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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-K

For the fiscal year ended December 31, 2003

OR

Commission File Number 0-18050

PW EAGLE, INC.

(Exact name of registrant as specified in its Charter)

1550 Valley River Drive, Eugene, Oregon 97401

(Address of principal executive offices)

(541) 343-0200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: Common stock, $.01 par value

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined by 12-b2 of the Act).    Yes  ¨    No  x

The aggregate market value of our common stock held by non-affiliates as of June 30, 2003 was approximately $22,137,000 (based on the closing sale price of $3.92 per share as reported on the Nasdaq Stock Market).

The number of shares of the registrant’s common stock, $.01 par value, outstanding as of March 26, 2004 was 7,230,350.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement for registrant’s 2004 Annual Meeting of Shareholders are incorporated by reference into Items 10, 11, 12, 13 and 14 of Part III.

PART I

ITEM 1. BUSINESS

General

PW Eagle, Inc., a Minnesota corporation, (the Company) manufactures and distributes polyvinyl chloride (PVC) pipe and fittings, and polyethylene (PE) pipe and tubing products used for potable water and sewage transmission, turf and agricultural irrigation, natural gas transmission, water wells, fiber optic lines, electronic and telephone lines, and commercial and industrial plumbing. We distribute our products throughout the United States, including Hawaii and Alaska, and a minimal amount of shipments to selected foreign countries.

Our executive offices and the operating headquarters are located in Eugene, Oregon. We have production facilities in Cameron Park, Visalia and Perris, California; Columbia, Missouri; Hastings, Nebraska; Eugene, Oregon; Conroe, Texas; Buckhannon, West Virginia; Tacoma and Sunnyside, Washington; and West Jordan, Utah. We also have a distribution facility in Baker City, Oregon.

Our web address is www.pweagleinc.com. Investors can access our news releases and the periodic reports we file with the Securities and Exchange Commission free of charge on our web site.

Changes We Made to Our Business in 2003

Acquisition of Uponor ETI Company

On March 14, 2003, we acquired all of the stock of Uponor ETI Company, a subsidiary of Uponor Oyj, a Finnish company. In connection with the acquisition, we formed a wholly owned subsidiary. We merged the wholly owned subsidiary into Uponor ETI Company, which changed its name to Extrusion Technologies, Inc.

ETI is a technology leader in the North American polyvinyl chloride (PVC) pipe market for municipal engineering applications. ETI produces approximately 200 million pounds of PVC pipe annually, in diameters ranging from 4 to 36 inches. Their products are used for water transmission and sanitary, storm sewer and roadway drainage applications. ETI’s Ultra line of products utilizes proprietary processes or designs, which result in superior strength-to-weight characteristics relative to competitive products. ETI’s Ultra-Blue product incorporates a proprietary molecular-oriented manufacturing process to create PVC pressure pipe that, despite its thinner wall, provides greater impact strength and flow capacity while yielding pressure ratings comparable to conventional PVC pressure pipe.

In addition to its PVC pipe products, ETI had a wholly owned subsidiary, Mid-States Plastics, Inc., (“MSP”) which manufactured plastic water meter boxes used in the construction industry. This subsidiary was sold on September 30, 2003. The results of operations of MSP are shown as discontinued operations in the Condensed Consolidated Statement of Operations for the twelve months ended December 31, 2003.

For the year ended December 31, 2002, ETI had net sales of $89 million and earnings before interest, taxes, depreciation and amortization of $7.3 million. Approximately 31% of the net sales of ETI are from sales of its Ultra products and approximately 9% of its net sales are from Mid-States Plastics, with the balance being conventional PVC pipe products. ETI has production facilities in Texas, West Virginia, and Missouri and its operating headquarters in Denver, Colorado. We intend to continue to use ETI’s production facilities and equipment as historically utilized for the production of ETI’s PVC pipe products and Ultra products. See ITEM 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Form 8-K dated March 14, 2003 for more information regarding our acquisition of ETI.

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Recent Internal Business Operation Restructuring

On October 1, 2003, the operating management teams of the previously separate PWPipe and ETI business units were combined into a single operating management team with Jerry Dukes (formerly Senior VP Operations, for ETI) as President. While ETI remains a separate legal entity, this new team has integrated the PWPipe and ETI units into a single operating unit, utilizing the PW Eagle management team. See ITEM 10 “Directors and Executive Officers of the Registrant” for additional information regarding our management team.

Concurrent with these changes in PVC operations, we transferred certain assets and liabilities of our PE pipe operations to PWPoly Corp. (PWPoly). PWPoly operates with a separate management team and has its own credit facilities with no guarantee or cross default provisions. In order to maximize the value of PWPoly, PW Eagle has announced its intention to distribute the shares of PWPoly to PW Eagle shareholders. The PE business now conducted by PWPoly had sales of approximately $10.3 million in 2003. Refer to page 4 for an expanded discussion of the PWPoly business. See ITEM 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

Our PVC Pipe Business

We manufacture and distribute PVC pipe and fittings under the name PW Eagle. Our pressure and non-pressure PVC products consist of ½-inch to 36-inch PVC pipe for applications in the building, municipal water distribution, municipal sewage collection, turf and agriculture irrigation, fiber optic, power distribution and telecommunications industries. We look for new markets and, when appropriate, produce specialized products for our customers. Below are descriptions of our primary PVC pipe products and their applications.

A major use of PVC pipe is transporting water under pressure. We manufacture and distribute many PVC pressure pipe products for the transporting of drinking and irrigation water, including the following:

American Water Works Association (AWWA) Water Main Pipe. We offer this product in diameters of 4” to 24”. During the manufacturing process, each piece of this AWWA pipe is filled with water and proof tested. This pipe is also used in fire protection and carries the listing of Factory Mutual and Underwriters Laboratories (UL).

Ultra-Blue Water Main Pipe. Ultra-Blue is a molecular oriented PVC (MOPVC) pipe manufactured using proprietary processes that change the molecular orientation of the pipe, yielding greater strength, lighter weight and greater flow capacity than conventional PVC pipe. We produce Ultra-Blue in 6” through 16” diameters.

American Society for Testing and Materials (ASTM) PVC Pressure Pipe. Manufactured in diameters of ½” to 24” in a series of pressure ratings from 63 pounds to 315 pounds, this product delivers the water to grow crops and beautify parks, golf courses and homes.

ASTM PVC Well Casing. We offer a lightweight PVC pipe to be used as casing in water wells. Like the majority of our pressure pipes, well casing is in compliance with ANSI/NSF Standard 61 – Health Effects. As a companion to our well casing pipe, we also offer a threaded drop pipe for hanging submersible pumps. These heavy-duty pipes are made from Schedule 80 PVC and weigh approximately one-seventh of an equivalent metal pipe.

For many of the same reasons that plastic pipes are the materials of choice for pressure piping systems, PVC pipe is used in non-pressure applications. We service homes and industry through the production of non-pressure pipes to carry sewage, electrical power, fiber optics and telecommunications.

