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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-K

For the fiscal year ended December 31, 2004

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, 2004 was approximately $18,897,000 (based on the closing sale price of $3.29 per share as reported on the Nasdaq National Market).

The number of shares of the registrant’s common stock, $.01 par value, outstanding as of March 10, 2005 was 7,517,009.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement for registrant’s 2005 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 or PW Eagle) manufactures and distributes polyvinyl chloride (PVC) pipe and fittings used for potable water and sewage transmission, turf and agricultural irrigation, water wells, fiber optic lines, electronic and telephone lines, and commercial and industrial plumbing. We distribute our products throughout the entire United States, with a minimal amount of shipments to selected foreign countries. Our majority-owned subsidiary, USPoly Company, (USPoly) manufactures and distributes polyethylene (PE) pipe products and accessories. See page 3 for an expanded discussion of the USPoly business, and see Note 15 to consolidated financial statements included in Item 8 of this Form 10-K for further information on our PVC and PE business segments.

Our executive offices and operating headquarters are located in Eugene, Oregon and USPoly headquarters are located in Shawnee, Oklahoma. We have production facilities in Cameron Park, Visalia and Perris, California; Columbia, Missouri; Hastings, Nebraska; Shawnee and Tulsa, Oklahoma; 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. US Poly’s web address is www.uspolycompany.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.

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 thick-wall 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 used throughout the collection system of sewage treatment plants.

Ultra-Rib and Ultra-Corr Pipe. These structured 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.

Underwriters Laboratories (UL) 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 USPoly from PW Eagle and Acquisition of Uponor Aldyl Business

On February 28, 2003, we created a separate subsidiary, PWPoly, and on September 30, 2003, we transferred certain assets and liabilities of our PE pipe business to PWPoly. On September 27, 2004, USPoly acquired substantially all of the assets of Uponor Aldyl Company, Inc.’s (UAC) PE pipe business pursuant to the terms and conditions of the Contribution and Membership Interest Purchase Agreement, dated as of September 1, 2004, between PWPoly and UAC, among others (the UAC Acquisition). Pursuant to the Agreement, PWPoly acquired substantially all of UAC’s assets for approximately $18.6 million (including direct transaction costs of $1.0 million), and renamed the consolidated company USPoly Company. The purchase price included cash of $13.9 million, $2.1 million in the form of a note to Uponor Corporation, and $2.6 million which was subsequently paid to Uponor Corporation on March 11, 2005. In addition, USPoly incurred $0.6 million of deferred financing costs that are not included in the purchase price allocation. The funds for the purchase of UAC’s assets were primarily received from debt financings with Wells Fargo Business Credit Inc. and Medallion Capital Inc. USPoly focuses on extruding PE pipe in sizes up to 20 inches in diameter. USPoly’s pressure and non-pressure PE pipe products consist of ½ inch to 20 inch PE pipe and tubing for applications in the natural gas distribution, municipal water distribution, irrigation, fiber optic, power distribution and telecommunications industries. Below are descriptions of our primary PE pipe products and their applications.

Natural Gas Distribution Pipe. We sell PE pipe for natural gas distribution in diameters from ½ inch to 12 inches, in either straight sticks or coils depending on customer requirements and diameter. We use PPI-approved (Plastics Pipe Institute) PE 2406, PE 3408 and PE 100 resins to manufacture gas distribution pipe.

Oil and Gas Gathering Pipe. We offer a full range of pipes through 20 inches for this application. Oil and gas gathering pipes are made with PE 3408 resin in coils or sticks.

Irrigation and Agricultural Pipe. These pipes are usually smaller in diameter and are made from PE 2406, PE 3408 or linear low-density PE resin, as required by customers.

Water Distribution Pipe. Water distribution pipes are often in larger diameters, up to 20 inches. We use PE 3408 resin for this application and manufacture these products to meet NSF and AWWA requirements.

ASTM PE Pipes for Special Applications. PE’s unique properties produce valuable products for applications in fiber optic communications, mining, chemical transport and closed-loop ground coupled heat pump systems. We offer these products in various diameters and use different resins depending on customer requirements.

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Fittings. We offer a full line of fittings to complete our PE piping systems. Our product line includes butt and socket PE fittings, electrofusion PE fittings and our patented MetFit^TM fittings system. MetFit^TM is a steel-insert reinforced, nylon body plastic fitting that can make high quality connections under any conditions.

USPoly Investment in W.L. Plastics

On October 1, 2003, USPoly, 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. PW Eagle acquired an equity interest in W.L. Plastics Corporation (W.L. Plastics) of approximately 5.4% in exchange for $0.3 million in professional services rendered. PW Eagle contributed its equity interest to USPoly. W.L. Plastics focuses primarily on extruding large diameter PE Pipe with the bulk of its products currently in the 8-inch to 24-inch diameter sizes. At the time of the initial investment USPoly did not control W.L. Plastics, nor did they have the ability to exhibit significant influence over the management of W.L. Plastics. As such, USPoly initially accounted for this investment on the cost method. On January 16, 2004, USPoly invested an additional $1.6 million in W.L. Plastics to increase its ownership percentage to 23%. Following the increase in ownership to 23%, USPoly accounted for the investment on the equity method of accounting, and had recorded $0.6 million, net of tax of $0.4 million, of equity in earnings of unconsolidated affiliate during 2004. Effective December 1, 2004, USPoly determined, in accordance with FIN 35, “Criteria for Applying the Equity Method of Accounting for Investments in Common Stock”, that their investment in W.L. Plastics should be accounted for using the cost method of accounting as a result of the acquisition of UAC relinquishing their Board position and other changes. USPoly’s investment in W.L. Plastics at December 31, 2004 totaled $2.9 million and is included as a component of other assets on the accompanying consolidated balance sheet.

