,000	)			91,000
	Additional paid-in capital						87,070,000				—				—				—				87,070,000
	Accumulated other comprehensive loss						(6,790,000	)			—				(6,790,000	)			6,790,000				(6,790,000	)
	Accumulated deficit						(101,292,000	)			(36,607,000	)			(41,770,000	)			78,377,000				(101,292,000	)
			Total stockholders’ equity (deficit)				(20,921,000	)			19,532,000				(14,851,000	)			(4,681,000	)			(20,921,000	)
			Total liabilities and stockholders’ equity (deficit)			$	51,454,000			$	96,066,000			$	32,169,000			$	(117,257,000	)		$	62,432,000

1013

~~Table~~Pacific Aerospace & Electronics, Inc. Consolidating Condensed Statement of ~~Contents~~Operations and Comprehensive Income (Loss) For the Nine Months Ended February 28, 2003

Pacific Aerospace & Electronics, Inc. Consolidating Condensed Balance Sheet May 31, 2002


						GUARANTOR			NON-GUARANTOR
			PARENT			SUBSIDIARIES			SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED

Net Sales			$	—		$	20,267,000		$	28,283,000		$	(378,000	)	$	48,172,000
Cost of Sales				—			15,810,000			27,357,000			(378,000	)		42,789,000

	Gross profit			—			4,457,000			926,000			—			5,383,000
Operating expenses				3,753,000			4,724,000			3,162,000			(2,717,000	)		8,922,000

	Loss from operations			(3,753,000	)		(267,000	)		(2,236,000	)		2,717,000			(3,539,000	)
Other income (expense):
	Parent’s share of subsidiaries net loss			(3,600,000	)		—			—			3,600,000			—
	Interest expense			(3,173,000	)		(1,050,000	)		(900,000	)		1,800,000			(3,323,000	)
	Other			3,785,000			549,000			27,000			(4,517,000	)		(156,000	)

		Total other income (expense)		(2,988,000	)		(501,000	)		(873,000	)		883,000			(3,479,000	)

	Loss before income taxes			(6,741,000	)		(768,000	)		(3,109,000	)		3,600,000			(7,018,000	)
Income tax benefit (expense)				—			—			277,000			—			277,000

	Net loss			(6,741,000	)		(768,000	)		(2,832,000	)		3,600,000			(6,741,000	)
Other comprehensive income (loss)
	Foreign currency translation			1,892,000			—			1,892,000			(1,892,000	)		1,892,000

	Comprehensive income (loss)		$	(4,849,000	)	$	(768,000	)	$	(940,000	)	$	1,708,000		$	(4,849,000	)

								GUARANTOR			NON-GUARANTOR
					PARENT			SUBSIDIARIES			SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED
				Assets
Current assets:
	Cash				$	803,000		$	3,000		$	4,813,000		$	—		$	5,619,000
	Accounts receivable, net					—			3,298,000			9,022,000			(94,000	)		12,226,000
	Inventories					—			11,249,000			8,357,000			—			19,606,000
	Other					3,717,000			159,000			298,000			(3,593,000	)		581,000
			Total current assets			4,520,000			14,709,000			22,490,000			(3,687,000	)		38,032,000
Property, plant and equipment, net						4,899,000			8,554,000			9,862,000			—			23,315,000
Other assets:
	Goodwill					—			351,000			—			—			351,000
	Investment in and loans to subsidiaries					40,907,000			72,618,000			—			(113,525,000	)		—
	Other					1,147,000			1,824,000			—			—			2,971,000
			Total other assets			42,054,000			74,793,000			—			(113,525,000	)		3,322,000
			Total assets		$	51,473,000		$	98,056,000		$	32,352,000		$	(117,212,000	)	$	64,669,000
		Liabilities and Stockholders’ Equity
Current liabilities:
	Accounts payable				$	1,849,000		$	1,844,000		$	4,466,000		$	(94,000	)	$	8,065,000
	Current portion of long-term debt					65,000			734,000			—			—			799,000
	Other					941,000			2,105,000			5,135,000			(3,593,000	)		4,588,000
			Total current liabilities			2,855,000			4,683,000			9,601,000			(3,687,000	)		13,452,000
Long-term liabilities:
	Long-term debt, net of current portion					49,223,000			1,347,000			—			—			50,570,000
	Intercompany note and loan payable					—			72,223,000			36,957,000			(109,180,000	)		—
	Other					288,000			380,000			872,000			—			1,540,000
			Total long-term liabilities			49,511,000			73,950,000			37,829,000			(109,180,000	)		52,110,000
Series C convertible preferred stock						18,715,000			—			—			—			18,715,000
Stockholders’ equity (deficit):
	Common stock					91,000			56,139,000			33,709,000			(89,848,000	)		91,000
	Additional paid-in capital					87,070,000			—			—			—			87,070,000
	Accumulated other comprehensive loss					(8,389,000	)		—			(8,389,000	)		8,389,000			(8,389,000	)
	Accumulated deficit					(98,380,000	)		(36,716,000	)		(40,398,000	)		77,114,000			(98,380,000	)
			Total stockholders’ equity (deficit)			(19,608,000	)		19,423,000			(15,078,000	)		(4,345,000	)		(19,608,000	)
			Total liabilities and stockholders’ equity (deficit)		$	51,473,000		$	98,056,000		$	32,352,000		$	(117,212,000	)	$	64,669,000

11Pacific Aerospace & Electronics, Inc. Consolidating Condensed Statement of Operations and Comprehensive Income (Loss) For the Nine Months Ended February 28, 2002


					GUARANTOR			NON-GUARANTOR
		PARENT			SUBSIDIARIES			SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED

Net Sales		$	—		$	28,322,000		$	35,707,000		$	(699,000	)	$	63,330,000
Cost of Sales			—			21,563,000			30,475,000			(699,000	)		51,339,000

	Gross profit		—			6,759,000			5,232,000			—			11,991,000
Operating expenses			4,450,000			7,991,000			2,492,000			(3,450,000	)		11,483,000

	Income (loss) from operations		(4,450,000	)		(1,232,000	)		2,740,000			3,450,000			508,000
Other income (expense)
	Parent’s share of subsidiaries net loss		(2,258,000	)		—			—			2,258,000			—
	Interest expense		(11,084,000	)		(3,169,000	)		(2,890,000	)		5,728,000			(11,415,000	)
	Other		6,234,000			3,143,000			21,000			(9,178,000	)		220,000

	Total other income (expense)		(7,108,000	)		(26,000	)		(2,869,000	)		(1,192,000	)		(11,195,000	)

	Loss before income taxes		(11,558,000	)		(1,258,000	)		(129,000	)		2,258,000			(10,687,000	)
Provision for income taxes			—			—			(871,000	)		—			(871,000	)

	Net loss		(11,558,000	)		(1,258,000	)		(1,000,000	)		2,258,000			(11,558,000	)
Other comprehensive income (loss)
	Foreign currency translation		(81,000	)		—			(81,000	)		81,000			(81,000	)

	Comprehensive income (loss)	$	(11,639,000	)	$	(1,258,000	)	$	(1,081,000	)	$	2,339,000		$	(11,639,000	)

~~Pacific Aerospace & Electronics, Inc.~~15 ~~Consolidating Condensed Statement of Operations and Comprehensive Income (Loss)~~ ~~For the Quarter Ended November 30, 2002~~

						GUARANTOR			NON-GUARANTOR
			PARENT			SUBSIDIARIES			SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED
Net Sales			$	—		$	6,949,000		$	9,698,000		$	(194,000	)	$	16,453,000
Cost of Sales				—			5,291,000			9,030,000			(194,000	)		14,127,000
	Gross profit			—			1,658,000			668,000			—			2,326,000
Operating expenses				1,078,000			1,548,000			890,000			(905,000	)		2,611,000
	Income (loss) from operations			(1,078,000	)		110,000			(222,000	)		905,000			(285,000	)
Other income (expense):
	Parent’s share of subsidiaries net loss			(373,000	)		—			—			373,000			—
	Interest expense			(957,000	)		(345,000	)		(300,000	)		600,000			(1,002,000	)
	Other			1,262,000			328,000			13,000			(1,505,000	)		98,000
		Total other income (expense)		(68,000	)		(17,000	)		(287,000	)		(532,000	)		(904,000	)
	Income (loss) before income taxes			(1,146,000	)		93,000			(509,000	)		373,000			(1,189,000	)
Income tax benefit (expense)				—			—			43,000			—			43,000
	Net income (loss)			(1,146,000	)		93,000			(466,000	)		373,000			(1,146,000	)
Other comprehensive income (loss) Foreign currency translation, net of tax				134,000			—			134,000			(134,000	)		134,000
	Comprehensive income (loss)		$	(1,012,000	)	$	93,000		$	(332,000	)	$	239,000		$	(1,012,000	)

Pacific Aerospace & Electronics, Inc.
Consolidating Condensed Statement of Cash Flows
For the Nine Months Ended February 28, 2003


							GUARANTOR			NON-GUARANTOR
				PARENT			SUBSIDIARIES			SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED

Cash flow from operating activities:
	Net cash provided by (used in) operating activities			$	(618,000	)	$	1,331,000		$	(3,023,000	)	$	—		$	(2,310,000	)
Cash flow from investing activities:
		Acquisition of property, plant and equipment			(68,000	)		(323,000	)		(757,000	)		—			(1,148,000	)
		Proceeds from sale of property, plant and equipment			25,000			467,000			—			—			492,000
		Investment in and loans to subsidiaries			715,000			(715,000	)		—			—			—

			Net cash provided by (used in) investing activities		672,000			(571,000	)		(757,000	)		—			(656,000	)
Cash flow from financing activities:
		Payments on long-term debt and capital leases			(60,000	)		(905,000	)		—			—			(965,000	)
		Other changes, net			(7,000	)		143,000			—			—			136,000

			Net cash used in financing activities		(67,000	)		(762,000	)		—			—			(829,000	)
		Net change in cash and cash equivalents			(13,000	)		(2,000	)		(3,780,000	)		—			(3,795,000	)
Effect of exchange rates on cash					—			—			446,000			—			446,000
Cash at beginning of period					803,000			3,000			4,813,000			—			5,619,000

Cash at end of period				$	790,000		$	1,000		$	1,479,000		$	—		$	2,270,000

Supplemental cash flow:
		Noncash operating expenses related to:
			Depreciation	$	345,000		$	1,097,000		$	1,485,000		$	—		$	2,927,000
			Amortization		—			93,000			—			—			93,000
		Cash paid during the period for:
			Interest	$	1,016,000		$	150,000		$	1,500,000		$	(1,500,000	)	$	1,166,000
			Income taxes		—			—			198,000			—			198,000

~~Table of Contents~~16

Pacific Aerospace & Electronics, Inc. Consolidating Condensed Statement of ~~Operations~~Cash ~~and Comprehensive Income (Loss)~~Flows For the ~~Quarter~~Nine Months Ended ~~November~~February 3028, ~~2001~~2002

							~~GUARANTOR~~	GUARANTOR			~~NON-GUARANTOR~~	NON-GUARANTOR
			~~PARENT~~	PARENT			~~SUBSIDIARIES~~	SUBSIDIARIES			~~SUBSIDIARIES~~	SUBSIDIARIES			~~ELIMINATIONS~~	ELIMINATIONS			~~CONSOLIDATED~~	CONSOLIDATED
Net Sales			$	—			$	8,783,000			$	12,954,000			$	(158,000	)		$	21,579,000
Cash flow from operating activities:
Cost of Sales				—				7,959,000				10,479,000				(158,000	)			18,280,000
		Net cash provided by (used in) operating activities		$	(722,000	)		$	373,000			$	3,076,000			$	—			$	2,727,000
	Gross profit			—				824,000				2,475,000				—				3,299,000
Cash flow from investing activities:
Operating expenses				1,203,000				2,823,000				915,000				(1,225,000	)			3,716,000
	Acquisition of property, plant and equipment				(250,000	)			(339,000	)			(1,840,000	)			—				(2,429,000	)
	Income (loss) from operations			(1,203,000	)			(1,999,000	)			1,560,000				1,225,000				(417,000	)
	Proceeds from sale of property, plant and equipment				52,000				371,000				—				—				423,000
Other income (expense)
	Investment in and loans to subsidiaries				(144,000	)			—				—				144,000				—
	Parent’s share of subsidiaries net loss			(2,460,000	)			—				—				2,460,000				—
		Net cash provided by (used in) investing activities			(342,000	)			32,000				(1,840,000	)			144,000				(2,006,000	)
	Interest expense			(4,314,000	)			(1,065,000	)			(976,000	)			1,932,000				(4,423,000	)
Cash flow from financing activities:
	Other			2,065,000				494,000				12,000				(3,157,000	)			(586,000	)
	Payments on long-term debt and capital leases				(120,000	)			(549,000	)			(109,000	)			—				(778,000	)
	Total other income (expense)			(4,709,000	)			(571,000	)			(964,000	)			1,235,000				(5,009,000	)
	Sale of common stock, net of issuance costs				68,000				—				—				—				68,000
	Income (loss) before income taxes			(5,912,000	)			(2,570,000	)			596,000				2,460,000				(5,426,000	)
	Other changes, net				57,000				144,000				—				(144,000	)			57,000
Income tax benefit (expense)				—				—				(486,000	)			—				(486,000	)
		Net cash provided by (used in) financing activities			5,000				(405,000	)			(109,000	)			(144,000	)			(653,000	)
	Net income (loss)			(5,912,000	)			(2,570,000	)			110,000				2,460,000				(5,912,000	)
	Net change in cash and cash equivalents				(1,059,000	)			—				1,127,000				—				68,000
Other comprehensive income (loss) Foreign currency translation				(444,000	)			—				(444,000	)			444,000				(444,000	)
Effect of exchange rates on cash					—				—				55,000				—				55,000
	Comprehensive income (loss)		$	(6,356,000	)		$	(2,570,000	)		$	(334,000	)		$	2,904,000			$	(6,356,000	)
Cash at beginning of period					1,134,000				3,000				2,958,000				—				4,095,000
Cash at end of period				$	75,000			$	3,000			$	4,140,000			$	—			$	4,218,000
Supplemental cash flow:
	Noncash operating expenses related to:
		Depreciation		$	446,000			$	1,356,000			$	1,487,000			$	—			$	3,289,000
		Amortization			—				56,000				—				—				56,000
	Noncash investing activities:
		Seller financed acquisition of patent		$	—			$	950,000			$	—			$	—			$	950,000
	Cash paid during the period for:
		Interest		$	902,000			$	258,000			$	1,227,000			$	(1,201,000	)		$	1,186,000
		Income taxes			—				—				490,000				—				490,000