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ASTM Gravity PVC Sewer Pipe. Sewer pipe is used to transport wastewater from residential and commercial buildings to a treatment plant. Manufactured in diameters from 4” through 24”, our products are found leaving the home and entering the collection system of the sewage treatment plant. We believe PVC pipe is the most popular product in the nation for this purpose.

Ultra-Rib and Ultra-Corr Pipe. These structural wall pipes are offered in diameters from 8” to 36” for applications in sanitary sewers and storm drains. The proprietary design of these products provides significant strength and weight advantages in comparison to both conventional PVC pipes and competitive materials.

ASTM Drain, Waste and Vent (DWV) Pipe. This PVC DWV pipe is used inside the home to drain wastewater and vent the plumbing system. We manufacture this product up to 6” in diameter from either a solid wall construction, or a construction that layers solid walls around a cellular core. This ASTM coex cellular core pipe is very tough while having a lighter weight.

ASTM PVC Pipe with Recycle Content. We sponsored an ASTM Standard, which specifies a three-layer construction having the center layer made of recycled PVC. This pipe is sold as drainpipe, gravity sewer pipe and for removing methane gas from landfills.

Underwriters Laboratories Electrical Conduit. We manufacture a complete line of PVC heavy wall electrical conduit in diameters of ½” through 6” and fabricated fittings. The entire product line carries the UL mark and conforms to National Electrical Manufacturers Association Standards. This pipe carries electrical wiring below and above ground.

ASTM Utility Duct. Our PVC utility duct is used to carry power lines underground and house fiber optic and telephone communication lines.

Our PE Pipe Business

Separation of PWPoly from PW Eagle

On August 22, 2003 the Company created PWPoly and transferred certain assets and liabilities of our PE pipe business to PWPoly.

PWPoly focuses on extruding small diameter polyethylene pipe in sizes up to 6 inches in diameter. PWPoly’s pressure and non-pressure PE pipe products consist of ½” to 6” PE pipe and tubing for applications in the building, municipal water distribution, municipal sewage collection, irrigation, natural gas, fiber optic, power distribution and telecommunications industries. Below are descriptions of our primary PE pipe products and their applications.

ASTM PE Pressure Pipe. We offer a broad product line, which assures the customer the product of choice for its specific application. Polyethylene pressure pipes are manufactured from high quality PE 2406 and PE 3408 for irrigation. To complete the system, sprinkler pipe and drip tube is manufactured using a linear low-density PE resin.

ASTM PE Pipes for Special Applications. Polyethylene’s unique properties produce valuable products for applications in mining, chemical transport and closed-loop ground coupled heat pump systems. We believe our Eagle Pure-Core Blue^® and Eagle Geo-Flo^® are recognized leaders in the marketplace. We also produce Eagle Tri-Stripe^® for natural gas distribution in diameters from  ¹/2” to 6”.

We also manufacture and sell PE Fiber Optic Pipe for use in non-pressure applications. We manufacture coiled PE duct pipe in diameters of 2” through 6” in lengths up to 5,000 feet. The pipe is color-coded and available with various features including a form that can be plowed directly into the ground. To complete the system, fiber optic pipe with the same color-codes as PE is offered in PVC.

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PWPoly Investment in W.L. Plastics, Inc., an extruder of PE Pipe Products

On October 1, 2003, PWPoly, together with an affiliate of William Blair Mezzanine Capital Partners and members of W.L. Plastics’ management team acquired the business of W.L. Plastics, LLC, for approximately $17.6 million. PWPoly acquired an equity interest in W.L. Plastics of approximately 5.4% in exchange for $0.3 million in professional services rendered. W.L. Plastics focuses primarily on extruding large diameter polyethylene pipe with the bulk of its products currently in the 8-inch to 24-inch diameter sizes. PWPoly and its affiliates do not control W.L. Plastics, nor do they share management. However, W.L. Plastics and PWPoly intend to explore ways they can cooperate to benefit both companies.

On January 16, 2004 PWPoly invested $1.6 million in W.L. Plastics to increase our ownership percentage to 23%.

Potential Spin-off of PWPoly to PW Eagle Shareholders

In connection with our 2003 restructuring, we announced our intent to spin off our shares of PWPoly to PW Eagle shareholders. If the spin-off is completed, the Company anticipates that it will distribute one share of PWPoly stock for each share of PW Eagle stock held by those shareholders of PW Eagle who beneficially own 8,000 shares or more of PW Eagle stock. Those shareholders of PW Eagle who beneficially own less than 8,000 shares will receive a cash distribution for each of their shares of PW Eagle stock in an amount equal to the value of a share of PWPoly stock. This distribution of PWPoly shares or cash to the shareholders of PW Eagle stock is subject to final approval by an independent committee of the Board of Directors of PW Eagle, the issuance of an opinion to the PW Eagle lenders independent committee as to the value of PWPoly, the approval of the transaction by PW Eagle’s and certain governmental approvals and the raising of the cash necessary to make the cash distribution. A record date for this transaction has not yet been established. This transaction will be a taxable event for both PW Eagle and its shareholders. Assuming that PW Eagle is profitable in 2004, the distribution of the PWPoly shares and the cash will be treated as a dividend to the shareholders of PW Eagle. Regardless of whether or not a PW Eagle shareholder receives PWPoly shares or cash in the distribution, the amount of the dividend on a per share basis will be equal to the amount of cash distributed on a per share basis. We anticipate that the spin-off will take place in the third quarter of 2004. There is no assurance that we will complete the spin-off. We intend to keep investors apprised of our progress regarding the spin-off in future press releases and in our periodic reports.

Marketing and Customers

We market our products through a combination of independent sales representatives, company salespersons and inside sales/customer service representatives. All sales representatives are primarily assigned to product lines and geographic territories. Our primary geographic market is the continental United States, Hawaii, Alaska and a minimal amount of shipments to selected foreign countries.

Our marketing strategy focuses on providing high quality products and responsive customer service. We believe our products enjoy wide acceptance and recognition.

Generally, our products are warranted for one year. We maintain product liability insurance to cover such warranty claims, and to date, warranty reserves have been sufficient to cover warranty claims.

Our customers consist primarily of wholesalers and distributors. We have a broad and diverse group of customers. No customer accounted for more than 8% of our net sales in 2003 and 7% in 2002.

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Competition in the PVC and PE Pipe Industry

The plastic pipe industry is highly fragmented and competitive, due to the large number of producers and the commodity nature of the industry. Because of shipping costs, competition is usually regional, instead of national, in scope and the principal methods of competition are a combination of price, service, warranty and product performance. We compete not only against other PVC and PE plastic pipe manufacturers, but also against ductile iron, steel, concrete and clay pipe producers. Although we believe we have lessened the commodity nature of our business through our brand name and proprietary pipe products, pricing pressure has effected our operating margins and will continue to in the future.

Manufacturing and Supply Sources

Our executive offices and operating headquarters are located in Eugene, Oregon. We have PVC pipe manufacturing facilities in Cameron Park, Visalia and Perris, California; Columbia, Missouri; Hastings, Nebraska; Eugene, Oregon; Conroe, Texas; West Jordan, Utah; Buckhannon, West Virginia; and Tacoma and Sunnyside, Washington, and a PE pipe manufacturing facility in Hastings, NE, and a PE distribution facility in Baker City, OR.