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 United States 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.

We have a broad and diverse group of customers consisting primarily of wholesalers and distributors. No customer accounted for more than 7% of our net sales in 2004 and 8% of our net sales in 2003.

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,

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Nebraska; Eugene, Oregon; Conroe, Texas; West Jordan, Utah; Buckhannon, West Virginia; and Tacoma and Sunnyside, Washington. PVC electrical fittings are fabricated in Tacoma, Washington; and Cameron Park and Perris, California. PE pipe is manufactured in Hastings, Nebraska and Tulsa, Oklahoma. A PE distribution facility is in Baker City, Oregon and a fittings manufacturing facility is located in Shawnee, Oklahoma.

The eleven PVC pipe manufacturing facilities have blending centers where PVC resin is mixed with additives to create an appropriate compound for each extrusion application. Natural resin is mixed with a pre-compound blend containing color and additives.

PVC and PE pipes are manufactured using the extrusion process. Compound is delivered to the extruder, heated to a plastic state and conveyed through dies and sizing equipment to form pipes of the appropriate diameter and wall thickness. The continuously formed product is cooled, cut to length, and if appropriate to the product, has a bell formed on one end. Following quality inspection, the packaged product is stored, generally in outside storage yards, although certain products are warehoused. Inventory is shipped from storage to customers by common carrier and by company owned trucks.

At each phase of the manufacturing process, we pay 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, 2004, 2003, and 2002, purchases of raw materials from two vendors totaled 87%, 85% and 79% 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 our customers 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 improve during the second and third quarters, when construction is stronger.

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 15, 2005, was approximately $32.7 million of PVC pipe and $2.4 million of PE pipe compared to $40.2 million and $0.7 million, respectively, on March 26, 2004. The 2005 backlog reflects normal demand for our products at this time of year. In early 2004, our PVC business experienced an unusual surge in demand, resulting in higher than normal backlog until these orders were filled in April or May.

Employees

The table below summarizes the approximate number of our employees:

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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 and Visalia, California, West Jordan, Utah and Tacoma and Sunnyside, Washington pursuant to long-term lease agreements (see ITEM 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Notes to the Consolidated Financial Statements under ITEM 8.).

USPoly has manufacturing facilities in Hastings, Nebraska, and Shawnee and Tulsa, Oklahoma, and a distribution warehouse in Baker City, Oregon. The Tulsa, Hastings and Baker City facilities are leased pursuant to long-term lease agreements.

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 manufacturing facilities, as currently equipped, were operating at approximately 95% of capacity in the first quarter of 2005.

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 2004.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is currently traded on the Nasdaq National 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 2004 and 2003:

On March 10, 2005, there were 7,517,009 shares of common stock outstanding held by approximately 1,345 shareholders of record and approximately 1,986 shareholders in street name.

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 debt repayment and does not intend to pay common stock dividends, until our debt has been reduced from current levels.

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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

We began 2004 in a difficult financial position since our industry was facing a period of historically low margins. Our focus was to complete the integration of the former PWPipe and ETI business units and realize the efficiencies and synergies, including utilizing additional manufacturing capacity, from our reorganization. These changes, combined with relatively strong demand for our products, led to improved margins and significantly better financial performance in 2004.

On October 25, 2004, we completed a refinancing of substantially all of our PW Eagle debt. This improved our liquidity and with maturities in 2009 – 2010 this new financing is consistent with our long-term plan to operate the business to maximize cash flow and pay down debt.

At December 31, 2004, USPoly was not in compliance with certain financial covenants of its Senior Credit Facility and Subordinated Debt Agreement. On March 10, 2005, the lenders waived all covenant violations and amended their Agreements such that we believe USPoly will be in compliance with the covenants in the future. In addition, the maximum borrowing under the USPoly Senior Credit Facility was increased to $15 million.

In the fourth quarter of 2003, we separated our PE pipe business into a separate legal entity, PWPoly, and announced our intention to distribute PWPoly shares directly to PW Eagle shareholders. On September 27, 2004, PWPoly acquired the business of Uponor Aldyl Company, Inc. and the combined business was renamed USPoly Company. Uponor had sales of $41 million in 2003. In addition to sales volume, the Uponor acquisition brings an established management team and infrastructure to operate USPoly. This represents a significant increase in the size of our PE pipe business. The PVC and PE segments are discussed separately in more detail below.

On January 31, 2005, we announced our decision to cancel the planned spinoff of USPoly. We will continue to own approximately 75% of USPoly and report consolidated financial information, including both PW Eagle and USPoly. USPoly operates as a separate entity, with its own management team, strategic plan and financing.

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 “Future Outlook and Risks to Our Business” section of this discussion.

We believe the 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. GDP growth improved in 2004 compared to 2003, demand for PVC resin for use in pipe was strong, and our margins increased. Both GDP growth and demand for PVC resin for use in pipe are expected to be similar in 2005 compared to 2004.

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Because of the volatility of selling prices for PVC and PE pipe and the cost of 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 for each segment by the pounds of pipe sold in the corresponding year.

PVC Segment

Net sales per pound sold increased to $0.562/lb in 2004 from $0.494/lb in 2003. This increase results from an increase in the selling price of conventional PVC pipe, as well as a full year of ETI’s Ultra product line which has higher selling prices.

Cost of goods sold increased to $0.480/lb in 2004 from $0.442/lb in 2003 due to higher prices for our primary raw material, PVC resin. Due to relatively strong demand for PVC pipe, we were able to increase our selling prices more than the increase in material costs, resulting in increased margins and gross profit.