1317

~~Table~~Inventories consist of ~~Contents~~the following:

Pacific Aerospace & Electronics, Inc. Consolidating Condensed Statement of Operations and Comprehensive Income (Loss) For the Six Months Ended November 30, 2002


		February 28,		May 31,
		2003		2002

Guarantor subsidiaries
	Raw materials	$	2,088,000	$	2,796,000
	Work in progress		2,684,000		3,122,000
	Finished goods		4,507,000		5,331,000

		$	9,279,000	$	11,249,000

Non-guarantor subsidiaries
	Raw materials	$	1,270,000	$	1,131,000
	Work in progress		8,314,000		6,963,000
	Finished goods		244,000		263,000

		$	9,828,000	$	8,357,000

						GUARANTOR			NON-GUARANTOR
			PARENT			SUBSIDIARIES			SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED
Net Sales			$	—		$	13,807,000		$	19,000,000		$	(298,000	)	$	32,509,000
Cost of Sales				—			10,449,000			18,091,000			(298,000	)		28,242,000
	Gross profit			—			3,358,000			909,000			—			4,267,000
Operating expenses				2,277,000			3,174,000			1,978,000			(1,811,000	)		5,618,000
	Income (loss) from operations			(2,277,000	)		184,000			(1,069,000	)		1,811,000			(1,351,000	)
Other income (expense):
	Parent’s share of subsidiaries net loss			(1,263,000	)		—			—			1,263,000			—
	Interest expense			(1,873,000	)		(701,000	)		(600,000	)		1,200,000			(1,974,000	)
	Other			2,501,000			626,000			20,000			(3,011,000	)		136,000
		Total other income (expense)		(635,000	)		(75,000	)		(580,000	)		(548,000	)		(1,838,000	)
	Income (loss) before income taxes			(2,912,000	)		109,000			(1,649,000	)		1,263,000			(3,189,000	)
Income tax benefit (expense)				—			—			277,000			—			277,000
	Net income (loss)			(2,912,000	)		109,000			(1,372,000	)		1,263,000			(2,912,000	)
Other comprehensive income (loss) Foreign currency translation, net of tax				1,599,000			—			1,599,000			(1,599,000	)		1,599,000
	Comprehensive income (loss)		$	(1,313,000	)	$	109,000		$	227,000		$	(336,000	)	$	(1,313,000	)

14ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

~~Table~~Preliminary ofNote ~~Contents~~Regarding Forward-Looking Statements

~~Pacific~~This ~~Aerospace~~report &contains ~~Electronics~~“forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, ~~Inc~~as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and is subject to the safe harbor created by those sections. Actual ~~Consolidating~~results ~~Condensed~~could ~~Statement~~differ materially from those projected in the forward-looking statements set forth in this report. Some of the factors that may cause results to differ materially from those projected include the overall economic decline in the aerospace industry due to both the recent economic downturn and the September 11 attacks, and the Company’s dependence on the success of its European Operations. Additional factors may also cause results to differ materially from those projected. We have included a more complete list of additional factors that could adversely impact our results of operations and our ~~Comprehensive~~financial ~~Income~~condition ~~(Loss)~~in our most recent Amended Annual Report on Form 10-K/A ~~For~~filed via Edgar with the ~~Six~~Securities ~~Months~~and ~~Ended~~Exchange ~~November~~Commission on December 306, 2002, ~~2001~~under the heading entitled “Risk Factors.” We urge you to read such information and the Company’s other recent filings with the Commission in detail; those filings are available at the Commission’s website, http;//www.sec.gov. Information contained in this quarterly report was prepared by management based on the best information available to it as of the date of filing of this report, and management does not plan to update forward-looking statements to reflect new events or changing circumstances occurring after this report was filed.

					GUARANTOR			NON-GUARANTOR
		PARENT			SUBSIDIARIES			SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED
Net Sales		$	—		$	19,612,000		$	25,754,000		$	(358,000	)	$	45,008,000
Cost of Sales			—			15,625,000			21,367,000			(358,000	)		36,634,000
	Gross profit		—			3,987,000			4,387,000			—			8,374,000
Operating expenses			2,821,000			5,387,000			1,676,000			(2,450,000	)		7,434,000
	Income (loss) from operations		(2,821,000	)		(1,400,000	)		2,711,000			2,450,000			940,000
Other income (expense)
	Parent’s share of subsidiaries net loss		(2,086,000	)		—			—			2,086,000			—
	Interest expense		(7,298,000	)		(2,120,000	)		(1,930,000	)		3,820,000			(7,528,000	)
	Other		4,249,000			1,480,000			21,000			(6,270,000	)		(520,000	)
	Total other income (expense)		(5,135,000	)		(640,000	)		(1,909,000	)		(364,000	)		(8,048,000	)
	Income (loss) before income taxes		(7,956,000	)		(2,040,000	)		802,000			2,086,000			(7,108,000	)
Income tax benefit (expense)			—			—			(848,000	)		—			(848,000	)
	Net income (loss)		(7,956,000	)		(2,040,000	)		(46,000	)		2,086,000			(7,956,000	)
Other comprehensive income (loss)
	Foreign currency translation		138,000			—			138,000			(138,000	)		138,000
	Comprehensive income (loss)	$	(7,818,000	)	$	(2,040,000	)	$	92,000		$	1,948,000		$	(7,818,000	)

Overview

15Pacific Aerospace & Electronics, Inc., is an engineering and manufacturing company with operations in the United States and the United Kingdom. We design, manufacture and sell components and subassemblies used in technically demanding environments. For the defense, electronics, telecommunications, energy and medical industries we produce such components as hermetically sealed electrical and fiber optic connectors and instrument packages as well as ceramic capacitors, filters and feed-throughs. We also produce machined, cast, and formed metal parts and subassemblies, using aluminum, titanium, magnesium, and other metals for the aerospace, transportation and medical device industries. Our customers include global leaders in all of these industries. We are organized into two operational groups: U.S. Operations and European Operations.

~~Table~~Critical ofAccounting ~~Contents~~Estimates and Policies

~~Pacific~~The ~~Aerospace~~discussion &and ~~Electronics~~analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, ~~Inc~~which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements ~~Consolidating~~requires ~~Condensed~~us ~~Statement~~to make estimates and judgments that affect the reported amounts of assets, ~~Cash~~liabilities, ~~Flows~~revenue and expenses, and related disclosure of contingent ~~For~~assets and liabilities. On an on-going basis, we evaluate our estimates including revenue recognition, the ~~Six~~allowance ~~Months~~for ~~Ended~~doubtful ~~November 30~~accounts, ~~2002~~sales returns and allowances, the salability and recoverability of inventory, impairment of long-lived assets, income taxes and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions and conditions, and such variations may be adverse.

						GUARANTOR			NON-GUARANTOR
			PARENT			SUBSIDIARIES			SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED
Cash flow from operating activities:
		Net cash provided by (used in) operating activities	$	120,000		$	410,000		$	(811,000	)	$	—		$	(281,000	)
Cash flow from investing activities:
	Acquisition of property, plant and equipment			(68,000	)		(106,000	)		(367,000	)		—			(541,000	)
	Proceeds from sale of property, plant and equipment			25,000			75,000			—			—			100,000
	Investment in and loans to subsidiaries			(172,000	)		172,000			—			—			—
		Net cash provided by (used in) investing activities		(215,000	)		141,000			(367,000	)		—			(441,000	)
Cash flow from financing activities:
	Payments on long-term debt and capital leases			(46,000	)		(551,000	)		—			—			(597,000	)
	Other changes, net			—			—			—			—			—
		Net cash provided by (used in) financing activities		(46,000	)		(551,000	)		—			—			(597,000	)
	Net change in cash and cash equivalents			(141,000	)		—			(1,178,000	)		—			(1,319,000	)
Effect of exchange rates on cash				—			—			258,000			—			258,000
Cash at beginning of period				803,000			3,000			4,813,000			—			5,619,000
Cash at end of period			$	662,000		$	3,000		$	3,893,000		$	—		$	4,558,000
Supplemental cash flow:
	Noncash operating expenses related to:
		Depreciation	$	239,000		$	738,000		$	980,000		$	—		$	1,957,000
		Amortization		—			62,000			—			—			62,000
	Cash paid during the period for:
		Interest	$	974,000		$	101,000		$	1,400,000		$	(1,400,000	)	$	1,075,000
		Income taxes		—			—			168,000			—			168,000

We recognize revenue primarily when products are shipped to customers and when services are performed.

1619

~~Table~~We must make estimates of ~~Contents~~the collectability of accounts receivable. We analyze historical sales returns, allowances, write-offs, changes in our internal credit policies and customer concentrations when evaluating the adequacy of our allowance for doubtful accounts, sales returns and allowances. Differences may result in the amount and timing of expenses for any period if we make different judgments or use different estimates.

~~Pacific~~We ~~Aerospace~~value &inventories ~~Electronics~~at the lower of cost, ~~Inc~~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). We regularly ~~Consolidating~~review ~~Condensed~~inventory ~~Statement~~detail ofto ~~Cash~~determine ~~Flows~~whether a write-down is necessary. We ~~For~~consider ~~the~~various ~~Six~~factors ~~Months~~in ~~Ended~~making ~~November 30~~this determination, ~~2001~~including recent sales history and predicted trends, as well as industry and general economic conditions. Differences could result in the amount or timing of write-downs for any period if we make different judgments or use different estimates.

						GUARANTOR			NON-GUARANTOR
			PARENT			SUBSIDIARIES			SUBSIDIARIES			ELIMINATIONS			CONSOLIDATED
CASH FLOW FROM OPERATING ACTIVITIES:
		Net cash provided by (used in) operating activities	$	(656,000	)	$	252,000		$	1,227,000		$	—		$	823,000
CASH FLOW FROM INVESTING ACTIVITIES:
	Acquisition of property, plant and equipment			(167,000	)		(208,000	)		(1,656,000	)		—			(2,031,000	)
	Proceeds from sale of property, plant and equipment			52,000			21,000			—			—			73,000
	Investment in and loans to subsidiaries			(275,000	)		—			—			275,000			—
		Net cash provided by (used in) investing activities		(390,000	)		(187,000	)		(1,656,000	)		275,000			(1,958,000	)
CASH FLOW FROM FINANCING ACTIVITIES:
	Payments on long-term debt and capital leases			(108,000	)		(316,000	)		(109,000	)		—			(533,000	)
	Proceeds from sale of common stock, net			68,000			—			—			—			68,000
	Other changes, net			65,000			255,000			—			(275,000	)		45,000
		Net cash provided by (used in) financing activities		25,000			(61,000	)		(109,000	)		(275,000	)		(420,000	)
	Net change in cash and cash equivalents			(1,021,000	)		4,000			(538,000	)		—			(1,555,000	)
Effect of exchange rates on cash				—			—			73,000			—			73,000
Cash at beginning of period				1,134,000			3,000			2,958,000			—			4,095,000
Cash at end of period			$	113,000		$	7,000		$	2,493,000		$	—		$	2,613,000
SUPPLEMENTAL CASH FLOW:
	Noncash operating expenses related to:
		Depreciation	$	294,000		$	952,000		$	996,000		$	—		$	2,242,000
		Amortization		—			34,000			—			—			34,000
	Cash paid during the period for:
		Interest	$	641,000		$	211,000		$	1,121,000		$	(1,101,000	)	$	872,000
		Income taxes		—			—			375,000			—			375,000

We review long-lived assets and certain identifiable intangibles 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. Cash flows expected to be generated by an asset are estimated based upon historical cash flows from the asset, current and expected market conditions related to products produced by the asset and the asset’s disposal value. Those estimates may not be accurate if actual market conditions or disposal values are different than expected. 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 exceeds the fair value of the assets. Fair value of an asset is estimated to be the present value of its expected future cash flows. Present value of expected future cash flows is dependent upon identifying the appropriate interest rate to use in the calculation commensurate with the risks involved. We determine the appropriate interest rate for the calculation based upon the rate that would be required for a similar investment with like risks for the assets being evaluated. We report assets to be disposed of at the lower of the carrying amount or fair value less costs to sell. Differences could result in the amount or timing of write-downs for any period if we make different judgments or use different estimates.