All eleven PVC pipe manufacturing facilities have compound centers where the PVC resin is precisely mixed with various waxes, colorants, UV protectants and lubricants to create the appropriate compound for each extrusion application. We use high quality raw materials, as well as manufacturing techniques and machinery that incorporate many of the newest extrusion technologies. Compounded PVC resin is automatically transported from storage silos to the extrusion equipment by a vacuum feeding system.

PE resin comes premixed with additives and is conveyed directly from storage silos to the extruders.

Extrusion is a common manufacturing process used in the production of plastic products. During production, PVC or PE resin compound is placed in an extrusion machine, where the PVC or PE material is heated into a plastic state and pulled through a sizing apparatus to produce pipe or tubing of the desired diameter. The newly extruded pipe or tubing is moved through a water cooling trough, marked to indicate the identity of the pipe or tubing and cut to length. Multiple warehousing and outdoor storage facilities are used to store finished product. Inventory is shipped from storage to customers by common carrier or by our vehicles.

At each phase of the manufacturing process, we strive to pay great attention to quality and production of a consistent product. Our PVC and PE pipe products are produced in compliance with consensus standards, such as American Society for Testing Materials, American Water Works Association and Underwriter’s Laboratory. We have a quality assurance program, which has its own testing lab for both resin and finished goods.

We acquire our PVC and PE resin in bulk, mainly by rail car, from primarily two sources. During the years ended December 31, 2003, 2002, and 2001, purchases of raw materials from two vendors totaled 85%, 79% and 77% of total material purchases, respectively. We strive to maintain strong relationships with our key raw material vendors to ensure the quality and availability of raw material. We believe our relationships with our key raw material vendors are good. However, the loss of a key supplier could have a significant impact on our business.

Business Seasonality

Due to general weather constraints in the geographic markets in which we operate, the demand for our products tends to be seasonal. As a result, we experience fluctuations in sales, accounts receivable and inventory levels during the year. Generally our sales are weaker during the winter months, when construction is slower, and improves during the second and third quarters, when construction and development improves.

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Backlog

Our goal is to keep delivery lead times to a minimum in order to meet customer requirements, thus minimizing backlog. Our backlog on March 26, 2004, was approximately $40.9 million of plastic pipe compared to $10.3 million on March 14, 2003. The backlog on March 14, 2003 did not include the ETI activity. Backlog increased by 297% over a similar period in 2003. Approximately $18 million is from the inclusion of ETI. The balance of the increase is from the strong increase in demand for our products in the first quarter of 2004.

Employees

We have approximately 924 employees, 175 are in administration, 136 in sales and shipping and 613 in manufacturing. Except for our production and maintenance employees at the Buckhannon, West Virginia facility, none of our employees are represented by a labor union, and we have never experienced any work stoppages.

ITEM 2. PROPERTIES

Our executive offices and operating headquarters are located in leased office space in Eugene, Oregon. Our PVC pipe manufacturing and warehouse facilities are located in Cameron Park, Visalia and Perris, California; Columbia, Missouri; Hastings, Nebraska; Eugene, Oregon; Conroe, Texas; Buckhannon, West Virginia; West Jordan, Utah; and Tacoma and Sunnyside, Washington. We both own and lease portions of our facilities in Hastings, Nebraska and lease our manufacturing facilities in Eugene, Oregon and Conroe, Texas. We lease our operating headquarters in Eugene, Oregon and manufacturing plants in Perris, California, West Jordan, Utah and Tacoma, Washington pursuant to a long-term lease agreement (see ITEM 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Notes to the financial statements under ITEM 8.).

PWPoly has a manufacturing facility in Hastings, Nebraska and a distribution warehouse in Baker City, Oregon.

On December 31, 2003 we sold our idled manufacturing facility in Phoenix, Arizona for $2.3 million. Proceeds from the sale, as required under our loan agreement were used to pay down long-term debt. In 2002, we sold our Hillsboro, Oregon manufacturing facility and certain equipment for $1.3 million. Proceeds from the sale were used to pay down long-term debt.

We believe that the production capacity of our facilities is sufficient to meet our current and future needs. The operating manufacturing facilities, as currently equipped, are operating at approximately 94% of capacity in the first quarter of 2004.

ITEM 3. LEGAL PROCEEDINGS

We are from time to time a party to various claims and litigation matters incidental to our normal course of business. We are not a party to any material litigation and are not aware of any threatened litigation that would have a material adverse effect on our business.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 2003.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock is currently traded on the Nasdaq Stock Market under the symbol “PWEI.” The following table sets forth the high and low closing prices of a share of common stock for each fiscal quarter in 2003 and 2002:

The above quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions. On March 26, 2004, there were 7,230,350 shares of common stock outstanding held by approximately 1,380 shareholders of record and approximately 1,524 shareholders in street name. Common stock outstanding decreased 28,500 shares during the first quarter of 2004 from the retirement of 33,500 shares of unvested restricted stock and increased by the exercise of 5,000 stock options.

We have never paid a cash dividend on our common stock. Payment of common stock dividends is at the discretion of the board of directors, subject to our lending arrangements, which currently restrict the payment of dividends. The board of directors plans to retain future earnings, if any, for operations and does not intend to pay common stock dividends in the near future, other than dividends issued in connection with the PWPoly spin-off.

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ITEM 6. SELECTED FINANCIAL DATA

PW EAGLE, INC.

SUMMARY OF OPERATIONS

(in thousands, except for per share amounts)

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Executive Summary

During 2003, our business has gone through changes and faced challenges. On March 14, 2003, we acquired ETI, which with net sales in 2002 of $89 million, significantly increased the size of our business. On October 1, 2003, we announced the reorganization of our operating management structure to integrate PWPipe and ETI into a single operating unit. This integration was substantially complete by December 31, 2003.

At December 31, 2003, we were not in compliance with our loan agreements. We have worked closely with our lenders and have reached agreements waiving all conditions of default and amending covenants such that we believe we will be in compliance with our agreements through March 31, 2005, and we believe we have sufficient liquidity to meet our obligations through that date as well.

Each of these matters is discussed in more detail below.

We monitor several nonfinancial indicators in evaluating our business operations and future prospects, including:

We provide a more detailed discussion of PVC and PE resin prices, GDP, interest rates and demand for PVC and PE pipe products under the “Outlook” section of this discussion.

We believe main drivers of industry performance are GDP growth and supply and demand of PVC resin. Historically, our profitability has improved during periods of strong GDP growth and decreased during periods of slower growth or recession. While GDP growth did improve in 2003 compared to 2002, demand for PVC resin for use in pipe was unchanged, and our margins decreased. Both GDP and demand for PVC resin for use in pipe are forecasted to increase in 2004 compared to 2003. Historically, our margins have increased under similar circumstances.