Operating expenses were $0.067/lb in 2004 compared to $0.068/lb in 2003. Higher per pound freight costs associated with higher freight rates experienced throughout the U.S. in 2004 were offset by reduced selling, general and administrative expenses.

PE Segment

Net sales per pound sold increased to $0.944/lb in 2004 from $0.779/lb in 2003. This increase was driven by higher raw material costs during 2004, primarily from resin cost increases.

Cost of goods sold increased to $0.770/lb in 2004 from $0.600/lb in 2003 due to higher prices for our primary raw material, resin. We were able to increase our selling prices consistent with the increase in material costs, resulting in stable margins and gross profit.

Operating expenses were $0.171/lb in 2004 compared to $0.157/lb in 2003. Higher per pound freight costs associated with higher freight rates experienced throughout the U.S. in 2004 were incurred.

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Results of Operations

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

We posted net sales of $475 million in 2004, which was an increase of 43% from 2003, and net sales of $332 million in 2003, an increase of 32% from 2002. The PVC segment increased net sales by $127 million (40%) in 2004 from 2003 due to volume increases of 23% as well as average price increases, and increased net sales by $79 million (33%) in 2003 from 2002 due to volume increases of 21%, primarily from the ETI acquisition in March of 2003, and price increases. The PE segment increased net sales by $16 million (129%) in 2004 from 2003, due to both volume (89%) and price increases, and PE increased net sales by $1 million (11%) in 2003 from 2002 due to volume and price increases. Most of the PE volume increase in 2004 is a result of the UAC Acquisition late in the third quarter of 2004.

Gross profit, as a percent of net sales, increased to 15% in 2004 as compared to 11% in 2003, while 2003 had decreased by 7 percentage points from 2002. Gross profit for the PVC segment was 14.5% in 2004, 10.6% in 2003 and 18.3% in 2002. The 2004 PVC improvement was due to both the higher volume, and increased PVC pricing spread over raw material costs, a reversal from 2003 when prices were declining and demand was weaker than normal, especially in the second and third quarters. Gross profit for the PE segment was 18.4% in 2004, 23% in 2003, and 14% in 2002. The 2004 gross profit reflects a continuation of margin levels from our traditional PE business, and the lower margin products included as a result of the UAC Acquisition. The 2003 increase from 2002 was due to increasing prices rebounding from 2002 levels where both excess capacity and the telecommunications market depressed prices.

Operating expenses, as a percent of net sales, decreased to 12.3% in 2004 as compared to 14.0% in 2003, a reduction of 1.7 percentage points. Most of this decrease is from a reduction in general and administrative costs, both in total dollars (about $1.1 million) and a 1.4 percentage point decrease as a percent of net sales. This reduction is a result of the restructuring activities begun in 2003 and ongoing cost control measures. Selling expenses were also down as a percentage of net sales, but this was partially offset by increases in freight expense during 2004. PVC operating expenses were 11.9% in 2004 compared to 13.7% in 2003, and PE operating expenses were 18.1% in 2004 compared to 20.1% in 2003. Operating expenses as a percent of net sales increased 0.6 percentage points in 2003 as compared to 2002. PVC operating expenses were 13.7% in 2003 compared to 13.3% in 2002. The PVC increase in 2003 was the result of restructuring charges of $1.3 million, as well as higher freight costs associated with ETI’s Ultra product line. PE Operating expenses were 20.1% in 2003 compared to 16% in 2002. The PE increase in 2003 was due to increased staffing as a result of the separation from PW Eagle.

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Non-operating expenses increased to $21.1 million in 2004 from $11.4 million in 2003. Interest expense increased by $8.8 million during 2004 from 2003 due to higher interest rates and higher debt levels. At the time of our refinancing in October 2004, we incurred $5.3 million in interest charges from prepayment penalties, debt discount amortization and write-off of related deferred finance costs (see Note 5 to Consolidated Financial Statements under Item 8 for further detail). Interest expense also includes a $0.2 million non-cash charge for the PVC segment and a $0.8 million non-cash charge for the PE segment in 2004 to adjust to fair value the warrants issued with subordinated debt as discussed in Note 5. The PVC segment recorded a loss of $0.4 million on the sale of two manufacturing facilities in the second quarter of 2004. The PE segment recorded equity in earnings of affiliate of $0.6 million net of tax during 2004, which represents its 23% ownership interest in W. L. Plastics. Non-operating expenses increased to $11.4 million in 2003 from $10.7 million in 2002. This increase resulted from increased interest expense related to higher 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 income tax provision (benefit) for the years ended December 31, 2004, 2003 and 2002 was calculated based on management’s estimates of the annual effective tax rate for each year. The annual effective tax rate for 2004 reflects our statutory federal and applicable state tax rates of approximately 33%, down from 38% in 2003 and 39.5% in 2002. The decrease in 2004 is primarily due to permanent differences related to stock warrants.

Liquidity and Capital Resources

Cash used in operating activities was $(9.8) million in 2004, compared to cash provided of $1.6 million and $0.1 million in 2003 and 2002, respectively. The key component in changes in cash flow levels is the fluctuation in accounts receivable and inventories.

Investing activities used $(15.1) million in 2004, compared to $(16.8) million in 2003 and provided $0.6 million in 2002. The UAC Acquisition in 2004 used $(13.9) million in cash. Capital expenditures for 2004 were $2.0 million. In 2003, the ETI acquisition used $19.1 million in cash and the sale of Mid States Plastics provided $4.4 million. In 2004, we sold our Hastings and Baker City facilities for $1.9 million, acquired an additional interest in W. L. Plastics for $1.5 million, and received proceeds from the sale of miscellaneous equipment of $0.3 million. In 2002, we sold our Hillsboro manufacturing facility and certain equipment for $1.4 million, which was partially offset by capital expenditures of $0.8 million. Fiscal 2004 and 2003 capital expenditures of $2.0 million and $2.2 million, respectively, reflect a spending program consistent with our recurring replacement needs.