17We follow 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 and operating loss and tax credit carry forwards. 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 the period that includes the enactment date. Differences could result in the amount of our provision for income taxes for any period if we make different judgments or use different estimates.

~~Table~~The Company operates in two segments, U.S. Operations and European Operations. This is based on the fact that the Company’s chief operating decision maker, the Company’s chief executive officer, regularly reviews operating results, assesses performance and makes decisions about resources to be allocated at this level (U.S. Operations and European Operations) and not on any of ~~Contents~~the underlying divisions or business units that comprise these two segments.

~~Inventories~~Results ~~consist~~ of ~~the following:~~Operations

		November 30,		May 31,
		2002		2002
Guarantor subsidiaries
	Raw materials	$	2,496,000	$	2,796,000
	Work in progress		2,559,000		3,122,000
	Finished goods		5,498,000		5,331,000
		$	10,553,000	$	11,249,000
Non-guarantor subsidiaries
	Raw materials	$	1,406,000	$	1,131,000
	Work in progress		7,677,000		6,963,000
	Finished goods		300,000		263,000
		$	9,383,000	$	8,357,000

Quarter Ended February 28, 2003 Compared to Quarter Ended February 28, 2002

Net Sales. Net sales decreased by $2.6 million, or 14.2%, to $15.7 million for the quarter ended February 28, 2003, from $18.3 million for the quarter ended February 28, 2002. This decrease was due to a number of factors including the effects of our operational restructuring plan and various events that

~~Table of Contents~~20

~~ITEM~~affected 2:our markets. ~~MANAGEMENT’~~The European Operations contributed $9.3 million of net sales during the quarter ended February 28, 2003, down $0.7 million, or 7.0%, from the $10.0 million contributed during the quarter ended February 28, 2002. Following the tragic events of September 11, the commercial aerospace market in the U.S. ~~DISCUSSION~~and Europe ~~AND~~saw ~~ANALYSIS~~a OFsignificant ~~FINANCIAL~~decline. ~~CONDITION~~Boeing ~~AND~~and ~~RESULTS~~Airbus OFhave ~~OPERATIONS~~announced substantial cuts in their planned commercial aircraft build rates and domestic and foreign air carriers have cut aircraft orders and flight schedules in efforts to reduce their costs. The decrease in net sales contributed by our European Aerospace Group is largely attributable to reduced, postponed, or cancelled orders from commercial aircraft manufacturers. All of these trends are likely to have an adverse long-term and short-term impact on our commercial aerospace revenues.

~~Preliminary~~The ~~Note~~U.S. ~~Regarding~~Operations ~~Forward-Looking~~contributed ~~Statements~~$6.4 million to net sales during the quarter ended February 28, 2003, down $1.7 million from $8.1 million contributed during the quarter ended February 28, 2002. This decrease was primarily due to the reduction in orders from commercial aircraft manufacturers which was caused by the same market conditions experienced by the European Operations. We also experienced decreases in net sales because of our operational restructuring, in which we discontinued some operations that previously had been unprofitable or that had contributed only nominal profits. Those divisions collectively had contributed $0.2 million to net sales for the quarter ended February 28, 2002, but did not contribute any net sales during the quarter ended February 28, 2003.

~~This~~Receivable ~~report~~collection ~~contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933~~periods, as ~~amended~~calculated ~~(the~~by ~~“Securities~~dividing ~~Act”),~~ending ~~and~~accounts ~~Section 21E~~receivable ofbalances ~~the~~by ~~Securities~~annualized ~~Exchange~~sales ~~Act~~for ~~of 1934, as amended (~~the ~~“Exchange Act”),~~quarter ~~and~~multiplied ~~is subject to the safe harbor created~~ by ~~those sections. Actual~~360 days, ~~results~~decreased ~~could~~to ~~differ materially from those projected in the forward-looking statements set forth in this report~~64.9 days ~~Some~~for of the ~~factors~~quarter ~~that~~ended ~~may cause results to differ materially from those projected include the overall economic decline in the aerospace industry due to both the recent economic downturn and the September~~February 1128, ~~attacks~~2003, ~~and the Company’s dependence on the success of its European Operations. Additional factors may also cause results to differ materially~~ from ~~those projected~~70. ~~We have included a more complete list of additional factors that could adversely impact our results of operations and our financial condition in our most recent Form~~0 ~~10-K/A filed via Edgar with~~days for the ~~Securities~~quarter ~~and~~ended ~~Exchange Commission on December~~February 628, 2002,. ~~under~~This ~~the~~decrease ~~heading entitled~~was ~~“Risk~~primarily ~~Factors.”~~due ~~We urge you~~ to ~~read such information and the~~a ~~Company’s~~concerted ~~other~~focus ~~recent filings with the Commission in detail. Information contained in this quarterly report was prepared~~ by management ~~based on the best information available~~ to itincrease ascollection ~~of the date of filing of this report~~efforts, ~~and management~~primarily ~~does not plan to update forward-looking statements to reflect new~~within ~~events~~the orEuropean ~~changing circumstances occurring after this report was filed~~Operations.

~~Overview~~Gross Profit. Gross profit decreased by $2.5 million, or 69.4%, to $1.1 million for the quarter ended February 28, 2003, from $3.6 million for the quarter ended February 28, 2002. As a percentage of net sales, gross profit decreased to 7.1% for the quarter ended February 28, 2003, from 19.7% for the quarter ended February 28, 2002. This decrease was due to the reduction in revenue associated with the commercial aerospace industry, while many of our costs are fixed. We also increased our inventory reserves by $400,000 during the quarter related to certain inventory that, based upon our current estimates of usage, would not be utilized. The increase in slow moving inventory during the quarter was due primarily to reduced sales volumes. Without the increase in inventory reserves our gross profit as a percentage of sales would have been 9.7% for the quarter ended February 28, 2003. In an effort to increase our gross profit, we have significantly reduced staffing levels at our operating facilities in the United States and in the United Kingdom. We are also in the process of consolidating our manufacturing sites and have sold or are in process of selling excess machinery. We are also outsourcing certain operating functions along with implementing production processes which we expect to be more efficient.

~~Pacific~~Inventory ~~Aerospace & Electronics~~turnover, ~~Inc.,~~as iscalculated anby ~~engineering~~dividing ~~and~~annualized ~~manufacturing company~~sales ~~with~~for ~~operations in~~ the ~~United States and the United Kingdom. We~~quarter ~~design,~~by ~~manufacture~~ending ~~and sell components and subassemblies used in technically demanding environments. For the defense~~inventory, ~~electronics,~~remained ~~telecommunications, energy~~relatively ~~and~~unchanged ~~medical~~at ~~industries we produce such components as hermetically sealed electrical and fiber optic connectors and instrument packages and ceramic capacitors, filters and feed-throughs~~3.3 Weturns ~~also~~for ~~produce~~the ~~machined, cast, and~~quarter ~~formed~~ended ~~metal parts and subassemblies~~February 28, ~~using~~2003 ~~aluminum,~~compared ~~titanium,~~to ~~magnesium,~~3.4 ~~and other~~turns ~~metals~~ for the ~~aerospace,~~quarter ~~transportation~~ended ~~and medical device industries.~~February ~~Our~~28, ~~customers include global leaders in all of these industries~~2002. ~~We are~~ ~~organized into two operational groups: U.S. Operations and European~~ ~~Operations.~~

~~Critical~~Operating ~~Accounting~~Expenses. ~~Estimates~~Operating expenses decreased by $0.3 million, to $3.3 million for the quarter ended February 28, 2003, from $3.6 million for the quarter ended February 28, 2002. This decrease was primarily due to the 2002 disposition of our Engineering & Fabrication and ~~Policies~~Display Divisions. In an effort to reduce operating expenses further, we have significantly reduced our corporate overhead by reducing corporate executive salaries, eliminating several executive positions, and other headcount reductions. Interest Expense. Interest expense decreased by $2.6 million, or 66.7%, to $1.3 million for the quarter ended February 28, 2003, from $3.9 million for the quarter ended February 28, 2002. This decrease was due to our March 2002 debt restructuring, which is detailed in our Current Reports on Form 8-K dated March 27, 2002 and April 3, 2002 as filed with the Securities and Exchange Commission.

~~The discussion and analysis of financial condition and results of operations is~~21 ~~based upon our condensed consolidated financial statements, which have been~~ prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates including revenue recognition, the allowance for doubtful accounts, sales returns and allowances, the salability and recoverability of inventory, impairment of long-lived assets, income taxes and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions and conditions, and such variations may be adverse.

WeOther ~~recognize~~Income ~~revenue primarily when products are shipped to customers and when services are performed~~(Expense). InOther ~~certain~~income ~~instances~~represents ~~we recognize revenues from long~~non-~~term,~~operational ~~fixed-price~~income ~~contracts on the percentage of completion method~~and ~~measured~~expense ~~by cost. Contract costs~~ for ~~long-term contracts include all direct material and labor costs related to contract performance. Provisions for estimated losses on uncompleted contracts are made in~~ the ~~period~~quarter inended ~~which losses~~February 28, ~~are determined~~2003. ~~Contract costs are~~

19Income Tax Benefit (Expense). No income tax benefit was recorded during the quarter ended February 28, 2003 due to uncertainties related to realization of the tax benefit.

~~Table~~Net ofLoss. ~~Contents~~Net loss increased to $3.8 million for the quarter ended February 28, 2003 primarily due to the lower gross profit percentages offset by lower interest expense.

~~estimated~~Nine atMonths ~~the~~Ended beginning of each contract which establishes our estimated profitability related to the contract. Our initial estimates of cost are uncertain and may need to be revised due to changes in job performanceFebruary 28, ~~job conditions,~~2003 ~~contract~~Compared ~~forfeiture provisions, and final contract settlements. Revisions~~ to ~~costs~~Nine ~~and~~Months ~~income~~Ended ~~are recognized in the period in which the revisions are determined. Profit incentives are included in revenue when their realization is reasonably assured. When formal customer approval is necessary~~February 28, ~~we defer revenue recognition until such approval is received. Differences~~2002 ~~could result in changes to the amount and timing of the recorded revenues if we~~ ~~make different judgments or use different estimates.~~

WeNet ~~must~~Sales. ~~make~~Net ~~estimates~~sales decreased by $15.1 million, or 23.9%, to $48.2 million for the nine months ended February 28, 2003, from $63.3 million for the nine months ended February 28, 2002. This decrease was due to a number of factors including the ~~collectability~~effects of ~~accounts~~our ~~receivable~~operational restructuring plan and various events that affected our markets. WeThe European Operations contributed $28.3 million ~~analyze~~of ~~historical~~net sales ~~returns~~during the nine months ended February 28, ~~allowances~~2003, ~~write-offs~~down $7.4 million, or ~~changes~~20.7%, infrom ~~our~~the $35.7 million contributed during the nine months ended ~~internal~~February 28, ~~credit~~2002. ~~policies~~Following ~~and~~the ~~customer~~tragic ~~concentrations~~events ~~when~~of ~~evaluating~~September 11, the commercial ~~adequacy~~aerospace ofmarket ~~our~~in ~~allowance~~the ~~for~~United ~~doubtful~~States ~~accounts~~and Europe saw a significant decline, ~~sales~~and those ~~returns~~markets have continued to decline owing in part to continuing uncertainties about the global economy and ~~allowances~~international political tensions. ~~Differences~~Boeing ~~may~~and ~~result~~Airbus have announced substantial cuts in ~~the~~their ~~amount~~planned commercial aircraft build rates, and ~~timing~~domestic ofand ~~expenses~~foreign ~~for~~air ~~any~~carriers ~~period~~have ifcut aircraft weorders ~~make~~and ~~different~~flight ~~judgments~~schedules in efforts to reduce their costs. The decrease in net sales contributed by our European Aerospace Group is largely attributable to reduced, postponed, or ~~use~~cancelled ~~different~~orders ~~estimates~~from commercial aircraft manufacturers. All of these trends are likely to have an adverse long-term and short-term impact on our commercial aerospace revenues.

WeThe ~~value~~U.S. ~~inventories~~Operations atcontributed $19.9 million to net sales during the ~~lower~~nine months ofended ~~cost~~February 28, ~~primarily~~2003, ~~determined~~down by$6.2 million ~~the~~from $26.1 million ~~first-in,~~contributed ~~first-out~~during ~~method,~~the ornine ~~market~~months ~~(replacement~~ended ~~cost~~February 28, ~~for~~2002. ~~raw~~This ~~materials and~~decrease ~~fair~~was ~~value~~primarily ~~for~~due ~~work~~to inthe ~~progress~~reduction ~~and~~in ~~finished~~orders ~~goods).~~from Wecommercial ~~regularly review~~aircraft ~~inventory~~manufacturers ~~detail~~which towas ~~determine~~caused ~~whether~~by athe ~~write-down~~same ismarket ~~necessary.~~conditions Weexperienced ~~consider~~by the ~~various~~European ~~factors~~Operations. inSome ~~making~~of ~~this~~the ~~determination,~~decrease ~~including~~in ~~recent~~net sales ~~history and~~also ~~predicted~~relates ~~trends,~~to divisions asthat ~~well~~have asbeen ~~industry~~discontinued. ~~and~~Those ~~general~~divisions ~~economic~~collectively ~~conditions.~~had ~~Differences~~contributed ~~could~~$1.5 million ~~result~~to innet sales for the ~~amount~~nine ofmonths ~~timing~~ended ofFebruary 28, 2002, ~~write-downs~~but ~~for~~did ~~any~~not ~~period if~~contribute weany ~~make~~net ~~different~~sales ~~judgments~~during orthe ~~use~~nine ~~different~~months ~~estimates~~ended February 28, 2003.