Because of the volatility of selling prices for PVC pipe and the cost of PVC resin, management monitors various data in terms of dollars per pound of pipe sold. The above table expresses financial statement items in these terms by dividing the amounts shown in the financial statements by the pounds of pipe sold in the corresponding year.

Net sales per pound sold increased to $0.498/lb in 2003 from $0.458/lb in 2002. This increase results from the acquisition of ETI, which includes sales of the Ultra product line which generate more net sales per pound because they utilize less material than conventional PVC pipes, as well as an increase in the selling price of conventional PVC pipe.

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Cost of goods sold increased to $0.443/lb in 2003 from $0.375/lb in 2002 due to higher prices for our primary raw material, PVC resin. Due to competitive pressures from a relatively weak demand for PVC pipe in the 2nd and 3rd quarters, we were not able to increase our selling prices enough to cover the increase in material costs, resulting in decreased margins and gross profit.

Operating expenses increased to $0.069/lb in 2003 from $0.062/lb in 2002. This increase is primarily from higher per pound freight costs associated with ETI’s Ultra product line.

In 2002, net sales per pound were basically unchanged from 2001. Cost of goods sold decreased to $0.375/lb from $0.408/lb in 2001 as the cost of PVC resin decreased. Because we were able to keep selling prices constant while our costs decreased, our gross profit increased. Operating expenses per pound were also basically unchanged from 2001 as our costs changed in conjunction with the additional pounds sold.

Results of Operations

The following table sets forth items from our statements of operations as percentages of net sales:

We posted net sales of $332 million in 2003, increasing 32% from 2002 to 2003 and net sales of $251 million in 2002, increasing 2% from 2001 to 2002. Substantially all of the increase in net sales in 2003 is from the acquisition of ETI in March of 2003. ETI sales represent $73 million or 29% of the 32% increase in net sales. In 2002, average product prices increased less than 1% from 2001, and pipe pounds sold increased 2%, resulting in the increase in net sales in 2002 compared to 2001.

Gross profit, as a percent of net sales, decreased by 7.0% in 2003 as compared to 2002. Strong demand for PVC pipe led to pipe prices increasing faster than PVC resin from January through April of 2003 and margins increased. PVC resin peaked in April and decreased over the balance of the year. Pipe prices decreased faster than PVC resin price during the traditionally strong construction period in the 2^nd and 3^rd quarters of 2003 due to weaker than normal demand for PVC pipe. Weak economic conditions and inclement weather in certain parts of the country were the major contributors to this decreased demand. This drove a significant reduction in margins, offsetting the gains achieved in the first quarter.

Gross profit, as a percent of net sales, increased by 7.4% in 2002 as compared to 2001. Gross profit percentage increased during the first nine months of 2002 due to a combination of strong demand for pipe and rising PVC resin and pipe prices. PVC resin prices increased in the first seven months of 2002 due to a strong demand for resin and increasing raw material costs. The strong demand for pipe in the first six months of 2002 allowed us to increase pipe prices at a greater rate than resin prices, thereby increasing our gross profit percentage. A decrease

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in PVC resin and pipe prices in the second half of 2002 due to a weak economy resulted in a decrease in gross profit percentage in the fourth quarter of 2002. This offset some, but not all, of the gains achieved in gross profit percentage in 2002 as compared to 2001. In addition, the cost reduction measures taken in the second half of 2001 have reduced our cost of goods sold, further enhancing our gross profit. Decreased pipe and resin prices resulted in a lower of cost or market adjustment at year-end, reducing pipe inventory and increasing cost of goods sold by $2.1 million in 2001. The demand for pipe was further reduced by the reluctance of distributors to purchase pipe for inventory when pipe prices were dropping, and market conditions caused pipe prices to drop at a faster rate than resin prices.

Operating expenses as a percent of net sales increased 0.6% in 2003 as compared to 2002. In connection with the business restructuring implemented in the fourth quarter of 2003, we incurred restructuring charges of $1.3 million. The balance of the increase in 2003 is primarily due to the increase in freight costs associated with ETI’s Ultra product line. Operating expenses as a percentage of net sales decreased by 0.6% in 2002 as compared to 2001. The decrease is primarily the result of restructuring costs of $1.2 million incurred in the third quarter of 2001.

Non-operating expenses increased to $11.4 million in 2003 from $10.7 million in 2002. This increase results from increased levels of debt incurred as a result of the ETI acquisition, partially offset by the gain on the sale of our idled manufacturing facility in Phoenix, Arizona. The decrease in non-operating expense in 2002, compared to 2001, is primarily attributable to a decrease in interest rates for the unhedged portion of debt, a reduction in the balance of the Revolving Credit Facility and continued payments on the long-term debt.

The income tax provision (tax benefit) for the years ended December 31, 2003, 2002 and 2001 were calculated based on management’s estimates of the annual effective tax rate for the year. The annual effective tax rate for 2003 reflects our statutory federal and applicable state tax rates of approximately 38.3%, down from 39.5% in 2002. The 2001 rate was impacted by rate increases in certain states in which we operate, offset by an adjustment of accruals associated with certain tax contingencies.

Liquidity and Capital Resources

In conjunction with the acquisition of ETI and formation of PW Poly, we entered into new credit facilities (see Note 5).

On September 30, 2002, we entered into a revised financing agreement with the lenders of our Senior Credit Facility and an amended agreement with holders of the Senior Subordinated Notes. Under the terms of the agreements, the Company increased the amount of its Senior Term Loan from $15.2 million to $18.0 million and decreased the annual principal payments from $2.9 million to $2.6 million. The proceeds of $2.8 million from the revision of the Senior Term Loan were used to pay down the Revolving Credit Facility to $8.0 million. Changes to certain provisions in the borrowing base calculation of the Senior Credit Facility were made to increase the availability of funds under the Revolving Credit Facility by $6.0 million. The maximum amount available under the Revolving Credit Facility was increased from $40 million to $45 million between February and May of each year. The Company incurred $0.2 million in additional financing costs to complete these transactions which were capitalized and will be amortized over the life of the respective loans. Under the amended agreement, the term of the Senior Credit Facility was extended by one year to September 2005 and the interest rates were reduced by 0.25%.

The Company’s obligations at December 31, 2003 under various long-term debt arrangements, including the new ETI Senior Credit Facility and the new PWPoly Credit Facility, operating leases and other arrangements are summarized in the table below:

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At December 31, 2003, the Company had a contingent liability for standby letters of credit totaling $2.2 million that are issued and outstanding. These letters of credit guarantee payment to third parties in the event the Company is unable to pay in a timely manner. Standby letters of credit reduce the funds available under the revolving credit facility. No amounts were drawn on these letters of credit as of December 31, 2003.

On May 30, 2003, we amended our Senior Credit Facility with Fleet Capital Corp and CIT Group/Business Credit to increase the amount available on the Revolving Credit Facility to $50.0 million from its previous amounts of $40.0 million from September to January and $45.0 million from February to May.