Financing activities provided $25.5 million during 2004. The primary sources of cash were net borrowings under the Senior Credit Facilities of PW Eagle and USPoly. Debt issuance and financing costs of $3.8 million were incurred primarily in connection with the PW Eagle refinancing and UAC Acquisition financing. In 2003, financing activities provided $15.2 million primarily from net borrowings under the Senior and Revolving Credit Facilities for PWPipe, PWPoly and ETI. 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.

PW Eagle

On October 25, 2004, PW Eagle completed a refinancing of its debt. In connection with the refinancing, PW Eagle entered into a new $100 million Revolving Credit Facility with Bank of America (formerly Fleet Capital Corporation), the CIT Group/Business Credit, Inc. and Wells Fargo Business Credit, Inc. (the “Agreement”). PW Eagle’s borrowing capacity under the Agreement is limited to the sum of a Current Asset Collateral Component (CACC) based on percentages of accounts receivable and inventories and a Fixed Asset Collateral Component (FACC) of $22 million. The FACC is reduced by $0.8 million quarterly beginning March 31, 2005. Borrowings under the FACC bear interest at LIBOR plus 2.75% and borrowings under the CACC bear interest at LIBOR plus 2.5%. PW Eagle is required to pay a fee equal to 0.5% of the unused portion of the Revolving Credit Facility. At December 31, 2004, the LIBOR rate was 2.4%.

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Under the Agreement, PW Eagle is required to comply with certain restrictive financial covenants including minimum interest coverage, minimum EBITDA (earnings before interest, taxes, depreciation and amortization), maximum capital expenditures, as well as other customary covenants, representations, warranties and funding conditions. Borrowings under the Agreement are collateralized by substantially all of PW Eagle’s assets. The Agreement expires on October 25, 2009.

In connection with the refinancing, PW Eagle issued $16 million of Senior Subordinated Notes and $8 million of Junior Subordinated Notes together with detachable warrants to purchase 366,651 shares of PW Eagle common stock (the “Subordinated Notes”). The Subordinated Notes are due on October 25, 2010, and are collateralized by substantially all assets of PW Eagle, subordinated to the security interest granted under the Revolving Credit Facility. The Senior Subordinated Notes bear interest at 19%, of which 13% is payable in cash monthly and 6% is deferred until October 31, 2009. The Junior Subordinated Notes bear interest at 22.5%, of which 13% is payable in cash monthly and 9.5% is deferred until October 31, 2009.

A debt discount of $1.2 million was recorded upon the issuance of the Subordinated Notes based on the collective estimated fair value of the Subordinated Notes and warrants on the date issued. The discount is being amortized as a yield adjustment over the term of the Subordinated Notes using the effective interest method. The warrants contain provisions granting the warrant holder rights to require the Company to repurchase the warrants at the earlier of repayment or maturity of the Subordinated Notes or an event of default under the Subordinated Notes. In accordance with the Emerging Issues Task Force (EITF) 00-19, the warrants have been recorded as a liability in other long-term liabilities on the Company’s consolidated balance sheet. During 2004, the Company’s value for the warrants increased due to an increase in the Company’s stock price. Accordingly, the warrant liability was subsequently increased to fair value, resulting in a $0.2 million non-cash charge to interest expense.

In connection with the refinancing, PW Eagle incurred financing costs of $2.2 million, which have been capitalized and are being amortized over the life of the related debt as a component of interest expense.

Also in connection with the refinancing, PW Eagle repaid all amounts outstanding under the PWPipe and ETI Revolving Credit Facilities, the PWPipe and ETI Senior Term Notes and the PWPipe Senior Subordinated Notes (at the completion of this refinancing, ETI was legally merged into PW Eagle). At the date these obligations were repaid, PW Eagle had unamortized deferred financing costs related to the extinguished debt of $2.0 million and unamortized discount of $2.9 million on the PWPipe Senior Subordinated Notes. The terms of the PWPipe Senior Subordinated Notes also required a prepayment penalty of $0.4 million. A charge of $5.3 million related to these items was recorded in 2004 as a component of interest expense. Amortization of deferred financing costs during 2004, prior to the refinancing, was $1.4 million.

On March 26, 2004, PW Eagle entered into a sale-leaseback transaction on two manufacturing facilities in Sunnyside, Washington and Visalia, California. As a result of the sale-leaseback transaction, a capital lease obligation of $3.6 million, net of the debt discount of $0.1 million, was recorded based on the estimated fair value of the capital lease obligation. No gain or loss was recognized on the transaction. The capital lease obligation requires an annual lease payment of $0.4 million, including interest at a rate of 9.7%. The capital lease has an initial term of twenty years, upon which the lease will automatically renew for ten years. The capital lease will continue to automatically renew every ten years until the financing lease is terminated. The capital lease includes certain financial covenants and requires the Company maintain an irrevocable letter of credit equal to $0.4 million, which can be drawn in the event of a default under the lease.

In connection with this transaction, warrants were issued to the lender to purchase 15,000 shares of our common stock for $0.01 a share at any time through March 26, 2009. The lender exercised these warrants during the second quarter of 2004. A debt discount totaling $0.1 million has been recorded with the issuance of the warrant and is being amortized using the effective interest method as a yield adjustment over the term of the lease. Net proceeds of $3.3 million resulting from the sale-leaseback transaction were used to pay down the PWPipe Revolving Credit Facility and Senior Term Note A.