WeReceivable ~~review~~collection ~~long-lived~~periods, ~~assets~~as ~~and~~calculated certain identifiable intangibles 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 adividing ~~comparison~~ending ~~of the carrying amount of an asset to future~~accounts ~~net~~receivable ~~cash~~balances ~~flows expected to be generated~~ by ~~the~~annualized ~~asset.~~sales ~~Cash~~for ~~flows expected to be generated by an asset are estimated based upon historical cash flows from~~ the ~~asset,~~nine ~~current~~months ~~and~~multiplied ~~expected market conditions related to products produced~~ by ~~the asset and the asset’s disposal value. Those estimates may not be~~360 ~~accurate if actual market conditions or disposal values are different than expected. If such assets are considered to be impaired~~days, ~~the~~increased ~~impairment~~ to ~~be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets~~63.3 days ~~Fair~~for ~~value of an asset is estimated to be~~ the ~~present~~nine ~~value~~months ofended ~~its~~February 28, ~~expected~~2003, ~~future cash flows. Present value of~~from ~~expected future cash flows is dependent upon identifying the appropriate interest rate to use in the calculation commensurate with the risks involved~~60. We8 days ~~determine the appropriate interest rate~~ for the ~~calculation~~nine ~~based~~months ~~upon~~ended ~~the rate~~February 28, ~~that would be required for a similar investment with like risks for the assets being evaluated~~2002. WeThis ~~report~~increase ~~assets~~was ~~to be disposed of at the lower of the~~due ~~carrying amount or fair value less costs~~ to ~~sell.~~slightly ~~Differences~~slower ~~could~~payments ~~result~~from ~~in the~~some ~~amount or timing~~ of ~~write-downs~~our ~~for~~larger ~~any~~customers, ~~period if we make different~~primarily ~~judgments~~commercial oraerospace ~~use different estimates~~customers.

WeGross ~~follow~~Profit. ~~the~~Gross ~~asset~~profit ~~and~~decreased ~~liability~~by ~~method~~$6.6 million, ofor ~~accounting~~55.0%, ~~for~~to ~~income taxes~~$5. ~~Under~~4 ~~the~~million ~~asset~~for ~~and~~the ~~liability~~nine ~~method~~months ofended ~~accounting~~February 28, ~~for income taxes~~2003, ~~deferred~~from ~~tax assets~~$12.0 million ~~and~~for ~~liabilities are recognized based on~~ the ~~estimated future tax~~ ~~consequences~~nine ~~attributable~~months toended ~~differences~~February 28, ~~between~~2002. ~~the~~As ~~consolidated~~a ~~financial statement~~percentage ~~carrying amounts~~ of ~~existing~~net ~~assets~~sales, ~~and liabilities and their~~gross ~~respective~~profit ~~tax~~decreased ~~bases~~to ~~and operating loss and tax credit carry forwards~~11. ~~Deferred~~2% ~~tax~~for ~~assets~~the ~~and~~nine ~~liabilities~~months ~~are~~ended ~~measured~~February 28, ~~using~~2002, ~~enacted tax rates in~~from ~~effect~~18.9% for the ~~year~~nine inmonths ~~which~~ended ~~those~~February 28, ~~temporary differences are expected to be recovered or settled~~2002. ~~The~~This ~~effect~~decrease onwas ~~deferred~~due ~~tax assets and liabilities of a~~to ~~change~~the reduction in ~~tax~~revenue ~~rates~~associated iswith ~~recognized in~~ the ~~period~~commercial ~~that~~aerospace ~~includes the enactment~~industry, ~~date.~~while ~~Differences~~many ~~could result in the amount~~ of ~~timing~~ our ~~provision~~costs ~~for income~~are ~~taxes for any period if we make different judgments or use different estimates~~fixed.

~~The~~Inventory ~~Company~~turnover, ~~operates~~as incalculated ~~two~~by ~~segments,~~dividing ~~U.S.~~annualized ~~Operations~~sales ~~and~~for ~~European~~the ~~Operations.~~nine ~~This~~months isby ~~based~~ending oninventory, ~~the~~decreased ~~fact~~to ~~that~~3.4 ~~the~~turns ~~Company’s~~for ~~chief operating decision maker,~~ the ~~Company’s~~nine ~~chief~~months ~~executive officer~~ended February 28, ~~regularly~~2003 ~~reviews~~from ~~operating~~3.9 ~~results, assesses~~turns ~~performance~~for ~~and~~the ~~makes~~nine ~~decisions~~months ~~about~~ended ~~resources~~February 28, ~~to be allocated at~~2002. ~~this~~The ~~level~~decrease ~~(U.S.~~was ~~Operations~~due ~~and~~to ~~European~~lower ~~Operations)~~average ~~and~~sales ~~not~~volumes onwithout ~~any~~a ~~of the~~significant ~~underlying~~decrease ~~divisions~~in orinventory ~~business units that comprise these two segments~~levels.

20Operating Expenses. Operating expenses decreased by $2.6 million, to $8.9 million for the nine months ended February 28, 2003, from $11.5 million for the nine months ended February 28, 2002. This decrease was primarily due to the disposition of our Engineering & Fabrication and Display Divisions. In

~~Table of Contents~~22

~~Results~~a further effort to reduce operating expenses, as well as increasing our gross profit, we have significantly reduced our corporate overhead including reduction in corporate executive salaries, elimination of ~~Operations~~several executive positions, and other headcount reductions. We have also reduced headcount at our operating facilities in the United States and in the United Kingdom. We are in the process of consolidating our manufacturing sites and have sold or are in process of selling excess machinery. We are also outsourcing certain operating functions along with implementing production processes which we believe will be more efficient.

~~Quarter~~Interest ~~Ended~~Expense. ~~November~~Interest expense decreased by $8.1 30million, ~~2002~~or ~~Compared~~71.1%, to $3.3 million ~~Quarter~~for ~~Ended~~the ~~November~~nine months ended February 3028, ~~2001~~2003, from $11.4 million for the nine months ended February 28, 2002. This decrease was primarily due to our March 2002 debt restructuring.

~~Net~~Other ~~Sales.~~Income ~~Net sales decreased by $5~~(Expense).~~2 million,~~ orOther ~~24.1%,~~income torepresents ~~$16.4 million for the quarter ended November 30, 2002, from $21.6 million for the quarter ended November 30, 2001. This decrease was due to a number of factors including the effects of our~~ non-operational ~~restructuring~~income ~~plan~~ and ~~various events that~~ ~~affected~~expense ~~our~~for ~~markets. The European Operations contributed $9.7 million of net sales during~~ the ~~quarter~~nine ~~ended~~months ~~November 30, 2002, down $3.3 million from the $13.0 million contributed during the quarter~~ ended ~~November~~February 3028, ~~2001~~2003. ~~Following the tragic events of September 11, the commercial aerospace market in~~ the U.S. and Europe saw a significant decline. Boeing and Airbus have both announced substantial cuts in their planned commercial aircraft build rates. The decrease in net sales contributed by our European Aerospace Group is largely attributable to reduced, postponed, or cancelled orders from commercial aircraft manufacturers.

~~The~~Income ~~U.S.~~Tax ~~Operations~~Benefit ~~contributed $6~~(Expense).~~8 million~~ toIncome ~~net~~tax ~~sales~~benefit ~~during~~for the ~~quarter ended~~nine ~~November 30, 2002, down $1.8 million from $8.6 million contributed during~~months ~~the quarter~~ ended ~~November~~February 3028, ~~2001.~~2003 ~~This decrease~~ was ~~primarily~~derived ~~due to the reduction in orders~~ from ~~commercial~~taxable ~~aircraft~~losses ~~manufacturers which was caused by the same market conditions experienced by the European Operations. We also experienced decreases~~ in ~~net sales because of~~ our ~~operational restructuring, in~~foreign ~~which we discontinued some operations that previously had been unprofitable or that had contributed only nominal profits~~subsidiaries. ~~Those divisions collectively had~~ ~~contributed $0.3 million to net sales for the quarter ended November 30, 2001,~~ ~~but did not contribute any net sales during the quarter ended November 30, 2002.~~

~~Receivable~~Net ~~collection~~Loss. ~~periods,~~Net asloss ~~calculated~~decreased by ~~dividing~~$4.9 million ~~ending~~to ~~accounts receivable~~a ~~balances~~net byloss ~~annualized~~of ~~sales for the quarter multiplied by 360 days, decreased to 57~~$6.87 ~~days~~ million for the ~~quarter~~nine months ended ~~November~~February 3028, ~~2002~~2003, from 72a net loss of $11.86 ~~days~~million for the ~~quarter~~nine months ended ~~November~~February 3028, ~~2001.~~2002, ~~This~~due ~~decrease~~to ~~was~~the ~~primarily~~factors ~~due~~listed ~~to a~~above, ~~concerted~~primarily ~~focus~~lower byinterest ~~management~~expense due to ~~increase~~our ~~collection~~March ~~efforts,~~2002 ~~primarily~~debt ~~within the European Operations~~restructuring.

~~Gross~~Liquidity ~~Profit.~~and ~~Gross~~Capital ~~profit decreased by $1.0 million, or 30.3%, to $2.3~~Resources ~~million for the quarter ended November 30, 2002, from $3.3 million for the~~ ~~quarter ended November 30, 2001. As a percentage of net sales, gross profit~~ decreased to 14.1% for the quarter ended November 30, 2002, from 15.3% for the quarter ended November 30, 2001. This decrease was due to the reduction in revenue associated with the commercial aerospace industry, while many of our costs are fixed.

~~Inventory~~Our ~~turnover~~consolidated financial statements have been prepared assuming that we will continue as a going concern. However, our independent auditors in their report accompanying our May 31, 2002 audited consolidated financial statements stated that we have suffered recurring losses from operations and have a net capital deficiency that raise substantial doubt about our ability to continue as ~~calculated~~a going byconcern. ~~dividing~~Our ~~annualized~~consolidated ~~sales~~financial ~~for~~statements do not include any adjustments that might result from the ~~quarter~~outcome of that uncertainty. If we are bynot ~~ending~~sufficiently ~~inventory~~successful in generating cash from operating activities, ~~decreased~~we may need to ~~3.3~~sell ~~turns~~additional ~~for~~common stock or other securities, or we may need to sell assets outside the ~~quarter~~ordinary ~~ended~~course ~~November 30~~of business. Current market conditions, coupled with our current stock price, may pose difficulties in ~~2002~~closing ~~from~~a 4securities offering on acceptable terms, or at all.0 ~~turns~~Moreover, ~~for~~if we need to dispose of assets outside of the ~~quarter~~ordinary ~~ended~~course ~~November 30~~of business to generate cash, ~~2001.~~we ~~The~~may ~~decrease~~not ~~was~~be able to realize the carrying value of those assets ~~due~~upon liquidation. If we are unable to ~~lower~~generate ~~average~~the ~~sales~~necessary ~~volumes~~cash, ~~without~~we acould ~~significant~~be unable ~~decrease~~to continue in ~~inventory levels~~existence.

~~Operating~~At ~~Expenses.~~February 28, ~~Operating~~2003 ~~expenses~~our ~~decreased~~total bycash on hand was $12.13 million, tocompared with cash on hand of $25.6 million at May 31, 2002. Cash used by operating activities was $2.3 million ~~for~~during the ~~quarter~~nine months ended ~~November~~February 3028, ~~2002,~~2003 compared to cash flows from operating activities of $32.7 million ~~for~~during the ~~quarter~~nine months ended ~~November~~February 3028, ~~2001~~2002. ~~This~~The ~~decrease~~change in cash flows from operating activities was primarily due to ~~the disposition of~~ our ~~Engineering~~loss &from ~~Fabrication~~operations and ~~Display~~cash ~~Divisions.~~used Into anpay ~~effort~~down toaccrued ~~reduce~~liabilities. ~~operating~~Our ~~expenses~~future ~~further~~success ~~and~~as toa ~~increase~~company ~~our~~will ~~gross~~depend ~~profit,~~heavily weon ~~have significantly reduced~~ our ~~corporate~~ability ~~overhead~~to bygenerate ~~reducing~~cash ~~corporate executive~~from ~~salaries,~~operating ~~eliminating~~activities. ~~several~~We ~~executive~~are ~~positions,~~continuing to ~~and~~focus ~~other headcount~~on ~~reductions.~~cost Wereduction ~~have~~initiatives ~~also~~that ~~reduced~~specifically ~~headcount~~address atthe ~~our~~need ~~operating~~to ~~facilities~~increase incash ~~the~~provided ~~U.S.~~by ~~and~~operating ~~in the U~~activities.K. WeSome ~~are in process~~ of ~~consolidating~~these ~~our~~initiatives ~~manufacturing~~include ~~sites~~staff ~~and~~reductions, ~~have~~reduction ~~sold~~of orproduct ~~are~~line inofferings, ~~process~~sale of ~~selling~~ excess ~~machinery.~~inventory, Weand ~~are~~general ~~also~~and ~~outsourcing~~administrative ~~certain~~cost ~~operating functions along with implementing production processes we expect to be more efficient~~controls.