Cash provided by operating activities was $1.6 million in 2003, compared to $55,000 and $14.1 million in 2002 and 2001, respectively. The key component in changes in cash flow levels is the fluctuation in inventories. Working capital decreased $17.2 million to $(3.6) million in 2003 from $13.6 million in 2002, primarily from the increase in the Revolving Credit Facility.

Investing activities used $16.8 million in 2003, provided $0.6 million in 2002 and used $3.1 million in 2001. The acquisition of ETI in 2003 used $18.9 million in cash, and the sale of MSP provided $4.4 million in cash. Capital expenditures for 2003 were $2.2 million. In 2002, we sold our Hillsboro manufacturing facility and certain equipment for $1.3 million, which was partially offset by capital expenditures of $0.8 million. The primary use of cash in 2001 was capital improvements. Fiscal 2002 capital expenditures of $0.8 million were held to minimum required levels and are not representative of our annual requirements. Fiscal 2003 and 2001 capital expenditures of $2.2 million and $3.4 million, respectively, reflect a spending program more consistent with our recurring replacement needs.

Financing activities provided $15.2 million during 2003. The primary sources of cash were net borrowings under the Senior Credit Facilities of ETI and PWPoly and the Revolving Credit Facility of PW Pipe of $19.6 million. The Company made a final payment of $0.6 million to the original owners of our former Hillsboro, Oregon manufacturing facility. Debt issuance and financing costs of $0.8 million were incurred in connection with the establishment of ETI’s and PWPoly’s Senior Credit Facilities. Financing activities used $1.0 million in 2002. In 2002, we entered into a sale-leaseback transaction, which generated $13.4 million in proceeds. The proceeds were used to reduce the term debt by $8.8 million. The remaining proceeds of approximately $4 million were used to pay down the Revolving Credit Facility. Financing activities used cash of $11.3 million in 2001. In 2001, $11.8 million provided from the Revolving Credit Facility and $9.2 million provided from operating activities was used to repay $10.0 million in long-term debt and fund the repurchase of approximately $11 million of our common stock.

As described above, the Company entered into a sale-leaseback transaction agreement on February 28, 2002 for certain manufacturing facilities and the Eugene office building. As a result of the sale-leaseback transaction, a financing lease obligation of $13.6 million, net of a debt discount of $0.4 million, was recorded based on the collective estimated fair value of the financing lease obligation and warrant on the date issued. No gain or loss was recognized on the transaction. The financing lease obligation, which expires in September 2022, requires an annual lease payment of $1.7 million, including interest at a rate of 11.6%. The financing lease includes certain financial covenants and requires the company to maintain an irrevocable letter of credit equal to one year’s lease payments. The company has a purchase option at the end of the lease term at an amount equal to the greater of the fair market value of the leased assets or $14.7 million. If the purchase option is not exercised and the company does not terminate the lease, the lease will automatically renew for a term of 10 years.

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We had commitments for capital expenditures of $18,000 at December 31, 2003, which we intend to fund from our Revolving Credit Facility.

Restructuring Activities

In response to difficult economic conditions and poor operating results, the Company decided to consolidate the PWPipe and ETI business units under common management control in October 2003. The former ETI headquarters office in Denver, Colorado was closed and all administrative and accounting functions were transferred to the Eugene, Oregon office. In addition, effective January 2004, the corporate office in Minneapolis, Minnesota was closed and all corporate office functions were transferred to the Eugene, Oregon office, which now represents our corporate headquarters, expanding the previous role as our lead operating office. As a result of the consolidation, approximately 30 non-management positions were eliminated. In addition, certain officers and directors resigned their positions and cancelled consulting agreements.

In connection with these fiscal 2003 activities, the Company expects to incur severance costs totaling $1,359,000, including the forgiveness of stock loans totaling $387,000 (see Note 13). As of December 31, 2003, the Company has incurred a charge of $1,253,000 for these severance costs, with the remaining charges of $106,000 expected to be incurred during the first quarter of fiscal 2004. Severance payments through December 31, 2003 totaled $78,000, with the remaining amounts to be paid according to contractual terms extending through August 2005. Restructuring charges are recorded on a separate line within operating income in the Company’s statement of operations.

On February 22, 2002, the Company completed a sale of its Hillsboro, Oregon facility, together with certain equipment, for $1.3 million. Additionally, an analysis of the carrying value of equipment not included in the sale indicated that its carrying value exceeded its net realizable value. Accordingly, the financial statements for fiscal 2001 reflect an asset impairment charge of $400,000 recorded as a component of cost of goods sold.

In July 2001, the Company announced a restructuring plan to align the Company’s operations with market conditions, reduce the Company’s fixed costs and improve profitability. These actions included a net reduction of 11 percent of the Company’s workforce, permanently closing and selling the Hillsboro, Oregon production facility, temporarily suspending operations of the Phoenix, Arizona manufacturing facility until customer demand required additional capacity and initiated focused cost reduction programs. The related restructuring charge of $1.2 million was recorded on a separate line within operating income in the Company’s statement of operations.

Under the 2001 restructuring plan, 93 positions were eliminated. Severance payments totaling $60,000 and $295,000 were paid to terminated employees in fiscal 2003 and 2002, respectively. The remaining severance payment of $3,000 will be paid during the first half of fiscal 2004.

Following is a summary of the restructuring reserve activity:

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We anticipate a charge to the fiscal 2004 operating results associated with certain debt financing activities. The amount of this charge is dependent upon the outcome of these activities.

Acquisition

On March 14, 2003, we acquired (the Acquisition) all of the stock of Uponor ETI Company, a subsidiary of Uponor Oyj, a Finnish company. In connection with the acquisition, we formed a wholly owned subsidiary. We merged the wholly owned subsidiary into Uponor, which changed its name to Extrusion Technologies, Inc.

The purchase price for ETI was approximately $27.3 million, of which $18.9 million was paid in cash. Also, included in the purchase price are transaction costs of $0.6 million and royalties to be paid by ETI of $8 to $12 million over the next eight years, based on the sales of specific products. The Acquisition was accounted for as a purchase business combination. The purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values, comprised of net current assets of $8.3 million, property, plant and equipment of $14.4 million, various intangible assets totaling $5.1 million, net deferred tax liabilities of $0.8 million and net non-current assets of $0.3 million.

The Acquisition was financed by an equity contribution from PW Eagle to ETI of $7 million, drawn from PW Eagle’s Revolving Credit Facility, a new $5 million Term Note drawn under ETI’s new financing facility and a $10 million advance drawn from ETI’s new Revolving Credit Facility. In 2003, ETI was operated as a stand-alone wholly owned subsidiary of PW Eagle, with each entity responsible for its own debts and obligations without any guarantees or cross defaults.