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Issuance of Additional USPoly Stock

In January 2004, the Company’s Board of Directors approved USPoly entering into an agreement to issue additional common shares to new investors, thereby resulting in PW Eagle, Inc. no longer owning 100% of USPoly. In connection with the agreement, the new investors contributed approximately $1.7 million in exchange for approximately 25% of the common stock of USPoly, which includes $0.3 million from directors, officers and employees. During the fourth quarter of 2004, USPoly management contributed $0.3 million to purchase USPoly stock. In the first quarter of 2005, USPoly issued $0.3 million in additional stock at a price of $1.10 per share. USPoly sold 3.3 million shares of stock in 2004 at prices determined by the Board of Directors of USPoly, ranging from $0.50 to $1.10 for a total of $1.7 million. At December 31, 2004, PW Eagle owns approximately 75% of USPoly. Upon the completion of this transaction, the Company adjusted its investment in USPoly by $0.9 million to appropriately align the Company’s investment with its underlying 75% interest in USPoly. This adjustment was recorded as an increase to the Company’s Additional-Paid-In-Capital and a corresponding increase to the Company’s Investment in USPoly.

During 2004, USPoly created a stock option plan under which 2,000,000 shares are authorized for issuance. As of December 31, 2004, USPoly had granted to various directors and employees, at fair value, 531,250 shares, of which 161,265 were exercisable and none were exercised. The 531,250 shares represent less than 4% of USPoly’s outstanding stock.

USPoly

On September 27, 2004, USPoly acquired UAC (see Note 2 to Consolidated Financial Statements under Item 8 for further details). To finance this acquisition, USPoly entered into a new Senior Credit Facility. Under the new Senior Credit Facility, USPoly has a $10 million revolving credit and term loans amounting to $6.9 million. The term loans are payable in monthly installments of $0.1 million with interest at prime plus 0.75% to 1.00%. The prime rate was 5.25% at December 31, 2004. The revolving portion of the credit facility carries interest of prime plus 0.5%, and a non-use fee of 0.5%. These new senior loans are due September 30, 2007 and are collateralized by substantially all of USPoly’s assets. In connection with the refinancing, USPoly incurred financing costs of $0.6 million which were capitalized and are being amortized over the life of the debt. USPoly entered into a capital lease agreement for the Tulsa, Oklahoma manufacturing facility connected with the acquisition of UAC for $1.5 million or the current market value, whichever is greater. The capital lease includes a put feature. Under the put feature if the lessor meets certain requirements, USPoly would be obligated to purchase the Tulsa plant for $1.5 million or the current market value, whichever is greater.

On January 16, 2004, USPoly entered into a Subordinated Debt Agreement with Medallion Capital, Inc. (Medallion) for $1.3 million. Interest of 12% on the Subordinated Debt is due monthly and matures on January 15, 2009. In connection with the Subordinated Debt Agreement, warrants were issued to purchase up to 7.5% of USPoly’s then outstanding common stock on a fully diluted basis for $10 per issuance (fixed warrants). In addition, warrants were issued for the purchase of the lesser of 14% of USPoly’s then outstanding common stock on a fully diluted basis or for an amount sufficient to incrementally provide Medallion an overall 24.5% internal rate of return on the subordinated debt (performance warrants). The fixed warrants are exercisable at any time after January 15, 2004 through the fifth anniversary of the date when all outstanding principal and accrued interest on the subordinated debt has been paid in full. The performance warrants are exercisable immediately through the later of the maturity of the subordinated debt or at which time the subordinated debt and interest are paid in full. The warrants also contain a clause whereby after the occurrence of a put date, defined as the earlier of the maturity of the subordinated debt or an occurrence of a default under the debt agreement until the expiration date, the lender shall have the right to sell to USPoly all or a portion of the warrants or the warrant based shares. Under the clause, USPoly would be obligated to purchase such warrant or warrant based shares at USPoly’s fair value. The warrants are therefore recorded as a liability which will be periodically adjusted to fair value. A debt discount totaling $0.4 million, representing the initial value of the warrants, has been recorded in connection with the issuance of the warrants and is being amortized using the effective interest method as a yield adjustment over the term of the debt. During 2004, the Company increased its estimate of the value of USPoly,

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based on its operating performance and the UAC Acquisition (see Note 2 to Consolidated Financial Statements under Item 8 for further details). Accordingly, the warrant liability was adjusted to fair value, resulting in a $0.8 million non-cash charge to interest expense in 2004. In connection with the UAC Acquisition, USPoly amended the Subordinated Debt Agreement to provide an additional $3.7 million of borrowings, bringing the total amount of the Subordinated Debt facility to $5.0 million. The $3.7 million note bears interest at 12% payable monthly and requires principal payments of $65,315 monthly beginning October 1, 2007, through September 1, 2009, with all remaining principal payable on September 17, 2009.

On April 1, 2004, USPoly entered into lease transactions on manufacturing facilities in Hastings, Nebraska and a distribution center in Baker City, Oregon. These leases are recorded as capital leases, with a total capital lease obligation of $1.9 million. The leases require monthly payments of $20,000, including interest at a rate of 11.25%. These capital leases have a term of twenty years, with purchase options of the greater of $2 million ($1.3 million on the Hastings property and $0.7 million on the Baker City property) or the fair market value at the end of the lease term. As a part of these transactions, USPoly issued standby letters of credit for $0.2 million, which can be drawn in the event of default under the leases.

The Company’s obligations at December 31, 2004 under various long-term debt arrangements, operating leases and other arrangements are summarized in the table below:

Interest obligations excludes interest on revolving credit facilities, due to the unknown future balances outstanding and unknown interest rates. We had commitments for capital expenditures of $0.3 million at December 31, 2004, which we intend to fund from our Revolving Credit Facilities.