~~Interest~~Cash ~~Expense.~~used ~~Interest~~in ~~expense~~investing activities decreased byfrom $32.~~4 million, or 77.3%, to $1.~~0 million ~~for~~during the ~~quarter~~nine months ended ~~November~~February 3028, 2002, ~~from~~to $40.47 million ~~for~~during the ~~quarter~~ ~~ended~~nine ~~November~~months ended February 3028, ~~2001~~2003. This decrease was due to lower amounts of investment in manufacturing equipment and manufacturing facility improvements. We currently do not have any material commitments for capital equipment purchases.

2123

~~Table~~Cash ofused ~~Contents~~in financing activities increased from $0.7 million during the nine months ended February 28, 2002 to $0.8 million during the nine months ended February 28, 2003. Cash used in financing activities was used primarily for debt payments during the nine months ended February 28, 2003.

~~was~~We ~~due~~were tonotified ~~our~~by ~~March~~certain ~~2002~~of ~~debt~~our ~~restructuring,~~secured ~~which~~lenders isthat ~~detailed~~we are not in compliance ~~our~~with ~~related~~certain covenants of loans that are secured by a deed of trust on our headquarters building and ~~subsequent~~substantially ~~filings~~all ~~with~~of our other assets. Pursuant to forbearance agreements, our secured lenders have agreed to forbear from declaring covenant defaults until the ~~Securities~~earlier ~~and~~of ~~Exchange~~the ~~Commission~~date on which we regain compliance (thereby curing such covenant violations) or March 1, 2004.

~~Other~~We ~~Income~~translate ~~(Expense)~~the activity of our European Operations, whose functional currency is the British Pound Sterling, into U.S. ~~Other~~Dollars ~~income~~on ~~represents~~a ~~non-operational~~monthly ~~income~~basis. ~~and~~The ~~expense~~balance ~~for~~sheet of the ~~quarter~~European ~~ended~~Operations ~~November 30,~~is ~~2002~~translated using the exchange rate as of the date of the balance sheet, ~~primarily~~and ~~interest~~for ~~income~~purposes of the statement of operations and statement of cash flows we use the weighted average exchange ~~gain~~rate onfor the ~~sale~~period. As a result, the value of ~~certain~~our assets, liabilities, revenue, and expenses may vary materially from one reporting period to the next solely as a result of varying exchange rates. We had not entered into any hedging arrangements as of February 28, 2003.

~~Provision~~Significant ~~for~~Events ~~Income~~During ~~Tax~~The ~~Benefit (Expense). Income tax benefit for the quarter~~Quarter ~~ended November 30, 2002 was derived from taxable losses in our foreign~~ ~~subsidiaries, no provision or benefit was recorded for U.S. income tax during~~ ~~the quarter.~~

~~Net~~Conversion ~~Income (Loss). Net loss decreased by $4.8 million to a net loss~~ of ~~$1.1 million for the quarter ended November~~Series ~~30,~~C ~~2002,~~Convertible ~~from~~Preferred aStock ~~net~~and ~~loss~~Reverse ofStock ~~$5.9~~Split ~~million for the quarter ended November 30, 2001, due to the factors listed~~ ~~above, primarily reduced interest expense due to our March 2002 debt restructuring.~~

~~Six~~On ~~Months~~January 27, ~~Ended~~2003, ~~November 30~~following approval by a majority of our shareholders, ~~2002~~we increased ~~Compared~~the number of our authorized shares of common stock from 100,000,000 to ~~Six~~20,000,000,000 ~~Months~~shares ~~Ended~~without ~~November~~affecting per share par value. Upon the increase in authorized shares the holders of all of our Series 30C Convertible Preferred Stock converted their preferred shares into 4,865,819,000 ~~2001~~shares of common stock. On the same day, following approval by a majority of our shareholders, we completed a 1 for 200 reverse split of our outstanding shares of common stock, as well as a proportionate reduction in our shares of authorized but un-issued common stock. At February 28, 2003, as a result of the reverse split, we had 100,000,000 authorized shares of common stock with 24,779,209 common shares outstanding.

~~Net~~Revolving ~~Sales.~~Invoice ~~Net~~Funding ~~sales decreased by $12.5 million, or 27.8%, to $32.5 million~~Facility ~~for the six months ended November 30, 2002, from $45.0 million for the six~~ ~~months ended November 30, 2001. This decrease was due to a number of factors~~ including the effects of our operational restructuring plan and various events that affected our markets. The European Operations contributed $19.0 million of net sales during the six months ended November 30, 2002, down $6.8 million from the $25.8 million contributed during the six months ended November 30, 2001. Following the tragic events of September 11, the commercial aerospace market in the U.S. and Europe saw a significant decline. Boeing and Airbus have both announced substantial cuts in their planned commercial aircraft build rates. The decrease in net sales contributed by our European Aerospace Group is largely attributable to reduced, postponed, or cancelled orders from commercial aircraft manufacturers.

~~The~~In ~~U.S.~~February ~~Operations~~2003, ~~contributed $13.5 million to net sales during~~ the ~~six months~~Company ~~ended~~entered ~~November 30,~~into ~~2002,~~a ~~down~~revolving ~~$5.8 million~~invoice ~~from~~funding ~~$19.3 million~~facility ~~contributed~~with ~~during~~a ~~the~~national ~~six months ended November 30, 2001~~bank. ~~This~~Under ~~decrease~~the ~~was primarily~~facility ~~due to~~ the ~~reduction~~Company inmay ~~orders~~borrow ~~from~~up ~~commercial~~to ~~aircraft~~80% ~~manufacturers~~of ~~which~~acceptable ~~was~~domestic ~~caused~~United byStates ~~the~~accounts ~~same~~receivable, ~~market~~up ~~conditions~~to ~~experienced~~a bymaximum ~~the European~~amount ~~Operations. Some~~ of ~~the~~$3,000,000. ~~decrease~~The infacility ~~net~~is ~~sales~~secured ~~also~~by ~~relates~~all todomestic ~~divisions~~United ~~that~~States accounts ~~have~~receivable ~~been~~and ~~discontinued.~~all ~~Those~~domestic ~~divisions~~United ~~collectively~~States ~~had contributed $1~~inventories.~~3 million~~ toThe ~~net~~facility ~~sales~~bears interest ~~for~~at the ~~six~~bank’s ~~months~~prime ~~ended~~rate ~~November 30,~~plus ~~2001,~~5.5% ~~but~~and ~~did~~expires ~~not~~in February 2004. ~~contribute~~There ~~any~~were ~~net~~no ~~sales~~amounts ~~during~~borrowed ~~the~~under ~~six~~this ~~months~~facility ~~ended~~at ~~November~~February 3028, ~~2002~~2003.

~~Receivable~~Sale ~~collection~~of ~~periods, as calculated by dividing ending accounts receivable balances by annualized sales for the six months multiplied by 360 days, decreased to 58~~U.~~5 days for the six months ended November 30, 2002, from 69~~S.~~8 days~~ ~~for~~Operations’ ~~the~~Boeing ~~six~~Statement ~~months~~of ~~ended November 30, 2001. This decrease was~~Work ~~primarily due to a concerted focus by management to increase collection~~ ~~efforts, primarily within the European Operations.~~

~~Gross~~On ~~Profit. Gross profit decreased by $4.1~~January ~~million~~31, ~~or 48.8%~~2003, ~~to $4.3 million for~~ the ~~six~~Company ~~months~~sold ~~ended~~its ~~November 30,~~rights ~~2002,~~and ~~from~~responsibilities ~~$8.4 million~~ for the ~~six months ended November 30, 2001~~U.S. AsOperations’ aBoeing ~~percentage~~Statement of ~~net~~Work ~~sales,~~to ~~gross~~an ~~profit decreased~~independent tothird 13party.1% ~~for~~The Company ~~the~~also ~~six~~sold ~~months~~inventory, ~~ended~~tooling ~~November 30,~~and ~~2002,~~certain ~~from~~intangible ~~18.6%~~assets ~~for~~related to the ~~six~~Boeing ~~months~~Statement ~~ended~~of ~~November 30, 2001~~Work. ~~This~~The ~~decrease~~sale price was ~~due~~$400,000 topayable ~~the~~as ~~reduction~~follows: in$181,250 ~~revenue~~due ~~associated~~at ~~with~~closing ~~the~~and ~~commercial~~seven ~~aerospace~~quarterly ~~industry,~~payments ~~while~~of ~~many~~$31,250. ofThere ~~our~~was no ~~costs~~significant ~~are~~gain ~~fixed~~or loss resulting from the transaction.

~~Inventory turnover, as calculated by dividing annualized sales for the six~~24 ~~months by ending inventory, decreased to 3.3 turns for the six months ended~~ ~~November 30, 2002 from 4.2 turns for the six months ended November 30, 2001. The decrease was due to lower average sales volumes without a significant decrease in inventory levels.~~

~~Operating~~Recent ~~Expenses.~~Accounting ~~Operating expenses decreased by $1.8 million, to $5.6~~Pronouncements ~~million for the six months ended November 30, 2002, from $7.4 million for the~~ ~~six months ended November 30, 2001. This~~

22In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and normal use of the asset. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset, and this additional carrying amount is depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, the Company will recognize a gain or loss on settlement. The Company is required to adopt the provisions of SFAS No. 143 in the first quarter of fiscal year 2004. To accomplish this, the Company must identify all legal obligations for asset retirement obligations, if any, and determine the fair value of these obligations on the date of adoption. The determination of fair value is complex and will require the Company to gather market information and develop cash flow models. Additionally, the Company will be required to develop processes to track and monitor these obligations. The adoption of this statement is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

~~Table~~In April 2002, the FASB issued SFAS No. 145, Rescission of ~~Contents~~FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. Among other things, this statement rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, which required all gains and losses from early extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. As a result, the criteria in APB Opinion No. 30, Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, will now be used to classify those gains and losses. The statement became effective for the Company on June 1, 2002 for prospective transactions. Additionally, adoption of the statement requires that the Company reclassify gains previously reported for the years ended May 31, 2000 and 2002 related to debt extinguishments from extraordinary items to income from continuing operations.

~~decrease~~In ~~was~~June ~~primarily~~2002, ~~due~~the toFASB ~~the~~issued ~~disposition~~SFAS ofNo. 146, ~~our~~Accounting ~~Engineering~~for &Costs ~~Fabrication~~Associated ~~and~~with ~~Display~~Exit ~~Divisions~~or Disposal Activities. InThis anstatement ~~effort~~addresses tofinancial accounting ~~reduce~~and ~~operating~~reporting ~~expenses~~for ~~further,~~costs asassociated with exit or disposal activities ~~well~~and asnullifies ~~increasing~~Emerging ~~our~~Issues ~~gross~~Task ~~profit~~Force (EITF) Issue No. 94-3, weLiability Recognition ~~have~~for ~~significantly~~Certain ~~reduced~~Employee ~~our~~Termination Benefits and Other Costs to Exit ~~corporate~~an ~~overhead~~Activity (including ~~reduction~~Certain Costs Incurred in ~~corporate~~a ~~executive~~Restructuring). ~~salaries,~~This ~~eliminating~~statement ~~several~~requires ~~executive~~that ~~positions,~~a ~~and~~liability ~~other~~for ~~headcount~~a ~~reductions.~~cost Weassociated with an exit or ~~have~~disposal ~~also~~activity ~~reduced~~be ~~headcount~~recognized at ~~our~~fair ~~operating~~value ~~facilities~~when in the ~~U.S.~~liability ~~and~~is ~~in the U~~incurred.K. The WeCompany ~~are~~adopted inthis ~~process~~statement offor ~~consolidating~~exit ~~our~~or ~~manufacturing~~disposal ~~sites~~activities ~~and~~that ~~have sold~~were orinitiated ~~are~~after inDecember 31, ~~process~~2002, ofand ~~selling~~the ~~excess~~adoption ~~machinery.~~did Wenot ~~are~~have ~~also~~a ~~outsourcing certain~~material ~~operating~~impact ~~functions~~on ~~along~~the ~~with~~Company’s ~~implementing~~consolidated ~~production~~results ~~processes~~of weoperations ~~believe will~~or ~~be more efficient~~financial position.

~~Interest~~In ~~Expense.~~December ~~Interest~~2002, ~~expense~~the ~~decreased~~FASB byissued $5SFAS No.5 ~~million~~148, orAccounting 73for Stock-Based Compensation -Transition and Disclosure — an amendment of FAS 123.~~3%,~~ toSFAS No. $2148 amends SFAS No.0 ~~million~~123 Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the ~~six~~fair ~~months~~value ~~ended~~based ~~November 30,~~method ~~2002~~of accounting for stock-based employee compensation. In addition, ~~from~~SFAS $7No.5 ~~million~~148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures about the method of accounting for stock-based employee compensation and the effect of the ~~six~~method ~~months~~used ~~ended~~on ~~November 30~~reported results. Finally, ~~2001~~SFAS No.148 ~~This~~amends ~~decrease~~APB ~~was~~Opinion No. 28, ~~due~~“Interim Financial Reporting,” to ~~our~~require ~~March~~disclosure about those effects in interim financial information. The amendments to the transition and disclosure provisions is effective for fiscal years ending after December 15, 2002. ~~debt~~The amendment ~~restructuring~~to APB Opinion 28 is effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. We are currently evaluating the impact

~~Other Income (Expense). Other income represents non-operational income and~~25 ~~expense for the six months ended November 30, 2002, primarily interest income~~ ~~and gain on the sale of certain assets.~~

~~Provision~~of ~~for~~SFAS ~~Income Tax Benefit (Expense)~~No. 148. ~~Income~~We ~~tax~~will ~~benefit~~adopt ~~for~~ the ~~six months~~disclosure ~~ended~~provisions ~~November 30,~~of ~~2002~~SFAS ~~was~~No. 148 ~~derived from taxable losses~~ in our ~~foreign~~ ~~subsidiaries,~~Annual noReport ~~provision~~on orForm 10-K ~~benefit was recorded~~ for ~~U.S. income tax during~~ the ~~six~~year ~~months~~ending ~~ended November~~May 3031, ~~2002~~2003.