In connection with the Acquisition, ETI entered into a Senior Credit Facility consisting of (i) a Revolving Credit Facility of $25 million less the outstanding balance on the ETI Term Note and the ETI Equipment Notes (ii) a $5 million Term Note and (iii) potential Equipment Notes of up to $1.5 million. The ETI Revolving Credit Facility bears an interest rate of LIBOR plus 2.75%. ETI is required to pay a fee of .5% on the unused portion of the Revolving Credit Facility. Principal payments on the ETI Term Note are due in quarterly payments of $250,000 beginning on June 30, 2003 until it is paid in full on August 20, 2005. The Term Note bears an interest rate of LIBOR plus 3.25%. Additional payments on the Term Note will be made annually commencing December 31, 2003 for a cumulative total of $1 million from Excess Cash Flow, defined as EBITDA (Net Income plus interest, income taxes, depreciation, and amortization) minus non-financed capital expenditures, cash taxes, scheduled principal payments and cash interest. Payments on the ETI Equipment Notes will be made monthly at 1/60th of the total Note balance until paid in full on August 20, 2005. The Equipment Notes bear an interest rate of LIBOR plus 3.25%. At December 31, 2003, there were no outstanding Equipment Notes.

Under this ETI Senior Credit Facility, ETI is required to comply with certain restrictive financial ratios and covenants relating to minimum fixed charge coverage, minimum interest coverage, funded debt to EBITDA, and maximum capital expenditures as well as other customary covenants, representations, warranties, and funding conditions. The ETI Senior Credit Facility is collateralized by nearly all of the assets of ETI. Effective April 1, 2003, as required under its covenants, ETI entered into a fixed rate agreement for 50% of its term debt with a LIBOR rate of 2.49%. At December 31, 2003, the Contract had a notional amount of $2.1 million and a fair value of $(21,000). The notional amount decreases in proportion to payments on the term debt until the fixed rate agreement terminates in August of 2005. The ETI Senior Credit Facility is collateralized by nearly all of the assets of ETI.

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In addition, PW Eagle amended its financing agreement with JP Morgan Partners, LLC, among other parties (collectively, the “Lenders”), to acknowledge and reflect the purchase of ETI. In connection with this amendment, PW Eagle issued to the Lenders 10-year warrants to purchase an aggregate of 350,000 shares of PW Eagle common stock for $9.50 per share. The warrants become exercisable on October 1, 2004. However, exercise is subject to the occurrence of certain events associated with a change in control of the Company, as defined, which may either delay exercise or effectively cancel the warrants. The warrants expire March 14, 2013 unless earlier terminated.

Separation of Polyethylene Pipe Business

On August 22, 2003, the Company created a wholly owned subsidiary, PWPoly Corp (“PWPoly”). On October 1, 2003, the Company transferred certain assets and certain liabilities of its PE pipe business to PWPoly. Machinery and equipment with a net book value of $2 million and inventory with a net book value of $1.8 million were transferred to PWPoly. In addition, PWPoly assumed payables related to its business with a net book value of $0.6 million. PWPoly paid the Company $1.5 million of cash upon the transfer of the net assets. As PWPoly and the Company are entities under common control, the transfer of the net assets was recorded at historical cost.

In connection with the creation of the PWPoly subsidiary, PWPoly entered into a Senior Credit Facility consisting of (i) a Revolving Credit Facility of $3.5 million, and (ii) a $1.1 million Term Note. The PWPoly Revolving Credit Facility bears and interest rate of prime plus 1%. PWPoly is required to pay a fee of 0.5% on the unused portion of the Revolving Credit Facility. Principal payment terms of the PWPoly Term Note are due in monthly payments of $18,333 beginning on November 1, 2003 until it is paid in full on September 1, 2006. The Term Note bears an interest rate of prime plus 1.5%.

Under the PWPoly Senior Credit Facility, PWPoly is required to comply with certain restrictive financial ratios and covenants relating to debt service coverage, senior debt to tangible capital base, minimum earnings before tax and capital expenditures, as well as other customary covenants, representations, warranties and funding conditions. The PWPoly Senior Credit Facility is collateralized by nearly all of the assets of PWPoly.

On October 1, 2003, PWPoly, together with an affiliate of William Blair Mezzanine Capital Partners and members of the management team of the acquired company, acquired the business of W.L. Plastics, LLC for approximately $17.6 million. PWPoly acquired an equity interest in W.L. Plastics of approximately 5.4% in exchange for $0.3 million in professional services rendered. On January 16, 2004, PWPoly invested $1.6 million in W.L. Plastics, to increase our ownership to approximately 23 percent. This investment was funded primarily through the issuance of new PWPoly subordinated debt of $1.3 million.

Future Outlook and Risks to Our Business

The statements contained in this section and statements contained in Items 1, 3, 7 and 7A of this Report on Form 10-K and the President’s letter to shareholders in connection with our 2004 Annual Meeting of Shareholders regarding our beliefs and expectations that are not strictly historical are forward-looking statements made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements reflect our current expectations and beliefs as of March 26, 2004 and are based on information known to us and our assumptions as of that date. These forward-looking statements involve known and unknown business risks and risks that we cannot control. As a result, our statements may not come true and our operating results may differ materially from our stated expectations and beliefs.

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Some of our current beliefs and expectations are discussed below along with risk factors that impact our industry and business.

Forward Looking Statements

We believe the Gross Domestic Product (GDP) is closely correlated to the demand for PVC resin and PVC pipe and we recognize that our business is tied to economic cycles. GDP increased by 3.1% in 2003, as compared to the 2.2% increase in 2002. Demand for PVC pipe was relatively strong in the first quarter of 2003; however, we believe a significant portion of this demand was related to inventory increases by distributors. During the second quarter of 2003, as pipe prices stabilized and then began to decrease, distributors significantly reduced their inventories resulting in lower volumes for PVC pipe producers. We believe that distributors have maintained lower inventory levels through the end of 2003. Accordingly, we believe that inventory levels at resin producers, pipe producers and distributors were relatively low at the end of 2003, making it likely that demand for PVC pipe and PVC resin will be greater than supply during the first half of 2004, providing moderate economic growth continues.

In addition, the production of PVC may be limited by the availability of chlorine, a major raw material component of PVC resin. Chlorine capacity could be limited due to the closure of several chlorine manufacturing plants and, to our knowledge, no significant capacity has been added. This combination of industry conditions could lead to increased product pricing and increased margins in 2004.

Demand for PVC resin was strong early in 2003 and PVC resin producers implemented price increases totaling eight cents per pound during the first four months of the year. Pipe producers implemented several pipe price increases during the same period in response to these resin price increases. During the final eight months of 2003, PVC resin prices decreased by three cents per pound in response to a weakening demand for PVC resin. During the same period, PVC pipe prices decreased at a greater rate than PVC resin prices.

In response to increasing demand and relatively fixed current production capacity, pipe producers have implemented and announced several pipe price increases in response to resin price increases announced for the first four months of 2004. We believe these pipe price increases will have a positive impact on our margins.

Over time, we expect the demand for plastic pipe to grow as acceptance of plastic pipe over metal pipe continues and the overall economy continues to grow. Industry growth projections call for annual sales growth rates for PVC pipe of three percent or greater in 2004. The actual growth rate may be less than or greater than three percent based on short-term economic conditions. Our strategy has been, and continues to be, to concentrate growth initiatives in higher profit products and geographic regions.