At December 31, 2004, the Company had a contingent liability for standby letters of credit totaling $2.8 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 facilities. No amounts were drawn on these letters of credit as of December 31, 2004.

As described above, under current financing agreements, PW Eagle and USPoly are required to comply with certain restrictive financial ratios and covenants. Maintenance of these ratios and covenants is of particular concern given the uncertain economic climate in the United States and price stability of PVC pipe and PVC resin. At December 31, 2004, PW Eagle was in compliance with all debt covenants. At December 31, 2004, USPoly was not in compliance with certain financial covenants of its Senior Credit Facility and Subordinated Debt Agreement. On March 10, 2005, the lenders waived all covenant violations and amended their Agreements such that we believe USPoly will be in compliance with the covenants in the future. In addition, the maximum borrowing under the USPoly Senior Credit Facility was increased to $15 million.

We had negative working capital of $(17.5) million in 2004 and excess borrowing capacity of $11 million. Working capital decreased $13.9 million to $(17.5) million in 2004 from ($3.6) million in 2003, primarily from the increase in the Revolving Credit Facility and the decrease in long-term debt. The new Revolving Credit Facility includes $22 million that is collateralized by property and equipment. Instead of obtaining a new long-term loan on the property and equipment, this portion of the debt was included in the current revolving credit

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amount. Had this portion of current debt been converted to long-term loans consistent with the long-term collateral, our working capital would be positive by approximately $4.5 million.

As discussed above, the Company has refinanced the majority of its credit facilities in 2004. Following is information about credit facilities outstanding as of December 31, 2003.

PWPipe

PWPipe had outstanding a Senior Credit Facility consisting of a Revolving Credit Facility and a Senior Term Note. The PWPipe Senior Term Note bore interest at a rate equal to the LIBOR plus 2.75% and required quarterly principal payments of $650,000. The LIBOR rate at December 31, 2003 was 1.25%. Outstanding notes issued pursuant to the Revolving Credit Facility bore interest at a rate equal to LIBOR plus 2.50%. The Company was required to pay a fee equal to 0.5% of the unused portion of the Revolving Credit Facility. At December 31, 2003, the Company had excess borrowing capacity of $5.2 million, which was based on available collateral, including eligible accounts receivable and inventories. The maximum amount available under the Revolving Credit Facility was $50 million.

Under the agreement, the Company was required to comply with certain restrictive financial ratios and covenants relating to minimum net worth, minimum fixed charge coverage, minimum interest coverage, funded debt to EBITDA (earnings before interest, taxes, depreciation and amortization), and maximum capital expenditures, as well as other customary covenants, representations, warranties and funding conditions.

In 1999, the Company entered into Senior Subordinated Notes totaling $32.5 million ($26.4 million recorded amount net of debt discount described below) with detachable warrants to purchase an aggregate of 1,940,542 shares of Company common stock at $0.01 per share (the Subordinated Debt Agreement). Interest on the Senior Subordinated Notes of 14% was payable quarterly. Of this interest, 12% was payable in cash and 2% was accrued through the issuance of additional subordinated notes. Principal was due in three equal installments on September 20th of 2005, 2006 and 2007. A debt discount totaling $6.1 million was recorded upon the issuance of the Senior Subordinated Notes based on the collective estimated fair value of the Senior Subordinated Notes and warrants on the date issued. The discount was being amortized as a yield adjustment over the term of the notes using the effective interest method. The unamortized discount related to these notes was $3.1 million at December 31, 2003. For the years ending December 31, 2003, and 2002, $0.8 million, and $0.7 million, respectively, of the discount was recognized as interest expense in the income statement.

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 capital 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 capital lease obligation and warrant on the date issued. No gain or loss was recognized on the transaction. The capital lease obligation, which expires in September 2022, requires an annual lease payment of $1.7 million, including interest at a rate of 11.46%. The capital lease includes certain financial covenants and requires the Company 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. In connection with this transaction, a warrant was issued to purchase 120,000 shares of Company common stock for $0.01 a share at any time through February 28, 2022. A debt discount totaling $0.4 million has been recorded with the issuance of the warrant. The discount is being amortized using the effective interest method as a yield adjustment over the term of the lease. The unamortized discount relating to the financing lease obligation was $0.4 million at December 31, 2004 and 2003, respectively.

ETI

In connection with the acquisition of Uponor ETI Company (see Note 2 to Consolidated Financial Statements included in Item 8), ETI entered into a Senior Credit Facility with Fleet Capital Corp. and CIT Group/Business

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Credit, Inc. 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) available, but unutilized, Equipment Notes of up to $1.5 million (the ETI Senior Credit Facility). The ETI Revolving Credit Facility bore an interest rate of LIBOR plus 2.75%. ETI was required to pay a fee of 0.5% on the unused portion of the Revolving Credit Facility. Principal payments on the ETI Term Note were due in quarterly payments of $250,000. The Term Note bore an interest rate of LIBOR plus 3.25%.

The ETI Senior Credit Facility was collateralized by substantially all of the assets of ETI. Under the ETI Senior Credit Facility, ETI was 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.