~~Net~~In ~~Income~~November ~~(Loss).~~2002, ~~Net~~the ~~loss~~FASB ~~decreased~~issued byInterpretation $5No.1 ~~million~~45, toGuarantor’s aAccounting and ~~net~~Disclosure ~~loss~~Requirements for Guarantees, Including Indirect Guarantees of Indebtedness $2to Others.9 The initial recognition and initial measurement ~~million~~provisions ~~for~~of ~~the~~this ~~six~~Interpretation ~~months~~are ~~ended~~applicable ~~November~~on a prospective basis to guarantees issued or modified after December 3031, 2002, ~~from~~regardless aof ~~net~~the guarantor’s ~~loss~~fiscal year-end. The guarantor may not revise or restate its previous accounting for guarantees issued before the date of $8the Interpretation’s initial application to reflect the effect of the recognition and measurement provisions of the Interpretation.0 The disclosure requirements ~~million~~in this Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. The guidance on indirect guarantees of the ~~six~~indebtedness ~~months~~of ~~ended~~others, ~~November~~which previously was included in FASB Interpretation No. 3034, ~~2001~~Disclosure of Indirect Guarantees of Indebtedness of Others, ~~due~~continues to ~~the~~apply ~~factors~~to ~~listed~~financial statements for fiscal years ended after ~~above~~June 15, ~~primarily~~1981. ~~lower~~The ~~interest~~adoption ~~expense~~of ~~due~~this tointerpretation ~~our~~did ~~March~~not ~~2002~~have ~~debt~~a material ~~restructuring~~impact on the Company’s results of operations, consolidated financial position or cash flows and has been considered in formulating disclosures for the third quarter of fiscal year 2003 condensed consolidated financial statements.

~~Liquidity~~In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on EITF 00-21, Revenue Arrangements with Multiple Deliverables, with respect to determining when and ~~Capital~~how ~~Resources~~to allocate revenue from sales with multiple deliverables. The EITF 00-21 consensus provides a framework for determining when and how to allocate revenue from sales with multiple deliverables based on a determination of whether the multiple deliverables qualify to be accounted for as separate units of accounting. The consensus is effective prospectively for arrangements entered into in fiscal periods beginning after June 15, 2003. The Company does not expect that the adoption of this consensus will have a material impact on the Company’s consolidated results of operations or financial position.

~~Cash used by operating activities was $0.3 million during the six months ended~~26 ~~November 30, 2002 compared to cash provided by operating activities of $0.8~~ million during the six months ended November 30, 2001. The change in cash provided by operating activities was due to cash used for prepaid insurance premiums and cash used to pay down accrued liabilities. Our future success as a company will depend heavily on our ability to generate cash from operating activities. We are continuing to focus on cost reduction initiatives that specifically address the need to increase cash provided by operating activities. Some of these initiatives include staff reductions, reduced product line offerings, selling of excess inventory, and general and administrative cost controls.

~~Cash~~ITEM ~~used in investing activities decreased from $2~~3.~~0 million~~ ~~during~~QUANTITATIVE ~~the~~AND ~~six months~~QUALITATIVE ~~ended~~DISCLOSURES ~~November 30,~~ABOUT ~~2001~~MARKET ~~to $0.4 million during the six months ended~~RISK ~~November 30, 2002. This decrease was due to lower amounts of investment in~~ ~~manufacturing equipment and manufacturing facility improvements. We currently~~ ~~do not have any material commitments for capital equipment purchases.~~

~~Cash~~We ~~used~~have financial instruments including debt obligations issued at a fixed rate which generally are not callable until maturity and therefore market fluctuations in ~~financing~~interest ~~activities~~rates ~~increased~~will ~~from~~not ~~$0.4 million~~affect ~~during~~our earnings for the ~~six~~period. ~~months~~Based ~~ended~~upon ~~November 30~~this fact, ~~2001~~we todo ~~cash~~not ~~used~~consider ofthe ~~$0.6 million~~market ~~during~~risk ~~the~~exposure ~~six~~for interest ~~months~~rates ~~ended~~to ~~November 30,~~be ~~2002~~material. ~~Cash~~It ~~used~~is innot ~~financing~~practicable ~~activities~~to ~~was~~estimate ~~used~~the ~~for~~fair value of our long-term debt ~~payments~~due ~~during~~to ~~the~~our ~~six~~history ~~months~~of ~~ended~~losses ~~November 30~~and debt defaults, ~~2002~~among other factors.

We ~~translate~~are ~~the~~subject ~~activity~~to offoreign ~~our~~currency ~~European~~exchange ~~Operations,~~rate ~~whose~~risk ~~functional~~relating ~~currency~~to receipts from isand payments to suppliers in currencies other than the ~~British~~functional ~~Pound~~currencies ~~Sterling,~~in which ~~into~~our business segments operate (the U.S. ~~Dollars~~Dollar onand athe ~~monthly~~British ~~basis~~Pound Sterling). ~~The balance~~Although ~~sheet~~we ofhave ~~the~~significant ~~European~~foreign ~~Operations~~operations, istransactions ~~translated~~in currencies ~~using~~other ~~the~~than ~~exchange~~our ~~rate~~functional currencies are not significant. We also asdo ofnot ~~the~~have ~~date~~significant oftransactions ~~the~~between ~~balance~~our ~~sheet,~~U.S. and ~~for~~European ~~purposes~~Operations. Historically, ofwe ~~the~~have ~~statement~~not ofexperienced material foreign currency transaction ~~operations~~gains and ~~statement~~losses ofand ~~cash~~do ~~flows~~not weanticipate ~~use~~any ~~the~~material ~~weighted~~foreign ~~average exchange~~currency ~~rate~~transaction ~~for~~gains or losses in the ~~period~~future. AsTherefore, awe ~~result~~have not entered into any hedging or other transactions to manage our foreign currency exchange rate risk as of February 28, 2003. However, the value of our assets, liabilities, revenue, and expenses may vary materially from one reporting period to the next solely as a result of varying exchange rates between the British Pound Sterling and the U.S. WeDollar. ~~had~~For ~~not~~example, ~~entered~~British ~~into~~Pound ~~any~~Sterling was worth $1.4625 on ~~hedging~~May 31, ~~arrangements~~2002 asbut one British Pound Sterling was worth $1.5737 on February 28, 2003. As a result, we incurred a positive foreign currency translation adjustment of ~~November~~$1,892,000 during the nine months ended February 3028, ~~2002~~2003.

~~Our~~We ~~consolidated~~are ~~financial~~exposed ~~statements~~to ~~have~~commodity ~~been~~price ~~prepared~~fluctuations ~~assuming~~through ~~that~~purchases weof ~~will~~aluminum, ~~continue~~titanium, asand aother ~~going~~raw ~~concern~~materials. ~~However,~~We ~~our~~enter ~~independent~~into ~~auditors~~certain insupplier ~~their~~agreements that ~~report~~guarantee quantity and price of the applicable commodity to limit the ~~accompanying~~exposure ~~our~~to ~~May~~commodity price fluctuations and availability concerns. At February 3128, ~~2002~~2003, ~~audited~~we ~~consolidated~~had ~~financial~~purchase ~~statements~~commitments ~~stated~~for raw materials aggregating ~~that~~approximately we$1.4 million. ~~have~~This ~~suffered~~amount ~~recurring~~relates ~~losses~~to ~~from~~a ~~operations~~titanium ~~which~~supply agreement with a fixed price.

23ITEM 4. CONTROLS AND PROCEDURES.

~~Table~~Our ofexecutive ~~Contents~~officers, including our Chief Executive Officer and Chief Financial Officer, are responsible for establishing and maintaining disclosure controls and procedures for Pacific Aerospace & Electronics, Inc and its’ subsidiaries. Those executives have designed such controls to ensure that all material information relating to Pacific Aerospace & Electronics, Inc. and its’ subsidiaries is made known to them by others within the organization.

~~raise~~On substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments that might result from the outcome of that uncertainty. If we are not sufficiently successful in generating cash from operating activitiesApril 4, ~~we may need to sell additional common stock or other securities~~2003, orour weexecutive ~~may~~officers ~~need~~completed toan ~~sell~~evaluation ~~assets outside the ordinary course~~ of ~~business. Current market conditions, coupled with~~ our ~~current stock price, may pose difficulties in closing a securities~~ ~~offering~~disclosure oncontrols ~~acceptable~~and ~~terms,~~procedures orand athave ~~all.~~determined ~~Moreover,~~them ~~if we need~~ to ~~dispose~~be offunctioning ~~assets~~properly ~~outside~~and ofeffectively. ~~the~~They ~~ordinary~~did ~~course of business to generate cash, we may~~ not be ~~able~~discover toany ~~realize~~significant ~~the carrying value of those assets upon liquidation. If we~~deficiencies ~~are~~or ~~unable~~material toweaknesses ~~generate~~within the ~~necessary~~controls ~~cash,~~and weprocedures ~~could~~that ~~be unable to continue~~required ~~operations~~modification.

~~Recent~~Since ~~Accounting~~the ~~Pronouncements~~completion of that evaluation, management has noted no significant changes in internal controls or in other factors that could significantly affect internal controls.

~~In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement~~27 ~~Obligations, which addresses financial accounting and reporting for obligations~~ associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and normal use of the asset. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset, and this additional carrying amount is depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, the Company will recognize a gain or loss on settlement. The Company is required to adopt the provisions of SFAS No. 143 in the first quarter of fiscal year 2004. To accomplish this, the Company must identify all legal obligations for asset retirement obligations, if any, and determine the fair value of these obligations on the date of adoption. The determination of fair value is complex and will require the Company to gather market information and develop cash flow models. Additionally, the Company will be required to develop processes to track and monitor these obligations. The adoption of this statement is not expected to have a material impact on the Company’s financial position or results of operations.

InPART ~~April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.~~II ~~4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.~~ ~~Among other things, this statement rescinds FASB Statement No. 4, Reporting~~ Gains and Losses from Extinguishment of Debt, which required all gains and losses from early extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of the related income tax effect. As a result, the criteria in APB Opinion No. 30, Reporting the Results of Operations – Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, will now be used to classify those gains and losses. The statement became effective for us on June 1, 2002 for prospective transactions. Additionally, adoption of the statement requires that the Company reclassify gains previously reported for the years ended May 31, 2000 and 2002 related to debt extinguishments from extraordinary items to income from continuing operations.

InOTHER ~~June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated~~INFORMATION ~~with Exit or Disposal Activities. This statement addresses financial~~ accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). This statement requires that a liability for a cost associated with an exit or disposal activity be recognized at fair value when the liability is incurred. The Company will be required to adopt this statement for exit or disposal activities initiated after December 31, 2002. The Company is currently assessing the impact of this statement on our results of operations, financial position.

24ITEM 1. LEGAL PROCEEDINGS

~~Table~~From time to time the Company is involved in legal proceedings relating to claims arising out of ~~Contents~~operations in the normal course of business.

InOn November 26, 2002, the ~~FASB~~Company ~~issued~~filed ~~Interpretation~~a ~~No. 45,~~complaint ~~Guarantor’s~~in ~~Accounting and~~the ~~Disclosure~~United ~~Requirements for Guarantees, Including Indirect Guarantees of~~States ~~Indebtedness~~District toCourt ~~Others.~~for ~~The~~the ~~initial~~Eastern ~~recognition~~District ~~and initial measurement provisions~~ of ~~this~~Washington ~~Interpretation~~against ~~are~~Edward ~~applicable on a prospective basis to~~Taylor, ~~guarantees~~James ~~issued~~Petri, ortheir ~~modified~~spouses, ~~after~~and ~~December 31,~~RAAD ~~2002~~Technologies, ~~regardless~~a ofWashington ~~the guarantor’s fiscal year-end~~corporation. ~~The guarantor may not revise or restate its~~ ~~previous~~In ~~accounting for guarantees issued before~~ the ~~date~~compliant ofwe ~~the Interpretation’s~~seek ~~initial application~~ to ~~reflect~~enjoin the ~~effect~~defendants offrom ~~the~~continuing ~~recognition~~infringement ~~and measurement provisions~~ of ~~the~~certain ~~Interpretation.~~intellectual ~~The~~property ~~disclosure~~rights ~~requirements in~~and ~~this~~against ~~Interpretation~~certain ~~are~~conduct ~~effective~~we ~~for~~contend represents ~~financial~~unfair ~~statements~~competition. ofWe ~~interim~~also ~~or annual~~seek ~~periods~~damages, ~~ending~~attorney ~~after December 15~~fees, ~~2002.~~court ~~The guidance on indirect~~costs ~~guarantees~~and ofother ~~the~~equitable ~~indebtedness~~relief. ofThe ~~others,~~defendants ~~which~~filed ~~previously~~a ~~was~~lawsuit ~~included~~ in ~~FASB~~the United ~~Interpretation~~States ~~No. 34,~~District ~~Disclosure~~Court offor ~~Indirect~~the ~~Guarantees~~Western District of ~~Indebtedness~~Washington ~~of Others~~on February 18, 2003 ~~continues~~seeking toa ~~apply~~declaratory tojudgment ~~financial~~that ~~statements~~infringement ~~for~~has ~~fiscal~~not ~~years~~occurred ~~ended after~~on ~~June 15,~~certain ~~1981~~related technologies. The Company isplans ~~required~~either to ~~adopt~~seek ~~the~~to ~~provisions~~dismiss ~~of FASB Interpretation No. 45 for~~ the ~~quarter ending February 28, 2003. The adoption~~ ofsecond ~~this~~action ~~statement~~or ~~is not expected~~ to ~~have~~consolidate ait ~~material~~with ~~impact on~~ the ~~Company’s financial~~original ~~position or results of operations~~claim.