We believe that the operational restructuring we began in the fourth quarter of 2003 has positioned the Company for improved results in the future by improving our efficiency and reducing our selling, general and administrative costs. We are continuing to pursue a financial restructuring in fiscal 2004 to reduce our interest charges.

Risk Factors

The pipe industry and our business are heavily dependent on the price and trend of PVC resin, our main raw material.

Our gross margin percentage is sensitive to PVC raw material resin prices and the demand for PVC pipe. Historically, when resin prices are rising or stable, our margins and sales volume have been higher. Conversely, when resin prices are falling, our sales volumes and margins have been lower. During the first four months of 2003, PVC resin producers implemented PVC price increases totaling eight cents per pound. During the last eight months of 2003, PVC prices decreased by three cents per pound due to a decrease in demand for PVC. In

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response to increasing demand and relatively fixed current production capacity, PVC resin producers implemented a two cent per pound price increase for January 2004 and a two cent per pound price increase for February 2004. In addition, price increases of two cents per pound in March 2004 and two cents per pound in April 2004 have been announced.

Our gross margin decreases when the supply of PVC resin and PVC pipe is greater than demand. Conversely, our gross margins improve when PVC resin and PVC pipe are in short supply. In April 2001, a major producer of PVC resin filed for bankruptcy and, during the first quarter of 2001 ceased operations at two manufacturing facilities. This resulted in a reduction of approximately one billion pounds of production capacity, or 5% of the North American industry capacity. Although these two facilities have subsequently been purchased by two PVC producers, we do not expect this idled capacity to re-start in 2004. In addition, we believe the production of PVC resin may be limited by the availability of chlorine, a major raw material component.

The demand for our products is directly affected by the growth and contraction of the Gross Domestic Product and economic conditions.

Due to the commodity nature of PVC resin and PVC pipe and the dynamic supply and demand factors worldwide, historically the markets for both PVC resin and PVC pipe have been very cyclical with significant fluctuations in prices and gross margins. Generally, after a period of rising or stable prices, capacity has increased to exceed demand with a resulting decrease in prices and gross margins. Over the last ten years, there have been consolidations in both markets, particularly with respect to PVC resin manufacturers. During the same period, the capacity of PVC resin producers has increased from just over 9 billion pounds to over 18 billion pounds today. In the last 10 years published PVC resin prices have fluctuated between $.25 and $.40 per pound. Currently resin prices are at or near the historical high price of $.40 cents per pound.

While we expect the demand for PVC pipe to continue to increase over the long term, we also expect that the industry will continue to be subject to cyclical fluctuations and times when supply will exceed demand, driving prices and margins down. These conditions could result from a general economic slowdown either domestically or elsewhere in the world or capacity increases in either the PVC resin or PVC pipe markets. General economic conditions both in the United States and abroad will continue to have a significant impact on our prices and gross margins.

We have a significant amount of outstanding debt and must continue to operate our business to meet our outstanding obligations.

At December 31, 2003, PW Eagle and PWPoly were in violation of certain covenants on their Revolving Credit Facilities and Term Loans. In addition, PW Eagle was in violation of certain covenant and payment defaults on its Senior Subordinated Debt, as well as certain covenant defaults on its Financing Lease. As of March 31, 2004, we have cured the payment default and obtained waivers of all covenant violations. In addition, our lenders have amended their agreements such that we believe we will be in compliance with the covenants through the first quarter of 2005. We also believe we have sufficient liquidity to meet our obligations through that date. In the event of a default, we will be required to either obtain a waiver from our lenders or amend our lending agreements. There is no assurance that our lenders, note holders and lessors will waive any future default or agree to any future amendments of our credit facilities and leases. If we failed to obtain a waiver or an amendment, we would be required to obtain new financing from alternative financial sources. There is no assurance that we could obtain new financing, and if we did, there is no assurance that we could obtain terms as favorable as our current credit facilities.

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Interest rates affect our ability to finance our indebtedness and may adversely affect the demand for our products when higher rates slow the growth of our economy.

We financed our purchase of PWPipe in 1999 using a $100 million Senior Credit Facility and approximately $32 million of Senior Subordinated Notes. On February 28, 2002, we completed a financial restructuring to reduce our floating interest rate term notes from $27.5 million to $17.6 million. On September 30, 2002, we modified our financing agreement with the lenders of our Senior Credit Facility. Changes to certain provisions of the Senior Credit Facility were made to increase the availability of funds under the Revolving Credit Facility by $6 million. The maximum amount available under the Revolving Credit Facility was increased from $40 to $45 million between February and May of each year. We increased the amount of the Senior Term Loan from $15.2 million to $18.0 million. We used these proceeds to pay down the Revolving Credit Facility to $8.0 million. However, even with the revisions made to the Senior Credit Facility and the Senior Subordinate Notes, our ability to service our debt remains sensitive to an increase in interest rates. Interest rate increases would further challenge our ability to pay the interest expense on our debt and fixed charges. See ITEM 7A. In addition, an increase in interest rates could slow the growth of the economy and affect the demand for our products.

Other risk factors

In addition to the risk factors discussed above, our business is also affected by the following: (i) adverse weather conditions that result in a slow down in construction and the demand for our products; (ii) competition in the PVC resin and pipe industry that puts pressure on the price of PVC resin and the demand for PVC pipe; and (iii) net operating loss utilization. For financial reporting purposes, the Company’s cumulative deferred tax asset recorded in prior years totaling approximately $13.5 million associated with net operating loss carryforwards, has been fully utilized, including approximately $4.0 million in the first half of 2000. We have evaluated tax-reporting compliance relating to the past and fiscal 2000 utilization of the net operating loss carryforwards, and believe we have complied in all respects. A failure to meet the requirements could result in a loss or limitation of the utilization of carryforwards, which could have a material adverse effect on our financial position and results of operations in future periods.

We have not provided any valuation allowance associated with deferred tax assets of approximately $12 million at December 31, 2003. The matter and associated risk of a significant change in our reported financial condition are discussed under critical accounting policies below.

Critical Accounting Policies

Management’s discussion and analysis of its financial condition and results of operations are based upon the Company’s financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported revenues and expenses during the reporting period. Management bases these estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the recorded values of certain assets and liabilities. Actual results could differ from these estimates.

Management believes the Company’s critical accounting policies and areas that require more significant judgments and estimates used in the preparation of its financial statements include:

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts necessary to maintain the allowance at a level estimated to be sufficient to absorb future losses due to accounts that are potentially uncollectible. The allowance is based on our historical experience with prior year write-offs, aging of past due accounts, financial condition of the customer and the general economic conditions of our market place. Actual results could differ from these estimates under different assumptions resulting in an increase to the allowance for doubtful accounts and bad debt expense.

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Inventories

Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method and includes materials, labor and manufacturing overhead. Judgment by management is required to determine both replacement cost and market. We recorded a lower of cost or market adjustment in the fourth quarter of 2003, 2002 and 2001, reducing pipe inventory values by $0.7 million, $0.05 million, and $2.1 million, respectively. A change in this management estimate would impact cost of goods sold and the inventory carrying value.