USPoly

On October 1, 2003, USPoly entered into a credit and security agreement (the USPoly Senior Credit Facility) with Wells Fargo Business Credit, Inc. (Wells Fargo) consisting of (i) a Revolving Credit Facility of $3.5 million and (ii) a $1.1 million Term Note. The USPoly Revolving Credit Facility was limited to the lesser of $3.5 million or the aggregate amount of 85% of eligible USPoly accounts receivable and the lesser of 60% of eligible USPoly inventories or $1.5 million, less a liquidity reserve. At December 31, 2003, the maximum available revolving line of credit was approximately $1.3 million, net of outstanding borrowings. Borrowings under the USPoly Revolving Credit Facility bore interest rates equal to the prime rate plus 1.5%. Payments on the USPoly Term Note were due in monthly principal payments of $18,333 plus accrued interest beginning in November 2003, with the remaining principal and accrued interest due in September 2006. The USPoly Term Note bore an interest rate of the prime rate plus 2.0%. During periods of default, the interest rate is increased to the prime rate plus 3.0%. The Company was also subject to certain fees and charges, including prepayment charges, as defined by the Agreement. On December 31, 2003, the prime rate was 4.0%.

The USPoly debt was collateralized by all of the assets of USPoly. Under the USPoly Senior Credit Facility, USPoly was required to comply with certain restrictive financial ratios and covenants which included, but were not limited to, minimum earnings before taxes, debt service coverage ratio, Senior Debt to tangible capital base ratio and a cap on aggregate capital expenditures, as defined by the USPoly Senior Credit Facility. The USPoly Senior Credit Facility also included restrictions on additional indebtedness, guarantees, investments, acquisitions, change in control and dividends and distributions to shareholders. The USPoly Senior Credit Facility also contained subjective acceleration and cross-default clauses under which Wells Fargo could have declared an event of default if a material adverse change in USPoly’s business occurred or USPoly defaulted on other indebtedness.

The Company incurred $1.1 million in additional financing costs in 2003 related to its various borrowing arrangements. These financing costs were capitalized and were being amortized over the life of the respective debt using the effective interest method.

The weighted average interest rate on all revolving credit facility borrowings for the years ended December 31, 2004 and 2003 was 4.32% and 3.67%, respectively.

At December 31, 2003, PW Eagle and USPoly were in violation of certain covenants on senior and subordinated debt, as well as on the financing lease obligation. These violations were cured, either by waivers and/or amendments to the then existing debt agreements. On March 30, 2004, ETI amended its loan and security agreement to revise certain financial covenants. As discussed above, the ETI and PWPipe Senior and Subordinated debt was replaced by the Revolving Credit Facility on October 25, 2004.

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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 positions were eliminated. In addition, certain officers and directors resigned their positions and cancelled consulting agreements. In connection with the officer resignations, the Board of Directors modified certain outstanding restricted stock and stock option awards effective January 2, 2004. The modifications allow for continued vesting of the stock awards, which would have been forfeited upon the officers’ resignation under the original terms, resulting in a charge of $0.5 million. During 2004, the Board of Directors approved the payment of management bonuses of $1.0 million for the successful restructuring of the Company. The recipients of the management bonus elected to receive $0.8 million in PW Eagle common stock and $0.2 million in cash.

In connection with these activities, we incurred restructuring charges of $1.6 million in 2004 and $1.3 million in 2003. At December 31, 2004, we had $0.1 million of severance payments remaining from the restructuring, which are to be paid in 2005.

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 2005 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 15, 2005 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.

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 and PE resin and pipe and we recognize that our business is tied to economic cycles. GDP increased by 4.4% in 2004, as compared to the 3.1% increase in 2003. Demand for PVC and PE pipe was relatively strong in 2004 and supply and demand were in reasonable balance.

We believe that inventory levels at resin producers, pipe producers and distributors were at moderate levels at the end of 2004, making it likely that demand and supply of PVC and PE pipe and resin will remain in balance during the first half of 2005, providing moderate economic growth continues.

In addition, the production of PVC may be limited by the availability of chlorine and vinyl chloride monomer (VCM), major raw material components of PVC resin. Chlorine and VCM capacity could be limited due to the closure of several manufacturing plants in the past and announced for 2005—2006. Announced capacity

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increases are not likely to have a significant impact until 2007. This combination of industry conditions could lead to increased product pricing and increased margins in 2005.

Demand for PVC resin was strong in 2004 and PVC resin producers implemented price increases totaling $0.15 per pound during the year. In light of relatively strong demand for PVC pipe, pipe producers implemented several pipe price increases in response to these resin price increases. PE resin producers implemented price increases of $0.14 to $0.20 cents per pound in 2004.

Pipe producers have implemented and announced pipe price increases in response to resin price increases announced for January and March 2005. We believe these pipe price increases will allow us to maintain 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 3% or greater in 2005. The actual growth rate may be less than or greater than 3% 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 and completed in the second quarter of 2004 has positioned the Company for improved results in the future by improving our manufacturing efficiency and reducing our selling, general and administrative costs. Our refinancing completed in 2004 will reduce our interest charges in the future.

Risk Factors

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

Our gross margin percentage is sensitive to raw material resin prices and the demand for PVC and PE 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 2004, PVC resin producers implemented PVC price increases totaling $0.15 per pound. These increases were driven by raw material and energy cost increases, combined with strong demand for PVC resin. In response to strong demand and relatively fixed current production capacity, PVC resin producers implemented a $0.02 per pound price increase for January 2005. In addition, price increases of $.02 per pound in March 2005 and $0.01 per pound in April 2005 have been announced.

Our gross margin decreases when the supply of resin and pipe is greater than demand. Conversely, our gross margins improve when resin and pipe are in short supply. In April 2001, a major producer of PVC resin filed for bankruptcy and, during the first quarter of 2002 ceased operations at two manufacturing facilities. This resulted in a reduction of approximately 1.0 billion pounds of production capacity, or 5% of the North American industry capacity. Although two PVC producers have subsequently purchased these two facilities, only one of them has announced intentions to re-start a portion of its capacity in 2005. In December, 2004, a major PVC producer announced plans to build a PVC plant with annual capacity of 1.3 billion pounds together with integrated production of chlorine and VCM, with completion expected by the end of 2006 for the first phase and by the end of 2007 for the second phase. If these capacity increases result in industry capacity exceeding demand when they begin production, it could result in decreasing prices for PVC resin. In addition, we believe the production of PVC resin may be limited by the availability of chlorine, a major raw material component.