25Other than as described above, the Company is not aware of any suits or proceedings that, if decided adversely to the Company, would have a material adverse effect upon the Company or its assets.

~~Table~~ITEM of2. ~~Contents~~CHANGES IN SECURITIES AND USE OF PROCEEDS

~~ITEM 3~~(a) None. ~~QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~

We(b) Dividend ~~have~~Payment financial instruments including debt obligations issued at a fixed rate which generally are not callable until maturity and therefore market fluctuations in interest rates will not affect our earnings for the periodRestrictions. ~~Based upon this fact, we do not consider the market risk exposure for interest~~ ~~rates to be material. It is not practicable to estimate the fair value of our long-term debt due to our history of losses and debt defaults, among other factors.~~

We ~~are~~have ~~subject~~never todeclared ~~foreign~~or ~~currency~~paid ~~exchange~~cash ~~rate~~dividends ~~risk~~on ~~relating~~our tocommon ~~receipts~~stock. ~~from~~We ~~and~~currently ~~payments~~anticipate tothat ~~suppliers~~we inwill ~~currencies~~retain ~~other~~any ~~than~~future ~~the~~earnings ~~functional~~to ~~currencies~~fund ~~in which our business segments operate (~~the ~~U.S. Dollar and the British Pound~~ ~~Sterling). Although we have significant foreign~~ operations, ~~transactions in currencies other than our functional currencies are not significant. We also do not have significant transactions between our U.S.~~ and ~~European Operations. Historically,~~ we ~~have not experienced significant foreign currency transaction gains and losses and~~ do not anticipate ~~any~~paying ~~significant~~dividends ~~foreign~~on ~~currency transaction~~our ~~gains~~common orstock ~~losses~~ in the foreseeable future. ~~Therefore,~~Our weagreements ~~have~~with ~~not entered into any hedging or other transactions to manage~~ our ~~foreign~~senior ~~currency~~secured ~~exchange~~lenders ~~rate risk~~and ~~as of November 30, 2002. However,~~ the indenture ~~value~~governing of our ~~assets,~~Subordinated ~~liabilities, revenue~~Notes ~~and~~restrict ~~expenses~~our ~~may~~ability ~~vary materially from one reporting period~~ to ~~the next~~pay ~~solely as a result of varying exchange rates between the British Pound Sterling and the U~~dividends.~~S. Dollar. For example, British Pound Sterling was worth $1.4625 on~~ ~~May 31, 2002 but one British Pound Sterling was worth $1.5553 on November 30,~~ ~~2002. As a result, we incurred a positive foreign currency translation adjustment of $1,599,000 during the six months ended November 30, 2002.~~

We are exposed to commodity price fluctuations through purchases of aluminum, titanium, and other raw materials. We enter into certain supplier agreements that guarantee quantity and price of the applicable commodity to limit the exposure to commodity price fluctuations and availability concerns. At November(c) ~~30, 2002, we had purchase commitments for raw materials aggregating approximately $1~~None.~~5 million. This amount relates to a titanium supply agreement~~ ~~with a fixed price.~~

~~ITEM~~(d) Not 4applicable. ~~CONTROLS AND PROCEDURES.~~

~~Our~~ITEM executive officers, including our Chief Executive Officer and Chief Financial Officer, are responsible for establishing and maintaining disclosure controls and procedures for Pacific Aerospace & Electronics, Inc and its’ subsidiaries3. ~~Those~~DEFAULTS ~~executives~~UPON ~~have~~SENIOR ~~designed such controls to ensure that all~~SECURITIES ~~material information relating to Pacific Aerospace & Electronics, Inc. and~~ ~~its’ subsidiaries is made known to them by others within the organization.~~

OnWe ~~January 9,~~were ~~2003,~~notified by certain of our ~~executive~~secured ~~officers~~lenders ~~completed~~that anwe ~~evaluation~~are ofnot ~~our~~in ~~disclosure~~compliance ~~controls~~with ~~and~~certain ~~procedures~~covenants ~~and~~of ~~have~~loans ~~determined~~that ~~them~~are tosecured beby ~~functioning~~a deed of trust ~~properly~~on our headquarters building and ~~effectively~~substantially all of our other assets. Pursuant ~~They~~to ~~did~~forbearance ~~not~~agreements, ~~discover~~our ~~any~~secured ~~significant~~lenders ~~deficiencies~~have agreed to forbear orfrom ~~material~~declaring ~~weaknesses~~covenant ~~within~~defaults until the ~~controls~~earlier ~~and~~of ~~procedures~~the ~~that~~date ~~required~~on which we ~~modification~~regain compliance (thereby curing such covenant violations) or March 1, 2004.

~~Since~~ITEM ~~the~~4. ~~completion~~SUBMISSION ofOF ~~that~~MATTERS ~~evaluation,~~TO ~~management~~A ~~has~~VOTE ~~noted~~OF noSECURITY ~~significant~~HOLDERS ~~changes in internal controls or in other factors that could significantly~~ ~~affect internal controls.~~

26On January 27, 2003, we held a special meeting of shareholders in lieu of our 2001 annual meeting of shareholders. The shareholders voted upon the following matters at the meeting:

~~Table of Contents~~28

~~PART~~(a) Election ~~II OTHER~~of ~~INFORMATION~~the following five individuals to serve as directors of the Company:

ITEM 1. LEGAL PROCEEDINGS


							BROKER
DIRECTOR	FOR		AGAINST		ABSTAIN		NON-VOTES

Richard W. Detweiler		80,399,631		29,001		1,465,820
Carl H. Goldsmith		80,373,582		55,050		1,465,820
Matthew C. Kaufman		80,357,666		70,966		1,465,820
Philip Raygorodetsky		80,334,482		94,150		1,465,820
Donald A. Wright		79,788,049		640,583		1,465,820

~~From~~(b) Approval ~~time~~of toan ~~time~~amendment to the Company’s isArticles ~~involved~~of inIncorporation ~~legal proceedings relating~~ to ~~claims~~increase ~~arising~~the ~~out~~number of ~~operations~~authorized inshares ~~the normal course~~ of ~~business.~~Common WeStock ~~are~~from ~~not~~one hundred ~~aware~~million of(100,000,000) ~~any~~shares ~~material~~to ~~legal~~twenty ~~proceedings~~billion ~~pending~~(20,000,000,000) orshares ~~threatened against the~~(without ~~Company~~affecting orpar ~~any of its subsidiaries or properties.~~value):

On November 26, 2002 the Company filed a complaint in the United States District Court for the Eastern District of Washington against Edward Taylor, James Petri, their spouses, and RAAD Technologies, a Washington corporation. In the compliant we seek to enjoin the defendants from continuing infringement of certain intellectual property rights and against certain conduct we contend represents unfair competition. We also seek damages, attorney fees, court costs and other equitable relief.


For			48,261,710
Against			3,017,797
Abstain			142,815
Broker Non-Votes			30,472,130
TOTAL			81,894,452

~~ITEM~~(c) Approval 2.of ~~CHANGES~~a IN1-for-200 ~~SECURITIES~~reverse ~~AND~~stock ~~USE~~split OFof ~~PROCEEDS~~the Company’s authorized, issued and outstanding shares of Common Stock:

(a) None.


For			48,196,948
Against			3,142,352
Abstain			83,022
Broker Non-Votes			30,472,130
TOTAL			81,894,452

(bd) ~~Dividend~~Approval ~~Payment~~of ~~Restrictions.~~a new Stock Option Plan for the Company providing for non-qualified stock option grants to employees, directors and consultants:

We have never declared or paid cash dividends on our common stock. We currently anticipate that we will retain any future earnings to fund the operations, and we do not anticipate paying dividends on our common stock in the foreseeable future. Our agreements with our senior secured lenders and the indenture governing our Subordinated Notes restrict our ability to pay dividends.


For			47,712,458
Against			3,439,974
Abstain			269,890
Broker Non-Votes			30,472,130
TOTAL			81,894,452

(ce) ~~None.~~Ratification of the appointment of KPMG LLP as the independent auditors of the Company for the fiscal year ended May 31, 2002:

ITEM 3. DEFAULTS UPON SENIOR SECURITIES


For			81,058,074
Against			641,938
Abstain			194,440
Broker Non-Votes			—
TOTAL			81,894,452

WeITEM ~~were notified by one of our secured lenders that we are not in compliance with certain covenants of loans that are secured by a deed of trust on our headquarters building and other assets~~6. ~~Pursuant~~EXHIBITS toAND aREPORTS ~~forbearance~~ON ~~agreement dated~~FORM ~~December 19, 2002, our secured lender will forbear from declaring~~8-K ~~covenant defaults until the earlier of the date on which we regain compliance~~ ~~(thereby curing such covenant violations) or December 31, 2003.~~

~~ITEM~~(a) 6Exhibits. ~~EXHIBITS AND REPORTS ON FORM 8-K~~

~~a. Exhibits.~~The following documents are filed as exhibits to this Quarterly Report:

~~The following documents are filed as exhibits to this Quarterly Report:~~29

Exhibit
Number		Description
3.1		Articles of Amendment of Pacific Aerospace & Electronic, Inc. filed March 19, 2002.(1)
10.56		Asset Purchase Agreement dated January 31, 2003, among Cashmere Manufacturing Co., Inc. as Seller and Damar Machine Company, Inc. as Buyer.
3.2		Designation of Rights and Preferences for Series C Convertible Preferred Stock of Pacific Aerospace & Electronics, Inc.(1)
10.57		Contract of Sale and Security Agreement between CAPCO Financial, Inc., a subsidiary of Cupertino National Bank, the registrant and certain of the registrant's subsidiaries dated February 12, 2003.
4.1		Indenture dated as of March 19, 2002, among Pacific Aerospace & Electronics, Inc., as issuer, Aeromet America, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Northwest Technical Industries, Inc.,
10.58		Subordination Agreement dated February 12, 2003 among CAPCO Financial, Inc., a division of Cupertino National Bank, Wachovia Bank, N.A. (f/k/a First Union National Bank), the registrant and its wholly owned subsidiaries, Cashmere Manufacturing Co., Inc., Northwest Technologies, Inc., and Pacific Coast Technologies, Inc.
10.59		Cross Guaranty and Collateral Agreement dated February 12, 2003 among CAPCO Financial, Inc., a division of Cupertino National Bank, the registrant and its wholly owned subsidiaries, Cashmere Manufacturing Co., Inc., Northwest Technologies, Inc., and Pacific Coast Technologies, Inc.
10.60		Guaranty dated February 12, 2003 among CAPCO Financial, Inc., a division of Cupertino National Bank, the registrant and Cashmere Manufacturing Co., Inc.
10.61		Security Agreement dated February 12, 2003 among CAPCO Financial, Inc., a division of Cupertino National Bank, the registrant and its wholly owned subsidiaries, Cashmere Manufacturing Co., Inc., Northwest Technologies, Inc., and Pacific Coast Technologies, Inc.
10.62		Amendment No. 1 to Security Agreement dated February 12, 2003 between CAPCO Financial, Inc., the registrant and its wholly owned subsidiaries, Cashmere Manufacturing Co., Inc., Northwest Technologies, Inc., and Pacific Coast Technologies, Inc.
99.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, Section 906 of the Sarbanes-Oxley Act of 2002.

27(b) Reports on Form 8-K.

~~Table~~The Company filed a Current Report on Form 8-K on February 17, 2003, reporting a 1-for-200 reverse split of ~~Contents~~its outstanding shares of common stock, as well as a proportionate reduction in its shares of authorized but unissued common stock.

		Pacific Coast Technologies, Inc., PA&E International, Inc., Seismic Safety Products, Inc. and Skagit Engineering & Manufacturing, Inc., each as guarantors, and U.S. Bank National Association.(1)
4.2		Note Purchase Agreement dated as of March 25, 2002, , among Pacific Aerospace & Electronics, Inc., as issuer, Aeromet America, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., PA&E International, Inc., Seismic Safety Products, Inc. and Skagit Engineering & Manufacturing, Inc., each as guarantors, and FirstUnion National Bank, as collateral agent, relating to our 5% senior secured notes due 2007.(1)
4.3		Security Agreement dated as of March 25, 2002, among Pacific Aerospace & Electronics, Inc., as issuer, Aeromet America, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., PA&E International, Inc., Seismic Safety Products, Inc. and Skagit Engineering & Manufacturing, Inc., each as guarantors, and FirstUnion National Bank, as collateral agent, relating to our 5% senior secured notes due 2007.(1)
99.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, Section 906 of the Sarbanes-Oxley Act of 2002.(2)

(1)		Incorporated by reference to the Company’s Current Report on Form 8-K filed on April 3, 2002.
(2)		Submitted herewith.

SIGNATURES

b. ~~Reports~~Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on ~~Form 8-K~~its behalf by the undersigned, thereunto duly authorized.