Property Equipment and Goodwill

Management periodically reviews its long-lived and intangible assets and goodwill for impairment and assesses whether significant events or changes in business circumstances indicate that the carrying value of the assets may not be recoverable. An impairment loss is recognized when the carrying amount of an asset exceeds the anticipated future undiscounted cash flows expected to result from the use of that asset and its eventual disposition. The amount of the impairment loss to be recorded, if any, is calculated by the excess of the asset’s carrying value over its estimated fair value. Management also periodically reassesses the estimated remaining useful lives of its long-lived assets. Changes to either estimated future undiscounted cash flows or useful lives would impact the amount of depreciation and amortization expense recorded in earnings.

Accounting for Income Taxes

Significant judgment by management is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets. As part of the process of preparing our financial statements, management is required to estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities, which are included within our balance sheet. Management must then assess the likelihood that deferred tax assets will be recovered from future taxable income and, to the extent management believes that recovery is not likely, a valuation allowance must be established. To the extent that a valuation allowance is established or increased, an expense within the tax provision is included in the Statement of Operations.

Although the Company is highly cyclical in terms of its industry and operating profits, management believes that the Company will be profitable over its operating cycle, based on historical results and other analysis. This belief is largely based on a combination of 1) the Company’s participation as one of the PVC pipe industry leaders, 2) distribution centered on populated growth markets, 3) professional management dedicated to the PVC pipe industry and 4) debt paydown and corresponding reduction in financing costs. The Company’s cyclicalness and corresponding operating results are significantly influenced by the overall US economic cycles, which, in addition to driving demand for the Company’s products, also influence the cost of the primary raw material input, PVC resin. Generally, as PVC resin costs are rising during our operating cycles, our profitability associated with product shipments increases. This is the result of demand, and gross margins used in product pricing being applied to increasing overall productivity costs. These factors have been considered as part of the Company’s evaluation of the need for a valuation allowance associated with deferred tax assets. The Company will continue to monitor the need for a valuation allowance at each balance sheet date in 2004, to ensure the conclusions reached in 2003 are sustainable. Any change in this conclusion would result in a direct reduction of our reported results from operations, and could result in virtual elimination of our shareholders’ equity as of the date of the potential determination of the need for such a valuation allowance for financial reporting purposes.

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Insurance Liability

We self-insure a portion of our employees for health and dental related claims and record a claims liability based on claims history. The liability is based on analysis of our historical claim activity and reporting trends. While management believes that the insurance liability is adequate at year-end, results could be materially different if historical trends do not reflect actual results.

Worker’s Compensation Liability

We maintain an insurance liability for incurred and not paid and incurred but not reported employee related injuries. The liability is based on analysis of our historical claim activity and reporting trends. While management believes that the worker’s compensation liability is adequate at year-end, results could be materially different if historical trends do not reflect actual results.

Warranty Liability

The provision for expenses related to product warranty is reviewed regularly. Warranty liabilities are estimated using historical information on the frequency and average cost of warranty claims. Management studies trends of warranty claims to improve pipe quality, pipe installation techniques and minimize future claims. While management believes that the warranty liability is adequate at year-end, results could be materially different if historical trends do not reflect actual results.

Recent Accounting Pronouncements

Effective January 1, 2003 the Company adopted SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 requires the recognition of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the carrying amount of the related long-lived asset is correspondingly increased. Over time, the liability is accreted to its present value and the related capitalized charge is depreciated over the useful life of the asset. The adoption of SFAS No. 143 did not have a material impact on the Company’s consolidated financial statements.

Effective January 1, 2003, the Company adopted SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. This statement is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a material impact on the Company’s consolidated financial statements.

In April 2003, the Financial Accounting Standards Board (FASB) issued SFAS No. 149, which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133. In general, SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The Company has not entered into or modified any derivative contracts subsequent to June 30, 2003.

On May 15, 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement requires that three types of freestanding financial instruments be classified as liabilities: Mandatory redeemable shares; instruments that do or may require the issuer to buy back some of its shares in exchange for cash or assets; and obligations that can be settled with shares, the value of which is fixed, tied to a variable or varies inversely with the share price. The statement is effective for all financial instruments modified or entered into after May 31, 2003 and otherwise effective for interim periods beginning after June 15, 2003. On November 7, 2003, the FASB indefinitely deferred the effective date for applying the provisions of FAS No.150 for a) mandatorily redeemable financial instruments of certain non-public entities and b) certain mandatorily redeemable noncontrolling interests. The adoption of SFAS No. 150 did not have a material impact on the Company’s consolidated financial statements.

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On January 17, 2003, the FASB issued Interpretation Number (FIN) 46, “Consolidation of Variable Interest Entities — an Interpretation of Accounting Research Bulletin (ARB) No. 51.” The Interpretation expands upon existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity, referred to as a variable interest entity. FIN 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is applicable to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. The Company has not created any variable interest entities after January 31, 2003. FIN 46 is applicable in the interim period beginning after June 15, 2003 to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Company has not completed its evaluation of the impact associated with the adoption of FIN 46.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to certain market risks on $51.0 million of outstanding variable interest-rate debt obligations at December 31, 2003. Market risk is the potential loss arising from the adverse changes in market rates and prices, such as interest rates. Market risk is estimated as the potential increase in fair value resulting from a hypothetical one-percent increase in interest rates, which would result in an annual interest expense increase of approximately $510,000.

We do not enter into derivatives or other financial instruments for trading or speculative purposes. We only enter into financial instruments to manage and reduce the impact of changes in interest on our credit facility. In November 1999, under covenants of our Senior Credit Facility, the Company entered into an agreement to receive fixed and pay variable interest, with a notional amount of $25 million, to hedge 50% of the outstanding Senior Term Notes for three years with a LIBOR rate of 6.46%. This fixed-rate agreement expired in September 2002. In March 2003 under covenants of the new Credit Facility for ETI, the Company entered into an agreement to receive fixed and pay variable interest, with a notional amount of $2.5 million, to hedge 50% of the outstanding Term Note for three years with a LIBOR rate of 2.49%. This fixed-rate agreement expires in August 2005. Based on our current assessment of interest rates, we elected to not enter into additional future fixed-rate agreements.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT AUDITORS

To the Stockholders and the Board of Directors

of PW Eagle, Inc.

In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of changes in shareholders’ equity and comprehensive income and of cash flows present fairly, in all material respects, the consolidated financial position of PW Eagle, Inc. at December 31, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 1 to the financial statements, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” on January 1, 2002. Under SFAS No. 142, goodwill and indefinite-lived intangible assets are no longer amortized, but are reviewed at least annually for impairment.

February 6, 2004, except for the last paragraph of Note 5, as to which the date is March 31, 2004

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CONSOLIDATED STATEMENT OF OPERATIONS (in thousands, except for per share amounts)

The accompanying notes are an integral part of the consolidated financial statements.

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PW EAGLE, INC.

CONSOLIDATED BALANCE SHEET (in thousands, except for shares and per share amounts)

The accompanying notes are an integral part of the consolidated financial statements.

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PW EAGLE, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

(in thousands)