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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 resin, pipe and the dynamic supply and demand factors worldwide, the markets for both resin and pipe have historically 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 $.51 per pound. Currently resin prices are at historic highs.

While we expect the demand for PVC and PE 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 resin or 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 are dependent on suppliers of our raw materials. Our production or reputation could be seriously harmed if these suppliers were unable to timely meet our requirements on a cost effective basis.

Our PVC and PE products contain raw materials that are procured from a variety of suppliers. The cost, quality and availability of these raw materials, chief among them PVC and PE resin, are essential to the successful production and sale of our products. There are a limited number of suppliers for some of these raw materials. Alternative sources are not always available or may not be available on terms acceptable to us. For example, there are currently only five suppliers of PVC resin and four suppliers of PE resin in North America who are capable of providing us the material in an amount that would meet our requirements on terms acceptable to us. We believe our relationships with our raw materials suppliers are good and currently have long-term agreements in place with several of our key suppliers. However, if our suppliers were unable or unwilling to meet our demand for raw materials on terms acceptable to us and if we are unable to obtain an alternative source or if the price for an alternative source is prohibitive, our ability to maintain timely and cost-effective production of our products will be seriously harmed.

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

At December 31, 2004, PW Eagle was in full compliance with all debt covenants. As reported in Note 5 to Consolidated Financial Statements under Item 8, PW Eagle completed a refinancing in the fourth quarter of 2004 and has new senior and subordinated debt facilities in place. At December 31, 2004, USPoly was not in compliance with certain financial covenants of its Senior Credit Facility and Subordinated Debt Agreement. On March 10, 2005, the lenders waived all covenant violations and amended their Agreements such that we believe USPoly will be in compliance with the covenants in the future. In addition, the maximum borrowing under the Senior Credit Facility was increased to $15 million.

We expect these new credit facilities to provide sufficient liquidity to operate our business and meet our obligations for the next several years. These conditions could change, however, if general economic conditions or other unforeseen events should cause a significant deterioration in our business results.

In the event of a default under our debt agreements, we would be required to either obtain a waiver from our lenders or amend our lending agreements. There is no assurance that our lenders would 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 have $77.6 million of variable interest rate debt at December 31, 2004. Accordingly, interest rate increases would further challenge our ability to pay the interest expense on our debt and fixed charges. 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 resin and pipe industry that puts pressure on the price of resin; 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 $14.4 million at December 31, 2004. 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 our 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, prior years’ 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 resulting in an increase to the allowance for doubtful accounts and bad debt expense.

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, reducing pipe inventory values by $0.7 million. No such adjustment was required at December 31, 2004. A change in this management estimate would impact cost of goods sold and the inventory carrying value.

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Long-lived Assets

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 Consolidated 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 future financing costs. The Company’s cyclical nature and corresponding operating results are significantly influenced by the overall US future 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. 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 2005, to ensure the conclusions reached in 2004 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.

Insurance Liability

We self-insure a significant 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, which is deducted from our premium deposits, 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.

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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.

Recently Issued Accounting Standards

In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 151, “Inventory Costs. An Amendment of ARB No. 43, Chapter 4” (“SFAS 151”), which is effective for fiscal years beginning after June 15, 2005. SFAS 151 amends the guidance in ARB No. 43 to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Among other provisions, SFAS 151 requires that items such as idle facility expense, excessive spoilage, double freight, and rehandling costs be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal” as stated in ARB No. 43. In addition, SFAS 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. We believe the adoption of SFAS 151 will not have any material effect on our financial statements.

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (“SFAS 123R”), which replaces SFAS 123 and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. SFAS 123R requires that the cost of all share-based payments to employees, including grants of employee stock options, be recognized in the financial statements based on their fair values. That cost will be recognized as an expense over the vesting period of the award. The pro forma disclosures previously permitted under SFAS 123 (which are shown in Note 1 to the Consolidated Financial Statements in Item 8) no longer will be an alternative to financial statement recognition. In addition, we will be required to determine fair value in accordance with SFAS 123R. SFAS 123R is effective for reporting periods beginning with the first interim or annual period after June 15, 2005, with early adoption encouraged, and requires the application of a transition methodology for stock options that have not vested as of the date of adoption. We are currently evaluating the impact of SFAS 123R on our financial statements.

Related Party Transactions

Transactions with related parties are described in Note 18 to the Consolidated Financial Statements in Item 8.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to certain market risks on $77.6 million of outstanding variable interest-rate debt obligations at December 31, 2004. 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 $0.8 million.

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 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%. The Senior Term Note was paid in full in connection with the new PW Eagle Senior Credit Facility of October 24, 2004. On November 12, 2004, the Company entered into a fixed rate swap agreement for 50% of the fixed asset collateral portion of the new Senior Credit Facility amounting to $11 million. This total notional amount was comprised of the remaining ETI swap contract amounting to $1.7 million, and a new PW Eagle swap contract amount of $9.3 million. The total notional amount decreases in proportion to reductions in the fixed asset collateral portion of the credit facility, until the fixed rate agreement terminates in November 2007. At December 31, 2004, these contracts had a notional amount of $10.9 million and a fair value of $(0.1) million. Based on our current assessment of interest rates, we elected to not enter into additional future fixed-rate agreements.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of PW Eagle, Inc.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders’ 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, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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.

March 25, 2005

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PW EAGLE, INC.

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 share data)

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

(in thousands)