(i) The Company filed a Current Report on Form 8-K on September 10, 2002, reporting its certifications of each of the Company’s Chief Executive Officer and its Chief Financial Officer as to the matters required by Rules 13a-14 and 15d-14.


		PACIFIC AEROSPACE & ELECTRONICS, INC

		/s/ Donald A. Wright
Date: April 14, 2003
		Donald A. Wright
		President and Chief Executive Officer
		(Principal Executive Officer)

		/s/ Charles A. Miracle
Date: April 14, 2003
		Charles A. Miracle
		Chief Financial Officer and Treasurer
		(Principal Financial and Accounting Officer)

2831

~~Table of Contents~~CERTIFICATION

~~SIGNATURES~~I, Donald A. Wright, certify that:

1. ~~Pursuant~~I tohave ~~the~~reviewed ~~requirements of the Securities Exchange Act of 1934, the registrant has duly caused~~ this quarterly report ~~to be signed~~ on ~~its~~Form 10-Q ~~behalf~~of byPacific ~~the~~Aerospace & ~~undersigned~~Electronics, ~~thereunto duly authorized~~Inc.;

		PACIFIC AEROSPACE & ELECTRONICS, INC
Date: January 14, 2003
		/s/ Donald A. Wright
		Donald A. Wright President and Chief Executive Officer (Principal Executive Officer)
Date: January 14, 2003
		/s/ Charles A. Miracle
		Charles A. Miracle Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

293. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

~~Table~~4. The ofregistrant’s ~~Contents~~other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

~~CERTIFICATION~~a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

I,b) ~~Donald~~evaluated A.the ~~Wright,~~effectiveness ~~certify~~of ~~that:~~the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

~~1. I~~c) ~~have~~presented ~~reviewed~~in this quarterly report onour ~~Form 10-Q~~conclusions about the effectiveness of ~~Pacific~~the ~~Aerospace~~disclosure &controls and procedures based on our evaluation as of the ~~Electronics,~~Evaluation ~~Inc.~~Date;

25. ~~Based~~The onregistrant’s myother ~~knowledge,~~certifying ~~this~~officer ~~quarterly~~and ~~report~~I ~~does~~have ~~not~~disclosed, ~~contain~~based ~~any~~on ~~untrue~~our ~~statement~~most ofrecent aevaluation, ~~material fact or omit~~ to ~~state a material fact necessary to make~~ the ~~statements~~registrant’s ~~made,~~auditors inand ~~light of~~ the ~~circumstances~~audit ~~under~~committee ~~which such statements~~of ~~were~~registrant’s ~~made,~~board ~~not~~of ~~misleading~~directors ~~with~~(or ~~respect~~persons toperforming the ~~period covered by this quarterly~~equivalent ~~report;~~function):

~~3. Based~~a) onall mysignificant ~~knowledge,~~deficiencies in the ~~financial~~design ~~statements,~~or ~~and~~operation ~~other~~of ~~financial~~internal controls ~~information~~which ~~included~~could inadversely ~~this~~affect ~~quarterly~~the ~~report,~~registrant’s ~~fairly~~ability ~~present~~to inrecord, ~~all material~~process, ~~respects~~summarize ~~the~~and report financial ~~condition,~~data ~~results of operations~~ and ~~cash~~have ~~flows~~identified offor the registrant’s auditors asany ~~of,~~material ~~and~~weaknesses ~~for, the periods presented~~ in ~~this~~internal ~~quarterly report~~controls; and

~~4. The~~b) ~~registrant’s~~any ~~other~~fraud, ~~certifying~~whether ~~officers~~or ~~and~~not Imaterial, ~~are~~that ~~responsible~~involves ~~for establishing~~management ~~and~~or ~~maintaining~~other employees ~~disclosure~~who ~~controls~~have ~~and~~a ~~procedures~~significant ~~(as~~role ~~defined~~ in ~~Exchange~~ ~~Act Rules 13a-14 and 15d-14) for~~ the registrant’s ~~and~~internal ~~we have:~~controls; and

a)6. The ~~designed~~registrant’s ~~such~~other ~~disclosure~~certifying ~~controls~~officer and ~~procedures~~I tohave ~~ensure~~indicated ~~that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period~~ in ~~which~~ this quarterly report iswhether ~~being~~or ~~prepared;~~not b)there ~~evaluated~~were ~~the~~significant ~~effectiveness~~changes ofin ~~the registrant’s disclosure~~ internal controls ~~and~~or ~~procedures~~in asother offactors athat ~~date~~could ~~within~~significantly 90affect ~~days~~internal ~~prior~~controls subsequent to the ~~filing~~ date of ~~this~~our ~~quarterly~~most ~~report~~recent ~~(the~~evaluation, ~~“Evaluation~~including ~~Date”);~~any ~~and~~corrective actions c)with ~~presented~~regard into ~~this~~significant ~~quarterly~~deficiencies ~~report our conclusions about the effectiveness of the disclosure controls~~ and ~~procedures~~material ~~based on our evaluation as of the Evaluation Date;~~weaknesses.

~~5. The~~Date: ~~registrant’s other certifying officers and I have disclosed~~April 14, ~~based on~~2003 ~~our most recent evaluation, to the registrant’s auditors and the audit~~ ~~committee of registrant’s board of directors (or persons performing the equivalent function):~~

~~a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’~~/s/ ~~ability~~Donald toA. record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; andWright

6Donald A. ~~The~~ ~~registrant’s other certifying officers and I have indicated in this~~Wright ~~quarterly report whether or not there were significant changes in internal~~ ~~controls or in other factors that could significantly affect internal controls~~ ~~subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.~~

~~Date:~~Chief ~~January 14,~~Executive ~~2003~~Officer

~~/s/ Donald A. Wright~~32 ~~Donald A. Wright~~ ~~Chief Executive Officer~~

30CERTIFICATION

~~Table~~I, ofCharles ~~Contents~~A. Miracle, certify that:

~~CERTIFICATION~~1. I have reviewed this quarterly report on Form 10-Q of Pacific Aerospace & Electronics, Inc.;

I2. Based on my knowledge, ~~Charles~~this A.quarterly ~~Miracle~~report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, ~~certify~~in ~~that:~~light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

13. IBased ~~have~~on ~~reviewed~~my knowledge, the financial statements, and other financial information included in this quarterly report, onfairly ~~Form 10-Q~~present in all material respects the financial condition, results of ~~Pacific~~operations ~~Aerospace~~and &cash flows of the ~~Electronics~~registrant as of, ~~Inc.~~and for, the periods presented in this quarterly report;

24. ~~Based~~The onregistrant’s myother ~~knowledge,~~certifying ~~this~~officer ~~quarterly~~and ~~report~~I ~~does~~are ~~not~~responsible ~~contain any untrue~~for ~~statement~~establishing ofand amaintaining ~~material~~disclosure ~~fact~~controls orand ~~omit~~procedures to(as ~~state~~defined ~~a material fact necessary to make the statements made,~~ in ~~light of the circumstances under which such statements~~ ~~were~~Exchange ~~made,~~Act ~~not~~Rules 13a-14 ~~misleading~~and ~~with~~15d-14) ~~respect~~for to the ~~period~~registrant ~~covered~~and bywe ~~this quarterly~~have: ~~report;~~

~~3. Based~~a) ondesigned mysuch ~~knowledge,~~disclosure ~~the~~controls ~~financial~~and ~~statements,~~procedures ~~and~~to ~~other~~ensure ~~financial~~that material information ~~included~~relating into ~~this~~the ~~quarterly report~~registrant, ~~fairly~~including ~~present~~its ~~in all material~~consolidated ~~respects the financial condition~~subsidiaries, ~~results~~is ofmade ~~operations~~known ~~and~~to ~~cash~~us ~~flows~~by ofothers ~~the registrant~~within asthose ofentities, ~~and~~particularly during ~~for,~~ the ~~periods~~period ~~presented~~ in which this quarterly report is being prepared;

~~4. The~~b) ~~registrant’s~~evaluated ~~other~~the ~~certifying~~effectiveness ~~officers~~of ~~and~~the Iregistrant’s ~~are~~disclosure ~~responsible~~controls ~~for~~and ~~establishing~~procedures ~~and~~as ~~maintaining~~of ~~disclosure~~a ~~controls~~date ~~and~~within ~~procedures~~90 days ~~(as~~prior ~~defined~~to ~~in Exchange~~the ~~Act~~filing ~~Rules 13a-14~~date ~~and~~of ~~15d-14)~~this quarterly ~~for~~report (the ~~registrant~~“Evaluation ~~and~~Date”); ~~we have:~~and

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying ~~officers~~officer and I have disclosed, based on ~~our~~ our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the ~~equivalent~~ equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and ~~b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and~~

~~6. The~~b) ~~registrant’s~~any ~~other~~fraud, ~~certifying officers and I have indicated in this quarterly report~~ whether or not ~~there~~material, ~~were~~that ~~significant~~involves ~~changes~~management inor ~~internal~~other ~~controls~~employees orwho inhave ~~other~~a ~~factors~~significant ~~that~~role ~~could~~in ~~significantly~~the ~~affect~~registrant’s internal controls; ~~subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies~~ and ~~material weaknesses.~~

~~Date:~~6. The ~~January 14~~registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, ~~2003~~including any corrective actions with regard to significant deficiencies and material weaknesses.

~~/s/~~Date: April ~~Charles~~14, ~~A. Miracle~~2003 ~~Charles A. Miracle~~ ~~Chief Financial Officer~~

31/s/ Charles A. Miracle

~~Table~~Charles ofA. ~~Contents~~Miracle

~~EXHIBIT~~Chief ~~INDEX~~Financial Officer

~~The following documents are filed as exhibits to this Quarterly Report:~~33

Exhibit
Number		Description
3.1		Articles of Amendment of Pacific Aerospace & Electronic, Inc. filed March 19, 2002.(1)
3.2		Designation of Rights and Preferences for Series C Convertible Preferred Stock of Pacific Aerospace & Electronics, Inc.(1)
4.1		Indenture dated as of March 19, 2002, among Pacific Aerospace & Electronics, Inc., as issuer, Aeromet America, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., PA&E International, Inc., Seismic Safety Products, Inc. and Skagit Engineering & Manufacturing, Inc., each as guarantors, and U.S. Bank National Association.(1)
4.2		Note Purchase Agreement dated as of March 25, 2002, , among Pacific Aerospace & Electronics, Inc., as issuer, Aeromet America, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., PA&E International, Inc., Seismic Safety Products, Inc. and Skagit Engineering & Manufacturing, Inc., each as guarantors, and FirstUnion National Bank, as collateral agent, relating to our 5% senior secured notes due 2007.(1)
4.3		Security Agreement dated as of March 25, 2002, among Pacific Aerospace & Electronics, Inc., as issuer, Aeromet America, Inc., Balo Precision Parts, Inc., Cashmere Manufacturing Co., Inc., Ceramic Devices, Inc., Electronic Specialty Corporation, Northwest Technical Industries, Inc., Pacific Coast Technologies, Inc., PA&E International, Inc., Seismic Safety Products, Inc. and Skagit Engineering & Manufacturing, Inc., each as guarantors, and FirstUnion National Bank, as collateral agent, relating to our 5% senior secured notes due 2007.(1)
99.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, Section 906 of the Sarbanes-Oxley Act of 2002.(2)

EXHIBIT INDEX

(1)		Incorporated by reference to the Company’s Current Report on Form 8-K filed on April 3, 2002.
(2)		Submitted herewith.

The following documents are filed as exhibits to this Quarterly Report:


Exhibit
Number		Description
10.56		Asset Purchase Agreement dated January 31, 2003, among Cashmere Manufacturing Co., Inc. as Seller and Damar Machine Company, Inc. as Buyer.
10.57		Contract of Sale and Security Agreement between CAPCO Financial, Inc., a subsidiary of Cupertino National Bank, the registrant and certain of the registrant's subsidiaries dated February 12, 2003.
10.58		Subordination Agreement dated February 12, 2003 among CAPCO Financial, Inc., a division of Cupertino National Bank, Wachovia Bank, N.A. (f/k/a First Union National Bank), the registrant and its wholly owned subsidiaries, Cashmere Manufacturing Co., Inc., Northwest Technologies, Inc., and Pacific Coast Technologies, Inc.
10.59		Cross Guaranty and Collateral Agreement dated February 12, 2003 among CAPCO Financial, Inc., a division of Cupertino National Bank, the registrant and its wholly owned subsidiaries, Cashmere Manufacturing Co., Inc., Northwest Technologies, Inc., and Pacific Coast Technologies, Inc.
10.60		Guaranty dated February 12, 2003 among CAPCO Financial, Inc., a division of Cupertino National Bank, the registrant and Cashmere Manufacturing Co., Inc.
10.61		Security Agreement dated February 12, 2003 among CAPCO Financial, Inc., a division of Cupertino National Bank, the registrant and its wholly owned subsidiaries, Cashmere Manufacturing Co., Inc., Northwest Technologies, Inc., and Pacific Coast Technologies, Inc.
10.62		Amendment No. 1 to Security Agreement dated February 12, 2003 between CAPCO Financial, Inc., the registrant and its wholly owned subsidiaries, Cashmere Manufacturing Co., Inc., Northwest Technologies, Inc., and Pacific Coast Technologies, Inc.
99.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, Section 906 of the Sarbanes-Oxley Act of 2002.

Filing Compare · PACIFIC AEROSPACE & ELECTRONICS INC